For most taxpayers, 31 March represents the end of the financial year. In the lead up to ‘year-end’ there are a number of actions that business owners may want to take to avoid missing the boat on simple tax planning opportunities.

Trading stock: stock can be valued at the lower of cost and market selling value (“MSV”), and generally it will be beneficial to use a lower MSV where possible. But to use MSV you must have evidence that this represents the market value of the specific stock items at or about balance date. The IRD have indicated that suitable evidence includes independent or internal valuations by suitably qualified persons of the price of goods and actual sales for a reasonable period before and/or after balance date.

Accruals and provisions: a tax deduction should be available if you are definitively committed to an expense at year end and can reliably estimate the amount. Ensure all expenditure is captured and accrued to minimise the amount of taxable income. One exception is employee related accruals that are tax deductible if they are incurred and are paid within 63 days after balance date (so by 6 June); consider paying any staff bonuses by then to gain a current year tax deduction.

Bad debts: to be tax deductible bad debts must be actually written off before year end – it’s no good booking the journals after balance date as part of your year-end accounts preparation. There also needs to be evidence that the debt was considered “bad” (e.g. review of accounts receivable, debt-enforcement notices and other actions taken).

Assets: if you are planning on buying any depreciable assets (e.g. plant and equipment), a full month’s depreciation can be claimed in the month of purchase, so it may be worth buying replacement assets just before 31 March.

Relevant to companies only:

Charitable donations: in order to claim a donation deduction, it needs to be paid in cash before 31 March. The amount of the donation is limited to the amount of a company’s net income in the absence of the donation. Hence, if a company has made a loss it might be beneficial to push the payment into the next year.

Shareholder current accounts: if a company is owed money by shareholders, consider paying commercially justifiable shareholder-employee salaries or paying a dividend to settle the debts.  If not done, there may be fringe benefit tax or deemed dividend issues.

Imputation Credit Account (ICA) balance: ensure the imputation credit account does not have a debit balance at 31 March, otherwise penalties will be incurred. If the ICA may be in debit, consider a making a voluntary provisional tax payment before 31 March.

A recent case Taxation Review Authority (TRA) decision has highlighted the importance of good record keeping.

The taxpayer, an accountant, was accused by Inland Revenue (IRD) of using a company as a vehicle to create a tax advantage. He claimed to have sold his sole trade accountancy practice to his own company for $2m in 2002. The company did not have the ‘cash’ to purchase the business, and hence a loan was recognised to the company. Later, in 2007, his family trust purchased a family beach house for $1.3m. To fund the purchase of the beach house, the company borrowed from the bank to repay the debt it owed to him and he lent the funds to the trust.

The IRD did not dispute that the 2002 sale took place, however they argued that the sale price was just $425,000, creating a much smaller loan. On this approach, recognition of the $2m loan to the accountant triggered a taxable dividend for the difference.

Given the facts of the case, it is not surprising IRD were suspicious of the transaction.

Originally, the accountant was unable to produce a sale and purchase agreement evidencing the transaction. When eventually he did, IRD referred the agreement to a document examiner who found a number of irregularities, based on which the IRD concluded the document was a fabrication. The accountant’s explanation for the irregularities were that he had used a client’s sale and purchase agreement, that he had ‘twinked’ out the details and hand written in his own changes.

At the time of the transaction, the company’s 2002 financial statements only recorded a goodwill value for the purchase of the business of $425k. According to the accountant, the original value of $425k was recorded in the financial statements so that his wife did not know the true value of the business (the marriage later broke down). Then In 2003 the goodwill was written off. Over the course of the 2006 and 2007 years, the goodwill and loans were recorded back up to $2m.

The accountant advised the reason for the increase was to improve the standing of the company before a review by the accountant’s professional body. The taxpayer prepared three different sets of financial statements for the 2007 year before arriving at the final version.

The accountant claimed a reversing journal in his accounting software showed an original figure of $2m. IRD contended that this entry had not been made until 2008, after the purchase of the beach house. However, an accounting software expert called by the IRD, confirmed journals cannot be entered into prior years because they are effectively “frozen”.

IRDs final argument was that $2m was a vast overstatement of the value of the accountancy practice in 2002, for which they had the support of an independent valuer. Again, the taxpayer was able to explain in detail how he arrived at his calculation. He accepted the valuation may have been ‘over-enthusiastic’.

Notwithstanding the poor record keeping, unhelpful facts and the arguments put forward by the IRD, the TRA found in favour of the accountant. Accepting the sale was genuine, the price was what was paid by the company and therefore the repayment of the debt was not a taxable dividend. If the accountant had clear and accurate documentation from the outset, the court case and associated costs might have been avoided.

Over the past few years there has been a pronounced improvement in the manner in which Inland Revenue selects and conducts its investigations.

There has been an increased focus on data analysis, comparisons to statistical norms, and use of external information such as land transfer data. As a result there is an increasing need to consider how IRD might approach a particular transaction or issue.

In cases where the position is unclear or the dollars involved are material, consideration needs to be given to approaching IRD beforehand to seek their approval or view to treat something in a particular way. This can occur by approaching IRD for a ‘private binding ruling’ or a ‘non-binding indicative view’.

Both processes are positive and collaborative, as IRD generally are focused on determining the correct position under the law. In contrast, if IRD approach the matter ‘after the fact’ through the course of an investigation there may be more focus on proving a tax shortfall exists; and their view of the law can feel as though it is bending to accommodate that outcome. It can become emotional, as each party becomes increasingly entrenched in their view, giving rise to significant cost to defend a position and if the taxpayer is unsuccessful, penalties could apply. Too often the incremental cost will exceed what it would have cost to approach IRD before-hand.

A private binding ruling provides the highest degree of comfort, because if successful, the outcome is binding on IRD. This provides peace of mind that a different individual from IRD won’t take a different view in the future. The binding rulings process is not subject to a legislated timeframe within which one must be provided, however IRD work to a timeframe of 3 months and are very good at meeting that time frame. They are also willing to provide early indications of their expected view if required for the purpose of a particular transaction that may be occurring. IRD do charge a fee to provide a binding ruling, it does so at an hourly rate of approximately $160 per hour. The total IRD cost for a ruling is generally about $15k – $20k. This cost must be considered in light of the tax involved and the comfort otherwise associated with taking a particular position. When this is balanced with the downside risk of IRD disputing the treatment in the future it quickly becomes reasonable.

A further option is to acquire an indicative view. It’s understood IRD will consider issues through this process if it will take 20 hours or less. IRD don’t charge for providing an indicative view, however the outcome is not binding. Irrespective of the fact that the IRD is not bound by the outcome, from a practical point of view it should provide a high degree of comfort. It would be unusual for an alternative view to later be taken by IRD, and if this did occur, the fact that an indicative view was acquired should provide a strong negotiating position when asserting no penalties should be charged.

A self-proclaimed tax agent has been found by the Taxation Review Authority (TRA) to have taken an unacceptable tax position and demonstrated a high level of disregard for the consequences of claiming GST refunds over a two and a half year period.

The taxpayer claimed a GST refund for five consecutive six month periods from March 2009 – March 2011, accumulating refunds of almost $10,000. The taxpayer argued he was eligible for the refunds as he was carrying on a taxable activity of “services to finance and investment” by (1) acting as a registered tax agent, (2) holding patent rights as a patentee, (3) devising inventions and patenting them, and (4) supplying services to two trusts.

The Commissioner denied the input tax deductions and deregistered the taxpayer on the basis that he was not conducting a taxable activity and was therefore not eligible to claim GST. The Commissioner argued that the conduct amounted to gross carelessness and therefore sought to impose shortfall penalties.

It is a fundamental rule that in order to claim GST you must engage in a taxable activity that satisfies the following four criteria:

1. There is an activity;
2. The activity is carried on continuously or regularly by a person;

• The activity involves, or is intended to involve, the supply of goods and services to another person; and

1. The supply or intended supply of goods and services is for consideration.

On review of the facts, the TRA was highly critical of the taxpayers’ alleged taxable activities. In regard to (1) acting as a tax agent, the taxpayer asserted that he provided accounting services to many clients during the disputed GST periods. His evidence however, consisted of six invoices for two clients of small sums that could not be supported by bank statements. The TRA stated that even if they accepted that the taxpayer was acting as a tax agent, the taxpayer did not prove that the activity was being carried on “continuously” or “regularly”. The TRA described the activity as spasmodic at best and therefore dismissed the claim that this was a taxable activity.

Regarding (2) holding patent rights as a patentee, the patents the taxpayer referred to expired in 1994 and 2006 respectively, which is before the start of the first disputed GST period. The taxpayer saw his taxable activity as being a “continuous attempt to enforce the equities in the patents” and his position was not affected by the expiry of the two patents. The TRA had difficulty in following this assertion and so found that this activity did not meet the required threshold for taxable activity.

The taxpayer also failed to produce evidence to support his claim that (3) devising inventions or (4) supplying services to two trusts satisfied the criteria of a taxable activity. He produced no evidence of design work or time expended on inventing, no invoices or payment evidence nor any trust deeds or engagement agreements. The TRA found it unclear whether such a trust was even in existence and dismissed both of these claims.

The TRA consequently found that there was no nexus between a taxable activity and the input tax deductions. The taxpayer had taken an unacceptable tax position and demonstrated a high level of disregard for the consequences when he filed GST returns and claimed refunds for each of the periods in dispute. The taxpayers conduct was described as a “flagrant breach of the GST regime”.

All input tax deductions claimed were denied and shortfall penalties for gross carelessness were imposed in each of the GST periods in dispute.