Notes to the financial schedules

Note 1: Student loan movements

2006-07 Actual $000		2007-08 Actual $000	2007-08 Main Estimates $000	2007-08 Supp Estimates $000
	Analysis of student loans portfolio
8,403,789	Nominal loan balance^[*]	8,552,630	8,919,949	7,867,789
(2,974,543)	Adjustment to fair value	(2,512,330)	(3,122,111)	(2,106,715)
5,429,246	Total student loans balance	6,040,300	5,797,838	5,761,074
	Movement during the year
4,978,077	Opening balance	5,429,246	5,247,942	5,429,246
(151,052)	Impairment reversal/(impairment)	136,967	(16,743)	(200,000)
1,003,510	Loans transferred from Ministry of Social Development to Inland Revenue	1,118,556	1,278,135	1,187,649
(320,357)	Fair value write-down on new borrowings transferred	(454,556)	(517,645)	(483,821)
(448,958)	Capital repayments	(550,048)	(547,511)	(536,000)
(37,500)	Interest repayments	-	-	-
-	Other	(1,084)	-	-
405,526	Interest on impaired student loans	361,219	353,660	364,000
5,429,246	Closing student loans balance	6,040,300	5,797,838	5,761,074
547,512	Short term student loans	550,048	416,396	593,000
4,881,734	Long term student loans	5,490,252	5,381,442	5,168,074
5,429,246	Total	6,040,300	5,797,838	5,761,074

^*The nominal loan balance for 2008 excludes accrued interest whereas in the prior year this balance included accrued interest of $493 million. Accrued interest is written off each year when certain criteria are met. On review of the nominal balance it was concluded that it was more appropriate to exclude the accrued interest from the disclosure of the nominal balance as this will be written off for New Zealand based borrowers

Student loan valuation model

The valuation model has been adapted to reflect current student loans policy. As such, the book value is sensitive to changes on a number of underlying assumptions, including future income levels, repayment behaviour and macro economic factors such as inflation and the discount rates used to determine the effective interest rate on new borrowers.The data for the student loan valuation model has been integrated from files provided by Inland Revenue, Ministry of Social Development and Ministry of Education. The current data is up to 31 March 2007 and contains information on borrowings, repayments, income, educational factors and socio-economic factors, amongst others, and has been analysed and incorporated into the valuation model. This integrated data has been supplemented by less detailed, but more recent data to value student loans at balance date. Given the lead time required to compile and analyse the detailed integrated data it is expected that there will always be a lag time between the integrated dataset and balance date. The significant assumptions behind the impaired value and fair value are shown below:

	30 June 2008	30 June 2007
Carrying value
Effective interest rate	8.44%	7.12%
Interest rate applied to loans for overseas borrowers	6.7% - 6.8%	6.8% - 6.9%
Consumer Price Index	2.5% - 4.0%	2.4% - 2.6%
Future salary inflation	3.5% - 4.7%	3.4% - 3.6%
Fair value
Fair value ($000)	4,945,700	4,897,600
Discount rate	9.19%	8.17%
Impact of fair value of a 1% increase in discount rate ($000)	(287,000)	(232,000)
Impact of fair value of a 1% decrease in discount rate ($000)	327,000	258,000

Fair value is the amount for which the loan book value could be exchanged between knowledgeable, willing parties in an arm's-length transaction as at 30 June 2008. It is determined by discounting the cash flows at an appropriate discount rate.

Fair values will differ from carrying values due to changes in market interest rates, as the carrying value is not adjusted for such changes whereas the fair value was calculated on a discount rate that was current at 30 June 2008. At that date the fair value was calculated on a discount rate of 9.19% whereas a weighted average discount rate of 6.56% was used for the carrying value. The difference between fair value and carrying value does not represent an impairment of the asset.

The Student Loan Scheme Annual Report contains more information on the student loan scheme.

Credit risk

For the student loan scheme, credit risk is the risk that borrowers will default on their obligation to repay their loans or die before there loan is repaid, causing the scheme to incur a loss.

The student loan scheme policy does not require borrowers to provide any collateral or security to support advances made. As the total sum advanced is widely dispersed over a large number or borrowers, the student loan scheme does not have any material individual concentrations of credit risk.

The credit risk is reduced by collection of compulsory repayments through the tax system.

Interest rate risk

Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in interest rates. Changes could impact on the government's return on loans advanced. The interest rate and the interest write-off provisions attached to student loans are set by the government.

Note 2: Tax receivables

Tax receivables encompass general tax receivables and working for families tax credit debt.

The recoverable amount of receivables is calculated by forecasting the expected repayments based on analysis of historical debt data, deducting an estimate of service costs and then discounting at the current use of money interest (UOMI) rate. If the recoverable amount of the portfolio is less than the carrying amount, the carrying amount is reduced to the recoverable amount.

	30 June 2008 $000	30 June 2007 $000
Tax receivables
Gross tax receivables	9,819,938	8,715,022
Impairment of tax receivables	(3,024,926)	(2,779,688)
Total tax receivables	6,795,012	5,935,334
Impairment of tax receivables
Balance at beginning of the year	2,779,688	1,020,758
Impairment losses recognised	945,988	2,451,733
Amounts written off as uncollectable	(700,750)	(692,803)
Balance at end of the year	3,024,926	2,779,688
Gross tax receivables
Current	5,615,160	5,209,986
Past due	4,204,778	3,505,036
Total gross tax receivables	9,819,938	8,715,022
% Past due	43%	40%
Tax receivables past due again
less than 6 months	1,458,314	959,858
6 - 12 months	458,299	365,450
1 - 2 years	700,796	755,254
greater than 2 years	1,587,369	1,424,474
Total past due	4,204,778	3,505,036

Tax receivables are classified as past due when any outstanding tax is not paid by the taxpayer's due date. Due dates will vary depending on the type of tax outstanding (eg, income tax, GST, PAYE) and the taxpayer's balance date. Past due debt includes debt collected under instalment, debt under dispute, default assessments and debts of taxpayers who are bankrupt, in receivership or in liquidation. Inland Revenue has debt management policies and procedures in place to actively manage the collection of past due debt.

The estimated recoverable amount of this portfolio and key assumptions underpinning the valuation are:

	30 June 2008 $000	30 June 2007 $000
Recoverable amount of tax receivables current	5,615,160	5,209.986
Recoverable amount of tax receivables past due	1,179,852	725,348
Discount rate (UOM)	14.2%	14.2%
Impact on recoverable amount of a 2% increase in discount rate	(18,000)	(19,000)
Impact on recoverable amount of a 2% decrease in discount rate	19,000	21,000

The fair value of tax receivables is not materially different from the carrying value.

Credit risk

In determining the recoverability of tax receivables Inland Revenue uses information about the extent to which the taxpayer is contesting the assessment and experience of the outcomes of such disputes, from lateness of payment and other information obtained from credit collection actions taken. Due to the size of the tax base the concentration of credit risk is limited and this is not a risk that is actively managed.

Under the Tax Administration Act 1994 Inland Revenue has broad powers to ensure that people meet their obligations. Part 10 of the Act sets out the powers of the Commissioner to recover tax which is unpaid.

The Crown does not hold any collateral or any other credit enhancements over receivables which are past due.

Note 3: Receivables - child support

The Crown collects monies from non-custodial parents and remits this to custodial parents. The child support receivable represents penalties which have been incurred as a result of under-collection of the debt.

Impairment is calculated by forecasting the expected repayments based on analysis of historical debt data, deducting an estimate of service costs and then discounting at the current use of money interest (UOMI) rate.

The concentration of credit risk is limited and this is not a risk that is actively managed. The Crown does not hold any collateral or other credit enhancements over these receivables.

Child support debt relates to penalties imposed on non-custodial parents who default on their payments. This does not include debt relating to the assessment of child support obligations.

Child support penalties grow exponentially due to their compounding nature. 95% of child support debt is greater than two years old and its recovery is challenging. There are limited provisions under child support legislation to remit penalties. The non-recoverability of penalties has been allowed for in the impairment figure.

	30 June 2008 $000	30 June 2007 $000
Receivables - child support
Gross receivables	865,553	711,762
Impairment receivables	(842,012)	(694,968)
Total receivables - child support	23,541	16,794
Impairment of receivables - child support
Balance at beginning of the year	694,968	616,934
Impairment losses recognised	147,044	78,034
Balance at end of the year	842,012	694,968

Note 4: Refundables and payables

Refundables and payables are recognised at their nominal value as they are due within 12 months. This figure has increased over 2007 due to the inclusion of KiwiSaver member payments and other credits due to providers but not yet passed on.

	30 June 2008 $000	30 June 2007 $000
Refundables and payables
Tax refundable	3,723,597	3,157,329
KiwiSaver payables	696,545	-
Total refundables and payables	4,420,142	3,157,329

Note 5: Reserve accounts

Income equalisation is a scheme where taxpayers in the farming, fishing and forestry industries can elect to make payments during the year by way of income equalisation deposits. Interest at a rate of 3% is paid, provided that no withdrawals are made within 12 months of the date of the deposit.

The adverse event income equalisation scheme operates in addition to the ordinary income equalisation scheme. Interest at a rate of 6.5% is paid on deposits. Deposits can be withdrawn immediately, but are transferred to the main income equalisation account if not withdrawn within 12 months of the deposit.

The environmental restoration scheme is a scheme whereby a business deposits funds into an environmental restoration account.
The environmental restoration account scheme allows businesses to set aside money to cover restoration costs for monitoring, avoiding, remedying or mitigating the detrimental environmental effects which may occur in later years. Interest at a rate of 3% is paid on the deposit while it is held in the scheme. Payment is made when the environmental restoration costs are incurred.

Note 6: Accident compensation collections

2006-07 Actual $000		2007-08 Actual $000	2007-08 Main Estimates $000	2007-08 Supp Estimates $000
987,011	Earner premium - employees - provisional	1,029,683	966,600	997,550
987,011	Total accident compensation collection	1,029,683	966,600	997,550

Inland Revenue collects these levies on behalf of the Accident Compensation corporation and passes the monies directly to them. They do not appear on the Crown schedules.

Note 7: Events after balance date

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

Note 8: Structured finance transactions

The Crown is currently in dispute with a number of financial institutions regarding the tax treatment of certain structured finance transactions. Taxation revenue from these transactions has not been recognised as revenue or a contingent asset. At this stage, revenue of $1,589 million has been assessed. This includes use of money interest in some cases.

Note 9: Budget variances

Explanations of variances between actual and budget can be found in the Financial Statements of the Government of New Zealand for the year ended 30 June 2008.

Note 10: Explanation of transition to NZ IFRS

In line with other government entities Inland Revenue will prepare its first set of financial schedules for the year ending 30 June 2008 under NZ IFRS. As part of this transition, the financial schedules for the year ended 30 June 2007 have been restated to provide comparative to the 2007-08 accounts. This includes restating the opening Statement of Financial Position as at 1 July 2006 to be NZ IFRS compliance as this was the transition date.

NZ IFRS 1 has been applied in the preparation of these accounts. Inland Revenue has elected not to apply any of the optional exemptions from full retrospective application, and to make the following mandatory exception from retrospective application:

Estimates under NZ IFRS as at 1 July 2006 are consistent with estimates made for the same date under previous NZ FRS.