IRD has tough task winning the war against the 'black economy'

01:07, Sep 09 2013
Taxing Times is a weekly column that looks at various aspects of tax and money management.

From time to time we see headlines in the news media such as "IRD takes $18m from tax dodgers", "Complex tax evasion case sounds a warning to tax cheats", "Woman jailed for tax evasion", and IRD media releases such as "Church members sentenced for false rebate claims" and "Fitness business operator sentenced for false GST claims".

However, as salacious as the headlines seem, if we look behind their veneer, is Inland Revenue winning the battle against people who are committing fraud against the tax system?

In 1999, economist David Giles was engaged by Inland Revenue to assist with measuring the size of the black economy in New Zealand. He estimated it was at 6.8 per cent of GDP in 1968 and 11.3 per cent of GDP in 1994.

While this work is a little old now, it highlights the probable size of the issue. Other more recent estimates put the loss at $7 billion a year in tax revenue.

In Budget 2010, the Government allocated Inland Revenue an extra $119.3 million over four years to strengthen compliance and debt activities, and in Budget 2012, an extra $78.4m over four years was added.

In 2011, the then minister of revenue announced that of the $119.3m allocated in 2010, extra tax assessed was $46.8m. In 2012 it was announced that this had increased to $86.9m - which was reported to be a return of $6.62 for every dollar allocated.


There is no doubt that extra resources devoted to administering compliance with our tax system will net the revenue extra funding. But is IRD getting on top in its battle with the black economy?

The reality is that many people operating in the black economy are completely outside the tax system. To put it another way, these people are all but invisible to Inland Revenue.

While the headlines give the impression IRD has the black economy "on the run", looking behind all the headlines I could find on the topic reveals that most relate to people inside the tax system in one form or other.

The headline "IRD takes $18m from tax dodgers" relates to taxpayers who made voluntary disclosures to IRD (that is, they owned up) following a case that went to the Supreme Court, the "Complex tax evasion case sounds a warning to tax cheats" headline related to two people who were very well known to IRD, the headline "Woman jailed for tax evasion" was a person who failed to account for PAYE and GST having previously done so, and the IRD media releases "Fitness business operator sentenced for false GST claims", again relate to people and documents within the tax system.

So when people are in the tax system in one form or other, and deliberately evade the payment of tax, it's fair to say IRD is making inroads into this part of our black economy.

However, when in excess of $200m has been allocated to IRD over six years starting in 2010, you would expect to see a return to Government from this. But even if IRD achieves a return of $6 for every extra dollar of the $200m allocated, this would be a return of a mere $1.2b over six years, which, when compared to the estimate of the size of the revenue leakage, still leaves a very large gap.

So despite the headlines and the associated fanfare, my intuition is that for those outside the tax system, the black economy is holding its own against the IRD onslaught.

* Craig Macalister is tax principal at accounting firm WHK in Invercargill. 

The Southland Times