More frequently, the news from the IRD is about those who fail to pay enough tax either via tax avoidance or tax evasion schemes. For these people, their day of reckoning eventually occurs and the penalties that some face are huge.
Milestone is all for clients not paying more tax than they need to but it does not condone illegal tax practices nor does it suggest clients engage in aggressive tax minimisation techniques. It is usually better to take a more conservative approach, pay the required amount of tax, and incur minimum costs in doing so. However, we frequently find that many New Zealanders fail to submit an IR3 and hence could inadvertently not be obtaining the refunds they are legitimately entitled to.
7 July is the date each year when an IR3 needs to be filed unless the person has a tax agent or has been given an extension of time. Find out if you need to file an IR3 and how to go about it. The most common circumstances we see where clients may be eligible for tax refunds is where they have:
Made a donation and can now claim the tax benefits of that
Made childcare and housekeeper payments
Income changed during the year
Only worked part of the year
The wrong tax rate lodged with the bank and hence paid too much tax
Certain insurance policies where a portion of the premiums are tax deductible
Loss making rental properties.
What happens if you do not pay tax or pay too little?
Things can turn ugly pretty quickly if you fail to pay the correct tax. Consider this:
Use-Of-Money Interest (UOMI) is the rate charged by Inland Revenue on any underpaid or overpaid taxes. The rates are 9.21% for any underpayment of tax, which is deductible; and 2.63% for any overpayments of tax, which is assessable. These interest rates are per annum and compounding.
The amount of a late filing penalty on income tax returns depends on your net income. If your income is less than $100,000 then the penalty is $50. If your net income is between $100,000 and $1,000,000 then the penalty is $250. If your net income is more than $1,000,000 then the penalty is $500.
Shortfall penalties: These penalties increase in proportion to the seriousness of the breach.
- For failure to take reasonable care, the standard penalty is 20% of the tax shortfall. - For adopting an unacceptable interpretation, the standard penalty is 20% of the tax shortfall. - For gross carelessness, the standard penalty is 40% of the tax shortfall. - For abusive tax position, the penalty is 100% of the tax shortfall. - For tax evasion, the standard penalty is 150% of the tax shortfall.
Penalties can be reduced if you disclose the tax shortfall. However, timing of the disclosure is critical:
Before the first IRD investigation notice will receive a 75% penalty reduction
After the first IRD investigation notice but before the investigation starts, will receive a 40% penalty reduction.
For employers, there are many other fees and penalties to be aware of. Some of these fees and penalties are the non-payment penalty on employer monthly schedule (EMS), Goods and Service Tax (GST), employment deduction fees, to name a few
.Give Milestone a call if in doubt about filing a tax return or if you are not sure about your tax status regarding your investments.