Prepare for IRD's searching questions

Several high profile NZ cases and new directives from Inland Revenue highlight the need to carefully plan taxes, accountants say

Within the legal side of contracts and day-to-day functioning of an IT department, the tax side of the law should not escape attention, a meeting of the Technology Law Society meeting last month was told.

There can be significant tax questions attached to the way the IT industry works, says PricewaterhouseCoopers lawyer Kathryn Roberts and these range from the depreciation rebates claimed on the intangible property in software to the widespread use of contract developers, she says.

High-profile financial scandals, particularly in the US, have highlighted the risk of doing the wrong thing by the taxman.

“Risk management has shot up the agenda of most organisations and is increasingly being discussed inside both commercial organisations and revenue authorities,” Roberts says.

The question of when the intangible property of IT qualifies for a depreciation rebate made headlines locally last year when Inland Revenue brought legal action against software company Actonz alleging tax avoidance in a complex scheme whereby supposed purchasers of software claimed income tax and GST rebates (Computerworld, December 2, 2003).

The judgment, in favour of the IRD, is now unlikely to be appealed, as Actonz management and investors originally planned.

The Simkin Trust case, over depreciation of trademarks, highlighted more fine lines regarding how intangible property, including that related to IT developments, should be depreciated.

If a project falls behind schedule this can mean retaining contractors for longer than expected, which can create tax issues, Roberts warns. Contractors are not usually put on the PAYE system, but may incur withholding tax. New Zealand customers paying overseas contractors for development may create even more complex tax issues.

IRD’s corporate unit, under “new management” by a manager from the private sector, is giving closer and more dedicated attention to tax-risk management (as distinct from auditing activity) and has added searching questions to its taxpayer questionnaire. It asks, for example, what "tax minimisation strategies" have been suggested to a company and what its reaction was.

Roberts says tax risks in a number of different categories should be addressed, from tax on transactions through accounting and compliance, to the risk of adverse publicity to an organisation stigmatised as a tax evader. The board, the company’s tax experts, business units, auditors and investors all have their roles to play in various combinations in minimising these categories of tax risk, she says.

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