Tax Bites #29: Various Tax Issues

About the Author:

MURRAY McCLENNAN

Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.

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MyIR

I am aware of an attempted fraud on a taxpayer’s myIR account. The taxpayer lodged their GST return with $8,000 of GST being payable. The return was amended at 11pm at night same day, by adding over $12,000 of Box 13 adjustments, turning the $8,000 payment into a $4,000 refund.

 At the same time as the return was amended a request the bank account for refunds was changed. The result would be that the fraudster would receive the $4,000 refund per the amended return, and then when the client paid the $8,000 that would have been refunded to the fraudster too.

Fortunately, the taxpayer’s Tax Agent accessed the taxpayer’s myIR account for another reason and discovered the change in bank account. This sent off alarm bells. The tax agent immediately contacted Inland Revenue. As Inland Revenue had not released the refund the fraud failed. However, this was purely down to good luck.

The taxpayer is now working with their IT provider to see how this happened. The would-be fraudster obviously understands tax filing requirements.

Independent Contractor or Employee?

Typically, a business with employees generally will have greater compliance burdens and costs compared to engaging independent contractors. These include deducting and paying PAYE, ACC earner levies, child support payments, and student loan repayments. There are also non-tax issues such as holiday and sick pay.

I have seen several situations where there was clearly an employment relationship, but the parties agreed in writing that the service provider was an independent contractor. If Inland Revenue establishes that there is an employment relationship it can become very expensive for the employer. The costs include:

1. Paying the underlying source deduction payments that had not been paid. The employer can attempt to recover these from the employees (good luck);

2. Interest;

3. Penalties; and

4. Potentially knowledge offence fines for the business owners and/or managers.

It is not always easy to determine the distinction between employee and independent contractor. The following link provides an excellent summary:

https://www.employment.govt.nz/starting-employment/who-is-an-employee/difference-between-a-self-employed-contractor-and-an-employee/

You probably know that the property brightline test was extended to 10 years, but did you know the other significant change?

Under the recent change to the main home exclusion that applies to land acquired from 27 March 2021, even if the residential property were the principal family home there could still be a tax consequence. That is, if the property were not the individual’s main home for more than 12 months during the period of ownership, the main home exclusion would not apply in full. The gain from the sale of the property would be partly taxable under the bright-line period. That is, an apportionment would be made for between the periods in which it was and was not the principal family home.

Examples of this include renting the property or leaving it empty when the family moves to a new family home.

Watch this space for further comment on the Government’s recently released discussion document on interest apportionment in respect of rental properties and changes to the brightline test.

Murray McClennan

Director
Tax Central Ltd
027 244-5365

www.taxcentral.co.nz

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