Posted on 28 January 2015
It’s the final quarter of the financial year and the beginning of the calendar one. From long-standing to new contractors: How will your business look when you submit your tax return for 2015?
Are you compliant with the law? Tax efficient? Did you exhibit a beautifully orchestrated accounting rhythm in 2014?
It never fails to spark my interest when I get a notification that one of our contractors is being audited by the IRD due to suspicion of unpaid tax, whether GST or income tax. It’s not always people relatively new to contracting either. In fact, it tends to be more experienced contractors who fall afoul of the taxman. It makes me wonder what hasn’t worked in the running of that contractor’s books. Do they not have an accountant? Have they not established a good tax management policy? Or is it simply that the temptation of spending funds that should be earmarked for tax is just too great?
It also makes me wonder what I can do to help if anything. This makes me come back to the broader subject of setting up a business for contracting purposes.
I decided to gain some insight from the pros, so spoke to Paul McPadden (Tax Partner) and Katie Hayward-Wu (Tax Manager) from KPMG. I simply asked them why they believe contractors find themselves falling afoul of the law around tax issues.
Paul described two key reasons:
“Firstly, the sudden change from being an employee to being a contractor. It’s a lot easier as an employee, as your employer looks after everything for you. However, as a contractor, you’re responsible for your own tax affairs and those that switch from salaried jobs to contracting can miss this when they transition. This requires a bunch of changes that many contractors don’t acknowledge and act on.”
“Second is listening to what your mates tell you. Contractors need to watch where they get their tax knowledge and advice. People are often being misadvised by colleagues and friends about ‘acceptable’ and creative tax breaks. The best source of what you’re allowed to do or not do is the tax department or an accountant. Be careful what your mates tell you!”
Katie had a useful perspective too and added these points:
“Another area of noncompliance is ACC. Under compliance is commonplace and generally due to a lack of understanding of the law and the calculation methods. This is also true of GST.”
“Tax Advisors can also save you some money."
Some people Katie encounters only have the belief that a tax advisor costs you money in order to achieve tax compliance. However, correct calculation of things like home office and motor vehicle use can create savings for contractors.
In addition, here is a link to a useful guide that we posted in April 2014 on setting up as a contractor.
Until next month, all the best with landing on the right side of our good friend the IRD.