IRD COMPLIANCE FOR 2011 / 2012
The Inland Revenue Department (“IRD”) has released its Compliance Focus Report on the current financial year. One of the four areas of compliance focus will be ensuring that people pay and receive the right amount of tax. The strategy looks at aggressive tax planning, fraud and identity theft, under-reporting and operating outside the system.
For Small to Medium Enterprises, the areas of risk that have been identified are aggressive tax planning, the diversion of personal income, the misuse of charities, discussed in the article below, and the use of offshore bank accounts and offshore schemes to misrepresent income or assets and evade tax.
Aggressive tax planning has been a focus for some time, evidenced by the IRD’s approach in the Penny and Hooper litigation. The IRD has noted in its compliance report that taxpayers are able to legitimately manage their affairs to minimise the amount of tax they pay but notes that there can be a fine line between legitimate tax planning and tax avoidance. People who knowingly adopt particular structures to get a tax advantage or increase their entitlements are a target. The IRD’s view is that any arrangement should be commercially justifiable and not rely on any supposed tax savings to make it worthwhile.
The changes to the Working for Families Tax Credit rules, and the change in the personal and company tax rates, are measures adopted to stop diversion of income.
Overseas bank accounts and schemes are sometimes used to under-report worldwide income.
Another focus continues to be those operating outside the system. The IRD is taking a particular interest in the hospitality, scrap metal, fishing, aquaculture, tourism, and agricultural and horticultural industries as areas that need to improve compliance, as well as those engaged in business through online trading and not declaring their income. The IRD has added ACC providers and the construction industry to its areas of interest and is also keeping a close watch on those participating in short-term rental and accommodation for major events.
How it affects you
If you have been claiming Working for Families Tax Credits, have restructured your business in a way that has reduced the tax you pay or have operated overseas bank accounts you may find yourself an IRD target over the next year. Similarly, if you operate in one of the target industries, have been trading online, or are renting out your property for the Rugby World Cup, expect a knock on your door.
Not everyone in these target areas will have a tax problem. If you are worried about any of the issues raised, or you receive a phone call from the IRD, we recommend that you speak to your advisor before doing anything else.
IS YOUR “DONATION” A FRAUD?
The IRD has issued a Revenue Alert RA 11/01 that sets out the IRD’s view on a number of “donation” scams. People have sought to gain a tax advantage in relation to the ability to claim a tax credit for any donations made to charities of $5.00 or more.
The IRD has been investigating arrangements where tax credits for donations have been claimed in circumstances where a true gift of money has not been made. These arrangements involve recharacterising gifts that would not ordinarily have been a donation in order to receive the tax credit.
The IRD has given examples where donation tax credits are being claimed which the IRD considers are not valid. We summarise the examples for you to indicate where the IRD’s enquiries are focusing.
Example One - A person has a loan outstanding to a charitable organisation (or in some cases has taken over a loan to a charity) which that organisation is unable to repay. Instead of forgiving the loan the person pays the organisation an amount of money equal to the debt in the form of a “donation”, on the understanding that the money will, in turn, be used to repay the debt. The organisation repays the debt and the person claims a donations tax credit.
Example Two - Instead of gifting property to the charity (which would not ordinarily qualify for the tax credit) the person makes a gift to the organisation which the organisation then uses to purchase the property from them. The person claims a donations tax credit. In some cases, the arrangement also enables the charitable organisation to claim a second-hand goods input tax credit for GST purposes on the purchase of the property.
Example Three - Fundraising is done on behalf of a charity. The money raised is then passed to an individual (generally someone closely associated with the charity) on the understanding that the person will “donate” that money to the organisation. The organisation will not have to account for any GST on the fundraising event, and the donor will claim a donations tax credit.
How it affects you
If you are making a donation to a charity and claiming a tax credit, make sure there is an actual gift of money. The IRD has made it clear that if an arrangement is identified, not only will the IRD recover the excess tax credit from the person making the claim, but it will also consider the imposition of monetary penalties. In extreme cases, the IRD considers the arrangements amount to fraud and will consider criminal prosecution.
If you have been involved in an arrangement of the kind identified above, or anything similar, the IRD is recommending you discuss the matter with your tax advisor, and consider making a voluntary disclosure.
If you fail to do so, and the IRD finds it, the consequences could be worse.