Compliance focus 2009-10: Community and business segments

Small and medium enterprises (SMEs)

Our compliance approach

We know that tax is only one of many obligations for small and medium enterprises. To make it as easy as possible for them to manage their tax affairs we provide education and information tailored to their specific needs. For example:

• they can manage their tax affairs online using our e-services, including filing their returns electronically, managing their account and updating their details
• our website has information about how to register a businesses, manage tax, file returns and claim expenses, as well as producing a customised list of relevant filing and payment due dates
• community relationship advisors run seminars and provide advisory services for small and medium enterprises, providing information about their obligations and how to meet them, as well as running seminars on using our e-services.

In 2008, the Government aligned the payment dates for GST and provisional tax to reduce the number of due dates for businesses. Now businesses can pay GST and provisional tax at the same time, using the same form.

Every year we survey 300 recently investigated small and medium enterprises. This helps us understand their perceptions of the investigations process and identify areas of improvement in our performance.

In addition, we often carry out compliance reviews about a year after an investigation to ensure the business has remained compliant.

Improving the SME customer experience

We regularly consult with stakeholders, including SMEs, industry groups, other government agencies and business advisory services, and commission research to get a better understanding of the SME customer experience. SME customers have told us they want their interaction with us to include: customised service a fair and predictable relationship with Inland Revenue easy and helpful services understanding their reality dealing with tax cheats. This helps us manage a range of issues and design better services, products and tools to improve compliance. For example, we are: designing electronic payment, refund, filing and account look up online services that meet businesses’ needs and minimise their compliance costs implementing an interactive web-based business tax tool that shows SMEs how to meet their tax obligations working collaboratively with other agencies to streamline processes for businesses planning to measure the tax compliance costs incurred by small and medium enterprises to test whether we are achieving our aim of reducing compliance costs.

Areas of focus

Small and medium enterprises are generally compliant. We know their filing and payment behaviour differs, based on their previous experience with us, the industry they are working in and where their business is based. The majority of small and medium enterprises use a tax agent.

Tax debt

We are seeing more businesses carrying higher burdens of tax debt and this is likely to increase in the current economic environment.

We will be focusing on applying the appropriate intervention based on the circumstances of the business.

We know that new businesses are more likely to have a debt with us and if they get into debt within their first 12 months they are more likely to take a long time to repay the debt.

As businesses increasingly face cash flow pressures they have to make difficult decisions to stay in business or remain competitive.For some this means paying suppliers and service providers before paying their tax or addressing their tax debt.

What we will be doing

We will be:

• focusing on ways to prevent people and businesses getting into debt through education and advice, for example, reminding them about due dates through media releases and prototyping a subscription-based text message service
• intervening earlier in the debt process by proactively calling customers who have had difficulty meeting their tax obligations to set up payment options
• entering into agreements with other revenue authorities to assist in the recovery of unpaid tax from New Zealanders living overseas
• identifying undisclosed assets which can be sold to recover and minimise outstanding customer debt.

Hidden economy

In any economy there will always be a proportion of people who participate in activities or schemes to deliberately evade their tax obligations. They might under report or misrepresent their income, or not declare any of their income. People involved in the "hidden economy" tend to deal in cash or swap goods or services for no payment, such as barter activities, and avoid issuing invoices or receipts. Hidden economy activities include income earned from illegal activities.

This type of activity has consequences for others. For example, businesses that do the right thing have unfair competition, so we are committed to taking appropriate action to ensure a level playing field for all businesses.

We continue to receive information from members of the public about people involved in the hidden economy. We are continuing to enhance our systems and procedures to improve the process for people providing information and our ability to better analyse the information we receive. We focus on following up the information passed on using a range of responses, from advisory visits through to investigations.

We gather information from organisations and government agencies to build a picture of areas of non-compliance, identify emerging hidden economy activity and act quickly. We work with community groups and key intermediaries to increase awareness of how the tax laws apply while gathering insight into the reasons people are engaging in the hidden economy.

In 2009–10 our focus will be on the following types of hidden economy activities:

GST fraud

We have seen an increase in dishonest attempts to get GST refunds, including the use of fictitious identities and false documents. Information from a variety of sources suggests a high level of coordination by a small number of people.

Every year we successfully detect, investigate and prosecute a number of people for GST refund fraud. Those we prosecute receive a range of sentences from fines and community service to prison sentences.

What we will be doing

We will be:

• intensifying our focus on GST by further strengthening our screening process to identify high risk refunds as they are filed. Programmes are in place to further check the accuracy of claims after they are made
• using the screening process to ensure high risk refund claims are identified and investigated early and may progress to prosecution.

Agricultural and horticultural contractors

Tax evasion schemes have been operating in the agricultural and horticultural industry for a number of years. These schemes result in contractors being able to greatly reduce their GST, PAYE and income tax liabilities.

We have worked extensively with industry representatives to make sure operators understand their compliance responsibilities. Industry representatives and legitimate contractors have publicly welcomed our involvement and endorsed our actions.

We have completed numerous nationwide investigations and successfully prosecuted 35 people for evasion and fraud, involving over $24 million in tax. The average sentence given so far is eighteen months in prison. We have a number of prosecutions under way, involving more than $19 million in evaded tax.

What we will be doing

We will be:

• continuing to develop relationships with agricultural and horticultural industry groups
• using information gathered from past investigations and interviews with participants in schemes to identify key features and investigate people that are part of or benefiting from an evasion scheme and, where appropriate, undertake further prosecution activity

Increase in illegal activity

We anticipate an increase in fraud through deception and identity takeover.

What we will be doing

We will be:

• working with the Serious Fraud Office, Organised Financial Crime Agency of New Zealand and the Combined Law Agency Group to combat serious and organised crime and complex fraud through an interagency partnership approach
• assessing the potential impacts for us of the new Criminal Proceeds (Recovery) Bill and the Anti-Money Laundering and Countering Financing of Terrorism Bill.

Hidden economy in the hospitality industry

Businesses that deal mainly in cash are more likely to have incentives and opportunities to understate their income or overstate their expenses. Applying the lessons we have learned in previous cases, particularly around how we assess the profitability of a cash business, we have an investigations project focusing on the hospitality industry. Our research shows that a business that does not comply with its tax obligations is also likely to be non-compliant in other areas. We have cross-checked our data with information received from local authorities about compliance with local government regulations. This has enabled us to target and tailor our investigations activity, revealing signs of substantial tax evasion.

E-commerce

There has been a substantial increase in the volume of trading through online sales and auction sites.

Many people use online sales and auction sites to sell articles they no longer need or want. If the sales are not part of a business activity there are usually no tax implications. However, people who regularly sell online may in fact be in business and should be declaring their sales for income tax purposes.

We have been focusing on the under-reporting of income from online sales to improve people's understanding of how the tax laws apply to people trading online, and encouraging people to comply. As a result, we have substantially reduced the number of online traders who were not complying.

We want to help people and businesses understand and comply with their tax obligations if they are operating a business online.

What we will be doing

We will be:

• continuing to run awareness campaigns for online traders, especially people who have recently started trading, explaining how the tax laws apply to them
• contacting those people we identify as making significant online sales to explain their obligations, provide clear information to determine if they are operating as a business and encouraging them to comply
• investigating people who have high volumes of sales and those who have a history of non-compliance.

Income from property transactions

In some circumstances people may need to pay tax on profits made from selling property. Whether profits are treated as income depends on the intention when the person bought the property, and whether they or someone associated with them, is in the business of building or dealing in, developing or subdividing land.

Not everyone is aware of their tax obligations. We have been focusing on the under-reporting of income tax and GST from property transactions since 2004. Since 2005 we have assessed more than $100 million a year, on average, from property-related investigations.

We want to help people understand their obligations, ensure property speculators pay their fair share of tax, and enforce existing laws effectively. We have:

• developed resources, eg, our booklet Buying and selling residential property (IR313) and online property-related tools, including a self-assessment questionnaire
• increased awareness of property tax issues through articles prepared for newspapers and an advertising campaign
• issued a Revenue Alert (RA 07/01) outlining our concerns with people selling private homes to loss attributing qualifying companies (LAQCs) to generate tax deductions
• contacted more than 40,000 people and businesses directly about issues related to GST claims, GST zero-rated purchases and LAQCs
• worked with key intermediaries and interest groups, such as real estate agents and tax advisors, who can pass on information and help people get it right.

What we will be doing

We will be:

• continuing to investigate cases of systematic under-reporting. Our focus will be on people who trade in properties with the intention of making a profit.

Income from offshore investments

The tax rules for offshore investment income have been amended with the cancellation of the grey list exemption in the foreign investment fund (FIF) rules. This significantly widens how the FIF rules can be applied.

Understanding the rules and reporting income are two issues likely to come up as a result of the amended FIF rules.

What we will be doing

We will be:

• providing information and assistance to help people, businesses, agents and financial advisors understand the changes and FIF calculations.
• carrying out an overseas data matching exercise to identify unreported income.

Artificial losses

We have reviewed tax losses annually for several years, with many investigations resulting in tax to pay. In the current economic conditions, we will increase our focus on tax losses. During economic downturns the number of individuals and businesses who report tax losses typically increases sharply, as does the amount of losses reported. While many of the reported losses will be genuine, others may be exaggerated or artificially generated to get tax benefits.

What we will be doing

We will be:

• assessing significant losses and following these up with an investigation, where appropriate.

 

 

 

Date published: 09 Jun 2009

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