I spent Thursday and Friday last week at the Chartered Accountants Australia and New Zealand (CAANZ) tax conference, listening to specialists from practice, economists, and very noticeably the Inland Revenue (IRD). In fact, IRD seemed to have the largest contingent of people there. I even ended up chatting with a few of them while lining up for morning tea.

There is one key message I think our clients really need to hear: the IRD has changed in a material way.

Why things are changing

A mix of factors is behind the shift. As a country, we are in a position where government cash is going out faster than it is coming in, and on top of that, the Government has provided targeted funding to tighten up tax compliance. Over the COVID period and in the subsequent years, IRD’s focus shifted more toward support and assistance, and enforcement and audit activity were dialled back. The result is that tax debt has climbed. The Minister of Revenue has stated it reached around $7.4 billion, which is more than 50 percent higher than in 2022. IRD is now in catch up mode.

More funding, more audits

IRD has been given around $29 million per year in extra compliance funding from Budget 2024, and a further $35 million per year from Budget 2025, on top of their baseline funding. This represents a significant and permanent increase in audit and collection resources. The extra funding is not symbolic. IRD expects to return about $4 for every $1 spent in the first year, rising to around $8 for every $1 spent from year two onwards.

The softly, softly approach to debt is over

One IRD staffer I chatted with put it like this: imagine you are a small business sending out invoices for four years but never checking whether your customers actually paid. That is essentially what happened in some areas. Unsurprisingly, tax debt is now sitting at elevated levels and IRD is starting the long process of bringing it back down. If you have been used to leniency on payment arrangements or overdue amounts, you may find the tone and approach very different from here on. Related to this it’s important to remember that different tax types are treated more seriously and in particular non payment of PAYE and employer related taxes can lead to criminal prosecutions more quickly than other tax types..

Data matching is ramping up

Alongside audits, IRD’s data matching capability has taken a big leap forward. They now have far better visibility of:

• Land transactions including undeclared rental income and bright line profits
  
• Complex structures and personal service arrangements that run through a taxpayer’s own entity
  
• Hidden economy income, cross border transactions and platform based income
  
• Market rate salaries tied to shareholder and contractor arrangements

One presenter summed it up nicely: “If you want to fly under the radar with IRD, the best thing you can do is pay your taxes on time.” I took that to mean the opposite is also true. Late payments and overdue tax are now one of the quickest ways to attract IRD attention.

A new focus: tax governance for all businesses

Something that really stood out this year was IRD’s renewed emphasis on tax governance. Historically this was something only the big end of town really needed to think about. Large corporates had audit committees, internal tax teams and formal governance frameworks.

That expectation has now shifted. IRD made it clear that SMEs are increasingly expected to have basic tax governance systems in place, and that these systems should improve as the business grows.

Good tax governance for an SME does not need to be complicated, but it should be deliberate. Examples include:

• Having clear processes for tracking income and expenses, with the right coding, documentation and approvals
  
• Maintaining adequate internal controls such as segregation of duties, approval workflows and checks to confirm bank transactions match the accounting system
  
• Regularly reconciling key accounts such as GST, wages, PAYE, shareholder current accounts and loan accounts
  
• Keeping good records and retaining documentation that supports income, deductions and GST claims
  
• Ensuring payroll processes and contractor arrangements are correct
  
• Having someone responsible for tax oversight. This might be the owner, an internal administrator or the external accountant, but the accountability should be clear
  
• Reviewing transactions that have tax implications including drawings, dividends, inter-entity charges and land related transactions
  
• Documenting decisions where there is judgement involved, such as bright line, GST on mixed use assets or market rate salaries

IRD’s message was straightforward: As your business grows, the quality of your tax processes should grow with it. Weak or inconsistent systems are now a risk factor that increases the likelihood of audit activity.

What this means for our clients

In short, the landscape has changed. It is important not to rely on what IRD was like over the past few years. Stronger enforcement, more audits, better data matching and a clear focus on tax governance all mean that compliance needs to be taken seriously.

If you are unsure whether your internal processes are up to scratch, or if you have been meaning to tidy things up but have not yet got there, now is a very good time to get on top of it.

Feel free to get in touch if you would like to talk through how this might affect you, or if you are concerned about outstanding tax. We are here to help.