Taxman says 'cash jobs' and internet traders on hit-list

[Naki Rat]

That sounds a bit unfair - we renovated our two bathrooms recently and also replaced our stove, then sold the old stuff on TM for about $700. Once I factor in all the other crap, whoops, unwanted treasures, I've sold on there, it could easily be more than $2000 in a year. I'm certainly not making a living out of doing it as it's all stuff I owned to start with and now don't need, but I'd certainly stop doing it if that was classed as 'income'.

If that was all it took to be in the wrong anybody who sold a secondhand item for over $2,000 would be in the wrong. Note the "absence of evidence" clause:

"For the purposes of the Act, a person is presumed (in the absence of evidence to the contrary) to be engaged in business as a secondhand dealer if, ..."

I would think that if you were buying for resale it would be altogether different.

[YellowDog]

People who believe that the IRD will never get caught may in for a surprise.

If you have a Trademe account, this will be all the evidence they need. So it is a good idea to keep purchase receipts as evidence.

Trademe is audited every year and any traders/clients over the IRD's threshold will be passed to the IRD for inspection.

Don't risk this happening to you!

[Max Preload]

bullshit

While your response is pragmatic although a little subtle, I disagree. It is to your advantage because the change over once you hit the threshold is both tedious and complicated.

ironic how the gubbermint thieves expect us to be honest in our business practices and yet they are the worst at flouting the "rules" to suit them fookn black selves - pack of thieving cunts they is

Unfortunately, I cannot find fault with this statement.

If you are going to have to register for GST as you anticipate a turnover in excess of $60,000 then I agree with you.

I wouldn't bother for less than the threshold turnover, but I concur on the basis of less hassle and other points I'll make below.

Thats because you may as well get to claim all the stuff you buy, and all the fees you shell out getting started.

Often what happens is a small business starts off at home, and they pay for the extra phone line, and the fax, and the broadband and the new computer without being GST registered so don't get to claim for it. But a few months later, everything is going well, and they have to register anyway, so end up paying GST on all sales.

But if your business is small, and you don't have a legal obligation to register, then why would you ?.

You still get to claim the GST content of those goods and services by offsetting it against their income though as I've outlined below to p.dath (although asset purchase costs are capitalised and depreciated so you only get up to 39% of the 12.5% GST back as a sole-trader).

GST takes time to administer, and you are in serious trouble if you make an error on a return. It also has to be done every 8 weeks, which is a serious hassle if you want a decent holiday, or some time out of the business, as it still has to be done unless you deregister.

No - you can elect a 6-monthly GST period. You get the use of money and keep the interest on it for the period. Deregistering is far more hassle. It's not like GST periods come out of the blue either - they're the same time every year.

If your business makes a profit, you will also be better off NOT being GST registered, from a purely profit point of view.

That depends largely on who you are supplying your goods and services to - GST registered or non-GST registered entities. See my rehash of your example below.

For example (using exaggerated margins to make the point):

There's part of the problem right there - a 990% markup is unrealistic and generally unachieveable which grossly exagerates the benefit. However, IMHO the benefit of accounting for GST as a registered entity cannot be exagerated including cashflow benefits and an image of professionalism (it may only be an image but everything helps! ). Also, doing GST returns in your early stages of business with small turnover will mean if/when the business takes off you will be able to do them as second nature.

I buy a cheap widget for $1.12 from my supplier. I sell the widget for $112.

My gross margin is $110.88, if I am not GST registered.

If I an GST registered, I pay $12 in GST, and claim 12c, meaning my gross margin is $99.

Lets go back through your example with more realistic margins - say a 250% markup.

First lets look at...
Non-GST registered entity buying from a GST registered entity and re-selling to a non-GST registered entity.
GST registered entity purchase price: $1.12 ea incl. GST
Sale price: $2.80 ea
Gross margin: 250%

Next...
Non-GST registered entity buying from a GST registered entity and re-selling to a GST registered entity
Non-GST registered entity purchase price: - $1.12 incl GST ea
Sale price - $2.80 ea (no GST content).
Gross margin: 250%

Now here's the trouble. Your GST-registered competitor is selling them with the same 250% margin for $2.50 (buying at $1.00+GST, selling at $2.50+GST). Hell, he could mark up to 275% margin and sell at $2.75+GST to the GST registered entity and they'd still be cheaper than you and neither the widget supplier nor the buyer has to deal with non-GST registered part-time business Joe Schmos either!

As you can see your target market plays a considerable part in the decision matrix.

Not quite. If you are not GST registered then you will pay GST in that 1.12 to your supplier that you can not claim back, and you sell price contains no GST.

While the GST you paid the supplier (12c per widget) is not accounted for on your GST return because you don't do one as a non-GST registered entity, the GST content is still claimable as a 100% tax deductable expense, hence the $110.88 gross margin on the widgets. Trouble is the tax on your higher profit is also considerably higher than the GST of 12.5%...

[davereid]

Trouble is the tax on your higher profit is also considerably higher than the GST of 12.5%...

I'm not sure that is correct

Using your numbers..
I buy at $1.12
I sell at $2.81
My Gross profit is $1.69 before and after GST

You buy at $1.12
You sell at $2.81
Your gross profit is $1.69 before GST
You claim 0.12c GST and pay 0.31c
Your gross profit is $1.50

I have made 0.19c more on the transaction than you.

As my turnover is under $60,000, I might, if I am very good make $45,000 -$48,000 P.A. so I would have to pay 0.04c income tax on the extra profit, meaning I am still better off than the GST registered party by 0.15c.

Your GST-registered competitor is selling them with the same 250% margin for $2.50 (buying at $1.00+GST, selling at $2.50+GST). Hell, he could mark up to 275% margin and sell at $2.75+GST to the GST registered entity and they'd still be cheaper than you and neither the widget supplier nor the buyer has to deal with non-GST registered part-time business Joe Schmos either! [/B][/I]

However, the average purchaser on Trade-me will not be expecting to claim GST, so the seller who is not GST registered will make a higher gross margin than a GST registered trader.

But even if he were selling 50% of his product to someone who demanded a lower price as they couldnt claim the GST, it may still be a very marginal call as to the viability of GST registration.

The non GST registered seller may lower his price to be competitive with the GST registered trader - this will make him worse off only by the GST he paid to buy the item, and of course he will get 21% of that back in income tax.

For example..

For 50% of my customers I have to discount as they are GST registered

I buy at $1.12
I want to sell at $2.81, but I can't, as to be competitive with my competitor I have to sell at $2.50.
My Gross margin = $1.38

My GST registered seller (competitor)
Buys at 1.12
Sells at 2.81
Claims 0.12c and pays 0.31c
His gross margin = $1.50

He is 0.12c better off than me, before he pays income tax. If he is at the same income tax rate as me, he will be 0.09c better off than me after income tax.

If my turnover is $60,000, then I can sell about 24,000 widgets.

On 12,000 of them, I dont discount and I make 0.19c more than my competitor.

On 12,000 of them I have to discount, and I make 0.12c less.

I'm still up, more than 0.07c a unit or $1700, and I didn't need to spend any time doing GST returns, or paying my accountant to do them for me.

In fact, I would have to discount for almost 88% of my customers before GST registration made financial sense. And even then, if it cost me time or money to do the GST return, I may be better off remaining GST unregistered.

[Elysium]

So does this mean those people on Trademe like the ones who sell those BMW clones (Chinese bikes) aren't paying their taxes? If that's the case we may see a decline in cheap things like memory sticks, cameras and computer parts for sale on Trademe.

[davereid]

So does this mean those people on Trademe like the ones who sell those BMW clones (Chinese bikes) aren't paying their taxes? If that's the case we may see a decline in cheap things like memory sticks, cameras and computer parts for sale on Trademe.

I would be of the opinion that most large volume sellers on TradeMe etc are fully within the tax laws.

A much smaller and dumber volume would be operating illegally.

Trade me is a public place, and it seems to have a free two-way data flow to the government.

For example, you now have to enter your firearms licence number, to sell a firearm, and its validity is apparently checked.

This means TradeMe must have a data sharing agreement with the police (at least for firearm sales).

IMHO Large volume sellers use trade me for two reasons :

1. Its a huge market place with tens of thousands of potential customers
2. It allows you to sell junk that you culd not otherwise dispose of, as the auction process avoids the consumer guarantees act.

[flyingcr250]

ive done countless cash jobs for people, i mean lots. none of it goes in my bank account, it all goes on stuff and bills.

[Winston001]

Evading tax is a criminal offence. Avoiding tax is doing non-taxable activities. Evading tax is hiding taxable activities.

Steve

Well yes, that is the way it used to be. Evasion = illegal. Avoidance = legal - until the Commissioner had the newish anti-avoidance provisions inserted in the Income Tax Act. Happened in the mid 1980s maybe? So we had a perfectly understood term suddenly turned on its head which is why there is still confusion about avoiding tax. BG1 as referred to above.

You're all WRONG! Secondhand goods bought from a non-GST registered person still carry a deemed GST content regardless. A receipt is all you need to be able to use it as a GST credit against your account.

That's what I thought too. Does that apply to non-registered supply of services though? Say, an invoice from a casual cleaner or gardener.

I only ask because I was told by an accountant a few weeks ago that claiming GST on non-reg services was not allowed. Shame cos I'd been doing it for a club for years.

[Conquiztador]

Interesting comments and some factual (and not so factual) information. Much has been made of the GST or not GST registration when below $60K.

But what I think the IRD is looking for here is the avoidance of income tax.

If we forget the GST for a moment:

You buy a gadget for $1.12.
You sell the gadget for $2.81.
Lets assume that you only traded on TM.
The profit that IRD would be targeting would be $0.69 before any costs were deducted.
So now it is up to you to show IRD that you made no profit on the sale (you will get away with this for the first, even the second year, but then...)
You need to keep records of the TM listing costs and fees (easily done as they do this for you)
Then you claim office costs as you work from home. Storage costs at home. Stationery, car costs, phone costs, work clothes, sponsorship, travel costs etc. If you can not show a loss or at least a zero profit for the first years you are not doing it well. (This is assuming that you are trading below $60K/year).

So back to my reason for starting this thread: It sounds like IRD will spend our money investigating traders who make no money, as so their investigations are a waste of time.

Case study:

John started a small home based business. He decided not to GST register as he did not expect to trade over $60K/year.
He decided to sell exclusively on TM as it was simple and he did not need a shop or any advertising.
His turnover the first year was $59,999.12.

He achieved this by selling gadgets for $2.81 each. He sold 21,352 of them.
He bought them for $1.12 each totalling a cost of $23,914.24.
That left him with a surplus of $36,084.88.

When the IRD came knocking on his door thanks to the TM collaboration with the guvernment he was able to show that he had in fact made a loss.

This is what he provided the IRD with:
- His transaction fees at TM was $5,000.00 (as he had sold more then one per auction where the cost was to him $0.50/auction)
- He had purchase a accounting package for $3,000.00
- He had purchased a van so he could pick up the gadgets. He had this van signwritten and serviced. there was also new tyres, insurance and so on. Totalling $15,000.00
- He needed a laptop to do the TM work. Cost $2,000.00
- His office and storage was at home. He was therefore able to claim 40% of his rent and power costs: $8,320.00
- He needed a mobile phone and connection: 1,200.00
- He had postage and stationery costs of $2,000.00

That made him show a loss for the first year of $435.12.

After two days of investigation the IRD cappies left and life was back to normal for John.

Next year he knew he would sell double the amount of gadgets. But his sister who lives in Hamilton was happy for him to use her name and TM account to sell 50% of them. She had easily been convinced to agree on this when John told her that he was planning to upgrade his van and he would "sell" his old one to her for money she was making from not doing anything...

[Winston001]

But what I think the IRD is looking for here is the avoidance of income tax.

So now it is up to you to show IRD that you made no profit on the sale (you will get away with this for the first, even the second year, but then...)
You need to keep records of the TM listing costs and fees (easily done as they do this for you)

Then you claim office costs as you work from home. Storage costs at home. Stationery, car costs, phone costs, work clothes, sponsorship, travel costs etc. If you can not show a loss or at least a zero profit for the first years you are not doing it well. (This is assuming that you are trading below $60K/year).

So back to my reason for starting this thread: It sounds like IRD will spend our money investigating traders who make no money, as so their investigations are a waste of time.

I agree with you to some extent. The issue is - the black economy. Economic activity which isn't taxed. International estimates are that 8.8% of GDP falls into this bracket. That's a houseload of money which you and I make up for.

I suspect you are right about many TM traders not making much taxable income. However there will be sophisticated dealers who do very well, using a multitude of TM accounts. They are the real targets.

However anyone trading (which is quite different to just buying and selling the odd item) will face the possibility of an investigation and that can be costly. Tax law everywhere is written in favour of the income tax authorities. It is the one situation where you are guilty until you prove yourself innocent.

All very well to talk about deducting your home expenses, cellphone etc. That doesn't mean IRD will agree with you and allow it. Depends on how busy they are, your attitude, and the money involved. Add in an accountants costs, lawyers fees, compulsory orders on your bank accounts....the powers of the IRD are formidable.

[Max Preload]

I had a big reply almost done for davereid but Firefox crashed and I lost it and couldn't be arsed redoing it at the time, then forgot about this thread until I saw it in my USERCP.

In any case...

You buy a gadget for $1.12.
You sell the gadget for $2.81.
Lets assume that you only traded on TM.
The profit that IRD would be targeting would be $0.69 before any costs were deducted.

Your example would make a profit of $1.69, but regardless of that they'd be seeking tax on the $2.81 if you're discovered. They're not going to know or care about the $1.12 you spent unless you claim it yourself as an expense.

When the IRD came knocking on his door thanks to the TM collaboration with the guvernment he was able to show that he had in fact made a loss.

See below.

- He had purchase a accounting package for $3,000.00
- He had purchased a van so he could pick up the gadgets. He had this van signwritten and serviced. there was also new tyres, insurance and so on. Totalling $15,000.00
- He needed a laptop to do the TM work. Cost $2,000.00

The accounting software & van are capitalised and depreciated so you don't get the entire benefit in the first period. I'm not certain but I expect the signwriting is the same. Repairs, insurance & fuel are 100% deductable in the period the expense in incurred.

- His office and storage was at home. He was therefore able to claim 40% of his rent and power costs: $8,320.00
- He needed a mobile phone and connection: $1,200.00
- He had postage and stationery costs of $2,000.00

The cellphone purchase is capitalised too and the percentage of floor area used determines the claimable percentage of rent/power/rates/mortgage (interest portion only and no GST content in that) etc.

That made him show a loss for the first year of $435.12.

Not once he does it correctly.

Next year he knew he would sell double the amount of gadgets. But his sister who lives in Hamilton was happy for him to use her name and TM account to sell 50% of them. She had easily been convinced to agree on this when John told her that he was planning to upgrade his van and he would "sell" his old one to her for money she was making from not doing anything...

Doesn't work for the reasons outlined above.