What information should you file with your tax return?
Tax Alert - March 2016
When filing a tax return disclosing business income, taxpayers have the option of providing a full set of financial statements or completing Inland Revenue’s financial statement summary form, known as the IR 10.
It is Inland Revenue’s preference for most taxpayers to provide financial information using the IR 10 form. Significant and large enterprises are an exception to this rule as Inland Revenue requires large taxpayers to provide a package of information, including financial statements, which are part of Inland Revenue’s risk assessment process.
The Inland Revenue’s preference for other taxpayers to use the IR 10 arises because receiving information via an IR 10 significantly reduces Inland Revenue’s administrative costs in processing the data. Inland Revenue also suggest that completing the IR 10 saves businesses in compliance costs because it saves 45,000 additional businesses from having to complete Statistics New Zealand surveys. That may be so, but given the prescribed nature of the IR 10, there has been a longstanding concern amongst many tax advisors as to whether taxpayers have the same time bar (or “statute bar”) protection provided by section 108 of the Tax Administration Act 1994 (“the time bar”) when only the prescribed information is provided instead of a full set of financial statements.
To address this concern, Inland Revenue has released a draft operational statement, Filing an IR 10 and section 108 of the Tax Administration Act 1994. This draft operational statement sets out how Inland Revenue will apply the time bar to IR 10s.
The time bar prevents Inland Revenue from amending an assessment to increase the amount of tax payable if four years have passed since the end of the tax year in which the taxpayer provides its tax return. The time bar operates to draw a line in the sand by providing certainty and closure for taxpayers as, after the expiry of the time bar period, the return cannot be reopened and the assessment increased. Essentially, the time bar forces Inland Revenue to conduct and close out investigations on a timely basis. However, the time bar will not apply where the tax return provided is fraudulent, wilfully misleading or “does not mention income which is of a particular nature or was derived from a particular source, and in respect of which a tax return is required to be provided”. The disclosure of income to Inland Revenue is therefore critically important to ensure time bar protection.
Historically, the early form of the IR 10 contained a random bunch of numbers which didn’t necessarily reconcile to the financial statements and was actually quite cumbersome to complete. With the added concern that taxpayers were potentially not making adequate mention of all types and sources of income when completing the IR 10, many tax advisors advised clients to submit full financial statements as a protection.
As a general rule, the financial information given to Inland Revenue should amount to the “disclosure” of income where there is sufficient factual information relating to the item to draw Inland Revenue’s attention to the possibility that the item may be assessable income. That is, it is not necessary for the taxpayer to treat the item as income; but merely that the item has been mentioned in the tax return, financial statements, IR 10 or drawn to Inland Revenue’s attention in some way (such as submitting a IR 282 statement to support a tax interpretation taken).
IR 10s and the draft operational statement
Importantly, the IR 10 form was redesigned in 2012. The changes gave taxpayers a greater ability to disclose income, gains and receipts that may or may not be necessarily classed as taxable income. Where taxpayers complete an IR 10, they are now specifically asked to mention (at box 53) all untaxed realised gains and receipts. The changes to the IR 10 also limit the potential discrepancies between amounts recorded on the IR 10 and what would be contained in a taxpayer’s financial statements.
Inland Revenue has now released draft guidance regarding when the time bar will apply to taxpayers in certain scenarios:
- Where the IR 10 is completed and discloses the income, gain or receipt, the time bar will apply; and
- Where the IR 10 is fully completed and consistent with the financial statements but it does not disclose the income, gain or receipt due to limitations with the IR 10 form, the approach will be:
- If the financial statements disclose the income, gain or receipt (regardless of whether the financial statements have been provided to Inland Revenue at the time of filing the return), the time bar will apply; and
- If neither the IR 10 nor the financial statements disclose the income, gain or receipt, the time bar will not apply (when supported by a senior Inland Revenue manager).
The need to prepare financial statements that meet minimum requirements
With recent changes to financial reporting rules, many companies are no longer required to prepare financial statements that comply with generally accepted accounting practice (“GAAP”). However companies that do not prepare GAAP financial statements will be required to prepare financial statements in accordance with Inland Revenue’s minimum requirements. Furthermore, subsidiaries of New Zealand companies that prepare consolidated financial statements in accordance with GAAP are now also expected to prepare their own financial statements and will need to apply the new minimum financial reporting requirements to each subsidiary individually. The key point to note is that companies do not need to attach and file these minimum requirement financial statements with the income tax return, but they do at least need to prepare them and have them on hand in the event of an Inland Revenue information request or audit. If a company chooses not to attach and file these financial statements with the tax return, they should then prepare an IR 10 and file this instead.
To complete the IR10 or not, that is the question?
While Inland Revenue states that completing the IR 10 may save a business from completing statistics surveys, there still is a compliance cost of having your accountant complete the summary in addition to preparing financial statements. We’d say it is therefore, at best, neutral on the compliance cost issue.
If the IR 10 is completed, there is now a box for taxpayers to disclose all receipts which may not be taxable income. Some taxpayers may feel they are perhaps asking for audit attention if they complete the IR 10 including what they have self-assessed to be a non-taxable amount in box 53.
The key takeaway point is that taxpayers and their advisors must carefully consider how income, gains and receipts are disclosed in the underlying financial statements and IR 10, where one is prepared. If the IR 10 is used, it should be fully completed and consistent with the underlying financial statements.
The risk arises where a taxpayer self-assesses that a particular receipt is not taxable and does not include or mention it in the financial statements or the IR 10. If Inland Revenue were to successfully challenge that the amount received was income, then the time bar rule would not apply to that tax return.
While the statement is in draft, it is a timely reminder for taxpayers and their advisors to reflect on what information taxpayers are providing with tax returns.
The deadline for comments is 24 March 2016. For further information, please don’t hesitate to contact your usual Deloitte advisor.
Tax Alert March 2016 Contents:
- Inland Revenue audits are fun and friendly! – Or so Inland Revenue’s latest video suggests
- Peering into tax: bad debts and P2P lending
- Engaged in R&D? The R&D loss tax credit regime is a go!
- What information should you file with your tax return?
- Comical Australian employee deduction case highlights New Zealand’s pragmatic rules