Helping you get it right

Transcription

1 JUNE 2009 / IR504 Helping you get it right Inland Revenue s compliance focus IRD Compliance Brochure_12cg 1 29/05/09 10:41 AM

2 Open and transparent about compliance issues The New Zealand tax system is based on self assessment. It functions because the majority of New Zealanders pay taxes and claim social support payments appropriately. Most people and businesses comply voluntarily, and are confident in Inland Revenue s ability to take appropriate action against those who do not. We take this responsibility very seriously. We must address a broad range of compliance issues. We use a balanced approach and increasingly we are using intelligence-led, evidence-based techniques. This ensures we focus on the most significant areas. We use a range of activities from education and assistance to enforcement, and must be able to respond to changing circumstances such as the current economic conditions. We are pleased to present our programme of work for the coming year which addresses key compliance issues. We want to be open and transparent about compliance matters that concern us. This will enable people and businesses to understand the areas we are targeting, and help them and their advisors manage their tax affairs more effectively, resulting in better overall compliance. We hope that readers will find this document useful, and welcome any comments or feedback. Robert Russell Commissioner of Inland Revenue helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

3 Contents Open and transparent about compliance issues 1 How we will work with you Inland Revenue s charter compliance snapshots 4 Contributing to a successful New Zealand 6 Our general approach to improving compliance 8 Collaboration and global networks 10 Small and medium enterprises 11 High wealth individuals 16 Large enterprises 17 Non-profit groups 22 Employers 24 Tax agents 27 Individuals 29 Families 34 2 Compliance Management Programme helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

4 compliance snapshots A compliant person or business:» registers when they are supposed to» reports or provides complete and accurate information» files returns or other information required on time» claims and receives only what they are entitled to» pays correct amounts on time. We recognise the majority of businesses and people meet these requirements voluntarily. Our research often identifies patterns of behaviour that attract our attention. This document highlights those areas of concern and sets out the appropriate action we will take in response. It also outlines our activities to make it easier for businesses and people to do the right thing. Managing tax in the current economic environment In the current economic environment many people and businesses are facing financial pressures, or worry they will be in the future. This is likely to have an impact on their ability to comply. Our priorities are:» intervening earlier when businesses have difficulty meeting their tax obligations (see page 12)» using our discretion and flexibility to assist people and businesses in debt (see page 12)» identifying emerging hidden economy and fraudulent activity earlier and acting quickly (see page 12)» identifying behaviours or activities that indicate tax credit or tax refund fraud, such as ineligible and fraudulent claims (see page 30)» identifying misuse of charities tax-exempt status (see page 23)» following up significant tax losses to ensure they are not exaggerated or artificially generated to get tax benefits (see page 15). Encouraging accurate filing and reporting Accurate filing and reporting establishes an individual s or a business s tax liability. Filing late or failing to file impacts on our ability to collect taxes and establish entitlement to social support. Our priorities are:» increasing the number of employers who e-file their employer monthly schedules and pay using ir-file (see page 24)» focusing on the systematic under-reporting of income tax on profits made from selling property (see page 15) and online trading (see page 14)» monitoring targets for tax agents extension of time for filing clients income tax returns (see page 27)» making the end-of-year process for individuals easy to get right by improving the accurate use of tax codes, and increasing understanding of who needs to complete an individual income tax return (IR 3) (see page 31). Promoting sound tax practices We monitor tax practices to ensure acceptable tax planning does not cross over to tax avoidance. Our priorities are:» fostering cooperative relationships, particularly with large enterprises (see page 18)» identifying and responding to significant transactions, trends and schemes (see pages 19 and 28)» analysing the role of intermediaries in aggressive tax planning schemes (see page 28)» supporting tax agents to be alert to areas of avoidance, fraud and evasion so they can provide quality advice to their clients (see page 28)» providing more certainty for businesses in applying tax law (see page 18), mergers and acquisitions (see page 20), specific tax industry issues (see page 21) and monitoring complex financing arrangements (see page 20). Ensuring people receive their correct entitlements We administer a number of social support programmes. Our priorities are:» ensuring families receive their correct entitlements, while keeping focused on detecting incorrect payments as a result of deliberate fraud or avoidance activities (see page 35)» developing new ways parents can pay their child support payments, and collecting child support from parents who have moved overseas using multi-lateral, reciprocal and data-matching agreements (see page 35)» clearly setting out employers KiwiSaver responsibilities and working with scheme providers (see page 25)» raising awareness about eligibility for tax credits (see page 30). In line with our approach to managing compliance (see page 8), we have provided practical support and guidance to help people and businesses get it right, as well as outlining the risks of detection and the consequences of non-compliance. Paid parental leave issues (Families) We know the world keeps moving. New Zealand is a small, open economy, susceptible to global trends, rapid changes in business priorities, new technological developments and demographic shifts. So, we must address any new compliance issues that emerge during the year and change our priorities and vary our plans in response. In the following diagram the compliance issues set out in our work programme are shown according to their impact on revenue and integrity of the tax and social support systems we administer. Details about each compliance issue are shown in the corresponding segment shown in brackets. The segments include:» small and medium enterprises» high wealth individuals» large enterprises» non-profit groups» employers» tax agents» individuals» families. Increasing level of Health impact on revenue and integrity of the tax and social support systems Misusing charity exempt status (Non-profits) Filing and paying (Tax agents) GST compliance (LE) Identity (Individuals) Student loans (Individuals) Mutuality (Non-profits) Non-payment of child support (Families) Employer issues (Employers) Donation tax credits (Individuals) E-Commerce (SME) Agricultural and horticultural contractors (SME) Mergers & Acquisitions (LE) Filing (Individuals) Income from global wealth and complex business structures (HWI/SME) Energy, film, investment, insurance, banking & finance industry issues (LE) Artificial losses (SME) GST fraud (SME) Working for families tax credits issues (Families) KEY: SME: Small and medium enterprises LE: Large enterprises HWI: High wealth individuals Aggressive tax planning (LE and tax agents) Evasion (Tax agents) International issues (LE) Property industry (SME) Complex financing (LE) Hidden economy (SME/Individuals) Tax debt (SME) 4 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

5 Contributing to a successful New Zealand Inland Revenue plays a key role in improving the economic and social wellbeing of New Zealanders. We collect taxes and administer social support programmes for the New Zealand government to ensure:» revenue is available to fund government programmes through people meeting payment obligations of their own accord» people receive payments they are entitled to, enabling them to participate in society. Revenue collected through taxes funds the vital services the community wants from Government and other infrastructure. If some people do not pay, the burden of ensuring we continue to benefit from these services falls on those who do pay. The tax revenue we collected represented 87% of the core Crown revenue the Government used to pay for its programmes and services. In we collected a total $51.2 billion in tax (compared to $48.6 billion for ). Government spending for tax revenue by tax type Health Education 17% 20% Fringe benefit tax 1% Other 1% Other social security and welfare 15% Schedular payments 10% NZ Super 13% Other persons (net) 7% Primary services Core government services 5% 9% Law and order 5% Company tax (net) 18% PAYE 45% Transport and communications Working for families tax credits 5% 4% Economic and industrial services 4% GST 19% Defence 3% (Source: NZ Treasury) 0% 5% 10% 15% 20% 25% Tax remains our core function, but over the years our focus has widened to include the administration of a number of social support programmes. In we:» distributed $1.9 billion in working for families tax credits» distributed $1 billion in KiwiSaver funds to scheme providers» received $550 million in student loan repayments» collected $367 million in child support payments» distributed $134 million paid parental leave. 6 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

6 Our general approach to improving compliance We know most people and businesses comply with their tax obligations and receive the social support they are entitled to of their own accord. Our approach to managing and improving compliance reflects this and emphasises:» using evidence-based intelligence to identify compliance issues through scanning the environment and assessing external and internal information» committing resources to address priority issues» addressing issues using a range of appropriate and graduated proactive and reactive responses» measuring and learning from our actions. Compliance model Economic Customer Business Sociological Industry Psychological In the majority of cases, we help people and businesses self-manage their compliance. We work cooperatively with them to help get it right, while being able to better identify and deal firmly with those who choose not to do the right thing. Our compliance model is based on this tailored and graduated approach. Have decided not to comply Don t want to comply Try to, but don t always succeed Willing to do the right thing HIGH Create pressure down Use full force of the law Level of compliance costs Deter by detection Factors that influence customer decisions and behaviour Attitude to compliance Compliance strategy Assist to comply Make it easy LOW Helping people and businesses to comply We acknowledge many people and businesses want to comply but need some help. We provide a mix of services and practical support to help them self-correct and get it right the next time. To do this we:» offer advisory services for individuals, businesses, community groups and intermediaries» account manage our large, most complex businesses» identify issues and develop policy proposals for new law» encourage people and businesses who think they have made a mistake in their return to let us know before we become aware of it. If they tell us before we start an investigation we can significantly reduce shortfall penalties.» Key focus for improving the timeliness of our binding ruling service to provide certainty on specific arrangements assisting people and businesses who have not filed or have missed a payment to determine appropriate payment options and recovery action. Deter by detection» Key focus for more transparent about the issues concerning us using more sophisticated tools to analyse data to identify areas of non-compliance taking up opportunities to negotiate with overseas authorities to increase information exchange and tax collection increasing our presence nationwide through a range of proactive interventions, based on our assessment of compliance behaviour. Using the full force of the law There will always be a small number of people who have decided not to comply. We have a responsibility and a statutory obligation to take the appropriate action and respond firmly. To do this we:» continually improve our ability to identify and investigate fraud and tax evasion, including exchanging data with international agencies (see page 10)» use a range of collection and recovery methods where people have deliberately failed to file correct returns or pay the right amount of tax» prosecute people and businesses for tax evasion and fraud. Making it easy The majority of people and businesses comply voluntarily. They assess and pay their tax and claim the social support they are entitled to in full and at the right time. We make it easy for them to get it right the first time.» design and identify opportunities to improve our systems to make it easier for people and businesses to interact with us.» Key focus for Most people and businesses are compliant, but some are still reluctant. We will continue to ensure these people know their activities do not go undetected for long. We use a wide range of information to identify indicators of unacceptable behaviour, develop a view of the noncompliance and evaluate the most appropriate response.» Key focus for applying the prosecution framework continuing to trial different remedies for our most serious debt cases. To do this we:» provide information and self-assessment tools» offer online e-services to reduce compliance costs, save time and enable people and businesses to do more for themselves, for example: file returns customise a calendar of filing and paying due dates calculate working for families entitlements request forms and guides read our newsletters increasing the number and uptake of our e-services, in particular e-filing developing prototypes of new communication channels. To do this we:» regularly analyse people s and businesses tax affairs» issue Revenue Alerts» investigate people and businesses to confirm the right amount of tax has been paid and social support claimed» as part of the investigation process, educate people and businesses and provide more comprehensive information to tax advisors so we can have a positive impact on future compliance. 8 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

7 Collaboration and global networks Small and medium enterprises (SMEs) Global collaboration in tax administration is not a passing trend. For a small country like New Zealand, it is a vital element in ensuring we keep up with emerging risks and apply best international practices. We are strengthening our collaboration with other New Zealand-based agencies and industry groups to improve early detection of tax avoidance schemes and compliance issues. We also work closely with other revenue agencies and international organisations. Globalisation has increased the ability of people to move goods, services, people and capital across borders. Historically, substantial cross-border trade has been a business for major multi-national companies. However, globalisation, supported by technology, makes it possible for smaller businesses throughout the world to compete on a global basis. In recognition of this, our ever widening network of tax treaties with international tax authorities supports our early detection, sharing of information and collection efforts. For example our reciprocal agreement with the Australian Child Support Agency enables us to collect outstanding child support from non-custodial parents living in Australia. Provision for helping to collect outstanding tax debt is included in tax treaties New Zealand has with a number of countries, including the United Kingdom, the Netherlands and Poland. Since September 2008 we have been able to send tax debt cases to the Australian Taxation Office. Under the arrangement, they collect outstanding tax debt owed by New Zealanders now living in Australia, and we do the same for them. We are getting better quality and an increased quantity of information than ever before through our network of tax treaties. We are aware that some offshore activities and investments are operated on the assumption that we may not be able to get information from other countries. These assumptions are no longer safe in today's environment of international cooperation.» at a glance Businesses with an annual turnover of up to $100 million. 665,000 SMEs operate in New Zealand. 175,000 are employers, with over 1.7 million staff. SMEs produce about 37% of New Zealand s total output of goods and services. 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 accounts and updating their details» our website has information about how to register a business, 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. 10 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

8 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.» 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. File your tax returns, even if you cannot pay the tax owing. Find more information in our Debt options (IR 582) booklet. You can find it on our website under Forms and guides. It is possible to set up an arrangement to pay your tax in instalments. You can ask us to review the arrangement if your financial situation changes. If you are experiencing serious financial difficulty there are other ways we may be able to help you. Call us on and we can talk about the options available to you. You do not have to wait until the due date to contact us. Contacting us early means you will minimise penalty and interest charges. 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 about the reasons people are engaging in the hidden economy. In 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.» 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.» 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, investigate people who are involved in 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.» 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. 12 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

9 » 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.» 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. For more information see our Guide to tax consequences of trading over the internet. You can find a copy on our website under Forms and guides, e-commerce. Consider making a voluntary disclosure before we contact you. Go to our website under Business & employers", Starting a business", Your business tax obligations", Putting your tax returns right" 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 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 (IR 313) and online propertyrelated 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 direct about issues related to GST claims, GST zerorated 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.» continuing to investigate cases of systematic underreporting. 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.» 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. To find out what the rules are and check if you have foreign investment fund income, go to the decision tree on our website 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.» assessing significant losses and following these up with an investigation, where appropriate. Learn about the tax rules that apply to property, including when you need to pay tax on property sales, GST on rental apartments and the tax rules for LAQCs and rental properties. Go to our website at 14 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

10 High wealth individuals Large enterprises» at a glance High wealth individuals either have, or are in control of, wealth in excess of $50 million and often have complex tax affairs. Their sources of income include: property development, investment, retail business, agriculture, tourism, manufacturing, finance. They get expert advice and assistance from business advisors, including accountants and lawyers We are actively working with 155 high wealth individuals. On average, they have 36 associated entities, such as companies, trusts and partnerships.» at a glance There are approximately 4,500 large enterprises with an annual turnover of more than $100 million. This includes about 300 central and local government bodies and their associated entities referred to as Crown entities (State Owned Enterprises, Council Controlled Organisations and many of the electricity line companies, ports and airports). To June 2008 they accounted for over $25 billion total taxes. Despite making up only 0.1% of registered entities they account for half of the revenue. Crown entities account for 20% of the total tax take. Our compliance approach We select high wealth individuals for review based on risk assessments. They are asked to complete a questionnaire to give us a clearer picture of their entire business. This helps us tailor our interactions with them. We analyse the group structures to identify areas that may need to be investigated. Sometimes, our risk assessments do not uncover any issues we need to take further. In other cases, our risk assessment has identified aggressive tax avoidance arrangements set up to defeat the intent of the tax legislation. Arrangements designed to reduce tax are not necessarily illegal, but where there appears to be a lack of commercial substance, we will take a very close look at them. For cases where we decide the arrangements involve deliberate tax avoidance, we will make the necessary adjustments and apply shortfall penalties if appropriate. Since 2004, more than $209 million (net) in extra tax has been paid by high wealth individuals as a result of our activities. We issue an annual media release detailing the work undertaken over the previous year, including how much tax has been collected and any emerging trends or schemes. Areas of focus High wealth individuals generally meet their obligations by registering, filing and paying on time. However, the complexities of their business structures and associated entities mean accurate reporting can be an issue. Global wealth and complex business structures The issues of global wealth, transactions through complex business structures and many associated entities often being based overseas present many challenges. This makes the opportunities for non-compliance, accidental or deliberate, much greater. Issues identified include:» determining the country where the high wealth individual and their entities should be taxed» using trusts to divert or split taxable income» inappropriate management fee payments made to loss-making associates» businesses disposing of investment assets» the purchase and ongoing associated costs of lifestyle assets, such as luxury yachts, shown as business assets» entering into arrangements that generate tax losses» transferring profits from one entity to another one, often to associated offshore entities» entering schemes specifically designed to avoid tax.» using a range of initiatives to improve the compliance behaviour of this group and our understanding of leading-edge commercial and tax planning approaches» using environmental scans, including international intelligence, and risk assessments to identify and select high wealth individuals for review» continuing to develop and issue specialist questionnaires to gather details of assets and all businesses which high wealth individuals and their close family members are associated with» prioritising areas of focus, such as property developers, new immigrants, financial arrangements and avoidance, for targeted compliance initiatives, including education and investigation» reviewing international best practice for new approaches and using, as appropriate, for example, enhanced relationships and pre-filing reviews» working closely with other government agencies to facilitate provision of information to us. Our compliance approach Many large enterprises are publicly listed, foreign-owned or part of international operations. They often manage their tax obligations from an international perspective, with financial arrangements and ownership typically involving several jurisdictions. Their tax responsibilities are complex. In addition to interacting with us throughout the year on the full range of tax types and collecting and passing on other payments, large enterprises comply with industry specific and international tax legislation. Because of their complexity and significance we take a different approach to providing assistance to many of our large enterprises. We have a relationship management programme including one-to-one account management. Regular meetings are held between our senior managers and chief executive officers to discuss issues. We offer a range of advice to large enterprises to provide certainty about different tax arrangements. Our quarterly Large Enterprises Update newsletter provides information for people who deal with tax matters in large corporate organisations. We carry out an annual survey to assess large enterprises perceptions of us and our impact on their compliance behaviour. The survey helps us to better understand what matters most to them, areas of our service they are happy with and areas for improvement. Our approach to risk identification for large enterprises is more entity specific than other businesses. We identify issues on an individual basis as well as general and industry issues across the sector. Income tax returns for many large enterprises are reviewed on an annual basis and individual effective tax rate calculations are undertaken to determine if any risks exist. We discuss any risks identified with the large enterprise before deciding if any further action is required. We use this information to prioritise issues for investigation. 16 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

11 » Helping large enterprises have greater certainty Large enterprises have told us they want certainty so they can make the right business decisions. Certainty can be provided through personalised relationships and timely and effective information and services. In line with international trends, we are reviewing our relationship with large enterprises, particularly around complex and large tax issues. A key objective is to develop and foster relationships based on two-way transparency and early disclosure of tax issues. This approach is intended to result in mutual benefits. Overseas experience shows that two-way transparency and disclosure results in more certainty upfront and much less investigations activity. We will be actively exploring how we can achieve cooperative compliance with large enterprises through enhanced relationships. We are focusing on improving our people s commercial awareness. This will help them deliver a better service to large enterprises. We are committed to reviewing the timeliness of our services and activities. In particular, the rulings system and the time it takes to complete an investigation. We are also looking to ensure we have processes in place to regularly update the large enterprise during the investigation process. Another way of improving timeliness is by working with large enterprises on transaction issues or impacts of legislative changes as they happen, rather than several years after. Our advice matrix describes the nature of the technical assistance and information we provide for those who want certainty on transactions or issues. Under this approach, we will provide advice in the following categories: Binding rulings Where a business requires certainty on a specific arrangement, including consideration of the tax avoidance provisions there is generally the ability to obtain a binding ruling. Areas of focus Large enterprises generally meet their obligations for registering, return filing and paying. Due to their size and complexity, accurate reporting is the main compliance issue. In , investigations of large enterprises resulted in net discrepancies and adjustments of $723 million. This included $14.4 million refunded or credited to large enterprises. Large enterprises also made 169 voluntary disclosures declaring $39.9 million of tax. International issues Over two-thirds of world trade involves multi-national enterprises and well over 50% of world trade comprises associated party transactions. Increased cross-border activity and the development of global capital markets make it easier for businesses to move profits between countries. Our activities are aimed at making sure New Zealand maintains its fair share of multi-national tax. Transfer pricing has been identified in global surveys as the most important issue for multi-national enterprises. We will continue to closely monitor foreign enterprises operating limited risk structures, such as limited risk distributors/commissionaires and contract/toll manufacturers in New Zealand. We are aware of pressures building on company balance sheets as a result of losses and asset write-downs. We will be reviewing compliance with thin capitalisation rules, especially for those groups with above average debt. Companies can use our online transfer pricing questionnaires to assist in evaluating compliance risk at It is the responsibility of New Zealand management to ensure a company s transfer prices are in accordance with the arm s length standard. If a major downward shift in profitability has taken place in the last 18 months, we recommend you fully document your tax position with supporting evidence in case we ask you about it. Informal indicative view Transactions where no binding rulings available Statutory discretions/ determinations Existing Inland Revenue policy Straightforward technical, procedural and administrative matters Identified legislative or administrative anomaly We will provide an initial informal view on arrangements, transactions or issues, if requested, to assist with any future decisions on the transaction. Where a binding ruling cannot be legally obtained, written advice would generally be provided. Where the legislation specifically requires the Commissioner to exercise his discretion, approve an action or make a determination, we will provide advice either as part of a binding ruling application, determination process or through written advice. We will identify or confirm an existing Inland Revenue policy if requested. We will provide confirmation through information and technical correspondence. Where situations raise a legitimate issue about the meaning of statutory wording, involving a material legislative ambiguity for which no published view exists, we may provide guidance for resolving the issue. We will work with international tax bodies and tax treaty partners to share information and better understand international compliance risks. In particular, we will:» further develop the directory of aggressive tax planning schemes to identify trends and appropriate ways we can respond» work with overseas tax authorities on joint initiatives, such as identifying key bilateral differences in the treatment of hybrid financial instruments» continue to develop our understanding of issues, including training for our staff. Our transfer pricing work programme will continue to cover the full range of both inbound and outbound associated party transactions, with special emphasis on:» any arrangements made to import offshore losses through non-market pricing» potential gaming of interest rates, taking undue advantage of gyrations experienced in credit spread» pricing of hybrid financial instruments, such as mandatory convertible notes» advance pricing agreements. Aggressive tax planning Large enterprises decide whether to adopt particular tax planning opportunities in line with their strategies for tax risk management and tax risk. There is often a fine line between legitimate tax planning and tax avoidance. Our activities during will focus on:» identifying and analysing key transactions which might have a tax risk, for example, business restructures» advising customers which schemes we are concerned about, for example, through our Revenue Alerts» monitoring compliance issues identified by Inland Revenue staff working with large enterprises» working with international tax bodies developing the directory of aggressive tax planning schemes to identify trends and appropriate ways we can respond» continuing to undertake investigations and compliance projects where the application of the tax avoidance provisions are the key factor, including (but not limited to) hybrid financial instruments, imputation structures and structured finance. 18 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

12 International financial reporting standards (IFRS) New Zealand companies have been using the New Zealand adapted International Financial Reporting Standards (IFRS) for reporting periods starting on or after 1 January IFRS has significant implications for accounting practices and it may also have impacts on tax calculations. We have worked closely with companies during the change to using IFRS to assess the impact on their tax liabilities and provide tailored assistance. We will continue to monitor tax returns of companies and work with them to identify and respond to any issues that may arise. For more information about IFRS go to our website Business income tax, International Financial Reporting Standards Compliance projects Some compliance issues relate across the large enterprises customer group and are best addressed by a project approach. Current compliance projects for include: Complex financing Some large enterprises reduce their tax by entering into tax arbitrage arrangements, either within New Zealand or with parties based overseas. Tax arbitrage can involve directing income (or expenses) from a party subject to a less favourable tax treatment, to a party subject to a more favourable tax treatment. We will be monitoring large enterprises (including financial institutions) to make sure we are aware of new structured finance arrangements, and challenging arrangements where appropriate, with investigations and legal action. A hybrid instrument is an investment that is part equity and part debt and can be used in tax arbitrage arrangements, when each party treats equity and debt differently for tax purposes. We have noticed an increased number of New Zealand companies issuing hybrid financial instruments, especially mandatory convertible notes, to their non-resident parent companies and/or associates. We have concerns about the tax treatment in New Zealand and the non-arm's length nature of some of these transactions. We are issuing financing questionnaires, mainly to foreignowned companies, to identify for example, which companies have issued hybrid financial instruments. In some cases we will investigate further. GST compliance Crown entities account for 28% of total GST. The major compliance risk for this sector are the systems and processes used to account for their GST. We will be implementing a programme of system and process reviews for government departments, large Crown entities (including district health boards and tertiary education institutions) and local authorities. In addition, this year we will be undertaking a general health check on large enterprises' GST accounting systems to verify that effective systems are in place to account for GST and GST compliance is still satisfactory. Executive remuneration Risk review work carried out will include executive remuneration. The initial phase will involve the completion of a questionnaire where the results will be evaluated against supporting information and analysis. This may result in specific contract/file reviews to understand the tax treatment of remuneration packages. Executive remuneration will be reviewed as part of our regular investigations. Mergers and acquisitions There are many tax risks that can arise for both the vendor and purchaser when shares or business assets are transferred. For example, in asset sales, the GST may not be returned. In share sales, the company being sold may not make the required forfeits of losses and imputation credit balances. To help us understand the transaction as it happens and identify any tax issues, we monitor large enterprises for significant merger or acquisition transactions and offer advisory visits. During an advisory visit we will discuss the steps undertaken by the business to implement the transactions. This information is used to help detect issues and also assess the impact on the tax payments of, for example, any refinancing. If we detect any issues at the time of the visit, we will let them know. Depending on the nature and extent of the issues, we may investigate. In situations where the advisory highlights an issue that could apply to other business s risk assessments or investigations, activity could occur over a wider group. For more information about accounting for GST see our website Industry risks Compliance issues are more likely to occur in some industries because they are structured to minimise tax, the complexities of their operations, and the impact of implementing new and/or specialist legislation. We will continue to work with these industries to identify and address emerging risks and develop relationships with industry associations to assist with compliance and legislative issues. These relationships mean we can discuss problematic issues which raise complexities for voluntary compliance and we can often reach agreement on an acceptable approach to make it easier to comply. Discussion with industry associations can highlight ambiguities and anomalies with legislation which we can consider for legislative amendment. In we will have a particular focus on the energy, film, banking, finance, investment and insurance industries. Energy industries The current energy environment is focusing on increasing the level and investigating alternative sources of electricity generation. This activity will continue to raise issues on the correct tax treatment of feasibility expenditure, repairs and maintenance, refurbishment and replacement programmes related to generation assets. Due to the volatility in global oil prices, New Zealand has experienced an increase in oil and gas exploration activity, both onshore and offshore. We will be closely monitoring the activities of large businesses involved in this industry as a result of the increased production from the new oil and gas fields, to assess the tax implications. Film industry The New Zealand screen production industry has been subject to special tax rules since the early 1980s. We are continuing to assist in incentive programmes for the film industry. As well as the large budget screen production grant, a new screen production industry fund is being introduced this year. We will be closely monitoring applications for the new incentive fund to make sure genuine applications are being made. Banking and finance industry We will continue to assist the industry by working with them on the tax effects of business responses to the global economic environment. This could include ensuring government initiatives are not unintentionally impeded by the tax system. Our investigation focus will be on structured finance arrangements that financial institutions either take part in or facilitate for their customers. Investment Implementation of the relatively new taxation of investment income (TOII) and portfolio investment entities (PIE) rules are still an issue. We will continue to assist fund managers to resolve issues. A particular focus at the investment entity level will continue to be on examining the transitional adjustments on entry to TOII and PIE. Insurance Both life and general insurance are subject to specialised rules for income tax and GST purposes. Developments in the nature of insurance products have raised some issues about the application of the rules to different types of insurance. New tax rules are currently being proposed. We will focus on working with the industry as they work through the transitional stage and start applying the new rules. For information on portfolio investment entities (PIE), insurance industry and screen production industry go to Business & employers, Information and guides for specific industries. 20 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

13 Non-profit groups» at a glance Non-profit groups are organisations, societies or associations that are self-governing, non-government and/or voluntary. Their activities cannot be carried out for the profit or gain of any member and their rules do not allow money, property or any other benefit to be distributed to any of their members. In 2008 there were 98,000 non-profit entities registered with Inland Revenue. Only 12% have paid employees (a total of 173,000 paid employees, a significant number are part-time). In 2008 non-profit groups generated about $1.5 billion tax revenue. Our compliance approach Non-profit groups provide important community services and products that make a difference for thousands of New Zealanders. Funding for these groups is mainly through donations, grants, member subscriptions and sponsorships. In recognition of their important role in society, New Zealand, like other countries, provides tax relief for non-profit groups and tax incentives for the people who support them. We receive and pay donation claims, making sure they are accurate and paid to an approved organisation, raise awareness among non-profit groups of their tax obligations and focus on organisations that intentionally do not comply or are structured for evasion, fraudulent or avoidance purposes. We are undertaking research to give us a better understanding of the organisations working in the nonprofit sector. The range and level of our interactions will develop as our understanding grows. By grouping organisations by their size and complexity we will be able to tailor our services and responses appropriately. We are using our relationships with a range of national and regional organisations and other agencies to provide information and advice. Our community relationship advisors hold seminars for non-profit groups, including iwi/hapu. Areas of focus Non-profit groups generally meet their tax obligations. The most common causes of non-compliance are due to the implementation of new laws, unclear information or lack of knowledge. Misusing charities tax-exempt status We are aware of schemes that have been used overseas where charities or others, such as tax return preparers or fraudsters, misuse the tax advantages provided to charities. This is also an issue in New Zealand. Registered charities do not have to pay tax in recognition of the important and significant role the non-profit sector plays in building a strong, caring and well-functioning society. The vast majority of charities are legitimate, but their tax-exempt status makes them an attractive avenue for fraudulent activity for some members of society. Schemes can involve people posing as charitable organisations and providing false receipts and charities issuing receipts for payments that are not true donations or manipulating the value of the donation.» identifying fraudulent schemes by using information passed on by members of the public, third-party data and information from other tax authorities, along with our analysis of donation claims.» educating non-profit groups about their tax obligations and investigating, where appropriate. Mutual associations Income tax liability for mutual associations is based on the nature of mutual transactions undertaken by an association. In some cases, there are issues associated with the correct classification of income from mutual transactions and in attributing expenditure to that income to determine appropriate tax deductions.» investigating cases of associations with mutual transactions and answering questions of income derivation and expense deductibility on a case-by-case basis.» providing clarity in this area. More information for non-profit organisations can be found on our website at Recent policy initiatives and legislative changes A number of recent and proposed policy initiatives and legislative changes impact on the non-profit sector. Since 1 July 2008 charitable organisations have had to register with the Charities Commission to be approved for charitable giving (donations) and to be eligible for exemption from paying income tax. Changes have been made to tax incentives for giving. The biggest change has been removing the limit on how much a person can claim back for donations. Changes have been proposed to the treatment of honoraria and reimbursements to provide clarity for tax purposes. Our agreement with the Charities Commission will see us working together to provide greater certainty about the tax obligations of charitable organisations. This is being developed further to ensure a coordinated approach to confirming organisations tax-exempt status and co-hosting events, such as expos, to raise awareness and provide information. We will provide information for non-profit groups about the legislative changes and their impact. For example, we will be working with organisations that have not registered with the Charities Commission to ensure they understand their tax obligations. 22 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

14 Employers» at a glance As at February 2009 there were 188,220 registered, active employers. 65 of the 100 largest employers are central and local government and their associated entities (state-owned enterprises, council controlled organisations and many of the electricity lines companies, ports and airports) In , employers collected about $24 billion pay-as-you-earn (PAYE) from employees about 45% of the total tax revenue. 80% of PAYE is calculated through employers software packages. As at January % of employer monthly schedules are filed electronically. Approximately 2.1 million employer monthly schedules are filed each year. Our compliance approach Employers play a central role in our tax system. They collect income tax, student loan repayments, child support payments and KiwiSaver contributions from employees and pass them on to us. Employers may also have to pay FBT (fringe benefit tax). Employers are concerned about compliance costs. For example, KiwiSaver has placed additional responsibilities on them. We know tax is only one small part of employers day-to-day responsibilities. We want to make meeting tax obligations as easy as possible so employers can focus on effectively running and growing their business. Our online services are designed to make it easier for employers to comply, reducing the time spent on tax obligations. For example, employers can:» register» use our online calculators to work out deductions from employees wages for PAYE, KiwiSaver and student loan payments» work out the PAYE on cash payments» calculate KiwiSaver employer contributions» electronically file employer monthly schedules» make online payments using our ir-file service. We issue a regular payroll newsletter giving information and updates for employers and their advisors. Areas of focus e-filing employer monthly schedules Employer monthly schedules (EMS) filed by employers provide us with PAYE information about their employees, including child support payments, KiwiSaver contributions and student loan repayments. This information also helps us calculate working for families tax credits and paid parental leave entitlements. Most employers file their EMS on time, although many have been slow to take up e-filing opportunities. We are encouraging all employers to electronically file their EMS using our online service, ir-file. This system is secure, accurate and reduces the time it takes to complete and file schedules. By law, all employers who have annual PAYE of more than $100,000 are required to file using ir-file.» contacting employers who are not filing electronically but should be. We will help them register for ir-file for the first time and demonstrate how to use it» holding local ir-file seminars and workshops and having community relationship advisors available» working closely with payroll software providers to make the employer monthly schedule easier to file and faster to process. Register for ir-file on our website by going to Get it done online, File an employer schedule (ir-file) service You can also read the ir-file filing electronically (IR 317) factsheet at Forms and guides Employers who pay less than $500,000 in PAYE and employer superannuation contributions tax each year are eligible for a subsidy if they use a listed PAYE intermediary. Find out more about the PAYE intermediary scheme on our website Employer responsibilities", Filing returns and making payments", PAYE intermediaries" Employer registration There are some employers who should be registered with us but are not. In some cases, we have indentified employers who are not registered through their employees registering for KiwiSaver.» reviewing the employer/employee registration process» identifying employers who are not registered, or are not correctly registered with us as an employer. We will respond to compliance issues with education and enforcement activities. For more information for employers see Employer responsibilities If you employ staff you need to register yourself or your company with us as an employer by going to Becoming an employer, How to register as an employer KiwiSaver KiwiSaver is a voluntary savings scheme, mainly work-based, to help New Zealanders with their long-term retirement saving. It began in July 2007 and by the end of February 2009, more than 1 million people had joined. More than $2 billion in KiwiSaver contributions (employee, employer and government) has been passed to KiwiSaver providers. Employers play an important role in the KiwiSaver scheme. They provide us with information about employees enrolling, deduct KiwiSaver contributions and make compulsory employer contributions. Employers have also provided information about KiwiSaver to their employees. As with any new scheme, there has been a period of learning how it will work. Research shows that:» business size affects employers KiwiSaver costs the more employees, the greater the time and financial costs involved» employers with only a few staff are less likely to understand their obligations. We will be clearly setting out what employers need to do by:» contacting them to outline changes to the scheme» ensuring our printed and online information is up-to-date and relevant and our people have the most recent information to help with questions» regularly including information in newsletters, industry publications and media releases» providing community relationship advisors to inform employers of their obligations and assist them to comply. We will continue to work with:» scheme providers who have the direct relationship with KiwiSaver members» the Retirement Commission to develop a coordinated approach to communications about retirement savings. 24 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

15 Tax agents Over the next four years, working with the Ministry of Economic Development and Housing New Zealand Corporation, we will assess:» the implementation and delivery of KiwiSaver to inform the scheme s ongoing administration» the uptake of KiwiSaver, to understand the profile of members and if the various features of KiwiSaver are achieving their intended outcomes» the impact of KiwiSaver on individuals savings habits to determine if KiwiSaver has achieved its policy objectives» the impact of KiwiSaver on the superannuation industry and broader financial sector. For more information on KiwiSaver see Kiwisaver for employers» at a glance We define a tax agent as someone who prepares income tax returns for 10 or more clients and is: a professional public practitioner, or a person preparing income tax returns, or a Maori Trustee. About 5,700 tax agents are registered with us, handling the tax business of 1.9 million customers. Tax agents file just over 75% of all income tax returns. Our compliance approach Tax agents play a key role in making the tax system work effectively by helping people and businesses understand and meet their obligations and modelling good compliance behaviours. People and businesses using a tax agent can qualify for an extension of time to file their tax returns and can give their tax agent access to their tax information. We provide online resources, tools and services through our website to help tax agents deliver accurate and timely services to their clients. Agents currently have access to online information through the Look at account information service on our website. This lets them view account balances, transaction details and due dates for clients accounts, and link and delink clients. Our agent account managers work closely with tax agents, supporting them to meet their filing obligations, providing education and support, information about obligations under new laws and helping to resolve tax issues. The majority of tax agents are members of a professional body. We have a longstanding and valued relationship with tax professionals through the New Zealand Institute of Chartered Accountants, Tax Institute of New Zealand and the New Zealand Law Society. We find out what is happening in the tax profession, discuss common issues and take part in presentations to their members around the country. AGENTSanswers is our monthly newsletter to tax agents on operational and technical issues. Areas of focus Tax agent s own compliance behaviour We have found the compliance behaviour and attitude of a tax agent towards their own personal tax affairs generally reflects the advice they give to their clients. The majority of tax agents comply with the tax rules. At the end of November % had outstanding personal debt not under arrangement and 9.6% had outstanding returns.» working closely with professional industry groups» monitoring and reporting on tax agents filing and paying performance at the professional body level, and working directly with individual tax agents to manage and improve their performance» recognising tax agents who have a good performance record. Extension of time for filing returns Tax agents have an extended amount of time to file clients income tax returns. Under the extension of time agreement, agents have standard targets for the percentage of returns that must be filed. Approximately 56% of tax agents achieved this in If an agent files less than the target, typically 80% of returns due, for two years in a row, they may lose their extension of time filing arrangement for all their clients returns. Recent law changes require us to maintain a list of tax agents. We can refuse to list someone as a tax agent and remove their status as a tax agent under certain circumstances. For example, agents who have broken a client s trust or are caught defrauding their clients or Inland Revenue.» advancing changes as a result of reviewing our extension of time agreement in helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

16 Individuals» removing extension of time from tax agents who do not meet the requirements of the agreement» enhancing e-services to include more self-service options, for example, client maintenance and look at account information» enhancing our understanding of the environment tax agents operate in and the opportunities to increase compliance through research and direct interaction. For resources, tools and services to help tax agents go to our website For extension of time agreement arrangements for 2008 returns see Extension of time arrangements Advice on tax planning and structuring Tax agents advise clients on how to plan and structure their tax affairs and whether to adopt particular tax planning opportunities. We pay close attention to schemes to ensure they are appropriate. Some of the areas we closely monitor involve:» intangible property» loss companies charging an inflated management fee to the profit company but not physically providing a service or having a basis for charging the fee» structuring income to maximise eligibility for working for families tax credits or decreasing obligations for student loans or child support» diverting income from personal or professional services 1» structuring to avoid associated persons rules. 1 On the 19 March 2009, in the case of Penny & Hooper v CIR, the Christchurch High Court found in favour of Mr Penny and Mr Hooper (both orthopaedic surgeons) holding that their respective arrangements (including trading trusts) did not amount to tax avoidance. The Commissioner of Inland Revenue has filed a Notice of Appeal of that decision, and we have prepared a brief statement to be published in the May 2009 Tax Information Bulletin stating that we consider: the decision does not correctly reflect the law on tax avoidance and we are appealing the decision the use of company and trust structures to avoid higher personal tax rates can be tax avoidance» clarifying what income structuring arrangements are tax avoidance and sharing the outcomes with people, businesses and tax agents» analysing information collected from returns filed to profile and identify trends or unusual deductions and transactions» analysing the role intermediaries have in aggressive tax planning schemes and undertaking targeted investigations of intermediaries who design, advise or on-sell products» identifying schemes and how they are used to identify potential participants for investigation» setting up special projects dedicated to tackling specific schemes, for example, where an individual s income (potentially parents) is filed as another s (possibly a child s under 16 year of age), and is taxed at a lower rate» investigating offshore income not declared. Awareness of fraud and evasion Tax agents are in a unique position to see indicators of evasion and fraud activity. Through early detection, agents can give their clients the right advice to correct their compliance behaviour. Potential indicators of fraud and evasion we are monitoring include:» offshore tax havens, for example, people moving profits out of New Zealand through management fees and interest to a controlled foreign entity or associate, which enables them to break the audit trail and disguise the true nature of the transaction» using foreign credit/bankcards to access funds held offshore and conceal the transactions» using New Zealand or offshore entities to hide the true ownership of assets» selling share options, earned by an individual, to an associated entity to limit the tax. We will continue to closely monitor fraud and evasion schemes and investigate, where appropriate.» at a glance The individuals segment includes people interacting with us about their personal income tax and related affairs. There are 5.3 million individual customers, including New Zealanders living overseas. They received $105 million for the 2007 period from 380,000 claims for donations tax credits. 20% file an individual tax return each year. 14% request or receive a personal tax summary each year. There are 530,000 student loan borrowers. Our compliance approach Since 1999, most individual customers have not had to file a tax return. Instead, tax is taken out of salary and wages by their employer and passed on to us through the pay-as-you-earn (PAYE) system. Individuals who receive additional income, such as rent, interest, or income from overseas or investments may have to file an Individual income tax return (IR 3). Others can claim tax credits on donations, childcare or housekeeping. While we have made the tax system simpler for individuals, many now have little interaction with us and, as a result, they tend to have a limited awareness or understanding about their obligations. For many, our systems seem complex and they are worried about contacting us. Our compliance approach focuses on helping and supporting people to get it right and showing them it is easy to deal with us. We are making improvements to our e-services so individuals can self-manage and do a lot more online. This includes updating their bank accounts and contact details, viewing the information we have about their income, and filing an individual income tax return. Our online calculators let individuals check if they owe money or have money owing to them at the end of the tax year, instead of having to call us. Individuals can also use the INFOxpress service to order a personal tax summary and change or confirm details in their personal tax summary. Areas of focus Establishing identity An IRD number is a unique identifier for people and businesses. It is not compulsory for every individual to have one, but when they start earning income, set up a business, or receive other types of income they have to pay tax on, they will need an IRD number. An IRD number is the key to all our products and services, such as working for families tax credits and student loans. Instances of identity theft are increasing and agencies are looking at ways to improve registration processes to protect customers from identity-related fraud. Our people are trained to pick up fraudulent identities. If, at any point, a suspicious application is picked up they attempt to resolve the issue by asking for other identity documents to ensure registrations are legitimate. We will take further action if we suspect fraudulent activity.» improving our registration process through a face-to-face verification system and integrating the all-of-government evidence of identity standard into our system and business processes» investigating joint services with other government agencies to verify applicants identities. This will improve accuracy and reduce the compliance effort for individuals applying for an IRD number» working with other government agencies to apply an all-of-government approach so, when a customer provides proof of identity for another government agency s service they will not have to give it again when applying for an IRD number. 28 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

17 » strengthening our relationships with national and international law enforcement agencies and organisations that address identity theft and fraud to facilitate information sharing, best practice and, where relevant, cross-border enforcement activity.» continuing to identify and investigate identity theft and fraud issues, particularly those that aid fraudulent claims.» Changes to the IRD number application process Donation tax credits Many people donate to charitable organisations to help them continue to provide important community services and products. People who make donations may not know they can claim a tax credit. Some people misuse the tax credit scheme. The law change that applies from 1 April 2009, removing the limit on what individuals can claim for donations, is likely to increase the number of ineligible and fraudulent claims.» providing information to people, including charitable organisations and key social and cultural networks, about who can apply for a tax credit for donations and other forms of expenditure, how much they can claim and what they can claim for Find our more about how to apply for an IRD number at our website IRD numbers (at bottom of homepage) In 2008 the process for applying for a new personal IRD number changed to protect people and businesses from identityrelated theft and fraud. Individuals wanting an IRD number can now apply at Inland Revenue offices, Automobile Association (AA) centres and PostShops or NZ Post agents over 400 locations throughout the country. When applying for a new IRD number, applicants have to provide two forms of identification, one of which must contain a photo. A full list of approved identity documents is available on our website The AA, PostShop or NZ Post agent will confirm the applicant s identity and send us photocopies of the documents. We will notify the applicant of their new IRD number within 8 to 10 working days. This process is in line with the new all-of-government evidence of identity standard.» continuing to identify behaviour or activities that indicate tax credit fraud by analysing claims, identifying patterns and trends and undertaking investigations. Where individuals have made an error and claimed money they are not entitled to, we will help them to make sure they get it right in the future. In many instances where people have made dishonest claims we consider prosecution. In all instances we will reclaim the funds. To see if you are eligible for a donation tax credit go to our website Income tax, Donations, childcare and housekeeper tax credits (formerly rebates) To see if you made a donation to an organisation with approved donee status go to Donee organisations Filing a return At the end of the tax year most individuals do not have to do anything because their income is deducted by their employer and passed on to us through the PAYE system. Most people who earn salary or wages pay the correct amount of tax. In some situations individuals use the wrong tax code, either with their employer for salary or wages, or with their bank for interest earned. This means the income tax deducted will be incorrect. Some individuals, for example, who have earned additional income to their salary and wages, including interest and dividends, or who have not paid the right amount of tax, are required to do an end-of-year square-up. They can request a personal tax summary (PTS) or file an Individual income tax return (IR 3). Because many individuals have little interaction with us throughout the year they do not know how to do a square-up or why. So, more individuals are asking intermediaries to act as their agent to ensure they do the right thing and receive any tax they have overpaid.» providing information about what individuals need to do through our peak season advertising and media campaign» improving the end-of-year square-up process by making changes to reduce or remove compliance costs and obligations.» making the end-of-year process easy to get right by providing online tools individuals can use to confirm their personal tax summary and file an individual income tax return. Online returns automatically include information we have about individuals, such as their name, IRD number, address and PAYE income.» improving the accurate use of tax codes. For example, we will be working with the Ministry of Social Development to make sure customers turning 65 and starting to receive New Zealand superannuation payments are on the right tax code» supporting PTS intermediaries to help their clients comply by developing e-services and processes for non-agent intermediaries» increasing awareness of the tax obligations on interest. We will work with the New Zealand Bankers Association to inform individuals about using the correct tax codes through their interest statements and information on their websites. We will identify and investigate non-compliance.» Helping people understand and meet their obligations To see if you re eligible for a donation tax credit go to our website Income tax, Donations, childcare and housekeeper tax credits (formerly rebates) To see if you made a donation to an organisation with approved donee status go to Donee organisations When our community relationship advisors visit secondary schools they get the opportunity to talk to year 13 students about income tax, why we pay it and what it is used for. A lot of the students have after-school jobs, so it is a good opportunity to also talk about topics related to what they will need to do when they start working, like completing a tax code declaration and the amount of tax they should pay. The community relationship advisors also show the students how our online services work. In one presentation a student volunteered to go through the online registration process. He was able to activate his account and even learned he qualified for a refund. The whole process took about 15 minutes and was a very engaging way to show the other students what to do. 30 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

18 » student loans In we collected $550 million student loan repayments ($63.5 million more than the year before). As at 30 June 2008 the amount of overdue debt was $207 million, which is an increase of $49 million over the year. Overseas borrowers represent 31% of the total overdue debt but only 14.5% of borrowers. 71% of repayments were collected through the PAYE system. More than 15,000 borrowers repaid their loans in The student loan scheme provides finance to tertiary students to cover course fees, course-related costs and subsidise their living expenses. We work closely with other agencies who administer the student loan scheme the Ministry of Education and StudyLink. This includes the yearly transfer of loans from StudyLink to us, the publication of a cross-agency student loan scheme annual report, and issuing student loans newsletters to borrowers twice a year. Loans are transferred to us at the end of the academic year. We collect payments once a borrower starts earning over a certain repayment threshold. Most repayments are made through the pay-as-you-earn (PAYE) system. This relies on borrowers telling their employers to use the appropriate student loan tax code when deducting tax from their income. Using the right tax code means the correct repayments are collected through the PAYE system and there is no further square-up for payments owing at the end of the tax year. We have done a lot of work in the past to make sure borrowers are using the correct tax code and most people are getting it right. We will be making enhancements to our service to make it easier for borrowers to manage their loans and make repayments. This includes:» enhancements to the student loan online calculator to allow student loan repayment calculations for both overseas based and New Zealand-based borrowers» an account look up online service allowing borrowers to access and update information about their loan details» an enhanced credit/debit card payment option where we pay the transaction fee» improved online information» expanding the notify me service» continuing to educate borrowers of the importance of using the right tax code to repay their student loan by working with employers and proactively calling borrowers we have identified as not using the correct tax code» proactively contacting the borrower where there are overdue repayments and working through repayment options» case managing high risk cases, including appropriate enforcement action when people choose not to comply» helping manage other borrowers who have overlooked their repayments» placing deduction notices on salary and wages where the borrower has not complied voluntarily» working closely with the New Zealand Customs Service as part of the interest-free policy for overseas-based borrowers to receive information about borrowers who leave New Zealand without letting us know. We use this information to update our records and ensure we do not charge interest to borrowers who are entitled to interest-free loans. For more information about student loans go to our website You can use the Look at Account Information service to view up-to-date information on your student loan, including your loan balance, any repayments you have made, interest charged and written off, and any penalties you may have incurred. We have expanded the way you can repay your loan, you can: get your employer to deduct it through the PAYE system set up an automatic payment use internet banking use debit or credit cards use special tax codes. You can use the Student loan repayment calculator to work out your repayment options. You can use the Notify Me Service to subscribe online to receive s with general student loan information that will help you manage your loan. Some of the topics we will cover include changes to student loan policy, reminders of your due dates, what to do if you are going overseas, using the right tax code and lots of other useful information.» Student loan amnesty Student loan borrowers living overseas who had fallen behind in their repayments were encouraged to take advantage of the amnesty on late payment penalties between April 2006 and March Working with the New Zealand Customs Service we identified overseas-based borrowers. All eligible borrowers either had their late payment penalties reversed or not applied to their account. They then had to apply for the amnesty and agree to start making payments on their student loan by 31 March 2008 to avoid having a one-off amnesty penalty applied to their account. More than 13,000 (30%) of eligible borrowers applied. About 31,000 borrowers who didn t apply received a one-off amnesty penalty. Borrowers whose amnesty applications were accepted were required to make four equal repayments over two years towards their student loan. For the majority of borrowers, the two-year term will end in the 2010 tax year. If a borrower does not meet their amnesty repayment obligations, a one-off amnesty penalty will be added to their loan balance, based on the number of payments they have made. 32 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM

19 Families» at a glance Families customers have a dependent child(ren) or are financially responsible for child(ren) and interact with us for child support, working for families tax credits (WFFTC) and/or paid parental leave. 395,100 families received WFFTC for the tax year ending 31 March ,000 custodial parents receive child support and 173,000 liable parents pay child support for approximately 265,000 children as at June In we distributed: $1.9 billion in WFFTC $134 million in paid parental leave $193 million of child support to custodial parents and $164 million to the Crown to offset benefits paid to custodians. Our compliance approach We administer a range of social support programmes intended to help families cover the costs of raising children. We estimate that approximately three-quarters of families with dependent children receive WFFTC and nearly 75% of all new parents receive either paid parental leave or the parental tax credit. Approximately 90% of one-parent families are part of the child support scheme. Increasing awareness of what is available is an essential part of making sure families get the support they are entitled to.» Community relationship advisors provide education and information at workplace seminars and family and community expos.» Our leaflet, Congratulations on your new baby, which includes information about parental tax credit, paid parental leave and WFFTC, is sent out to all new parents with the Department of Internal Affairs' new baby registration packs.» We continue to use services like the Families Commission, Citizens Advice Bureaus and parenting groups to develop our understanding of what parents know about the social support they are entitled to. Our online services, like My family details and income, make it easy for customers to confirm or update their:» spouse or partner details» annual family income details» children s current details» payment options» bank account details. People can use the working for families online calculator to work out whether they are eligible, find out what payment types are available and how much they might be able to receive, depending on their income and family circumstances. Areas of focus The most common compliance issues involve:» some families receiving more social support than they are entitled to because of changes in circumstances, such as income changes or children joining or leaving the family during the year» people deliberately trying to collect more than they are entitled to» some people trying to avoid paying child support. Under and overpayment of working for families tax credits (WFFTC) Families can choose to receive their WFFTC payments weekly, fortnightly or as a lump sum at the end of the year. Entitlements are based on a family s annual income, the number and age of dependent children and the parents income sources. If a family chooses to receive payments weekly or fortnightly and their income varies during the year, or their family situation changes, they may find they have not received enough, or received too much. If they tell us about their change of circumstances we can make the necessary changes to their payments to minimise any over or under payment. Incorrect payments in some cases may also be the result of deliberate fraud or avoidance activities. We want people to receive their correct entitlements when they need them and not have to worry about whether they will have to pay back money at the end of the year. To do this we will be:» calling new recipients and people we know are more at risk of receiving an overpayment, especially those who are self-employed or have seasonal work. We will clarify the family s income and family details and encourage an income re-estimate to reduce the risk of overpayment at the end of the year» improving our online services for families ( My family details and income ) so recipients can view and update their personal details» improving the information provided by the electronic information exchanges with the Ministry of Social Development to make sure the information we have about our WFFTC recipients is as accurate as possible» collecting and analysing information to identify people involved in fraud and referring these for investigation. In some cases we will reassess the overpaid entitlement and impose shortfall penalties. Where the investigation finds that a family s affairs have been deliberately structured to inflate their level of entitlement, we will consider prosecuting them. For more information on working for families tax go to our website To let us know of a change in your circumstances online go to Get it done online, My family details and income service Paid parental leave administration Since 2002 we have worked with the Department of Labour to administer the paid parental leave scheme. Our part of the administration process involves paying parental leave payments and collecting debt resulting from overpayment.» We are enhancing our processes, including crosschecking paid parental leave applications, with information we have about a person s income and employment to help avoid overpayment or payments to people who might not be eligible. For more information on paid parental leave go to our website Individuals & families, Paid parental leave Parents who do not pay their child support The child support scheme is designed to assess, collect and disburse payments from parents not living with their children to help financially support them. Parents are typically more willing to pay their child support when they see their children benefiting from the payments. Parents who have a shared care arrangement usually pay their child support. We have found that in the first year of child support some parents who do not have their children living with them do not meet their obligations. Since the child support scheme started in 1992 we have collected 88.4% of the $4 billion child support assessed. 34 helping you get it right helping you get it right IRD Compliance Brochure_12cg /05/09 10:41 AM