Brad Golchin shows you how to get things in order now to avoid problems later.
You might not have noticed among all the changes in the latest Budget, that the IRD has been given $120 million over four years to beef-up audit and compliance activity. The Government, in other words, wants to make sure that the tax system is being adhered to and is fair across a number of industry groups, i.e. that their tax revenue is as high as it should be.
Their extra resources will focus, among other things on property, debt collections and the ‘hidden economy.’ In their view, certain sectors are more likely to be involved in the hidden economy (dealing mainly in cash) allowing a ‘greater opportunity to understate income, overstate their expenses or operate entirely outside the tax system.’ One of the target sectors is hospitality, with its relatively high rate of openings and closings, staff turnover and cash transactions. The IRD, through its work in this sector has an idea of what income should be as opposed to what is reported and discrepancies will attract IRD investigation.
The IRD tax audits are comprehensive and targeted. Potential candidates can be identified using computerised case selection which gathers and analyses a range of information, and the audit can be a spot check on a single revenue period, an extended GST audit focus on salary and wages income or a full investigation to locate businesses outside the tax system.
So what are the tax obligations of a business owner running a small restaurant, coffee house or food bar?
The big three are income tax, GST and PAYE. Within each of these, there is lots of room for under-reporting income and over-reporting expenses. Keeping up-to-date records in detail is essential on a day-to-day basis and particularly if you are audited by the IRD. You would be well advised to look at some of the new accounting software available which makes this process so much more streamlined and easy to reconcile.
The company tax rate will go down from 30 to 28 per cent from next year (April 2011). The IRD wants to encourage productivity in New Zealand and create jobs and raise wages and to retain and reinvest earnings – so remember this when your tax goes down. As a company you can pay your employees in different ways.
For audit purposes the IRD will need to look at your company documents, registration details, shareholdings and annual reports, profit and loss statements, financial forecasts and all documents to do with your setup. Along with this you are obliged to keep records of invoices and receipts, bank statements and deposit slips, all your worksheets and anything else to support your account entries. If you are taking cash payments and not declaring them, remember this is against the tax laws and that you are leaving yourself open for the consequences – if you take cash and declare it, you have no worries at all.
You must be registered for GST if you carry out a taxable activity at certain levels of turnover and if you include GST in your pricing. The IRD will send you your GST form for completion every period and you work it out for the period through sales/income, purchases/expenses then submit by the deadline either by mail or online. Your records for a GST audit are books of account (paper or online) till tapes, receipts, bank statements, vehicle logbooks, stock-on-hand records, vouchers, accounting system instruction manuals (yes, that’s right) invoices from overseas suppliers and all records across the board need to be kept for seven years.
PAYE (pay as you earn)
The tax you deduct from your employees’ wages/salaries and pay to the IRD. It includes income tax and the ACC earners’ levy. Based on your employees tax code you establish what needs to be deducted and your Employer Monthly Schedule and Employer Deduction forms are submitted to the IRD, preferably electronically. You need to watch who and how you are employing – are they residents? Make sure the amount of remuneration paid is in keeping with the work undertaken.
The records you need to keep for PAYE are wage book information, PAYE payment receipts, employee tax code declarations and IRD correspondence.
With all of these obligations there is room for corrections – the IRD would rather you corrected things than left them wrong and correcting mistakes or changes at least indicates to the tax officers that you are keeping a close eye on what you are doing. There are good business reasons for keeping records over a long period – computer based records have many advantages, mainly in the areas of instant calculation and day to day reconciliation. As long as the paperwork backs up your records – and auditing is facilitated online, prospective buyers can easily judge your performance and you can make well-informed decisions about the future direction of your business. You don’t need to take on all of this yourself, a lot of accountants offer special packages for the small business owner and can direct you to online software that makes everyone’s life easier. Consider using an intermediary (a payroll provider registered with the IRD) for your payroll work as you don’t have to worry about it and you can get a subsidy on using a service. The whole point of the exercise is to help you run a good, solid enterprise that bears up to close scrutiny and that your staff feel good about working for.
As published in Hospitality, December issue 2010
Hospitality Advice – A division of Wise Advice Limited