Annual Report. ird.govt.nz

Transcription

1 Annual Report 2015 ird.govt.nz

2 Crown Copyright 2015 This work is licensed under the Creative Commons Attribution 3.0 New Zealand licence. In essence, you are free to copy, distribute and adapt the work, as long as you attribute the work to the Crown and abide by the other licence terms. To view a copy of this licence, visit creativecommons.org Please note that no departmental or governmental emblem, logo or Coat of Arms may be used in any way that infringes any provision of the Flags, Emblems, and Names Protection Act legislation.govt.nz Attribution to the Crown should be in written form and not by reproduction of any such emblem, logo or Coat of Arms. ISSN (Print) ISSN (Online) ird.govt.nz Presented to the House of Representatives pursuant to the Public Finance Act 1989 and the Tax Administration Act 1994.

3 Contents About Inland Revenue 8 Delivering and improving our core business 11 Contributing to the Government s priorities 23 Business Transformation 31 Organisational health 35 Our performance 43 Measuring our performance 57 Departmental financial statements 93 Non-departmental financial statements 125 Audit Report 145 Additional information 149 ANNUAL REPORT

4 From the Commissioner A year of making tax simpler As Commissioner I m enormously proud of how much Inland Revenue has achieved for the people of New Zealand. This year s Annual Report reflects many of the improvements you ll notice next time you look for information online, file a return or claim a refund. We re making the business of tax and entitlements simpler, more open and more certain for customers and businesses across New Zealand. Easier for customers Our Business Transformation will completely change how people interact with the revenue system in future. And as we prepare for transformation, we re making it easier every day for businesses and individuals, through continuous improvement and innovation. More people are doing a lot more online. During the year we improved our website and myir online services, and made it easier to register and find information. Since August customers have been able to activate their new myir account instantly via text. Customers are embracing new digital opportunities last year 67% of returns and almost 83% of payments were done online. Our mobile app that lets small businesses do GST on the go, developed through crowd-sourcing and research, is hugely popular. Going digital gives customers increased certainty. But if they need to call us we re answering more calls and answering them faster: 75% of our 3.24 million calls received last year were answered in less than two minutes. Voice ID, with 1.5 million customers registered, and automatic call-back makes the process even smoother. These changes and more contribute to Better Public Services, making it simpler and more seamless for New Zealanders to deal with Government. We re working with many other agencies on a range of projects from sharing information that supports customers to joint service delivery. Businesses are noticing the difference: a recent survey reported a 23% reduction in the effort of dealing with Inland Revenue. Getting it right Our new Compliance Model helps us understand customers better and tailor our approaches to respond to different customer behaviours and needs. We want to help people get it right from the start, make tax simpler and more certain, and help more people avoid debt. For the first time in five years, Inland Revenue s overdue debt total has reduced. We ve done this by contacting businesses and individuals upfront to prevent them getting into debt, following up fast with effective arrangements to manage any debts, and recognising that some debt costs more than it s worth to collect. The vast majority of student loan debt is owed by borrowers now living overseas, and much child support debt is owed by liable parents living in Australia. We ve used innovative campaigns to successfully reach these customers and recover debt. Our student loan campaign was a goldmedal winner in communications awards. We also reduced overdue tax returns by 21.5% last year, finalising 1.45 million overdue returns and reducing the number outstanding to the lowest level in five years. We also take further action to ensure everyone pays the tax they should. During the year we tackled the hidden economy, property tax compliance and aggressive tax planning, with an excellent rate of return on each. We also had some outstanding wins in the courts. Reforming child support A significant project during the year was changing the child support system to better reflect how families live since child support was introduced in After earlier public consultation, the first changes took effect on 1 April 2015, with the second stage to come in April In preparation we contacted thousands of parents who pay or receive child support to make sure they understood the changes and were well-prepared for their impacts. We used social media and texts as well as more traditional channels. 68,000 visitors used our online calculator to work out how changes could affect them. 2 ANNUAL REPORT 2015

5 Future Inland Revenue Business Transformation Implementing our Business Transformation programme is one of our three strategic priorities for I m excited to see preparation for changes that will create a modern tax administration by 2023, now coming to fruition. It s critical we have the right people helping us develop and implement transformation. After an intensive selection process we appointed Accenture and Fast Enterprises, along with several New Zealand-based supporting companies, to work alongside us. We also completed high-level design for all four transformation stages taking place over the next eight to 10 years and started detailed design of the first stage expected to start next year. We re involving stakeholders across all areas, with four advisory panels providing a wide range of advice and opinions. Quality assurance reviews from external organisations who make sure we re spending taxpayers funds wisely, have all been positive. We asked New Zealanders for their thoughts on the tax system of the future through two significant Government consultations during the year. These received great engagement from the public and tax community, with more than 900 comments online and over 90 written submissions. Conclusion It s a privilege to be Commissioner of Inland Revenue. Alongside great customer service delivered every day this organisation provides advice to Government on tax and social policy; and contributes to solving international tax issues. This year we helped make New Zealand an even better place to live and work in many ways - including collecting $59.7 billion of tax revenue that helps fund services to benefit all New Zealanders. I m proud of our people who are committed to making a difference in people s lives and adding value every day. As we look forward to next year s challenges I am confident Inland Revenue has the people, skills and innovation to meet the future. Naomi Ferguson Commissioner of Inland Revenue ANNUAL REPORT

6 Highlights WE COLLECTED $59.7 BILLION OF TAX REVENUE FOR THE GOVERNMENT WE TRANSFERRED $4.8 BILLION OF KIWISAVER CONTRIBUTIONS TO PROVIDERS $ WE PAID $3.4 BILLION IN WORKING FOR FAMILIES TAX CREDITS, KIWISAVER, PAID PARENTAL LEAVE PAYMENTS AND PAYROLL SUBSIDY KIWISAVER MEMBERSHIP REACHED 2.5 MILLION WE NOW HAVE 1.5 MILLION CUSTOMERS REGISTERED WITH VOICE ID MOBILE APPLICATION LAUNCHED FOR APPLE PRODUCTS SMALL TO MEDIUM ENTERPRISES CAN NOW MANAGE THEIR GST ON THEIR SMARTPHONES BUSINESSES WHOSE MOST RECENT INTERACTION WITH GOVERNMENT WAS WITH INLAND REVENUE REPORTED A 23 % REDUCTION IN EFFORT OF DEALING WITH US, IN THE LATEST BUSINESS REFERENCE GROUP SURVEY OVERDUE DEBT CASES HAVE DECREASED BY 16 % (67,000) THIS IS THE FIRST TIME IN five years THAT WE HAVE BEEN ABLE TO REDUCE THE TOTAL AMOUNT OF OVERDUE DEBT 4 ANNUAL REPORT 2015

7 INLAND REVENUE IS THE FIRST AGENCY TO REACH five stars IN THE ENERGY EFFICIENCY AND CONSERVATION AUTHORITY (EECA) ONE2FIVE ENERGY MANAGEMENT RATING EECA LOOKED AT OUR ENERGY USAGE AND HOW WELL WE DEMONSTRATE CORPORATE COMMITMENT, TARGETS AND PERFORMANCE INDICATORS, PLANS, AND ACCOUNTABILITY TO ENERGY MANAGEMENT. OUR FIVE STAR RATING IS AN IMPROVEMENT FROM OUR FOUR STAR RATING IN NOVEMBER $ 82.5 % OF PAYMENTS ELECTRONICALLY COMPARED TO 74.2% LAST YEAR CONTINUED INCREASE IN CUSTOMERS USE OF DIGITAL SERVICES. WE RECEIVED 67.4 % OF RETURNS ELECTRONICALLY, UP FROM 59.8% LAST YEAR OUR BUSINESS TRANSFORMATION PROGRAMME ACHIEVED ALL ITS MILESTONES AND WAS UNDER BUDGET WE ACHIEVED 91 % CHILD SUPPORT REFORMS PHASE ONE COMPLETED AND IMPLEMENTED SUCCESSFULLY OF OUR SERVICE PERFORMANCE TARGETS COMPARED TO 85% LAST YEAR SIGNIFICANTLY CONTRIBUTED TO THE GOVERNMENT S RESULT 10 TARGET OF AN AVERAGE OF 70% OF NEW ZEALANDERS MOST COMMON TRANSACTIONS WITH GOVERNMENT WILL BE COMPLETED IN A DIGITAL ENVIRONMENT WITH Tax return 88 % OF INDIVIDUALS FILING THEIR TAX RETURNS ELECTRONICALLY AND JUST OVER 81% PAYING INDIVIDUAL TAX ELECTRONICALLY ANNUAL REPORT

8 6 ANNUAL REPORT 2015

9 01 About Inland Revenue ANNUAL REPORT

10 About us Outcomes Inland Revenue contributes to the economic and social wellbeing of New Zealand by collecting and distributing money. New Zealanders pay tax to and may get money from the Government. We are accountable to the Minister of Revenue. Inland Revenue s success is reflected in two outcomes: 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. Strategic intentions Our strategic intentions set out in our Statement of Intent are to: Deliver and improve our core business Contribute to the Government s priorities Implement our transformation change agenda. We are working on these three areas to ensure that we deliver for our customers today and transform for tomorrow. Why paying tax matters In , Inland Revenue collected $59.7 billion in tax revenue, which is around 80% of the money government uses to pay for services that all New Zealanders benefit from, including healthcare, education and policing. In the Crown expected to spend the following: Where taxes go Total Crown expenses $73,107 million* Forecast 2015 Social security and welfare Health Education Core government services Finance costs Law and order Transport and communications Economic and industrial services Defence Heritage, culture and recreation Primary services Other Environmental Protection GSF pension expenses Housing and community development * includes $291 million for forecasted new operating spending and ($875) million top down expense adjustment which are not included in graph $million 0 5,000 10,000 15,000 20,000 25,000 30,000 Our tax system An effective tax and social policy system comprises good policy settings plus good administration. A well-functioning tax system supports a more competitive and productive economy and helps the Government achieve its fiscal, economic and social objectives. Most of New Zealand s tax revenue is from three main sources: Personal income Company income GST. These three main tax types have broad bases, allowing substantial amounts of tax to be collected at modest tax rates. Scope of operations In the tax year ended March : Individuals about 1.08 million individuals filed annual tax returns Employers about 196,000 employers filed almost 2.1 million employer monthly schedules with PAYE deductions for employees Companies 392,000 company tax returns were filed GST filers 631,000 registered customers filed 3.0 million GST returns. We also manage or share the administration of: Working for Families Tax Credits we distributed, with the Ministry of Social Development, $2.4 billion in entitlements to support working families. Child support we collected $463 million from 174,000 liable parents who pay child support and distributed $265 million to parents who are main carers of children. The balance is collected for the Government as an off-set for custodial families supported through the benefit system. 8 ANNUAL REPORT 2015

11 01 Executive Leadership Team From left to right: Greg James, Deputy Commissioner Change Giles Southwell, Chief Financial Officer Mary Craig, Deputy Commissioner Corporate Integrity & Assurance Mike Cunnington, Deputy Commissioner Information, Intelligence & Communications Naomi Ferguson, Commissioner Martin Smith, Chief Tax Counsel Jeanie Truell, Chief People Officer Arlene White, Deputy Commissioner Service Delivery Myles Ward, Chief Technology Officer Struan Little, Deputy Commissioner Policy & Strategy KiwiSaver we administer the scheme by collecting contributions and transferring them to scheme providers for investment. At 30 June 2015 there were 2.5 million people enrolled in KiwiSaver. We distributed $4.8 billion to scheme providers. Student loans we jointly administer this programme with the Ministries of Education and Social Development (StudyLink). We had 728,000 student loan borrowers and collected $1.1 billion in repayments. Paid parental leave we make payments, for the Ministry of Business, Innovation and Employment, to parents who take leave from their job or business to care for a baby. We made $180 million in payments to 27,500 parents. Our operating budget Our operating expenditure for the year was $704.2 million, an increase of $3.7 million over the prior year. Expenditure for is forecast to be $764.9 million, an increase of $60.7 million. Most of the forecast increase relates to expenditure on our business transformation programme figures not available ANNUAL REPORT

12 10 ANNUAL REPORT 2015

13 02 Delivering and improving our core business ANNUAL REPORT

14 We aim to make it easy for our customers to manage their own tax and social policy obligations and entitlements by providing information, assistance and tools so they can do it themselves. Digital services We are enabling our customers to do more online. It is part of our strategy to save our customers and Inland Revenue time and money. Completing their tax and social policy obligations online also helps customers get it right the first time and means we do not have to contact customers to check the information provided is accurate. Over the past year the number of people who have started to file online and use our online tools has increased. The number of returns we received electronically increased by 8.3 percentage points since last year compared to a 4.4 percentage point increase the previous year. Customers are able to register for a myir account to manage their own tax and social policy affairs. To make things easier for our customers, we have updated myir and introduced more online documents to provide access to statements, notices and letters electronically. We made edocuments available to customers in April This fits with the objectives of the Government s Better Public Services Result 9 and 10 goals covered on page 27. Customers expect to be able to interact with us using all their digital devices. In January 2015, we launched our new free mobile application myir on Apple products. This enables small to medium enterprises to manage their GST through their smartphones. We recognise that our website is the first place most people go when they want to find out information so we work hard to make sure it is the best it can be. We also publish instructional videos on our YouTube channel InlandRevenueNZ. We are continually improving our website and YouTube information to make sure customers are able to find the information they need. One of the improvements we made was to add transcripts of our introductory videos written in Korean and traditional and simplified Chinese to reflect the changing needs of our customers. These are in addition to information in English, Māori and New Zealand Sign Language already available. Another example of improvements we have made to our website is the employer superannuation contribution tax (ESCT) tool. Customers told us that ESCT was hard to understand so we created an educational tool in July 2014 to help employers. The tool explained what ESCT was and how to calculate, file and pay ESCT. This has been used over 163,000 times. Our work to make tax easier to understand on our website was recognised again. In December, ird.govt.nz won the ESET NetGuide best Government website award for the eighth time in nine years. 12 ANNUAL REPORT 2015

15 02 Phone calls COVERAGE ACTUAL OUR TARGET Minimum percentage of attempted 96.5% 75% calls that we answer TIME Minimum percentage of telephone 75% 75% calls answered within two minutes We aim to make sure our customers can get the answers to all their questions online. However, if customers cannot find the answer they need online then most will call us. When people do call, we are answering more phone calls and answering them faster. We answered 3.24 million calls this year, which was 96.5% of calls received. Overall the number of calls we answered was similar to last year but our contact centres received 4% (141,000) fewer calls this year than last year. Reducing the time it takes for us to answer customers telephone calls improves their experience and satisfaction. This is why we aim to answer calls as quickly as possible. We answered 75% of our customers calls within two minutes. We managed our calls more effectively by directing calls to staff with the best skills to help and by offering our customers call-back options including the opportunity to book a time for us to call them back when they are free. We have also reduced the number of phone calls that are related to follow-up contact by improving how quickly we get back to people. We introduced Voice ID in November 2011 as a way to recognise people and remove the need for us to ask questions to confirm that we are talking to the right people. This saves the customer time and enables us to answer calls faster. People register with Voice ID once then use the system each time they call. At the end of June 2015, 1.5 million people were registered for Voice ID. Inland Revenue has one of the world s highest rates of enrolment for voice recognition services. Tax agents Some of our customers choose not to manage their own taxes, but instead use tax agents. Tax agents are a key customer group for us. A tax agent is a person who prepares the returns of income required to be filed for 10 or more taxpayers. We have been working with tax agents to continue to make things easier. An example of the changes we made to help tax agents was creating new correspondence guidelines for any requests they send to us. These explain what information needs to be provided so the request can be considered or the return processed as quickly as possible. We also updated the Tips for Faster Processing page on the tax agent section of our website to improve accuracy and reduce common errors when they are filing returns. Tax agents also told us that linking Inland Revenue client information with their systems was an issue. In March 2015 we made changes to myir where tax agents link and delink clients and they can now do this easily for new customers or if a customer chooses to no longer use a tax agent. Tax agents overall satisfaction with us showed statistically significant improvement from 89% satisfied and 69% very satisfied in to 92% satisfied and 78% very satisfied this year. ANNUAL REPORT

16 Returns Returns are the way in which customers give us their tax information for the year. We aim to be more proactive by letting customers know their returns are due before issues arise. This proactive approach is working. The number of outstanding returns was down 21.5% at the end of June 2015, to reach the lowest number in the last five years. This reflects an ongoing reduction and we had about 234,000 fewer returns outstanding at 30 June 2015 than at 1 July We are encouraging as many customers as possible to use our online channels to file their returns. YEAR Making payments % GST RETURNS RECEIVED ELECTRONICALLY 30 June % 44.9% 30 June % 50.6% 30 June % 62.5% Electronic returns by tax type % OF GST CUSTOMERS FILING ELECTRONICALLY INCOME TAX 84.1% 86.9% 88.8% GST 47.6% 54.9% 64.0% EMPLOYER MONTHLY SCHEDULES 41.3% 49.6% 60.0% Our proactive approach of letting people know their obligations before their payments are due is also supported by Budget 2012 and 2014 funded projects which improved our predictive modelling capability. These projects looked at how we can identify patterns of compliance and engage with customers before issues arise. When customers need to make payments, we are making it easier for them to pay electronically. This also makes it easier for us to process payments faster. To help our customers know all the ways they can pay electronically, we developed a 45-second video on the Make a payment page of our website. We have also made the payment page responsive and easy to use on mobile devices. Around 20% of customers visit our payment page using a mobile device. We removed the option for cheque payments at Westpac. Now that Westpac only receives cash or EFTPOS payments, we have seen a large reduction in exceptions. Exceptions are payments that cannot be processed or that are missing information like IRD numbers. In December 2014, we had 21 payments which could not be processed. These exceptions were worth $10,000. This compares with 5,400 exceptions worth $56 million in December During January and February 2015 we had one exception each month and by March we had no exceptions. For customers who want to pay over the counter at Westpac, we introduced barcodes on payment slips in June The barcode aims to reduce time and errors for these transactions. GST return Predictive modelling helps us change customer behaviour before issues arise Our work on the probability of GST returns being filed shows we can reliably predict customers who are highly unlikely to file GST returns on time. We have changed our processes based on our findings. This has already resulted in a reduction of more than 98,000 outstanding GST returns during the past year. In the future, we will be able to take a more proactive approach for these customers and contact them before any potential GST filing issues arise. $ We had 82.5% of payments made electronically compared to 74.2% in and 70% in ANNUAL REPORT 2015

17 02 Social policy programmes We have an important role in administering social policy programmes, often in conjunction with other government agencies. During the year we made changes to our child support, paid parental leave, and KiwiSaver systems to implement Government policy changes. Child support changes Inland Revenue collects and distributes child support payments for about 200,000 children whose parents do not live together. The Government recognised that things have changed for families since child support was first introduced in After significant public consultation, extensive changes were made to the scheme to better reflect family life today. These changes come into effect in two stages on 1 April 2015 and 1 April The first stage went live on 1 April 2015 and changed the way child support was calculated. The calculation moved from focusing on the liable parent s income to the cost of ongoing care of the child by: taking into account the cost of raising children taking into account the income of both parents recognising lower levels of shared and regular care provided for each child. To ensure the liable and receiving parents knew how the changes would affect them, we contacted them via either mail, phone, text messaging or to ensure we had the correct information about their situation and to help them understand the changes. As part of the changes we developed two new calculators and made them available on our website to help parents work out how the changes would affect them. Since going live in September 2014, the calculators have had 68,000 visits. We used social media as a new way to improve engagement with some of our child support customers and also contacted parents through our normal communication channels. We undertook our first question and answer session on Facebook on the privately-run Child Support NZ Facebook page. During the session we had 139 participants in a one-hour discussion, received over 200 questions and had over 680 comments made. We also had over 10,000 views of the Facebook page during the session. An additional change we made is that parents who received child support payments from more than one liable parent can now see who made the payment. Changes to paid parental leave We make paid parental leave payments for the Ministry of Business, Innovation and Employment (MBIE), to parents who take leave from their job or business to care for a baby. We are responsible for ensuring people receive their correct entitlements. On 1 April 2015 paid parental leave was extended from 14 to 16 weeks. From 1 April 2016 this will be extended to 18 weeks. Also from 1 April 2015, the parental tax credit increased from $150 to $220 a week and the payment period was extended from eight weeks to 10 weeks. KiwiSaver Inland Revenue administers members KiwiSaver contributions through the PAYE system. We do this by collecting contributions and transferring them to scheme providers for investment. Through Budget 2015, changes were made to KiwiSaver. The KiwiSaver Budget Measures Act enacted on 27 May 2015 removed the KiwiSaver $1,000 kick-start payment to help contain the cost of the scheme to taxpayers. Removing the kick-start payment for One of our outcomes is to ensure people receive payments they are entitled to, enabling them to participate in society. In the financial year we collected $463 million from 174,000 liable parents and distributed $265 million to receiving caregivers. This is an increase of 3% in payment collection. ANNUAL REPORT

18 future enrolments will save over $500 million over the next four years. In March, we got excellent feedback from an Australian research company SuperRatings for the role we play in administering KiwiSaver. Their assessment also recognised our role is critical in maintaining the efficiency of the system and the overall cost-effectiveness of KiwiSaver schemes in comparison to other countries retirement systems. In April 2015, KiwiSaver membership hit a significant milestone of 2.5 million people. Improving compliance A key aspect of our core business is helping to maximise voluntary compliance. We assist customers who are willing to meet their compliance obligations but are unaware or uncertain about how to do so. Influencing voluntary compliance, targeting inadvertent noncompliance by providing information, assistance and tools, and detecting and deterring deliberate non-compliance are part of our core activities. CAPABILITY OPPORTUNITY CUSTOMER MOTIVATION Understanding and influencing customer behaviour We aim to make it easy for people to understand their obligations and entitlements. In our Statement of Intent we said we would redesign our compliance model so it reflects a more comprehensive range of the factors influencing customer behaviour. We launched our new compliance model in March The new model places greater emphasis on understanding our customers, their lifecycles and perspectives. We want to give our customers certainty with the least number of interactions. We also want our customers to be able to get it right first time. We have worked with customers, tax agents, private providers and other government departments to design solutions that fit tax and social policy obligations around customers needs, and we will continue to do this. The impacts of changes on customers will also be assessed to ensure we understand how they influence and affect compliance and the customer experience. Dealing with non-compliance The majority of our customers file and pay on time, but New Zealanders need to have confidence that we take action when people or businesses do not pay. This encourages compliance and maintains confidence in our tax system. We use a range of tools to identify areas of non-compliance and evaluate the most appropriate response, including investigations of the tax affairs of individuals and businesses. We have focused our efforts on specific areas of non-compliance such as aggressive tax planning, property and the hidden economy and received further funding in Budget 2015 to expand our investigations activity in these areas. At the core of our new compliance model are the three factors that form customer behaviour capability, motivation and opportunity. Capability is how well customers can meet their obligations and access their entitlements. It includes their knowledge of rules that apply to them, their access to tools and assistance, and their ability to understand. Motivation is about the factors that create the willingness to comply and then actually follow through and do it. Motivation includes both social and personal norms. Opportunity is about how easy it is for a customer to comply or not to comply with their obligations or access their entitlements. 16 ANNUAL REPORT 2015

19 SERVICE 02 If our investigation detects a discrepancy, a difference between the tax position filed by a taxpayer and the position determined by our investigations, we issue a new assessment and may charge penalties and interest. This year we identified discrepancies of $1.23 billion. The overall return on investment for our investigation activity was $7.52:$1 (target $7.00:$1). Aggressive tax planning A small number of people try to avoid paying the tax they should, reduce the amount they should be paying or increase their entitlement to social benefits. They use inappropriate or unlawful tax structures and this is called aggressive tax planning. We match information from different sources to identify potential aggressive tax planning structures and schemes. Our work to counter aggressive tax planning contributed $336.9 million toward the total discrepancies result. Of this, $191.1 million came from examining complex finance and trust losses. This produced a return on investment of $34.10:$1 (target $11.60:$1). We resolved the last optional convertible notes cases after the settlement with Alesco New Zealand in This contributed $64.3 million to this year s discrepancies. This year we have worked on cases New Zealand has a voluntary compliance approach to tax. This is an environment dependent on an open, honest and transparent tax system where there are high levels of mutual trust and understanding between customers and the revenue agency. OUR NEW COMPLIANCE MODEL A thinking tool to help us understand customers better so we can > work pro-actively and tailor approaches to make compliance easier. EDUCATE ENFORCE Understand and involve the customer and stakeholders Build compliance right from the start CAPABILITY CUSTOMER MOTIVATION DESIGN Make it easy to comply and difficult not to LEGISLATE > Customer centred: Customers are at the centre of our thinking surrounded by context that affects their behaviour. > Behaviour wheel: we consider the three factors that form customer behaviour so we can tailor our approaches to facilitate compliance. > Principles wheel: five key principles guide how we work with customers to build compliance. We apply a mix of these in different ways, depending on our role and the customers we work with. OUR MODEL FOR facilitating compliance Influence norms ANALYSE OPPORTUNITY Provide certainty COLLABORATE > Activity wheel: whatever our job in IR, we have a role in making sure people pay the taxes and get the entitlements they should. We use different activities to facilitate compliance depending on our customers. The movable wheels show we use a range of approaches that change depending on our customers. The more we understand customer needs and behaviours, the better we can tailor our actions so people pay the taxes and get the entitlements they should. ANNUAL REPORT

20 involving the use of mandatory convertible notes, which led to discrepancies of $91.8 million. Since we received multi-year funding to work on aggressive tax planning in Budget 2012, we have assessed revenue of $811.1 million. We will use Budget 2015 funding to continue addressing emerging risks such as high-income individuals, in particular high-income new immigrants. Non-compliance in the property sector We have continued to focus on identifying property speculation, particularly in Auckland and Christchurch. This focus includes examining residential property sales and new developments to ensure that speculators and developers are paying the correct amount of tax. We have found discrepancies during the year of $67.1 million. The return on investment was $9.97:$1 (target $6.80:$1). To help clarify the tax position we delivered presentations to different industry groups on this topic. We aim to educate people about how to deal with GST on a property and property investment. We will use funding from Budget 2015 to expand customer education and increase our focus on this sector. We list notes of decisions made by the Taxation Review Authority, the High Court, Court of Appeal, Privy Council and the Supreme Court on our website at technical-tax/case-notes. Hidden economy People operate in the hidden economy by intentionally not declaring or accurately reporting transactions. We focused on higher-risk sectors such as hospitality and construction. We identified discrepancies of $146 million in the hidden economy. Of this, $45 million (target $44 million) came from Budget 2010-funded work, a return on investment of $5.21:$1 (target $5.00:$1). As a last resort we prosecute to recover funds from taxpayers operating in the hidden economy. In May and June 2015, we ran an advertising campaign to remind tradespeople to declare all of their income. The campaign ran in four suburbs in Auckland and included billboards and posters at construction sites, and advertisements online, on radio, and in trade publications. The reaction was fast, with tax agents reporting a large number of calls from people looking to add cash jobs to the information they had submitted to us. A post-campaign survey with tradies showed strong unprompted awareness (42% aware of the campaign) and 65% awareness after prompting. Of these tradies, 33% discussed the topic with others and the main messages recalled were, Declare it all (32%) and Inland Revenue will catch those doing cash jobs (25%). We also saw good public interest after the media picked up on our activities. 18 ANNUAL REPORT 2015

21 02 Clarifying tax law in cases where there are different interpretations When interpretation of the law is not clear we provide certainty by providing binding rulings on specific transactions, public rulings and statements and disputes reviews. However in some cases we may need to clarify tax law by taking cases to court. The court will decide on the correct interpretation and create a precedent. In June 2015, our appeal to the Court of Appeal against Trustpower was successful. Trustpower had claimed tax deductions on the costs of getting resource consents for new power generation projects, arguing that these costs were revenue expenses. We believed these were capital costs and therefore not deductible. In 2013 the High Court agreed with Trustpower and we appealed this judgment. The Court of Appeal found that Trustpower s spending on resource consents was capital expenditure and that Trustpower was not entitled to the deductions it had claimed. Trustpower have been granted leave to appeal. Clarifying this question will help us and our customers have certainty over how these expenses should be dealt with. Litigation against non-compliance Over a decade of litigation came closer to conclusion in April 2015 when the High Court struck out the remaining 77 Trinity tax challenges. This case, a significant tax avoidance scheme, has been subject to a large number of court proceedings since the Supreme Court found in Inland Revenue s favour in the 2008 Ben Nevis case. Prosecutions We completed 67 prosecutions for tax evasion or knowledge offences. This compares with 74 last year. The decrease was related to the timing of cases before the courts. At 30 June 2015, 79 such cases were pending. There were 89 cases pending at the same time last year. Tax law is complicated. We need to interpret and apply the law correctly and give our customers certainty on areas of tax law. So we have teams of legal experts spread across Inland Revenue whose research and consultation provide us and our customers with reliable technical advice. We provide public rulings, interpretation statements and interpretation guidelines, which clarify difficult areas of tax law, give our customers certainty and help them comply. We also research and analyse technical tax issues that come from private or product ruling applications. ANNUAL REPORT

22 Managing debt We want people to pay on time to prevent them getting into debt. Our debt strategy sets out our long-term goals for debt, which are: minimise what becomes debt maximise what is collected deal appropriately with what cannot be collected. At the end of our total debt 2 was almost $6.1 billion, a decrease of 2.5% ($154 million) from the previous year. Total tax debt was almost $5.2 billion, a decrease of 5.8% ($318 million) since the same time last year and has returned to the same level it was in Size of overdue debt excluding child support (billion) as at 30 June This is the first time in five years that we have been able to reduce the total amount of overdue debt. The total number of overdue debt cases has also decreased by 16% (67,000). Tax debt $4.826 $5.110 $5.404 $5.342 $5.471 $5.153 Student loan debt $0.325 $0.412 $0.512 $0.636 $0.769 $0.933 Total debt $5.151 $5.522 $5.916 $5.978 $6.240 $6.086 Penalties and interest included $2.150 $2.359 $2.711 $2.863 $2.999 $2.937 Minimising what becomes debt We contact customers by text, and letters to remind them that they need to pay before the key payment dates. We do this to help customers file and pay on time. This stops them from going into debt and being charged penalties and interest that can rapidly get out of control. We have taken action quickly when customers go into debt and have used specific government funding received to target newer debt. Maximise what is collected We collected $4.7 billion cash from debt cases over the year. This is compared to $4.1 billion the previous year, an increase of 14.3%. We quickly followed up those who did not pay on time. This cleared debts sooner, leading to 81.7% of new debt cases being closed within six months of opening. Our work on high-value and older cases is also generating significant cash payments. We specifically focused on cases over five years old, large dollar-value cases that were over $1 million and audit-assessed debt. In the year we collected $536 million from these cases, which was a 37.1% increase on the cash collected from similar cases last year. At the end of , the total value of penalties and interest charged on the overdue debt was $2.9 billion, a reduction of 2.1% compared to last year. 2 All debt figures up to the child support section on page 21, exclude child support debt 20 ANNUAL REPORT 2015

23 02 Deal appropriately with what cannot be collected New Zealanders expect us to take action against those that do not pay their fair share of tax. In the most severe cases we will take legal action against people who refuse to pay their debt. It is rare, but we can ask for people to be arrested if they refuse to pay. Where necessary we have made decisions over the year to write off debt that would cost more to collect than the cost of the debt. Child support debt Size of overdue child support debt (billion) as at 30 June Debt value $1.990 $2.335 $2.452 $2.781 $3.047 $3.276 Penalties included $1.430 $1.743 $1.818 $2.109 $2.372 $2.605 Child support debt is $3.3 billion, 79% ($2.6 billion) of which is penalties. Of the total child support debt, around $827 million is owed by liable parents living in Australia, and is mostly in the form of penalties. In accordance with our agreement with the Australian Department of Human Services they collected $50.2 million from these parents on our behalf. A further $778 million is owed by those living in other parts of the world. The remaining $1,671 million debt is owed by liable parents living in New Zealand. For child support, over the last year there were 56 cases where the lack of action by the liable parent justified Inland Revenue to seek an arrest warrant. We have only been required to execute one arrest warrant. All other cases were able to be resolved by simply having the possibility of a warrant being executed. The total debt relating to the 56 cases amounted to $11.7 million. Budget 2014 provided us with additional funding to help improve child support compliance. We are beginning to see positive outcomes from our activities in this area, including more debt cases being closed within 12 months of opening and a reduction in the total number of debtors at the end of the year. Early work has included an education campaign to new child support customers on their obligations, particularly taking into account the child support reform changes, ensuring they understand their obligations to help them get it right from the start. This initiative aims to progressively increase the amount of debt repaid over a five-year period with early work resulting in an extra $1.5 million recovered from liable parents. ANNUAL REPORT

24 Student loan debt Size of student loan debt (billion) as at 30 June $0.325 $0.412 $0.512 $0.636 $0.769 $0.933 We jointly administer student loans with the Ministry of Education and Ministry of Social Development (MSD), through StudyLink. As at 30 June 2015, we had 108,300 borrowers with an overdue repayment, a reduction of 1.3% compared to 30 June Of these, 75% were overseas-based borrowers. The total overdue amount was $933 million, of which 90.5% was owed by overseas-based borrowers. Overseas-based borrowers continued to be our focus for the year since they make up such a large percentage of student loan debt. In November 2010 we began a specific programme of work targeting overseas-based borrowers who were not meeting their obligations. Cash collected in was $78.6 million, an increase of 47% on the previous year. Since this programme began, we have collected an extra $200 million from overseas-based borrowers. This year we introduced a direct debit option in Australia to continue providing overseasbased borrowers easy payment channels to help encourage them to pay their debt. We received $39 million of payments through these fee-free payment channels. Our approach to reminding people about payment dates is also used for student loans. In March we sent 53,000 reminders to overseas-based student loan borrowers to remind them of their payment obligation on 31 March. We had 7,000 responses to the and we sent reminder s to people we had not heard from or who did not pay their loan obligation. We had around 5,300 phone calls from overseas-based student loan borrowers in March almost twice as many as March last year. In June, our innovative approach to encourage overseas-based borrowers to get in touch with us and to pay their student loans was recognised. We won five gold medals at the Communications Agencies Association New Zealand Beacon Awards. Gold: Best Use of Insight Gold: Best Communication Strategy Gold: Most Effective Gold: Best Use of Digital Gold: Social Marketing/Public Service. For the campaign which we called Finding the unfindable we made a change to our assumptions on how to find overseas-based borrowers. We previously targeted borrowers based on the locations of overseas borrowers that we knew about. The new approach: advertised to a fairly broad profile through Facebook and LinkedIn continually refined the profile to find more similar people as people responded to those adverts used that profile to target media and advertising beyond Facebook and LinkedIn. 22 ANNUAL REPORT 2015

25 03 Contributing to the Government s priorities ANNUAL REPORT

26 We have a responsibility as a government agency to contribute to the Government s priorities. These are to: responsibly manage the Government s finances build a more competitive and productive economy deliver Better Public Services within tight fiscal constraints rebuild Canterbury. We participate in a range of all-ofgovernment activities, collaborate with other agencies to reduce costs, improve efficiency and effectiveness. Along with the Government s priorities, we also continued to work on the Government s tax policy work programme which was updated and released by the Minister of Revenue on 13 March This programme focused on three main areas: Business Transformation and Better Public Services International tax reform and contributing to international efforts to counter base erosion and profit shifting (BEPS) Continuing improvement and enhancements to tax and social policy settings to keep the tax system well maintained. Responsibly manage the Government s finances Inland Revenue collected $59.7 billion tax revenue and transferred $4.8 billion of KiwiSaver contributions to providers. Total payments for the year ended 30 June 2015 for social policy entitlements were $3.4 billion. Social policy entitlements include Working for Families Tax Credits, KiwiSaver, Paid Parental Leave Payments and Payroll Subsidy. We also managed a departmental budget of $727 million. Full finance details are covered in parts eight and nine. 24 ANNUAL REPORT 2015

27 03 Build a more competitive and productive economy Inland Revenue contributed to building a more productive economy through legislation changes. These changes are designed to ensure New Zealand is an attractive place to do business. We also want to strengthen tax rules to ensure overseas companies pay their fair share of tax in New Zealand. The Government s tax policy work programme focuses on improving tax and social policy settings and participating in the global response to the problem of tax base erosion and profit shifting. Our work to enhance tax and social policy settings An important part of our approach to the development and review of tax policy is public consultation. This provides transparency of our policy-making process and allows us to listen and respond to New Zealanders, tax professionals and associations. During the year we asked for public feedback on: an officials issues paper, Related parties debt remission, released on 24 February This asked for feedback on proposed changes to make the tax rules on this more certain and fairer. a discussion document, Simplifying the tax collection for employee share schemes released in April Public feedback helped shape proposals introduced in the Taxation (Transformation: First Phase Simplification and Other Measures) Bill in June 2015, which will allow employers to choose to withhold tax on an employee s behalf as part of their PAYE return. detailed design proposals for the new bright-line test announced in Budget 2015 released on 29 June The proposal clarifies whether or not gains on the sale of residential property bought and sold within two years are taxable. Feedback helped shape legislation planned for introduction in September Legislation To improve the economic environment for businesses and New Zealanders we provided policy analysis and options to the Government to change legislation. We focused on three main bills during the year. The Taxation (Annual Rates for , Research and Development, and Remedial Matters) Bill introduced on 26 February 2015 contains proposals to reflect the Government s Business Growth Agenda emphasising the importance of innovation to help grow New Zealand s economy. The bill removes some distortions relating to Research and Development to encourage businesses to invest in these activities. It also clarified the GST rules for bodies corporate. The KiwiSaver HomeStart Bill enacted on 31 March 2015 implemented part of the Government s support package for first home buyers, allowing eligible KiwiSaver members to access more of their KiwiSaver funds to purchase their first home. It also clarified and corrected the tax rules for payments made under the Veterans Support Act New rules to strengthen the property tax rules were introduced in the Taxation (Land Information and Offshore Persons Information) Bill on 22 June The proposed rules will require domestic and overseas buyers and sellers of property to provide their IRD number at the time of the property transfer and the equivalent tax identification number for people resident in another country. ANNUAL REPORT

28 Overseas residents will have to provide a New Zealand bank account number to obtain an IRD number for properties bought on or after 1 October The IRD number requirement will not apply to New Zealand individuals buying or selling their main home, unless they are selling their third main home in a two-year period. International tax reforms and base erosion and profit shifting As outlined in our Statement of Intent we are participating in the Organisation for Economic Co-operation and Development (OECD) led response to the global problem of base erosion and profit shifting, where multinational organisations take advantage of the interaction between the tax rules of different countries to pay little or no tax. We continue to work on projects to strengthen domestic rules on international tax. We continued to work with the OECD and the G20 forum of countries on implementing an Automatic Exchange of Financial Account Information, a global automatic exchange of information to counter tax evasion. Over the year we worked on the taxation of cross-border purchasing of services and intangibles, low-value goods and digital downloads. This work aligns with the OECD s draft guidelines to develop rules to tax consumption fairly. On 1 January 2015 the Convention on Mutual Administrative Assistance in Tax Matters came into effect for New Zealand. This lets us seek assistance from other tax authorities to discover evasion and pursue tax debt overseas. An issues paper, NRWT: Related party and branch lending, which explores options to clarify the non-resident withholding rules to help ensure that non-resident investors pay an appropriate amount of tax, was released in May Our tax treaty negotiations with other jurisdictions continued, with China completed in July 2014, Korea in April 2015 and Norway in June A new tax treaty between New Zealand and Canada came into force in June 2015, replacing the 1980 treaty with a more modern agreement. Foreign Account Tax Compliance Act As outlined in our Statement of Intent , we need to implement legislative change to help New Zealand s financial institutions to meet Foreign Account Tax Compliance Act (FATCA) obligations. This legislation requires New Zealand financial institutions to give United States authorities details of accounts held by American citizens, tax residents and others. In July 2014, New Zealand was granted more favourable terms from the United States Government as part of the FATCA intergovernmental agreement signed between New Zealand and the United States. Implementing Inland Revenue s obligations set out in the agreement is on track. We started collecting information from New Zealand financial institutions from April We will start forwarding the information to the United States Government s Internal Revenue Service in We are making good progress in working with significant enterprises and multinational companies operating in New Zealand and across different countries to identify and address potential risk before noncompliance occurs. Our work with these taxpayers can result in advance pricing agreements (APAs) which represent a more co-operative approach to addressing transfer pricing compliance. We completed 15 APAs this year. This is the best mechanism to achieve certainty for multinationals in their international associated-party dealings as they involve complex issues such as restructuring arrangements and intellectual property transfers. 26 ANNUAL REPORT 2015

29 03 Deliver Better Public Services within tight fiscal constraints We play an important role in improving services for New Zealanders and continue to play a key role in: the Better Public Services programme the delivery of the Government s ICT Strategy all-of-government services other cross-agency initiatives. Our Business Transformation programme, outlined in part four, contributes to the Government s goal of making it easier for customers to interact with government and delivering a significant reduction in the effort of dealing with government. We are working closely with other government agencies to deliver the innovative and effective public services that government and our customers expect. We are working to link more of our customer services with those of other government agencies to provide a seamless service. More cross-agency information sharing will be balanced against the need to protect customer privacy and the integrity of the tax system. In line with Government s ICT Strategy, we are also using all-of-government services where they are available and where they fit with our Business Transformation programme. Working with the Ministry of Business, Innovation and Employment (MBIE) and other participating agencies, we have helped to develop the Result 9 roadmap and worked on key initiatives such as the New Zealand Business Number (NZBN). We have also delivered products and services that support Result 9 s intent of improving interaction with government for businesses including egst, more digital delivery, a myir application, online business videos and simplified Tools for business web pages. We have continued to focus on the digitisation of key processes for individuals and businesses to make it easier to interact with government. We contribute to the Result 10 target of an average of 70% of New Zealanders most common transactions with government will be completed in a digital environment with over 88% of individuals filing their tax returns electronically and just over 81% paying individual tax electronically. The Department of Internal Affairs (DIA) digitised the process for applying for an IRD number as part of the birth registration process and this will also contribute to this target. We are working with the Ministry of Social Development (MSD) to understand if it is possible and practical to share one voice biometric service for customers interacting with multiple agencies. Initial results saw 84% of customers saying they thought sharing one voice identification service across several government agencies would be useful, while 51% of customers surveyed gave consent to their voiceprint and information being shared with MSD. We have now completed our first year of running a shared financial management information system with DIA. As part of this service we have successfully provided accounts receivable, accounts payable and bank reconciliations for both organisations. We have refined the system during the year and are working with DIA on enhancing the system and processes in the future. We continue to work with the Property Management Centre of Expertise (PMCoE) and to join with other agencies to lease accommodation, where it makes sense to do so. 3 The Better Public Services result areas we contribute to are: Result 7: Reduce total crime rate Result 9: New Zealand businesses have a one-stop online shop for all government advice and support they need to run and grow their business Result 10: New Zealanders can complete their transactions with government easily in a digital environment. 3 Hosted by MSD, PMCoE leads and assists agencies in meeting the goals set by Government for the efficient and effective management of the property owned or leased by 61 government agencies. ANNUAL REPORT

30 Information sharing The Government has increasingly recognised that information is an asset which, under certain circumstances, should be shared across government to support collective outcomes for New Zealand. We continue to work with other government agencies to enable more effective information sharing between government agencies and with third parties by helping to simplify the management and control of agency data. New Zealanders expect us to responsibly manage their details and only share information between agencies when it is appropriate. We have Approved Information Sharing Agreements (AISA) in place with DIA and New Zealand Police. Reports of sharing that we have done under these agreements can be found on pages 154 to 156. Full details of the agreements are on our website We contribute to Result 7 through an AISA with New Zealand Police. This allows Inland Revenue to share certain personal information with the New Zealand Police for the purpose of prevention, detection, investigation or providing evidence of serious crime. We also participate in the Whole-of-Government Gangs Action Plan, a multi-agency approach to reducing the harm caused by gangs, involving intelligence gathering and a range of prevention and enforcement activities. Over , we have continued to enable more effective information sharing between government agencies. This has included: working on the development of possible future information sharing initiatives with MSD and the Accident Compensation Corporation (ACC) working with MBIE and Worksafe to share information for the enforcement of employment standards as a result of changes to workplace legislation participating in cross-agency forums such as the privacy reform group, data futures forums, Government Chief Information Officer information management groups, and Government Chief Privacy Officer leadership forums and working groups. Our sharing arrangements are supported by our new Information Management Strategy. The strategy enables effective administration of information and helps us to build and manage our intellectual property. This will improve information management capability through collective ownership of information management and simplified guidelines supported by fit for purpose IT capability. Government Information and Communication Technology Strategy Inland Revenue s Information and Communication Technology (ICT) strategy and roadmaps reflect the Government ICT Strategy s focus on using information and technology to deliver better services to New Zealanders. By 2017, the aim is to enable individuals and businesses to connect with government services through digital channels, joined-up services and technology that will function across agencies. We already use a number of all-ofgovernment services. One example is Storage as a Service provided through Datacom New Zealand. This approach means that we no longer have to physically manage storage ourselves. By using the all-of-government data storage service we have access to more capacity, flexibility and improved performance at less cost. Businesses are already noticing the differences we are making. The latest results of the business reference group survey looking at effort of dealing with government and how government agencies compare with the private sector show overall a 16% reduction in effort with dealing with government. For businesses whose most recent interaction with government was with Inland Revenue, the survey showed there was a 23% reduction in effort. The key reasons businesses listed for the improvement were: ease of filing returns led by the implementation of online GST filing and increased uptake of other online services ease of contacting Inland Revenue, with businesses finding it easy to get through to services and dealing with helpful Inland Revenue staff. 28 ANNUAL REPORT 2015

31 03 Contributing to other all-of-government services We are involved in other all-of-government activities. We will continue to work with other agencies to identify where we could adopt new and improved processes and services used elsewhere in the public sector. Procurement We are participating in the Government s new streamlined procurement rules, which have changed the way government does business with suppliers by making agencies procurement practices more consistent and business-friendly. The new rules promote a value for money approach to procurement, which means that rather than just getting the lowest price, we consider total cost of ownership and other benefits. We have a long-term strategy to buy not build for our Business Transformation programme. To make it easier for small businesses to engage with Inland Revenue, we developed the Business Transformation Approved Panel in October 2014, which covers a number of the professional services our Business Transformation programme is likely to need on a recurring basis. This panel is open and allows suppliers to register their interest at any time. Inland Revenue is committed to using collaborative procurement opportunities such as all-of-government, collaborative and syndicated procurement contracts. We have signed up to a number of these in the past 12 months and are leading the syndicated waste management contract. All-of-government banking services The state sector s banking contract with Westpac has been in place for more than 20 years. During this time the banking requirements of government have changed considerably. We are working with Treasury and MBIE who are leading an all-of-government solution to meet the Government s current and future banking needs. This solution will provide access to economies of scale, better value for money, process efficiencies and better interaction for financial payments between government, business and taxpayers. ANNUAL REPORT

32 Rebuild Canterbury Providing joined-up government services in Christchurch We continued to work with the Canterbury Earthquake Recovery Authority (CERA) and other agencies in various forums to support the overall reconstruction effort. This included planning for the Public Sector Precinct and exploring opportunities to co-locate 1,600 public servants from 17 agencies in four new CBD locations from late We continue to operate and learn from co-location in the New Zealand Government site in Durham Street and work with other agencies to investigate opportunities for cross-government collaboration. Supporting our people in Canterbury We provided additional support and wellbeing initiatives for our own Christchurch workforce and other government agencies supporting the Government sector in Christchurch. This included chairing the Public Sector Organisational Resilience Team and contributing to the Greater Christchurch Psychosocial Recovery Committee and work programme. Improving compliance in Canterbury We have focused on mitigating and addressing the compliance risks from the $40 billion rebuild. This included working alongside funding distributors, including all major insurance companies and government, to gain assurance in the integrity of their systems and identify any areas of risk. We have continued our compliance focus on identified high-risk sectors, including construction, hospitality and property. We have also provided support to the wider community with educational activities to help customers get it right from the start. Inland Revenue research has confirmed on-time GST filing and payments have improved in Canterbury since the low point in the 2011 tax year when the earthquakes occurred. While the proportion of Canterbury small and medium enterprises (SME) in debt spiked at the time of the earthquakes, it has improved since then, with Canterbury SMEs making up a smaller proportion of SMEs in debt nationally than they did in Understanding the impact of adverse events and the characteristics of the rebuild workforce Inland Revenue has sponsored research projects to understand the impact of the earthquakes on SMEs in Canterbury and the characteristics of the Christchurch rebuild workforce. The research has provided insight into SME compliance, debt and employment and the compliance issues associated with the rebuild workforce. The effect of the rebuild on SME GST in different industries and sectors has also been evaluated. These insights are now informing our initiatives in Canterbury. 30 ANNUAL REPORT 2015

33 04 Business Transformation ANNUAL REPORT

34 Business Transformation is a multi-year, multi-stage change programme that will help us become the modern world-class revenue organisation that is set out in our vision IR for the future. Over the year we got closer to realising this vision. Business Transformation We are currently managing a range of tax and social policy products on an ageing system and business model. Over the years our role has expanded from solely collecting tax in a paper world, to today where we manage the collection and payments of tax and a range of other services like student loans, child support and KiwiSaver. Adding these social policy products and services to 30 year old technology has resulted in complexity. Our tax administration needs to catch up and be fit for 21st century needs. Technology is rapidly advancing, our customers lives are busier than ever and businesses want to spend less time on compliance. New Zealand is becoming more diverse and customers want and expect us to interact with them in a digital world. Modernising our systems and processes will also enable the Government to implement policy more quickly. The Business Transformation programme consistently met its milestones and spent less than its budget throughout the year. How we are changing Our Business Transformation programme is being delivered in four customerfocused stages over eight to 10 years. High-level design of the four stages has been completed and the detailed design of stage one has begun. We anticipate that the detailed business case will be completed and submitted to the Government for approval by March Once approved, implementation of stage one will begin. We have delivered some visible, early improvements to our digital services, including improving myir and making improvements to our website. This year we focused on designing the foundations for our future revenue system. The design phase began in January 2015, and covers high-level design for stages one to four of the programme, and detailed design for Stage 1: Enabling secure digital services. The design and digital services business case outlining the approach to design and the funding, was approved by Cabinet on 17 November We have a regular programme of independent quality assurance reviews to continually check that what we are doing is the best way to do it. Over the year we had a Deloitte review and the Gateway Review in September 2014, KPMG Independent Quality Assurance and Technical Quality Assurance completed in December 2014 and a review from the Office of the Auditor General in April All were positive and support the way we are transforming and the quality of our processes. Results of the reviews are available on transformation. Cabinet approval and legislative changes Changes proposed in the Taxation (Transformation: First Phase Simplification and Other Measures) Bill introduced on 30 June 2015 pave the way for modernising and simplifying the tax administration system by removing some current legislative obstacles. They include: proposals to allow earlier tax refunds on personal tax summaries that meet the automatic refund threshold reforming the way we are able to communicate with our customers by providing modern rules to support electronic communication in the same way as paper communications measures to allow us to share certain information with other agencies when it makes customers lives easier. Choosing design and core software partners We spent most of the year completing very careful procurement processes to select partners to help us design the next stage of Business Transformation and a software provider to supply the technological core of our future system. We chose Accenture and two local providers to help us with design. External quality assurance checks found the 32 ANNUAL REPORT 2015

35 04 The programme has been set up to succeed, and is suitably prepared to begin the design phase, while being aware of the considerable challenge of sustaining the good progress thus far. KPMG Independent Quality Assurance and Technical Quality Assurance review, December 2014 procurement process that we used was sound and fair. Accenture joined Inland Revenue in January 2015 and have been helping us with the high-level design of the four stages of the Business Transformation programme. We have developed blueprints outlining our future system. In June 2015 we announced Fast Enterprises (FAST) as our preferred Commercial Offthe-Shelf (COTS) software vendor. COTS software will form the technological core of our future system. FAST started working with us on the detailed design in August To help us prepare for the changes, we have engaged a range of local providers including Optimation, ThinkPlace, Assurity Consulting and Tenzing along with Accenture and FAST. Stakeholder engagement A large part of what we are doing is engaging with stakeholders and seeking their input on designing New Zealand s future tax system. Discussions continued during the year with GST and payroll software developers on options for how they can better interact with our core systems and reduce compliance costs for businesses. We also met and presented to a wide range of groups including: financial services and accounting industry bodies software developers industry groups including Federated Farmers and Business New Zealand social service groups such as Age Concern and Citizens Advice Bureau. We have set up three key reference groups to help us. The Taxpayers Simplification Panel was created to give New Zealanders a voice in simplifying, modernising and transforming the way we pay tax. The Transformation Reference Group provides us insights and perspectives from businesses, individuals and the tax community to inform our Business Transformation programme. Members have extensive experience across a broad range of sectors and represent diverse communities. Our ICT Reference Group provides an independent voice and sounding board on our Business Transformation programme. It is an opportunity for ICT professionals to contribute individual perspectives and experience on the impact of our Business Transformation programme on business and the community. Public consultation Improving the customer experience and making it easier and simpler for our customers will require significant policyrelated work over the life of the Business Transformation programme. We ran two significant public consultations asking New Zealanders for their feedback on our Business Transformation and explored options designed to modernise and simplify the tax system. The Minister of Revenue launched both on 31 March Making Tax Simpler A Government Green paper on Tax Administration set out the policy direction for modernising and simplifying the tax administration. This consultation ran until 29 May Making Tax Simpler A Government discussion document on Better Digital Services asked for feedback on approaches to encourage customers to move to better digital services and any barriers that currently prevent them from doing so. This consultation closed on 5 May More than 900 online comments and over 90 written submissions were received on the proposals. This was a significantly higher number of responses than we expected. Detailed feedback on these consultations will be published on our website when it is collated. ANNUAL REPORT

36 Cabinet confirmed a programme roadmap to deliver Business Transformation in a number of steps, enabling the Government to make investment choices throughout the life of the programme: STAGE 1 Enabling secure digital services to enable the majority of customers to self-manage and reduce businesses compliance burden in fulfilling their PAYE obligations. STAGE 2 Streamline income and business tax processes this will leverage the foundations delivered in the previous stage and further reduce businesses compliance burden to fulfil their tax obligations. STAGE 3 Streamline social policy delivery this will improve the delivery of the social policies that Inland Revenue administers. STAGE 4 Complete delivery of the future revenue system this will include transitioning any remaining tax and social policies to a new platform and decommissioning technical platforms that are no longer required. 34 ANNUAL REPORT 2015

37 05 Organisational health ANNUAL REPORT

38 It is important that we effectively manage our people, our assets and the risks to our business so that we can achieve our strategic intentions. Organisational health Governance To ensure our governance system continues to meet the needs of our transforming organisation, we introduced changes to our governance system in May The governance system will ensure robust and timely governance of our strategy, investment and performance activities, focusing on transformation, but also ensuring we are meeting the needs of today. Membership across the system is a mix of our Inland Revenue Executive Leadership Team, senior leaders and external members where appropriate. Preparing our people for change Changing and streamlining the way we deliver our services, mainly through greater use of digital and online services, will have an impact on our people. As we move towards greater application of technology and streamlined processes, we will make changes to our workforce. To prepare for this, we are designing frameworks and systems to help reshape our organisational capability. We have updated our workforce strategy to help us identify what we need to do to deliver our strategic intentions. This has supported work on our organisation s culture and our leadership strategy. Change leadership and capability Effective change leadership is essential to lead our people through Business Transformation. We need leaders to be more agile, adaptable and open to new ways of working. 36 ANNUAL REPORT 2015 We have revised our leadership framework and are currently redesigning our leadership programmes to reflect this. Our people leadership strategy includes: embedding this leadership framework renewing our development programmes for leaders encouraging leadership collaboration further developing our leadership skill set. This work aligns with the State Services leadership strategy and Leadership Success Profile (LSP). Our leadership framework identifies those things from the LSP which are important for us to focus on at this time and describes some of the fundamental shifts we are looking for in our leaders as we progress through our transformation journey. In line with the introduction of talent management across the state sector, Inland Revenue has implemented a talent management approach for senior leaders, to be extended to other leadership levels in the future. Culture Inland Revenue wants productive and engaged employees, and a work environment that features strong leadership, innovation, clear accountability and sound risk management. In June 2015, we completed a baseline culture survey of a sample of 600 employees. This survey was designed to give us some benchmark measures around our culture and will help us understand the shifts we need to make in order to get us to our desired future culture. Health and Safety A range of activities have started to ensure Inland Revenue is compliant and has strategies in place that will effectively transition the organisation to the new Health and Safety legislation, which comes into effect 4 April We are currently working to bring our health and safety-related policies, processes and systems into line with the requirements of the new legislation. Our activities include exploring a health and safety governance reporting structure that will provide our governance group with regular information on health and safety risks and mitigation and ensuring people including managers and health and safety committees receive education and increased visibility of the legislation.

39 05 OUR PEOPLE PROFILE AS AT JUNE 2014 OUR PEOPLE PROFILE AS AT JUNE 2015 HEADCOUNT 5788 AVERAGE AGE 42.9 years FTE FULL TIME 91% PART TIME 9% PERMANENT 98% FIXED TERM 2% HEADCOUNT 5820 AVERAGE AGE 43.0 years FTE FULL TIME 91% PART TIME 9% PERMANENT 98% FIXED TERM 2% FEMALE STAFF OVERALL 64% PEOPLE LEADERS 54% MANAGERS 46% MALE STAFF OVERALL 36% PEOPLE LEADERS 46% MANAGERS 54% FEMALE STAFF OVERALL 64% PEOPLE LEADERS 55% MANAGERS 46% MALE STAFF OVERALL 36% PEOPLE LEADERS 45% MANAGERS 54%!! NEW HIRES 743 EXITS 663 UNPLANNED TURNOVER* ANNUALISED 8.6% NEW HIRES 737 EXITS 675 UNPLANNED TURNOVER* ANNUALISED 10% TOTAL TURNOVER* ANNUALISED 10% AVERAGE LENGTH OF SERVICE* 11.1 years TOTAL TURNOVER* ANNUALISED 10.6% AVERAGE LENGTH OF SERVICE* 11.3years *Permanent staff only ANNUAL REPORT

40 A new multi-union collective agreement Three unions represent our employees: Public Service Association (PSA) Taxpro National Union of Public Employees (NUPE). All union agreements ran out this year PSA and Taxpro in February 2015 and NUPE in May A new multi-union collective agreement was ratified by PSA and Taxpro members in June 2015, effective from July We have been bargaining with NUPE and reached an agreement in July Non-union members who are in positions covered by the collective agreements were offered a change to their terms and conditions. SSC Integrity and Conduct Survey The most recent State Services Commission (SSC) Integrity and Conduct Survey confirmed that we are performing extremely well, and in some important areas exceptionally well, compared with other survey participants, particularly around integrity, leadership, our processes and the working environment. The Commissioner established a working group with representatives from Inland Revenue, the PSA and Taxpro to look at areas from the survey which required some focus: bullying in the workplace change management visible leadership clarity around promotions and appointments. The primary focus of recommendations made by the working group related to the way Inland Revenue manages bullying in the workplace. The majority of changes will occur as a result of work currently underway to update our Human Resources policies and guidance. Diversity at Inland Revenue Our diversity and inclusion policy reflects our commitment to attracting and retaining a diverse range of people who bring different perspectives, experiences and skills. The insight gained in understanding the facets of diversity gives us a better appreciation of the challenges that some of our customers have when interacting with us. The diversity of thought and culture also make Inland Revenue a vibrant place to work. New Zealand s population is changing, with increasing migration and an ageing population. As we understand these population changes, we will respond by developing the capabilities, skills and organisational culture required to meet customer needs. Our staff diversity networks, including women, Māori and Pacific networks, continue to support their members and wider community interests through regular meetings, mentoring and training opportunities. They promote cultural events across Inland Revenue such as Māori Language Week and various Pacific language weeks. The positive benefit of diversity in practice also spreads to our customers even in simple things like learning to pronounce customers names correctly. Tiriti o Waitangi / Responsiveness to Māori Inland Revenue s customer charter sets out our commitment to work in ways consistent with the spirit of the Treaty of Waitangi and that we acknowledge people s individual, specific and cultural needs. During the year, we formalised a new relationship agreement between the Public Service Association s Inland Revenue s Māori Rūnanga and our Responsiveness to Māori team. This agreement established a new working Celebrating diversity An environmental scan last year showed that the workforce at the Penrose Contact Centre is representative of the Auckland population. It found 29% of people identified as New Zealand European, 28% Indian, 24% Pacific Islander, 8% Māori and others were European, Chinese, Korean and from the Philippines. Representatives of the different cultures meet regularly to come up with ideas for events to create a fun environment and embrace the diversity of the teams. 38 ANNUAL REPORT 2015

41 05 group called Te Manu Taupua, which has a focus on areas of common interest and concern for our Māori staff. Security incidents We are committed to keeping our people safe. We monitor and record security incidents and continually assess our workplaces to ensure that we minimise risks and concerns so that our staff feel safe. We review any process after any incident and will change a process if a threat profile is changed. For example, in early April we received a security threat. The threat was via a phone call and involved our Tauranga and Wellington offices. We informed staff of the threat and we worked quickly to ensure security was provided to mitigate the risk and provide a safer environment for our staff. Inland Revenue reviewed the recommendations that came out of the independent review of MSD s physical safety environment following the tragic shooting of three of their staff members in Ashburton in September Given the findings of this review, we believe we have a sound security operating model and effective security policies and practices in place. Business Continuity Plan We have continued to review, refine and exercise our Business Continuity Plans and Crisis Management arrangements to ensure that critical processes can continue to function during and after business disruptions. The benefit of this preparation was demonstrated in an effective organisational response to a fire at our Auckland contact centre. Full telephone services were restored within 48 hours. Risk management Risk management is an important part of Inland Revenue s governance and internal control environment. We ensure Inland Revenue s approach to risk management reflects good practice and supports risk based decision making across all levels of the organisation. We are continuing to improve our practices to provide greater clarity to our decisionmaking processes. We have a mature Enterprise Risk Management Framework that is used to identify and manage risk as we: deliver our core business implement projects and programmes consider risks to achievement of our strategic objectives. We use the concept of risk champions embedded within business groups to further improve our risk management maturity. We continue to use a Three Lines of Assurance model to enhance clarity regarding risks and controls and help improve the effectiveness of the internal control environment. Our Internal Audit plan and use of third party assurance providers ensures that there is an appropriate level of independent assurance. Our Risk and Assurance Committee meets formally on a quarterly basis. All members are independent. Privacy We are committed to ensuring our customers privacy is protected. Any personal information customers do provide to us will be kept for as long as necessary to achieve the purpose we collected it for. If personal information becomes part of Inland Revenue records, we will retain the information in accordance with Inland Revenue policy on retention of Inland Revenue records. Full details of privacy breaches are outlined on page 156. ANNUAL REPORT

42 ENTERPRISE RISK We fail to balance all-ofgovernment strategies effectively with the delivery of our core business leading to sub-optimal outcomes We are unable to source sufficient government funding to deliver our Business Transformation programme Natural hazards such as earthquakes disrupt delivery of critical services We don t have enough experienced and qualified people to deliver the Business Transformation programme and other programmes The expanding availability of our information in digital form to others reduces our ability to control that information Individuals and organisations represent themselves as Inland Revenue, affecting the integrity of the tax system Outdated technology and unsupported software result in systems failures that affect delivery of critical services OUR MITIGATIONS INCLUDE THE FOLLOWING ACTIONS: We will align our long-term planning with the Government s Better Public Services goals. We will participate in all-of-government steering groups to understand and anticipate impending public sector changes. Our four-year and 10-year plans will make a compelling case for the investment we need to implement changes. We will present rigorous, well-considered business cases for government funding that set out the costs and benefits of proposed spending. Our Investment Board will provide strong governance oversight of our Business Transformation programme investments. We will identify and assess potential business impacts and regularly review our response plans, which include business impact assessments, business continuity plans, disaster recovery plans and business continuity emergency management procedures. We will develop and implement strategies to promote workforce capability, employment relations, leadership and workplace culture. We will ensure our security policies, procedures and standards are strong and enforced. We will develop and monitor information-sharing protocols. We will align our protocols with government security and privacy standards. We will continue to review staff training and awareness. We will continue to assess our security processes and performance. We will keep our security incident database up to date. We will monitor social media and internet sites for signs of security breaches. We will respond rapidly to reports of misrepresentation. We will develop communications strategies to alert the public to scams. We will continue to invest in stabilising our IT systems. We will invest in the upgrade of some key systems and applications. We will increasingly buy technology services, rather than buy technology for in-house operation. 40 ANNUAL REPORT 2015

43 05 ENTERPRISE RISK Ineffective or incomplete delivery of the Business Transformation programme reduces our ability to meet government revenue forecasts Ineffective or incomplete delivery of the Business Transformation programme reduces our ability to implement government policy Confidence among customers and stakeholders in our ability to protect their data as a result of information-sharing with government agencies results in a drop in voluntary compliance A downturn in the world s economy affects New Zealand s ability to fund and deliver government priorities The changing customer profile affects voluntary compliance We lose the trust and confidence of stakeholders by not recognising or understanding how their expectations change Complex international transactions affect our ability to collect revenue OUR MITIGATIONS INCLUDE THE FOLLOWING ACTIONS: We will continue to work towards reaching our target operating model. Our governance boards will monitor progress of the Business Transformation programme. Our management will coordinate and report on progress of the Business Transformation programme. We will continue to work towards reaching our target operating model. Our governance boards will monitor progress of the Business Transformation programme. Our management will coordinate and report on progress of the Business Transformation programme. We will ensure our security policies, procedures and standards are strong. We will develop and monitor information-sharing protocols. We will align our protocols with government security and privacy standards. We will continue to review staff training and awareness. We will align our security processes with other agencies and continuously monitor performance. We will continuously identify and monitor changes in overseas economic trends through research and forecasting. We will monitor and report on the effect of changes to the customer base. We will use research and planning to develop tailored responses to customer base changes. We will continue to work closely with the Ministers offices. The Executive Leadership Team will engage closely with key stakeholders. We will monitor and respond to changes in the integrity of the tax system. We will monitor and respond to emerging trends in policy and strategy. We will take part in forums with our key stakeholders. We are members of the OECD and work with overseas tax administrations to identify changes to practices. We are joint advisors with the Treasury in developing policy and strategies to work on complex international practices. ANNUAL REPORT

44 42 ANNUAL REPORT 2015

45 06 Our performance ANNUAL REPORT

46 Our outcomes Inland Revenue contributes to the economic and social wellbeing of New Zealand by collecting and distributing money. New Zealanders pay tax to and may get money from the Government. We are accountable to the Minister of Revenue. Inland Revenue s success is reflected in two outcomes: 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. In we collected $60.6 billion of revenue to fund government programmes. We collected $59.7 billion of this from tax. Direct (or income) taxation, for example individuals income tax or corporate income tax, accounts for 73.3% of tax revenue. GST accounts for 26.1%. For full details refer to pages 126 to 127. $3.5b from $17.5m from TAX REVENUE $59.7b IND $29.4b OTHER REVENUE $887.5m INTEREST UNWIND STUDENT LOANS $604.2m GST $15.6b OTHER $86.3m CHILD SUPPORT $197.0m OTHER $3.9b CORP $10.9b We also manage or share administration of several social policy entitlements and payments. The key programmes we administer are: $4.8b KiwiSaver payments transferred to $1.1b student loan payments collected scheme providers $2.4b Working for Families Tax Credits entitlements distributed $463m child support payments collected $265m child support entitlements distributed* $180m paid parental leave entitlements distributed 44 ANNUAL REPORT 2015 *The balance is collected for the Government as an off-set for custodial families supported through the benefit system.

47 06 While we have achieved 91% of our output measure targets for , we have not been able to collect all revenue owed. Our debt book is made up of payments which are overdue, and the penalties and interest we charge against this debt. At the end of the size of our debt book, excluding debt from student loans and child support, was $5.2 billion. This is a good result, representing a 5.8% decrease from Child support debt reached $3.3 billion by the end of , a 7.5% increase from the previous year. Penalties make up 79.4% of this total. Student loan debt has also increased, totalling $933 million by the end of This is a 21.3% increase since the previous year. Overseas-based borrowers owe 90.5% of this debt. Size of our debt book excluding child support and student loan debt as at 30 June 6 5 DEBT $BILLION Total debt value including penalties and interest Penalties and interest Size of overdue child support debt as at 30 June DEBT $BILLION Total debt value including penalties Penalties Size of overdue student loan debt as at 30 June 1.0 DEBT $BILLION Total debt value including interest Overseas-based borrowers Interest ANNUAL REPORT

48 Our appropriations To achieve our outcomes, Government funds us to deliver our services under the following appropriations: Policy Advice Services to Inform the Public About Entitlements and Meeting Obligations Services to Process Obligations and Entitlements Management of Debt and Outstanding Returns Taxpayer Audit Services to Other Agencies. To deliver the services for the six appropriations effectively we need to invest in the renewal, upgrade and replacement of assets. To support the delivery of our services, we have an additional appropriation for capital expenditure. See pages 89 to 92 for a full breakdown of: departmental expenses and capital expenditure attributed to these appropriations non-departmental appropriated expenditure non-appropriated expenditure. We measure and manage our performance against 53 targets within these six appropriations. The dashboard scores indicate the number of targets we have achieved in each output class. This reflects the relative impact of each activity on the business. A full breakdown of our appropriation performance is outlined in part seven. FUNDING APPROPRIATIONS OUTPUT MEASURES Government provides us with funding to deliver our services within the scope of each appropriation. Appropriations provide a Minister with the authority from Parliament to spend public money or incur expenses or liabilities on behalf of the Crown. We measure whether or not we are achieving what we set out to achieve in each appropriation through our output measures and targets. 46 ANNUAL REPORT 2015

49 06 Performance Targets Achieved 91 % Policy Advice Achieved 1 target out of 3 33 % 2 Services to Inform the Public About Entitlements and Meeting Obligations Achieved 15 targets out of % 3 Services to Process Obligations and Entitlements Achieved 14 targets out of % 4 Management of Debt and Outstanding Returns Achieved 9 targets out of % 5 Taxpayer Audit Achieved 8 targets out of % 6 Services to Other Agencies Achieved 1 target out of 2 50 % ANNUAL REPORT

50 Providing value for money Government expects us to provide the best value for money from public funds. We have to ensure our services are delivered in a cost-effective and efficient way. We carefully consider the relationship between our resources, outputs and impacts to ensure we stay focused on delivering value for money. Three elements contribute to this: Effectiveness operating in a way that achieves our outcomes Efficiency producing more for the same or less Economy getting and using our resources as economically as possible. We have made a number of changes to our processes to ensure we deliver our services in the best way possible within the limits of our funding, which may not always be visible to our customers. Our FIRST database which holds all tax and social policy customer information is three terabytes in size. It is the single largest Unisys database of its type in the world. Effectively managing peak season Our peak season, when we have very high contact volumes, runs between April and August. Most of the people who contact us want information about how certain tax and social policy rules work and apply to them. These high volumes can translate into very long wait times. To make things easier for our customers, we improved our internal planning processes, increased use of our online channels and continued to improve our communication with our customers and our working relationship with tax agents. We opened the Personal Tax Summary (PTS) annual run to tax intermediaries 28 hours earlier than last year, allowing us to confirm the 264,000 returns they filed earlier. Getting these out sooner relieved pressure on our systems and allowed better service for individual customers logging into myir to confirm their PTS. The core PTS annual run was completed ahead of time and we achieved our target for calls answered within two minutes for the year. This also resulted in fewer customer calls to manage. Operational efficiency Our operational teams have achieved considerable savings in the form of greater efficiencies in servicing our customers. This has created additional capacity, which has been reinvested to help us improve performance and deliver additional change effectively, such as the first phase of the changes to child support. We use a number of tools to automate basic repetitive tasks that do not need any decision-making or real input from our people. This enables our people to focus more on tasks that require real decision-making or customer engagement, with the overall outcome being that we can provide an improved and faster service to customers. We continued to improve processes to ensure we deliver the value for money the public and Government expects. The efficiencies driven by our operations management programme in customer-facing areas enabled us to do just over 450,000 hours more work this year. We estimate that this extra capacity is equivalent to a cost of $12.2 million. Since the programme started in March 2011, it has produced capacity savings equivalent to $32.5 million, $4.7 million above the target. To achieve further efficiency gains we are taking an enterprise-wide continuous improvement approach. We have been developing our continuous improvement capability and while this is focused on improving our performance to the customer, it is also helping to prepare 48 ANNUAL REPORT 2015

51 06 our people for the transformation of our business. We will extend our continuous improvement programme across the organisation to a number of our support services in Economy saving on postage and printing costs This year we spent $16 million on print and postage. By giving customers access to their details online, we aim to reduce these costs. Because more of our customers are filing online we stopped providing prepaid envelopes for Employer Monthly Schedules (EMS) in November In the cost to send envelopes was about $840,000. In the cost was around $200,000 and for the year, it is expected that the annual cost will be reduced to $40,000. Maintaining our computer systems and infrastructure While we prepare to make a large investment in a new core system through our Business Transformation programme we are also investing in our existing systems where it is sensible to do so. We still need to meet government and customer expectations for better, smarter and more cost-effective systems and support the stability of our ICT environment while we transform. Our ICT Strategy and Roadmaps guide our activities to deliver safe and secure digital services to our customers. The strategy will drive the future rationalisation, consolidation and simplification of our ICT environment and is closely linked to our Business Transformation objectives and the Government s overall ICT Strategy. Our mainframe platform houses the core FIRST business systems, all our customers data, including their return, payment, entitlement and transaction activity. In 2012 Cabinet approved a business case for us to replace the existing platform which was approaching end of life. There was considerable risk attached to this move. We spent nearly a year planning and testing to get this right, which included moving the planned cut-over date from May 2014 to November 2014 in order to ensure that our peak business periods were not affected. In November 2014 we successfully transitioned to a new mainframe platform service. With the new mainframe in place, run by Unisys New Zealand, we can accelerate our digital growth and support our goal to make it easier and faster for customers to do business with us. We have since seen significant performance improvements for both our external customers submitting their tax returns and accessing our online services and our internal staff members accessing the system. For example system back-ups that used to take six hours can now be completed in three hours and the time to complete the annual PTS run reduced from 27 hours to seven hours and was able to be completed over a weekend. This meant that intermediaries were able to process refunds much more quickly and customers received their refund days earlier than previous years. We continued to update and upgrade our existing systems and infrastructure to ensure they support a high level of stability and reliability for our customers. Examples include: upgrading the underlying ICT environment for our electronic document storage and retrieval system moving our legacy printing platform to XPression upgrading the software components and replacing the underlying hardware in our contact centres and our telephone environment. In May we were ranked as number two in CIO Magazine s top 100 companies and government agencies across New Zealand an acknowledgement of the complex technology planning and support we provide to collect and distribute revenue and social policy payments for New Zealand. System back-ups that used to take six hours are now completed in three hours. ANNUAL REPORT

52 Keeping information safe is a top priority. We are continuing to invest significantly in information security initiatives so our security policies, procedures and standards are continually refreshed and enforced. We have implemented technology to assist us to proactively monitor how we are using cloud-based services, as well as additional tools to monitor and detect cyber-security threats. Maintaining our property leasehold portfolio We actively manage our property portfolio to optimise the use of office space and move where we can find accommodation for comparable or better rates. We co-locate with other government agencies where it makes sense to do so. We continue to work with the Property Management Centre of Expertise (PMCoE). Hosted by MSD, PMCoE leads and assists agencies in meeting the goals set by Government for the efficient and effective management of the property owned or leased by 61 government agencies. For the financial year we reduced our office space usage to 14.1m² per person. This compares to 15.5m² per person last year. The PMCoE target is to achieve between 12m² and 16m² per person. EECA five star rating We are the first agency to reach five stars in the Energy Efficiency and Conservation Authority (EECA) One2Five energy management rating. EECA looked at our energy usage and how well we demonstrate corporate commitment, targets and performance indicators, plans, and accountability to energy management. Our five star rating is an improvement from our four star rating in November How did our customers rate our performance? What our customers think is important to us. We aim to make our services as easy as possible for customers to pay tax and receive their correct entitlements. We closely monitor customer satisfaction and perception scores to ensure we are doing a good job. High customer satisfaction contributes to improved voluntary compliance in the long term. ONLINE % satisfied % VOICE & CORRESPONDENCE % satisfied % INDIVIDUALS 94% 94% BUSINESS 96% 96% INDIVIDUALS 81% 81% BUSINESS 88% 88% 50 ANNUAL REPORT 2015

53 06 Overall customer satisfaction scores have remained stable in , with the same results for online and voice and correspondence services as measured in Tax agents showed a statistically significant change in overall satisfaction for voice and correspondence services, with 92% satisfied (up 3.4% from ) and 78% very satisfied (up 13.0% from ), which can be attributed to an improvement in satisfaction with accessibility and perceived ease of access to our services. However, due to the weighting of results based on the sample size of customer groups surveyed, this does not result in an increase in Business and Overall satisfaction scores. Tax revenue is used by government to pay for services we all use. In , 97% of our customers recognised that paying tax contributes to New Zealand society. Between and , the proportion of customers who resent paying tax dropped from 46% to 41%. For our customers to trust us and believe in the integrity of the tax system it is important they believe we do a good job in collecting taxes and paying entitlements. From to , the proportion of customers who were confident that Inland Revenue did a good job was stable at 92%. In recent years this has increased, reaching 94% in There were also increases in the proportions of customers who agreed that they accessed Inland Revenue easily, from 81% in to 87% in Looking at 4-5 out of 5 ratings, or customers who were very satisfied, there were improvements in customers perceptions for all indicators in compared to Increases of at least 3 percentage points in the proportions of customers who rated 4-5 out of 5 were seen for the following indicators: Confidence that Inland Revenue does a good job Inland Revenue can easily be accessed Information is treated confidentially Inland Revenue treats people fairly Inland Revenue makes it easy to get it right. Proportions of all customers who agreed (3-5 of 5) that they resent paying tax: to % 46% 45% 44% 43% 42% 41% 40% Resent paying tax Proportions of all customers who agreed (3-5 of 5) that Inland Revenue can easily be accessed, and that paying tax contributes to NZ society: to % 95% 90% 85% 80% 75% 70% Paying tax contributes to NZ Confidence IR does a good job Easily access IR ANNUAL REPORT

54 How we compare to other tax authorities The OECD compares tax authorities around the world on various measures every three years. The latest OECD survey published, Tax Administration 2015: Comparative Information on OECD and Other Advanced and Emerging Economies, compares results from 2013 provided by tax authorities. We were among a group of 13 revenue bodies reporting IT costs over 15% of total expenditure. In 2013 our IT expenditure was 18.3% of our total expenditure. The OECD observed that this group generally performed favourably on performance-related measures such as e-filing and payment, administrative costs as a percentage of GDP and average staffing numbers. Our year-end debt to total revenue collected ratio of 9.2% was the same as the OECD median and slightly below Australia and Canada. Our cost of collection (85 cents to collect $100) also compared favourably with other countries, though it is difficult to compare different countries on this measure as they have different tax rates and there is no single method for calculating this result. Our impacts We want our activities and interventions to improve customer compliance behaviour. We use 14 impact indicators and four contextual indicators, grouped under five Impact Statements, to measure our progress. We have set targets to be achieved by , which take into account our strategic intentions (including transformation goals), our operating environment (including government priorities), the economy, our resources and customer expectations. 52 ANNUAL REPORT 2015

55 06 More customers are able to self-manage The behaviour of non-compliant customers improves Our impacts More customers register and report accurate information when required More customers pay and file information on time More customers claim their correct entitlements More customers are able to self-manage This year we reached our 2018 target of 80% or more of customers find it easy to comply. We are now only 2% away from achieving our 2018 target of 85% or more of customers are aware of their obligations and entitlements. More customers register and report accurate information when required The results show improvements in the accuracy of submitted returns, driven by lower error rates for individual income tax returns submitted electronically. More customers claim their correct entitlements Social policy-related compliance levels remained stable. This year we achieved our 2018 target of 75% or more of child support assessments are collected. More customers pay and file information on time On-time filing and paying compliance and customer satisfaction and perceptions levels remained high. The behaviour of noncompliant customers improves We continue to improve our results, collecting debt quicker and identifying older debt which cannot be collected as uncollectable. The high level of penalties and interest as a proportion of total debt, and high levels of uncollectable debt unable to be dealt with are limited by appropriations for write-off. The end of this year sees a smaller debt book with less cases on hand which shows the debt book moving in the right direction. Achieving our impact indicator targets will contribute to us achieving our long-term outcomes. To view the full set of impact indicator results and targets, please see pages 84 to 88. ANNUAL REPORT

56 Our Outcomes Framework What we have described above is depicted in our Outcomes Framework. It shows how we organise and use our resources to deliver services to New Zealanders, provide value for money from public funds, and contribute to the social and economic wellbeing of New Zealand by collecting and distributing money. Our Outcomes Framework Government Priorities Responsibly manage the Government s finances Build a more competitive and productive economy Deliver better public services within tight financial constraints (result areas 9 & 10 improving interaction with government, and Result 7 reducing crime) Rebuild Canterbury Value for Money Our Outcomes The goals we are aiming to achieve 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 We improve compliance by ensuring: Compliance improves if: We address noncompliance so: Our Impacts The difference we want to make More customers self-manage More customers register and report accurate information when required More customers claim their correct entitlements More customers pay and file on time The behaviour of non-compliant customers improves Effectiveness Our Outputs The activities we do Services to inform the public about entitlement and meeting obligations Services to process obligations and entitlements Policy Advice Management of debt and outstanding returns Taxpayer audit Efficiency Our Inputs The way we use our resources People Systems Processes Assets Economy Our Priorities The key areas we will direct our effort and resources to We retain, develop and attract highcalibre people with the skills required in the future enabling a culture of service and excellence We proactively influence voluntary compliance and address the causes of compliance risk and threats through a range of interventions We move customers to cost-effective channels while creating an environment to make it easy for customers to self-manage We improve the efficiency and effectiveness of government through working with other agencies and private providers We use our information to make timely decisions and build an intelligence-led organisation Our systems meet current and future needs 54 ANNUAL REPORT 2015

57 06 Our Direction We are reviewing our Outcomes Framework in to ensure it remains fit for purpose and allows us to tell the clear performance story of how we will continue to deliver today while achieving our strategic objectives. Our updated framework will be included in our next Statement of Intent. The mission, vision and values of IR for the future continue to guide us: What we are here for We contribute to the economic and social wellbeing of New Zealand by collecting and distributing money What we want to be A world-class revenue organisation recognised for service and excellence What s important to us in how we work Trust and integrity Valuing people Innovating to make a difference Working together IR for the future also required us to change to overcome our challenges and meet our transformation goals. As our change has become more tangible, we have sharpened our objectives, clarified how we ll achieve them and what we ll do differently. That sharper focus is summarised in Our Change Story - why and how IR is changing. Strategic objectives How we ll do this What we ll do 1. Grow voluntary compliance by making it easier for people to get it right 2. Reduce customer compliance costs 3. Make Government policy changes faster and more cost-effectively Link our systems across the government and private sector Fit revenue processes into customers broader lives Make more intelligent use of information Replace our computer system Become truly digital Upskill our people and change the ways we work Designing our future Customer Experience Tailoring services & channels Intelligence Led Providing greater selfmanagement Embedding a customer-centric approach Embracing richer data sources Taking a service-centric approach Being highlyautomated and event-driven Enabling greater outreach Future State Organisation Extending the digital border Embedding righttime insights Extracting actionable insights Adopting agile, responsive design Driving Enterprise Excellence Providing seamless data flows Enabling a wider Core Tax & service delivery ecosystem Social Policy Delivering One Way of Working Enterprise Support Services Supporting Our People to Achieve Organisation Design Future State Policy and Legislation Enhancing Enterprise Tools and Systems Enhancing risk based tolerance to technology failure Continuously learning from feedback Improving information security Streamlining delivery Rationalising and and operations across consolidating an ecosystem of trusted partners applications Policy and Providing an agile Technology and adaptive set Legislation of capabilities ANNUAL REPORT

58 56 ANNUAL REPORT 2015

59 07 Measuring our performance ANNUAL REPORT

60 Statement of Responsibility In terms of the Public Finance Act 1989 I am responsible, as Chief Executive of Inland Revenue, for the preparation of the department s financial statements and end of year performance information, and for the judgments made in them. I am also responsible for the preparation of the department s forecast financial statements including the appropriateness of the underlying assumptions and all other required disclosures. I have the responsibility for establishing a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting and the accuracy of our end of year performance information. In my opinion, these financial statements fairly reflect the financial position and operations of the department for the year ended 30 June 2015 and the forecast financial statements reflect the financial position and operations of the department for the year ending 30 June 2016 based on Government decisions and information as at 28 April Naomi Ferguson Chief Executive and Commissioner of Inland Revenue 29 September 2015 Countersigned by: Giles Southwell Chief Financial Officer 29 September ANNUAL REPORT 2015

61 07 Performance summary We achieved 48 of our 53 (91%) output performance targets this year, an increase of 7.1% on performance. Here is a summary of our performance by output class. For full details on our performance against each measure refer to pages 62 to % 1 of % 15 of % 1 of % 1 of % 14 of % 12 of 18 POLICY ADVICE What is intended to be achieved This appropriation is intended to provide policy advice to support decision-making by Ministers on tax and social policy matters, to protect and maintain the integrity of the tax system while ensuring that our tax system is as simple as possible and is internationally competitive. Commentary on our output performance during Of the three performance measures in this output class, results for one of them improved from last year. During we continued to support the Government s priorities through delivering the Government s tax policy work programme. One of the three performance measures for this output class was achieved. Aspirational targets were set for the two performance measures not achieved. More appropriate targets, benchmarked against other agencies, were set for these in SERVICES TO INFORM THE PUBLIC ABOUT ENTITLEMENTS AND MEETING OBLIGATIONS What is intended to be achieved The purpose of this appropriation is to promote confidence in the tax system, and associated social policy programmes, by providing services that help taxpayers and other customers meet their payment obligations and receive payments they are entitled to. This appropriation also provides services to help Ministers fulfil their responsibilities to Parliament and the New Zealand public. Commentary on our output performance during Of the 16 performance measures in this output class, results for 13 of them were either the same or improved from last year. We have had strong performance this year, achieving our target of 75.0% of our customers calls being answered within two minutes, 9.0% more than in This result was supported by the fact we answered 96.5% of all calls, up from 89.5% last year. We have also seen a 7.8% reduction in total 0800 call volumes as we successfully promote and encourage uptake of our online self-service options such as myir. Customer satisfaction remains high, with 85.0% of our customers satisfied with the quality of our services. ANNUAL REPORT

62 % 14 of % 9 of % 14 of % 17 of % 8 of % 6 of 11 SERVICES TO PROCESS OBLIGATIONS AND ENTITLEMENTS What is intended to be achieved This appropriation is intended to contribute to the availability of revenue to fund government programmes by ensuring taxpayer and other customer payments, credit claims, refunds and entitlements are processed in a timely, efficient and effective way. Commentary on our output performance during Of the 14 performance measures in this output class comparable to last year, results for 10 of them were either the same or improved from last year. We maintained strong performance across our core high transactional activities: returns and payment processing and issuing refunds and entitlements to customers. 60 ANNUAL REPORT 2015 Peak season planning also enabled us to maintain strong service levels across all our transactional channels over the peak season to end of June These include priority areas that help our customers the most, such as employer monthly schedules (EMS), income tax and GST refunds, returns and regular social policy payments. During the year we also successfully implemented legislative changes to the Child Support Programme, maintaining our high standard of service with over 82% of applications issued within two weeks. MANAGEMENT OF DEBT AND OUTSTANDING RETURNS What is intended to be achieved This appropriation is intended to increase funding available for government programmes through the collection of revenue owed. Commentary on our output performance during Of the eight performance measures in this output class comparable to the previous year, results for seven of them were either the same or improved from last year. We continued a dedicated focus on overdue returns between July and December 2014 following the primary 7 July filing date for income tax returns. This focus helped us achieve the performance target, to finalise returns within six months, for the second time since its introduction and demonstrates the success of our early intervention approach. We have reduced the child support debt owed to custodial parents and contained the growth in assessment debt for liable parents. We continued our work with liable parents who live in New Zealand using outbound calling campaigns, similar to that successfully applied to tax debt collection by making contact with paying parents as early as possible. This has increased our level of coverage and as a result we have closed a much higher percentage of cases within 12 months of opening than ever before.

63 % 8 of 8 50 % 1 of % 8 of % 8 of 8 New output class added TAXPAYER AUDIT What is intended to be achieved This appropriation is intended to ensure that the revenue base for funding government programmes is protected through auditing activities to prevent non-compliance, and undertaking legal action where appropriate. Commentary on our output performance during Of the eight performance measures in this output class, results for five of them were either the same or improved from last year. We continued to focus our investigations on areas that present the highest risk. This year, our return on investment was 7.4% higher than target, resulting in a total of over $1.2 billion in discrepancies being assessed. This year, in our aggressive tax planning area we identified $336.9 million in discrepancies. We continued to resolve the remaining optional and mandatory convertible note cases that have contributed $156.1 million of discrepancies. Significant aggressive tax planning cases provided a further $180 million. Our focus on property compliance has identified $67.1 million in discrepancies. We have continued to focus on education and on identifying developer speculation, particularly in the Auckland and Christchurch regions to ensure that speculators and developers are paying the correct amount of tax. In the hidden economy area we continued targeting people who intentionally do not declare or accurately report transactions. We have identified $146.0 million in discrepancies. Overall satisfaction with how we deal with customers during an audit has improved from last year and remains at a high level. Of customers surveyed, seven out of 10 had a positive view about their audit activity experience. We continue to work on improving timeliness to complete audits and have reduced the average completion time in most categories since last year. SERVICES TO OTHER AGENCIES What is intended to be achieved This appropriation is intended to provide support services to other government agencies, such as the provision of a hosted financial management information system and shared financial transactional services. Commentary on our output performance during These measures are new in We provide financial support services to the Department of Internal Affairs and the New Zealand Productivity Commission. These shared service arrangements have been successful, with both agencies rating us highly. In reviewing this year s performance we have agreed with both agencies a more appropriate target of 70% for ANNUAL REPORT

64 Reporting our performance FOR THE YEAR ENDED 30 JUNE 2015 The following parts provide detailed reporting on our performance against our targets. Where a performance measure is expressed in terms of a range of characteristics that the output should meet, the result is reported as achieved or not achieved (eg, see Departmental Output Expense 5). Comparative performance data Where appropriate, we have included comparative performance information against the activity forecasts and performance measures for the previous year ( actual). We have not included comparative performance information for new performance measures, or where there has been a change in the performance measure or measurement methodology that make the results not comparable. These are indicated by n/a. Activity forecasts Where appropriate, we have included forecasts of expected customer demand for our services that provide context for our results. Significant variation from the forecast figures can influence the achievement of the targets set for our performance measures. Key More customers are able to self-manage More customers register and report accurate information when required More customers claim their correct entitlements More customers pay and file information on time The behaviour of non-compliant customers improves Review of output performance measures and targets As in previous years, we reviewed our output measures before the start of the new financial year. The purpose of this review was to: create or update measures to reflect changes in our business remove items that were not true measures of our performance. Of the 53 measures from , we removed two and added two. There are 49 measures comparable with last year. Our performance improved for 29 of these measures (59%), remained the same for seven measures (14%) and deteriorated for 13 measures (27%). For seven (54%) of the 13 measures where performance deteriorated, the change in performance between years was less than 5%. We have provided comments for: key activity forecasts where actual demand was outside the expected range performance measures that were not achieved performance measures with a positive variance greater than 10%. Some performance measures are calculated using a sample of the customer population. We have marked these performance measures with a hash mark (#). All target and forecast figures in pages 63 to 82 are not subject to audit. Performance context Each appropriation contributes to achieving Inland Revenue s long-term outcomes: 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. We have included information to give context to the performance achieved. For each output expense we have included a summary of the impacts we believe it contributes to. Further information about our Outcomes Framework can be found in part six. This forms part of the overall performance picture and should be read in conjunction with the activity forecasts and narrative in the other parts of this report. Our non-financial performance targets for the coming year are also included, and provide context to this year s results. Full details of our performance measures and targets can be found in Performance measures and targets on our website. 62 ANNUAL REPORT 2015

65 07 1 Departmental Output Expense 1: Policy Advice Description This appropriation is limited to the provision of advice (including second opinion advice and contributions to policy advice led by other agencies) to support decision-making by Ministers on government policy matters. Contributes to Impact Statements: Providing policy advice services protects and maintains the integrity of the tax system while ensuring that our tax system is as simple as possible and is internationally competitive. Financial performance OUTPUT STATEMENT FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget revised forecast budget $000 $000 $000 $000 $000 Revenue Crown 8,166 8,051 9,151 9,151 8,000 Other Total revenue 8,172 8,053 9,153 9,161 8,002 Expenses Annual appropriations 8,118 8,053 9,153 8,128 8,002 Total expenses 8,118 8,053 9,153 8,128 8,002 Net surplus/(deficit) 54 1,033 Output 1.1 Policy advice in relation to tax and social policy Description This output involves: advising on all aspects of tax policy and social policy measures that interact with the tax system developing tax and social policy in line with the Generic Tax Policy Process drafting tax legislation for introduction in the House of Representatives and assisting its passage through the House of Representatives negotiating and maintaining New Zealand s network of double tax agreements with other countries forecasting future tax and non-tax Crown revenue receipts and disbursements for the government analysing revenue implications of changes in tax and social policy. ANNUAL REPORT

66 Performance measures All targets are unaudited. Minimum percentage of policy advice papers that meet quality standards Although we did not achieve our target this year, the result has improved from 73% in to 83%. The target for is set at 75% to align our target with other agencies which provide policy advice. Areas identified for improvement will be implemented next year, including more consistent analysis of the impacts of proposals, and greater attention to risk and risk management Actual Target 90% Target 73.0% 83.0% 75% Minimum percentage of ministerial satisfaction for policy advice Performance is assessed by a survey completed by the Minister of Revenue. On review the appropriate target for this measure has been deemed to be 80%, which is consistent with other agencies that provide policy advice Actual Target 95% Target 87.0% 78.3% 80% Maximum average cost per hour of producing policy advice outputs The result for of $ was less than the target set of $150. The target was based on our best estimate of the cost per hour of providing policy advice. Our forecast for the year end was revised to a cost per hour of $115, in line with the results from previous years. However, when the measure was calculated this year less time was attributed to direct policy work, resulting in the maximum cost per hour being above our forecast. This measure is still relatively new, and further work is required on how to more accurately forecast the result Actual Target $ Target $ $ $115 2 Departmental Output Expense 2: Services to Inform the Public About Entitlements and Meeting Obligations Description The scope of this appropriation is limited to: providing information and assistance to customers on the application of the law responding to customer enquiries about tax and social support programmes adjudication on behalf of the Commissioner on proposed taxpayer assessments providing binding rulings and other statements on the interpretation and application of the law administered by Inland Revenue provision of services to Ministers to enable them to discharge their portfolio (other than policy decision-making responsibilities). Contributes to Impact Statements: Providing customers with relevant information and advice, certainty in relation to the application of the law, and a choice in how they engage with us ensures that customers are aware of and understand their obligations and entitlements. This means more customers can self-manage. 64 ANNUAL REPORT 2015

67 07 Financial performance OUTPUT STATEMENT FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget revised forecast budget $000 $000 $000 $000 $000 Revenue Crown 265, , , , ,297 Other 1,245 1,461 1,461 1,151 1,461 Total revenue 266, , , , ,758 Expenses Annual appropriations 248, , , , ,758 Total expenses 248, , , , ,758 Net surplus/(deficit) 18,799 7,029 Core service costs AVERAGE COST PER CUSTOMER-INITIATED CONTACT $31.10 Target*: $ $33.00 Cost per contact Actual* Actual* Target* Telephone $29.88 $30.41 $36.00 Counter $64.89 $22.65 $65.00 Correspondence $37.80 $35.81 $45.00 * These figures are unaudited. Output 2.1 Information services Description This output involves responding to customer enquiries on tax and social support programmes (including child support and KiwiSaver) through electronic channels, correspondence, telephone, personal appointments, actively providing advice through a range of communication approaches delivered in the community and through our complaints management service. ANNUAL REPORT

68 Activity forecasts ACTIVITY FORECASTS Number of customer service contacts. Number of self-help service contacts Actual Actual Unaudited forecast Actual Unaudited forecast 6.41m 5.53m m 5.69 m m 17.95m 21.23m^ m 23.20m m ^Restated Commentary on demand outside forecast range Number of customer services contacts Customer services contacts include calls to our contact centre, over-the-counter interactions and appointments and correspondence, whether by post or electronic. We are focused on improving our processing of returns, payments and entitlements, making it easier for customers to self-manage and reducing unnecessary contacts. Overall, the number of contacts increased by 3% compared to last year. However, this was slightly less than forecast. Number of self-help services contacts Self-help includes usage of our online account services called myir and our Interactive Voice Recognition service (IVR). All types of self-help services contacts have increased this year, which reflects our efforts to encourage customers to use self-service channels. We have seen increasing uptake of myir as a result of active promotion, with around 298,000 new myir registrations during the year and almost 2.7 million more logons compared to More services are now available through our IVR system, with 1.5 million customers currently registered with voice ID, a key enabler of IVR service uptake. During the year we identified an issue with the tool that was used to calculate the number of self-help service contacts. As a result, we have determined the most appropriate data source for reporting volume and have restated the result to reflect the same approach. Performance measures All targets are unaudited. Minimum percentage of customers who are satisfied with the quality of phone and correspondence contacts # Actual Target 85% Target 85.0% 85.0% 85% 66 ANNUAL REPORT 2015

69 07 Minimum percentage of customers who are satisfied with the quality of online services # Actual Target 90% Target 94.5% 94.9% 90% Minimum percentage of customers confident that Inland Revenue takes appropriate action to ensure people receive their social support entitlements # Actual Target 70% Target 72.5% 70.9% 70% Minimum percentage of attempted calls that we answer This year we answered 3.24 million calls a similar number to last year. Overall, total volumes decreased by 141,000 calls (4%) as our customers continue to shift to self-service channels (such as myir) and as we focus on improving the speed of service across our other contact channels (such as the minimum percentage of correspondence answered within two weeks). Success with this performance measure is a lead indicator of our ability to answer calls within two minutes and has flow-on effects for overall customer experience and satisfaction Actual Target 75% Target 89.5% 96.5% 75% Minimum percentage of telephone calls answered within two minutes We answered a similar number of calls to last year. We managed our calls more effectively by improving our call management system to direct calls to staff with the best skill-set, and by offering options such as a call-back at a time of our customers choosing Actual Target 75% Target 68.8% 75.0% 75% Minimum percentage of correspondence answered within two weeks Actual Target 75% Target 76.0% 80.1% 75% Maximum average cost of a customer-initiated contact Although total contacts increased on last year, our continuous improvement initiatives and decrease in customer call times have reduced the average cost per contact across the phone, correspondence and over-the-counter channels Actual Target $ Target $32.96 $31.10 $35 ANNUAL REPORT

70 Output 2.2 Adjudication and rulings Description This output involves: Adjudication providing a technical review of existing taxation disputes referred to the Adjudication Unit issuing an adjudication report (or other formal communication of conclusions) to the parties concerned directing the issuing, where required, of an assessment consistent with the conclusions of the technical review. Taxpayer Rulings considering applications for and providing binding private and product rulings, and financial arrangement determinations. Public Rulings preparing and issuing binding public rulings developing and publishing non-binding statements on the Commissioner s view of the law administered by Inland Revenue eg, interpretation statements and interpretation guidelines considering applications for and providing taxpayer-specific depreciation determinations preparing and publishing depreciation and other determinations eg, livestock valuations considering and responding to technical correspondence. Commentary on significant positive variances This year we maintained a strong performance across all areas, reflecting our continuing focus on delivery and our ability to better forecast and meet customer demand resulting in more effective scheduling of our work programme. During the period we further developed the capability to balance work across business units, with a number of business areas contributing directly to the high quantity of public items finalised during the period. Our continuous improvement initiatives have contributed to this and the other positive variances achieved over Performance measures All targets are unaudited. Percentage of all rulings reports, adjudication reports, public items and technical correspondence or advice that meet the applicable purpose, logic, alternatives, consultation and practicality standards Actual Target 100% Target 100% 100% 100% 68 ANNUAL REPORT 2015

71 07 Minimum number of published or finalised public items that give the Commissioner s interpretation of the law Actual Target Target Minimum percentage of adjudication cases completed within three months of receipt Actual Target 90% Target 98.2% 97.2% 90% Minimum percentage of taxpayer ruling applications that have a draft ruling completed within three months of receipt Actual Target 90% Target 100% 100% 90% Minimum percentage of non-qualifying ruling applications that have a draft ruling completed within six months of receipt Actual Target 90% Target 100% 100% 90% Minimum percentage of public items (including relevant public consultation), completed within 18 months of allocation Actual Target 90% Target 92.0% 94.3% 90% Minimum percentage of submissions by the applicant on any draft ruling responded to within one month of receipt Actual Target 90% Target 97.9% 100% 90% Output 2.3 Government and Executive Services Description This output involves all activities associated with ministerial services, including responding to ministerial correspondence and parliamentary questions. It includes all tax, child support, student loan, KiwiSaver and family assistance ministerial correspondence and supply of information. ANNUAL REPORT

72 Performance measures All targets are unaudited. Minimum percentage of ministerial correspondence responded to within 10 days We received and dealt with more Official Information Act (OIA) requests and ministerial reports than expected. Although these OIAs and ministerial reports are not included in the measure, we gave these a higher priority than other ministerial correspondence in a number of cases Actual Target 95% Target 92.7% 87.0% 95% Percentage of parliamentary questions responded to within required timeframes Actual Target 100% Target 100% 100% 100% 3 Departmental Output Expenses 3: Services to Process Obligations and Entitlements Description The scope of this appropriation covers: registering taxpayers making tax assessments assessing child support liabilities including providing a readily accessible inexpensive process for reviewing assessments receiving and making payments to customers processing applications and payments for social support programmes collection of ACC Earners levies supplying information to other government agencies accounting and reporting the collection of Crown revenue. Contributes to Impact Statements: Accurate, timely, complete and efficient processing of notices, statements and social policy entitlements increases customers confidence in the tax system. When customers have confidence in the tax system they are more likely to self-manage their compliance obligations. 70 ANNUAL REPORT 2015

73 07 Financial performance OUTPUT STATEMENT FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget revised forecast budget $000 $000 $000 $000 $000 Revenue Crown 137, , , , ,737 Other 20,590 20,997 20,997 20,652 20,997 Total revenue 158, , , , ,734 Expenses Annual appropriations 144, , , , ,734 Total expenses 144, , , , ,734 Net surplus/(deficit) 13,321 5,550 Core service costs AVERAGE COST PER RETURN PROCESSED $3.48 Target*: $ $3.95 Cost per return processed Actual* Actual* Target* Income tax $4.92 $4.32 $6.50 GST $1.34 $1.03 $2.00 Employer monthly schedules $5.14 $4.56 $7.75 * These figures are unaudited. Output 3.1 Registrations, applications and processing Description This output involves processing all registrations, applications and assessments for the tax and social policy programmes we administer. ANNUAL REPORT

74 Activity forecasts ACTIVITY FORECASTS Number of tax and social policy registrations (excluding child support) received Number of child support applications received Number of applications for administrative review of child support assessments received Actual Unaudited forecast 689, , , Actual Unaudited forecast 686, , ,000 53,055^ 44,000 51,706 50,000 49,000 56,000 3,838^ 4,300 4,700 4,246 4,400 4,900 Number of returns received 9.14m m 9,492, m 10.2m Percentage of returns filed 59.8% 60% 67.4% 68% electronically Percentage of income tax returns filed 86.9% 86% 88.8% 90% electronically Percentage of GST returns filed 54.9% 55% 64.0% 65% electronically Number of payments received 8.71m m 8,903, m 9.5m Percentage of payments received electronically 74.2% 75% 82.5% 85% ^ Restated Commentary on demand outside forecast range Number of child support applications received We have restated the number of child support applications received during after we corrected an error with our measurement tool that was excluding some application types from the result. Our result is above the forecast range due to the previous year s under-reporting of actual volumes. The forecast range for has been adjusted to take into account the revised calculation. Number of applications for administrative review of child support assessments received We have also restated the volume based on an improvement to the way we count applications received. We now count applications on the day received, not the day processed. This resulted in a minor increase. Filing and paying online As a result of the success of our strategy to make our digital offering more compelling, we continue to see significant increases in the proportion of customers who use digital channels such as myir to file their returns online and make payments electronically. The number of customers using these services exceeded our expectations. 72 ANNUAL REPORT 2015

75 07 Performance measures All targets are unaudited. Minimum percentage of income tax returns finalised within four weeks Actual Target 90% Target 94.6% 95.5% 90% Minimum percentage of GST returns finalised within three weeks Actual Target 95% Target 99.6% 99.2% 95% Minimum percentage of employer monthly schedule employee deductions finalised within four weeks Actual Target 95% Target 99.7% 99.8% 95% Minimum percentage of social policy and tax registrations processed within five working days During the year, an IT issue led to approximately 77,500 KiwiSaver registrations being held and not released for processing. This issue has been investigated and resolved primarily through ensuring issues are escalated appropriately. Excluding this one-off issue, we achieved a processing result of 88.3% for the year Actual Target 85% Target 89.6% 80.5% 85% Minimum percentage of payments banked on the day of receipt Actual Target 99% Target 99.3% 99.4% 99% Minimum percentage of payments correctly processed to customers accounts Actual Target 99.5% Target 99.8% 100% 99.5% ANNUAL REPORT

76 Maximum average cost of processing income tax returns, GST returns and employer monthly schedules Although the total number of returns has increased this year, the cost of processing each return continues to decline as more of our customers file their returns online. In , 67.4% of all returns were filed electronically, compared to 59.8% last year Actual Target $ Target $3.95 $3.48 $5 Output 3.2 Statements, notices, refunds and payments Description This output involves: issuing statements, notices, rebates and refunds receiving and banking payments. It covers all the tax and social policy programmes that we administer. Performance measures All targets are unaudited. Minimum percentage of notices and statements produced without error # Actual Target 98.5% Target 99.4% 99.4% 98.5% Minimum percentage of Income Tax refunds issued within six weeks Actual Target 85% Target 90.2% 91.5% 85% Minimum percentage of GST refunds issued within four weeks Actual Target 95% Target 97.8% 97.2% 95% Minimum percentage of tax credit claim payments made within three weeks Actual Target 90% Target 96.1% 96.9% 90% 74 ANNUAL REPORT 2015

77 07 Minimum percentage of Working for Families Tax Credit (WfFTC) payments made on the first regular payment date following an application Actual Target 95% Target 98.9% 99.4% 95% Minimum percentage of paid parental leave payments issued to customers on the first regular pay day following the agreed date of entitlement Actual Target 97% Target 98.4% 98.2% 97% Output 3.3 Child support Description This output involves dealing with child support assessments and providing an administrative process for reviewing child support assessments that is both inexpensive and readily accessible to custodians and liable parents. Performance measures All targets are unaudited. Minimum percentage of child support assessments issued within two weeks The changes in child support legislation that took effect on 1 April 2015 required changes to the systems and processes which form the basis for calculating timeliness. Performance to 31 March 2015 was 81.6%, and performance in the final quarter from 1 April to 30 June 2015, using the updated systems and processes, was 83.3%. Please note that an adjusted measurement approach has been used from 1 April 2015 due to a refreshed data-set being available. Minimum percentage of child support administrative review decisions issued within 10 weeks Actual Actual Target 80% Target 85% Target 80.7% 82.0% 80% Target N/A 90.7% 85% ANNUAL REPORT

78 4 Departmental Output Expense 4: Management of Debt and Outstanding Returns Description The scope of this appropriation covers taking action where returns are outstanding and where payments are overdue, including providing people with assistance on the actions they need to take to meet their obligations. This includes collection on behalf of other agencies and external parties. Contributes to Impact Statements: We apply a tailored approach to our interventions based on our Prevent, Assist, Recover and Enforce model (PARE). This model is designed to take into account past compliance behaviour together with current circumstances. By attempting to prevent people and businesses from missing filing and payment dates in the first instance, we are able to be more effective at following up quickly on those who do not file and pay on time. Financial performance OUTPUT STATEMENT FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget revised forecast budget $000 $000 $000 $000 $000 Revenue Crown 134, , , , ,207 Other 1,859 2,962 2,962 2,171 2,962 Total revenue 136, , , , ,169 Expenses Annual appropriations 132, , , , ,169 Total expenses 132, , , , ,169 Net surplus/(deficit) 4,037 2,639 Additional funding received from Government for initiatives Budget-funded Initiative Unaudited ROI actual Unaudited ROI actual Unaudited ROI target Early debt $13.79 $18.91 $8.20 Ageing debt $11.45 $11.19 $5.50 Unfiled returns $19.64 $16.40 $ ANNUAL REPORT 2015

79 07 Additional funding for child support aims to progressively increase the amount of debt repaid over a five year period. The total cash target for this period is $174 million. Work to date has resulted in an extra $1.5 million recovered from liable parents. Core service costs COST OF COLLECTING AN OVERDUE RETURN Actual* Actual* Target* Collecting an overdue return $5.60 $9.00 $15.00 * These figures are unaudited. Output 4.1 Outstanding returns Description This output involves all activities associated with collecting outstanding returns, including taking appropriate follow-up action against taxpayers who do not file a return. Performance measures All targets are unaudited. Maximum percentage growth in outstanding returns Our collections approach is targeting returns based on risk and assessment value, regardless of age. There has also been an increased investment in the collection of outstanding returns through Budget Actual Target 0% Target (7.1%) (21.5%) (2%) Minimum percentage of outstanding returns finalised within six months Actual Target 65% Target 67.4% 69.9% 65% Minimum percentage of outstanding employer monthly schedules finalised within three months Actual Target 85% Target 92.0% 92.2% 90% Maximum average cost of finalising an outstanding return The average cost of finalising outstanding returns increased in due to the provision of Budget 14 funding, which enabled us to invest more resource in targeting the more difficult cases which take longer to resolve is the second year where there was a significant positive variance. We have reviewed the target accordingly, and are increasing it from $15 to $12 for Actual Target $ Target $5.60 $9.00 $12.00 ANNUAL REPORT

80 Output 4.2 Overdue debt Description This output covers all activities associated with collecting overdue debt (excluding child support debt). It involves taking both a preventative focus and appropriate follow-up action when customers do not pay on time, including providing them with assistance on how they can get back on track with their payment obligations. Performance measures All targets are unaudited. Maximum percentage of collectable debt value over two years old The reduction in aged collectable debt has been achieved by stopping new collectable debt progressively ageing through our early intervention strategy, and resolving more of our aged collectable debt as well as addressing older debt which is not collectable. This demonstrates good progress with our debt strategy to have a newer, more collectable debt book. Minimum percentage of debt cases resolved within six months Actual Target 60% Target 52.2% 48.7% 60% Actual Target 80% Target N/A 81.7% 80% Minimum percentage of debt value resolved for those who did not have a debt at the start of the year Our focus on intervening early with new debt has seen an improvement in the result from last year. This measure is also influenced by the degree to which large enterprise customers get an extended period of time to make end of year income tax payments. Minimum cash collected for every debt dollar spent This measure is influenced to some degree by large enterprises using extension-of-time payment provisions, as well as more cash collected from budget-funded initiatives Actual Target 65% Target 73.3% 78.5% 65% Actual Target $ Target $45.95 $48.77 $40.00 Output 4.3 Child support debt management Description This output involves all activities associated with the recovery of overdue child support payments. It includes taking appropriate enforcement action against parents who are less inclined to pay for the support of their children. 78 ANNUAL REPORT 2015

81 07 Performance measures All targets are unaudited. Minimum percentage of NZ paying parent child support debt cases resolved within 12 months Actual Target 75% Target 75.5% 79.5% 75% 5 Departmental Output Expense 5: Taxpayer Audit Description This output is limited to: identifying risks to revenue and designing and undertaking audit activities accordingly managing litigation of disputed tax cases. Contributes to Impact Statements: We use intelligence analysis to target our compliance activities to customers who are non-compliant or at risk of non-compliance. This creates an environment where customers expect us to detect non-compliance and are deterred from providing inaccurate information. It also protects the revenue base and provides certainty to customers in relation to the application of the law. We also use our compliance activities to educate customers who are unaware of their obligations and help them get it right. We only use enforcement action where necessary. This ensures that the behaviour of non-compliant customers improves. Consequently, more customers pay and file information on time in the future. Financial performance OUTPUT STATEMENT FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget revised forecast budget $000 $000 $000 $000 $000 Revenue Crown 171, , , , ,903 Other Total revenue 172, , , , ,168 Expenses Annual appropriations 165, , , , ,168 Total expenses 165, , , , ,168 Net surplus/(deficit) 6,762 5,103 ANNUAL REPORT

82 Additional funding received from Government for initiatives Budget-funded Initiative Unaudited ROI actual Unaudited ROI actual Unaudited ROI target Hidden Economy $5.51 $5.21 $5.00 Aggressive Tax Planning $62.43 $34.10 $11.60 Fraud $3.74 $3.09 $3.10 Output 5.1 Taxpayer audit Description This output involves the auditing of taxpayers including individuals, small to medium businesses and larger businesses. It includes audits of duties and non-residents. Performance measures All targets are unaudited. Minimum percentage of cases completed that are correct, complete, clear and appropriately referenced # Actual Target 90% Target 95.1% 96.6% 90% Minimum percentage of audited customers who are satisfied with their experience # This year, we surveyed audited customers once per quarter rather than in previous years when we have measured customer satisfaction by annual survey. Overall, the level of customer satisfaction has improved from last year and remains at a high level. We have increased the target for Actual Target 65% Target 74.4% 76.2% 70% Minimum percentage of customers confident that Inland Revenue takes appropriate action against those who do not comply # Actual Target 75% Target 77.1% 75.0% 75% Minimum percentage of audits that result in a material discrepancy Actual Target 75% Target 79.2% 80.3% 75% 80 ANNUAL REPORT 2015

83 07 On average we will complete audits within agreed timeframes: 4 months for general audits 12 months for risk-based audits 16 months for evasion and fraud audits 28 months for aggressive tax planning audits Actual Target Achieved Target Achieved Achieved Achieved Minimum percentage of disputed cases completed within 15 months Actual Target 75% Target 79.1% 75.9% 75% Minimum discrepancy identified for every output dollar spent Actual Target $ Target $8.00 $7.52 $7.00 Output 5.2 Litigation management Description This output involves the management of litigation of disputed tax cases, including the requirement to state the case through to resolution by the courts. Performance measures All targets are unaudited. Minimum percentage of litigation judgments found in favour of the Commissioner This achievement reflects a total of 74 judgments for the year, 62 of which were found fully in the Commissioner s favour (ie, in relation to all issues). A case will generally concern multiple issues and this measure requires a win on all issues in a single judgment. We are confident our interpretation of the law is correct before we take any case to court and the number of judgements in our favour reflects this. With the small number of cases, any slight variation in judgments found in the Commissioner s favour can alter the percentage achieved significantly Actual Target 66% Target 83.3% 83.8% 66% ANNUAL REPORT

84 6 Departmental Output Expense 6: Services to Other Agencies Description This output is limited to the provision of services by Inland Revenue to other agencies, where those services are not within the scope of another departmental output expense appropriation in Vote Revenue. Contributes to Impact Statements: N/A Financial performance OUTPUT STATEMENT FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget revised forecast budget $000 $000 $000 $000 $000 Revenue Crown Other 555 3,060 3,060 2,396 3,060 Total revenue 555 3,060 3,060 2,396 3,060 Expenses Annual appropriations 555 3,060 3,060 2,394 3,060 Total expenses 555 3,060 3,060 2,394 3,060 Net surplus/(deficit) 2 Performance measures All targets are unaudited. Minimum percentage of satisfaction of the Department of Internal Affairs for services provided This was the first year a measure and target has been set for this appropriation. The target of 95% was set prior to the completion of a measurement methodology. The result of 80% satisfaction from the Department of Internal Affairs reflects a high level of satisfaction with the services provided based on the measurement methodology. The target for the financial year has been set at 70%. Minimum percentage of satisfaction of the New Zealand Productivity Commission for services provided Actual Actual Target 95% Target 95% Target N/A 80.0% 70% Target N/A 98.0% 70% 82 ANNUAL REPORT 2015

85 07 Description Departmental Capital Expenditure and Capital Injections The scope of this appropriation is limited to the purchase or development of assets by and for the use of the Inland Revenue Department, as authorised by section 24(1) of the Public Finance Act Contributes to Impact Statements: This appropriation is intended to invest in the renewal, upgrade and redesign of assets that support the delivery of the department s services. This includes enhancements to support child support scheme reform and the commencement of the transformation programme including detailed design of strategic initiatives and progressing core foundational and tactical requirements. Financial performance For details of departmental capital expenditure incurred against appropriations please refer to the Statement of Budgeted and Actual Expenses and Capital Expenditure Incurred Against Appropriations, in the Departmental capital expenditure lines Property, plant and equipment, Intangible assets and Total departmental capital expenditure on page 89. For details of departmental capital injections please refer to page 90. Commentary on performance information Expenditure supports the delivery of our output performance measures in accordance with our capital asset management priorities. Deliver infrastructure that will support transformation Our investment profile changed due to the timing of our investment in business transformation foundational technology. Maintain and improve business infrastructure The assumptions we made around the investment required to maintain and improve our business infrastructure and the technology needed for us to transform changed during the year. Our investment profile changed due to the timing of our investment in business transformation foundational technology. Performance measures All targets are unaudited Target 40% 20% 40% Actual 41% 1% 58% Target 10% 60% 30% Implement government policy initiatives Deliver infrastructure that will support transformation Maintain and improve business infrastructure ANNUAL REPORT

86 Our impact indicators Full details of our impact Indicators are listed below. More customers are able to self-manage Factors that influenced target setting: this impact is key to enabling improved customer compliance and cost-effectiveness in a fiscally constrained environment. We only include results for the contextual indicator under this impact customer compliance costs are minimised when the data is less than two years old. The survey that this indicator uses was last undertaken in 2009 and results were included in the 2011 Annual Report. 83 % of customers who are aware of their % obligations and entitlements increases YE June % YE June 2014 By June 2018 Increase to 85 % or more 82 % of customers who find it easy to % comply increases YE June % YE June 2014 By June 2018 Increase to 80 % or more More customers register and report accurate information when required Factors that influenced target setting: this impact is key to improving customer self-management, reducing unneccessary contacts and improving end-to-end planning. % of returns filed without errors increases 88 % July 2014 March % July 2013 March 2014 By June 2018 Increase to 88 % or more 84 ANNUAL REPORT 2015

87 07 89 % of applications submitted without % errors increases YE June % YE June % of correct student loan deductions % for New Zealand-based borrowers is July 2014 March 2015 maintained 99% July 2013 March 2014 By June 2018 Increase to 90 % or more By June 2018 Maintain at 98 % or more Employer registrations follow an appropriate trend We report on this indicator to provide additional contextual information. Employers correlation is between the number of employers who register for PAYE and the percentage of the labour force that is employed (from the Statistics New Zealand Household Labour Force Survey) Correlation % YE June 2015 Correlation 98% YE June 2014 N/A (contextual) GST assessed to consumer spending follows an appropriate trend We report on this indicator to provide additional contextual information. This measure highlights a link between consumers spending and the amount of GST assessed, showing the completeness of information provided by GST customers. No target has been set because this is an indicator that is beyond our influence. 98 Correlation % YE March 2015 Correlation 98% YE March 2014 N/A (contextual) ANNUAL REPORT

88 More customers claim their correct entitlements Factors that influenced target setting: the expected impact of the upcoming changes to Working for Families Tax Credits eligibility rules has been taken into account when assessing our ability to improve accuracy. % of accurate Working for Families Tax Credits payments increases Payments are considered accurate if customers total yearly payments are within 20% of their entitlement. The accuracy of payments is primarily a reflection of the quality of information provided to us by our customers. 67 % Tax year % Tax year 2013 Tax year 2017 Increase to 70 % or more 77 % of child support assessments collected % increases YE June % YE June 2014 By June 2018 Increase to 75 % or more Working for Families registrations follow an appropriate trend We report on this indicator to provide more context. Working for Families Tax Credits correlation is between the number of customers who receive payments from Inland Revenue and the number of households with dependent children (from the Statistics New Zealand Household Labour Force Survey). 35 Correlation % YE July 2015 Correlation 32% YE June 2014 N/A (contextual) Donations rebates claimed follow an appropriate trend We report on this indicator to provide more context to gauge if customers are claiming donation rebates. It looks at the relationship between donation rebates claimed from Inland Revenue and donation levels recorded at the Charities Service. 58 % Tax year % Tax year 2013 N/A (contextual) 86 ANNUAL REPORT 2015

89 07 More customers pay and file information on time Factors that influenced target setting: this impact is a key compliance driver and consequently stretch targets are appropriate. % of returns filed on time is maintained 83 % Tax year % Tax year 2013 Tax year 2017 Maintain at 83 % or more 86 % of payments made by customers on % time is maintained Tax year % Tax year 2013 Tax year 2017 Maintain at 86 % or more 67 % of child support assessments paid on % time increases YE June % YE June 2014 By June 2018 Increase to 68 % or more The behaviour of non-compliant customers improves Factors that influenced target setting: the economic environment is a significant factor in debt performance. Maintaining or making small improvements will be challenging. 77 The compliance behaviour of customers % who received an audit intervention YE June 2015 improves 86% YE June 2014 By June 2018 Increase to 85 % or more ANNUAL REPORT

90 % of collectable debt to total debt increases 57 % YE June % YE June 2014 By June 2018 Increase to 65 % or more % of collectable debt recovered increases 15 % YE June % YE June 2014 By June 2018 Increase to 13 % or more by YE 5.8 % of collectable debt to revenue assessed % decreases YE June % YE June 2014 By June 2018 Decrease to 6.0 % or less 88 ANNUAL REPORT 2015

91 07 Appropriation Statements The following statements report information about the expenses and capital expenditure incurred against each appropriation administered by Inland Revenue for the year ended 30 June STATEMENT OF BUDGETED AND ACTUAL EXPENSES AND CAPITAL EXPENDITURE INCURRED AGAINST APPROPRIATIONS FOR THE YEAR ENDED 30 JUNE Expenditure 1 Unaudited Unaudited Expenditure 1 Unaudited budget revised forecast budget 2 $000 $000 $000 $000 $000 Vote: Revenue Output expenses Policy advice 8,118 8,053 9,153 8,128 8,002 Services to inform the public about entitlements and meeting obligations 248, , , , ,758 Services to process obligations and entitlements 144, , , , ,734 Management of debt and outstanding returns 132, , , , ,169 Taxpayer audit 165, , , , ,168 Total departmental output expenses 1 698, , , , ,831 Services to other agencies RDA ,060 3,060 2,394 3,060 Total output expenses 699, , , , ,891 Other expenses Transformation 55,000 Administration and use of another departments appropriations Total other expenses ,000 Total expenditure 700, , , , ,891 Departmental capital expenditure Property, plant and equipment 15,564 20,000 4,000 3,678 10,000 Intangible assets 29,127 42,336 29,000 28,710 95,000 Total departmental capital expenditure 44,691 62,336 33,000 32, ,000 1 Excludes remeasurement of ($1,999,000), ( : $641,000). 2 The Revised Budget figures for are those included in The Supplementary Estimates of Appropriations and Supporting Information for the year ending 30 June Revenue-dependent appropriation (RDA). The amount of a RDA is limited to the amount of revenue earned. The budget, revised budget and forecast figures have been prepared in accordance with NZ GAAP, using accounting policies that are consistent with those adopted in preparing the departmental financial statements in part eight. ANNUAL REPORT

92 Explanations of significant variances against budget are detailed in Note 25 of the departmental financial statements in part eight. All of the performance information for each appropriation administered by Inland Revenue has been reported within part seven, Measuring our performance. STATEMENT OF EXPENSES AND CAPITAL EXPENDITURE INCURRED WITHOUT, OR IN EXCESS OF, APPROPRIATION OR OTHER AUTHORITY FOR THE YEAR ENDED 30 JUNE 2015 In the financial year there were no instances of: expenses and capital expenditure incurred in excess of appropriation ( : $nil) expenses and capital expenditure incurred without appropriation or other authority, or outside the scope or period of appropriation ( : $nil). STATEMENT OF DEPARTMENTAL CAPITAL INJECTIONS FOR THE YEAR ENDED 30 JUNE Actual capital Actual capital Unaudited injections injections revised budget $000 $000 $000 Vote: Revenue Capital injections 5,329 3,572 3,572 Inland Revenue has not received any capital injections during the year without, or in excess of, authority ( : $nil). 90 ANNUAL REPORT 2015

93 07 STATEMENT OF NON-DEPARTMENTAL APPROPRIATIONS FOR THE YEAR ENDED 30 JUNE 2015 Vote: Revenue Actual Unaudited Unaudited Actual Unaudited budget revised forecast budget 7 $000 $000 $000 $000 $000 Benefits and other unrequited expenses Child support payments PLA 241, , , , ,000 Child tax credit PLA 1,835 1,300 1,300 1,298 1,100 Family tax credit PLA 1,965,263 1,934,000 1,857,000 1,854,048 1,837,000 In-work tax credit PLA 533, , , , ,000 KiwiSaver: Fee subsidy (11) (8) KiwiSaver: Interest 7,294 13,000 13,000 8,413 15,000 KiwiSaver: Kick-start payment 227, , , ,364 KiwiSaver: Tax credit 569, , , , ,000 Minimum family tax credit PLA 14,275 13,000 16,000 15,975 16,000 Paid parental leave payments 164, , , , ,000 Parental tax credit PLA 17,640 19,000 21,000 20,967 31,000 Payroll subsidy PLA 3,129 4,000 4,100 3,945 5,100 Research and development tax credit (3,952) Total benefits and other unrequited expenses 3,741,773 3,735,300 3,750,400 3,708,849 3,648,200 Borrowing expenses Adverse event interest PLA (1) 10 Environmental restoration account interest PLA 1,636 2,000 2,000 1,634 2,000 Income equalisation interest PLA 7,260 7,000 15,000 3,543 15,000 Total borrowing expenses 8,908 9,010 17,020 5,176 17,010 Other expenses Bad debt write-offs 930,158 Impairment of debt 3 94,902 6 Impairment of debt and debt write-offs 4 1,162,098 1,180, ,829 1,179,224 Impairment of debt relating to child support 6 Impairment of debt relating to student loans 5 41, , , , ,000 Initial fair value write-down relating to student loans 629, , , , ,000 Total other expenses 1,695,599 1,930,098 2,085,200 1,614,494 1,925,224 Total appropriations 5,446,280 5,674,408 5,852,620 5,328,519 5,590,434 1 PLA refers to appropriations established under a permanent legislative authority. 2 Historically Inland Revenue had made paid parental leave payments on the basis they had PLA. During it was identified they did not have PLA. Refer to the Statement of Unappropriated Expenditure for details. 3 Impairment of debt relates to general tax, Working for Families Tax Credits and KiwiSaver debt. ANNUAL REPORT

94 4 Impairment of debt and debt write-offs is a new appropriation combining both bad debt write-offs and impairment of debt, effective from 1 July Excludes remeasurement of $117 million ( ($29) million). Macroeconomic changes are classified as a remeasurement, as defined in the Public Finance Act The Schedule of Non-departmental Expenditure includes remeasurement adjustments in the impairment figure. However, the Statement of Non-departmental Appropriations excludes remeasurement adjustments. The remeasurement relates to changes in the macroeconomic assumptions used for the valuation of the receivable. 6 These numbers are restated due to the transition to the new PBE accounting standards. Refer to Note 9 of the non-departmental financial schedules in part nine for details. 7 The revised budget figures for are those included in The Supplementary Estimates of Appropriations and Supporting Information for the year ending 30 June All of the non-departmental appropriations administered by the Department are exempt from the requirements to report end-of-year performance information, under section 15D of the Public Finance Act The budget, revised budget and forecast figures have been prepared in accordance with NZ GAAP, using accounting policies that are consistent with those adopted in preparing the non-departmental financial schedules in part nine. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June STATEMENT OF NON-DEPARTMENTAL UNAPPROPRIATED EXPENDITURE In the financial year: There were no instances of expenditure incurred outside of appropriation ( : $nil). There were no instances of expenditure incurred in excess of appropriation ( : $ million). 92 ANNUAL REPORT 2015

95 08 Departmental financial statements ANNUAL REPORT

96 STATEMENT OF COMPREHENSIVE REVENUE AND EXPENSE FOR THE YEAR ENDED 30 JUNE 2015 Notes Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Revenue Revenue Crown 717, , , , ,144 Other revenue 1 25,698 28,747 27,199 26,950 28,747 Total revenue 743, , , , ,891 Expenses Personnel 2 431, , , , ,944 Operating 3 194, , , , ,745 Depreciation and impairment 4 13,440 16,848 12,708 12,497 12,362 Amortisation and impairment 5 37,925 38,528 31,052 31,032 42,638 Capital charge 6 21,616 22,031 22,031 22,031 22,166 Finance costs Total expenses 699, , , , ,891 Net surplus/(deficit) and total comprehensive revenue and expense 43,650 19,357 The accompanying accounting policies and notes form part of these financial statements. Explanations of significant variances against budget are detailed in Note ANNUAL REPORT 2015

97 08 STATEMENT OF CHANGES IN TAXPAYERS FUNDS FOR THE YEAR ENDED 30 JUNE 2015 Notes Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Balance at start of year 270, , , , ,093 Total comprehensive revenue and expense 43,650 19,357 Repayment of surplus to the Crown 8 (43,651) (19,357) Capital injection 5,329 2,336 3,572 3,572 2,480 Capital withdrawal (279) (1,872) (1,872) (34) Balance at end of year 275, , , , ,539 The accompanying accounting policies and notes form part of these financial statements. ANNUAL REPORT

98 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2015 Notes Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Taxpayers' funds Taxpayers' funds 275, , , , ,539 Total taxpayers' funds 275, , , , ,539 Represented by: Current assets Cash and cash equivalents 30,643 12,000 12,000 20,679 12,000 Debtor Crown 238, , , , ,342 Debtors and prepayments 9 16,811 15,422 12,407 15,471 11,922 Inventories held for distribution , Total current assets 286, , , , ,064 Non-current assets Prepayments Property, plant and equipment 4 55,450 59,176 46,330 45,689 43,968 Intangible assets 5 107, , , , ,811 Total non-current assets 164, , , , ,821 Total assets 450, , , , ,885 Current liabilities Creditors and other payables 11 44,303 33,200 37,418 37,090 33,200 Surplus payable to the Crown 8 43,651 19,357 Employee entitlements 12 47,931 43,815 50,889 58,345 36,500 Provision for other liabilities Derivative financial instruments 14 1 Finance leases Other financial liabilities Total current liabilities 136,508 77,494 89, ,864 70,222 Non-current liabilities Employee entitlements 12 36,626 39,948 37,091 38,807 35,700 Provision for other liabilities , Finance leases Other financial liabilities , Total non-current liabilities 39,000 41,430 39,246 40,827 37,124 Total liabilities 175, , , , ,346 Net assets 275, , , , ,539 The accompanying accounting policies and notes form part of these financial statements. Explanations of significant variances against budget are detailed in Note ANNUAL REPORT 2015

99 08 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2015 Notes Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Cash flows operating activities Receipts from Crown 678, , , , ,360 Receipts from government departments 1,310 7,572 3,807 3,769 4,630 Receipts from third parties 21,977 21,397 25,659 24,158 24,492 Payments to employees (432,522) (458,735) (463,607) (451,073) (519,724) Payments to suppliers (184,028) (180,903) (181,441) (180,275) (185,070) Payments for capital charge (21,616) (22,031) (22,031) (22,031) (22,166) Goods and services tax (net) 2,252 (1,779) (2,773) (2,215) (2,550) Net cash flow from operating activities 17 65,536 57,925 55,928 63, ,972 Cash flows investing activities Receipts from sale of property, plant and equipment Purchase of property, plant and equipment (15,564) (20,000) (3,587) (3,678) (10,000) Purchase of intangible assets (29,102) (40,008) (28,647) (28,710) (94,998) Net cash flow from investing activities (44,552) (60,008) (32,234) (32,085) (104,998) Cash flows financing activities Capital injection 5,329 2,336 3,572 3,572 2,480 Repayment of surplus (41,080) (43,650) (43,650) Capital withdrawal (279) (1,872) (1,872) (34) Payments of finance leases 58 (253) (387) 215 (420) Net cash flow from financing activities (35,972) 2,083 (42,337) (41,735) 2,026 Net (decrease)/increase in cash and cash (14,988) (18,643) (9,964) equivalents Opening cash and cash equivalents 45,631 12,000 30,643 30,643 12,000 Closing cash and cash equivalents 30,643 12,000 12,000 20,679 12,000 The accompanying accounting policies and notes form part of these financial statements. The goods and services tax (GST) (net) component of operating activities reflects the net GST paid to and received from Inland Revenue. The GST components have been presented on a net basis, as the gross amounts do not provide meaningful information for financial statement purposes. ANNUAL REPORT

100 STATEMENT OF COMMITMENTS AS AT 30 JUNE 2015 Notes Actual Actual $000 $000 Capital commitments IT equipment Leasehold improvements Intangible assets 2,841 2,284 Total capital commitments 3,771 3,023 Operating commitment leases as lessee The future aggregate minimum lease payments to be paid under non-cancellable accommodation leases: Not later than one year 32,642 33,805 Later than one year and not later than five years 115, ,330 Later than five years 77,667 63,082 Total non-cancellable operating commitments 225, ,217 Total commitments , ,240 The accompanying accounting policies and notes form part of these financial statements. 98 ANNUAL REPORT 2015

101 STATEMENT OF CONTINGENT LIABILITIES AND CONTINGENT ASSETS 08 AS AT 30 JUNE 2015 Notes Actual Actual $000 $000 Contingent liabilities Legal proceedings and disputes taxpayer 843 1,706 Personal grievances Total contingent liabilities ,736 Contingent assets Legal proceedings and disputes taxpayer 2,867 2,647 Total contingent assets 19 2,867 2,647 The accompanying accounting policies and notes form part of these financial statements. ANNUAL REPORT

102 STATEMENT OF ACCOUNTING POLICIES These financial statements are for the year ended 30 June 2015 and include forecast financial statements for the year ending 30 June The statements have been combined to provide a single view of budget, actual and forecast information. References to the financial statements incorporate the financial statements and the forecast financial statements, unless otherwise stated. REPORTING ENTITY Inland Revenue is a government department as defined by section 2 of the Public Finance Act (PFA) 1989 and is domiciled and operates in New Zealand. The relevant legislation governing Inland Revenue s operations is the PFA It is a wholly owned entity of the Crown whose primary objective is to provide services to the public rather than making a financial return. Accordingly, Inland Revenue has designated itself as a Public Benefit Entity (PBE) for financial reporting purposes. REPORTING PERIOD The reporting period for these financial statements is for the year ended 30 June The forecast financial statements are for the year ending 30 June The financial statements were authorised for issue by the Chief Executive of Inland Revenue on 29 September STATEMENT OF COMPLIANCE The financial statements have been prepared in accordance with the requirements of the PFA 1989, which includes the requirement to comply with New Zealand generally accepted accounting practice (NZ GAAP), and Treasury Instructions. In May 2013, the External Reporting Board issued a new suite of PBE accounting standards for application by public sector entities for reporting periods beginning on or after 1 July Inland Revenue has applied the new suite of Tier 1 PBE accounting standards in preparing the 30 June 2015 financial statements. These financial statements are the first financial statements presented in accordance with the new Tier 1 PBE accounting standards. There are no material adjustments arising on transition to the new Tier 1 PBE accounting standards. BASIS OF PREPARATION The financial statements have been prepared on a going concern basis, and the accounting policies set out below have been applied consistently to all periods presented in these financial statements. These financial statements have been prepared on a historical cost basis, unless otherwise stated. The accrual basis of accounting has been used, unless otherwise stated. These financial statements are presented in New Zealand dollars, and all values are rounded to the nearest thousand dollars ($000). The functional currency of Inland Revenue is New Zealand dollars. STANDARDS ISSUED AND NOT EARLY ADOPTED There are no new relevant standards and interpretations issued this year and Inland Revenue has not early adopted any new standards and interpretations. ESTIMATIONS AND JUDGEMENTS In preparing these financial statements, judgements, estimates and assumptions have been made concerning the future. These estimates and their associated assumptions may differ from the subsequent actual results. Estimates and assumptions are continually evaluated and are based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period the estimate is revised in if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are related to retiring and long-service leave liabilities. An analysis is provided in Note12 of the exposure in relation to estimates and uncertainties surrounding retiring and longservice leave liabilities. Finance leases Determining whether a lease agreement is a finance lease or an operating lease requires judgement as to whether the agreement transfers substantially all the risks and rewards of ownership to Inland Revenue. Judgement is required on various aspects that include, but are not limited to, the fair value of the leased asset, the economic life of the leased asset, whether or not to include renewal options in the lease term, and determining an appropriate discount rate to calculate the present value of the minimum lease payments. Classification as a finance lease means the asset is recognised in the Statement of Financial Position as property, plant, and equipment, whereas with an operating lease no such asset is recognised. Inland Revenue has exercised its judgement on the appropriate classification of equipment leases, and has determined that one of these arrangements included a finance lease. 100 ANNUAL REPORT 2015

103 08 ACCOUNTING POLICIES The following accounting policies, which materially affect the measurement of financial results, financial position, and output statements within part seven, Measuring our performance have been applied. Budget and forecast figures The budget figures for are those included in The Estimates of Appropriations for the year ending 30 June The estimated actual figures for and the forecast figures for are those included in The Estimates of Appropriations for the year ending 30 June The estimated actual figures represent forecasts submitted to Treasury based on all Government decisions and assumptions as at 28 April It is not intended that the forecast financial statements will be updated subsequent to presentation. The budget, estimated actual and forecast figures have been prepared in accordance with NZ GAAP, using accounting policies that are consistent with those adopted in preparing these financial statements. GST All items in the financial statements, and appropriation statements, are stated exclusive of GST, except for debtor Crown, net debtors and accounts payable, which are stated on a GST-inclusive basis. Where GST is not recoverable as input tax, it is recognised as part of the related asset or expense. The net amount of GST owing to or from Inland Revenue at balance date, being the difference between output GST and input GST, is included in creditors and other payables or debtors and prepayments in the Statement of Financial Position. The net GST paid to or received from Inland Revenue, including the GST relating to investing and financing activities, is classified as an operating cash flow in the Statement of Cash Flows. Commitments and contingencies are disclosed exclusive of GST. Income tax Government departments are exempt from income tax as public authorities, so accordingly, no charge for income tax has been provided for. Revenue Revenue is measured at the fair value of consideration received or receivable. Revenue is recognised as follows: Revenue Crown Revenue Crown transactions are considered to be nonexchange transactions. Revenue Crown is measured based on Inland Revenue s funding entitlement for the reporting period. The funding entitlement is established by Parliament when it passes the Appropriation Acts for the financial year. The amount of revenue recognised takes into account any amendments to appropriations approved in the Appropriation (Supplementary Estimates) Act for the year and certain other unconditional funding adjustments formally approved prior to balance date. There are no conditions attached to the funding from the Crown. However, Inland Revenue can incur expenses only within the scope and limits of its appropriations. The fair value of Revenue Crown has been determined to be equivalent to the funding entitlement. Other revenue Other revenue transactions as outlined below are considered to be exchange transactions. Sale of services Sale of services are recognised in the accounting period the services are provided in, by reference to completion of specific transactions, assessed on the basis of actual services provided as a proportion of the total services to be provided. Revenue from recoveries Revenue from recoveries is recognised as revenue when earned. Sub-leases Rental revenue from sub-leased property is recognised in the surplus or deficit on a straight-line basis over the term of the lease. Insurance proceeds Insurance claim proceeds are recognised as revenue when the claim has been accepted by the insurer or when receipt of the insurance proceeds is considered virtually certain. The insurance proceeds will be disclosed as a contingent asset if the receipt is only probable. Capital charge The capital charge is recognised as an expense in the period to which the charge relates. Foreign currency transactions, hedge accounting, and hedging activities Inland Revenue s activities expose it primarily to risks of changes in foreign exchange rates. Foreign currency transactions (including those for which forward exchange contracts are held) are translated into New Zealand dollars using the spot exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the surplus or deficit. For certain commitments Inland Revenue uses derivative financial instruments (primarily, foreign currency forward exchange contracts) to mitigate its risks associated with ANNUAL REPORT

104 foreign currency fluctuations. The use of financial derivatives is governed by Inland Revenue s foreign exchange policy, which provides written principles on the use of financial derivatives consistent with Inland Revenue s risk management strategy. Inland Revenue does not hold or issue derivative financial instruments for trading purposes. It also has not adopted hedge accounting. Derivative financial instruments Derivative financial instruments are recognised at fair value on the date a derivative contract is entered into and subsequently at fair value at each balance date. They are reported as either assets or liabilities, depending on whether the derivative is in a net gain or net loss position, respectively. The fair value gains or losses on derivatives are recognised in the surplus or deficit. Foreign currency forward exchange contracts are classified as derivative financial instruments. Foreign currency forward exchange contracts are classified as current if the contract is due for settlement within 12 months of balance date. Otherwise the full fair value is classified as non-current. Debtors and receivables Accounts receivable and other debtors transactions are considered to be exchange transactions. Debtor Crown transactions are considered to be non-exchange transactions. Debtors and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method. Debtors and receivables issued with durations of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Impairment of receivables Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that Inland Revenue will not be able to collect all amounts due according to the original terms of the receivable. Significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy, and default in payments are considered indicators that the debtor is impaired. The amount of the provision is the difference between the asset s carrying amount and the estimated amount expected to be collected. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the impairment loss is recognised in the surplus or deficit. Cash and cash equivalents Cash and cash equivalents include all cash held in the bank accounts. All cash held in bank accounts is held in on demand accounts and no interest is payable to Inland Revenue. Inland Revenue is only permitted to expend its cash and cash equivalents within the scope and limits of its appropriations. Inventories held for distribution Inventories held for distribution comprise forms, booklets and returns held for distribution to the public at no or nominal consideration in the ordinary course of operations. Inventories held for distribution for public benefit purposes are carried at cost, calculated using the first-in, first-out (FIFO) cost method, adjusted where applicable for any loss of service potential. The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Where inventories are acquired through a non-exchange transaction, the cost is deemed to be the fair value at the date of acquisition. The carrying amount is recognised as an expense in the period in which the goods are distributed. The amount of any writedown for the loss of service potential is recognised in the surplus or deficit in the period the write-down occurs. Property, plant and equipment Inland Revenue has operational assets that include IT equipment, furniture and office equipment, motor vehicles, and leasehold improvements. The capitalisation thresholds are: IT equipment desktop all computers and laptops IT equipment other $2,000 and over (or $20,000 for bulk purchased IT equipment) Furniture and office equipment $2,000 and over (or $20,000 for bulk purchased furniture) Motor vehicles $2,000 and over Leasehold improvements $20,000 and over Property, plant and equipment are shown at historical cost, less accumulated depreciation and impairment losses. Historical cost is the value of consideration given to acquire or create the asset and any directly attributable costs of bringing the asset to working condition for its intended use. Additions The cost of an item of property, plant and equipment is recognised as an asset if it is probable that future economic benefits or service potential associated with the item will flow to Inland Revenue and the cost of the item can be measured reliably. In most instances, an item of property, plant and equipment is recognised at its cost. Where an asset is acquired through a non-exchange transaction, it is recognised at fair value as at the date of acquisition. 102 ANNUAL REPORT 2015

105 08 Subsequent costs Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits or service potential associated with the item will flow to Inland Revenue and the cost of the item can be measured reliably. All repairs and maintenance are recognised in the surplus or deficit during the financial period in which they are incurred. Depreciation Depreciation is provided on a straight-line basis on all property, plant and equipment, other than assets under construction. The rate of depreciation will write off the cost of the asset to the estimated residual value over the useful life of the asset. The useful life of major classes of assets have been estimated as follows: IT equipment 3 to 6 years Furniture and office equipment 5 to 7 years Motor vehicles 5 to 7 years Leasehold improvements up to 10 years All property, plant and equipment other than motor vehicles are assumed to have no residual value. Motor vehicles are assumed to have a 20% residual value. The cost of leasehold improvements is capitalised and depreciated over the unexpired period of the lease, or the estimated remaining useful life of the improvements, whichever is shorter, up to a maximum of 10 years. Assets under construction are recognised at cost less impairment and are not depreciated. The total cost of a capital project is transferred to the appropriate asset class on its completion and then depreciated. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date. Disposals Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are recognised on a net basis in the surplus or deficit. Intangible assets Inland Revenue has intangible assets in the form of internally generated intangible assets and software licenses. Additions Intangible assets are initially recorded at cost. Inland Revenue only has intangible assets with finite useful lives. The two main categories are: internally generated intangible assets and software licences. a) Internally generated intangible assets The cost of internally generated intangible assets represents expenditure incurred in the development phase of the asset only. There are two types of internally generated intangible assets: computer software developed and business processes. The cost of computer software developed comprises direct labour, material purchased and an appropriate portion of relevant overheads. These costs are directly associated with the development of identifiable and unique software controlled by Inland Revenue, and will generate future economic benefits. Expenditure on development activities where research findings are applied to a plan or design for new or substantially improved business processes, is capitalised if the business process is technically and commercially feasible and Inland Revenue has sufficient resources to complete development. Other development expenditure as part of a new or improved business process is recognised in the surplus or deficit as an expense as incurred. Expenditure incurred on research of an internally generated intangible asset is expensed when it is incurred. Where the research phase cannot be distinguished from the development phase, the expenditure is expensed when it is incurred. Costs associated with maintaining internally generated computer software are recognised as an expense when incurred. Costs of configuring and customising Commercial Off-the-Shelf (COTS) software are capitalised. Costs associated with ongoing development and maintenance of Inland Revenue s existing websites are recognised as an expense in the surplus or deficit when incurred. Staff training costs are recognised as an expense in the surplus or deficit when incurred. b) Software licences Intangible assets acquired by Inland Revenue such as computer software licences are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licences are capitalised on the basis of costs incurred to acquire and bring to use the specific software. Costs associated with maintaining computer software licences are recognised as an expense when incurred. The capitalisation thresholds for intangible assets are: Internally generated intangible assets $50,000 and over Software licences $5,000 and over Subsequent cost The cost of intangible assets with finite lives is subsequently recorded at cost less any amortisation and impairment losses. Amortisation The carrying value of an intangible asset with a finite life is amortised on a straight-line basis over its estimated useful life. Amortisation begins when the asset is available for use and ceases at the date that the asset is de-recognised. The amortisation charge for each period is recognised in the surplus or deficit. ANNUAL REPORT

106 The useful lives of major classes of intangible assets have been estimated as follows: Internally generated intangible assets 5 to 10 years Software licences 5 to 10 years Assets under construction are recognised at cost less impairment and are not amortised. The total cost of a capital project is transferred to the appropriate asset class on its completion and then amortised. De-recognition The gain or loss arising from the de-recognition of an intangible asset is recognised in the surplus or deficit when the asset is de-recognised. Impairment of non-cash generating property, plant and equipment and intangible assets Inland Revenue does not hold any cash generating assets. Assets are considered cash generating where their primary objective is to generate a commercial return. Property, plant and equipment and intangible assets that have a finite useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Property, plant and equipment and intangible assets including assets under construction are also reviewed annually for impairment at each balance date. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable service amount. The recoverable service amount is the higher of an asset s fair value less costs to sell and value in use. Value in use is the present value of the asset s remaining service potential. Value in use is determined based on either a depreciated replacement cost approach, restoration cost approach, or a service units approach. The most appropriate approach used depends on the nature of the impairment and the availability of information. If an asset s carrying amount exceeds its recoverable service amount, the asset is considered to be impaired and is written down to the recoverable service amount. The impairment loss is recognised in the surplus or deficit. The reversal of an impairment loss is also recognised in the surplus or deficit. Financial liabilities Financial liabilities measured at amortised cost are recognised initially at fair value less transaction costs and subsequently measured at amortised cost using the effective interest rate method. Included in this category are creditors and other payables, finance leases and leasing incentives. Financial liabilities entered into with durations of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Creditors and other payables are recognised at their nominal value as the effect of discounting is immaterial. Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards of ownership of an asset, whether or not title is eventually transferred. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to the ownership of an asset. Operating leases Rentals payable under operating leases are recognised as an expense on a straight-line basis over the term of the relevant lease. Lease incentives received as an incentive to enter into an operating lease are also recognised evenly over the term of the lease as a reduction in the rental expense. Contractual arrangements considered to be operating leases have been recognised during the reporting period. Finance leases At the commencement of the lease term, finance leases are recognised as assets and liabilities in the Statement of Financial Position at the lower of the fair value of the leased item or the present value of the minimum lease payments. The finance charge is charged to the surplus or deficit over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. The amount recognised as an asset is depreciated over its useful life. If there is no certainty as to whether Inland Revenue will obtain ownership at the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. Contractual arrangements considered to be finance leases have been recognised during the reporting period. Employee entitlements Short-term entitlements Employee entitlements that Inland Revenue expects to be settled within 12 months of balance date are measured at nominal values based on accrued entitlements at current rates of pay. These include salaries and wages accrued up to balance date, annual leave and time off in lieu earned up to but not yet taken at balance date, retiring, long-service leave and sick leave entitlements expected to be settled within 12 months. Inland Revenue recognises a liability for sick leave to the extent that absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent that Inland Revenue anticipates it will be used by staff to cover those future absences. Inland Revenue recognises a liability and an expense for bonuses where it is contractually obliged to pay them, or where a past practice has created a constructive obligation and a reliable estimate of the obligation can be made. 104 ANNUAL REPORT 2015

107 08 Long-term entitlements Employee entitlements that are payable beyond 12 months such as long-service leave and retiring leave have been calculated on an actuarial basis. The actuarial calculations for long-service leave and retiring leave liabilities are based on: Employee contractual entitlements Years of service accrued to balance date and years remaining to entitlement Present value of the estimated future cash outflows using an applicable discount rate and salary inflation rate. Sick leave, annual leave, and vested long-service leave are classified as a current liability. Non-vested long-service leave and retiring leave liabilities expected to be settled within 12 months of balance date are classified as a current liability. All other employee entitlements are classified as a non-current liability. Superannuation schemes Obligations for contributions to the Inland Revenue Superannuation Scheme, State Sector Retirement Savings Scheme, KiwiSaver, and the Government Superannuation Fund are accounted for as defined contribution schemes and are recognised as an expense in the surplus or deficit as they are incurred. Termination benefits Termination benefits are payable when an employee s employment contract is terminated before their normal retirement or when an employee accepts voluntary redundancy in exchange for these benefits. Inland Revenue recognises the expenditure in the surplus or deficit when it is demonstrably committed to either terminate the employment of current employees, according to a detailed formal plan without the possibility of withdrawal, or as a result of an offer for voluntary redundancy. Termination benefits to be settled within 12 months are reported at the amount expected to be paid, otherwise they are reported as the present value of the estimated future cash outflows. Provisions Inland Revenue recognises a provision for future expenditure of uncertain amounts or timing where there is a present obligation (either legal or constructive) as a result of a past event, and it is probable that expenditure will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are not recognised for net deficits from future operating activities. Provisions are recorded at the best estimate of the expenditure required to settle the obligation. Provisions to be settled beyond 12 months are recorded at their present value and are discounted using market yields on government bonds at balance date with terms to maturity that match, as closely as possible, the estimated timing of the future cash flows. The increase in the provision due to the passage of time is recognised as an interest expense and is included in finance costs. A provision for onerous contracts is recognised when the expected benefits or service potential to be derived from a contract are lower than the unavoidable cost of meeting the obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net costs of continuing with the contract. Taxpayers funds This is the Crown s net investment in Inland Revenue. It is measured as the difference between total assets and total liabilities. Taxpayers funds are disaggregated and classified into a number of components: Capital injection Capital withdrawal Repayment of surplus to the Crown. Statement of Cash Flows Cash and cash equivalents mean cash balances in bank accounts. Operating activities include cash received from all revenue sources of Inland Revenue, and cash payments made for the supply of goods and services. Investing activities are those activities relating to the acquisition and disposal of non-current assets. Financing activities comprise capital injections by, or repayment of capital to, the Crown. Commitments Expenses and liabilities yet to be incurred on non-cancellable contracts that have been entered into on or before balance date are disclosed as commitments to the extent that they are unperformed obligations. Information on non-cancellable capital and lease commitments is reported in the Statement of Commitments. Cancellable capital commitments that have penalty or exit costs explicit in the agreement on exercising that option to cancel are reported in the Statement of Commitments at the lower of the remaining contractual commitment and the value of those penalty or exit costs (i.e. the minimum future payments). Contingent liabilities and assets Contingent liabilities and assets are recorded in the Statement of Contingent Liabilities and Contingent Assets at the point at which the contingency is evident. Contingent liabilities are disclosed if the possibility that they will crystallise is not remote. Contingent assets are disclosed if it is probable that the benefits will be realised. Insurance claim proceeds are disclosed as a contingent asset if the receipt of the insurance proceeds is probable. ANNUAL REPORT

108 Cost allocations Inland Revenue uses an integrated cost allocation process to derive the cost of its outputs. This process involves the initial costing of business processes followed by the full costing of outputs. Business processes represent Inland Revenue s key functional activities. These business processes are used to capture direct costs. Direct personnel costs are charged to business processes based on actual hours and standard activity rates. Other related direct costs including depreciation, are allocated to business processes based on planned hours or relevant activity drivers. Premises lease costs are charged to business processes based on headcount or relevant activities. Other indirect costs and corporate overheads that cannot be attributed directly to a business process are apportioned to outputs based on planned business process activity allocation to outputs. There have been no material changes in cost allocation policies since the date of the last audited financial statements. Comparatives Certain comparative information has been reclassified, where required, to conform with the current year s presentation. CHANGES IN ACCOUNTING POLICIES For the preparation of the Department s financial statements, forecast financial statements and output statements within part seven, Measuring our performance as at 30 June 2015 there have been no changes in accounting policies and cost allocation policies since the date of the last audited financial statements. All policies have been applied on a basis consistent with the previous year. Forecast policies The forecasts have been compiled on the basis of existing government policies and ministerial expectations at the time the statements were finalised and reflect all government decisions and circumstances as at 28 April It is not intended that the forecast financial statements will be updated subsequent to presentation. The main assumptions are as follows: The Department s main activities will remain substantially the same as for the previous year. Operating costs are based on historical experience. The general historical pattern is expected to continue. Estimated year-end information for is used as the opening position for the forecasts. Variations to forecast The actual financial results for the forecast period covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these forecast financial statements and the actual reported results include: Changes to the budget through initiatives approved by Cabinet Technical adjustments to the budget including transfers between financial years The timing of expenditure relating to significant programmes and projects. Any changes to budgets during will be incorporated into The Supplementary Estimates of Appropriations for the year ending 30 June FORECAST FINANCIAL STATEMENTS The forecast financial statements have been prepared in accordance with the PFA The purpose of the forecast financial statements is to facilitate Parliament s consideration of appropriations for, and planned performance of, the department. These forecast financial statements may not be appropriate for other purposes. The forecast financial statements have been prepared in accordance with the accounting policies detailed above. Additional accounting policies relating to the forecasts are set out below. The forecast financial statements comply with NZ GAAP and have been prepared in accordance with PBE Financial Reporting Standard 42 Prospective Financial Statements. The forecast financial statements are not subject to audit. 106 ANNUAL REPORT 2015

109 08 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: OTHER REVENUE Actual Unaudited Actual Unaudited budget forecast $000 $000 $000 $000 Accident Compensation Corporation (ACC) agency fees 20,500 20,500 20,500 20,500 Support services to other government agencies 555 3,060 2,396 3,060 Court costs recovery 2,081 2,828 2,124 2,828 Revenue from rulings 1,061 1, ,088 Rental revenue from sub-leases 475 1, ,257 Services on behalf of other government agencies 1, Supply of information to other agencies Net gains on disposal of property, plant and equipment 1 1 Insurance proceeds 1 Other Total other revenue 25,698 28,747 26,950 28,747 NOTE 2: PERSONNEL Actual Unaudited Actual Unaudited budget forecast $000 $000 $000 $000 Salaries and wages 371, , , ,770 Contractors and temporary staff 37,489 39,926 45,328 70,203 Employer contributions to defined contribution plans 11,745 11,952 12,181 12,790 Retiring, long-service and sick leave 242 3,000 5,109 3,000 Terminating benefits 1,926 2,051 1,995 2,106 ACC levies 1,536 1,714 1,653 2,036 Annual leave 1, ,585 1,589 Bonuses Other 6,498 2,763 7,322 2,215 Total personnel 431, , , ,944 ANNUAL REPORT

110 NOTE 3: OPERATING Actual Unaudited Actual Unaudited budget forecast $000 $000 $000 $000 Information technology costs 50,545 50,312 52,093 55,556 Accommodation lease rentals 31,471 33,280 32,315 34,355 Printing and postage 17,943 18,623 16,304 17,122 Communication 15,845 15,404 14,025 14,136 Consultants 23,348 13,763 10,513 12,051 Travel and transport 9,027 7,905 9,198 9,305 Premises costs 9,505 8,120 8,109 8,868 Staff development 6,882 6,860 7,689 7,934 Legal expenses 8,568 8,642 6,404 6,937 Office supplies 3,604 3,435 3,963 4,189 Bank fees 3,400 3,241 2,849 2,953 Advertising and publicity 1,881 2,086 2,035 2,109 Equipment maintenance 1,780 1,297 1,734 1,789 Audit fees for audit of the financial statements 1,033 1,100 1,033 1,100 Disbursements for audit of the financial statements Fees to Audit NZ for other services 30 Net loss on disposal of property, plant and equipment Net loss on disposal of intangible assets Inc/(Dec) in provision for onerous leases 488 (52) Inc/(Dec) in provision for debt impairment Realised foreign exchange losses 2, Bad debts written off 10 6 Other operating expenses 7,070 3,000 6,936 5,269 Total operating 194, , , , ANNUAL REPORT 2015

111 08 NOTE 4: PROPERTY, PLANT AND EQUIPMENT BY CATEGORY IT equipment Furniture and office equipment Motor vehicles Leasehold improvements Assets under construction leasehold Total $000 $000 $000 $000 $000 $000 Cost Balance as at 1 July ,671 30,724 4,595 62,011 1, ,407 Additions by purchase 2, ,939 Other movements 1 (684) (684) Transfers between category 1,362 (1,347) 15 Disposals (5,329) (4) (1,120) (3,573) (10,026) Balance as at 30 June ,463 31,316 3,711 60, ,651 Accumulated depreciation and impairment losses Balance as at 1 July ,232 23,528 1,508 27,689 99,957 Depreciation charge expensed 4,399 2, ,413 12,477 Depreciation charge capitalised 2 1 (9) (8) Impairment losses Transfers between category Disposals (4,812) (1) (735) (3,936) (9,484) Balance as at 30 June ,820 25,706 1,250 29, ,962 Carrying amount as at 30 June ,643 5,610 2,461 30, ,689 Unaudited forecast carrying amount at 30 June ,558 4,251 2,293 30, ,968 Cost Balance as at 1 July ,621 29,298 4,904 53,003 4, ,160 Additions by purchase 4,935 1,437 8, ,944 Other movements 1 (175) (175) Transfers between category 25 3,905 (3,112) 818 Disposals (13,910) (11) (309) (3,110) (17,340) Balance as at 30 June ,671 30,724 4,595 62,011 1, ,407 Accumulated depreciation and impairment losses Balance as at 1 July ,952 21,190 1,123 26, ,608 Depreciation charge expensed 6,100 2, ,455 13,740 Depreciation charge capitalised Impairment losses (300) (300) Transfers between category Disposals (13,832) (11) (162) (3,109) (17,114) Balance as at 30 June ,232 23,528 1,508 27,689 99,957 Carrying amount as at 30 June ,439 7,196 3,087 34,322 1,406 55,450 There is no restriction over the title of Inland Revenue s property, plant and equipment, nor is any property, plant and equipment pledged as security for liabilities. 1 This relates to the addition/reduction of lease make-good costs on leased buildings. 2 The depreciation charge for existing assets that are used in the development of intangible assets. Finance leases Inland Revenue has entered into an agreement for the provision of telecommunications services that includes embedded finance leases. The net carrying amount of these finance leases within the IT equipment category is $1,117,000 ( : $935,000). ANNUAL REPORT

112 NOTE 5: INTANGIBLE ASSETS BY CATEGORY Internally generated intangible assets Software licences Assets under construction intangibles Total $000 $000 $000 $000 Cost Balance as at 1 July , ,803 30, ,697 Additions by purchase 5,984 5,984 Additions internally developed 11,058 11,704 22,762 Transfers between category 21,715 (21,730) (15) Disposals (1,100) (17,222) (146) (18,468) Balance as at 30 June , ,565 19, ,960 Accumulated amortisation and impairment losses Balance as at 1 July , ,450 6, ,844 Amortisation charge expensed 22,227 7,422 29,649 Amortisation charge capitalised Impairment losses 1,383 1,383 Transfers between category 2,519 (2,519) Disposals (1,100) (17,019) (18,119) Balance as at 30 June ,814 97,853 5, ,774 Carrying amount as at 30 June ,726 16,712 14, ,186 Unaudited forecast carrying amount at 30 June ,612 25,073 52, ,811 Cost Balance as at 1 July , ,343 26, ,861 Additions by purchase 5,445 5,445 Additions internally developed 6,826 17,706 24,532 Transfers between category 13, (14,196) (818) Disposals (5,969) (4,354) (10,323) Balance as at 30 June , ,803 30, ,697 Accumulated amortisation and impairment losses Balance as at 1 July , ,989 4, ,735 Amortisation charge expensed 27,938 8,338 36,276 Amortisation charge capitalised Impairment losses 1,649 1,649 Transfers between category Disposals (5,971) (3,877) (9,848) Balance as at 30 June , ,450 6, ,844 Carrying amount as at 30 June ,716 18,353 23, ,853 There is no restriction over the title of Inland Revenue s intangible assets, nor are any intangible assets pledged as security for liabilities. 1 Refers to the amortisation charge for existing assets that are utilised in the development of intangible assets. 110 ANNUAL REPORT 2015

113 08 Internally generated intangible assets include the following items and carrying amounts: FIRST technology environment $30,378,000, Child Support Reform $22,490,000, student loans $19,478,000, KiwiSaver $1,380,000 ( : FIRST technology environment $35,922,000, student loans $25,207,000, KiwiSaver $4,587,000). The amortisation period for these intangible assets ranges from 5 10 years. Software licences include the following items and carrying amounts: FIRST technology environment $15,884,000, KiwiSaver $669,000, Child Support Reform $159,000 ( : FIRST technology environment $17,379,000, KiwiSaver $974,000). The amortisation period for these intangible assets ranges from 5 10 years. NOTE 6: CAPITAL CHARGE Inland Revenue pays a capital charge to the Crown on taxpayers funds as at 30 June and 31 December each year. The capital charge rate for the year ended 30 June 2015 was 8.0% per annum ( : 8.0%, forecast : 8.0%). NOTE 7: FINANCE COSTS Actual Actual $000 $000 Interest on finance leases Total finance costs NOTE 8: SURPLUS PAYABLE TO THE CROWN Actual Actual $000 $000 Net surplus/(deficit) 43,650 19,357 Add unrealised losses/(gains) in relation to forward foreign exchange contracts 1 Total surplus payable to the Crown 43,651 19,357 ANNUAL REPORT

114 NOTE 9: DEBTORS AND PREPAYMENTS 112 ANNUAL REPORT Actual Actual $000 $000 Current assets exchange transactions Debtors Accounts receivable 5,098 4,368 Less provision for impairment (8) (14) Other debtors Net debtors 5,564 4,586 Prepayments 11,247 10,885 Total current assets 16,811 15,471 Non-current assets exchange transactions Prepayments Total non-current assets Total debtors and prepayments exchange transactions 17,645 15,799 Given their short-term nature, the carrying value of accounts receivable and other debtors approximates their fair value. Overdue receivables have been assessed for impairment and appropriate provisions applied, as detailed below: Gross debtors Impairment Net debtors actual actual actual $000 $000 $ Not past due 4,339 4,339 Past due 1 to 30 days Past due 31 to 60 days Past due 61 to 90 days Past due > 90 days 116 (14) 102 Total 4,600 (14) 4, Not past due 3,061 3,061 Past due 1 to 30 days 2,107 2,107 Past due 31 to 60 days Past due 61 to 90 days Past due > 90 days 79 (8) 71 Total 5,572 (8) 5,564 The provision for impairment has been calculated based on expected losses for Inland Revenue s debtors. Expected losses have been determined based on a review of each debtor. Movements in the provision for impairment are as follows: Actual Actual $000 $000 Opening balance (9) (8) Additional provisions made during the year (8) (9) Unused amounts reversed Receivables written off during the year 9 3 Closing balance (8) (14)

115 08 NOTE 10: INVENTORIES HELD FOR EXTERNAL DISTRIBUTION Inventories comprise forms, booklets and returns held for external distribution. The carrying amount of inventories held for distribution that are measured at cost as at 30 June 2015 amounted to $873,000 ( : $879,000). The write-down of inventories held for distribution amounted to $179,000 ( : $331,000). There have been no reversals of writedowns. The carrying amount of inventories held for distribution included the write-down of $179,000. No inventories are pledged as security for liabilities. NOTE 11: CREDITORS AND OTHER PAYABLES Actual Actual $000 $000 Creditors and other payables exchange transactions Accounts payable 9,164 6,483 Accrued expenses other 23,816 21,501 Total creditors and other payables exchange transactions 32,980 27,984 Creditors and other payables non-exchange transactions GST payable 11,323 9,106 Total creditors and other payables non-exchange transactions 11,323 9,106 Total creditors and other payables 44,303 37,090 Creditors and other payables are normally settled on 30-day terms, therefore the carrying value of creditors and other payables approximates their fair value. ANNUAL REPORT

116 NOTE 12: EMPLOYEE ENTITLEMENTS 114 ANNUAL REPORT Actual Actual $000 $000 Current liabilities exchange transactions Annual leave 25,139 26,332 Accrued salaries and wages 14,180 22,542 Retiring leave 1,539 1,801 Long-service leave 1,007 1,348 Sick leave 1,138 1,140 Terminating benefits Time off in lieu 10 3 Total current liabilities exchange transactions 43,899 54,107 Current liabilities non-exchange transactions PAYE payable 4,032 4,238 Total current liabilities non-exchange transactions 4,032 4,238 Total current liabilities 47,931 58,345 Non-current liabilities exchange transactions Retiring leave 28,971 30,764 Long-service leave 7,655 8,043 Total non-current liabilities exchange transactions 36,626 38,807 Total non-current liabilities 36,626 38,807 Total employee entitlements 84,557 97,152 The present value of retiring and long-service leave obligations depend on a number of factors that are determined on an actuarial basis by an independent actuary using a number of assumptions. Two key assumptions used in calculating these liabilities are the discount rate and salary inflation. Any changes in these assumptions will impact on the carrying amount of the liabilities. The discount rates used by the independent actuary for the retiring and long-service leave valuations are based on Treasury published forward rates at 30 June The forward rates are derived from New Zealand government bonds. The long-term salary inflation assumption is based on Treasury published rates at 30 June 2015 and after obtaining advice from the independent actuary. The longterm salary inflation assumption used was 3.0% ( : 3.5%). In there was a general decrease in Treasury published forward discount rates. The impact of the forward discount rate movement was to increase the carrying amounts of the retiring leave liability by $1,578,000 and the long-service leave liability by $421,000. The following table provides a sensitivity analysis for the key assumptions: Discount rate Salary inflation 1.0% + 1.0% 1.0% + 1.0% $000 $000 $000 $000 Retiring leave 1,776 (1,589) (1,722) 1,895 Long-service leave 489 (432) (474) 527 Movements in the provision for terminating benefits are as follows: Actual Actual $000 $000 Opening balance 2, Additional provisions made 1,907 1,995 Amounts used (3,431) (1,940) Unused amounts reversed Closing balance The closing provision is expected to be fully utilised in the year.

117 08 NOTE 13: PROVISION FOR OTHER LIABILITIES Actual Actual $000 $000 Current liabilities Onerous contracts 90 Lease make-good 53 Total current liabilities Non-current liabilities Onerous contracts 397 Lease make-good 912 Total non-current liabilities Total provision for other liabilities Movements for each class of provision are as follows: Onerous Lease Total contracts make-good $000 $000 $000 Balance at 1 July Additional provisions made Amounts used (15) (15) Unused amounts reversed (668) (668) Discount unwind (282) (282) Balance at 30 June Balance at 1 July ,895 1,895 Additional provisions made Amounts used Unused amounts reversed (999) (999) Discount unwind (734) (734) Balance at 30 June Onerous contracts The provision for onerous contracts arises from non-cancellable accommodation leases where the unavoidable costs of meeting the lease contract exceed the economic benefits to be received from it. Inland Revenue currently leases one property that includes some residual floor space which is not currently being utilised. The residual floor space is available for sub-lease but there is no certainty that the space can be sub-let due to it being part of one floor. The potential cost of a floor reconfiguration may outweigh the benefit of a new sub-leasing agreement. The lease is due to expire in December Lease make-good As a result of changes in lease arrangements Inland Revenue no longer has any lease make-good obligations at 30 June In and prior years as a condition of some of its leasing arrangements, Inland Revenue was required at the expiry of the lease term to make-good any damage caused to the premises and remove any fixtures and fittings it had installed. ANNUAL REPORT

118 NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS To hedge its currency risk, Inland Revenue enters into foreign currency forward exchange contracts with the New Zealand Debt Management Office (NZDMO). The notional principal amount of outstanding forward exchange contract derivatives as at 30 June 2015 was NZ $nil ( : NZ $95,146). The prior year contracts consisted of the purchase of US $82,720 and the unrealised loss on the forward exchange contract derivative was NZ $728 at 30 June The fair value of forward exchange contracts entered into during the financial year was determined by reference to published price quotations in an active market. NOTE 15: FINANCE LEASES Actual Actual $000 $000 Total minimum lease payments payable Not later than one year Later than one year and not later than five years Later than five years Total minimum lease payments 1,093 1,301 Future finance charges (114) (107) Present value of minimum lease payments 979 1,194 Present value of minimum lease payments payable Not later than one year Later than one year and not later than five years Later than five years Total present value of minimum lease payments 979 1,194 Represented by: Current Non-current Total finance leases 979 1,194 Inland Revenue has entered into an agreement for the provision of telecommunications services that includes embedded finance leases. The leased items are included within the net carrying amount of IT equipment (refer Note 4). Inland Revenue has no rights of renewal and no option to purchase the assets at the end of the lease term. There are no restrictions placed on Inland Revenue by any of the finance leasing arrangements. Finance lease liabilities are effectively secured, as the rights to the leased assets reverts to the lessor in the event of default in payment. 116 ANNUAL REPORT 2015

119 08 NOTE 16: OTHER FINANCIAL LIABILITIES Actual Actual $000 $000 Current liabilities Leasing incentives Total current liabilities Non-current liabilities Leasing incentives 869 1,136 Total non-current liabilities 869 1,136 Total other financial liabilities 1,052 1,411 NOTE 17: RECONCILIATION OF NET SURPLUS/(DEFICIT) TO NET CASH FLOW FROM OPERATING ACTIVITIES Actual Actual $000 $000 Net surplus/(deficit) 43,650 19,357 Add/(less) non-cash items Depreciation and impairment 13,440 12,497 Amortisation and impairment 37,925 31,032 Net (gains)/losses on derivative financial instruments (2) (1) Total non-cash items 51,363 43,528 Add items classified as investing or financing activities Net loss/(gain) on disposal of property, plant and equipment Net loss/(gain) on disposal of intangible assets Total items classified as investing or financing activities Add/(less) working capital movements (Inc)/Dec in debtor Crown (39,675) (7,127) Dec/(Inc) in debtors and prepayments 1,455 1,846 Dec/(Inc) in inventories held for distribution (Dec)/Inc in creditors and other payables 8,917 (7,212) Inc/(Dec) in provision for employee benefits (536) 12,595 (Dec)/Inc in provision for other liabilities (930) (478) Inc/(Dec) in other financial liabilities Net movements in working capital items (30,041) (11) Net cash inflow from operating activities 65,536 63,856 ANNUAL REPORT

120 NOTE 18: COMMITMENTS Capital commitments Capital commitments are the aggregate amount of capital expenditure contracted for the acquisition of property, plant and equipment and intangible assets that have not been paid for or recognised as a liability at balance date. Operating commitments Operating commitments for non-cancellable accommodation leases relate to Inland Revenue s long-term leases on its premises at many locations throughout New Zealand. The annual lease payments are reviewed regularly, and the amounts disclosed as future commitments are based on current rental rates. These commitments also include office space vacated by Inland Revenue as a result of organisational restructuring and sub-leasing. Provision has been made in the financial statements for the expected net expenses for the duration of these leases. The total minimum future sub-lease payments expected to be received under non-cancellable sub-leases at balance date is $13,632,426 ( : $12,294,537). The increase is mainly due to an upcoming establishment of a co-located building in Tauranga with another government agency. The co-location is expected to take place in the financial year. Inland Revenue s non-cancellable operating leases have varying terms, escalation clauses and renewal rights. There are no restrictions placed on Inland Revenue by any of its leasing arrangements. NOTE 19: CONTINGENT LIABILITIES AND CONTINGENT ASSETS Contingent liabilities Legal proceedings and disputes taxpayer This contingent liability relates to potential claims against Inland Revenue for court costs associated with tax disputes and other legal proceedings being taken through the courts against taxpayers. It only relates to court costs; the actual revenue (tax) under dispute is recognised as a non-departmental contingency (refer to part 9, Schedule of Non-departmental Contingent Liabilities and Contingent Assets). The expected value of the contingent liability is calculated using an outcome probability model that weighs the total potential liability against outcome probabilities. The contingent liability as at (excluding court costs recoverable) was $1,706,058 ( : $843,283). Legal proceedings and disputes departmental This contingent liability relates to disputes such as claims made by departmental suppliers. Personal grievances Personal grievances represent amounts claimed by employees for alleged breaches of contract against Inland Revenue. Contingent assets Legal proceedings and disputes taxpayer This contingent asset relates to potential court costs recoverable by Inland Revenue for court costs associated with tax disputes and other legal proceedings being taken through the courts against taxpayers. It only relates to court costs; the actual revenue (tax) under dispute is recognised as a non-departmental contingency (refer to part 9, Schedule of Non-departmental Contingent Liabilities and Contingent Assets). The expected value of the contingent asset is calculated using an outcome probability model that weighs the total potential court costs recoverable against outcome probabilities. The contingent asset as at was $2,646,669 ( : $2,867,162). 118 ANNUAL REPORT 2015

121 08 NOTE 20: RELATED PARTY TRANSACTIONS AND KEY MANAGEMENT PERSONNEL Inland Revenue is a wholly owned entity of the Crown. The government significantly influences the role of Inland Revenue as well as being its major source of revenue. Related party disclosures have not been made for transactions with related parties that are within a normal supplier or client/ recipient relationship on terms and conditions no more or less favourable than those that it is reasonable to expect that Inland Revenue would have adopted in dealing with the party at arm s length in the same circumstances. Further, transactions with other government agencies (for example, government departments and Crown entities) are not disclosed as related party transactions when they are consistent with the normal operating arrangements between government agencies and undertaken on the normal terms and conditions for such transactions. Inland Revenue has no related party transactions that are required to be disclosed in ( : $nil). Remuneration to key management personnel The remuneration of key management personnel during the year was as follows: Actual Actual Leadership team, including the Chief Executive Remuneration and other benefits $3,334,000 $3,526,000 Full-time equivalents Key management personnel comprise the Minister of Revenue, the Commissioner, five Deputy Commissioners, Chief Tax Counsel, Chief Financial Officer, Chief Technology Officer, Chief People Officer and those formally acting in those positions during the financial year. The Commissioner s remuneration is determined and paid by the State Services Commission. The above key management personnel disclosure excludes the Minister of Revenue. The Minister s remuneration and other benefits are set out by the remuneration authority, are not received only for his role as a member of key management personnel of Inland Revenue and are not paid by Inland Revenue. ANNUAL REPORT

122 NOTE 21: FINANCIAL INSTRUMENTS CATEGORIES OF FINANCIAL INSTRUMENTS The carrying amounts of financial assets and financial liabilities in each of the financial instrument categories are as follows: Notes Actual Actual $000 $000 Debtors and receivables Cash and cash equivalents 30,643 20,679 Debtor Crown 238, ,557 Net debtors 9 5,564 4,586 Total debtors and receivables 274, ,822 Fair value through surplus or deficit Derivative financial instrument liabilities 14 1 Total fair value through surplus or deficit 1 Financial liabilities measured at amortised cost Creditors and other payables 11 32,980 27,984 Finance lease liabilities ,194 Other financial liabilities 16 1,052 1,411 Total financial liabilities measured at amortised cost 35,011 30,589 NOTE 22: FINANCIAL INSTRUMENTS FAIR VALUE HIERARCHY DISCLOSURES For those instruments recognised at fair value in the Statement of Financial Position, fair values are determined according to the following hierarchy: Quoted market price (level 1) Financial instruments with quoted prices for identical instruments in active markets. Valuation technique using observable inputs (level 2) Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. Valuation techniques with significant non-observable inputs (level 3) Financial instruments valued using models where one or more significant inputs are not observable. The following table analyses the basis of the valuation of classes of financial instruments measured at fair value in the Statement of Financial Position. Valuation Technique Quoted market Observable Significant non - Total price inputs observable inputs $000 $000 $000 $ Financial liabilities Foreign exchange derivatives Financial liabilities Foreign exchange derivatives 1 1 There were no transfers between the different levels of the fair value hierarchy. 120 ANNUAL REPORT 2015

123 08 NOTE 23: FINANCIAL INSTRUMENTS FINANCIAL INSTRUMENT RISKS Inland Revenue s activities expose it to a variety of financial instrument risks, including market risk, credit risk, and liquidity risk. Inland Revenue has a series of policies to manage the risks associated with financial instruments and seeks to minimise exposure from financial instruments. These policies do not allow any transactions that are speculative in nature to be entered into. Market risk Currency risk The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates is called currency risk. Because Inland Revenue purchases fixed assets and services from overseas suppliers it is exposed to currency risk arising from various currency exposures, primarily for the United States and Australian dollars. Currency risk arises from future purchases of fixed assets and services which are denominated in a foreign currency. Inland Revenue has policies in place to manage the risks associated with financial instruments and, being risk averse, seeks to minimise exposure from its treasury activities. Under its foreign exchange policy, Inland Revenue enters into foreign currency forward exchange contracts to manage foreign exchange exposures when single foreign exchange transactions exceed NZ $100,000, or the transaction exposure for an individual currency exceeds NZ $100,000. This policy has been approved by Treasury and is in line with the requirements of Treasury s Guidelines for the Management of Crown and Departmental Foreign Exchange Exposure. Interest rate risk Interest rate risk is the risk that the fair value of a financial instrument will fluctuate or, the cash flows from a financial instrument will fluctuate, due to changes in market interest rates. Inland Revenue has no interest-bearing financial instruments so it has no exposure to interest rate risk. Credit risk The risk that a third party will default on its obligations to Inland Revenue, causing a loss to be incurred is called credit risk. In the normal course of its business, credit risk from debtors and receivables is concentrated with the Crown and other government agencies. The carrying amount of financial assets recognised in the Statement of Financial Position best represents Inland Revenue s maximum exposure to credit risk at balance date. Inland Revenue does not require any collateral, security, or other credit enhancements to support financial instruments with financial institutions that it deals with, because these entities have high credit ratings. Westpac is Inland Revenue s main bank and has a Standard and Poor s credit rating of AA. Inland Revenue enters into foreign currency transactions with the NZDMO (Standard and Poor s credit rating of AA). For its other financial instruments, Inland Revenue does not have significant concentrations of credit risk. The carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated is not material. Liquidity risk Liquidity risk is the risk that Inland Revenue will encounter difficulty raising liquid funds to meet commitments as they fall due. As all but an insignificant proportion of funds come from the New Zealand Government and cash is drawn down on a fortnightly basis, Inland Revenue does not have significant liquidity risk. In meeting its liquidity requirements, Inland Revenue closely monitors its forecast cash requirements with expected cash drawdowns from the NZDMO. Inland Revenue maintains a target level of available cash to meet liquidity requirements. ANNUAL REPORT

124 Contractual maturity analysis of financial liabilities, excluding derivatives The table below analyses Inland Revenue s financial liabilities that will be settled, based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows. Notes Carrying Contractual Up to 1 year 1 to 5 years Over 5 years Total amount cash flows $000 $000 $000 $000 $000 $ Creditors and other payables 11 27,984 27,984 27,984 27,984 Finance lease liabilities 15 1,194 1, ,093 Other financial liabilities 16 1,411 1, ,144 Closing balance 30,589 30,221 28,715 1, , Creditors and other payables 11 32,980 32,980 32,980 32,980 Finance lease liabilities , ,028 Other financial liabilities 16 1, Closing balance 35,011 34,869 33,604 1, ,869 Contractual maturity analysis of derivative financial instrument liabilities The table below analyses Inland Revenue s forward exchange contract derivatives into relevant maturity groupings based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows. Notes Liability Asset carrying Contractual Less than years carrying amount cash flows months months amount NZD NZD NZD NZD $000 $000 $000 $000 $000 $ Gross settled forward foreign 14 exchange contracts Outflow Inflow Gross settled forward foreign 14 1 exchange contracts Outflow Inflow The following provides a sensitivity analysis for the key assumptions: At 30 June 2015, if the NZ dollar had strengthened by 5% against the US dollar, with all other variables held constant, the surplus for the year would have been $1,083 ( : $4,769) higher. At 30 June 2015, if the NZ dollar had weakened by 5% against the US dollar, with all other variables held constant, the surplus for the year would have been $1,198 ( : $5,271) lower. This movement is attributable to the translation of US dollar-denominated creditors. At 30 June 2015, if the NZ dollar had strengthened by 5% against the Australian dollar, with all other variables held constant, the surplus for the year would have been $16,131 ( : $8,232) higher. At 30 June 2015, if the NZ dollar had weakened by 5% against the Australian dollar, with all other variables held constant, the surplus for the year would have been $17,829 ( : $9,098) lower. This movement is attributable to the translation of Australian dollar-denominated creditors. 122 ANNUAL REPORT 2015

125 08 NOTE 24: CAPITAL MANAGEMENT Inland Revenue s capital is its taxpayers funds, which is made up of general funds. Taxpayers funds is represented by net assets. Inland Revenue manages its revenues, expenses, assets, liabilities and general financial dealings prudently. Inland Revenue s taxpayers funds are largely managed as a by-product of managing revenue, expenses, assets, liabilities, and compliance with the Government Budget processes, Treasury Instructions and the Public Finance Act The objective of managing Inland Revenue s taxpayers funds is to ensure that it effectively achieves its strategic direction, while remaining a going concern. NOTE 25: EXPLANATION OF MAJOR VARIANCES AGAINST BUDGET The following major budget variances occurred between the actuals and the budget. The budget figures for are those included in The Estimates of Appropriations for the year ending 30 June Notes Unaudited Actual Variance Variance budget $000 $000 $000 % Statement of Comprehensive Revenue and Expense Revenue Revenue Crown (a) 683, ,650 (15,015) (2%) Expenses Personnel (b) 457, ,668 (5,918) (1%) Depreciation and impairment (c) 16,848 12,497 4,351 26% Amortisation and impairment (d) 38,528 31,032 7,496 19% Statement of Financial Position Current assets Cash and cash equivalents (e) 12,000 20,679 (8,679) (72%) Debtor Crown (f) 195, ,557 (50,055) (26%) Non-current assets Property, plant and equipment (g) 59,176 45,689 13,487 23% Intangible assets (h) 113, ,186 8,301 7% Current liabilities Creditors and other payables (i) 33,200 37,090 (3,890) (12%) Employee entitlements (j) 43,815 58,345 (14,530) (33%) Statement of Comprehensive Revenue and Expense (a) Revenue Crown was higher than budget by $15,015,000 (2%). The increase was mainly due to additional funding of $32,000,000 received for the business transformation programme. This is offset by an expense transfer of ($13,000,000) from to and for depreciation to align with the proposed timing of capital expenditure for the business transformation programme. (b) (c) (d) Personnel expenses were higher than budget by $5,918,000 (1%). The variance in expenditure was mainly due to the additional funding received for the business transformation programme and a contract settlement payment. Depreciation and impairment was lower than budget by $4,351,000 (26%). The variance was due to lower spending on existing equipment and infrastructure, which reflects decisions to hold capital funding in reserves to contribute to future business transformation programme capital expenditure. Amortisation and impairment was lower than budget by $7,496,000 (19%). This variance was due to lower spending on existing systems and software, which reflects decisions to hold capital funding in reserves to contribute to future business transformation programme capital expenditure. ANNUAL REPORT

126 Statement of Financial Position (e) Cash and cash equivalents were higher than budget by $8,679,000 (72%). This was due to holding cash for salaries and wages that were paid on 1 July (f) Debtor Crown was higher than budget by $50,055,000 (26%). This variance was mainly due to $13,487,000 of underspending in property, plant and equipment, $8,301,000 of underspending in intangible assets, and the net surplus for of $19,357,000 that will be repaid to the Crown. (g) & (h) Non-current assets were lower than budget by $21,788,000 (13%). The variance in non-current assets mainly reflects a reduction in the capital expenditure during the year. Capital expenditure on existing systems and infrastructure has been reduced, with capital funding held in reserves to contribute to future business transformation programme capital expenditure. (i) (j) Creditors and other payables were higher than budget by $3,890,000 (12%). This was due to the timing of trade payables and a higher than forecast GST liability. Employee entitlements were higher than budget by $14,530,000 (33%). This was mainly due to a contract settlement payment and macro-economic changes in the actuarial valuations for retiring and long-service leave in NOTE 26: EVENTS AFTER BALANCE DATE No events have occurred between the balance date and date of signing these financial statements that materially affect the actual results within these financial statements. 124 ANNUAL REPORT 2015

127 09 Non-departmental financial schedules ANNUAL REPORT

128 SCHEDULE OF NON-DEPARTMENTAL REVENUE FOR THE YEAR ENDED 30 JUNE Actual Unaudited budget Unaudited estimated Actual Unaudited forecast actual $000 $000 $000 $000 $000 Direct taxation Income tax Individuals Source deductions 23,125,625 24,484,000 24,449,000 24,663,899 25,651,000 Other persons 5,246, ,428,000 5,661,000 5,848,242 5,584,000 Refunds (1,515,058) 2 (1,395,000) (1,517,000) (1,595,041) (1,696,000) Fringe benefit tax 488, , , , ,000 Total individuals 27,346,095 29,029,000 29,112,000 29,431,171 30,079,000 Corporate tax Gross companies tax 10,617,384 10,686,000 10,900,000 10,526,789 11,096,000 Refunds (192,338) (207,000) (152,000) (142,608) (148,000) Non-resident withholding tax 427, , , , ,000 Foreign-source dividend withholding payments 8,213 2,000 (2,000) (3,438) 2,000 Total corporate tax 10,860,973 10,962,000 11,232,000 10,850,816 11,456,000 Other direct income tax Resident withholding tax on interest income 1,643,787 2,007,000 1,777,000 1,829,835 2,094,000 Resident withholding tax on dividend income 445, , , , ,000 Employer superannuation contribution tax 1,077,974 1,209,000 1,130,000 1,113,918 1,175,000 Gift duties (70) 87 Total other direct income tax 3,167,558 3,711,000 3,430,000 3,486,367 3,806,000 Total direct taxation 41,374,626 43,702,000 43,774,000 43,768,354 45,341, ANNUAL REPORT 2015

129 SCHEDULE OF NON-DEPARTMENTAL REVENUE (CONTINUED) 09 FOR THE YEAR ENDED 30 JUNE Actual Unaudited budget Unaudited estimated Actual Unaudited forecast actual $000 $000 $000 $000 $000 Indirect taxation Goods and services tax Gross goods and services tax 25,751,108 27,946,000 26,878,000 26,566,080 28,378,000 Refunds (11,191,411) (11,632,000) (11,312,000) (10,954,126) (11,949,000) Total goods and services tax 14,559,697 16,314,000 15,566,000 15,611,954 16,429,000 Other indirect taxation Cheque duties 1 2, Approved issuer levy 90,522 90,000 93, ,075 92,000 Gaming duties 266, , , , ,000 Other indirect taxation 2,709 5,000 5,000 2,480 5,000 Total other indirect taxation 362, , , , ,000 Total indirect taxation 14,922,206 16,676,000 15,926,000 15,979,185 16,796,000 Total taxation 56,296,832 60,378,000 59,700,000 59,747,539 62,137,000 Other revenue Child support 204, , , , ,250 Interest unwind student loans 579, , , , ,000 Other revenue 86,059 92,000 76,000 86,341 78,000 Total other revenue 870, , , , ,250 Total operating revenue 57,166,883 61,300,620 60,559,350 60,635,040 63,020,250 1 Cheque duties were abolished from 1 July These numbers are restated due to the transition to the new PBE accounting standards. Refer to Note 9 for details. The accompanying accounting policies and notes form part of these financial schedules. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June ANNUAL REPORT

130 SCHEDULE OF NON-DEPARTMENTAL EXPENDITURE FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Benefits and other unrequited expenses Child tax credit 1,835 1,300 1,300 1,298 1,100 Family tax credit 1,965,263 1,934,000 1,857,000 1,854,048 1,837,000 In-work tax credit 533, , , , ,000 KiwiSaver: Fee subsidy (11) (8) KiwiSaver: Interest 7,294 13,000 13,000 8,413 15,000 KiwiSaver: Kick-start payment 227, , , ,364 KiwiSaver: Tax credit 569, , , , ,000 Minimum family tax credit 14,275 13,000 16,000 15,975 16,000 Paid parental leave payments 164, , , , ,000 Parental tax credit 17,640 19,000 21,000 20,967 31,000 Payroll subsidy 3,129 4,000 4,100 3,945 5,100 Research and development tax credit (3,952) Total benefits and other unrequited expenses 3,500,178 3,468,300 3,477,400 3,443,771 3,372,200 Borrowing expenses Adverse event interest (1) 10 Environmental restoration account interest 1,636 2,000 2,000 1,634 2,000 Income equalisation interest 7,260 7,000 15,000 3,543 15,000 Total borrowing expenses 8,908 9,010 17,020 5,176 17,010 Other expenses Impairment of debt and debt write-offs 1 1,025, ,162, , ,829 1,179,224 Impairment of debt relating to child support 2 Impairment of debt relating to student loans 12, , , , ,000 Initial fair value write-down relating to student loans 629, , , , ,000 Total other expenses 1,666,599 1,930,098 1,734,972 1,731,494 1,925,224 Total expenditure 5,175,685 5,407,408 5,229,392 5,180,441 5,314,434 1 Impairment of debt and debt write-offs relates to general tax, Working for Families Tax Credits and KiwiSaver debt. 2 These numbers are restated due to the transition to the new PBE accounting standards. Refer to Note 9 for details. The accompanying accounting policies and notes form part of these financial schedules. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June ANNUAL REPORT 2015

131 09 SCHEDULE OF NON-DEPARTMENTAL ASSETS AS AT 30 JUNE 2015 Notes Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Current assets Cash and cash equivalents 2,489,327 1,355,000 1,200,000 1,768,113 1,075,000 Receivables 1 8,228, ,775,600 7,971,600 7,511,685 8,437,000 Receivables child support 2 10,899 13,720 10,899 12,001 10,899 Receivables other 111, , ,352 97, ,352 Student loans 3 1,193,000 1,219,000 1,161,000 1,122,000 1,251,000 Total current assets 12,032,532 10,491,672 10,471,851 10,510,919 10,907,251 Non-current assets Receivables 1 467, , , , ,400 Receivables child support 2 64,506 72,325 71,506 67,037 77,166 Student loans 3 7,522,829 7,804,993 7,717,476 7,742,382 7,919,536 Total non-current assets 8,054,735 8,315,718 8,256,382 8,250,719 8,464,102 Total assets 20,087,267 18,807,390 18,728,233 18,761,638 19,371,353 1 This number is restated due to the transition to the new PBE accounting standards. Refer to Note 9 for details. The accompanying accounting policies and notes form part of these financial schedules. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June ANNUAL REPORT

132 SCHEDULE OF NON-DEPARTMENTAL LIABILITIES AS AT 30 JUNE 2015 Notes Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Current liabilities Payables and provisions Child support 37,359 30,096 37,359 42,752 37,359 Refundables and payables 4 4,489, ,404,794 4,381,975 4,311,622 4,749,799 Unclaimed monies 5 13,818 12,475 13,818 14,859 13,818 Total current liabilities 4,540,422 4,447,365 4,433,152 4,369,233 4,800,976 Non-current liabilities Reserve schemes 6 245, , , , ,437 Total non-current liabilities 245, , , , ,437 Total liabilities 4,786,359 4,742,333 4,862,589 4,708,512 5,163,413 1 This number is restated due to the transition to the new PBE accounting standards. Refer to Note 9 for details. The accompanying accounting policies and notes form part of these financial schedules. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June ANNUAL REPORT 2015

133 09 SCHEDULE OF NON-DEPARTMENTAL MOVEMENTS BETWEEN DEPARTMENTS FOR THE YEAR ENDED 30 JUNE Actual Unaudited Unaudited Actual Unaudited budget estimated forecast actual $000 $000 $000 $000 $000 Opening balance 14,956, ,568,802 15,300,908 15,300,908 13,865,644 Net result from operating activities 51,991, ,893,212 55,329,958 55,454,599 57,705,816 Asset transfer between departments Ministry of 1,521,537 1,597,153 1,539,647 1,528,794 1,594,060 Social Development student loans New Zealand Debt Management Office (53,168,371) (58,014,490) (58,519,420) (58,231,175) (58,967,990) Other 20, ,551 10,410 Closing balance 15,300,908 14,065,057 13,865,644 14,053,126 14,207,940 1 This number is restated due to the transition to the new PBE accounting standards. Refer to Note 9 for details. 2 This number is restated due to the flow-on effect from the Schedule of Non-departmental Revenue and the Schedule of Nondepartmental Expenditure on the transition to the new PBE accounting standards. Refer to Note 9 for details. The accompanying accounting policies and notes form part of these financial schedules. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June ANNUAL REPORT

134 SCHEDULE OF NON-DEPARTMENTAL COMMITMENTS AS AT 30 JUNE 2015 Inland Revenue, on behalf of the Crown, has no non-cancellable capital or lease commitments ( : $nil). SCHEDULE OF NON-DEPARTMENTAL CONTINGENT LIABILITIES AND CONTINGENT ASSETS AS AT 30 JUNE 2015 Notes Actual Actual $000 $000 Quantifiable contingent liabilities Legal proceedings and disputes assessed 7 535, ,178 Unclaimed monies 5 111, ,221 Total quantifiable contingent liabilities 647, ,399 Quantifiable contingent assets Disputes non-assessed 7 89, ,323 Total quantifiable contingent assets 89, ,323 There were no non-quantifiable contingent liabilities and contingent assets for the year ended 30 June 2015 ( : $nil). The accompanying accounting policies and notes form part of these financial schedules. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June ANNUAL REPORT 2015

135 09 SCHEDULE OF NON-DEPARTMENTAL TRUST MONEY FOR THE YEAR ENDED 30 JUNE Actual Contributions Distributions Actual $000 $000 $000 $000 Child support Child support trust account 17, ,880 (262,075) 16,199 Reciprocal child support agreement trust account ,546 (12,504) 439 Total child support 17, ,426 (274,579) 16,638 KiwiSaver KiwiSaver returned transactions trust account Total KiwiSaver Total trust money 17, ,528 (274,579) 16,784 The child support trust accounts were established in accordance with sections 139 and 140 of the Child Support Act Inland Revenue administers these trust accounts for amounts collected from liable parents and the subsequent child support payments that are paid to the custodial parents. The KiwiSaver trust account was established in accordance with section 74(4) of the KiwiSaver Act Inland Revenue administers this account to hold money deposited with the Crown from KiwiSaver scheme providers, primarily for refunds and payments made in error, pending the completion of the financial transaction. The accompanying accounting policies and notes form part of these financial schedules. For a full understanding of the Crown s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June ANNUAL REPORT

136 STATEMENT OF ACCOUNTING POLICIES These financial schedules are for the year ended 30 June 2015 and include forecast financial schedules for the year ending 30 June The schedules have been combined to provide a single view of actual, budget and forecast information. References to the financial schedules incorporate the financial schedules and forecast financial schedules, unless otherwise stated. REPORTING ENTITY These non-departmental financial schedules present financial information on public funds managed by Inland Revenue on behalf of the Crown. These non-departmental balances are consolidated into the Financial Statements of the Government of New Zealand for the Year Ended 30 June For a full understanding of the Crown s financial position, results of operations, and cash flows for the year, refer to the Financial Statements of the Government of New Zealand for the Year Ended 30 June REPORTING PERIOD The reporting period for these financial schedules is for the year ended 30 June The forecast financial schedules are for the year ending 30 June The financial schedules were authorised for issue by the Chief Executive of Inland Revenue on 29 September BASIS OF PREPARATION The accounting policies set out below have been applied consistently to all periods presented in these financial schedules. These financial schedules have been prepared on a historical cost basis, unless otherwise stated. The accrual basis of accounting has been used, unless otherwise stated. These financial schedules are presented in New Zealand dollars, and all values are rounded to the nearest thousand dollars ($000). The functional currency of Inland Revenue is New Zealand dollars. These financial schedules are the first prepared in accordance with the new Tier 1 Public Benefit Entity (PBE) accounting standards. The material adjustments arising on transition are explained in Note 9. There are no other new relevant standards and interpretations issued this year and Inland Revenue has not early adopted any new standards and interpretations. 134 ANNUAL REPORT 2015 CRITICAL ACCOUNTING ESTIMATES The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of receivables and payables within the next financial year are referred to below: Income tax Income tax is recognised on an accruals basis in the period the taxable event occurs. It is deemed to accrue evenly over the period to which it relates. Where income tax returns have not been filed for the relevant period, accrued income tax revenue receivable or payable has been estimated based on current provisional assessments or prior year terminal assessments. The outcome of income tax revenue and refunds is not known with certainty until income tax returns for the period have been filed. This occurs sometime after the publication of the annual report, usually in the next accounting period. The measurement of the income tax accruals requires significant estimates where terminal tax assessments are not yet available for the period. Key features of the estimation used are as follows: Where taxpayers subject to the provisional tax regime have not yet filed a terminal tax assessment for the period, provisional tax assessments are accrued. Where taxpayers have made payments to Inland Revenue but have not submitted a provisional tax assessment for the period, their credit balance is accrued as revenue. Payments into the tax pool are not captured by this approach. For individual taxpayers not subject to provisional tax, an estimate is made of the tax revenues receivable and refundable based on prior year returns adjusted for current year experience. This is a new estimate for For company taxpayers not subject to provisional tax for the current year, revenue is recognised on an assessment basis, i.e. no estimate of tax revenue is accrued in the period of the taxable event. This is because a reliable estimate cannot be made in the period of the taxable event. Other critical accounting estimates Material estimates and assumptions impact on receivables, student loan debt and refundables and payables. See Notes 1, 3 and 4 for more information on these. ACCOUNTING POLICIES The following accounting policies, which materially affect the measurement of financial results and financial position, have been applied.

137 09 Budget and forecast figures The budget figures for are those included in The Estimates of Appropriations for the year ending 30 June The estimated actual figures for and the forecast figures for are those included in The Estimates of Appropriations for the year ending 30 June The estimated actual figures represent forecasts submitted to the Treasury based on all Government decisions and assumptions as at 28 April The budget, estimated actual and forecast figures have been prepared in accordance with NZ GAAP, using accounting policies that are consistent with those adopted in preparing these financial schedules. Revenue Operating revenue The payment of tax in itself, does not entitle a taxpayer to an equivalent value of services or benefits, because there is no direct relationship between paying tax and receiving Crown services and transfers, that is, tax revenue is a non-exchange transaction. Tax revenue is recognised when a taxable event has occurred, the tax revenue can be reliably measured and it is probable that economic benefits will flow to the Crown. The taxable event is defined as follows: Tax type Income tax Goods and services tax Taxable activity The earning of assessable income during the taxation period by the taxpayer. The purchase or sale of taxable goods and services during the taxation period. The New Zealand tax system is predicated on self-assessment where taxpayers are expected to understand the tax laws and comply with them. This has an impact on the completeness of tax revenues when taxpayers fail to comply with tax laws, for example, if they do not report all of their income. Inland Revenue has implemented systems and controls in order to detect and correct situations where taxpayers are not complying with the various acts it administers. These systems and controls include performing audits of taxpayer records where determined necessary by Inland Revenue. Such procedures cannot be expected to identify all sources of unreported income or other cases of non-compliance with tax laws. Inland Revenue is unable to estimate the amount of unreported tax. Interest unwind student loans Interest unwind on student loans is accrued using the effective interest rate method. The effective interest rate exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset s net carrying amount. Effective interest rates are assigned to new lending each year on a year of lending basis. Expenses Expenses are recognised in the period to which they relate. Cash and cash equivalents Cash and cash equivalents include cash on hand, cash in transit and funds held in bank accounts administered by Inland Revenue. Receivables Receivables include taxes and Working for Families Tax Credits (and any penalties and interest associated with these activities) and exclude student loans and child support debt. Receivables are initially assessed at nominal value, that is, the receivable reflects the amount of tax owed or Working for Families Tax Credits payable. The nominal value of receivables at recognition does not materially differ from their fair value at that point, taking into consideration the effects of uncollectability and discounting of future cashflows to present value. Receivables are subsequently adjusted for penalties and interest as they are charged, and tested for impairment annually. Interest and penalties charged on receivables are presented as revenue in the Schedule of Non-departmental Revenue. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired. Impairment movements are recognised in the Schedule of Nondepartmental Expenditure. Impairment losses can be reversed where there is evidence that the impaired value of the asset has increased. Financial models have been constructed for Inland Revenue to calculate the impairment of Crown debt. These models apply a number of assumptions on future repayment behaviour as well as economic assumptions such as the discount rate and inflation. Receivables child support Child support receivables consist of penalties applied when a non-custodial parent is in default. These receivables are initially recognised at fair value and are assessed annually for impairment. Financial instruments Financial assets Student loans Student loans are designated as loans and receivables under PBE IPSAS 29 Financial Instruments: Recognition and Measurement. Student loans are recognised initially at fair value, plus transaction costs, and subsequently measured at amortised cost using the effective interest rate method, and adjusted for impairment movements. Fair value on initial recognition of student loans is determined by projecting ANNUAL REPORT

138 forward expected repayments and discounting them back at an appropriate discount rate. The difference between the amount lent and the fair value on initial recognition is expensed on initial recognition. The subsequent measurement at amortised cost is determined using the effective interest rate calculated at initial recognition. This rate is used to spread the Crown s interest income across the life of the loan and determines the loan s carrying value at each reporting date. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that Inland Revenue will not be able to collect all amounts due according to the original terms of the receivables. Impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan and a loss event has an impact on the estimated future cash flows of the loan that can be reliably measured. The amount of the provision is the difference between the asset s carrying amount and estimated impaired value. The impairment losses are recognised in the Schedule of Nondepartmental Expenditure. Impairment losses can be reversed where there is evidence that the impaired value of the financial asset has increased. Actuarial models have been constructed by a third party to calculate the impairment of student loan debt. Refer to Note 3 for more information on this model. Financial liabilities Financial liabilities entered into with a duration of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Contingent liabilities and assets Contingent liabilities and assets are recorded in the Schedule of Non-departmental Contingent Liabilities and Contingent Assets at the point at which the contingency is evident. Contingent liabilities are disclosed if the possibility that they will crystallise is not remote. Contingent assets are disclosed if it is probable that the benefits will be realised. Comparatives When presentation or classification of items in the financial schedules is amended or accounting policies are changed, comparative figures have been restated to ensure consistency with the current period, unless it is impracticable to do so. Note 9 shows the adjustments to comparatives arising on transition to the new PBE accounting standards. FORECAST FINANCIAL SCHEDULES The forecast financial schedules have been prepared in accordance with the Public Finance Act The purpose of the forecast financial schedules is to facilitate Parliament s consideration of appropriations for, and planned performance of, the department. These forecast financial schedules may not be appropriate for other purposes. The forecast financial schedules have been prepared in accordance with the accounting policies detailed above. Additional accounting policies relating to the forecasts are set out below. The forecast financial schedules comply with NZ GAAP and have been prepared in accordance with PBE IPSAS 42 Prospective Financial Statements. The forecast financial schedules are not subject to audit. Forecast policies The forecasts have been compiled on the basis of existing government policies and ministerial expectations at the time the schedules were finalised and reflect all government decisions and circumstances as at 28 April The key assumptions in the preparation of the forecasts include: Tax revenue: tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts as calculated and agreed between Inland Revenue and the Treasury. Student loans: the carrying value of student loans is based on a valuation model adapted to reflect current student loans policy. As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers. Any change in these assumptions would affect the present fiscal forecast. For other key fiscal forecast assumptions, refer to the Budget Economic and Fiscal Update Variations to forecast The actual financial results for the forecast period covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these forecast financial schedules and the actual reported results include: Changes to the Budget through initiatives or legislation approved by Cabinet Macroeconomics impacting revenue, expenditure and debt levels The timing of taxpayer s filing and payment of returns The timing of taxpayer refund and credit claims Outcomes of the disputes process including litigation. Any changes to budgets during will be incorporated into The Supplementary Estimates of Appropriations for the year ending 30 June ANNUAL REPORT 2015

139 09 NOTES TO THE FINANCIAL SCHEDULES NOTE 1: RECEIVABLES Receivables include taxes and Working for Families Tax Credits and exclude student loans and child support debt. The recoverable amount of receivables is calculated by forecasting the expected repayments based on analysis of historical debt data, deducting an estimate of service costs and then discounting using an appropriate rate. If the recoverable amount of the portfolio is less than the carrying amount, the carrying amount is reduced to the recoverable amount. Alternatively, if the recoverable amount is more, the carrying amount is increased. Tax pooling funds held in Crown bank accounts have been netted off against receivables. These funds have been deposited by a commercial intermediary and allow taxpayers to pool tax payments to reduce their use-of-money-interest exposure. Underpayments and overpayments are offset within the same pool. We estimate that the majority of pooling funds relate to income accruals already included in not yet due receivables Actual Actual $000 $000 Receivables Gross receivables 13,162, ,145,147 Impairment receivables (4,466,435) 2 (4,192,162) Carrying value receivables 8,695,641 7,952,985 Current and non-current apportionment Receivables current 8,228, ,511,685 Receivables non-current 467, ,300 Carrying value receivables 8,695,641 7,952,985 Ageing profile of receivables gross Not due 7,691, ,992,052 Past due 1 Less than 6 months 930, , months 389, , years 719, ,751 Greater than 2 years 3,431,311 3,161,771 Total past due 5,470,706 5,153,095 Total receivables gross 13,162,076 12,145,147 % Past due 42% 42% Receivables impairment Opening balance 4,371,533 4,466,435 Impairment losses recognised 1,025, ,829 Amounts written off as uncollectable (930,158) (1,135,102) Closing balance 4,466,435 4,192,162 1 Figures are based on debt elements (a specific tax type and time period for which a debt is due). They are not comparable with the figures in the Additional Information section, which are based on debt cases (one debt case can have one or more debt elements) and also include overdue student loan debt. 2 These numbers are restated due to the transition to the new PBE accounting standards. Refer to Note 9 for details. Receivables are classified as past due when any outstanding revenue is not paid by the taxpayer s due date. Due dates will vary, depending on the type of revenue outstanding (e.g. income tax, GST, KiwiSaver) and the taxpayer s balance date. Past due debt includes debt collected under instalment, debt under dispute, default assessments and debts of taxpayers who are bankrupt, ANNUAL REPORT

140 in receivership or in liquidation. Inland Revenue has debt management policies and procedures in place to actively manage the collection of past due debt. Not due receivables comprise estimations for taxation where the tax has been earned but is not yet overdue. The estimated recoverable amount of this portfolio and significant assumptions underpinning the valuation are: Recoverable amount of receivables not due ($000) 7,648, ,954,717 Recoverable amount of receivables past due ($000) 1,047, ,268 Use-of-money-interest rate 8.40% 9.21% Discount rate 6.00% 6.00% Impact on the recoverable amount of a 2% increase in discount rate ($000) (21,000) (20,000) Impact on the recoverable amount of a 2% decrease in discount rate ($000) 22,000 21,000 1 This number is restated due to the transition to the new PBE accounting standards. The fair value of receivables is not materially different from the carrying value. Credit risk In determining the recoverability of receivables Inland Revenue uses information about the extent to which the taxpayer is contesting the assessment and experience of the outcomes of such disputes, from lateness of payment and other information obtained from credit collection actions taken. Under the Tax Administration Act 1994 Inland Revenue has broad powers to ensure that people meet their obligations. Part 10 of the Act sets out the powers of the Commissioner to recover unpaid tax. The Crown does not hold any collateral or any other credit enhancements over receivables which are past due. Receivables are widely dispersed over a number of taxpayers and as a result the Crown does not have any material individual concentrations of credit risk. 138 ANNUAL REPORT 2015

141 09 NOTE 2: RECEIVABLES CHILD SUPPORT The Crown collects monies from liable parents and remits this to custodial parents. The child support receivable represents penalties which have been incurred as a result of the under-payment of the debt, and in the main, relates to penalties imposed on liable parents who default on their payments. Child support penalties grow exponentially due to their compounding nature. The recovery of debt is challenging and 97% of child support debt is written down at initial recognition as it is not expected to be collected. There are limited provisions under child support legislation to remit penalties. The non-recoverability of penalties has been allowed for in the initial fair value write-down figure. At year end the fair value of the outstanding debt is also tested for impairment. The concentration of credit risk is limited and this is not a risk that is actively managed. The Crown does not hold any collateral or other credit enhancements over these receivables Actual Actual $000 $000 Receivables child support Gross receivables 2,372,026 2,605,488 Impairment receivables (2,296,621) (2,526,450) Total receivables child support 75,405 79,038 Current and non-current apportionment Receivables current 10,899 12,001 Receivables non-current 64,506 67,037 Carrying value receivables 75,405 79,038 Ageing profile of receivables gross Not due Past due Less than 12 months 267, , years 296, ,192 Greater than 2 years 1,808,276 2,098,011 Total past due 2,372,026 2,605,488 Total receivables gross 2,372,026 2,605,488 % Past due 100% 100% Impairment of receivables child support Opening balance 2,041,986 2,296,621 Initial write-down to fair value 1 350, ,070 Impairment losses recognised during the year Amounts written off as uncollectable (96,356) (108,241) Impairment losses reversed Closing balance 2,296,621 2,526,450 1 This is to comply with the new PBE accounting standards. Refer to Note 9 for details. ANNUAL REPORT

142 NOTE 3: STUDENT LOANS Student loans are initially issued by StudyLink (Ministry of Social Development). The loans and any associated transactions are transferred to Inland Revenue on a daily basis. Inland Revenue holds the total nominal debt and carrying value of the scheme. The initial capital lending of student loans is administered under Vote Social Development. The initial fair value write-down expense on new capital lending, and any subsequent impairment, is administered under Vote Revenue Actual Actual $000 $000 Opening carrying value 8,288,177 8,715,829 Repayments (1,031,664) (1,113,751) Borrowings transferred from Ministry of Social Development 1,521,537 1,528,794 Fair value write-down on new borrowings (629,539) (601,665) Impairment (12,000) (269,000) Interest unwind 579, ,175 Closing carrying value student loans 8,715,829 8,864,382 Current and non-current apportionment Student loans current 1,193,000 1,122,000 Student loans non-current 7,522,829 7,742,382 Carrying value student loans 8,715,829 8,864,382 Opening nominal value 13,562,221 14,235,007 Borrowings transferred from Ministry of Social Development 1,521,537 1,528,794 Repayments (1,031,664) (1,113,751) Interest on overseas based borrowers 150, ,345 Administration and establishment fees 21,794 22,365 Penalties 48,894 58,394 Death and bankruptcies (24,500) (34,831) Voluntary repayment bonus (14,200) (295) Closing nominal value 14,235,007 14,837,028 Student loan valuation model The student loan valuation model reflects current student loan policy and macroeconomic assumptions. As such, the book value is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and the discount rates used to determine the effective interest rate on new borrowers. For these reasons, the valuation has a high degree of inherent uncertainty, and there is a significant risk of material adjustment to the carrying value in future accounting periods. Most of the data upon which the modelling depends is collated by Statistics New Zealand from Inland Revenue, Ministry of Education and Ministry of Social Development. That data covers borrowings, repayments, income, educational factors and socioeconomic factors. It is current up to 31 March Some supplementary data from Inland Revenue and Customs, about loan transactions and borrowers cross-border movements for the period up to 31 March 2015 are also factored into the modelling. 140 ANNUAL REPORT 2015

143 09 The significant assumptions behind the carrying value and fair value are: Carrying value Carrying value ($000) 8,715,829 8,864,382 Effective interest rate 7.06% 7.00% Interest rate applied to loans for overseas borrowers 5.1% 6.2% 4.5% 6.2% Consumer price index 1.8% 2.5% 0.3% 2.5% Future salary inflation 2.8% 3.5% 2.3% 3.5% Fair value Fair value ($000) 8,924,000 9,267,000 Discount rate 6.62% 6.20% Impact on fair value of a 1% increase in discount rate ($000) (448,000) (492,000) Impact on fair value of a 1% decrease in discount rate ($000) 501, ,000 Fair value is the amount for which the loan book could be exchanged between knowledgeable, willing parties in an arm s-length transaction as at 30 June It is determined by discounting the future cash flows at an appropriate discount rate. Fair values will differ from carrying values due to changes in market interest rates, as the carrying value is not adjusted for such changes whereas the fair value was calculated on a discount rate that was current at 30 June At that date, the fair value was calculated on a discount rate of 5.66% which excludes expenses whereas a weighted average discount rate of 7.00% including expenses was used for the carrying value. For reference, the representative discount rate for fair value including an allowance for expenses is 6.20%. The Student Loan Scheme Annual Report 2014/15 contains more information on the student loan scheme. Impairment of student loans in totalled $269 million. This impairment is mainly due to data and modelling changes. Extensive modelling enhancements were made to the income sub-models. The changes focussed on better reflecting the poorer employment prospects arising after the Global Financial Crisis for those with lower qualifications. Macroeconomic changes contributed to the impairment expense as well. All of the economic assumptions have fallen significantly since the previous valuation. Actual repayments were lower than forecast. To reflect expected improvements in employment rates and repayment compliance, an adjustment was made to reverse some of the modelling impairment loss. In the impairment of student loans totalled $12 million. This was driven by lower than expected incomes and repayments as well as changes to macroeconomic assumptions for income recovery and earnings inflation. The valuation data is still very sensitive to changes in certain areas as can be seen from the sources of impairment set out below: Actual Actual $000 $000 Sources of impairment Policy and legislative changes 53,000 Experience variance (2,000) (40,000) Macroeconomic changes 29,000 (117,000) Remaining model and data changes (92,000) (262,000) Adjustments for expected improvements 150,000 Total sources of impairment (12,000) (269,000) Credit risk Credit risk is the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid, causing the scheme to incur a loss. The student loan scheme does not require borrowers to provide any collateral or security to support advances made. As the total sum advanced is widely dispersed over a large number of borrowers, the student loan scheme does not have any material individual concentrations of credit risk. ANNUAL REPORT

144 The credit risk is reduced by collection of compulsory repayments through the tax system. Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in interest rates. Changes could impact on the Government s return on loans advanced. The interest rate and the interest write-off provisions attached to student loans are set by the Government. NOTE 4: REFUNDABLES AND PAYABLES Refundables and payables are recognised at their nominal value as they are due within 12 months. The nominal value is considered to approximate their fair value. Taxes refundable represent refunds due to taxpayers. Refunds are issued to taxpayers once account and refund reviews are complete Actual Actual $000 $000 KiwiSaver payable 943, ,020 Paid parental leave payable 6,659 7,894 Taxes refundable 3,539, ,386,708 Total refundables and payables 4,489,245 4,311,622 1 These numbers are restated due to the transition to the new PBE accounting standards. Refer to Note 9 for details. NOTE 5: UNCLAIMED MONIES Under the Unclaimed Money Act 1971, entities (e.g. financial institutions, insurance companies) hand over money not claimed after six years to Inland Revenue. The funds are repaid to the entitled owner on proof of identification. NOTE 6: RESERVE SCHEMES Actual Actual $000 $000 Adverse event income equalisation Environmental restoration 54,927 54,926 Income equalisation 191, ,220 Total reserve schemes 245, ,279 The adverse event income equalisation scheme operates in addition to the income equalisation scheme. Deposits earn interest at a rate of 6.5% per annum from the date of receipt until the deposit is refunded. Deposits can be withdrawn immediately, but are transferred to the main income equalisation account if not withdrawn within 12 months of the deposit. The environmental restoration account allows businesses to set aside money to cover restoration costs for monitoring, avoiding, remedying or mitigating the detrimental environmental effects which may occur in later years. Interest is calculated at a rate of 3% per annum and is payable from the day after the deposit is made until the day before a refund is made. Refunds will be made when the environmental restoration costs are incurred. The income equalisation scheme allows taxpayers in the farming, fishing and forestry industries to make payments during the year by way of income equalisation deposits. Interest paid at a rate of 3% per annum will apply where a deposit is left in the scheme for a period of 12 months or more. 142 ANNUAL REPORT 2015

145 09 NOTE 7: CONTINGENCIES Contingent liabilities Legal proceedings and disputes assessed Contingent liabilities arise if a legal case is still not resolved at the end of the disputes process, Inland Revenue will issue an amended assessment to the taxpayer and recognise revenue. The taxpayer is then able to file proceedings with the Taxation Review Authority or the High Court disputing the assessment. These are recorded in the Schedule of Non-departmental Contingent Liabilities and Contingent Assets as legal proceedings and disputes assessed. The contingent liability is the maximum liability Inland Revenue has in respect of these cases. Unclaimed monies Unclaimed monies are repaid to the entitled owner on proof of identification. Based on trends from prior years, the estimated likely amount of unclaimed monies that will be paid out is recorded as a liability in the Schedule of Non-departmental Liabilities and the remainder is recorded as a contingent liability in the Schedule of Non-departmental Contingent Liabilities and Contingent Assets. Contingent assets Disputes non-assessed Contingent assets arise as part of the tax dispute process, for example, when Inland Revenue has advised a taxpayer of a proposed adjustment to their tax assessment through a notice of proposed adjustment (NOPA). At this point there has been no amended assessment issued and no revenue has been recognised so these adjustments are recorded in the Schedule of Non-departmental Contingent Liabilities and Contingent Assets as disputes non-assessed. The taxpayer has the right to dispute this adjustment and a disputes resolution process is entered into. Inland Revenue quantifies a contingent asset based on the likely cash collectable for the disputes process based on experience and similar prior cases, net of losses carried forward. Contingent assets can also arise where the taxpayer has not filed an assessment but Inland Revenue believes they are liable for tax. In this situation Inland Revenue will issue an assessment. Where the taxpayer chooses to dispute the Inland Revenue initiated assessment, the assessment is not recognised as revenue and a contingent asset is recorded in the Schedule of Non-departmental Contingent Liabilities and Contingent Assets. The value of the asset is based on the likely collectable portion of the default assessment, net of losses carried forward. NOTE 8: COLLECTION OF EARNER LEVIES Inland Revenue collects these levies on behalf of the Accident Compensation Corporation and passes the monies directly to them. The levies are not recognised as revenue or expenditure on the non-departmental schedules Actual Actual $000 $000 Earner levy 1,546,101 1,443,343 Total collection of earner levy 1,546,101 1,443,343 ANNUAL REPORT

146 NOTE 9: ADJUSTMENTS ON TRANSITION TO THE NEW PBE ACCOUNTING STANDARDS Inland Revenue has adjusted the comparative year non-departmental schedules for the year ended 30 June 2014 arising from transition to the new PBE accounting standards. The adjustments are shown in the table below: Notes NZ IFRS Adjustment PBE accounting (PBE) standards $000 $000 $000 Schedule of Non-departmental Revenue Income tax Individuals Other persons 5,216,335 30,658 5,246,993 Refunds (1,573,264) 58,206 (1,515,058) Other revenue Child support 459,309 (254,635) 204,674 Schedule of Non-departmental Expenditure & Statement of Non-departmental Appropriations Other expenses Impairment of debt 1 95,257 (355) 94,902 Impairment of debt relating to child support 254,635 (254,635) Schedule of Non-departmental Assets Current assets Receivables 1 7,568, ,560 8,228,241 Schedule of Non-departmental Liabilities Current liabilities Payables and provisions Refundables and payables 4 3,630, ,461 4,489,245 Schedule of Non-departmental Movements between Departments Opening balance 15,244,664 (288,120) 14,956,544 1 This restated number is part of the Impairment of debt and debt write-offs figure in the Schedule of Non-departmental Expenditure and is also shown in the Statement of Non-departmental Appropriations in part 7, Measuring our performance. Measurement of child support penalties revenue and associated impairment Under NZ IFRS (PBE), child support penalty revenue was recognised at the amount of penalty imposed (nominal value), with an allowance for impairment recognised as expenditure. Under the new PBE accounting standards, child support penalty revenue is recognised at fair value on initial recognition. The fair value incorporates uncollectability and discounting. The effect of this change is to reduce child support penalty revenue and child support impairment expense. Therefore, the impact of this transition change on the net result from operating activities is $nil. Measurement of income tax for other persons and refunds This year we have included a new accrual in the non-departmental financial schedules for income tax (other persons) for non-provisional taxpayers including those who received personal tax summaries. Previously income tax revenue for these taxpayers was only recognised when the terminal assessments were filed. The effect of this change is to increase both receivables and refundables and payables. However, the impact of this transition change on the net result from operating activities is not material. NOTE 10: EVENTS AFTER BALANCE DATE No events have occurred between the balance date and the date of signing these financial schedules that materially affect the actual results within these financial schedules. 144 ANNUAL REPORT 2015

147 10 Audit Report ANNUAL REPORT

148 INDEPENDENT AUDITOR S REPORT To the readers of Inland Revenue s annual report for the year ended 30 June 2015 The Auditor-General is the auditor of Inland Revenue (the Department). The Auditor-General has appointed me, Ajay Sharma, using the staff and resources of Audit New Zealand, to carry out the audit on her behalf of: the financial statements of the Department on pages 94 to 124, that comprise the statement of financial position, statement of commitments, statement of contingent liabilities and contingent assets as at 30 June 2015, the statement of comprehensive revenue and expense, statement of changes in taxpayer funds, and statement of cash flows for the year ended on that date and the notes to the financial statements that include accounting policies and other explanatory information; the performance information prepared by the Department for the year ended 30 June 2015 on pages 59 to 88; the appropriations statements for the year ended 30 June 2015 on pages 89 to 92; and the schedules of non-departmental activities which are managed by the Department on behalf of the Crown on pages 126 to 144 that comprise: the schedules of assets, liabilities, contingent liabilities and assets, expenses, and revenue, and movements between departments for the year ended 30 June 2015; the schedule of trust monies for the year ended 30 June 2015; and the notes to the schedules that include accounting policies and other explanatory information. Opinion In our opinion: the financial statements of the Department: present fairly, in all material respects: its financial position as at 30 June 2015; and its financial performance and cash flows for the year ended on that date; comply with generally accepted accounting practice in New Zealand and have been prepared in accordance with Public Benefit Entity Reporting Standards. the performance information of the Department: presents fairly, in all material respects, for the year ended 30 June 2015: what has been achieved with the appropriation; and the actual expenses or capital expenditure incurred compared with the appropriated or forecast expenses or capital expenditure; complies with generally accepted accounting practice in New Zealand. the appropriation statements on pages 89 to 92 are presented fairly, in all material respects, in accordance with the requirements of section 45A of the Public Finance Act the schedules of non-departmental activities which are managed by the Department on behalf of the Crown on pages 126 to 144 present fairly, in all material respects, in accordance with the Treasury Instructions: the assets, liabilities, contingent liabilities and assets, expenses, and revenue for the year ended 30 June 2015; the statement of trust monies for the year ended 30 June 2015; and the schedule of movements between departments for the year ended 30 June Our audit was completed on 29 September This is the date at which our opinion is expressed. The basis of our opinion is explained below. In addition, we outline the responsibilities of the Chief Executive and our responsibilities, and we explain our independence. 146 ANNUAL REPORT 2015