Budget 2010: IRD beefed up

Bill English (right, with Prime Minister John Key) puts the returns at $5 for every $1 spent on tax enforcement. Photo / Mark Mitchell

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The taxman is to get sharper teeth with a $119.3 million increase in funding over the next four years to enforce the new tax regime, target the "hidden" economy, and chase speculators who dodge tax on property deals.

But while yesterday's tax shake-up removed a key incentive for the wealthy to structure their affairs to avoid the top tax rate, the Inland Revenue Department (IRD) is likely to use much of its new resources pursuing taxpayers using a newly created loophole, says one tax expert.

Revenue Minister Peter Dunne said the new money for the IRD would go mainly on "audit and compliance" and should generate a return of about $745 million over four years.

Finance Minister Bill English put the returns even higher at $5 for every $1 spent on tax enforcement.

Mr Dunne said the funding would improve Inland Revenue's ability to detect and take action against those "who deliberately structure their affairs to avoid paying the tax they should".

That included "hidden" activities such as cash transactions. The money would also aid the department's pursuit of overdue tax bills.

Deloitte tax partner Thomas Pippos said yesterday's cut in top personal tax rate from 38c to 33c removed the incentive for taxpayers to structure their affairs to enjoy the comparative advantage offered by trusts.

But the cut in the company tax rate to 28c created a new 5c "wedge" which would inevitably be exploited with taxpayers using company structures to avoid the top rate.

"We'll still have tension around that boundary and so you'd expect to see this investment in investigations to be used to police that."

Mr Pippos said the new money was a continuation of Government investment in the IRD over successive Budgets.

While it was unclear to what extent the economic returns quoted by ministers yesterday were skewed by last year's multibillion-dollar tax settlements with foreign owned banks, "there's always been a material return on every dollar invested in this space", he said.

Property speculators were also identified as targets for increased IRD scrutiny yesterday.

Mr Pippos said the IRD had historically not policed property speculators as hard as legislation allowed.

But with the property boom well and truly over, "the train has left the station" and investigations into current activities were not likely to yield great returns.

New Zealand Institute of Chartered Accountants tax director Craig Macalister also questioned the IRD's ability to collect as much as budgeted, as it was possible those it chased down would have no money.