Taxman to set sights on top bosses

The IRD is turning its sights on the country's top earners, as the recession leaves a gaping hole in the government's tax take.

This year, for the the first time, the tax department has sent questionnaires to some of the country's biggest companies demanding details of the salary and perks of its three highest-earning staff. Top executives in New Zealand earn as much as $7 million a year, attracting tax bills in the millions of dollars. The questionnaire asks for details of all the perks and non-cash benefits of employment contracts.

The IRD focus on executive high-fliers comes hot on the heels of the department's huge court victories against Westpac and Bank of New Zealand, which must now pay $918m and $645m to the IRD respectively in taxes and penalties.

The most common perks for top execs include cars, share options, bonuses, superannuation and sports club memberships. But there are more gold-plated versions, such as those in Telecom boss Paul Reynolds' contract.

His package for the year to June 2009 was worth $7.1m, and included a base salary of $1.75m plus a $1.75m annual performance incentive. Telecom is also paying for Scottish-born Reynolds and his family to travel business class between New Zealand and the UK for his first three years in the job (he took over in September 2007) and giving him accommodation costs of $100,000 for the first two years. His salary package also includes $20,000 towards legal advice on his contract and $6000 for tax advice.

The spotlight on CEO pay is part of IRD's new "compliance focus" document released in June, which spelt out where it will be placing greater scrutiny in the coming year.

There about 4500 large businesses in New Zealand with an annual turnover of more than $100m. The questionnaires ask companies to disclose the non-cash percentage of executive packages for the last three financial years, details of share options, superannuation contributions and non-cash benefits of more than $10,000 per year.

IRD says the new focus comes because many top bosses' salary packages are complex and have been identified as an area of "potential risk", where the appropriate tax may be overlooked or misinterpreted.

In other words, IRD appears to be looking at extracting more money from areas that have previously remained under its radar, and in extracting the right level of tax from the non-cash parts of executive pay packages.

But tax experts say putting these high-value taxpayers in the gun may also be connected to the recession, and suggest the IRD is trying to claw back some of the huge drop in tax income in the past year.

A Treasury report out last week showed the government accounts for the first three months of this financial year were far worse than forecast. The deficit for the three months to September 30 was $2 billion, or 77% worse than forecast in the May Budget. Lower corporate tax revenue was pinpointed as the main contributor to the higher deficit.

"Unemployment is up which means the PAYE take is down," says specialist tax expert Greg Harris, of Deloitte, and meanwhile "spending is down, which means that revenue from GST is down. IRD seems to beefing up its interest in areas it hasn't looked at before, partly in response to the recession".

Harris says there has long been confusion surrounding executive salaries. While PAYE and fringe benefit tax was easily identified, it was trickier to work out exactly what tax was owed on share options and bonuses.

Martin Scott, group manager assurance for IRD, says so far about 100 executive pay questionnaires have been sent out.

IRD emphasises in a letter that accompanies each questionnaire that the responses will not necessarily lead to a company audit, but instead will form part of its "risk assessment". However, the compliance focus document states results "will be evaluated against supporting information and analysis". That may then lead to specific reviews.

Harris described IRD's approach this year as far more targeted than in previous years. "In the past, everyone expected to be audited every five years, but it was inconsistent and random. This is a far more consistent approach."