Report to the Treasurer and Minister of revenue - members of the committee MEMBERS OF THE COMMITTEE

Report to the Treasurer and Minister of revenue

By a committee of experts on tax compliance

MEMBERS OF THE COMMITTEE

The Rt Hon Sir Ian McKay, KNZM; BA, LLB; FCIArb; FAMINZ (Arb) is a
member of the Privy Council and a retired Judge of the Court of Appeal. As a
barrister and solicitor, he practised as a partner in the firm of Swan Davies
McKay, ultimately Kensington Swan, and was senior partner 1967-91. Sir Ian was
engaged as senior counsel in a wide range of litigation in the High Court, Court
of Appeal and Privy Council; in tribunals of various kinds and in arbitration,
with a New Zealand wide practice, particularly in the field of commercial
litigation. From 1970-91, he was a director of a number of listed public
companies and also private companies. Since his retirement from the court, he
has returned to prac-tice as an arbitrator. He is President of the Electoral
Commission and a member of the Surveillance Panel of the NZ Stock Exchange.

Tony Molloy QC has over three decades combined full-time law prac-tice
with contributions to legal education, lecturing in equity as well as tax law
and corporation law. Dr Molloy has published widely, including the text, Molloy
on Income Tax, for which he received a doctorate of laws. In 1984, Dr Molloy
became one of the youngest barristers to have been elevated to the rank of
Queen's Counsel, and both before that time and since, he has been counsel in
many leading tax cases. He has also practised in canon law as counsel in the
ecclesiastical courts of the Ro-man Catholic Church. He was awarded the New
Zealand Sesquicenten-nial Medal in 1990 for his services to New Zealand. One of
Dr Molloy's particular interests is wine making under the St Nesbit label.

John Prebble, BA, LLB (Hons) (Auckland); BCL (Oxford); JSD (Cor-nell);
Inner Temple (London) is a professor and former dean of law at Victoria
University of Wellington. Professor Prebble practises as a bar-rister in the
areas of tax law and policy, which are also his major re-search interests.
Professor Prebble was a member of the New Zealand government's tax reform
Consultative Committees on Full Imputation in Company Taxation and on
International Taxation in the late 1980s. He has held research fellowships or
visiting positions as a teacher or scholar at universities and institutes in the
United States, Britain, the Nether-lands, Italy, Australia as well as in New
Zealand. Professor Prebble was formerly a Governor of the Asian Pacific Tax and
Investment Research Centre, Singapore and is on the editorial boards of the Asia
Pacific Tax Bulletin and the NZ Journal of Taxation Law and Policy. He is a
member of the Advisory Board or the International Bureau of Fiscal
Documenta-tion, Amsterdam and a fellow of the Society for Advanced Legal
Stud-ies, London. He has written or edited 11 books on tax or business law and
has published many articles in scholarly and professional journals.

John Waugh, FCA, CA (SA), is a chartered accountant based in
Wark-worth, specialising in tax with practical experience both in New Zealand
and overseas. Mr Waugh was formerly a tax partner in the Auckland of-fice of the
international accountancy practice, Deloitte Touche Toh-matsu, and is now
practising on his own account. A former member and Chair of both the National
Tax Committee of the Institute of Chartered Accountants of New Zealand and the
government's Tax Simplification Consultative Committee in 1989-90, Mr Waugh is
an experienced writer on tax topics and a consultant editor of Andersen's Income
Tax Com-panion. He also speaks on tax topics to professional audiences in New
Zealand and elsewhere.

GOVERNMENT STATEMENT

The Government welcomes the Report of the Committee of Experts on Tax
Compliance, and congratulates the Committee on its work. Its terms of reference
were wide-ranging. Its approach is in line with the Government's revenue
strategy. The Government is pleased with the quality and scope of the report,
and has decided to work through its recommendations as follows:

• Recommendations on aspects of the taxation of charities and amateur sports
  bodies will be included in the Government's tax policy work programme, but the
  issues involved are complex. They need careful consideration. Since the tax
  policy work programme is, in the near future, fully committed to other
  priorities, those recommendations will not be considered in the short term.
• Recommendations on the project which is rewriting the Income Tax Act will be
  referred by the Government for consideration to the Rewrite Advisory Panel, a
  group of specialists advising on that project.
• Recommendations closely related to the Government's existing project on the
  reduction of the business compliance costs imposed by taxation will be
  incorporated by the Government into that proj-ect.
• Where policy recommendations are outside those three areas, public
  submissions will be sought in line with the Government's ge-neric tax policy
  process.

The Committee of Experts on Tax Compliance was appointed by the Government in
March 1998. The Committee's terms of reference broadly required it to consider
and make recommendations on tax compliance costs and the robustness of the tax
system against avoidance and evasion.

The Committee reported on 18 December 1998. The Government re-gards the
report as a valuable contribution which reinforces many of the themes of its
current tax policy. In particular, the Committee recommends that "the Government
should continue to restrict the conditions that make tax avoidance possible by
continuing its broad-base, low-rate tax policy". The Government had, in its July
1997 Revenue Strategy, emphasised that broad-based taxes reduce distortions
among different forms of earning, saving, investment and consumption, and reduce
the opportunities and incentives to engage in tax avoidance. That document
recognised the importance of identifying and closing loopholes offering
opportunities for tax avoidance and evasion, and maintaining vigorous
enforcement action.

The Government, in that revenue strategy, recognised the importance of tax
simplification as a means towards lower compliance costs. The Government is
pleased to see that the Committee's recommendations endorse this strategy. The
effective and efficient operation of our tax sys-tem makes, as the Committee
observes, a crucial contribution to national well-being. The Committee has, in
addition to making tax policy recommendations, commented and made
recommendations on a number of operational as-pects of the Inland Revenue
Department. The Committee notes, for example, the Department's conclusion that
it needs to increase the empha-sis on countering tax avoidance and evasion.

The report recognises that Inland Revenue has, in the past decade,
implemented significant improvements, but has also identified areas such as
technical skill levels as in need of further improvement. Its recommendations
endorse the Government's view of the right strategic direction for further
change in the Department.

Committee recommendations on Inland Revenue operations come, of course,
within the statutory responsibilities of the Commissioner of Inland Revenue. The
Government has directed the Commissioner to con-sider those recommendations, and
report back to the Government.

The Committee, in its overriding recommendation, highlights the fact that tax
systems, of their very nature, need to be kept under continuous review. The
Government concurs entirely with that finding, and thanks the Committee for an
exceptionally valuable contribution towards that on-going review process.

Rt Hon W F Birch Treasurer

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Hon Bill English Minister of Finance and Minister of Revenue

LETTER OF TRANSMITTAL

18 December 1998

Rt Hon W F Birch Treasurer and Minister of Finance

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Hon Max Bradford Minister of Revenue

Dear Ministers

On behalf of the Committee of Experts on Tax Compliance, I am pleased to
submit to you the committee's report. In accordance with the committee's terms
of reference, the report con-siders and makes recommendations on tax compliance
costs and the ro-bustness of the tax system against avoidance and evasion.

The committee is confident that its work makes a valuable contribution to the
New Zealand tax system, the effective and efficient operation of which is of
crucial importance to the well-being of the country.

The committee records its appreciation of the very able assistance it has
received from officials of the Inland Revenue Department and the Treas-ury.

Yours sincerely

Sir Ian McKay
Chair

PREFACE

1. New Zealand has had a tax system since the earliest
days of colonial settlement: in the early colonial period, customs and excise
duties provided over 90 per cent of tax revenue, the balance being provided by
stamp duties. The first income tax was levied by the Land and Income Tax
Assessment Act 1891 at the rate of sixpence in the pound on taxable income up to
£1,000, and one shilling in the pound on any balance for individuals, and one
shilling in the pound for companies.¹

2. Today, the government collects over $30 billion in taxes, through
two main bases: the income tax and the goods and services tax. The Inland
Revenue Department is one of the largest departments of state, with over 4,500
staff in 30 offices throughout the country.

3. New Zealanders deserve a good tax system. Taxes fund vital public
services, like hospitals, the police and our schools. Taxes also have powerful
effects on the size and shape of the New Zealand economy. They make an impact
directly and indirectly on how, where and when New Zealanders save, work and
invest.

4. A good tax system needs to be robust and efficient both in terms of
revenue collection and compliance costs. It was against this background that the
committee had its genesis.

Establishment of the committee
5. The government announced
the formation of the committee on 31 March 1998. The committee’s terms of
reference are set out on here. In brief, they require
the committee to consider and make recommendations on two main areas: tax
compliance costs and the robustness of the tax system against avoidance and
evasion.

6. In April 1998, the Treasurer and the Minister of Revenue at that
time provided the committee with a set of guidelines for interpreting the
committee’s terms of reference. These guidelines, the text of which is
reproduced in appendix 1, showed how the terms of reference interacted with
existing tax policy activities, such as the rewriting of the Income Tax Act
1994.

Conduct of the committee’s activities
7. At its first
meeting the committee agreed to seek public submissions, so that it could gain
from the experiences of others in formulating its recommendations. The committee
accordingly called for submissions through a press release, advertisements in
major metropolitan and provincial newspapers, and by way of the Treasury and
Inland Revenue websites. Many submissions were received from individuals, firms
and professional bodies. The committee would like to record here its
appreciation to all those who made submissions.

8. Although the submissions contained many worthwhile suggestions, not
all suggestions are mentioned in the committee’s report, often because they were
outside the terms of reference. In other cases, the committee did not have
sufficient time to give the suggestions the detailed examination that would have
been necessary to convert them into viable proposals. However, where
appropriate, the committee has referred to the matters raised, with a
recommendation that the government give them attention as part of its tax policy
work programme. Inevitably, the committee did not share all the views put
forward in submissions, and on occasion, has recorded this in the report.

9. The committee’s terms of reference are very wide. This breadth in
part reflects the scope of the tax system. To meet the reporting deadline
imposed by the government, the committee needed to be selective in its approach.
The committee has, therefore, concentrated on areas where it considers that it
has the greatest skills and experience. In those areas that require review but
where, for whatever reason, the committee has been unable to undertake complete
analysis of the issue, the committee has recommended that the government ensure
that the appropriate review does take place. See appendix 3 for the list of some
of the more important omitted topics.

Compliance costs
10. Compliance costs are ‘the costs
incurred by taxpayers in meeting the requirements laid on them by the tax law
and the revenue authorities. They are costs over and above the actual payment of
tax and over and above any distortion costs inherent in the nature of
tax.’²

11. The only comprehensive study of tax compliance costs in New
Zealand estimated, for the 1990-91 year, that New Zealand business spent over 46
million hours complying with tax laws and spent a further $600 million in fees
to external advisers. In aggregate, the study estimated annual compliance costs
at $1,882 million.³

12. Compliance costs clearly are a significant factor in the design of
the tax system. The committee believes that the government should take into
account the following when considering compliance costs:

The recognition that there is no simple or single solution that of
itself will reduce compliance costs to business.

The need to develop a reliable indicator of the extent to which compliance
costs are holding back the economy, and to use this as a benchmark for a
publicly stated and measurable goal of containing, and later reducing,
compliance costs.

The need to maintain an active focus on opportunities to ease the compliance
cost burden placed on small, and small to medium-sized, entities.

The need to weigh carefully the balance between imposing compliance costs on
third party agents, for example, banks and employers, and securing universal tax
administrative and compliance efficiencies.

13. At the same time, the committee notes that it behoves the
government and the public to keep always in mind that the major costs of the tax
system to society are not compliance costs but allocative costs. The committee
does not minimise the significance of compliance costs, which are a major topic
of its terms of reference, but it keeps them in perspective. The committee
addresses this perspective in paras 1.6 to 1.14 of this report.

14. The committee makes a number of specific recommendations directed
at reducing compliance costs. As with robustness, reducing compliance costs is
not something that can be achieved immediately or as the result of a single
initiative. The committee’s overall recommendation on compliance costs is,
therefore, that the government needs to keep under continuing and active review
all elements of the tax system that impose significant compliance costs on
taxpayers. The government’s aim should be to identify the need for or
appropriateness of individual compliance measures, to identify opportunities
that changed circumstances and technologies may allow, and to develop
appropriate initiatives.

The robustness of the tax system
15. The tax system,
including policy formation and legislation, must be as robust as necessary to
protect the revenue in New Zealand’s sometimes aggressive commercial
environment.

16. The committee considers that, at an administrative level, a
sufficiently robust system would:

Be alert to the fact that people at the helm of business entities
have a duty to their companies to see that not only do they pay every dollar
that the law does require, but that they do not pay one dollar more than that.

Monitor and initiate appropriate audit and policy responses to the attitudes
and initiatives of significant participants in the business and investment
sectors and to all tax-planning arrangements being employed.

Test all such arrangements thoroughly in relation to all relevant tax
provisions, taking care not to nullify the work of the Parliament by failing to
apply the laws it enacts.

Make full use of the range of remedies and procedures available, including
practices for obtaining declaratory and injunctive relief.

Ensure that no arrangements are permitted to proceed so far as to expose the
public moneys to risk and have in place systems enabling the size of such
revenue risks to be clear at all times.

Test in court any arrangements which appear ‘too good to be true’, or which
attempt to defeat the income tax legislation.

Be intolerant of affront and obstruction, particularly when yielding to it
might create a perception that might is right.

Ensure that when prosecution is appropriate, it is not derailed through lack
of proper appreciation of the ability to prove by inference from proven or
provable facts.

Employ staff with educational and professional qualifications, experience,
and skills appropriate to the complexity of the legislation being administered
by the Inland Revenue Department, and appropriate to meet on equal terms those
who would aggressively test the legislation.

Encourage employees, even at the cost of creating internal tensions, to
observe fully their duty under section 6(1) of the Tax Administration Act 1994
‘at all times to use their best endeavours to protect the integrity of the tax
system’.

17. Much of the report deals, either directly or indirectly, with
testing whether the tax system, and the way it is administered by the Inland
Revenue Department, measures up to these standards.

18. The committee is not the first group to investigate the tax
system. As the list in appendix 9 shows, in the last two decades the New Zealand
tax system has undergone significant reform, often based on the work of other
expert committees. Much has already been done to ensure that the tax system is
robust.

19. Three projects that have made, or should make when fully
implemented, major strides towards ensuring a robust tax system, are:

the Organisational Review of Inland Revenue, conducted by a
committee headed by Sir Ivor Richardson, ⁴

the rewriting of the Income Tax Act 1994, and

the department’s project, Directions: Customer Requirements. ⁵

20. Creating and maintaining a robust, efficient tax system is a
process not an event. The committee has been able to examine only a limited
number of key areas. Our overriding recommendation to the government, therefore,
is to keep the tax system under constant review.

21. The committee also makes many recommendations directed towards
making the tax system more robust. See here for a
summary of those recommendations.

Outline of the report
22. The committee’s report is in four
parts.

23. Part I deals with tax compliance costs. The committee begins with
a discussion of the principles of simplicity and coherence in tax laws. The
committee explains how tax laws strike a compromise between simplicity and
neutrality. The committee uses the term ‘fiscal paradox’ to explain why the tax
system is often so complex: the more neutral and more equitable a government
makes a tax system, the more complex that system becomes. This paradox shapes
the results of modern tax reform, as most governments rightly regard neutrality
and equity as key goals of tax policy.

24. The report then proceeds to consider the government’s project of
rewriting the Income Tax Act. The committee includes specific recommendations on
ways in which it believes the rewrite project could be improved. The report goes
on to consider some aspects of the capital-revenue boundary, one of the most
problematical features of the tax system. The committee was concerned that the
opportunity for taxpayers to characterise otherwise taxable income as capital
receipts presents a significant risk, and makes a number of recommendations to
limit this opportunity. Then the committee considers tax-exempt entities,
particularly the appropriateness of the existing scope of certain tax
exemptions, and the exemption from tax of certain compensation paid by
tax-exempt entities to their employees.

25. Part 1 also contains some chapters that analyse specific areas
that raise compliance cost concerns. The committee makes a number of
recommendations that it hopes will lead to lower compliance costs. The committee
also refers to the project ‘Directions: Customer Requirements’ being undertaken
at present by the government and the Inland Revenue Department.

26. Part II of report deals with the robustness of the tax system
against avoidance and evasion. The committee begins the part with an analysis of
the terms tax mitigation, avoidance and evasion, and goes on to discuss tax
avoidance within a policy framework. Some particular topics are then examined:
the loss attributing qualifying company rules and contrived depreciation
deduction schemes.

27. Tax evasion and the so-called hidden economy are serious threats
to the revenue and are the subject of detailed discussion in chapter 7 of the
report. Chapters 8 to 11 deal with specific powers of the Commissioner of Inland
Revenue, and procedures affecting the robustness of the tax system. Topics
covered include the Commissioner’s powers to gather information, legal
professional privilege, and the provisions relating to the assessment of tax,
disputes resolution and withholding payments. The committee makes
recommendations on ways in which the current approach to collecting taxes could
be improved.

28. Penalties for non-compliance are an essential element of a robust
tax system. The government introduced new penalties provisions into the tax laws
in 1996. Because of the newness of the regime, and in the light of the fact that
the government intends to undertake a post-implementation review of these
provisions in 1999, the committee does not make any major recommendations for
change. The committee does, however, make recommendations on specific matters it
believes should form part of that review.

29. Chapter 13 contains the committee’s discussion of one of its more
important topics: how the Inland Revenue Department should apply the law. The
part concludes with the committee’s analysis of the tax implications of
electronic commerce.

30. Part III discusses the role of tax advisers in the tax system.
Because of the complexity of the tax system, many taxpayers, particularly
business taxpayers, need professional assistance in understanding and complying
with tax laws. The conduct of those advisers is, therefore, an important part of
how the tax system operates. The committee discusses whether greater regulation
of tax advisers is warranted, drawing on the registration and regulation regimes
operating in a number of other countries. The committee concludes that
professional bodies should continue to have responsibility for regulating the
ethical conduct of their members, but must be more vigilant if self-regulation
is not to give way to external control.

31. Part IV of the report is concerned with operational matters. The
committee discusses such matters as the Inland Revenue Department’s relationship
with the public, how the Inland Revenue Department issues rulings on its
interpretation of the law and the Inland Revenue Department’s budget.

32. The scope of the committee’s report is broad. The committee has
considered and has made many recommendations on tax compliance costs and on ways
to make the tax system more robust against avoidance and evasion. The committee
hopes its work will contribute to the efficiency and effectiveness of the tax
system in New Zealand and, therefore, to the well-being of the country.

 

Ian McKay

Tony Molloy

John Prebble

John Waugh

1. For those raised in the decimal/metric age, these rates equate to 2½ per
   cent and 5 per cent, respectively.

2. Sandford C, 1995, 'The Rise and Rise of Tax Compliance Costs' in
   Sandford (ed), Tax Compliance Costs Measurement and Policy.

3. Sandford C, and Hasseldine J, 1992, The Compliance Costs of Business
   Taxes in New Zealand.

4. For an outline of the review, see the notes in appendix 2.

5. For a description of the project, see appendix 5.

TERMS OF REFERENCE

THE COMMITTEE is to consider and make recommendations on the fol-lowing with
a view to considering their implications for future policy:

• tax compliance costs, including how tax laws may be simplified and made more
  coherent and understandable while ensuring an appropriate balance between the
  levels of complexity, fairness, ac-curacy and economic efficiency;
• how to make the tax system more robust against avoidance and evasion
  (identifying and bearing in mind the underlying causes of such activity), with
  particular regard to:
  • the use of tax driven structures lacking business reality;
  • abuse or complicity by tax advisers;
  • standards of conduct for tax advisers;
  • concealment and other tax related offences, and the possi-bility of
    confiscating concealed profits;
  • the lack of prosecutions to prevent harmful tax practices and schemes;
  • the adequacy of the current penalties regime, including criminal
    penalties;
  • how to achieve disclosure of tax schemes affecting the in-stance of tax
    payable by greater than $100,000;
  • the possibility of treating the failure to disclose (or falsifica-tion of
    material facts) by a person experienced in tax matters as a serious criminal
    offence, and establishing it as punish-able by a maximum penalty of 10 years
    imprisonment where more than $5 million in tax revenue is involved; and
  • the possibility of recovering from large-scale, tax-evasion schemes (say
    $100,000 and over) and those who aid them, profits attributable to the use of
    unpaid tax (unjust enrich-ment); and
  • the internationalisation of the economy, including electronic commerce.

The committee is required to make its recommendations on the
above consistent with:

• the Coalition Agreement;
• the government's revenue strategy;
• the generic tax policy process;
• the maintenance of a broad-base, low-rates and tax system;
• the maintenance of the existing tax rates and tax mix;
• there being no decrease in the extent to which the income tax laws focus on
  the taxation of a comprehensive definition of income;
• there being no decrease in total tax revenue;
• there being no increase in overall compliance costs.

The committee will not consider the recommendations of the Com-mission of
Inquiry into Certain Matters Relating to Taxation.

The committee is required to report to the government by 21 De-cember 1998.

LIST OF RECOMMENDATIONS

THE COMMITTEE RECOMMENDS that any proposals for change emerging from its
report and listed below should proceed through the generic tax policy process.
The summary recommendations set out here should be read in the context in which
they appear in the report.

2 The rewrite project
Interpretation
The government
should review section AA 3(1) as a whole (para 2.73). In considering this
recommendation, the government should make ex-plicit that provisions that are
intended to operate only in a particular manner or in a particular context
should not apply in other contexts (para 2.41), and consider whether the
reference to the core provisions in sec-tion AA 3(1) of the Income Tax Act 1994
should stay (para 2.58).

The government should review the way in which the interpretation pro-visions
of the Income Tax Act 1994, together with the organisational scheme operate in
relation to the 'local context' of a statutory rule (para 2.71). Alternatively,
the government should consider whether section AA 3(1) should omit any reference
to the way in which the Act is or-ganised, in order to avoid the possibility of
perverse interpretations (para 2.74). If sections AA 1 and AA 3 are to remain in
the statute, the Income Tax Act 1994 should state that its interpretation
provisions do not oust any statutory generally-applicable rules of
interpretation unless the for-mer are clearly inconsistent with the latter (para
2.76).

The government should undertake a thorough study of the courts'
inter-pretation of income tax legislation with a view to determining whether
Parliament should be satisfied with present practices and emphasis, or whether
the rewrite should mandate a change (para 2.89).

In the rewriting process, when a rule is to provide that a particular
re-ceipt is to be taxed, it is better to frame the provision as a rule, rather
than to define the receipt as something that it is not, followed by another rule
that taxes the item that is defined (para 2.99).

The uncertainty that has arisen over whether certain judge-made timing rules
have survived the change to a 'gross income' approach of the re-write should be
resolved (para 2.118). Organisation

There should be an assessment of the value of the benefits to be obtained
from continuing on the present drafting course, that is, one based on functional
organisation, together with an assessment of the work in-volved in reorganising
the statute on a regime-by-regime basis. The gov-ernment should consider having
those assessments done, with a view to deciding whether to persist with the
functional organisation of the In-come Tax Act (para 2.141). If the government
determines to adhere to a formalistic organisational structure, it should
consider allocating a spe-cific part or subpart to rules about valuation, which
at present are not gathered together in the manner that is standard for the
rewritten Act (para 2.188).

The phrase 'under ordinary concepts' in section CD 5 should be elimi-nated,
and the provision should be rephrased using the term 'income' without
qualification (para 2.155). Section CD 5 should be the first charging provision
that places 'income' within 'gross income' and, as the calculations are worked
through, 'net income' and 'taxable income'. Alternatively, section CD 5 could be
woven into section BC 4, where it could act as the core provision that initially
captures gross income as an-nual gross income (para 2.159).

The government should give some priority in the rewrite programme to the
following topics: apportionment, movement of assets in and out of the tax base,
accounting for long-term contracts and tax avoidance provi-sions (para 2.171).

Drafting policies
Statute-wide drafting policies should not be
adopted as a matter of prin-ciple without reasonably rigorous practical testing
(para 2.183).

Some advantage may be had in splitting the Income Tax Act 1994 into two
separate Acts, one for provisions of general application, removing some
relatively complex groups of provisions, that concern only a lim-ited number of
taxpayers, into a second Act. The government should di-rect officials to
evaluate whether such an approach should be taken (para 2.184).

Schedule 23 should be kept under continuous review and updated when-ever
there is renumbering. The ambulatory nature of the rewrite process has some
advantages, but regular changes make the statute difficult for users to follow
(para 2.185). The government should also consider in-cluding in the Act a
schedule of the monetary thresholds that are scat-tered throughout the Income
Tax Act (para 2.186).

The Inland Revenue Department should establish a special 'repairs and
maintenance' unit to address promptly any queries raised as to the effect on
established principles of the rewritten Income Tax Act, to deal with any
unintended outcomes identified, and to provide an administrative mechanism to
ensure both that the general body of taxpayers and tax ad-visers are informed of
issues as they arise, and that remedial legislation is developed and introduced
at the first opportunity (para 2.187). The department should redraft the
existing qualified accruals rules de-terminations in an endeavour to publish
fresh drafts at the same time as the proposed exposure draft of part E of the
Act is published. When pos-sible, each determination should follow one of a
limited number of stan-dard templates. The procedure for issuing determinations
should take on the basic features of the generic tax policy process (para
2.196).

Additional matters
New Zealand should return to formal annual
taxing Acts (para 2.200).

The rewrite should include a provision to state the law on the relation-ship
between the Income Tax Act and fraud, so that there can be no doubt that even
though taxpayers may have strictly complied with the requirements of the Income
Tax Act, or believe that they have done so, when the facts of the case require
it they can still be described as dishon-est, and be guilty of fraud (para
2.201).

Legislation that affects the operation of the Income Tax Act should be listed
in a schedule, which should begin with a statement to the effect that the
omission of any legislation does not mean that the omitted Act does not affect
the operation of either that Act or the Income Tax Act (paras 2.203, 2.205). An
additional schedule could list sections of the Crimes Act 1961 that are
potentially relevant to income tax fraud (paras 2.204, 2.205).

3 Aspects of the capital-revenue boundary
The government should
consider legislation to ensure that payments for restrictive covenants involving
services (para 3.22), inducement pay-ments (para 3.32), certain capital
contribution payments, and other simi-lar payments should be taxable (para
3.42). The submissions by the In-vestment Savings and Insurance Association of
New Zealand to the committee on investment gains of collective investment
vehicles should be evaluated with a view to introducing legislation to remedy
the prob-lems that the Association has identified (para 3.4).

4 Charities and other tax-exempt entities
The government should
review the law and practice relating to the in-come tax exemption in section CB
4(1)(h) for amateur sports bodies (para 4.9), and also the threshold in section
DJ 17 to ascertain whether it is sufficiently high enough to meet its objective
of reducing compliance costs (para 4.11). The income tax exemption in section CB
5(1)(i) for trustees of sick, accident and death benefit funds should be
repealed (paras 4.15, 4.25). The net income derived by charities and other
tax-exempt entities from commercial activities unrelated to their exempt purpose
should be taxable (para 4.17). The exemption from fringe bene-fit tax in section
CI 1(m) for benefits provided by charitable organisa-tions to their employees
should be repealed (para 4.22). Superannuation schemes for the benefit of
employees of charitable organisations should not be eligible for charitable tax
exemptions (para 4.24).

5 Some specific concerns
Tax treatment of expenditure on motor
vehicles
The government should develop a universal approach to the tax
treat-ment of motor vehicles (para 5.7).

Fringe benefit tax
There should be no change in the present
formula for calculating the value of the fringe benefit of a motor vehicle (para
5.16), but the Inland Revenue Department should publish in the Tax Information
Bulletin a full and informative explanation of the rationale underlying the use
of the factor of 24 per cent of the original GST-inclusive cost price as a
method for determining the base fringe benefit value of a motor vehicle (para
5.17).

GST on fringe benefits should be returned on the FBT return rather than the
GST return (para 5.18).

Use of money interest
The question of charging use of money
interest to those paying FBT an-nually should be pursued in the context of the
review of obligations of business taxpayers. If this review should not result in
any simplification for small taxpayers paying FBT, the government should
consider the re-moval of the use of money interest charge from fringe benefit
taxpayers who pay annually (para 5.25).

Provisional tax
The government should monitor the use by taxpayers
of the election to estimate income to prevent divergent outcomes relating to use
of money interest (para 5.31).

Payment and refunds
The government should publish a discussion
document that sets out the debate on amalgamating payment dates to allow
informed public consid-eration of the issues and to provide for public
submissions. The discus-sion document should clearly distinguish the needs and
concerns of the small, small to medium, and large businesses (para 5.47).

The government should also consider implementing, at the first practical
opportunity, a universal rule that when the due date for the payment of tax
falls on a non-business day, the due date moves to the next working day (paras
5.53, 5.54). The routine practice of applying refunds to meet outstanding debts
should be modified to allow discretion in its application (paras 5.57, 5.59).
Taxpayers should be able to request a refund of an amount of tax not subject to
a dispute provided certain criteria are met. For income tax, the refund would be
subject to the Commissioner's discretion as to the calculation of the
appropriate amount of refund (para 5.65).

Depreciation
There should be no increase in the $200 threshold for
the low value write-off (para 5.72). When assets are purchased at the same time
from the same supplier, the threshold should be increased to allow up to $500 in
assets purchased at the same time from the same supplier to be imme-diately
deductible, providing no asset exceeds $200 in value (para 5.78). Consideration
should also be given to either an increase in, or the re-moval of, the ceiling
that limits the application of the pooling approach to depreciation (para 5.88).

Goods and services tax
A registered person who is no longer
eligible to use the payments basis of accounting should be able to continue
accounting in that way for a further year before being required to adopt the
invoice basis of account-ing. The government should also consider an increase in
the threshold to account for inflation (para 5.94).

The Inland Revenue Department should publish a statement about its
operational policy on GST tax invoices, identifying the errors that are
considered significant and the errors that are not (para 5.99). There should be
no increase in the $50 threshold for tax invoices (para 5.103).

GST secondary use adjustments for private or exempt use should be moved to
the period in which the annual income tax return is filed, ex-cept when the
adjustment involves the procedures available for acquisi-tions of items under
$10,000 (para 5.108).

Financial arrangements
As part of the rewrite process, the
government should consider a year-end valuation approach as an alternative to
the current rules for valuing financial arrangements (para 5.118). Rewriting the
accrual rules deter-minations should be given a high priority (para 5.120).

Readability of statements
The redesign of statements of account
should be given priority (para 5.124).

Education
The Inland Revenue Department should publish booklets for
specific industry groups, advising taxpayers of their tax obligations and the
tax treatment of specific transactions (para 5.128).

6 Tax mitigation, avoidance and evasion
Anti-avoidance
rule
The government should continue to restrict the conditions that make
tax avoidance possible by continuing its broad-base, low-rate policy (para
6.37).

The general anti-avoidance rule in sections BG 1 and GB 1 of the In-come Tax
Act 1994 should not affect the application of any principles of common law. This
position should be made completely clear in order to ensure that the courts are
not precluded from applying common law anti-avoidance rules like the fiscal
nullity doctrine (paras 6.42, 6.53).

The application of the anti-avoidance rule is automatic. This feature should
be made absolutely clear in the legislation (paras 6.44, 6.53). An amendment
should be made to clarify that any reconstruction under sec-tion GB 1 applies
from the date of the original avoidance arrangement (paras 6.46, 6.53).

The department should review existing interpretation statements,
inter-pretation guidelines and public rulings that depend on high-level legal
analysis to determine whether these statements should be revised. The department
should immediately withdraw any statements found to be deficient without waiting
until replacement drafts are available. In par-ticular, the department should
immediately withdraw the 1990 policy statement on section 99 of the Income Tax
Act 1976. The department should obtain external expert input into interpretation
guidelines and in-terpretation statements before they are released for
consultation, espe-cially for issues involving complex reasoning. Particular
care should be taken when including generic examples in statements. The
department should also reconsider and refine its apparent view on how the
form/substance and sham/genuine analysis should be approached (para 6.101).

Loss attributing qualifying companies
The government should examine
loss attributing qualifying companies to determine whether the use of loss
attributing qualifying companies as tax avoidance vehicles is a threat to the
tax base, whether the use of loss at-tributing qualifying companies is
consistent with the government's tax policy in relation to forestry, and whether
the provisions as to loss attrib-uting qualifying companies should be amended or
repealed (para 6.114).

7 Tax evasion and the hidden economy
The goal of the Inland
Revenue Department in improving the taxation of the hidden economy should be a
sustained accretion of improvements that steadily whittle away at the amount of
tax that is evaded and that enable the department to respond quickly to new
business techniques or to new systems of concealment that offer opportunities
for new methods of evasion (para 7.40). The targeting of audits should not be
based solely on the amount of tax being evaded by a particular taxpayer, but
should also be directed to types of tax evasion that involve many taxpayers
evading tax on small amounts of income (para 7.42) The Inland Revenue Department
should continually identify opportuni-ties for tax evasion by taxpayers and new
opportunities to use withhold-ing tax methodologies. The department should also
develop a strong community awareness of the cost to the community of tax evasion
and review the law relating to non-cash transactions (para 7.45).

The department should work closely with community groups, tax practi-tioners
and particularly specialists in public awareness campaigns to de-velop industry
profiles and more effective compliance at all levels. The focus of the community
awareness programme should be on the costs of the cash economy to the community,
the fact that there is no excuse for the non-declaration of income, education
through school curricula, the seriousness of the consequences of detection, the
details of the depart-ment's initiatives on the cash economy, and the
publication of instances of evasion that have been identified, and where
appropriate, the actions taken (para 7.51).

The law relating to non-cash transactions should be clarified so that such
transactions do give rise to taxable income even when they cannot be converted
into cash (para 7.55). The department should effectively communicate a suitable
explanation of the tax law relating to barter transactions to those sectors of
the community where barter transactions are prevalent (para 7.56).

8 Disclosure
Section 15B(e) of the Tax Administration Act 1994,
which states that taxpayers must disclose to the Commissioner in a timely and
useful way all information required to be disclosed under the tax laws, should
be amended to identify the different categories of required disclosure:
in-formation specifically required by statute, information required by the
department in a prescribed form, and information requested by the de-partment
from specific taxpayers (para 8.4).

The department should consider a review of each of the purposes of the tax
return to decide if the return is the most appropriate vehicle for these
functions (para 8.19).

An examination should be made of the application of technology to the
government's disclosure requirements (para 8.20). The government should consider
a review of the records that a taxpayer must keep under self-assessment. The
review should be undertaken at the same time as the review of return filing
obligations (para 8.21).

The Inland Revenue Department should prepare and send out to taxpay-ers forms
to guide them through their key annual income tax activities, and also to act as
a record for audit purposes (para 8.25).

As part of the review of penalties to be conducted in 1999, there should be
public discussion on disclosure (paras 8.27, 8.33).

9 The Commissioner's information-gathering powers
An amendment
should be made to section 16 of the Tax Administration Act 1994 to give the
Commissioner authority to remove books or docu-ments from premises for the
purpose of making copies (paras 9.25, 9.35). The government should also clarify
the ambit of section 16(2) to ensure that it applies to third parties (paras
9.30, 9.35).

The words 'necessary or relevant' in section 17 encourage taxpayers to raise
spurious arguments and should be removed (paras 9.23, 9.35). Sec-tion 17 should
also be amended to deem the records of an offshore entity controlled by a New
Zealand resident to be under the control of that New Zealand resident (paras
9.18, 9.35). The section should be further amended to give the Commissioner the
discretion to require that docu-ments requisitioned under that section should be
sent to an Inland Reve-nue office (para 9.24, 9.35).

The government should await the outcome of the Law Commission's study of
legal professional privilege before making any decisions on this matter in
relation to tax (paras 9.59, 9.63). In the meantime, amendments should be made
to section 20 first, to ensure the physical protection of documents once a claim
for privilege is made, and secondly, to require the identification of documents
for which privilege is being claimed as a condition of obtaining privilege
(paras 9.60, 9.61, 9.63).

10 Assessments and disputes resolution
The time bar for amending
assessments should be suspended for the pe-riod between one month after the
issue of a section 17 notice in which the taxpayer is advised that
non-compliance will result in such suspen-sion and the taxpayer's compliance
with the notice. The statutory mini-mum periods for keeping records should be
extended by the period for which the time bar is suspended (para 10.8).

The onus of proof in civil proceedings, except for civil penalties for
eva-sion, should continue to lie with the taxpayer. The law should be clari-fied
expressly to provide that if a taxpayer is able to prove on the balance of
probabilities that the Commissioner's assessment is excessive by at least a
certain amount, the court should be able to reduce the Commis-sioner's
assessment by that amount (para 10.13).

11 Tax collection
Withholding payment regulations
The
current withholding system should continue to apply if, and to the extent that,
there is a risk that the business to which the withholding system applies may
not be in a position to meet its income tax liability. Smaller businesses,
irregular activities, or infrequent activities, such as sphagnum moss
collection, game hunting and certain labour-only serv-ices which are activities
specifically covered by the regulations are more likely to run this risk (para
11.16).

The definition of 'withholding payment' should be amended to exclude first,
payments made to a GST registered person for the supply of serv-ices when the
payer holds at the time a GST tax invoice disclosing the GST-inclusive value of
that supply except in specific areas of revenue risk (paras 11.22, 11.28), and
secondly, payments made by people in the household sector to the extent that the
payments are of a private nature (paras 11.25, 11.28).

Interest on underpayments
Questions about relief from the use of
money interest rules should be fully addressed as part of the review of the
penalties provisions to be conducted by the Inland Revenue Department in 1999
(para 11.37).

The government should consider removing the application of the 5 per cent
penalty to taxpayers who fail to pay on time, but who correct that error within
a few days of the due date for payment. The government should also consider
reducing the incremental late payment penalty of 2 per cent per month to 1 per
cent per month (para 11.43).

Tax recovery
The requirement in section HK 11(1)(c)(ii), that the
purpose of an ar-rangement must have the effect of avoiding tax, should be
amended so that it is an alternative or disjunctive requirement only (para
11.52).

12 Penalties
There should be no major changes to the penalties
provisions until they are subject to post-implementation review in 1999 (para
12.9). The gov-ernment should, however, specifically require the review team to
report on whether the government's performance expectations of taxpayers are
reasonable, whether, and to what extent, a past record of good behaviour should
be taken into account in deciding to impose penalties or to esca-late
enforcement, whether the fairness of the penalties provisions is ap-parent to
all taxpayers, and whether taxpayers who comply can see that those who do not
comply are adequately punished (para 12.7).

13 Applying the law
The government should ensure that the Inland
Revenue Department re-views staff skill levels, and further, that the department
ensures that re-cruitment, retention and continuing education policies are fully
adequate to establish and maintain the staff skill levels that are necessary
(paras 13.41, 13.121).

The Inland Revenue Department should remove from its internal prac-tices and
procedures and from public statements any suggestions that section BG 1 should
be read restrictively rather than liberally (paras 13.53, 13.121). The Inland
Revenue Department should always be alert to the possibility of criminal fraud
by taxpayers, and when fraudulent activity is detected, the department should
ensure that its officers are aware that the Crimes Act 1961 is the appropriate
vehicle for prosecution (paras 13.89, 13.121).

14 The tax implications of electronic commerce
The government
should monitor and should continue to participate in the efforts of the OECD in
developing tax policy on electronic commerce and should seriously consider any
recommendations that are proposed (para 14.35).

15 Tax advisers
Whether or not they are members of professional
bodies, officers of the Inland Revenue Department who encounter misconduct by
tax advisers should be able to have it drawn to the attention of the appropriate
body. Because of the secrecy requirements in section 81 of the Tax
Admini-stration Act 1994, the first step should be internal to the department.
Section 81 would need to be amended to allow the department then to report such
misconduct. The government should consider such an amendment (para 15.11). The
penalties provisions should be allowed to operate for some time to gauge their
effect in practice, with a later re-view, if necessary, to consider the
desirability of having penalties apply directly to tax advisers (para 15.14).

16 Relationship with taxpayers
Thorough surveys should take place
to determine whether the depart-ment should continue to use the customer needs
model and, if so, whether any measures are necessary to deal with the
contradictions be-tween the roles of taxpayer and customer (para 16.23). The
Inland Revenue Department should abandon the motto, 'It's our job to be fair'.
If consideration is given to adopting a replacement motto, it should be tested
carefully, not only by research to discover taxpayers' reactions, but also by
measuring the motto against the legal and admin-istrative duties of the Inland
Revenue Department (para 16.31). The department's decision to investigate the
possibility of attitude-forming campaigns should be implemented more rapidly
than is cur-rently proposed (para 16.36).

Section 81(1) of the Tax Administration Act 1994 should be amended to clarify
that the administration exception in that provision permits the Commissioner to
disclose taxpayer affairs for the purpose of responding to publicity about the
department's activities when the Commissioner considers in good faith that such
disclosure is necessary to safeguard the integrity of the tax system (para
16.41).

17 The rulings process
The department should consider the way in
which product rulings are issued. Issuing product rulings should be
discretionary, as is the case with public rulings. In exercising its discretion
to issue public and prod-uct rulings, the department should take into account
the policy implica-tions of such rulings (para 17.40).

18 The Inland Revenue Department's Budget
The government should
encourage the Commissioner fully to utilise the scope for flexibility within the
government's budget processes. The gov-ernment should also keep the whole issue
of management flexibility in the context of budget issues under review (para
18.22).