In search of certainty

Typically, the average Kiwi business owner manager waits till the last ten days of March to give any thought to meeting the business’s 2015 tax obligations (2014 through to March end), cursing the money involved, as well as the time spent getting to grips with new legislation. And often still trying to get fully au fait with existing rules and requirements too.

So we’ve gathered some of the top experts in the field to:

• Help you do the right thing, at the right time, for the best outcome,
• Advise you on what to do if you get into a bind with the IRD,
• Encourage you that new legislation is likely to ease your pain of compliance soon, and
• Show you how to be smart and still be legal.

There is both good news – a promised simplification of the rules and cost of compliance are imminent this year – and bad. First the good.

About $1.5 billion is being spent on a programme which is intended to reduce tax compliance obligations for businesses from late 2015. Peter Vial, tax leader for Chartered Accountants Australia and New Zealand (CAANZ) reports the Government has set up a Taxpayer’s Simplification Panel to challenge IRD’s thinking about ways to improve the ‘customer experience’.

“This includes making it simpler for individual taxpayers and SMEs to meet their tax obligations. The Panel is keen to hear from SME owner managers about any aspect of tax compliance, so it can identify areas where the IRD can make paying tax easier.

“That includes the things frustrating Kiwis and they welcome ideas on how things can be done better.”
(The Panel’s email address is [email protected].)
On the other side of the coin, Mike Rudd, director, Taxation Services, Staples Rodway sets the scene on the current environment, with Inland Revenue’s ‘Tax Compliance Focus’ and he has two words of advice – be prepared.

“With reports of more than $500 million in tax unaccounted for last year, due to tax avoidance, IRD is under increased pressure to maximise the tax take,” he says. “It has also been buoyed by recent success, announcing a 750 percent return in the 2014 year on its existing costs of investigation and enforcement.”

Rudd says the main areas IRD is focusing on include:

• On-time filing and payment.
• Tax losses and availability to ‘carry forward’.
• Trusts.
• Property speculators.
• High-wealth and high-income individuals, and trusts.

“They have, for some time, focused on ensuring businesses get their basic tax obligations right. With many accounting and return preparation systems being automated, the risk of minor errors being unnoticed is high, and presents the IRD with potentially rich pickings, particularly in PAYE and GST.

“If you have engaged in any property transactions in recent years, it is important to remember, among other things, you need to prove your intention when acquiring the property was not to sell it and that you have not engaged in a regular pattern of buying and selling property. Although New Zealand does not have a capital gains tax, profits from property sales can be taxable in a surprising number of circumstances.

“Inland Revenue’s emphasis on high wealth and high income individuals, as well as trusts, is a continuation of the IRD’s recent focus on minimising the impact of aggressive tax planning arrangements. Many of these arrangements have included the use of a variety of entities for non-commercial purposes,” Rudd says.

SMEs should also be aware of some recent changes to the IRD’s practices on treating tax payments as being ‘received in time’, says CAANZ’s Vial. “This particularly affects the minority of businesses which do not pay their tax electronically.

“It has changed its long-standing practice whereby it would treat a payment made by cheque as being received ‘in time’, provided it was posted by the due date. Now cheques must be received by the due date to ensure penalties for late payment and interest are not charged. Previously, cheques to Inland Revenue could be paid in at Westpac branches. This is no longer the case, although cheques can still be left in drop boxes at Inland Revenue offices or posted to Inland Revenue.

“Cash payments only can be made at Westpac branches. Many advisers are likely to suggest to their SME clients that paying their tax electronically is efficient and straightforward.”

New R&D initiative
One opportunity to look out for in 2015 is a new Government initiative that will allow some companies that undertake research and development to’ cash out’ their tax losses. Effectively an eligible company will be able to swap its tax losses for cash from the Government.

Vial says the initiative is looking like it could apply to tax years starting from 1 April this year.
“The initiative is targeted at small companies which invest heavily in R&D and incur tax losses particularly in the start-up phase. To assist these companies with their cashflow the Government will buy their tax losses (up to $500,000 in the first year, which at the 28 percent company tax rate equates to up to a $140,000 cash payment).
“In subsequent years the threshold will rise gradually to $2 million of losses, which will result in $560,000 of cash.

“The cash from the Government is effectively a loan that will be repaid as tax once the company is deriving taxable income, as it will no longer have tax losses to bring forward,” adds Vial. The Government will also recoup the cash if the shares in the company or the underlying intellectual property are sold.

“To be eligible a company must be ‘R&D intensive’. This requirement looks like it will be met if 20 percent of the company’s wages and salaries are spent on R&D wages and salaries. This will include expenditure on shareholder salaries, contracted labour and 66 percent of contracted R&D.

“It must also be carrying out eligible research and development, the definition for which will be consistent with that used by the relevant accounting standard,” Vial says.
He expects the IRD to publish more information about the initiative once the legislation has been introduced into Parliament. If your company may be eligible you should ask your chartered accountant or other adviser to keep you up to date with the progress of the initiative.

As part of being proactive in dealing with all tax issues, Staples Rodway’s Rudd recommends:
1. PAYE, FBT and GST ‘health checks’. Your adviser does a review similar to an IRD one, giving you a ‘dry run’ of the questions and checks they could conduct.

2. Maintain proper records. These investigations are ‘a fact of life of being in business’. “Ensure your records are tidy, correct, and up to date. If the IRD can quickly find your records are in order and you are complying with the tax rules, you can expect any review to be over and done with quickly. Where there is something to investigate, expect more digging”.

3. Review your business structures. With their focus on trusts, business structures should be reviewed to ensure these make commercial sense and do not deliver tax advantages “which could be characterised as tax avoidance”.

4. Insurance. Consider taking out insurance for the cost of an investigation by any government department, including Inland Revenue.
“This levels the playing field with tax investigations. Where we have previously seen taxpayers concede their statutory rights or enter an agreement they do not believe is correct, because of the cost of challenging IRD, the taxpayers can stand their ground if they know their adviser’s costs will be covered.
“The key is taking out the insurance before any notification of a review is received.”

And Rudd’s final bit of advice: “As you are coming up to the end of your financial year, we recommend giving some thought to all of these areas and ask yourself: How prepared are you if the IRD comes knocking?”

Tax pooling
After the advice above, you’ll probably be ready for something that won’t cost you money and, indeed, will save you some – particularly if you have a problem with provisional tax.

“It’s called tax pooling,” says Chris Cunniffe, CEO Tax Management NZ, “and a growing number of SMEs utilise this as a means to reduce their exposure to IRD interest and late-payment penalties.

TMNZ says it has helped more than 25,000 SMEs save more than $70 million in IRD compliance costs since 2003.
“Businesses can reduce IRD interest costs by up to 30 percent and eliminate late-payment penalties on underpaid tax if they purchase tax, as opposed to paying IRD directly,” explains Cunniffe. “In monetary terms, a business which has underpaid its 2014 income tax by $10,000 would save $1,842 in late-payment penalties and $230 in use-of-money interest (UOMI), if it bought tax from us.”

Tax pooling can be used to settle tax liabilities up to 75 days after a business’s terminal tax date. Here’s how this IRD-approved concept works:
“Tax paid through a tax pool is transferable, so businesses which overpay provisional tax can sell any surplus tax to those businesses which have underpaid. The trading between buyers and sellers is facilitated through a tax pooling intermediary such as TMNZ. Tax pool funds are held at the IRD and overseen by an independent trustee,” says Cunniffe.

“Businesses wanting to better manage their cashflow during slow trading periods or free up working capital for reinvestment can also use tax pooling to defer future provisional tax payments to a time which suits them – without incurring IRD late payment penalties and UOMI.”

Cunniffe says rates are competitive compared to many other traditional forms of finance (such as an overdraft or unsecured loan) and no security or credit check is required.
“There is no need to pay for all the tax financed if a business ends up owing less money than first thought. The finance arrangement can be extended easily.”

Tools to help
Finally, again, here is further good news on ‘no cost’ help – and it is online.

The Ministry of Business, Innovation and Employment (MBIE), through its online portal Business.govt.nz, allows SMEs to search their central Government compliance requirements in one place. This Compliance Matters tool is the latest addition in a suite of resources, aimed to make life easier SMEs by providing a searchable and easily-navigable database of government compliance requirements from seven central agencies, including ACC, IRD and MBIE.

And all at no cost. It saves trawling through multiple government sites to determine their core compliance requirements, whether it be managing aspects of your business (starting or expanding) right through to employing staff, exporting, tax and reporting.

“Best of all it directs you right to the agency you need to go to, to fulfil these requirements,” says Matt Kennedy-Good, manager of Business.govt.nz. “We are hot on compliance and how to do it. We have also built a really great tool to help give businesses the confidence to make the right decisions when addressing the cost of employing staff. Have a look at the Employee Cost Calculator and see what you think – it’s a very handy little tool.”

For those SMEs who find choosing the right employee-type confusing, Kennedy-Good also had a further update of their site launching “some very helpful content”, including some new visualisations to help SMEs make the right decisions when choosing the type of employee suitable for their type of enterprise.

Kevin Kevany is an Auckland-based freelance business writer. Email [email protected]