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Information-gathering powers
(Clauses 73, 74 and 75)
Summary of proposed amendments
The amendments give effect to the government's proposals set out in the discussion document Taxpayer compliance, standards and penalties: a review in relation to information-gathering powers. The amendments aim to clarify and correct deficiencies in the existing rules.
They will affect only a small number of taxpayers, and will improve the Commissioner's ability to access the necessary information to confirm taxpayers' correct tax positions.
Application date
The amendments to the information-gathering powers of Inland Revenue will apply to information requests made on or after the date of enactment.
Key features
The amendments will extend and clarify Inland Revenue's information-gathering powers. Section 16 will be amended to:
- clarify that third parties can be required to give reasonable assistance and facilities in an investigation;
- clarify who may be given authority to enter a taxpayer's premises; and
- allow Inland Revenue to remove and photocopy documents.
Section 17 will be amended to:
- allow Inland Revenue to requisition information held by offshore entities controlled by a New Zealand resident; and
- give Inland Revenue the discretion to require documents to be sent to a particular Inland Revenue office.
Background
Inland Revenue relies on taxpayers being honest in the provision of information about their income. Information is, in many cases, almost exclusively within their possession and control. If Inland Revenue decides to audit a taxpayer, the value of the audit process is compromised if it cannot independently verify the taxpayer's tax position. Therefore Inland Revenue's information-gathering powers in sections 16 and 17 are critical to the department carrying out its statutory function of collecting the correct amount of tax.
In December 1998 the Committee of Experts reported to the then government. The committee raised several issues relating to Inland Revenue's information-gathering powers and made several recommendations that have formed the basis of the proposed amendments.
In August 2001 the government released a discussion document Taxpayer compliance, standards and penalties: a review, which included a chapter on information-gathering powers.
The proposals in the discussion document were in line with the recommendations of the Committee of Experts. The discussion document also proposed that the legislation be amended to clarify who may be given authority to enter a taxpayer's premises.
Detailed analysis
Reasonable assistance from third parties
Under section 16(2), Inland Revenue has the authority to require the owner, manager, and current or former employees of any business that is being investigated to give reasonable assistance in an investigation or to answer questions relating to an investigation. There is uncertainty, however, over whether third parties - for example, a taxpayer's bank manager - are required to give reasonable assistance or answer questions.
The Committee of Experts recommended that section 16(2) be clarified. It commented that in principle, third parties should be required to give reasonable assistance and answer questions because the information being sought can be requisitioned under section 17. This statutory requirement would also protect third parties from actions for breach of confidence or infringement of the Privacy Act 1993.
The amendment to section 16(2) will clarify that occupiers must provide Inland Revenue with reasonable assistance and facilities. "Occupier" under Australian case law has been interpreted to mean all persons entitled to be on the premises, including employees, and is not restricted to the owner or lease holder.
Submissions on the discussion document raised concerns that Inland Revenue may request facilities that may not be available or appropriate. A taxpayer is not expected to provide Inland Revenue with facilities other than those already existing. It is essential that basic facilities such as lighting are available to Inland Revenue.
Authority to enter a taxpayer's premises
This issue was not raised by the Committee of Experts but was included in the discussion document as a result of the government's own concerns.
The ability to have other persons accompany Inland Revenue officers onto taxpayer's premises is necessary as those other persons may have specialist skills not possessed by Inland Revenue officers, such as computer forensic skills. The ability to have the Police accompany officers may be necessary to discourage physical violence. Accordingly, section 16 will be amended to allow other persons, whose assistance is considered necessary, to enter taxpayers' premises.
Currently, a taxpayer's consent or a judicial warrant must be obtained before Inland Revenue officers can enter the taxpayer's private dwelling. Section 16 requires a warrant to specify the individual investigator who may enter the premises. Practical difficulties can arise if circumstances require another Inland Revenue officer not named in the warrant to take part in the investigation.
Section 16 will be amended to allow warrants to authorise Inland Revenue officers in general to enter a private dwelling.
These amendments will reduce practical difficulties in enforcing the Inland Revenue Acts.
Removing documents for photocopying
Although section 16 confers on Inland Revenue full and free access to all premises to inspect and copy any books, documents or anything else that Inland Revenue considers necessary or relevant for tax purposes, it has no authority to remove documents for copying elsewhere.
The Committee of Experts was concerned that the current wording of section 16 could create problems in cases where it is not possible or practicable to make copies of documents on the taxpayer's premises.
The government is concerned that the risk of documents being altered or destroyed exists despite the availability of inspection. The value of an audit is compromised if Inland Revenue cannot independently verify the taxpayer's tax liability. If Inland Revenue is to discharge its statutory duty of collecting the right amount of tax, documents must be able to be protected from being altered or destroyed.
Section 16 will be amended to provide Inland Revenue with the power to remove documents for photocopying. Documents will not be removed if it is practicable to make copies on premises.
The power to remove documents will be tightly controlled, and guidelines will be developed around the use, handling and storage of information. The amendment will expressly state that documents removed from a taxpayer or third party for the purpose of copying will be returned to the taxpayer as soon as practicable. The taxpayer will be given a list of the documents removed.
A submission on the discussion document Taxpayer compliance, standards and penalties: a review suggested that if given the power to remove documents for photocopying, Inland Revenue should have a duty to provide an identical set of copied documents to the taxpayer. This would ensure taxpayers were aware of the specific documents obtained from their records. Administrative guidelines will require taxpayers to be provided with a copy of the specific documents photocopied, unless all the documents removed were photocopied.
Requisition of information held by offshore entities
Under section 17 Inland Revenue can require a person to produce for inspection any records under the control of that person. However, there is uncertainty over the meaning of "control" and, in particular, over whether documents can be regarded as being under the control of a New Zealand resident if that resident has control of an offshore company which has those documents in its possession.
The Committee of Experts recommended that section 17 be amended to ensure that New Zealand resident individuals and companies can be required to produce such records for inspection in New Zealand.
The amendment will allow Inland Revenue to requisition from New Zealand residents records held by offshore entities controlled by them and provide that foreign secrecy laws restricting the production of records in New Zealand be ignored.
The Committee of Experts noted that foreign secrecy laws are an important reason for companies establishing subsidiaries in certain countries in the first place so as to exploit such laws to frustrate investigations by tax authorities in their home countries. Countries such as Australia and the United States already have such provisions for ignoring foreign secrecy laws.
Documents to be sent to a specified Inland Revenue office
The Committee of Experts noted that section 17 requires a person to produce documents for inspection only at the person's premises. The committee considered that it could be more efficient in some cases for documents to be sent to a particular Inland Revenue office. Therefore it recommended that section 17 be amended to give Inland Revenue the discretion to require that documents be sent to a particular Inland Revenue office.
Submissions on the discussion document recommended that the legislation provide that documents be sent to the Inland Revenue office closest to the taxpayer. As certain issues are dealt with at designated Inland Revenue offices, it would not be in the interests of either the taxpayer or Inland Revenue to have the documents delivered to any office other than the office where the matter is being dealt with. Having documents delivered to the office closest to the taxpayer would often necessitate the double handling of documents, create an unnecessary administrative burden and most likely delay Inland Revenue's response to the taxpayer.
Other matters under consideration
The ability to remove computers to copy information
In the discussion document Taxpayer compliance, standards and penalties: a review, the government proposed that section 3 of the Tax Administration Act 1994 be amended to clarify that the word "document" includes computers. This proposal was aimed at clarifying that Inland Revenue has clear authority to access or remove computers for the purpose of copying information they contain. The submissions on the discussion document raised concerns regarding the removal of computers and the impact upon businesses. The government recognises the importance of information to taxpayers and appreciates the need to minimise disruption appreciated. Officials will carry out additional research on this proposal.
Removal of the words "necessary or relevant"
The removal of the words "necessary or relevant" from section 17 was also proposed in the discussion document Taxpayer compliance, standards and penalties: a review. This issue will now be considered following the government's forthcoming review of tax and privilege.