Tax trap for horse owners with lifestyle blocks

March 21, 2007

Article © Horsetalk 2007
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Death and taxes, it is said, are the only certainties in life. If you're a small-block holder in New Zealand, it's almost certain you will end up paying tax on behalf of someone who has done work on your property.

If you fail in your obligations and the person evades the tax, the Inland Revenue might just be knocking on your door to cough up the amount owed.

How can this be, you ask? How can such a nasty tax problem be lurking in your paddocks?

It all comes down to the legal status of the person doing the work, and the kind of work they are doing for you.

There is a select group of work activities that the tax department has singled out for special attention, and agricultural work looms large in the list.

This is how it works:

You employ a contractor to do some work around your property. If they are trading as a limited liability company, then everything will be OK. Because they're a limited liability enterprise, the whole issue of the tax they pay is between them and the Inland Revenue Department.

As long as the cheque you write out requires a "Ltd" at the end of the company name, or you pay cash and the receipt you receive shows the company to be a "Ltd" company, then you have no obligation to pay any tax on their behalf.

The tax issue arises if the contractor is trading on their own (a sole trader), is in a partnership (two or more people running a business, but not as a limited liability company), or is trading as a trust.

If this is the case, and they are carrying out work in one of the categories nominated by the tax department, you are required to retain a portion as withholding tax, and pay it to Inland Revenue.

It is not a popular tax law, on a lot of levels, and attempts have been made to have it changed. However, as things stand at the moment, the liability is with the small-block holder to hold back the tax portion, and pay it to the IRD on behalf of the contractor.

It is to be hoped that most contractors' accountants would have organised their clients into limited liability companies to simplify contractors' relations with customers, but the obligation remains with the landowner to determine the status of the person doing the work.

And most lifestyle block owners holding down a full-time job won't exactly be overjoyed at what they will have to do.

Firstly, let's look at the list of work affected by this tax law. It is on the back of a form called an IR330.

The categories most likely to affect block holders are:

The front of the IR330 has a section where the contractor (and, remember, we're not talking about those trading as a limited liability company), can fill in their name, IRD number, tax code, and sign it.

If they do this, you, as their employer, can withhold a much smaller amount of tax. For most agricultural work, it's 15 cents in the dollar. If, however, the person doing the work is not prepared to do the paperwork, you're required to deduct the tax at a much higher rate - up to 45 cents in the dollar.

Contractors who would normally be subject to this withholding tax can obtain an exemption certificate from the tax department (an IR331). If they can show you this, then you are saved the trouble of withholding the tax. However, make sure their IR331 is current.

Never assume that, just because the contractor appears a big operation with a lot of tractors and gear, that they're trading as a limited liability company. Many contractors started out small and have grown to be large operations with big turnovers.

It's up to you to ask.

Now you have to pay the tax you have withheld from the contractor's payment to the IRD.

To do this, you have to register as an employer. You do this by filling out an IR334 form, which you can download from the department's website. (Just search for the form by name in the search box).

Once you've done this, you'll be posted an employer's pack, and will begin to receive a monthly return called an Employer monthly schedule (IR348). You then fill out this form with the information supplied to you on the worker's IR330 and send in a cheque to pay their tax.

Needless to say, it's a very serious offence not to pay this withholding tax to the department, as the money belongs to the contractor - and you are paying it on their behalf.

Do not send in the IR330 with the payment. You must hold on to this completed form for seven years after you made the last payment to the contractor.

The problem you now have is that the tax department will be sending you an IR348 each month from this pointon. You are required to fill it out each month, even if, as is likely, you'll effectively be filing nil returns.

After six months, by which time you should have a track record of religiously filing a nil return on your IR348, you can contact the department and ask to be moved to "unpoliced" status.

Being unpoliced sounds like a splendid status to have with the Inland Revenue Department, but all it really means is that they will continue to send out the monthly form, but will not be chasing you up if you don't file a return.

Once you're to this point, you should be OK.

Have a few IR330 forms at home for any sole-trader contractors to fill out, and you only have to fill out the IR348 and send in a cheque for their withholding tax if you've employed them during the month.

Fortunately, the people whose tax you are paying are responsible for their own payment of levies to the Accident Compensation Corporation.

And don't think that GST registration means anything in the context of withholding tax. There are plenty of sole traders and partnerships out there who are registered for GST.

It will be handy to have a few IR330 forms at home. They can be downloaded from here.

Employers can also register on-line to meet their obligations electronically. Simply visit www.ird.govt.nz.