Report to the Treasurer and Minister of revenue - by a committee of experts on tax complianceBill Birch Treasurer
Report to the Treasurer and Minister of revenue
By a committee of experts on tax compliance
Appendix 3 -
The committee's terms of reference are broad. In one respect or another, they cover the whole of New Zealand's tax system. At the same time, the committee's time and resources have been constrained. One conse-quence is that the committee has had to omit from its scrutiny a number of significant areas of the tax system.
The committee has addressed other areas only partially. The committee lists some of these omitted or partially omitted areas in this appendix. While all these matters are important, the committee draws the govern-ment's attention to the items in the first list below as requiring early at-tention. The committee expresses no view on whether the matters in the other lists require attention, but records there are items the committee would have discussed if it had time.
Matters requiring early attention Lack of neutrality in taxation of different investment structures; see the submission from the Investment Savings and Insurance Association of New Zealand Incorporation in appendix 8 on page 326
Education and training of Inland Revenue staff
Recruitment and retention of Inland Revenue staff
Matters partially considered The company tax system
The international tax rules
Matters not considered The FIRST computer system, and other departmental computer systems
Departmental methods of measuring and upgrading the quality of work in the service centres
Goods and Services Tax in general, and section 76, the anti-avoidance provision of the Goods and Services Tax Act 1985 in particular
Interest deductibility (the subject of a discussion document planned for publication in 1999)
Penalty level (to be reviewed according to the generic tax policy process in 1999)
The status and work of the Taxation Review Authority 279
A post-implementation review of the Organisational Review's recommendations on tax policy advice
GUIDE FOR INLAND REVENUE FORMS
Use plain English.
Where jargon needs to be used provide clear explanations, for example, for 'reassessments', 'balance brought forward', 'cred-its' and 'debits'.
Amount and date to be paid needs to be clear.
The pay-in slip should specify date payment is due - not 'imme-diately'.
Need to clearly differentiate between revenue types.
Transfers - clearly state where transfer has been made to/from (which revenue or period).
Provide information on a more timely basis.
Provide clear explanation when the reassessment shown on the notice of assessment differs from that on the return. Must be clear how calculations have been derived.
Be clear about why penalties/interest is being charged, and how this is calculated.
Be clear what year/period the information relates to.
Be clear about the period covered by the statement.
DO NOT LIST
Do not issue pay-in slip or envelope if there is nothing to pay.
Do not use multiple sheets when the information could fit on one piece of paper.
Do not repeat information in a statement or a notice that was on a previous one.
Do not provide information from back years.
Appendix 5 -
DIRECTIONS: CUSTOMER REQUIREMENTS
The committee has been briefed on the work being undertaken by the Inland Revenue Department on reducing compliance costs for taxpayers. This work is known by its project name, Directions: Customer Requirements. It has two phases, the first resulting in the removal of the need for wage and salary earners to file tax returns. The second involves simplifi-cation for business taxpayers, and in some cases, the issues considered by the committee have overlapped with initiatives being proposed under the second phase. In these cases, the committee has mainly recom-mended simultaneous implementation of its proposals along with any outcomes of the second stage review.
This appendix was provided by the Inland Revenue Department in order to provide a short history of compliance cost reduction in the first phase of the project and to summarise the features of the second phase.
Strategic direction for the Inland Revenue Department
Since implementing its new organisational structure in 1996, Inland Revenue has been looking at measures to improve its performance by focusing on areas of compliance risk. This focus has resulted in a strate-gic direction based on five broad aims:
to encourage compliance with the aim of maximising net reve-nue;
to reduce to a minimum and to simplify the information require-ments the department places on taxpayers;
to conduct business in a way that suits taxpayers;
to develop a workforce that is respected for its professionalism, knowledge, ability and willingness to meet taxpayers' needs;
to develop an organisational infrastructure and information sys-tems that support a taxpayer-focused compliance improvement strategy.
The strategic direction is being implemented in two linked phases.
The first phase of Directions: Customer Requirements
In August 1996, the government released the discussion paper, 280 which put forward proposals for reducing the requirement for saving and wage earners to file IR 5 returns. The discussion paper also proposed simpli-fying the labyrinth of rules, thresholds, penalties, and interest provisions in the provisional tax regime.
These proposals were developed as part of a strategy in the project Directions: Customer Requirements which is aimed at simplifying and re-ducing to a minimum the information requirements the Inland Revenue Department places on taxpayers.
Under the old system of filing returns, IR 5 taxpayers were required to file a tax return annually showing income received throughout the year and rebates claimed. Approximately, 1.2 million taxpayers filed an IR 5 return. Under the new system, the Inland Revenue Department will pro-vide an income statement to those with whom annual contact is required for a social policy or other reason. Approximately 300,000 of these statements are expected to be issued by the Inland Revenue Department, with a further 300,000 being requested, mainly to claim a tax refund.
Employers had certain responsibilities, including furnishing an annual reconciliation to balance the PAYE deductions made during the year. Approximately 200,000 reconciliations were filed each year. A number of amendments, principally the introduction of an employer monthly schedule removed these obligations.
The second phase of Directions: Customer Requirements
The second phase of the project is to examine further minimisation of the requirements placed on business taxpayers, particularly small businesses. The goal of the review is to reduce tax compliance costs for businesses by minimising return filing and other tax administration requirements when possible and by simplifying the remaining requirements, and by improving the Inland Revenue Department's service. The review will also identify opportunities to rationalise the information needs across government agencies. This process will involve reviewing cases of du-plication, either in the information collection process or in the collection of data.
The Inland Revenue Department recognises that in order to identify practical solutions to reduce compliance costs, it is important to have regard to the way businesses are run, and to consider the impact that tax obligations and other government requirements have. Wide consultation with businesses and their representatives will be required, to be facili-tated by the publication of a discussion document. Inland Revenue will complete a scoping report to the Minister of Revenue by 30 May 1999.
The impact of the department's strategic vision
In simplifying the tax system to make it easier for taxpayers to comply with their obligations, the Inland Revenue Department will be concen-trating its resources on those areas of compliance risk, for example, eva-sion and the underground economy. The implementation will signifi-cantly affect the Inland Revenue Department's business processes. The department will change from a large, process-focused organisation to one that is technically specialised and geared to areas of greatest compli-ance risk. This process will shift the focus of the department's resources away from the bulk processing of low value-added transactions. By re-moving the need for taxpayers to file wage and salary tax returns if the amount of tax involved is small, the department can target its resources in other directions, for example, towards ensuring compliance.
In the future, the Inland Revenue Department's core business will be audit, policy, litigation management, adjudication and rulings, child sup-port, and some return and debt management processing. Targeting re-sources to these higher value-added functions will in turn require review to ensure the new resources are used efficiently. A major initiative in the second phase of the project is Audit 2000, intended to improve audit methodologies and tools to address areas of risk. In order to make this transition, the Inland Revenue Department recognises that the depart-ment will need to invest in its management resources and infrastructure.
The Inland Revenue Department considers technical training and man-agement development are a primary focus. Technical competence is a core skill required to ensure that Inland Revenue Department staff are kept up-to-date with developments and legislative change. New per-formance management and remuneration systems are being implemented to ensure that the department can compete in the limited labour pool for tax professionals, policy analysts and customer service staff. This em-phasis will be supported by more flexible employment contracts. A new financial management system has already been introduced and provides Inland Revenue managers with access to world-class integrated financial tools.
Inland Revenue has a large integrated information base of income data which provides an integrated picture of each taxpaying entity, and the department is committed to using new technology for efficiency and more importantly, to keep pace with taxpayers' service expectations and the new ways in which they are doing business. Examples are call centre technology, electronic commerce and computer-based auditing.
The next stage of the department's technology plan is to develop data warehousing and decision support tools that can access the information collected for compliance analysis. Other technology projects include making greater use of specialised tools, such as a technical reference system and audit tools for field use.
THE PENALTIES PROVISIONS
In 1994, the government identified that the prevailing system of penal-ties did not address comprehensively the different ways in which taxpay-ers failed to meet their obligations. Some sanctions were overly punitive and some were costly to administer. As an example, the only sanction available for failure to file a return was prosecution. There were also in-consistencies in the application of some penalties. The courts and the Commissioner had considerable latitude when considering the level of penalty to impose.
These deficiencies made the previous rules unfair to taxpayers who complied with the law, because those taxpayers who did not comply were not always adequately penalised. The government considered that if these problems were allowed to persist, they would undermine public confidence in the tax system, and would reduce voluntary compliance by the majority of taxpayers, such compliance being an integral feature of an effective self-assessment tax system.
It was, therefore, considered that the standards that taxpayers were expected to meet in interpreting and applying tax law needed to be clarified.
The government enacted the new compliance and penalties legislation in 1996, generally with application from the 1997-98 income year. The legislation is intended to signal clearly what is expected of taxpayers and their agents, to improve compliance with tax laws by clearly linking obligations with sanctions for non-compliance, and to increase the effectiveness of incentives to comply with tax laws and impose costs on those who do not comply.
Penalty for failure to file returns
The late filing penalty recognises that taxpayers have a fundamental obligation to file their return by the due date. Unless taxpayers comply with this obligation, revenue streams to meet Crown commitments may arrive late. Recovery work is expensive and all of these costs have to be met by taxpayers. The government considered it unfair that taxpayers who meet their tax obligations should have to carry these extra costs. Previously, the only option available to the Commissioner was to prosecute, and this is a time-consuming and expensive procedure.
The standard penalty for late filing is $50. This penalty rises to $250 if the net income exceeds $100,000, and to $500 if the income is higher than $1,000,000. A penalty of $250 applies if a PAYE or ACC reconciliation is filed late.
The penalty is imposed only after prior warning from the Inland Revenue Department that the return is overdue. This measure recognises that some taxpayers may file their returns late for reasons beyond their control. On receipt of notification, taxpayers have an opportunity to apply for an extension of time to file their returns. Remission is possible when late filing is caused by factors beyond a taxpayer's control.
Late payment penalties
The late payment penalties apply from the due date for a tax, or, in the case of a reassessment, from the new due date for payment of reassessed tax. The sole objective of these penalties is to encourage payment of tax by the due date.
A 5 per cent penalty applies if the due date for the payment of the tax is missed. Previously, the rate was 10 per cent. After the due date, however, incremental penalties of 2 per cent of the tax outstanding are charged monthly.
The previous initial penalty of 10 per cent for late payment of tax was reduced to reflect the automatic imposition of this penalty and its incremental scale, the relative culpability compared to other actions, and the availability of other, more significant sanctions when late payment occurs as a result of lack of reasonable care.
The committee has already considered amendments to the late payment penalty in paras 11.38 to 11.43.
The fundamental standard expected from taxpayers in meeting their tax obligations is the standard of reasonable care. This standard is breached by lack of reasonable care, taking an unacceptable position, gross carelessness, abusive avoidance and tax evasion. Sanctions apply according to the seriousness of the offence and the amount of revenue at stake. The penalty rates applying are:
|lack of reasonable care
| 20 per cent of the tax shortfall
20 per cent of the tax shortfall
40 per cent of the tax shortfall
100 per cent of the tax shortfall
150 per cent of the tax shortfall
The level of penalty may be adjusted up or down to take account of matters such as hindrance or voluntary disclosure.
The standard of reasonable care is the basic standard that all taxpayers must exercise in fulfilling any tax obligation. The term 'reasonable care' is not defined in the legislation. The government considered the concept of reasonable care was sufficiently well established in the commercial world and in common law as to not require definition. Also, by not defining the term, it remains adaptable to changing perceptions of what constitutes reasonable care. The concept also is sufficiently flexible to reflect a wide range of circumstances as well as changes over time in the tax system.
The test of an unacceptable interpretation applies if the tax at stake exceeds the greater of $10,000 or 1 per cent of the income tax returned in the relevant period. The test applies in all cases if the tax at stake exceeds $200,000.
An 'unacceptable interpretation' is defined in the legislation as an interpretation that does not meet the standard of being 'about as likely as not' to be correct. Effectively, 'about as likely or not' creates an expectation that the interpretation must be one that the courts might regard as worthy of consideration, even if it is not one that they will adopt. The decision as to whether or not an interpretation is unacceptable takes into account all the provisions of the relevant legislation, including the likelihood of the application of a general or specific anti-avoidance provision.
If an arrangement fails the unacceptable interpretation test, and its dominant purpose is determined to be tax avoidance, it constitutes 'abusive avoidance', the penalty for which is 100 per cent of the tax shortfall. If an arrangement is not abusive, but fails the unacceptable interpretation or reasonable care tests, the lower shortfall penalties will apply.
Abusive avoidance occurs if arrangements have as their principal purpose the gaining of a tax advantage, and the taxpayer's interpretation was not 'more likely than not' to be correct. Such arrangements are defined by characteristics such as artificiality, contrivance and lack of commerciality. They might also involve concealment of information.
The names of those who have taken a position of abusive avoidance are published in the New Zealand Gazette.
Imposing a heavy penalty when the dominant purpose of an arrangement is to avoid tax sends a clear message from the government that the manipulative and aggressive interpretation of tax laws is unacceptable behaviour.
Under the previous rules, the provisions in the Inland Revenue Acts relating to criminal penalties were at times illogical and inappropriate. Some duplicated one another and treated breaches of similar magnitude inconsistently. Some contained ineffective and inconsistent penalties, which were confusing, and did not reflect the severity of the offence. Criminal penalties are now grouped into the following classes:
Information offences: The provision of accurate information is fundamental to the effective operation of the tax system. The Income Tax Act 1994 contains absolute liability offences for failure to provide information, keep records and provide returns. These statutory offences ensure that the burden of meeting these fundamental obligations rests firmly on the taxpayer.
'Knowledge' offences: Taking into account the seriousness of criminal prosecutions, knowledge of breach of an obligation is a minimum requirement. These offences include knowingly failing to provide information or books and documents, and providing false, incomplete or misleading information.
Evasion: There are a number of particularly serious defaults which involve the evasion of tax. For this purpose the meaning of evasion is well established, and involves an act done with the intention of not paying tax which is payable. Intent is critical to this offence.
Other offences: This covers such matters as aiding and abetting, and obstruction.
The names of taxpayers who commit these offences are published in the New Zealand Gazette.
Remission of penalties
Provisions for remission to allow the Commissioner of Inland Revenue to take into account circumstances when a penalty is not appropriate, such as:
Remission for reasonable cause: The late payment penalty and the late filing penalty can be remitted if failure to pay or file was brought about by a reasonable cause beyond the taxpayer's control, and the taxpayer remedied the default as soon as practicable. Remission under this provision will occur only if the taxpayer was not in control of the event that caused the failure to comply.
Remission consistent with collecting the highest net revenue over time: The Commissioner may remit penalties if satisfied that remission is consistent with the obligation to collect the highest net revenue over time. It may apply, for example, when a late payment or late filing penalty was imposed on a taxpayer who failed to comply as a result of an honest oversight.
Remission of late payment penalty by way of an instalment arrangement: Taxpayers may negotiate with the Commissioner to pay their overdue tax by instalments over an agreed period. Incremental late payment penalties will be remitted if taxpayers have adhered to the terms of the arrangement. If taxpayers arrange to pay a tax debt by instalment before the due date for payment of the tax, knowing they are in financial difficulty, the initial penalty for late payment will also be reduced from 5 per cent to 2 per cent.
No specific remission criteria are required for shortfall penalties. The requirement for reasonable care covers all situations contemplated by the provisions for remission.
The offences under the Crimes Act 1961 of potential application to tax advisers include:
Destroying evidence, section 231:
'Every one who destroys, cancels, conceals, or obliterates any document for any fraudulent purpose is liable to the same punish-ment as if he had stolen the document, or to imprisonment for a term not exceeding three years, whichever is the greater.'
Fabricating evidence, sections 113 and 229A:
For example, backdating documents, or creating documents with intent to mislead the court or a Taxation Review Authority. Section 113 which makes fabricating evidence with intent to mislead any tribunal holding any judicial proceeding an offence and which car-ries a seven year maximum term then could become relevant.
Or obtaining a foreign tax certificate with intent fraudulently to use it in order to obtain a reduction in New Zealand tax payable or a re-fund of New Zealand tax paid. Section 229A then could become relevant: 'Every one is liable to imprisonment for a term not exceeding seven years who, with intent to defraud,-
(a) ... obtains any document that is capable of being used to obtain any privilege, benefit, pecuniary advantage, or valuable considera-tion; or
(b) Uses or attempts to use any such document for the purpose of obtaining, for himself or for any other person, any privilege, benefit, pecuniary advantage, or valuable consideration.'
Attempts, section 72:
Taking a step in the direction of an intended offence against the Crimes Act 1961 is, within s 72(1), to be 'guilty of an attempt to commit the offence'. Where the enactment creating the intended of-fence does not specify the penalty attaching to an attempt, the maximum penalty is half the maximum term which would have ap-plied had the attempt to commit the offence been successful: section 311(1).
Conspiracy to defraud the revenue in New Zealand, section 257:
'Everyone is liable to imprisonment for a term not exceeding five years who conspires with any other person by deceit or falsehood or other fraudulent means to defraud ... any person ...'
'Person' is defined, by s 2(1) to 'include the Crown'.
In this context, the relevant intent is an intent, dishonestly, either
'to get out of the revenue something that was already in it, or to pre-vent something from getting into the revenue which the revenue was entitled to get:' Parker v Churchill (1986) 65 ALR 107 at 121, Jack-son J (Fed Court: Full Court). See also R v Kidman (1915) 20 CLR 425 at 437, Griffith CJ (Full High Court);
'to deceive a person [such as the Commissioner of Inland Revenue] responsible for a public duty into doing something, or failing to do something, which he would not have done, or failed to have done, but for the deceit.' Wai Yu-tsang v R  4 All ER 664, 668c.
Suppose a transaction is devised with an intent of either sort, but is thwarted at the last minute. Even though it did not go ahead in the end, the people who agreed or who agreed to procure a taxpayer to carry out the scheme have already committed the offence of con-spiracy to defraud. This is because the offence is completed on the making of their agreement: R v Cuthbertson  AC 470 at 481, Lord Diplock; R v Doot  AC 807 at 825-827. In Liangsiri-prasert v United States Government  2 All ER 866 at 873, the Privy Council adopted a statement that 'the gist of the offence [is] the agreement whether or not the object is attained.'
Conspiracy to defraud the revenue of another country, section 310:
Under s 310, up to seven years' jail can be the lot of the person who conspires 'to do or omit, in any part of the world, anything of which the doing or omission in New Zealand would be an offence,'
unless that person can prove
'that the doing or omission of the act to which the conspiracy relates was not an offence under the law of the place where it was, or was to be, done or omitted.'
So, whereas an agreement to defraud the revenue in New Zealand will be a crime under section 257, an agreement to defraud the reve-nue of a foreign state will be a crime under section 310 save in the unlikely event that such defrauding is not criminal in the place in which the fraud was intended to be carried out.
- The committee includes the Taxation Review Authority in the third category for completeness only. The committee does not suggest and has heard no suggestion that the Authority needs review or evaluation. The committee understands that there are some cases where the Authority would wel-come a discretion to award costs. The Authority would also be assisted by better facilities for the re-cording of evidence.