Columnist Terry Baucher details some sobering and potent powers of the IRD including the imposition of "shortfall penalities" of 150% for unreported cash earnings.

By Terry Baucher*

In my last column I described how some persons who had transferred their U.K. pension entitlements to a New Zealand superannuation scheme were facing a potentially ruinous tax charge on all gains made by the UK fund prior to the date of transfer.

I am pleased to say that following representations made by myself and other tax advisors the Government has announced a policy review of the current law with respect to foreign pensions and foreign pension schemes. As a result the IRD has “determined that the current compliance activity should be put on hold until the outcome of the policy review becomes clearer”.

So cheers and champagne all round then? Not quite. You’ll note that the IRD said that the current reviews are to be put “on hold”. The IRD have advised that it reserves the right to re-open its enquiries after the policy review is completed which might not be for another five or six months. In effect the taxpayers concerned have only been granted a temporary stay of execution.

This ability of the IRD to effectively suspend matters but reserve itself the right to re-open the investigation at a later date is one of the many powers granted to the department, or more properly, the Commissioner of Inland Revenue. Most readers will be familiar with the range of financial penalties available to the IRD beginning with use of money interest on unpaid tax currently 8.89%.

Evade at your own risk

Then there are late payment penalties consisting of an initial 5% of the unpaid tax and then 1% per month thereafter (and, yes, any use of money interest charges are in addition to these penalties). Where the IRD have determined that a tax shortfall has arisen then they may impose “shortfall penalties” of between 20% and 150% of the tax involved.

The 150% shortfall penalties are reserved for tax evasion; where the taxpayer has deliberately omitted income. A common example would be the non declaration of earnings paid in cash. As if these financial penalties were not enough the IRD has other powers of investigation and search and seizure which in some cases go beyond those available to the police investigating a criminal matter.

For example, as part of an investigation the Commissioner may require a person to give evidence. In such circumstances that person cannot refuse to answer on the basis that they might incriminate themselves. Once you take into consideration the fact that for tax purposes the burden of proof is on the taxpayer then it is an interesting philosophical point to contrast the position of someone under IRD investigation with the general presumption of innocence in criminal law.

The recent High Court case of Tauber & Others v Commissioner of Inland Revenue illustrates the extent to which the IRD is prepared to use its available search and seizure powers. In March this year as part of a tax investigation into Mr. Tauber and various related entities the Commissioner carried out simultaneous search and seizure raids on six properties including Mr. Tauber’s home, the home of an associate, a boat shed and the office (which was also the home) of the accountant acting for one of Mr.Tauber’s entities.

Not surprisingly, Mr. Tauber and his associates thought the IRD’s actions were a bit extreme and sought a judicial review. The High Court dismissed the application, holding that the various searches were within the law. As the Tauber case demonstrates, the IRD has massive powers available to it.

Just cause

Fortunately, the IRD invokes its full range of powers rarely: in my day to day dealings with IRD staff they act professionally and strive to ensure that taxpayers are treated fairly and according to the law. But with power comes responsibility.

In my view the IRD ought to have been far more proactive in advising taxpayers of its view of the New Zealand taxation treatment of UK pension schemes and transfers from such schemes. It’s not like the current situation developed overnight.

Pension transfer companies have been advertising their services for many years now and as far back as 2006 the Finance and Expenditure Select Committee specifically recommended that the IRD review the treatment of pension transfers.

Given that background the IRD’s decision to begin investigations into pension scheme transfers and then suspend its enquiries pending a policy review is poor policy. For the moment the issue of pension transfers sits in an unsatisfactory limbo. I will update readers on any developments but in the meantime it bears to keep in mind the words of the Desk Sergeant in Hill Street Blues: “Let’s be careful out there”.

*Terry Baucher is New Zealand tax specialist and consultant. To read his other tax columns click here.