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IRD Key Compliance Focus

August 24, 2016

From time to time IRD publishes its key compliance focus areas – specific issues that IRD are looking at now.

The latest report includes the following areas of focus;

  • Aggressive tax planning
  • Charities
  • People with high-wealth or high-income
  • Trusts
  • The “property business”
  • Under-reporting income and operating outside the system

This is consistent with IRD’s obligation to collect tax, and appropriate in the context of all taxpayers paying their fair share.

Aggressive Tax Planning

A small number of people try to avoid paying the tax they should or boost entitlements to social benefits by using inappropriate or unlawful tax structures. IRD call this aggressive tax planning (ATP).

What IRD are doing

They match tax data from various sources to identify potential ATP structures and schemes. If they suspect ATP is happening, they will monitor the tax position taken and follow up with an investigation, where required.

IRD are working on projects to address specific ATP issues they have identified. For example, herd scheme restructuring in the dairy farming industry and complex financing and they have been very successful challenging tax avoidance in court over the past few years.

IRD also actively support the international community's work on Base Erosion and Profit Shifting (BEPS) in New Zealand

How you can get it right

Learn more about IRD’s approach to aggressive tax planning.

Charities

Charities make an important contribution in our communities. In recognition of this:

  • registered charities receive tax exemptions
  • Kiwis who donate to charities can claim tax credits.

It's rare, but sometimes charities are misused by people to pay less tax than they should or receive money they shouldn't.

What IRD are doing

IRD educate people when they have gone off track. This helps ensure that they understand what they need to do get their tax right now and in the future.

They work closely with the Charities Services team at the Department of Internal Affairs to identify people who misuse charities. IRD investigate when people set up structures or schemes designed to avoid paying tax or receive money they shouldn't.

How you can get it right

If you help run a charity, make sure you know and follow the rules. You'll also find information on the Charities Services' website.

People with high-wealth or high-income

People who have significant assets or high income often have complex tax affairs. Like everyone else, most people with high wealth pay the right amount of tax at the right time, but sometimes people make mistakes and don't get their taxes quite right. We have a dedicated team that helps these customers get back on track.

What IRD are doing

IRD share information with high-wealth customers and their tax agents to help people avoid common mistakes.

IRD also look out for signs that they might not be paying the right amount of tax. That way IRD can contact them early, help them get back on track and stop penalties and interest adding up. Here are just a few examples of what IRD look out for:

  • large one-off or unusual transactions
  • unexplained losses
  • unusual classifications of income and expenditure between capital and revenue
  • mismatches between tax paid and net wealth
  • complicated structures or intra-group dealings
  • unusual financial instruments or financing arrangements
  • mixed business/private use of assets - especially lifestyle assets.

How you can get it right

If you think you may have got your taxes wrong, let us know by making a voluntary disclosure.

Trusts

People can choose to use trusts in their personal or business affairs. If you set up, manage, or receive income from a trust, make sure you understand and meet your tax responsibilities. Otherwise, you might face penalties or end up with an unexpected tax bill.

What IRD are doing

They are working to educate people about the tax rules for trusts and how they can avoid common mistakes. IRD are doing this through:

  • IRD trusts information
  • maintaining their guides
  • articles in business journals, industry publications and our newsletters.

IRD also look out for the use of trusts in aggressive tax planning arrangements. We look for structures involving trusts that:

  • don't seem to make commercial sense
  • deliver unusually favourable tax advantages.

They don't find a lot of these cases. But when they do, they take action.

How you can get it right

If you're a trustee, keep good records. This includes trust deeds, meeting minutes, resolutions, asset registers, bank statements and invoices. Good record keeping will help make filing income tax returns easier for you.

The ‘Property Business’

Whether you're buying or selling property for profit, renting out a property you own or having boarders stay in your family home, it pays to know the rules. That way you won’t end up with an unexpected tax bill to pay.

What IRD are doing

IRD are focusing on tax issues associated with residential property trading and one-off speculation, with a focus on new and infill developments.

But no matter what your situation, IRD want to make it as easy as they can for you to understand what you need to do to get your tax right on any property transaction.

IRD property information is there to help. Whether you have a straightforward question or a situation that's a bit unusual, it's a great starting point. It even includes a handy tool to help you check out if you have to pay tax on your property.

IRD also work with industry groups and educate people about their tax responsibilities.

People who don't follow the rules may be investigated. IRD may also place an alert on any future property transactions they make, so they can make sure you file your returns and declare the right amount of income down the track.

How you can get it right

Look at the IRD property information, read the IRD guide Tax and your property transactions (IR361) and watch their video "Tax on property rental income".

Find out about the common mistakes people make before you buy, sell or rent out a property.

Under-reporting income and operating outside the system

Most people report their income correctly and pay the right amount of tax. But a small number intentionally underreport their income and pay less tax than they should. This means:

  • some businesses may get an unfair competitive advantage over other businesses that pay the right amount of tax
  • government has less to spend on services that make New Zealand a great place to live, like schools and hospitals.

What IRD are doing

IRD understand that people who are new to New Zealand and people who are starting their first job or business might not know exactly what they need to do to get their tax right. IRD provide information, education and services you need to get your tax right from the start. For example, through our free tax seminars.

IRD are always working to improve the tools and techniques they use to detect when people are underreporting their income or taking steps to stay outside of the tax system. Where IRD find tax evasion, they take action.

To support global efforts to combat tax evasion, we contribute to information sharing that's happening across government here in New Zealand and with organisations overseas, for example, the Australian Taxation Office.

How you can get it right

Find out about your tax obligations on the IRD website or contact your accountant. If you're in business IRD recommend checking out their Tool for Business and the Companies Office's website.

Make meeting your tax responsibilities simpler by having good business processes in place and keeping good records.

If you've done some under-the-table jobs, or you've been under-reporting your income or not paying the right amount of tax and you want to get back on track with your taxes, contact your accountant and we can help you make a voluntary disclosure.

Notification of audits, and opportunity to make voluntary disclosures

IRD sometimes notifies an audit or investigation and invites a voluntary disclosure. A voluntary disclosure made after an audit has been notified but before it actually commences provides a 40% reduction in any penalty that may otherwise apply, and a reduced exposure to prosecution.

An audit is generally regarded as commencing at the end of the first formal interview with the taxpayer. It is very concerning that IRD correspondence does not make that clear and taxpayers sometimes stumble into an interview without realising they have given up the opportunity to make a disclosure. Know your rights!

Sometimes IRD instead notifies a risk review and provides an opportunity to make a pre notification voluntary disclosure of a shortfall, with a minimum 75% reduction in any penalties and immunity from prosecution. Unfortunately, IRD is inconsistent between different offices and between different investigators.

Our Conclusion

  • IRD Audit, Investigation and Risk Review activity continues to increase and this is not likely to change in the future.
  • The Inland Revenue audit officers are well trained and more aggressive.
  • Audit, Investigation and Risk Review activity tend to be stressful and can years to conclude.
  • A considerable about of information is requested and this can take time to get together and generally run up large accounting fees. So even if you have not committed any tax fraud (as is the case in most Inland Revenue audits), you are likely to be exposed to major costs if selected for an audit.

How can Chester Grey help

One of the services we offer is a Tax Audit Retainer Service Contract. The benefit to you is that the cost of our fees for attending to a tax audit, investigation or Risk Review is limited, depending on the level of retainer you choose. Therefore, you can reduce the stress on yourself by having professional help without the worry about the cost of the accounting fee. There is no doubt that having professional advice during a tax audit is a good idea - we can tell you some horror stories about people who have tried to “go it alone”.

We have a standard level of contract that we can offer you of $195 + GST to cover up to $2,500 of Chester Grey Accounting fees in any 12 month period. You can increase this if you wish by simply increasing the level of cover (and the annual fee) by $100 + GST for every additional $1,000 of Chester Grey Accounting Fees. We recommend that you discuss the appropriate level for your business with us before you decide. If you feel your circumstances do not meet our standard fee, we are happy to provide a quotation to your specific requirements.

CONDITIONS OF TAX AUDIT RETAINER SERVICE CONTRACT

  • The contract is for the 12 month period from the date the fee is paid.
  • Chester Grey Chartered Accountants Limited (CG) reserves the right to refuse to offer the contract.
  • The Tax Audit Retainer Service is for professional fees charged by CG, incurred in relation to an Income Tax, GST, FBT or PAYE audit, investigation or risk review by the Inland Revenue Department where written notification is received from the IRD of New Zealand dated within the 12 month from date the fee is paid.
  • The audit, investigation or risk review can be for any examination for any accounting period limited to condition three.
  • The contract excludes any legal or specialist accounting or taxation advice sought from professionals other than CG.
  • The contract relates to the territorial boundaries of New Zealand only.
  • The maximum liability of CG is limited to the amount of Tax Audit Retainer Service applied for, accepted by CG and paid for by the client.
  • The Tax Audit Retainer is limited to each entity applied for by the client and accepted by the CG.
  • Each entity includes “a company” or a “partnership” or a “trust” and its trustees (in their role as trustees) or “sole trader”.

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