IRD ‘five years late’ with blitz

Tax ex­pert blasts tardy ac­tion on New Zealand’s bil­lion-dol­lar ‘hid­den econ­omy’

The New Zealand Herald - - Business - Aimee Shaw

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.”

Terry Baucher

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