It's nearly that time of year again, time to get your affairs in order and your return filed.
Recently the Inland Revenue established the Property Compliance Division and secured resourcing from the Government to carry out more auditing than ever before.
Last year alone, IRD found $70 million in tax position differences relating to property investment and development. For the IRD it’s well worthwhile investigating when a return is suspected non-compliant.
Additionally, the introduction of the Bright Line test in 2015, and the subsequent compulsory registration of buyers’ IRD numbers, means data matching against Land Transfer records has become highly sophisticated.
Now more than ever it’s important to make every effort to comply with tax requirements.
If you get audited
When the IRD initially red flags your tax return, it will look at doing a ‘risk review’ rather than a full audit and will often give you an option to make a voluntary disclosure. This means you’ll be able to make sure you have filed correctly. At this point it would be prudent to get an accountant to look over your return.
Naturally if you have dotted your I’s and crossed your T’s you’ll have nothing to worry about. If IRD proceed with a full audit the only thing that should concern you is how much time you’ll have to spend with your accountant – and the corresponding fees.
Many accountancy firms offer insurance against tax audits – this insures their client against the cost of complying with an audit request – not against any unpaid tax. You can typically buy insurance cover of up to $20,000 – due to the cost of paying your accountant for the extensive work they may have to undertake as part of the audit it may well be worthwhile.
If worst comes to worst and you are prosecuted there is a shortfall penalty regime with a range of penalties associated with the severity of the offence.
However, the IRD would normally only actually prosecute if they find fraud or wilful evasion. If a tax payer makes a full disclosure during a risk review prior to an audit being launched there is an immunity from prosecution.
Unsure of your tax position?
If the tax payer has taken reasonable care in determining their position they are likely to be prosecuted at the low end of the regime. To show you have taken reasonable care you can have your accountant go over your tax affairs before you submit your return.
Withers recommends that when taking a tax position on whether a cost is deductible or not “the tax payer can leave a deduction out of their return and lodge a Notice of Proposed Adjustment which forces the Inland Revenue to consider the deduction. This mitigates the risk of IRD finding it and then penalising them for having taken a wrong tax position”.
This is particularly important if the tax payer is taking a tax position regarding a large amount of money.
Check out http://www.ird.govt.nz/property for more information.
To help you avoid a tax blunder see page 32 of the Property Investor magazine where they have compiled a list of 11 common mistakes http://www.propertyinvestor.co.nz/