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Tax Talk Newsletter Dec 16 / Jan 17
Audits: What to do when IRD calls
- What’s an audit?
An Inland Revenue audit looks at your financial affairs to make sure you’ve paid the right amount of tax and complied with tax laws. It could be a simple check of your GST registration or a full examination of all your business and personal records.
Who gets audited?
Inland Revenue can audit any business. It uses a range of methods to select who to audit, but won’t disclose the reason you have been chosen.
How it works
Inland Revenue may sample your records to see if an audit is needed. If everything is okay, the inquiry ends there and Inland Revenue will confirm you won’t be audited.
If an audit is necessary, you’ll get a letter telling you what records Inland Revenue needs to see, with an information sheet on how the process works. Usually, Inland Revenue will follow up with a face-to-face interview to learn more about your business and answer your questions.
Some audits focus on a small part of a business. In these instances, Inland Revenue may not need to meet you and may instead choose to conduct the audit by email or through your tax agent.
An audit will look at your:
- ledgers
- journals
- invoices
- payroll records
- bank statements.
How long do audits take?
Audits, like the businesses they look at, are all different. At the start of the process, Inland Revenue will give you an estimate of how long it thinks the audit will take.
Results
Near the end of the audit, Inland Revenue will meet you again to discuss its findings. It should be clear at this point if you’ll get a refund or need to pay more tax.
The auditor will also tell you where you’ve gone wrong and how to put things right.
You can download a Audits Guide from the Inland Revenue website.
Consumer Law: footing the bill for faulty products or services
Who is responsible for fixing a product if it breaks after the manufacturer’s warranty or an extended warranty has expired? If you answered “the customer”, you should read on — the good reputation of your business may depend on it.
If your business sells, hires or leases products — or supplies services for household or personal use — here’s what the Consumer Guarantees Act says you must do if something goes wrong.
Faulty products
Products your business sells must meet certain quality guarantees under the Consumer Guarantees Act (CGA).
If any of these guarantees are not met, a customer can come back to you and ask for a solution. If the problem is minor and can be easily fixed, it’s your choice whether to offer repairs, a replacement or a refund.
If you fail to do so within a reasonable time, or refuse, then the customer can either:
- get someone else to fix it and claim reasonable costs from you or
- return the item and ask for a refund.
If the problem is serious or can’t be easily fixed, then it’s the customer’s choice to either:
- return the product and get a refund or replacement
- keep the product and claim compensation for the drop in value.
The customer can also claim compensation for any loss or damage as a result of the faulty product that your business could have anticipated.
CASE STUDY:
Christine buys a new & expensive oven from H Berry Appliances, perfect for baking the sweet treats that her family loves. After three years of occasional use, the oven stops working and an appliance repairer quotes more than $1,000 to fix it. Christine contacts Harry Berry, who sold her the oven, who tells her it was only guaranteed for two years and therefore “not my problem."
Christine is not impressed. After getting advice, she sends Harry a letter asking for free repairs under the Consumer Guarantees Act (CGA).
Since the oven must be fit for purpose under the guarantee of acceptable quality, it should be able to heat and cook food easily. In this case, as it’s a lightly used oven that cost a lot but doesn’t do what an oven should, it’s reasonable for the retailer to fix the problem. Harry agrees to repair Christine’s oven under the CGA. Although Christine can once again bake her sweet treats, she is left with a sour taste in her mouth over Harry’s initial refusal to comply with the law. She tells her friends about it, damaging H Berry Appliances’ reputation. If Harry had just offered to fix the problem straight away, he might have turned this bad news story into a good customer experience.
Faulty services
Your business must meet certain quality guarantees under the Consumer Guarantees Act (CGA).
If the problem with a service is minor, the customer must give you a chance to fix the problem free of charge within a reasonable time.
If you refuse, or fail to do so within a reasonable time, the customer can either:
- get someone else to fix it and claim reasonable costs from you
- cancel the contract and refuse to pay for work done.
If the problem is serious or can’t be fixed easily, a customer can either:
cancel the contract and ask for all or some of their money back
claim compensation for any drop in value of the service.
The customer can also claim compensation for any damage your business could have anticipated
Guarantees won’t apply when you sell to another business — also known as contracting out of the Consumer Guarantees Act.
Contracting out of the Act
This applies if you sell goods or services to another business, and you have both agreed to contract out of the CGA in writing. It must also be fair and reasonable for both you and the other business to do so.
Aside from contracting out you can’t tell customers that the guarantees under the CGA won’t apply. To do so can breach the Fair Trading Act.
Beware terms and conditions
Many large suppliers seem to be using their terms and conditions in ingenious ways to take advantage of their customers.
It’s been reported that TrustPower advertised unlimited broadband for $49 a month. However, customers needed to sign up for a minimum of two years and in the small print it stated that the second 12 months was to be charged at $79 a month. The commerce Commission has filed charges under the Fair Trading Act.
Magazine publishers sometimes include a clause in their terms and conditions which says if you don’t say you do not wish to renew your subscription, the company automatically renews it for a further year.
Be selective in choosing who you are going to allow to direct debit your bank account. If there is a dispute, you might find it hard to get your money back. Unfortunately, none of us has enough time to read all the terms and conditions. About the best we can do is be aware they can be badly skewed against the customer.
How to reduce bad debts
PREVENTION is better than cure when reducing the number of bad debts.
- Avoid giving credit to a stranger, without undertaking a credit check.
- If you have to give credit without doing a proper check, be sparing.
- Giving credit can help you gain customer loyalty, but be careful.
- There is no obligation to give credit to anyone. Try to make it a habit, if your type of business will permit, to assume you will be paid on the spot.
If it can’t prevent bad debts then:
- Jump on new customers who start to abuse your credit arrangement.
- Make notes of every conversation you have with a debtor.
- If you have to make follow up calls, quote back to the customer what he/she undertook to do.
- Immediately after you have made a call, make a note in your diary of the day on which you will next call if the money has not been received and keep a record of what was said.
- Discontinue giving credit to the chronically bad payers. The time you put into them will destroy your profitability. You could be doing better things with the same time.
What about the big customer who will not pay on time?
Small businesses often find their biggest customer is their worst payer. You feel you can't afford to be too demanding, in spite of the fact you're entitled to your money. What should you do?
The answer is not to have one major customer that dominates your business. You will always be vulnerable while you let this continue.
Set a maximum percentage of total sales from any customer and do your utmost to see this is not exceeded. If your big customer goes broke it could take your business with it.
Don't grab all the money
If you sell your business, which you run through a company, the money does not belong to you. It belongs to the company.
You can only take it out if you are entitled to do so. If there is money owing to you, according to the balance sheet of the company, then that money can be paid out. However, any more than this becomes a loan to you or may even be an illegal distribution.
A problem often arises when a business is sold. The seller gets paid for “goodwill”. This is the value of the customers who have been built up over the years. It is a payment for the potential to get a higher income.
The sale of goodwill in excess of what was paid for it (if anything) is usually a capital gain. This capital belongs to the company.
You can get it out if your company happens to be a Look-through company or one of those old qualifying companies. Otherwise, it must stay there until the company is wound up. If you take the cash out prematurely it has to be treated as a loan from the company to you. There are tax consequences as a result. If you want the capital gain paid out to you, without tax consequences, you must first have a signed special resolution of shareholders resolving to wind up the company. A Liquidator can do this for you
Important: This is not advice. Clients should not act solely on the basis of the material contained in the Tax Talk Newsletter. Items herein are general comments only and do not constitute nor convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Tax Talk Newsletter is issued as a helpful guide to our clients and for their private information. Therefore it should be regarded as confidential and should not be made available to any person without our prior approval.