Everyone pays and receives the right amount
Our taxes pay for the services and infrastructure we need to sustain our communities. They ensure we have safe roads to travel on and a quality education system for our children. They provide hospitals and healthcare if we get sick, and they support people into their retirement. The integrity of our tax system is based on everyone paying and receiving the right amount.
Individuals and businesses that don't pay what they owe, or claim more than they should, disadvantage all New Zealanders. Those of us who do pay then bear the burden of making sure everyone continues to benefit from these services.
We provide education, information and tools to support our customers and help them comply with their tax and social policy responsibilities. However, some individuals regularly and intentionally commit fraud or fail to meet their tax obligations. These customers often have a history of non-compliance beyond Inland Revenue.
Over the last year we've researched habitual non-compliers to better understand what drives their behaviour. This information has strengthened our ability to identify, monitor and respond to habitual non-compliers.
We take tax avoidance and evasion very seriously. We'll focus on the small group of individuals and businesses who deliberately structure, under-report or minimise their tax obligations, and we'll take enforcement action where needed.
Aggressive tax planning
Our role is not only to collect tax but to identify ways people try to avoid paying what they owe, such as inappropriate schemes and tax planning structures to minimise tax.
Taxpayers are able to legitimately manage their affairs to minimise the amount of tax they pay. However, there can be a fine line between legitimate tax planning and tax avoidance. A few people knowingly adopt particular structures to get a tax advantage or increase their entitlements.
Tax schemes can involve significant risks, including penalties and interest. Any arrangement should be commercially justifiable and not rely on any supposed tax savings to make it worthwhile. To be certain that your tax arrangements are valid you can request a binding ruling.
Diverting personal income
A small proportion of individuals avoid paying the top tax rate by diverting personal income to companies, trusts, or using other techniques. They also manipulate their income to claim more social support than they're entitled to, eg, Working for Families Tax Credits (WfFTC), or to reduce their liability for payments, such as child support.
We are continuing to focus on individuals who create structures to minimise their tax obligations or increase their entitlements. We evaluate information sources to quickly detect and profile inappropriate structures, and we will take action where needed.
From 1 April 2011 WfFTC recipients can no longer claim rental losses against their income. This reduces the incentive for people to structure their affairs to increase their WfFTC entitlements. We are exploring more legislative changes to further reduce the ability for individuals to structure or split their income.
We will investigate individuals where income diversion is frequent or prevalent, and we'll conduct investigations of those who show a high rate of non-compliance.
What you can do
- Read the information on our website about tax schemes and aggressive tax planning.
- If you or a client uses an inappropriate tax structure you can contact us and let us know by making a voluntary disclosure.
- If you know of any fraudulent activities you can report it anonymously.
Complex financing
A few large enterprises, often foreign-owned multinationals, are continuing to enter into cross-border funding arrangements. We have concerns about arrangements that don't have commercial justification and deliver a disproportionate tax advantage to these groups.
This is an ongoing problem with trans-Tasman financing because of the differences between New Zealand and Australian debt/equity rules. Over the last year we've noticed changes in the instruments and structures these companies use and we're adapting our approach accordingly.
We're continuing to actively identify companies, large corporations and high-wealth/income individuals who enter into complex financing arrangements. We'll review any arrangements that are outside the law. We'll take firm corrective action against customers using arrangements that give them a disproportionate tax advantage.
What you can do
- Request a binding ruling for new funding arrangements to minimise uncertainty.
- If you or your client is using inappropriate financing arrangement you can make a voluntary disclosure.
Loss generation and usage
Some customers avoid or lower their income tax liability by entering into arrangements that create deductions for items that aren't real economic losses. Others enter into schemes that use losses in contravention of the loss rules, or retain losses that should be forfeited. We'll be reviewing these arrangements and identifying customers who enter into them.
We'll continue to examine large claims and the use of losses. We'll also examine previously dormant companies that start to use their losses to see whether the company can still claim the loss.
What you can do
- Make sure you understand the responsibilities of a business in a loss position. Read more about losses.
- Avoid entering into any inappropriate loss arrangements. If you're unsure you can contact us for confirmation.
Misuse of charities
In recognition of the role and service the non-profit sector provides to our communities, registered charities don't have to pay tax. The majority of charities are legitimate, but they can be targeted by individuals who try to exploit their tax-exempt status. Charities have been used to abuse the tax system through aggressive tax planning and fraud.
This year we'll continue to work closely with the Charities Commission to identify charities which misuse their tax-exempt status. We'll investigate individuals who enter into tax avoidance schemes or create false receipts and invoices, organisations that claim to be charities but aren't, and claims from claimants who are trustees or officers or who receive monetary gain from the charity. We will prosecute those who choose not to comply.
What you can do
- Make sure you understand your obligations.
- Avoid entering into any scheme that uses charities inappropriately. If you're unsure you can contact us for confirmation.
- If you or your client has misused a charity's status you can contact us and make a voluntary disclosure.
Offshore and international issues
The use of offshore bank accounts and offshore schemes to misrepresent income or assets and evade tax continues to be an area of concern. Customers can be encouraged into these situations by promoters in no or nominal tax jurisdictions abroad. This issue commonly affects high-wealth and high-income individuals. We're also aware of customers who under-report their worldwide income.
A small number of customers continue to use investments, transactions and schemes in tax haven countries to evade or avoid New Zealand tax. To remove these opportunities we've signed 18 tax information exchange agreements with more under negotiation. These agreements give us access to key ownership and banking information.
We'll evaluate information from our overseas tax treaty partners and data from financial institutions and credit card service providers to identify suspect behaviour and trends. The tightening of anti-money laundering rules will show up more suspicious tax haven transactions. And we are working with other New Zealand law enforcement agencies to ensure the most effective use of resources in fighting financial crime.
What you can do
- If you or a client are involved in a tax haven scheme or have undisclosed offshore income you can make a voluntary disclosure.
Fraud and identity theft
Some customers misrepresent their income and expenses, donations or family circumstances to reduce what they owe or to claim more than they are entitled to. Other customers become victims of fraud when their identity is used by someone else to access refunds or tax credits.
False information and fraudulent claims
Each year Inland Revenue pays out millions of dollars in refund or credit claims for GST, income tax, Working for Families Tax Credits and donations. Our aim is to make it easy for those customers with legitimate claims to access their refunds as quickly as possible.
Unfortunately, some people deliberately attempt to make claims for tax refunds they're not entitled to. This behaviour cheats the community of its revenue, disadvantaging honest New Zealand taxpayers. We are serious about protecting the integrity of the tax and social policy systems on behalf of the community.
We are strengthening our systems to identify suspicious activity, from sophisticated and organised schemes to basic scams, to prevent fraudulent refund or entitlement claims being issued. We use a range of tools and technology, information from other government agencies and data analysis to detect fraudulent claims. We protect the revenue and our customers' identities from misuse and fraud.
Refund fraud can come from opportunistic individuals and organised groups exploiting online transactions to steal personal identity data and using it to commit fraud within the tax system.It is important that customers keep their IRD number, personal details and passwords safe (see Keeping your identity safe, page 9).
We pay legitimate refunds or credits right away, but if any aspect of the claim doesn't square up we will contact the individual, business, their tax agent or employer for more information and investigate the refund. They are not all fraudulent, but it is often worth our while to take a closer look. If we find a fraudulent claim we will apply penalties or prosecute the claimant.
What you can do
- If you've falsely obtained refunds or tax credits you can make a voluntary disclosure.
- If you know of any fraudulent activities you can report it anonymously.
Identity protection
Some customers access refunds and tax credits they're not entitled to by creating false identities or falsely accessing other people's accounts.
In 2008 we introduced a robust identity verification process for issuing IRD numbers. When a customer applies for an IRD number they must provide several forms of identification. The information then goes through numerous checks before we issue a number. Since improving our verification process, we have reduced the risk of people defrauding the tax system.
When our customers contact us they must be able to prove their identity before we discuss any of their account matters with them. If we suspect someone is using an identity fraudulently we will investigate, and prosecute when needed.
We're strengthening our ability to proactively detect identity fraud and people misusing identities. This year we're launching a new customer identification system based on voice biometrics. Voice ID will match the customer's voice against a pre-recorded voice print, giving us a higher level of certainty and our customers a smoother, more efficient service.
We are continuing to tighten procedures to keep our customers' identity information safe from fraud. These processes also give our customers confidence that we're protecting their tax and social policy affairs. We're also working with other agencies on all-of-government solutions that further strengthen our identity processes.
What you can do
- Keep your IRD number, tax and social policy information and online password safe.
- Contact us if you suspect your identity has been misused.
- If you suspect anyone of misusing an identity you can report it anonymously.
Keeping your identity safe
While we work to prevent fraud to protect customers, there are a few things people can do to protect themselves.
Fraudsters trick people into giving away their personal details or passwords. It may be through a hoax email claiming to offer a tax refund or people cold calling and pretending to work for Inland Revenue. If someone calls or visits your home and claims to work for Inland Revenue, ask for identification and a business card, and call us on 0800 227 774. Don't offer them any information until you're certain they're genuine.
Sometimes we email or text customers to notify them about services or due dates. We will never text or email you asking you to confirm, update or disclose details like your name, date of birth, address, passwords, credit card and bank account. If you receive a suspicious email delete it immediately from your inbox - don't click on any links in the email and don't reply.
If you think an email or online activity appears suspicious email us at phishing@ird.govt.nz.
A smart and secure way to avoid "phishing" and identity theft is communicating with us electronically through an online services account or secure mail.
Under-reporting and operating outside the tax system
Some individuals and businesses look for ways to reduce their tax obligations. This may be by not declaring cash jobs, not reporting the trade of goods and services, failing to declare offshore income or income from property trading, income from organised crime, skimming takings from the till, or paying wages and salaries in cash. This behaviour reduces our tax revenue and cheats all New Zealanders out of funding for the services that support their communities.
The hidden economy
Some customers deliberately choose to work in cash or use other methods, to avoid paying the right amount of tax and gain an unfair advantage over other individuals or businesses. We're developing innovative and robust compliance approaches to address the gap between compliance and non-compliance. We're working with overseas tax authorities to develop and share methods and resources to target and combat tax cheats.
We'll continue to keep a close watch across all businesses and target those who are cheating the system. We're taking a particular interest in the hospitality, scrap metal, fishing and aquaculture, tourism, and agricultural and horticultural industries as areas that need to improve compliance.
We're also conducting visits with people engaging in business through online trading and not declaring their income, and keeping a close watch on individuals and businesses participating in short-term rental and accommodation for major events. This year we've added ACC providers and the construction industry to our areas of interest.
We've developed profiles for several industries to help us better target those businesses that are cheating on their obligations. We've seen some excellent results from our work with these industries, including significant voluntary disclosures from within the hospitality industry. One of these alone amounted to more than $2.2 million in tax revenue.
Our targeted approached against those who cheat the system has gained significant support from industry bodies. We've refined our anonymous information service so that industry can play its part by supplying us with information about people who are cheating the system and undermining successful businesses.
We're also working with industry to develop tools and methods to improve compliance. For example, we're working with hospitality representatives to develop language-specific tools to address common misunderstandings for migrant business owners.
We're publishing industry benchmarks to help businesses compare their performance. Introducing benchmarks makes it clear to small businesses what we expect of them. We'll be reviewing those outside industry standards and taking action where needed.
We've improved our ability to match other parties' data with our own to help us identify people who have not returned all their income. Third party information often shows up substantial cash expenditure that doesn't match up with the customer's reported income. We have access to many information streams, including those sourced from within industries and supplier networks and overseas treaty partners.
We're researching how and why people participate in the hidden economy. This information will help us prevent and deter people from operating outside the system in the future.
We aim to increase understanding and engagement to help people meet their correct obligations on time. We will be working to let individuals and businesses know what they need to declare and how to keep accurate records, and to help them to pay what they owe when it's due. If we uncover any customer cheating the system, we will enforce penalties and prosecute as appropriate.
What you can do
- Keep accurate records of all transactions, paid or otherwise, and declare your income.
- If you've been operating outside the tax system you can make a voluntary disclosure.
- If you have information about tax evasion and fraud you can report it anonymously.
Record keeping
Customers are required to keep records so their tax position can be easily determined. Some individuals and businesses are not aware of what records they need to keep and a small number deliberately avoid keeping accurate records. We're exploring several initiatives to help improve this area, including:
- developing clear and up-to-date industry record keeping standards
- establishing consequences when a customer fails to comply with these standards, to encourage accurate recording of business transactions
- working with industry and tax practitioners to design record keeping factsheets.
If a customer has intentionally kept inaccurate or incomplete records we will investigate them.
Serious crime and cross-border transactions
We're continuing to take an inter-agency partnership approach to fight organised crime. We're working closely with other government departments, the Combined Law Agency Group and the Organised Financial Crime Agency of New Zealand.
We're also working closely with overseas tax authorities and private organisations to match up data and share knowledge and understanding. This gives us greater visibility across transactions and the individuals involved in them.
What you can do
- If you suspect a business or individual is not reporting, or under-reporting, their income you can report it anonymously.
Income from property
Income earned from property transactions may be taxable. However, not everyone is aware of their tax obligations in this area, while others choose to avoid their obligations and hope it goes unnoticed.
This year we're increasing our investigations into property speculators and dealers who haven't declared income from their property transactions for tax purposes, or have treated income as capital gain. In many cases, they haven't filed tax returns either.
Over the past few years we've focused on education and raising awareness. While this will continue, we are also moving to a targeted audit response with those who continue to be non-compliant.
What you can do
- If you're in doubt about your situation you can contact us, or a professional advisor you trust, for advice.
- If you've failed to declare income from property you can make a voluntary disclosure.
Anonymous information
- If you suspect an individual or business of cheating the tax system or committing fraud you can report them anonymously
- The information you provide remains anonymous and we use it to coordinate a response depending on the severity of the allegations.
- If we find the customer is non-compliant we may charge penalties and prosecute them.
Voluntary disclosures
If you've made a mistake or filed an incorrect tax return, it's best to tell us about it before we find out in some other way. For example, you may have left out some income from your return or incorrectly claimed expenses.
Anyone can make a voluntary disclosure - salary or wage earners, individuals, businesses, trusts and employers. If you let us know all the details of your mistake, the penalties (if any) will be much lighter than if you wait for us to find out.
For more information see Voluntary disclosure IR281.
This section of the document
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Date published: 22 Jul 2011
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