Ian David Penny and Gary John Hooper’s application to appeal to take their “company structure” tax evasion case to the Supreme Court was approved on August 2nd. The action revolves around alleged tax evasion committed by the medical professionals through a controversial company structure which was claimed, by the Inland Revenue Department (IRD), to amount to non-payment of their fair market salaries, for the purpose of reducing income tax liabilities.

In June 2010, the New Zealand Court of Appeal agreed with the IRD that the doctors used corporate and family trust structures to greatly downplay their taxable incomes, by paying themselves salaries well below the “market rate”. The IRD claims that Ian David Penny saved a cumulative NZD 102 000 in personal income tax payments through the structure. Gary John Cooper was alleged to have lowered his payments by NZD 65 000.

The case is scheduled to be heard by the Supreme Court in early 2011. Meanwhile the IRD commented on the development, saying that it welcomes the opportunity to hear the Court’s clarification of the Income Tax Act 1994, but until then will continue to apply the laws as set out by the Court of Appeal.

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Throughout the previous financial year, the Inland Revenue Department (IRD) and 29 520 New Zealand businesses have made installment-payment agreements for NZD 546 million worth of unpaid taxes. A similar negative effect on tax payments is expected to continue throughout the current fiscal year, according to the IRD’s latest annual Compliance Focus report, released on July 23rd.

Bob Russell, Commissioner for Inland Revenue, stated that the IRD anticipated the current number of businesses requiring tax payment arrangements, due to the economic downturn. Many of the suffering businesses have not previously experienced a serious economic recession, and are subsequently unaware of the tax laws surrounding businesses losses. However, Bob Russell added that in the IRD’s experience, some of the businesses claiming to be in financial difficulty are actually artificially inflating their losses or understating their reported incomes. Subsequently, the IRD is intending to increase its compliance monitoring measures, and pay closer scrutiny to payment arrangement applications.

The IRD will soon endeavor to educate business owners regarding tax filing, calculation and declaration mistakes commonly seen among struggling companies, such as mismatches between losses brought forward and losses available. Additionally, businesses with significant or suspicious tax loses will undergo additional investigations.

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The Government and the Inland Revenue Department (IRD) are urging New Zealand taxpayers to give comment on planned changes to tax administration. On June 15th the Making Tax Easier proposal was introduced, along with a public consultation period lasting until July 23rd.

For individual taxpayers, the IRD has proposed creating a new digital portal, which would theoretically allow individuals to manage all their tax affairs. The idea is promised to be similar to internet banking in regards usability and security. New software standards have also been suggested, which will improve the reliability and timeliness of PAYE tax data.

For corporate clients, the IRD is suggesting the implementation of advanced internet-based information sharing which will allow accounting software to manage routine business related tax tasks. It is envisioned that the applications will share IRD-held information on a businesses employees and automatically adjust their PAYE requirements. Within the discussion, the IRD has also invited comment on the idea of mandating electronic filing for non-for-profit organizations.

Additionally, the IRD has proposed instating a new Government inter-department information sharing system, claiming it will reduce redundancy and data gathering. Concerns have already been raised about possible privacy implications for the idea. However, the initiative could reduce incidence of tax evasion or money laundering.

Comments on any of the proposals can be submitted via the Making Tax Easier website.

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On July 6th, Stephen Blackman, director and shareholder of Plant and Platform Consultants LTD, was fined NZD 1500 in addition to court costs on July 6th, for two charges of filing false or incomplete tax returns. According to the New Zealand Inland Revenue Department (IRD) Stephen Blackman failed to declare a shareholder salary of NZD 150 150 in the year 2007, and NZD 158 408 in the year 2008. He claimed that he did not receive any payments, and that the IRD was confused by documentation provided by his company which contained “…[an] impressive numbers preceded by a $ symbol”. He argued further, claiming not to be aware of the meaning of the “$” symbol, and stipulating that no one employed in his company understood the “$” either.

Jonathan Matthews, Assurance Manager of Investigations for the IRD, commented on Stephen Blackman, calling his claim of not knowing the “$” as hollow and ridiculous, and despite his alleged ignorance his tax obligation remained. He said further that the IRD will continue to investigate tax evasion to ensure that honest tax payers are not disadvantaged by the actions of evaders. Jonathan Mathews concluded by saying that if taxpayers are genuinely confused by their tax liabilities, they can seek assistance from tax advisers or the IRD.

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Last week the IRD released a statement disclosing its intention to utilize New Zealand’s existing Tax Information Exchange Agreements (TIEA) to catch potential tax evaders. Martin Scott, Group Manager of Assurance, revealed that the IRD is particularly interested in discovering New Zealand tax residents undisclosed offshore bank accounts, overseas life-insurance policies and superannuation benefits.

Under current New Zealand tax legislation, taxpayers are required to disclose all of their incomes, including those from foreign sources. According to Martin Scott, governments worldwide are becoming increasingly cooperative with New Zealand authorities in sharing tax and bank account information for the purpose of audits and criminal investigations. New Zealand is currently engaged in 15 separate bi-lateral TIEA agreements. Martin Scott added that in the future he expects even greater levels of availability of information on financial transactions involving New Zealanders.

Taxpayers who hold undisclosed offshore assets have been advised consult with a professional tax advisers regarding their situation. New Zealanders who are knowingly evading their tax obligations through the use of offshore assets are advised to consider making a voluntary information disclosure to the IRD. Currently, failure to reveal appropriate financial information can attract severe punishment, including a 150 percent shortfall penalties and criminal prosecution. Martin Scott warned tax evaders to make appropriate use of any time left before their assets are discovered in an IRD investigation.

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On May 6th British American Tobacco (New Zealand) Ltd (BAT) revealed that it is currently under investigation by the IRD for a set of financing transactions. Although both parties refused to disclose complete details on the investigation, industry analysts believe that the alleged discretion is similar to the tax evasion through structured financing charges laid against several New Zealand banks recently.

The BTA has announced that NZD 39.6 million has been set aside as a reserve for any back taxes that might need to be paid. The BTA commented further that the IRD has not yet filed an official complaint or issued all appropriate documents. When all official procedures and investigations are completed by the IRD, BTA will make a full comment on its position. An official statement issued by the BTA claims that recent court rulings against structured financing indicate that the New Zealand Government is taking a conservative jurisprudence approach and the BTA will have similar results to previous cases.

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In a media statement released March 10th, the IRD revealed that it has received multiple customer-reports of a suspicious email being circulated to its clients. The email allegedly bears the IRD logo and informs recipients that they are entitled to a tax refund. It later directs readers to visit a website which requests an array personal details, including usernames and IRD numbers. Heather Daly, IRD’S Customer Operations Group Manager, has laid assurances that the department is already trying to track and shut down the website, which is believed to be US-based.

As a reminder to IRD customers, Heather Daly warned that the they will never be asked to reveal personal details or IRD numbers through an email, and any communications making such request should be regarded as fraudulent and deleted. Anyone who received the email and divulged any information should contact the IRD on 0800 227 774.

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James Talaga Toala, received sentencing at the Wellington District Court on February 26th, after pleading guilty to six charges of using documents to defraud or receive monetary gain. It was alleged by the IRD that in the period between April 2002 and March 2008 James Toala claimed to make a series of donations to a Wellington church, in order to receive an undue tax credit. The court heard that a total of 79 rebate forms filed with the IRD, totaling NZD 163 110, though none of them were ever actually paid. Further, each claim was accompanied by a false receipt. James Toala received NZD 41 491 worth of rebates for his claims.

No reparation is being sought from Mr. Toala, as the court was told that he is not in a financial position to pay. Patrick Goggin, Inland Revenue Investigations Manager, commented on the sentencing, saying that the ruling was a message to anyone else considering committing similar actions. As a warning, he continued on to say “As with other areas where taxpayers can claim rebates, we’re always watching closely for any fraudulent activity involving donations.”

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The New Zealand Government has begun to incorporate the DTA into the country’s law system through a signing of an Order in Council on February 17th, according to Peter Dunne, New Zealand Revenue Minister. Once the legal incorporation is complete for both nations the DTA will come into full effect. Australia is yet to commence their respective ratification process. Changes within the DTA are expected to begin in late 2010, two months after the expected conclusion of both countries’ ratification process.

The DTA which was a product of more than a year’s worth of negotiations was signed on June 29th 2009. The main features of the agreement are superannuation portability and several lowered withholding tax rates. On royalties the withholding rate levy will be cut by half to a level of 5 percent. The rate on interest will be lowered to 0 percent for all financial institutions, and remain at 10 percent for all other firms. Dividend payments will be categorized into one of three rates, ranging from 0 percent to the current 15 percent, differentiated by shareholding levels. Further, tax-exempt pension payments from either country will be regarded as tax-free in the corresponding nation.

At the Order of Council announcement, Peter Dunne described the DTA as a recognition and update of the already close business relationship between New Zealand and Australia. He continued on and said, “I expect the new DTA to bring significant benefits to New Zealand and improve certainty for trans-Tasman business.”

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In a court action that will be closely monitored by both the medical profession and other high-cost professionals the IRD is seeking to claim that two Christchurch based orthopedic surgeons were using company and trust structures to pay themselves less than the typical rate for their profession. The IRD initiated court action against the two doctora, and the High Court found against the department in April.

Due to the wide spreading implications of any decision made in the proceedings great attention is being paid to the case, with some speculation arising that it could lead to Government legislative action. Bill English, New Zealand Finance Minister, has indicated that he is concerned of possible precedent stemming from the Courts ruling against the IRD, which would see a sizeable shrink to the Government’s tax stake. Robin Oliver, IRD Director of Tax Policy, has indicated to the Government Finance and Expenditure Select Committee that a ruling against the IRD would see a significant drop in tax revenues, though he also admitted that his department had not yet been able to quantify the potential impact.

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