Rich pickings for taxman as rich pay up

A blitz by the taxman on the nation's wealthiest people netted an extra $81 million in the past tax year.

That takes the IRD's High Wealth Individual Unit tally of unpaid tax identified and collected to $300m in the seven years since it was formed, although that's likely to rise further and fast, as the taxman is pursuing a further $178m officially defined as "under dispute".

Martin Scott, the IRD's group manager for assurance, said the rising figure demonstrated the unit's growing sophistication and capability, and the unit's officers had noticed a much reduced appetite among the wealthy to take risks to reduce their tax bill.

Creating that sense of hazard among wealthy taxpayers was vital in the taxman's work, Scott said.

"The integrity of the system increases when the tax administrator is seen as able and willing to do its job. We are constantly upgrading our capabilities to deal with difficult and complex issues and see them through."

But Scott said the rich should not be unfairly demonised as tax evaders.

Although tax avoidance (non-criminal non-payment of tax) had been found, Scott said, there was little tax evasion, which was reflected in a low level of penalty fees imposed.

"These people are significant contributors to the tax base," he said, and the IRD was taking a co-operative stance where possible in working with the rich, whose affairs could be horribly complex. Just how complex is shown by the fact that the 250 individuals the HWI had audited controlled some 7500 companies, domestic trusts and other legal entities. The record for any one individual was a staggering 262 entities, said Scott.

The $81m figure for extra tax collected in the tax year ended June 2009 was paid by just 95 individuals, Scott said, and the team had audited 161 individuals. That's an average of about $850,000 each.

The rising success of the HWI unit reflected how cases begun several years ago had worked their way through the system, Scott said, although he could not confirm whether any of the tax collected related to the "two handfuls" of wealthy Kiwis named when a whistleblower in the tax haven of Liechtenstein sold details of cross-border tax dodgers to German tax authorities.

Scott said that although a portion of the cases involved tax havens, tax secrecy around the world was crumbling as the US, Germany and the OECD were leaning heavily on tax havens to open up. Germany has exerted huge pressure on Liechtenstein, and the US has pressured Switzerland and its biggest bank, UBS, into handing over details of wealthy US tax dodgers.

The IRD finds the most common tax-reduction tricks of the wealthy include:

One company charging a related company inflated management fees which increase its costs and reduced its tax bill.

Creating artificial transactions to create the illusion of costs to reduce tax.

Using trusts to divert income to lower-rate taxpayers.

The HWI unit scrutinises individuals or families with $50m or more, though this drops to $20m where there are significant company or property assets involved, excessively complex structures are used, or very little tax is paid.

That will include many household names, though the IRD will not identify them. Those with lesser wealth who have got themselves into aggressive tax arrangements could also find the HWI unit taking an interest.

Some do not wait for the taxman to find them. Each year some 1200-1300 people turn themselves in.

Scott said: "People realise the radar is working and come to us before we find them."

- © Fairfax NZ News