When any Government is faced with falling revenues, a recessionary environment and an inability to raise its headline tax rates, there is little room for movement.
One way that Governments around the world are resorting to is raising additional revenue through increasing its audit activity and assessing additional taxes on taxpayers.
New Zealand is following that trend with an announcement in Budget 2010 for an additional allocation of funding to the Inland Revenue to bolster its compliance activities including audit and debt collection.
The Budget was all about the integrity of the tax system, and its redesign to remove anomalies, such as the focus New Zealanders have on property. A strong compliance function also has a role of ensuring equity between taxpayers, particularly where New Zealand relies on a voluntary compliance regime to collect its taxes. That is, taxpayers are required to assess the tax they are required to pay and pay it on time. Inland Revenue will then decide on a risk based approach who to audit to confirm whether those tax treatments were in fact correct.
The Budget allocated an additional $119.3 million over the next 4 years to increase that compliance function.
Part of that allocation is in the area of debt collection, a clear problem at present given the poor financial situation of taxpayers who do not have the cash flow to meet their obligations. It is unclear whether the recent policy of Government to assist taxpayers in their debt management rather than persecute them will remain under this renewed focussed. It could also be a recognition that the level of taxpayers facing debt problems will inevitably increase over the next few years, meaning greater resources are required to manage them.
The audit function is the one which most taxpayers will fear the most. Additional funding has previously been targeted against the property sector to catch activity in this sector which comes within the ever-expanding reach of our property taxation rules. This Budget will inevitably lead to further scrutiny in this area, although with the drop in housing values there may be little short-term gain to the government.
The Government has also highlighted a focus on the cash economy, that is required to pay tax like everyone else, and GST Phoenix schemes. Such schemes involve transfers of assets from old defunct companies to newly formed ones where a GST claim is made on the transfer of the assets to the new company, without the old company being in a position to pay the resulting output tax.
Despite these particular focuses, it is inevitable that a more broadly applied activity will occur. With Inland Revenue having significant powers to penalise and charge interest in addition to assessing the core tax at stake, taxpayers in general will be more likely to see the taxman knocking on their door.