According to an article by Jo Doolan of Ernst & Young, tax evasion in New Zealand is thought to be as high as $7 billion a year. Our Government has huge debt, so if you were the Minister of Finance, what would you do? Pretty obvious -- tighten the net of course.
HOW TO PAY NONE
In 2005, I observed a fellow who had several properties, carefully geared so after interest and expenses he had no taxable income. However, he still had positive cash flow after claiming depreciation.
Very clever (or so he thought). He even got a student allowance for his children at university, despite the fact he was quite wealthy.
However, all his efforts to avoid tax came unstuck in several ways.
The 2009 GFC broke some of his tenants, so he lost considerable rental income. Then the Government removed depreciation as a tax deduction, so he had less expenses to claim. Last time I saw him, he and his wife were back at work.
It never pays to build your world around minimising tax alone.
A TRAP FOR THE INNOCENT
You start a small business and in the first year you barely break even, so you pay no tax. However, in year two you make a profit and suddenly you have to pay provisional tax in July, November and March, say three lots of $4000. Then you receive a terminal tax bill the following year in April, say $6000. A total tax bill of $18,000 within 12 months -- ouch.
Put money aside for the taxman, or pay yourself a salary and pay PAYE monthly.
INVESTING - DOES DIVERSIFICATION COME FIRST?
When it comes to investments, diversification should come way ahead of tax minimisation.
There is not much point in saving a few thousand dollars in taxes, only to take the added risk of poor diversification.
THE IRD HAS SEEN IT ALL BEFORE - AND IT'S NOT STUPID
The onus is on us to show we have done things correctly, not on the IRD to show that we are wrong.
It is always introducing new processes and using sophisticated technology, plus the Government has given it an extra $330 million since 2010 to catch more Kiwis trying to get away with criminal activity through tax evasion.
THE IRD RUNS CAMPAIGNS
It also conducts campaigns on different industries, which gives it the opportunity to compare similar businesses. This method makes it easy to pick up discrepancies.
Some years ago the IRD visited all the bakeries in one region, since bakeries take in a lot of cash. It then returned to those businesses that took low drawings or were not banking much cash and audited them in more depth.
DON'T HAVE A BIG MOUTH
Kiwis are reported to have dobbed in others to the IRD more than 23,000 times since 2009. You don't have to look far to see who does blab too much - some of them make it so obvious.
Even if you are doing nothing wrong, keep quiet. Never discuss your taxes.
YOU OWN A SMALL BUSINESS
The IRD knows small businesses and cash industries have lots of opportunity to hide income and skim profits.
If you own a business that takes a lot of cash, don't be tempted -- report your income. This will help you sell your business for more money later on, too.
If you're flagged for an audit, the IRD will be sceptical of any business that looks like it's actually a hobby, especially if you are deducting a loss on your return, for example, a launch that does maybe one or two charters a year.
YOU HAVE A HOME OFFICE
You can legitimately deduct part of your home expenses when you run an office in your home. Just don't go overboard.
YOU HAVE MONEY OVERSEAS
New Zealand residents have to declare all income from anywhere in the world, including bank interest and dividends. Don't risk it, the back taxes and penalties will kill you. One person I know had money in the Channel Islands and "came clean" after several years, but the IRD had no mercy. The person still had to pay all the taxes and a big penalty too.
* Tell no one about your tax.
* Run an efficient set of books.
* You can pay as little tax as possible as late as possible. But make sure you are legal because the penalties are horrific.
* The IRD has seen it all before and it's not stupid.
* Is it worth it? New Zealand tax rates are not so bad.
* If you need an accountant, hire the type of accountant that fits your needs.
* If you are in a start-up business, put money aside for tax from day one.
* If you are an investor, diversification comes first, way ahead of tax.
* Before minimising tax, ask your accountant and lawyer first. Listen carefully to their answers and make haste slowly.
* Paying tax you tried to avoid, plus a 100 per cent penalty, is perhaps the most painful way of all to lose your money.
Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle, is available at acfs.co.nz Alan is an independent authorised financial adviser (AFA) FSP26532; his disclosure statement is available on request and is free.