The New Zealand Herald
IRD ‘five years late’ with blitz
Tax expert blasts tardy action on New Zealand’s billion-dollar ‘hidden economy’
Inland Revenue is “five years late” to tackle the mammoth issue of the country’s estimated billion-dollar “hidden economy”, a tax expert says. Inland Revenue collected $77.9 billion in tax revenue in the 2019 year, but experts estimate it is missing out on at least $1b more as self-employed Kiwis are under-reporting their income by about 20 per cent.
A Victoria University of Wellington and IRD study released in April estimated NZ is missing out on about $800 million in its annual tax take.
Chartered Accountants Australia and New Zealand believe this is likely to be in excess of $1b each year.
The tax department yesterday said it had carried out a series of surprise raids on hospitality businesses in the Queenstown and Central Otago region — new measures in a bid to curb unreported cash sales and staff being paid cash under the table.
Using court-issued search warrants, IRD raided three hospitality businesses and made unannounced visits to six others. It seized wage records, computers and other business records, along with information on employer-provided accommodation, working for Families Tax credits and payroll matters.
It found businesses were paying staff in cash without PAYE being deducted, and documents revealed some were making cash deposits into private bank accounts without being returned for GST or income tax.
IRD says it would continue to use the strategy to catch operators failing to comply with tax law, but Terry
Baucher, founder of Baucher Consulting, says IRD has in recent years taken its “eye off the ball” as it became “too focused” on its business transformation programme rather than the hidden economy.
“The business transformation programme should have happened five years ago, at the very latest,” Baucher told the Herald. “We don’t know the size of the hidden economy and that’s the point coming out . . . my view is that this sector is bigger than people realise, much bigger.
“Inland Revenue is now returning its focus on to this matter. With its new upgraded systems I think it has got better data-matching abilities — they are now enhanced, so it can now go about this with a renewed figure.”
Baucher said New Zealand’s GST system enabled it to pick up on under-the-table activity.
“Because our GST is so comprehensive, I believe that policy makers; that means Inland Revenue, have been a little complacent about the extent of the cash economy.”
IRD reckons about $256m worth of income was not reported in 2018 and 2019 — about $108.8m identified this year, and $148m last year.
According to its annual report, for every $1 spent on efforts to tackle the hidden economy, IRD got about $6 in return revenue last year.
“They targeted getting $4.59 [back] so they were 20 per cent above what
they were expecting,” Baucher said.
IRD research has found that the proportion of people participating in cash jobs was beginning to fall. In 2011, 34 per cent of people said they participated in cash jobs. This is now at 27 per cent, while only 16 per cent of people said they were now likely to ask for a cash price discount compared with 27 per cent previously.
About 49 per cent of people said cash jobs were acceptable, down from 72 per cent from 2011.
Baucher said IRD’s surprise visits and raids to its assessed
“high-risk businesses” would have a positive impact on tackling the hidden economy.
He said New Zealand could also follow the Swedes by implementing a surcharge or similar for cash payments rather than electronic.
Inland Revenue customer segment leader for micro Richard Philp said there were 90 tax evasion prosecution cases before the court, and IRD was making progress on the issue.
“The construction industry and the hospitality industry are two industries that typically represent a higher level of cash transactions, and particularly with the hospitality industry, there are small amounts one-by-one but collectively they can build up to be substantial amounts of cash suppressed and not declared annual GST returns,” he said.
The IRD first began cracking down on cash payments in the hospitality industry about three years ago. Unannounced visits to businesses, however, are a new strategy the tax department is undertaking to claw back tax owed.
“Cash jobs undercut legitimate operators,” Philp said. “So our goal is not to prosecute everyone but to have enough examples and representation around our enforcement work that helps guide people to do the right thing.”