Newsletter – 13 March 2023
We all said “Happy New Year” months ago now…. but for accountants, our New Year’s Day is April 1. And yes, we see the irony!
After the events of the last three years, we’re approaching the new (financial) year with caution.
Our thoughts are with those affected by the floods and cyclones – and if you’re in this position, please let us know as there may be government measures that can help.
What you need to know this month…..
Prepare for 31 March – things for businesses to do this month:
- For businesses that carry a debtors ledger, go through your accounts receivable list, and write off any bad debts. This is so that you won’t pay tax on money you aren’t going to receive. Tax law requires that the write off is done PRIOR to balance date.
- Stocktake – all businesses that carry stock must prepare an annual stocktake. There are tax opportunties here – make a note of any obsolete, damaged, or unsaleable stock to discuss with us, so that together we can value this stock appropriately for tax use.
- Accounts Payable – ensure your Accounts Payable list agrees to all your supplier statements at 31st March.
- Start collating all the information required and listed on our Questionnaires, this will make things easier when it comes to sending your information in. https://www.millerjohnson.co.nz/free-resources/client-questionnaires/
Inland Revenue Updates:
COVID measures are wrapping up. The concessions which have meant no penalties or interest for later payment cease on 8 April 2024. We note that similar limited measures apply for those affected by the recent storms, but registration of the impact is essential.
Policing the 39% tax rate – and other “get tough” measures Inland Revenue have indicated that they will actively investigate those who earn in excess of $180,000. They have stated this will include looking into income diverted to trusts, and income allocation that has been effective in the past will be challenged. We have also noticed an increase in audit activity from IR, and expect this to continue, and to increase.
The powerful new computer system is now embedded. This system is going to be a significant tool in investigation, as suggested above. It is already being used to investigate possible Brightline tax exposure. Another factor we have noted, is that more of the work that IR used to do to resolve issues, we are being required by IRD to do.
Trust disclosures are quite frankly, confusing. Those clients who have trusts are aware that much more information is now being collected about trust ownership and assets. The 2022 guidelines were unclear, and some fine tuning is still being done. We expect the requirements for information from trusts to increase. In our opinion, IRD is aiming to remove the tax advantages that trusts provide. We will keep you appraised of developments in this area.
Construction sector: Inland Revenue have advised that they are starting their increased audit activity with the construction sector, with a focus on ensuring all taxes and return filing are up to date. They will also look at randomly selected tax and GST returns, FBT returns and unusually high expenses or low income returns.
Fringe Benefit Tax is another area that IRD have expressed particular interest in.
Please refer to the section about Audit Shield later in this newsletter – this is one way of minimising the cost of an audit.
Residential Rental Property owners:
We hear a lot of frustration from clients who own residential rental properties.
The information you need is:
- Interest deduction “denial” – no deduction for interest on new house purchases (except new builds), and the continuing reduction of claiming interest on borrowing for rental properties. This is a real cost to rental property owners.
- Brightline tax – we have repeated this separately below, but remember that sale of a property which is not your primary residence is subject to income tax if:
- Purchased after 29 March 2018, before 26 March 2021 and sold within 5 years
- Purchased after 27 March 2021 and sold within 10 years (unless new-build, then subject to 5 year Brightline rule).
- Healthy Homes and earthquake strengthening – do not assume you will get a tax deduction for expenses which are required by law – contact us to check if you have concerns.
- Maintenance as part of a renovation – this is another area which is being more closely monitored, and do not assume that the definition of a cost as a repair will automatically gain a tax deduction – again, contact our office.
- Loss of Rents insurance – do you have this? With the way things are, in light of floods etc, might be something to consider.
Family Trust – do you still need one?
Trusts still have their uses, but should be reviewed. We recommend you discuss this with your lawyer and with us. The tax advantages of trusts are being eroded. You may be aware that trusts no longer provide an absolute protection from rest home fees, and in some cases from business creditors and unhappy ex-partners.
Home Ownership – a warning:
If you have bought any residential property since 27 March 2021 you need to keep good records of use. This includes your own home.
Why? If you buy a home, then move out for one of many reasons, you could find yourself with a hefty tax bill if you sell within 10 years.
- Go overseas for a time
- Move to another city for a while
- Buy a different house and hold on to the existing one
- Purchase intending to live there but then sell without moving in
And don’t forget the bach. Or a home you buy for another family member. Inland Revenue aren’t interested in your intention, but in the event and the financial outcome.
A word on fees:
Unfortunately, we have had to increase our fees, much like many other fees and costs.
We work hard to balance our charges against our ability to continue delivering the high standard of work that we are known for. IRD is effectively “outsourcing” work that they used to do in-house to accountants (like us). We estimate this is adding upwards of $100 a year to even pretty straightforward small business or trust assignments. We are also experiencing significant scope creep with AML issues (sigh). Currently we do not charge for AML work, but please be aware that this may change as it becomes more of a cost to us.
However, we have some suggestions for ways you can aim to keep costs down.
Some practical points to note:
- If you are still using MYOB, another system or a spreadsheet, we urge you to consider moving to Xero. While it is no better than MYOB from a technical perspective, it is much simpler to use and has become the industry standard. If you are in this position, please contact our office to discuss. There is a monthly cost to Xero, but you will save the cost of it in end of year fees, and it may even make your life easier in other ways.
- When you prepare your records for us, do take the time to prepare a questionnaire for each tax return, read the questions carefully and provide all information requested. Contact us if you have any questions, as it is better for you if we help you provide clear and complete information at the outset.
- If payment of fees is an issue, we offer smartAR fee funding – please contact our office if you would like to spread your costs firstname.lastname@example.org
- We are always happy to provide an estimate of fees before starting a job.
Finally, please remember that our rates cover the experience and expertise of our team – which is reflected in the hourly rate.
Audit Shield Insurance:
We can’t say this enough – IRD are getting tough!
You will have received an email from us about Audit Shield, which is a service we use and recommend to clients. It is an annual insurance premium you or your business pay to cover the cost of any IRD-raised investigation.
We make no apology for encouraging the use of this insurance. IRD attention is costly and the work it requires is time-consuming. And as set out above – on the rise!
Don’t fall into the trap of thinking that because you are honest, and your tax returns are correct and complete, that you are safe from IRD attention. They have the right to ask anything of you, and increasingly they do.
Talk with us if you have concerns. Clients who have taken up Audit Shield and then have some sort of investigation from IRD are always happy they have had this protection. Consider it a part of your essential business insurance.
The final word:
Remember to talk to us BEFORE you make any major financial decision. We will never advise you to set up anything to avoid or evade tax, but we can help you with tax-effective structures.