Annual Report 2005 - Part 3

Create an environment which promotes compliance

Inland Revenue recognises that most taxpayers are willing to comply and we strive to make it easy for them to do so. On the other hand, we need to respond in differinga ways to taxpayers who find it difficult to comply, or who deliberately evade or avoid their obligations.

Over the last year we have improved the way we identify risks to revenue and developed strategies to ensure compliance where taxpayers are not meeting their obligations.

International relationships are increasingly important in our economic environment. We have continued to work closely with international agencies and other tax authorities to understand and deal with any international tax risks.

Our compliance model

The compliance model (Figure 22) shows how we should respond to a variety of attitudes.

We continued to apply this model to promote a tailored response to taxpayers. It takes account of the external factors that influence taxpayers' attitudes and behaviours, and recognises that these differences direct our approach to the best ways of improving compliance.

A key concept of the model is that most taxpayers are either willing to "do the right thing", or try to comply, but do not always succeed. Our response to them is to make compliance easy, or assist them to comply. At the other end of the compliance spectrum, where people deliberately do not comply, suitable sanctions are needed. Enforcing the law helps maintain overall taxpayer confidence in the tax system and encourages ongoing compliance. When we are enforcing the law our approach needs to move taxpayers to a position where they are likely to comply voluntarily in the future.

The compliance model thinking also applies to child support, family assistance and student loans.

Figure 22 - Our compliance model

Click on image above to get a full sized view

Industry Partnership, the compliance model in action Industry Partnership is a long-term initiative that began in 2002 to improve compliance in small- and medium- sized industries operating in the cash economy, and to build stronger relationships with the small business sector. By working closely with industry groups, Inland Revenue has identified common problems and reasons for non-compliance. By developing relationships with industry associations at national and local levels, and with individual small businesses, we encourage compliance among those who are willing to meet their obligations. When people choose not to comply, our investigation teams target enforcement and take prosecutions in key areas. In 2004-05 our auditors found a total of $14.7 million in discrepancies in the industries covered by Industry Partnership. Together, we have improved compliance, with fewer debt cases and outstanding returns in the first eight industries covered by the partnership arrangements. Between May 2002 and June 2005 the: value of outstanding tax debt decreased by 5% number of debt cases decreased by 24% number of outstanding returns decreased by 19%. We are also developing our understanding of the broader impacts of our Industry Partnership approach on overall compliance. For example, based on the first year of the initiative (2002-03), when there were relatively few industries involved and relationships were being formed throughout the year, our estimates are that additional taxable income of over $5 million was declared. Industry Partnership has relationships with organisations in 19 industries. We support these relationships with targeted communication, educational seminars and enforcement programmes, as needed. Many industry associations have now published articles on how to sort out tax affairs and get advice. In 2004-05 we established five new Industry Partnership "assurance teams" to complement the existing "encouragement/enablement" field teams. The assurance teams provide national coverage and identify and remedy deliberate non-compliance.

Providing information

Getting the right information to people at the right time is fundamental to achieving compliance.

Our focus in 2004-05 was implementing the first phase of Working for Families. We took an integrated approach across all our field delivery areas to provide information to our customers.

• We recruited an additional 92 part-time, fixed-term call centre staff to answer Working for Families telephone enquiries over the peak period.
• Staff from our service and processing centres also answered Working for Families telephone enquiries, reducing the load on our call centres.
• Our liaison officers worked proactively to make sure communities knew about the range of assistance available.

We handled 7.2 million contacts with taxpayers and our social assistance customers ¹, including:

• 3.9 million person-to-person telephone contacts through our call centres, plus 1.5 million automated telephone contacts through INFOexpress
• 1.6 million correspondence contacts, 12.5% of which were electronic contacts
• 178,000 personal contacts at our offices.

Quality of our services

We regularly survey our customers to measure how well we are delivering our services. Despite our growing customer base and the increasing complexity of our business, we have maintained a consistently high standard of customer satisfaction in recent years.

Figure 23 - Customer satisfaction ²

This year, our overall customer satisfaction level was 85%. The results from our call centres were even higher, with 86% overall satisfaction, and 96% satisfaction among tax agents. An additional measure of call centre performance is that 81.5% of customers considered their questions to be fully resolved, requiring no follow-up action. ³

Helping customers use online services Ninia Strickland, Customer Service Representative, Wellington Call Centre Ninia Strickland is a Customer Service Representative in Wellington Call Centre, who answers calls mainly to do with GST queries. "In terms of workload, calls about GST are reasonably steady throughout the year, although there is usually a rush at the end of the financial year when people transfer their tax affairs to their tax agent. With GST, complex calls usually come from people who have just started up in business and need assurance or help from us," says Ninia. Call centre staff are encouraged to check with people to make sure that they feel that all of their issues have been dealt with. Although this may lengthen the time of the call, it leads to a "complete job" and means that people don't need to call again with follow-up questions. Where possible, we direct customers to our online services to save them time. Our recently-upgraded website now provides comprehensive information and more than 70 services that can be accessed easily at any time. "Our customers rightly expect fast and efficient service from us. We encourage people to use our website to get the information they need. Most people are really happy to do this because they're comfortable using the internet." "Some people have access to the internet but need us to take them through it over the phone until they have the confidence to use it themselves. As long as they know what they're looking for and where to go, they're fine. Sometimes they just need a little help to begin with," says Ninia. However, other people prefer to deal with our call centres. "This means that we often go the extra mile for them-that way we know they're going to get the information they need."

Our telephone services

Most of our customers contact us through our telephone services. We had an increased number of high volume days ⁴ this year, which impacted on our ability to meet our target standards for timeliness to answer calls. On average we answered:

• 60.1% of tax agents' calls, 75.0% of employer calls, and 54.1% of return and debt collection calls within 20 seconds
• 47.9% of general service calls within 60 seconds, on those days when call volumes were below 17,500
• general service calls within an average of 5:56 minutes on those days when call volumes were above 17,500.

The Palmerston North extension to the Wellington Call Centre completed its first full year. This site expanded our capacity by answering 239,753 calls for the year. Staff from our service and processing centres also assisted our call centres to meet demand during the peak calling periods.

The total number of automated telephone contacts through INFOexpress was 20% less than last year. This was attributed mainly to increasing use by tax agents of the Look at Account Information service, which provides online access to a wider range of clients' income details. However, there were high volumes through the three main SPK2IR (Speak to Inland Revenue) lines. This natural language speech recognition service lets callers request information verbally, rather than having to use the touch tone keypad on their telephone.

Quality of our services

In all cases we aim to give taxpayers an answer that is complete, correct, clear, timely and appropriately referenced. The answer should also show an understanding of the business environment. We achieved a result of 80% in this area for our taxpayers and social assistance customers, a 2.5% improvement from last year.

Working in the community

We continued to build strong relationships with community groups and individual taxpayers to help improve voluntary compliance and the early take-up of entitlements. This was especially important this year with the introduction of Working for Families. We also helped taxpayers affected by emergency situations such as flooding to manage their tax obligations. We also created a full-time migrant liaison officer position in Auckland. Having links to migrant and refugee groups helps to make sure that they understand their tax obligations and establish good compliance habits.

Advisory services

Our liaison officers' network provides an important face-to-face service for:

• small business and tax professionals
• specific communities such as Maori, Pacific peoples, new migrants and refugees
• community groups-by giving seminars and other promotional work.

The major emphasis this year has been on giving people information about eligibility for the Working for Families package. This has meant extra effort on our part and we have delivered our message by visiting community, field and gala days and set up stalls at city malls and shopping centres.

We exceeded our target hours for advisory work by 12%. The graph below shows the advisory hours that we delivered from 2000 to 2005.

Our work has been very effective because of the existing community networks and relationships that we have built up over the years. We maintained the 97% satisfaction rating given by people we provided this service to.

Figure 24 - Advisories

Inland Revenue-a "fast follower" in floods' wake Matata, Bay of Plenty, following flooding in May 2005. If you mention emergency management, Inland Revenue probably isn't the first agency that comes to mind. But we have an important role as a "fast follower" behind the emergency crews, ensuring continuity of service when disaster strikes-as with the floods that struck the Bay of Plenty in July 2004 and May 2005. We also encouraged our staff to volunteer for flood recovery work at the time of the emergency. Immediately after the July floods we: set up a dedicated Inland Revenue 0800 number for flood-related tax or social support issues sent our staff to work in information centres waived penalties (for example, overdue payment of tax) where appropriate liaised with Federated Farmers on tax issues faced by affected farmers held a seminar for Whakatane tax agents on flood-related tax and social support issues sent our Tauranga-based Maori Community Officer to local marae to help with any individual tax issues. Our links with regional emergency preparedness networks are growing. Earlier this year, we signed an agreement with the Auckland Region Civil Defence Emergency Management Group, officially linking us into Auckland's emergency planning and response network.

Supporting cross-government strategies

In 2004-05 we contributed to a number of cross-government strategies that aim to improve the outcomes for specific groups within the community. These include:

• The New Zealand Disability Strategy - people need to have access to our buildings so we are making sure that there are no physical barriers for disabled people. We are also improving our website for people with disabilities in line with e-government guidelines for improved access
• The Positive Ageing Strategy - our initiatives include making sure our services are appropriate for older taxpayers, and looking at our future workforce needs.
• Relationships with community, voluntary, and tangata whenua organisations - we have been assessing our relationships to the many groups with links to taxpayers and other customer groups.
• Reducing inequalities - this Government goal aims to reduce disadvantages and promote equal opportunity. We contribute to this by administering family assistance programmes that give extra income support to eligible families.
• Development goals for the State Services - our contribution to the State Services Commission goal of "…a system of world-class professional State Services serving the government of the day and meeting the needs of New Zealanders" is demonstrated in a variety of ways, for example, through our e-government initiatives.

Managing outstanding returns and overdue debt

The active management of outstanding returns and overdue debt helps to maintain a high level of tax compliance and strengthen the government's cash flow. It also has a positive influence on community confidence in the system of tax administration. We achieve this by applying the compliance model and tailoring our enforcement activities to the severity of non-compliance.

Much of our information services' work aims to help people file their returns and make their payments by due dates. However, when people do not file a return or do not make payments on time, we work hard to help those who have tried to comply. We take firm action against deliberate non-compliers, including those identified through our audit activities.

During the year the value of overdue debt and the number of outstanding returns have both increased. This growth is influenced by a number of factors. There continues to be growth in the customer base (4%), especially small- and medium-sized enterprises (SMEs) ⁵. The economy's continuing strong performance also resulted in a growth in tax revenue of 11%. Added to these external factors is the result of our taxpayer audit activity, including tax avoidance and evasion schemes that generated additional debt of $541 million, a 35% increase on the previous year.

Total overdue debt was $2,883 million at June 2005 (a 23% increase on June 2004). This is made up of non-collectable debt at $1,329 million and collectable debt at $1,553 million (debt under instalment and debt for collection). The main components of debt are shown in Figure 26.

Figure 26 - Overdue debt ⁶

Non-collectable debt is debt that cannot currently be collected. It includes:

• debt deferred or under dispute in the courts
• assessments raised by Inland Revenue in the absence of a return filed by a taxpayer
• tax owing that is subject to bankruptcy, liquidation or receivership action
• debt identified as possibly eligible for write-off.

Collectable debt includes:

• debt being repaid under instalment arrangements
• net collectable debt-debt for collection (action for collection has been started or is pending).

Our strategies for dealing with debt and returns included focusing on early intervention, high-value debt and old overdue debt/outstanding returns. This emphasis resulted in:

• $1.5 billion in overdue debt ⁷ being collected, 36% more than last year
• 2.0 million outstanding returns being finalised, 3.3% more than last year.

Increasing workload

2004-05 has been challenging due to an increased workload arising from the growth in our case load. This year our Returns and Debt Collection (RADC) people spent one-third of their time on reactive contact with customers, answering more than 300,000 customer calls and responding to more than 100,000 items of correspondence.

RADC staff also provided priority support to other areas of Inland Revenue, especially for the Working for Families initiative (7,000 hours of assistance was provided to call centres, which included 1,250 hours for Working for Families).

Outstanding returns

In 2004-05, we sent out 11.5 million return forms ⁸ for completion, 2% more than last year. Of this total, 82% of the returns were promptly finalised and we needed to take collection action on the remaining 18% ⁹ (see Figure 27).

Figure 27 - Return forms sent out each year

As a result of our collection activities in 2004-05, we finalised 2.0 million outstanding returns (3.3% more than last year) and increased the percentage of returns collected within 12 months of their due dates to 82.3%. Part of our return collection focus has been on the 2,000 oldest outstanding returns, which we reduced by 86%. We also took prosecution action against 856 taxpayers for failing to file a return.

Figure 28 - Outstanding returns finalised

Overdue debt

In managing our overdue debt we used a risk-based approach that focused on:

• High-value debt (debt over $100,000) - we used a considerably higher portion of our resources than in previous years to actively manage high-value debt cases (48% of total debt). As a result, we collected $793 million. We targeted the 1,000 largest debt cases (29% of total debt) and successfully resolved 95% of them.
• Industry Partnership - specialist teams work with industry groups and use education and assistance as well as detection and deterrence to improve compliance levels. (See "Our compliance model" on page 30).
• Old debt - debt which is more than 2 years old is 37% of total debt. During the year we successfully closed or placed under positive collection action 51% of the 2,000 oldest debt cases, and collected $62 million.
• Audit-assessed debt - this year audit-assessed debt increased by 35% to $541.2 million and now accounts for 19% of total debt. 61% of tax evasion cases and 51% of other cases ¹⁰ were under positive collection action by year-end.

Addressing these risk areas allowed us to:

• collect $1,492 million in overdue debt, $393 million (36%) more than last year
• clear 482,643 debt cases, 26,300 (5.8%) more than last year
• close 84.2% of all new debt cases within 12 months of the due date for payment (compared to 86.6% last year)
• resolve 95% of the 1,000 largest debt cases.

Figure 29 - Overdue debt collected

The tax types comprising debt have remained relatively steady for the year. Although GST represents 32% of total overdue debt, it only represents 22% of collectable debt. The difference is attributable to default assessments made by Inland Revenue in the absence of a return.

Figure 30 - Total overdue debt by tax type

Collectable debt

During the year, the level of collectable debt increased to $1,553 million (a 20% increase over 2003-04). Collectable debt comprises debt that is currently under an instalment arrangement for repayment and the balance that is awaiting action.

Debt under instalment arrangement is currently $639 million and represents 41% of collectable debt (compared to 44% in 2004). Net collectable debt (debt for collection and not under instalment) has increased this year from $726 million to $914 million. We are currently taking legal action ¹¹ on 25% ($232 million) compared to 19% last year.

Figure 31 - Debt under instalment arrangement

Non-collectable debt

Almost half of total debt is classified as currently uncollectable. It includes:

• debt deferred or under dispute in the courts ($570 million, compared to $436 million last year). Much of this debt relates to litigation following tax audits, and the increase reflects the larger and more complex cases currently being handled.
• assessments raised by Inland Revenue in the absence of a return filed by a taxpayer ($564 million, compared to $506 million last year). The increase reflects the higher number of outstanding returns.
• tax owing that is subject to bankruptcy, liquidation or receivership action, ie debt with the Official Assignee or Liquidator ($63 million compared to $7 million last year ¹²). The increase is due to several very large liquidation cases this year.
• debt identified as possibly eligible for write-off ($132 million compared to $99 million last year).

Debt and hardship provisions

The debt and hardship provisions that were implemented in December 2002 gave us greater flexibility when dealing with taxpayers who are in debt or experiencing financial hardship. This year 42,662 cases ($83 million) were written off under these provisions, compared to 43,250 cases ($86 million) ¹³ last year.

The debt and hardship provisions, combined with our work in addressing high-value debt, have had a positive impact on penalty accumulation. The penalty and interest component of total overdue debt decreased from 43% to 41% this year.

More flexibility to deal with debt The debt and hardship provisions give us more flexibility when dealing with taxpayers in debt. We can look at an individual's particular circumstances and provide appropriate support. "In cases of serious hardship we can write off debt; in other cases we can make a suitable instalment arrangement. For some it is simply a matter of encouraging them to establish a better system. So we're definitely here to help those taxpayers who want to get back on track," says Simon Brown, chairperson of the National Consistency Committee. "We meet regularly to discuss particular cases. We want to ensure that we are being consistent and fair in our treatment of taxpayers; helping where required, but taking firm action when there is ongoing non-compliance. I find the meetings are really valuable for sharing knowledge and experiences. We also use the meetings as a forum to discuss ways to improve our processes and decision-making". Customer comments include: "I am thankful for you spending the time to come out and look at the situation first-hand and then allowing some time to provide all information required and improve the current system. I believe this was the best result for all concerned and I would like to congratulate you and your team on your approach to this matter. I am aware that you deal with genuine cases and some that are less than genuine".

Improving compliance through our audits

In 2004-05 we continued to focus on high-risk areas such as avoidance and evasion. Challenges to major avoidance schemes were successful in the courts, sending a strong message to promoters of such schemes and to potential investors. We gave high priority to tax evasion, particularly as a follow-up to Industry Partnership initiatives to educate and promote compliance among willing taxpayers.

Our compliance model has also influenced our approach to audit work. We are working on ways to be more effective in assessing and responding to risks to revenue, to have a positive impact on overall compliance. We are applying our audit strategy to taxpayers across all sectors of our business from small- and medium-sized enterprises (SMEs) to large businesses (corporates).

Focus on risk in individual and SME audits

We continued to target the following risk areas:

• Real property - tax issues arising from the timing of claims on property purchases and undeclared profits relating to GST and income tax for speculative transactions. Our main focus was in Auckland and Central Otago. Our investigations have featured widely in the media, raising awareness of the tax consequences of property transactions, particularly for speculative investors new to the industry.
  We also provided information to tax agents-setting out the types of errors and under-reporting identified through our audits. We've used this information to support education seminars run by organisations such as the New Zealand Institute of Chartered Accountants.
• Tax evasion and income suppression - businesses operating outside the tax system or failing to meet employer obligations. There have been a number of prosecutions following on from our audits, particularly for non-payment of income tax and GST, and fraud.
• Tax avoidance - at the end of the year we had more than 1,300 open cases under investigation. We managed a further 700 disputed cases involving tax assessments totalling $264 million.
• Technical non-compliance - to June 2005, technical non-compliance resulted in discrepancies of $54 million. These adjustments include loss treatment and imputation issues, treatment of special taxation groups (especially charities) and high turnover entities with technical errors.

South Island property transactions Four audit teams have been investigating property transactions in Queenstown, Wanaka and Te Anau. They found more than $6.0 million in discrepancies in 2004-05 and are considering a number of prosecutions. The teams targeted taxpayers who did not disclose gains on property transactions. Carson McNeill, South Island Service Centre Manager, said the number of voluntary disclosures in the region was 41 and covered about $1.2 million in discrepancies. This compares to 69 disclosures last year of about $0.8 million. "We are pleased to see people coming forward. By doing so they are able to gain significant reductions in penalties which would otherwise be applied." Penalties can range from 20% to 150% of the amount owed. Nationally, $119 million has been found in discrepancies for audits of speculative property transactions.

Discrepancies

We identified a net total of $763 million in audit discrepancies this year, 1% over our targeted figure and slightly less than last year. Discrepancies were down in our main areas of audit focus in SMEs and large businesses. However, discrepancies were well above target in specific areas of focus, especially tax evasion and avoidance. From year to year the value of discrepancies has been quite volatile due to the effect of large cases which may be finalised in a particular year.

Figure 32 - Net audit discrepancies

Figure 33 - Audit discrepancies - actual versus budget

	Budget $ million	Actual $ million
Non-business and business audit	280	254
Aggressive tax issues	105	165
Tax evasion and fraud	49	76
Corporates	321	268
Total	755	763

Adjustments to losses have a potential impact on current or future tax obligations and changes to imputation credits are made in anticipation of future tax liability. The emphasis on making this kind of adjustment is important to protect the future tax base. The calculation of additional tax assessed for 2004-05 is:

Total discrepancies $763 million

• Less adjustments to losses $256 million
• Less adjustments to imputation credits $40 million

Additional tax assessed $467 million

Voluntary disclosures and refunds

The discrepancy figures include cases where taxpayers have made voluntary disclosures about under-reported tax. The disclosures can be made by a taxpayer before, or during, an audit and result in lesser penalties being imposed.

Figure 34 - Voluntary disclosures-number and value

Although the number of voluntary disclosure cases has gone down compared to 2004, there was an increase in the amount of tax assessed from them. Our audit activity focused on property transactions, Industry Partnership, the farming industry (specifically sheep and cattle farming) and related industries.

An audit may also find that a taxpayer should actually receive a refund or a credit. This year we identified $46.7 million in refunds, compared to $37.5 million in 2003-04.

Figure 35 - Audit credits and refunds

	2003 $ million	2004 $million	2005 $million
Corporates	54.0	30.3	42.3
Non-business and business audit	19.3	5.3	4.0
Other	0.1	1.9	0.4
Total	73.4	37.5	46.7

Tax avoidance schemes and arrangements

In 2004-05 Inland Revenue made significant headway in challenging tax avoidance schemes or arrangements designed to reduce or eliminate a tax liability. Cases typically involve long and complex investigations where international arrangements or sophisticated structures are used. Much of our litigation effort was focused on cases where the taxpayer subsequently disputed the assessment arising from an audit.

The "Trinity" scheme was the most notable of these cases, with a very significant potential tax benefit to investors. The High Court upheld our decisions on this scheme. In delivering his decision, Justice Venning stated, "…the dominant purpose of the arrangement was tax avoidance." He also supported Inland Revenue's position on shortfall penalties, saying these had been "…properly imposed...on the basis the plaintiffs took an abusive tax position". The Trinity decision has been appealed.

An important decision by the Privy Council in the Peterson Case has significant implications for the application of the anti-avoidance provisions of our tax laws. Although the Privy Council found for Mr Peterson in a 3-2 decision, it upheld the Commissioner's view that, where a taxpayer had benefited from a tax avoidance arrangement, Inland Revenue can adjust their taxable income, no matter whether or not the taxpayer was aware of the details of tax avoidance.

While finding there was no tax avoidance arrangement on the case before them, the majority judgment of the Privy Council set out the basis for an alternative argument upon which they would have found a tax avoidance arrangement. The minority judgment of the Privy Council supported the Commissioner's view that it was a tax avoidance arrangement.

Tax evasion and fraud

Tax evasion commonly involves keeping cash transactions out of recording systems (working in the "cash economy"), understating income, or not deducting or accounting for PAYE. Fraud cases could involve claiming false GST credits, or-for very small number of tax agents- misappropriation of funds belonging to clients.

In 2004-05:

• we identified $75.9 million in discrepancies in evasion cases. An increasing proportion of this has arisen from the work that our audit teams have followed up from Industry Partnership's work in the cash economy.
• $14.7 million in discrepancies was detected from 16 industries covered by Industry Partnership, compared to the previous year, when ten industries were covered and $5.5 million was found in discrepancies.
• A quarter of all completed cases were in the agricultural sector-mainly fruit picking contractors-where $8.5 million in discrepancies was assessed. The second largest group was painters and decorators, where we assessed $1.8 million.

Use of powers to obtain information

The Tax Administration Act 1994 gives Inland Revenue a wide range of powers to obtain information including accessing private property, requesting accounts and documents, and carrying out enquiries before a district court.

During 2004-05 we used our powers to obtain information 506 times, compared to 486 in the previous year.

Figure 36 - Use of powers

		Total usage
s16	Judicial warrants for access to private premises	12
s16	Where it is proposed to demand access to premises	5
s17	Notice to provide books or documents	444
s17A	Court order for production of records	11
s18	Enquiries before a district court judge	1
s19	Enquiries before the Commissioner of Inland Revenue	33

In 2004-05 Inland Revenue's audit work led to 886 prosecutions, mainly for failure to file returns. The major cases included:

• Mohammad Ataur Rahman, the director of several horticulture contracting companies in the Tauranga area, who received a jail term after pleading guilty to two charges of tax evasion totalling over $260,000. Mr Rahman arrived in New Zealand in 2001 and set up several companies, one of which was struck off the companies register in 2004 for failing to file annual returns. All the companies set up were used to falsify invoices and evade GST and PAYE payments.
• Manjit Singh, an agricultural contractor, who was sentenced to two years imprisonment for GST and income tax evasion of over $170,000.
• Kathryn Louise Webber, a barrister and solicitor, who was sentenced to two-and-half years imprisonment for tax evasion and theft from clients. She pleaded guilty to 18 charges of using a document to evade income tax and GST on almost $1.2 million, and charges of misappropriating $46,450 from her clients.

Tax evasion in the fruit and wine growing industries Inland Revenue has been active in improving compliance in the rural contracting industries through the Industry Partnership initiative, by providing education to people in the industry and working with industry bodies. By following up with audits in the industry we have demonstrated that we will take action against those who are unwilling to comply. The wide media attention given to prosecutions for evasion has added to the community's understanding of our approach. Legitimate orchardists and wine growers, as well as contractors and pickers working in the industry, welcome Inland Revenue's efforts to stamp out tax fraud. Our audit focus in 2004-05 was on services to orchardists and wine growers in the Bay of Plenty, Hawke's Bay, Otago and Marlborough. Over the last 12 months we have: completed 184 cases, and have a further 149 under way assessed $8.5 million in audit discrepancies taken 11 successful prosecutions, with an average sentence of 14 months' imprisonment. To prevent future non-compliance we intend to strengthen the proof of identity required to issue an IRD number in line with the Department of Internal Affairs' proposed standard. Changes have also been proposed to withholding tax regulations for companies in the agricultural contracting sector. Our audit teams have recently been working in the Marlborough region to check on the tax records of contractors and workers. The local growers and contractors feel that our presence in the area gives a more level playing field when competing for work.

Improving compliance among large enterprises

Our Corporates segment administers the tax affairs of taxpayers who have a turnover exceeding $100 million a year. Typically, their tax affairs are complex and sophisticated, and are often managed in an international context.

Timeliness, consistency and certainty were central to the focus of the work which the segment undertook in 2004-05. This included not only tailoring services and processes to meet the needs of taxpayers, but also raising the capability of our people in specialist technical and legal areas to support compliance initiatives.

In 2004-05 our focus was on the following areas:

• Risk review - in 2004 we piloted a risk review methodology with a small number of corporate taxpayers. The results led to our risk identification and evaluation programmes being refined to better use our existing data and include new types of intelligence
  .Risk reviews are designed to be beneficial for both parties. They help large enterprises understand Inland Revenue's position and the response they can expect from us. They also help us to identify taxpayer risk and rank that across our taxpayer base, allowing allocation of resources to high risks and address them in a more timely manner. The risk review programme will now be implemented across all our taxpayer groups.
• Rulings - we improved the way information is given to taxpayers when we give binding rulings. We completed 10 binding rulings and have 11 under action. The time taken to complete the rulings, from the acceptance of the estimate of our costs to the first draft, has been under 80 days.
• Work with industry groups and proactive account management - our help desks continue to work with industries, addressing industry-specific issues and ensuring they have the relevant information to meet their tax obligations. We set up an Oil Exploration Industry Desk in 2004, adding to the Screen Production, Banking, Investment, Life Insurance, and General Insurance industry desks.
• Structured finance arrangements - we audited structured finance arrangements and a number of tax assessments are at the disputes stage.
• High-wealth individuals - our examination of this group of taxpayers has increased significantly. Profiles have been developed on almost 80 taxpayers and all their associated entities-around 3,500-using data obtained from both the taxpayers and third-party sources. Risk assessments and audits are currently under way using these profiles. The audits have resulted in:
  • assessment of an additional $2.5 million tax
  • assessments for a further $37 million tax (however, these cases are in the disputes process)
  • $4 million tax per annum to be returned in future years as a result of a transfer pricing adjustment.
• International audits - we have stepped up the examination of transfer pricing compliance of outbound direct investment by New Zealand companies, as well as foreign-owned multinationals. Over the last five years more than 500 companies have been reviewed and we have completed 16 advance pricing agreements, including our first bilateral agreements with Japan and the United States this year, covering two major exporters.
  
  Two simultaneous audits with the Australian Taxation Office were set up involving trans-Tasman promoters. This has substantially increased the volume of information exchange with our major treaty partners.

Our current projects also include:

• drafting a Memorandum of Understanding on collection assistance with the Netherlands, and
• active participation in an OECD design team, with nine other countries, focusing on aggressive tax planning schemes.

International interest in banking conference Our banking industry conference held in May 2005, attracted international participation and interest. Representatives from the Australian, Canadian, South African and United Kingdom revenue authorities, and Inland Revenue attended the two-day meeting. The conference focused on current and emerging issues in the taxation of global banking. Presentations provided useful insights into a range of issues confronting the banking sector, from developments in banking and financial products and their tax implications, to the new thin capitalisation rules and OECD initiatives. "We were particularly impressed with the knowledge and experience of the speakers at this conference, including the external advisors. As multinationals export their best practices for dealing with tax authorities, tax administrations must also share best practices for effective enforcement of complex tax legislation in order to ensure compliance. International conferences such as this are an important and necessary tool in our understanding of complex issues" said John Luck, Manager Financial Industries, Canadian Revenue Authority.

Audit strategy

The compliance model has influenced the way we conduct audit work and promoted new approaches that aim to raise overall compliance. Our audit strategy covers managing intelligence, compliance risk, our capability and the processes for investigations and related responses. Our strategy also addresses the recommendations from the 2003 report of the Office of the Auditor-General into our taxpayer audits.

In the last two years we have introduced significant initiatives to consolidate our working practices and develop our capability in all aspects of the business. They include:

• enhancements to standard work practices which reinforce consistency and visibility of our processes
• sophisticated training frameworks for core investigations and intelligence analyst staff
• development of a broader range of compliance measurement criteria and tools to help target and assess the impact of audits on compliance outcomes
• creation of a future-focused operating infrastructure based on common audit frameworks and directing our work to continually develop intelligence and risk management
• piloting technology and work practices that assist our people on a day-to-day basis, for example, web-based conferencing for fast and effective information sharing
• monitoring overseas developments in identifying revenue risks and sharing best practice approaches across OECD member countries.

Adjudicating and ruling on the law

Our Adjudication and Rulings Units specialise in providing impartial interpretations of legislation and case law, to resolve disputes and provide certainty for taxpayers.

Adjudication

Adjudication is the final step in Inland Revenue's formal disputes resolution process before possible litigation. The Adjudication unit takes a fresh look at tax disputes in an impartial and independent manner.

This year was unusual in that while the number of adjudication cases received was within the expected range, most were received in the last seven months of the year. As each case involves careful and complete consideration of the parties' arguments and appropriate law, it was not possible to complete most of these before the end of the year. As a result, the number of cases completed by yearend was significantly below budget.

During the first half of the year our adjudication staff assisted with taxpayer and public ruling projects until our caseload increased. By the end of the year we had received 56 cases and completed 20. On average, we took 17.1 weeks to complete each case.

Public rulings

We achieved our annual forecast by completing a total of 31 public items this year, including 18 new and expired public rulings and 10 interpretation statements or guidelines. All public items for current and previous years are published on our website

http://www.ird.govt.nz/technical-tax/public-rulings/

Finalised items included interpretation statements relating to:

• the impact of company amalgamations on binding rulings
• deductibility of travel costs between work and home
• the income tax treatment of Treaty of Waitangi settlements
• "work of a minor nature" in the context of the income tax treatment of land subdivisions.

In addition, public consultation was completed on a draft interpretation statement relating to the anti-avoidance provision of the Income Tax Act 2004. When finalised, this significant piece of work will provide comprehensive and updated guidance in what is a complex area of revenue law.

Taxpayer rulings

We completed 78 taxpayer rulings, comprising 491 technical issues. This was below our forecast as a number of draft rulings comprising an additional 238 technical issues were unable to be finalised, due to a delay in receiving input from taxpayers or their advisors. However, we met all quality standards and exceeded timeliness standards, including 100% of draft rulings being finalised within a nine-month timeframe.

¹ Figures in this section include contacts with taxpayers, family assistance, student loan and paid parental leave customers. Child support services are provided by a separate division within Inland Revenue.
²Margin of error typically +/- 2%
³ The 2003-04 first call resolution result was 83.8%, not 90.5% as reported in our 2004 Annual Report.
⁴High-volume days are defined as those on which we receive more than 17,500 calls (about 30% of days in 2004-05).
⁵ The number of SMEs increased 10% in the year to February 2004, more than double the increase of the previous year. Source: SMEs in New Zealand: Structure and Dynamics August 2005. www.med.govt.nz
⁶Total overdue debt includes student loan overdue repayments and family assistance debt, but excludes child support debt.
⁷ An additional $440 million of debt was paid within one month of the payment due date.
⁸ Including GST, income tax, employer monthly schedule and fringe benefit tax return forms.
⁹ In addition, approximately half a million returns were still outstanding from previous years.
¹⁰ Cases that had shortfall penalties applied, other than evasion.
¹¹ Excluding debt under dispute in the courts.
¹² This fluctuates from month to month. Although $7 million at 30 June 2004, it was $43 million at 31 May 2004.
¹³These 2003-04 figures differ slightly from those given in the 2004 Annual Report, where written-off loan balances of deceased student loan borrowers were erroneously included.

 

 

 

Date published: 13 Oct 2005

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