Annual Report 2005

Part 2 Providing advice and maintaining an efficient tax administration

Advising on government policies

Inland Revenue's Policy Advice Division, working together with The Treasury, advises the government on all aspects of tax policy and social policy measures that interact with the tax system.

Much of the year's policy work culminated in the major tax package announced in Budget 2005, the introduction of two large taxation bills and the publication of several government discussion documents on proposed reforms.

Budget 2005, delivered in May, contained the largest package of tax measures to feature in a budget for over a decade. The tax package presented tax-related proposals to encourage savings, ensure more productive use of capital, improve access to worldwide capital, labour and skills, and reduce compliance costs.

The key themes of the 2002-05 policy work programme included tax-related measures to support growth and innovation; simplify the tax system-especially for small businesses; reduce compliance costs; protect the revenue base; and promote social cohesion.

This year's policy highlights were:

• Increasing New Zealand's access to worldwide labour, skills and capital. Policy reforms included removing impediments to international recruitment through temporary relief of much of the offshore income of new migrants and returning New Zealanders, and changes to the tax treatment of trans-Tasman superannuation, stock lending, venture capital and foreign hybrids. Also contributing to this objective was an expansion in our network of double tax agreements with other countries.
• The coherent taxation of savings and the entities through which people invest and save. A discussion document on the taxation of investment income proposed reforms aimed at removing anomalies between the treatment of savings held through collective investment vehicles and savings held directly by individuals. Policy officials also made a significant contribution to the design of the work-based savings scheme announced in Budget 2005.
• Improving the efficiency of capital allocation. Measures included changing the basis of depreciation deductions and giving companies that bring in new equity investors better access to research and development tax deductions.
• Tax simplification and reduction of tax compliance costs. Measures included changes designed to make tax easier for small businesses-including the introduction of legislation aligning provisional tax and GST payment dates, and raising the depreciation low-value asset threshold. The progressive rewrite of the Income Tax Act, to make the Act easier to use and understand, continued.
• The environment. A discussion document sought feedback on implementation of the proposed carbon tax and how it would apply to specific industries, while legislative changes improved business access to deductions for repairing environmental damage.
• Protecting the revenue base. Important reforms included changes relating to the tax treatment of deferred deductions, Australian unit trusts, foreign-owned banks operating in New Zealand, and corporate migration.

The Forecasting and Analysis unit regularly informed government of the amount of tax collected against forecasts. It costed a wide range of tax and social policy initiatives and prepared tax revenue and social expenditure forecasts for the December 2004 fiscal update and Budget 2005.

Maintaining an efficient tax administration

Growth in revenue and our taxpayer base has presented many challenges to our administrative systems over the past five years. We continued to process larger volumes of assessments and payments and respond to greater demand for information. In the future we will be expected to handle new work, improve our efficiency and remain responsive to the way that taxpayers and social support customers want to be treated.

To respond to these challenges we are focused on how we use our resources and the design of our business processes to ensure continued improvements in efficiency. We are also strengthening our technology base to provide an increasingly robust platform for the future.

Workload trends

The trend over the last five years in the growth of the taxpayer base and in major social support customer groups is shown in Figure 19 (2001 = 100). This is contrasted with the trend in Inland Revenue staff numbers to indicate the relative change in the ratio of staff to our customer base. The social support indicator contains only the main programmes: child support, family assistance and student loans. At June 2005 the total customer base in this group was 0.9 million and there were 6.0 million taxpayers. Over 2004-05 they grew by 3.4% and 3.6% respectively.

Figure 19 - Workload indicators

The growth in these two groups has had consequences for our workload, particularly in the interactions we have with people, for example registering for GST, issuing assessments, receiving payments and following up non-compliance. New programmes such as the Working for Families package have also required systems changes and the development of information products to explain the changes to the potential recipients. It will also increase our customer base significantly over the coming year.

The number of Inland Revenue staff has increased slightly over the comparison period, mainly to meet demand in call centres as a result of new activities and for enhanced child support services. The pressure from the increasing workload is reflected in the initiatives that we have undertaken to offer customers ways of dealing with us online or through automated systems such as INFOexpress.

Managing resources

We have found savings in our operations (for example, in our mainframe computer services and through procurement policies) that we have used to meet the additional demand placed on our resources by the growth in our customer base.

The buoyant labour market has also added to the pressure on our ability to provide resources for our operations. This has implications for the recruitment of staff as we compete directly with the private sector to attract people to work in our call centres, and for professional accountants and specialists in tax law. Similarly, we compete with the private sector to obtain resources such as office space and services.

We also recognise the need to operate in a sustainable way and to look for savings that we can make in our operations to free up resources.

Baseline funding

Over the past three years the increases to Inland Revenue's baseline funding has mainly been directed to new activities and to bring remuneration into line with public sector median levels. As noted above, we have used the savings from operations to self-fund the response to demand pressure on our services and to enhance our business infrastructure, for example, our online filing services and improvements to telecommunications. We have also self-funded the inflationary increases in resources such as building leases, software licences and services such as printing and postage.

Figure 20 - Departmental expenditure

In 2004-05 we received specific funding for various purposes including future capability, enhanced administration of Child Support, and resourcing to maintain and improve taxpayer compliance.

For 2005-06 additional funding has been allocated for further capability improvements, implementing government initiatives, handling cases under the child support reciprocal agreement with Australia, extending paid parental leave to self-employed people, Working for Families and implementing KiwiSaver and student support initiatives.

Outputs

Inland Revenue receives appropriations under eight output classes.

Figure 21 - Output class expenditure for 2004-05

Personnel expenditure continues to be our major expenditure area, accounting for 62% of total expenditure. The next largest category is operating expenditure (29%), followed by depreciation (7%) and capital charge (2%).

Sustainability

It is important for Inland Revenue to manage resources in a sustainable way. We are placing more emphasis on how we utilise non-renewable resources, and interact with our environment. These objectives are linked to the Govt³ programme that reflects the "three pillars of sustainability": environmental, social, and economic. In 2004-05 we have also continued to focus on:

• The print supply chain. Our outsourced print services provider manages contracts with our five main suppliers of print products to ensure sustainability.
• Vehicle replacements. The recent replacement of a large part of our vehicle fleet was based on an evaluation process that included factors such as carbon emission and fuel efficiency.
• Buildings. Our performance specifications for buildings have been used by the Energy Efficiency and Conservation Authority as a basis for other government organisations. We have also undertaken building audits, including energy audits on premises before entering into rental agreements, or on an ad hoc basis when issues arise. We conducted four audits in 2004-05.

Imaging begins with GST returns Our imaging technology went into action in 2004 with the scanning and electronic data capture of taxpayers' GST returns in our Central Processing Centre in Upper Hutt. By the end of June 2005, close to 320,000 GST returns had been processed using the imaging system. By the end of 2005 we plan to be imaging at all three processing centres. As well as GST, all employer monthly schedule returns will be imaged. The processing of these two forms will represent 70% of all Inland Revenue data preparation and data capture hours. Inland Revenue's ultimate goal is for imaging and electronic data capture to be used for all taxpayer returns and correspondence. Taxpayers and agents will be able to access tax information online; and for us, the weight and movement of paper will reduce, leading to faster, simpler and more efficient processing of taxpayer information.

Strengthening our technology platform

During 2004-05 we took a number of important steps to improve our technological infrastructure and platform. We upgraded our systems to keep pace with the demand for our services and to secure capacity to meet future business requirements. The new technologies offer us greater flexibility and will achieve cost savings.

We have reviewed our mainframe and telecommunications requirements and made major improvements to them. We have:

• signed a new mainframe services contract for seven years, increasing our mainframe processing capacity and taking advantage of improved technology and lowered operating cost
• signed a telecommunications services agreement covering voice, data, mobile and internet services using a converged voice and data network. The agreement will make our network more effective and offer opportunities to improve productivity
• begun implementing an imaging and electronic data capture project which will enable us to capture most of the paper-based information we receive in an imaged form and make it available at any site online when needed. www.ird.govt.nz

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Date published: 11 Oct 2005

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