In this article, we’re diving into two important topics that have been gaining significant attention from Inland Revenue. By staying informed and proactive, you can safeguard you and your business against potential compliance issues.
This issue is addressing two hot tax topics – Cryptocurrency and Personal Services Income. To set the scene, Inland Revenue is one government department in these straightened times that is not experiencing a headcount reduction. This department is actively recruiting, for the simple reason that they are seeking to maximise the tax take, because the government needs the money.
Navigating the Crypto-Currency Landscape: Profits, Losses, and Compliance
Cryptocurrencies have rapidly emerged as a popular investment and transaction medium. However, with their rise, the importance of accurately accounting for profits and losses associated with crypto transactions has never been more critical.
Why It Matters:
Taxable Events: Buying, selling, exchanging, mining, and even receiving cryptocurrencies as payment can all create taxable events. Transferring crypto from one wallet to another is sufficient to generate a taxable transaction.
Record-Keeping: Maintaining detailed records of your crypto transactions is essential. This includes dates, amounts, what you received or paid, and the purpose of these transactions. There are some good tools out there, like Koinly.
Valuation: Cryptocurrencies are volatile, and as such, determining the fair market value at the time of each transaction is paramount for accurate reporting.
What is Inland Revenue Doing:
Inland Revenue is amplifying efforts to trace unreported crypto income. The most recent activity has centered on collaborating with NZ based crypto exchanges to obtain transaction data. Inland Revenue receives regular information from these exchanges, and have identified a large number of taxpayers that have not been declaring their crypto gains and losses. Many voluntary disclosures have consequently been made.
Don’t think for a moment that being on an overseas based exchange will save you. 126 countries (and growing) adhere to what is known as the Common Reporting Standard (CRS). This provides for the automatic transfer of banking and taxation data between countries. If you happen to be so lucky as to have a wallet that is registered in a country outside the CRS (or inside for that matter), and funds are transferred “home” so that your perfect palace can be purchased, what explanation will you provide to the authorities as to the source of funds.
What You Can Do:
Consult with Experts: Work with a knowledgeable accountant to ensure accurate reporting.
Stay Updated: Keep abreast of changes in tax legislation regarding cryptocurrencies.
Be Transparent: Report all relevant crypto activity, just like you would with traditional financial income.
Focus on Income from Personal Services
Another vital area of focus is income derived from personal services. Inland Revenue is making robust efforts to ensure individuals correctly report income from personal services. The current target are people working in the accounting, legal, medical and architect sectors. It has been reported that 800 individuals have come under the watchful eye of Inland Revenue.
Key Considerations:
Personal services arise when services are provided personally, however the revenue is transacted through another entity, such as a company or trading trust. These entities can be useful for enabling income to be taxed at a lower rate, either through remaining in the entity or through being diverted to another individual – say a family member. There are situations where it is deemed appropriate to retain income in the entity or to pay to a family member, however these situations are carefully prescribed.
Why Now?
Why not! The top tax rate for individuals now is 39 percent, and with a company rate of 28 percent, and a family member who may have a marginal rate of 17.5 percent, the rewards for diverting personal services income to lower taxed taxpayers can be very significant.
On Another Note
Inland Revenue changed the tax returns for trusts a couple of years ago, and we are starting to see the results of these changes. Using the information from Trusts Disclosures, 3500 people have been identified who have received very large distributions, but have not updated their income for Working for Families entitlements. Oops. Payback time plus penalties and interest.
Construction
As they say, ignorance of the law is no excuse, although prompt action when an issue arises can result in a reduced penalty. By addressing these crucial areas, you can rest easy when the tax officer comes knocking. If you have questions or need assistance with your tax obligations, including crypto transactions or personal services income, please don’t hesitate to contact our office. Our team is here to provide the expertise and support you need to maintain compliance and optimize your financial strategy.