Departmental financial statements

Notes

Note 1: Revenue other

2005/06 Actual $000		2006/07 Actual $000
20,500	Accident Compensation Corporation - agency fees	20,500
3,783	State Services Commission - State Sector Retirement Savings Scheme	4,432
1,374	Supply of information to other agencies	1,328
1,020	Court cost recovery	1,504
810	Rulings	659
281	Rental recovery	281
14	Other	1
27,782	Total revenue other	28,705

Note 2: Personnel

2005/06 Actual $000		2006/07 Actual $000
264,573	Salaries and wages	289,134
17,424	Contractors and temporary staff	21,722
6,124	Superannuation	6,768
2,034	Retiring and long-service leave	4,240
1,194	ACC levies	1,506
822	Bonuses	855
6,499	Other	10,756
298,670	Total personnel	334,981

Note 3: Operating

2005/06 Actual $000		2006/07 Actual $000
28,160	Information technology costs	30,410
24,718	Operating lease rentals	25,469
18,049	Communication	19,104
11,768	Office supplies	10,293
9,086	Travel and transport	10,697
8,858	Legal expenses	10,391
6,870	Consultants	9,320
7,746	Premises costs	8,722
8,412	Training and employee-related costs	8,613
4,102	Advertising and publicity	5,660
1,332	Equipment maintenance	1,664
923	Audit fees for audit of the financial statements	955
20	Audit fees for transition to NZ IFRS	55
242	Loss on sale of property, plant and equipment	347
(334)	Increase/(decrease) in provision for doubtful debts	215
13	Bad debts written off	10
337	Increase/(decrease) in provision for onerous contracts	(471)
7,601	Other operating expenses	7,969
137,903	Total operating	149,423

Note 4: Property, plant and equipment by category

2006/07	IT equipment $000	Motor vehicles $000	Furniture and office equipment $000	Leasehold improvements $000	Software $000	Asset under construction $000	Total $000
Cost
Balance as at 1 July 2006	54,550	4,626	28,456	57,489	316,888	21,617	483,626
Additions by purchase	7,285	-	2,992	824	13,777	49,080	73,958
Transfers between category	-	-	-	842	12,514	(13,364)	(8)
Disposals	(2,269)	(1)	(3,062)	(19)	(2,033)	-	(7,384)
Balance as at 30 June 2007	59,566	4,625	28,386	59,136	341,146	57,333	550,192
Depreciation and impairment losses
Balance as at 1 July 2006	39,335	1,281	20,745	44,821	255,282	-	361,464
Depreciation charge	7,499	506	2,374	5,506	21,434	-	37,319
Impairment	183	-	-	-	495	-	678
Capitalised depreciation	438	-	34	-	564	-	1,036
Disposals	(2,219)	-	(3,029)	(17)	(1,747)	-	(7,012)
Balance as at 30 June 2007	45,236	1,787	20,124	50,310	276,028	-	393,485
Carrying amount as at 30 June 2007	14,330	2,838	8,262	8,826	65,118	57,333	156,707

At balance date there was an impairment identified for certain items of software and IT equipment. This amount of $678,000 has been recognised in the Statement of Financial Performance (2006: nil)

Asset under construction (AUC) by category 2006/07	AUC - Leasehold improvements $000	AUC - Software $000	Total $000
Cost
Balance as at 1 July 2006	1,520	20,097	21,617
Additions by purchase	4,136	44,944	49,080
Transfers between category	(842)	(12,522)	(13,364)
Disposals	-	-	-
Balance as at 30 June 2007	4,814	52,519	57,333

2005/06	IT equipment $000	Motor vehicles $000	Furniture and office equipment $000	Leasehold improvements $000	Software $000	Asset under construction $000	Total $000
Cost
Balance as at 1 July 2005	47,971	5,707	24,742	52,745	286,364	25,162	442,691
Additions by purchase	7,466	1,900	3,950	2,814	14,466	18,231	48,827
Transfers between category	-	-	-	3,919	20,118	(21,776)	2,261
Disposals	(887)	(2,981)	(236)	(1,989)	(4,060)	-	(10,153)
Balance as at 30 June 2006	54,550	4,626	28,456	57,489	316,888	21,617	483,626
Depreciation and impairment losses
Balance as at 1 July 2005	32,021	2,921	18,572	41,726	239,067	-	334,307
Depreciation charge	8,028	444	2,335	5,084	19,546	-	35,437
Capitalised depreciation	153	-	60	-	295	-	508
Disposals	(867)	(2,084)	(222)	(1,989)	(3,626)	-	(8,788)
Balance as at 30 June 2006	39,335	1,281	20,745	44,821	255,282	-	361,464
Carrying amount as at 30 June 2006	15,215	3,345	7,711	12,668	61,606	21,617	122,162

Asset under construction (AUC) by category 2005/06	AUC - Leasehold improvements $000	AUC - Software $000	Total $000
Cost
Balance as at 1 July 2005	4,424	20,738	25,162
Additions by purchase	303	17,928	18,231
Transfers between category	(3,206)	(18,570)	(21,776)
Disposals	-	-	-
Balance as at 30 June 2006	1,521	20,096	21,617

Note 5: Capital charge

Inland Revenue pays a capital charge to the Crown on taxpayers's funds as at 30 June and 31 December each year. The capital charge for the year ended 30 June 2007 was $9,803,000 (2006: $7,644,000). The capital charge rate for the year ended 30 June 2007 was 7.5% (2006: 8%).

Note 6: Other debtors and repayments

2005/06 Actual $000		2006/07 Actual $000
5,073	Other debtors	6,448
(55)	Less provision for doubtful debts	(72)
5,018	Net debtors	6,376
2,307	Prepayments	4,008
7,325	Total other debtors and prepayments	10,384

Note 7: Creditors and payables

2005/06 Actual $000		2006/07 Actual $000
11,477	Accounts payable	14,691
2,682	Accrued expenses - employees	3,361
17,516	Accrued expenses - other	26,789
4,558	GST payable	3,488
36,233	Total creditors and payables	48,329

Note 8: Provision for employee benefits

2005/06 Actual $000		2006/07 Actual $000
Movements in provision
41,022	Opening balance	43,176
26,883	Additional provisions made during the year	41,191
(24,729)	Charged against provision for the year	(37,215)
43,176	Closing balance	47,152

2005/06 Actual $000		2006/07 Actual $000
Employee benefit provision
	Current liabilities
14,466	Annual leave provision	15,694
976	Retiring leave	948
603	Long-service leave provision	620
62	Time off in lieu	178
-	Other	52
16,107	Total current portion	17,492
	Non-current liabilities
21,524	Retiring leave	23,910
5,545	Long-service leave	5,750
27,069	Total non-current portion	29,660
43,176	Total employee benefit provision	47,152

Note 9: Provision for onerous contracts

2005/06 Actual $000		2006/07 Actual $000
Movements in provision
2,416	Opening balance	1,650
336	Additional provisions made during the year	-
(1,043)	Charged against provision for the year	(945)
(59)	Unused amounts reversed during the year	-
1,650	Closing balance	705

2005/06 Actual $000		2006/07 Actual $000
Onerous contract provision
	Current liabilities
650	Net expenses on surplus space leased under non-cancellable operating leases	443
650	Total current portion	443
	Non-current liabilities
1,000	Net expenses on surplus space leased under non-cancellable operating leases	262
1,000	Total non-current portion	262
1,650	Total onerous contract provision	705

Note 10: Reconciliation of net surplus to net cash flow from operating activities

2005/06 Actual $000		2006/07 Actual $000
6,815	Net surplus	3,260
	Add non-cash items
35,437	Depreciation	37,319
-	Impairment	678
138	Increase/(decrease) in non-current employee benefits	2,591
(363)	Increase/(decrease) in non-current onerous contracts	(738)
35,212	Total non-cash items	39,850
	Add/(less) working capital movements
(2,566)	(Increase)/decrease in other debtors and prepayments	(3,059)
(62,223)	(Increase)/decrease in debtor Crown	(1,166)
14,936	Increase/(decrease) in creditors and other payables	12,096
2,017	Increase/(decrease) in current employee benefits	1,385
(403)	Increase/(decrease) in current onerous contracts	(207)
(48,239)	Working capital movements - net	9,049
	Add/(less) investing activity items
242	Net loss on property, plant and equipment	347
242	Total investing activity items	347
(5,970)	Net cash inflow/(outflow) from operating activities	52,506

Note 11: Commitments

Inland Revenue's commitments comprise both capital and operating commitments. The operating commitments consist of non-cancellable accommodation leases and cancellable contracts for the supply of goods and services.

Commitments for non-cancellable accommodation leases relate to Inland Revenue's long-term leases on its premises at many locations throughout New Zealand. The annual lease payments are subject to regular reviews and the amounts disclosed at future commitments are based on current rental rates. These commitments also include office space that was vacated by Inland Revenue as a result of organisational restructuring and subleased. Provision has been made in the financial statements for the expected net expenses for the duration of these leases.

Inland Revenue has also entered into cancellable contracts for computer maintenance and other contracts for the supply of goods and services.

Note 12: Contingent liabilities

Inland Revenue is involved in a large number of legal proceedings and disputes. The majority of these court cases relate to tax prosecutions, debt collection cases and insolvency matters. The expected value of the contingent liability is calculated using an outcome probability model that weighs the total potential liability against outcome probabilities. Independent confirmation on the liability has been ascertained on all legal proceedings and disputes.

The contingent liability does not include tax in dispute which is reported under the Crown Schedules.

Note 13: Financial instruments

Inland Revenue is party to financial instruments as part of its everyday operations. These include instruments such as bank balances, accounts receivable, accounts payable and foreign currency forward exchange contracts.

Credit risk

Credit risk is the risk that a third party will default on its obligations to Inland Revenue, causing the department to incur a loss. In the normal course of its business, Inland Revenue incurs credit risk from trade debtors.

Inland Revenue does not require any collateral or security to support financial instruments with financial institutions that Inland Revenue deals with, or with the New Zealand Debt Management Office, as these entities have high credit ratings. For its other financial instruments, Inland Revenue does not have significant concentrations of credit risk.

Fair value

The fair value of all Departmental financial instruments is equivalent to the carrying amount disclosed in the Statement of Financial Position.

Currency risk

Currency risk is the risk that debtor or creditor amounts due in foreign currency, will fluctuate because of changes in foreign exchange rates. Inland Revenue uses foreign currency forward exchange contracts to manage foreign exchange exposures where single foreign exchange transactions exceed $NZ100,000, or the transaction exposure for an individual currency exceeds $NZ100,000.

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. This could impact on the return on investments or the cost of borrowing. Inland Revenue has no significant exposure to interest rate risk on its financial instruments.

Under the Public Finance Act 1989 Inland Revenue cannot raise a loan without ministerial approval and no such loans have been raised. Accordingly, there is no interest rate exposure for funds borrowed.

Note 14: Related party information

Inland Revenue is a wholly owned entity of the Crown. The government significantly influences the roles of Inland Revenue as well as being its major source of revenue.

Inland Revenue enters into numerous transactions with other government departments, Crown agencies and State-Owned Enterprises (SOEs) on an arm's length basis. Where those parties are acting in the course of their normal dealings with Inland Revenue, related party disclosures have not been made for transactions of this nature.

Apart from those transactions described above, Inland Revenue has not entered into any related party transactions.

Note 15: Major variations

Statement of Financial Performance

The following major variations occurred in the Statement of Financial Performance between 30 June 2007 Actuals and 30 June 2006 Actuals:

Revenue Crown was higher than last year's actual by $48,072,000 (10%). This increase was to fund new initiatives such as interest free student loans, student loan amnesty, retaining people capability, and taxation of investing income and SSCWT.
Personnel expenses were higher than last year's actual by $36,311,000 (12%). The increase was mainly due to an increase in staff numbers associated with new initiatives (refer Revenue Crown) and an update to remuneration lines.
Operating expenses were higher than last year's actual by $11,520,000 (8%). The increase was mainly due to increases in consultants, IT and system costs, and travel and transport.

The following major budget variations occurred between Actuals and the Main Estimates in the Statement of Financial Performance for the year the ended 30 June 2007:

Operating expenses were higher than budget by $18,834,000 (14%). This was due to an increase in IT and system costs, consultants, advertising, and other operating expenses.
Depreciation expense was lower than budget by $3,681,000 million (9%). This was due to development expenditure on legislative projects that will be carried forward into the 2007-08 financial year.

Statement of Financial Position

The following major variations occurred in the Statement of Financial Position between 30 June 2007 Actuals and 30 June 2006 Actuals:

Property, plant and equipment was higher than last year's actual by $34,545,000 (28%). This was due to an increase in assets under construction associated with the implementation of new initiatives including interest free student loans, student loan amnesty, and KiwiSaver.
Creditors and other payables were higher than last year's actual by $12,096,000 (33%). This was mainly due to an increase in accrued IT related costs and invoiced IT costs.

The following major budget variations occurred between Actuals and the Main Estimates in the Statement of Financial Position as at 30 June 2007:

Cash was higher than budget by $3,019,000 (29%). This was due to a timing delay in the payment of creditors and other payables.
Debtor Crown was higher than budget by $35,522,000 (71%). This was due to reduced personnel expenses, increases in creditors and other payables, and capital expenditure that will now be carried forward into the 2007-08 financial year.
Other debtors and prepayments were higher than budget by $4,597,000 (79%). This was due to an increase in prepayments, and receivables from SOEs and other government departments.
Creditors and other payables were higher than budget by $25,235,000 (109%). This was due to an increase in trade payables, accrued staff salaries, and other accruals.

Statement of Commitments

The following major variations occurred in the Statement of Commitments between 30 June 2007 Actuals and 30 June 2006 Actuals:

Total accommodation commitments were higher than last year's actual by $46,654,000 (63%). This was mainly due to Inland Revenue entering into a new accommodation leases in Christchurch and Wellington.
Total cancellable contracts for supply of goods and services were lower than last year's actual by $34,013,000 (55%). This was due to a reduction in the commitment period for several IT contracts.

The following major budget variations occurred in the Statement of Commitments between Actuals and the Main Estimates as at 30 June 2007:

Total capital commitments were higher than budget by $14,159,000 (769%). This has arisen as a result of an increase in commitments to contractors working on legislative projects and Inland Revenue entering into new accommodation leases.
Total accommodation commitments were higher than budget by $79,865,000 (193%). This was due to Inland Revenue entering into new accommodation leases in Christchurch and Wellington.
Total other lease commitments were lower than budget by $31,461,000 (100%). This variation was due to last year's reclassification of an IT contract from an operating lease to a supply of services.

Note 16: Events after balance date

No events have occurred between the balance date and date of signing these financial statements that materially affect the financial statements