Inland Revenue Compliance Focus 2011-2012: Aggressive Tax Planning and the "Cash Economy"

Inland Revenue Compliance Focus 2011-2012: Aggressive Tax Planning and the "Cash Economy"


Author: Michael Levertoff

Aggressive tax planning

Taxpayers are able to legitimately manage their affairs to minimise the amount of tax they pay. However, Inland Revenue take a very dim view on people who try to avoid paying what they owe by employing schemes and tax planning structures or who divert personal income to companies, trusts to claim more Working for Families Tax Credits (WfFTC), or to reduce child support liability.

Arrangements that create deductions for items that aren't real economic losses, schemes that use losses in contravention of the loss rules, or retained losses that should be forfeited are currently under the microscope.

Also large claims along with the use of losses from previously dormant companies that start to use their losses are being actively reviewed and targetted by Inland Revenue.

And from 1 April 2011 WfFTC recipients can no longer claim rental losses against their income.

Some years back we assisted a client who had to deal with a complicated array of structures put in place by their former accountant to reduce tax that our client didn't even understand. Their accounting fees were approximately $14,000 per annum at this point - for a business turning over less than $200,000 per annum.

Things had changed for this client as they were heading in a new direction and they wanted to dismantle the scheme. It took six months and quite a lot of money spent to unravel the mess - and, to boot, on the way out the client had to pay a large sum of money to Inland Revenue in GST clawbacks.

Not only did this cost them financially and create an immense amount of stress, it used up a considerable amount of their time which meant their focus was not on their business. This distraction led to a bad decision made which caused a loss of over $150,000.

Our view: It's not worth it. Often the tax you avoid in the good times is simply a deferral to be paid in another tax year - at a time when you may not be able to afford to pay an expensive tax bill. Simple setups are easy to manage and understand, easy to dismantle and keep you off the Inland Revenue radar - and keep your fees down with NZ Accounting.

Under-reporting and operating outside the tax system

Not declaring cash jobs, paying wages and salaries in cash, or not reporting the trade of goods and services? Be warned: Inland Revenue is watching.

Recently we completed a second hand goods claim for GST for a client who had not brought these assets on the books which brought about a routine GST audit. Unbeknown to us, their tax returns over the previous years were much lower than would be expected - which led to a wider audit of our client's tax affairs. It wasn't hard at all for the tax inspector involved to uncover thousands of dollars of cash pocketed and not declared. This client is now up for a tax bill of more than $50,000.

Our view: use simple structures that openly and clearly present what you have turned over less what you have spent. Aside from this, avoiding your tax obligations reduces our tax revenue, cheats all New Zealanders out of funding for the services that support our communities, and provides an unfair advantage over other businesses who do pay their fair share.

If you are concerned about where you stand and need further assistance please Ask a question.