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The return to the Crown from every dollar spent by Inland Revenue on audit activity in 2023 was $8.92. No surprise then that Budget 2024 increased the allocation for tax compliance enforcement by more than 60%, to $165,390m.
Inland Revenue updated the “tax community” in December on the “full throttle” compliance activity this additional funding had enabled between July and September 2024, the first quarter post-budget: almost 2000 audit cases opened, more than $1b in overdue debt collected, and “amended returns” to the tune of almost $400m.
Our money is on a further escalation in the 22 May Budget. The clue is in the Ministerial foreword to the Crown Financial Statements for the year ending 30 June 2024 where Finance Minister Nicola Willis recommitted to bringing the books back into surplus through “prudent control of spending”, specifically ruling out “any need to seek major additional sources of revenue”.
But spending cuts can carry high political risks, as the 35,000-strong Dunedin Hospital protest demonstrated, so the Government will also be looking to optimise its existing tax base, meaning that taxpayers can expect increased information requests, audits, tax disputes and prosecutions.
Inland Revenue’s current focus in the corporate sphere is on the retail and construction sectors, cryptocurrencies, trust compliance, company restructures, and multinationals. There is also some evidence of a growing public concern about perceived tax avoidance or tax advantages for corporates, purpose entities (including iwi, charitable entities and community trusts) and high net worth individuals. These trends are international.
What does this mean for you?
Be prepared for more attention from Inland Revenue, regardless of the industry you’re in. We have seen a step-up in the level of detail requested as part of annual risk reviews, basic compliance package (BCP) reviews and ad hoc information requests.
It is inevitable that some of those requests will progress to audits, and then disputes. Should this happen to you, it is important to understand at an early stage where Inland Revenue might be heading and to think strategically about how to respond. Weighing up options to manage the process and minimise adverse outcomes will inform the response.
One of the better strategies for avoiding a dispute is to ensure there is no disagreement with Inland Revenue over the correct tax treatment. For complex transactions or material tax positions, seeking a binding ruling (or an advance pricing agreement (APA) for transfer pricing matters) is a great option for obtaining certainty of treatment.
Where early interaction with Inland Revenue indicates there may be an audit and a dispute on the horizon, consideration should be given to options to reduce interest and penalty exposure. This might include purchasing tax deposits from a tax pooling intermediary and (if appropriate) making voluntary disclosures to benefit from penalty reductions.
If a dispute becomes inevitable, early engagement with your legal adviser is valuable.
Having a good handle on the timeline and due dates for replying to Inland Revenue is critical to ensure you can continue to challenge Inland Revenue’s position. Being clear on your strategy for managing the dispute becomes increasingly important, with a need to think about when to engage experts and whether to enter into settlement discussions or commit to litigation.
Throughout the process, it will be important to think about what communication and documents are subject to legal privilege and ensure that privilege is maintained.
How Chapman Tripp can help
Our team routinely assists clients managing tax risk and tax disputes. This includes helping to keep those clients away from dispute (e.g., by obtaining binding rulings and APAs) through to advising on all aspects of audits and the tax dispute process.
Our clients have found that getting us involved early is key to proactively managing interaction with Inland Revenue and increasing the prospect of successful outcomes.
