Smart tax tips – July

There are a couple of recent matters that are likely to be of interest to clients.

The long arm of the IRD

The IRD is clarifying the meaning ofexcessive remuneration’ and ‘excessive profits or losses’ paid or allocated to relatives, partners, shareholders or directors for consultation.

They are doing so to clamp down on taxpayers reducing their income tax liability by shifting it to a related party with a lower marginal tax rate.

The key focus is on the nature and extent of the work the relative carries out. Based on the recent cases on this matter, the IRD says the key factors are:

• The nature of the services and the circumstances in which they will be or are performed.

• The knowledge and skills required to carry out the services, including any particular qualifications.

• The amount of payment that the person carrying out the duties would be paid by another independent employer for like services.

• The locality where the duties are being performed.

• The amount the taxpayer would be prepared to pay an arm’s length employee undertaking similar duties.

Whether remuneration is reasonable may depend on the relative’s age and the type of work carried out. It is unrealistic to claim a deduction for payments made to very young children because they are unlikely to be able to perform any useful work. In one case wages paid to a five year old child were disallowed.

Mileage rates

The IRD mileage rate will remain at 77 cents per kilometre for both petrol and diesel vehicles for the 2014 income year.

Paid a bond to hire goods?

Here are the GST implications:

  • The paying of the bond has no GST effect because there are no services supplied in return for the bond. If the bond is repaid in full on the return of the goods, that remains the case.
  • If the bond is forfeited because it is applied in accordance with the agreement between the parties. If the bonds goes towards an extra hire charge (because the goods are returned late) then it is consideration for a supply and is subject to GST. But if the bond is forfeited as compensation for damages to, or loss of, the goods, then it is not consideration for a supply and is not subject to GST.

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