WAIKATO BUSINESS NEWS
January/February 2015
29
On the radar - Inland Revenue’s latest Compliance focus Taxation and the law The New Year is a time to reflect on the year that has been and the changes we want or need to make.
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or many businesses, this is a good time to step back and look at key areas of improvement, one of which may relate to your tax compliance. Despite Inland Revenue’s (IR) best efforts, there continues to be a level of noncompliance from people either inadvertently missing the mark or intentionally choosing to cheat the system. Each year IR identifies specific areas of risk and publishes a ‘Compliance Focus’ document. The 2014/2015 publication sets out IR’s key compliance focus areas and provides an indication on what to expect in the upcoming year – which can provide a starting point when deciding what areas to focus on. Because if IR is focusing on it - there is likely to be a reason why. Key focus areas for 2014/2015 include: Everyone files and pays on time It may seem simple, but IR will be focusing on prompting people to file overdue returns (particularly employer monthly schedules as these can impact employee entitlements) and pay outstanding amounts. This includes all types of returns and payments whether this is tax, child support or student loans. IR may
prompt you via text message, phone call or letter. There is no better way to avoid interest and penalties than to pay what you owe by the due date. People with high wealth or high income If you earn a high income, or have a high net worth, there is a presumption on IR’s part that you are more likely to have complex tax affairs. IR looks out for particular signs that may require further scrutiny from a tax perspective including: • large one-off transactions • unexplained losses • unusual capital/revenue classifications • mismatches between tax paid and net wealth • complicated structures, intra-group dealings and financing arrangements, or • mixed business/private use assets. If you are uncertain about the application of legislation to your situation, independent professional advice should be sought. The property business The New Zealand property market continues to be robust with property speculators, dealers and investors actively buying and selling in the market. Tax consequences in relation to each transaction must be considered under the land
taxing provisions. IR has had a focus on this area for a number of years given the complexity behind taxing property transactions. Key areas of focus include tax issues associated with residential property trading, one-off speculation and new and infill developments. If IR finds a person hasn’t complied with the rules, they may place an alert on a person’s account to check and ensure future property transactions are treated correctly. Trusts Trusts provide a flexible structure for protecting and preserving assets and can be an effective means to balance asset and tax planning. In recent years, the IR has been looking at trusts with increasing scrutiny, and this year is no different with IR looking at trusts from two angles. Firstly, IR wants to educate people and ensure they understand the tax rules applying to trusts to avoid common mistakes. Secondly, IR is looking out for the use of trusts in aggressive tax planning arrangements and in structures that may not appear to make commercial sense or deliver unusually favourable tax advantages. More on aggressive tax planning below. Fraud and identity theft Your identity enables you to travel, work and receive government benefits. Occasionally however, people will create fake documents, identities, intentionally provide incorrect information to
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By hayden farrow
Hayden Farrow is a Director in the Tax Team at PricewaterhouseCoopers | Email: hayden.d.farrow@nz.pwc.com pay less tax or illegitimately seek money from IR. At present, IR’s systems are designed to prevent people from receiving refunds they aren’t entitled to and data analysis helps to detect and monitor suspicious activity, ranging from basic scams to complex and organised criminal activities. IR is also increasingly working with other government agencies to identify and take appropriate action when someone attempts to commit fraud against a government agency. IR’s systems are becoming more sophisticated. With the transformation of IR and associated IT systems upgrade, we expect IR’s ability to analyse and identify risks will increase. Under-reporting income and operating outside the system People that are new to New Zealand or are starting a business for the first time may not know what their tax obligations are and IR is looking to educate and inform people in these circumstances. In other instances, people may intentionally under-report their income to evade tax. Not only does this provide an unfair competitive advantage over other businesses that pay the right amount of tax, but it results in the Government receiving less to spend on providing services.
IR has been looking at this area for a number of years and is working to improve the tools and techniques it uses to detect evasion. Aggressive tax planning Aggressive tax planning involves the use of inappropriate or unlawful tax structures to avoid paying tax or to enhance entitlements to social benefits. Aggressive tax planning has come under increasing scrutiny in recent years with IR actively pursuing aggressive tax structures. IR has been looking more closely at transactions where the tax benefits seem to drive the transaction or the tax benefits outweigh the commercial reality of a transaction. Internal tools assist IR in matching tax data from various sources to identify potentially aggressive tax structures and schemes. With IR’s success through the Courts, the line representing acceptable tax planning has swung in IR’s favour, so it is even more important to ensure your tax structures are appropriate and lawful in today’s environment. Charities Charities operate for the purpose of providing benefits to the public, or a sufficient section of the public. In return for their contributions to the community, charities receive an income tax exemption and people who donate to charities
can claim tax credits. However, sometimes charities are misused by people to pay less tax than they should or to receive money they shouldn’t. IR is working to educate people with regards to laws for charities and is operating closely with the Charities Services team to identify people who misuse them. Tax is not black and white. The circumference of IR’s radar is growing so if in doubt, please seek professional advice. The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice. About PwC PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.co.nz PwC refers to the New Zealand member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/ structure for further details. © 2014 PricewaterhouseCoopers New Zealand. All rights reserved.
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