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OVERDUE TAX – WHAT DO YOU DO?

When the going gets tough, taxpayers often use the Inland Revenue Department (“IRD”) like a bank and choose to pay creditors before their taxation liability.

Reports suggest that the global financial crisis is entering its most “dangerous” phase yet, having regard to the happenings in Greece, and the downgrade of credit ratings in several countries. It is little wonder in this environment that the IRD has increasingly shifted its focus to management of overdue tax debt.

The IRD has wide ranging powers to collect debt, and will enter into arrangements with taxpayers that allow a taxpayer to continue to trade.

Recovery options available to the IRD include a deduction notice against a bank account, charging orders over property and orders for sale of assets. In serious cases, the IRD can also seek judgment and subsequently bankrupt an individual or liquidate a company.

If an arrangement is to be entered into the IRD can agree to accept payment by instalment over time (usually over a period of no more than two years), or can agree to a lump sum payment together with an instalment arrangement, or agree to write off part or all of the debt, or a combination of the above.

One of the factors the IRD considers when looking at relief options is whether the taxpayer is in a position of serious hardship or would be put into a position of serious hardship upon entering into any arrangement. Serious hardship looks at a person’s ability to meet minimum living expenses, meet the cost of medical treatment and meet the cost of education of dependent children.

Any application for relief made by a taxpayer must be made by telephone or in writing and must set out all the circumstances surrounding the debt and the person’s personal and financial circumstances.

There is an underlying obligation on a taxpayer to approach the IRD “with clean hands” and to fully and accurately disclose their full position and the value of any offer being made, (as we are reminded in a recent court case of Kea v CIR).

While an arrangement does not halt use of money interest, it does suspend penalties.

How it affects you

If you are unable to pay your tax at any time, we recommend that you seek some form of relief from the IRD as soon as possible. This will minimise any penalties and allow you to focus on getting things back on track.

GST CHANGE OF USE ADJUSTMENTS

Where an asset is purchased for non-taxable purposes but is subsequently applied for a taxable purpose, a GST change of use can be undertaken.

All of the provisions surrounding a change of use adjustment for GST purposes changed from 1 April 2011. One of the most substantial changes relates to assets that were purchased prior to GST registration and the taxpayer subsequently registers for GST.

Under the rules that applied prior to 1 April 2011, it was possible for a taxpayer to register for GST and undertake a change of use adjustment in relation to assets previously purchased and receive a one-off GST refund equal to the total GST paid for the good purchased. This can be illustrated in the following example:

On 1 April 2005, James purchased a piece of land for $225,000, including GST. On 1 October 2011, James decides to register for GST and undertake a change of use adjustment with respect to the land.

Under the old GST change of use rules, James would be entitled to a GST input credit for $25,000 in his first GST return.

Under the new change of use rules, James will be allowed a GST input tax adjustment at the end of the “first adjustment period”, which will end on 31 March 2012. The amount of the GST input adjustment is based on the proportion of taxable use of the land since the land was originally purchased. In this case, the land has been owned for 84 months at the end of the first adjustment period. Of those 84 months, six were used for making taxable supplies. As such, James will be allowed a GST input tax adjustment of $1,786 in the GST return period ending 31 March 2012.

Further adjustments will be allowed at the end of each subsequent adjustment period. Over time James will eventually receive GST input credits totalling the GST originally paid when the property was purchased, albeit that the final adjustment will occur on sale of the asset.

How it affects you

 If you are considering registering for GST, and have purchased assets prior to registration which will be used in your taxable activity, you will be entitled to make a change of use adjustment. The compliance costs associated with making the change of use adjustment are significantly greater under the new change of use rules. As such, we suggest that you discuss the matter with your tax advisor if you are considering registering for GST and making change of use adjustments.

POINTS OF INTEREST…

There will be no Tax Update next week.

Normally, an exporter must export their goods within 28 days in order for the transaction to be zero-rated for GST purposes. Exporters of goods intended to be sent overseas on the Rena, currently grounded off the coast of Tauranga, have been provided with a 60 day extension to allow them to make alternative arrangements to export their goods and still be able to zero-rate that supply for GST purposes.

If you are employing a student over the summer holidays, and the student’s total annual income will be less than $2,340, you do not need to deduct PAYE from the payment.

TO THE POINT…

“There is nothing better than a friend, unless it is a friend with chocolate.”

- Charles Dickens

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