Minimise tax, avoid potential penalties

OPINION: A survey recently detailed in the Chartered Accountants Journal found that business clients wanted their accountants to be creative in dealing with tax matters provided it is not to the extent of testing the tax law and best practice, writes Murray McClennan in this week's Taxing Times.

 In short, business clients want to minimise tax, but without being exposed to penalties.

Given that general attitude this article highlights the most common errors made by taxpayers (and their advisers) that result in the imposition of penalties and interest.

Income tax

• The main errors include:

• omitting or not recognising income, whether innocently or deliberately;

• incorrectly calculating depreciation;

• understating trading stock with the consequence of understating income;

• claiming repairs and maintenance, when the expenses should have been added to the capital cost of the asset;

• not recognising breaches of shareholder continuity that result in the forfeiture of losses carried forward and imputation credits;

• incorrectly assuming loss attributing qualifying company status and allocating losses to shareholders, when in fact the losses are locked in the company; and

• not paying PAYE and other source deductions to IRD on time.

GST

The main errors include:

• understating sales;

• incorrectly determining time of supply (and thus the time at which the liability to account for GST is triggered);

• maintaining insufficient records;

• ignoring private use of assets; and

• claiming input credits in respect of exempt expenditure (for example, interest).

FBT

The main errors include:

• not accounting for FBT at all;

• using the GST exclusive value to calculate the value of fringe benefits;

• miscalculating FBT by using the wrong rate for a given employee.

Most of the above errors reflect one or more of the following:

• a lack of reasonable care (or in extreme cases gross carelessness);

• a lack of understanding of fundamental tax issues and obligations; or

• a willingness to take a calculated tax risk.

Remember, be careful out there!

» Queenstown-based Murray McClennan is a tax director at WHK Cook Adam Ward Wilson.

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