|Tim Stewart||Alex Mackenzie|
The paper provides useful background as to the areas of Inland Revenue's current audit and enforcement focus. For that reason, the paper is relevant to taxpayers and their advisers in determining how best to manage tax risks.
The paper describes the background to the allocation of an additional NZ$74 million ($49 million) in funding over five years for Inland Revenue audit and enforcement activities. Inland Revenue plans to use the additional funding to investigate aggressive tax planning, compliance with the property tax rules and the hidden economy. Some specific aspects of each of these three main focus areas are detailed below.
Aggressive tax planning
The additional funding allocated to investigating aggressive tax planning will be used to investigate:
- international tax issues, especially transfer pricing;
- issues requiring specialist expertise, such as the valuation of financial instruments;
- 'significant enterprises' (which Inland Revenue defines as businesses with a turnover exceeding $30 million);
- improving the analytical capability to undertake risk assessments; and
- high income individuals, especially new immigrants.
The paper notes that compliance with property tax rules as a risk area "continues to grow", particularly given the buoyant residential property market in Auckland and Christchurch. Extra funding allocated to compliance with property tax rules is intended to allow:
- more resources for work in establishing whether property has been acquired with an intention of resale (in which case any gain on disposal will be taxable, rather than a non-taxable capital gain);
- expansion of analytical capability; and
- further "customer education".
The 'hidden economy' refers to people and businesses operating outside the tax and social policy systems. To date, work in this area has focused on the construction and hospitality industries, but Inland Revenue hopes to expand its focus to other areas. Additional funding will be used to address:
- fraudulent activity, especially organised attacks on the tax administration and its systems; and
- activity in a range of 'at-risk' industries within the hidden economy.
The paper states that the expected return on investment is a return of $8 in additional tax revenue for every $1 spent. If this ratio is not achieved, officials are to report back to the Minister of Revenue to seek direction on whether the funding should continue.
Explicitly linking the continuation of additional government funding to additional revenue raised from investigative activity is perhaps understandable given the government's fiscal constraints, and hence the need for a strong business case for any additional funding. It will, however, be interesting to observe how the revenue raised targets influence Inland Revenue's approach to case selection and interpretation of uncertain aspects of the tax legislation, particularly where large sums are concerned.
Tax managers and advisers should consider how best to manage the tax risk where large sums are involved, especially if the issue is one that falls within the areas of focus Inland Revenue has identified. In such cases, a taxpayer may wish to seek an Inland Revenue ruling or advance pricing agreement to manage the risk of a later audit.