Shadow economy leaving NZ taxman $1 billion out of pocket

Tax dodgers have left the Inland Revenue Department (IRD) a billion dollars short, according to Chartered Accountants Australia and New Zealand (CA ANZ).

This figure is central to recommendations put forward by CA ANZ in its submission to the Government's Tax Working Group, which is currently examining structure and fairness of New Zealand's tax structure.

The billion dollar amount is based on a Victoria University and IRD study released in April showing that New Zealand is missing out on about $800 million in its annual tax take due to the country's self-employed under-reporting their income by about 20 per cent.

John Cuthbertson, New Zealand Tax Lead for CA ANZ, said that when other legal entities such as companies are included the amount of undeclared tax from the shadow economy is likely to be in excess of $1 billion a year.

"This figure is actually conservative," Cuthbertson told the Herald.

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Cuthbertson said CA ANZ is urging the Government to address this because it is one of the easier ways in which the Government could increase its annual tax haul.

He said that rather than putting pressure on other areas and looking to alter existing laws, the Government should first look into ensuring it gets the full amount due in a given tax year.

"This should be the first cab off the rank," he said.

Cuthbertson said the shadow economy's potential tax gap is equivalent to the Government's annual commitment to the Provincial Growth Fund, which will invest in regional development.

He also pointed to the Government's previous success in this space, saying that the additional $83 million in funding given to the IRD since 2010 to combat the shadow economy has delivered results.

"Inland Revenue uncovered $159 million in tax in the 2016 year alone and significant amounts in all years since 2010," Cuthbertson said.

Cuthbertson added that work needed to be done in changing Kiwi attitudes to tax evasion.

"Under-reported income, manipulating your expenses and slipping a tradesman some bank notes, is not okay," he said.

"It's not a victimless crime. There's a cost to this behaviour and that cost is less money for health and education, social housing and the huge range of government services in need of more money."

Cuthbertson said that various international markets have successfully managed to increase tax collection by educating taxpayers, making compliance simpler, reducing opportunities, increasing detection and reinforcing social norms.

He said these steps should come well before the Government puts pressure on other areas of taxation.