IRD has 'list of taxpayers as targets'

Tax professionals are urging vigilance from their clients as the financial year draws to a close and the feeling the Inland Revenue Department has the momentum of recent court decisions on its side.

IRD has issued press releases warning taxpayers to consider making Penny and Hooper-like disclosures before March 31.

IRD group tax counsel Graham Tubb said taxpayers who might have reduced their income tax obligations through an income diversion arrangement had until then to take advantage of IRD's concession to make voluntary disclosure.

The concession was granted following the Supreme Court's decision in the Penny and Hooper case in 2011.

WHK tax principal Scott Mason and Polson Higgs tax partner Michael Turner are among those concerned about looming issues for clients.

''Be aware the IRD does have a list of taxpayers that have been identified as being targets. Letters from the department are likely to be issued during this month which may mean you lose the voluntary disclosure relief.''

The warning from the IRD was definitely the last after two previous time extensions, Mr Mason said.

Mr Turner said the recent dismissal by the Court of Appeal of Alesco New Zealand's case confirmed the use of optional convertible notes was tax avoidance.

''While this case is significant in terms of structuring offshore investments, for the average New Zealand business, its greater significance is that it represents another win to the IRD on tax avoidance.''

One of the issues coming out of cases like that was the boundary of what was considered acceptable by the IRD and the courts was being redrawn 10 years after transactions were entered into, he said.

Only the IRD had the benefit of being able to apply the decision to past transactions.

In many cases, those tax avoidance decisions were taking today's thinking and applying it to situations that occurred a considerable time ago, Mr Turner said.

It was not surprising that the mood of the IRD and of the courts had changed and taxpayers were seeing the results through recent decisions.

''In the meantime, as the IRD continues to chalk up wins in the courts, taxpayers will face continued uncertainty and the department will be more inclined to raise tax avoidance in audits knowing that this is costly to defend and they have a series of wins to support their broadening view of what is tax avoidance,'' he said.

Mr Mason said the Penny and Hooper case had implications for all providers of personal services, including accountants, lawyers and professions such as valuers.

WHK had been talking to clients raising the issues to be aware of before the end of the tax year.

''The worst position to be in is to not think about it this month and to do nothing. There is no doubt the IRD is proactive in looking at these sorts of issues.''

Mr Turner said the Australian Tax Office had previous success in arguing tax avoidance cases but more recently, the taxpayer had been successful - much to the frustration of the ATO.

In New Zealand, tax professionals saw the tax avoidance boundary like a pendulum which had swung in the favour of the IRD.

''What the ATO experience shows us is that as the revenue authorities keep chalking up wins in the courts, they become more inclined to push where that boundary is. This eventually results in courts not accepting the IRD's suggestions of tax avoidance and the pendulum swings back in the taxpayers' favour,'' Mr Turner said.

 

 

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Tax tips

 

• Collect RWT deduction certificates.

• Collect any donation receipts that have not been claimed.

• Consider any bad debts that need to be written off.

• Determine whether an estimation for provisional tax should be made for the coming year.

• Determine any terminal tax liability.

• Address any depreciation adjustments that may be required as a result of receiving insurance proceeds from the Canterbury earthquakes.

• Calculate intended and actual use of mixed-use assets for GST purposes and calculate the adjustment required.

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dene.mackenzie@odt.co.nz