The 'hidden economy' and in particular 'cashies' in the building and construction industry are a "high priority" for the IRD. People known to be working in the construction industry can expect to receive regular reminders from the IRD on their obligations to record and declare all of their income.
Lets be clear, there is nothing illegal with receiving cash payment for a job or giving a customer a discount for paying in cash at completion. What is illegal, and unethical, is not declaring that cash correctly as income in your Tax Returns. The IRD has no desire to stamp out the cash economy, they just want to make sure that tradies and anyone else who gets paid in cash understand their obligations and responsibilities to correctly declare that cash as income.
The IRDs biggest source of intelligence about the hidden economy and tradies committing tax evasion is on-the-ground intel and anonymous tips to their hotline. These tips could be from anyone, a disgruntled client unable to get proper redress on improper work due to the lack of a paper trail with the cash job, to an angry ex or a fellow tradie who is doing everything above-board and wants to see you pay your fair share. So, what do you have to do to avoid jail (yes, tax evasion is a crime and you can go to jail) and do everything above board?
Doing Cashies Above Board
Its pretty simple really, keep good records and declare all of your income and expenses when you file your GST and Income Tax Returns.
The IRD knows how much gross profit you and every other average person/ company in every industry should be making based on bench marking comparisons with your competitors. When you fall out of the usual profit range it sends up red flags and prompts them to look closer at you. You can avoid this scrutiny and all of the added stress and expenses associated with an audit by being upfront, honest and accountable.
Keeping good records is key. This not only allows you to correctly declare your income but to maximise your deductible expenses and optimise your tax position. If you have clear evidence that you have recorded every job, including the cashies, and only deducted those expenses that you are entitled to, any audit is a painless and inexpensive process that might be over after a simple review of your records. For more information on this refer to our earlier update on IRD Audit Survival 101.
What If I Don't Declare It?
Failing to declare all of your income is against the law. There are considerable financial penalties on top of back taxes, late payment interest and, like any other crime, the prospect of jail time. All of this is on top of the necessary professional accounting and legal fees associated with any audit and resulting court action.
If you are concerned that you might have income you need to declare or think you may be at risk of getting caught, talk to a tax professional as soon as possible and go through your options. There are pathways forward that can help you to avoid the worst of the penalties by being upfront and declaring any errors before the IRD catches up with you.
The IRD has more funding than ever before to catch up with those who are trying to avoid their tax responsibilities. The likelihood has never been greater to be audited or investigated by the IRD, especially if you are in an industry that they consider high risk such as building and construction.
Don't be Afraid to Ask for Help
If you are concerned you may have made an error it is always better to ask for some advice and assistance to set it right than sit back and hope you don't get caught. If you need any help you can always talk to your accountant or tax agent and they can set you on the right path. If you don't have one, all good accountants will be more than willing to have a free, confidential chat with you to get a picture of where you are at and how they can help you. Asking for help now is a lot cheaper and easier than being dragged through court later.
This advice is general in nature. Every situation is unique and requires tailored advice. MBP has the expertise to guide you and your business through the process of making informed decisions about all of your tax obligations and responsibilities. If you think you may need a some advice or have been contacted by the IRD and aren't sure how to proceed, talk to our team today by calling 07 378 6655 or email firstname.lastname@example.org