Annual Report 2006: Part three - Key strategies

Tackling the harder end of compliance

The Tax Administration Act requires our customers to meet certain obligations around record keeping, filing and paying. If a customer fails to do so, we need to take the appropriate corrective action. Taking this action is important for maintaining the overall integrity of New Zealand's tax system.

Fortunately, only a small percentage of our customers deliberately decide not to meet their obligations or engage in evasion - these people form the top of the compliance model (refer to Promoting compliance). In many cases, our only recourse is to address these customers by using the full force of the law, including using our powers to obtain information, and taking prosecution and litigation action.

Use of our powers

Inland Revenue has broad powers to ensure that people meet their obligations under the Inland Revenue Acts and other legislation we administer. It is important that we use these powers carefully when making decisions that directly impact on the customer.

When we use our powers we also need to consider how they help to create an environment which promotes compliance. There is a clear expectation in the community that we will make it easy for customers to meet their obligations of their own accord. Equally, the community also expects that we will take appropriate action against those people who do not comply with the laws. The powers we have to help achieve this are shown in Figure 19.

During 2005-06 we used these powers 815 times (506 in 2004-05), of which 93% related to the use of section 17 notices and section 17A court orders and the remainder to sections 16, 18 and 19.

Use of the Companies Act 1993 provisions

In addition to using the Tax Administration Act 1994, we have become more active in moving to take action under the Companies Act 1993, particularly where:

• a director has misapplied or retained money or property or where there may have been reckless trading or failure to keep adequate records (Section 301, Companies Act 1993)
• there is a need to actively work with a liquidator to assist with the recovery of tax debt
• it is believed that the independence of a liquidator may be an issue. In these cases we have taken steps to remove or replace a liquidator, or at the very least, ensure there is active compliance with the requirements of the Companies Act 1993.

Although it does not represent the bulk of our work in our collection activity, we take this action when we need to make sure that we are in the best possible position to recover any tax and penalties due at the end of an investigation.

Legal action

When appropriate, Inland Revenue continued to use the legal system to encourage compliance with the tax laws. This action ranged from prosecution for failure to file returns through to more involved and complex legal action.

During the year, we had success with a number of prosecutions for serious breaches of the Tax Administration Act 1994 and Crimes Act 1961. Some of the prosecutions we undertook this year included:

• CIR v David James Judson: failure to comply with section 17 requests Charges were laid in Christchurch against Mr Judson, a wholesaler/processor under section 143B(1)(b) and (f) of the Tax Administration Act 1994 for not complying with section 17 requests. Mr Judson was sentenced to 200 hours of community work and an order to pay $25,000 in reparation.
• R v David Lawrence Marsters: filing false returns Mr Marsters, a farmer/helicopter pilot/concrete cutter, filed 48 false GST returns over a three-year period claiming a myriad of items that included multiple claims for land, concrete cutting equipment and vehicles. Mr Marsters was convicted in the High Court and sentenced to four years' imprisonment with a six-month reduction for an early guilty plea. Mr Marsters appealed the ruling but the Court of Appeal upheld the original sentence of three and a half years.
• R v Gavin Harris: tax and GST fraud Mr Harris was a property developer who entered into alleged agreements between his associated entities to either purchase property or undertake building contracts. GST was claimed on the input (invoice basis) but no output tax (payments basis) was declared. In December 2005, Mr Harris was convicted and sentenced on one representative charge of nine counts under section 229A of the Crimes Act 1961 for GST fraud totalling $455,310. He received two and a half years' imprisonment.
• R v Sione Tuimana: fraudulent use of identity records to defraud family support Mr Tuimana defrauded $364,000 of family support by assuming the identity of family and immigration clients and claiming family assistance using birth certificates of children not resident in New Zealand. In May 2005, Mr Tuimana was convicted and sentenced to four years' imprisonment for 65 charges under section 229A of the Crimes Act 1961. Mr Tuimana appealed this sentence on the basis that the sentencing judge did not take into consideration his ability to repay or make reparation. In September 2005, he was re-sentenced in the Palmerston North District Court to three years and nine months' imprisonment.
• CIR v Josephine Robertson: filing false returns and failing to account 25 charges were laid against Ms Robertson, an agricultural contractor, for failing to keep books of account, filing false returns and failing to deduct PAYE over a number of years. Ms Robertson was sentenced to six months'  imprisonment with deferral of two months to seek home detention.

Litigation

In 2005-06 most of Inland Revenue's litigation efforts focused on large and complex cases where we have challenged arrangements designed to reduce or eliminate a tax liability. Before reaching the litigation stage, these cases have typically involved detailed investigations into sophisticated structures that are often based on international arrangements. In most cases, taxpayers subsequently disputed the assessment arising from an audit.

In 2005-06 Inland Revenue's success rate continued to be high, with over 80% of substantive judgments delivered during the year favouring our view of the law.

Two major groups of cases have taken up a large part of our effort: the Trinity case and litigation of structured finance arrangements.

The Trinity case has involved several years' of work by our investigations and legal teams. The case itself involved a forestry venture on land owned by the Trinity Foundation. The scheme gave investors a very large and disproportionate tax advantage in return for their investment. The High Court decision in December 2004 supported Inland Revenue's view that the arrangement constituted tax avoidance and also confirmed the proper imposition of shortfall penalties of 100% in the case. An appeal in this case has been set to be heard by the Court of Appeal in September 2006.

Another area of focus for legal action related to structured finance transactions, which are now before the courts.  Investigations by our Corporates group have led to tax assessments being issued to financial institutions. These assessments have been disputed, but litigation to date has been to decide procedural (including disputes  resolution procedures) or interlocutory issues. A substantive hearing is expected in late 2007.

During the year, Inland Revenue was also successful in its first Supreme Court case. The Supreme Court found for Inland Revenue in Allen v CIR. The decision confirms the process which a taxpayer must follow to dispute an assessment when there has been a default in filing a return.

Other pages in: Part three - Key strategies

• Promoting compliance
• Providing information and support
• Maintaining compliance with the law
• 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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