Income tax is generally recognised as being one of the biggest expenses that a business faces.
Not only is there the cost of the tax itself; there are also compliance costs associated with managing the myriad of responsibilities that taxpayers have.
Employers have a particularly heavy burden. Calculating wages and leave entitlements can be difficult enough. But since the introduction of PAYE in 1958, additional taxes have been progressively added to the system including child support deductions, student loan repayments, deduction notices for repayment of tax arrears, KiwiSaver contributions (employer and employee), superannuation taxes, and payroll giving (donation) deductions. While most employers may have these overwhelming calculations handled by a computer, they remain daunting.
What most of these taxes have in common is that they are not the employer’s money. The deductions are made from the salaries and wages of employees and are dealt with by the employer on their behalf. While PAYE is undoubtedly a significant cash outflow for a business, it is part of employee wages and held on trust for those employees until paid to Inland Revenue – on either a monthly or twice-monthly basis.
It is that element of “trust” that makes PAYE a different tax than, say, the employer’s income tax charge on their own profits. It is somebody else’s money. As Inland Revenue puts it: “The money deducted doesn’t, at any stage, belong to employers. Under no circumstances should the deductions be used for any other purpose than for payment to us. We’ll…take action against employers who don’t comply with the tax laws.”
However, it can also be a tempting source of funding for a struggling business. Imagine the scene: deductions have been made from wages, with the net amount paid to employees. The overdraft is approaching its limit and the bank has indicated they’re not prepared to extend. Solution: hold off paying the PAYE to IRD.
A word to the wise: Don’t. The maximum penalties are a fine of up to $50,000 or five years in prison, or both1. A collection of current court decisions illustrate the seriousness with which Inland Revenue views these cases.
For example, in one case2, a taxpayer was sentenced to seven months home detention and 400 hours of community service for failing to account for over $114,000 of PAYE deductions. In this case the sentence was less than it could have been because the offending was obvious from the start, as the taxpayer had made the deductions and filed the appropriate returns - they simply didn’t pay the money to Inland Revenue.
There are further penalties that may apply, up to 150% of the tax shortfall. That means still having to pay the original tax, with that amount and half again payable on top as a penalty. Interest charges will also apply.
The nature of GST is similar to PAYE. GST is charged by registered persons on the supplies they make. It is collected from customers and held until paid to Inland Revenue with the filing of a GST return. Significant penalties also apply to a failure to pay GST.
If a business is in the position of being unable to make PAYE or GST payments, it is a sure sign that there is something seriously wrong. Rather than succumbing to the temptation to hold on to other people’s tax money, seek professional advice about improving the business or making appropriate arrangements with Inland Revenue.
1Tax Administration Act 1994, section 143B(4) 2Commissioner of Inland Revenue & Robb NZ 31/5/12 DC Taupo CRI-2011-069-001773
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