Now our government has huge debt, so if you were the Minister of Finance, what would you do? Pretty obvious - tighten the net of course.
Back in 2005, I observed a fellow who had several properties, carefully geared so after interest and expenses, he had no taxable income. However, he still had positive cashflow after claiming depreciation. Very clever (or so he thought)… He even got a student allowance for his children at university, despite the fact he was quite wealthy.
However, all his efforts to avoid tax came unstuck in several ways:
The 2009 GFC broke some of his tenants, so he lost some considerable rental income. Then the government removed depreciation as a tax deduction, so he had less expenses to claim. Last time I saw him, both he and his wife were back at work.
It never pays to build your world around minimising tax alone.
A trap for the innocent
You start a small business and in the first year you barely break even, so you pay no tax. However, in year two you make a profit and suddenly find yourself paying provisional tax in July, November and March, say $4,000 x 3. Then you receive a terminal tax bill the following year in April, say $6,000. A total tax bill of $18,000 within 12 months - ouch!
Put money aside for the taxman, or pay yourself a salary and pay tax via PAYE monthly.
Investing - does diversification come first?
When it comes to investments, diversification should come way ahead of tax minimisation.
There is not much point in saving a few thousand dollars in taxes, to take the added risk of poor diversification.
The IRD have seen it all before, and they are not stupid
The onus is on us to show that we have done things correctly, not for the IRD to show that we are wrong. They are always introducing new processes and using sophisticated technology, plus the government has given them an extra $330 million since 2010 to catch more naughty Kiwis.
The IRD run campaigns
They also conduct campaigns on different industries which gives them the opportunity to compare similar businesses. This method makes it easy for them to pick up discrepancies.
Some years ago they visited all the bakeries in one region, since bakeries take in a lot of cash. They then returned to those businesses that took low drawings or were not banking much cash, and audited them in more depth.
Don’t have a big mouth
Kiwis are reported to have dobbed in others to the IRD more than 23,000 times since 2009. You don’t have to look far to see who does blab too much - some of them make it so obvious.
Even if you are doing nothing wrong, keep quiet. Never discuss your taxes.
You own a small business
The IRD know small businesses and cash industries have lots of opportunity to hide income and skim profits.
If you own a business that takes a lot of cash, don’t be tempted - report your income. This will help you sell your business for more money later on too.
And if you're flagged for an audit, the IRD will be sceptical of any business that looks like it’s actually a hobby, especially if you are deducting a loss on your return eg a launch that does maybe one or two charters a year.
You have a home office
You can all legitimately deduct part of your home expenses when you run an office in your home. Just don't go overboard.
You have money overseas
NZ residents have to declare all income from anywhere in the world, including bank interest and dividends.
Don’t risk it, the back taxes and penalties will kill you. One person I know had money in the Channel Islands and “came clean” after several years, but the IRD had no mercy. They still had to pay all the taxes and a big penalty too.
- Tell no one about your tax.
- Run an efficient set of books.
- You can pay as little tax as possible as late as possible. But make sure you are legal because the penalties are horrific.
- The IRD have seen it all before and they are not stupid.
- Is it worth it? NZ tax rates are not so bad.
- If you need an accountant, hire the type of accountant that fits your needs.
- If you are in a start-up business, put money aside for tax from day one.
- If you are an investor, diversification comes first, way ahead of tax.
- Before minimising tax, ask your accountant and lawyer first. Listen carefully to their answers and make haste slowly.
- Paying tax you tried to avoid, plus a 100% penalty, is perhaps the most painful way of all to lose your money.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media and on line.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.
You can buy it on line at www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge.