This week: “He kupu i tō mātou Kaikōmihana”, that's Te Reo for "a word from the Commissioner". I'm taking a look at Inland Revenue's annual report for the year ended 30th June 2019.
Each year, every government department prepares an annual report for its minister and for the reporting lines to Parliament. These will set out its activities in the previous 12 months, its performance against agreed measures and also include its financial statements.
Inland Revenue’s is a treasure trove of information as you can imagine, a lot of detail to poke through here. And in fact, there is so much in this I could probably spend two or three podcasts on the matter. Instead, what I'm going to do this week is start with some headline numbers about Inland Revenue itself, the tax it collects and the data it shares and then finish with some observations about the state of the organisation itself.
The report is grouped around five areas. They are “Making It Easier for Customers”, “Helping Meet People Meet Their Obligations”, “Managing Ourselves Well”, “Governance and Management” and the biggie, “How We Performed”, a sort of NCEA assessment of Inland Revenue.
Big budget, big staff levels
Now Inland Revenue was given $847.5 million in appropriations for the year 2018-19 to spend and it actually finished up spending $828 million of that. The bulk of it goes to what it calls “Services for customers”, $616 million. Then the other areas that receives money are policy advice, $11 million, services to other agencies, $6 million and the big one, Business Transformation, $215 million.
It spent about 97% of its budget. And it is saying in one of the headline items that the Commissioner points out in ther report is that through Business Transformation to date, it's released $60 million in administration savings and improved compliance outcomes as a result by raising additional revenue of about $90 million.
So to achieve that result Inland Revenue has just over 5,000 staff as of 30th June 2019, now that is down 800 since 2015 and about 90% are full time now. The average age is 44.6 which is quite old, I think. And a really interesting point here is that 65% of all its staff are female, but, and women will not be surprised to see this, is that 50% of all managers are male. One of Inland Revenue’s metrics is trying to improve on that matter.
But there's been a fair amount of churn through its staff. I mean 938 staff left during the year, which is a near 20% loss. Now, they hire people as well, and that's something that I'll pick up on later on. So, it's got a lot of money to deliver services. But a fair chunk of that $200 million is in part of the Business Transformation, which has been its main focus.
"The one that takes"
Anyway, for the year it collected $77.9 billion of tax revenue. Now included in that is nearly $985 million of tax differences. It identified this as part of its audit activities and investigation activities. That is a fairly significant number and we will see more of that going on.
But Inland Revenue, its main focus through the year quite frankly, has been managing its transformation to implement its so-called Business Transformation. And the key thing here was Release Three, the third stage of its transformation, which happened in April. That was when it moved over Pay As You Earn and also was the stage where it was automatically issuing refunds and assessments for taxpayers.
That as you are probably well aware, put huge strain on its resources. The report notes on page 31, "We received 41% of all calls for the year between April and June 2019." This was over 1.6 million calls compared with 1.4 million for the same period previously in 2018. I will say that they suffered a disruption because of the having to evacuate the office in Palmerston North, the call centre there, because it was found to be earthquake prone.
But quite apart from all the calls that received, people also quite reasonably turned up at their offices and the Manukau office had more than a thousand visits on some days. Many people also then went online with massive numbers of people were hitting the online system. Between 26th of April when the system went live and the end of June, there were 16.9 million login to its myIR system, an increase of 90%, or nearly double from the same period in 2018. On its busiest day, there were almost 500,000 logins, so the system put itself under some strain, but Inland Revenue feels it managed with that. It's a matter of debate whether you think that, but there's no doubt it was an ambitious call on an ambitious project and I would expect that next year it should run a little bit more smoothly.
Interestingly, it's now saying that 88.8% of all returns were filed digitally up from 83% in previous years and that 86.8% of tax payments were made on time, which is down from 87.9% and this is a measure that I think Inland Revenue needs to have a closer look at because it has a penalty system. But we do know that the payment on time rate between 85 and 87% is no better than other tax agencies that don't charge late payment penalties, and this has been a bane of my life. I think it's clogged up the system and it's particularly noticeable when you look at what happens with child support debt. You have a penalty system. It's not working. It's been clearly not working both by its own standards and judged internationally and yet we still persist with it.
Talking of tax debt, at 30th June 2019 Inland Revenues' tax debt, excluding student loans and child support stood at $3.5 billion, up 13% from 2018 when it was $3.1 billion. That's after writing off $532 million of overdue debt and in the previous June 2018 year it wrote off $613 million.
The key thing of note here is that the level of GST debt is up 45% from $815 million to $1.18 billion and the amount of Pay As You Earn is also up 24% from $375 million to $466 million. They're explaining that that rise in overall debt being the result of a number of factors including late filing penalties and late payment penalties, interest in default assessments.
Is the penalties system working?
That all just bears out the point I've just made, if people aren't paying on time and we're hammering with penalties and we're still not collecting it, maybe Inland Revenue needs to rethink its approach about those penalties. Because you can see that in child support, the amount of child support debt is actually down a little bit in June 2019 to $2.2 billion, but $1.6 billion of that represents penalties.
As part of its efforts to collect Child Support, Inland Revenue's obtained four arrest warrants from the courts, of which one was executed and so far, it's collected $11,000 as a result of that. And then it's looked at another 14 summonses for examination of financial means and 20 charging orders against property and warrants. Key focus here is chasing down people who are overseas who owe child support and under its reciprocal arrangement with Australia, collected about $46.4 million from Australia.
It actually sent $14.7 million over to Australia. And this information sharing is one of the things that Inland Revenue does a lot of, which people don't realise here. For example, the repot talks about passport information sharing programme with the Department of Internal Affairs and that resulted in 1,409 contact records match for parents who had a child support debt in 2018-2019. As a result, 120 customers made payments of over $234,000.
It sent plenty of information with the Australian Tax Office (ATO) in relation to student loan customers. They sent 149,000 requests to the ATO asking, "Can you tell us all about that?" And maybe that's not doing as well as it should do because the level of overdue student loan debt is now $1.48 billion and that's up 12% basically because of overseas-based student loan holders. In fact, they issued a couple of arrest warrants.
The information sharing goes not just to the ATO, it goes with WorkSafe is one area where it's passed information to other agencies. And the big one, the one that people should be really aware of, and I'm starting to see come across my desk, is international compliance. Inland Revenue and New Zealand are part of the Common Reporting Standard or the initiative run by the OECD to counter offshore tax evasion. In September 2018 Inland Revenue swapped data with other tax agencies around the world. It sent out 600,000 account reports too other agencies saying "We have people here [with financial accounts] who have an overseas address or overseas tax information number, there's 600,000 of them. In turn Inland Revenue received similar details about over 700,000 such accounts. You may recall that I've mentioned in a past podcast that Inland Revenue's looking into this in more detail and that is just the tip of the iceberg, the 700,000 records to work through. That's a lot of people. And I think quite a few more than what I've seen will be receiving a "Please tell us a bit more about your finances."
Talking about tax evasion and addressing additional compliance, Inland Revenue overall found discrepancies as I called it, of $985 million and its return on its investment was $7.54 per dollar. In other words, every dollar it put into its investigation activities, it got $7.54 back identified $985 million in total tax position differences. That involved over 12,305 cases.
There are some interesting snippets in here about high wealth individuals, that is people worth more than $50 million. According to Inland Revenue, high-wealth individual customers and their respective groups pay more than $700 million in income tax and collect over $1 billion of pay as you earn. So that's a fairly significant amount of the over $80 billion of tax income.
This is a reasonably small group of people representing maybe 200-300 people in there, and Inland Revenue says they identified $44 million of discrepancies as a result of investigations into this area.
In the hidden economy, there’s some very interesting stuff in here. They found an additional revenue of about $109 million and that is they also found over fraudulent refunds and entitlements about another $30 million. But what's interesting to see here is that the proportion of people saying that they participated in cash jobs is starting to fall slightly.
Fewer people are asking for this. When they started measuring this in 2011, 34% of people said they participate in a cash job. It's now down to 27% but the level of people who said they were likely to ask for a cash price discount has gone from 27% and dropped to 16%. However, the number of people who said they would report themselves as being likely to participate in cash jobs, is 19%, same as 2018.
And here's the big one though. Only 49% of people agreed in 2018 that cash jobs were acceptable, but that's down from 72% in 2011. That's one of those interesting measures that people point the finger at multinationals but are not averse to getting a bit of a discount for cash.
It's the same thing, whether it's tax avoidance by a multinational or flat-out tax evasion. You're on the same spectrum. Well, the argument would be that tax avoidance is within the means of the law. Whereas tax evasion, taking a discount for cash isn't. Anyway, it's encouraging to see this improvement in behaviours there.
Bright-line test returns
And finally, the tax revenue they collected from property tax compliance that is looking at the Bright-line test, et cetera, had a return for investment of $9.58 per dollar. So that's nearly 50% above its target of $6.42 per dollar. And that added another $109 million. And just on the Bright-line test Inland Revenue got in touch with a thousand taxpayers over their returns filed in the 2017 income year about the Bright-line test possibly applying.
So that's a fair snippet of what Inland Revenue has done during the year. And there's plenty more in the report to go through and I might pick out particular aspects in future podcasts.
The IRD has poor staff engagement
Well what about the state of the organisation itself? How did it perform against its measures? According to Inland Revenue it achieved 36 out of the 48 output performance targets for the year and that's compared with 43 out of 50 in the 2017-18 year. Now where it fell down in its own measures is its services for customers when it met 28 of the 40. But it met all the other top performance targets for services to other agencies, policy advice and on Business Transformation.
But the area that concerns me is the staff engagement rate. I deal with Inland Revenue staff pretty much every day, and I deal with them at all levels. Those who are answering the phones, dealing with requests up to the policy officials. What I think the Revenue Minister and the Finance and Expenditure Committee should be concerned about is that the staff engagement by Inland Revenue's own measure is a mere 29%.
That's actually an improvement from the year to June 2018 when it was 27% and when this was first measured in the June 2017 year, it was 44% and even then that annual report noted that that was below the Australasian government average or expectation of 51%.
These measurements have only happened in the last three years. The 2016 report simply notes that staff engagement rose during the year. Now if its staff engagement rose during the year 2016 it implies that the staff engagement since the Business Transformation project really took off, which began in 2016 has halved to all intents and purposes. That is a major concern because it affects everyone in the system. Taxpayers, if Inland Revenue staff are of low morale, that feeds through to the rest of how they deal with us. The pressures they're under and there's wider implications for the government of underperformance in revenue collection. So I think this is a matter that the Commissioner of Inland Revenue, Inland Revenue management and the Minister of Revenue and The Finance and Expenditure Select Committee should all be asking very hard questions as to what's going on here.
The staff turnover in Inland Revenue has been quite dramatic over the past five years the organisation is losing on average just under 700 people a year and that's a lot of experience to be walking out the door. And so from a base of 5,800 in 2015, you can say that two thirds of that, almost 60% of those that were there in 2015 would appear to have gone by now. That's a massive turnover. The report notes that the turnover has decreased but it is expected to increase commenting, "Turnover turnover's decreasing, reflecting the period of significant organizational changes occurred in 2017-18, as we work through further changes to reach our future operating model, we expect turnover is likely to increase."
I don't like being called a customer by Inland Revenue. It's actually quite amusing to see the use of the word "customer" here in the report. The report refers to customers over 500 times, but taxpayers, merely 47 times. But as a stakeholder, as a tax agent and as a taxpayer, the performance of Inland Revenue is very dependent on the morale of its staff. And what I'm seeing here in this report and it continues a trend that has emerged in the last three reports is not good.
I have experienced that. When you're talking with Inland Revenue staff, you can sense that they're frustrated, they're incredibly professional, they're always professional. I know people will say, "I've had bad experiences with Inland Revenue," but my experience is they're wholly professional at all times, but they're being asked to do a lot.
There's now overtime back, and the report says it saw 740 odd people had to come in and work extra hours [as part of Release 3]. They shifted a whole pile of people from the investigation area to help with the phones. And that's not something that should be a regular pattern. And so already pressured staff have been asked to do a lot and to see the staff engagement is just 29% is a major concern to me.
Well that's it for the Week in tax. More next week. 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!
This article is a transcript of the October 25, 2019 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.
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