How to shrink your tax bill

TAXING TIMES: What can you do to pay less tax without earning yourself a stomach-churning "please explain" from the taxman?
TAXING TIMES: What can you do to pay less tax without earning yourself a stomach-churning "please explain" from the taxman?

When British comedian Jimmy Carr was recently found to be paying as little as 1 per cent of his earnings in tax through a legal avoidance scheme, no-one was laughing.

Amidst the inevitable furore of finger-pointing and moralising, even UK Prime Minister David Cameron weighed in to condemn Carr's actions as "morally wrong".

Our own Inland Revenue Department is similarly unamused by the chicanery of New Zealand's artful dodgers, arguing all New Zealanders are disadvantaged when individuals and business don't pay what they owe or claim more than they should.

But in a sense, moral arguments are irrelevant anyway. If you think tax is little more than legalised theft, see how far the strength of your libertarian convictions take you in court.

The difference between tax avoidance and tax evasion, as the former UK Chancellor of the Exchequer once said, is the thickness of a prison wall.

With that level of ambiguity in mind, we'll stick to strategies here to minimise your tax bill that adhere to both the letter and the spirit of the law.

So what can you do to pay less tax without earning yourself a stomach-churning "please explain" from the taxman?

If you're a slave to the wage, the answer is not much, says JMV Chartered Accountants director David Stacey.  "Your normal guy on a salary, generally they don't lodge a tax return."

It's all automatic. But to claw back all the tax credits you're entitled to, you still need your wits about you.

If you have an annual income between $24,000 and $48,000 for the tax year and don't receive a benefit or super, you qualify for an independent earner credit.

Employees who have chosen the correct tax code get it factored in automatically, but if you're a contractor or self-employed make sure to tick the box on your IR3 form.

Earn less than $9880? This is the last year you'll be able to claim a credit, available for every week that you were in paid work for 20 hours or more.

Then there's a tax credit for children, perhaps intended to slowly acclimatise them to the joys of taxation. Those under 18 are eligible while they're still at school, but only provided they fill out the IR3 form correctly.

And not everything happens automatically.

Do you get a warm glow from supporting the underpriviledged? You'll feel even rosier once you claim a third of it back as a tax credit.

Every donation over $5 applies, including the donation part of any annual school fees if you're a parent, but you have to hold on to the receipts and send them in with an IR526 claim form, available here: 

If you're kicking yourself for not getting a kickback earlier, you can also apply retrospectively as far back as 2000.

Stacey points out a couple of other tax-savers. If you use an accountant or agency, the fee they charge is deductible, as are the premiums for income protection insurance.

But that's small change, and probably won't apply to many. The real opportunities arise for the self-employed, owners of the estimated 460,000 small businesses throughout the country.

"Totally different kettle of fish," says Stacey.

"If they've got a little business on the side, they'll be able to claim a home office, petrol, motor vehicle expenses, cellphone, possibly internet as well."

Claiming as many expenses as you're fairly entitled to decreases your net income, effectively reducing how much you're going to be paying tax on.

The big saver is the deduction on a proportion of your rent for your office space, or for home owners, your rates, mortgage interest and insurance.

The full scope of the entitlements are too voluminous to cover in depth, but you can trawl through them here:

"All those things will come off, and sometimes you end up that your expenses are more than your income," says Stacey. "Go figure."

Luckily, IRD have no right to challenge your business acumen, says chartered accountant and industry veteran Graeme Lee. "You're quite entitled to lose money!"

What they will look for, he says, is intent. A sham business designed solely to reduce income tax will stink to high heaven to the Revenue bloodhounds. It's also important to keep a tight handle on receipts, records and diary notes, in case of a challenge.

Rental properties don't have quite the tax advantage they used to, says Stacey, but owners are still on a pretty good wicket. The ability to claim depreciation costs on the house itself has been done away with, and there has been a tightening of the company structure that many people were using.

"What it means now is you still get a deduction on some of the chattels, your stoves, your carpet and blahdy-blah, but pretty much now what you fund is what you get a deduction for," Stacey says.

In other words, if you have to dip into your money to pay the difference between the rent coming in and all the expenses (mortgage interest, rates, insurance and others), you can claim it as a loss against your personal income.

Overall, the IRD has done an admirable job of stamping out any blossoming creative streaks within the tax planning sector.

"There isn't as much scope today as there used to be for employing fancy tax avoidance schemes," says Lee, who has been practicing for 35 years.

While not an aggressive tax planner himself, he remembers some agents using movies, forestry, agriculture, and even racehorses as part of wider plans to minimise tax.

In the last 10-15 years the use of trusts and companies to channel income at lower tax rates was popular, but those too have largely died out with the flattening of tax rates.

"The IRD are increasingly given more ammunition to go out and challenge schemes," says Lee. And they have been very successful.

Revenue's winning streak over the past few years has seen it push the boundaries of tax avoidance for individuals and big corporates alike.

The recent landmark victory that really set the cat amongst the pigeons involved a couple of Christchurch surgeons, Ian Penny and Gary Hooper.

The pair paid themselves much lower salaries than they earned, funnelling the rest into lower-taxed trusts that their families had access to.

Given that paying oneself a salary less than market rates is a hallmark trait of Kiwi businesses, there was plenty of uncertainty about the decision that Penny and Hooper were indeed avoiding tax.

New Zealand Institute of Chartered Accountants tax director Craig Macalister says the IRD has now laid out a broad framework, but there's still a lot of debate about what it all means in practice.

That's not helped by the fact that IRD originally claimed it would not pursue others, but has since done a little bit more snooping around.

And it's mostly professionals - medical, law, accountancy - in the crosshairs.

"Somebody with trucks and diggers and stuff wouldn't be impacted by the Penny-
Hooper decision," says Macalister.

Others think the net will widen. "I'm sure they'll start looking at other businesses as well," says Lee.

The penalties for evasion can be severe; up to five years in jail and/or a $50,000 fine, and the onus falls on the taxpayer to justify their position.

The phrase "guilty until proven innocent" is not an accurate representation, says Lee.

But perhaps there is a grain of truth somewhere in there.

"There's going to be the odd situation where IRD have gone in with the jackboots on, and taken prisoners without too much reason," he says. "But that's not normal."

Keep your intentions pure, and you avoid being crushed beneath the heel of a zealous taxman.