Cash jobs costing New Zealand billions

Cash trade jobs, crime, wages under the table and online trading are costing the Government more than $7 billion a year in lost tax.

According to new research by the international Tax Justice Network, that's equivalent to 44 per cent of the country's health budget.

It estimates a "shadow economy" worth more than $20b makes up 12.4 per cent of New Zealand's gross domestic product.

The total tax lost each year from people who either evade tax or move it to tax havens is $7.1b, just behind Bulgaria and just ahead of Azerbaijan.

The Inland Revenue Department said yesterday that, while it could not attempt to estimate the size of the shadow economy, it had collected $137 million from tax evasion and fraud work in the past year.

Tax evasion is generally defined as the criminal non-payment of tax, while tax avoidance refers to using legal means to reduce the amount of tax a person or company must pay.

IRD spokesman Tony Morris said the department was unable to give an estimate of the size of the hidden economy.

In recent years, the huge growth in online trading had led to some trying to dodge tax.

"Some traders carrying out significant business think they are invisible to us because they operate without a traditional store front.

"We are working with the online sites and have access to sales data to identify people who are carrying out business over the internet without paying any tax.

"We analyse millions of transactions," Morris said.

A Trade Me spokesman said the website was the most public marketplace in the country and deep footprints of information were left behind.

"Trade Me is a really dumb place to do anything illegal, including avoiding tax.

"Everyone can see what a member has bought and sold.

"We work with government agencies including IRD. Like everyone else in New Zealand, sections 16 and 17 of the Tax Administration Act mean we are obliged to pass on information."

PricewaterhouseCoopers tax partner Geof Nightingale said there was no doubt New Zealand had a large shadow economy.

"The most significant part of this shadow economy will be cash jobs for tradespeople.

"Every time a tradesman turns up at your house and says: 'Well, it's $1000 to paint that room but if you pay me cash it's $800,' that's the shadow economy.

"That's tax evasion happening.

"There's a common Kiwi acceptance for cash jobs."

The shadow economy also included people who had money invested offshore but did not declare the interest, and businesses paying wages under the table, Nightingale said.

"If we could tax that shadow economy, we would either have more roads or hospitals or get out of deficit faster. I think Inland Revenue is well aware of that and are working very hard to do that, with some success."

In July, IRD commissioner Bob Russell said that, since the February earthquake in Christchurch, there had been a rise in the hidden economy.

"We anecdotally hear there's quite a lot of cash business going on in Christchurch these days," he said.

"It's a seller's market in the construction trades and, if you decide you only want to work for cash, you have power to do so."

Revenue Minister Peter Dunne said the $20b estimate of the shadow economy was in the area he expected.

"There is a vast underground economy in New Zealand, always has been: mate's rates, cash jobs, jobs in kind, all of those sort of things which are very hard to track down.

"There will be some high-level corporate evasion – I'm not denying that for a moment.

"But I think, in the New Zealand context, it is more likely to be those ingrained sorts of things – the mate's rates, the 'do a mate a favour', which has been part of our informal system, forever really."

Tax evasion was difficult to stop, he said.

"We discover a loophole, we close it and you never get ahead really – the next loophole is discovered and you are closing that.

"That's just the way it is, right around the world."

Since last year's Budget, the Government has allocated additional funding of $119.3m to IRD over several years.

Morris said the department's efforts were paying off: "This funding has enabled us to increase audit activity around the hidden economy and property transactions, and already we are seeing dividends on that investment.

"At the end of March this year, our hidden economy and property transaction areas were showing a return on investment of $5.70 for every dollar invested."

Serious offending could result in a criminal prosecution.

"Conviction on tax evasion charges can result in a fine of up to $50,000 for each offence ... they can also result in jail terms of up to five years."

- © Fairfax NZ News