If you are thinking of joining a network marketing scheme, you should at the outset understand the tax implications.
We have found some people claiming GST refunds and income tax losses to which they are not entitled.
It is therefore important that you are aware of the law, your entitlements and expenses or items that you cannot claim as refund.
Goods & Services Tax
As a member of a network marketing scheme, you can only register for GST if you are selling your products to other people continuously or regularly.
You cannot register if the products are for your own use, or if sales only take place occasionally.
What happens if you are registered for GST?
You must charge GST to your customers and file regular GST returns. The GST on your sales is paid to Inland Revenue but you can claim the GST paid to suppliers.
Such claims will be only in respect of your network marketing activity.
You cannot claim private or household expenses.
If something is used partly for private purposes and partly in your network marketing activity, you can claim a percentage of the GST paid.
In order to claim motor vehicle expenses, you must maintain a logbook.
If you work from home, you may be able to claim a percentage of your home expenses (such as power, rates and insurance).
Remember to keep your tax invoices. If we audit your GST returns, and find a tax invoice missing, your claim may not be allowed. In fact, you would be required to repay the money to us.
I cannot describe every situation in this column and hence please visit our website for more information.
Please note that registration is only compulsory if your annual turnover (gross sales of your products) is more than $60,000.
If your turnover is less than $60,000, you can voluntarily register.
You may decide that all the paperwork is not worthwhile for part-time activity.
If you decide to go ahead, please register from the date on which you start your networking activity.
If your network marketing activity is a business, you must file an income tax return every year and pay tax on your net profit.
Business losses can be deducted from any other income you earn.
If your networking activity is not a business, you do not pay tax on your profits and you cannot claim any losses.
What is a business?
You are probably running a business if your networking activity is carried out in an organised and coherent way and you intend to make a profit.
“Intending to make a profit” does not mean you must make a profit; an activity can incur loss and still be a business, but intention must be apparent.
How do we decide if there is an “intention to make a profit”?
The Assessment method
We look at a variety of factors including your plans, the scale of your activity, the volume of sales made and the time spent on your network marketing.
We would also seek answers to the following questions: 1. Are your sales regular or occasional? 2. Have you priced your products realistically? 3. Do you prepare budgets?
If you are operating a business, you must pay tax on your sales.
Most business expenses are deductible.
You cannot claim private or household expenses like food and rent.
If an expense is partly private and partly related to your business, you can claim a percentage of the cost. You must keep a logbook for your car.
If you work from home, you may be able to claim a percentage of your home expenses (like power, rates, and insurance).
Remember, you cannot claim expenses or losses unless you are running a business. Your networking activity would not be considered as a business if the products are for your own use.
If you have made a mistake with your taxes, you had better tell us before we find out in some other way.
There can be penalties if you file an incorrect return, but if you make a voluntary disclosure, the penalties can be significantly reduced.
Our website provides useful information about your tax responsibilities and entitlements.
You can also call us toll-free on 0800-377776 (GST) or 0800-227774 (income Tax).
Abdul Rafik is Inland Revenue’s Community Relationships Advisor based in Auckland. He is happy to answer readers’ queries, which should be sent to:
Visit our website (www.ird.govt.nz) for further information and to register for our free taxation seminars and workshops held throughout the country.