Simple errors made by small businesses are resulting in penalties worth thousands of dollars, tax experts say.
Last year, the IRD handed New Zealand businesses just over $33 million in shortfall penalties, more than 400 of which were for gross carelessness.
Institute of Chartered Accountants tax director Craig Macalister said he saw a lot of small businesses making little errors that they often did not even realise had happened.
Most small firms filed a GST return every couple of months, and that was where a lot of mistakes happened.
Often, people would get something such as the time of supply wrong. He said although that might seem like a trivial matter, it was technically breaching the law and could land a business with use-of-money interest penalties.
“They might be looking at buying a large machine and claim the invoice before they have paid it.” Macalister knew of a farmer who sold all of his livestock, paid GST on the transaction but put the GST into his partnership GST return instead of his trust’s return. He was handed a $4000 penalty.
Patrick Goggin, IRD’s group manager assurance, said small businesses made errors over a range of things, such as using the wrong depreciation rate for things such as carpets in a rental property, arithmetic or transposition errors in the filing of the return or things that were “sometimes a little bit more deliberate”, like forgetting to make an adjustment for personal expenses, such as grocery shopping or trips away.
He said businesses could cut the penalties by contacting the department and explaining what had happened. “If they do that before any audit activity is launched, any shortfall penalties can be significantly reduced.”
Macalister said small businesses often ran into problems with income tax when it came to claiming items not allowed or not understanding the treatment of expenses.
Goggin said an error meant the taxpayer had not met their obligation to provide an accurate return. “We view very strongly that we want taxpayers to get it right. If you realise you’ve made a mistake, it is best to make a voluntary disclosure, either by talking to your tax agent or going directly to the IRD.”
He said the department would work to rectify errors that went in the IRD’s favour but usually mistakes cost revenue money. Macalister said getting good advice was key to avoiding problems. “A chartered accountant should be able to put you right.”
Advice could cover things such as cash-flow projections and many accountants would already have clients in a particular industry, so they could advise on what they had seen with other firms.