The Inland Revenue Department (IRD) gained an extra $78 million in this year’s Budget for compliance and audit activity, on top of $119.3 million over four years, which the Government allocated in Budget 2010.
The Government has seen very good returns from this investment (better than anticipated), and so has been encouraged to invest more.
You can be sure that your chances of an IRD audit will be high if you (a) seek a larger refund of GST or Tax (b) have significant tax losses (c) operate in an industry where there is an opportunity to pocket some cash (d) have mixed use assets; (e) are involved in personal services industries (particularly dentistry, medical, veterinary, architecture or various other consultancy-based activities); and (f) operate through a company or a trust.
So how can a business owner manage this?
The three most common taxes are income tax, GST and PAYE. Associated with these taxes are risks of under-reporting income and/or over-reporting expenses. Keeping detailed financial records, updated on a daily basis, is essential.
It is advisable to consider accounting software now available, which makes this process more streamlined and easy to reconcile.
Review details
The company tax rate has reduced from 30% to 28% (effective from 2011/2012 income year). The Government aims to create jobs, raise wages and encourage businesses to retain and reinvest earnings.
It is important you consider these when complying with your tax obligations.
For audit purposes, the IRD would review your company documents, registration details, shareholdings and annual returns, profit and loss statements, balance sheet, financial forecasts and establishment documents.
You are also obliged to keep records of invoices and receipts, bank statements and deposit slips, all your worksheets and other documents to support account entries. It is a serious offence to take cash payments as part of your business and not declare them. This will expose you to severe penalties should the IRD undertake a review.
GST obligations
You must be registered for GST if you carry out a taxable activity, with a turnover of more than $60,000 or if you include GST in your pricing.
The IRD sends you your GST form for completion every period, which should be completed and lodged by the due date, accompanied with any payment.
Your records for a GST audit are books of account (paper or online), till tapes, receipts, bank statements, vehicle logbooks, stock-on-hand records, vouchers, accounting system instruction manuals and invoices from local and overseas suppliers.
All financial records must be kept for at least seven years.
PAYE obligation
PAYE is the tax you deduct from your employees’ wages/salaries and pay to the IRD. It includes income tax and the ACC earners’ levy.
Based on your employee’s tax code, you establish what needs to be deducted and your Employer Monthly Schedule and Employer Deduction forms are submitted to the IRD. Those employed by you must be entitled to work in New Zealand.
You should also ensure that the level of remuneration reflects the work undertaken by your employees.
The records you need to keep for PAYE are wage book information, PAYE payment receipts, employee tax code declarations and IRD correspondence.
Voluntary Disclosure
You may inform the IRD of an error in your tax returns before it finds out in some other way. This Voluntary Disclosure Scheme may involve disclosing omitted income or expenses incorrectly claimed. The key advantage of a voluntary disclosure is that any penalty you may face is reduced or remitted.
Every business entity should have a system of saving receipts and maintaining adequate documentation concerning every deduction.
Business owners with good records emerge from an audit easily; others can end up paying additional taxes (including penalties and interest) because expenses cannot be proven.
Jayesh Kumar is an Associate with William Buck (NZ) Limited, Chartered Accountants and Advisers. William Buck is an association of independent firms, each trading under the name of William Buck across Australia and New Zealand with affiliated offices worldwide. Liability limited by a scheme approved under Professional Standards Legislation other than for acts or omissions of financial services licensees. William Buck is an Associate member of Praxity, a global alliance of independent firms. Website: www.williambuck.com
Editor’s Note: The above article should be taken only as a guideline and readers should consult their professional accountants for issues relating to their specific business. The management and staff of William Buck (NZ) Limited and Indian Newslink including its Editor and Publisher absolve themselves of any liability or responsibility that may arise from the above article. Readers may seek clarifications by writing to editor@indiannewslink.co.nz
A related story from the Inland Revenue Department appears in this section
