Snippets

End of year write-offs

As increasing interest rates have bitten and with industry sectors such as retail and construction not performing as strongly, some businesses are struggling. As the end of the financial year approaches, now is a good time to assess whether any of your accounts receivable need to be written off as ‘bad’. This is because, in order to claim a tax deduction, a bad debt needs to be physically written off as bad within the income year.

Whether an amount is “bad” was discussed by Inland Revenue in Public Ruling BR Pub 18/07. The factors to be considered include:

  • the time period the debt has been outstanding;

  • steps taken by the lender to recover/collect the debt;

  • knowledge of the debtor’s financial position;

  • status of the debtor, e.g. deceased, unreachable, or in receivership or liquidation; and

  • when the debt will become statute barred.

Inland Revenue noted that it is not necessary for a debtor to be insolvent or that legal proceedings be commenced to recover a debt, in order for it to be ‘bad’.

Evidence of what recovery action has been taken and why the debt is considered bad should be held in the event of review by Inland Revenue.

If GST has been paid on a sale that has subsequently been written off as bad, the GST paid on the sale should also be recoverable from Inland Revenue.

Paying tax on a sale for which you will not be paid is like pouring salt into a wound, and to be avoided where possible.

UK’s HMRC hit workers with big tax bills

The UK’s tax collection department (HMRC) has been sending letters to tens of thousands of taxpayers, demanding they pay large outstanding tax obligations. The letters have come as a surprise to many and have allegedly been linked to 10 suicides.

The issue has arisen out of the use of umbrella companies. Workers would have their salaries paid into the umbrella company, which would then lend the money to the worker, but it was not repaid. Such a structure was common in fields such as nursing and teaching, with there often being no choice but to get paid in this way. However, the scheme was not compliant with UK tax legislation, resulting in large underpayments of tax and national insurance over the years.

Rather than go after the employers that set these schemes up, the HMRC is contacting individuals directly and placing the tax burden on them.

Is this something that could happen in New Zealand? Technically, the legislation does allow for it. The Income Tax Act 2007 provides that where PAYE is not withheld from an income payment, the employee is then liable to pay that tax. In reality, this is unlikely to happen because Inland Revenue would more likely pursue the employer.

However, if someone is being paid ‘gross’ it is better to ask the question and not consider it a ‘windfall gain’.