Annual Report 2008: Part three - Key strategies
Compliance - paying tax and receiving entitlements
Our approach to compliance is based on a principle of voluntary compliance being the norm in society, which means that our customers assess their own tax. We rely on them to pay their tax and claim what they're entitled to in full and at the right time - and the majority of our customers do. Our role is to make it easy for these customers to self-manage by providing them with the right information. We use a mix of services to support those who want to comply but fail to do so, and enforcement activities to ensure those who don't want to comply meet their obligations.
Assisting our customers to comply
Understanding our customers
We make it easier for our customers to work with us by designing systems and processes that address their needs. This helps them meet their obligations, access their entitlements and encourages voluntary compliance.
We develop our understanding of our customers and make changes that will improve our customers' experience of our services. Our community networks help us identify when things can and do go wrong, spot trends and gain customer support. This lets us respond quickly to our customers' needs and improve compliance.
We learn about our customers by building relationships with them and the groups that represent them. We ask them what we can do to make their experience of our services better and gather data that helps us understand them.
We use reference groups to communicate what we know about our customers, ensure we have a consistent and collaborative approach, and to coordinate and plan initiatives. We have reference groups for small and medium enterprises, families, individuals and not-for-profit entities and large enterprises.
We translate this customer understanding into usable services and effective administration. We use customer-centred service design and project management techniques to achieve this.
Delivering electronic services
Inland Revenue's aim is to maximise the potential of electronic services for our customers. To achieve this, we are building e-business capability across the organisation. This year, we have continued developing our e-services and use of these services by our customers has grown significantly. Our main website www.ird.govt.nz is the most visited government site and also won the "Best Government Site" category at the 2008 People's Choice Net Guide Web Awards.
In April 2008 we launched "My family details and income", a new online service for Working for Families Tax Credits customers. This service makes it easier for customers to access and update details that affect their entitlements. We are looking at ways to enhance the service over the next year. This will include introducing a self-management facility for customers to make changes to their details outside the current financial year, reducing the need for them to contact us to make changes to their entitlements.
We have added to the range of e-services available through the KiwiSaver portal. Members can now view their summary of transactions and see the KiwiSaver contributions that have been passed to their scheme provider. KiwiSaver members can also see all their service requests on the homepage.
Use of Client Maintenance, our online service that lets tax agents add or remove clients from their client list, has grown steadily. This year, 395,626 online sessions were completed, a 34% increase from 2006-07. Customers accessed accounts using the Look at Account Information (LAAI) service 6.4 million times compared to 4.9 million last year. Tax agents make 85% of LAAI transactions.
All major banks offer an internet tax payment service. Internet tax payments made up 42% of total electronic payments we received this year, compared to 37% in 2006-07. We received 1.6 million internet tax payments to the value of $5.7 billion, which is a 30% increase in payments and a 38% increase in value compared to 2006-07.
Portal infrastructure
Inland Revenue has put a portal infrastructure in place, so we can deliver smarter, personalised web services to our customers. The portal will help us to increase the up-take of our e-services, from electronically filing returns to accessing information about our customers' entitlements and obligations. We migrated our authenticated e-services (ir-File, Look at Account Information, My family details and income, Client Maintenance, PIE file transfer and Send & Receive Mail) onto the portal infrastructure in June 2008.
We are investigating further opportunities the portal gives us to transform the way we deliver e-services to our customers.
Enhancements to external authentication
During the second half of 2008 we are rolling out improvements to our online authentication systems so businesses and organisations can access more of our online services requiring a user ID and password, and self-manage their organisation's access. This is in line with the all-of-government authentication programme run from the State Services Commission.
The ability to authenticate organisations online and open up access to our online services is a major step forward for us and our customers. It will make our e-services easier to use, increase customer satisfaction and give customers more control over the way they use our services. Reducing manual intervention through self-management is a key part of our organisational strategies.
Standard business reporting
The aim of standard business reporting is to coordinate information requirements between agencies by standardising data definitions and eliminating redundant data. Not having to send the same or similar information to multiple agencies will save time and reduce compliance costs for businesses.
We are working with the Ministry of Economic Development, Statistics New Zealand and ACC to implement phase one of standard business reporting. Phase one is a four-year programme that will use XBRL [14] to increase the automation of electronic financial reporting across government and business.
Services provided by our people
Our relationships with our customers and the community are essential in encouraging voluntary compliance. We support our customers by providing advisory services, building relationships with community groups, business groups and intermediary groups. This year, we provided over 157,000 hours of educational advice to our customers to help them understand what they're entitled to, or what they need to do. These included:
- inter-agency information events and a range of expos and seminars
- working with the Maori Land Court and Te Puni Kokiri in delivering information to many marae belonging to the Mataatua waka on tax issues and other government agency laws affecting the marae
- our ongoing relationships with the New Zealand Institute of Chartered Accountants, the New Zealand Association of Citizens Advice Bureaux and other government agencies.
Customer contacts
This year, we had a large increase in customer contacts compared to 2006-07, mostly related to the introduction of KiwiSaver. We responded to 16.3 million customer contacts compared to 12.9 million in 2006-07.
| 2006-07 | 2007-08 | |
|---|---|---|
| Customer contacts |
|
|
| Telephone calls answered [15] | 3,812,293 | 4,231,342 |
| Correspondence items | 1,814,044 |
3,220,812 |
| Counter enquiries | 218,726 | 233,080 |
| Self-help and e-services |
|
|
| INFOexpress calls |
864,583 |
772,820 |
| Look at Account Information |
4,859,542 |
6,374,800 |
| Client maintenance |
295,162 |
395,626 |
| KiwiSaver self-help services |
- |
675,178 |
| Online banking tax payments |
1,206,592 |
1,564,516 |
| Website visits |
6,233,248 |
8,378,820 |
| Advisory hours |
145,577 |
157,090 |
| Returns processed | ||
| Income tax |
2,267,285 |
2,203,857 |
| GST |
3,126,318 |
3,193,055 |
| Employer monthly schedules |
2,147,288 |
2,169,155 |
| FBT |
91,090 |
89,495 |
| Tax credit claims* |
429,723 |
439,783 |
*Formerly rebate claims
Telephone services
This year we continued to experience high demand for our telephone services, as shown by the large number of calls answered. We answered 419,049 (11%) more calls than 2006-07. We are also experiencing continued growth in the complexity of calls. Over the past five years, this has resulted in an increase of:
- 58% in the total time we spent on the telephone
- 26% in average handling times.
| 2006-07 (normalised) [17] |
2007-08 | |
|---|---|---|
| Calls answered | ||
| Priority calls [18] |
506,151 |
974,754 |
| General service calls |
3,306,142 |
3,256,588 |
| Total calls | 3,812,293 |
4,231,342 |
| Average speed to answer calls | ||
| Priority | 1:20 |
1:05 |
| General services (off-peak) | 2:06 |
3:04 |
| General services (on-peak) | 3:59 |
4:40 |
| Average handling times | ||
| Priority calls |
10:06 |
9:10 |
| General service calls | 8:10 |
8:48 |
| Total calls | 8:26 |
8:53 |
High call volumes were particularly evident during the fourth quarter of the year with 17.9% more calls answered than the same period last year. This resulted in a drop in our first call resolution rate in the fourth quarter, which impacted on the annual performance level. Our research shows that customers who have previously contacted us, call us back to seek clarification or certainty on complex issues or new initiatives.
Despite the performance issues, overall 82% of telephone customers were satisfied with our telephone service compared to 84% last year and 81% in 2005-06. As would be expected, we had an increase in customer complaints about our telephone services compared to 2006-07, mostly related to difficulties accessing our services.
To help us improve our service performance we are investing in our telephone services in 2008-09 to make it easier for customers to access our services, and to shorten the waiting times.
How we performed in delivering services to our customers
Customer surveys
We regularly survey our customers about the services we deliver and the perceptions of Inland Revenue in the community. This is an integral part of assessing how effective we are at understanding our customers and delivering services to address their needs.
Our latest research into community perceptions of Inland Revenue shows we are most commonly perceived to be professional and effective. 77% of the public, 82% of small businesses and 75% of large enterprises considered Inland Revenue to be professional. In addition, 70% of the public, 81% of small businesses and 78% of large enterprises considered Inland Revenue to be effective. Customers who have recently contacted Inland Revenue are significantly more positive than those who have not.
This year we had a small decrease in overall customer satisfaction - 80% of customers rated our service as good or very good, compared to 82% last year and 79% in 2005-06. Our customer satisfaction survey focuses on our nine key customer groups and the channels they use to contact us.
| Overall satisfaction (good or very good) | ||
|---|---|---|
| Customer group | 2006-07 | 2007-08 |
| Overall customer satisfaction (all customer groups) |
82% |
80% |
| Tax agents |
88% |
90% |
| Small and medium enterprises |
85% |
79% |
| Working for Families Tax Credits |
83% |
84% |
| Large enterprises |
85% |
84% |
| Student loans |
83% |
81% |
| Individuals |
83% |
79% |
| Not-for-profits |
81% |
75% |
| Child support |
68% |
69% |
| KiwiSaver [19] |
- |
77% |
| Channel | 2006-07 | 2007-08 |
| Phone |
84% |
82% |
| Correspondence |
76% |
65% |
| Counter |
79% |
81% |
Complaints and ministerial services
Our Relationship Management Group (RMG) manages all contacts where customers are dissatisfied with the service they have received from Inland Revenue, or want to raise an issue with the Minister of Revenue, the Commissioner or other authorities.
The RMG is also responsible for championing our charter and helping to identify trends and areas of concern, which help to inform organisational learning. We measure contacts received against the charter principles and record the areas where our customers think we have not met those principles.
Reliable and correct advice and information, and prompt, courteous and professional service, were the charter principles our customers identified most often as the ones we did not meet.
This year, we received 7,175 complaints compared to 6,170 last year. Most of the extra complaints were about difficulties customers had accessing our telephone services. We also received 1,202 ministerials of which 42% related to income tax and 22% child support.
Adjudicating and ruling on the law
The Office of the Chief Tax Counsel (OCTC) maintains taxpayer confidence in the tax administration by giving guidance on the correct interpretation of the Inland Revenue Acts and other relevant laws, and by considering case law. It produces adjudications, public rulings and statements, as well as the more complex and sensitive taxpayer rulings. Our Large Enterprises business unit produces the more straightforward taxpayer rulings. The OCTC also oversees technical issues and decision making in Inland Revenue and is responsible for technical excellence in delivering these.
Adjudication is the final step in Inland Revenue's formal disputes resolution process and provides impartial reviews independent of our audit work. We completed 66 cases this year compared to 83 in 2006-07.
Public rulings are the Commissioner's formally binding interpretations of the tax laws. They are issued where there is uncertainty or ambiguity in the law that affects a significant amount of revenue or number of taxpayers. We also issue interpretation statements and guidelines, depreciation determinations and livestock determinations. We finalised 39 public projects this year. These projects related to a range of income tax and GST issues and involved issuing depreciation determinations on various items of depreciable property and the annual livestock determinations.
All public items for current and previous years are published at www.ird.govt.nz/technical - tax
By issuing private and product taxpayer rulings on specific tax issues, we give customers certainty about specific tax positions they may be considering as part of their business activities. We finalised 59 private rulings and two product rulings this year containing 521 technical issues.
Our Escalations and Advising unit within the OCTC, has broad responsibility for determining the Commissioner's view of the law, some oversight on how the law is implemented by other areas of Inland Revenue, and advises the senior management team on tax technical matters.
Responding to non-compliance
Our tax system relies on the majority of our customers complying with their obligations, but we also need to intervene if returns are not filed on time, or people go into debt. We also audit taxpayers to verify they have paid the right amount of tax. Where it's apparent that taxpayers engage in deliberate non-compliance, court action may be necessary.
These interventions help to maintain compliance, sustain revenue cash flow and influence community confidence in the tax administration.
Outstanding returns
Our initial approach to managing outstanding returns is to make it easier for customers to file returns on time. This year we sent out 12.7 million return forms, 3.5% more than last year.
We use a range of interventions to follow up those who do not file on time. Recovery of overdue returns focuses on high risk to revenue areas. This includes employer responsibilities and those customers with the highest volume of outstanding returns.
During 2007-08, we finalised 1.3 million outstanding returns which was 19.8% above the annual target and 13.5% more than last year. We collected 80.2% of outstanding returns that were not filed within 12 months of their due date.
We have taken prosecutions when other remedies have not been effective. This year we prosecuted 563 customers for 5,903 outstanding returns. For those people convicted for not filing returns, sentences ranged from fines through to prison terms.
Overdue debt
In 2006-07 we separated our debt recovery activities into two work streams. They are:
- receivables, focusing on using early intervention with customers and assisting them to meet their obligations, while increasing the automation of manual processes
- national collections enforcement, targeting customers who seem to have made a decision not to comply, and taking firm and deliberate action against them where appropriate. In some cases we take legal action.
We targeted these areas:
- International debt recovery - we are about to start recovery of tax debts on behalf of the Australian Taxation Office (ATO), and have agreed on the number of cases to be sent to the ATO for collection on our behalf.
- Complex debt - we are keeping our focus on customers who deliberately take steps not to meet their payment and filing obligations. This involves a number of large, complex cases relating to customers who use a variety of mechanisms and structures to defer or avoid payment.
- Property transactions - we have increased our attention to property-related transaction debt, specifically that identified by audit activity. This aligns with the funding given to target property issues in Budget 2007.
- High volume debt and returns - in July 2007 we targeted the 2,000 taxpayers with the largest number of outstanding returns, the 1,000 taxpayers with the highest number of debt periods outstanding and the 1,000 taxpayers with the highest number of PAYE periods outstanding. By the end of June 2008, 71.9% (31,180 returns) of the outstanding returns had been cleared - 89.8% of the outstanding debt periods and 98% of the outstanding PAYE periods had been cleared (all against annual targets of 50%).
- Audit-assessed debt - customer debt resulting from audit activity is managed nationally and is a high priority for debt collection teams, with careful monitoring of case status and timeliness of intervention action.
- Insolvency law reform - we have implemented the changes to part 15a (Voluntary Administration) of the Companies Act 1993, and have been involved in 21 applications under the voluntary administration system. Centralised teams have been formed to ensure we take a consistent and appropriate approach to these cases.
- Employers - we give priority to managing PAYE compliance because it has major implications for the successful administration of employee tax deductions, KiwiSaver, child support, Working for Families Tax Credits, paid parental leave, and student loans. Compliance activity focuses on following up with employers who do not file returns. This year, we targeted the 1,000 employers with the most PAYE outstanding and by June 2008 we reduced outstanding debt in this area by 49%.
Audit activity
Over the last four years we have focused on identifying and responding to areas of greatest risk. At the same time we have also supported compliance improvement by using a broader range of measures such as taxpayer education and providing more comprehensive information to tax intermediaries.
Small and medium enterprises (SMEs) audits
Our focus continues to be on key risk areas such as aggressive tax planning, evasion and fraud. We are also doing more work on companies that are otherwise not categorised as large enterprises.
These are the main areas of risk:
- Property transactions - to make sure property speculators, in particular, pay their proper share of tax. This was the first year of a three-year programme of work for which we received an additional $14.6 million in Budget 2007. The first phase of the programme was the identification of risks and extreme examples of speculative activity.
Our approach to addressing any non-compliance and emerging risks includes taxpayer education and publicity and leverage activities. We reserve audits for those who do not voluntarily comply. This more comprehensive approach includes:- encouraging intermediaries such as tax agents and legal advisors to also help us get appropriate messages across to property buyers and sellers before transactions take place
- providing targeted information on our website
- producing a variety of publications about tax and property transactions
- using direct mailing and calling where there is a historical pattern of buying and selling. This has encouraged people, who may have a tax liability, to consider making voluntary disclosures (about $3 million in voluntary disclosures have been made to date).
- Evasion and fraud - identification of cases involving evasion and fraud continues to be effective. Of cases closed in 2007-08, 23 had discrepancies over $500,000, and 10 of these had discrepancies over $1 million.
- Aggressive tax planning (avoidance) - significant aggressive tax planning cases have been closed for a variety of film investor schemes, a GST scheme and cases which are part of a project focusing on the accuracy of imputation credit accounts in consolidated company groups. These cases have taken a number of years to complete - particularly the film investor schemes.
- Tax technical non-compliance - including issues such as the treatment of losses, imputation credits, breaches of the shareholder continuity rules, intellectual property issues and depreciation claims.
- Income suppression to reduce child support liability - we selected these cases because we had seen a significant change in income reported by the paying parent for tax purposes when compared to the year before they became a paying parent.
Large enterprise audits
The taxpayers in this sector typically have tax affairs that are complex and sophisticated. Our approach is to identify risks specific to each taxpayer, rather than general risks across the whole sector, as in the case with SMEs. Our Large Enterprises group has one-on-one account manager relationships with taxpayers in this sector which facilitates this approach.
We continued to undertake major audits and compliance projects where the application of the tax avoidance provisions are the key factor. The audits covered:
- Hybrid instruments - an investment that is part equity and part debt. The instruments can be used in tax arbitrage arrangements when each party treats equity and debt differently for tax purposes.
- Imputation structures - with our current imputation system, companies may have incentives to stream fully imputed dividends to shareholders who can best use the credits.
- Structured finance - some large enterprises reduce their tax by entering into tax arbitrage arrangements or avoidance opportunities. Tax arbitrage can involve diverting income (or expenses) from a party subject to a less favourable tax treatment, to a party subject to a more favourable tax treatment.
- Industry risks - some industries present a compliance risk because of the complexity of their operations, the impact of new legislation, and the use of structures to minimise tax liability. During 2007-08 we focused on risks in the film, petroleum, banking, finance, investment and insurance industries.
We also play an active role in working with international organisations and maintaining relationships with tax treaty partners, especially Australia, the United Kingdom and the United States. Our representative will hold the Vice-Chair position on the OECD Working Party on Tax Avoidance and Evasion for a further two-year period after re-election during April 2008. Progress is being made in the focus groups on high net worth individuals, hybrids and no or nominal tax jurisdictions.
Other international tax issues in 2007-08 included:
- Liechtenstein bank accounts - tax administrations in Australia, Canada, France, Italy, New Zealand, Sweden, the United Kingdom, the United States, and others, all member countries of the OECD's Forum on Tax Administration, are working together following reports that Liechtenstein bank accounts are being used for tax avoidance and evasion. The level of media interest in the use of tax havens gave us an opportunity to provide strong messages about our ability to access information through taxation treaties.
- Transfer pricing - involving the setting of prices for the transfer of goods, services and intangibles between associated parties. If such prices are manipulated, profits may be shifted out of New Zealand. Our objective is to maintain our fair share of multinational tax in accordance with New Zealand value-added and accepted international principles.
- Advanced pricing agreements (APAs) - where businesses restructure offshore it is possible to set in place an APA to agree in advance the share of income to be apportioned across two tax administrations. We negotiated a further four APAs, including both a major New Zealand exporter and manufacturer. We have now completed 34 APAs.
Enforcement where people choose not to comply
In cases where people deliberately engage in avoidance and evasion, or defraud Inland Revenue, we take action using the full force of the law. The range of action varies from taking prosecutions for not filing tax returns, to major fraud cases involving large amounts of money, as well as court action against business arrangements that are deliberately structured to avoid paying tax. These cases are often complex and can take many years to resolve. Inland Revenue is also taking action under the Companies Act 1993 to recover tax or penalties, or act against company directors who abuse insolvency law.
Prosecutions
Court action is usually preceded by audit work that detects wrongdoing or avoidance activity. The audits have, from time to time, focused on particular industries such as agricultural contracting, and led to numerous prosecutions. The following cases show our prosecution activity in 2007-08:
- Mohammed Wasim received a jail term of five years and nine months for his part in a horticultural industry tax fraud involving more than $15 million. There were 81 counts of tax evasion against him. Inland Revenue began investigating the tax evasion scheme operating in the agricultural contracting industry in 2001. The audit found that contractors were evading GST, PAYE and income tax by claiming that work completed for growers by the contractor's employees had been sub-contracted to other companies. At least 36 companies are believed to have been used in the scheme.
- Christopher Goldsmith was extradited from Australia to face tax charges totalling more than $240,000 and was sentenced to two years and four months imprisonment. Mr Goldsmith incorporated 11 companies, 10 of which used the identities of other people as directors and shareholders without their knowledge. All these companies claimed GST refunds.
- Scott Fraser ran a scheme designed to fraudulently obtain income tax refunds estimated to total over $2 million and was sentenced to five and a half years imprisonment. From June 2005 to July 2006, Mr Fraser, or an associate, convinced more than 300 people to divulge personal details, which were then used to create false claims for refunds.
Litigation
Our litigation group takes action to challenge schemes or arrangements designed to reduce or eliminate tax liability. In 2007-08, over 70 judgments were delivered by various courts and two separate tax matters were heard by the Supreme Court.
Litigation in structured finance cases continued, with a growing list of judgments delivered in relation to them. To date these judgments mainly concern various pre - hearing procedural matters. The Supreme Court decision in Westpac Banking Corporation Limited & Ors, ANZ National Bank Limited & Ors v CIR (No. 2) clarified the operation of the Commissioner's secrecy obligations and the interaction of those obligations in the conduct of litigation on behalf of the Commissioner.
The year also concluded with the Supreme Court hearing its first tax avoidance case. The appeal on the test cases for what is known as the "Trinity scheme" was heard in the final week of June 2008 and we are awaiting a decision. The investigation into, and litigation of, the Trinity scheme is in its tenth year and the Supreme Court decision will be important in bringing these cases to a conclusion. A number of Trinity investors settled with the Commissioner prior to the hearing.
The Supreme Court's first GST avoidance case, Glenharrow Holdings Limited, was heard two weeks later. We are awaiting that decision.
Challenges to the commissioner's evidence gathering powers also featured in various cases this year. The extent of the accountants' non-disclosure right was tested in terms of whether it could be claimed over a list of clients' names in circumstances where the commissioner already had the content of the tax advice given by the accountant. The court held it could not. A further challenge related to whether taxpayers could withhold accountants' tax advice in discovery. To date, the court has held such documents must be discovered.
14 eXtensible business reporting language
19 New customer group in 2007-08.
Date published: 15 May 2009
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