Media Release - 5 August 2011
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IRD's Compliance Focus 2011-12
In a move to improve taxpayer compliance and to inform the public that non compliance will not go undetected the Inland Revenue Department (IRD) has released details of its Compliance Focus for 2011/2012.
Compliance Focus areas include:
- Tax planning or tax avoidance
- Fraud and identity theft
- The hidden economy
- Complex financing
- Transfer pricing
- Property transactions and high wealth individuals
- Misuse of charities
Tax planning or tax avoidance
Aggressive tax planning and personal income diversion schemes are highlighted again this year. The Compliance Focus acknowledges that there is a fine line between legitimate tax planning and tax avoidance and suggests a binding ruling is the only way to achieve certainty in this area.
In the wake of the recent Supreme Court hearing for the Penny & Hooper case involving medical practice structuring and what constitutes ‘market salary”, the IRD warns that it is focusing on diversion of personal income and schemes to wrongly increase Working for Families Tax Credits and that further legislative changes are being explored.
“Many small businesses are confused as to what the IRD requires of them in determining a compliant market salary and unless clarity is provided from the Supreme Court in the upcoming Penny & Hooper judgment this will continue to be an area of uncertainty and stress for small operators,” says Aaron Quintal, Tax partner with EY.
Fraud and identity theft, Misuse of charities, offshore and international issues
Taxpayers should be aware that any information held about them overseas is not out of reach of the IRD. The IRD emphasises that it has signed 18 Tax Information Exchange Agreements with countries with whom New Zealand does not have Double Tax Agreements. This information will be evaluated to identify suspicious tax haven transactions.
The hidden economy - hospitality industry and short-term rentals can expect increased scrutiny
The IRD’s hidden economy project continues and with the Rugby World Cup just around the corner the hospitality industry and short-term rentals can expect increased scrutiny.
“The IRD is worried about the amount of cash work being done and is promising to step up enforcement and prosecution,” says Quintal.
In an effort to encourage voluntary compliance the IRD is promising an education program to inform people of their obligations.
“Complex financing in relation to large enterprises entering into cross border financing arrangements, their commercial justification and whether or not they deliver disproportionate tax advantages is highlighted,” said Quintal. “But at this point the Compliance Focus appears to be ambiguous, possibly indicating the Commissioner is keeping his powder dry due to ongoing disputes and litigation.”
The Compliance Focus also mentions the pilot for Cooperative Compliance Agreements (CCA) for Large Corporate Taxpayers. The Australian Tax Office has been offering these to taxpayers for some time now and appears to be ahead of the IRD.
While this is a worthwhile pilot, only one has been finalised to date and there is no role out date expected anytime soon for wider availability.
Memorandums of Understanding (MOUs) are also on offer (some Large Corporates already have these in place) to see to it that requests for information are more manageable and time frames are pre-agreed to save time for all parties.
Lost in translation – language challenges and migrant business owners
IRD is working with groups to address common misunderstandings for migrant business owners and to address migrants’ concerns about a lack of understanding by IRD of language challenges and a lack of easily accessible materials explaining New Zealand tax requirements.
High wealth individuals
High wealth individuals can expect to be audited every two years according to the Compliance Focus.
“Tax audits are an expensive time consuming and stressful experience for any taxpayer,” says Quintal. “But the concern here is that the mere fact of individual wealth, rather than any particular risk factor, is driving this high level of scrutiny. Audits can last 2 years, so it is likely that these people will be subject to what is in effect a rolling audit every year under this 2 year audit approach.
The IRD signaled its intention to rank high wealth individuals (people worth more than $50 million) from low risk to high risk in last year’s Compliance Focus. But the 2011/2012 Compliance Focus does not mention the risk ratings or what rights the taxpayer has to object to their rating as a high risk individual.
Companies, trusts and PIEs
In line with the high profile Penny & Hooper Court of Appeal decision, IRD will target income diversion through companies, trusts and PIEs.
Carrot or stick
In this current highly aggressive audit environment EY suggests a “carrots are more effective than sticks” approach to improving compliance.
“Rewarding good corporate citizens for positive compliance behavior is something that overseas jurisdictions, including Australia, are doing well,” says Quintal. “For example, giving a heads-up as to what will be looked into over a defined period could help ensure taxpayers are ready for audit. More carrot and less stick would also be an incentive to multinationals to do more business here. Overall, New Zealand’s approach is more stick than carrot”.
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