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Are you on the IRD radar?
The IRD recently published their Compliance Focus for 2013, aimed at assisting taxpayers and voluntary compliance by identifying areas that the Revenue regularly sees as having high potential for taxpayer error.
The material is published on the IRD website and for small to medium businesses outlines ten key areas of focus.
One of the identified areas where we also recognise the potential for client error is GST, particularly where the client is preparing their own GST return. In this regard, the IRD highlights the following specific areas of focus:
1. Identifying and advising taxpayers of mistakes that have been made in preparing the GST returns including entering figures in the wrong boxes or not including all the required information.
GS comment – A common mistake we see is client’s including their zero-rated sales in the total sales box (Box 5) as required, however then forgetting to put the amount in the next box (Box 6) so it is deducted prior to calculating the GST output tax for the period. Consequently the GST payable amount is overstated.
2. Identifying taxpayers who have business assets that they use privately but have not been making the required adjustments in respect of the private use.
GS comment – From 1 April 2011, the adjustment rules for acquisitions that were not solely acquired for a taxable purpose were changed.
The pre 1 April 2011 rules permitted you to claim 100% of the GST component of an acquisition as long as the taxable use was to be more than 50% and then you were required to make subsequent adjustments to account for the non-taxable use proportion.
Under the new rules however, your initial claim is based on your intended percentage of taxable use and then subsequent adjustments are only required if the actual percentage of taxable use differs by more than 10% from the previous year’s percentage or the adjustment amount would be greater than $1,000. Additionally, once the value of the particular item is less than $5,000 (GST ex.), no further annual adjustments are required.
While it was relatively easy under the old rules to justify the acquisition was to be used more than 50% for taxable purposes and consequently the 100% upfront claim was reasonable, the new rules will no doubt lead to greater scrutiny of input tax claims by the Revenue and require greater caution being exercised at the time of filing the initial return by the taxpayer to ensure that their claims are not challenged.
It should be noted that, with the exception of land, most acquisitions are now subject to a limited number of annual adjustment periods, the exact number determined by the original cost of the item. The old rules contained no such limitations so effectively regular adjustments were required for the life of the good or service acquired.
3. Identifying taxpayers who have not registered or deregistered for GST early enough.
GS comment – A person is required to register for GST at the point it can reasonably be estimated that the turnover (sales) of the taxable activity will exceed $60,000 in the coming twelve months, and not at the point when the $60,000 annual turnover has actually been exceeded. The commencement date for registration can be backdated by the Revenue if they determine that the person should have registered at an earlier date.
We also see clients who have effectively ceased their taxable activity but attempt to defer the timing of having to pay the GST on the assets they have retained personally, by not deregistering for GST until some later date. Be warned however, that if the IRD establish you have delayed your deregistration without a valid reason, you risk your deregistration being backdated to an earlier date, one consequence of this action being exposure to penalties and use of money interest.
4. Identifying clients who have not returned income or claimed expenses in the correct GST return period.
GS Comment – If you realize you have forgotten to include income in a GST return and the amount of GST involved is less than $500, the Revenue is happy for you to include the understated amount in a subsequent GST return. However where the amount of GST involved exceeds $500, you will need to request an adjustment to be made to the relevant return.
From an expense claiming perspective, in the majority of cases you will need to hold a proper tax invoice at the time of filing the relevant GST return. If your return is subject to a review, and you cannot produce any tax invoice requested as part of that review, the Revenue is likely to disallow your claim.
Note: a supplier does not have to issue a tax invoice with respect to every sale they make. However, once you have requested a tax invoice from the supplier, they must provide one to you within 28 days of your request.
Finally, when you receive your completed tax returns and financial statements from us, behind your copies of the bound accounts there will often be a GST schedule of adjustments we have prepared. The schedule identifies any errors in the GST returns covering the relevant income year we have discovered whilst preparing the financial statements as well as the GST component of any end of year adjustments we have made, the GST component of the non-deductible portion of entertainment expenditure being a classic example. The Revenue expects any end of year adjustments that your accountant has advised you of to be included in the GST return period that covers the date your income tax return is filed with IRD. A failure to include these amounts can result in the relevant return being reassessed, exposing you to late payment penalties and use of money interest.
5. Checking land transactions to ensure GST has been dealt with correctly.
GS Comment – The rules surrounding supplies of land changed with effect from 1 April 2011. Post this date, most sales of land between GST registered parties where the purchaser is acquiring the land for a taxable purpose and neither themselves nor their relatives will reside on the land, will be compulsory zero-rated for GST purposes. Note, you do not have a choice. If the legislative criteria are satisfied, the transaction must be zero-rated.
If you are the purchaser, watch for contracts that have plus GST if any terms, as if for any reason it transpires that zero-rating the transaction was incorrect, the Revenue is likely to come knocking on your door to collect the GST. Pre 1 April 2011, it was the vendor who was exposed and then had to rely on other clauses in the sale and purchase agreement to attempt to recover the GST amount from the purchaser.
This article has only briefly discussed five areas of concern raised by the Revenue. Naturally, there are other areas of the GST rules that you may have trouble with or do not completely understand and please do not hesitate to contact us with any questions in this regard. As is often said, there is never a dumb question.
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