Well-funded IRD drives an aggressive compliance approach

This article was current at the time of publication.

Last year the Inland Revenue Department (IRD), armed  with substantial new resources, went into risk review and audit high gear.

In 2024 the regulator received NZ$116 million over four years in additional funding and undertook to deliver the government NZ$4 for every additional dollar spent.

Its new stance has triggered a slew of publications on the tax technical page on its website.

By early December it had issued 22 consultation and interpretation notes, compared with five over the previous four years.

“IRD is under pressure to collect more revenue,” says Richard Ashby CPA, a partner and tax team lead at Gilligan Sheppard in Auckland. “It’s taking a more aggressive view, not just on risk review and audit but on people seeking remission from hardship.”

Searches surge

One measure of the new approach is the surging number of searches IRD is executing.

Andrew Dickeson FCPA, taxation services director at Baker Tilly Staples Rodway in Auckland, notes that the IRD had conducted 30 searches by early December, compared with eight in 2023 and none in 2022.

IRD has issued updated guidance on its search powers and its powers to demand information under section B of the Tax Administration Act.

Uptick in audits

Angus Ogilvie FCPA, Chair of CPA Australia's New Zealand tax committee, says there has been “a very noticeable uptick” in audit activities. Previously taxpayers would be sent “risk review” letters. 

“In many instances, IRD already knows the answers to the questions they’re asking. There would be fairly specific questions, like for example, ‘have you had foreign-sourced income?’ It was an opportunity for taxpayers to respond.”

Ogilvie says the approach has now moved toward full audit, with potential criminal sanctions attached. “Audits are not something to be taken lightly,” he warns. 

Focus on construction, liquor, HNW

Dickeson says IRD areas of focus are high net worth individuals, high debt situations, small business cash flow, trust disclosures and diverted personal income.

IRD is targeting specific industries for particular attention, such as liquor outlets and the building industry. In April it told the construction sector to “cut your excuses and sort your tax”.

One practice IRD is looking for among retailers is the use of Electronic Sales Suppression tools designed to evade tax by understating or completely changing revenues. IRD describes these as “a significant threat to the integrity of the tax system”.

Crypto concerns

IRD is scrutinising two activities favoured by Millennials – share and cryptocurrency trading.

In a July release, Focus on Cryptoassets, IRD said it had identified 227,000 crypto users in New Zealand conducting seven million recent transactions totalling NZ$7.8 billion, although it didn’t specify over what timeframe.

Ashby says IRD is among OECD (Organisation for Economic Co-Operation and Development) tax authorities increasingly obtaining information from crypto exchanges.

“Worldwide, governments have been shaking their heads a bit and haven’t caught up with the crypto world, and they’re not quite sure how to tax it.

“People buying crypto assets and selling for gain think, ‘there’s no specific tax provision’. A lot of people are unaware gains can be taxable income, or how it’s viewed from a GST perspective.”

Over the next 12 to 18 months, Ashby says, “we’ll see IRD and overseas tax authorities upping their game on crypto.”

IRD has also issued guidance on the taxation treatment on gains from share investing.

“There’s nothing new there, it’s just clarification,” says Ashby. “The average Joe on the street doesn’t understand when a gain is taxable and when it isn’t. IRD’s trying to encourage voluntary compliance.”

IRD is also expected to focus on income from foreign investment funds, “an area where there’s a lot of confusion,” adds Ashby. 

Personal income diversion

Dickeson says IRD will be looking out for diversion of personal income to companies following the lifting of the trustee tax rate to 39 per cent to match the top personal income tax rate.

“Trusts have gone from being a useful tax tool to being, almost something you’d like to avoid.”

What’s in store for 2025?

Apart from a review of the tax status of charities with trading enterprises, the government has yet to signal changes on the tax front in 2025.

As of December, the Taxation (Annual Rates for 2024–25, Emergency Response, and Remedial Measures) Bill, which offers relief to taxpayers in the wake of a natural disaster, is currently before Parliament’s Finance and Expenditure Select Committee.

Dickeson advises practitioners to look out for the effects of legislative changes already passed, such as:

• the restoration of mortgage interest deductibility for residential property investors 
• the restoration of the bright-line test for sales of residential property to two years
• income tax bracket adjustments
• the removal of depreciation deductibility for commercial property owners