Tax News

How audit insurance can help when Inland Revenue come calling

7 Dec, 2020 | The Week in Tax

Terry Baucher talks to Rod Spicer about insurance cover for tax audits and assessments for filed returns – what they do cover and what they don’t.

Transcript

This week, I’m joined by Rod Spicer, the associate director of claims and underwriting at Accountancy Insurance, which is the leading tax audit solution in Australia and New Zealand. Rod is a chartered accountant with more than 30 years’ experience and has worked at Accountancy Insurance since 2013. He is responsible for the operations of the claims department, policy wording development and the management of large and complex claims.

Kia ora, Rod, welcome to the podcast. Thank you for joining us. Now tell us a bit more about Accountancy Insurance. How did it start and what’s its role for tax agents like myself and my colleagues?

Rod Spicer
So Accountancy Insurance was born in Australia, which is where I’m currently residing, by our founder a man called Pat Driscoll who saw a niche, or a spot in the market for a tax audit insurance. There’s obviously been some of the products there in the past, however, we developed the product initially for Australia and got that up and running and then took it over to New Zealand a number of years ago now, and in more recent years into Canada.

We’re currently operating in three different countries, all within the Commonwealth. The reason for that being that all Commonwealth countries, or certainly those three, have reasonable or reasonably compliant tax systems, as well as reasonable similarities in terms of income tax, GST and the like. So we’ve been able to adapt our policy to each of the three countries and onwards and upwards, hopefully.

So in New Zealand, we have an office with about 10 staff based in Auckland and it’s been there for a number of years now. We handle the claims side of things online out of Australia from an administration point of view.

But we’ve sort of been for the ride, if you like, with Inland Revenue over recent years, which has certainly been interesting. Going way back to the Penny and Hooper days. It was probably just about when we first started up that it hit the road, so to speak, and we went along for the ride. And I think there was a herd scheme and a couple of big things way back in the day.

But I think in recent years, Inland Revenue, as a result of their whole transformation programme – I think you might know a bit more about that than me – seemed to sort of go off the rails a little bit. And they probably pulled back from an audit perspective in some respects, but certainly in recent times we’ve seen activity there again, albeit that this year we all know that with Covid and what happened etc. I think Inland Revenue certainly took their foot off the pedal for a while, but we’re currently seeing them come back with a few new initiatives and we’re seeing a lot of GST verifications, GST refund reviews and audits, amongst other things at the moment.

TB
Oh right. Yes, the audit hours have dropped away since 2015 – from about 680,000 in the year to June 2015 to about 240,000 in the year to June 2020. So there has been a falloff in activity. But you’re saying right now we’ve got a spike going on in GST verification. That’s interesting to hear that’s picked up because I would have thought that would have been there all the time, regardless of what’s happening.

Rod Spicer
I probably should qualify that to say during the Covid months, that was all they were doing, they had to keep something ticking over, I think. Just to keep people on their toes, I think is a way to put it. But yes, and I probably should say that’s been consistent, certainly last financial year to 31 March 2020. And then given that Covid was sort of hitting exactly around the new financial year start time, that has been the one constant. And the majority of our claims, certainly in the four or five months after March, were GST reviews in the main.

But now that has been supplemented in recent times, in recent weeks by what you’re probably going to talk about as well – a campaign for want of a better word on the bright-line property rules, which is sort of playing itself out at the moment in various different realms. And we’ve also seen – and this happened last year back in November, because Inland Revenue and the New Zealand Government (same as Australia) signed up to all sorts of international data sharing arrangements. And they’re all being flooded with offshore bank account information.

And what we saw with Inland Revenue in November 2019, there was a first wave, and a lot of them weren’t even audits, they were just an opportunity to self-review and voluntary disclose if you hadn’t disclosed offshore bank accounts that you were supposed to. Some had a questionnaire, or some went straight into more detailed information, but it certainly just stopped then. So, there was a whole bunch of activity in November and then effectively nothing happened.

But in November 2020 we saw the exact same thing happening again. Slightly different letters. Some of them even delved into overseas life insurance policies that obviously, you know, the data dump Inland Revenue got – Rod Spicer has a life insurance policy in England or Switzerland or wherever – and we want to know about it as well as the bank account. So we’ve just now seen another spike in claims being lodged for these type of letters.

Look, some aren’t covered because they’re just a warning, an alert, information. You don’t have to do anything if you think your return is correct. But it certainly gives taxpayers an opportunity to voluntarily disclose if they think they’ve made an error or haven’t disclosed. But it doesn’t take too much to work out that Inland Revenue already know what the answer is. They’ve already got the information, so they’re just giving taxpayers a chance to voluntarily disclose. And if they don’t, I would expect audits or some sort of risk review or something to come as a result of that, because they’ve obviously already got the data sitting in the system from whoever gave it to them.

TB
Excellent. That’s really handy what you’ve done there because you just described the complete gamut of types of letters or enquiries we would see from Inland Revenue covering risk reviews, GST reviews to enquiry letters to full blown audits. Now delving in a little bit more about the detail of how a policy might work, basically, the policy covers most enquiries from Inland Revenue, doesn’t it? That’s the idea if you take out one of these policies, whether through a tax agent, it covers just about all enquiries from Inland Revenue?

Rod Spicer
Pretty much, our policy’s structured as a master policy.

It’s held nominally in the name of the accounting practice. So our client is effectively the accounting practice and the accounting practice then offers their clients an opportunity to participate in that group master policy held by the accountant. The client chooses to participate. They pay the premium and then they’re effectively endorsed as an insurable interest on the accountant’s policy for the policy period. So each accountant has a common expiry date. It’s not like a client pays today, and one pays next week, and the week after that. They’ll all still have the same expiry date, whatever that might be, month on month, every accountant has got a different date.

We deliberately have a very wide definition of what a tax audit is, but it has to be from a government revenue authority. And other than Inland Revenue, the only other real revenue raising authority in New Zealand that I’ve come across is the Customs Department, where they’re obviously claiming customs duty. And we’ve got a couple of claims on duty, on tobacco imports and stuff like that. But there are no province-based tax collecting authorities or states or whatever, it’s just Inland Revenue.

But the definition is very wide of what a tax audit is. And in its most pure and simple form, it’s any enquiry, review, examination, investigation or audit where there is a compulsion to respond. And it is about a lodged return with Inland Revenue linked to the tax collecting function of the New Zealand government. So that could be a phone call, an email, a letter. It could just start with an official enquiry via a telephone call and it could end up in a risk review that expands into an audit. It’s all the one matter from an Audit Shield perspective.

You can’t get a risk review and then take out Audit Shield in case it becomes an audit if IR don’t like what they find in the risk review. So every risk review letter says this is not an audit, but from an Audit Shield perspective, it is an audit. And that’s to the advantage of the accountants and their clients, because that definition is very wide and basically covers all enquiries from Inland Revenue where you are compulsorily required to respond.

So we don’t deal with warning, alert, fishing expedition type letters and the recent bright-line property mail out, which I know got a fair bit of press, and we’re probably going to see some more detailed information. Inland Revenue just sent out a mass list of clients saying we think you have bright-line property rule exposure. There’s nothing in your tax return. You haven’t lodged your return yet. The form’s overdue. No detail, no nothing there. Where they’re going wrong there – well, if you haven’t lodged the return yet and you’re going to lodge it and it’s going to include a bright line, that’s not a claim under Audit Shield because you haven’t even lodged the returns yet. Versus yeah, this is from a return from a year or two ago. We don’t believe bright-line applies and we’re going to tell IR why. That would be a claim on face value – once you work out what the property address was. They didn’t tell you in the first place this week, as we’ve seen.

So that’s broadly how we assess things from a client perspective. The amount that a client or the accountant can be covered under the policy depends on their turnover and business groups. We cover entities up to $100 million in turnover. We don’t cover listed entities or subsidiaries of global groups turning over more than $100 million as a global group. So it’s a small, medium enterprise type policy. It’s under $100 million turnover around, and we only cover New Zealand returns. So if your client is a New Zealand client who operates in Australia, and lodges Australian tax returns, Audit Shield in New Zealand doesn’t cover the Australian tax returns. But they could take out cover through their accountant in Australia.

TB
Fantastic. A great summary. So just as you alluded to there, it covers anyone who is a client of an accountant. So it can range from the individuals who’ve got tax returns, including rental income from overseas, all the way up to a large corporation as long as the turnover was under $100 million. So it’s very broad. How many clients, how many accountancy firms have you got in New Zealand now? Has business been expanding?

Initially we had zero and we currently have – because I checked before today’s session – 550 active participants, active accountants in New Zealand at the moment.

TB
That’s about 10% of all tax agents in New Zealand. I think there’s about 5,000 odd tax agents in New Zealand. So you’ve got plenty of scope for market expansion.

Rod Spicer
It’s like anything Terry, not every accountant is interested. I often chuckle when our business development manager says “I spoke to this accountant and they reckon they never get tax audits”. So I said, well, it’s not about what you’ve had in the past, it’s about what you’re going to have in the future. It’s irrelevant. And anyone who thinks in today’s electronic world of data matching, you might have got away with a lot of things in the past, or your clients did, or you weren’t on the IR radar.

But as we saw by the International Exchange of Information and the bright-line tests, they’re getting their data from other sources that everyone feeds into Inland Revenue. Banks, EFTPOS machines, point of sale, credit card, they’re all linked. I don’t know how many claims I’ve seen where the business under audit is perceived to be in the cash economy, if you like. Where do I get the data from? Well, all sorts of different sources, lifestyle, assets of the proprietors versus the amount of income that they’re declaring, banking records, all sorts of different things.

So IR’s tentacles extend a lot further than they used to in the past, so to say “I never get audited, my clients don’t need it”. Well, who knows what the future’s going to hold?  But I don’t expect the Inland Revenue and the New Zealand Government to be looking for less of a take from audit activity versus more in the next few years would be just my common man observation of most governments as a result of Covid-19.

TB
Do you think any particular group sees a lot of activity relative to others, or is that just across the board?

Rod Spicer
It’s a hard one for us because we try to keep the process as simple as possible with our accountants. We don’t want to bog them down in data so we don’t capture what industry each of their clients is in. Otherwise it would just be another layer of work that they’d have to do for what real benefit to them? Be great for us. I get that. You can look at ABC Builders Proprietary Limited or ABC Cafe Propriety Limited, it doesn’t take much to work it out. But we’ve seen the campaigns, if you like. So the property and construction campaigns, the IR letters will head that up.

They’re doing a compliance programme in property and construction, in fruit picking, in cafes and restaurants, cash economy type attention businesses.

So we see those campaigns, they come and go. But that’s sort of the flavour. Over the years, you can see the target areas where the Inland Revenue focus is on, and they are in your traditional industries where there’s a perception that maybe the cash economy is more rife than it is in other industries. It doesn’t take too much to work out those type of businesses.

TB
Just on the cash economy, is there a difference in what claims you might see in Australia and those from New Zealand? Because here I get the sense that because our GST is so comprehensive, the powers that be are a little, I wouldn’t say relaxed, but they don’t seem to be as concerned as I’ve seen the ATO reports are, about the extent of the cash economy.

Rod Spicer
I definitely I agree with you. I read all reports, in Australia and New Zealand, obviously, and I agree. The Australian Government Tax Office is far more belligerent on the cash economy in Australia, and Phoenix activity where, you know, companies disappear, and Mr Smith starts up the next day with the same looking company doing the same thing, and things like that. There’s definitely audit activity in that space. But I agree it’s not as much as Australia, but again, population relevant to the size, I suppose again would come into it. But, you know, the ATO have stringent active campaigns dedicated today to the black economy, they have a black economy taskforce in Australia. So there’s no Inland Revenue task force on the cash economy that I’m aware of.

TB
You know, the numbers in Australia are quite astonishing, even allowing for the scale of the Australian economy, basically five to six times bigger than New Zealand. The amount of money that’s said to be circulating through the black economy is AU$22 to AU$23 billion, is one number I’ve seen. That is way, way in excess of any estimate here. It’s thought the best estimates here are about a billion dollars per year, by the way. So that is quite a difference, even allowing for scale. And I do wonder if Inland Revenue here are perhaps underestimating what’s going on. But who knows?

Rod Spicer
If they ramp up their campaigns again, then we’re here to support the accountants. Obviously, you can’t take out Audit Shield after an audit or a review or enquiries have already happened. The client must be on cover under the accountant’s policy, at least one business day before any first form of notification comes to why the taxpayer client or the accountant in whatever form that may be. Now, obviously, at times there can be some allowance for postal delay. But if we see clients taking out Audit Shield very close to the date of notification, then we do have to ask some questions on occasion around the circumstances, just to make sure that there’s no prior knowledge or anything like that involved. But it’s pretty rare that it pops up. I won’t say if it never does, but it can.

TB
I’m sure. So how do you see things playing out from here? Do you think Inland Revenue has now got through its blip with Covid and Business Transformation, or is it still sort of shaking itself down?

Rod Spicer
I think come 2021 I expect to see increased audit activity. So maybe I turn the question around to you, Terry, because you’re probably more knowledgeable on New Zealand ongoing government and what their projected tax take and new tax rules are going to be. But if there’s going to be new tax rules introduced, they’re not going to come into play for some time. And then people are going to lodge a return and there’s going to be audit activity. But I would have thought how’s the New Zealand budget looking Terry? Good, bad, indifferent?

TB
Interestingly, the tax take, according to the financials for the June 20 year was only down about a billion dollars on expectation. And it’s difficult to make comparisons because of the change in accounting brought about by Business Transformation. So the tax take has held up pretty well, but they’ve spent a lot of money is the key thing on the other side. You know, billions went out –  $12 billion –  on the wage subsidy. By the way, the wage subsidy enquiries are not covered by the policy, are they?

Rod Spicer
I’m glad you mentioned that Terry. Audit Shield, at the risk of stating the obvious, is a tax audit insurance policy, it’s about revenue collecting by the New Zealand Government through Inland Revenue. So Covid brought about new things that no one had ever seen before, in Australia, Canada, New Zealand.  Tax audit insurance policies have traditionally never covered government benefit audits, grants, welfare payments and things like that. Then all of a sudden government started handing out money left, right and centre as subsidies to try and prop up business and the economy. So it wasn’t about the tax take. It was about money flowing out of the businesses. Our policy doesn’t cover government benefits, grants, subsidies. Initially Inland Revenue wasn’t even in charge of it. But it seems that they took over from whatever department was initially doing it. And then the other one of interest that’s popped up a few times is the government loan scheme that businesses can get.

Now that was first offered via banks and then that didn’t work, so it got moved to Inland Revenue. So I’ll admit we have seen audits of the wage subsidy and the loans and the loan scheme. But I’ve only seen them and had to tell the accountant, look, that’s not covered for the reasons that we said. So we put out a company announcement in April to say these things weren’t covered. But we’re now in November, so we don’t expect the accountants to remember a bulletin right at the start of Covid that Accountancy Insurance put out.

But we’re certainly still telling them about it when it pops up. No, that type of matter isn’t covered. However, sometimes where there’s smoke, there’s fire, Terry. And if those subsidy or wage scheme matters escalate, expand, move in scope into things like GST or income tax, for example, or PAYE matters or something, then on face value, it’ll be covered from that point in time onwards, not the wage subsidy or the lone scheme maters.

TB
You actually took the words right out of my mouth because I was going to ask if you had seen any instances where an enquiry about a wage subsidy claim or a loan under the small business cash flow scheme had led to, or appears to have led to a further claim in relation to another tax.

Rod Spicer
We’ve just been talking about whether we’ve seen any wage subsidies or the government loans scheme as a result of Covid result in further audit activity on income tax or GST or PAYE lodged return. I’d have to say so far, no, but I’d be surprised if we didn’t see something in the future in the New Year along those lines, would be my expectation at this point in time.

TB
I suspect you are probably right there. I also suspect that the sort of people that may get picked up on that probably were people who’ve never had an audit before and may rue that point. I think that’s a really good place to leave it Rod. Thank you so much for your time today. We here at Baucher Consulting have used Accountancy Insurance for a number of years now. I think it’s an excellent product which has saved our clients a lot of heartache. So, I can recommend you talk to the guys there. Thank you very much again. Rod, you have a great day.

Well, that’s it for this week. I’m Terry Baucher. You can find this podcast on our website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients until next week, ka kite āno.

A Trusted Taxpayer Regime as a possible alternative tax regime for small businesses

3 Mar, 2020 | The Week in Tax

This week Nigel Jemson the winner of the 2019 Tax Policy Charitable Trust talks about his proposed Trusted Taxpayer Regime – in many ways a new and improved accounting income method

It offers a 10% tax credit for small businesses (turnover below $5million) and no annual filing obligation in return for quarterly filing and Inland Revenue access to data

 

Transcript

The Tax Policy Charitable Trust aims to promote broader tax thinking and positive tax policy.  As part of this it runs a biannual scholarship competition open to young professionals working in New Zealand. I’m joined today by Nigel Jemson, the winner of the Tax Policy Scholarship Competition for 2019. Nigel has been working in tax for seven years and is currently the group tax manager at Spark New Zealand. Morena Nigel, welcome to the podcast.

Nigel Jemson
Good morning, Terry. Great to be here.

Terry Baucher
Thank you. Now, you won the competition with a proposal for a Trusted Taxpayer Regime. What are the key components of this regime?

Nigel Jemson
So when designing this proposal, I was trying to design something that would give benefits to both small business and Inland Revenue.  From the IRD perspective they have a problem of administrative costs and being able to effectively scrutinise taxpayer compliance across a wide population.  That’s quite difficult to achieve in a cost-effective manner. So in order to enhance IRD’s ability to do this, I’ve proposed under the Trusted Taxpayer Regime, IRD would gain access to tax payers financial information via a real time link to the tax payers accounting software. That would save IRD the administrative costs of having to request access to that information and they can order that in real time.

TB
They can access that information anyway in the first place by demanding it under section 17 of the Tax Administration Act 1994.

Nigel Jemson
Yes, I think that’s just means I can just get access to that data in real time and potentially run data analytics and be able to audit taxpayer data faster to scrutinise taxpayer compliance more effectively.

Fortunately for small business, there is a benefit for them as well. In return for giving up this power out and their revenue and to encourage the small business to be a trusted taxpayer that get a 10 per cent tax discount on their income tax payments throughout the year. The second benefit under this proposal would be removal of the end-of-year tax filing obligation. This would be replaced by a less onerous quarterly tax statement, which would be a simplified sort of quarterly tax assessment which would replace the current provisional tax obligations.

TB
That’s excellent.  I’m fascinated that you’re currently working at Spark, one of New Zealand’s largest companies, yet your proposal is very much targeted at small businesses. It is in an area where you wouldn’t normally deal with this day to day So what attracted you to this idea?

Nigel Jemson
Yeah, it’s quite ironic, as when I won one manager said, “OK, can your next idea be something that targets large corporate telcos?”.

In light of the tax policy scholarship competition’s briefing to propose a significant reform to the tax system, I had to design a proposal that would have a wide ranging impact.  So I designed a proposal that would benefit the vast majority of businesses – the proposal targets businesses (including companies, partnerships and sole traders) with less than $5m turnover which is 97.5% of all businesses according to Stats NZ.

Small businesses in particular, do suffer under higher compliance costs relatively compared to other types of tax payers and larger tax payers. If you think about a sole trader business, for instance, they’ve got to deal with a number of tax obligations that an employee wouldn’t have to deal with: more complicated income tax returns, provisional tax, GST, PAYE etc. And compared to larger businesses, small businesses also have relatively less resources in time to deal with these tax obligations that are imposed on them and they don’t have the money to hire a tax professional like me full time. So it made more sense to target a proposal where it could achieve the greatest benefit.

And another criteria for the competition was feasibility of introduction and political acceptance. I think if my proposal had incorporated all businesses it would be harder to justify from a fiscal cost point of view and also might be less likely to gain broad public acceptance because there is a negative perception of large corporates getting tax breaks.

TB
But it doesn’t cover all corporates, it’s across all small businesses and sole traders as well.  Talking it on the politics of it, listeners will know I was a member of the Small Business Council. I ‘d have to say that if we had been aware of this proposal (we had wrapped up our report by the time Nigel Jemson wrote it), we would have taken a very close look at it because it addresses the issues that you raised about compliance costs and the burden for small businesses in that they’re expected to do all be all things to all people, but without the resources of a Spark.

So what are the benefits in this proposal for both Inland Revenue and businesses?

Nigel Jemson
So for Inland Revenue the aim was to lower the administrative costs and improve their effectiveness of administering the tax system. So easy access to taxpayers’ financial information would reduce the time and effort required to access their information and therefore make it easier to check and enforce compliance. And there could be other flow on benefits as well from having access to such a large data pool, for example they could run analytics over that over that data to try and find potential risk areas.

And due to greater oversight I think as well because trusted tax payers have elected into this regime and know the IRD is watching them, they’re more likely to be compliant in their tax affairs. And then IRD can focus more resources comparatively on taxpayers who are not in the regime because they know they’re probably less likely to comply.

TB
As part of that you are saying that really this scheme should target businesses where more than 80% of the income is of a basically non-cash basis where it is easily trackable. These businesses, in any case, are probably are working with accounting systems anyway. There is some leeway around that 80% threshold, but it mainly targets non-cash businesses.

Nigel Jemson
Yeah, you have to have 90% of your total receipts being non-cash. And the reason for that is just so there’s a data trail so you can actually verify that the receipts that the business is getting. And there would be a number of safety checks in place so that IRD could know that taxpayers weren’t trying to hide cash receipts from it. There’d also be some sort of link between the bank account and the accounting software to prevent manipulation of the data.

TB
Your Trusted Taxpayer regime bears some similarity to the existing Accounting Income Method, which I’ve heard described as a good idea, badly executed. And just as an aside, one of the reasons why the take up of AIM has been is the question of Inland Revenue’s concerns about manipulation have put too many prescriptions around its use.  And I think you’ve managed to sidestep those issues I believe. So, what would you say are the major differences between your proposal and the Accounting Income Method?

Nigel Jemson
Well, my proposal is similar in the respect that you calculate and pay income tax as you go. My proposal has a concept of a quarterly tax statement, which is a kind of simplified mini income tax assessment.  AIM has a statement of activity, which is a similar concept. What I’ve tried to do is simplify and refine that process so it’s less onerous on the small business. Under my proposal, the amount of tax payments would be reduced to four times a year. Under AIM you’d still need to file a tax return at the end of the year, whereas the Trusted Taxpayer Regime removes that requirement.

And I think that’s quite a benefit to the taxpayer. Because I don’t have to have that end of year wash up, another point in the year when have to think about tax and get a tax agent involved. So that is good, I think. The kicker is my proposal actually provides a decent incentive to join with a 10% tax discount for the taxpayer. I like the idea that if the taxpayer does something which actually lowers Inland Revenue’s administrative costs, the small business should get some benefit from that. I think it’s quite an attractive proposition. And in this case, I think real time access to taxpayers’ financial information could deliver a real benefit to IRD and it could be compensated in some way. And the final thing I note, it’s just that the lower amount of tax payments at four times a year instead of AIM’s six payments.

TB
Yeah, it’s funny you raise this point because one of the issues whenever small business taxation comes up it is frequently accompanied by a call for a lower tax rate. And you’ve you’ve been very specific in rejecting that approach instead of opting for this 10% tax credit. Would you please give us a little bit more behind your reasoning on that?

Nigel Jemson
Sure.  I opted for a tax credit for a couple of reasons. Firstly, a blanket lower tax rate across the board for small business doesn’t really mesh with my idea that taxpayers had to do something extra that actually benefits Inland Revenue to get the discount. So, you had to target this in a way that has a credit rather than some sort of special class of taxpayer that has a lower rate. A tax credit just makes it easier to deliver that, whereas a lower tax rate across the board would introduce significantly more complexity.

TB
And just speaking from the discussions I know went on within the Tax Working Group and in the Small Business Council, whenever the idea of a special rate for small businesses came up, it  was rejected out of hand for those reasons that it was too broad. What I find appealing about Nigel’s proposal is it’s targeted and the fiscal cost is much less. Although you have to go through quite a few number of hoops to qualify for it they’re not insurmountable. So that’s a good trade-off here, which is why I like it.

A tax credit for corporate taxpayers would also include an imputation credit so that would benefit the final shareholders. If you had a lower tax rate and then the profits are distributed out to the shareholders there’s ultimately no benefit because that’s going to be taxed at the higher rate of 33%.

Nigel Jemson
So tax morale is the overall sense in society of whether the tax system is fair ie whether people feel that they have a moral obligation to pay taxes and believe it’s the right thing to do, regardless of what sort of enforcement obligations or penalties might apply to them. And I think that’s really important. We have a self-assessment system in New Zealand.  IRD to a large extent relies on people to voluntarily comply because they believe it’s the right thing to do.

And simply put IRD cannot audit the whole population. They need tax morale to be strong in our society. And I think we do have pretty good tax morale in New Zealand.

My proposal is designed to enhance tax morale further. I think if you introduced an additional IRD access to information without having some quid pro quo for the taxpayer in return, that would probably not go down too well with small business because Big Brother’s watching you. So, I think having an actual incentive for small business in the form of a tax discount is designed to encourage them into the regime and boost tax morale.

TB
I mean, this is one of the things I really like about your Trusted Taxpayer Regime is that its name and its approach recognises that small businesses act as unpaid tax collectors and frankly, it’s a bit of a sore point at times. And so just about tax morale, you’re quite rightly pointed out that if you were to say, “We’ve got this brilliant idea, you’re going to let Inland Revenue have access to everything” and there’s no quid pro quo. Well, it would be worse than AIM, which has had a very little take-up with people and people are just not going to buy it. In this case, there is a definite quid pro quo. Many of the businesses that qualify for it would be well along that pathway anyway to integrating their systems with software such as MYOB.

But most importantly, we get called customers a lot by Inland Revenue now. But this is something that actually says, “Well, yes, you are customers, you’re helping us. And here’s something for making our day a bit easier”. So, what prompted you to include this idea of the sort you’re talking about, recognising the role of small busineses as tax collectors?

Nigel Jemson
Often from my own personal experience as a tax professional, there are a lot of additional obligations aside from income tax which are imposed on businesses. So, you have GST, PAYE etc. I know a lot of my own time and my own role is spent on non-income tax obligations, so I can only imagine for small business with less resources to deal with that what it would be like. So that’s that’s another reason why I’ve proposed an actual cash tax discount with this 10% discount, because there’s only so much you can do to simplify the tax system and make it better. Another way of doing that, would be simply by reducing taxpayers’ costs, having less tax to pay.

TB
Currently, for Pay As You Earn if you use a PAYE intermediary you will get a subsidy for that. But incredibly, that’s being withdrawn at the same time as the requirement for payday filing was being introduced. And I have to say, I’ve been less than impressed by IRd saying we want you to do this more frequently and we’re going to remove you the ability to cover your costs of doing so. So again, it’s why I like how you’ve recognized that approach Nigel Jemson.

Now your proposal doesn’t cover GST, but do you think there’s scope for maybe having quarterly filing for GST in this?

Nigel Jemson
Well, I think it makes logical sense. I’m not saying I’d consider it in my original proposal, but I completely agree with this suggestion. You’re dealing with essentially the same set of financial information to calculate your quarterly income tax. So, it makes sense to do your GST at the same time. And I think that would further actually simplify taxpayer compliance costs every quarter. Only having to think about tax once would be it would be a step forward. You know, aside from payroll and other obligations, I think there would be good to incorporate both.

TB
Do you foresee any difficulties from that?

Nigel Jemson
Well, Inland Revenue might not be in favour because it’s not getting GST returns as often if businesses filing GST monthly or bi-monthly. But then again, if the taxpayers are in this Trusted Taxpayer Regime it can actually see the information at any point. So, I don’t know. I’m not too sure it would be a major issue.

TB
What’s been the feedback about your proposal from Inland Revenue? Is it something policy officials have said they would explore? I mean, [Minister of Revenue] Stuart Nash I think handed over the cheque to you, didn’t he? So, if he and if Inland Revenue are keen about this, how quickly do you think it could be implemented?

Nigel Jemson
I think some work would need to be done about implementation to flesh out more how Inland Revenue would benefit from the data and how they’d use it. And that would be quite key to the proposal being a success. You need to make sure that Inland Revenue will actually be able to use this information effectively. And because it’s a new thing, there might be some time to build up that capability and work out what they need to do.

You’ll also need to work with software providers as well, because they essentially would have to build this into Xero and MYOB, etc. to build this sort of gateway. And you can imagine there could be some technical difficulties and privacy issues and all that that would need to be sorted first.

I think the core concept of a quid pro quo, so some sort of some kind of benefit for a taxpayer that goes beyond their ordinary compliance obligations is quite an attractive proposition. I did get some feedback from one of the judges that maybe they weren’t necessarily convinced on the benefits for Inland Revenue gaining access to this data. But they were attracted to the core idea of a taxpayer getting some benefit for essentially good behaviour.

So, the judge suggested maybe another option instead of Inland Revenue gaining access to information would be some sort of systems audit. This would allow Inland Revenue to gain confidence about how good is their tax compliance framework and how they are meeting their tax obligations.

I think a barrier to the proposal being implemented would be because it has an incentive. Our traditional thinking is not favouring widespread use of incentives in the tax system because these introduces distortions. I think there are some good reasons for that. I’m just saying that the incentive is another useful weapon that can be used from time to time to enhance taxpayer compliance and benefit the tax system. And especially if you’re moving to something like real time access to taxpayer financial information, you would have to actually deliver some sort of quid pro quo to the taxpayer. Otherwise, I think there’d be outrage.

TB
Well, I mean, I think you’re right that it’s this whole question of voluntary compliance, but also a quid pro quo. Inland Revenue’s Business Transformation program has greatly simplified its administration costs. But a cynical tax agent such as myself might say that actually some of those costs are being passed down the line to ourselves.

So, if you’re wanting to encourage compliance and we all do, because Gresham’s law applies and bad money drives out the good, you want to encourage behaviour like this. And that’s why I think the Trusted Taxpayer really appeals because, yes, there is an incentive which we regard as distortionary. But think of it also as recognizing our role in the smooth running of the tax system. And I think also fiscal costs might not be that great because you’re getting four tax payments a year as opposed to three. So better management of cash flows.

Well, this has been an absolutely fascinating discussion Nigel Jemson. I really appreciate you taking the time to talk and congratulations again on your win. I hope you have put the money to good use. I hope we hear more about this. No doubt you were a very bright future ahead of you. So, thank you again for joining us, Nigel Jemson.

Well, that’s it for the week in tax. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.