Budget 2011: IRD tax evasion crackdown pays off

It may have raised the ire of businesses but Inland Revenue's crackdown on tax evasion appears to be paying dividends for the government's coffers.

Last year's budget allocated $119.3 million over four years to the crackdown, which has already helped assess or bring in an extra $115.2 million of tax in the first nine months.

"This is well ahead of the targets set," Revenue Minister Peter Dunne said.

The extra funding has been used for Inland Revenue audits focused on seasonal workers, the hospitality industry and the property sector, with an extra $46.8 million of tax assessed between July 2010 and March 31, 2011.

This represents a return on investment of $5.74 for every $1 spent, according to Mr Dunne, and is 13% above the agreed targets for the property sector and the "hidden economy."

Inland Revenue has also used the funding boost to focus on early debt collection through targeted campaigns for select groups.

Mr Dunne said this approach had helped Inland Revenue recover an extra $68.4 million from July 2010 to March 2011, at an even bigger return of $8.75 for every $1 spent, and also 13% above target.

"In these difficult times, anything short of full compliance with tax obligations is effectively stealing from the honest New Zealand taxpayers paying their due,” Mr Dunne said. “I am committed to following up on tax evaders.”

Thin cap rules changed for banks
Today's budget didn't feature any major changes to the tax system but it did include changes to thin capitalisation rules for foreign-owned banks.

From April 1 next year the minimum prescribed percentage of equity for tax purposes will increase from 4% to 6%.

This change is expected to raise about $8 million more tax revenue in the next fiscal year and $31 million per year after that.

"The change is part of the government's continuing focus on ensuring that all taxpayers pay their fair share of tax," Mr Dunne said.

"The effect of these rules is to limit foreign-owned banks' interest deductions against the New Zealand tax base.

"The percentage increase is not likely to translate into increased costs for capital or borrowing, and reflects the reality of the commercial and regulatory environment banks operate in today."

More tweaks to come
Budget 2011 has also signaled other changes to the tax system concerning the treatment of employee benefits, the rules for mixed-use assets, and a new approach to livestock valuations for farmers.

Regarding employee benefits, Mr Dunne said, "The questions now are whether the definition of income for Working for Families tax credit purposes should be further widened to include more fringe benefits provided to employees, and whether salary that can be traded off for non-taxed non-cash benefits should be subject to tax."

Mr Dunne said the tax treatment of mixed-use assets used for both private and business purposes would be reviewed so the rules are fairer and don't distort investment decisions.

"There have been instances where high-value assets such as yachts and holiday homes that are both rented out and used privately have provided owners with inflated tax deductions, which either result in less taxable rental income or tax losses that can be used to offset other income.

"Everyone would like to own a holiday home, but it should not be subsidised by the taxpayer."

Under current rules, farmers usually value their livestock for tax purposes under one of two valuation methods: the herd scheme or the national standard cost scheme. Substantial differences in values between them are possible.

"Under current rules, a farmer can switch back and forth between the two methods, choosing the more favourable outcome for tax purposes," Mr Dunne said.

"This can mean increases in market valuations go untaxed, while decreases in valuation can be eligible for tax deductions."

Public consultation documents will be released on all three budget initiatives later this year.

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4 Comments & Questions

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The Banks should be paying far more tax than they currently do or will under this budget.

They are reeming it at the moment at the expense of their clients and the IRD - their margins are too high as are their fees

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I hope the law of unintended consquences does not apply to those working from home and there proprtion of expenses claimed. I hope that there is an opportunity for the select commitee process for this and other changes so I can have a say, as opposed to the "urgency" trend.

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Re Herd Scheme "increases in market valuations go untaxed, while decreases in valuation can be eligible for tax deductions."

If we consider a herd as being akin to Fixed Assets, then this is pretty much the same treatment as any other business gets on the fixed assets they purchase, which is quite appropriate for dairy herds - the individual cows are held for a substantial length of time to produce the goods that produce the income. They aren't turned over at a rapid rate like shop goods - they're not "stock on hand" in the same context as shop stock is. The calves, however, could be equated to shop stock - except where they are retained for the herd.

Taxing increases in market value is basically a tax on unrealised capital gains. If the government is going to have an unrealised capital gains solely targetted at farmers, that's a little unfair.

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easy just audit all farmers an there company holdings an the tax will come flowing in

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