IRD Compliance Focus

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Each year IRD target a few specific issues relating to tax payer compliance, carrying out investigation and audit activities to recover unpaid tax and penalties.

For every $1 spent by Inland Revenue on compliance focus activities they are recovering approximately $8 from non-compliant tax payers.

In the next year they will receive a funding boost from the government to increase their compliance focus work, which is likely to increase the scope and frequency of IRD investigations and audits.

IRD have indicated that key areas which they will be targeting over the coming year include:

 

The Hidden Economy

This includes any illegal activities or income earned outside of tax system (i.e. “cashies”). The IRD have signalled they have recently had success prosecuting several industries that deal largely in cash, such as takeaway restaurants, beauty salons and builders.

With increased funding Inland Revenue will have greater resources to identify offenders and conduct more investigations into these types of businesses.

 

Property Investment

Previously, residential property sales were only regarded as taxable if it was the purchasers “intention” at the time the property was purchased to resell it for a profit.

However, with the introduction of the Bright Line legislation in October this year, IRD now have an objective test to supplement the intention test, to help determine whether the sale of a residential property is taxable.

Therefore, Inland Revenue are ramping up audit activity in this area to try and catch any property speculators who in the past have hidden their intentions to make tax-free gains on the sale of property.

 

GST Refunds

Inland Revenue will be focusing on tax payers who receive large GST refunds and those who receive GST refunds on an ongoing basis.

For large GST refunds they are likely to request documentation (such as copies of invoices and receipts) to verify the GST claim.

The risk with taxpayers who consistently receive GST refunds is that they may no longer be eligible to be GST registered and should therefore have deregistered for GST (e.g. if the business has ceased or it has slowed down so much that it is a “hobby” rather than a taxable activity).

For any clients who think they might be at risk of audit by the IRD, we urge you to make sure that you are declaring all of your income and complying with all relevant tax laws.

 

It is never too late to come clean to IRD, as up until an audit notification is received from them, taxpayers can make a voluntary disclosure of any mistakes or omissions from tax returns, which can significantly reduce the amount of penalties and interest Inland Revenue will charge on any underpaid tax.

If you are not sure you have met all of your tax obligations or have any questions about Inland Revenue’s compliance focus please contact our office.

 

Changes to Property Rules & Bright-Line Test

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From the 1st October 2015 new rules come in to force surrounding the buying and selling of property in New Zealand, including a new test designed to catch and tax individuals making profits from the sale of properties that they have owned for only a short period of time.

From October 1 all NZ residents and citizens must supply their IRD number when they buy or sell any NZ property that is not their main home.

For non-NZ residents or citizens, they must supply their IRD number and taxpayer identification number (if they have one) when purchasing any property in NZ, regardless of whether or not it will be their main home.

There is also a “Bright Line Test” (which is currently awaiting its second reading in Parliament) which has been designed to help IRD identify residential property speculators and tax them accordingly.

This proposed test will require taxpayers to pay tax on any capital gain made from the sale of a residential property that has been purchased and sold within two years, unless that property was the taxpayer’s main home, inherited or transferred as part of relationship property.

If you are in the process of purchasing a property or plan to in the future and would like advice regarding the new rules please contact our office.

Xero Pricing Update

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Accounting software company Xero have announced they will be increasing their subscription prices come 1st December 2015 to help support the ongoing development and innovation of their software.

What this means for Xero users is that most will be required to increase their monthly subscription payments from between $2-5 (plus GST) per month – depending on the plan they are subscribing to.

The new monthly subscription costs for each Xero plan will be as follows:

Xero Plan

Current Price     (GST Incl.)

New Price (GST Incl.)
Ledger $5.75 $5.75
Non-GST Cashbook $11.50 $13.80
GST Cashbook $21.85 $24.15
Business Starter $28.75 $31.63
Standard $57.50 $63.25
Premium $86.25 $86.25

For Xero users who subscribe through Savage and Savage we will be sending out an email later on in the month informing you of the new monthly subscription cost for your Xero ledger and asking you to update your automatic payment by the 1st of December.

If you would like to read more about why Xero are changing their prices you can visit their blog here: https://www.xero.com/blog/2015/09/pricing-plan-changes-for-new-zealand/

IRD and Tax Refunds

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IRD are now only paying refunds you may be due for into a bank account, they are no longer issuing cheques.

This means it is vital we have your correct bank account number on record for the account you want refunds paid to. Please ensure you advise us of the preferred bank account number(s) when you deliver your accounts information to us.

If you do not provide us with your bank account number there will be a delay in preparing your tax return while we confirm the information with you.

Once assessed by IRD, we will check your assessment and notify you that the refund has been issued, but sometimes the refund goes through before we receive the assessment. Please await our confirmation that the assessment has been checked before you spend the money. In the case of an incorrect refund we will notify you and advise you how to pay the money back to IRD.

IRD and tax free allowances

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IRD are currently looking at tax free allowances paid to employees and whether they are actually tax free. To be a tax free allowance it has to be a reimbursement of an employment related expense, this can be actual cost or a reasonable estimate (however if it includes a portion above the employment related cost that part is taxable). There are also new rules and time limits to tax free allowances for accommodation, meals, clothing and relocation.

IRD are initially targeting the forestry sector and if that proves successful they are likely to extend their investigations. If  you pay your employees allowances now is a good time to revisit the tax status. If you get it wrong, the employer may need to pay backdated PAYE with added interest and the employee could end up with extra income affecting their Working for Families Tax Credits or Student Loan repayments.

IRD and Cash Jobs

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You will most likely have seen the item on the news lately about IRD targeting cash jobs in some areas of Auckland and while IRD are concentrating on Auckland they will not be ignoring other parts of New Zealand and they certainly are looking at certain industries such as construction, hospitality and similar industries where cash payments are not unusual.

An example of this was highlighted in the Nelson Mail recently. A restaurant was sued for tens of thousands of dollars by IRD for significantly under-reporting income and failing to pay GST and Income Tax. The owners have been found guilty but haven’t been sentenced yet, we will update this when they have been.

And, don’t forget about Trade Me.  IRD are keeping a close eye on those that buy and sell on Trade Me, so if you are doing this on a regular basis (regular enough that IRD consider it to be you are a business) then you should be declaring the income from sales and claiming the purchases and other expenses.

IRD refund changes

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IRD have removed the option to request an income tax refund by cheque and they will now issue refunds by direct credit where they have a valid bank account number on file. If IRD do not have a valid bank account number the refund will be issued by cheque.

There are a couple of potential issues that clients need to be aware of, the first being in the case of an incorrect assessment. As the refund will reach your bank account at the same time as we receive the assessment from IRD, we won’t have time to stop an incorrect refund before it is direct credited. This means we would have to ask the client to make a payment of the refund amount back to IRD to return the funds and this will take time and therefore have a cost attached. Secondly, if your bank account details change but are not updated with IRD, the refund might be issued to a valid but not preferential bank account  (if the bank account has been closed IRD would be alerted to that fact). This could result in the funds sitting in an old bank account for some time, before your check the balance and notice the refund has been received.

 

 

New Zealand Tax Residency

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To be treated as a New Zealand Tax Resident an individual needs to be in NZ for 183 days in a 12-month period or have a permanent place of abode.

There has been some recent development around the issue of permanent place of abode to establish New Zealand Tax Residency. If you are leaving NZ but still have ties to NZ and a place hypothetically available to stay (even if not immediately available, for example an investment property or holiday home) you could still be classed as a NZ tax resident and therefore need to pay tax on your worldwide income in NZ.

Furthermore tax residency can be backdated, for example a person coming to NZ on a holiday, then coming back a month later with family to settle, could be a NZ tax resident from the first time they stepped of the plane.

While needing to file two tax returns in different countries can be a hassle the good news is that for countries that NZ has a double tax agreement with you will be able to claim overseas tax paid to the level of the NZ tax due here on that income. You can go to IRD’s website and see which countries these are.

If you are leaving or entering NZ for more than a holiday it is important to talk this through with your Chartered Accountant and advise them of your intentions, your business interest and interests in trusts and companies as these can also be affected by your NZ tax residency status. We will help you meet your tax obligations and ensure correct disclosures are filed with the IRD.

If you are leaving NZ permanently and meet the criteria for being a non-resident for tax purposes, you would only be taxed in NZ on your NZ sourced income. To cease being a tax resident an individual needs to no longer have a permanent place of abode and be absent from NZ for more than 325 days in a 12-month period.

 

New Financial Reporting Standards: Simpler, Cheaper – or Not

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There’s been quite a bit of publicity in the media about how, for the 2014/2015 financial year, Companies and Partnerships will be able to have simpler (and therefore cheaper) Annual Accounts prepared.

Unfortunately the reality is a little different. It is true that the reporting requirements will be less for some fairly large Companies compared to current requirements. And it is true that for some it will also be cheaper, this would be the case if your Chartered Accountant currently prepares more reports than are required – which we don’t.

At Savage & Savage we strive to prepare Financial Reports (Annual Accounts) that meet the user(s) needs and legal requirements, not more, not less, so for most of our clients there won’t be any major changes. Many of the companies we prepare financial statements for already take advantage of the current simplified statements option under the Financial Reporting Order and the only report not required in the future is the Annual Report. There will, in fact be two or so additional reporting requirements.

Some things haven’t changed. All companies must still keep proper accounting records and apply solvency test and prepare financial statements for other reasons and users. The following users of financial statements all have their own requirements:

Inland Revenue Department (see below)

Banks (if you have an overdraft, revolving credit, loan, mortgage or any type or facility with a security attached)

Industry regulatory bodies eg TAANZ, Law Society

Companies Office Act

Other specific legislations

 

IRD’s minimum requirements S&S current practice Change
Profit & Loss, balance sheet, notes & schedules Yes N/A
Using double entry, historical cost and accrual concepts, tax values acceptable Yes N/A
Statement of accounting policies Yes N/A
Financial statement to taxable income reconciliation No – not currently required *NEW*
Comparable figures for the previous year Yes N/A
IR10 key points alignment Mostly – as currently required *NEW*
Associated persons transactions (from 2015-16 year) including a reconciliation to Shareholders’ Current Accounts No – not currently required except as a note *NEW*

 

The only exemption to these minimum requirements is for small companies were neither income nor expenditure exceed $30,000 for the year and they are not part of a group. The only requirement for these companies by IRD will be to file a tax return. For clients that may fall into this category and don’t need financial statements for the bank, industry regulatory body or other legislation we will give you the option of not having Annual Accounts prepared. However, we still need to compile the information and prepare a summary of income and expenses that can be used in the tax return.

The New Zealand Institute of Chartered Accountants (NZICA) has developed a new framework that will be acceptable to IRD and other users including most banks for most clients, but each case is different. If you have an overdraft, revolving credit, loan, mortgage or any type or facility with a security attached you will need to contact your bank. In the next few days we will send clients a template letter to send to your bank.

As members of this professional body we are required to follow their recommendations and use the new framework for preparing financial statements.

It is likely the above will be extended to apply to non-Company entities in the near future.

Is it OK to become a Trustee or Director?

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Obviously it is fine for you to become a director of a company you own. Becoming a director does come with responsibilities but as long as you operate within the law and meet your obligations as a director everything should run quite smoothly.

Do note however that the responsibility for a company trading within the law rests with the Directors not the Shareholders and if the company does not operate within the law then many of the protections offered by a limited liability company disappear. If you are asked to become a Director of a friends company tread with extreme caution, especially if your good friend is running the business and isn’t a Director – you will be taking on the legal liability for your good friend’s deeds and the end result may not always be a happy one.

People are often flattered if they are asked to become a Trustee of a trust or want to help a family member or friend by becoming a Trustee of a family trust. Again, tread with caution because there are significant personal liabilities you can be exposed to. If something goes wrong a Trustee can (and often is) held to account on behalf of the trust.

Several years ago a client of ours did a good deed by becoming a Trustee of a good friend’s family trust. The trust owned some property and seemed quite straight forward until the property was sold. It turned out the trust was developing property and IRD deemed there was tax owing by the Trust. The ‘friends’ were both made bankrupt and had no money to pay the tax so the tax man knocked on the door of the other Trustee (our client) and demanded he pay up. The good deed our client carried out by agreeing to be a Trustee ended up personally costing him tens of thousands of dollars in GST, Income Tax and penalties.

Many people are Trustees and Directors but the job is often best left to professionals rather than good friends. If you do become a Trustee or Director make sure you take on this legal responsibility with your eyes wide open and know what the worst case scenario may be.