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26 Oct 2017
In their October 2016 “Agents Answers” newsletter, IRD advised agents that they were continuing their focus on the hidden economy and undeclared cash. Their area of interest at that time, with the Auckland building boom, was the construction industry. Since then we have also seen court cases relating to restaurants/takeaways... In IRD’s words “undeclared cash is a crime.”
Examples of the hidden economy may be found in any business where cash is received – “Discounts for cash!”. These funds may be pocketed or used to pay “cash” expenses. Another form of the hidden economy is barter systems where no transactions are declared for income tax or GST purposes.
This behavior is detrimental to the whole NZ economy. In a 2016 TVNZ Facebook poll, 70% of the nearly 4,000 respondents saw no problem with “Tradies” doing cash jobs that they don’t declare for tax. This is disturbing. Remember that our services such as health, education, and even MSD benefits are funded through our taxation system. So, the hidden economy is actually affecting us all.
A common example is payment of cash wages. Often this occurs because the recipient is on some sort of (tax funded) benefit that they don’t want to lose. In other cases, it is so lower wages can be paid. Then, as the employee would not have an employment agreement, they may be missing out on some of their legal entitlements.
Other employers will withdraw cash from their business account to pay undeclared cash wages, often at the “employee’s” normal gross pay rate . In this case the business has paid tax and GST on the takings banked, but will be unable to claim the “wages” paid as a deduction against income. So the real cash cost to the business is the cash wages paid plus income tax on that amount at the business’s marginal tax rate.
Failure to declare cash or barter sales, is regarded very seriously by the IRD. It is tax evasion. This is reflected in the penalties that the IRD may impose on defaulters. If detected, not only will the person have to pay the tax evaded but also a penalty of 150% of that tax. For the worst (habitual) offenders, there could be a fine of up to $50,000 and/or a term of imprisonment not exceeding five years.
The increasing usage of EFTPOS has reduced the potential to pocket cash, but there are still some opportunities to avoid tax. The IRD has a number of strategies to detect potential avoidance. These include:
A person with concerns about the tax liabilities that may arise from transactions they have hidden from IRD has the option of making a voluntary disclosure. By making a voluntary disclosure before IRD identifies an issue, a person can obtain a reduction in the penalties they face of between 100% and 40%.
The ‘hidden economy’ is a cost to all New Zealand taxpayers, who carry more than their fair share of the burden because of it. There’s another hidden cost too, as business owners who are meeting their tax obligations find it hard to compete with operators who can undercut on quotes because they don’t pay tax.
If you think you may have a problem with your tax, declaring it early and taking action to correct it goes a long way toward setting you apart from deliberate tax evaders. Your accountant can help you submit a voluntary disclosure which may reduce shortfall penalties by up to 100% and protect you from prosecution.
For more information on how we can help your business, get in touch