Tax Archives – Page 5 of 6 – Johnston Associates Chartered Accountants

6th July 2015 by Janine

Common tax traps to avoid

It’s the latest post from Kelvin, our resident Tax Consultant.

TaxTrap

As a tax advisor I’m often asked by people at social events what the most common errors are that I see in the course of my work.

This is not an easy question to answer because taxpayers come in all shapes and sizes, the rules are many, varied and occasionally complex, and some scenarios simply have to be seen to be believed.

Notwithstanding that, however, if we focus on SME and individual taxpayers, and if we think of them in the context of Inland Revenue’s current compliance focus and the types of perennial risks tax auditors are very good at spotting, here’s a quick grab bag of issues which immediately spring to mind:

Property transactions: the new two-year disposal rule and a doubling in Property Compliance Project funding over the next five years means the ranks of IRD auditors are set to swell. This sector is now in the full glare of a very bright compliance spotlight. Combine that with IRD’s extensive information-gathering powers and sophisticated analytical techniques and it quickly becomes obvious how critical it is to get the tax treatment of land transactions right first time. Mistakes are costly (the PCP currently returns roughly $6 in additional tax for every $1 expended) so the golden rule continues to be get good advice as early as possible. Bottom line – only a fool would assume that all of the increased attention will be directed at Auckland and Christchurch.

Hidden economy: basically cash transactions and suppressed income. The heat will continue to go on the hospitality sector while a big (and very visible) push has just started on tradies. Don’t wait for the IRD to come knocking on this one. Their default assumption if they find any mischief is likely to be tax evasion. That means potential criminal charges and serious consequential outcomes.

International: for present purposes that means immigrants and Kiwis returning home after extended periods overseas. Lots to think about here including tax holidays for transitional residents, the correct tax treatment of all worldwide income, potential application of Double Tax Agreements, special rules for foreign currency loans and bank accounts, other special rules for overseas investments and interests in foreign superannuation schemes, and what IRD may want to know if you use foreign credit cards to pay for goods and services here in NZ.

Trusts: after a long period of serious analysis about where trusts fit in the NZ tax landscape, there are signs this has become an area of targeted enquiries by IRD. Although they remain tight-lipped over this particular stream of work, obvious areas of interest to IRD auditors include the accumulation and use of tax losses and “Penny-Hooper” issues arising from the diversion of personal services income.

GST and zero-rating for land: while the CZR rules are complex around the margins, frankly I’m amazed how often people get this wrong. This sets them up for preventable problems that are time consuming and costly to resolve. Seek advice on your position before any contract to buy or sell land goes unconditional.

GST and “lifestyle” choices: main warning signs here are low or no annual income, irregular sales and perpetual refunds. List of usual suspects here is headed by registered owners of small rural landholdings, homestays, charter boat operators and other interests that look more like private recreational pursuits than genuine taxable activities. Beware also the obligations you have to pay GST on any assets that are retained on deregistration.

Other GST issues: these tend to be more technical and less well known to the average punter. They include special time and value of supply rules for transactions between associated persons, deferred settlement rules and annual adjustments to correctly account for any non-taxable use of business assets.

Look-Through Companies: correct application of Owners Basis rules and tax issues arising from buying or selling LTC interests.

Please note that this column is general in its nature and there will always be exceptions to any rule expressed or inferred above. Tax is all about detail and it is very rare for any two situations to be precisely the same. If you are in any doubt please discuss your concerns with your advisor.

11th June 2015 by Janine

Keeping great records.

RecordKeeping As your Nelson and Marlborough based Chartered Accountants it’s time for us to start concentrating on the preparation of your Annual Accounts, and so we’ll be asking you to complete the Johnston Associates South 2015 Client Questionnaire, so we can begin preparing some of your records.

Why it’s important to keep your records.

Business Growth. Keeping good records will ensure you have all the information you need to manage your business and make sound decisions in terms of business strategy.
You’ll save money. Time is money and having everything to hand will save you costs somewhere along the line.
To prove your deductions are legitimate. The IRD carry out routine business audits, if this happens to you, having your financial records organised and on hand will definitely make the process smoother and faster.

How long do you need to keep them for?

Accounting records and all the associated documents must be maintained for the current accounting period and the last 7 completed accounting periods of the company

What should you be keeping?

details of all income received (copies of invoices issued etc);
all tax invoices and receipts for purchases, insurance, power, phone and all other costs incurred; (For GST you do not need to hold a tax invoice for items costing less than $50, but you do need to maintain a record of such payments. For income tax, you should have invoices for all expenses, whatever the amount).
credit and debit notes;
bank statements;
cash books or computerised accounting records;
wage records for any employees;
interest and dividend payments;
a list of business assets and liabilities;
motor-vehicle log books;
details of entertainment expenses for clients, staff or suppliers;
any other necessary documents to confirm entries in your accounts.

But there’s more…

The Companies Act 1993 sets out the statutory record keeping requirements for all registered New Zealand companies. These requirements include the retention of;

Company Constitution
Minutes And Resolutions
Written Communications To Shareholders
Register Of Directors
Register Of Interests
Share Register
Financial Statements
Accounting Records

If you do have any questions regarding your obligations, or what records are prepared by us as part of your Annual Accounts please feel free to contact us.

18th May 2015 by Janine

New tax on capital gains as property crackdown accelerates

cgt The Government has upped the ante in its continuing crackdown on property speculators with a new capital gains tax featuring in a raft of 2015 budget initiatives it hopes will help to slow a runaway Auckland housing market.

We say “new” because the latest “bright line” test adds to the complex suite of land taxing rules in the Income Tax Act which already treat some capital gains from property investment as assessable income.

While there is sure to be an outpouring of political and economic debate over the effectiveness of the new rule, particularly with regard to its targeting of overseas buyers, what cannot be in doubt is the fact that Inland Revenue auditors will have a powerful new tool to use against investors whose strategy is oriented more towards short term gains in the price of property rather than a clear focus on the rental income that asset will generate over time.

Despite the unqualified success of Inland Revenue’s Property Compliance Project (PCP) over recent years, it is important to note that the new tax is only one enforcement measure among several aimed at bolstering the taxation of certain types of property transactions. The range of initiatives to be announced by the Minister of Finance this week also includes:

A virtual doubling of funding to Inland Revenue for compliance and enforcement activity as part of the PCP work programme over the next five years.
Requiring IRD numbers to be used as part of the land transfer process.
Non-resident investors must now hold a New Zealand bank account, register with Inland Revenue and advise their tax identification number from the country in which they live before they can buy property here.

Notable features of the new “bright line” tax are:

Any gains realised from property which is sold within two years of acquisition will be taxed at the owner’s marginal rate of income tax.
There will be only limited exemptions. They include transactions involving an owner-occupier’s main home and property inherited from a deceased estate or transferred as part of a relationship property settlement.
The new rule supplements the existing “intention” rule. More to the point, it effectively removes any doubt around the tax treatment that applies to properties which are disposed of relatively quickly. As such there will now be some welcome clarity in an area of tax law that is open to abuse and, because of that, often creates considerable tension between Inland Revenue, investors and their advisors.

New disclosure requirements for non-residents will be welcomed by many as they will increase Inland Revenue’s ability to track speculators overseas and enforce New Zealand’s claim to tax through our network of international tax treaties and other administrative tools.

Some consultation and feedback will occur but we expect this part of the process to be relatively brief as the new rules are intended to apply to properties acquired from 1 October 2015. Special NRWT measures for non-residents will take slightly longer to bed down and are targeted for introduction in mid-2016.

If you wish to discuss any aspect of the tax initiatives in this year’s Budget in more detail, including the new property taxing provision or any other land taxing rule, please contact your usual Johnston Associates South advisor.

2nd March 2015 by Janine

Update for Overseas-Based Student Loan Borrowers

As your Nelson based Chartered Accountants it’s our job to keep you abreast of changes that may affect you. Are you an overseas-based Student Loan borrower?

The government’s clampdown on overseas-based Student Loan borrowers has moved up another gear with John Key and Tony Abbott confirming an extension of information sharing arrangements during their annual leaders meeting late last month.

The arrangements are designed to give Inland Revenue more teeth to enforce the collection of Student Loan debt and follow on from a suite of tough measures introduced in last year’s budget, including potential arrest at the border for borrowers who persistently fail to meet repayment obligations.

Inland Revenue’s moves to beef up its capability across the Tasman drive off the fact that two-thirds of the nearly $700 million in delinquent non-resident Student Loan debt currently resides with Kiwis in Australia. The latest round of talks confirmed that tax officials in Australia would be able to provide up to date contact information to their colleagues in New Zealand.

Inland Revenue’s expanded reach means it has progressively initiated more legal proceedings in Australia in its own right. While this is to be expected some aspects which are less widely understood are that Inland Revenue also has the ability to use statutory powers granted to the ATO to enforce New Zealand court judgments for Student Loan debt. This may be done through a combination of charging orders on assets, compulsory deduction orders on salary payments, seizures of property and, in worst case scenarios, forced bankruptcy.

Because targeted funding and increased enforcement capabilities have made Inland Revenue more active and more effective in this space, the collection of Student Loan arrears is expected to remain a major focus for compliance and enforcement activities over the months and years ahead.

We note that arrangements similar to the trans-Tasman framework are also being made with other countries, including the UK, although they are in most respects works in progress.

Given the surge of activity in this area we recommend that anyone who needs further information about Student Loan obligations for non-resident borrowers consults the IRD website HERE.

21st August 2014 by Frances

Bitcoins and other digital currencies – emerging tax treatment

The Digital Age has given us a whole new range of ways to conduct our business and personal dealings and a feature of this continuing evolution is the development of “Bitcoin” and other forms of digital “crypto-currencies”.

Their emergence over recent years has posed increasing problems for tax authorities around the world, primarily because of the propensity for crypto-currencies to be used for money laundering and tax evasion purposes by organised crime syndicates and others who preferred to live off the financial grid. They were also the preferred consideration of choice for consumers who shopped internationally for recreational drugs through e-channels like “Silk Road” etc, but that’s another matter.

It is increasingly common as advisors to come across New Zealand residents who possess and/or trade in Bitcoins and other similar digital “currencies”. This has proved challenging due to the lack of clarity for related tax issues. Following a set of draft rulings by the Australian Tax Office yesterday we now have a clearer idea of treatment going forward.

There is more detail at the hyperlink below, but we summarise as follows:

The ATO is adopting a similar technical approach to their IRS counterparts in the United States by holding that Bitcoin and other similar crypto-currencies will not be considered “money” or a “foreign currency” when it comes to taxation issues in Australia.

Instead the ATO says in its draft Guidance Paper that Bitcoin and its equivalents are a form of property or commodity and that transacting with Bitcoins “is akin to a barter arrangement”.

The ruling means several things in Australia, principally that:

(a) Bitcoins are not a “financial supply” for GST purposes in Australia;

(b) instead they are a taxable supply of a commodity – these supplies attract GST at 10% (all amounts converted to AUD equivalents to determine the value of supplies);

(d) payments of salary or wages in Bitcoins constitute a fringe benefit.

Implications for NZ tax residents

Although Inland Revenue is yet to issue an authoritative statement on the tax treatment of crypto-currency issues, New Zealand is expected to take a similar technical approach as we are often in lock-step with Australia on tax policy matters. Assuming this turns out to be the case we could reasonably anticipate that:

The supply of Bitcoins and their ilk would not be a “financial service” (and therefore exempt from GST in New Zealand) because crypto-currencies would not be considered a “currency” (chiefly due to the fact that they are not issued or controlled by a regulated central bank or similar institution).

Instead Bitcoins are likely to be considered a “good” because they would be caught by the “all kinds of personal property” element of the statutory definition in the GST Act. As such they may be capable of constituting a “taxable supply” (subject to all other requirements in the Act).

Bitcoin transactions are potentially susceptible to income tax where any of the following applies:

(a) the Bitcoins were acquired for the purpose of disposing of them [s CB 4 ITA 2007]; or

(b) a person is deemed to have a “business” of dealing in Bitcoins and/or any other property “of that kind” [CB 5]; or

(c) if all else fails (from the perspective of the Commissioner) profits from Bitcoin speculation or trading may be treated as “income under ordinary concepts” [CA 1(2)].

If there is a change of government next month Bitcoins may also be caught by any CGT legislation that might subsequently be introduced.

An FBT compliance nightmare if people in business choose to pay an “employee” in Bitcoins – our advice: just don’t go there (at least as far as staff are concerned).

Parking Fines – Can you claim on yours?

Here is some information on parking fines that you may not know.

Fines are not tax deductible and there is no GST. This includes parking fines levied by a City Council.

However, parking fines issued by Wilson’s Parking are not statutory fines and are therefore claimable. They are merely an additional fee. They have GST in them.

Tax

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