Get your accounts in order and returns prepared or face the wrath of the IRD
The new financial year is upon us and that means tax return time is looming. Sadly the tax fairies don't fill in your IR3 and other tax returns.
On the other hand the goblin - aka the Inland Revenue Department (IRD) - can fine you if you don't get your paperwork in order. Last year a third of the 500,000 IR3s issued hadn't been filled in by the July 7 deadline. Fines ranged from $50 to $500.
Tax is one of those things everyone should review regularly to ensure you avoid those fines or the spectre of an audit - although they're almost unheard of for regular wage and salary earners - and that you're getting all the tax benefits you're entitled to.
I've compiled an eight-point checklist:
1. Get started. Unless you want to be stung with fines and penalties this year, then it's a good idea to get going early.
Not everyone needs to file a return. However, it's worth going through the exercise of preparing the figures in case you're due a refund.
Charles Ronaldson, the IRD's assistance group manager, recommends taxpayers use the department's online tools to find out if they need to file a return. And if you're not using an accountant you can file returns online at IRD.govt.nz.
For deep-seated psychological reasons some people simply can't tackle their taxes.
Each year accountants such as Andy Crossen, an associate in Grant Thornton's taxation consulting division, have clients appear with boxes full of papers. Some have had their head in the sand for several years - and it's not uncommon for them to be owed money by the IRD, not vice versa.
Crossen says those disorganised souls may be shocked at what it will cost to turn their paper war into figures that can be filed in a tax return. Many on his suggestion go away and sort out the papers themselves before they return.
At the other end of the scale Grant Thornton has plenty of clients who have excellent systems in place and will provide their accountant with a spreadsheet of their financial position.
2. Get your tax-deductible ducks in order. For example, it's worth giving PIEs (portfolio investment entities) more than a passing thought.
If you haven't got any of these investments and have cash savings or New Zealand-based funds then it's worth considering whether investing in PIE funds, including cash ones, would save you tax.
What's more, make sure you've sent your prescribed investor rate (PIR) forms to banks and financial institutions so you get taxed at the right rate.
The rates PIEs are taxed at change from April 1, 2010 to 12.5 per cent, 21 per cent or 30 per cent. It's worth visiting ird.govt.nz/toii/pir/workout/ to find out about the new rates and how they work.
3. Give charitable giving a thought. This is another area where tax treatment has changed in the past year and tax-payers can benefit.
All donations to registered charities over $5 entitle you to third back as a tax rebate. One effective way to do this, says Crossen, is to give through the payroll to receive the rebate immediately. He likens it to the IR23 special tax code certificate, which allows property investors to reduce the tax rate they pay up-front on income.
4. Are you getting your KiwiSaver rebates? The Government matches your Kiwisaver contributions up to $1040 per year, which is a whole lot better than a kick in the teeth.
5. Should you get professional help? Professional help from an accountant can be worth its weight in gold. Most accountants say that they will save a taxpayer more than they charge. But there is a certain threshold of complexity you need to cross before it becomes worthwhile to have an accountant.
Crossen recommends wage and salary earners whose finances are straightforward do their own returns. Likewise wage and salary earners who own one investment property should be able to take the DIY approach. The "trigger points", he says, that suggest the need for an accountant include:
Being self-employed.
If you feel you don't know what you are doing or need on-going compliance assistance to make sure you don't fall foul of Inland Revenue regulations.
Owning any foreign investments - be it property, superannuation/pensions, or shares and other investments that come under the foreign investment fund rules. Some investors get themselves into a real pickle over these.
Another reason to have a tax agent such as an accountant is you get longer to file your returns, says Ronaldson.
Tax refund agencies are a booming business in New Zealand. They're the ones you see at shopping malls throughout the country. Typically they offer their services to wage and salary earners only and apply for a personal tax summary from the IRD. What's surprising is how popular these services are, given any individual can do exactly the same themselves for free on the IRD's website.
Having said that, if your taxes are simple and you're pathologically incapable of doing anything related to tax, then the money may be well spent. Charges vary, but at Mytaxrefund.co.nz, for example, you'd pay 30 per cent of a $100 refund for the privilege of the website's staff doing the job for you and $50 for a $200 refund.
The maximum fee of $97 applies to all refunds over $321.
6. Children. Should you put a return in for your kids? A reader wrote to me recently pointing out few parents were aware that the lowest resident withholding tax is now 12.5 per cent, from 1 April 2010. Children with bank accounts and KiwiSavers are affected. Unless parents tell the children's bank or other financial institution, they will be taxed on the old rate of 19.5 per cent. From April 1, the lowest rate is now 12.5 per cent for income up to $14,000. Likewise few children earn enough to be due a tax refund. If they are working, however, says Crossen, it's worth checking to see if they're owed money by the IRD. This can be done using the IRD's online tools.
7. Sharing assets for tax benefits. Again this is good tax planning. But the ideal situation is to plan the ownership of assets before you buy them, says Crossen. If, you buy an investment property in your own name, for example, then later realise it would be better in a trust or LAQC (loss attributing qualifying company) then you'll trigger depreciation recovery by the IRD when you change the ownership - assuming you've claimed it.
Whether investors will be able to claim depreciation on their properties after the May Budget is a moot point. Other situations where you may want to think carefully about ownership of assets is where one member of a couple is in a lower tax bracket than another. It may make sense to have the ownership of loss-making assets in the higher earning partner's name and the income generating ones in the lower earner's name.
This does not affect the situation of matrimonial property. If something is joint property under the Property (Relationships) Act, it makes no difference whose name it is in. The ownership structure is simply for tax purposes.
You do need to beware, says Crossen of the relatively new Associated Persons rules. These rules can result in your paying tax on capital gains on your property if you are a builder, developer, or property trader, or are related by blood, marriage or business to one of these people. It makes sense to get specialist advice before you fall foul of this rule.
8. Get organised or get planning for next year. It never ceases to amaze me how many self-employed people I know who don't collect receipts for 100 per cent legitimate expenses. Having a system is essential - even if it's only having an expander file with pockets for different types of receipts.
If you've got an iPhone or Blackberry there are also applications that allow you to record your expenses as you incur them. Every dollar counts. Likewise having your paperwork in order as a matter of course means that you can get the right figures to your accountant or the IRD in good time.
