Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative. Any feedback would be welcomed.
McLean and Co. is a home based chartered accountancy practice based in Clive, Hawkes Bay. Readers are invited to peruse the practice website www.mcleanandco.co.nz, which lists services provided, gives contact details and indicates how to become a client, contains an extensive base of articles on business and taxation matters, and has links to other websites that may assist your business. Being a small firm itself, McLean and Co. strives to provide a personal and professional service largely to a self employed person and small business client base. Enquiries are welcomed.
INDEX
-
Festive Rewards
Company Passed its Used By Date
Tax Audits- What is IRD Finding?
Record Keeping Confusion
-
Fines and Penalties
-
Domain Names for McLean and Co.
-
Internet Tax Payments.
RELEVANT BUSINESS AND TAXATION ARTICLES
The McLean and Co. website contains an extensive number of articles prepared by McLean and Co. relating to taxation and business matters. Here are a selection that will be of interest:
 |
Personal Planning for Business People www.mcleanandco.co.nz/page30.htm
| Tax Calender April 2002- March 2003 www.mcleanandco.co.nz/Page24.htm
| Motor Vehicle Expenses- Deductibility-Keeping Logbooks www.mcleanandco.co.nz/Page29.htm
| Current Tax Rates www.mcleanandco.co.nz/Page4.htm
| Back Claiming of Rebates www.mcleanandco.co.nz/Page57.htm |
FESTIVE REWARDS
Christmas is a time when employers often reward employees and key clients. It's a good time to review the tax treatment of these festive rewards.
Employees
Rewards to employess usually attract either PAYE, FBT or are only 50 % deductible under the entertainment rules.
The general principles for employee rewards are:
|
a cash bonus is part of the employee's pay package and PAYE must be deducted at the "extra emolument" rate.
| gifts of goods or services (including food and drink) which are available for the employees to take away and enjoy at their leisure attract FBT
| but...........food and drink is subject to the entertainment rules if the employer decides where and when it is consumed. |
Here are some simple ideas to maximise deductibility of Christmas rewards:
Fully Deductible for Tax
|
a reasonable amount of food and drinks for a staff break-up morning or afternoon tea on the premises
| food and drink incorporated into an on site end of year function including "employment related duties" such as training or a strategic review. |
Under the FBT Threshold
|
Gifts of $75 per employee (maximum 6 employees or $450 for the organisation) in the Christmas quarter will be under the FBT threshold |
Off site events are generally less tax efficient. Food, drinks, venue hire, transport and any associated costs will be 50% deductible. Although costs associated with an off site training event of four hours duration will qualify for a full deduction.
Clients
Gifts of food and/or drink to clients fall into the entertainment rules and are 50 % deductible.
A more effective way is to get a full deduction for corporate goodwill gestures is to give non-consumable gifts e.g Christmas trees, clothing, diaries, wine openers, keyrings etc
As shown above a bit of planning in advance can make festive activities fully deductible.
COMPANY PASSED ITS USED BY DATE
Occasionally clients decide that a company has passed its "use by" date. It is common practice to simply let the company lapse. This is done by ignoring the reminders issued by the Companies Office for the filing of the company's annual return. Eventually a notice arrives announcing that the company has been struck off.
There can be problems with this approach. Struck off companies can be reinstated by application of an creditor. If money is owed to the IRD, they too can seek reinstatement.
For example, sometimes companies are allowed to lapse where a shareholder has an overdrawn current account. An overdrawn current account means that the shareholder has borrowed money from the company ( eg drawings). The company is required to charge interest on the amount owing, using the FBT prescribed rate. If the company does not charge interest there will either be an FBT liability for the company or the shareholder will owe tax on a deemed dividend. If the company is struck off and the overdrawn current account is still in place the liability for the interest will continue to tick on. The company will owe income tax on the interest income, even if nothing else is happening.
Under a formal wind up process the company is required to give public notice of the intention to remove the company. A specified notice period permiits objection to the removals. If no objections are received the removal proceeds. Reinstatements will be more difficult to obtain.
Although a formal wind up process takes time and involves some cost, it is more difficult for the company to rise from the grave!
TAX AUDITS- WHAT IS IRD FINDING
IRD recently announced the major tax discrepancies identified in tax investigations.
The results represent a good indicator for you of common errors made by taxpayers, which may assist with checks that can be made to minimise the risk of you falling into the same trap as those taxpayers who have suffered the pain of getting it wrong and being caught by IRD. The interesting factor is that the list bears a striking resemblance to one we saw a few years ago.
The major discrepancies are:
|
losses ineligible to be carried forward
| capital expenditure claimed in error
| taxable income treated as a capital receipt
| failure to deduct and account for NRWT
| group loss offsets
| non-compliance of the accruals regime
| reserves disallowed
| GST- time of supply
| losses on sale of assets claimed in error
| FBT on vehicles
| FBT on free or subsidised goods
| Superannuation
| Failure to deduct PAYE/ Withholding Tax |
RECORD
KEEPING CONFUSION
We all know that it is a fudamental requirement of the GST system that a registered person must hold a tax invoice before an input deduction can be claimed for supplies over $50. The only exception is for second-hand goods claims.
IRD regularly uncover errors in an audit situation that include:
|
no tax invoice being held | ||||||||||
|
the words "Tax Invoice" missing from the Invoice
| An incorrect GST number is being used
| The name of the recipient incorrect or missing (e.g. trading names on the tax invoices that have not been registered with IRD rather than the taxpayer's name?
| No GST content being shown
| A simplified Tax invoice is relied on for supplies over $200
| The invoice does not include a date |
If taxpayers do not hold a technically correct tax invoice, IRD may disallow the imput tax deductions claimed and impose penalties.
The "tax invoice" requirements are carefully described in the GST Act and IRD can be very pedantic in enforcing them
The ability to dispense with the requirement to hold a "tax invoice" if a supply is less that $50 is a GST rule.
There is no such rule for income tax purposes. If the taxpayer wishes to claim a deduction for $1 sufficient records must be kept to support deduction
The conclusion is therefore quite simple...........request and retain Invoices for every business purchase.
FINES
AND PENALTIES
We are often required to make a decision about the income tax and GST treatment of fines or late payment penalties.
Examples include: fines for overloading vehicles, fines for inadequate road user kilometres on trucks, late payment penalties, speed camera and parking fines.
The traditional IRD view has been no deduction is available, for income tax purposes, for any penalty or fine paid for a breach of the law. You do the crime: you pay the fine--- no tax deduction.
That view has been modified over time by a series of legal cases to a point where current IRD practice allows a deduction for fines incurred by an employee. Similarly, a professional adviser who pays a fine on behalf of a client for some statutory breach which occurred because of negligence or bad advice, the fine will be a deductible expense in the hands of the adviser.
But where a self employed person or partner in a partnership incurs a fine in their own name there is generally no tax deduction available.
Late payment fees on local body rates are not fines. They are simply treated as additional rates and will be fully deductible, where they are charged in respect to a farm or other business premises, Similarly , late payment fees on ACC Levies are not fines; rather they are treated as additional ACC Levies and are tax deductible.
The decision as to whether to claim GST on fines will follow the deductibility for income tax rule. Thus parking fines, speeding fines, overloading fines etc do not have any GST content and cannot be claimed for GST. Late payment on rates and ACC Levies will have GST content and GST should be claimed. The problem is there are many items which are loosely called fines e.g. overdue library book fines. In fact, these are not fines at all but penalties or further charges imposed on the extended use of the book, and therefore include GST.
DOMAIN NAMES FOR McLEAN AND CO.
INTERNET TAX PAYMENTS
Three banks are now offering a tax payment service on their internet sites which meet IRD electronic payment requirements. These are:
|
ANZ
| Kiwibank
| Westpac |
Customers of these banks are able to make payments to IRD for most revenues, including student loans and child support. Payments relating to income equalisation and most duties cannot be made this way.
If you are making payments over the internet, it is most important that you check with your bank to find out what their daily cut-off time is for processing payments so that due dates are not missed.