Report of the Inland Revenue Department Te Tari Taake

Inland RevenueAnnual Report 2003

2003

Inland Revenue A

nnual Report 2003

Desired Future

• Taxpayers and other customers meet obligations of their own accord—and

Inland Revenue makes this easy

• Increasingly, the community regards paying tax as contributing to society

• Inland Revenue is visible in the community, getting alongside taxpayers

• The community regards Inland Revenue as professional, approachable,

effective and effi cient.

2 Inland Revenue – Annual Report 2002-03 www.ird.govt.nz www.ird.govt.nz Inland Revenue – Annual Report 2002-03 3

CONTENTS

5 Part 1 Commissioner’s introduction

11 Part 2 Performance overview

12 Taxation

33 Child support

38 Student loans

41 Family assistance

43 Capability

53 Risk and assurance

55 Part 3 Performance information

57 Statement of responsibility

59 Our Charter and Complaints Management Service

67 Statements of objectives and service performance

93 Part 4 Departmental financial statements

111 Part 5 Financial schedules for administered accounts

127 Audit opinion

131 Additional information


• Tax revenue of $35 billion, 81% of government revenue

• Customer satisfaction ratings 86–88%, the highest ever recorded

• 19.4% reduction in the number of debt cases through our Industry Partnership approach

• Almost $900 million assessed in audit discrepancies

• Strengthened our leadership

• Extended community outreach services

• New electronic services for customers

Highlights

www.ird.govt.nz Inland Revenue – Annual Report 2002-03 3

4 Inland Revenue – Annual Report 2002-03 www.ird.govt.nz

In accordance with the provisions of section 15 of the Tax Administration Act 1994 and section 39 of the Public Finance Act 1989, I submit the following report on my administration of the Inland Revenue Acts for the year ended 30 June 2003 and on the operations of the Inland Revenue Department for that year, together with the audited financial statements.

David ButlerChief Executive and Commissioner of Inland Revenue

Minister of Revenue


This year we have:• made it easier to meet obligations • increased our community outreach to assist those

who need help to comply• increased focus on those areas of greatest revenue

risk and where there is deliberate non-compliance with the law

• enhanced our capability to deliver our outcomes.

Part 1Commissioner’sintroduction

5


On behalf of all of the people who work for Inland Revenue I am proud to acknowledge our achievements in 2002–03. Our people have continued their commitment to achieving today’s outcomes as well as developing and successfully implementing new initiatives to meet the challenges of the future.

In our business plan, The Way Forward, we describe our shared vision for our desired future, which is:

Desired future• Taxpayers and other customers meet obligations of

their own accord—and Inland Revenue makes this easy



• The community regards Inland Revenue as professional, approachable, effective and efficient.

To achieve our desired future we have set out our strategic direction, which is to:

• Streamline and simplify tax processes• Create an environment which promotes compliance• Enhance our people capability• Enhance the administration of our social policy

business

Compliance model An important component of our business plan is our compliance model which we use to aid our understanding of the factors that influence compliance. The model identifies the external factors which influence taxpayer compliance attitudes and behaviours, and promotes a more targeted response to taxpayers. The model equally applies to our child support and student loan clients.

Given our desired future and strategic direction for 2002–03, our achievements, and new initiatives were that we:

• made it easier for taxpayers and social support programme clients to meet their obligations

• increased our community outreach so we can assist people who need help to comply

• increased our focus on those areas of greatest revenue risk and where there is deliberate non-compliance with the law

• enhanced our capability to deliver our outcomes by placing emphasis on further developing our people through strengthening our leadership and technical capability.

Making it easy to meet obligationsThis year through our e-enablement strategy we have made it easier for people to contact us when they want to through the introduction of secure online correspondence. It has also widened the options available to taxpayers about the way they transact their business through the electronic filing of forms, GST, income and FBT returns as well as paying their tax obligations. In addition, we have introduced a new website for student loan borrowers www.owezero.org.nz — this website has online calculators and a range of information on the benefits of making voluntary repayments.

Factors that influence taxpayerdecisions and behaviour

Assist tocomply

Attitude tocompliance

Compliancestrategy

Have decidednot to comply

Don’t wantto comply

Try to, but don’talways succeed

Willing to do theright thing

Use full forceof the law

Deter bydetection

Make iteasy

Taxpayer

Economic Sociological

Psychological

IndustryBusiness

Create pressure down

Level of compliance costs

HIGH

LOW

FIGURE 1 COMPLIANCE MODEL

Commissioner’sintroduction


While introducing new electronic services, we have maintained high levels of service through our call centres where we maintained the good performance achieved last year.

The theme of making it easy to meet obligations is also reflected in our policy work. One of the main areas of work this year was tax simplification and compliance cost reduction.

Assisting people who need help to complyOur people’s dedication and our success in meeting our Charter commitments of working with taxpayers and social support programme clients, is reflected in our high customer satisfaction ratings. These results are our highest achieved to date:

We have also placed greater emphasis on our advisory services. Our advisory staff work with the community, including businesses. This year we have particularly focused on improving the service we offer tax agents through expanding our agent account manager role. This growth reflects our confidence in our advisory services as a means of helping people comply, and therefore improving compliance.

We have also increased our presence in rural communities through expanded participation in the Government’s Heartlands programme. In addition, this year we

produced a new comprehensive publication to assist our Child Support clients – Helping you to understand child

support.

Increasing focus on areas of greatest revenue riskVerifying that the correct amount of tax has been paid is an important component of improving compliance. We have increased our focus on those areas of greatest revenue risk and where there is deliberate non-compliance. As a result, we assessed nearly $900 million in audit discrepancies through our audit activities. This is the best ever result from our audit work and it is particularly pleasing to note the progress we have made in addressing tax avoidance scheme cases.

We also collected $1.041 billion in debt, excluding child support, representing an increase of $271 million on 2001–02. This improvement is linked to focusing on high value debts, improving cash collected through our automated debt processes and legislative change through new debt and hardship provisions. However, our debt collection work is an area where we recognise we need to make further improvements.

We have also had some excellent early results from our Industry Partnership initiative. This is a long-term initiative focusing on working with industries to address non-compliance in the cash economy. Industry Partnership is identifying reasons for non-compliance and actively addressing them, and targeting services to support and improve compliance.

In the first year of Industry Partnership we have already seen some significant improvements in the debt profiles of the first two participants. These include a 19.4% decrease in the number of debt cases and an almost 200% improvement in the percentage of debt under arrangement.

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FIGURE 2 CUSTOMER SATISFACTION


There is however, much more which needs to be done to find systemic solutions for the cash economy and influence the community’s willingness to participate in cash transactions.

Further developing our people – leadership and technical capabilityTo achieve our desired future requires the commitment and energy of every person within Inland Revenue as well as ensuring that we have strong, credible leadership. Given the nature of our business we also need to have highly credible and competent people with well-developed technical skills.

Our second climate survey conducted in December 2002 found:

• 60% of our people support the strategic direction set out in our business plan—a 3% increase on 2001 and 22% above the private and public sector benchmark for New Zealand.

• Our people have confidence in Inland Revenue as a good employer—a 6% increase on 2001 and 2% above the benchmark.

During 2002–03 we implemented a number of initiatives to strengthen our overall leadership capability. We developed a leadership framework which provides all our leaders with clear expectations of what we need to do to be effective leaders.

Part of this framework is a new team leader development course that provides all team leaders with a common set of leadership and management skills and expectations.

We have also introduced management forums to provide the opportunity for managers to enhance their leadership

and management capability through discussing good practice with senior Inland Revenue staff and guest speakers.

To strengthen our technical capability we have developed 12 new training products this year and introduced three qualifications that are registered on New Zealand’s National Qualifications Framework.

ConclusionsThis year we have made significant progress towards our desired future. We have strengthened our leadership capability, achieved our highest ever customer satisfaction ratings and made it easier to meet obligations by introducing additional e-services. These achievements ensure we have a firm foundation for continuing, ongoing success.

There are however, many challenges for the future as we strive to continually improve our performance and increasingly meet the expectations of the government and the community. With my recent reappointment as Commissioner I am delighted to be leading this important work.

David ButlerChief Executive and Commissioner of Inland Revenue


1. Operational Strategy and Business Design, and Planning, Finance and Monitoring were formed in August 2003. Formerly they both comprised Design and Monitoring.

FIGURE 3 OUR STRUCTURE AND SENIOR MANAGEMENT TEAM

David ButlerCommissioner

Policy

Revenue Forecasting

Adjudication

Rulings

Field Delivery

Child Support

Call Management

Complaints Management

Technical Development Unit

Technical Standards Unit

Operational Strategy and Business Design1

Planning, Finance and Monitoring

Strategic Technology and E-Business

Information Technology

Processing

Business Management Services

HR Business Development and Systems

Strategic Development

Corporate Communications

Corporate Human Resources

Corporate Finance

Corporate Legal

Colin MacDonaldGeneral Manager

Business Development and Systems

Liz SinclairGeneral Manager

Strategic Design

Naomi FergusonGeneral Manager

Service Delivery(From 4 August 03)

Robin OliverGeneral Manager

Policy Advice

Martin SmithGeneral Manager

Adjudication and Rulings

Geoff McRobieNational Manager Risk and Assurance

(From 4 August 03)

Michael LennardDirector

Litigation Management

Senior management resignations and appointmentsDuring the year Bruce Thompson, our General Manager of Service Delivery, resigned to return to Australia. We have recently appointed his replacement, Naomi Ferguson, who joins us from the United Kingdom Inland Revenue Department. Naomi was the Director, Northern Ireland, responsible for the delivery of all taxation, tax credits and National Insurance outcomes.



In 2002–03• tax revenue was $34.97 billion, 81% of the Government’s

total revenue • student loan repayments were $386.9 million• $273.5 million in child support payments was collected• $1,017 million in family assistance was distributed

(includes payments by Ministry of Social Development)• $111 million in child support was paid to custodial

parents• $56 million of paid parental leave was distributed.

Taxation

Child support

Student loans

Family assistance

Capability

Risk and Assurance

Part 2Performance overview

11


Our taxation outcomes reflect our role as a tax administrator and a policy advisor to government on the design of New Zealand’s tax system. Optimal revenue is available to fund government programmes when both the tax system and administration are operating efficiently and effectively for both government and the community.

Issues with how the tax system operates are rarely solved with purely a legislative or an administrative response. For example, the best way of reducing compliance costs for small businesses is through a mix of changes in legislation and improvements to the interactions between businesses and Inland Revenue.

Our taxation outcomes were reviewed in 2002–03 as part of the development of our second Statement of Intent and were amended slightly to better reflect what we are striving to achieve.

There are five distinctive stages to achieving our taxation outcomes:

• providing policy advice• registering and informing taxpayers assessing, collecting and banking revenue• verifying that the correct amount of tax has been paid• resolving disputes, clarifying the law and court actions.

This annual report is structured around these stages.

Providing policy adviceMeasures that support the goals of the government’s growth and innovation strategy are a priority for its tax policy work programme. They include reducing the extent to which tax is a barrier to New Zealand doing business with the rest of the world, simplifying the tax obligations of smaller businesses—which form the vast majority of our businesses, and working with the private sector task forces that have been set up to consider measures that will help specific sectors of the economy to grow. Also central to the strategy is tax policy’s role in supporting the government’s broader social and economic goals, and revenue base maintenance measures that protect its fiscal and economic position.

Our policy work during 2002–03 was centred on these themes as reflected in the following:

• tax simplification and compliance cost reduction• international taxation matters• other policy and legislation reviews• government reforms in non-tax areas• new and proposed legislation.

Taxation

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FIGURE 4 TAXATION OUTCOMES


Getting alongside the

community

In December 2002, Takapuna

Service Centre surveyed small

isolated Northland businesses

to find out their tax concerns, as

part of a government consultation

programme to reduce compliance

costs for small and medium-sized

businesses.

The Northland survey was part

of 30 such consultations Inland

Revenue carried out with small

rural businesses around New

Zealand during November and

December 2002. Its purpose

was to get first-hand accounts

of compliance issues, to identify

problems specific to this taxpayer

group and find solutions to those

problems.

The Northland businesses

included retail outlets, a transport

firm, an orchard and a building

company. They varied in size, with

turnover ranging from $10,000 to

$250,000.

The Northland businesses said

they had problems finding the

time to deal with tax issues. Many

indicated a willingness to use

internet facilities for return filing

and payment.

In the past year we have also

undertaken consultation with

2,500 small and medium-sized

businesses through facilitated

focus groups, telephone surveys,

visits and self-completion surveys

on the internet.

The research results provided

valuable information to the

development of proposals to

be included in a government

discussion document.

Tax simplification and compliance cost reductionTaxation of Maori authoritiesLegislation that simplifies and modernises the income tax rules applying to organisations that manage communally owned Maori assets was enacted in March 2003.

Tax simplification for small businessLegislation allowing businesses to pool their provisional tax payments with those of other businesses and make it easier for employers to transfer the bulk of their PAYE obligations to payroll agencies was enacted in March 2003. Further measures to make tax easier for small and medium-sized businesses are proposed in a government discussion document released in September 2003.

Fringe benefit tax review The first major review of fringe benefit tax since it was introduced, in 1985, has resulted in a series of proposals for simplifying the tax, reducing the associated compliance costs and improving its effectiveness. They will appear in a government discussion document planned for release in 2003.

Rewrite of the Income Tax Act The 2000-page Income Tax Bill was introduced in November 2002. The bill rewrites Parts A to E of the Income Tax Act and re-enacts the remainder of the Act. It represents the third stage of the progressive rewrite of the Act that began in the early 1990s. The aim of rewriting the Act is to make it easier for users to read and understand. The bill was under consideration by Parliament’s Finance and Expenditure Committee at the time of reporting.

International taxation mattersTrans-Tasman imputation lawA bill introduced in June 2003 will bring into effect New Zealand’s part in an agreement with Australia to relieve a longstanding problem of the double taxation of certain trans-Tasman investment, sometimes known as “triangular taxation”. The bill extends New Zealand’s imputation rules to include Australian companies, and corresponding legislation was recently enacted in Australia.

Andrew James, Acting Area Manager, Services, who last year surveyed small businesses in Northland


Double tax agreementsNew Zealand has a network of 27 double tax agreements with other countries that are aimed at reducing tax impediments to cross-border trade and investment. A new double tax agreement with the Russian Federation entered into force on 4 July 2003. A new South African double tax agreement awaited final approval at the time of reporting, as did protocols with Finland, Belgium, the Netherlands and the Philippines.

Tax review recommendationsWork and consultation continued on international tax issues raised by the Tax Review 2001, chaired by Rob McLeod. The issues include the taxation of foreign direct investment and the application of a risk-free rate of return method of taxation to offshore portfolio investment in equity.

Other policy and legislation reviewsGST review Two major reforms arising from the second stage of the GST review were included in the taxation bill introduced in June 2003:

• legislation that better aligns the GST treatment of the financial services sector with that of other countries, and

• a GST reverse charge to tax certain imports of services, to alleviate the current distortion in favour of imported services.

Tax dispute resolution process A discussion document setting out proposals for improving the process for resolving disputes between taxpayers and Inland Revenue relating to tax assessments was released on 2 July 2003. The discussion document,

which concentrates on the pre-assessment phase of the dispute resolution process, is the result of the first review of the legislative framework of the process.

Taxpayer compliance and penaltiesChanges resulting from the first stage of the review of the compliance and penalties legislation in the Tax Administration Act 1994 were enacted in October 2002 and March 2003. They include measures that give Inland Revenue greater flexibility in dealing with individual taxpayers’ debt problems, provide relief for many people who get into tax debt, and make it possible for a taxpayer’s “good record” to be taken into account when penalties are imposed.

Asset transfersAn officials’ issues paper on the tax treatment of certain assets was released for public consultation in April 2003. It makes suggestions for clarifying the tax treatment of non-monetary distributions by companies and trusts, gifts of assets by individuals, and various asset transfers that occur when someone dies.

Government reforms in other areasPrivate provision for retirementThe new Periodic Report Group, which prepares a report on the government’s retirement income policies every six years, was appointed in December 2002. The group, composed of private and public sector representatives, including Inland Revenue, is looking at ways to promote employer-based superannuation, and the impact of the tax system on the private provision of retirement—also a theme of the government’s tax policy work programme. It will report to the government by 31 December 2003.


Climate changeFollowing New Zealand’s ratification of the Kyoto Protocol in December 2002, inter-agency officials began work on the design of a greenhouse gas emissions charge. The proposed measures will be set out in a government discussion document to be released in early 2004.

New and proposed legislationFour pieces of legislation were either introduced or enacted during 2002–03.

• Legislation resulting from the Taxation (Relief, Refunds and Miscellaneous Provisions) Bill, introduced in December 2001, was enacted in October 2002.

• Legislation resulting from the Taxation (Annual Rates, Maori Organisations, Taxpayer Compliance and Miscellaneous Provisions) Bill, introduced in May 2002, was enacted in March 2003.

• The Income Tax Bill was introduced in November 2002. The Finance and Expenditure Committee has until 19 December 2003 to report on the bill.

• The Taxation (Annual Rates, GST, Trans-Tasman Imputation and Miscellaneous Provisions) Bill was introduced in June 2003.

Revenue Forecasting and AnalysisDuring the year, as part of our advice to the government, Inland Revenue’s forecasting and analysis unit provided tax revenue and social expenditure forecasts for the December 2002 fiscal update and Budget 2003. It also informed the government each month on tax collected against forecasts, and costed and provided information on a wide range of tax and social policy initiatives.

Registering and informing taxpayers The first step in complying with the law is taxpayers being aware of their obligations and entitlements. If taxpayers are aware of their obligations, and we make it easy to comply, there is a greater likelihood that taxpayers will voluntarily comply with their obligations. Through our information services functions we advise taxpayers on new and existing tax laws, register taxpayers so they have an IRD number, and assist them with inquiries on the tax system. Assistance to taxpayers is available in a number of ways including:

• our call centres• personal appointments at our offices• responses to correspondence• electronic services, including our website www.ird.govt.nz• booklets, factsheets and other printed material• advisory visits.

How many taxpayers?The number of taxpayers2 who we potentially interact with is large:

• 5.529 million registered taxpayers at 30 June 2003• 212,585 new IRD numbers registered in 2003.

The number of calls we recorded grew with the introduction of revised processes for salary and wage taxpayers to meet their taxation obligations together with the introduction of call centres and 0800 numbers. Since these changes call numbers have been relatively stable. The number of calls from tax agents, however, continues to grow rapidly. In 2002–03, we had 7.352 million contacts with taxpayers and social support programme clients3. The contacts comprised:

• 4.111 million person-to-person telephone contacts• 1.489 million automated telephone contacts• 1.573 million correspondence contacts• 0.179 million personal appointments.

2 Taxpayers includes people, businesses, partnerships, trusts and others who are registered for tax purposes.

3 Figures include contacts with taxpayers, family assistance, student loan and paid parental leave clients. Child support is counted separately.


Making it easy to contact usThis year we have continued to maintain high customer satisfaction ratings. When surveyed by an independent research agency, between 86% and 88% of people who had contacted us were satisfied with the service received.

We have also made it easier to contact us this year with the introduction of secure online correspondence in March. Our website www.ird.govt.nz also offers taxpayers access to tax and social support programme information 24 hours a day.

If customers prefer to telephone us, we are easy to reach through our call centres, which are open from 8am to 8pm Monday to Friday and 9am to 1pm on Saturdays.

Our call centres have maintained the high level of performance achieved last year.

Average time to answer a call2000: 3 minutes 30 seconds2001: 2 minutes 30 seconds2002: 1 minute 30 seconds2003: 1 minute 28 seconds

Most calls are answered significantly faster than the average:

• 75% of tax agents’ calls • 81% of employers’ calls • 73% of overdue debt and return calls

were answered within 20 seconds

• 65% of other calls were answered within 30 seconds.

As part of our wider customer satisfaction survey we specifically measure satisfaction with our call centre services. The ratings this year have been between 85%

and 87%. Tax agents contacting the call centre have rated our service at higher levels, between 94% and 97%.

We have also achieved our forecast timeliness standards for responding to correspondence and personal appointments.

Assisting taxpayers to complyPart of our desired future is that:

Inland Revenue is visible in the community, getting

alongside taxpayers

This is important, as we believe changing how we interact with taxpayers will lead to an increase in compliance, and people receiving their correct entitlements. For example, rather than simply responding to questions asked by taxpayers, we are also proactively looking at the reasons for the questions and helping to solve any problems that may exist for that taxpayer or, for example, for the industry they operate within.

One way of providing advice within the business, accounting and general community is through our advisory services. Since 1999-00, Inland Revenue’s advisory service has undergone significant changes in size and nature to reflect our desired future. Over the four-year period, the amount of time spent in the community has almost doubled, with over 96,000 hours being spent by the equivalent of over 754 people on advisory services5 in 2002-03.

4 Some advisory roles are full-time positions. In other cases the function may be carried out as part of a wider job description.

5 Advisory services hours include time spent on the advisory as well as preparation, travel, and follow-up action.

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FIGURE 5 ADVISORY HOURS


Three key factors have driven growth in Inland Revenue’s advisory service in the past four years:

• There has been a steady increase in the number of business tax advisories being conducted by business tax information officers and Maori community officers. We have also expanded the agent account manager role. This growth reflects not only the emergent demand for one-on-one tax advice, but also our confidence in this medium as a means of assisting those in the business community. More resources will be placed into this area in 2003-04.

• The introduction of the social policy liaison officers’ role—their work is described later in this report.

• The inception and subsequent growth of Heartlands—rural assistance agencies run by representatives from various government departments—has increased our advisory hours and presence in rural communities. We currently attend 22 Heartlands sites throughout the country, and proposals are being developed for a further six centres next year. In 2000–01 there were only four sites. Feedback from community representatives indicates that people appreciate seeing the face of Inland Revenue in their rural districts. Some of the sites serviced by the Heartlands initiative are: Waiheke Island, Takaka, Wairoa, Turangi, Hawera, Westport, and Gore.

Responsiveness to MaoriMaori are an important customer group in the tax and social policy areas we administer. Ensuring Maori service needs are addressed recognises the fact that Maori make up approximately 15% of New Zealand’s population. Their particular requirements for service need to be

considered and addressed, in the same way that we consider the particular requirements of other important customer groups, for example, small businesses.

In the 2002–03 Statement of Intent we indicated that we would have completed the design phase of developing our response and would be beginning implementation by the start of 2003–04. Recognising the importance of undertaking consultation on design, implementation will now be undertaken 2004–05.

During the year, we have been working on the following initiatives that will provide a basis for the way that we work with Maori.

Understanding the Treaty of WaitangiLike all government agencies, the department has a responsibility to act in accordance with the principles of the Treaty of Waitangi. During the year we held a series of internal hui with our people to talk about the principles of the Treaty of Waitangi, as expressed by the Courts and the Waitangi Tribunal. The feedback from these hui has given us an internal perspective about what the Treaty of Waitangi might mean for the work of the department. In 2003–04, we will seek external feedback on what the Treaty principles might mean for us in our role of administering the tax system legislated by Parliament.

Maori Language StrategyBecause of the nature of Inland Revenue’s work and our responsibility to provide public services, it is important that the way we develop and deliver our public services recognises and respects the status and role of te Reo Maori.

Weaving the strands of the Treaty of Waitangi into the fabric

of Inland Revenue

Te whatu i nga kanoi o Te Tiriti o Waitangi ki roto i te

papanga o Te Tari Taake

The graphic theme for the cover is based around weaving

because weaving is an activity that has a strong identity in

Maori culture but can also be understood or related to by

people in other cultures.

www.ird.govt.nz Inland Revenue – Annual Report 2002-03 1918 Inland Revenue – Annual Report 2002-0318 Inland Revenue – Annual Report 2002-0318 Inland Revenue – Annual Report 2002-03 www.ird.govt.nz

Positive approach brings benefi tsAfter the successful pilot scheme last year, we have now appointed full time agent account managers (AAMs). Previously, the AAM role was often combined with other duties such as team leader.


During the year, we have made progress towards the implementation of the Maori speaking personnel plan, a component of the Maori Language Strategy. Some of the other positive things that have occurred include: an increase in the number of our people learning te Reo Maori; and increasing the frequency of use of tikanga Maori (for example powhiri or welcoming ceremonies).

Maori authorities legislation implementationThe legislation related to the taxation of Maori Authorities was enacted in March 2003. During 2003–04 we will provide information to Maori organisations to assist them to understand the changes in order to meet their tax obligations.

Assessing, collecting and banking revenueDuring 2002–03 total tax revenue was $34.971 billion. Of this $27.250 billion was direct and $7.720 billion was indirect taxation6.

Reaction to the new service has

been favourable. One tax agent

wrote to thank Inland Revenue

for the initiative, saying that “the

benefits gained have been many”

and complimenting their AAM.

Trudy Eaden of Christchurch

who trained the new AAMs said

that the first year under the new

system would mainly involve

building relationships with tax

agents. She also stressed the

importance of making sure agents

are aware of all the tools we offer,

such as eGST and what their

clients can do if they have a debt.

“Agents don’t serve as debt

collectors for Inland Revenue but

by increased education we hope

they can encourage their clients

to comply” said Trudy. “We visit

them on a regular basis and

talk through our debt reports.

We don’t necessarily discuss

individual cases, but we do go

through options available to their

clients.”

“During our roadshows, where we

visited all the agents along with

our area managers, we promoted

a number of tax simplification

measures, and the new debt and

hardship rules.”

Manukau-based AAMs Team Leader Gerry Whittaker with Katherine Ezeugo (standing) and Cushla Gamlin (seated)

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FIGURE 6 TAX REVENUE – ACTUAL REVENUE TO JUNE 2003 AND FORECAST REVENUE TO JUNE 2007

6 Direct taxation is taxation that directly relates to the economic action of the agents that bear it, the most common example being income tax. In contrast, indirect tax does not relate to the economic actions of the agent. The most common example of indirect taxation is GST.

www.ird.govt.nz Inland Revenue – Annual Report 2002-03 2120 Inland Revenue – Annual Report 2002-03 www.ird.govt.nzwww.ird.govt.nz20 Inland Revenue – Annual Report 2002-03 www.ird.govt.nz

Same day bankingOur processing centres in Hamilton, Wellington and Christchurch are responsible for the accurate and timely processing of all payments, including automatic debits and internet. The processing of these payments is vital to ensure that revenue is available to government as soon as practicable after it is received. Payments must be banked on a daily basis.


Tax revenue has increased by $7.647 billion (27.9%) since 1997–98. The strong growth is reflected in both direct and indirect revenue.

The growth in tax revenue is attributable to changes in tax rates, the increasing size of the taxpayer base and economic factors. These factors include the value of New Zealand exports on overseas markets, interest rates and the general performance of the New Zealand economy.

Between 1997 and 2002, Inland Revenue assessed between 74.25% and 77.61% of total government revenue. This year we assessed 81.47%−this increase is largely as a result of increases in company and individual tax. Other agencies such as the New Zealand Customs Service account for the balance.

Total tax revenue was 0.7%, or $256.6 million above Inland Revenue’s 2003 Budget Economic and Fiscal Update Forecast.

Brian Nally, Team Leader,

Payments Processing at Upper

Hutt, explains how it works.

“The cheques arrive in the

morning and are fed through a

sorting machine at a rate of 500

cheques per minute. They are

read by the machine, and then

verified by a second feed-through.

They are then separated out

depending on whichever bank

the cheque originated from. If the

payments are “clean”, that is, the

payment amounts match that of

the deposit slip, the cheque is not

post-dated, there is no problem.

Post-dated cheques are sorted

separately. We hire extra staff

at peak times to cope with the

increased workload. Our busiest

day over the last year was 7 April

(end-of-year tax day for clients

of agents) when over 50,000

payments were processed.

Northern Processing Centre in

Hamilton processes all payments

from the Auckland area. Its two

busiest days over the last year

were 7 April, when it processed

30,508 payments with a total value

of $151 million, and 1 May, when it

processed 36,246 payments with

a value of $228 million.

For the 2002–03 year, we

processed 7,288,552 payments

with a total value of $43.77 billion.

Westpac, ANZ, Kiwibank and the

National Bank8 have all introduced

internet banking for tax payments

resulting in 150,811 payments

worth $241 million being received.

Shavel McLean, sorting automatic credits at the Upper Hutt Processing Centre

7 Although we received $43.7 billion in payments, tax revenue was $34.971 billion. Most of this difference is refunded to taxpayers for example, through GST refunds and a difference between cash payments and accrual accounting systems.

8 ANZ introduced this service in August 2002, Kiwibank December 2002. The National Bank introduced the service in July 2003.

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FIGURE 72002-03 TAX REVENUE BY TAX TYPE


Outstanding returns and debt9

To ensure that government receives the amount of revenue owed to it, follow-up action is taken by our returns and debt collection teams when:

• a return is expected for GST, PAYE, income tax and the like but not filed, or

• when the correct amount of tax is not paid in full and on time.

To encourage compliance, appropriate enforcement action occurs, including the application of interest and penalties if filing and payment requirements are not met.

Outstanding returnsThis year we reduced the average age of outstanding returns by 14 days and achieved a slight decrease in the total number of outstanding returns over the 30 June 2002 result. Initiatives contributing to this include:

• continuing to target the top 500 overdue returns cases, by volume and age. These cases represented taxpayers who had 11,600 outstanding returns, and 44% of these were successfully cleared by June 2003. Our success in this area has meant the extension of priority targeting for follow-up of the top 2,000 non-filers in 2003–04.

• pro-active contacts of taxpayers by our call centres to advise them that their returns were due but had not yet been filed, was trialled to improve the number of returns filed. The positive results received means we are continuing this initiative in 2003–04.

DebtIn 2002–03 through our debt work we collected $1,041 million of tax, student loan and family assistance debt,

excluding child support, representing an increase of $271 million on 2001–02.

Within this, there were a number of positive results in our key debt measurements during the year:

• there was a 5% reduction in the number of debt cases• a 2.5% improvement in the age of outstanding debt• a 26% increase in the value of debt under instalment

These improvements are linked to:

• focusing on collecting high value debts• improving cash collected through automated debt

processes• legislative change through the new debt and hardship

provisions.

We also targeted the top 500 debt cases by amount of debt, and were able to clear 23% of these by 30 June 2003. For 2003–04 we have expanded this target group to our top 2000 debtors, who account for approximately 40% of Inland Revenue’s tax debt, by value.

The total amount of outstanding debt10 owed as at 30 June 2003 was $2.324 billion, which represents an increase of $430 million over the 30 June 2002 result of $1.894 billion. FIGURE 8 DEBT TABLE

2002 2003 $ million $ million

Total outstanding debt 1,893 2,324

Less debt deferred due to tax in dispute, debt assessed in the absence of a return and debt to be written off 674 964

Collectable debt 1,219 1,360

Less debt under arrangement 358 450

Net collectable debt 861 910

Cash collected during year 771 1,042

Penalty and interest component of total outstanding debt 874 1,049

9 Child support debt is counted separately.10 Total outstanding debt = total of all debt types recorded in the debt system

Collectable debt = as above, less deferred debt and default assessments, and bankrupt/liquidated/written-off debt. These debt figures exclude child support.


The total amount of outstanding debt includes debt assessed in absence of a return being filed, which totalled $476 million for the year, debt deferred due to tax disputes, which totalled $336 million during 2002–03, and debt to be written off.

All but $35 million of the increase in total outstanding debt is the result of increased audit activity in the areas of aggressive tax issues and tax evasion, where it takes some time to secure payment of tax. Audit debt has increased from $270 million to $552 million during the year, with disputed tax debt increasing to $336 million.

$450 million of collectable debt is under instalment arrangement, a 26% increase on last year. Collectable debt has remained a stable proportion of total revenue.

Penalties and interest as a percentage of total outstanding debt has remained approximately the same as at 30 June 2002, accounting for 45.1% of total outstanding debt.

Provision for doubtful debtPotential uncollectability of debt is recognised by way of provision (refer to Note 10 in Part 5). The provision for general tax debt has decreased by $34.3 million (6.3%) from 2001–02 partly reflecting implementing a new calculation methodology.

Debt and hardship provisionsLegislative changes implemented in December 2002 allow for greater flexibility when taxpayers who are in debt are in a position of hardship. The changes also seek to maximise the revenue position for the government over time. Although the new arrangements have only been in place for a short period, initial results are positive.

Previously, instalment arrangements were generally entered into only when the debt under arrangement could be fully repaid within a maximum period of two years. Each debt case is now able to be considered on its own merits and we are able to make commercial decisions about recovery and collection. One of the outcomes of this has been a substantial improvement in the amount of debt under instalment arrangement.

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FIGURE 11TOTAL OUTSTANDING DEBT BY TAX TYPES

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FIGURE 10COLLECTABLE DEBT AS A PERCENTAGE OF REVENUE

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FIGURE 9TOTAL OUTSTANDING DEBT AND COLLECTABLE DEBT OVER TIME

24 Inland Revenue – Annual Report 2002-03 www.ird.govt.nz www.ird.govt.nz Inland Revenue – Annual Report 2002-03 2524 Inland Revenue – Annual Report 2002-03 www.ird.govt.nz

Industry Partnership addressing non-complianceIndustry Partnership is a long-term initiative focusing on working with industries to address non-compliance in the cash economy. Identifying common problems and reasons for non-compliance in an industry, and acting on those issues effectively across the industry, is a focus for Industry Partnership teams. By the end of June 2003 the teams had been operating for eight months.


They actively follow up issues for the partnered industries. These issues are identified through the industry surveys undertaken, by the industry groups Inland Revenue is in partnership with, and from interactions with industry taxpayers.

High levels of overdue returns and outstanding debt are characteristic of the industries we are working with, so the teams are trialling new approaches to improve compliance around these requirements. Towards the end of the year the Manukau Team carried out a mail drop to electricians and painters who don’t have tax agents, and reminded them of the 7 July deadline for returns. Manukau Team member Peter Stowers said, “We’re trying to get across the message that if they have any issues they should contact us. We got some good responses.”

Industry Partnership has extensively promoted e-products and e-services to industry groups to encourage industry taxpayers to explore Inland Revenue’s website and the opportunities it provides to meet their obligations around filing and payments, and obtain information. Care has been taken to match

the promotion with the current general use of the internet by industries. In many cases this is quite low so a website training package has been developed by the Wellington team. Team member and package designer Daniel Whiting said taxpayers involved have been enthusiastic about discovering the value of the website in helping them meet their obligations. “Some of them have been really amazed at how much information they can get from the web.”

In 2002–03 there were improvements in the debt profile for our first two industry participants.

These improvements compare favourably with the changes in the overall debt profile managed by Inland Revenue.11

As well as working directly with taxpayers, the department has reviewed and updated records for these industries, and adjustments made in the process have contributed to the improved results.

In the new financial year Industry Partnership will progressively trial further approaches to improve compliance across an industry targeting the issues raised and intelligence gathered.

Electricians, and painters and decorators Overall debt profile

Debt cases 19.4% decrease 5% decrease

Average age of debt 8.3% decrease 4.4% decrease

Debt under arrangement 195% increase 26% increase

Outstanding returns 7.7% decrease 1.3% decrease

Average age of outstanding returns 10% decrease 2.5% decrease

11 For an accurate comparision overall debt and Industry Partnership figures exclude child support but include all other debt types recorded in the debt system. Industry Partnership teams had been operating in these industries for eight months of the year. In 2002–03 there were also improvements in the child support debt profile for our first two Industry Partnership participants.

Members of Wellington’s Industry Partnership field team discuss initiatives

that can be used to address non-compliance. Iriea Williams (standing),

Evelyn Wright (left) and Sue Jones (right)

www.ird.govt.nz Inland Revenue – Annual Report 2002-03 2726 Inland Revenue – Annual Report 2002-03 www.ird.govt.nz

A more fl exible approach to debtWe implemented the second part of our new debt strategy in December 2002 and now are able to be more fl exible in making arrangements to pay off debt.


The table below indicates the trend in debt under instalment since 1999.

Although it is difficult to determine the degree to which this increase is a direct outcome of the new provisions, the increased flexibility we have to handle debt cases has meant taxpayers are, on balance, more likely to enter into instalment arrangements. With the legislation giving us the ability to now deal conclusively with the total

debt position, this option may also be part of an overall settlement, resulting in settlement of some of the debt in cash and some of the debt being written off.

An increase in the number of cases written off due to hardship has also occurred, with emphasis on hardship cases involving family assistance debt.

Jacquie Hayes, from Returns

and Debt Collection Unit in

Christchurch, has found that

change in this area affected the

attitude of our customers.

Taxpayers who previously were

reluctant to talk to Inland Revenue

are now willing to stay in contact.

They know that if there are any

changes in their circumstances

that meant they couldn’t afford

their current repayments, they can

contact us to renegotiate.

“I have seen cases where

taxpayers got into debt with us,

and things would just go from bad

to worse. They would try to pay,

but under the old rules there was

no room for movement. If they

made an arrangement they had

to keep to it. Then something

unforeseen would happen

and they would default on the

arrangement, meaning they got

penalised” says Jacquie.

“Under the new system we can

sit down with them and work out

a repayment plan that maximises

revenue without causing hardship.

We don’t have to accept their

offer. If, for example we feel

they are being unrealistic by

understating expenses, we can

negotiate a lower repayment plan.

We can write off some of the debt

upfront, rather than waiting until

they’ve finished paying off the

agreed amount.”

“Some of the people we have

worked with have written to us,

thanking us for our new attitude.

We are seen as understanding

and compassionate and this

view has a flow-on effect on their

attitude towards complying.”

Graham Pomeroy, Return and Debt Collection

Area Manager Auckland North with Marcia

Paurini from Inland Revenue’s New Plymouth

Office

FIGURE 12LEVEL OF DEBT UNDER INSTALMENT

Year ending Value of debt Annual percentage 30 June instalment $ million change

1999 231 27.7%

2000 295 10.8%

2001 327 9.8%

2002 359 25.1%

2003 449

FIGURE 13DEBT CASES WRITTEN OFF USING HARDSHIP PROVISIONS

Year Cases Value Average Annual increase/decrease $ million per case Cases Value

1999–00 5,736 $10.7 $1,857

2000–01 17,579 $38.4 $2,183 11,843 $27.7

2001–02 27,949 $58.3 $2,087 10,370 $20.0

Jul 02–Nov 02 17,807 $40.2 $2,260

New debt and hardship provisions implemented

Dec 02–Jun 03 37,996 $76.1 $2,004

2002–03 55,803 $116.4 $2,086 27,854 $58.0


Verifying that the correct amount of tax has been paidClearly, an important part of our role is to determine whether taxpayers are complying with their obligations, and taking appropriate enforcement action if they are not. Our auditing function is central to this, in that it focuses on detecting non-compliance with the law and improving taxpayer compliance. This contributes to gathering unpaid revenue for government. It also contributes to people having confidence in Inland Revenue and our administration of the tax system.

Most people meet their tax obligations voluntarily, because sanctions will apply if they are found not to have paid the correct amount of tax on time. By Inland Revenue carrying out this selected verification role it helps maintain confidence that the tax administration is ensuring the law applies equally to those who comply voluntarily and those who do not.

We have changed the focus of our audit activity over the last few years to place a greater focus on the areas that present significant compliance or revenue risks, namely corporate taxpayers, aggressive tax issues and tax evasion.

We have also recently commenced a programme focused on high-wealth individuals. This covers approximately the top one hundred of New Zealand’s high-wealth individuals, including their associated entities. These are people with assets over $50 million, or over $20 million where certain aspects are also present, for example, aggressive tax arrangements. Over the next year we will develop a better understanding of this group of taxpayers through research, analysing responses to questionnaires, undertaking specific enquiries and selected audits.

In June we issued 30 questionnaires to specific individuals, 15 more were issued in September 2003, and another 15 are planned for issue in the near future. We will use the programme to ensure high-wealth individuals are fully complying with their tax responsibilities.

DiscrepanciesNearly $900 million of audit discrepancies were identified this year, 21% above forecast. Employing and training new investigators over the past two years has significantly contributed to this above forecast result.

The net taxation effect of adjustments made to taxpayers’ income returns as a result of audit activity was $899.4 million. Not all these adjustments result in an immediate financial liability or additional tax to pay. For example adjustments to losses would potentially have a direct impact on current or future taxation obligations,

FIGURE 15AUDIT DISCREPANCIES

Annual Net discrepancy discrepancies12

budget $ millions $millions

Non-business audit and business audit 283.5 315.4

Aggressive tax issues 129.9 146.1

Tax evasion 29.7 54.5

Corporates 301.3 383.4

Total 744.4 899.4 (120.8% of budget)

12 Net discrepancies = gross discrepancies less timing adjustments. Timing adjustments were $29.7 million for this year. They occur when an error is found in a return filed in one tax period but this amount is claimable in another tax period.

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FIGURE 14NET AUDIT DISCREPANCIES TRENDS


and imputation credit adjustments are made in anticipation of a future taxation liability. Clearly, audits resulting in these are still important as they protect the future tax revenue base because, for example, losses can be offset against other income. This year, adjustments for losses were $209 million, and imputation credit adjustments $69 million. Therefore as a result of audit activity there was $621.4 million in additional tax assessed.

Our discrepancies figure includes cases where taxpayers have made voluntary disclosures about under-reported revenue. Voluntary disclosures can be made by a taxpayer before or during the course of an audit. They reflect a taxpayer’s desire to avoid or reduce exposure to shortfall penalties. The number and value of these has steadily increased.

As well as finding cases of underpaid tax, investigators find cases where a tax credit or refund is owed.

Audits were finalised both faster than forecast, and faster than previous years, with a focus on old cases.

Addressing cash economy through Industry PartnershipA specific audit plan for Industry Partnership has been developed and was finalised at the end of the financial year. This is being implemented, focusing initially on the first industries with which Industry Partnership has been working. The plan comprises a comprehensive range of responses and activities to address non-compliance in the cash economy including use of leverage tools and targeted audits of selected cases.

Auditor-General’s Report on Taxpayer AuditOn 6 August 2003, the Auditor-General (OAG) tabled his report in Parliament following the completion of a performance audit into Inland Revenue’s taxpayer audit activities. This audit was a comprehensive review into Inland Revenue’s taxpayer audit activities, including business strategies, audit and management practices, systems, business processes and policies that support the conduct of audit activity within Inland Revenue.

In conducting the review the OAG spoke with a large number of our people, and:

• conducted detailed reviews of some individual audit files

• sought the views of a number of external parties including the Privacy Commissioner and a cross-section of tax practitioners from large metropolitan to small rural practices.

The report recognised that in a difficult environment taxpayer audit has delivered against budgeted outputs, that there have been significant improvements over the last few years and that there are further improvements required to ensure we not only continue to deliver on our outputs, but also on our new strategic direction as outlined in The Way Forward.

FIGURE 17AUDIT CREDITS AND REFUNDS FOUND IN THE TAXPAYERS’ FAVOUR

Business Audit Corporates Total$ million $ million $ million

$19 $54 $73

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FIGURE 16VOLUNTARY DISCLOSURES


The Auditor-General made eleven recommendations where improvements needed to be made under the following headings:

• implementing the new audit strategy• audit systems and processes• intelligence needs• staff capability and training • technology to support audit processes.

As noted above the OAG noted that work was already under way to further develop our audit activities. This work included the development of our audit strategy for our audit function that is aligned to our business plan, The Way Forward. These principles outline how taxpayer audit will operate in the future.

Given this and other work under way at the time the OAG report was tabled, five of the eleven recommendations had already been implemented. The remaining six OAG recommendations are part of our wider audit design work. This is part of our strategy to continually strive to improve our approach and performance and overall, all but two of the OAG recommendations will be implemented by June 2004.

The outstanding recommendations relate to longer term initiatives involving information technology improvements in the area of case management and intelligence systems. These initiatives are among the highest priorities identified in our technology strategy released in December 2002, and full implementation will occur over the next few years.

Audit strategyOur audit strategy identified the following eight inter-related principles that underpin how our audit function will operate in the future:

1 Audit has a key role in the wider process of compliance management.

2 The outcome of audit activity is maintaining and improving compliance.

3 Audit staff are highly-skilled, motivated and equipped to achieve quality outcomes.

4 Technology supports and enhances all aspects of audit.5 Audit is strongly focused on the identification of

compliance risk, based on credible intelligence.6 Audit activity concentrates on high risk but is still

visible throughout the community.7 Audit applies a range of interventions to maintain and

improve compliance. 8 Audit activity supports measures to reduce compliance

costs.

The programme required to implement the projects that support these principles will be finalised in September 2003. The changes will involve:

• improving organisation-wide processes and systems for compliance management

• improving the use of technology to capture, share and apply intelligence at all stages of the audit process

• continuing the development of staff capability• continuing the development and application of best

practices in audit • improving the focus of audit resources on high risk areas• improving collection and analysis of compliance risk

intelligence • measuring audit performance against strategic outcomes.

Implementing the audit strategy will position taxpayer audit to better support the implementation of The Way

Forward and the compliance model. Because of the level of change involved, the Controller and Auditor-General has accepted our offer to keep him regularly informed of


progress being made to implement these changes. He will conduct a follow-up audit in two to three years time to examine the results achieved.

Resolving disputes, clarifying the law, and court actionsIn the course of administering the tax laws, disputes can arise between taxpayers and Inland Revenue about tax liability. These need to be resolved to ensure that the correct amount of tax is paid while maintaining taxpayer confidence in the tax administration.

During the year, a review of the disputes resolution process was undertaken, while we believe this to be a well-designed process, there is an opportunity to make improvements. A discussion document released in July highlighted a number of possible changes including:

• the need, wherever possible, for the full disputes process to be followed before a case goes to court

• simplifying the documentation required to progress a dispute, and

• ensuring that legislated timeframes for the process and for assessments are consistent and clear.

Disputes not resolved during the earlier steps of the disputes resolution process may go to adjudication. The function of the adjudication unit is to consider disputes impartially and independently of the audit function, to ensure consistency and impartiality in the application of the tax law.

There were 63 adjudication cases in 2002–03, the same as in 2001–02. All cases met the quality standards, however, we did not meet our target time for allocating cases. This delay was largely due to the unit not having a full complement of staff as a result of vacancies, particularly in senior positions, and the unpredictable

arrival of cases—40% of cases were received in a two-month period. The average time for completion of an adjudication case this year was 15.8 weeks, compared to 14.4 weeks last year.

Binding rulings are provided to clarify the law. These provide taxpayers with the Commissioner’s view of the law administered by Inland Revenue. This year we completed a similar number of rulings cases to last year, but they contained fewer issues than in previous years, meaning that the number of issues finalised was significantly below the target range. We met all of our other quantity standards for the year.

Three timeliness standards were not met, largely due to the continuing complexity of rulings. This complexity makes it difficult to accurately estimate the initial time and cost of a ruling case. Rulings cases have on average taken longer to complete this year. However, the cost estimates have improved markedly over the 2001–02 result. Rulings also continue to achieve timeliness standards on the delivery of draft rulings and determinations.

To increase capability during the year our Corporates area began working on some binding rulings and this increased capability will assist us to better meet demand levels.

Court actionsWhen taxpayers have decided not to comply with the law, the compliance model thinking is that the community would expect Inland Revenue to use the full force of the law to ensure optimal compliance is achieved. We therefore take a number of court actions each year.


Prosecutions are undertaken under the Crimes Act and under revenue Acts—usually where there has been tax evasion by individuals or businesses. In 2002–03 there were:

• 7 cases brought under the Crimes Act, mainly for GST and income tax fraud (total value of discrepancies: $0.9 million)

• 19 cases brought under revenue legislation mainly for evasion of GST (total value of discrepancies: $3.5 million).

In tax litigation (as opposed to prosecutions) we also made excellent progress in resolving a number of tax schemes through High Court and Court of Appeal hearings.

This year, High Court test cases were designated for the two largest alleged tax avoidance schemes in New Zealand’s history, as representative cases for tax disputes involving over $650 million.

There was extensive pre-trial litigation during this year in relation to the High Court test case for the second-largest alleged tax avoidance scheme, the ACTONZ scheme (the actual trial commenced in July 2003). Two successful Court of Appeal judgments on tax avoidance schemes (CIR v Peterson, Numbers 1 and 2) also provided a valuable precedent for Inland Revenue’s litigation activities against aggressive tax schemes.

Our litigation cases have a high rate of success with 76.3% of disputed tax cases found in our favour during 2002–03.

False GST returns breach

community’s trust

A former accountant who filed

false GST returns was jailed for

seven years. He was told by

the judge that his offending was

among the worst and was a

breach of the community’s trust.

The judge also expressed a hope

that the sentence would serve as

a deterrent to others. The man

pleaded guilty to using false GST

returns to the value of over $1.3

million.

Richard Philp, Service Centre

Manager for Auckland North,

was pleased with the results and

with the judge’s comments. “The

taxes paid by hardworking New

Zealanders are used to support

the community and should not be

targeted by fraudsters” he said.

“It is not a victimless crime as the

community is short-changed”.

This year we identified more GST

fraud than previously. Specialist

teams throughout the country

are using improved technology to

examine financial information more

effectively. They are better able to

track patterns and trends which

may indicate fraud. Richard Philp

says that targeting fraudsters will

act as a disincentive to others.

Richard Philp, Service Centre Manager, Auckland North


Inland Revenue collects and distributes child support. This can be a difficult function to carry out successfully because we are dealing with very emotional issues frequently at at a time when people are under a considerable amount of pressure as a result of the breakdown of a relationship.

This means to be successful our Child Support work needs to have a strong education and advice component to foster an environment that encourages voluntary compliance from paying parents and makes it easy for custodial parents to receive entitlements. We believe this environment will be achieved if people value the child support system and have confidence in its administration. Our outcomes also recognise that we can assist child support clients, where they are able, to organise their own arrangements, so removing the need for Inland Revenue to be involved.

As part of our development of our 2003–04 Statement

of Intent we developed our intermediate outcomes for Child Support. This process led to a change in our

primary outcome for Child Support to reflect our focus on working directly with parents.

These outcomes are achieved by:

• registering clients and providing information on obligations and entitlements

• assessing obligations and entitlements, collecting the amount assessed and disbursing payment

• reviewing obligations and entitlements.

Registering clients and providing informationThe first step in clients receiving their entitlements and meeting their obligations is for them to contact Inland Revenue. We need to make this easy.

How many child support clients?• In 2002-03 there were 452,000 in total— 236,000

custodians, and 216,000 paying parents. This is an increase of 31,000 in total clients (19,000 increase in custodians and 11,000 increase in paying parents) from 2001–02.

• Of the 452,000, 285,372 parents had a current year assessment or entitlement—144,597 custodians and 140,775 paying parents.

• There were 964,220 customer contacts—an increase of 45,470 from 2001–02.

Child support

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FIGURE 19CHILD SUPPORT CLIENTS WITH CURRENT YEAR ASSESSMENT OR ENTITLEMENT

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FIGURE 18CHILD SUPPORT OUTCOMES


Making people comfortable brings resultsInland Revenue’s social policy staff work in the community providing advice and information about child support and family assistance.


The percentage of Child Support clients with a current year assessment or entitlement has grown by between 1% and 2.6% over the past four years.

Making it easy to complyThis year we made it easier to contact us by an 18% improvement in our timeliness indicators for child support calls and by maintaining our response times for correspondence.

We also focused more on community interaction, with an increase to the equivalent of 10.3 community liaison officers.

A number of initiatives and projects were implemented including:

• Community Liaison Resource Package – This pack was designed to better target education material to meet the needs of particular audiences and to ensure consistency of messages, information and image. The resource package is made up of a number of components, each designed to cater for a specific group in the community.

• Information for customers – A new Child Support publication Helping you to understand child support was developed in accordance with customers’ needs as defined by external research. This was supported by factsheets that covered specific areas of information.

Jan Hoare has been the

Community Liaison Officer for the

Tauranga Office since November

2002. She visits community

groups, prisons, schools,

Heartlands, Ministry of Social

Development offices, and other

target groups to advise on child

support issues.

She also visits homes, especially

when it’s difficult for the customer

to get to an Inland Revenue office.

She was able to make instalment

arrangements, help employers to

understand their obligations when

making child support deductions,

and clarify shared care issues.

On one occasion she visited a

custodian who had been trying

for some time to sort out his child

support entitlement. He was

nervous about dealing with Inland

Revenue so had support people

with him during the interview.

“This person was happy to

deal with Inland Revenue in

an environment he found

comfortable” says Jan. “One

of his support people said they

were expecting ‘men in dark

suits’. We took this as

a compliment.”

Penoa Tuigamala (left), Social Policy Liaison

Officer (SPLO) and (right) Child Support staff

member, Elena Lemalama


Assessing and collecting child supportThis year we collected 74% of the child support assessed for the year—$233 million. We also collected $38.7 million of previous years’ assessments and penalties and $1.3 million of current year penalties. Since the scheme began in 1992 we have collected approximately $2.05 billion (86.7%) of child support assessments. The comparable figure before the scheme began was 40.7%.

Previous research has indicated that the percentage of child support we collect compares well with child support agencies internationally.

One way of encouraging compliance is educating paying parents to make them aware of their obligations to financially support their children. Our education for paying parents is targeted at making sure that they pay their liability in full as it falls due. However, as the average assessment value has increased, compliance has reduced with falls in both the percentage of parents

paying in full and on time and the percentage of child support assessed for the year that was actually collected.

In 2002–03, 61.8% of assessed amounts were paid in full and on time by paying parents. This was below our forecast level of 70% and also a decrease of 1.4%13 on last year. In 2003–04 we are focusing on improving compliance levels through our community liaison work and raising overall awareness of child support in the community.

The increase in assessment values has also had an impact on the level of child support debt. The total amount of debt owing, which includes penalties and overdue assessment payments, has grown to $711.4 million. The compounding effect means that penalties comprise a growing percentage of total debt at 54.6%. Suspended debt is when customers are, for example, not locatable, in hospital, prison, or bankrupt. This debt accounts for 43.3% of total debt value. It is reviewed and reactivated when new information becomes available, or the customer’s circumstances change.

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FIGURE 23CHILD SUPPORT DEBT

13 A change in the way this standard is measured means that this year’s figure is not directly comparable with the figure reported last year of 65.5%. The equivalent figure for last year’s results based on the new way of measuring is 63.2%.

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FIGURE 21PERCENTAGE OF CHILD SUPPORT ASSESSED PER YEAR COLLECTED IN THAT YEAR

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FIGURE 20CHILD SUPPORT ASSESSMENT AND COLLECTION RATES ��

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FIGURE 22AVERAGE ANNUAL ASSESSMENT VALUE


As part of the Government’s 2003 Budget it was announced that Inland Revenue would receive additional resources for Child Support. These new resources are being targeted at new initiatives to slow the rate of debt growth and improve compliance. The funding will be used to:

• expand community-based work to improve compliance• enhance monitoring of debt under arrangement through

earlier contact with the debtor if the arrangement is not met.

We are also developing policy options, using remission of penalties as an incentive to encourage payment of arrears and future compliance, for the Government’s consideration for inclusion in the next Child Support Amendment Bill.

Provision for doubtful debtWe are also developing policy options to encourage payments of arrears and future compliance by using remission of penalties as an incentive.

The provision for child support doubtful debt (penalty and interest only) has increased by $82.1 million (30.9%) from 2001–02, reflecting the percentage increase between imposing and collecting penalties.

Reciprocal agreement with AustraliaThe agreement has been operating from 1 July 2000. It enables each country to have payment of administrative assessments enforced from paying parents who are residing in the other country.

The agreement impacts on paying parents living in Australia or New Zealand in two ways. First, information can be exchanged between both countries to enable paying parents to be located and assessed. Second, those who attempt to avoid paying their child support liability will be subject to the same enforcement action that each country takes against its own defaulters.

Under the agreement in 2002–03, $1.4 million was collected

by the Australian Child Support Agency and $1.6 million was collected by New Zealand Child Support.

Reviewing child support obligations and entitlements – administrative review processThe amount of child support a paying parent is required to pay is assessed annually using a formula, that takes into account the number of children to be supported, the paying parent’s income and living expenses. The formula also takes into account the paying parent’s current situation, for example, if they live with a new partner or have other children.

The Child Support Act provides that if parents disagree with the level of child support they are receiving or paying based on the formula, they may be able to apply for an administrative review. The administrative review process is regarded as one of the major achievements of Child Support. This shows in:

• the steady increase in the number of applications being received

• the processing of the majority of the applications within the required timeframes

• the low number of review decisions being overturned by the Family Court.

It is essential that our customers understand the administrative review process, see it as an open and fair way of having a child support assessment reviewed, and have confidence in the process and the ability of review officers to objectively consider their case and apply the law correctly.

Best practice research has been obtained from Child Support Australia. This research was based on the initiatives that have been implemented in Australia to enhance their Child Support administrative review system. This research will be analysed and evaluated in order to identify any initiatives that may be implemented within the New Zealand environment.

In November Child Support launched its new publication

Helping you to understand child support (IR 100). This

one booklet replaced most of Child Support’s existing

pamphlets.

Research and feedback from customers had shown a

preference to have all the information they need in one

comprehensive publication.

Child Support also took the opportunity to update its

publications aiming to make information more readily

accessible and customer-friendly.


We administer the Student Loan Scheme in conjunction with the Ministry of Social Development (StudyLink) and the Ministry of Education. Our outcomes reflect our role of collecting repayments from borrowers earning over the minimum repayment threshold, once their loan balance has been transferred from StudyLink.

As part of our development of our 2003–04 Statement

of Intent during 2002–03 we developed our intermediate outcomes for student loans and redefined our primary outcome to better reflect our focus on the repayment of the loan.

We work toward achieving our primary outcome by ensuring that borrowers understand their repayment obligations, and that our requirements do not create barriers to repaying the loan. The various educational services we provide are an important aspect of this approach.

Registering borrowers and providing informationAt the end of each academic year borrowers’ details are transferred to Inland Revenue from StudyLink.

How many borrowers?Over the year, the total number of borrowers has increased in line with expectations and now stands at 390,027. The steady growth in borrower numbers is reflective of the increasing number of students attending tertiary institutions, and the increased availability of student loans for courses at private training establishments.

Making it easy and assisting to complyOver the year, we have continued to provide a range of student loan seminars. We work closely with StudyLink on its presentations to students, which convey some important information about loan repayments, and have attended a variety of “Youth Expos”. Our Social Policy Liaison Officers also attend the “Big OE” evenings held by the British High Commission in New Zealand.

Over the next few months, we are introducing online account viewing for borrowers, and a calculator for non-resident borrowers.

Collecting repaymentsThe total student loan borrowing was $5.27 billion as at 30 June 2003, an increase of 15.5% over the 30 June 2002 figure, and in line with expectations.

Although the value of the average student loan borrowing has continued to increase to $13,68014, the rate of growth has slowed. Much of the recent rise in the value of the average student loan borrowing was due to

Student loans

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FIGURE 24STUDENT LOAN OUTCOMES

14 Average value refers to the average value of all loans that have been transferred to Inland Revenue. It does not refer to the average value of a loan at the time the borrower graduates.


the write-off of a large number of small balance loans, many of these were less than $1. Although the removal of a large number of small value loans has little impact on the overall student loan borrowings, it does decrease the number of borrowers, causing the average loan borrowing to increase.

Therefore, the median value of each student loan is perhaps more representative of the spread of loans across all borrowers. Ιt was $9,272 for resident borrowers and $13,171 for non-resident borrowers at 30 June 2003.

The number of repaid loans has also continued to increase. Last year, 21,770 loans were repaid in full, the highest number since the scheme started, and a 27.4% increase on the previous year. This was partly due to the write-off of a large number of small balance loans.

The total value of loan repayments collected by Inland Revenue to 30 June 2003 was $386.39 million. Of this, $201.88 million was collected through employers, and $184.51 million was directly from borrowers. In addition, under the interest write-off provisions $198.08 million in interest was written off.

Overdue repaymentsOverdue debt as a proportion of the total student loan borrowings remains small at 1.92% of the amount borrowed. Total student loan overdue debt as at 30 June 2003 was $101.05 million. Of the resident borrower population, 35,086 had an overdue obligation, and they collectively owe $43.1 million. Although the number of non-resident borrowers in debt is much smaller, at 10,891, they collectively owe $58.1 million. Of the total overdue, $35.4 million is currently under an arrangement to pay.

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FIGURE 25TOTAL STUDENT LOAN BORROWING

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FIGURE 26STUDENT LOAN OVERDUE DEBT

Website helps save money

In May we launched a new

website aimed at student loan

borrowers www.owezero.org.nz

This site provides online

calculators and a range of

information for borrowers on

the benefits of making voluntary

repayments to reduce the total

cost of their student loans.

We used a range of advertising,

including cinema, print media, and

standard communications with

borrowers, to raise awareness of

the site. In its first two months of

operation, it has been accessed

15,000 times and 15% of these

people have then continued to look

around Inland Revenue’s site for

further information on student loans.


Overdue debt has increased due to a combination of factors, including increased borrower numbers and a higher proportion of non-resident borrowers. Non-resident debt can be difficult to collect effectively as many borrowers do not inform us of their change in address.

We have developed a range of initiatives to counter the rise in non-resident debt by:

• enhancing our non-resident sections of the student loan website, and

• introducing our Going overseas publication for non-resident borrowers.

This year we also issued a non-resident edition of the student loan newsletter with all non-resident repayment notices. One of the key messages included encouraging borrowers to nominate someone in New Zealand to act on their behalf. We are also exploring the possibility of introducing a credit card payment facility to reduce the transaction costs of repaying a loan while overseas.

Provision for doubtful debtsThe provision for student loan debt contains a capital and interest component. The increase of $89.2 million (16.8%) from 2001–02 reflects:

• An increase in the capital base following the annual transfer of loans ($958.2 million) from the Ministry of Social Development.

• The increase on the percentage used to provide for the impact of full interest write-offs being available while students continue to study, along with increased income thresholds used to determine repayments through the income tax year.


We jointly administer the various components of family assistance—family support, parental tax credit, child tax credit and family tax credit with the Ministry of Social Development. We distribute paid parental leave on behalf of the Department of Labour. Our primary outcome reflects our role ensuring eligible families receive the financial support they are entitled to.

We strive to achieve these outcomes through reaching eligible families, making it easy for them to receive their payments and disbursing the correct payment.

Number of family assistance and paid parental leave recipientsThe Department of Labour estimated that we would receive 20,000 applicants for paid parental leave and we received 20,029.

Making it easy to receive family assistance paymentsDuring 2002–03, we introduced a number of initiatives to ensure customers are aware of their obligations and entitlements under the family assistance scheme, in addition to continuing programmes from last year. These include:

• Our general advertising and radio campaign from 2002 that continued in 2003. We also conducted market research to further increase the effectiveness of this campaign.

• A family assistance awareness week, during which our social policy liaison officers spent the week in local communities highlighting family assistance. This included time on the Tagata Pasifika television programme.

• The promotion of family assistance at a variety of events, including Wellington and Auckland parent and child expos and displays at a variety of public markets.

• A continuation of our Community-Wise newsletter that informs a range of government agencies, tertiary institutions, Citizen Advice Bureaux, and community social services agencies on family assistance, child support and student loan issues. Distribution numbers have increased to 4,500.

• A slight increase (4%) in family assistance seminar hours. The seminars raise community awareness of family assistance and help ensure families receive their correct entitlements.

We continue to work with the Department of Internal Affairs, by including a flier with birth registration forms informing parents of potential family assistance entitlements.

Familyassistance

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FIGURE 28FAMILY ASSISTANCE RECIPIENTS

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FIGURE 27FAMILY ASSISTANCE AND PAID PARENTAL LEAVE OUTCOMES


Disbursing the correct amount of payments

An area of focus over the past year has been the overpayment of family assistance and the penalties that result. Overpayments can occur because of changing incomes and varying eligibility threshold levels. This year we have placed special emphasis on the reduction of family assistance debt.

Family assistance debt has decreased by $41 million, or 20%. A large proportion of this decrease is attributable to write-offs made under section 176(2) of the Tax Administration Act. This section applies where collection may not be an efficient use of resources or may put the taxpayer in a position of hardship. In addition, there was a concerted and coordinated effort by our returns and debt collection and information services people to avoid overpayments to family assistance recipients.

To avoid overpaying family assistance we systematically check people’s actual earnings against their predicted earnings through income information supplied in employer monthly schedules. If it appears that a recipient may be receiving too much family assistance, we contact them to discuss whether they need to revise their estimate. If we do not hear from the client, we issue a new certificate of entitlement and the recipient’s payments are adjusted to avoid them going into debt.

We also continue to work closely with the Ministry of Social Development to decrease the risk of overpayments.

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FIGURE 29VALUE OF FAMILY ASSISTANCE

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FIGURE 30FAMILY ASSISTANCE DEBT


Strong leadership, excellent people and good management are required for us to achieve our desired future. These need to be supported by good relationships, strong processes and excellent financial management. Our Statement of Intent highlights the need for the continual development of our capability to enable us to successfully manage to achieve our outcomes.

People and cultureThe capability, energy and commitment of our people is vital to ensuring that we are working towards achieving our revenue and social support programme outcomes.

Organisational climateIn November 2002, we conducted our second climate survey to measure progress in relation to the values supporting our Charter and our business plan, The Way

Forward, and to examine work environment issues.

The percentage of people who are positive about our strategic direction has also increased from the last survey to 60%, and is 22 % above the benchmark for New Zealand private and public sector organisations. The climate survey indicated that the morale and commitment of the majority of staff regarding their working environment and the future direction of Inland Revenue remains high.

Overall, the climate survey showed that our people are increasingly positive about their relationship with the department. The number indicating that they feel positive has increased by 6% since the first climate survey, which was conducted in December 2001, and is 2% above the “other” benchmark that is based on both private and public sector organisations.

The survey also showed some areas for improvements including rewards and recognition. Since the survey, we have implemented as part of our ongoing review of remuneration levels, updates for most of our staff.

Profile of our peopleWe employ 4,636 full-time equivalent people, across 22 sites in 17 centres. This represents an increase of 2.2% from 30 June 2002.

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FIGURE 31BREAKDOWN OF STAFF BY BUSINESS GROUP

Capability

FIGURE 32LENGTH OF SERVICE AND TURNOVER

Length of service

• Less than 5 years 43%

• Between 5 and 19 years 44%

• Over 20 years 13%

• Median length of service 8 years

Turnover • 2000-01 10.9%

• 2001-02 9.4%

• 2002-03 9.4%


We have had a slight increase in the number of undergraduate qualifications held by our people, and a slight decrease in postgraduate qualifications. Accounting remains the most common of our undergraduate qualifications. We have the third largest number of members of the Institute of Chartered Accountants of New Zealand with 107 provisional and 273 chartered accountant members.

Equal employment opportunitiesWe are committed to providing equal employment opportunities (EEO). At 30 June 2003, 39% of our managers and 63% of our team leaders, who also have responsibility for managing staff, are female. Our Valuing Diversity strategy aims to support the business by valuing and managing the diversity of our workforce to enable a wide variety of perspectives to contribute to analysis and decision making within the organisation. This in turn enhances Inland Revenue’s ability to achieve its overall strategic direction.

This year we have focused on the following themes:

• We developed an online educational tool on harassment as part of an awareness and education package for managers and team leaders. This self-paced package will be implemented in the second quarter of 2003–04.

• We have implemented our Valuing Diversity strategy, designed to ensure that we have a diverse mixture of people and talents at all levels of the organisation. The core elements of this strategy have been incorporated into our leadership expectations framework, and will be assessed through 360º feedback and performance management. We will also examine the potential addition of aging and disability components to our diversity strategy.

Our Valuing Diversity Fund provided funding to support staff in EEO target groups to attend courses to help advance their careers, as well as assist two network group initiatives, and for a group of team leaders and managers to increase their awareness of diversity issues.

• We have also recently provided our people with the opportunity to personally check and amend personal information (including EEO data) through our intranet. This also links to our disability strategy. Improving the quality of information we hold will help us better plan for our people with disabilities.

Enhancing our people capabilityWe are committed to the ongoing professional development of our people. A fundamental part of our human resources strategy is ensuring that our people are provided with, and use, appropriate development opportunities. In return for providing these opportunities, we actively encourage our people to take responsibility for their own development, and ensure that they apply the skills and knowledge gained to achieving departmental outcomes.

Technical expertise is the core of our organisation. Our leaders must lead technically skilled staff who are supported by processes designed to take advantage of their skills, knowledge on compliance behaviour, complex legislation and community concerns.

We need to be able to determine our existing technical and leadership capability levels so that we can measure progress. We are in the process of developing additional measures to help determine our leadership capability. One of our current means of measuring capability is our 360° feedback process that provides the organisation with a wide-ranging assessment of an individual’s ability over a range of areas, including leadership capability.


All of our managers have now been through the 360º process, and are about to receive their second round of feedback. We are also progressively rolling this out to all team leaders. The 360º process presently focuses on the developmental requirements of managers.

Over the past year, we focused on three areas of development—leadership, technical capability, and performance management.

LeadershipA high priority for 2002–03 was the ongoing development and enhancement of leadership skills for our managers and team leaders. To achieve The Way Forward initiatives and the future direction of the department we require strong leadership and people management capability. Pleasingly, our leadership strategy is ahead of where we planned to be for the year. A main component of our strategy is our leadership framework that was developed during 2002–03.

This framework provides all our leaders with clear expectations of what they need to be doing to be effective leaders. The Leadership Expectations are a fundamental component of the leadership framework describing what we expect of our managers and team leaders.

Part of this framework is our new team leader development course. This course provides all team leaders with a common set of leadership and management skills and expectations, and develops a common language across team leaders in relation to leadership issues. In addition, the development programme provides training in core management tools such as planning, remuneration and performance management, fraud awareness, and health and safety. All team leaders are expected to have completed this course by July 2004.

We have introduced management forums to provide the opportunity for managers to enhance their leadership and management capability through discussing good practice with external guest speakers. We have held three forums with approximately 100 staff at each forum during the 2002–03 year. These have featured Professor Malcolm Higgs from the Henley Management College (UK), Michael Wintringham, the State Services Commissioner, Bruce Anderson, Chief Executive of the Leadership Development Centre and senior Inland Revenue staff. We intend to continue holding three management forums a year.

Technical developmentTechnical capability is one of the most important areas of our capability. We operate within a highly complex legislative environment, and only through continuing to enhance our technical capability can we ensure that we can operate a well-functioning administration that is able to deliver our outputs and outcomes. This year our technical quality levels were:

• 82% of our phone, appointment and correspondence work met our technical quality standards (excluding Child Support)

• 76% of Child Support phone, appointment and correspondence work met our technical quality standards

Inland Revenue has been active in the area of

diversity/EEO over the past ten years. Initiatives

have included providing flexible work practices and

family-friendly programmes like the school holiday

programmes

VISION

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RESULTS

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BUILDING

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FIGURE 33OUR LEADERSHIP FRAMEWORK


Team leaders learn as a teamOur team leader development programme has proved very successful with four programmes completed during the year.


We operate a four-part quality assurance measurement system. To meet the standard, calls, correspondence or appointments must meet all parts of the correct, complete, timeliness and clarity measures. This means that a response to a customer may be correct, but the standard may not be achieved as the information involved may not have been recorded completely from the department’s perspective.

To further develop our technical capability we have a training framework. This framework encourages development in areas such as interpretation of legislation and policies. We have introduced twelve new products during the year and are also working towards introducing a number of others in early 2003–04.

We have also introduced three qualifications that are registered on the National Qualifications Framework.

To assist those who wish to complete the level five National Certificate in Administration of Revenue Law, we introduced the Head Start programme, allowing completion of the certificate within twelve months instead of two to three years. Approximately 60 staff are on the first intake. We also offer an ABC block course, which provides for acceleration toward the level four National Certificate in Administration of Revenue Law.

The courses focus on people

management, leadership skills

and performance management.

There are also courses for those

who want further development

opportunities. One person who

went through the course was

Adrian Kelly from the Wellington

Service Centre.

“Day-to-day I am involved in

sometimes reactive situations with

taxpayers, and with staff who are

truly at the coalface” says Adrian.

“Learning more about myself as a

person and as a leader has given

me perspective on my team’s role

in Inland Revenue.

“Everyone on the course was

fabulous. It gave me a feeling that

Inland Revenue was serious about

developing its people, and was

taking care of people at the sharp

end of their day-to-day business.”

Participants at a team leader development

forum: Carreen Disher (left), Sue Parrott

(centre), Brian Nally (right)

A leadership development fund provides support

for managers to undertake a range of short external

management and leadership courses. This fund has

enabled two of our managers, Andrew Minto and

Heather Daly, to undertake the two-year Masters of Public

Administration programme offered by the Australia New

Zealand School of Government.

Heather Daly


Inland Revenue continues to be an Approved Training Organisation by the Institute of Chartered Accountants of New Zealand. This means we are able to offer work experience that fulfils the practical experience requirements for admission to the College of Chartered Accountants.

Performance management and remunerationWe are progressing with our performance management and remuneration strategies in accordance with the timetable indicated in the 2002–03 Statement of Intent. These strategies contribute toward Inland Revenue achieving its strategic objectives through aligning individual performance and remuneration to business directions and outcomes.

Health and safetyThe implementation of the Health and Safety in Employment Amendment Act 2002 in 2003 requires that all organisations with more than 30 employees formally establish a health and safety representative role. We are a member of the ACC Workplace Safety Management Practice Programme—accredited at a secondary level—and already have in place health and safety committees to enable communication between Inland Revenue as the employer, our people, and their representatives on health and safety matters. Inland Revenue began implementing

policies and procedures which address “stress” and “fatigue” as workplace hazards as defined in the changes to the Health and Safety in Employment Amendment Act 2002.

Business processes – information technologyInland Revenue is one of the largest information technology businesses in New Zealand. It is important that our investment in information technology infrastructure and systems is made in accordance with our requirements that our technology infrastructure use proven technology, be reliable and sustainable over the longer term, and adaptable enough to allow for further growth and enhancement.

Our business plan, The Way Forward, commits us to increasing the number, range and effectiveness of services offered to taxpayers and social support programme clients, as well as improving the overall capability of the organisation through improved technology. This is in alignment with the wider Government strategy of providing greater access to services for citizens.

We have made a number of significant advances in the ongoing development of our technology infrastructure as well as the range and scope of services we offer. A major initiative during last year was a review of our technology infrastructure, and this found that our core technology

FIGURE 34TECHNOLOGY STRATEGY DIAGRAM


structure was sound, and was meeting our current business needs. The review led to the development of our technology strategy, which was completed in October 2002 (see Figure 34 opposite).

The strategy provides a broad five-year roadmap of our intended development. Some of the central themes of the strategy include repositioning our technology environment to support the future needs of our business, lowering compliance costs, making it easier to modify our systems to meet new business and legislative requirements and increasing access for taxpayers and social support programme clients. We have subsequently worked extensively with key business owners and our stakeholders to refine this roadmap of activity into a technology plan that will deliver major new capabilities to the organisation, both in terms of internal efficiencies but also customer responsiveness.

One of the more significant strands of work is our e-Enablement strategy. Providing access to information on-line and an electronic channel of communication are part of our commitment to further the Government’s e-government strategy as well as provide access to our services at times which suit our customers.

This year we have developed and implemented a wide range of new initiatives:

• Our pilot programmes for electronic GST, FBT and income tax filing have been completed, and these products have been released to all taxpayers

• We have made it easier and cheaper for tax agents to file• We have improved the range of forms and calculators

available through the internet• We have also introduced a secure email service and

are one of only a few leading tax administrations to offer this facility to taxpayers.

We have also rolled out the ability for our staff to access core Inland Revenue systems from remote locations, which will enable our field officers to have access to customer information at the customer’s location. All of these initiatives are consistent with our intention to reduce compliance costs and increase access to our services.

We are currently in the process of piloting new services for introduction over the coming year, including the ability for individual taxpayers to look at their personal account details securely online. We plan to roll out more functionality in this area including providing tax agents access to their client information.

At an operational level, we have also introduced a range of initiatives to continue to improve capability. This year we completed the roll out of personal computers and internet access to all our people. We also enhanced our desktop environment through expanding our intranet facilities and upgrading software.

BenchmarkingThis year we have continued to gauge our efficiency by conducting a survey benchmarking our performance in a number of areas againts other tax authorities. This survey was first carried out in 2002 with its primary focus being on benchmarking our information technology functions, although it included questions concerning general organisational information, payment processing and call centres.

Relationships Employee representative relationshipsWe have collective agreements and positive and constructive relationships with the PSA and Taxpro unions that represent approximately 58% of our employees. We participated

Barbara Sherry—the first Inland Revenue staff member to be

involved in the new Community Internship Programme—is

learning first-hand about working for a community organisation.

Barbara, a returns and debt collection officer from the

Takapuna Office, joined the Auckland-based Abilities Group

in January for a six-month internship sponsored by the

Department of Internal Affairs


in the Partnership for Quality Implementation Review carried out by the State Services Commission and the PSA during the year. Inland Revenue and the PSA are using the review findings to help us learn from our experiences, and those of other organisations. We are also negotiating for a collective agreement with the National Union of Public Employees who represent a small number of our people.

Other government agenciesTo achieve both Inland Revenue’s outcomes and wider government outcomes we collaborate with central agencies such as The Treasury and the State Services Commission as well as a number of other agencies throughout the public sector. For example:

• Ministry of Social Development on social assistance and student loans

• Ministry of Education on the student loan scheme • Department of Labour on paid parental leave• Customs Department on GST• ACC.

We also liaise with departments about specific initiatives. For example:

• The Ministry of Economic Development on initiatives within the small to medium enterprise area. This involves sharing research information, better understanding the compliance issues faced by small to medium enterprises, and improving the cross-government delivery of services.

• Industry Partnership is liaising with other government agencies that have an interest or role in the industries we are working with. This contributes to our understanding of those industries and our

appreciation of the range of compliance issues within them.

We are involved in a number of cross-government initiatives including:

• E- government – support for specific government initiatives and ensuring the alignment of our e-Enablement programme

• Pathfinder – we were involved in the steering group with the aim of better integrating outcome information into the management of the public sector.

Other tax administrationsWe regularly host visitors from a number of tax administrations around the world. Last year, we hosted senior management, including the Commissioner, from the Australian Taxation Office (ATO). This was part of a wider strategy of exploring the ways in which we and the ATO can better work together in the future in ways that benefit both organisations.

In the past year we have also hosted senior officers from the Canadian Customs and Revenue Agency and the United Kingdom Inland Revenue Department. Details on other international visits are listed in Additional

Information, Figure 7.

We also attended some key meetings with overseas tax administrations. The Commissioner was accompanied by senior managers to a meeting of the Study Group on Asian Tax Administration and Research, and The Commonwealth Association of Tax Administrators. We also attended a meeting in Oslo on corporate management issues within European and Australasian tax administrations.


OECDWe are active participants in the OECD’s Committee on Fiscal Affairs, that deals with tax matters. Robin Oliver, General Manager of the Policy Advice Division, is a member of the committee’s Bureau. The committee is considering a number of issues of importance to New Zealand, including:

• harmful tax practices• better international information exchange• improving access to bank information, and• matters relating to the OECD’s model double tax

convention and the appropriateness of different thin capitalisation rules.

StructureAlthough our structure is sound, we made some structural changes in 2002–03 to enhance our capability.

Design and monitoring reviewWe reviewed our Design and Monitoring Group, which is part of Business Development and Systems division. This review recommended the need for changes to meet the challenges of implementing our strategic direction. The revised structure will enable the department to be more effective in developing and implementing business improvement activities with a medium to longer-term focus.

Refocus of internal auditWe also commenced a refocusing of our Internal Audit Group to ensure we have sound risk management and assurance practices in our strategic and operational planning.

Enhancing corporates capabilityWe began our enhancing corporates capability project in March 2003. This was established to examine how our Corporates segment could enhance its capability with respect to investigating sophisticated and complex transactions undertaken by large companies. The changes arising from this project are being introduced in 2003–04.

Strengthening governanceThis year we established the Business Initiatives Governance Board. This board is responsible for ensuring that business projects are aligned to The Way

Forward, add value to the department and are delivered. We already have a governance board for information technology projects.

Strengthening our technology accountability processesA result of our technology strategy project was a review of our technology accountabilites to identify any modifications that may be required to meet future technology needs. This review process provided for the further enhancement of:

• sound management practices• effective standards and methodologies, and• accountabilities and relationships

for all technology management processes.

Resources – financial capabilityIn 2002–03, the department’s baseline increased by $14.704 million to $385.819 million (GST-exclusive). This net increase included additional funding to maintain the tax base and to implement initiatives from our business plan, The Way Forward.


In 2002–03 our actual expenditure totalled $382.362 million. This resulted in an operating surplus of $1.858 million below appropriation.

The department is appropriated under eight output classes. All eight of these output classes came within appropriation in 2002–03. Information Services (23%) and Taxpayer Audit (24%) continue to be our largest output areas.

Personnel expenditure continues to be our major expenditure area, accounting for 58% of our total expenditure. Operating expenditure (32%) is the next largest expenditure ctaegory followed by depreciation (8%) and capital charge (2%).

Included within our operating expenditure is $9.844 million (2.59%) for consultants and contractors. The department engages consultants and contractors to complement internal resources and provide specialist short-term advice on specific projects and new initiatives. During 2002–03 our expenditure on consultants and contractors increased largely due to the range of specialist skills required to develop our technology strategy. Further details regarding Inland Revenue’s 2002–03 expenditure on consultants and contractors are provided in Additional Information, Figure 9.

Over the next few years, financial management issues will be an important area of focus, as we continue to progress The Way Forward, respond to stakeholder requirements, and fund technology developments within tight fiscal constraints.

For 2003-04 the department has received additional funding of $9.605 million (GST-exclusive) as part of the Budget. This included funding for additional Child Support debt collection activities and additional funding for enforcement activities.

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FIGURE 36OUTPUT CLASS EXPENDITURE IN 2002-03

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FIGURE 35ACTUAL EXPENDITURE OVER PAST 10 YEARS

Note: The dotted line represents funding received for restructuring costs

Savings of 11.5% achieved

During May and June,

Government departments were

asked to save electricity as a

result of lower than expected

water levels in the Southern

hydro lakes. Inland Revenue

made electricity savings of 11.5%

during this period by reducing

non-essential lighting and

encouraging our people to use

the stairs instead of the lifts. This

was a significant achievement

as over the past few years we

have already placed considerable

efforts into reducing energy use.


We need to clearly identify risks to achieving our outcomes, develop risk management strategies and ensure these are applied at a strategic, project and operational level.

In the past year we have reviewed our key governance mechanisms and as a result placed greater emphasis on risk management. As a result of the review we have:

• reviewed our Audit and Risk Committee—now Risk and Assurance Committee—so that it has a greater focus on risk management, and it and other governance groups a more strategic focus

• clearly set out senior management’s expectations for actively using risk management as a business improvement tool.

We also refocused our Internal Audit group. This group became the Risk and Assurance group in August 2003 with a new National Manager. The primary purpose of the area is to ensure the effective development and implementation of sound risk management and assurance systems and practices across Inland Revenue as part of our strategic and operational planning. It will also allow risk management to be a greater lever to enhance organisational achievement, reinforce cultural change and extend managerial capability.

One part of our risk mitigation strategy this year has been the introduction of new training products focusing on the importance of staff acting with integrity, responsibility and respect for both people and the law. Managers and team leaders are also receiving additional training on the risks of conflicts of interest. All staff will receive this training by early 2004.

We recognise that there are risks to achieving our outcomes for government. Our strategies and initiatives outlined earlier in the report are helping to deliver our desired future, these strategies also help mitigate potential risks to achieving our outcomes. For example, our investment in maintaining and enhancing the technical competency of our staff helps maintain community confidence in Inland Revenue. A fall in community confidence could have an impact on compliance levels and therefore the amount of revenue received.

Risk and assurance



Statement of responsibility

Our Charter and Complaints Management Service

Statement of objectives and service performance

Part 3Performance information

55

56 Inland Revenue – Annual Report 2002-03 Inland Revenue – Annual Report 2002-03 57


In terms of sections 35 and 37 of the Public Finance Act 1989, I am responsible, as Chief Executive of Inland

Revenue, for the preparation of the department’s financial statements and the judgements made in the process of

producing those statements.

I have the responsibility of establishing and maintaining, and I have established and maintained, a system of

internal control procedures that provides reasonable assurance as to the integrity and reliability of financial

reporting.

In my opinion, these financial statements fairly reflect the financial position and operations of the department for

the year ended 30 June 2003.

David Butler Commissioner of Inland Revenue 26 September 2003

Countersigned by:

Cathy MagiannisChief Financial Officer26 September 2003

STATEMENT OF RESPONSIBILITY



Initiatives How we will Reliable Confidentiality Consistency Your right to work with advice and and privacy and equity question us you information

Customer satisfaction survey • • •

Staff giving first name to customers • • •

Climate survey •

Disability Strategy • •

E-enablement project • • •

Technical training • •

Monitoring and reporting technical • • •

quality of our work

Small business • • •

Advisory services • • •

Code of Conduct • • • •

Recruitment and induction • • • • •

Training on ethical standards • •

Security of taxpayer information •

Compliance model • • •

Industry Partnership initiative • • •

New debt and hardship rules • • •

Complaints management process • •

This section also covers correspondence and phone calls made to the Minister, Commissioner and other authorities.

Summary of initiatives supporting our Charter

Introduction

Our Charter, which has been in place since March 2001, is key to ensuring that we have an effective relationship

with the community. It sets out how we will work with people and what we aspire to in providing advice and

information, acting consistently, and guarding privacy and confidentiality. This is reinforced by people having the

opportunity to question us through our Complaints Management Service.

Public expectations of good service are evolving. Therefore it is important that we develop new initiatives to

enhance our current services so we can continue to meet public expectations and our Charter obligations.

Over the past two years we have made significant advances in improving the way we provide services to

taxpayers and social support programme clients.

We have also worked with our people on reinforcing standards of professionalism and service. This has been

done by providing clear guidelines and training initiatives.

This section describes some of the more important initiatives that support our Charter. It also provides a more

detailed analysis of the work of our Complaints Management Service.

OUR CHARTER AND OUR COMPLAINTS MANAGEMENT SERVICE


Customer satisfaction survey

The most important overall indicator of taxpayer perception of our services is through our customer satisfaction

survey. Over 2002-03 we have sustained high ratings, with results in the 86-88%1 range. The highest scores for

individual areas of service were the phone and advisory service for tax agents: both scored 95%2.

Staff giving first name to customers

Our Charter requires that our people give their names to taxpayers when they are making an enquiry. Over

the last six months of 2002-03 the quality control monitoring records for our five call centres checked on this

commitment. The results showed that our people gave their first names in 99.9% of the calls monitored.

Climate survey

In November 2002, we conducted our second climate survey of our staff to measure progress in relation to the

values supporting our Charter and our business plan The Way Forward and to examine work environment issues.

Overall, the climate survey showed that our people are increasingly positive about their relationship with the

department. The number indicating that they feel positive has increased by 6% since the first climate survey,

which was conducted in December 2001, and is 2% above the “other organisations’ benchmark” in the survey.

The organisations represented in the benchmark were from both the public and private sector.

The percentage of people who are positive about our strategic direction has also increased from the last survey

to 60%, 22% above the benchmark. The climate survey indicated that, although areas for improvement have

been identified, the morale and commitment of the majority of staff towards their working environment and the

future direction of Inland Revenue, remains high.

Disability Strategy

Inland Revenue has also been looking at ways in which improvements can be made to the way services are

provided to people with disabilities. As part of the New Zealand Disability Strategy we have worked on a number

of aspects of our service provision to ensure accessibility—in particular our web-based services, and specific

facilities for deaf people. Last year we issued a new brochure for deaf customers in consultation with the Deaf

Association of New Zealand. Work is currently under way to consider ways of improving our policy on sign

language services.

How we will work with you

1. Margin of error: +/- 2%2. Margins of error: +/- 6% (tax agent phone service); +/- 7% (tax agent account managers); the ratings were recorded

in the last quarter of 2002-03.


E-enablement project

Providing an electronic means of accessing Inland Revenue services is an important way of improving advice

and information to taxpayers and agents who prefer this means of communication. This year we introduced:

• electronic filing for GST

• secure correspondence using email

• calculators for a range of items including child support liabilities and early repayment of student loans.

Technical training

To provide reliable advice we have invested in making sure that people have the skills and knowledge to do their

job. Under the aspire3 banner we provide ongoing training to improve skills on taxation subjects. In 2002-03 we

made the following gains:

• 12 new technical training products introduced

• coverage of the staff included in our technical competency database has gone up by 23% (in the last six months)

• the measured competency level has been raised by 8.9%.

Monitoring and reporting the technical quality of our work

As part of measuring the quality of information services, we rate the technical quality of correspondence, child

support information services and other personal contacts (phone services and information provided as a part

of personal appointments). In 2002-03 the technical quality ratings showed that:

• personal contacts improved slightly, going from 75% meeting the standards last year, to 77% this year

• child support information services improved significantly rising from 61% meeting the standard, to 76%

• correspondence quality standards were down, going from 90% meeting the standard to 87%. The main

reasons for the lower score were incomplete follow-up action and errors in information systems that support

correspondence activities. We have taken action to remedy quality issues that arose.

The way we measure our technical quality means that a response may be accurate in terms of the advice the

customer receives, but will be marked down because it has not met some departmental requirements, such

as follow-up action that needs to be taken. Hence the percentage score reflects all aspects of the advisory

service process.

Small business

As part of this initiative we have carried out a survey of some 2,500 small to medium-sized businesses using

focus groups, phone surveys, site visits and self-completion internet surveys. The results indicated that some

70% of the respondents in the phone survey identified Inland Revenue as having the biggest impact on their

compliance cost. They also saw some benefits to their businesses from these costs as it helped them introduce

accounting systems and procedures that gave them greater information about their business.

Inland Revenue is at present working on a discussion document on the small business initiative. It is due to be

published in September 2003.

The survey has given us a better understanding of what is important for small business and we have taken this

into account in further simplification options that are being worked on in our policy area. The further development

of electronic services also offers efficiencies to small business.

Reliable advice and information

3. aspire: Acquisition (of) Skills Programme for Inland Revenue Employees


Advisory services

Providing advisory services in the community is vital to reaching taxpayers and social support programme clients.

This year we have increased both the number of people and the hours spent on advisory work. Inland Revenue

has dedicated advisory officers for tax agents, as well as advisors for businesses, who deal most frequently with

issues that affect small business.

Inland Revenue provides information and advice to Maori and Pacific peoples’ communities, through our Maori

Community Officers and our Social Policy Liaison Officers. These advisors often meet people in their own

environment and deal with both taxation and social policy questions. Our Industry Partnership initiative is also

involving our advisory officers in specific industries where compliance needs to be improved.

We have also continued to participate in the Heartlands programme that reaches out to remote rural

communities, and provides advice that would otherwise be difficult for people to access. In 2002-03 we

attended 22 sites compared to four in 2001-02.

Inland Revenue advisors also attended the Mystery Creek National Fieldays for the first time this year and

provided advice on tax issues relevant to the farming community.


Code of Conduct

Our Code of Conduct is central to Inland Revenue’s commitment to preserving the confidentiality and secrecy of

taxpayer information according to the law—in particular the Tax Administration Act. New employees and existing

staff have received a copy of the Inland Revenue code, and have signed to acknowledge that they have received it.

The New Zealand Public Service Code of Conduct also establishes that it is unacceptable for public servants to

make unauthorised use or disclosure of information to which they have official access.

This year we have continued educational programmes involving our people in discussions about the maintenance

of ethical standards of behaviour. These programmes ensure that our staff are aware of the requirements of the code.

Recruitment and induction

Our non-technical training framework—IR Fundamentals—provides training for all staff and emphasises our

organisational values. The package covers our Code of Conduct and the systems that Inland Revenue uses to

process taxpayer information and monitor its use. It stresses the importance of the environment in which Inland

Revenue works; there are course segments on tax legislation and the responsibilities and expectations when

working in the public sector.

In addition, it deals with a range of topics such as providing good customer service and subjects relating to the

workplace such as the policy on harassment, valuing diversity and fraud awareness.

We expect most of our staff to complete the course within six months of joining Inland Revenue. For the period

April to June 2003, 49% of new entrants in that period had done the course within three months of starting.

Training on ethical standards

Our Code of Conduct for Inland Revenue staff has also received special emphasis in 2002-03 through Judge

for yourself and Play it again Sam training programmes. These programmes cover practical aspects of fraud

awareness and the standard of integrity that is expected of our people. The programmes were begun in the last

quarter of 2002-03 and had covered about 20% of Inland Revenue people by 30 June 2003. All our people are

scheduled to receive training by February 2004. These programmes will be provided as a part of the induction

programme for new staff.

Security of taxpayer information

Access to taxpayer data is monitored by our User History System (UHS) to safeguard against misuse of

information. This system, introduced in August 2001, has proven to be a valuable way of tracking access to

taxpayer information and helps resolve concerns about misuse.

Misuse occurs if records are accessed without authorisation or a breach of secrecy has occurred. Routine

monitoring is carried out with the UHS to detect misuse, and when necessary, investigations are initiated.

Similarly, if other concerns about misuse arise (including taxpayer complaints), the UHS is able to help decide

whether further action is necessary. In most instances no misuse is found.

Overall, 66 investigations were initiated in 2002-03 and 14 dismissals occurred as a result.

Confidentiality and privacy


Compliance model

Inland Revenue’s compliance model is the central concept which governs our relationship with taxpayers.

The model emphasises voluntary compliance as well as the need for appropriate measures to manage

non-compliance.

We have used this model to promote compliance by providing information tailored to the specific needs of

businesses and groups in the community such as small business and in the Industry Partnership initiative

which is described below. It is also applied in our approach to designing our business processes and audit

and debt strategies.

Industry Partnership initiative

Our Industry Partnership initiative targets the cash economy. It aims to identify barriers to compliance and makes

it easier to comply through systems that are effective and efficient.

This year we further developed our relationships with painters and electricians and began working with agricultural

contractors, entrepreneurs and hairdressers. As the financial year drew to a close we had also established

relationships in the collision repair, automotive repair, plumbing and long-distance bus and coach driving industries.

In working with organisations we have followed a process of using surveys to define the issues that are reasons

for non-compliance. Once we have compiled the survey results, the next step is to identify the best way of

improving compliance. Improvement strategies are often taken to focus groups, and priorities and solutions put

forward. We have received positive feedback from the groups involved about Industry Partnership and have also

seen some compliance improvements. For example a reduction in the percentage of painters and electricians

with a child support debt.

We have also established a film production industry desk which deals with specific issues in this industry.

New debt and hardship rules

We have ensured that the new debt and hardship rules that came into effect in December 2002 have been

applied consistently. Training has been provided for all our service centre staff and we have closely monitored

the decision-making process.

A major change to the rules has been that debt is managed in a sustainable way: taxpayers in debt are able

to manage their position, and Inland Revenue maintains a positive relationship with the taxpayer. Research

conducted through an independent company has found that compared to 2002, taxpayers are more satisfied

with the way Inland Revenue handled their debt situation.

Consistency and equity


Complaints management process

Our new complaints management process has now been in operation for just over two years. Most complaints

are handled by the Complaints Management Service (CMS), but our service centres also form part of the

process. There is a greater awareness and increased use of the complaints procedure—especially now that the

0800 number for the CMS has been widely publicised on our website and in our publications. The recording

system for complaints handed by service centres was not fully operational in 2001-02, so recorded complaints in

that year were low.

Of the complaints received, a greater proportion is now about policies and procedures. This reflects the complex

nature of tax issues and the need to provide an explanation of their application. Complaints about phone

services have declined sharply. This decline is consistent with our high customer satisfaction survey results and

the performance levels achieved in our call centres.

In addition to managing individual complaints, our CMS also facilitates the Complaints Feedback Committee.

The committee has a brief to identify trends and issues through the analysis of complaints, and then provide an

appropriate solution and contribute to business learning.

Complaints Complaints % of total

2001-02 2002-03 2001-02 2002-03

Cause of contact

Correspondence 518 636 30.8% 18.0%

Objections to policies/procedures 537 1,753 31.9% 49.7%

Phones 281 182 16.7% 5.2%

Staff behaviour 262 623 15.6% 17.7%

Other 83 330 5.0% 9.4%

Total 1,681 3,524 100.0% 100.0%

Outcomes

Apology and/or correction to taxpayer’s account 810 1,425 48.2% 40.4%

Explanation 533 1,089 31.7% 30.9%

Resolved using existing service 209 579 12.4% 16.4%

Cases still open 16 80 1.0% 2.3%

Discontinued 57 58 3.4% 1.6%

Other 56 293 3.3% 8.4%

Total 1,681 3,524 100.0% 100.0%

Approaches to the Minister, Commissioner and other authorities

Our Ministerial Services Team is responsible for investigating and resolving matters raised with the Minister and

the Commissioner by taxpayers in respect of their tax obligations or the service they have received from Inland

Revenue. On average 2,000 to 3,000 contacts are made annually and they are a mixture of complaints, queries,

information requests and suggestions for policy and legislative reform. Correspondence can range from the

reasonably straightforward to requests to review a decision by Inland Revenue.

Once resolved, any matters relating to improving or changing systems or processes are passed on to the

appropriate areas for consideration.

Your right to question us


The team also investigates complaints to the Ombudsmen, the Privacy Commissioner and the Human Rights

Commissioner and reviews refusals to provide information under the Official Information Act 1982. In addition,

Ministerial Services provides advice on matters arising under the Official Information Act and the Privacy Act

1993 and coordinates responses to parliamentary questions.

The table below gives the total contacts received during the year ended June 2003.

Type of contact Number % of

received contacts

Ministerial correspondence 814 37.5%

Commissioner’s correspondence 970 44.7%

Commissioner’s telephone calls 218 9.8%

Website correspondence (includes requests to the Privacy Officer) 106 4.9%

Ombudsmen correspondence 58 2.7%

Privacy correspondence 9 0.4%

Total 2,175 100%

The table below shows the outcome of complaints received from the Office of the Ombudsmen and the Office of

the Privacy Commissioner during the year ended June 2003. Formal complaints received from the Ombudsmen

and Privacy Commissioner require a full investigation and can take some time to resolve.

Outcome Number % of

of cases cases

Ombudsmen correspondence

Sustained 8 13.7%

Not sustained 12 21.0%

Partly sustained 1 1.7%

Resolved informally 20 34.4%

Discontinued 7 12.0%

Under action 10 17.2%

Total 58 100%

Privacy correspondence

Not sustained 1 11%

Discontinued 3 33%

Under action 5 56%

Total 9 100%


Summary of departmental output classes

Departmental output classes delivered by Inland Revenue during the year ending 30 June 2003, and their

associated revenue, expenses and surplus or deficit are summarised below. All figures are GST-exclusive.

Output class description Revenue Expenses Net surplus

(deficit)

$000 $000 $000

1. Policy Advice 7,601 7,473 128

2. Adjudication and Rulings 6,441 6,230 211

3. Information Services 88,526 88,318 208

4. Revenue Assessment and Collection 57,981 57,691 290

5. Management of Debt and Outstanding Returns 56,496 56,897 (401)

6. Taxpayer Audit 92,433 91,282 1,151

7. Assessment and Collection of Child Support 50,711 50,440 271

8. Collection of ACC Premiums 24,031 24,031 0

Total 384,220 382,362 1,858

STATEMENTS OF OBJECTIVES AND SERVICE PERFORMANCE


DescriptionThis output class involves:

• providing advice on laws impacting on the tax system

• providing assistance with the design and introduction of legislation that changes tax and social policy

• forecasting future tax flows

• the progressive review and rewrite of the income tax legislation

• ministerial servicing.

Financial performance for the year ended 30 June 2003 (GST-exclusive) $000

Revenue Expenses Net surplus

7,601 7,473 128

All policy advice outputs

The service performance objectives detailed below apply to all policy advice outputs.

Quantity

Provide the Minister with tax and social policy advice, revenue legislation, rewritten revenue legislation and

forecasts in accordance with the agreed work programme.

Quality

All advice, legislation and forecasts comply with the following quality standards, where appropriate:

Purpose: Reports clearly state their purpose and answer any questions raised by the Minister.

Logic: The assumptions behind the advice are explicit and arguments are logical and supported by facts.

Accuracy: The facts in the papers are accurate and all material facts have been included.

Coverage: Advice accurately reflects revenue, economic and administrative implications, and compliance costs.

Options: An adequate range of options has been presented and each is assessed for benefits, costs and

consequences to the Government and the community.

Consultation: There is evidence of adequate consultation with interested parties and possible objections to

proposals have been identified.

Practicality: The problems of implementation, technical feasibility, timing and consistency with other policies

have been considered.

Presentation: The format meets with the Cabinet Office requirements and clearly states the deadline by

which ministerial action is required. Material is effectively summarised and is concise, has short

sentences in plain language, and is free of spelling and grammatical errors.

Legislation: All revenue and rewritten legislation is drafted in as simple, clear and concise manner as practicable.

The required services and advice are provided to assist the passage of revenue legislation and non-

revenue bills with revenue or tax administration implications through the House.

Forecasts: Forecasts take into account the economic outlook, historical patterns and trends and announced

policy changes. They are based on the best available information, and development methods

and techniques that reflect best practices in revenue forecasting.

The policy development process is managed in accordance with the generic tax policy process.

The Minister is satisfied with the quality of policy advice, revenue legislation, forecasts, rewritten legislation and

ministerial servicing provided.

Timeliness

Provide or deliver all reports and advice, the tax and social policy work programme, revenue legislation, rewritten

legislation and forecasts within the agreed timeframes.

OUTPUT CLASS 1POLICY ADVICE


DescriptionThis output involves:

• providing advice on new tax and social policy laws impacting on the tax system

• providing advice on remedial legislation in respect of these laws

• assisting with the design and introduction of legislation which gives effect to changes in tax or social policy

• conducting a systematic review of the effectiveness of legislation after it has been enacted.

The general service performance objectives detailed in “All policy advice outputs” apply to this output.

Actual

Quantity Achieved

Quality Achieved

Timeliness Achieved

Output 1.2Legislative drafting

DescriptionThis output involves drafting revenue legislation for introduction in the House and providing assistance with its

passage through the House. The general service performance objectives detailed in “All policy advice outputs”

also apply to this output.

Actual

Quantity Achieved

Quality Achieved

Timeliness Achieved

Output 1.3Forecasting and analysis


• forecasting future tax flows for the Government

• forecasting other non-tax Crown revenue

• reporting on revenue receipts against forecasts

• analysing revenue implications of changes in tax and social policy.


Actual

Quantity Achieved

Quality Achieved

Timeliness Achieved

Output 1.1 Policy advice in relation to tax and social policy



• the progressive review and rewrite of the income tax legislation

• analysis of the potential effect on policy and operations of any proposed changes

• the provision of redrafted sections of the Income Tax Act according to a plan agreed to by Cabinet.


Actual

Quantity Achieved

Quality Achieved

Timeliness Achieved

Output 1.5Ministerial servicing

DescriptionThis output involves all activities associated with ministerial servicing and parliamentary questions. It includes

all tax, child support, student loans, family assistance, supply of information and accident compensation

correspondence.

Ministerial correspondence and parliamentary questions

Budget Actual Variance

Quantity

Draft responses to:

• 1,500 to 2,000 pieces of ministerial correspondence 1,500 814 -45.7%

to 2,000

• 300 to 500 parliamentary questions that concern the administration 300 to 500 239 -20.3%

of the Inland Revenue Acts or relate to Inland Revenue business.

424 fewer pieces of ministerial correspondence, and 127 fewer parliamentary questions were received than last year.

Forecast levels are based on experience over time; the actual levels received are outside the department’s direct influence.

Quality

All responses will be accurate and free from material error. Achieved

All responses to parliamentary questions will meet the standing Achieved

orders requirements.

Timeliness

Replies to all ministerial correspondence received will be forwarded

for ministerial signature:

• 80% within six working days 80% 83.5% 4.4%

• 100% within 10 working days 100% 95.5% -4.5%

from the date received by Inland Revenue, where the information

required to provide a response is readily available.

All responses to parliamentary questions are forwarded for ministerial 100% 100% Nil

approval in time to meet any parliamentary deadlines.

Output 1.4Rewrite of the tax Acts


Output statement: policy advicefor the year ended 30 June 2003

Actual Actual Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue

8,587 Sale of outputs to the Crown 7,600 8,568 7,600

1 Sale of outputs to others 1 2 2

8,588 Total revenue 7,601 8,570 7,602

Expenses

8,273 Annual appropriations 7,473 8,570 7,602

0 Other appropriations 0 0 0

8,273 Total expenses 7,473 8,570 7,602

315 Net surplus/(deficit) 128 0 0

4,839 Output 1.1: Policy advice in relation 4,676 5,095 4,800

to taxation and social policy

817 Output 1.2: Legislative drafting 601 795 689

1,035 Output 1.3: Forecasting and analysis 913 992 880

483 Output 1.4: Rewrite of the tax acts 385 639 314

1,099 Output 1.5: Ministerial servicing 898 1,049 919

8,273 Output class cost 7,473 8,570 7,602



• adjudicating on behalf of the Commissioner on disputes between taxpayers and Inland Revenue’s operational

business groups in respect of proposed assessments to provide assurance of consistency and impartiality in

the application of the tax law

• providing binding rulings and other guidance on the interpretation and application of the law administered by

Inland Revenue to facilitate business confidence by providing certainty and encouraging voluntary compliance.

Financial performance for year ended 30 June 2003 (GST-exclusive) $000


6,441 6,230 211

Output 2.1Adjudication


• providing a technical review of disputed notices of proposed adjustment referred to the Adjudication Unit

• issuing an adjudication report to the parties concerned

• issuing, where required, an assessment consistent with the conclusions of the technical review.


Quantity

Complete 50 to 70 adjudication cases. 50 to 70 63 Nil

Quality

All adjudication reports supporting each decision meet the purpose, Achieved

logic and alternatives standards (defined at the end of this output class).

Timeliness

Allocate 75% of adjudication cases to an adjudicator within ten working 75% 39.7% -47.1%

days of receipt by the Adjudication Unit.

The receipt of cases during the year was uneven, with 36% in a two-month period. This can create a backlog of cases for

allocation, as new cases can only be allocated once adjudicators become available to work on them. In addition, low staff

numbers have also contributed to the delay in case allocation. 75% of cases were allocated within 20 days of receipt.

Complete:

• 50% of adjudication cases within twelve weeks, and 50% 44.4% -11.2%

50% of adjudication cases were completed within 12.6 weeks of receipt.

• 75% of adjudication cases within twenty weeks of receipt of all the 75% 81.0% 8.0%

necessary information and allocation by the Adjudication Unit.

OUTPUT CLASS 2ADJUDICATION AND RULINGS



• considering applications for and providing binding public, private and product rulings

• the development and publication of non-binding statements on the Commissioner’s view of the law

administered by Inland Revenue (such as interpretation statements and interpretation guidelines)

• the preparation and publication of statutory determinations and valuations (such as livestock valuations

and taxpayer-specific accruals and depreciation determinations).


Quantity

Finalise the Commissioner’s ruling in relation to 800 to 1,200 technical issues 800 to 1,200 520 -35.0%

contained in applications for private and product binding rulings.

Although we completed a similar number of cases last year, on average this year they have contained 1.56 fewer issues per

ruling. Around half of this variance is due to the decline in the number of large issue ruling cases completed this year compared

to previous years. On average, there were also less sub-issues per ruling.

Finalise 5 – 10 applications for accrual determinations and taxpayer specific 5 to 10 5 Nil

depreciation determinations.

Publish or finalise consideration of a total of 30 to 50 public items giving the 30 to 50 32 Nil

Commissioner’s interpretation of the law. These include new and expiring public

binding rulings, general statutory depreciation determinations, interpretation

statements and interpretation guidelines, questions we have been asked.

Complete 5-10 items of technical correspondence. 5 to 10 10 Nil

Compile the national standard cost for livestock and the national average Achieved

market values for livestock.

Quality

In relation to private and product binding rulings and taxpayer-specific statutory 100% 100% Nil

determinations, all reports supporting the decision to issue or decline to issue a

ruling, or determination, and any letter setting out the reasons for these decisions,

meet the following standards (defined at the end of this output class).

All public binding rulings (including the commentary to those rulings), statements, 100% 100% Nil

and general statutory depreciation determinations giving the Commissioner’s

view of the law meet the purpose, logic, alternatives, consultation and practicality

standards (defined at the end of this output class).

All technical correspondence meets the correctness, completeness and clarity 100% 100% Nil

standards (defined at the end of this output class).

Output 2.2Rulings



Timeliness

In all cases Inland Revenue will notify the applicant within five working days that 100% 96.9% -3.1%

their application for a private or product binding ruling or taxpayer-specific

statutory determination has been received.

In 75% of cases the application for private and product binding rulings will be 75% 32.7% -56.4%

allocated to an analyst within four weeks of the receipt of a complete application.

The length of time required to complete binding rulings has meant a backlog of applications received, with consequent

delays in allocation. The timeliness standard was therefore not met.

In 80% of cases the applicant for a private and product binding ruling, 80% 94.4% 18.0%

a taxpayer-specific accrual or depreciation determination will, within 10 working

days of the allocation of the application to an analyst be advised of:

• the name of the officer dealing with the application

• an estimated delivery date for the draft ruling or determination

• an estimated cost.

Deliver draft private and product binding rulings and draft taxpayer-specific

statutory determinations in:

• 50% of cases within three months 50% 53.0% 6.0%

• 70% of cases within five months 70% 77.0% 10.0%

• 80% of cases within nine months of the receipt of any additional information 80% 91.0% 13.8%

necessary and the applicant accepting the cost estimate.

Deliver draft private or product binding rulings or draft taxpayer-specific

statutory determinations in:

• 50% of cases, in which the scope of the application is not expanded, 50% 29.8% -40.4%

on or before the first agreed delivery date.

As further submissions are received and complex issues analysed further, the majority of initial time estimates are altered.

• 90% of all cases, on or before the last agreed delivery date. 90% 92.7% 3.0%

Inland Revenue will compile the national standard cost for livestock and the Achieved

national average market values for livestock within four weeks of receiving

all valuation information.

In 75% of cases Inland Revenue will provide a response to a request for 75% 70.0% -6.7%

technical correspondence within six weeks.

10 items of technical correspondence were received during the year, and three of these did not meet this timeliness standard.

This was due to the particularly complex nature of these items which meant a number of additional queries had to be

completed before the responses could be finalised.

Cost

Where Inland Revenue provides an applicant for a private or product binding

ruling or a taxpayer-specific determination with an estimate of the cost of the

ruling or determination, the actual cost will be in:

• 65% of cases, in which the scope of the application is not expanded, 65% 50.0% -23.1%

within 25% of the estimate first provided to the applicant.

An improvement on last year’s result of 34.9%. It is often difficult to estimate the initial cost of a ruling. As the estimation of time

to complete a ruling is adjusted through the rulings process, this invariably requires a re-estimation of the cost of the ruling.

• 95% of all cases, less than or equal to the last estimate agreed with 95% 100.0% 5.3%

the applicant.


Definitions of quality standards for Adjudication and Rulings

Clarity: The response will be communicated in a way that is clear to the enquirer.

Completeness: The response fully resolves all aspects of the enquiry.

Consultation: There is evidence of appropriate consultation with the public, and contrary legal arguments and

practical difficulties identified have been considered.

Correctness: The law is correctly interpreted and the response is supported by the appropriate legal authority.

Logic: The assumptions used are explicit, and the argument is logical and supported by appropriate

legal authority.

Alternatives: Alternative legal arguments and interpretations are adequately considered and their respective

merits assessed.

Practicality: Compliance and administrative costs and problems for taxpayers and Inland Revenue arising

from implementation, including feasibility, timing, and consistency with the general body of the

Commissioner’s interpretation and application of tax law, have been considered, and incorporated

in the analysis in so far as they are relevant to the interpretation and are possible under the

legislation.

Purpose: The subject matter and conclusions are clearly stated and guidance is provided in a manner

useful to those affected by them.

Output statement: Adjudication and Rulings for the year ended 30 June 2003


Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue



6,412 Total revenue 6,441 6,715 6,444

Expenses



6,179 Total expenses 6,230 6,715 6,444


1,338 Output 2.1: Adjudication 1,654 1,530 1,770

4,841 Output 2.2: Rulings 4,576 5,185 4,674



DescriptionThis output class involves advising taxpayers on new and existing tax laws, assisting taxpayers with enquiries on

the tax system, and assisting customers of social policies administered by Inland Revenue.



88,526 88,318 208

Output 3.1Public information services

DescriptionThis output involves responding to public enquiries on tax and social policy matters through correspondence,

telephone, personal appointments, official information requests and the Complaints Management Service.


Quantity

Action between 6.9 and 7.4 million specific customer contacts during the year. 6.9 to 7.4m 7,352,600 Nil

Customer contacts are 11.6% above the figure reported last year. This year we widened our definition of correspondence

to include a broader range of incoming items and areas. Using the old definition customer, contacts were 1% less than the

2001-02 reported figure.

Quality

In all cases we aim to give taxpayers an answer that is correct, complete, 90% 82.0% -8.9%

clear, timely and appropriately referenced. The answer should also show an

understanding of the business environment. This year we aim to improve

our performance in this area by 5% from our 30 June 2002 result.

This is a 3.5% decrease on the 30 June 2002 result due to a decrease from 94% to 87% for correspondence. However the

quality for phone and appointments went up slightly. Follow-up action has been taken to improve the technical quality of

correspondence, emphasising comprehensive follow-up to enquiries.

Improve by 2% taxpayers’ satisfaction with the quality of service we provide 87% 87.0% Nil

from our 30 June 2002 result, as measured by Inland Revenue research.

Customer satisfaction ratings have ranged between 86% and 88% for the year; 88% is the highest figure reached for

customer satisfaction.

80% of all calls will be fully resolved at the time, requiring no follow-up action. 80% 90.3% 12.8%

The proportion of family assistance recipients with a new family assistance <2% -0.3% Nil

debt in the 12 months to 30 June 2003, will not increase by more than 2%

over the proportion of family assistance recipients with a new family

assistance debt in the 12 months to 30 June 2002.

Family assistance debt has decreased as a result of increased debt write-offs, enhanced customer education and more active

monitoring of family assistance recipients income levels to prevent overpayment.

The proportion of student loan borrowers with an overdue student loan <1% -1.0% Nil

repayment obligation in the 12 months to 30 June 2003 will not increase by

more than 1% over the proportion of student loan borrowers with an overdue

student loan repayment obligation in the 12 months to 30 June 2002.

This standard refers to the proportion of student loan borrowers with overdue debt, not to total loans outstanding.

OUTPUT CLASS 3INFORMATION SERVICES


Timeliness

Issue a substantive response, or action a reassessment for:

• 85% of correspondence within three weeks 85% 87.9% 3.4%

• 100% within six weeks of receipt by Inland Revenue 100% 97.6% -2.4%

80% of:

• tax agent telephone enquiries 80% 75.1% -6.1%

• employers’ telephone enquiries 80% 80.9% 1.1%

• return and debt collection telephone enquiries1 80% 72.7% -9.1%

will be answered within 20 seconds

This is a significant improvement on last year where 54% of calls were answered within 20 seconds. The tax agent queue

received consistently higher volumes than predicted through the whole year and especially the last quarter. The customer

response pattern and call arrivals did not occur as predicted as a result of follow-up action from the February 7 due date

for tax payment.

50% of all other calls will be answered within 60 seconds, except on days 50% 65.1% 30.1%

when the total number of calls exceed 17,500.

A higher standard of service was achieved as call numbers were lower than expected.

For the days when total calls exceed 17,500:

• the average speed to answer will be less than or up to five minutes, and

• callers will be advised of the potential delay and offered alternative services. 05:00 02:51 43.0%

Standard applied on 78 days out of 301.

The percentage of returns collected or finalised before the due date will improve > 1% -0.6%

by more than 1% over our 30 June 2002 result.

All completed paid parental leave applications will be processed within five 100% 95.3% -4.7%

working days of receipt.

Output 3.2Advisory services

DescriptionThis output involves providing proactive advice to the public on tax and social policy matters through advisory

visits, providing temporary tax offices and education visits and seminars.


Quantity

Complete between 93,500 and 103,500 hours of advisory services. 93,500 96,709 Nil

to 103,500

Quality

Improve by 1% customers’ satisfaction with the quality of service we provide

from our 30 June 2002 result, as measured by Inland Revenue research. 96% 94.0% -2.1%

Timeliness

Conduct all advisories within four weeks of receipt of the request by Inland 100% 95.0% -5.0%

Revenue, or at a later date set by the customer.

1. From 1 October 2002


Output statement: Information servicesfor the year ended 30 June 2003


Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue



83,894 Total revenue 88,526 86,446 88,558

Expenses



83,640 Total expenses 88,318 86,446 88,558


77,604 Output 3.1: Public information services 79,163 80,483 79,188

6,036 Output 3.2: Advisory services 9,155 5,963 9,370



DescriptionThis output class involves

• issuing tax assessments and refunds

• banking tax payments

• processing applications and payments under social policies administered by Inland Revenue on behalf

of the Government

• the supply of information to other government agencies

• accounting and reporting the collection of Crown revenue.



57,981 57,691 290

Output 4.1Return processing

DescriptionThis output involves processing all tax returns and issuing assessments, refunds, notices of adjustment and

statements of account.


Quantity

Process between 5.8 and 6.4 million income tax returns, GST returns, 5.8 to 6.4m 6,251,205 Nil

FBT returns, rebate claim forms and employer monthly schedules.

Receive at least 25% of returns electronically. 25% 27.6% 10.4%

The growing number of online services is contributing to the continual increase in the number of electronic returns being

received into the department.

Issue at least 40% of refunds by direct credit. 40% 47.5% 18.7%

The growth in the percentage of refunds by direct credit can be attributed to the volume of taxpayers requesting their tax

refunds by direct credit through the personal tax summary peak season.

Quality

All notices, statements, certificates of entitlement and loan transfer letters Achieved

are correctly processed.

Timeliness

Assess and issue at least 80% of income tax returns within six weeks of 80% 97.6% 21.9%

receipt at a processing centre and the balance within ten weeks. 100% 95.1% 4.9%

Timeliness has been affected because of a project to carry out database maintenance.

Assess and issue no less than 95% of FBT returns, GST returns, and employer 95% 95.1% 0.1%

monthly schedules within three weeks of receipt at a processing centre and 100% 98.7% -1.3%

the balance within six weeks.

This year has seen the six-week timeliness standard continually exceed target. We have seen further improvement as

a result of internet filing.

Issue all non-queried GST refunds within 15 working days of receipt. 100% 97.9% -2.1%

Process and issue 90% of rebate claim refunds within three weeks of receipt 90% 96.8% 7.5%

at a processing centre and the balance within eight weeks. 100% 99.8% -0.2%

The increase in the timeliness standard for rebate claim forms is due to business process improvements implemented this year.

OUTPUT CLASS 4REVENUE ASSESSMENT AND COLLECTION


DescriptionThis output involves processing and banking all tax payments (exclusive of child support and student loan

payments) made to Inland Revenue.


Quantity

Process between 7.0 and 7.7 million cheques, cash and direct credit payments. 7.0 to 7.7m 7,205,075 Nil

Quality

Correctly process all payments to accounts. 100% 99.8% 0.2%

Timeliness

In the peak period (one working week in duration, beginning on 5 April 2003) 100% 100% Nil

bank all payments within two working days of receipt at a processing centre 100% 99.6% 0.4%

and at all other times within one working day.

Output 4.3Supply of information to other agencies

DescriptionThis output involves the supply of information to other government agencies, in accordance with the agreements

between Inland Revenue and those agencies.


Quantity and timeliness

All information and reports provided to outside agencies are accurate and 100% 100.0% Nil

provided in accordance with the agreed timeframes.

Output 4.2Payment processing


Output statement: Revenue assessment and collectionfor the year ended 30 June 2003


Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue


1,362 Sale of outputs to others 1,341 1,617 1,617

58,267 Total revenue 57,981 59,527 58,257

Expenses



58,254 Total expenses 57,691 59,527 58,257


40,449 Output 4.1: Return processing 39,184 42,628 39,760

16,365 Output 4.2: Payment processing 17,179 15,405 17,169

1,440 Output 4.3: Supply of information 1,328 1,494 1,328

to other agencies



DescriptionThis output class involves taking follow-up action against non-compliers who fail to file a return, and those who

do not pay on time.


Revenue Expenses Net surplus/(deficit)

56,496 56,897 (401)

Output 5.1Outstanding returns

DescriptionThis output involves all activities associated with collecting overdue tax returns and includes taking appropriate

follow-up action against non-compliers who fail to file a return.


Quantity

The total number of unfinalised returns as at 30 June 2003 will be 1% less 1% 1.3% 30.0%

than the total number of unfinalised returns at 30 June 2002.

Timeliness

Of all returns not filed by due date, 85% are collected or finalised within 12 months. 85% 81.0% -4.7%

Quality and timeliness

The average age of unfinalised returns at 30 June 2003 will improve by 1% 1% 2.5% 150.0%

over the average age as at 30 June 2002.

Average age of returns reduced by 14 days during the year by targeting old outstanding returns.

Output 5.2Overdue debt

DescriptionThis output involves all activities associated with collecting outstanding debt and includes taking appropriate

follow-up action against non-compliers who fail to pay money when it is due.


Quantity

The total number of open:

• field debt cases

• corporate debt elements

as at 30 June 2003, will increase by no more than 2% over the total 2% -5.0%

number at 30 June 2002.

Number of outstanding debt cases was reduced by 14,528 by clearing debt base mainly in family assistance cases.

OUTPUT CLASS 5MANAGEMENT OF DEBT AND OUTSTANDING RETURNS


Timeliness

Of all tax not paid by the due date, 80% is collected or finalised within 12 months. 80% 86.1% 7.6%

Achieved through a focus on actioning new debt cases.

Quality and timeliness

The average age of total debt cases at 30 June 2003 will improve by 4% over 4% 4.4% 10.0%

the average age as at 30 June 2002.

Average age of debt cases was reduced by 27 days as a result of targeting old debt cases.

By 30 June 2003 the ratio of the total debt asset to net assessments will be 8% 3.8% 52.5%

no more than 8%.

First year standard, no comparison.

All debt and return outputs

All debt cases and return policing profiles are actioned appropriately, in 100% 91.0% -9.0%

accordance to law and Inland Revenue debt and return collection policies.

Errors mainly found in procedural areas; these are being addressed.

Output statement: Management of debt and outstanding returnsfor the year ended 30 June 2003


Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue



47,062 Total revenue 56,496 53,475 57,315

Expenses



47,316 Total expenses 56,897 53,475 57,315

(254) Net surplus/(deficit) (401) 0 0

18,077 Output 5.1: Outstanding returns 16,997 21,172 17,297

29,239 Output 5.2: Overdue debt 39,900 32,303 40,018



DescriptionThis output class involves auditing all classes of taxpayers with emphasis on high-risk non-compliers and the

management of tax litigation.



92,433 91,282 1,151

Output 6.1Audit

DescriptionThis output involves the detection of non-compliance and deterrence of future non-compliance among

businesses with a turnover of up to $100 million (excluding groups in the Corporate Segment). It includes audits

of duties, non-resident and salary and wage earners and investment earners.


Quantity

Between 823,000 and 843,000 hours will be dedicated to conducting audits, 823,000 875,926 3.9%

extended audits and investigation. to 843,000

Quality

At least $550 per hour will be identified and assessed for all audits, extended $550 $589 7.1%

audits, investigations, aggressive tax issues and tax evasion cases completed.

Two large cases raised the rate of return from $534 to $695.

Timeliness

On average, complete 95% of all audits1 within 3 months. 95% 100.0% 5.3%

On average, complete 95% of all extended audits2 within 6 months. 95% 100.0% 5.3%

On average, complete 95% of all investigations3 within 12 months. 95% 100.0% 5.3%

On average, complete 90% of all disputed cases within 30 months. 90% 100.0% 11.1%

No more than 15% of all open cases are more than 24 months old. 15% 9.4% 37.3%

This result reflects the continued focus on monitoring the progress of open cases to ensure that they are completed

as quickly as possible.

No more than 12.5% of all open disputed cases are more than 24 months old. 12.5% 11.8% 5.6%

This result reflects increased focus on reducing the number of disputed cases on hand as quickly as possible.

OUTPUT CLASS 6TAXPAYER AUDIT

1. Audit: short-term usually involving one tax type in one tax period; usually taking less than 20 hours2. Extended audit: usually involving more than one tax type over multiple tax periods; usually taking between 20 and 50 hours3. Investigation: in-depth audit activities.


DescriptionThis output involves the detection of non-compliance and deterrence of future non-compliance, and provides

services to businesses with a group turnover of greater than $100 million, plus specific industries.


Quantity and quality

Between 191,000 and 201,000 hours will be dedicated to conducting 191,000 202,502 0.7%

investigations, audits, checks and risk assessment. to 201,000

Timeliness

On average, complete 95% of all investigations within 18 months. 95% 100% 5.3%

No more than 15% of all open cases are more than 36 months old. 15% 5.8% 61.3%

Achieved through improved focusing on these cases.

On average, complete 90% of all disputed cases within 30 months. 90% 100.0% 11.1%

No more than 15% of all open disputed cases are more than 30 months old. 15% 19.1% -27.3%

This standard covers 10 cases. The emphasis on resolving the cases falling outside this standard is continuing.

All audit outputs

Quality

At least 85% of all cases meet the standards of the internal assurance processes. 85% 87.9% 3.4%

Output 6.3Litigation Management

DescriptionThis output involves the management of litigation of disputed tax cases, including the requirement to state the

case through to resolution by the courts.


Quantity

Manage the following number of tax cases:

• High Court 160 160 266 66.3%

• Taxation Review Authority 145 145 225 55.2%

A large number of virtually identical cases for investors in (alleged) tax avoidance schemes are on hand this year.

Although this has resulted in the numbers on hand being greater, workload is not greatly more than anticipated.

Take the following number of tax cases to hearing at the:

• Court of Appeal 10 10 13 30.0%

• High Court 20 20 8 -60.0%

• Taxation Review Authority 40 40 16 -60.0%

In addition to these results, three cases were taken to the Privy Council. There are relatively few cases for hearing each year

and court timetables and the possibility of settlement make precise prediction impossible, so large variations often occur.

Output 6.2Corporate audit



Quality

At least 66% of disputed tax in the tax cases decided during 2002-03 is 66% 76.3% 15.6%

resolved in favour of the department.

This favourable result reflects a largely successful year of court hearings.

At least 66% of disputed tax in the tax cases resolved other than by court 66% 52.4% -20.7%

decision (such as concession or settlement) during 2002-03 is resolved in

favour of the department.

With one exception, settlements reached by the department were on a very favourable basis indeed. However, the impact of

one settlement reduced the figures below target.

At least 66% of disputed tax in all tax cases resolved by any means (that is, 66% 52.8% -20.1%

court decision, concession or settlement) during 2002-03 is resolved in favour

of the department.

This result reflects the above trends.

For those tax cases decided or resolved other than by court decision during $20.00 $21.10 5.5%

2002-03, $20 in disputed tax will be resolved in favour of the department for

every dollar spent on managing these cases.

Timeliness

No tax cases will be lost due to failure to comply with statutory timeframes. 100% 100.0% Nil

All timetable requirements imposed by the courts on the department’s solicitors 100% 100.0% Nil

in tax cases will be met.

Output statement: Taxpayer auditfor the year ended 30 June 2003


Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue



90,317 Total revenue 92,433 96,648 92,398

Expenses



89,251 Total expenses 91,282 96,648 92,398

1,066 Net surplus (deficit) 1,151 0 0

67,731 Output 6.1: Audit 65,003 73,088 65,925

16,481 Output 6.2: Corporate audit 20,398 18,018 20,661

5,039 Output 6.3: Litigation Management 5,881 5,542 5,812




• informing people of their rights and obligations under the child support law

• assessing child support liabilities

• banking payments of child support

• disbursement of child support payments to custodians

• taking action against those who do not comply with the child support law

• providing an administrative process for reviewing child support assessments that is inexpensive and readily

accessible to child support custodians and paying parents.



50,711 50,440 271

Output 7.1Customer information services

DescriptionThis output involves responding to customer enquiries and providing advice and information on

child support matters.


Quantity

Action between 910,000 and 960,000 specific customer contacts. 910,000 964,220 0.4%

to 960,000

Quality

Improve the overall technical quality of work by 5% from that attained in 64.2% 76.1% 18.5%

the 30 June 2002 year.

This is a 15% improvement on last year’s result. This improvement has been achieved through enhanced quality

assurance measures.

70% of all phone calls will be answered within 30 seconds, except on days 70% 74.4% 6.2%

when the total number of calls exceed 3,500.

This result is an 18% increase on last year’s result. This improvement has been achieved through improved call

management processes.

For the days when total calls exceed 3,500:

• the average speed to answer will be less than 3 minutes, and

• callers will be advised of the potential delay <180 secs 95 secs 47.2%

These processes were put in place to allow greater flexibility in allocating resources to provide appropriate levels

of customer service.

Issue a substantive response for:

• 85% of correspondence within 2 weeks 85% 84.0% -1.2%

• 100% within 6 weeks of receipt by Inland Revenue 100% 98.0% -2.0%

OUTPUT CLASS 7ASSESSMENT AND COLLECTION OF CHILD SUPPORT


DescriptionThis output involves the registration and assessment of new child support customers together with issuing annual

assessments and reassessments to paying parents.


Quantity

Process between 45,000 and 50,000 applications for child support. 45,000 to 58,913 17.8%

50,000

The increase is due to procedural changes made by the Child Youth and Family Service (no longer applying for more than one

child per application), work to capture more potential custodians of children and extension of our community work.

Quality

All assessments issued are correct on the basis of the information provided. 100% 97.9% -2.1%

This is a 1.3% increase on last year’s result.

Timeliness

We will issue 95% of assessments within six weeks and 99% of assessments 95% 93.7% -1.4%

within eight weeks of receipt of the properly made application. 99% 95.5% -3.5%

Although volumes have increased, similar timeliness standards to last year have been achieved.

Output 7.3Collection of payments

DescriptionThis output involves collecting and banking child support payments from paying parents.



Collect 80% of child support assessments for the year ended 31 March 2003 80% 74% -7.5%

by 30 June 2003.

This is a 2.8% decrease on last year’s result. The increase in the minimum and maximum assessment legislation (implemented

in the 2002 year) has impacted on voluntary compliance levels. Measures are planned for 2003-04 to expand our community-

based work to improve compliance, enhance debt monitoring and prepare policy changes on penalties.

70% of assessed paying persons pay their whole liability by the due date 70% 61.8% -11.7%

This represents a 3.7% decrease on last year’s published result, but as the standard has been measured slightly differently this

year, the equivalent figure for last year is 63.2%. Performance has been consistent throughout the year. Measures have been

put in place to improve performance in this area in the new year.

Output 7.2Registration and assessment


DescriptionThis output involves the disbursement of child support payments to custodians.



Disburse 95% of identified payments received by the due date (20th of the 95% 97.2% 2.3%

month) to custodians on or before the 7th day of the following month. Disburse 100% 98.5% -1.5%

the balance (5%), and any previous payments received prior to the 7th day of

the following month, by the 20th of that month.

Output 7.5Management of debt

DescriptionThis output involves all activities associated with the recovery of overdue child support payments. It includes

taking appropriate action against non-compliers within the child support law.


Quantity, quality and timeliness

Collect 90% of total back year assessments calculated up to 31 March 2002 90% 89% -1.1%

by 30 June 2003.

The rate of growth of total debt (excluding penalties) from 1 July 2002 until 10% 18.0% -80.0%

30 June 2003 will be no more than 10%.

This result is directly related to the decrease in the percentage of child support collected when it was due. The result compares

to growth of 14.5% in 2001-02. Slowing debt growth is the primary area for focus. Additional resources in 2003-04 and

initiatives to improve compliance and working more closely with the community for debt, will restrict debt growth.

60% of cases will be cleared within three months from the end of the month 60% 59.4% -1.0%

that they are identified as a new arrears case.

This was a new standard in 2002-03.

Reduce by 2% the number of paying persons in debt at 30 June 2002 2.0% -6.9%

by 30 June 2003.

The increase in the minimum and maximum assessment levels contained in the legislation (implemented in the 2002 year)

has impacted on voluntary compliance levels.

Output 7.4Disbursement to custodians


Output 7.6Child support administrative reviews

DescriptionThis output class involves providing an administrative process for reviewing child support assessments that is

inexpensive and readily accessible to child support custodians and paying parents.


Quantity

Complete between 4,000 and 4,500 applications for administrative review of 4,000 to 4,637 3.0%

child support assessments. 4,500

Administrative reviews continue to be at higher than expected levels due to recent assessment level changes.

However, numbers for this year, although above forecast, were not as high as last year (5,010).

Timeliness

We will issue 90% of administrative review decisions within 7 weeks and 100% 90% 91% 1.1%

of decisions within 10 weeks of receipt of the application, except during the 100% 99% -1.0%

peak period (April – June) when we will issue 100% of decisions within 12 weeks. 100% 99.8% -0.2%

Output statement: Assessment and collection of child supportfor the year ended 30 June 2003


Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue



47,280 Total revenue 50,711 49,582 50,870

Expenses



47,077 Total expenses 50,440 49,582 50,870


4,107 Output 7.1: Customer information services 4,560 4,260 4,522

12,071 Output 7.2: Registration and assessment 12,830 12,948 12,866

10,612 Output 7.3: Collection of payments 10,885 11,176 10,915

2,165 Output 7.4: Disbursement to custodians 2,277 2,289 2,271

15,745 Output 7.5: Management of debt 17,335 16,495 17,848

2,377 Output 7.6: Child support administrative reviews 2,553 2,414 2,448



DescriptionThis output class involves the following:

• collection by Inland Revenue as agent for ACC of employee earners’ levy as a component of PAYE deductions

(for collection purposes, earners’ levy includes both an earners’ levy and an earners’ account residual claims

levy component)

• supply of core tax information to ACC in terms of section 246 of the Injury Prevention, Rehabilitation, and

Compensation Act 2001 for the purposes of ACC invoicing employers and earners for accident cover and

residual claims levies

• residual work by Inland Revenue for ACC premiums and levies for the years up to and including the income

year ended 31 March 2001, including policing of late filers and late payers, audits and investigations and other

associated actions.


Revenue Expenses Net surplus (deficit)

24,031 24,031 Nil

Output 8.1Collection of employee earners’ levy

DescriptionThis output covers the operational procedures supporting the collection of employee earners’ levy as

a component of PAYE deductions.


Quantity

Action between 4,000 and 12,000 employee earners’ levy contacts. 4,000 4,858 Nil

to 12,000

Timeliness

Pay to ACC, within the agreed timeframes, the determined amount of earners’ Achieved

levy collected as a component of PAYE.

OUTPUT CLASS 8COLLECTION OF ACC PREMIUMS

92 Inland Revenue – Annual Report 2002-03

Output 8.2Supply to ACC of core tax information and residual work by Inland Revenue

DescriptionThis output covers:

• the supply of core tax information to ACC in terms of section 246 of the Injury Prevention, Rehabilitation,

and Compensation Act 2001 for the purposes of ACC invoicing employers and earners for accident cover

and residual claims levies, and

• the residual work by Inland Revenue for ACC premiums and levies for the years up to and including the

income year ended 31 March 2001, including policing of late filers and payers, audits, investigations and other

associated actions.

The processes governing this supply are covered in a service level agreement between the parties.

Actual

Quantity Achieved

Quality Achieved

Timeliness Achieved

Output statement: Collection of ACC premiumsfor the year ended 30 June 2003

Actual Notes Actual Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue

0 Sale of outputs to the Crown 0 0 0


27,901 Total revenue 24,031 22,530 24,375

Expenses

0 Annual appropriations 0 0 0

27,757 Other appropriations 24,031 22,530 24,375

27,757 Total expenses 24,031 22,530 24,375


14,385 Output 8.1: Collection of employee earners’ levy 14,386 14,572 14,592

13,372 Output 8.2: Supply to ACC of core tax 9,645 7,958 9,783

information and residual work by Inland Revenue.



Statement of accounting policies

Statements

Notes

Part 4Departmental financial statements

93


Reporting entityInland Revenue is a government department as defined by section 2 of the Public Finance Act 1989.

These are the financial statements of Inland Revenue prepared pursuant to section 35 of the

Public Finance Act 1989.

In addition, Inland Revenue has reported the trust monies which it administers.

Measurement systemThese financial statements have been prepared on the basis of historical cost unless otherwise stated.

Accounting policiesThe following particular accounting policies, which materially affect the measurement of financial results

and financial position, have been applied.

Budget figures

The budget figures are those presented in the Main Estimates and those amended by the Supplementary

Estimates.

Revenue

Inland Revenue derives revenue through the provision of outputs to the Crown, other government departments,

and for services to third parties. Such revenue is recognised when earned and is reported in the financial period

to which it relates.

Cost allocations

Inland Revenue uses an integrated cost allocation process to derive the cost of its outputs. This process involves

the initial costing of business processes followed by the full costing of outputs.

Business processes represent the key functional activities within the department. These business processes

are used to capture direct costs.

Direct personnel costs are charged to business processes based on actual hours and standard activity rates.

Other related direct costs, including depreciation, are allocated to business processes based on actual hours and

relevant activity drivers. Premises costs are charged to business processes based on a combined floor space

and actual hours allocation.

Business process costs are allocated to outputs based on specific historical activity drivers for each business process.

Indirect information technology costs are assigned to specific service categories and allocated to outputs based

on system usage drivers.

Other indirect costs and corporate overheads that cannot be directly attributed to a business process are

apportioned to outputs based on planned business process activity allocations to outputs.

Debtors and receivables

Receivables are recorded at estimated realisable value, after providing for doubtful and uncollectable debts.

Operating leases

Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased

items are classified as operating leases. Inland Revenue leases office premises, computer hardware and

office equipment.

Property, plant and equipment

The cost of a fixed asset is the value of consideration given to acquire or create the asset and any directly

attributable costs of bringing the asset to working condition for its intended use. The capitalisation policy is:

Software development $50,000 and over

Software purchases $5,000 and over

Set-up of new site or activity $50,000 and over

Other assets $2,000 and over

STATEMENT OF ACCOUNTING POLICIES for the year ended 30 June 2003


Any write-down of an item to its recoverable amount is recognised in the Statement of Financial Performance.

Assets under construction represent the costs of assets under development. The cost comprises direct labour,

material purchased and overheads, if appropriate. There are currently two categories:

• leasehold improvements

• software/IT equipment.

When assets under construction are completed and become operational they are recognised as fixed assets

and depreciated over their useful lives.

Depreciation

Depreciation is provided on a straight-line basis on all fixed assets, other than assets under construction.

The rates of depreciation will write off the cost of the assets to the estimated residual value over the useful

life of the assets.

The useful lives of major classes of assets have been estimated as follows:

Motor vehicles 5 years

IT equipment 3 – 5 years

Office equipment 5 years

Furniture 7 years

Leasehold improvements 5 – 7 years

Software 5 – 7 years

The cost of leasehold improvements is capitalised and depreciated over the unexpired period of the lease, or the

estimated remaining useful lives of the improvements, whichever is shorter.

Assets under construction are not depreciated. The total cost of a capital project is transferred to the appropriate

asset class on its completion and then depreciated.

Employee entitlements

Provision is made in respect of Inland Revenue’s liability for annual, long service and retirement leave and time off

in lieu. Annual leave, time off in lieu and other entitlements that are expected to be settled within 12 months of

reporting date are measured at nominal values on an actual entitlement basis at current rates of pay.

Entitlements that are payable beyond 12 months, such as long service leave and retiring leave, have been

calculated on an actuarial basis based on the present value of expected future entitlements.

Cash flows

Cash means cash balances on hand, and held in bank accounts.

Operating activities include cash received from all income sources of Inland Revenue, and record the cash

payments made for the supply of goods and services.

Investing activities are those activities relating to the acquisition and disposal of non-current assets.

Financing activities comprise capital injections by, or repayment of capital to, the Crown.

Financial instruments

Inland Revenue is party to financial instruments as part of its normal operations. These financial instruments

include bank accounts, debtors and creditors. All financial instruments are recognised in the Statement of

Financial Position and all revenues and expenses in relation to financial instruments are recognised in the

Statement of Financial Performance. All financial instruments are shown at their estimated fair values.

Goods and services tax (GST)

The Statement of Unappropriated Departmental Expenditure and the Statement of Departmental Expenditure and

Appropriations are inclusive of GST. The Statement of Financial Position is exclusive of GST except for creditors

and payables, and debtors and receivables, which are GST-inclusive. All other financial statements and notes are

GST-exclusive.

The amount of GST owing to or from Inland Revenue at balance date, being the difference between output GST

and input GST, is included in creditors and payables or debtors and receivables (as appropriate).


Taxation

Government departments are exempt from the payment of income tax in terms of the Income Tax Act 1994.

Accordingly, no charge for income tax has been provided for.

Commitments

Future expenses and liabilities to be incurred on contracts that have been entered into at balance date are

disclosed as commitments to the extent that they are equally unperformed obligations.

Contingent assets and liabilities

Departmental contingent assets and liabilities are recognised in the Statement of Contingent Assets and the

Statement of Contingent Liabilities at the point at which the contingency is evident.

Taxpayers’ funds

This is the Crown’s net investment in Inland Revenue.

Comparatives

Certain comparative information has been reclassified in order to conform with the current year’s presentation.

Changes in accounting policiesThere have been no changes in accounting policies and cost allocation policies since the date of the last audited

financial statements.

All policies have been applied on a basis consistent with the previous year.



Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue

336,872 Crown 355,604 355,123 355,604

32,849 Other 1 28,616 28,370 30,215

369,721 Total operating revenue 384,220 383,493 385,819

Expenditure

206,154 Personnel expenses 2 221,875 220,012 225,791

119,344 Operating expenses 3 119,989 121,952 120,677

33,711 Depreciation 4 31,338 33,878 31,700

8,371 Capital charge 5 7,651 7,651 7,651

167 Loss on sale of fixed assets 1,509 0 0

367,747 Total operating expenses 382,362 383,493 385,819

1,974 Net surplus 1,858 0 0

The accompanying accounting policies and notes form part of these financial statements.

STATEMENT OF FINANCIAL PERFORMANCEfor the year ended 30 June 2003



Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

1,974 Surplus for year 1,858 0 0

1,974 Total recognised revenues and 1,858 0 0

expenses for year

93,008 Equity at start of year 90,008 90,008 90,008

(3,000) Repayment of capital to the Crown 0 0 0

(1,974) Provision for repayment of surplus to the Crown (1,858) 0 0

90,008 Equity at end of year 90,008 90,008 90,008


STATEMENT OF MOVEMENTS IN EQUITYfor the year ended 30 June 2003



Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Taxpayers’ funds

90,008 Taxpayers’ funds 90,008 90,008 90,008

90,008 Total taxpayers’ funds 90,008 90,008 90,008

Represented by:

Current assets

17,877 Cash 11,339 12,142 9,097

7,028 Prepayments 6,867 7,600 8,100

32,166 Debtor Crown 46,166 22,306 46,166

9,226 Debtors and receivables 6 2,706 5,114 3,050

66,297 Total current assets 67,078 47,162 66,413

Non-current assets

93,754 Fixed assets 7 85,074 94,000 87,137

93,754 Total non-current assets 85,074 94,000 87,137

160,051 Total assets 152,152 141,162 153,550

Current liabilities

29,822 Creditors and payables 8 23,111 19,272 27,822

1,974 Provision for repayment of 1,858 0 0

surplus to the Crown

10,472 Provision for employee entitlements 9 11,960 10,899 11,050

2,540 Provision for restructuring expenses 10 3,109 2,051 1,974

44,808 Total current liabilities 40,038 32,222 40,846

Non-current liabilities

19,195 Provision for employee entitlements 9 17,645 14,942 18,390

6,040 Provision for restructuring expenses 10 4,461 3,990 4,306

25,235 Total non-current liabilities 22,106 18,932 22,696

70,043 Total liabilities 62,144 51,154 63,542

90,008 Net assets 90,008 90,008 90,008


STATEMENT OF FINANCIAL POSITIONas at 30 June 2003



Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Cash flows – operating activities

Cash provided from:

Supply of outputs to

315,872 – Crown 341,604 359,423 341,604

1,454 – departments 1,383 1,485 1,485

29,012 – other 31,908 26,885 28,730

0 Interest 0 0 0

346,338 374,895 387,793 371,819

Cash was applied to:

Cost of producing outputs

207,950 – personnel 219,611 212,608 207,389

107,153 – operating 127,475 133,608 138,499

(568) – net GST paid 552 0 0

8,371 – capital charge 7,651 7,651 7,651

322,906 355,289 353,867 353,539

23,432 Net cash inflow from 11 19,606 33,926 18,280

operating activities

Cash flows – investing activities

Cash provided from:

196 Sale of fixed assets 157 1,295 1,295

196 157 1,295 1,295

Cash disbursed for :

30,285 Purchase of fixed assets 24,327 32,878 26,381

30,285 24,327 32,878 26,381

(30,089) Net cash (outflow) from (24,170) (31,583) (25,086)

investing activities

Cash flows – financing activities

Cash disbursed to:

3,156 Repayment of surplus 1,974 3,000 1,974

3,000 Capital repayment 0 0 0

6,156 1,974 3,000 1,974

(6,156) Net cash (outflow) from (1,974) (3,000) (1,974)

financing activities

(12,813) Net inc/(dec) cash held (6,538) (657) (8,780)

30,690 Opening cash 17,877 12,799 17,877

17,877 Closing cash 11,339 12,142 9,097


STATEMENT OF CASH FLOWSfor the year ended 30 June 2003


Actual Actual

2002 2003

$000 $000

Capital commitments

Equipment

640 Less than one year 383

640 Total capital commitments 383

Operating commitments

Non-cancellable accommodation leases

22,194 Less than one year 22,235

21,064 One to two years 19,684

37,989 Two to five years 26,865

10,935 Over five years 5,213

92,182 Total accommodation commitments 73,997

Other non-cancellable leases



37,103 Two to five years 12,089

0 Over five years 0

91,175 Total other lease commitments 63,836

Non-cancellable contracts for the supply of goods and services



324 Two to five years 1,875

0 Over five years 0

12,700 Total supply commitments 15,651

196,057 Total operating commitments 153,484

196,697 Total commitments 153,867

Operating leases include lease payments for premises, computer and IT equipment, telephone exchange

systems, and office equipment.

Inland Revenue has long-term leases on its premises at many locations throughout New Zealand. The annual

lease payments are subject to regular reviews and the amounts disclosed as future commitments are based on

the current rental rates.

Commitments for non-cancellable accommodation leases include commitments for the surplus space as a result

of organisation restructuring. Provision has been made in the financial statements for the expected net expenses

for the duration of the lease in respect of this surplus space.

Inland Revenue has entered into non-cancellable contracts for computer maintenance and other contracts for

goods and services.


STATEMENT OF COMMITMENTSas at 30 June 2003


Actual Actual

2002 2003

$000 $000

0 Legal proceedings and disputes 60

0 Total contingent assets 60

The above relates to disputed income. The expected value of the contingent asset is based on the actual figure

that is in dispute.

STATEMENT OF CONTINGENT LIABILITIES as at 30 June 2003

Actual Actual

2002 2003

$000 $000

40 Personal grievances 197

4,915 Legal proceedings and disputes 1,201

4,955 Total contingent liabilities 1,398

The department is involved in a large number of legal proceedings and disputes. The majority of these court

cases relate to tax prosecutions, debt collection cases and insolvency matters. The expected value of the

contingent liability is calculated using an outcome probability model that weighs the total potential liability against

outcome probabilities. Independent confirmation on the liability has been ascertained for most significant cases,

but not for the larger number of smaller cases where the cost of confirmation outweighs the benefit.

STATEMENT OF UNAPPROPRIATED DEPARTMENTAL EXPENDITURE for the year ended 30 June 2003

Inland Revenue incurred no unappropriated expenditure to 30 June 2003 (2002, nil).


STATEMENT OF CONTINGENT ASSETS as at 30 June 2003


Account As at 1 July Contribution Distribution As at

2002 30 June 2003

$000 $000 $000 $000

Child support 3,195 110,956 (109,543) 4,608

Child support – reciprocal agreements 34 1,965 (1,961) 38

Total 3,229 112,921 (111,504) 4,646

This trust account was established in accordance with sections 67, 68 and 139 of the Child Support Act 1991.

Inland Revenue administers this trust account for amounts collected from non-custodial parents and the

subsequent child support payments that are paid to the custodial parents.

STATEMENT OF DEPARTMENTAL EXPENDITURE AND APPROPRIATIONSfor the year ended 30 June 2003 (figures are GST-inclusive where applicable)

Supp.

Actual Actual Estimates

2002 2003 2003

$000 $000 $000

Vote: Revenue

Appropriations for classes of outputs

9,347 D1 Policy Advice 8,423 8,552

6,980 D2 Adjudication and Rulings 7,035 7,250

81,313 D3 Information Services 99,384 99,628

58,848 D4 Revenue Assessment and Collection 64,939 65,539

51,517 D5 Management of Debt and Outstanding Returns 63,959 64,480

100,541 D6 Taxpayer Audit 102,836 103,948

52,987 D7 Assessment and Collection of Child Support 56,779 57,229

9,946 D8 Administration of Income Maintenance* 0 0

9,632 D9 Student Loan Scheme* 0 0

1,606 D10 Supply of Information to Other Agencies* 0 0

31,245 D11 Collection of Accident Compensation 27,035 27,422

Corporation Premiums

413,962 Total 430,390 434,048

*From 2002-03 these output classes have been amalgamated within existing output classes.Comparative figures for 2002 have not been adjusted in the output tables.


STATEMENT OF TRUST MONIESfor the year ended 30 June 2003


Note 1: Other revenue

Actual Actual

2002 2003

$000 $000

27,901 Agency fee (Accident Compensation Corporation) 24,031

1,328 Supply of information to other agencies 1,341

976 Rulings 922

1,949 Court cost recovery 1,933

651 Rental recovery 375

44 Other 14

32,849 Total other revenue 28,616

Note 2: Personnel expenses

Actual Actual

2002 2003

$000 $000

185,443 Salaries and wages 202,645

8,429 Contractors and temporary staff 8,859

5,009 Other 5,036

2,473 Superannuation 2,705

2,297 Retiring and long service leave 154

1,388 Bonuses 1,249

1,115 ACC levies 1,227

206,154 Total personnel expenses 221,875

NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2003


Note 3: Operating expenses

Actual Actual

2002 2003

$000 $000

38,270 Information technology costs 37,064

19,718 Operating lease rentals 20,073

15,898 Communication 15,248

10,790 Office supplies 11,310

6,441 Services 6,867

6,282 Legal expenses 7,292

5,386 Premises costs 5,319

5,122 Travel and transport 5,430

4,131 Training and employee related 5,117

2,296 Increase in provision for restructuring rental 108

1,688 Advertising and publicity 1,934

1,242 Consultants 2,097

1,020 Audit fees for audit of the financial statements 850

748 Equipment maintenance 1,045

123 Increase in provision for doubtful debts 48

5 Bad debts written off 15

184 Other operating expenses 172

119,344 Total operating expenses 119,989

Note 4: Depreciation

Actual Actual

2002 2003

$000 $000

375 Motor vehicles 355

8,289 IT equipment 7,239

1,737 Office equipment 2,018

1,074 Furniture 794

4,788 Leasehold improvements 4,760

17,448 Software 16,172

33,711 Total depreciation charge 31,338

Note 5: Capital charge

The department pays a capital charge to the Crown on taxpayers’ funds as at 30 June and 31 December each

year. The capital charge rate for the year ended 30 June 2003 was 8.5% (2002, 9%).


Note 6: Debtors and receivables

Actual Actual

2002 2003

$000 $000

9,380 Other receivables 2,909

(154) Less provision for doubtful debts (203)

9,226 Total debtors and receivables 2,706

Note 7: Property, plant and equipment

2002 2003

At cost Accum. Net book At cost Accum. Net book

depn value depn value

$000 $000 $000 $000 $000 $000

Motor vehicles 4,431 2,131 2,300 4,878 2,388 2,490

IT equipment 46,372 35,266 11,106 52,550 36,941 15,609

Office equipment 18,375 12,642 5,733 18,337 13,325 5,012

Furniture 11,366 9,659 1,707 7,470 6,493 977

Leasehold improvements 56,141 39,061 17,080 48,518 34,182 14,336

Software 262,192 220,487 41,705 251,048 210,741 40,307

Assets under construction 2,334 0 2,334 1,409 0 1,409

(leasehold improvements)

Assets under construction 11,789 0 11,789 4,934 0 4,934

(software/IT equipment)

Total 413,000 319,246 93,754 389,144 304,070 85,074

Note 8: Creditors and payables

Actual Actual

2002 2003

$000 $000

6,242 Accounts payable 4,096

6,089 Accrued expenses – employees 5,025

14,573 Accrued expenses – other 11,624

2,918 GST payable 2,366

29,822 Total creditors and payables 23,111


Note 9: Provision for employee entitlements

Actual Actual

2002 2003

$000 $000

a) Movements in provision

27,871 Opening balance 29,667

15,811 Additional provisions made during the year 15,702

(13,817) Charged against provision for the year (15,715)

(198) Unused amounts reversed during the year (49)

29,667 Closing balance 29,605

b) Employee entitlement provision

Current liabilities

9,488 Annual leave provision 9,878

184 Time off in lieu 164

500 Long service leave provision 779

300 Retiring leave 473

0 Other 666

10,472 Total current portion 11,960


4,794 Long service leave 3,706

14,401 Retiring leave 13,939

19,195 Total non-current portion 17,645

29,667 Total employee entitlements 29,605

Note 10: Provision for restructuring expenses

Actual Actual

2002 2003

$000 $000

a) Movements in provision

8,361 Opening balance 8,580

2,296 Additional provisions made during the year 1,258

(2,077) Charged against provision for the year (2,268)

8,580 Closing balance 7,570

b) Restructuring provision

Current liabilities

2,540 Net expenses on surplus space leased under non-cancellable operating leases 1,959

0 Severance of employees 1,150

2,540 Total current portion 3,109


6,040 Net expenses on surplus space leased under non-cancellable operating leases 4,461

6,040 Total non-current portion 4,461

8,580 Total provision for restructuring expenses 7,570


Note 11: Reconciliation of net surplus to net cash flow from operating activities


Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

1,974 Net surplus 1,858 0 0

Add non-cash items

33,711 Depreciation 31,338 33,878 31,700

1,729 Inc/(dec) in non-current employee entitlements (1,550) (1,300) (805)

(94) Inc/(dec) in non-current restructuring expenses (1,579) (2,050) (1,734)

35,346 Total non-cash items 28,209 30,528 29,161

Add/(less) working capital movements

(2,384) (Inc)/dec in debtors and receivables 6,520 841 6,176

350 (Inc)/dec in prepayments 161 (300) (1,072)

(21,000) (Inc)/dec in debtor Crown (14,000) 4,300 (14,000)

8,599 Inc/(dec) in creditors and payables (6,708) (1,102) (1,997)

67 Inc/(dec) in current employee entitlements 1,488 100 578

313 Inc/(dec) in current restructuring expenses 569 (441) (566)

(14,055) Working capital movements – net (11,970) 3,398 (10,881)

Add/(less) investing activity items

167 Net loss on sale of fixed assets 1,509 0 0

167 Total investing activity items 1,509 0 0

23,432 Net cash flow from operating activities 19,606 33,926 18,280


Note 12: Financial instruments

Inland Revenue is party to financial instrument arrangements as part of its everyday operations. These include

instruments such as bank balances and accounts receivable.

Credit risk

Credit risk is the risk that a third party will default on its obligations to Inland Revenue, causing the department

to incur a loss. In the normal course of its business, Inland Revenue incurs credit risk from trade debtors.

Inland Revenue does not require any collateral or security to support financial instruments with financial

institutions that Inland Revenue deals with, or with the New Zealand Debt Management Office (NZDMO), as these

entities have high credit ratings. For its other financial instruments, Inland Revenue does not have significant

concentrations of credit risk.


Fair value

The fair value of all financial instruments is equivalent to the carrying amount disclosed in the Statement

of Financial Position.

Currency risk and interest rate risk

Inland Revenue has no significant exposure to currency or interest rate risk on its financial instruments.

Under section 46 of the Public Finance Act 1989 Inland Revenue cannot raise a loan without ministerial approval

and no such loans have been raised. Accordingly, there is no interest rate exposure for funds borrowed.

Note 13: Related party information

Inland Revenue is a wholly owned entity of the Crown. The Government significantly influences the roles of Inland

Revenue as well as being its major source of revenue.

Inland Revenue enters into numerous transactions with other government departments, Crown agencies and

state-owned enterprises on an arm’s length basis. Where those parties are acting in the course of their normal

dealings with Inland Revenue, related party disclosures have not been made for transactions of this nature.

Apart from those transactions described above, Inland Revenue has not entered into any related party

transactions.

Note 14: Major budget variations

Statement of Financial Performance

There were no major budget variations between the Estimates and the Supplementary Estimates budget figures

in the Statement of Financial Performance.

Statement of Financial Position

The cash surplus from the previous financial year combined with this year’s reduced capital expenditure has

resulted in significantly less cash drawdowns from the NZDMO, therefore increasing debtor Crown. Decreased

liabilities were primarily as a result of a decrease in creditors and payables.


Unit Actual Actual Actual

2003 2002 2001

Operating results

Revenue: Third parties $000 28,616 32,849 33,146

Output expenses $000 382,362 367,747 361,875

Operating surplus before capital charge $000 9,509 10,345 12,669

Net surplus/(deficit) $000 1,858 1,974 3,156

Working capital

Liquid ratio 0.49 0.60 1.44

Current ratio 1.68 1.48 1.51

Average payment period of trade creditors Days 29.27 19.08 18.95

Resource utilisation

Physical assets:

Physical assets as % of total assets % 56% 59% 64%

Additions as % of physical assets % 29% 32% 23%

Taxpayers’ funds

Level at year end $000 90,008 90,008 93,008

Taxpayers’ funds as % of total assets % 59% 56% 61%

Forecast net cash flows

Surplus/(deficit) from operating activities $000 19,606 23,432 37,921

Surplus/(deficit) from investing activities $000 (24,170) (30,089) (22,352)

Surplus/(deficit) from financing activities $000 (1,974) (6,156) (9,771)

Net increase/(decrease) in cash held $000 (6,538) (12,813) 5,798

SUMMARY OF DEPARTMENTAL FINANCIAL RESULTSfor the year ended 30 June 2003


Statement of accounting policies

Schedules

Notes

Part 5Financial schedules for administered accounts

111


Reporting entityInland Revenue administers activities on an agency basis on the Crown’s behalf. These activities comprise

elements of income, expenditure, assets, liabilities and cash flows, which form part of the consolidated financial

statements of the Government of New Zealand.

The financial information has been prepared by Inland Revenue and represents extract information of the Crown

activities which are administered by Inland Revenue.

Measurement systemThese schedules have been prepared on the basis of modified historical cost unless otherwise stated.

The accrual basis of accounting has been used unless otherwise stated.

Accounting policies The following accounting policies, which materially affect the measurement of financial results and financial

position, have been applied.

Budget figures

The 2003 actuals are reported against Inland Revenue’s independent forecast, prepared as part of the

preparation of the 2003 Main and Supplementary Estimates.

Revenue

The Crown provides many services and benefits that do not give rise to revenue. Further, payment of tax does

not, of itself, entitle a taxpayer to an equivalent value of services or benefits, as there is no direct relationship

between paying tax and receiving Crown services and transfers. Where possible, revenue is recognised at the

time the debt to the Crown arises.

Revenue type Revenue recognition point

Source deductions (PAYE) When an individual earns income that is subject to PAYE

Resident withholding tax1 When an individual is paid interest or dividends subject to deduction at source

Fringe benefit tax (FBT) When benefits are provided that give rise to FBT

Provisional tax2 Payment due date

Terminal tax2 Assessment filed date

Goods and services tax (GST) When the liability to the Crown is incurred

Stamp, cheque and credit card duties When the liability to the Crown is incurred

Other indirect taxes When the debt to the Crown arises

1. Corresponds to withholding taxes on residents’ interest and dividend

2. Provisional and terminal taxes are paid by “other persons” and companies

Investment income

Investment income is recognised in the period in which it is earned.

Receivables and advances

Receivables and advances are recorded at the amounts expected to be ultimately collected in cash.

Liabilities

All liabilities are recorded at the estimated obligation to pay.

Contingent liabilities

Contingent liabilities are recorded in the Statement of Contingent Liabilities at the point at which the contingency

is evident.

Changes in accounting policiesThere have been no significant changes in the Crown accounting policies applicable to the preparation of financial

statements of Crown activities administered by Inland Revenue for Crown consolidation, from those used in the

previous year. All Crown accounting policies have been applied on a basis consistent with the previous year.

STATEMENT OF ACCOUNTING POLICIES


SCHEDULE OF REVENUE – CROWN AS ADMINISTERED BY INLAND REVENUE for the year ended 30 June 2003

Actual Notes Actual IRD forecast IRD forecast

Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Revenue

24,557,123 Direct taxation 1 27,250,606 26,936,000 26,936,000

6,821,560 Indirect taxation 2 7,720,027 7,778,000 7,778,000

31,378,683 Total taxation 34,970,633 34,714,000 34,714,000

214,397 Compulsory fees, fines, penalties and levies 236,683 236,930 236,930

282,168 Investment income 331,820 352,244 352,244

31,875,248 Total operating revenue 35,539,136 35,303,174 35,303,174

The accompanying accounting policies and notes form part of these financial schedules.

For a full understanding of the Crown’s financial position and the results of its operations for the period, reference should be made to the consolidated audited Crown Financial Statements for the year ended 30 June 2003.

SCHEDULE OF EXPENDITURE – CROWN AS ADMINISTERED BY INLAND REVENUEfor the year ended 30 June 2003


Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

1,133,833 Benefits and other unrequited expenses 3 1,185,000 1,271,940 1,271,940

8,388,718 Other expenses incurred 5 7,891,110 7,785,350 7,785,350

33,381 Repayment of loans 6 144,195 218,500 218,500

267,645 Change in debt provisions 6 137,048 328,350 328,350

147,602 Student loan write-offs 12 203,887 171,739 171,739

(2,233) Borrowing expenses 4 7,064 3,774 3,774

9,968,946 Total operating expenditure 9,568,304 9,779,653 9,779,653





Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Assets

Current assets

1,150,662 Cash and bank balances 1,600,417 1,150,662 1,150,662

4,617,144 Receivables and advances 7 5,280,667 4,469,981 4,469,981

5,767,806 Total current assets 6,881,084 5,620,643 5,620,643

Non-current assets

3,683,497 Advances 8 4,217,581 4,333,202 4,333,202

3,683,497 Total non-current assets 4,217,581 4,333,202 4,333,202

9,451,303 Total assets 11,098,665 9,953,845 9,953,845



SCHEDULE OF LIABILITIES – CROWN AS ADMINISTERED BY INLAND REVENUEas at 30 June 2003


Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Current liabilities

7,052,883 Payables and provisions 9 4,654,334 4,452,686 4,452,686

214,478 Borrowings 13 330,832 214,478 214,478

7,267,361 Total current liabilities 4,985,166 4,667,164 4,667,164

7,267,361 Total liabilities 4,985,166 4,667,164 4,667,164



SCHEDULE OF ASSETS – CROWN AS ADMINISTERED BY INLAND REVENUEas at 30 June 2003



Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Cash flows from operating activities

Direct taxation

Individuals:

14,631,489 Source deductions 15,622,684 15,700,000 15,700,000

4,499,752 Other persons 4,499,638 4,615,000 4,615,000

(1,242,945) Refunds (1,286,622) (1,250,000) (1,250,000)

356,159 Fringe benefit tax 373,507 377,000 377,000

18,244,455 Sub-total individuals 19,209,207 19,442,000 19,442,000

Companies:

5,333,211 Gross company tax – other 6,129,917 5,871,000 5,871,000

70,121 Gross company tax – SOEs 102,613 212,000 212,000

47,589 Gross company tax – CEs 7,725 43,000 43,000

20,213 Gross company tax – NZS fund 123,180 69,000 69,000

(759,904) Refunds (820,720) (668,000) (668,000)

4,711,230 Sub-total companies 5,542,715 5,527,000 5,527,000

Withholding tax:

990,331 Residents’ interest 1,104,302 1,070,000 1,070,000

19,648 Residents’ dividends 55,838 54,000 54,000

143,640 Foreign source dividends 159,623 128,000 128,000

625,609 Non-residents’ income 740,566 713,000 713,000

1,779,228 Sub-total withholding 2,060,329 1,965,000 1,965,000

24,734,913 Total income tax 26,812,251 26,934,000 26,934,000

Other direct taxation:

1,517 Estate and gift duties 1,320 1,000 1,000

1,517 Sub-total other direct 1,320 1,000 1,000

24,736,430 Total direct taxation 26,813,571 26,935,000 26,935,000



SCHEDULE OF CASH FLOWS FROM OPERATING ACTIVITIES – CROWN AS ADMINISTERED BY INLAND REVENUE for the year ended 30 June 2003



Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Indirect taxation

Goods and services tax:

12,772,199 GST (Inland Revenue) 13,184,282 13,228,000 13,228,000

(6,191,327) GST (refunds) (5,717,573) (5,840,000) (5,840,000)

6,580,872 Sub-total GST 7,466,709 7,388,000 7,388,000

Other indirect taxation:

59,204 Stamp and cheque duties 50,770 51,000 51,000

241,932 Gaming duties 274,998 277,000 277,000

3,003 Other 2,025 0 0

304,139 Sub-total other indirect 327,793 328,000 328,000

6,885,011 Total indirect taxation 7,794,502 7,716,000 7,716,000

31,621,441 Total taxation receipts 34,608,073 34,651,000 34,651,000

148,762 Compulsory fees, fines and penalties 157,464 151,820 151,820

(child support)

Other receipts:

149,408 Interest from investment (student loan) 186,146 167,849 167,849

47,054 Other operating receipts (ACC) (4,218) 0 0

196,462 Total other receipts 181,928 167,849 167,849

31,966,665 Total cash provided from operating activities 34,947,465 34,970,669 34,970,669

Cash was disbursed to:

0 Finance cost 7 (3,774) (3,774)

(1,060,835) Family assistance tax credits (1,057,085) (1,074,000) (1,074,000)

(1,060,835) Total cash disbursed to operations (1,057,078) (1,077,774) (1,077,774)

30,905,830 Net cash flows from operating activities 33,890,387 33,892,895 33,892,895



SCHEDULE OF CASH FLOWS FROM OPERATING ACTIVITIES – CROWN AS ADMINISTERED BY INLAND REVENUE (CONTINUED)for the year ended 30 June 2003



Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Cash flows from investing activities

Cash was provided from:

197,485 Repayment of advances (student loan capital) 200,247 203,022 203,022

197,485 Net cash from investing activities 200,247 203,022 203,022



SCHEDULE OF CASH FLOWS FROM FINANCING ACTIVITIES – CROWN AS ADMINISTERED BY INLAND REVENUEfor the year ended 30 June 2003


Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Cash was provided from:

203,988 Income Equalisation Scheme 256,952 218,500 218,500

203,988 Total cash provided 256,952 218,500 218,500

Cash was disbursed to:

(34,162) Repayment of income equalisation (147,666) (218,500) (218,500)

(34,162) Total cash disbursed (147,666) (218,500) (218,500)

169,826 Net cash flows from financing activities 109,286 0 0



SCHEDULE OF CASH FLOWS FROM INVESTING ACTIVITIES – CROWN AS ADMINISTERED BY INLAND REVENUE for the year ended 30 June 2003



Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

31,273,141 Net movement in cash 34,199,920 34,095,917 34,095,917

877,408 Opening cash balance 1,150,662 1,150,662 1,150,662

9,829,816 Cash received from New Zealand 10,161,459 9,802,564 9,802,564

Debt Management Office

(40,829,703) Cash applied to New Zealand (43,911,624) (43,898,481) (43,898,481)

Debt Management Office

1,150,662 Closing balance 1,600,417 1,150,662 1,150,662



SCHEDULE OF RECONCILING NET CASH FLOWS FROM OPERATING ACTIVITIES TO OPERATING BALANCE – CROWN AS ADMINISTERED BY INLAND REVENUEfor the year ended 30 June 2003


Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

30,425,405 Net cash flows from operating activities 34,117,377 33,636,311 33,636,311

Movement in working capital

(42,617) (Inc)/dec student loan short-term (83,522) 35,629 35,629

168,365 (Inc)/dec provision bad debts 58,307 170,644 170,644

255,596 (Inc)/dec tax receivable (general tax) (541,099) 26,000 26,000

(26,528) (Inc)/dec GST debtors (12,947) 0 0

(65,039) (Inc)/dec account receivable (child support) (84,262) (85,110) (85,110)

857,466 (Inc)/dec account payable (student loan) (2,604,105) (2,600,197) (2,600,197)

47,442 (Inc)/dec account payable others (1,371) 0 0

(14,022) (Inc)/dec tax refundable 206,927 0 0

1,180,663 Total working capital movements (3,062,072) (2,453,034) (2,453,034)

Other non-cash items

(199,718) Other non-cash items (193,179) (203,022) (203,022)

(500,520) Student loan provision (534,084) (649,705) (649,705)

0 Ministry of Education student loan transfer 3,562,345 3,562,345 3,562,345

(700,238) Total other non-cash items 2,835,082 2,709,618 2,709,618

30,905,830 Net cash flows from operating 33,890,387 33,892,895 33,892,895



SCHEDULE OF CASH FLOW MOVEMENTS – CROWN AS ADMINISTERED BY INLAND REVENUEfor the year ended 30 June 2003



Main Supp.

Estimates Estimates

2002 2003 2003 2003

$000 $000 $000 $000

Tax in dispute

63,943 Tax in dispute 11 34,923 30,000 30,000

63,943 Total quantifiable 34,923 30,000 30,000

contingent liabilities



SCHEDULE OF ACCIDENT COMPENSATION COLLECTIONS – CROWN AS ADMINISTERED BY INLAND REVENUE for the year ended 30 June 2003

Actual Actual

2002 2003

$000 $000

Accident compensation collection type

118,780 Residual claims levy and earners’ account levy (self-employed) 14,133

20,462 Residual claims levy (employers) 4,969

549,375 Earner premium (employees – provisional) 622,244

688,617 Total 641,346

For the 1999 return period, Inland Revenue commenced the collection of residual claims and earners’ levies, instead of the old ACC premiums.

From 1 April 2002 the responsibility for the collection of residual claims levies has been moved from Inland Revenue to ACC.

SCHEDULE OF CONTINGENT LIABILITIES – CROWN AS ADMINISTERED BY INLAND REVENUEfor the year ended 30 June 2003


NOTES TO THE CROWN FINANCIAL SCHEDULESfor the year ended 30 June 2003

Note 1: Direct taxation

Actual Actual

2002 2003

$000 $000

Income tax

Individuals:

14,599,768 Source deductions 15,933,086

4,018,663 Other persons 4,195,126

(835,500) Refunds (833,731)

360,721 Fringe benefit tax 374,640

18,143,652 Sub-total individuals 19,669,121

Companies:

4,664,437 Gross company tax – other 5,528,356

94,392 Gross company tax – SOEs 85,299

44,285 Gross company tax – CEs 5,341

7,615 Gross company tax – NZS fund 98,167

(223,539) Refunds (190,692)

4,587,190 Sub-total companies 5,526,471

Withholding tax:

999,758 Residents’ interest 1,110,992

19,793 Residents’ dividends 57,378

140,952 Foreign source dividends 153,564

664,465 Non-residents’ income 731,724

1,824,968 Sub-total withholding tax 2,053,658

24,555,810 Total income tax 27,249,250

Other direct taxation:

1,313 Estate and gift duties 1,356

1,313 Sub-total other direct taxation 1,356

24,557,123 Total direct taxation 27,250,606

Note 2: Indirect taxation

Actual Actual

2002 2003

$000 $000

Goods and services tax:

13,162,521 GST (Inland Revenue) 13,614,202

(6,641,765) GST (refunds) (6,220,255)

6,520,756 Sub-total GST 7,393,947

Other indirect tax:

60,251 Stamp and cheque duties 48,605

240,553 Gaming duties 277,473

0 Other indirect tax 2

300,804 Sub-total other indirect 326,080

6,821,560 Total indirect taxation 7,720,027


Note 3: Benefits and other unrequited expenses

Actual Actual

2002 2003

$000 $000

Benefits and other unrequited expenses

97,004 Child support payments 111,240

847,829 Family support tax credit 846,791

14,358 Family tax credit 15,610

156,910 Child tax credit 143,244

17,732 Parental tax credit 11,662

0 Paid parental leave 56,453

1,133,833 Total benefits and other unrequited expenses 1,185,000

Note 4: Borrowing expenses

Actual Actual

2002 2003

$000 $000

Borrowing expenses

(2,268) Income equalisation interest 7,061

35 Adverse equalisation interest 3

(2,233) Total borrowing expenses 7,064

Note 5: Other expenses incurred

Actual Actual

2002 2003

$000 $000

Other expenses incurred

223,539 Companies’ refunds 190,692

6,641,765 GST Inland Revenue refunds 6,220,255

835,500 Other persons’ refunds 833,731

549,375 Payment of premiums to Accident Compensation Corporation 622,244

137,624 Accident Compensation Corporation levies 23,322

915 Unclaimed monies 866

8,388,718 Total other expenses incurred 7,891,110


Note 6: Repayment of loan and change in debt provision

Actual Actual

2002 2003

$000 $000

Repayment of loans

27,772 Income equalisation reserve account 389

5,609 Adverse event income equalisation account 143,806

33,381 Total repayment of loans 144,195

Change in debt provisions

80,564 Tax (34,315)

107,252 Student loan 89,216

79,829 Child support 82,147

267,645 Total change in debt provisions 137,048

Note 7: Current receivables and advances

Actual Actual

2002 2003

$000 $000

406,500 Student loan short-term 490,022

(47,194) Student loan provisions for doubtful debts (57,669)

4,697,225 Taxes receivable general 5,238,324

(547,739) Provisions for doubtful debts general (513,424)

69,691 GST debtors (intra-Crown)* 82,638

304,316 Accounts receivable child support 388,578

(265,655) Provisions for doubtful debts child support (347,802)

4,617,144 Total current receivables and advances 5,280,667

* This balance is eliminated upon consolidation of the Crown accounts.

Note 8: Non-current receivables and advances

Actual Actual

2002 2003

$000 $000

4,167,310 Student loan long-term 4,780,135

(483,813) Student loan provisions for doubtful debts (562,554)

3,683,497 Total non-current receivables and advances 4,217,581


Note 9: Payables and provisions

Actual Actual

2002 2003

$000 $000

5,170,618 Student loan capital* 2,566,513

7,027 Accounts payable (child support) 5,656

1,875,238 Taxes refundable 2,082,165

7,052,883 Total payables and provisions 4,654,334

* This balance is eliminated upon consolidation of the Crown accounts.

Note 10: Provision for doubtful debts

Actual Actual

2002 2003

$000 $000

547,739 General tax provision* 513,424

531,007 Student loan provision** 620,223

265,655 Child support provision* 347,802

1,344,401 Total provision for doubtful debts 1,481,449

* Refer to note 7.

** Refer to notes 7 and 8.

General tax

A refined calculation methodology was used for June 2003 to better reflect anticipated write-offs.

Student loan

• The Capital provision of 11.4% has been applied in the current year.

• Government policy on student loan provides for the write off of interest in certain circumstances, depending on

study status and income levels. In 2003, a provision rate of 46.5% was applied against current year accrued

interest. This provision rate can fluctuate from year to year depending on forecast repayment levels. See note

12 for more information.

Child support

Unpaid child support contributions attract penalties which accrue to the Crown. A provision for the non-recovery

of penalties owing is calculated according to the age of outstanding penalty debts.

Note 11: Contingent liabilities

When a taxpayer disagrees with an assessment issued following the disputes process, the taxpayer may

challenge that decision by filing proceedings with the Taxation Review Authority or the High Court.

Prior to 1 April 2003, a disputant was liable to pay 50% of the tax relating to any tax in dispute on the due date

for payment of the tax specified in the notice of assessment that was the subject of challenge. There was no

requirement for the disputant to pay the deferrable tax relating to the tax in dispute, or any shortfall penalties and

interest, until the due date for payment of that deferrable tax.

From 1 April 2003, 100% of the tax under dispute is deferrable, but Inland Revenue is able to require payment

of all the tax in dispute if there is a significant risk that the tax in dispute will not be paid should the challenge or

objection proceeding by the taxpayer not be successful. Interest continues to accrue on deferrable tax even

though the taxpayer may have no liability at the time of the deferrable tax.


Note 12: Student loan report – administered by Inland Revenue

Actual Actual

2002 2003

$000 $000

Analysis of student loans

Outstanding balance

4,573,810 Total loans outstanding ( including interest) 5,270,157

(531,007) Total provisions (capital and interest) (620,223)

4,042,803 Total student loans 4,649,934

3,507,638 Opening balance 4,042,803

857,466 Amount advanced in current year 958,240

282,168 Interest accrued on outstanding loan balances 331,820

(197,485) Repayment of base capital (200,247)

(149,408) Repayment of accrued interest (186,146)

(147,602) Interest written off and movement in provision (203,887)

(107,252) Movement in provision (89,216)

(2,722) Other (3,433)

4,042,803 Closing balance 4,649,934

Provision for student loan

The methodology used to provide for student loans contains a capital and an interest component. These

provisions are periodically reviewed for appropriateness and the methodologies updated where necessary.

Capital provision

The provision on the outstanding capital issued is 11.4% (in 2002). The key variables that impact on the

expected level of write-offs relate to death and bankruptcy as well as debt that will not be collected because

of retirement. The underlying assumptions regarding the borrowing characteristics and income growth profiles

of borrowers and the expected level of defaulters are based on the most current information. The provision is

sensitive to the assumptions on borrowing characteristics and income growth profiles, and so will be regularly

reassessed as new information becomes available. A 1% shift will impact on the provision level by around $50

million.

Interest write-off provision

The provision for interest write-offs on interest accrued after 31 December 1999 was reviewed in light of changes

to government policy, resulting in a substantial increase in the provision level to 70% (from 17%) in 2002. This

reflected changes to the student loan scheme allowing the full write-off of interest while students continue to

study, along with the increased income thresholds used to determine repayments through the income tax system.

The effective provision for interest write-offs from 1 January 2002 was approximately 57% and from 1 January

2003 it was approximately 46.5%. The interest rate provision is reviewed annually.


Fair value

The fair value of the student loan debt as at 30 June 2003 is calculated to be $4,868 million. The fair value has

been calculated using a new model constructed for the Ministry of Education based on the new integrated data

set. The fair valuation model considers current debt owed by borrowers of various characteristics including

assumptions regarding their future income. Among other assumptions, critical is the discount rate (4.5%), which

is based on the after tax risk free rate plus a risk premium. A 1% shift in the discount rate alters the value by

between ($217) million and $233 million.

The fair valuation of the scheme differs from the economic cost to the Crown because the discount rate applied

differs between the two calculations. While the economic cost uses the pre-tax long-term borrowing rate to

reflect the cost to the Crown of the scheme, the fair valuation uses the after-tax long-term borrowing rate plus a

risk premium to reflect the tax paying status of a third party and the added risk to a third party of the uncertainty

of the timing of future cash flows.

Note 13: Income equalisation and adverse event schemes – administered by Inland Revenue

Actual Actual

2002 2003

$000 $000

214,065 Income equalisation reserve account 330,740

413 Adverse event income equalisation reserve account 92

214,478 Total value of the reserve accounts 330,832

Income equalisation is a scheme where taxpayers in the farming, fishing and forestry industries can elect to make

payments during the year by way of income equalisation deposits. Interest at a rate of 3% is paid, provided

that no withdrawals are made within 12 months of the date of the deposit. There are two schemes, the income

equalisation scheme, and the adverse event income equalisation scheme.

The income equalisation scheme has increased in 2003 by 54.2%, as a result of the increased income level in

the agricultural sector. This has meant that farmers and others who are eligible are more likely to make use of the

deferred income advantages offered by the income equalisation scheme.



Audit opinion

127

128 Inland Revenue – Annual Report 2002-03 Inland Revenue – Annual Report 2002-03 129Inland Revenue – Annual Report 2002-03 129

Report of the Auditor-General

To the Readers of the Financial Statements of the Inland Revenue Departmentfor the year ended 30 June 2003

We have audited the financial statements on pages 59 to 125. The financial statements provide information about

the past financial and service performance of the Inland Revenue Department and its financial position as at

30 June 2003. This information is stated in accordance with the accounting policies set out on pages 94 to 96

and 112.

Responsibilities of the Chief Executive

The Public Finance Act 1989 requires the Chief Executive to prepare financial statements in accordance with

generally accepted accounting practice in New Zealand that fairly reflect the financial position of the Inland

Revenue Department as at 30 June 2003, the results of its operations and cash flows and service performance

achievements for the year ended on that date.

Auditor’s responsibilities

Section 15 of the Public Audit Act 2001 and section 38(1) of the Public Finance Act 1989 require the

Auditor-General to audit the financial statements presented by the Chief Executive. It is the responsibility

of the Auditor-General to express an independent opinion on the financial statements and report that

opinion to you.

The Auditor-General has appointed John O’Connell, of Audit New Zealand, to undertake the audit.

Basis of opinion

An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial

statements. It also includes assessing:

the significant estimates and judgements made by the Chief Executive in the preparation of the financial

statements; and

whether the accounting policies are appropriate to the Inland Revenue Department’s circumstances,

consistently applied and adequately disclosed.

We conducted our audit in accordance with the Auditing Standards published by the Auditor-General, which

incorporate the Auditing Standards issued by the Institute of Chartered Accountants of New Zealand. We planned

and performed our audit so as to obtain all the information and explanations which we considered necessary in

order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free

from material misstatements, whether caused by fraud or error. In forming our opinion, we also evaluated the

overall adequacy of the presentation of information in the financial statements.

Other than in our capacity as auditor acting on behalf of the Auditor-General, we have no relationship with or

interests in the Inland Revenue Department.


Unqualified opinion

We have obtained all the information and explanations we have required.

In our opinion the financial statements of the Inland Revenue Department on pages 59 to 125:

comply with generally accepted accounting practice in New Zealand; and

fairly reflect:

– the Inland Revenue Department’s financial position as at 30 June 2003;

– the results of its operations and cash flows for the year ended on that date; and

– its service performance achievements in relation to the performance targets and other measures

set out in the forecast financial statements for the year ended on that date.

Our audit was completed on 26 September 2003 and our unqualified opinion is expressed as at that date.

John O’ConnellAudit New Zealand

On behalf of the Auditor-GeneralWellington, New Zealand

Matters relating to the electronic presentation of the audited financial statements

This audit report relates to the financial statements of the Inland Revenue Department for the year ended 30 June 2003

included on the Inland Revenue Department’s website. The Chief Executive is responsible for the maintenance and

integrity of the Inland Revenue Department’s website. We have not been engaged to report on the integrity of the Inland

Revenue Department ’s web site. We accept no responsibility for any changes that may have occurred to the financial

statements since they were initially presented on the web site.

We have not been engaged to report on any other electronic versions of the Inland Revenue Department’s financial

statements, and accept no responsibility for any changes that may have occurred to electronic versions of the financial

statements published on other websites and/or published by other electronic means.

The audit report refers only to the financial statements named above. It does not provide an opinion on any other

information which may have been hyperlinked to/from these financial statements. If readers of this report are concerned

with the inherent risks arising from electronic data communication they should refer to the published hard copy of the

audited financial statements and related audit report dated 26 September 2003 to confirm the information included in

the audited financial statements presented on this web site.

Legislation in New Zealand governing the preparation and dissemination of financial statements may differ from

legislation in other jurisdictions.



Additional information

131


Table 1 – Returns identified as overdue during 2002-03 and returns outstanding at 30 June 2003

Returns Returns Returns

due identified as outstanding as at

overdue 30 June 2003

1999 income tax

Individual: Business 1,055,468 443,633 5,020

Individual: Non-business 1,444,040 868,513 5,353

Other 542,507 239,795 3,416

2000 income tax


Individual: Non-business 269,234 253,970 798

Other 559,212 231,900 8,377

2001 income tax


Individual: Non-business 1,326 1,314 -

Other 578,751 248,594 15,406

2002 income tax

Individual: Business 1,154,163 1,101,929 52,234

Other 607,297 579,820 27,477

Tax deductions

Monthly EMS 863,347 12,015

Other EMS 2,017,444 1,418

Other PAYE 32

All reconciliations 275

GST 930,911 106,940

Table 2 – Analysis of revenue outstanding 1998-99 to 2002-03

Debt type 1998-99 1999-00 2000-01 2001-02 2002-03

$000 $000 $000 $000 $000

Collectable debt

Instalments 231,017 294,763 327,341 358,514 449,270

Other collectable debt 571,349 592,222 781,141 861,112 910,492

Total collectable debt 802,366 886,985 1,108,482 1,219,626 1,359,762

Uncollectable debt

Bankruptcies/liquidations/receiverships 24,748 25,644 12,414 19,092 37,304

Pending write-off 7,311 10,969 11,133 14,610 114,524

Total uncollectable debt 32,059 36,613 23,547 33,702 151,828

Total 834,425 923,598 1,132,029 1,253,328 1,511,590


Table 3 – Statistics of tax disputes 1 July 2002 to 30 June 2003

Taxation High Court of Privy

Review Court Appeal Council

Authority

Tax disputes commenced 121 76 Nil Nil

Tax disputes determined:

– Commissioner’s favour 9 3 8 0

– taxpayer’s favour 6 1 0 0

Total tax disputes determined 15 4 8 0

Table 4 – Shortfall penalties imposed 1999-00 to 2002-03

Shortfall category 1999-00 2000-01 2001-02 2002-03

number $000 number $000 number $000 number $000

Lack of reasonable care 4,821 3,559 5,164 3,689 2,935 8,548 1,422 4,229

Gross carelessness 1,794 2,683 2,343 3,134 927 9,328 148 1,192

Unacceptable interpretation 80 191 125 695 232 1,208 438 4,380

Abusive tax position 34 209 22 1,156 155 8,757 45 4,909

Evasion 418 2,971 1,081 4,482 402 19,297 222 14,136

Total 7,147 9,613 8,735 13,156 4,651 47,138 2,275 28,846

Table 5 – Offences against Inland Revenue Acts

1998-99 1999-00 2000-01 2001-02 2002-03

Income tax

Wilfully or negligently furnishing false income tax returns 5 7 7 3 6

Failure to furnish income tax returns 349 260 553 459 587

Aiding, abetting or inciting the making of false income tax returns 0 2 1 0 0

GST

Furnishing false GST returns 3 5 10 6 4

Failure to furnish GST returns 299 200 303 307 383

Aiding, abetting or inciting the making of false GST returns 0 1 0 0 0

GST frauds (prosecution action taken under the Crimes Act) 0 7 4 0 6

Knowingly not providing information with the intent to evade tax 0 0 2 1 0

PAYE

Failure to deduct or account for PAYE deductions 4 7 20 9 26

Aiding or abetting failure to deduct or account for PAYE deductions 0 0 4 14 1

Penal tax imposed

(shortfall penalties not included)

Cases in which penal tax was imposed 4 58 19 27 42

Value of penal tax imposed $125,856 $717,458 $628,419 $762,186 $889,528


Table 6 – Legal responsibilities

Inland Revenue administers the following main Acts:

• Child Support Act 1991

• Estate and Gift Duties Act 1968

• Gaming Duties Act 1971

• Goods and Services Tax Act 1985

• Income Tax Act 1994

• Parental Leave and Employment Protection (Paid Parental Leave) Act 2002

• Stamp and Cheque Duties Act 1971

• Student Loan Scheme Act 1992

• Tax Administration Act 1994

• Taxation Review Authorities Act 1994

Table 7 – International visits

Country Number of visits Study topics

Australia 3 Key tax challenges

Technology developments

Closer strategic alignment

GST

Benchmarking

Bangladesh 1 GST

Canada 1

China 3 State taxation policy

Tax reform

Small and medium enterprises

Hong Kong 1 Child support

Japan 1 Activity based costing

Korea 1 Revenue collection improvements

Latvia 1 Study tour

Lesotho 1 GST

Philippines 1 Tax administration reforms

South Africa 1 GST

Tonga 1 Operations


Table 8 – Property information

1998 1999 2000 2001 2002 2003

Accommodation area (m2) 121,740 120,218 112,743 102,795 102,940 104,125

Other area (m2) 10,989 9,155 8,870 7,816 8,619 8,507

Total area leases (m2) 132,729 129,373 121,613 110,611 111,559 112,632

Vacant accommodation (m2) 6,376 5,694 5,128 4,599 4,714 4,439

Vacant as a % of total 5.20% 4.74% 4.55% 4.68% 4.58% 4.26%

Average space per person (m2) 23.5 22.8 22.4 21.7 20.6 20.5

Total rental per annum per person ($) 4,982 4,961 4,804 4,506 4,262 4,178

Utility costs per person ($) 934 904 925 810 830 804

Total occupancy cost per person ($) 5,916 5,866 5,729 5,253 5,206 5,229

Fitout costs per person ($) 4,003 3,599 4,004 3,986 4,066 3,232

Table 9 – Expenditure on consultants and contractorsfor the year ended 30 June 2003

Actual Actual

2002 2003

$000 $000

Information technology 4,512 6,401

Tax issues 534 774

Research 552 957

Human resources 136 167

Other 1,100 1,595

Total 6,834 9,894

Consultants and contractors as a % of total operating expenses 1.86% 2.59%


Inland Revenue office locations

Whangarei

Tauranga

Rotorua

Gisborne

Napier

New Plymouth

Palmerston North

Greymouth

Nelson

Timaru

Dunedin

Invercargill

Wellington

Christchurch

Hamilton

Takapuna

Manukau

regional office

branch office

The map is shaded to show

the boundaries between our

regional offices.



Inland RevenueAnnual Report 2003

2003

Inland Revenue A

nnual Report 2003

Desired Future

• Taxpayers and other customers meet obligations of their own accord—and

Inland Revenue makes this easy



• The community regards Inland Revenue as professional, approachable,

effective and effi cient.

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