Client Newsletter – Spring 2014

TAKE CARE WITH BANK DISCUSSIONS

Anything you say to a bank can be written down and used in evidence against you. Not by the bank so much as the Tax Department.

It is not confidential from the IRD. Always imagine an officer of the department is listening to your every word.
You have no control over the notes your bank manager makes of your meeting. Just in case he/she makes a mistake and writes a note of something he/she imagines was said, make a detailed diary note yourself immediately following the meeting.

For example, if you were to buy a property for renting and were to tell the bank there is a good capital gain to be made, this could be interpreted by the IRD as being a purchase made to get a capital gain. Consequence: taxable income.

If you have the intention to make a profit and a reasonable prospect of success, the eventual gain on any transaction you are engaged in is probably taxable. So, if you buy a rental property but have in mind selling it for a profit some time in the future, the profit on sale is taxable. On the other hand, if you buy the same rental property as a long-term investment to provide income in future years, you are not taxed on the profit you make on the eventual sale.

We all know property prices rise over time. So the person who buys to rent is aware there's likely to be a capital gain on sale of the property. The issue is you must buy for the income, not the capital gain.

The same applies to the sharemarket. Buy shares like Xero for fat dividends once they make profits and your sale of Xero shares for a gain is not taxable. Buy Genesis shares and sell them soon after issue "to take a profit" as sharebrokers say, and the gain is probably taxable.


DON'T USE THE IRD AS A BANK...THEY ARE TOO EXPENSIVE!

The IRD charge various amounts if a return is filed late or a payment is made late.  In particular, the IRD will generally charge interest and late payment penalties on any amount of tax paid late.  The interest rate is currently just under 9%.  Late payment penalties are applied in two stages:

  • an initial 1% late payment penalty will be charged on the day after the due date
  • a further 4% penalty will be charged if there is still an amount of unpaid tax (including penalties) at the end of the 7th day from the due date.

Every month the amount owing remains unpaid, a further 1% incremental penalty will be added.

The combined per annum cost of interest and late payment penalties is approximately 30% p.a!!  Therefore, if you believe you may not be able to pay a tax payment by its due date, it is generally better to try and fund that payment by other means than incur the IRD's interest and late payment penalties.  One option can be the use of the tax purchase system.   Another could be to negotiate a payment plan with the IRD (which should be negotiated before the due date for the tax). 

If you think you may miss a tax payment, please give us a call and we would be happy to discuss your options.

 

TRUSTEES MUST BE AWARE OF FISHHOOKS

A solicitor in a provincial town was the independent trustee for a family trust. Mr and Mrs B bought and sold 11 properties over a 12-year period. Ms X, the solicitor, did the conveyancing.

The trust treated these properties as separate residences of the beneficiaries. The tax department alleged the transactions were taxable and charged both GST and income tax, plus penalties.

The trust deed required all trust decisions to be made unanimously. In this case, it would have required Mr and Mrs B and Ms X to have agreed to each purchase and each sale.

However, Mr and Mrs B acted on their own account, buying and selling property and arranging finance, and then getting their solicitor, Ms X, to do the legal work.

It seems regular minutes were not prepared. However, they were prepared retrospectively and signed by all trustees. It seems that even if the minutes had not been completed, Ms X had agreed to the transactions because she would have signed the various documents in her capacity as a trustee and she would have known that all the transactions were occurring.

Ms X was held to be jointly and severally liable for all tax and penalties, along with the other two trustees. This means if they could not or would not pay some or all of the money owing to the IRD, Ms X would have to make up the shortfall.

If you are an independent trustee of a trust, we hope you have read this little story. If it gives you nightmares, resign your trusteeship first thing in the morning.

If you must accept the position of trustee for someone else's trust, you must know what is going on. If your co-trustee(s) thinks they can act independently, resign. Sometimes this can be a painful process. For solicitors and accountants it can mean the loss of clients. For others it can be the loss of friends. Face up to it, don't get caught like Ms X.



BRIEFLY

Make Sure You Get Proper Tax Invoices

Not all retailers are issuing proper tax invoices.
For purchases over $50 at a minimum a tax invoice must include the words "Tax Invoice" as well as the GST registration number.
If you do not receive a tax invoice for goods purchased, you are not permitted to claim GST. Should you be given an invoice which does not qualify as a tax invoice, ask the assistant to record the missing information on the document and, to be extra cautious, get the person to initial the changes.
You may well discover the omission after you have left the shop. The remedy, in that case, is to ring the firm concerned, get the name of the person you talk to and ask for permission to insert the missing information as agent for the supplier. Then insert the missing words or number. Be careful, it is illegal to be issued with two tax invoices for the same transaction.

Get Personal-Business Loan Arrangements Right
A client bought a new car for his business. The business paid for the car but the finance arrangement was in his own name. The interest is not tax deductible on the money borrowed.
While we can remedy the situation, it adds to our work and your costs. Make sure if you are borrowing money for your company, the documentation is made out to the company and is signed on behalf of the company by you as a director.
Sometimes you can get a lower rate of interest by getting a loan in your own name rather than in your company name. If this is the case, talk to us. You could be appointed agent for the company. This would need to be properly documented.

ACC classification
It appears ACC may be using "Manufacturing" as a default classification. If you receive ACC statements, check to see they have the correct classification for your industry. Your premiums could be too high. If this has happened to you, go back to earlier years and request refunds if necessary.

IRD and 'your cheque is in the mail'
From 1 October this year cheques must reach IRD by the due date for payment.
Posting a cheque on the last day will be too late. IRD will accept post-dated cheques but won't guarantee to not bank them early.
If there are insufficient funds to pay the tax, that's the taxpayer's problem. IRD say they will endeavour to avoid banking early and we believe them. Mistakes are made, however.
To help ensure a post-dated cheque is not banked too soon, highlight the date on the cheque in a bright colour and staple a warning to the cheque that it's post-dated.
Payment on the next working day after a weekend or holiday is still acceptable. A provincial anniversary day is a working day, NOT a public holiday for the purpose of the tax being received on time.

Westpac will accept cash or eftpos for tax payments, but not cheques.  IRD will not accept cash.

 

Please note: 
The above E-newsletter notes and the related articles on our web site are of a general nature and therefore we urge clients who may be affected by these changes to contact us to discuss your specific circumstances before making any changes or drawing conclusions.
If you do not wish to receive these E-newsletters from us please use the unsubscribe option.