THE DOG ATE MY ASC. A little sidebar first: just prior to going to print (metaphorically speaking) the 2021 Tax Bill has been reported back to Parliament.

We will wade into the reams of text in due course and update you on the proposed changes.

We are guessing not many of you remember what you were doing on 1 July 1994. If you were a good company accountant, though, you would have been diligently recording (using Lotus 1-2-3 on your Windows 3.1-equipped PC, if you were lucky enough to have such technology) your company’s Available Subscribed Capital (ASC) balance, and since that time you and your successors will have been diligently updating this balance and accurately preserving records of relevant transactions.

Oh, you (or your predecessors) weren’t doing that? You may have a problem with the IRD one day.

You see, the IRD has recently released a draft Operational Statement called “ED0239: Available Subscribed Capital record keeping requirements.” It’s fairly brief, because its message is pretty simple – if your company claims its ASC has increased but it hasn’t kept accurate records to substantiate this, the IRD may dispute your level of ASC.

So far, so boring. Why does this matter? Well, in simple terms ASC is the amount of capital shareholders have paid into a company for their shares. ASC is a great thing to have, because if a company repurchases its own shares or liquidates, distributions of ASC may be tax-free. Once you run out of ASC, though, any further distributions are generally a taxable dividend.

This is all well and good, but if your company has been around since 1994, its ASC balance may have gone up and down several times over the years. Apparently the IRD has come across several taxpayers in recent times who, when asked to substantiate their claimed level of ASC, have tried to argue their dog ate their accounting records. Or something.

Unsurprisingly, the IRD isn’t particularly sympathetic to tales of record-destroying canines. No records, no tax-free distribution.

“But that’s not fair!” I hear you cry. “I only need to keep my records for seven years!”

The Tax Administration Act 1994 says you need to keep your records for at least seven years. You can’t rely on the seven-year rule to get out of substantiating a tax position, even if that tax position relates to something that happened in 1994.

And this leads us into a wider issue. It’s called the onus of proof, and in simple terms it means that if a taxpayer makes a self-assessment of their tax, it’s up to them to prove it’s correct. If the IRD takes a different position, it’s up to the taxpayer to prove the IRD wrong, and by how much.

The IRD very much has the high ground here. They don’t need to prove their position if you can’t prove yours.

So keep your pets out of your accounting records!