Tax professor calls for independent inquiry into how tax evaders and benefit fraudsters are treated by the justice system

Tax professor calls for independent inquiry into how tax evaders and benefit fraudsters are treated by the justice system

By Jenée Tibshraeny

A tax expert is calling for an overhaul of the way we treat white collar criminals compared to benefit fraudsters.

Victoria University of Wellington Associate Professor of Taxation, Lisa Marriott, wants to see an independent inquiry undertaken into our justice system, further to her research highlighting the extent to which tax evaders are largely let off the hook, while benefit fraudsters are chased down and forced to repay every cent they’ve swindled.

She says $1.24 billion of tax was evaded in 2014, while just $33.55 million of welfare payments were defrauded.

Yet for around a third of the level of offending, welfare fraudsters were three times more likely to receive prison sentences than tax evaders.

What’s more, with the Ministry of Social Development (MSD) spending proportionately more recovering benefit debt than the Inland Revenue (IRD) does recovering tax evaded, Marriott says there could be $5 billion to $9 billion of undetected tax being evaded every year.

With this much at stake - without even considering tax ‘avoidance’ - she questions whether we should be putting more resource into recovering these funds.

Having spent three years studying the issue under a Royal Society of New Zealand Marsden Grant, she echoes the Orwellian view that “all people are equal, but some are more equal than others” in our justice system.

Here is a summary of some of Marriott’s findings:

Conclusions drawn from data collected between 2008 and 2014 Tax evasion Benefit fraud
Value of tax evasion/welfare fraud committed in 2014 $1.24b $30.55m
Average portion of income earners/benefit recipients investigated for tax evasion/benefit fraud  0.01% 5%
Average number of prosecutions brought forward in a year 60-80 800-1000
Average value of offending  $229,000 $77,000
Average portion of offenders who received prison sentences 18% 67%
Average amount spent by the IRD/MSD recovering every $100 of tax/welfare debt  $3 $17
Tax/welfare debt written off in the 2011-12 financial year $435m $8.7m

Double standards among different government departments

Speaking to interest.co.nz in a Double Shot Interview, Marriott says: “People think the differences come about because the tax evasion is repaid and the welfare fraud is not repaid. In fact it’s completely the other way around.”

Of the 399 tax evasion cases she investigated over a six-year period, only one perpetrator was made to make a full repayment at the time of sentencing.

She admits defrauded welfare funds aren’t always repaid at the time of sentencing, but the MSD is committed to ensuring they are eventually repaid in full.

“The MSD does have a policy where they will attempt to get all that welfare fraud money back from the offenders. Usually most of it is repaid - admittedly over a long period of time - but it is their policy that those funds are collected.”

On the flipside, the IRD’s mandate is to collect the largest amount of tax revenue at the lowest possible cost.

“Prosecuting people is not going to collect much in the way of tax revenue, because only a tiny proportion of those prosecuted cases repay their tax anyway, and of course it’s expensive to take a criminal prosecution.

“So the IRD will do that when they want to make an example of somebody, but it’s not going to help them achieve their objective, which is collecting tax revenue for the government.

“Whereas, if you contrast that with the MSD, there does certainly seem to be a wee bit more willingness to punish people or make an example of people, because of the type of crime that it is.”

Marriott notes that the IRD only spends $3 recovering every $100 of tax debt, while the MSD spends $17 recovering every $100 of welfare debt.

“If they [the IRD] had specific funding, perhaps to investigate more debt and collect more of their debt, then perhaps that might be a good outcome for them.”

Guideline judgements should be introduced

As well as an independent review, Marriott is calling for guideline judgements for financial crimes to be introduced in New Zealand.

This way judges can have guidelines as to what sentences are appropriate for certain levels of offending, enabling them to treat all cases in a similar way.

Being of a financial nature, Marriott says tax evasion and welfare fraud are readily quantifiable.

“There is an absolute dollar amount of the harm that we are talking about.

“So it strikes me that a guideline judgement would be ideal for the types of crimes that we are talking about here. And what that would mean is that any large discrepancies from those guideline judgements would be a bit more transparent.”

She says this would be relevant given the examples we see in the media where there are “suggestions that the outcomes from the justice system have been different because of people’s family or who they are, or what they do for a living”.

Lack of government will to review situation despite public opinion

Asked what the government’s response has been to her findings, Marriott says: “I haven’t had much challenged to the data.

“My overall impression is that people [government authorities] are accepting of the facts as they are, but there isn’t much happening in the way of willingness to review the situation and to think about whether we would like it to be different.”

In fact, Marriott’s request to interview judges in New Zealand as a part of her research, was declined.

Yet a survey she’s undertaken suggests public opinion supports authorities coming down harder on tax evaders.

“People do tend to see tax evasion as worse than welfare fraud, which is a bit of change of thinking in recent times. Historically it has been the other way around.”

Therefore, contrary to what’s expected of it, the justice system isn’t reflecting society’s views.

Lack of robust capital gains tax perpetuating inequality

Marriott says we also have a two-tiered system in the sense that we tax wage/salary earners, not but those who earn income from capital gains made by selling property.

“Given what is happening with our property market - not just in Auckland… - I think it’s a really sensible time to be putting this discussion back on the table, of having a capital gains tax.”

It is worth noting we do currently have some form of capital gains tax in that you will be taxed if you buy a property with the firm intention of resale. However the ambiguity in this rule makes it easy to skirt, as described in this story.  

A bright-line test also took effect in October last year, which means that if you buy and sell a residential property within two years, you'll pay tax on the income you earn from the sale, regardless of your intention at the time of the purchase. The family home is excluded in both instances.

Nonetheless, Marriott says a more robust capital gains tax is an “enormous gap in our tax base”.

“Our philosophy towards tax in New Zealand is broad base, low rate. We have a very broad base with our GST, we have a good base with our income tax, but there is a real gap where we don’t tax capital.

“I think this general idea that the population as whole has no desire for a capital gains tax probably comes from a really significant misunderstanding of what a capital gains tax is and who would be affected by a capital gains tax.”

She points out owner-occupier homes are excluded from capital gains taxes in most countries, with investment properties being the target.

“If we look at Auckland at the moment, people are making significant capital gains on properties, but those gains are not taxed in most cases where people have structured their affairs appropriately, which most of them have…

“Whereas other people who only have gains in the form of traditional income for example - wage and salary earners - they will be taxed from the first dollar they earn.

“So we do end up with this two tiered system whereby people who are wealthy, who are the asset owners, the capital owners, can make gains which are not subject to tax. Whereas people who are the workers, the income earners, they are taxed. So it does strike me as being particularly unfair.”

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38 Comments

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I can't see that much benefit fraud is finally collected. Maybe it's not actually written off, but is it collected either? And it's possible that the liable person is compensated in other ways by WINZ.
I think Marriots figures are very wonky anyway. Not hard to identify benefit fraud, most people working in the social services see it regularly. But it is only prosecuted in the most outrageous cases.

Tax fraud needs to be sorted. Lots of money involved and the IRD is too far stretched to deal with it. They have very few people on the ground doing the basic work. There is a limit to dealing with fraud, if they only work through administrative means. They need to walk the beat.

Why bother with those who benefit little.

Start with the Big Guys and work your way down, is best Tax Evasion scheme.

And it is working a treat. As they already know.

disagree. 40% of the budget goes on welfare.

You're misinformed. Its less than $7b of the welfare budget which is mostly Super & Student Loans, training & education, employer subsidies and landlord subsidies.
Student loans are on the welfare budget because Ed doesn't want it on their balance sheet.
So this perpetuated myth you push is BS. The biggest bludgers are the private sector who's productivity has dropped in the past 8 years but have cost the NZ tax payers the most!
40% of the NZ economy is government funded.

The dole takes up close to a third of our tax. Welfare(13%), super(17%) & housing benefits(3%). Super appears to be completely separate from welfare & Student loans appear to be a part of the education budget (which isn't listed above) to me.

Dude you are so wrong. Super is almost $13b. You any good at the math?? You're obviously not getting your figures from Treasury?? Or any budget papers?? Pictographs, Phff..
Try reading instead of looking at pictures?
As of 13 Oct - Crown's core expenses was a 5.8 percent rise in New Zealand superannuation payments to $12.28 billion as recipients rose to 690,600 from 665,100. The government's accommodation assistance payments rose 3.1 percent to $1.16 billion and income-related rent subsidies climbed 7.4 percent to $755 million, while most other welfare payments, including Working for Families and KiwiSaver subsidies, declined from a year earlier.

According to that link which is produced by Treasury in conjunction with Statistics NZ, super is 12.9 billion. Please provide details as to why you believe the information to be incorrect and cite sources for your data.

Here is the URL (Notice how it is from .govt.nz) :
http://www.budget.govt.nz/budget/2016/my-tax-dollars/index.htm

it ain't BS as you so eloquently state Taker. A 5% reduction in welfare spend would equate to a tax saving for Paye payers of a similar amount, whom I'm sure could find many ways of spending it. For someone who has worked all of their life I find it absurd that so many people cannot find work in Godzone. However with attitudes like yours its hardly surprising.

That is no indication of the fraud that needs to be policed. The figures provided in the article are $1.24b tax fraud and $30.55m benefit fraud. Not rocket science which one should get the most attention.

IRD can yield a lot from chasing tax evasion, and would be worth budgeting more money for enforcement. Yet the Government is typically silent as the Prime Minister is trying to encourage tax evasion amongst the global 1%. It's unfortunate that the current Government does not stand for integrity and fairness.

Actually a massive additional $800 million has just been given to IRD in this years budget to improve systems and collect more tax.

That's the opposite of doing nothing.

Link please, I can not se that sort of funding going to IRD for enforcement, maybe for the new IT system
http://taxpolicy.ird.govt.nz/news/2015-05-22-extra-funding-ird-complianc...

Which should improve enforcement by aiding in the detection of offending, perhaps?

Your link shows year after year there has been significant additional funding to IRD for additional tax enforcement.

$500m of the new funding is for even more operating funding, and $350m is for new systems, which combined are expected to extract an extra quarter of a billion dollars of tax that currently isn't being collected (along with a similar amount in savings).

http://taxpolicy.ird.govt.nz/news/2016-05-26-budget-2016

thanks IT is good but I prefer them to fund more boots on the ground chasing the non payers. I like many know of people that have brought and sold property and not paid up, not to count the cashies being done by more and more tradies (had a offer to do my fence for cash minus the GST) , and then what about all the shops that deal in cash.
you need the old days of inspectors wandering around using there eyes and ears to see what is going on

Isn't part of the point of the upgrade to enable software like Xero to do automated tax payments? In a way that is enforcement, and by simplifying payment, it makes it easier to get it right. I think it is rather clear that they are getting rid of staff. I'm certain they will collect more tax, but only because those who aren't getting it correct unintentionally will start getting it correct.

The global 1% very rarely evade tax, they generally prefer to avoid it instead. Perhaps a simpler system where both benefit fraudsters and tax evaders are forbidden from receiving any government transfers for life? In addition to being pursued for repayment of the full amount.

Think about it: if my business is going to make X amount and you want to tax me 28% on that for bringing jobs to your countrty, why would I not go to Ireland or Singapore instead? At least in those countries they will appreciate the jobs and reasonable level of corporate tax that they get.

Similarly if I start a company in NZ and it becomes a success why wouldn't I move to a country that actually wants the Jobs and tax associated with innovation as opposed to remaining here where success and innovation are punished?

so are you saying you can tax my workers but not me the owner?

Not at all. I am saying that we should set corporate tax rates at a level that attracts more money into the country because a smaller slice of a bigger pie can be worth more than a bigger slice of a smaller pie.

the government will still make a large amount in tax from what the company pays out to it's shareholders and/or employees and the GST that they incur when they spend all the extra money that is in circulation in the country as a result.

For example Ireland reduced the effective tax rate for multi-nationals to about 2% and went from one of the poorest countries in Europe 35 years ago to where it is today. Direct taxation isn't always the answer, indirect taxation such as GST is much less likely to scare off potential multi-national investors and growing NZ companies.

Race to the bottom, anyone?

Blah, people like you will prefer to see no companies investing at all. Now that is a race to the bottom

No, I think he saying that they should invest in people as well. Oh, and innovation. There are other ways to be competitive other than on price (cost). A successful business, in my option, is one that builds an innovative product, charges a high price and sells a lot of it. Any robot can run a company if math (cost - price = profit) is the only requirement.

Great idea sadr. Reduce my tax to zero from the heaps I pay now. Then I will spend all those wads of cash and the economy will boom. Magic.
If you don't think that wise for everybody. Just eliminating tax for me alone will be fine.

Are you suggesting a purely GST driven tax system? You'd probably need GST to be about 40% for that to work. You'd also run the risk of local retail business losing customers to overseas companies it you didn't develop an effective method of applying GST to private small scale imports whose values can be artificially reduced.

you do realize that most international companies pay very little tax in NZ on their income, no where near what the actual rate is.
I have seen and heard of many expenses that have to paid to overseas cooperate offices to reduce the income to next to nothing.
the most common vehicle is debt, in simple terms head office leads to NZ company at 10%+ company here just breaks even, meanwhile head office borrows that same money on the market at a much much lower rate and pockets the difference.
or you have the license or franchise fees.
it does not matter what rate you set there are a lot of clever people out there that will find vehicles to get the money transferred out as an expense that can be used to bring down the tax payment

Unless you are the country where they place the head office that gets the profit from all the other offices. To attract head offices you need effective corporate tax rates that are sub 2% I think.

And how does that work when other countries introduce sub 1% corporate tax rate?

With that kind of attitude ... you are probably better off taking that kind of business elsewhere.

Has anyone considered the difference in the relative complexity of tax law vs dole law? Perhaps if we made the rate for all existing taxes in NZ 20% we would have a much simpler regime and it would be easier to detect tax evasion? (ie. 20% GST, 20% personal tax, 20% corporate tax, 20% trustee tax rate, 20% Fringe benefit tax, etc...)

Well that's one way to get rid of the tax advice industry I guess.

That would highly favour the very wealthy and increase the already too high wealth disparity. It would need to be offset with something as simple as Gareth Morgan's Big Kahuna universal benefit. (that would eliminate benefit fraud issues also)
I note that you did not suggest that we should also have a 20% capital gains tax. To be consistent all forms of income or wealth accumulation should be included.

20% income tax should already cover all capital gains that are income at the point at which they get converted to income. Taxing someone because the capital value of their home has gone up on paper is unlikely to go down very well with anyone.
If you want to expressly stipulate that a 20% capital gains tax applies in lieu of a 20% income tax when you make a profit from the sale of capital assets, then I won't argue.

Clean up taxation around property speculation. Eliminate the often used "I brought it without the intent of making a gain" excuse, and enforce any capital gain as taxable income. Also do away with the interest on debt tax offset. Would be interesting to see just how much offset there is against this rule...

Catch multinational companies. They are the main fraudsters.

Check out "The World's Favourite New Tax Haven Is The USA" - Bloomberg. Forget the Panama Papers. USA is the new Switzerland. "USA is one of the few places left where advisers are actually promoting accounts that will remain secret from overseas authorities". The biggest debtor nation in the world needs the money of course.

USA is nice place to do business. You get looked after. Take your chances in some bullshit sunny place, full of people who don't actually know what they doing.Well shit happens.