Annual Report 2006: Part three - Key strategies

Maintaining compliance with the law

Our compliance activities help to maintain and improve voluntary compliance. In doing this, the compliance model (see Promoting compliance) guides us on how to best handle particular compliance issues. We provide assistance that makes it easy for our customers to file their returns and make their payments by due dates. When customers try to meet their obligations but do not succeed, we work hard to help them comply. We also take firm action against deliberate non-compliers. This may be through our audit or other scrutiny activities.

Managing outstanding returns

Our approach to managing outstanding returns focuses on making it easier for taxpayers to file returns before the due date. In 2005-06 we sent out 12.1 million return forms²¹to customers, 4.6% more than last year. Overall, taxpayers filed 82% of returns promptly.

In addressing returns outstanding after the due date, we use a range of collection actions and take a risk-based approach. For example, this year we took action on the 2,000 oldest outstanding returns. 86.4% of the 2,000 oldest returns were finalised by year-end. During 2005-06, we finalised 1.1 million outstanding returns, a similar volume to last year. 81.5% of these returns were collected within 12 months of their due dates.

In addition, when other remedies have not proved effective, we successfully prosecuted:

• 579 taxpayers for failing to file an income tax return
• 378 taxpayers for failure to file a GST return.

Managing overdue debt

The collection of overdue debt helps to maintain compliance, sustain revenue cash flow and can positively influence community confidence in the tax administration. In managing our overdue debt portfolio, we use a risk-based approach to target debt collection activities.

During the year, we focused on the following areas:

• high-value debt (debt over $100,000), which makes up 56% of overdue debt. In the past year, the amount of high-value debt has increased by 29%. We targeted the 1,000 largest debt cases and 97% were resolved or under positive collection action²²at the end of June 2006
• tax agent client debt and returns (47% of overdue debt and 34% of outstanding returns). Agent account managers are targeting tax agents who have clients with tax arrears over $10,000 and where no positive collection action is being taken
• the 2,000 oldest debt cases (5% of overdue debt). By the end of the year, 49.2% of these debt cases had been finalised.

We have also set up dedicated teams to work on complex debt arrangements. These teams are identifying and developing processes to better manage cases where the taxpayer takes steps to make the collection of the overdue tax more difficult.

Our audit activity

Our approach to audit activity is guided by the compliance model and our Audit Strategy. The Strategy helps us to focus on the areas of greatest compliance risk and develop the capability required to respond to these risks. Since the introduction of the Audit Strategy in July 2004, we have made improvements to consolidate our working practices and develop our capability in all aspects of the business.

In 2005-06, the results of audits in high-risk areas such as corporate taxpayers, and tax evasion and tax avoidance schemes have been particularly successful. During the year we identified $980 million in discrepancies, 24% over our objective. A large part of the additional discrepancies came from cases relating to avoidance schemes, which exceeded our objective by $149 million (142% over the objective for this discrepancy type).

Small and medium enterprises

In looking at small and medium enterprises, we made good progress on audits against our current national risk categories, with 79% of the audit hours being directly attributed to case work on the following risk areas:

• real property
• tax evasion and tax avoidance
• technical non-compliance
• return and filing obligations.

During the year, we also identified other risk areas through our risk analysis processes. Areas that we will continue to focus on include:

• aggressive tax planning, particularly income splitting where customers aim to minimise the amount of tax they need to pay on their income
• income suppression-we have now incorporated a more direct link to people who pay child support where income has been concealed to reduce child support liability.

Corporates

Corporates²³are an important part of our audit focus. These taxpayers typically have tax affairs that are complex and sophisticated and often conduct business in an international context. They may also have headquarters outside New Zealand.

In 2005-06 our audit activity focused on high-risk taxpayers and issues, while making sure that compliance was maintained among lower-risk taxpayers. For 2005-06 the high-risk issues included:

• related-party financing into New Zealand - we identified instances where related-party financing has been used to create what we consider to be inappropriate deductions
• intangible property - including sale and leaseback of intangible property across tax jurisdictions and the pricing of transactions between associated parties
• asset valuations and the allocation of depreciation - we reviewed a number of depreciation issues that relate to the valuation and asset allocations of significant asset purchase
• dividend withholding payments (DWP) - we reviewed a number of structures that either use DWP in inappropriate ways or that defer or avoid DWP liability altogether
• international financial reporting standards (IFRS) - early adopters of IFRS are now starting to disclose the financial effects through reporting disclosures. Understanding transitional year tax filing disclosures and tax adjustments will be a key issue when 2006 tax returns are filed
• financing expenses paid to non-resident associates - we reviewed a number of taxpayers for rates of interest applied, guarantee fees and financing costs, to ensure that excessive rates are not being paid.

During the year, we worked with company chairpersons and directors to raise their awareness of the benefits of adopting risk management practices for taxation. We also discussed tax risk management at a number of conferences, for example, the Trans-Tasman Business Circle conference in September 2005.

We also completed a risk review process for our largest taxpayers. Risk reviews provide a number of benefits for both corporates and Inland Revenue. For example, they:

• ensure our audits are shorter and targeted, which will reduce costs to both parties
• provide greater transparency, for example, we discuss significant risks we have identified at the end of the risk review, rather than waiting to disclose them during the audit process.

This year, we also focused on 104 high wealth individuals and their associated entities. Results of our audit activity this year included:

• assessment of additional tax of $23 million from 63 individuals
• assessment of a further $181 million from 17 individuals. However, these cases are in the disputes process.

^21. Including GST, income tax, employer monthly schedule and fringe benefit tax return forms.
^22. Under instalment arrangement, written off, deferred, under investigation or objection, under bankruptcy receivership or liquidation, under negotiation, subject to legal action or direct deduction.
^23. Entities with an annual turnover exceeding $100 million.

Other pages in: Part three - Key strategies

• Promoting compliance
• Providing information and support
• Tackling the harder end of compliance
• Gaining organisational efficiency
• Reducing compliance costs
• Developing the capability of our people and providing the tools they need
• Becoming an employer of choice
• Excellent state servants
• Key people statistics
• Developing our tools

Date published: 06 Nov 2006

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