IRD sets sights on construction industry, by Stewart Russell
The construction sector is a major contributor to the economy, accounting for just under a tenth of the economy’s output and just over a tenth of total expenditure. The total construction sector is a significant national employer.
The COVID environment has meant businesses have faced difficulties in sourcing building materials, lack of available skilled staff and uncertainty and timing of projects.
With all this going on businesses also need to ensure they keep up to date with tax requirements. Tax goes towards funding/subsidising our national infrastructure such as housing, health, education, roading etc. Additionally, we will be funding the cost of the various COVID initiatives which the Government bankrolled, most notably the wage subsidy scheme.
The IRD are concerned that people are more likely to engage in hidden economic activity (cash jobs) in an environment of economic uncertainty, such as the current COVID-19 environment.
The IRD are running an awareness and education campaign called “Cashies won’t rebuild our country” to help people in the construction industry comply with the tax rules. They are running ads on-line, at building sites and hardware stores.
The focus is to provide information to enable taxpayers to fill in their tax returns correctly. Making sure they record every job.
There is no problem in performing a job and being paid in cash – but of course you should still declare this on your income tax return and pay GST (if you are GST registered).
The IRD are aware that cash jobs are performed and have ways to identify these to ensure that taxpayers pay the right amount of tax. For example, they might perform an audit on one contractor which identifies other contractors working on the same job, or perhaps find materials claimed for jobs which were not included on their tax returns.
An area that is commonly misunderstood is the use of sub-contractors.
A business operating in the construction industry is required to deduct withholding tax from all labour only contractors unless the individual has a certificate of exemption from the IRD.
Even if the business does not have any employees and only uses subcontractors (who are not companies) and don’t have an exemption certificate then withholding tax must be deducted by the business and paid to the IRD on behalf of the contractor.
The danger for the business is that if the subcontractor does not pay their tax, the IRD can go back to the business and demand the tax – since the business had the obligation to deduct the tax from the subcontractor.
Historically the rate of withholding tax was 20%, but nowadays the contractor can elect for any rate between 10% - 39% - albeit most contactors have stuck with the old 20% rate.
We recommend that you contact your tax advisor if you are unsure what your tax obligations are.