The Inland Revenue Department are investing resources into identifying people not declaring their cash income. Diprose Miller associate Anthony Gray outlines five key points to consider.
It’s a case of the taxman hunting the cashman. Inland Revenue is taking a serious look at what they call the ‘hidden economy’. This refers to income that is not declared for income tax purposes, usually because payments for goods and/or services are made in cash. These payments are more difficult to detect than payments deposited into a bank account.
The Government has made significant financial resources available for this campaign over multiple years. Here are five key points to think about.
1. Cash declaration
With improvements in technology and digital data storage, the IRD has some serious tools at their disposal to assist with identifying taxpayers who have a high risk of offending in this area. Using a taxpayer's EFTPOS transactions and GST return information the IRD can calculate the level of cash declared. This is normally expressed as a percentage of total turnover. Inland Revenue has access to robust statistics indicating the ‘normal’ percentage of cash income for different types of businesses. Those that display a significantly lower percentage will come under scrutiny.
Top tip: Be sure to declare all income including any cash receipts for goods/services provided.
2. Compliance visit
Inland Revenue has indicated they will use a variety of methods to approach taxpayers, but for those they consider ‘high risk’ the first contact will likely be a knock on the door of the business with a request to conduct a compliance visit. The IRD has broad powers to enter business premises, request to examine records and conduct interviews with business owners and staff.
Top tip: Keep your records up to date and in order. We can help with this if required.
3. Target industries
Inland Revenue are currently targeting hospitality, construction and property compliance businesses. This includes cafes, restaurants, takeaways, bakeries, tradespeople, builders and people buying and selling real estate. Compliance visits are already underway in the Thames Valley/Coromandel region.
Top tip: Call Diprose Miller if you fall into the above categories and have any concerns. We can advise you on the best course of action.
4. Shortfall penalties
Where a shortfall is identified, the result is often a ‘two-fold’ gain for Inland Revenue. This is because where income is not declared for income tax purposes it is also not included in the taxpayer’s GST returns. Therefore, any shortfall of tax that is assessed includes both an income tax and GST component. Both penalties and interest can be added to the shortfall. Penalties can be up to 150% of the tax shortfall and interest is currently applied at 8.27%. The combined effect of these components can be significant and only the interest is non-deductible!
Top tip: Be aware the consequences of non-compliance can be considerable.
5. Voluntary disclosure
Where a ‘voluntary disclosure’ is made prior to notification of a review, shortfall penalties can be remitted (not charged) although interest will still apply. A partial reduction in shortfall penalties is also available where a voluntary disclosure is made after notification but before any review is undertaken. Inland Revenue is advertising widely to promote the campaign and is determined to increase the compliance rate in this area.
Top tip: Talk to us about a voluntary disclosure if you think you may be at risk.
