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Chapter - 18
New Zealand

1.    Introduction

1.1.    The Inland Revenue Department (IRD) is the primary collector of revenue for the New Zealand government, collecting just over 90% of total government revenue. The IRD is also responsible for the delivery of a number of the government's social policy initiatives.

1.2.    The core businesses of IRD are:

• Collection of revenue on behalf of the Government
• Collection of employer and earner premiums on behalf of the Accident Rehabilitation and Compensation Insurance Corporation
• Administration of the Child Support Scheme
• Administration of the Student Loans Scheme
• Administration of the Family Support Tax Credit and Guaranteed Minimum Family Income and Independent Family Tax Credit Schemes
• Provision of policy advice to the Government on taxation, child support and other key social policies
• Provision of a ruling service, including statutory determinations and valuations for taxpayers. This includes a binding rulings service which binds the Commissioner of Inland Revenue to the decision in the ruling.

1.3.    The Commissioner of Inland Revenue is responsible to the Minister of Revenue for the successful administration of these functions.

1.4.    The IRD expects to collect $33 billion of Crown Revenue in 1996/97, most of which is tax revenue, including:

• Source deductions from individual taxpayers $12 billion
• Other persons (other income tax from indiciduals and trusts) $ 3 billion
• Company tax $ 5 billion
• Goods and Services Tax (GST) $10 billion
• Witholding taxes $1 billion

2.    Audit Mandate

2.1.    The functions and duties of the Auditor-General are set out in section 25 of the Public Finance Act 1977. The Auditor-General is appointed to be the auditor of public sector entities and without limiting the scope of that appointment, he has the responsibility to ascertain whether:

• the entity's books and accounts have been faithfully kept;
• the entity's procedures, including internal control, are suffient to ensure that there is effective control over the revenue, expenditure, and other resources of the entity; and
• the entity's resources have been applied effectively and efficiently in a manner that is consistent with the applicable policy of the entity.

2.2.    The Auditor-General has further defined the scope of the legislative audit by issuing a set of auditing standards which auditors who conduct the audit on his behalf are required to comply with. These additional standards adopt the Institute of Chartered Accountants of New Zealand's standards as a minimum but enlarge on the following areas:

• legislative compliance - the organisation has acted within the authority granted by Parliament;
• performance - the organisation has delivered the goods, services or results in accordance with Parliament's intentions (this includes details of non-financial information that has been reported by organizations in their statement of service performance);
• accountability - the organisation has given a full and accurate account of its activities and its compliance with Parliament's intentions through the annual reporting cycle;
• probity - the organisation has acted in accordance with the standard of behaviour expected both by Parliament and the public.

*    Exchange rate for different currencies vis-a-vis the US $ as on 31st March, 1997 are indicated in Appendix 1

2.3.    In New Zealand, the government contracts with Departments for the management of Crown functions. The government issues consolidated financial statements which include all Crown inflows and outflows and the associated costs from all government departments and crown entities.

2.4.    The audit opinion in relation to the consolidated financial statements is signed by the Auditor-General himself. Each departmental auditor will provide audit clearance on their Crown consolidation schedules to the Crown accounts auditors.

2.5.    Each government department and Crown entity also receive an audit opinion in their own right. This opinion covers the contract amount (or appropriation) that the Department received to carry out its functions for the government and how it was spent, and also the non financial measures of their service delivery.

2.6.    The audit of the IRD is therefore split into two components:

2.7.    The audit of Crown revenue

2.7.1.    The objectives of this audit are to provide a letter of clearance as to the accuracy of the Department's Crown schedules prior to submission to Treasury and to ensure compliance with statutory and regulatory requirements.

2.8.    The audit of the Inland Revenue Department

2.8.1.    The objective of this audit is to issue an audit opinion in relation to the Departmental accounts. This audit principally covers the personnel and operating expenditure of the Department and the assets used in the management of its activities. The Departmental audit also covers the non-financial performance measures which provide another gauge of how well the IRD performed in carrying out its functions of behalf of the Crown.

2.8.2.    The Crown Revenue audit is the area applicable to the items covered in the questionnaire.

3.    Audit Approach - Crown Revenue

3.1.    Our audit focuses on the systems and controls the IRD has in place to:

• maintain a record of those in the taxpaying population
• ensure that the maximum number are complying with their obligations; and
• follow up on those who do not comply
• ensure that the returns received are correctly processed and recorded.

3.2.    At year end, our audit also focuses on:

• analytical review of tax revenue and refunds
• taxation receivable (including tax accruals and provisions for uncollectible debt)
• taxation refunds payable (including accruals for refunds payable)
• Crown bank accounts
• Movement in taxpayers equity for the period.

3.3.    One of our key objectives during the audit is to ensure that the total tax revenue is fairly stated within the limits of overall Crown materiality. Our audit of the IRD is designed to ensure that we can place reliance on systems and procedures in place to ensure that all information is fairly stated.

3.4.    The completeness of information provided in the returns submitted by the taxpayer to the IRD is not checked during the audit. We rely on the IRD taxpayer audit function to carry out this task. New Zealand relies on a voluntary compliance regime for taxation where the majority of returns are self assessed. We do however, check that the IRD's audit process is subject to sufficient controls surrounding the objectivity of the selection process and the quality of work performed.

3.5.    The IRD currently monitors the top 100 companies in New Zealand. Other companies, individuals and other entities are selected for audit on a risk basis. As stated above our audit includes checking that systems are in place to ensure that revenue is fairly stated. A sample of transactions are selected from transaction tapes, cheque listing, direct credit listings, banking receipts and bank statements. A sample of hard copy returns are also selected at the processing centres to ensure that the data entry into the computer is accurate. Prior period returns are scanned online as a check that the current assessment is reasonable. Due to the size of the population, the sample size is based on the sample sizes specified in our audit methodology, taking into account the multi-location nature of processing and a requirement for an additional level of assurance.

3.6.    Our audit approach is to rely on the Commissioner of Inland Revenue to administer the tax legislation and we check that the systems and procedures set in place to administer that function are working appropriately.

4.    Information Technology Audit Techniques

4.1.    The IRD operates in a highly sophisticated computer environment. The majority of tax types are administered under the IRD computer system known as FIRST (Future Inland Revenue Systems and Technologies). FIRST is the name of a group of interlinked computer systems. FIRST was conceived out of a plan to completely overhaul the computer processing facilities of the IRD. The objectives of FIRST were to:

• enable the computerisation of more client and return information
• provide enhanced security
• provide wide scale on-line access
• allow integration of client information
• reduce paper based processing
• provide economies of scale
• enable the implementation of office automation techniques
• enable the shift in resources from processing to compliance activities.
• ensure that the system has the flexibility to cope with. ftxtuYe fax changes.

4.2.    FIRST is one of the largest system development integration projects carried out in Australia.

4.3.    While IRD technical staff maintain the system, the computer processing is carried out under a bureau arrangement with EDS who utilise two Unisys Clearpath mainframe computers to handle IRD transactions. The machines replace a triple Unisys A19 and Dual A18. IRD have also recently converted to imaging technology for receipts processing and are currently working on a pilot project for the imaging of returns. The IRD also have systems in place to allow tax agents to file tax returns electronically (E.File) directly into FIRST.

4.4.    Computer Assisted Audit Techniques (CAATS) are used during our audit, including the monthly extractions of transaction tapes from FIRST. These are reconciled to control totals for completeness and from this information, various reports are run, for example:

• High value transactions
• Transaction totals by location and transaction type, also analysed by maximum, minimum and mean
• High risk transactions selected according to various parameters.

4.5.    At year end, we also qbtain computer downloads of:

• Taxpayer balances
• Debt management System balances
• Supporting details of tax accrual calculations
• Provisional tax information (used to calculate tax revenue assessed but not yet due for payment).

4.6.    The IRD also has an in-house computer audit team as part of their Internal Audit function, however, we do not generally place any reliance on the work that they perform, In addition to CAATs the audit team checks the logical access users have to the system and that control documentation is up-to-date.

4.7.    We have experienced some difficulty in obtaining all the information we required from the IRD's computer system in the past. However, over successive audits we have managed to refine the process by improving the communication channels with IRD's Information Technology unit. Generally our data download process now works smoothly.

5.    Disputes Resolution Procedures

5.1.    New procedures have just been implemented to try to avoid the backlogs that were being experienced. The new procedures are:

• The Commissioner has to issue a notice of the proposed adjustment to the taxpayer. If the taxpayer accepts the adjustment the Commissioner will issue an amended assessment and the taxpayer will not be able to challenge the assessment.
• If the taxpayer disagrees with the proposed adjustment a conference can be called by either the taxpayer or the Commissioner. If the conference fails to resolve the issue the dispute will follow an adjudication process.
• Once an assessment has been issued the taxpayer does have the right to challenge the correctness by issuing proceedings in the High Court; or issuing proceedings in the Taxation Review Authority; or filing a claim in the small claims jurisdiction of the Taxation Review Authority.

5.2.    An outline of the new procedures is provided in the attached Appendix.

5.3.    In New Zealand only one administration ever deals with each area. For example, the Inland Revenue Department is the sole administrator of taxation, the Customs Department deals with excise, local authorities with petrol tax and the Ministry of Transport with road user charges.

5.4.    In New Zealand, taxpayer (and the IRD) have recourse to either the Taxation Review Authority or to the High Court. As there is no separate state and federal structure in this country the question of conflicting judgements does not arise. The courts have an order of hierarchy so that a higher court can overturn the judgement or decision of a lower court.

APPENDIX
DISPUTES RESOLUTION PROCEDURES

THE NEW AND OLD PROCESS