After what could be seen as a period of hibernation, two recent developments reinforce that Inland Revenue has awoken and taxpayers should not be complacent. The past few years have seen resources dedicated to both a technology system upgrade and providing Covid support services.
With these now largely dealt with, Inland Revenue has shifted its focus towards active compliance enforcement. Budget 2024 provided increased funding of $29m per annum for “investment in compliance activities” and this has been followed by press releases from both the Minister of Revenue and the Commissioner of Inland Revenue explicitly confirming that the funding will be used to crack down on those not meeting their tax obligations.
Compliance focus areas
Recent examples of heightened Inland Revenue activity include an uptick in the number of requests for information, an increase in the amount of information being requested in those requests, as well as letters notifying that matters have been sent straight to audit. Going forward, compliance focus areas announced to date are as follows:
- Hidden economy
- Trusts
- Retail sector (including liquor stores)
- Construction sector
- Property
- Cryptocurrency
- Electronic sale suppression software
- Corporate restructures
- Overseas student loan borrowers
- Small business cashflow loans
- Multinationals
- Voluntary disclosures
In the event you are the subject of a tax audit, if errors are found not only will you have to pay any tax due but Inland Revenue will also consider whether to apply penalties. These penalties range from 20% to 150%, but can be reduced if you make a voluntary disclosure of the error.
Voluntary disclosures made before you’ve been notified of an audit materially improve the opportunity to secure a full penalty reduction. They also reduce the risk of being audited, as a voluntary disclosure demonstrates that you are undertaking some form of self-review, have governance processes in place, and are making efforts to voluntarily comply.
Compliance assurance
How do you know if you are complying with your tax obligations? To start with, you should seek professional advice and assistance with your tax returns where appropriate. You can also undergo regular tax “health checks”, especially for tax returns that you are preparing in house. Following the advice of a specialist tax advisor is a mitigating factor when it comes to penalties if the IR subsequently disagrees with the approach taken.
For complex commercial arrangements, the only way to get absolute certainty on how the tax rules apply is to apply for a binding ruling from Inland Revenue. As the name suggests, provided a taxpayer has been accurate (and not misleading) in the application and has complied with any conditions, the ruling will be binding on the IR for the stipulated timeframe (unless there is a law change).
Be prepared
With the increase in IR activity, you can consider the following for peace of mind:
Check for outdated positions: If you’ve been relying on historical tax advice or rulings, it’s good to confirm the law has not changed and you are still complying with the rules.
Frequent law changes mean you can’t assume a position taken years ago is still applicable today.
Review any contentious positions: How comfortable are you that your position is reasonable and fully documented?
Would obtaining more certainty via a binding ruling be a valuable investment?
Undertake a review: Having an independent review is a good way to confirm that your ducks are in a row—or a good way to notice that they are not. Payroll, FBT, and GST reviews are the most common.
To take the guesswork out of your tax preparation, seek advice from a tax professional.
Related: Personal tax changes coming from 31 July
