From the Accountant's Desk

A  little shot across the bows

If you’re a building contractor of retirement age and are considering winding down but not completely stop working and not filing an end of year tax return, then be aware that there are community compliance officers from Inland Revenue that are ever present.

The IRD's mileage rate increases for the 2017 income year

The IRD's mileage rates for the 2017 income year for vehicles with business travel of 5,000km or less in an income year have been set as follows:

  • Petrol vehicles - 73 cents/km

  • Diesel vehicles - 73 cents/km

  • Hybrid vehicles - 73 cents/km

  • Electric vehicles - 81 cents/km

Taxpayers can choose to use the IRD's mileage rates or use actual costs if they consider that the IRD's mileage rates do not reflect their true costs. Sufficient records need to be kept to support actual costs claimed.

Employers can choose to use the mileage rates as a reasonable estimate of costs when they reimburse employees for the use of their private vehicle for business related travel.  Employers can also choose to use an alternative estimate from a reputable source such as the NZ Automobile Association. 

For the 2018 income year onwards, the IRD has made changes to its mileage rates.  Specifically, the 5,000km limit will be removed and a new two-tier mileage rate calculation will apply.  The IRD is yet to publish the mileage rates for this new two-tier system.

Beware of paying excessive salaries

It is very common for family owned companies to employ members of the family in the business on a permanent or casual basis. There is no problem with this per se, however income tax rules seek to prevent ‘excessive salaries’ being paid to family members. 

Inland Revenue has recently been focusing on this issue and has been scrutinising the type of work completed, the amount paid, the way in which it was calculated, and what a third party might be paid for the same work. 

There is no precise measurement as to what constitutes ‘excessive’, as each case is different. What is most important is that business owners determine the value of a relative’s remuneration based on the service provided to the business. The relative should be paid the same amount as an unrelated employee performing similar duties. 

IR has the ability to intervene and reallocate remuneration, income or losses if it considers the amount is not reflective of the value contributed. If an amount is deemed to be excessive, the excess may be recharacterised as a dividend and therefore non-deductible to the payer. Where salaries to family members are paid it is important to ensure the employment and the amount paid is calculated and documented on an arms-length basis.