ANNUAL REPORT 2011 - Inland Revenue Department

B-23ANNUAL REPORT 2011ANNUAL REPORT2011

Crown Copyright © 2011This work is licensed under the Creative Commons Attribution 3.0 New Zealand licence. In essence, you are free to copy, distributeand adapt the work, as long as you attribute the work to the Crown and abide by the other licence terms. To view a copy of thislicence, visitcreativecommons.orgPlease note that no departmental or governmental emblem, logo or Coat of Arms may be used in any way that infringes anyprovision of the Flags, Emblems, and Names Protection Act 1981.legislation.govt.nzAttribution to the Crown should be in written form and not by reproduction of any such emblem, logo or Coat of Arms.ISSN 2230-6005 (Print)ISSN 2230-6013 (Online)ird.govt.nzPresented to the House of Representatives pursuant to the Public Finance Act 1989 and the Tax Administration Act 1994.

CONTENTSTo the Minister of Revenue 4Commissioner’s introduction 5Inland Revenue’s charter 8PART 1 – Operational context 9Factors influencing our operations 10Tax revenue 13Advising on government policy 14PART 2 – Strategic direction 19IR for the future 20Measuring our performance 22PART 3 – Operational performance 29How we provide better, smarter services 30Working with other agencies and providers 33Influencing voluntary compliance 34Delivering social programmes 41PART 4 – Organisational health and capability 47Developing our people capability 48Our systems meet our needs 50PART 5 – Governance and risk management 51Governance 52Managing risks 53PART 6 – Statement of service performance 55Statement of responsibility 56Statement of service performance 57PART 7 – Departmental financial statements 87PART 8 – Financial schedules – Crown as administeredby Inland Revenue119Audit report 139Additional information 145ird.govt.nz3

SERVICE PERFORMANCEThis year, our service performance was affected by the Canterburyearthquakes and we did not achieve some targets as a directconsequence. We also decided to reallocate resources to the areaswhere they were most needed, eg, we increased the number ofhours spent on advisory services.Areas directly affected by the earthquakes included:""our outbound calling campaigns for collecting overdue debt""timeliness of responding to electronic correspondence""processing of registrations and child support administrativereview applications.We also expect service performance to be affected during2011–12 because we are still re-establishing our full range ofservices in Christchurch. Despite these pressures, we maintainedhigh levels of customer satisfaction with our services.More information about our service performance is included inParts three and six.PROVIDING BETTER, SMARTER SERVICESThis year, we continued to strengthen our e-service platformto make our e-services faster, more consistent and stable. Weintroduced a new e-service for tax agents and we improved theexisting ones for families and individuals. This gives our customersmore opportunity to self-manage their interactions with us. Therewas a 56% increase in the number of customers registered fore-services compared to last year.We also continued to improve our telephone services and wemade greater use of “front-end banner messaging” to encouragecustomers to use our Interactive Voice Response system ande-services. This helped reduce demand, with Inland Revenueanswering 8.6% fewer calls this year than in 2009–10.MANAGING COMPLIANCEOur focus on prevention and early intervention in managingoverdue debt has helped us significantly reduce the number ofnew debt cases and the amount of debt aged under one year.We recruited additional debt staff and invested in technologyto develop our capability for outbound calling campaigns. Oneconsequence of our focus on new debt is an increase in the level ofdebt over two years old, which we plan to address in the comingyear.document and we have seen positive results from the activities weused to manage compliance during the year.In Budget 2010, Inland Revenue received additional funding forcompliance work in debt collection, the hidden economy andproperty transactions. In 2010–11, we exceeded our target returnson investment for these compliance programmes, despite somework being affected by the Canterbury earthquakes.PERFORMANCE IMPROVEMENTFRAMEWORK REPORTThe Performance Improvement Framework report onInland Revenue was released in May 2011. The report wascomplimentary of Inland Revenue’s performance. We rated strongor well placed in our delivery of core business functions, meetinggovernment priorities and policy advice.The report identified our business transformation programme,management of debt and returns, asset management andinformation management as needing improvement. One ofthe report’s key recommendations was that the Commissionershould provide greater leadership to the business transformationprogramme. I accepted this recommendation and now chair theBusiness Transformation Programme Board.OUR PEOPLEWith the introduction of IR for the future, a key priority is:We retain, develop, and attract high-calibre people with theskills required in the future–enabling a culture of service andexcellence.During the year we continued to focus on our leadershipdevelopment, recognising that good leadership is critical to deliverour priorities and build a culture of service and excellence.At the same time, we are carrying out a work programmeto improve the way we target our customer needs, focus oncompliance issues and work smarter. This programme will affectour people over the coming years. We also expect it will help usto provide better services by standardising processes, reducingduplication of effort and delivering prioritised services to meetlocal needs.See Part four for details of our work to develop the capability ofour people.This year, we published Inland Revenue’s compliance focus 2010–11.The document provides an overview of the key compliance issueswe were concerned with and the activities we used to managethem. This was the third year we published our compliance6 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

TRANSFORMING THE WAY WE WORKOur priorities and transformation goals, from IR for the future, setout the key features of Inland Revenue’s business in the future. Weare advancing our transformation through several key projectsand a range of service-focused initiatives across the organisation.During the year we continued to focus on developing options fortransforming Inland Revenue’s business, which we will discuss withMinisters in 2011–12.In 2010–11 we changed our approach for delivering the systemchanges needed to implement legislative changes in the StudentLoan Scheme Act 2011. We will now implement these changeswithin our existing system (FIRST) in two phases taking effect from1 April 2012 and 1 April 2013.CONCLUSIONWe continued to deliver high-quality services to the Governmentand our customers during a time of considerable organisationalchange. We responded quickly and effectively to the challengespresented by the Canterbury earthquakes and we supportedour staff in Christchurch while also providing relief to customersaffected by the earthquakes. I am proud of what Inland Revenueachieved during 2010–11.Robert RussellChief Executive and Commissioner of Inland Revenueird.govt.nz7

INLAND REVENUE’S CHARTERHow we willwork with youInland Revenue collects money to pay for public services. We helppeople to meet their obligations and receive their entitlements.We work within the Inland Revenue Acts and other relevant laws,and our actions are consistent with the spirit of the Treaty of Waitangi.How we willwork with youReliable adviceand informationConfidentiality We will be easy to deal with, prompt,courteous and professional. We will follow through on whatwe say we will do. We will be responsive to individual,cultural and special needs. The person you are dealing with willgive you their name. We will value your feedback and useit to improve our services. We will provide you with reliable andcorrect advice and information aboutyour entitlements and obligations. We will assist you to get in touchwith the right people for your needs. We will be well-trained andcompetent. We will keep looking for betterways to provide you with adviceand information. We will treat all information aboutyou as private and confidential, andkeep it secure. We will only use ordisclose it in accordance with thelaw.Consistencyand equityYour right toquestion us We will apply the law consistently soeveryone receives their entitlementsand pays the right amount. We will take your particularcircumstances into account asfar as the law allows. We will make it easy for you toquestion the information, adviceand service we give you. We willinform you about options availableif you disagree with us, and we willwork with you to reach an outcomequickly and simply.For this charter to work effectively,we rely on each customer to provideall relevant information when dealingwith Inland Revenue.Robert RussellCommissioner of Inland Revenue8 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Part oneOPERATIONAL CONTEXTird.govt.nzPART 1OPERATIONAL CONTEXT9

FACTORS INFLUENCING OUR OPERATIONSInland Revenue operates in an environment that is determinedby the Government’s priorities for the economy and the results itwants to achieve in the public sector.This year, several factors influenced how we work, which willcontribute to our long-term ability to deliver on the Government’spriorities and our outcomes. The Canterbury earthquakes had asignificant impact on Inland Revenue, requiring fast operationaland policy responses to recognise the situation people inCanterbury were facing. Another factor was our continued workon transformation initiatives.THE GOVERNMENT’S PRIORITIESThe Government’s priorities for 2011 include two goals that are afocus for Inland Revenue:""building a stronger economy""building better results from public services.Inland Revenue contributes to these priorities by:""delivering an effective and efficient tax administration whichsupports the Government’s objectives, especially contributingto the Government’s efforts to consolidate New Zealand’sfiscal position, and by providing value for money to theGovernment and our customers.""providing better, smarter public services by changing the waywe work to give customers greater certainty and faster, simplerinteractions with us.Our principal contributions to the Government’s priorities arereflected in the outcome indicators in figure 1.FIGURE 1 –OUTCOME INDICATORS REPORTOutcome indicator 2009–10 2010–11Revenue is available to fund government programmes throughpeople meeting payment obligations of their own accord.""Total revenue collected $46.0 billion $46.8 billion""Total student loan$644 million $691 millionrepaymentsPeople receive payments they are entitled to, enabling them toparticipate in society.""Total Working for FamiliesTax Credits paid 1$2,787 million $2,746 million""Total KiwiSaver fundsdistributed to providers forinvestment""Total child supportpayments distributed""Total paid parental leavedistributedCANTERBURY EARTHQUAKES$2,648 million $2,911 million$392 million $412 million$154 million $154 millionThe earthquakes in September 2010 and February 2011 seriouslydisrupted Inland Revenue’s operations in Christchurch and causedpersonal and business losses to many customers. Subsequentaftershocks have lengthened the recovery process. Our peoplehave been working in temporary locations and, in some places,sharing accommodation with other government agencies. Wedo not know when we will be able to return to our central citybuilding and provide services at the pre-quake level.The impact on our operationsAfter the earthquakes, our initial concern was for our peoplein Christchurch. We set up social media sites and ran drop-incentres to offer assistance and keep them connected with theircolleagues and other Inland Revenue offices. Many of our peoplein Christchurch worked on recovery efforts after the earthquakesand provided assistance to the Ministry of Social Development,New Zealand Police, Civil Defence and the Red Cross.1This includes Working for Families Tax Credits paid by Inland Revenue andthe Ministry of Social Development.10 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Some work previously done in the Christchurch Office wastransferred to other sites or contracted to outside providers.Temporary office sites were set up outside the central city torestore services. The aftershocks that occurred in early June setthe resumption of our work back because our main temporarybuildings were declared unsafe. Several of our performancemeasure results for 2010–11 reflect the disruption caused bythe earthquakes on our service delivery. We expect that serviceperformance will continue to be affected during 2011–12.How we supported our customersAfter the earthquakes, we recognised that many of our customershad suffered business or personal losses and we put a stop onletters requesting payment. We offered assistance for businessesand individuals through a helpline and local recovery assistancecentres. More than 300 of our people worked in the communityand with other agencies immediately after the earthquake.We implemented policy measures (see page 14) to assist ourcustomers and encourage people to make donations to the reliefeffort.As the recovery effort continues in Christchurch, we are workingwith other government agencies and private providers, suchas tax agents, to provide assistance. We are providing limitedface-to-face services for Working for Families Tax Credits andchild support customers at Work and Income offices outside theChristchurch city centre and at temporary sites in shopping malls.This situation has enabled us to explore a range of cooperativeworking options that may serve as a model for other locations inNew Zealand.We received an additional $4.4 million in funding to deal with theconsequences of the Canterbury earthquakes. The funding waslimited to writing off or repairing damage to departmental assets,maintaining output delivery and re-establishing operations inChristchurch following the February 2011 earthquake.THE ECONOMYThe recovery after the recession of 2008–09 has had a positiveeffect on tax revenue, but it was also evident that the downstreameffects of the recession were still being felt over the last year.Other collections such as student loan repayments have alsogrown more slowly than in the pre-2008 period. From July 2007 toJune 2009, repayments grew by an average of 13%. In the followingtwo years growth was 6%, despite continued increases in theborrower base and campaigns to improve compliance.TRANSFORMING OUR BUSINESSOur business transformation is a long-term programme thatwill make compliance faster, easier and less costly for customers,provide innovative online services, help us respond faster tofuture changes and maintain the integrity of the tax system. Ourtransformation goals set out the key features of our business in thefuture:""Efficient self-management options for customers thatprovide speed and certainty""A broader approach to compliance based on smarter use ofinformation and a wider range of interventions""A range of different working relationships with otherorganisations, including strategic partnerships to deliversome services""Less transactional work and less direct contact withcustomers""Excellence in complex technical work""More automation and streamlined information flows""Greater use of commercial IT products in our systems andservices""A healthy culture which our people value and thrive in.During the year, we continued to focus on developing options fortransforming Inland Revenue’s business that we will discuss withMinisters in early 2011–12.We are advancing our transformation work through several keyprojects and a range of service-focused initiatives across InlandRevenue.The most noticeable impact continued to be on our debtportfolio which reflected the pressure that some businesses havebeen under. Since 2007, just before the recession, the numberof customers in debt to Inland Revenue has risen by 39% andinsolvency debt has more than tripled. 22A large proportion of insolvency debt in our debt portfolio resulted fromactions initiated by parties other than Inland Revenue.ird.govt.nzPART 1OPERATIONAL CONTEXT11

FUTURE DIRECTION OF SERVICE DELIVERYWe continued developing a work programme to improve theway we target our customers’ needs, focus on compliance issuesand work smarter. We expect this will help us to provide betterservices by standardising processes, reducing duplication of effortand delivering prioritised services to meet local needs.Examples of these changes are:""tailoring advice and education to meet the needs andcompliance behaviour of customers in provincial locations""grouping non face-to-face work in the four main metropolitancentres (Auckland, Hamilton, Wellington and Christchurch) toincrease efficiency and effectiveness""keeping local counters for customers and looking for moreco-location opportunities with other agencies""managing customer-facing work nationally to provideconsistent customer services.We received funding in 2009 to implement the redesign project.Our original plan to use commercial software licences incombination with our core taxpayer system, known as FIRST, wasmodified during 2010–11 so that FIRST would be used. This wasdone because it became apparent that the changes to systemswere more complex and time-consuming than expected becauseof the particular complications of the student loan system.The upgrade will be done in two phases. The main policy changeswill be implemented to take effect from April 2012, and a numberof the more administrative components that will have minimalimpact on borrowers, will be implemented by April 2013.We analysed information about our customers and theircompliance behaviour. We also looked at demographics, socialstatistics and geographic spread, and aligned that with ourbusiness knowledge and priorities so we can provide the right mixof services to suit different communities.The new way of working has been implemented in Gisborne,Greymouth and Timaru and changes made in our operationsdelivery sites. We have consulted staff in Rotorua, New Plymouth,Napier, Nelson and Invercargill, about proposed changes to theiroffices. Changes will start to be implemented in early 2012 andcompleted by June 2013.STUDENT LOAN REDESIGNOur Student Loan Redesign Project addresses the need fora consolidated view of loans that integrates the lending andrepayment processes carried out by StudyLink and InlandRevenue. As well as enabling a greater degree of collaborationbetween these two agencies, the changes will give borrowersenhanced online services and encourage improved repaymentcompliance. The new system is supported by policy changes madeto the Student Loan Scheme Act 2011.12 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

TAX REVENUERevenue increased by $811 million (1.8%) in 2010–11 comparedto last year, reflecting a recovery in economic activity. However,the tax package in Budget 2010 has brought about a change in thecomposition of the revenue stream.Taxation from individuals fell by 4.2%, with lower personalmarginal tax rates coming into effect on 1 October 2010. This fallwas offset by increased revenue from GST, indicating resilience inconsumer spending through the course of the year. GST revenuewas also increased by the GST rate change to 15%, effective from1 October 2010.Company tax revenue was also higher than in the 2009–10 year.Much of the improvement in company tax collected was due toa recovery in economic activity, with improved growth in bothinternational and local markets.FIGURE 2 –REVENUE ASSESSED 2010–11 (ACCRUAL BASIS)Revenue type Outturn % change$ million previous yearDirect taxesIndividuals $23,136 –4.2%Company tax $8,195 9.1%Other $2,582 1.3%Sub-total direct $33,913 –0.8%Indirect taxesGST $12,575 9.6%Other indirect taxes $357 –Sub-total indirect $12,932 9.3%Total Inland Revenue tax $46,845 1.8%FIGURE 4 –COMPOSITION OF REVENUE BY TAX TYPERevenue type 2008–09 2009–10 2010–11Individuals 52% 52% 49%GST 20% 25% 27%Company tax 20% 16% 17%Other direct 7% 6% 6%Other indirect 1% 1% 1%See Part 8 for further information on revenue collected by InlandRevenue.Historical data for tax collected by Inland Revenue is available atird.govt.nzOutturn data for tax from all sources is available attreasury.govt.nzFigure 3 shows the trend in tax revenue collection over the last fiveyears and figure 4 shows the composition of revenue by tax type.FIGURE 3 –COMPOSITION OF ACTUAL REVENUE ASSESSED2006–07 2007–08 2008–09 2009–10 2010–11$ billion $ billion $ billion $ billion $ billionDirect$38.5 $41.3 $38.7 $34.2 $33.9taxesIndirect $10.1 $9.9 $10.4 $11.8 $12.9taxesTotal tax $48.6 $51.2 $49.1 $46.0 $46.8ird.govt.nzPART 1OPERATIONAL CONTEXT13

ADVISING ON GOVERNMENT POLICYThe Government’s tax policy programme is agreed by Ministersand is the major part of our Policy Advice Division’s work. Wealso advise on Budget packages and develop policy on basemaintenance matters. We develop policy to maintain the integrityof the tax system while ensuring that our tax system is as simple aspossible and is internationally competitive.POLICY HIGHLIGHTSDeveloping Budget 2011 policy work was a significant task. Itincluded support for the Government’s Savings Working Group.Considerable effort was also put into policy responses to theCanterbury earthquakes.Policy responses to the Canterbury earthquakesInland Revenue was significantly involved in legislative andregulatory change and advice on the tax implications of theearthquakes, providing relief for the people of Canterbury. Wereceived positive feedback about our response to these issues. Weare still working in this area through continuing consultation andwork with other agencies.Various Orders in Council focused on:""interest relief and its extension""the relief of GST on the Ministry of Social Development’semployer subsidy""exchange of taxpayer-specific information""flexibility of due dates.Legislative amendments included:""relationship between depreciation costs and insurance claims""timing of deemed disposal of assets relating to insurancepayouts""extending the deductible loss on the destruction of buildings""roll-over relief for depreciation recovered because of insuranceclaims""income and gift duty relief for donations of trading stock""new Working for Families definition of income—newCommissioner’s discretion""exempting certain employer welfare contributions""further extension of the redundancy tax credit""timing of loss-of-profits insurance claims.This work is ongoing.Savings Working GroupWe supported the Savings Working Group, established in October2010, to make recommendations on:""the role of government savings as part of New Zealand’soverall savings picture, including long-term savings/debttargets and the interaction of government and private savings.""the impact of the tax system on the level and composition ofnational savings and investment decisions.""the role of KiwiSaver in national savings.The Savings Working Group report recommended that theGovernment consider a large number of possible changes. Amajor theme of the report was the need for government to reduceexpenditure and improve its fiscal position, to reduce reliance onoffshore capital.The measures suggested by the Savings Working Group wereconsidered by the Government in developing Budget 2011.Budget 2011In an environment of economic recovery and the effects of theCanterbury earthquakes, Budget 2011 focused on national savingsand fiscal consolidation. In the tax system, savings were generatedthrough changes to KiwiSaver and Working for Families.The main changes in Working for Families were a gradual loweringof the abatement threshold and an increase in the abatement rate.The inflation adjustment for family tax credit amounts for childrenaged 16 and over was suspended until the amounts for childrenaged 13 to 15 in a family, catch up to the older child amounts.Changes to KiwiSaver included:""all employer contributions to KiwiSaver will be subject toemployer superannuation contribution tax from 1 April 2012.""the payment rate and maximum amount of the member taxcredit (MTC) was halved from the next MTC year (ending 30June 2012).""the default and minimum employee contribution rate will risefrom 2% to 3% for all members from 1 April 2013.""compulsory employer contributions will rise from 2% to 3%from 1 April 2013.The Budget also announced proposed changes to the student loanscheme and these changes will be included in the Student LoansScheme Amendment Bill 2011, to be introduced later in 2011.Earthquake charities, donations and fundraisingWe also advised whether particular organisations had charitablestatus and if donations made to these organisations would entitlethe donor to a tax credit.14 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

The student loan changes focused on improving the value of thestudent loan scheme and encouraging personal responsibility by:""ensuring lending is good value by requiring every newloan application to include a contact person as one of theconditions to access the scheme from 1 January 2013.""maximising repayments from New Zealand-based borrowersby excluding losses from the calculation of net income forstudent loan repayment purposes from 1 April 2012.""improving repayments from overseas-based borrowersby shortening the repayment holiday for overseas-basedborrowers from three years to one.Full details of the policy changes introduced in Budget 2011 werepublished at taxpolicy.ird.govt.nzInternational tax reformThe international tax rules have been progressively reformed toalign New Zealand with our international trading partners. Thishelps New Zealand-based businesses to compete more effectivelyin foreign markets.As part of the reform, an active income exemption for investmentsin foreign subsidiaries was enacted in 2009. The Taxation(International Investment and Remedial Matters) Bill, introducedin October 2010, proposes extending the active incomeexemption to non-controlling but significant investments—nonportfolioforeign investment funds.New Zealand has also continued to expand its tax treaty network.We signed a treaty with Hong Kong in December 2010. We arerenegotiating a number of other treaties.Information sharing and taxpayer confidentialityThe Taxation (Tax Administration and Remedial Matters) Act2011 changes Inland Revenue’s information disclosure rules.The Act amends the secrecy rule contained in section 81 of theTax Administration Act 1994 to give the Commissioner of InlandRevenue greater discretion to release taxpayer information toadminister the tax system more efficiently.The Act includes changes to facilitate tax information sharingbetween Inland Revenue and other government agencies. Thiswill allow more efficient use of information collected by InlandRevenue and reduce the need for individuals to provide duplicatedinformation to multiple government agencies.The changes aim to balance individuals’ privacy rights and a moreefficient and effective government service. They should result in:""improvements in service provision to customers""improved accuracy and timeliness of social assistancepayments""increased detection and prevention of fraud""reduced incidence of benefit debt""improved efficiency for departments due to reducedinformation duplication""reduced duplication of information that individuals arerequired to provide to separate government agencies.From next year, Inland Revenue will provide comment in ourannual report, on how the new secrecy provisions work, notingany issues or complaints that have arisen.ConsultationWe issued four significant public consultation documents thisyear.In July 2010, we sought public feedback on proposedadministrative and legislative changes to the tax disputes process.The proposed changes were largely administrative with someremedial legislative changes which have been included in theTaxation (Tax Administration and Remedial Matters) Act 2011.A consultation paper was released in August 2010 as part of areview of the distinction between depreciation fitout and nondepreciablebuildings.We issued a paper in August proposing broadening the definitionof family scheme income, which is used to determine entitlementsto Working for Families Tax Credits and other programmes. Thiswas part of a Budget 2010 announcement to improve the integrityof social assistance programmes.ird.govt.nzPART 1OPERATIONAL CONTEXT15

The tax policy yearJuly 2010A discussion document was released inviting feedback onproposed administrative changes supported by a number oflegislative changes to improve the tax disputes process.August 2010The Taxation (GST and Remedial Matters) Bill was introducedto the House on 5 August 2010. The bill addressed phoenixfraud schemes and was enacted on 20 December 2010.A technical paper on GST rate-change transitional matterswas published as a result of recommendations made by theGST Advisory Panel.An issues paper was released in August seeking feedback onsuggested changes to depreciation of non-residential buildingfitouts and to the grandparenting of depreciation loading forassets acquired before Budget 2010.The double tax agreement between New Zealand andSingapore became active on 12 August 2010.The Taxation (Income-sharing Tax Credit) Bill was introducedon 16 August 2010.Fund withdrawal tax was repealed and arrangements to helpbusinesses make the transition to the new GST rate of 15%was introduced by Supplementary Order Papers No 156 andNo 157 to the Taxation (Annual Rates, Trans-Tasman SavingsPortability, KiwiSaver, and Remedial Matters) Bill released on24 August 2010.The Student Loan Scheme Bill was tabled in Parliament on27 August 2010.On 30 August 2010 public feedback was sought on proposalsto improve integrity in social assistance programmes.September 2010Views were sought on options for child support reforms on2 September 2010.The Taxation (Annual Rates, Trans-Tasman Savings Portability,KiwiSaver, and Remedial Matters) Bill was introduced on19 November 2009 and received Royal assent on 7 September2010.On 30 September 2010, the redundancy tax credit repealedin Budget 2010 was extended to 31 March 2011 in responseto the September Canterbury earthquake.Feedback was sought in September 2010 on options for updatingthe child support scheme. Public feedback from over 2,000submissions was largely supportive, with most favouring acomprehensive review of the scheme. This could include changesto the child support formula, including revised estimates on thecost of raising children, the number of nights used to determinea shared-care arrangement, and counting both parents’ incomewhen setting support levels. Options to change the rules for howchild support payments could be made and for late paymentpenalties were also presented.LegislationIn the year to June 2011, the following tax bills were introduced tothe House:""Taxation (Annual Rates and Budget Measures) Act 2011(introduced 19 May 2011) introduced measures announced inBudget 2011, including changes to KiwiSaver and Working forFamilies. The bill was enacted on 24 May 2011.""The Taxation (Canterbury Earthquake Measures) Bill wasintroduced on 4 May and enacted on 24 May 2011. Thiscontained a number of earthquake-related relief measures.""On 23 November 2010, the Taxation (Tax Administrationand Remedial Matters) Bill was introduced. The billcontained proposals to abolish gift duty and also introducedamendments to secrecy provisions in tax administration. Thisbill was enacted on 29 August 2011.""The Taxation (International Investment and RemedialMatters) Bill builds on previous reforms of New Zealand’sinternational tax rules. It contains proposals to allow an activeincome exemption to joint ventures and other New Zealandshareholdings in foreign companies, that are not controlled byNew Zealand firms. The bill was introduced to the House on26 October 2010.""The Student Loan Scheme Bill was introduced on 27 August2010 introducing reforms that will in the future allowborrowers to manage their loans online. This bill was enactedon 29 August 2011.""The Taxation (Income-sharing Tax Credit) Bill, was introducedon 16 August 2010. It sets out the criteria that would applyfor couples caring for children to share their income for taxpurposes.""The Taxation (GST and Remedial Matters) Bill, introducedon 5 August 2010, aimed to remove the ability to avoidpaying GST on property transactions. The bill also clarifiesthe change-in-use rules and the GST boundary betweencommercial and residential accommodation. This bill wasenacted on 20 December 2010.16 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

October 2010The Software Developers’ Working Group was established on7 October 2010.Reform of New Zealand’s international tax rules continuedwith the tabling on 26 October 2010 of the Taxation(International Investment and Remedial Matters) Bill.November 2010A protocol amending the double tax agreement betweenNew Zealand and the United States came into force on12 November 2010.An Order in Council on 16 November 2010 set the annualamount of the minimum family tax credit at $22,204.The Taxation (Tax Administration and Remedial Matters) Billwas introduced on 23 November 2010.December 2010On 15 December 2010 Supplementary Order Paper No 200to the Student Loan Scheme Bill was released, clarifyingInland Revenue’s ability to recall a loan in cases of seriousnon-compliance.April 2011On 5 April 2011, Supplementary Order Paper No 220 to theTaxation (Tax Administration and Remedial Matters) Billwas released. It contained new tax rules for non-residentinvestors in portfolio investment entities.May 2011The Taxation (Canterbury Earthquake Measures) Bill wasintroduced on 4 May 2011 and enacted on 24 May 2011.The Taxation (Annual Rates and Budget Measures) Bill wasintroduced on 19 May 2011 and received Royal assent on24 May 2011.June 2011A Supplementary Order Paper No 245 to the Taxation(International Investment and Remedial Matters) Bill wasreleased on 13 June 2011.OECD Global Forum peer reviewNew Zealand participated in the OECD Global Forum peer reviewof tax administrations on the key tax administration measuresof transparency and information exchange. The Forum’s reportcommended the high standard of New Zealand’s laws andpractices for international cooperation on information exchange.The Forum examined New Zealand’s legal and regulatoryframework. This evaluation was done to understand how ourcommercial and civil laws create an environment promotingtransparency and exchange of information for tax purposes.The report noted only minor adjustments as recommendations.ird.govt.nzPART 1OPERATIONAL CONTEXT17

Part twoSTRATEGIC DIRECTIONird.govt.nzPART 2STRATEGIC DIRECTION19

IR FOR THE FUTUREInland Revenue’s mission is:We contribute to the economic and social wellbeing ofNew Zealand by collecting and distributing money.Our success is reflected in two outcomes:""Revenue is available to fund government programmesthrough people meeting payment obligations of their ownaccord.""People receive payments they are entitled to, enabling them toparticipate in society.In April 2011, we launched Inland Revenue’s new strategicdocument, IR for the future. It sets out our vision and highlightsour priorities and the culture we will need to move us towards ourfuture.IR for the future recognises that we need to develop a culture tohelp us deliver our outcomes and vision. Our culture is shapedby our beliefs, values and behaviour. The following statementsdescribe the attributes and behaviour we value most:""Trust and integrity—we act with integrity, honesty andprofessionalism. This ensures that we continue to be one ofNew Zealand’s most trusted organisations.""Valuing people—we treat each other and our customerswith respect.""Innovating to make a difference—we keep finding newways to lift our performance and make compliance easier.""Working together—we work together and with otherorganisations to deliver better services and value.We are also guided by our legislation, our code of conduct, ourcharter and our responsibilities as a government departmentunder the Treaty of Waitangi.OUR PRIORITIESWe have identified six priorities in IR for the future that we willneed to achieve our transformation goals. They show the areas weneed to focus our efforts and resources on to make a differenceand contribute to our outcomes.The priorities focus on building our information and intelligencecapability, improving our systems, aligning our resources andinvesting in the future skills required to enable a culture of serviceand excellence. The priorities are:""We retain, develop and attract high-calibre people with theskills required in the future—enabling a culture of service andexcellence.""We proactively influence voluntary compliance and addressthe causes of compliance risk and threats through a range ofinterventions.""We move customers to cost-effective channels while creatingan environment to make it easy for customers to self-manage.""We improve the efficiency and effectiveness of governmentthrough working with other agencies and private providers.""We use our information to make timely decisions and build anintelligence-led organisation.""Our systems meet current and future needs.For details about how we are delivering our priorities seeParts three and four.Measuring our progressInland Revenue’s Statement of Intent 2010–13 included a rangeof strategy measures through to 2014. With the introduction ofIR for the future, in April this year, these measures are no longercurrent and will not be reported. We are developing othermeasures to help us assess progress towards our priorities. Whenthese measures have been finalised and approved they will beincluded in future Statements of Intent.20 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

FIGURE 5–IR FOR THE FUTUREWhat we are here forWe contribute to the economic and social wellbeing of NewZealand by collecting and distributing moneyOur success is reflected in two outcomes:>>Revenue is available to fund government programmes throughpeople meeting payment obligations of their own accord.People receive payments they are entitled to, enabling them toparticipate in society.What we want to beA world-class revenue organisation recognised for serviceand excellenceWe work with customers and other organisations to make compliance easy and to giveNew Zealanders confidence that everyone pays and receives the right amount.To be recognised for service and excellence we aim to achieve the performance goalsthat define a world-class revenue organisation. These are:> Speed > Certainty > Compliance > ValueWhat’s important to us in how we workTrust and integrityInnovating to make a differenceValuing peopleWorking togetherThese values support a culture based on good relationships, continuous improvementand collaboration, so that we can achieve our performance goals.Our challengesWe need to:> Reduce our cost of administration> Maintain government revenue in a challenging economic environment> Work more across government to improve services> Respond to the challenges of an increasingly digital world> Improve the quality of information we use to make business decisionsImprove the responsiveness and agility of systems that hold and process business information>Our transformation goalsThe key features of our business in the future will be:> Efficient self-management options for customers that provide speed and certainty> A broader approach to compliance based on smarter use of information and a wider rangeof interventions> A range of different working relationships with other organisations, including strategicpartnerships to deliver some services> Less transactional work and less direct contact with customers> Excellence in complex technical work> More automation and streamlined information flows> Greater use of commercial IT products in our systems and servicesA healthy culture which our people value and thrive in>ird.govt.nzPART 2STRATEGIC DIRECTION21

EFFECTIVENESSWe measure our effectiveness through:""the impacts in the performance measurement framework,which help us to measure the effectiveness of ourinterventions""evaluating the long-term effectiveness of our workprogrammes.Measuring our impactsWe measure our impacts using a set of impact indicators. Figure 7shows an aggregated view of our impact performance over the lastfive years (where information is available).FIGURE 7 –IMPACT PERFORMANCEExcellentGoodSatisfactoryNeedsimprovementFigure 8 shows baseline performance, current-yearperformance and performance targets for our impactindicators. In setting the targets, we have taken intoaccount:""Inland Revenue’s priorities and transformation goals""our operating environment including governmentpriorities, the economy and changing customerexpectations.This is the first year we have set performance targets forour impact indicators. The targets vary from maintainingcurrent performance levels to seeking substantialperformance improvements. We will review the indicatorsand targets regularly to ensure they reflect our priorities andthe impact we want our interventions to make.85%75%65%55%2006–072007–082008–092009–102010–11More customers are ableto self-manageMore customers registerand report accurateinformation whenrequiredMore customers claim More customers pay andtheir correct entitlements file information on timeThe behaviour of noncompliantcustomersimprovesird.govt.nzPART 2STRATEGIC DIRECTION23

FIGURE 8 –MEASURING OUR IMPACTS 3Impact indicator Baseline Current performance Target by June 2014More customers are able to self-manage""% of customers who are aware of theirobligations and entitlements increasesYear end June 2010: 80% Year end June 2011: 80% Increase to 85% or more""% of customers who find it easy to comply increases Year end June 2010: 71% Year end June 2011: 71% Increase to 75% or more""Customer compliance costs are minimised 4 2004Internal hours: 93External costs: $1,635Overall costs 5 : $5,6282009Internal hours: 77External costs: $1,639Overall costs: $5,557n/aFactors that influenced the level that targets were set at: This impact is key to enabling improved customer compliance and costeffectivenessin a fiscally constrained environment.More customers register and report accurate information when required""% of returns filed without errors increases Year end June:2007 – 88%2008 – 82%2009 – 83%2010 – 86%July 2010 – March 2011:86%Increase to 90% or more""% of applications submitted without errorsincreases– March 2011 – June 2011: To be set when more data84% 6 is available""Ratio of registrations to population size and Year end June 2010:growth follows an appropriate trend 7 Employers–correlation of99%, WfFTC customers–correlation of 66%""GST assessed to customer spending follows an Year end March 2010:appropriate trend 8 Correlation of 92%Year end June 2011:Employers–correlation of99%, WfFTC customers–correlation of 67%Year end March 2011:Correlation of 94%n/an/aFactors that influenced the level that targets were set at: This impact is key to improving customer self-management, reducingunnecessary contacts and improving end-to-end processing.More customers claim their correct entitlements""% of accurate WfFTC payments increases 9 Tax year:2006 – 65%2007 – 65%2008 – 67%2009 – 68%Tax year 2010: 68%Tax year 2013: Increase to70% or more""% of customers confident that Inland Revenuetakes appropriate action to ensure peoplereceive their entitlements increasesYear end June 2010: 71% Year end June 2011: 73% Increase to 80% or moreFactors that influenced the level that targets were set at: The expected impact of the upcoming changes to WfFTC eligibility rules havebeen taken into account when assessing our ability to improve accuracy.3In 2010–11 we discontinued six of the impact indicators that were includedin the Statement of Intent 2010–13 because they were either unnecessary orbetter suited as output measures.4We report on this indicator to provide additional contextual information.Results are taken from customer compliance cost surveys of SMEs. As thesurvey is irregular, no formal target has been set. The results are tracked toensure tax compliance does not impose undue cost on customers.5Overall costs are the sum of external tax compliance costs and theconversion of internal compliance hours into dollars (incorporating labourcost inflation).6Results are based on an initial sampling that began in March 2011.7We report on this indicator to provide additional contextual information.Employers’ correlation is between the number of employers who registerfor PAYE and the percentage of the labour force that is employed (fromthe Statistics New Zealand Household Labour Force Survey). WfFTCcorrelation is between the number of customers who receive paymentsfrom Inland Revenue and the number of households with dependentchildren (from the Statistics New Zealand Household Labour Force Survey).24 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

FIGURE 8 –(CONTINUED)Impact indicator Baseline Current performance Target by June 2014More customers pay and file information on time""% of returns filed on time increases Tax year:2006 – 82%2007 – 81%2008 – 80%2009 – 82%Tax year 2010: 82%Tax year 2013: Increase to85% or more""% of payments made by customer on timeincreasesTax year:2006 – 88%2007 – 87%2008 – 87%2009 – 86%Tax year 2010: 87% 10Tax year 2013: Increase to90% or moreFactors that influenced the level that targets were set at: This impact is a key compliance driver and consequently stretch targets areappropriate.The behaviour of non-compliant customers improves""The compliance behaviour of customers whoreceived an audit intervention improvesYear end June:2007 – 87%2008 – 86%2009 – 82%2010 – 83%Year end June 2011: 82%Maintain at 80% or more""% of customers confident that Inland Revenuetakes appropriate action against those whodon’t comply increasesYear end June 2010: 75% Year end June 2011: 75% Increase to 80% or more""% of collectable debt to total debt increases Year end June:2007 – 68%2008 – 72%2009 – 66%2010 – 68%Year end June 2011: 69%Increase to 70% or more""% of cash collected to collectable debtincreasesYear end June:2007 – 74%2008 – 69%2009 – 83%2010 – 80%Year end June 2011: 65% 11Increase to 70% or moreby year end""% of collectable debt to revenue assesseddecreasesYear end June:2007 – 5.1%2008 – 6.2%2009 – 6.8%2010 – 7.6%Year end June 2011: 8.1%Decrease to 7.0% or lessFactors that influenced the level that targets were set at: The current economic environment is a significant factor in debt performance.Maintaining or making small improvements will be challenging.8We report on this indicator to provide additional contextual information.This measure highlights a link between consumer spending and theamount of GST assessed, showing the completeness of informationprovided by GST customers. As this is a indicator that is beyond ourinfluence, no formal target has been set.9Payments are considered accurate if customers’ total yearly payments arewithin $1,000 of their entitlement.10Measured using provisional results. Final results will be confirmed inOctober 2011.11The current economic environment, together with our successful focus onprevention and early intervention, has affected cash collection levels thisyear. Early intervention meant there were fewer new debt cases, resulting inan older debt book—older debt tends to have lower cash collection levels.ird.govt.nzPART 2STRATEGIC DIRECTION25

The work we have done this year to contribute to our impacts isdetailed in Part three. We have also included discussion of theimpacts our outputs contribute to in Part six.Evaluating our work programmesInland Revenue evaluates the effectiveness of policies andprogrammes against intended outcomes. Our evaluations focuson the effectiveness of interventions to improve compliance andparticipation in social policy programmes. Major evaluationreports and findings in 2010–11 included:""KiwiSaver—we released four major reports focusingon KiwiSaver outcomes. KiwiSaver evaluation: survey ofindividuals, SME tax compliance costs 2009, KiwiSavercompliance costs evaluation, KiwiSaver evaluation: follow-upsurvey of SME employers and the Annual Report to Ministers,July 2009 – June 2010.""Tax compliance costs of small businesses—tax compliancecosts for small and medium-sized businesses in New Zealanddecreased from 2004 to 2009. The average hours spent ontax decreased by 17.5% and the average amount of moneyspent on tax compliance decreased by 1.3%. The averagecompliance cost was $5,557 in 2009. These results include thecosts associated with the introduction of KiwiSaver.""Outbound calling—outbound calling positively influencedcompliance. Analyses suggest that outbound calling ismost effective if targeted at SME employers with the leastknowledge of business tax, ie, those not linked to a tax agentfor PAYE and, to a lesser extent, newer businesses and thosebased in the Auckland area.""Property compliance programme—programmemonitoring told us there was a positive outcome with asignificant reduction in new LAQC registrations and anincrease in deregistrations.""Compliance—we are evaluating the effectiveness ofprogrammes to improve compliance in the hidden economy,tax debt management, student loans collection, proactivecompliance management and disputes processes.You can view evaluation reports at ird.govt.nzEFFICIENCYWe focus on initiatives that improve the efficiency of the serviceswe provide to our customers. They include:""making it easier for people to interact with us, such as websiteimprovements and ongoing development of our onlineservices""improving our phone services, eg, SPK2IR, which has helpedimprove our overall telephone service performance""encouraging customers to file and pay online.We continued to use our Lean Six Sigma (LSS) programme toimprove the efficiency of our core processes. This year our LSSprogramme included Inland Revenue’s counter contact practices,a review of our debt management processes and streamlining theprocess for customers providing information. We have also beensupporting other government agencies with their LSS programmesand looking at opportunities to address cross-agency processes.Inland Revenue is implementing Operations Management 12 tosupport our workforce planning and performance monitoring.This year we ran a pilot programme in student loans that deliveredsignificant productivity improvements. We will be implementingthe programme in other parts of our Service Delivery group in thecoming year.Figure 9 shows the impact our efficiency initiatives have had onour bulk payment processing. Since 2006–07, the total cost ofprocessing a payment has dropped by 41% and the direct cost by56%.FIGURE 9 –COST PER PAYMENT PROCESSED$1.80$1.60$1.40$1.20$1.00$0.80$0.60$0.40$0.20$0.002006–07 2007–08 2008–09 2009–10 2010–11Cost per payment processed (including overheads)Cost per payment processed (excluding overheads)Trend per payment processed (including overheads)12Operations Management is an industry best-practice programme that helpsus allocate resources to best meet business and customer needs.26 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

CostWe measure our organisational efficiency using a number ofindicators—see figures 10 and 11.FIGURE 10 –EFFICIENCY INDICATORS 13Indicator 2010–11Cost per telephone contact $28.84Cost per correspondence contact $40.45Cost per counter contact $35.12Average cost per customer-initiated contact $31.97Cost per income tax return processed $5.14Cost per GST return processed $1.84Cost per employer monthly schedule processed $4.86Average cost per return processed $3.77Cost per child support administrative review$630.22processedCost per payment processed $0.95The cost of collecting $100 of revenue is an indicator of InlandRevenue’s relative efficiency if other conditions are kept constant.Analysis of the trend in collection cost over time should be treatedwith caution and understood in the light of background factorsthat influence the parameter. These factors include changes in taxrates, macro-economic conditions (eg, the recession) and changesin the scope of work we do.FIGURE 11 –COST OF COLLECTING $100 REVENUE$0.95$0.90$0.85$0.80$0.75$0.70$0.65$0.60$0.55$0.502002 2003 2004 2005 2006 2007 2008 2009 2010 2011YearBenchmarkingThis year, Inland Revenue took part in the second BetterAdministrative and Support Services (BASS) benchmarkingreview. The review measured administrative and support serviceperformance for 2009–10 using quality and cost metrics.Inland Revenue’s results for the quality metrics were consistentlyhigher than the average for the BASS cohort. In finance andproperty, we achieved the higher quality scores at a cost below themedian for the BASS cohort.In 2009–10 Inland Revenue spent 25.1% ($146 million) oforganisational running costs (full BASS cohort: 10.5%) onadministration and support functions. For Inland Revenue, 82%of this expenditure (20.6% of operational running costs) was oninformation and communications technology (ICT). The mainreasons for this high ICT expenditure are:""Inland Revenue’s investment in ICT systems development""ICT infrastructure management (eg, hardware, data storageand telephony) including maintaining our main legacy system,FIRST.Our level of ICT expenditure is typical for an organisation the sizeand complexity of Inland Revenue. While we have similar ICTexpenditure, as a proportion of total operational expenditure,compared to the Australian Taxation Office and the CanadaRevenue Agency, we have a lower ratio of staff to taxpayers. Weare also proactively managing our ICT infrastructure managementcosts, particularly through our procurement practices.During the year, we took part in two external exercises thatidentified measures of our efficiency:""Inland Revenue’s Performance Improvement Frameworkreview rated our efficiency and review processes as strong.The review identified that Inland Revenue was well placed todeliver an effective and efficient tax administration.""Inland Revenue took part in a benchmarking exercisecoordinated by HM Revenue and Customs (the UK revenueauthority). Inland Revenue is ranked in the top three (out of10 participating countries) for 26 of the 42 (62%) indicatorsused in the benchmarking study that are comparable andallow robust interpretation. Inland Revenue was the highestranking tax administration for seven of these indicators.132010–11 is the first year we have measured these indicators. In future, wewill provide back-year results as a comparison.ird.govt.nzPART 2STRATEGIC DIRECTION27

ECONOMYWe regularly review our inputs to improve internal processes andreduce costs. Ongoing initiatives have produced savings this year.Net input costs rose by $39.3 million in 2010–11. The net increaseincluded expenditure of $14.5 million on Budget 2010 fundedcompliance initiatives and $48.9 million of cost pressures. InlandRevenue delivered savings of $24.1 million to ensure that agreedbaselines were met without the requirement for additionalbaseline funding.The Crown investment in Budget 2010 compliance initiativesprovided returns on investment for the Government accountsabove target (see pages 36 and 39).Improvements to our procurement processes have enabled usto make savings in contracts with key suppliers, including savingsfrom all-of-government contracts for computers and officeconsumables. We are also planning to improve the value ofexisting contracts by reducing the number of suppliers, reviewingour specifications or improving Inland Revenue’s processes.We made savings in printing, stationery and postage costs byimproving the quality and take-up of our online services andinternal business processes. We also made savings in softwarelicensing and ICT services. These savings were offset by increasingmaintenance and mainframe costs, driven in part by the cost ofmaintaining legacy systems and our increased focus on electronicchannels.We also looked for savings in accommodation costs byconsolidating our offices and looking for opportunities toco‐locate with other government agencies.This year, staff numbers increased by 135 full-time equivalentemployees (FTEs). However, staff numbers excluding Budget 2010funded compliance initiatives decreased by 155 FTEs.The primary driver for savings delivered during the year was thesalaries and associated costs.Personnel costs account for 63% of total operating costs. Asa consequence, moderate increases in staff remuneration andincreases in staff costs, such as superannuation, created significantcost pressures.28 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Part threeOPERATIONAL PERFORMANCEird.govt.nzPART 3OPERATIONAL PERFORMANCE29

HOW WE PROVIDE BETTER, SMARTER SERVICESOne of the IR for the future priorities is:We move customers to cost-effective service channels, whilecreating an environment to make it easy for customers toself-manage.OUR E-SERVICESWe are developing our e-services to make it easier for ourcustomers to self-manage their obligations and entitlements, aswell as provide them with greater certainty.Over the year we continued to strengthen and stabilise oure-services platform to provide faster, consistent and integratedcustomer service. We also encouraged our customers to registerfor online services. By increasing the promotion of our self-serviceoptions, we have encouraged customers to interact with usthrough more cost-effective, automated service channels. Over960,000 people were registered for online services by the end ofJune 2011.Our main website ird.govt.nz is one of the most visitedgovernment sites and won the Best Government Site category atthe 2011 Net Guide Web Awards.This year we developed new online services for tax agents that givethem access to client information through their tax managementsoftware. We also improved our services for families andindividuals by introducing additional secure e-services for them.These services provide customers with access to account detailsand enable them to correspond with us through secure email.FIGURE 12 –ONLINE SERVICES2008–09 2009–10 2010–11Total registrations for online 360,003 619,932 964,904services (cumulative)Account look-up enquiries 9,279,339 13,748,954 12,397,006 14Agent client maintenance 913,492 714,268 507,824KiwiSaver self-help services 398,591 376,648 2,456,208 1514 Total account look-up enquiries have decreased because this year wemoved our account look-up services to Inland Revenue’s portal workspace.This provides customers with related information from different accountson the same screen, decreasing the number of visits to individual accounts.15 This is not comparable with previous years due to a change in ourmeasurement methodology.TELEPHONE SERVICESIn 2010–11 we answered 336,460 (8.6%) fewer calls than lastyear. The reduction in calls answered has been influenced by theintroduction of front-end banner messaging on our telephonesystems. Customers hear a brief message when they call toencourage more use of our voice and self-service channels.We have continued to invest in our telephone services to giveour customers a more seamless service. This year we enhancedour front-end SPK2IR system 16 and developed a new agent userinterface.We minimised the impact of the Canterbury earthquakes on ourtelephone services by reallocating resources to other locations.We also ran outbound calling campaigns to help customersaffected by the earthquakes.FIGURE 13 –TELEPHONE PERFORMANCE2009–10 2010–11Calls answered 4,230,914 3,894,454Average handling time (min:sec) 10:35 10:48CORRESPONDENCEDemand for correspondence requiring answers by staff isdecreasing slowly. We have also had a significant decrease in thenumber of paper correspondence items. Figure 14 shows thepaper and electronic correspondence items by tax type.FIGURE 14 –CORRESPONDENCE ITEMSTax type 2009–10 2010–11 2009–10 2010–11PaperElectronicIncome tax 501,614 352,399 437,910 409,675GST 100,224 82,157 66,015 85,701Working for Families Tax 29,099 26,332 21,036 23,708CreditsPAYE 58,876 49,698 10,483 14,603Student loans 11,818 10,227 16,235 24,871Child support 69,511 55,819 16,420 18,048Other tax types 131,374 166,594 49,065 7,977KiwiSaver 14,957 8,945 10,487 23,066Total 917,473 752,171 627,651 607,64916 SPK2IR is Inland Revenue’s natural language speech recognition system.30 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

SUPPORTING OUR CUSTOMERSThis year we provided over 212,000 hours of advice to customersto raise their awareness and understanding of their obligations andentitlements. We did this through:""running in-house customer seminars""working closely with other government agencies to provideservices, including seminars, to customers""working with our Christchurch customers to re-establishlinks and provide assistance, including running local recoveryassistance centres""attending onsite meetings with the Ministry of SocialDevelopment for businesses undergoing redundancies orclosures.MAKING TAX EASIERWe continued to work on our Making tax easier initiatives, whichwill provide better services to customers and reduce operationalcosts. We are exploring options including:""a new reporting service for employers to modernise our onlinefiling system""better support for business software developers, to ensurethey can produce software that meets their customers’ needsand Inland Revenue’s requirements.ADJUDICATING AND RULING ON THE LAWThe Office of the Chief Tax Counsel (OCTC) helps maintaintaxpayer confidence in the tax administration by giving guidanceon the correct interpretation of the Inland Revenue Acts andother relevant laws. We produce adjudications, public rulings andstatements, as well as the more complex and sensitive taxpayerrulings. More straightforward taxpayer rulings are produced inour Large Enterprises business unit. OCTC also oversees technicalgovernance to facilitate and coordinate Inland Revenue’s effort onkey tax issues.IMPROVING THE DISPUTES RESOLUTIONPROCESSWe introduced new administrative procedures to the tax disputesprocess to make it faster and easier for customers. Either InlandRevenue or the customer can initiate a dispute—usually if thereis a disagreement over a tax assessment. We also consulted thepublic about the disputes process. This consultation followeddiscussions with the New Zealand Institute of CharteredAccountants and the New Zealand Law Society about the bestway to handle disputes.The improvements to the disputes process focus on shorter,clearer Notices of proposed adjustment 17 , and offer customers afacilitated conference if a dispute remains unresolved.Since we introduced the changes, we have reviewed cases thatwent through the improved disputes process. We found that:""we have improved the timeliness for progressing cases""the number of old cases—disputes that have been under wayfor 18 months or more—is decreasing""the number of disputes reaching the litigation phase hasdecreased significantly.We have had positive feedback from tax agents about facilitatedconferences, indicating that the facilitator provided focus andstructure to the discussions between the disputing parties.Statistics about disputes are published on our website atird.govt.nz/aboutir/audits-legal-issuesOver the past few years we have consistently improved thetimeliness of our adjudications and rulings through improvedprocesses and better project management. For example, in2010–11 we completed 90 adjudication cases (2009–10: 86), and94% met our timeliness completion target within three months ofreceipt (target: 80%).Public items are published at ird.govt.nz/technical-tax17A Notice of proposed adjustment is the first formal step in the disputesprocess. It states the adjustments proposed to be made to an assessment,the tax laws that apply, the facts giving rise to the adjustments, and how thelaw applies to the facts.ird.govt.nzPART 3OPERATIONAL PERFORMANCE31

CUSTOMER FEEDBACKMeasuring customer satisfaction helps us understand howeffective customers think we are in delivering timely andappropriate services.FIGURE 15 –CUSTOMER SATISFACTION 18 2009–10 2010–11SatisfiedVery SatisfiedsatisfiedVerysatisfiedCustomer groupOverall customer87% 71% 86% 69%satisfaction (all customergroups)Tax agents 91% 78% 90% 71%Small and medium87% 71% 88% 74%enterprisesWorking for Families Tax 90% 75% 88% 71%CreditsLarge enterprises 90% 71% 89% 71%Student loans 85% 65% 85% 70%Individuals 86% 70% 84% 66%Not for profit 84% 68% 88% 71%Child support 79% 62% 76% 52%KiwiSaver 89% 66% 87% 71%ChannelTelephone 90% 74% 87% 70%Correspondence 74% 58% 78% 57%Counter 90% 66% 86% 70%E-services customer satisfactionWe piloted an e-satisfaction survey to find more about the driversof customer satisfaction with the online service channel. 72%of customers who recently used our online services found themeasy to use. Overall satisfaction with online services was high at95% for business customers, and 89% for individual customers.The results of the pilot survey will inform future measures ofsatisfaction with our online services. We will continue to reportresults in 2011–12, then set targets in 2012–13.Complaints and ministerial servicesThis year, we managed 7,390 complaints (2009–10: 7,496) andreceived 2,012 items of ministerial correspondence for reply(2009–10: 2,622). The decrease in ministerial correspondencewas mainly because in 2009–10, the Minister of Revenue received1,164 letters providing feedback for the Victoria University TaxWorking Group. However, ministerial volumes were still higherthan in previous years (2007–08: 1,233, 2008–09: 1,391) becausemany customers wrote to the Minister about the increase in GSTwhich took effect on 1 October 2010.We received 1,835 complaints (2009–10: 1,433) about ourtelephone services. We received 54% of these in July 2010, whenwe had very high peak season call volumes. During the secondhalf of the year the number of telephone-related complaints was70% less than in 2009–10.This year, we received 337 parliamentary questions (2009–10: 245).A large number of questions in April and May 2011 were about taxdebt write-offs and issues related to the student loan redesign.FIGURE 16 –REASONS FOR COMPLAINTS AND MINISTERIAL CONTACTS2009–10 2010–11Telephone services 1,433 1,835General services 3,162 3,717Information/explanation required 2,439 2,294Legislation 1,087 1,042Procedures 1,410 714Staff 369 43818Satisfaction is ranked on a 5-point scale, ranging from dissatisfied to verysatisfied. In the table, satisfied is made up of 3, 4 and 5 ratings and verysatisfied is made up of 4 and 5 ratings.32 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

WORKING WITH OTHER AGENCIESAND PROVIDERSOne of the IR for the future priorities is:We improve the efficiency and effectiveness of governmentthrough working with other agencies and private providers.We worked with other government agencies to establish a wholeof-governmentapproach designed around customer needs. Wedeveloped a staged low-risk pathway, where new solutions andservice delivery models are piloted in three agencies (the Ministryof Social Development, Inland Revenue and the Department ofInternal Affairs).In addition to this service delivery model, we have also cooperatedwith the Department of Internal Affairs and StudyLink on theenterprise integration design of the igovt logon service forour online services. This project will run in conjunction withStudyLink’s igovt logon migration to take advantage of serviceimprovement and cost reduction opportunities.We continue to work with software developers to make sure theycan develop products that meet their customers’ needs and InlandRevenue’s requirements. We established a Software DevelopersWorking Group, which provides a forum to engage and consultwith software developers and key business stakeholders.One of the effects of the Canterbury earthquakes was the need towork collaboratively with other agencies in Christchurch as part ofthe recovery effort. Part of this collaboration included co‐locatingour people with the Ministry of Social Development and Ministryof Economic Development staff.We also worked with the Ministry of Social Development inChristchurch to implement the earthquake support subsidyto employers and co-locate some face-to-face services. Ourstaff worked on recovery activities and assisted Civil Defence,New Zealand Police, the Earthquake Commission, CanterburyEarthquake Recovery Authority and the Red Cross. We alsoworked closely with private providers, particularly tax agents tore-establish links with our customers.ird.govt.nzPART 3OPERATIONAL PERFORMANCE33

INFLUENCING VOLUNTARY COMPLIANCEOne of the IR for the future priorities is:We proactively influence voluntary compliance and addressthe causes of compliance risk and threats through a range ofinterventions.In this section of the report we discuss the role of intelligencegathering in informing our approach to compliance, investigations,legal action, and management of outstanding returns and overduedebt.USING INTELLIGENCE TO MANAGECOMPLIANCEOne of the IR for the future priorities is:We use our information to make timely decisions and buildan intelligence-led organisation.Our approach to improving compliance is increasingly beingdirected by our intelligence gathering and analysis teams. In recentyears we have strengthened our capability in the area of strategiccompliance risk management, in line with the recommendationscoming from the Auditor-General’s review of our audit function 19 .The review emphasised the need to improve and better defineour intelligence needs and the technology that supports our auditwork. The results of these improvements are reflected acrossInland Revenue.By proactively seeking out intelligence on economic activity andusing information already within our organisation, we have beenable to take a more focused approach to compliance and makemore cost-effective decisions than in the past. We now take amore systematic view of priorities when we approach risks torevenue and the misuse of social policy entitlements, and considerthe best way of dealing with non-compliance. Our traditionalaudit methods still form an important part of our approach, butinvestigations have become highly targeted and prioritised tomake sure that we are achieving the best results in proportion tothe cost of the investigation.An international benchmarking study coordinated byHM Revenue and Customs 20 compared Inland Revenue’s auditperformance with nine other tax administrations, and foundthat we had a very high audit yield (as a percentage of taxpayerreceipts) compared to the other countries. The effectiveness ofour audits is a reflection of the intelligence effort that precedesaudit work and the use of other cost-effective methods toinfluence compliance.We have focused on influencing attitudes and behaviour so thatwe sustain improvements in voluntary compliance in the longterm. For example, we have:""begun intelligence gathering and analysis that exposes thehidden economy""continued to monitor the property sector to detect noncompliance""started work looking into the misuse of the charitable statusof organisations to avoid paying tax""begun intelligence gathering in the hospitality, scrap metal,fishing and aquaculture, tourism and agriculture industries,and monitoring online trading and short-term propertyrentals ahead of major events, eg, the 2011 Rugby World Cup.We are developing industry benchmarks for small businesses.They will provide guidance on the financial ratios that wouldnormally be expected for various sized businesses in a particularindustry.An important part of our approach to influencing compliancebehaviour was the publication of Inland Revenue’s ComplianceFocus 2010–11. We published the document on our website andwe made presentations about it to organisations with an interestin tax matters. This is the third year we have publicly presentedcompliance issues we are concerned about.19Office of the Auditor-General (2006), Inland Revenue Department:Performance of taxpayer audit—follow-up audit.20The United Kingdom’s revenue authority.34 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

INVESTIGATIONSIntelligence-based analysis is the cornerstone of our approach tomanaging compliance. We use a range of tools to identify areasof non-compliance and evaluate the most appropriate response,including investigations of the tax affairs of individuals andbusinesses. Some cases may lead to prosecutions or litigation ifdisputes arise.DiscrepanciesWhen we detect a discrepancy between a taxpayer’s selfassessmentand our determination of their tax liability, we issue anew assessment. In some cases penalties and interest are appliedto the assessment. The value of discrepancies fluctuates fromyear to year, depending on major cases and the underlying scale ofnon‐compliance identified.In 2010–11 actual discrepancies exceeded our target for largeenterprises due to a small number of high-value cases. Therewere also high-value evasion and fraud cases that were part of ourhidden economy investigations in which voluntary disclosureswere made by taxpayers.FIGURE 17 –AUDIT DISCREPANCIESAudit categoryActual2009–10$ millionTarget2010–11$ millionActual2010–11$ millionInvestigations $438 $401 $374Aggressive tax issues $156 $144 $110Tax evasion and fraud $174 $87 $209Large enterprises $2,098 $301 $757Total discrepancies $2,866 $933 $1,450AdjustmentsLess loss reduction$272 – $189adjustmentsLess imputation credit$158 – $429adjustmentsAdditional tax assessed $2,436 – $832Notes1. Net discrepancies = gross discrepancies, less timing adjustments.These adjustments are for errors found in a filed return for oneperiod, but claimable in another.2. Not all net discrepancies result in an immediate tax liabilityor payment of additional tax. Adjustments to losses havean impact on current or future tax, and imputation creditadjustments similarly affect future tax liabilities.Focus areas for compliance actionAggressive tax planningWe continued our focus on inappropriate income diversionarrangements, (see Legal action on page 36). We are also lookingto address the misuse of charities’ income exemptions and lossgeneration. We have also investigated structures where familyincome is reduced to artificially increase entitlements to socialassistance.High-wealth individualsWe continued to promote compliance among high-wealthindividuals and investigated non-compliance when necessary. Weassessed an additional $76 million in tax during the year for thisgroup.Working with large enterprisesWe consolidated improvements to our tax risk process so thatwe can identify and resolve tax risks in a more timely manner,working more closely with large enterprises and developing moreopen communication. This increases our understanding of theirbusiness and the commercial environment they operate in.We are also piloting cooperative compliance agreements with asmall number of large enterprises. This approach commits InlandRevenue and the large enterprise to a number of obligations andmay also reduce compliance costs for both parties.We continue to work with industries which are controlled byseparate arrangements, eg, life insurance providers. We make surethey understand the special tax rules for their industry and wemonitor the way they are applied.Complex financingWe have continued to focus on large enterprise groups using taxstructured funding arrangements that give a disproportionatetax advantage. These largely relate to the use of mandatory andoptional convertible notes. Court action has been initiated insome cases, (see Legal action on page 36).We are actively identifying and monitoring large enterprisegroups and high wealth individuals who enter into innovativeand complex financing arrangements. We will review anyarrangements considered outside the law.ird.govt.nzPART 3OPERATIONAL PERFORMANCE35

International taxOur advanced pricing agreement programme continues togrow. We completed 13 advanced pricing agreements (APAs)this year, including two bilateral agreements with Australia.We are developing this programme because APAs are still thebest mechanism to achieve certainty for multinationals intheir international associated party dealings. This is especiallyapplicable to more complex issues such as restructuringarrangements and intellectual property transfers.Budget 2010 funded initiativesIn Budget 2010, Inland Revenue received $119 million over fouryears to improve compliance in property, the hidden economyand debt.PropertyOur property compliance programme has continued in itsawareness and educative work during 2010–11. We released Taxand your property transactions: Getting it right for people involvedin property ownership to explain some of the least understoodtax obligations for people involved in buying or selling property. Itspecifically covers common mistakes people make.Enforcement in the property area has identified $48.8 million indiscrepancies (against our target of $45 million), and we received$0.7 million in voluntary disclosures.The hidden economyWe continue to concentrate our efforts on taxpayers who do notaccount for or declare all their income. We used the additionalfunding to address the hidden economy by investing in betterintelligence, increasing our investigation capacity and introducingtargeted education into the community. We are also workingwith private sector groups, other government bodies and overseasauthorities to promote better compliance.LEGAL ACTIONInland Revenue recognises that most businesses and individualsare compliant with tax law. However, we continued to takeaction against those who deliberately attempt to evade theirresponsibilities, and ensure that everyone pays their fair share.We continued to impose a range of penalties includingprosecution for serious non-compliance. One taxpayer, who failedto pay over $190,000 in PAYE, was sentenced to seven monthshome detention. Another taxpayer was jailed for two-and-a-halfyears after being found guilty of deliberately failing to file a GSTreturn and providing false GST returns to get a refund.Inland Revenue has achieved a high success rate—over 80%—indecisions delivered by courts on litigation cases. Efforts continueto be focused on tax avoidance issues.In June 2011 the Commissioner defended a Court of Appealfinding of tax avoidance in the Penny and Hooper case, which hadbeen appealed in the Supreme Court. A decision in this case wasdelivered on 24 August 2011, upholding the arrangements as taxavoidance.Work continued on optional convertible note tax avoidance cases,with the first substantive case scheduled to be heard in the HighCourt in September 2011. The Commissioner continues to focuson achieving a positive High Court judgment as a precedent forthese cases.We also continued to work on resolving outstanding Trinitydisputes and attempts to relitigate these cases.Our compliance enforcement activity, including specific hiddeneconomy work, resulted in 938 closed evasion and fraudinvestigations in 2010–11, with discrepancies of $208.6 million(target: $87 million). Prosecutions followed the more serious casesof non-compliance.See page 39 for progress on the debt initiative.36 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTSTANDING RETURNSIn 2010–11 we:""sent out 10.2 million returns to taxpayers, 1.1% fewer than inthe previous year""finalised 1.2 million outstanding returns, 18.3% fewer than inthe previous year.This year, we proactively updated our databases to preventunnecessary returns being sent to customers, which reduced thenumber of returns being issued. As a result, fewer returns becameoverdue than we expected. Consequently, we also cleared feweroutstanding returns.We carried out several early interventions to remind taxpayers tofile returns, including:""texting IR 3 customers with outstanding returns""running outbound calling campaigns for high-risk returns,eg, GST and PAYE""radio advertising.Our performance this year was affected by resources being used tomeet peak demand on phone and correspondence channels, andreduced capacity as a result of the Canterbury earthquakes.MANAGING OVERDUE DEBTDuring 2010–11:""total overdue debt increased by $371.5 million (7.2%) to$5,522.1 million (2009–10: $90.2 million increase or 1.8%)""we collected $1,565.5 million cash and $915.3 million from taxpooling 21 (2009–10: $2,085.3 million cash, $715.7 million taxpooling).Our main debt management focus, using the PARE 22 model, ison preventing people getting into debt and contacting themearly to assist them if they go into debt. We also take recoveryand enforcement action when required. Our early interventionapproach includes campaigns targeting customers before theirpayment due dates, and customers with debt less than one yearold. Our approach has shown success for:A consequence of our early intervention focus is a significantincrease in debt aged over two years, which has increased by$492.8 million (22%) in the past year and $911 million (49%) since2008–09. As debt gets older it accumulates penalties and interest.Of the $2,756.7 million debt aged over two years, $1,624.0 million(59%) is penalties and interest. We are developing plans to addressthe problem of aging debt in the coming year. Figure 20 has detailson the age of debt.We have also used the extra funding received from Budget 2010to expand our campaigns, targeting major payment dates for arange of revenue types. For example, we targeted customers withincome tax payments due on 7 February, who were at risk of goinginto debt. We used letters and text messaging to remind themabout their payments, supplemented with online advertising. Asa result of this campaign, 83% of assessments due on 7 February2011 were paid on time compared to 72% of payments due on7 February 2010. And 50% of customers who did not pay or werelate with payments due on 7 February 2010 paid on time thisyear. We also used outbound calling campaigns to quickly followup those who failed to pay on time after both key income taxpayment dates of 7 February and 7 April.Debt portfolio informationWe are still seeing the downstream effects of the recession in debtlevels and we expect this to continue for the next few years. Twoindicators of this are the continuing high level of insolvency debt 23 ,which has increased by 234% since 2007, and the increase in debtpending write-off, which has increased by 60% in the past year.Debt has also grown because of financial pressure on customers’available funds. Some customers choose to pay other creditors(especially suppliers) as a priority over Inland Revenue to keep abusiness activity going.In 2010–11 we opened 475,748 new debt cases (2009–10: 515,463)and closed 459,979 debt cases (2009–10: 510,980). 24 Thesedecreases are because, as a result of our debt prevention approach,we had a big decline in the number of short-term debt cases, ie,cases that closed within two months of being opened.""debt less than one year old, which decreased by $123 million(8.2%) over the last year, and $728.1 million (35%) since 2008–09""the decrease in new debt cases during 2010–11 with 39,715(7.7%) fewer cases being opened than in 2009–10.21Tax pooling allows compliant customers to reduce their exposure to use-ofmoneyinterest on underpayments of provisional tax by purchasing fundsfrom, or depositing money with, a tax pooling intermediary. This can createdebt for up to 60 days before being paid.22This model emphasises different responses to customers in different phasesof debt. The phases are prevent, assist, recover and enforce.23A large proportion of insolvency debt in our debt portfolio resulted fromactions initiated by parties other than Inland Revenue.24Excludes cases opened and closed in less than five days.ird.govt.nzPART 3OPERATIONAL PERFORMANCE37

FIGURE 18 –COMPONENTS OF OVERDUE DEBT (AT 30 JUNE)Debt type ($ million) 2007 2008 2009 2010 2011 1 Yearchange1 Yearchange(%)Non-collectable debtDeferred debt $757 $755 $963 $729 $686 –$42 –6%Insolvency debt $215 $283 $548 $742 $718 –$24 –3%Pending write-off $193 $188 $194 $193 $308 $114 60%Total non-collectable debt $1,165 $1,226 $1,705 $1,664 $1,712 $48 3%Collectable debtDebt under instalment $798 $918 $1,105 $938 $1,147 $209 22%Residual collectable debt $1,700 $2,268 $2,250 $2,549 $2,663 $114 5%Total collectable debt $2,498 $3,186 $3,355 $3,487 $3,810 $323 9%Total debt $3,663 $4,412 $5,060 $5,151 $5,522 $371 7%Customers in debt (total cases) 280,920 340,400 353,391 363,814 389,947 26,133 7%Annual debt change 4% 20% 15% 2% 7% – –FIGURE 19 –TOTAL OVERDUE DEBT BY TAX TYPE (AT 30 JUNE)Total overdue debt 2010$ million2011$ million1 Yearchange1 Yearchange(%)Income tax $2,158 $2,208 $50 2%GST $1,809 $1,908 $99 5%PAYE $532 $623 $91 17%Student loans $325 $412 $87 27%Working for Families $238 $275 $37 16%Tax CreditsOther tax $89 $96 $7 8%Total $5,151 $5,522 $371 7%FIGURE 20 –AGE OF DEBT AT 30 JUNE 25 2009 2010 2011 1 Year changeDebt($ million)DebtcasesDebt($ million)DebtcasesDebt($ million)DebtcasesDebt($ million)Debtcases< 1 year $2,106 238,964 $1,501 215,315 $1,377 220,597 –$124 5,2821–2 years $1,108 50,655 $1,386 84,000 $1,388 89,063 $2 5,0632–5 years $1,260 51,777 $1,542 50,839 $1,788 63,840 $246 13,001> 5 years $586 11,995 $722 13,660 $969 16,447 $247 2,787Total $5,060 353,391 $5,151 363,814 $5,522 389,947 $371 26,13325Debt value in this table includes student loans debt and is based on casesusing a weighted average of debt elements in each case. They are notcomparable with Part 8, where the age is calculated on the average of eachdebt case.38 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Future collection systemWe have completed initial work in developing a case for ourfuture collection system. It confirms the need for a new debt andreturns management system and recommends possible solutions.This initiative will be considered and prioritised in the future inconjunction with Inland Revenue’s long-term transformation workprogramme.Office of the Auditor-General’s report on managingtax debt (2009)We have implemented one of the five recommendations(alignment of internal and external reporting) in the Office ofthe Auditor-General’s 2009 report Inland Revenue Department:Managing Tax Debt and have made progress with the others.However, we depend on system and process changes to fullyimplement the remaining recommendations. Three of theserecommendations depend on the proposed future collectionsystem for implementation, and we will implement the fourthwhen we introduce an improved reporting tool and refresh ourdebt collection strategy.Budget 2010 funded initiativeWe used funding received in Budget 2010 to recruit specialistdebt staff and invest in new technology for our outbound callingcampaign work. During 2010–11:""we collected $115.3 million cash against a target of$100 million""the return on investment was 9.5:1, above the target of 7.8:1""we recruited additional specialist staff to build our campaigncapability. By 30 June 2011 these teams had approximately150 FTEs involved in campaign work.The outbound calling campaigns were affected by the Canterburyearthquakes because most of our outbound calling team is basedthere. As a result of the earthquakes, this work was picked up byother debt teams across the country. As an interim measure wealso used an external outbound calling provider for eight weeksfrom 28 March 2011.Despite the reduced ability to involve our Christchurch-basedoutbound calling staff at critical times, we improved the level ofcoverage over all our debt cases. During the year, we targeted justover 170,000 people and businesses through our early interventionstrategy, which meant substantially more customers were directlycontacted than in previous years.International benchmarkingInland Revenue meets regularly with the International DebtManagement Committee (IDMC) 26 to share information aboutdebt management best practice. The IDMC (led by the AustralianTaxation Office) is developing key performance indicators tobenchmark debt management performance. We have includedsome of the proposed benchmarks in our performance measuresfor 2011–12.We took part in an international tax benchmarking studycoordinated by HM Revenue and Customs (the United Kingdom’srevenue authority). The results show that Inland Revenue’s debtmanagement performance compares favourably with other taxauthorities. Inland Revenue was ranked in the top three (out of 10countries) for six out of 10 debt management indicators.Putting debt information in contextCrown tax receivables and overdue debtInland Revenue administers tax, student loan repayments andchild support on behalf of the Crown. As at 30 June 2011 thenominal value of these assets was $23,444 million.There is often a time lag between an assessment being raised ordebt being recognised, and the point when cash payment is due.If payment is not received on time the debt is considered overdue.Of the $23,444 million assets Inland Revenue administers, $5,110million tax, $412 million student loans and $1,743 million in childsupport penalties is overdue.FIGURE 21 –RELATIONSHIP BETWEEN RECEIVABLES AND OVERDUE DEBTComponentsof debt(June 2011)Not duedebt$ millionOverduedebt$ millionTotal$ millionTax $5,860 $5,110 $10,970Student loans $10,319 $412 $10,731Child support– $1,743 $1,743 27penaltiesTotal $16,179 $7,265 $23,44426The IDMC has revenue authority representatives from New Zealand,Australia, Canada, the United Kingdom and the United States.27This figure, taken from the Crown financial schedules, does not matchthe child support debt figures on page 41 because the Crown financialschedules include accruals and only show the portion of overdue debtdue to the Crown, ie, penalties. Overdue child support assessment debtis administered on behalf of custodial parents and is not reported in thissection.ird.govt.nzPART 3OPERATIONAL PERFORMANCE39

ImpairmentAs part of our financial reporting requirements we seek anindependent valuation of our receivables (debt). This year theimpairment charge for student loans and tax receivables wasnegative $94 million and $224 million respectively. The factorsinfluencing the impairment for student loans include policychanges, refinements to the actuarial model used and changes inthe borrowers’ demographic profile. The key driver of this year’simpairment is the Budget Economic and Fiscal Update 2011decision to hold the student loan repayment threshold constantuntil 2015. Holding the threshold constant results in increasedrepayments in a growing economy. The growth seen in the taxreceivables impairment is a result of growth in the overdue debtbook. For more information see Part eight.Note: See Additional information on page 143 for more detailedstatistics on our debt levels and pages 41 to 45 for a discussion ofdebt from the delivery of social policy programmes (child support,student loans and Working for Families Tax Credits).40 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

DELIVERING SOCIAL PROGRAMMESCHILD SUPPORTWe administer child support assessments and payments forapproximately 179,500 liable parents and 181,400 custodialparents, who support an estimated 272,700 children. Since thescheme began we have collected 89.3% of the total of $5.2 billionchild support assessed. This year we:""distributed $209.1 million (50.8%) of child support anddomestic maintenance collected to payees and $202.9 million(49.2%) to the Crown 28 to offset sole parent benefits paid tocustodians by the Ministry of Social Development.""collected $420.4 million 29 in child support payments(2009–10: $401.0 million). 23.8% of the amount collected wasfor previous year assessment arrears and penalties.In 2010–11, options for updating the child support scheme wereissued for public consultation (see page 16).Child support debtOffice of the Auditor-General’s report on managing childsupport debt (2010)In July 2010, the Office of the Auditor-General released its reportInland Revenue Department: Managing Child Support Debt.The report recognised that Inland Revenue is doing a good jobmonitoring, prioritising and collecting child support debt. We areworking to implement the report’s recommendations:""Assess the current penalty regime— we completed somesystem enhancements following our review of the childsupport debt management computer systems and processes.We have scheduled more changes for 2011–12.Child support debt portfolioAt 30 June 2011, total New Zealand child support debt was$2,271 million, an increase of $327 million (16.8%) from last year. 30Of the increase in total child support debt, $29 million (8.8%) isassessment debt and $298 million (91.2%) is penalties.$1,738 million (76.5%) of child support debt is more than fiveyears old. Of this, 15.6% is assessment debt and 84.4% is penaltydebt. The main reason for the high level of aged debt is that we arerequired to collect all outstanding child support debt, even whererecovery may be unlikely (eg, bankruptcy). We can only write off avalid assessment if the liable parent has died or by a court order.We can write off some of a liable person’s late payment penaltiesprovided they comply with their payment programme for26 weeks. This year, we wrote off $52.1 million for 23,798 liableparents compared to $38.5 million for 25,382 liable parents in2009–10.""Child support debt strategy—we have included the strategyfor collecting child support debt in Inland Revenue’s overalldebt strategy, and we have developed a plan for collectingchild support debt.""Information for new and existing customers—improvedservices for families and individuals have enabled childsupport customers to update income estimates and notechanges in their circumstances through a secure authenticatedchannel.We completed an audit of information available to childsupport customers on our website but flow-on effects fromthe Canterbury earthquakes have delayed planned work torefresh and update the website content. We are also reviewingand updating our printed publications.28Payments to the Crown include penalties as well as assessments paid.29This figure includes assessments and penalties collected for both this yearand any previous years.30This figure does not include $105.8 million debt being collected on behalfof the Australian Child Support Program from Australian paying parentswho live in New Zealand. Child support debt figures do not match those inPart eight, because the Crown financial schedules include accruals and onlyshow the portion of overdue debt due to the Crown, ie, penalties. Overduechild support assessment debt is administered on behalf of custodialparents.ird.govt.nzPART 3OPERATIONAL PERFORMANCE41

FIGURE 22 –CHILD SUPPORT DEBT (AT 30 JUNE)Child support debt type($ million)2006–07 2007–08 2008–09 2009–10 2010–11 1 Year 1 Yearchange change (%)Penalty debt $703 $834 $1,016 $1,368 $1,666 $298 21.8%Assessment debt $465 $504 $540 $576 $605 $29 5.0%Debt under arrangement $534 $612 $770 $964 $1,123 $159 16.5%Uncollectable debt $241 $258 $249 $273 $311 $38 13.9%Not yet under arrangement $393 $468 $537 $707 $837 $130 18.4%Total child support debt $1,168 $1,338 $1,556 $1,944 $2,271 $327 16.8%Customers in debt (cases) 130,863 132,026 134,535 139,136 141,464 2,328 1.7%Debt under arrangement/total debt (%) 45.7% 45.7% 49.5% 49.6% 49.4% –0.2% –Reciprocal debt 31 /total debt (%) 23.4% 24.0% 26.2% 23.8% 22.1% –1.7% –See Additional information on page 146 for analysis of childsupport debt by age.Information matching with New Zealand Customs ServiceThis year the New Zealand Customs Service notified us of bordercrossings by 8,614 liable parents in debt. This is a small increase 32in notifications compared to 2009–10 (8,582 – 2009–10 correctedfigure). The value of debt repayment arrangements entered intoas a result was $86.8 million, a 12% increase from $77.5 million in2009–10.Reciprocal collection agreement with AustraliaWe have had a reciprocal agreement for collecting child supportwith the Australian Child Support Program (ACSP) 33 since July2000. At 30 June 2011, ACSP managed 11,759 cases (11,450 indebt) for New Zealand and we managed 6,306 (4,978 in debt)cases for Australia.At 1 July 2010 there were 2,645 customers with uncollectable debtbecause they were missing. We located 268 of these, reducing thenumber of missing customers to 2,377 (10.1% reduction).FIGURE 23 –RECIPROCAL AGREEMENT FOR COLLECTION OF CHILD SUPPORT (AT 30 JUNE)Total debt casesDebt owed$ millionDebt collected$ million2010 2011 2010 2011 2010 2011New Zealand cases handled by Australian Child 10,487 11,450 $462.5 $502.1 $34.4 $43.3Support ProgramAustralian cases handled by Inland Revenue 4,401 4,978 $80.1 $105.8 $11.1 $11.331Debt being collected under the reciprocal agreement by the AustralianChild Support Program for New Zealand.32Due to recently discovered and corrected data integrity issues, last year’sresult of 12,602 was overstated by 4,020 cases as a result of countingdeparture and arrival of the same customer as two distinct notifications.33Previously known as the Australian Child Support Agency (ACSA).42 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

STUDENT LOANSThis year, the nominal value of loans with Inland Revenue forcollection increased from $9.8 billion to $10.7 billion. At 30 June2011 there were about 621,000 borrowers (2009–10: 587,500) andthe median value of the loans was $11,880 (2008–09: $11,399).FIGURE 24 –STUDENT LOAN REPAYMENTSRepayments 2006–07$ million2007–08$ million2008–09$ million2009–10$ million2010–11$ millionPAYE system $344.2 $394.4 $452.1 $473.9 $491.6From borrower $142.3 $155.7 $167.0 $170.5 $199.0Total $486.5 $550.1 $619.1 $644.4 $690.6 34RepaymentsIn the year to June 2011, 71% of repayments were collectedthrough the PAYE tax system. The remainder came fromborrowers living overseas, self-employed borrowers inNew Zealand, borrowers under the income threshold who madevoluntary repayments, and from those who chose to makepayments over their assessed repayment amount.The growth of 3.7% in repayments collected through the PAYEsystem reflects the underlying increase in the borrower base andcompliance activity to make sure that borrowers declare thecorrect tax code to their employer. However, the percentagegrowth in PAYE collected is lower than in previous years.Repayments received directly from borrowers increased by 16.7%.The main factors that affected this payment stream were:""expiry of repayment holidays for about 25,000 borrowers whonow have a repayment obligation""the campaign to improve compliance among overseas-basedborrowers""campaigns to raise repayment compliance among borrowersin New Zealand.Voluntary repayment bonusFrom April 2009 borrowers who made repayments of $500 ormore above their repayment obligation, received a 10% bonus.Since the bonus was introduced:""$216 million in voluntary repayments have attracted thebonus""the value of the repayments is evenly divided betweenNew Zealand-based and overseas-based borrowers, butthose overseas accounted for only 35% of those making therepayments""overseas-based borrowers’ repayments were about twice thevalue of New Zealand-based borrowers’ repayments.FIGURE 25 –REPAYMENT BONUS FROM APRIL 2009 TO JUNE 2011Bonus repaymentsNewZealandbasedOverseasbasedTotalNumber of bonuses granted 26,743 14,498 41,241Voluntary repayment $108million$108million$216millionAverage bonus $404 $744 $52334This figure is net of refunds to borrowers who have repaid their loans and isnot comparable to Part eight, which includes gross repayments.ird.govt.nzPART 3OPERATIONAL PERFORMANCE43

Overdue student loan repaymentsAt 30 June 2011, the amount of overdue student loan repaymentswas $411.6 million. There were 100,067 borrowers with paymentsthat were overdue (June 2010: 92,412), about 16% of the totalborrower base.FIGURE 26 –OVERDUE STUDENT LOAN REPAYMENTS30 June2010$ million30 June2011$ million% changeBorrowers based:– in New Zealand$142.2 $122.7 –13.7%– overseas $182.5 $288.9 58.3%Total $324.7 $411.6 26.7%The sharp increase in overdue repayments is due to a peak indefaults among overseas-based borrowers who reach the endof their repayment holiday and go into arrears. New Zealandbasedborrower overdue repayments have fallen by $20 milliondue to improved compliance. We credit this result to campaignsaimed at making sure that borrowers use the right tax code andproactive actions to prevent self-employed borrowers fromgetting into arrears.In October 2010, Inland Revenue started a year-long initiative,focusing on the recovery of overdue repayments from 1,000student loan borrowers whose last known address is in Australia.The initiative uses:""direct campaigns to contact the target group of borrowersabout paying their student loans""online advertisements on Facebook, Google and popularNew Zealand websites aimed at people who may haveNew Zealand student loans in Australia, to increase theirlevel of awareness and encourage repayment. The onlineadvertisements were recently expanded to reach borrowersworldwide.Changes to the student loan scheme were announced in Budget2011 (see Part one). For a full report on the student loan schemego to educationcounts.govt.nz44 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

WORKING FOR FAMILIES TAX CREDITSThis year, total Working for Families Tax Credits (WfFTC)distributions by Inland Revenue and the Ministry of SocialDevelopment were $2,745.5 million, $42 million (1.5%) less than2009–10.Customers can choose to receive their entitlements weekly,fortnightly or as a lump sum at year end. Details of customersreceiving regular WfFTC payments from Inland Revenue areincluded in figure 27.FIGURE 27 –CUSTOMERS RECEIVING REGULAR WfFTC PAYMENTS FROM INLAND REVENUEJune 2007 June 2008 June 2009 June 2010 June 2011Customers receiving regular payments from Inland Revenue 190,000 198,000 203,000 202,000 200,000Average weekly payment $153 $150 $156 $153 $153WfFTC debtThis year, total WfFTC debt increased by $37 million (15.5%)to $275 million. This increase is an inevitable consequence ofthe overpayment and underpayment of weekly and fortnightlyinstalments.The main causes of incorrect entitlements being paid are underor over-estimation of family income, changes to the customers’relationship status, changes to the number of children in their careand the delay in notifying Inland Revenue of those changes.FIGURE 28 –WfFTC DEBT (AT 30 JUNE)2007 2008 2009 2010 2011Total debt ($ million) $158 $169 $200 $238 $275Annual debt growth 3.9% 7.0% 18.3% 19.0% 15.5%We have focused on preventing WfFTC debt by ensuringcustomers receive their correct entitlements and are not overpaid.We did this through customer education and compliance activity,which included:""an outbound calling campaign to help our customers receivethe right amount of WfFTC. We made 14,800 proactive callsto customers during the year.""stopping interim payments to customers with businessincome who had not filed income tax returns to verify theirfamily income. We resume payments for these customerswhen they give us the required information.This year, we also focused on managing new debt cases andhigh‐value debt cases, resulting in:""$10.9 million decrease in high-value debt""11,000 cases cleared and $21.9 million new debt collectedfrom outbound calling campaigns.ird.govt.nzPART 3OPERATIONAL PERFORMANCE45

KIWISAVERThis year, KiwiSaver membership grew by 295,990 (20.3%), withtotal membership approaching 1.8 million at the end of June 2011.This represents about 46% of all New Zealanders under 65. Mostof the new members enrolled through providers.FIGURE 29 –KIWISAVER MEMBERSHIP (AT 30 JUNE)Enrolment method 2009 2010 2011Automatically enrolled 426,629 541,769 646,725Opted in through employer 195,940 211,883 232,131Opted in through provider 477,971 706,290 877,076Total members 1,100,540 1,459,942 1,755,932PAID PARENTAL LEAVEPaid parental leave (PPL) is a payment for parents who take leavefrom their jobs or business to care for a newborn or adoptedchild. Inland Revenue distributes PPL on behalf of the Departmentof Labour. The maximum amount of PPL is inflation-indexedeach year. The maximum weekly rate increased from $441.62to $458.82 from 1 July 2010 with 84% of applicants receiving themaximum payment.This year, we:""distributed $153.8 million to eligible applicants (2009–10:$153.9 million)""processed 26,368 applications for PPL (2009–10: 27,493).During 2010–11 Inland Revenue sent $2.9 billion to providers, 34%of which was a Crown contribution (2009–10: 36%). We expectthe proportion of Crown contributions to continue to decreaseover time because there will be fewer kick-start payments.FIGURE 30 –KIWISAVER FUNDS TO PROVIDERS 35Source of funds 2008–09$ million2009–10$ million2010–11$ millionMembersEmployee deductions $917 $1,051 $1,156Employer contributions $355 $626 $740Voluntary contributions $6 $9 $15Total member$1,278 $1,686 $1,911contributionsCrownMember tax credit $322 $573 $664Kick-start $471 $376 $331Fee subsidy $34 $9 –Interest $12 $5 $5Total Crown$839 $963 $1,000contributionsTotal funds to providers $2,117 $2,649 $2,911Changes to the KiwiSaver scheme were announced in Budget 2011(see page 14).35Figures are on a cash accounting basis and are gross (ie, exclude refundsfrom providers). They exclude member tax credits paid to complying fundsand contributions made direct to scheme providers.46 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Part fourORGANISATIONALHEALTH AND CAPABILITYird.govt.nzPART 4ORGANISATIONAL HEALTH AND CAPABILITY47

DEVELOPING OUR PEOPLE CAPABILITYAt 30 June 2011 we had 5,646 36 full-time equivalent employees(FTEs) (2009–10: 5,511). This increase is due to recruiting stafffor Budget 2010 initiatives. However, our FTE number is stillbelow the cap of 6,310 for total positions (including vacancies)established by Cabinet (CAB (09)111) in 2009.A CULTURE OF SERVICE AND EXCELLENCEOne of the IR for the future priorities is:We retain, develop, and attract high-calibre people with theskills required in the future—enabling a culture of service andexcellence.To build a culture of service and excellence, we need our people tohave the right skills and competencies required for the future.Strong leadership is central to delivering our priorities. This year,we introduced leadership expectations to provide our leaderswith clarity about what is expected of them. To help embed ourleadership expectations and build our desired culture, we areimplementing a number of initiatives to empowerthem. We:""delivered Making it real leadership forums, focusing on whatculture means for leadership behaviour and demonstratingour organisational values as set out in IR for the future""included leader expectations in our job expectation templates""aligned our 360° survey tools to the leader expectations anduse them to assess leadership development needs""developed an internal coaching model to help leadersdemonstrate required behaviour, develop coaching skills andimprove performance""refreshed components of our leadership framework toreinforce the leadership expectations.International research shows that engaged employees are moreproductive, customer-focused and more likely to stay longerwith an organisation. An engaged workforce will help us meetour customers’ needs and improve compliance. This year’sengagement survey showed an overall engagement mean score of3.77 out of 5, placing us at the 53rd percentile for the New ZealandState Sector Database.PLANNING FOR OUR FUTURE WORKFORCEWe are focusing on developing strengths in key areas to ensurethat we have the skills for a successful business transformation.They include designing services in collaboration with users,external stakeholder management and gaining productknowledge of the new technology being introduced. We aredeveloping key areas by:""conducting an IT capability assessment""focusing on project resources""developing and implementing individual developmentplanning tools""strengthening our stakeholder management capability,including introducing a toolkit to support our stakeholdermanagement skills.This year we have focused on identifying and addressing our futurecapability requirements. An example of this is our work on theFuture Direction of Service Delivery project (see page 12).We also introduced succession planning at a business unit level tosupplement our “critical roles” work at a senior level.DEVELOPING SKILLS AND KNOWLEDGETo develop high-calibre people now and for the future, weneed to provide access to effective and relevant developmentopportunities. We developed and shared training across priorityareas, eg, debt collection, systems training, senior technicalknowledge and networking. We also introduced new learningframeworks for customer-facing roles, which has helped us toidentify and plan for skill gaps.We analysed performance needs to ensure our training aligns withour capability priorities. A wider use of on-the-job training anduse of online media has ensured our flexibility in responding tothe Canterbury earthquakes, and supporting changes in how wedeliver our services.We also led and collaborated with other government agencies toimprove our learning management system. The system allows usto share our training resources with other government agenciesand helps align planning development with performance goals.SUPPORTING EEO AND DIVERSITYWe produced a diversity scorecard, which will help Inland Revenueto take a more strategic approach to diversity. We integratedour pay and employment equity response plan into the diversityscorecard. Our ongoing monitoring process ensures we considerpay and employment equity issues when analysing businessinformation.We ran a Diversity Network forum for representatives from our26 diversity networks, which allowed the diversity groups toshare their knowledge between the networks, and identify andimplement opportunities to enhance their effectiveness.36Excludes vacancies.48 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

MEASURING OUR CAPABILITYThis year we introduced new capability indicators. They measureInland Revenue’s capability, showing our performance over timeand comparing us to other public sector organisations.FIGURE 31 –WORKFORCE INDICATORS2006–07 2007–08 2008–09 2009–10 2010–11 ComparisonStaff FTEs 5,552 5,976 6,038 5,511 5,646 Establishment cap: 6,310Staff turnover 11.9% 12.0% 8.0% 7.2% 9.4% 2010 public sector average: 9.2% 37Staff engagement (mean)out of 53.75 3.83 3.90 3.77 3.77 2011 Gallup engagement surveydatabase for New Zealand StateSector, 50th percentile: 3.7437 State Services Commission, (2010), Human Resource Capability (HRC)Survey of Public Sector Departments (as at June 2010).ird.govt.nzPART 4ORGANISATIONAL HEALTH AND CAPABILITY49

OUR SYSTEMS MEET OUR NEEDSOne of the priorities for IR for the future is:Our systems meet current and future needs.It is critical that our technology systems are strong and stable.This year we focused on the following key areas to ensure that thesystems meet current and future needs:""Stabilising the environment to support the increase in activity.""Repositioning our business systems to support the shift to theelectronic channel.""Establishing centralised business rules capability andinfrastructure.""Improving capability to support the technologytransformation required to support the future direction ofInland Revenue.Stabilising our IT environmentDuring the year our IT environment has been available 99.9% ofthe time, with the highest number of transactions processed ina single day at 8.6 million in May. We continued to stabilise andstrengthen our core information technology infrastructure, as wellas improving our performance by:""moving our key subsystems to new platforms""making internal process efficiencies""improving the electronic end-user interface.A significant focus has been to ensure the stability of our onlineservices, which continue to grow in importance to Inland Revenue.We also implemented a new electronic channel for tax agentsto review account details. We are replacing the method forexchanging data with other agencies and improving the interfacefor customers to access account details. See page 30 for moreinformation on improvements to our online services.During the year we successfully managed business continuityduring the Canterbury earthquakes. We achieved this throughcooperation with other agencies and our vendors, which helpedus return to service within a short timeframe.Improving our IT capabilityWe reviewed our long-term plan for data centre housing andstorage. This will support the technology transformation requiredto ensure that our systems meet future needs. We have identifiedfurther efficiencies and improvements, including the uptake ofshared government services.We continue to review how our IT capability and systems areprovided to ensure that business systems delivery is managedeffectively. This includes considering how IT services will beprovided to support our future direction, including businesstransformation.We continued to work on the systems transformation stream ofour business transformation programme. We have developed thebusiness case for continued investment in our existing systems andintroduced five system transformation options. We will integratethese with our transformation business blueprint, which will helpus develop our business transformation options and roadmap.We have established a Business Rules Centre to simplify thetranslation from legislation and policy to business and systemrules. This will help them to become easily understood,centralised, documented, and provide transparency between thelegislation and the business and system rules.We worked with the Department of Internal Affairs (DIA) toimplement the first stage of the one.govt network solution. Thiswill provide a secure IT network for government agencies tocollaborate and share information. We also worked closely withthe DIA to evaluate the tender for the “Infrastructure as a service”for Inland Revenue’s future use.We worked closely with the Ministry of Social Development toidentify how to manage the shared student loan processes. Weare also implementing a rules engine that will help automate thestudent loans application processes.50 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Part fiveGOVERNANCE ANDRISK MANAGEMENTird.govt.nzPART 5GOVERNANCE AND RISK MANAGEMENT51

GOVERNANCEThe Commissioner chairs the Executive Board which examineslonger-term strategy, ethics, integrity, strategic risks and progresstowards our desired future and outcomes. In addition, the seniormanagement team meets weekly.The Executive Board is supported by the following governancegroups:""Portfolio Governance and Investment Committee—oversees the approval, initiation and implementation ofsignificant programmes/projects.""Business Transformation Programme Board—providesassurance that Inland Revenue business transformationinitiatives will meet the strategic needs of the organisation.Following the recommendations of our PerformanceImprovement Framework review, the Commissioner nowchairs this Board.""Technical Governance Committee—facilitates and ensuresthe coordination and consistency of departmental work onkey technical matters.In addition to the Executive Board and the supporting governancegroups above, the Risk and Assurance Committee providesindependent advice to the Commissioner on carrying out hisstatutory responsibilities and accountabilities. This Committeehas an independent chair and includes independent members toensure objective advice.Inland Revenue has a risk management framework based oninternational industry standards. Business areas apply theframework to operational and change activities to ensurethat we identify and manage risks to successful business andchange initiatives. We have established processes for managingrisks relating to programmes and portfolios of work and havestrengthened these during 2010–11.52 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

MANAGING RISKSOur risk management framework is based on the ISO RiskManagement Standard (ISO31000:2009) and sets out theprinciples for managing risk. The framework:""requires business owners to adopt risk management practices""has a strong assurance focus that supports governance bodies""applies to strategic, operational, project, programme andportfolio risk.STRATEGIC RISKSWe have identified these key strategic risks to Inland Revenue.RevenueThere are constant threats to the revenue base from global andnational developments and customer behaviour. The recessionhas had ongoing impacts that continue to influence our revenuecollection and increase the level of customer debt.We continue to undertake various measures to reduce therecession’s impact on the Crown’s accounts. We initiated a projectto improve debt management and we have a programme tomanage compliance risks.Reputation and community confidenceIf we do not understand increasing customers’ requirementsor meet our Minister’s and/or customers’ expectations, ourreputation could be negatively affected. This could lead to a lossof confidence in us by government and/or customers and couldundermine voluntary compliance and funding, which are criticalfor an effective tax administration.We continue to improve our understanding of customers, as wellas taking steps to deliver the right customer services. This includesanalysing customer survey responses, developing new customerprogrammes, strengthening customer relationships and improvingcustomer contact channels.Information technologyThere are risks associated with some of the informationtechnology systems we operate. These put pressure on our abilityto make system changes quickly and effectively.This risk is also reflected as a key organisational priority. As thePerformance Improvement Framework report (PIF report 2011)confirmed, our transformation programme is modernising ourinfrastructure and systems and is important to our future. Thisis reflected as a key investment priority in our future capitalintentions.Information managementIf Inland Revenue has poor information management processes,we may not have the business information to support planning,monitoring, analysis and reporting, compliance-basedmanagement or correct and accessible customer information.This could lead to poor decision-making capability, impacting onour ability to deliver our outcomes.We have established an information management programmeto build on the agreed information management vision,framework and principles. 38 This decision represents a significantcommitment of resources (people, information systems andbusiness processes changes) over the next few years.FinancialsIf Inland Revenue does not plan or anticipate funding needs forthe future we may be unable to deliver government priorities.We have reviewed short-term baseline reduction requirementsand balanced efficiency initiatives with longer-termtransformational objectives. Our fiscal forecasting and decisionmaking has allowed us to better meet current and future fundingexpectations.People capabilityIf we do not attract, develop or retain skilled, capable people tomeet the current and future needs of our customers, as well as thedepartment and the environment it operates in, we will reduceour ability to prepare and respond to policy and administrativechallenges.This risk is reflected as one of our key organisation priorities. Weare continuing to build our people capability through identifyingcapability gaps and are working on developing strengths in keyskill areas, (see Part four).38 This was discussed in the PIF report 2011.ird.govt.nzPART 5GOVERNANCE AND RISK MANAGEMENT53

Part sixSTATEMENT OF SERVICEPERFORMANCEird.govt.nzPART 6 STATEMENT OF SERVICE PERFORMANCE55

STATEMENT OF RESPONSIBILITYIn terms of the Public Finance Act 1989 I am responsible, asChief Executive of Inland Revenue, for the preparation of thedepartment’s financial statements and statement of serviceperformance, and for the judgements made in them.I have the responsibility for establishing a system of internalcontrol designed to provide reasonable assurance as to theintegrity and reliability of financial reporting and the statement ofservice performance.In my opinion, these financial statements fairly reflect the financialposition and operations of the department for the year ended30 June 2011.Robert RussellChief Executive and Commissioner of Inland Revenue22 September 2011Countersigned by:Margaret DelanyActing Chief Financial Officer22 September 201156 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

STATEMENT OF SERVICE PERFORMANCEFOR THE YEAR ENDED 30 JUNE 2011REPORTING PERFORMANCEOur forecast service performance is divided into two groups:""Activity forecasts—these are forecasts of expected customer demand for our services that provide context for our performancemeasures results. Significant variation from the forecast figures can influence the achievement of the targets set for our performancemeasures.""Performance measures—these are measures we use to set our performance targets. They measure our performance in terms ofquantity, quality, timeliness and cost. We are reporting cost measures for the first time. As we did not set targets for all of thesemeasures in 2010–11, a complete set of results is on page 27. Additional cost targets have been set for 2011–12 and these will bereported against in future annual reports.The following section reports on our performance against our original forecasts. Where a performance measure is expressed in terms of arange of characteristics that the output should meet, the result is reported as “achieved” or “not achieved” (eg, see Output Expense 1). Forthese performance measures we have provided additional information to explain our performance.We have bolded the 2010–11 columns for all performance measures that are not achieved with a negative variance greater than 5%.We have provided comment for:""key activity forecasts outside the expected range. Secondary activity forecasts have not been commented on separately because theyform part of the key activity forecasts.""performance measures with a negative variance of more than 5%. These measures were not achieved.""performance measures with a positive variance greater than 10%.Some performance measures are measured using a sample of the customer population. We have marked these performance measureswith a hash mark (#) in the 2010–11 Actual column.In the past, and in 2010–11, a 5% tolerance was applied to determine whether performance targets had been achieved. From 2011–12 wewill no longer apply this tolerance and we have adjusted some 2011–12 performance targets to reflect this change.Comparative performance dataWhere appropriate we have included comparative performance information against the activity forecasts and performance measuresfor the previous year (2009–10 Actual). We have not included comparative performance information for new performance measures, orwhere there has been a change in the performance measure or measurement methodology that made the results incomparable. These areindicated by “n/a”.Performance context commentaryWe have included information to give context to the performance achieved. For each output expense we have included a summary of:""the impacts we want to contribute to. Further information about our performance measurement framework is in Part two.""factors influencing our performance during 2010–11.These commentaries form part of the overall performance picture and should be read in conjunction with the activity forecasts andnarrative in the other sections of this report.ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE57

SUMMARY OF SERVICE PERFORMANCEFigure 32 summarises the performance measures achieved within the 5% tolerance. This year, we achieved 51 of 61 (84%) performancemeasures within the 5% tolerance. We achieved 37 of the 61 (61%) performance measures with a positive variance.FIGURE 32 – PERFORMANCE MEASURES ACHIEVED WITHIN 5% TOLERANCE2008–09 2009–10 Output expense 2010–113 of 4 4 of 4 Policy advice 6 of 619 of 24 20 of 21 Services to inform the public about entitlements and meeting obligations 12 of 1420 of 20 18 of 18 Services to process obligations and entitlements 15 of 178 of 8 8 of 9 Management of debt and outstanding returns 9 of 159 of 9 9 of 9 Taxpayer audit 9 of 959 of 65 59 of 61 Total 51 of 61Figure 33 shows the number of demand-driven activity forecasts below the forecast range, within the forecast range and above the forecastrange.FIGURE 33 – ACTIVITY FORECASTS WITHIN RANGEOutput expense 2010–11Below range2010–11In range2010–11Above rangePolicy adviceThere are no activity forecasts in this output classServices to inform the public about entitlements and meeting obligations 2 of 3 1 of 3 0 of 3Services to process obligations and entitlements 1 of 5 3 of 5 1 of 5Management of debt and outstanding returnsThere are no activity forecasts in this output classTaxpayer audit 0 of 1 0 of 1 1 of 1Total 3 of 9 4 of 9 2 of 9In 2010–11, the Canterbury earthquakes had a negative impact on the achievement of six of our performance targets:""timeliness of electronic correspondence responses""timeliness of processing registrations and issuing child support administrative review decisions""number of outstanding returns filed or brought to completion and percentage of returns finalised within three months of the due dateand within six months of the due date.These are discussed further in the following output sections. We anticipate that the situation in Canterbury will continue to influence ourperformance in 2011–12.58 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT EXPENSE 1POLICY ADVICEDescriptionThis output expense provides policy advice services jointly with the Treasury that contribute to achieving the government’s tax and socialpolicy outcomes, and improving the economic and social wellbeing of New Zealanders.Activities undertaken:""advising on all aspects of tax policy and social policy measures that interact with the tax system""drafting tax and social policy legislation""negotiating and maintaining New Zealand’s network of double tax agreements with other countries""forecasting tax revenues""providing ministerial services.Performance context commentaryThe impacts we contribute toProviding policy advice services protects and maintains the integrity of the tax system while ensuring that our tax system is as simple aspossible and is internationally competitive. This contributes to all of our impacts, ie:""more customers are able to self-manage""more customers register and report accurate information when required""more customers claim their correct entitlements""more customers pay and file information on time""the behaviour of non-compliant customers improves.When customers comply with their obligations and receive their entitlements we make progress towards Inland Revenue’s outcomes:""Revenue is available to fund government programmes through people meeting payment obligations of their own accord.""People receive payments they are entitled to, enabling them to participate in society.Factors influencing performance during 2010–11Significant areas of work in 2010–11 were:""providing policy advice for Budget 2011, including support for the Government’s Savings Working Group""the urgent policy response to the Canterbury earthquakes.This work took priority over other items in the Government’s tax policy work programme.See Advising on Government Policy on page 14 and Complaints and ministerial services on page 32 for further information.Financial performance for the year ended 30 June 2011 ($000)Revenue Expenses Net surplus/(deficit)14,833 14,627 206ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE59

OUTPUT 1.1 POLICY ADVICE IN RELATION TO TAX AND SOCIAL POLICYDescriptionThis output involves:""advising on all aspects of tax policy and social policy measures that interact with the tax system""developing tax and social policy in line with the Generic Tax Policy Process""drafting tax legislation for introduction in the House and assisting its passage through the House""negotiating and maintaining New Zealand’s network of double tax agreements with other countries""forecasting future tax flows and other non-tax Crown revenue for the government""reporting on revenue receipts against forecasts""analysing revenue implications of changes in tax and social policy.Performance measures2009–10ActualMeasure2010–11Target Actual VarianceQuantity, quality and timelinessAchieved We will provide the Minister with: Achieved Achieved 1 – tax and social policy advice as agreed in the tax policy workprogramme draft tax bills as agreed and support their introduction and passagethrough Parliamentbudget forecasts and updatesfollowing the Generic Tax Policy Process within agreed timeframes.n/aAchievedWe will ensure that we comply with the regulatory impact analysisrequirements for policy advice, including quality assuranceassessments where required (advice is complete, convincing, consulted,clear and concise).We will ensure that the Minister is satisfied with the quality of policyadvice, tax legislation and revenue forecasts provided.Explanation for “achieved” ratingWe will provide the Minister with tax and social policy advice, draft tax bills, and budget forecasts and updates.Achieved Achieved 2 –Achieved Achieved 3 –The achievement of this measure is based on the delivery of tax policy work, including draft tax bills and budget forecasts, in accordancewith the agreed timeframes to deliver the Government’s tax policy work programme.1See Explanation for “achieved” rating on this page and Generic Tax Policy Process on page 61.2See Tax policy quality assurance assessment criteria on page 61.3This standard is measured by using a survey of the Minister near the end of the year.60 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Generic Tax Policy ProcessA process designed to produce better, more effective tax policy. There are five key development stages.StageStrategicTacticalOperationalLegislativeImplementationand reviewDescriptionThis involves the development of an economic strategy, a fiscal strategy and a revenue strategy.This involves the development of a work programme and an annual resource plan.This involves detailed policy design, formal detailed consultation, and Ministerial and Cabinet approval of detailedpolicy recommendations.This stage, which can occur concurrently with the operational stage, involves the translation of the detailed policyrecommendations into legislation.This involves the implementation of legislation and any post-implementation review.Tax policy quality assurance assessment criteriaQualitystandardCompleteDescriptionAll required information (including disclosure statement) is included in the Regulatory Impact Statement (RIS).All substantive elements of each fully-developed option is included (or the RIS identifies the nature of the additionalpolicy work required).ConvincingAll substantive economic, social and environmental impacts have been identified (and quantified where feasible).Status quo, problem definition and any cited evidence is presented in an accurate and balanced way.The objectives relate logically to and fully cover the problem definition.The options offer a proportionate, well-targeted response to the problem.The level and type of analysis provided is commensurate with the size and complexity of the problem and themagnitude of the impacts and risk of the policy options.The nature and robustness of the cited evidence is commensurate with the size and complexity of the problem andthe magnitude of the impacts and risks of the policy options.ConsultedThe conclusions relate logically and consistently to the analysis of the options.The RIS shows evidence of efficient and effective consultation with all relevant stakeholders, key affected parties,government agencies and relevant experts.The RIS shows how any issues raised in consultation have been addressed or dealt with.Clear and conciseCommunicated in plain English, with minimal use of jargon and any technical terms explained.The material is structured in a way that is helpful to the reader.The material is concisely presented with minimal duplication, appropriate use of tables and diagrams andreferences to more detailed source material to help manage the length.ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE61

OUTPUT 1.2 MINISTERIAL SERVICESDescriptionThis output involves all activities associated with ministerial services, including responding to ministerial correspondence andparliamentary questions. It includes all tax, child support, student loan, KiwiSaver and family assistance ministerial correspondence andsupply of information.Performance measures2009–10Actual Measure2010–11Target Actual VarianceQualityAchieved We will ensure that all answers are correct, complete, clear andAchieved Achieved 4 –appropriately referenced.Timelinessn/a Percentage of ministerial correspondence responded to within 10 days. 95% 95% –n/a Percentage of parliamentary questions responded to within requiredtimeframes.100% 100% 5 –Explanation for “achieved” ratingWe will ensure that all answers are correct, complete, clear and appropriately referenced.This measure is achieved when:""standard quality checks are completed and agreed processes are followed as part of preparing a response""detailed quality reviews are completed for at least 10% of responses, and are assessed as satisfactory.Ministerial services quality criteriaQuality standardCorrectCompleteClearAppropriatelyreferencedDescriptionA correct interpretation of the law.A fully resolved response which answers all aspects of the enquiry.Communicated in a way that the customer can understand.Referenced to the appropriate sections of the Acts or authorities when required.4See Explanation for “achieved” rating and Ministerial services quality criteria on this page.5The statutory timeframe for oral parliamentary questions is response in the Minister’s office by 12:00pm on the day of receipt. The statutory timeframe forwritten parliamentary questions is six working days from the day lodged with the Office of the Clerk.62 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT STATEMENT: POLICY ADVICEFOR THE YEAR ENDED 30 JUNE 20112009–10Actual$000Revenue2010–11Actual$0002010–11Mainestimates$0002010–11Finalvoted$00015,320 Crown 14,655 15,117 14,655160 Other 178 168 15715,480 Total revenue 14,833 15,285 14,812Expenses14,653 Annual appropriations 14,627 15,285 14,81214,653 Total expenses 14,627 15,285 14,812827 Net surplus/(deficit) 206 – –ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE63

OUTPUT EXPENSE 2SERVICES TO INFORM THE PUBLIC ABOUT ENTITLEMENTS AND MEETING OBLIGATIONSDescriptionThis output expense provides services that help taxpayers and other customers to meet their payment obligations of their own accord andto receive payments they are entitled to. This is achieved through a range of proactive and reactive services to make people aware of theirentitlements and obligations, and the services available to help them comply. This output expense also contributes to confidence in the taxadministration system through managing individual customer complaints quickly, fairly and in confidence.Activities undertaken:""providing information to taxpayers on the application of the tax laws""responding to enquiries from taxpayers and social support programme customers""providing assistance to the public, businesses and tax agents""adjudication on behalf of the Commissioner on proposed taxpayer assessments""providing binding rulings and other statements, on the interpretation and application of the law administered by Inland Revenue.Performance context commentaryThe impacts we contribute toProviding customers with relevant information and advice, certainty in relation to the application of the law, and a choice in how theyengage with us ensures that customers are aware of and understand their obligations and entitlements. This means more customers areable to self-manage and consequently:""more customers register and report accurate information when required""more customers claim their correct entitlements""more customers pay and file information on time.When customers comply with their obligations and receive their entitlements we make progress towards Inland Revenue’s outcomes:""Revenue is available to fund government programmes through people meeting payment obligations of their own accord.""People receive payments they are entitled to, enabling them to participate in society.Factors influencing performance during 2010–11The Canterbury earthquakes had a major effect on performance this year. We responded immediately after the earthquakes byreallocating work to other sites. With the closure of our main Christchurch building, service delivery resources were significantly reduced(46% fewer FTEs available for output related work in June 2011 than in November 2010). We did not meet our timeliness target forresponding to electronic correspondence as a direct result of the earthquakes. However, due to our increased focus on engaging withcustomers affected by the earthquakes, we completed 21% more advisory hours than in 2009–10.Overall, demand for service customer contacts (telephone calls, correspondence and counter enquiries) was 9% below the forecast range.We made improvements to our management of this year’s peak season, which helped improve voice channel performance in the fourthquarter compared to the same period in 2009–10. The average cost of service customer contacts was $31.97 per contact. For 2011–12, wehave set a performance target for the average cost per contact and we will report on this in the 2011–12 Annual Report. The demand forself-help service enquiries was 8% below the forecast range.Customer satisfaction with our services remains high and is consistent with last year’s results. This year we piloted an e-satisfaction surveyto gain further insight into the drivers of customer satisfaction with the online service channel—72% of customers who recently contactedour online services found them easy to use. Overall satisfaction with online services was high at 95% for business customers, and 89% forindividual customers. The results of the pilot survey will inform future measures of satisfaction with our online services. We will continueto report results in 2011–12, then set targets for 2012–13.64 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT 2.1 INFORMATION SERVICESDescriptionThis output involves responding to customer enquiries on tax and social support programmes (including child support and KiwiSaver)through electronic channels, correspondence, telephone, personal appointments, actively providing advice through a range ofcommunication approaches delivered in the community and through the complaints management service.Activity forecasts2009–102010–11Actual Activity forecast 6 Forecastn/a We expect to answer an estimated 6.01 to 6.65 million service customer contacts,including child support contacts.n/a 0.88 to 0.92 million paper correspondence contacts, including child supportpaper correspondence contacts.n/a 0.65 to 0.72 million electronic correspondence contacts, including child supportelectronic correspondence contacts.6.01–6.65million880,000–920,000650,000–720,000242,299 0.23 to 0.26 million counter enquiries, including child support counter enquiries. 230,000–260,0004.23 million 4.25 to 4.70 million telephone enquiries, including child support telephone4.25–4.70enquiries.millionn/a We expect to answer an estimated 17.53 to 19.37 million self-help service contacts,including child support self-help service enquiries.n/a 0.67 to 0.74 million interactive voice response (IVR) contacts, including childsupport IVR.17.53–19.37million670,000–740,000n/a 2.24 to 2.48 million KiwiSaver scheme provider requests for confirmation. 2.24–2.48millionn/a 0.92 to 1.02 million agent client maintenance. 0.92–1.02millionn/a 13.70 to 15.14 million account look-up enquiries. 13.70–15.14millionExplanation for forecasts outside rangeWe expect to answer an estimated 6.01 to 6.65 million service customer contacts.Actual5.47 million752,171607,649219,3263.89 million16.06 million695,4982.56 million507,82412.40 millionDemand was below forecast for all service channels. This was influenced by our focus on moving customers to more cost-effective, selfhelpchannels.We expect to answer an estimated 17.53 to 19.37 million self-help service contacts.Although we encouraged customers to move to self-help channels, demand did not meet our forecasts. In particular, the Canterburyearthquakes affected customers’ ability to contact us.6Several changes to these activity forecasts mean some 2009–10 results are not comparable. Customer contacts have been split into service contacts andself-help contacts, correspondence contacts have been split into paper and electronic correspondence contacts, KiwiSaver scheme provider requests are nowcounted as self-help contacts instead of correspondence contacts, and we changed our measurement methodology for account look-up enquiries.66 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Child support activity forecastsNote: These activity forecasts are a subset of the previous information services activity forecasts and are reported separately fortransparency.2009–10ActualActivity forecast2010–11Forecast704,725 We expect to answer an estimated 574,000 to 634,000 child support contacts. 574,000–634,000n/a 75,000 to 83,000 child support paper correspondence contacts. 75,000–83,000n/a 14,500 to 16,000 child support electronic correspondence contacts. 14,500–16,00017,242 15,500 to 17,000 child support counter enquiries. 15,500–17,000497,566 469,000 to 518,000 child support telephone enquiries. 469,000–518,000103,986 We expect to receive 109,000 to 121,500 child support interactive voice response109,000–(IVR) enquiries.121,500Actual523,55955,81918,04813,323436,369not availableExplanation for forecasts outside rangeWe expect to answer an estimated 0.57 to 0.63 million child support contacts.Child support correspondence and telephone volumes have been decreasing for the past four years because we have focused on providingcomplete customer service, reducing child support customers’ need for additional contact with us.We expect to receive 109,000 to 121,500 child support interactive voice response (IVR) enquiries.In May 2010 we switched child support self-help service enquiries from the old IVR system to SPK2IR. Although child support IVRenquiries are included in the result for overall IVR contacts, due to system compatibility issues, we are unable to provide separate childsupport results for this forecast. We are working with our technology provider to fix this for 2011–12.ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE67

Performance measures2009–10ActualMeasureQuantity175,881 Hours spent completing information, education and compliancefocused advisory services.Quality88.6% Percentage of customers who are given an answer that is correct,complete, clear, timely and appropriately referenced, that also shows anunderstanding of their environment.87.0% Percentage of customers who have contacted us and are satisfied withthe quality of the service we provide.75.8% Percentage of all initial telephone enquiries fully resolved at the time,requiring no follow-up action.2010–11Target Actual Variance175,000 212,065 21.2%88% 85.9%# (2.4%)85% 86.4%# 1.6%80% 74.7%# (6.6%)n/an/an/aPercentage of customers who have contacted us and find they can easilyaccess our services.Percentage of customers who have contacted us and find theinformation straightforward and easy to understand.TimelinessPercentage of paper correspondence responded to within three weeksof receipt.85% 82.6%# (2.8%)85% 83.0%# (2.4%)80% 77.4% (3.3%)92.8% Percentage of all electronic enquiries responded to within one week ofreceipt.77.9% Percentage of telephone calls responded to within one minute onpriority queues.76.4% Percentage of telephone calls responded to within four minutes ongeneral service queues.80% 64.9% (18.8%)70% 71.0% 1.4%70% 76.5% 9.3%# measured using a sample of the customer population.Explanation for significant positive varianceHours spent completing information, education and compliance focused advisory services.Advisory hours are 20.6% above the result for 2009–10. Increased advisory work has been an important factor in supporting the recoveryfrom the Canterbury earthquakes.Explanation for targets not achievedPercentage of all initial telephone enquiries fully resolved at the time, requiring no follow-up action.This year’s result is consistent with previous years. Inland Revenue’s strategy to shift less complex contacts to self-help channels is increasingthe breadth and complexity of telephone enquiries, making them more difficult to resolve at first contact.Percentage of all electronic enquiries responded to within one week of receipt.Performance was affected by reduced capacity as a result of the Canterbury earthquakes.68 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT 2.2 ADJUDICATION AND RULINGSDescriptionThis output involves:Adjudication""providing a technical review of existing taxation disputes referred to the Adjudication Unit""issuing an adjudication report (or other formal communication of conclusions) to the parties concerned""issuing, where required, an assessment consistent with the conclusions of the technical review.Taxpayer rulings""considering applications for and providing binding private and product rulings, and statutory determinations""preparing statutory determinations and valuations, eg, taxpayer-specific accruals.Public rulings""preparing and issuing binding public rulings""developing and publishing non-binding statements on the Commissioner’s view of the law administered by Inland Revenue,eg, interpretation statements and interpretation guidelines""considering applications for and providing taxpayer-specific depreciation determinations""preparing and publishing depreciation and other determinations, eg, livestock valuations""considering and responding to technical correspondence.Activity forecast2009–10Actual Activity forecast36 Number of public items we expect to publish or finalise consideration of (includingtechnical correspondence), giving the Commissioner’s interpretation of the law.2010–11ForecastActual25–45 28Performance measures2009–10ActualAchievedn/an/an/aMeasureQuantityRulings reports, adjudication reports, public items and technicalcorrespondence or advice meets the applicable purpose, logic,alternatives, consultation and practicality standards.TimelinessPercentage of adjudication cases completed within three months ofreceipt.Percentage of taxpayer ruling applications that have a draft rulingcompleted within three months of receipt.Percentage of non-qualifying taxpayer ruling applications that have adraft ruling completed within the timeframe agreed with the applicant(which will not be more than six months from the receipt of theapplication).2010–11Target Actual Variance100% 100% 7 –80% 94.0% 17.5%90% 100% 11.1%90% 100% 11.1%7Each adjudication report is evaluated by a file closure issue review of the file, by a manager who was not involved in processing the adjudication case. See Qualitycriteria definitions on page 70.ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE69

Explanation for significant positive variancesPercentage of adjudication cases completed within three months of receipt.We completed 90 adjudication cases. This was our first year of targeting 80% of cases within three months of receipt, and measuringtimelines from receipt rather than allocation. The initial target proved to be an underestimate. Targets for 2012–13 onwards will be set tobetter reflect our performance.Percentage of taxpayer ruling applications that have a draft ruling completed within three months of receipt, andPercentage of non-qualifying taxpayer ruling applications that have a draft ruling completed within the timeframe agreed with the applicant.We completed 56 draft taxpayer rulings this year—39 qualifying rulings and 17 non-qualifying rulings. The improved rulings processimplemented in February 2010 has contributed to the positive variances.Quality criteria definitionsQualitystandardPurposeLogicAlternativesConsultationPracticalityCorrectCompleteClearDescriptionThe subject matter and conclusions are clearly stated and guidance is provided in a manner useful to those affectedby them.The assumptions used are explicit, and the argument is logical and supported by appropriate legal authority.Alternative legal arguments and interpretations are adequately considered and their respective merits assessed.There is evidence of appropriate consultation with the public, and contrary legal arguments and practicaldifficulties identified have been considered.Compliance and administrative costs and problems for customers and Inland Revenue arising fromimplementation, including feasibility and timing, and consistency with the general body of the Commissioner’sinterpretation and application of tax law, have been considered, and incorporated in the analysis insofar as they arerelevant to the interpretation and are possible under the legislation.The law is correctly interpreted and the response is supported by the appropriate legal authority.The response fully resolves all aspects of the enquiry.The response will be communicated in a way that is clear to the enquirer.OUTPUT STATEMENT: SERVICES TO INFORM THE PUBLIC ABOUT ENTITLEMENTS AND MEETINGOBLIGATIONSFOR THE YEAR ENDED 30 JUNE 20112009–10Actual$0002010–11Actual$0002010–11Mainestimates$0002010–11Finalvoted$000Revenue238,859 Crown 243,290 242,848 243,2903,120 Other 3,629 2,682 2,480241,979 Total revenue 246,919 245,530 245,770Expenses230,629 Annual appropriations 245,396 245,530 245,770230,629 Total expenses 245,396 245,530 245,77011,350 Net surplus/(deficit) 1,523 – –70 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT EXPENSE 3SERVICES TO PROCESS OBLIGATIONS AND ENTITLEMENTSDescriptionThis output expense provides services that contribute to the availability of revenue to fund government programmes, as well as ensuringthat taxpayers and other customers receive payments they are entitled to, including tax refunds. This is achieved through services designedto achieve timely, efficient and effective assessment and processing of:""tax payments, tax credit claims and refunds for taxpayers""entitlements for social support programmes.Activities undertaken:""registering taxpayers""making tax assessments""banking tax payments and making refunds""processing applications and payments for social support programmes""supplying information to other government agencies""accounting and reporting the collection of Crown revenue""collecting ACC employee earners’ levy as a component of PAYE deductions.Performance context commentaryThe impacts we contribute toAccurate, timely, complete and efficient processing of notices, statements and social policy entitlements increases customers’ confidencein the tax system. When customers have confidence in the tax system they are more likely to be able to self-manage their complianceobligations. This means:""more customers register and report accurate information when required""more customers claim their correct entitlements""more customers pay and file information on time.When customers comply with their obligations and receive their entitlements we make progress towards Inland Revenue’s outcomes:""Revenue is available to fund government programmes through people meeting payment obligations of their own accord.""People receive payments they are entitled to, enabling them to participate in society.Factors influencing performance during 2010–11We achieved all our performance targets in this output expense except two that were directly affected by the Canterbury earthquakes.These were:""the timeliness standard for processing registrations. Year-to-date performance to 31 January 2011 was 89%, which dropped to 84.1% at30 June 2011.""the timeliness standard for processing child support administrative review decisions.This year, we made improvements to the processing of paper-based income tax returns and tax credit claim forms, including centralisingmail opening and payment processing in Upper Hutt from February 2011. As a result, our timeliness for processing income tax returns andtax credit claim forms, improved from last year.During 2010–11, 81% of income tax refunds and 93% of GST refunds were issued within four weeks of a return being lodged. We will reporton refund timeliness in 2011–12 and we are planning to set performance targets for refund timeliness for 2012–13.ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE71

The average cost of processing income tax returns, GST returns and employer monthly schedules is $3.77 per return. In 2011–12, we set aperformance target for processing these returns, and we will report against it in the 2011–12 Annual Report.Further information on child support is on page 41.Financial performance for the year ended 30 June 2011 ($000)Revenue Expenses Net surplus/(deficit)114,445 115,910 (1,465)72 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT 3.1 REGISTRATIONS, APPLICATIONS AND ASSESSMENTSDescriptionThis output involves processing all registrations, applications and assessments for the tax and social policy programmes we administer.Activity forecasts2009–10ActualActivity forecast2010–11Forecastn/a Number of new tax and KiwiSaver registrations we expect to process. 481,200–531,90061,515 Number of new child support applications and registrations we expect to process. 56,200–62,300n/aNumber of new Working for Families Tax Credits (WfFTC) applications we expect toprocess.28,300–31,400Actual747,92958,19225,324Explanation for forecasts outside rangeNumber of new tax and KiwiSaver registrations we expect to process.This is the first year of forecasting new tax and KiwiSaver registrations and we underestimated the volume. The 2011–12 forecast has beenincreased accordingly.Number of new WfFTC applications we expect to process.This is the first year of forecasting WfFTC applications. The forecast was based on historical trends, however, the number of WfFTCapplications now appears to be decreasing over time.Performance measures2009–10Actual MeasureQuality98.4% Correctly process all notices, statements, certificates of entitlement andloan transfer letters.2010–11Target Actual Variance100% 99.7%# (0.3%)Timelinessn/a Percentage of registrations processed within five working days of receipt. 90% 84.1% (6.6%)85.6% Percentage of income tax assessments issued within four weeks ofreceipt.97.9% Percentage of FBT and GST assessments issued within three weeks ofreceipt.87.7% Percentage of paying parents issued with child support assessmentswithin two weeks of receipt of a properly made application.96.7% Percentage of KiwiSaver contributions from employees on employermonthly schedules finalised by the end of the month following the duedate.# measured using a sample of the customer population.80% 86.3% 7.9%95% 97.5% 2.6%70% 83.6% 19.4%95% 95.5% 0.5%ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE73

Explanation for target not achievedPercentage of registrations processed within five working days of receipt.This measure was being achieved until February 2011. Performance declined as a result of the February Canterbury earthquake and thesubsequent loss of capacity.Explanation for significant positive variancePercentage of paying parents issued with child support assessments within two weeks of receipt of a properly made application.This result is below the 2009–10 result. It was achieved by focusing on issuing assessments early to inform customers of their liability, whichhelps to improve compliance.OUTPUT 3.2 ADMINISTRATIVE REVIEWSDescriptionThis output involves providing an administrative process for reviewing child support assessments that is both inexpensive and readilyaccessible to custodians and paying parents.Performance measures2009–10Actual MeasureTimeliness92.7% Percentage of child support administrative review decisions issuedwithin seven weeks of receipt of a properly made application.n/aCostThe average cost of administering and issuing child supportadministrative reviews per assessment issued.2010–11Target Actual Variance85% 76.5%# (10%)

OUTPUT 3.3 PAYMENTS, RETURNS, COLLECTIONS AND DISBURSEMENTSDescriptionThis output involves:""issuing rebates and refunds""distributing KiwiSaver contributions to scheme providers""disbursing child support payments to custodians and the Crown""receiving and banking payments (including child support payments from paying parents)""accounting and reporting the collection of Crown revenue.Activity forecasts2009–10ActualActivity forecast2010–11Forecast8.27 million Number of returns we expect to process. 7.55–8.35million7.93 million Number of payments we expect to process. 7.48–8.27millionPerformance measures2009–10Actual MeasureActual7.97 million8.10 million2010–11Target Actual VarianceQuality100% Correctly process all payments to accounts. 100% 99.9% (0.1%)74.1% Percentage of child support assessments collected (excluding cases we78% 75.6% (3.1%)manage on behalf of overseas agencies and uncollectable debt cases) forthe year ending 31 March 2011.69.0% Percentage of assessed paying parents (excluding cases we manage on70% 69.3% (1.0%)behalf of overseas agencies and uncollectable debt cases) who pay theirwhole liability by the due date.n/a Percentage of New Zealand-based student loan borrowers who pay on85% 97.1% 14.2%time.n/a Percentage of employer monthly schedule and GST returns are filed35% 34.6% (1.1%)electronically.Timeliness85.8% Percentage of tax credit claims processed and issued within three weeks90% 91.9% 2.1%of receipt.98.7% Percentage of paid parental leave payments issued to customers on the100% 96.3% (3.7%)first regular pay day following the agreed date of entitlement.n/a Percentage of Working for Families Tax Credit payments processed and100% 96.5% (3.5%)issued to customers on the first regular pay period following the receiptof an application (excluding end-of-year payments).98.8% Percentage of payments banked on the day of receipt. 100% 98.7% (1.3%)ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE75

Explanation for significant positive variancePercentage of New Zealand-based student loan borrowers who pay on timeThis measure and target was trialled internally in 2009–10 and our target was based on performance in that year. Improved compliance byNew Zealand-based borrowers in 2010–11 has resulted in the performance achieved.OUTPUT STATEMENT: SERVICES TO PROCESS OBLIGATIONS AND ENTITLEMENTSFOR THE YEAR ENDED 30 JUNE 20112009–10 2010–11 2010–11 2010–11Actual Actual Main Finalestimates voted$000 $000 $000 $000Revenue98,218 Crown 92,540 90,941 92,54022,851 Other 21,905 23,723 23,648121,069 Total revenue 114,445 114,664 116,188Expenses115,740 Annual appropriations 115,910 114,664 116,188115,740 Total expenses 115,910 114,664 116,1885,329 Net surplus/(deficit) (1,465) – –76 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT EXPENSE 4MANAGEMENT OF DEBT AND OUTSTANDING RETURNSDescriptionThis output expense provides services that contribute to the availability of revenue to fund government programmes. This is achieved by:""ensuring that taxpayers assess their liabilities when required and they and any other customers meet payment obligations (orunderstand the action they need to take to meet overdue obligations)""taking appropriate enforcement action where people choose not to comply.Activities undertaken:""taking follow-up action where returns are outstanding""taking follow-up action where payments are overdue.Performance context commentaryThe impacts we contribute toUsing a tailored approach to our interventions, that reflects customers’ individual circumstances and compliance behaviour should ensurethat the behaviour of non-compliant customers improves. Consequently, more customers will pay and file information on timein the future.If more customers comply with their obligations and receive their entitlements, we make progress towards Inland Revenue’s outcomes:""Revenue is available to fund government programmes through people meeting payment obligations of their own accord.""People receive payments they are entitled to, enabling them to participate in society.Factors influencing performance during 2010–11This year, our performance in clearing outstanding returns declined compared to 2009–10. This was influenced by:""data-cleansing improvements that reduced the number of unnecessary returns issued to customers. We changed the measurementbasis in 2011–12 from an absolute reduction in the number of outstanding returns, to a percentage reduction to reflect this.""early intervention initiatives, such as text messaging customers with outstanding returns and outbound calling to target high-riskreturns (GST and PAYE).""the impact of the Canterbury earthquakes and the need to balance work on outstanding returns with other priorities.Our debt management approach is primarily focused on preventing people falling into debt and contacting them early to assist them ifthey go into debt. Our approach includes campaigns targeting customers before their payment due dates, and customers with debt agedless than one year. This has been successful, as indicated by the 35% decrease since 2008–09 in debt aged under one year. This year, as aresult of our 7 February campaign, 83% of assessments were paid on time, compared to 72% in 2009–10.One consequence of our focus on early intervention is a significant increase in debt aged over two years, which has grown by 49% since2009–10. As this debt gets older, it also continues to accumulate penalties and interest.Inland Revenue received additional funding in Budget 2010 to manage overdue debt (2010 –11: $10.2 million) mainly through outboundcalling campaigns. We achieved our performance targets for this programme of $100 million additional cash collection for this year.However, our outbound calling campaigns were affected by the Canterbury earthquakes because the majority of our outbound callingteam is based there. As a result of the earthquakes, this work was picked up by other debt teams across the country.Further information on managing outstanding returns and overdue debt is on pages 37 to 40 and in the Additional information section onpage 143.ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE77

Financial performance for the year ended 30 June 2011 ($000)Revenue Expenses Net surplus/(deficit)98,206 99,839 (1,633)Performance measuresThe following performance measures applies to all outputs in this output expense.2009–10Actualn/aMeasureQuantityNumber of hours we will spend proactively working with customers tofile and pay post due date.Quality96.5% Percentage of work actioned in a correct, complete, clear, timely andappropriately referenced manner that also shows an understanding ofthe environment.2010–11Target Actual Variance500,000 594,696 18.9%95% 97.1%# 8 2.2%# measured using a sample of debt cases and returns policing profiles .Explanation for significant positive varianceNumber of hours we will spend proactively working with customers to file and pay post due date.This result reflects our increased focus on running targeted campaigns, and the additional resources applied to ensure business continuityfollowing the Canterbury earthquakes. This measure has been discontinued in 2011–12 because it is not an effective measure of ourperformance.Debt and outstanding returns quality criteria definitionsQualitystandardCorrectCompleteClearTimelyAppropriatelyreferencedEnvironmentDescriptionA correct interpretation of the law.A fully considered reactive or proactive response or intervention that supports case resolution and recognises allrelevant aspects of the case or query.Communicated in a way that the customer can understand.Reactive responses or proactive interventions are completed promptly.Referenced to the appropriate sections of the Acts or authorities when required.The specific circumstances relevant to the customer at the time of resolving the non-compliance.8See Debt and outstanding returns quality criteria definitions on this page.78 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT 4.1 OUTSTANDING RETURNSDescriptionThis output involves all activities associated with collecting outstanding returns, including taking appropriate follow-up action againsttaxpayers who do not file a return.Performance measures2009–10Actual MeasureQuantity1.44 million Number of outstanding returns filed or brought to completion byyear end.2010–11Target Actual Variance1.45 million 1.17 million (19.1%)Qualityn/a Percentage of outstanding returns over two years old.

OUTPUT 4.2 OVERDUE DEBTDescriptionThis output covers all activities associated with collecting overdue debt (excluding child support debt). It involves taking appropriatefollow-up action when customers do not meet their obligations, including providing them with assistance on how they can meet their taxobligations.Performance measures2009–10Actual Measure2010–11Target Actual VarianceQuantity510,980 Number of debt cases resolved (excluding child support) by year end. 505,000 459,979 (8.9%)Qualityn/a Percentage of collectable debt value over two years old.

OUTPUT 4.3 CHILD SUPPORT DEBT MANAGEMENTDescriptionThis output involves all activities associated with the recovery of overdue child support payments. It includes taking appropriateenforcement action against non-compliers within the child support law.Performance measures2009–10Actual Measure2010–11Target Actual VarianceQuantityn/a Number of child support debt cases resolved by year end. 70,000 77,982 11.4%n/aQualityPercentage of child support assessments collected that were due overthe last five years (excluding penalties, debt we managed on behalf ofoverseas agencies and uncollectable debt cases).7.1% Limit the growth in child support debt between 30 June 2010 and30 June 2011 (excluding penalties, debt we manage on behalf of overseasagencies and uncollectable debt cases).84% 84.7% 0.8%

OUTPUT EXPENSE 5TAXPAYER AUDITDescriptionThis output expense provides services to ensure that the revenue base for funding government programmes is protected. This is achievedby verifying, through audit activity, that taxpayers across all taxpayer groups are meeting their obligations, specifically targeting risk areas,and taking appropriate enforcement action when obligations are not being met.Activities undertaken:""Identifying risks to revenue and designing audit activities accordingly""Verifying that tax obligations have been met by auditing a selection of taxpayers""Managing tax litigation.Performance context commentaryThe impacts we contribute toWe use intelligence analysis to target our compliance activities to customers who are non-compliant or at risk of non-compliance. Thiscreates an environment where customers believe we will detect non-compliance and are deterred from providing inaccurate information.It also protects the revenue base and provides certainty to customers on the application of the law.We also use our compliance activities to educate customers who are unaware of their obligations and only use enforcement action to theextent necessary. This ensures that the behaviour of non-compliant customers improves. Consequently, more customers will payand file information on time in the future.When customers comply with their obligations and receive their entitlements we make progress towards Inland Revenue’s outcomes:""Revenue is available to fund government programmes through people meeting payment obligations of their own accord.""People receive payments they are entitled to, enabling them to participate in society.Factors influencing performance during 2010–11The strengthening of our intelligence gathering and analysis capability has enabled us to better target our investigations. We assessed$1,451 million in discrepancies, 55.4% over target, which raised our rate of return per audit hour to well over the target. The variance wasdue to a small number of high-value cases in the large enterprises sector, and high-value evasion and fraud cases that were part of ourhidden economy investigations.Inland Revenue received additional funding in Budget 2010 to address the hidden economy (2010–11: $6.7 million) and propertycompliance (2010–11: $6.6 million). We achieved our performance targets for the hidden economy (2010–11: $23 million of additionaldiscrepancies) and property compliance (2010–11: $45 million of additional discrepancies).We used overtime and moved work to other sites to help offset the impact of the Canterbury earthquakes on the number of hours spentconducting audits. As a result of these actions, our total number of audit hours this year was only 2.1% below target.For further information see Investigations on page 35 and Legal action on page 36.Financial performance for the year ended 30 June 2011 ($000)Revenue Expenses Net surplus/(deficit)166,622 164,606 2,01682 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT 5.1 TAXPAYER AUDITDescriptionThis output involves:""Individual and small to medium enterprise audit —The audit of businesses with a turnover of up to $300 million (excluding largeenterprises). It includes audits of duties, non-residents, investments and salary and wage earners.""Large enterprise audit—Auditing and providing services to large businesses with a group turnover of more than $300 million, plusother specific groups.Performance measures2009–10Actual Measure2010–11Target Actual VarianceQuantity1.075 million Number of hours we will spend on audit activities. 1.088 million 1.065 million (2.1%)Quality94.6% Percentage of all cases completed that meet our quality standards fortimeliness, communication with taxpayers, technical accuracy, caseselection, case management and reporting.90% 95.8%# 9 6.4%Timeliness3.7 months Months on average to complete general audits. 6 months 3.1 months 48.3%9.4 months Months on average to complete risk-based audits. 12 months 9.5 months 20.8%9.5 months Months on average to complete disputed cases. 15 months 11.0 months 26.7%n/a Months on average to complete evasion and fraud cases. 18 months 17 months 5.6%92.8% Percentage of all open cases (excluding aggressive tax planning cases)that are less than 24 months old.90% 92.6% 2.9%Cost$2,816 Amount we will assess per hour for all audit activity. $875 $1,446 65.3%# measured using a sample of audit cases.Explanation for significant positive variancesMonths on average to complete general audits, andMonths on average to complete risk-based audits, andMonths on average to complete disputed cases.These targets have been consistently exceeded over the last three years. For general audits, the performance was boosted by high volumesof leverage cases 10 completed this year. For risk-based audits and disputed cases, effective case management techniques help to completecases within target times.Amount we will assess per hour for all audit activity.This result includes five large enterprise cases with discrepancies totalling $525 million. The rate of return with these cases excluded was$924 per hour, a positive variance of 5.6%.9See Quality standards on page 84.10Leverage cases target specific risks and compliance issues using a “blanket coverage” approach for relevant customers. For example, we use bulk mail to contactcustomers about their specific issues and invite voluntary compliance. We follow up with customers who do not respond using conventional audit processes.ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE83

OUTPUT 5.2 LITIGATION MANAGEMENTDescriptionThis output involves the management of litigation of disputed tax cases, including the requirement to state the case through toresolution by the courts.Activity forecast2009–10Actual Activity forecast2010–11ForecastActual262 Number of litigation cases we expect to finally resolve. 75–100 190Explanation for forecast outside rangeNumber of litigation cases we expect to finally resolve.This result is high because we closed a number of previously settled structured finance and Trinity cases. These are group cases, where alarge number of associated cases are closed at the same time.Performance measures2009–10Actual MeasureTimeliness96.7% Percentage of all timetable requirements delivered as imposed by thecourts for any litigation undertaken.2010–11Target Actual Variance95% 98.0% 3.2%Quality standardsThe quality standards are measured by a review of closed cases by a quality review panel. It is an independent check of the quality of ourcustomer interactions, our business requirements and our procedures where the impact is internal only. The review looks at:""case planning and selection""standard of correspondence""legislative correctness""timeliness""commercial awareness""adherence to best practice and procedures""completeness of the investigation""accuracy of codes used for reporting purposes""case management and actions""attaching documents""adequacy of notes.84 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

OUTPUT STATEMENT: TAXPAYER AUDITFOR THE YEAR ENDED 30 JUNE 20112009–10 2010–11 2010–11 2010–11Actual Actual Main Finalestimates voted$000 $000 $000 $000Revenue169,468 Crown 164,440 171,756 164,4408,478 Other 2,182 1,890 1,772177,946 Total revenue 166,622 173,646 166,212Expenses158,768 Annual appropriations 164,606 173,646 166,212158,768 Total expenses 164,606 173,646 166,21219,178 Net surplus/(deficit) 2,016 – –ird.govt.nzPART 6STATEMENT OF SERVICE PERFORMANCE85

Part sevenDEPARTMENTAL FINANCIALSTATEMENTSird.govt.nzPART 7 DEPARTMENTAL FINANCIAL STATEMENTS87

STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 30 JUNE 20112009–10 Notes 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000Income609,075 Revenue Crown 610,711 615,557 610,71136,160 Other income 1 30,314 32,706 36,586645,235 Total income 641,025 648,263 647,297Expenditure377,253 Personnel 2 403,665 400,401 407,905146,720 Operating 3 159,191 170,336 155,10716,501 Depreciation 4 16,500 16,697 16,61843,970 Amortisation and impairment 5 43,096 42,742 45,36116,666 Capital charge 6 17,926 18,087 17,926601,110 Total output expenses 640,378 648,263 642,917– Other expenses 7 3,226 – 4,380601,110 Total expenditure 643,604 648,263 647,29744,125 Net surplus/(deficit) (2,579) – –– Other comprehensive income – – –44,125 Total comprehensive income (2,579) – –The accompanying accounting policies and notes form part of these financial statements.Refer to Note 23 for explanation of major variances.88 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

STATEMENT OF CHANGES IN TAXPAYERS’ FUNDSFOR THE YEAR ENDED 30 JUNE 20112009–10 Note 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000222,402 Balance at start of year 241,292 241,292 241,29244,125 Total comprehensive income (2,579) – –(44,125) Repayment of surplus to the Crown 8 (647) – –21,913 Capital contribution 24,391 24,391 24,391(3,023) Capital repayment (720) (256) (720)(25,235) 23,024 24,135 23,671241,292 Balance at end of year 261,737 265,427 264,963The accompanying accounting policies and notes form part of these financial statements.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS89

STATEMENT OF FINANCIAL POSITIONAS AT 30 JUNE 20112009–10 Notes 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000Taxpayers' funds241,292 Taxpayers' funds 261,737 265,427 264,963241,292 Total taxpayers' funds 261,737 265,427 264,963Represented by:Current assets14,633 Cash and cash equivalents 14,666 12,000 12,000147,004 Debtor Crown 147,069 94,055 118,58414,098 Debtors and prepayments 9 17,988 10,822 12,5601,153 Inventories held for distribution 10 1,119 1,300 1,198176,888 Total current assets 180,842 118,177 144,342Non-current assets383 Prepayments 9 305 – 30057,723 Property, plant and equipment 4 58,562 69,994 60,105158,425 Intangible assets 5 134,577 182,226 164,990216,531 Total non-current assets 193,444 252,220 225,395393,419 Total assets 374,286 370,397 369,737Current liabilities22,392 Creditors and other payables 11 27,412 25,500 21,23444,125 Surplus payable to the Crown 647 – –37,873 Employee entitlements and provision for restructuring 12 41,537 36,159 40,5823,189 Provision for other liabilities 13 2,605 37 –142 Other financial liabilities 14 181 181 181107,721 Total current liabilities 72,382 61,877 61,997Non-current liabilities36,840 Employee entitlements and provision for restructuring 12 35,756 34,956 36,5946,514 Provision for other liabilities 13 3,018 6,990 4,8291,052 Other financial liabilities 14 1,393 1,147 1,35444,406 Total non-current liabilities 40,167 43,093 42,777152,127 Total liabilities 112,549 104,970 104,774241,292 Net assets 261,737 265,427 264,963The accompanying accounting policies and notes form part of these financial statements.Refer to Note 23 for explanation of major variances.90 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

STATEMENT OF CASH FLOWSFOR THE YEAR ENDED 30 JUNE 20112009–10 Note 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000Cash flows − operating activitiesCash provided from:Supply of outputs to571,442 − Crown 610,648 645,914 639,1337,457 − government departments 6,627 7,704 12,06529,875 − third parties 23,284 24,999 25,237608,774 640,559 678,617 676,435Cash applied to:Cost of producing outputs395,705 − employees 403,035 418,948 408,353148,377 − suppliers 162,412 166,943 160,921162 − net GST paid (877) 1,300 (5,000)16,666 − capital charge 17,926 18,087 17,926560,910 582,496 605,278 582,20047,864 Net cash inflow from operating activities 16 58,063 73,339 94,235Cash flows − investing activitiesCash provided from:122 Sale of property, plant and equipment 2 – –1 Disposal of intangible assets – – –123 2 – –Cash applied to:20,696 Purchase of property, plant and equipment 18,329 21,697 19,00037,893 Purchase of intangible assets 19,249 68,777 57,41458,589 37,578 90,474 76,414(58,466) Net cash (outflow) from investing activities (37,576) (90,474) (76,414)Cash flows − financing activitiesCash provided from:21,913 Capital contribution 24,391 24,391 24,39121,913 24,391 24,391 24,391Cash applied to:6,111 Repayment of surplus 44,125 7,000 44,1253,023 Capital repayment 720 256 7209,134 44,845 7,256 44,84512,779 Net cash inflow from financing activities (20,454) 17,135 (20,454)2,177 Net increase/(decrease) in cash and cash equivalents 33 – (2,633)12,456 Opening cash and cash equivalents 14,633 12,000 14,63314,633 Closing cash and cash equivalents 14,666 12,000 12,000The accompanying accounting policies and notes form part of these financial statements.The GST net component of operating activities reflects the net GST paid to and received from Inland Revenue. The GST components have been presented on anet basis, as the gross amounts do not provide meaningful information for financial statement purposes.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS91

STATEMENT OF COMMITMENTSAS AT 30 JUNE 20112009–10 Note 2010–11ActualActual$000 $000Capital commitments8,026 Property, plant and equipment 3,3311,686 Intangible assets 8949,712 Total capital commitments 4,225Operating commitmentsNon-cancellable accommodation leases34,880 Not later than one year 32,55094,647 Later than one year and not later than five years 87,834117,015 Later than five years 99,260246,542 Total non-cancellable accommodation leases 219,644Non-Cancellable contracts for the supply of goods and services15,362 Not later than one year 21,9812,364 Later than one year and not later than five years 3,367– Later than five years –17,726 Total non-cancellable contracts for the supply of goods and services 25,348264,268 Total operating commitments 244,992273,980 Total commitments 17 249,217The accompanying accounting policies and notes form part of these financial statements.92 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

STATEMENT OF CONTINGENT LIABILITIESAND CONTINGENT ASSETSAS AT 30 JUNE 20112009–10 Note 2010–11ActualActual$000 $000Contingent liabilities613 Legal proceedings and disputes – taxpayer 378– Legal proceedings and disputes – departmental 12045 Personal grievances 20658 Total contingent liabilities 18 518Contingent assets– Insurance claims 4,000– Total contingent assets 18 4,000The accompanying accounting policies and notes form part of these financial statements.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS93

STATEMENT OF DEPARTMENTAL EXPENSES ANDCAPITAL EXPENDITURE AGAINST APPROPRIATIONSFOR THE YEAR ENDED 30 JUNE 2011Departmental expenses and capital expenditure2009–10 2010–11 2010–11 2010–11Expenditure Expenditure MainestimatesFinalvoted 2$000 $000 $000 $000Vote: RevenueOutput expenses14,653 Policy advice 1 14,617 15,285 14,812245,238 245,530 245,770230,629 Services to inform the public about entitlements and meetingobligations 1115,740 Services to process obligations and entitlements 1 115,868 114,664 116,18881,320 Management of debt and outstanding returns 1 99,776 99,138 99,935158,768 Taxpayer audit 1 164,495 173,646 166,212601,110 Total output expenses 1 639,994 648,263 642,917– Recovery from February 2011 Christchurch earthquake 3,226 – 4,380601,110 Total expenditure 643,220 648,263 647,297Departmental capital expenditure20,696 Property, plant and equipment 18,329 18,400 19,00037,893 Intangible assets 19,249 77,388 51,92658,589 Total departmental capital expenditure 37,578 95,788 70,9261The Statement of Departmental Expenses and Capital Expenditure against Appropriations excludes remeasurements of $384,000.2This includes adjustments made in the Supplementary Estimates and transfers under the Public Finance Act 1989.The accompanying accounting policies and notes form part of these financial statements.Refer to Note 23 for explanation of major variances.STATEMENT OF UNAPPROPRIATED EXPENSESAND CAPITAL EXPENDITUREFOR THE YEAR ENDED 30 JUNE 2011In the 2010–11 financial year there were no instances of:expenses and capital expenditure incurred in excess of appropriation (2009–10, $nil).expenses and capital expenditure incurred without appropriation or other authority, or outside scope of appropriation (2009–10, $nil).In the 2010–11 financial year there were no breaches of projected departmental net asset schedules (2009–10, $nil).The accompanying accounting policies and notes form part of these financial statements.94 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

STATEMENT OF ACCOUNTING POLICIESREPORTING ENTITYInland Revenue is a government department as defined bysection 2 of the Public Finance Act 1989 and is domiciled inNew Zealand. In addition, Inland Revenue has reported on Crownactivities and trust monies which it administers. It is a whollyowned entity of the Crown whose primary objective is to provideservices to the public rather than making a financial return.Accordingly, Inland Revenue has designated itself as a publicbenefit entity for the purpose of New Zealand equivalents toInternational Financial Reporting Standards (NZ IFRS).Inland Revenue’s national office is 55 Featherston Street,Wellington.REPORTING PERIODThe reporting period for these financial statements is for the yearended 30 June 2011. The financial statements were authorised forissue by the Chief Executive of Inland Revenue on 22 September2011.STATEMENT OF COMPLIANCEThe financial statements have been prepared in accordance withthe requirements of the Public Finance Act 1989, which includesthe requirement to comply with New Zealand generally acceptedaccounting practice (NZ GAAP), and Treasury Instructions.These financial statements have been prepared in accordancewith NZ GAAP. They comply with NZ IFRS, and other applicablefinancial reporting standards, as appropriate for public benefitentities.BASIS OF PREPARATIONThe accounting policies set out below have been appliedconsistently to all periods presented in these financial statements.These financial statements have been prepared on a historical costbasis, unless otherwise stated.The accrual basis of accounting has been used, unless otherwisestated.JUDGEMENTS AND ESTIMATIONSThe preparation of financial statements in conformity withNZ IFRS requires judgements, estimates and assumptions thataffect the application of policies and reported amounts of assetsand liabilities, income and expenses. The estimates and associatedassumptions are based on historical experience and various otherfactors, believed to be reasonable under the circumstances.The estimates and underlying assumptions are reviewed on anongoing basis. Revisions to accounting estimates are recognised inthe period the estimate is revised in if the revision affects only thatperiod, or in the period of the revision and future periods if therevision affects both current and future periods.The estimates and assumptions that have a significant riskof causing a material adjustment to the carrying amount ofassets and liabilities within the next financial year are related toretirement and long-service leave.An analysis is provided in Note 12 of the exposure in relationto estimates and uncertainties surrounding retirement andlong‐service leave liabilities.STANDARDS AND INTERPRETATIONS EARLYADOPTEDInland Revenue has elected to early adopt the New Zealandequivalent to International Accounting Standard (NZ IAS) 24Related Party Disclosures (Revised 2009). The effect of earlyadopting the revised NZ IAS 24 is:""more information is required to be disclosed abouttransactions between Inland Revenue and entities controlled,jointly controlled, or significantly influenced by the Crown.""commitments with related parties require disclosure.""information is required to be disclosed about related partytransactions with Ministers of the Crown with portfolioresponsibility for Inland Revenue. An exemption is providedfrom reporting transactions with other Ministers of theCrown.These financial statements are presented in New Zealand dollars.All values in tables are rounded to the nearest thousand dollars($000). The functional currency of Inland Revenue is New Zealanddollars.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS95

STANDARDS AND INTERPRETATIONS ISSUEDAND NOT YET ADOPTEDInland Revenue has elected not to early adopt the followingstandards issued but not yet effective as at 30 June 2011.NZ IFRS 9 Financial Instruments will eventually replace NZ IAS39 Financial Instruments: Recognition and Measurement. Thisnew standard was approved by the Accounting Standards ReviewBoard in November 2010. NZ IAS 39 is being replaced throughthe following three main phases: Phase 1 Classification andMeasurement, Phase 2 Impairment Methodology and Phase 3Hedge Accounting. Phase 1 has been completed and has beenpublished in the new financial instrument standard NZ IFRS 9. Thenew standard addresses the issues of classification and measurementof financial assets and liabilities, and becomes effective for annualreporting periods commencing on or after 1 January 2013.FRS-44 New Zealand Additional Disclosures and Amendmentsto NZ IFRS to harmonise with IFRS and Australian AccountingStandards (Harmonisation Amendments). These were issuedin May 2011 with the purpose of harmonising Australia andNew Zealand’s accounting standards with source IFRS and toeliminate many of the differences between the accountingstandards in each jurisdiction. The amendments must first beadopted for the year ended 30 June 2012.The effects of the above standards on Inland Revenue’sdepartmental financial statements have not yet been assessed.As the External Reporting Board is to decide on a new accountingstandards framework for public benefit entities, it is expectedthat all new NZ IFRS and amendments to existing NZ IFRSwith a mandatory effective date for annual reporting periodscommencing on or after 1 January 2012 will not be applicable topublic benefit entities. This means that the financial reportingrequirements for public benefit entities are expected to beeffectively frozen in the short-term. Accordingly, no disclosure hasbeen made about new or amended NZ IFRS that exclude publicbenefit entities from their scope.ACCOUNTING POLICIESThe following particular accounting policies, which materiallyaffect the measurement of financial results and financial position,have been applied.Budget figuresThe budget figures are those included in the InformationSupporting the Estimates of Appropriations (Main Estimates) for theyear ending 30 June 2011 and the Information Supporting theSupplementary Estimates of Appropriations (SupplementaryEstimates) for the year ending 30 June 2011. The budget figureshave been prepared in accordance with NZ GAAP, usingaccounting policies that are consistent with those adopted inpreparing these financial statements.GST (goods and services tax)All items in the financial statements, including appropriationstatements, are stated exclusive of GST, except for “debtor Crown”,“net debtors” and “accounts payable”, which are stated on aGST‐inclusive basis. Where GST is not recoverable as input tax, it isrecognised as part of the related asset or expense.The net amount of GST owing to or from Inland Revenue atbalance date, being the difference between output GST and inputGST, is included in “creditors and other payables” or “debtors andprepayments” in the Statement of Financial Position.The net GST paid to or received from Inland Revenue, includingthe GST relating to investing and financing activities, is classified asan operating cash flow in the Statement of Cash Flows.Commitments and contingencies are disclosed exclusive of GST.Income taxGovernment departments are exempt from income tax as publicauthorities, so accordingly, no charge for income tax has beenprovided for.RevenueInland Revenue derives revenue through the provision of outputsto the Crown, government departments, and for services to thirdparties. Revenue comprises the fair value of sale of services, net ofGST, rebates and discounts. Revenue is recognised as follows:Revenue CrownRevenue earned from the supply of outputs to the Crown isrecognised as revenue when earned.Sale of servicesSale of services are recognised in the accounting period theservices are provided in, by reference to completion of specifictransactions, assessed on the basis of actual services provided as aproportion of the total services to be provided.Sub-leasesIncome from sub-leased property is recognised in the Statementof Comprehensive Income on a straight line basis over the term ofthe lease.Insurance revenueInsurance claim proceeds are recognised as revenue when theclaim has been accepted by the insurer or when receipt of theinsurance proceeds is considered virtually certain. The insurance96 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

proceeds will be disclosed as a contingent asset if the receipt isonly probable.Cost allocationsInland Revenue uses an integrated cost allocation process to derivethe cost of its outputs. This process involves the initial costing ofbusiness processes followed by the full costing of outputs.Business processes represent Inland Revenue’s key functionalactivities. These business processes are used to capture directcosts.Direct personnel costs are charged to business processes, basedon actual hours and standard activity rates. Other related directcosts, including depreciation, are allocated to business processes,based on planned hours and relevant activity drivers.Premises lease costs are charged to business processes based onheadcount and relevant activities.Other indirect costs and corporate overheads that cannot beattributed directly to a business process are apportioned tooutputs, based on planned business process activity allocation tooutputs.There have been no material changes in cost accounting policiessince the date of the last audited financial statements.Capital chargeThe capital charge is recognised as an expense in the period towhich the charge relates.LeasesA lease is classified as a finance lease if it transfers substantially allthe risks and rewards of ownership of an asset. A lease is classifiedas an operating lease if it does not transfer substantially all therisks and rewards incidental to the ownership of an asset. InlandRevenue has no finance leases.Rentals payable under operating leases are recognised as anexpense on a straight-line basis over the term of the relevant lease.Lease incentives received as incentive to enter into an operatinglease are also recognised evenly over the term of the lease as areduction in the rental expense.Contractual arrangements considered to be operating leases havebeen recognised during the reporting period.Financial instrumentsFinancial assetsInland Revenue classifies its financial assets into two categories:financial assets at fair value through surplus or deficit, and debtorsand receivables. The classification depends on the purpose forwhich the assets were acquired.a) Financial assets at fair value through surplus or deficitFinancial assets designated at fair value through surplus ordeficit are recorded at fair value with any realised and unrealisedgains or losses recognised in the Statement of ComprehensiveIncome. Gains or losses from foreign exchange and other fairvalue movements are separately reported in the Statement ofComprehensive Income. Transaction costs are expensed as theyare incurred. Derivatives (eg, foreign currency forward exchangecontracts) are classified under this category.Derivative financial instruments are recognised both initially onthe date a derivative contract is entered into and subsequently atfair value at each balance date. They are reported as either assetsor liabilities, depending on whether the derivative is in a net gainor net loss position, respectively. The fair value gains or losseson derivatives are recognised in the Statement of ComprehensiveIncome.b) Debtors and receivablesDebtors and receivables are non-derivative financial assets withfixed or determinable payments that are not quoted in an activemarket. They are recognised initially at fair value plus transactioncosts and subsequently measured at amortised cost using theeffective interest rate method. Debtors and receivables issuedwith durations of less than 12 months are recognised at theirnominal value, unless the effect of discounting is material.Impairment of financial assetsAllowances for estimated irrecoverable amounts are recognisedwhen there is objective evidence that Inland Revenue will not beable to collect all amounts due according to the original termsof the receivable. Significant financial difficulties of the debtor,probability that the debtor will enter into bankruptcy, and defaultin payments are considered indicators that the debtor is impaired.The amount of the provision is the difference between the asset’scarrying amount and the estimated impaired value. The carryingamount of the asset is reduced through the use of an allowanceaccount, and the amount of the impairment loss is recognised inthe Statement of Comprehensive Income.Financial liabilitiesInland Revenue classifies its financial liabilities into two categories:financial liabilities at fair value through surplus or deficit, and otherfinancial liabilities. The classification depends on the purpose forwhich the liabilities were incurred.a) Financial liabilities at fair value through surplus or deficitFinancial liabilities designated at fair value through surplus ordeficit are recorded at fair value with any realised and unrealisedgains or losses recognised in the Statement of Comprehensiveird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS97

Income. Gains or losses from foreign exchange and other fairvalue movements are reported separately in the Statement ofComprehensive Income. Transaction costs are expensed as theyare incurred. Derivatives (eg, foreign currency forward exchangecontracts) are classified under this category.b) Other financial liabilitiesOther financial liabilities are recognised initially at fair valueless transaction costs and subsequently measured at amortisedcost using the effective interest rate method. Financial liabilitiesentered into with durations of less than 12 months are recognisedat their nominal value, unless the effect of discounting is material.“Creditors and other payables” are recognised at their nominalvalue as the effect of discounting is immaterial.Cash and cash equivalentsCash and cash equivalents include all cash held in the bankaccounts. All cash held in bank accounts is held in “on demand”accounts and no interest is payable to Inland Revenue.Inventories held for distributionInventories held for distribution comprise forms, booklets andreturns held for distribution to the public at no or nominalconsideration in the ordinary course of operations.Inventories held for distribution for public benefit purposesare carried at cost, calculated using the first-in, first-out (FIFO)cost method, adjusted where applicable for any loss of servicepotential. The cost of inventories includes all costs of purchase,costs of conversion and other costs incurred in bringing theinventories to their present location and condition. Whereinventories are acquired at no cost, or for nominal consideration,the cost is deemed to be the current replacement cost at the dateof acquisition.The carrying amount is recognised as an expense in the period inwhich the goods are distributed. The amount of any write-downof inventories and all losses of inventories is recognised as anexpense in the period the write-down or loss occurs. The amountof any reversal of any write-down of inventories is recognised as areduction in the amount of inventories recognised as an expensein the period the reversal occurs in.Hedge accounting, hedging activities and foreigncurrency transactionsInland Revenue’s activities expose it primarily to risks of changesin foreign exchange rates. Inland Revenue uses derivative financialinstruments (primarily, foreign currency forward exchangecontracts) to hedge its risks associated with foreign currencyfluctuations relating to certain commitments. The use of financialderivatives is governed by Inland Revenue’s foreign exchange policy,which provides written principles on the use of financial derivativesconsistent with Inland Revenue’s risk management strategy.Inland Revenue does not hold or issue derivative financialinstruments for trading purposes. It also has not adopted hedgeaccounting.Foreign currency transactions (including those for which forwardexchange contracts are held) are translated into New Zealanddollars using the exchange rates prevailing at the dates of thetransactions. Foreign exchange gains and losses resulting from thesettlement of such transactions are recognised in the Statement ofComprehensive Income.Property, plant and equipmentInland Revenue has operational assets that include IT equipment,furniture and office equipment, motor vehicles, and leaseholdimprovements. The capitalisation thresholds are:""IT equipment – computers and laptops all""IT equipment – other $2,000 and over(or $20,000 forbulk purchased ITequipment)""Furniture and office equipment $2,000 and over(or $20,000 forbulk purchasedfurniture)""Motor vehicles $2,000 and over""Leasehold improvements $20,000 and overProperty, plant and equipment are shown at historical cost, lessaccumulated depreciation and impairment losses. Historical costis the value of consideration given to acquire or create the assetand any directly attributable costs of bringing the asset to workingcondition for its intended use.AdditionsThe cost of an item of property, plant and equipment is recognisedas an asset if it is probable that future economic benefits or servicepotential associated with the item will flow to Inland Revenue andthe cost of the item can be measured reliably. In most instances,an item of property, plant and equipment is recognised at its cost.Where an asset is acquired at no cost, or for a nominal cost, it isrecognised at fair value as at the date of acquisition.Subsequent costsSubsequent costs are included in the asset’s carrying amountor recognised as a separate asset, as appropriate, only when itis probable that future economic benefits or service potentialassociated with the item will flow to Inland Revenue and the cost98 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

of the item can be measured reliably. All repairs and maintenanceare charged to the Statement of Comprehensive Income during thefinancial period in which they are incurred.DepreciationDepreciation is provided on a straight-line basis on all property,plant and equipment, other than assets under construction.The rate of depreciation will write off the cost of the asset to theestimated residual value over the useful life of the asset. The usefullife of major classes of assets have been estimated as follows:""IT equipment 3 to 6 years""Furniture and office equipment 5 to 7 years""Motor vehicles 5 to 7 years""Leasehold improvements up to 10 yearsAll fixed assets other than motor vehicles are assumed to have noresidual value. Motor vehicles are assumed to have a 20% residualvalue.The cost of leasehold improvements is capitalised and depreciatedover the unexpired period of the lease, or the estimated remaininguseful life of the improvements, whichever is shorter, up to amaximum of 10 years.Assets under construction are not depreciated. The total cost ofa capital project is transferred to the appropriate asset class on itscompletion and then depreciated.The assets’ residual values and useful lives are reviewed, andadjusted if appropriate, at each balance sheet date.ImpairmentProperty, plant and equipment that has a finite useful lifeis reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may notbe recoverable. If any indication of impairment exists, therecoverable amount is estimated to determine the extent of theimpairment loss (if any).If an assets’ recoverable amount is less than its carrying amount,the asset is impaired and it will be reported at its recoverableamount. The impairment loss is recognised in the Statement ofComprehensive Income.The reversal of an impairment loss is also recognised in theStatement of Comprehensive Income.DisposalsGains and losses on disposals are determined by comparingproceeds with the carrying amount. These are included in theStatement of Comprehensive Income.Intangible assetsInland Revenue has intangible assets in the form of software,licences, and business process design.AdditionsIntangible assets are initially recorded at cost. Inland Revenueonly has intangible assets with finite useful lives. The three maincategories are: software – developed, software and licences –purchased, and business process design.a) Software – developedThe cost of an internally generated intangible asset representsexpenditure incurred in the development phase of the assetonly. The cost of developed computer software comprisesdirect labour, material purchased and an appropriate portion ofrelevant overheads. These costs are directly associated with thedevelopment of identifiable and unique software controlled byInland Revenue, and will generate future economic benefits.Expenditure incurred on research of an internally generatedintangible asset is expensed when it is incurred. Where theresearch phase cannot be distinguished from the developmentphase, the expenditure is expensed when it is incurred.Costs associated with maintaining computer softwareprogrammes are recognised as an expense when incurred. Costsof configuring and customising purchased software for intendeduse are capitalised.Staff training costs are recognised as an expense when incurred.b) Software and licences – purchasedIntangible assets acquired by Inland Revenue such as computersoftware and licences are stated at cost less accumulatedamortisation and impairment losses. Acquired computer softwareand licences are capitalised on the basis of costs incurred toacquire and bring to use the specific software.Costs associated with maintaining computer softwareprogrammes are recognised as an expense when incurred. Costsof configuring and customising purchased software for intendeduse are capitalised.c) Business process designExpenditure on development activities, where research findingsare applied to a plan or design for new or substantially improvedbusiness processes, is capitalised if the business process istechnically and commercially feasible and Inland Revenuehas sufficient resources to complete development. Otherdevelopment expenditure is recognised in the Statement ofComprehensive Income as an expense as incurred.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS99

The capitalisation thresholds for intangible assets are:""Software – developed $50,000 and over""Software and licences – purchased $5,000 and over""Business process design $50,000 and overSubsequent costThe cost of intangible assets with finite lives is subsequentlyrecorded at cost less any amortisation and impairment losses.AmortisationThe carrying value of an intangible asset with a finite life isamortised on a straight-line basis over its estimated useful life.Amortisation begins when the asset is available for use and ceasesat the date that the asset is de-recognised. The amortisationcharge for each period is recognised in the Statement ofComprehensive Income.The useful lives of major classes of intangible assets have beenestimated as follows:""Software – developed 5 to 10 years""Software and licences – purchased 5 to 10 years""Business process design 5 to 10 yearsImpairmentIntangible assets including assets under construction arereviewed for impairment at each balance date. If any indicationof impairment exists, the recoverable amount is estimated todetermine the extent of the impairment loss (if any).If an intangible asset’s recoverable amount is less than its carryingamount, the asset is impaired and it will be reported at itsrecoverable amount. The impairment loss is recognised in theStatement of Comprehensive Income.The reversal of an impairment loss is also recognised in theStatement of Comprehensive Income.De-recognitionThe gain or loss arising from the de-recognition of an intangibleasset is recognised in the Statement of Comprehensive Incomewhen the asset is de-recognised.Employee benefitsShort-term benefitsEmployee benefits that Inland Revenue expects to be settledwithin 12 months of balance date are measured at nominal valuesbased on accrued entitlements at current rates of pay. Theseinclude salaries and wages accrued up to balance date, annualleave and time off in lieu earned up to but not yet taken at balancedate, retiring and long-service leave, and sick leave entitlementsexpected to be settled within 12 months.Inland Revenue recognises a liability for sick leave to the extentthat absences in the coming year are expected to be greater thanthe sick leave entitlements earned in the coming year. The amountis calculated based on the unused sick leave entitlement thatcan be carried forward at balance date, to the extent that InlandRevenue anticipates it will be used by staff to cover those futureabsences.Inland Revenue recognises a liability and an expense for bonuseswhere it is contractually obliged to pay them, or where a pastpractice has created a constructive obligation.Long-term benefitsEmployee benefits that are payable beyond 12 months such aslong-service leave and retiring leave have been calculated on anactuarial basis, based on the present value of the estimated futurecash outflows.Long-service leave and retiring leaveThe actuarial calculations for long-service leave and retiring leaveliabilities are based on:""Employee contractual entitlements.""Years of service accrued to balance date and years remainingto entitlement.""Present value of the estimated future cash outflows using anapplicable discount rate and salary increase rate.Superannuation schemesObligations for contributions to the Inland RevenueSuperannuation Scheme, State Sector Retirement Savings Scheme,KiwiSaver, and the Government Superannuation Fund areaccounted for as defined contribution schemes and are recognisedas an expense in the Statement of Comprehensive Income as theyfall due.100 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Termination benefitsTermination benefits are payable when an employee’semployment contract is terminated before their normalretirement or when an employee accepts voluntary redundancyin exchange for these benefits. Inland Revenue recognises theexpenditure in the Statement of Comprehensive Income when it isdemonstrably committed to either terminate the employment ofcurrent employees, according to a detailed formal plan withoutthe possibility of withdrawal, or as a result of an offer for voluntaryredundancy.Termination benefits settled within 12 months are reported at theamount expected to be paid, otherwise they are reported as thepresent value of the estimated future cash outflows.ProvisionsInland Revenue recognises a provision for future expenditure ofuncertain amounts or timing where there is a present obligation(either legal or constructive) as a result of a past event, andit is probable that expenditure will be required to settle theobligation, and a reliable estimate can be made of the amount ofthe obligation. Provisions are not recognised for future operatinglosses.Provisions are recorded at the best estimate of the expenditurerequired to settle the obligation. Provisions to be settled beyond12 months are recorded at their present value.Taxpayers’ fundsThis is the Crown’s net investment in Inland Revenue. It ismeasured as the difference between total assets and totalliabilities. Taxpayers’ funds are disaggregated and classified into anumber of components:CommitmentsExpenses and liabilities yet to be incurred on non-cancellablecontracts that have been entered into on or before balancedate are disclosed as commitments to the extent that they areunperformed obligations.Cancellable commitments that have penalty or exit costs explicitin the agreement on exercising that option to cancel are includedin the Statement of Commitments at the value of that penalty orexit cost.Contingent liabilities and assetsContingent liabilities and assets are recorded in the Statement ofContingent Liabilities and Contingent Assets at the point at whichthe contingency is evident. Contingent liabilities are disclosed ifthe possibility that they will crystallise is not remote. Contingentassets are disclosed if it is probable that the benefits will berealised. Insurance claim proceeds will be disclosed as a contingentasset if the receipt of the insurance proceeds is probable.ComparativesCertain comparative information has been reclassified, whererequired, to conform with the current year’s presentation.CHANGES IN ACCOUNTING POLICIESThere have been no changes in accounting policies and costallocation policies since the date of the last audited financialstatements. All policies have been applied on a basis consistentwith the previous year.""Capital contributions""Repayment of capital to the Crown""Provision for repayment of surplus to the CrownStatement of Cash FlowsCash and cash equivalents mean cash balances in bank accounts.Operating activities include cash received from all income sourcesof Inland Revenue, and cash payments made for the supply ofgoods and services.Investing activities are those activities relating to the acquisitionand disposal of non-current assets.Financing activities comprise capital injections by, or repayment ofcapital to, the Crown.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS101

NOTES TO THE FINANCIAL STATEMENTSNOTE 1: OTHER INCOME2009–10 2010–11ActualActual$000 $00020,500 Accident Compensation Corporation (ACC) – agency fees 20,5006,348 State Services Commission – SSRSS and KiwiSaver recovery 6,7257,318 Court cost recovery 1,412629 Rulings 680– Secondments to other agencies – salary recovery 434189 Sub-leases 189– Insurance proceeds 16621 Net gains on derivative financial instruments 721,078 Supply of information to other agencies 1377 Other 12336,160 Total other income 30,314NOTE 2: PERSONNEL2009–10 2010–11ActualActual$000 $000345,563 Salaries and wages 352,36317,051 Contractors and temporary staff 23,3487,937 Employer contributions to defined contribution plans 9,1382,742 Terminating benefits 6,4651,672 ACC levies 1,867(1,544) Annual leave 1,6371,953 Retiring, long-service and sick leave 1,322153 Bonuses 2421,726 Other 7,283377,253 Total personnel 403,665Employer contributions to defined contribution plans include contributions to Inland Revenue Superannuation Scheme, KiwiSaver, StateSector Retirement Savings Scheme, and Government Superannuation Fund.102 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

NOTE 3: OPERATING2009–10 2010–11ActualActual$000 $00037,313 Information technology costs 45,04230,836 Operating lease rentals 35,39717,092 Communication 16,02312,491 Office supplies 12,2048,503 Premises costs 8,5186,546 Legal expenses 8,4106,103 Travel and transport 7,6346,444 Training and employee-related costs 6,9135,266 Consultants 6,6503,264 Bank fees 3,0591,334 Advertising and publicity 1,9171,541 Equipment maintenance 1,7431,033 Audit fees for audit of the financial statements 1,03370 Disbursements for audit of the financial statements 5543 Net loss on disposal of property, plant and equipment 3687 Bad debts written off 10070 Net loss on disposal of intangible assets –(46) Inc/(Dec) in provision for debt impairment (5)3,028 Inc/(Dec) in provision for onerous leases (1,679)5,782 Other operating expenses 5,809146,720 Total operating 159,191Net loss on disposal of property, plant and equipment relates to the disposal of superseded leasehold improvements and IT equipment.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS103

NOTE 4: PROPERTY, PLANT AND EQUIPMENT BY CATEGORYITequipmentFurnitureand officeequipmentMotorvehiclesLeaseholdimprovementsAssets underconstruction– leaseholdTotal$000 $000 $000 $000 $000 $000CostBalance as at 1 July 2010 65,773 29,001 4,594 62,536 17,305 179,209Additions by purchase 5,619 4,511 – 7,723 612 18,465Reductions – other 1 – – – (305) – (305)Transfers between category 402 – – 17,351 (17,351) 402Disposals (15,001) (922) – (1,653) – (17,576)Balance as at 30 June 2011 56,793 32,590 4,594 85,652 566 180,195Depreciation and impairment lossesBalance as at 1 July 2010 52,536 18,607 1,923 48,420 – 121,486Depreciation charge – expensed 7,926 3,221 480 4,873 – 16,500Depreciation charge – capitalised 2 207 26 – – – 233Impairment losses 3 43 62 – 513 – 618Transfers between category – – – – – –Disposals (14,933) (922) – (1,349) – (17,204)Balance as at 30 June 2011 45,779 20,994 2,403 52,457 – 121,633Carrying amount as at 30 June 2011 11,014 11,596 2,191 33,195 566 58,562CostBalance as at 1 July 2009 71,066 27,864 4,663 63,088 3,505 170,186Additions by purchase 3,815 3,496 283 144 13,804 21,542Reductions – other 1 – – – (751) – (751)Transfers between category 3 (55) – 56 (4) –Disposals (9,111) (2,304) (352) (1) – (11,768)Balance as at 30 June 2010 65,773 29,001 4,594 62,536 17,305 179,209Depreciation and impairment lossesBalance as at 1 July 2009 52,802 18,301 1,681 43,711 – 116,495Depreciation charge – expensed 8,785 2,567 472 4,677 – 16,501Depreciation charge – capitalised 2 39 56 – – – 95Impairment losses – – – – – –Transfers between category (8) (24) – 32 – –Disposals (9,082) (2,293) (230) – – (11,605)Balance as at 30 June 2010 52,536 18,607 1,923 48,420 – 121,486Carrying amount as at 30 June 2010 13,237 10,394 2,671 14,116 17,305 57,7231This relates to the addition/reduction of lease make-good costs on leased buildings.2Refers to the depreciation charge for existing assets that are used in the development of new intangible assets.3Impairment relates to damages that arose from the Canterbury earthquakes. Refer note 7.104 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

NOTE 5: INTANGIBLE ASSETS BY CATEGORYSoftware– developedBusiness processdesignSoftwareand licences– purchasedAssets underconstruction– intangiblesTotal$000 $000 $000 $000 $000CostBalance as at 1 July 2010 400,361 8,262 110,225 13,760 532,608Additions by purchase – – 4,596 – 4,596Additions internally developed 5,074 – – 10,064 15,138Transfers between category 8,590 – 56 (9,048) (402)Disposals – – – – –Balance as at 30 June 2011 414,025 8,262 114,877 14,776 551,940Amortisation and impairment lossesBalance as at 1 July 2010 302,018 4,032 65,186 2,947 374,183Amortisation charge – expensed 30,029 1,036 12,031 (1,820) 41,276Amortisation charge – capitalised 1 84 – – – 84Impairment losses – – – 1,820 1,820Transfers between category – – – – –Disposals – – – – –Balance as at 30 June 2011 332,131 5,068 77,217 2,947 417,363Carrying amount as at 30 June 2011 81,894 3,194 37,660 11,829 134,577CostBalance as at 1 July 2009 330,447 8,262 140,846 17,124 496,679Additions by purchase – – 22,507 – 22,507Additions internally developed 7,469 – – 8,146 15,615Transfers between category 62,958 – (51,448) (11,510) –Disposals (513) – (1,680) – (2,193)Balance as at 30 June 2010 400,361 8,262 110,225 13,760 532,608Amortisation and impairment lossesBalance as at 1 July 2009 244,990 2,996 81,176 2,947 332,109Amortisation charge – expensed 27,814 1,036 14,312 – 43,162Amortisation charge – capitalised 1 229 – – – 229Impairment losses 808 – – – 808Transfers between category 2 28,693 – (28,693) – –Disposals (516) – (1,609) – (2,125)Balance as at 30 June 2010 302,018 4,032 65,186 2,947 374,183Carrying amount as at 30 June 2010 98,343 4,230 45,039 10,813 158,425There is no restriction over the title of Inland Revenue’s intangible assets, nor are any intangible assets pledged as security for liabilities.1Refers to the amortisation charge for existing assets that are utilised in the development of new intangible assets.2Project-related assets in 2009–10 with a carrying amount of $20,553,000 were reclassified from software and licences – purchased, to software – developedfollowing an asset categorisation review.Software – developed and business process design includes the following items and carrying amounts: FIRST technology environment $51,121,000, KiwiSaver$29,578,000, student loans $4,389,000 (2009–10, FIRST technology environment $56,802,000, KiwiSaver $40,877,000, student loans $4,895,000). The amortisationperiod for these intangible assets range from 5-10 years. Software and licences – purchased includes the following items and carrying amounts: FIRST technologyenvironment $35,608,000, KiwiSaver $2,051,000 (2009–10, FIRST technology environment $34,529,000, KiwiSaver $1,759,000, Student loans $8,751,000). Theamortisation period for these intangible assets range from 5-10 years.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS105

NOTE 6: CAPITAL CHARGEInland Revenue pays a capital charge to the Crown on taxpayer’s funds as at 30 June and 31 December each year. The capital charge rate forthe year ended 30 June 2011 was 7.5% per annum (2009–10, 7.5%).NOTE 7: OTHER EXPENSES2009–10 Note 2010–11ActualActual$000 $000– Canterbury earthquakes – personnel and operating 2,608– Canterbury earthquakes – PPE impairment 4 618– Total other expenses 3,226NOTE 8: REPAYMENT OF SURPLUS TO THE CROWN2009–10 Note 2010–11ActualActual$000 $00044,125 Total comprehensive income (2,579)– Inc/(Dec) Other expenses 7 3,22644,125 Repayment of surplus to the Crown 647NOTE 9: DEBTORS AND PREPAYMENTS2009–10 2010–11ActualActual$000 $0002,595 Accounts receivable 3,165(25) Less provision for impairment (5)2,141 Other debtors 1,9544,711 Net debtors 5,1149,770 Prepayments 13,17914,481 Total other debtors and prepayments 18,293Given their short-term nature, the carrying value of accounts receivable and other debtors approximates their fair value.106 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Overdue receivables have been assessed for impairment and appropriate provisions applied, as detailed below:Net debtorsGross debtors$000Impairment$000Net debtors$0002010–11Due within 30 days 4,830 – 4,830Overdue by 31 to 60 days 63 – 63Overdue by 61 to 90 days 62 (1) 61Overdue by > 90 days 164 (4) 160Total 5,119 (5) 5,1142009–10Due within 30 days 4,408 – 4,408Overdue by 31 to 60 days 157 – 157Overdue by 61 to 90 days 10 – 10Overdue by > 90 days 161 (25) 136Total 4,736 (25) 4,711The provision for impairment has been calculated based on expected losses for Inland Revenue’s pool of debtors. Expected losses havebeen determined based on a review of each debtor.Movements in the provision for impairment are as follows:2009–10 2010–11ActualActual$000 $000(94) Opening balance (25)46 Unused amounts reversed 523 Receivables written off during the year 15(25) Closing balance (5)NOTE 10: INVENTORIES HELD FOR EXTERNAL DISTRIBUTIONInland Revenue holds inventories in the form of returns and guides for external distribution. The carrying amount of inventories held fordistribution that are measured at cost as at 30 June 2011 amounted to $1,119,000 (2009–10, $1,153,000).The write-down of inventories held for distribution amounted to $60,000 (2009–10, $nil). There have been no reversals of write-downs.No inventories are pledged as security for liabilities.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS107

NOTE 11: CREDITORS AND OTHER PAYABLES2009–10 2010–11ActualActual$000 $0003,811 Accounts payable 9,01913,149 Accrued expenses - other 12,0865,432 GST payable 6,30722,392 Total creditors and other payables 27,412Creditors and other payables are normally settled on 30-day terms, therefore the carrying value of creditors and other payablesapproximates their fair value.NOTE 12: EMPLOYEE ENTITLEMENTS AND PROVISION FOR RESTRUCTURING2009–10 2010–11ActualActual$000 $000Current liabilities21,398 Annual leave 22,95511,646 Accrued salaries and wages 13,8061,589 Retiring leave 1,6521,509 Sick leave 1,400978 Long-service leave 1,073694 Restructuring 61559 Time off in lieu 3637,873 Total current liabilities 41,537Non-current liabilities26,682 Retiring leave 27,9567,186 Long-service leave 7,8002,972 Sick leave –36,840 Total non-current liabilities 35,75674,713 Total employee entitlements and provision for restructuring 77,293The present value of retiring and long-service leave obligations depend on a number of factors that are determined on an actuarial basis byan independent actuary using a number of assumptions. Two key assumptions used in calculating these liabilities include the discount rateand the salary inflation factor. Any changes in these assumptions will impact on the carrying amount of the liabilities.The discount rates used by the independent actuary for the retiring and long-service leave valuations are based on Treasury publishedforward rates at 30 June 2011. The long-term salary inflation assumption is based on Treasury published rates at 30 June 2011 and afterobtaining advice from the independent actuary. The long-term salary inflation assumption used was 4.00%.In 2010–11 the methodology for calculating the sick leave liability was changed from an actuarial based long-term valuation to a shortterm model based on Treasury published guidance. Under the revised methodology a liability is recognised to the extent that absencesin the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated basedon the unused sick leave entitlement that can be carried forward at balance date, to the extent that it will be used by staff to cover thosefuture absences. The change in methodology has resulted in a $3.1m reduction of the sick leave liability.108 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

The following table provides a sensitivity analysis for the key assumptions:Discount rateSalary inflation–1% +1% –1% +1%$000 $000 $000 $000Retiring leave 1,850 (1,638) (1,700) 1,888Long-service leave 403 (359) (375) 414Movements in the provision for restructuring are as follows:2009–10 2010–11ActualActual$000 $000Restructuring17,549 Opening balance 694694 Additional provisions made 6,236(17,549) Amounts used (6,315)– Unused amounts reversed –694 Closing balance 615The 2009–10 and 2010–11 costs result from organisational restructuring. The 2009–10 provision was fully utilised in the 2010–11 year. The2010–11 provision is expected to be fully utilised in the 2011–12 year.NOTE 13: PROVISION FOR OTHER LIABILITIES2009–10 2010–11ActualActual$000 $000Current liabilities2,483 Onerous contracts 1,416706 Lease make-good 1,1893,189 Total current liabilities 2,605Non-current liabilities2,326 Onerous contracts 3914,188 Lease make-good 2,6276,514 Total non-current liabilities 3,0189,703 Total provision for other liabilities 5,623ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS109

Onerous Lease Totalcontracts make-good$000 $000 $0002010–11Opening balance 4,809 4,894 9,703Additional provisions made 1,396 1,325 2,721Amounts used (4,398) (1,258) (5,656)Unused amounts reversed – (865) (865)Discount unwind – (280) (280)Closing balance 1,807 3,816 5,6232009–10Opening balance 1,220 6,085 7,305Additional provisions made 4,154 1,649 5,803Amounts used (565) (12) (577)Unused amounts reversed – (2,819) (2,819)Discount unwind – (9) (9)Closing balance 4,809 4,894 9,703Onerous contractsThe provision for onerous contracts arises from non-cancellable operating leases where the unavoidable costs of meeting the lease contractexceed the economic benefits to be received from it. Inland Revenue currently has three leases where it is no longer able to use the surplusspace due to restructuring and floor plan revision.Lease make-goodFor a number of its leased premises, Inland Revenue is required at the expiry of the lease term to make-good any damage caused to thepremises and remove any fixtures and fittings it has installed.Where leases include make-good clauses, an asset and a provision for lease make-good costs is recognised at the commencement of thelease, for the costs of removing the improvement and restoring any damage from its installation. In some cases, Inland Revenue has theoption to renew these leases, which impacts on the timing of expected cash flows to make-good the premises.NOTE 14: OTHER FINANCIAL LIABILITIES2009–10 2010–11ActualActual$000 $000Current liabilities142 Leasing incentives 181142 Total current liabilities 181Non-current liabilities1,052 Leasing incentives 1,3931,052 Total non-current liabilities 1,3931,194 Total other financial liabilities 1,574110 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTSTo mitigate its currency risk Inland Revenue enters into foreign currency forward exchange contracts with New Zealand Debt ManagementOffice (NZDMO).The notional principal amounts of outstanding forward exchange contracts as at 30 June 2011 were nil (2009–10, nil).The fair value of forward exchange contracts entered into during the financial year were determined by reference to published pricequotations in an active market.NOTE 16: RECONCILIATION OF NET SURPLUS TO NET CASH FLOW FROM OPERATING ACTIVITIES2009–10 2010–11ActualActual$000 $00044,125 Net surplus/(deficit) (2,579)Add non-cash items16,501 Depreciation and impairment 17,11843,970 Amortisation and impairment 43,09660,471 Total non-cash items 60,214Add items classified as investing or financing activities43 Net loss on sale of property, plant and equipment 36870 Net loss on disposal of intangible assets –113 Total items classified as investing or financing activities 368Add/(less) working capital movements(37,632) (Inc)/Dec in debtor Crown (62)(1,246) (Inc)/Dec in debtors and prepayments (3,812)289 (Inc)/Dec in inventories held for distribution 34(2,039) Inc/(Dec) in creditors and other payables 5,020(17) Inc/(Dec) in derivative financial instruments –(18,452) Inc/(Dec) in provision for employee benefits 2,5802,398 Inc/(Dec) in provision for other liabilities (4,080)(146) Inc/(Dec) in other financial liabilities 380(56,845) Net movements in working capital items 6047,864 Net cash inflow from operating activities 58,063NOTE 17: COMMITMENTSCapital commitmentsCapital commitments are the aggregate amount of capital expenditure contracted for the acquisition of property, plant and equipmentand intangible assets that have not been paid for or recognised as a liability at the balance sheet date.Operating commitmentsInland Revenue’s operating commitments consist of non-cancellable accommodation leases, and non-cancellable contracts for the supply ofgoods and services, where a penalty or exit cost is charged for cancelling the contract.Commitments for non-cancellable accommodation leases relate to Inland Revenue’s long-term leases on its premises at many locationsthroughout New Zealand. The annual lease payments are regularly reviewed and the amounts disclosed as future commitments are based onird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS111

current rental rates. These commitments also include office space vacated by Inland Revenue as a result of organisational restructuring andsub-leased. Provision has been made in the financial statements for the expected net expenses for the duration of these leases.The total minimum future sub-lease payments expected to be received under non-cancellable sub-leases at balance date is $189,000 (2009–10,$189,000).Inland Revenue’s non-cancellable operating leases have varying terms, escalation clauses and renewal rights. There are no restrictions placed onInland Revenue by any of its leasing arrangements.Inland Revenue has also entered into non-cancellable contracts for computer maintenance and other contracts for the supply of goods andservices.NOTE 18: CONTINGENT LIABILITIESContingent liabilitiesLegal proceedings and disputes – taxpayerThis contingent liability relates to potential net claims against Inland Revenue for court costs associated with tax disputes and other legalproceedings being taken through the courts against taxpayers. It only relates to court costs; the actual revenue under dispute is recognisedas a Crown contingency (refer to Schedule of contingencies – Crown as administered by Inland Revenue).The expected value of the contingent liability is calculated using an outcome probability model that weighs the total potential liabilityagainst outcome probabilities. An estimate of potential court cost recoveries is made and netted off against the contingent liability.Independent confirmation on the liability has been ascertained on all legal proceedings and tax disputes.Legal proceedings and disputes – departmentalThis contingent liability relates to a disputed claim made by a departmental supplier.Personal grievancesPersonal grievances represent amounts claimed by employees for alleged breaches of contract against Inland Revenue.Contingent assetsInsurance claims – Canterbury earthquakesInland Revenue leases a building in Christchurch that sustained damage as a result of the 22 February 2011 and subsequent earthquakes.Damage was sustained to leasehold improvements, furniture, IT equipment, and office equipment.Inland Revenue will be submitting insurance claims for material damage caused by the earthquakes and business interruption as a resultof not being able to repair and access the building. These claims are estimated at $4 million. The final amount of the claim is still beingdetermined and will be subject to ongoing discussions with our insurance company.Insurance claim proceeds of $166,000 relating to the 4 September 2010 Canterbury earthquake are disclosed as other revenue in theStatement of Comprehensive Income.112 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

NOTE 19: RELATED PARTY TRANSACTIONS AND KEY MANAGEMENT PERSONNELInland Revenue is a wholly owned entity of the Crown. The government significantly influences the roles of Inland Revenue as well as beingits major source of revenue. In 2010–11 Inland Revenue has been provided with funding from the Crown of $611 million (2009–10, $609million) for specific purposes as set out in the scope of relevant government appropriations.Inland Revenue enters into numerous related party transactions with other government departments, Crown agencies and state-ownedenterprises which are controlled, significantly influenced, or jointly controlled by the Crown. All related party transactions have beenentered into on an arms’ length basis.In 2010–11 the purchase of goods and services by Inland Revenue from entities controlled, significantly influenced, or jointly controlledby the Crown totalled $33 million (2009–10, $31 million). These purchases included postal services from New Zealand Post, and air travelfrom Air New Zealand.In 2010–11 Inland Revenue paid the Crown capital charges on taxpayer’s funds totalling $18 million (2009–10, $17 million).In 2010–11 the services provided by Inland Revenue to entities controlled, significantly influenced, or jointly controlled by the Crowntotalled $22 million (2009–10, $22 million). These services included the collection of levies payable by earners on behalf of the AccidentCompensation Corporation (ACC), and the supply of information to other agencies.No provision has been required, nor any expense recognised, for impairment of receivables from related parties.No related party transactions were entered into with key management personnel during the year.Compensation to key management personnelThe remuneration of key management personnel during the year was as follows:2009–10 2010–11ActualActual$000 $0002,391 Short-term employee benefits 2,78427 Post-employment benefits 355 Other long-term benefits 202,423 Total key management personnel compensation 2,839Key management personnel include the Commissioner, five Deputy Commissioners, Chief Tax Counsel, Chief Financial Officer and thoseformally acting in those positions during the financial year. The Commissioner’s remuneration is determined and paid by the State ServicesCommission.The number of key management personnel increased by one from March 2010.NOTE 20: FINANCIAL INSTRUMENT RISKSMarket riskCurrency riskThe risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates is calledcurrency risk.Because Inland Revenue purchases fixed assets and services from overseas suppliers it is exposed to currency risk arising from variouscurrency exposures, primarily for the United States and Australian dollars. Currency risk arises from future purchases of fixed assets andservices which are denominated in a foreign currency.Inland Revenue has policies in place to manage the risks associated with financial instruments and, being risk averse, seeks to minimiseexposure from its treasury activities. Inland Revenue does not enter into transactions that are speculative in nature.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS113

Under its foreign exchange policy, Inland Revenue enters into foreign currency forward exchange contracts to manage foreign exchangeexposures when single foreign exchange transactions exceed NZ $100,000, or the transaction exposure for an individual currency exceedsNZ $100,000. This policy has been approved by Treasury and is in line with the requirements of Treasury “Guidelines for the Management ofCrown and Departmental Foreign Exchange Exposure”.Sensitivity analysisA sensitivity analysis has not been undertaken as there is no significant foreign exchange rate risk.Interest rate riskInterest rate risk is the risk that the fair value of a financial instrument will fluctuate or, the cash flows from a financial instrument will fluctuate, dueto changes in market interest rates.Inland Revenue has no interest-bearing financial instruments so it has no exposure to interest rate risk.Credit riskThe risk that a third party will default on its obligations to Inland Revenue, causing a loss to be incurred is called credit risk. In the normalcourse of its business credit risk from trade debtors is concentrated with the Crown and other government agencies.The carrying amount of financial assets recognised in the Statement of Financial Position best represents Inland Revenue’s maximumexposure to credit risk at balance date.Inland Revenue does not require any collateral, security, or other credit enhancements to support financial instruments with financialinstitutions that it deals with or the New Zealand Debt Management Office, because these entities have high credit ratings. For its otherfinancial instruments, Inland Revenue does not have significant concentrations of credit risk.The carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated, is not material.Liquidity riskLiquidity risk is the risk that Inland Revenue will encounter difficulty raising liquid funds to meet commitments as they fall due.As all but an insignificant proportion of funds come from the New Zealand Government and cash is drawn down on a fortnightly basis,Inland Revenue does not have significant liquidity risk. In meeting its liquidity requirements, Inland Revenue closely monitors its forecastcash requirements with expected cash drawdowns from the New Zealand Debt Management Office. Inland Revenue maintains a targetlevel of available cash to meet liquidity requirements.The table below analyses Inland Revenue’s financial liabilities that will be settled, based on the remaining period at the balance sheet dateto the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.LIQUIDITY RISKSNotes Up to 1 year 1 to 5 years Over 5 years Total$000 $000 $000 $0002010–11Creditors and other payables 11 27,412 – – 27,412Derivative financial instrument liabilities 15 – – – –Other financial liabilities 14 181 670 723 1,574Closing balance 27,593 670 723 28,9862009–10Creditors and other payables 11 22,392 – – 22,392Derivative financial instrument liabilities 15 – – – –Other financial liabilities 14 142 518 534 1,194Closing balance 22,534 518 534 23,586114 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

NOTE 21: CATEGORIES OF FINANCIAL INSTRUMENTSThe carrying amounts of financial assets and financial liabilities in each of the NZ IAS 39 categories are as follows:2009–10 Notes 2010–11ActualActual$000 $000Debtors and receivables14,633 Cash and cash equivalents 14,666147,004 Debtor Crown 147,0694,711 Net debtors 9 5,114166,348 Total debtors and receivables 166,849Fair value through surplus or deficit– Derivative financial instrument liabilities –– Total fair value through surplus or deficit –Financial liabilities measured at amortised cost22,392 Creditors and other payables 11 27,4121,194 Other financial liabilities 14 1,57423,586 Total financial liabilities measured at amortised cost 28,986ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS115

NOTE 22: CAPITAL MANAGEMENTInland Revenue’s capital is its equity (or taxpayers’ funds), whichcomprise of general funds. Equity is represented by net assets.Inland Revenue manages its revenues, expenses, assets, liabilitiesand general financial dealings prudently. Inland Revenue’s equityis largely managed as a by-product of managing income, expenses,assets, liabilities, and compliance with the Government Budgetprocesses and with Treasury Instructions and the Public FinanceAct 1989.The objective of managing Inland Revenue’s equity is to ensurethat it effectively achieves its goals and objectives, while remaininga going concern.NOTE 23: EXPLANATION OF MAJOR VARIANCESStatement of Comprehensive IncomeThe following major variations occurred in the Statement ofComprehensive Income between the 2010–11 Actuals and2009–10 Actuals:""Other income was lower than last year’s actual by $5,846,000(16%). This decrease was due to one-off court cost recoveriesbeing accounted for during the 2009–10 year relating tostructured finance litigation.""Personnel expenses were higher than last year’s actual by$26,412,000 (7%). This increase was due to:77An increase of $11,220,000 in staff costs in 2010–11primarily as a result of an increase in staff numbers todeliver new initiatives, an update to remuneration linesand contract settlements.77An increase of $6,297,000 in contractor and temporarystaff related expenditure. Of this $4,083,000 was inrelation to the reclassification of capital expenditureto operating on the student loan redesign project.The remainder of the increase was related to businesstransformation initiatives including the enterprise desktopproject.77Organisational restructuring costs of $6,465,000 in2010–11.""Operating expenses were higher than last year’s actual by$12,471,000 (9%). This was mainly due to an increase in ITmaintenance contracts.""Other expenses were higher than last year’s actual by$3,226,000 (100%). This related to costs incurred as a result ofthe Canterbury earthquakes.""Capital charge expense was higher than last year’s actual by$1,260,000 (8%). This increase was associated with capitalinjections from the Crown for various capital initiativesincluding $15,424,000 for the student loan redesign projectand $8,168,000 for Budget 2010 initiatives.The following major budget variations occurred between2010–11 Actuals and the 2010–11 Estimates of Appropriations(Main Estimates) in the Statement of Comprehensive Income:""Other income was lower than budget by $2,392,000 (7%). Thevariance was mainly due to binding rulings revenue and courtcost recoveries being lower than budgeted.""Operating expenses were lower than budget by $11,145,000(7%). This decrease was mainly due to the following:77Underspending in the operating component of projects,including enterprise desktop and student loans redesign.These projects will continue into 2011–12.77A decrease in the provision for onerous rental contracts(vacant space) in the 2010–11 year, relating to the longtermaccommodation solution in Wellington.77Underspending related to the child support reciprocalarrangement with Australia, with $2,996,000 fundingreturned as part of the 2011 March Baseline Update.77Savings in postage and printing costs resulting from lowerdemand volume than initially forecast.Statement of Financial PositionThe following major variations occurred in the Statement ofFinancial Position between 30 June 2011 Actuals and 30 June 2010Actuals:""Debtors and prepayments were higher than last year’s actualby $3,890,000 (28%). This was due to an increase in ITmaintenance contracts.""Intangible assets were lower than last year’s actual by$23,848,000 (15%). This was mainly due to the following:77$8,408,000 was in relation to reclassification andimpairment of capital costs for the student loanprogramme.77The remaining variance was due to less projects beingcapitalised during 2010–11. A portion of this is timingrelated and there is $18,561,000 of capital fundingproposed to be carried forward into the 2011–12 financialyear.""Creditors and other payables were higher than last year’s actualby $5,020,000 (22%). This was mainly due to the timing oftrade payables.116 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

""Current provision for employee benefits and restructuring werehigher than last year’s actual by $3,664,000 (10%). This wasmainly due to an additional day of salary and annual leaveaccruals compared to the same time last year.""Provision for other liabilities were lower than last year’s actualby $4,080,000 (42%). This was due to a decrease in theprovision for onerous rental contracts (vacant space) in the2010–11 year, relating to the long-term accommodationsolution in Wellington.The following major budget variations occurred between 30 June2011 Actuals and the 2010–11 Estimates of Appropriations (MainEstimates) in the Statement of Financial Position:""Cash and cash equivalents were higher than budget by$2,666,000 (22%). This was mainly due to timing in relation tothe payment of expenses and employee benefits.""Debtor Crown was higher than budget by $53,014,000 (56%).The variance was due to funding in Debtor Crown that wehave not drawn down due to capital underspending.""Debtors and prepayments were higher than budget by$7,166,000 (66%). This was due to an increase in tradereceivables from departments and third parties, and anincrease in prepaid IT maintenance contracts.""Property, plant and equipment was lower than budget by$11,432,000 (16%). This was mainly due to underspend anddeferral of several capital projects. The underspending isproposed to be carried forward into the 2011–12 financialyear.""Intangible assets were lower than budget by $47,649,000 (26%).This was due to an underspend in capital projects, of which$18,561,000 is proposed to be carried forward to the 2011–12year.""Creditors and other payables were higher than budget by$1,912,000 (8%). This was mainly due to the net GST payablefor the June 2011 month being higher than budgeted.""Provision for employee benefits and restructuring were higherthan budget by $6,178,000 (9%). This was mainly driven bychanges in the actuarial valuations for long-service leave andretiring leave in 2010–11.""Provision for other liabilities were lower than budget by$1,404,000 (20%). This was due to a decrease in the long‐termprovision for onerous rental contracts relating to thelong‐term accommodation solution in Wellington.Statement of CommitmentsThe following major variations occurred in the Statement ofCommitments between 30 June 2011 Actuals and 30 June 2010Actuals:""Total capital commitments were lower than last year’sactual by $5,487,000 (56%). This was mainly due to thecommitments associated with the Wellington building fit-outin 2009–10. The project has been completed as at June 2011.""Total accommodation commitments were lower than lastyear’s actual by $26,898,000 (11%). This was mainly due toless buildings being occupied as a result of the long-termaccommodation solution in Wellington.""Total supply commitments were higher than last year’s actualby $7,622,000 (43%). This was due to an increase in noncancellablecontracts (with exit or penalty costs) for thesupply of goods and services.Statement of Departmental Expenses and CapitalExpenditure against AppropriationsThe following major variations occurred in the Statementof Departmental Expenses and Capital Expenditure againstAppropriations between 30 June 2011 Actuals and 2010–11Appropriations:Intangible assets were lower than the Appropriation by$32,677,000 (63%). This was due to the deferral of severalcapital projects, of which $18,561,000 is proposed to be carriedforward to the 2011–12 year. Also having an impact was projectunderspending, impairment, and reclassification from capital tooperating expenditure.NOTE 24: EVENTS AFTER BALANCE DATEAfter the balance date, Inland Revenue completed a consultationprocess with staff in medium site offices on proposed changesto the way services will be delivered in these sites. The officesincluded in the proposed changes are Rotorua, New Plymouth,Napier, Nelson and Invercargill. Changes will start to beimplemented in early 2012 and completed by June 2013.No other events have occurred between the balance date anddate of signing these financial statements that materially affectthese financial statements.ird.govt.nzPART 7DEPARTMENTAL FINANCIAL STATEMENTS117

Part eightFINANCIAL SCHEDULES –CROWN AS ADMINISTEREDBY INLAND REVENUEird.govt.nzPART 8 FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE119

SCHEDULE OF REVENUE – CROWN ASADMINISTERED BY INLAND REVENUEFOR THE YEAR ENDED 30 JUNE 20112009–10 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000Direct taxationIncome taxIndividuals21,521,804 Source deductions 20,562,208 19,979,000 20,490,0003,986,978 Other persons 3,791,029 4,403,000 3,822,000(1,831,027) Refunds (1,679,127) (1,484,000) (1,681,000)460,726 Fringe benefit tax 462,327 430,000 461,00024,138,481 Sub-total individuals 23,136,437 23,328,000 23,092,000Corporate tax7,009,948 Gross companies tax 7,924,382 8,926,000 8,197,000(379,157) Refunds (196,732) (376,000) (363,000)883,949 Non-resident withholding tax 467,290 628,000 498,000(2,916) Foreign-source dividend withholding payments (274) 8,000 1,0007,511,824 Sub-total corporate tax 8,194,666 9,186,000 8,333,000Other direct income tax1,803,955 Resident withholding tax on interest income 1,704,194 1,465,000 1,707,000130,237 Resident withholding tax on dividend income 194,631 240,000 203,000612,904 Employer superannuation contribution tax 680,982 601,000 671,0001,621 Gift duties 1,713 1,000 2,0002,548,717 Sub-total other direct income tax 2,581,520 2,307,000 2,583,00034,199,022 Total direct taxation 33,912,623 34,821,000 34,008,000120 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

SCHEDULE OF REVENUE – CROWN ASADMINISTERED BY INLAND REVENUE (CONTINUED)2009–10 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000Indirect taxationGoods and services tax19,358,560 Gross goods and services tax 22,350,836 22,850,000 22,137,000(7,880,287) Refunds (9,775,501) (9,524,000) (10,047,000)11,478,273 Sub-total goods and services tax 12,575,335 13,326,000 12,090,000Other indirect taxation4,622 Cheque duties 4,076 4,000 4,00077,042 Approved issuer levy 82,098 77,000 79,000265,311 Gaming duties 266,081 273,000 263,00010,522 Other indirect taxation 4,934 15,000 5,000357,497 Sub-total other indirect taxation 357,189 369,000 351,00011,835,770 Total indirect taxation 12,932,524 13,695,000 12,441,00046,034,792 Total taxation 46,845,147 48,516,000 46,449,000Other revenue184,038 Child support – assessments 192,938 235,700 200,000376,634 Child support – penalties 317,009 387,300 329,000394,777 Interest unwind – student loans 420,371 440,000 437,00011,563 Other revenue 13,486 6,000 6,000967,012 Total other revenue 943,804 1,069,000 972,00047,001,804 Total operating revenue 47,788,951 49,585,000 47,421,000The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE121

SCHEDULE OF EXPENDITURE – CROWN ASADMINISTERED BY INLAND REVENUEFOR THE YEAR ENDED 30 JUNE 20112009–10 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000Benefits and other unrequited expenses4,056 Child tax credit 2,766 3,100 2,8002,158,923 Family tax credit 2,129,523 2,229,000 2,204,400595,088 In-work tax credit 584,787 597,080 592,000(2,732) KiwiSaver: Employer tax credit 198 – 1984,052 KiwiSaver: Fee subsidy (50) – –4,677 KiwiSaver: Interest 4,625 6,000 5,000359,802 KiwiSaver: Kick-start payment 312,797 293,000 302,000655,618 KiwiSaver: Member tax credit 263,692 880,000 263,692– KiwiSaver: Tax credit 460,777 – 468,1108,877 Minimum family tax credit 9,483 10,000 9,600153,945 Paid parental leave payments 154,194 162,800 154,60020,497 Parental tax credit 18,966 19,840 19,2001,302 Payroll subsidy 1,574 4,000 2,0003,964,105 Total benefits and other unrequited expenses 3,943,332 4,204,820 4,023,600Borrowing expenses5 Adverse event interest 10 10 101,459 Environmental restoration account interest 1,527 2,000 2,0005,778 Income equalisation interest 5,589 7,000 7,0007,242 Total borrowing expenses 7,126 9,010 9,010Other expenses666,830 Bad debt write-offs 785,466 931,000 819,000371,424 Impairment of debt relating to child support 280,802 401,000 330,000(76,432) Impairment of debt 223,953 222,650 311,000257,200 Impairment of debt relating to student loans (94,000) 100,000 154,0001,219,022 Total other expenses 1,196,221 1,654,650 1,614,0005,190,369 Total expenditure 5,146,679 5,868,480 5,646,610The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.122 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

SCHEDULE OF ASSETS – CROWN AS ADMINISTEREDBY INLAND REVENUEAS AT 30 JUNE 20112009–10 Notes 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000AssetsCurrent assets965,562 Cash and cash equivalents 1,062,519 800,000 800,0005,945,019 Receivables 1 6,484,079 5,874,726 5,716,48323,541 Receivables – child support 2 55,406 59,541 10,54116,012 Receivables – other 36,958 – 36,000670,000 Student loans 3 706,000 796,000 727,0007,620,134 Total current assets 8,344,962 7,530,267 7,290,024Non-current assets474,145 Receivables 1 343,100 345,718 418,6935,434,251 Student loans 3 5,984,213 5,761,882 5,709,5295,908,396 Total non-current assets 6,327,313 6,107,600 6,128,22213,528,530 Total assets 14,672,275 13,637,867 13,418,246The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE123

SCHEDULE OF LIABILITIES – CROWN ASADMINISTERED BY INLAND REVENUEAS AT 30 JUNE 20112009–10 Notes 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000LiabilitiesPayables and provisions18,942 Child support 24,004 18,942 18,9423,209,408 Refundables and payables 4 3,737,599 3,739,993 3,209,4086,123 Unclaimed monies 5 6,750 5,716 6,1233,234,473 Total payables and provisions 3,768,353 3,764,651 3,234,473Reserve schemes207,119 Reserve schemes 6 226,765 233,341 195,119207,119 Total value of the reserve schemes 226,765 233,341 195,1193,441,592 Total liabilities 3,995,118 3,997,992 3,429,592The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.SCHEDULE OF MOVEMENTS BETWEENDEPARTMENTS – CROWN AS ADMINISTERED BYINLAND REVENUEFOR THE YEAR ENDED 30 JUNE 20112009–10 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $00010,268,137 Opening balance 10,086,938 9,582,219 10,086,93841,811,435 Net result from operating activities 42,642,272 43,716,520 41,774,390792,988 Asset transfer between departments762,203 737,326 732,278– Ministry of Social Development – student loans(42,785,622) New Zealand Debt Management Office (42,814,256) (44,396,190) (42,604,952)10,086,938 Closing balance 10,677,157 9,639,875 9,988,654The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.124 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

STATEMENT OF APPROPRIATIONS – CROWN ASADMINISTERED BY INLAND REVENUEFOR THE YEAR ENDED 30 JUNE 20112009–10 2010–11 2010–11 2010–11Actual Actual Main Suppestimates estimates$000 $000 $000 $000Vote: RevenueBenefits and other unrequited expenses207,227 Child support payments PLA 209,128 225,000 213,0004,056 Child tax credit PLA 2,766 3,100 2,8002,158,923 Family tax credit PLA 2,129,523 2,229,000 2,204,400595,088 In-work tax credit PLA 584,787 597,080 592,000– KiwiSaver: Employer tax credit 198 – 1984,052 KiwiSaver: Fee subsidy – – –4,677 KiwiSaver: Interest 4,625 6,000 5,000359,802 KiwiSaver: Kick-start payment 312,797 293,000 302,000655,618 KiwiSaver: Member tax credit 263,692 880,000 263,692– KiwiSaver: Tax credit 460,777 – 468,1108,877 Minimum family tax credit PLA 9,483 10,000 9,600153,945 Paid parental leave payments PLA 154,194 162,800 154,60020,497 Parental tax credit PLA 18,966 19,840 19,2001,302 Payroll subsidy 1,574 4,000 2,0004,174,064 Total benefits and other unrequited expenses 4,152,510 4,429,820 4,236,600Borrowing expenses5 Adverse event interest PLA 10 10 101,459 Environmental restoration account interest PLA 1,527 2,000 2,0005,778 Income equalisation interest PLA 5,589 7,000 7,0007,242 Total borrowing expenses 7,126 9,010 9,010Other expenses666,830 Bad debt write-offs 785,466 931,000 819,000371,424 Impairment of debt relating to child support 280,802 401,000 330,000(76,432) Impairment of debt 223,953 222,650 311,000228,100 Impairment of debt relating to student loans* (43,000) 100,000 154,0001,189,922 Total other expenses 1,247,221 1,654,650 1,614,0005,371,228 Total appropriations 5,406,857 6,093,480 5,859,610* Excludes remeasurement.The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE125

STATEMENT OF UNAPPROPRIATED EXPENDITURE –CROWN AS ADMINISTERED BY INLAND REVENUEFOR THE YEAR ENDED 30 JUNE 2011Actual Authority Expensesin excess ofappropriation$000 $000 $000Benefits and other unrequited expensesKiwiSaver: Kick-start payment 312,797 302,000 10,797KiwiSaver: Employer tax credit: up to 18 November 2010 198 – 198The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.There were two instances of unappropriated expenditure:KiwiSaver: Kick-start payment totalled $312.797 million for the year. The breach in the KiwiSaver kick-start payment appropriation is largelydue to a spike in enrolments prior to the 2011 Budget. This spike happens annually just prior to the Budget and is due to the anticipatedchanges that could be introduced as part of the Budget. Although this seasonal spike was already built into the forecasts, the degree ofadditional uptake surpassed expectations. Another ongoing theme is that uptake among the under-17 age group continues to be strongerthan expected. This affects the KiwiSaver kick-start payment, but not in the short-term any other KiwiSaver credits.KiwiSaver: Employer tax credit appropriation enables the payment of the KiwiSaver employer tax credit. The employer tax credit has beenrepealed with effect from 31 March 2009. Expenditure against this appropriation in 2008–09 was $205.809 million. Whilst the bulk ofclaims for the employer tax credit ceased in 2008–09 there is still a requirement for Inland Revenue to make final adjustments to memberaccounts, such as adjusting for overpayments. In 2009–10 this resulted in a ($2.732) million credit to this appropriation. In 2010–11 therewas residual expenditure of $0.198 million that was unappropriated.126 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

SCHEDULE OF CONTINGENT LIABILITIES ANDCONTINGENT ASSETS – CROWN AS ADMINISTEREDBY INLAND REVENUEAS AT 30 JUNE 20112009–10 Notes 2010–11ActualActual$000 $000Quantifiable contingent liabilities295,408 Legal proceedings and disputes – assessed 281,28549,538 Unclaimed monies 5 54,617344,946 Total quantifiable contingent liabilities 335,902Quantifiable contingent assets503,533 Legal proceedings and disputes – non-assessed 635,665503,533 Total quantifiable contingent assets 635,665The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.SCHEDULE OF TRUST MONEY – CROWN ASADMINISTERED BY INLAND REVENUEFOR THE YEAR ENDED 30 JUNE 20112009–10 2010–11 2010–11 2010–11Actual Actual Contributions Distributions$000 $000 $000 $000Child support15,526 Child support trust account 11,927 203,628 (207,227)267 Reciprocal child support agreement trust account 319 16,912 (16,860)15,793 Total child support 12,246 220,540 (224,087)KiwiSaver27,962 KiwiSaver returned transactions trust account 137 – (27,825)27,962 Total KiwiSaver 137 – (27,825)43,755 Total trust money 12,383 220,540 (251,912)The Child Support trust accounts were established in accordance with sections 139 and 140 of the Child Support Act 1991. Inland Revenue administers these trustaccounts for amounts collected from liable parents and the subsequent child support payments that are paid to the custodial parents.The KiwiSaver trust account was established in accordance with section 74(4) of the KiwiSaver Act 2006. Inland Revenue administers this account to hold moneydeposited with the Crown from KiwiSaver scheme providers, primarily for refunds and payments made in error.The accompanying accounting policies and notes form part of these financial schedules.For a full understanding of the Crown’s financial position and the results of its operations, refer to the Financial Statements of the Government of New Zealand forthe year ended 30 June 2011.ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE127

STATEMENT OF ACCOUNTING POLICIESREPORTING ENTITYThe financial schedules (Crown as administered by Inland Revenue)have been prepared and administered by Inland Revenue inaccordance with the requirements of the Public Finance Act 1989.The schedules represent extracts of Crown activity. The activitiesinclude elements of income, expenditure, assets and liabilities.These form part of the Financial Statements of the Government ofNew Zealand.REPORTING PERIODThe reporting period for these financial schedules is for the yearended 30 June 2011. The financial schedules were authorised bythe Chief Executive of Inland Revenue on 22 September 2011.STATEMENT OF COMPLIANCEThe financial schedules have been prepared in accordancewith the requirements of the Public Finance Act 1989, whichincludes the requirement to comply with New Zealand generallyaccepted accounting practice (NZ GAAP) and in accordance withTreasury Instructions. Compliance with NZ GAAP in this instancemeans the figures for the year ended 30 June 2011 comply withNew Zealand equivalents to International Financial ReportingStandards (NZ IFRS), and where appropriate, standards issuedby the International Public Sector Accounting Standards Board(IPSAS) as appropriate for public benefit entities and New Zealandequivalents to International Accounting Standards (NZ IAS).BASIS OF PREPARATIONThe accounting policies set out below have been appliedconsistently to all periods presented in these financial schedules.These financial schedules have been prepared on a historical costbasis, unless otherwise stated.The accrual basis of accounting has been used unless otherwisestated. These financial schedules are presented in New Zealanddollars and all values are rounded to the nearest thousand dollars($000). The functional currency of Inland Revenue is New Zealanddollars.JUDGEMENTS AND ESTIMATIONSThe preparation of financial schedules in conformity with NZIFRS requires judgements, estimates and assumptions that affectthe application of policies and reported amounts of assets andliabilities, income and expenses. The estimates and associatedassumptions are based on historical experience and variousother factors that are believed to be reasonable under thecircumstances.The estimates and underlying assumptions are reviewed on anongoing basis. Revisions to accounting estimates are recognised inthe period the estimate is revised in if the revision affects only thatperiod, or in the period of the revision and future periods if therevision affects both current and future periods.Material judgements, estimates and assumptions impact onreceivables, payables, child support receivables and student loandebt. See notes 1, 2, 3 and 4 for more information on these.STANDARDS AND INTERPRETATIONS ISSUEDAND NOT YET ADOPTEDThe Government has elected to early adopt all NZ IFRS andInterpretations that had been approved by the New ZealandAccounting Standards Review Board as at the 30th June 2011but are not yet effective, with the exception of NZ IFRS 9:Financial Instruments. NZ IFRS 9 Financial Instruments willeventually replace NZ IAS 39 Financial Instruments: Recognitionand Measurement. This new standard was approved by theAccounting Standards Review Board in November 2010.NZ IAS 39 is being replaced through the following three mainphases: Phase 1 Classification and Measurement, Phase 2Impairment Methodology and Phase 3 Hedge Accounting.Phase 1 has been completed and has been published in the newfinancial instrument standard NZ IFRS 9. The new standardaddresses the issues of classification and measurement of financialassets and liabilities, and becomes effective for annual reportingperiods commencing on or after 1 January 2013.The standards and interpretations that have been early adoptedby the Government predominantly relate to the presentation offinancial information and did not have a material impact on thesefinancial schedules.ACCOUNTING POLICIESThe following particular accounting policies, which materiallyaffect the measurement of financial results and financial position,have been applied.Budget figuresThe budget figures are those included in the Information Supportingthe Estimates of Appropriations (Main Estimates) for the year ending30 June 2011 and the Information Supporting the SupplementaryEstimates of Appropriations (Supplementary Estimates) for the yearending 30 June 2011.128 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

RevenueOperating revenueThe Crown provides many services and benefits that do notgive rise to revenue. Further, payment of tax does not, in itself,entitle a taxpayer to an equivalent value of services or benefits,because there is no direct relationship between paying tax andreceiving Crown services and transfers. Where possible, revenue isrecognised at the time the debt to the Crown arises.Taxation and duties are accounted for as income under NZ IFRSwith an accounting treatment consistent with IPSAS 23 – Revenuefrom Non-Exchange transactions (Taxes and Transfers). The Crownrecognises income as follows:Revenue typeSource deductionsResident withholding taxFringe benefit taxProvisional taxTerminal taxGoods and services taxCheque dutiesOther indirect taxesChild Support assessmentsChild Support penaltiesRevenue recognition pointWhen an individual earns incomethat is subject to PAYEWhen an individual is paid interestor dividends subject to deductionat sourceWhen benefits are provided thatgive rise to fringe benefitsWhen taxable income is earnedWhen the terminal assessment isfiledWhen the liability to the Crown isincurredWhen the liability to the Crown isincurredWhen the debt to the Crown arisesWhen payment is receivedWhen the debt to the Crown arisesInterest unwind – student loansInterest unwind on student loans is accrued using the effectiveinterest rate method. The effective interest rate exactly discountsestimated future cash receipts through the expected life of thefinancial asset to that asset’s net carrying amount. The methodapplies this rate to the net carrying amount outstanding todetermine interest income each period.ExpensesGeneralExpenses are recognised in the period to which they relate.Benefits and other unrequited expensesExpense typeChild tax creditFamily tax creditIn-work tax creditKiwiSaver: Employertax creditKiwiSaver: Fee subsidyKiwiSaver: InterestKiwiSaver: Kick-startpaymentKiwiSaver: Member taxcreditKiwiSaver: Tax creditDefinitionExtra assistance for low to middleincome families who do not depend onthe state for financial support (expensesincurred pursuant to section 185 of theTax Administration Act 1994).Family support payments made tobeneficiaries and non-beneficiariesduring the year (expenses incurredpursuant to section 185 of the TaxAdministration Act 1994).Extra assistance for low to middleincome families where the personworks a minimum of 20 hours per weekand does not have a partner, or a personand their partner work a minimum of30 hours per week (expenses incurredpursuant to section 185 of the TaxAdministration Act 1994).Tax credit to employers in respect oftheir contributions to KiwiSaver as setout in the Income Tax Act 2007. Thisceased on 31 March 2009.Fee subsidy to members for providerfees as set out in the KiwiSaver Act2006. This ceased on 31 March 2009.Interest on KiwiSaver contributions asset out in the KiwiSaver Act 2006.One-off payment made on opening aKiwiSaver account for members whomeet the required eligibility criteria asset out in the KiwiSaver Act 2006.Tax credit to KiwiSaver members as setout in the Income Tax Act 2007.Tax credit to KiwiSaver members andthe payment of residual tax credits toemployers as set out in the Income TaxAct 2007.ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE129

Minimum family taxcreditPaid parental leavepaymentsParental tax creditPayroll subsidyBorrowing expensesExpense typeAdverse event interestEnvironmentalrestoration accountinterestIncome equalisationinterestExtra payment made to families whereat least one parent is working for salaryor wages (expenses incurred pursuantto section 185 of the Tax AdministrationAct 1994).Paid parental leave payments madeto parents eligible under the ParentalLeave and Employment Protection Act1987.Additional financial support made toworking families for the eight-weekperiod following the birth of a child(expenses incurred pursuant to section185 of the Tax Administration Act1994).Subsidy to a payroll agent undertakingemployers’ payroll-related taxcompliance activities on their behalf(expenses incurred pursuant to section185 of the Tax Administration Act1994).DefinitionInterest on adverse event incomeequalisation reserve accounts heldby taxpayers in the farming andagriculture business (expenses incurredpursuant to section 185 of the TaxAdministration Act 1994).Interest on environmental restorationaccounts (expenses incurredpursuant to section 185 of the TaxAdministration Act 1994).Interest on income equalisationreserve scheme accounts held bytaxpayers in the farming, fishing orforestry industries (expenses incurredpursuant to section 185 of the TaxAdministration Act 1994).Other expensesExpense typeBad debt write-offsImpairment of debtrelating to childsupportImpairment of debtImpairment of debtrelating to studentloansDefinitionBad debt write-offs for Crown debtadministered by Inland Revenue.These write-offs relate to general tax,KiwiSaver and family support debt.Impairment arising from objectiveevidence of one or more loss eventsthat occurred after the initialrecognition of the debt, and the lossevent (or events) has had a reliablymeasurable impact on the estimatedfuture cash flows of the collective bookof child support debt.Impairment arising from objectiveevidence of one or more loss eventsthat occurred after the initialrecognition of the debt, and the lossevent (or events) has had a reliablymeasurable impact on the estimatedfuture cash flows of the Crown debtbook. This impairment relates togeneral tax, KiwiSaver and familysupport debt.Impairment arising from objectiveevidence of one or more loss eventsthat occurred after the initialrecognition of the loan, and the lossevent (or events) has had a reliablymeasurable impact on the estimatedfuture cash flows of the collective bookof student loan debt.Cash and cash equivalentsCash and cash equivalents include cash on hand, cash in transit,and funds held in bank accounts.ReceivablesReceivables from taxes, levies and fines (and any penalties andinterest associated with these activities) as well as social benefitreceivables that do not arise out of a contract.Receivables are initially assessed at nominal amount or facevalue, that is, the receivable reflects the amount of tax owed, levy,fine charged, or social benefit debt payable. These receivablesare subsequently adjusted for penalties and interest as theyare charged, and tested for impairment annually. Interest andpenalties charged on receivables are presented as revenue in theSchedule of Revenue.130 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Allowances for estimated irrecoverable amounts are recognisedwhen there is objective evidence that the asset is impaired.Impairment movements are recognised in the Schedule ofExpenditure. Impairment losses can be reversed where there isevidence that the impaired value of the asset has increased.Financial models have been constructed for Inland Revenue tocalculate the impairment of Crown debt as well as child supportdebt. These models apply a number of assumptions on futurerepayment behaviour as well as economic assumptions such as thediscount rate and inflation.Financial instrumentsFinancial assetsStudent loansStudent loans are designated as loans and receivables underNZ IAS 39. Student loans are recognised initially at fair value,plus transaction costs, and subsequently measured at amortisedcost using the effective interest rate method, and adjusted forimpairment movements. Fair value on initial recognition ofstudent loans is determined by projecting forward expectedrepayments and discounting them back at an appropriatediscount rate. The difference between the amount lent and thefair value on initial recognition is expensed on initial recognition.The subsequent measurement at amortised cost is determinedusing the effective interest rate calculated at initial recognition.This rate is used to spread the Crown’s interest income across thelife of the loan and determines the loan’s carrying value at eachreporting date.Allowances for estimated irrecoverable amounts are recognisedwhen there is objective evidence that Inland Revenue will not beable to collect all amounts due according to the original terms ofthe receivables. Impairment losses are incurred if, and only if, thereis objective evidence of impairment as a result of one or moreevents that occurred after the initial recognition of the loan and aloss event has an impact on the estimated future cash flows of theloan that can be reliably measured. The amount of the provision isthe difference between the asset’s carrying amount and estimatedimpaired value. The impairment losses are recognised in theSchedule of Expenditure.Impairment losses can be reversed where there is evidence thatthe impaired value of the financial asset has increased.Contingent liabilitiesContingent liabilities are recorded in the Schedule of ContingentLiabilities at the point at which the contingency is evident.Contingent liabilities are disclosed if the possibility that they willcrystallise is not remote.Contingent liabilities arise if a case is still not resolved at the endof the disputes process, Inland Revenue will issue an amendedassessment to the taxpayer and recognise revenue. The taxpayer isthen able to file proceedings with the Taxation Review Authorityor the High Court disputing the assessment. These are recordedin the Schedule of Contingent Liabilities as legal proceedings anddisputes – assessed. The contingent liability is the maximumliability Inland Revenue has in respect of these cases.Unclaimed monies are administered by Inland Revenue under theUnclaimed Money Act 1971.Contingent assetsContingent assets are recorded in the Schedule of ContingentAssets at the point at which the contingency is evident.Contingent assets are disclosed if it is probable that the benefitswill be realised.Contingent assets arise as part of the tax dispute process, forexample, when Inland Revenue has advised a taxpayer of aproposed adjustment to their tax assessment through a notice ofproposed adjustment. At this point there has been no amendedassessment issued and no revenue has been recognised so theseadjustments are recorded in the Schedule of Contingent Assetsas legal proceedings and disputes – non-assessed. The taxpayerhas the right to dispute this adjustment and a disputes resolutionprocess is entered into. Inland Revenue quantifies a contingentasset based on the likely outcome of the disputes process based onexperience and similar prior cases, net of losses carried forward.Contingent assets can also arise where the taxpayer has not filedan assessment but Inland Revenue believes they are liable for tax.In this situation Inland Revenue will issue an assessment. Wherethe taxpayer chooses to dispute the Inland Revenue initiatedassessment, the assessment is not recognised as revenue and acontingent asset is recorded in the Schedule of Contingent Assets.The value of the asset is based on the assessment, net of lossescarried forward.Financial liabilitiesFinancial liabilities are recognised initially at fair value, lesstransaction costs. Financial liabilities entered into with a durationof less than 12 months are recognised at their nominal value,unless the effect of discounting is material.ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE131

ComparativesWhen presentation or classification of items in the financialschedules are amended or accounting policies are changedvoluntarily, comparative figures have been restated to ensureconsistency with the current period, unless it is impracticable todo so.Changes in accounting policiesThere have been no changes in accounting policies applicableto the preparation of financial schedules of Crown administeredby Inland Revenue. All policies have been applied on a basisconsistent with the previous year.132 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

NOTES TO THE FINANCIAL SCHEDULESNOTE 1: RECEIVABLESReceivables include general tax receivables, working for families tax credit debt and KiwiSaver debt, and exclude overdue student loanrepayments and child support debt.The recoverable amount of receivables is calculated by forecasting the expected repayments based on analysis of historical debt data,deducting an estimate of service costs and then discounting using an appropriate rate. If the recoverable amount of the portfolio is lessthan the carrying amount, the carrying amount is reduced to the recoverable amount. Alternatively, if the recoverable amount is more, thecarrying amount is increased.2010–11 2009–10$000 $000ReceivablesGross receivables 10,969,946 10,337,977Impairment receivables (4,142,767) (3,918,813)Carrying value receivables 6,827,179 6,419,164Current and non-current apportionmentReceivables – current 6,484,079 5,945,019Receivables – non-current 343,100 474,145Carrying value receivables 6,827,179 6,419,164Ageing profile of tax receivables – grossNot due 5,859,550 5,512,152Past dueLess than 6 months 982,436 947,7806 –12 months 467,202 601,3331–2 years 1,013,907 1,097,275Greater than 2 years 2,646,851 2,179,437Total past due 5,110,396 4,825,825Total receivables – gross 10,969,946 10,337,977% Past due 47% 47%Receivables – impairmentOpening balance 3,918,813 3,995,246Impairment losses recognised 1,009,420 590,397Amounts written off as uncollectable (785,466) (666,830)Closing balance 4,142,767 3,918,813The ageing profile of total past due in this note is based on debt element data that separates each component of a taxpayer’s debt withInland Revenue. The debt-ageing profile presented in the front of this Annual Report is based on case information which uses a weightedaverage of debt element information. An individual taxpayer may have multiple debt elements (eg, by tax type, by return period) that arerepresented within a single debt case.Receivables are classified as past due when any outstanding revenue is not paid by the taxpayer’s due date. Due dates will vary, dependingon the type of revenue outstanding (eg, income tax, GST, KiwiSaver) and the taxpayer’s balance date. Past due debt includes debt collectedunder instalment, debt under dispute, default assessments and debts of taxpayers who are bankrupt, in receivership or in liquidation.Inland Revenue has debt management policies and procedures in place to actively manage the collection of past due debt.ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE133

The estimated recoverable amount of this portfolio and key assumptions underpinning the valuation are:2010–11 2009–10$000 $000Recoverable amount of receivables not due 5,825,389 5,462,433Recoverable amount of receivables past due 1,001,790 956,731Use-of-money-interest rate 8.89% 8.91%Discount rate 6.10% 8.50%Impact on the recoverable amount of a 2% increase in discount rate (16,000) (15,000)Impact on the recoverable amount of a 2% decrease in discount rate 17,000 16,000The fair value of receivables is not materially different from the carrying value.Credit riskIn determining the recoverability of receivables Inland Revenue uses information about the extent to which the taxpayer is contestingthe assessment and experience of the outcomes of such disputes, from lateness of payment and other information obtained from creditcollection actions taken. Due to the size of the tax base the concentration of credit risk is limited and not actively managed.Under the Tax Administration Act 1994 Inland Revenue has broad powers to ensure that people meet their obligations. Part 10 of the Actsets out the powers of the Commissioner to recover unpaid tax.The Crown does not hold any collateral or any other credit enhancements over receivables which are past due.NOTE 2: RECEIVABLES – CHILD SUPPORTThe Crown collects monies from liable parents and remits this to custodial parents. The child support receivable represents penaltieswhich have been incurred as a result of the under-payment of the debt.Impairment is calculated by forecasting the expected repayments of this penalty debt based on analysis of historical debt data, deductingan estimate of service costs and then discounted.The concentration of credit risk is limited and this is not a risk that is actively managed. The Crown does not hold any collateral or othercredit enhancements over these receivables.Child support debt, in the main, relates to penalties imposed on liable parents who default on their payments.Child support penalties grow exponentially due to their compounding nature. The recovery of debt is challenging as 98% of child supportdebt is greater than two years old. There are limited provisions under child support legislation to remit penalties. The non-recoverability ofpenalties has been allowed for in the impairment figure.2010–11 2009–10$000 $000Receivables – child supportGross receivables 1,742,902 1,430,235Impairment receivables (1,687,496) (1,406,694)Total receivables – child support 55,406 23,541Impairment of receivables – child supportBalance at beginning of the year 1,406,694 1,035,270Impairment losses recognised 280,802 371,424Balance at the end of the year 1,687,496 1,406,694134 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

NOTE 3: STUDENT LOANS2010–11 2009–10$000 $000Nominal value student loans 10,730,926 9,829,358Nominal value student loans 10,730,926 9,829,358Adjustment to nominal value (4,040,713) (3,725,107)Carrying value student loans 6,690,213 6,104,251Current and non-current apportionmentStudent loans – current 706,000 670,000Student loans – non-current 5,984,213 5,434,251Carrying value student loans 6,690,213 6,104,251Movement during the yearOpening balance 6,104,251 5,825,704Impairment 94,000 (257,200)Loans transferred from Ministry of Social Development 1,442,129 1,268,435Fair value write-down on loans transferred from Ministry of Social Development (679,926) (475,447)Repayments (690,609) (652,022)Interest unwind 420,368 394,781Carrying value student loans 6,690,213 6,104,251Fair value student loansOpening balance 5,589,600 4,883,300Loans transferred from Ministry of Social Development 759,000 635,700Repayments (690,609) (652,022)Interest unwind 431,000 447,500Administration costs 24,009 22,322Change in expense assumption – 35,100Change in fair value discount rate 221,000 470,700Impairment 109,000 (253,000)Fair value student loans 6,443,000 5,589,600ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE135

Student loan valuation modelThe student loan valuation model has been adapted to reflect current student loan policy and macro-economic assumptions. As such, thebook value is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomicfactors such as inflation and the discount rates used to determine the effective interest rate on new borrowers.The data for the student loan valuation model has been integrated by Statistics New Zealand from files provided by Inland Revenue,Ministry of Social Development and Ministry of Education. The current data is up to 31 March 2010 and contains informationon borrowings, repayments, income, educational factors and socio-economic factors amongst others, and has been analysed andincorporated into the valuation model. This integrated data has been supplemented by less detailed, but more recent data to valuestudent loans at balance date. Given the lead time required to compile and analyse the detailed integrated data it is expected that therewill always be a lag time between the integrated dataset and balance date. The significant assumptions behind the impaired value and fairvalue are shown below:2010–11 2009–10Carrying valueCarrying value ($000) 6,690,213 6,104,251Effective interest rate 7.11% 7.00%Interest rate applied to loans for overseas borrowers 6.6%–6.7% 6.7%–6.8%Consumer Price Index 2.5%–2.8% 2.4%–3.0%Future salary inflation 3.5%–3.8% 3.0%–3.5%Fair value is the amount for which the loan book value could be exchanged between knowledgeable, willing parties in an arm’s-lengthtransaction as at 30 June 2011. It is determined by discounting the future cash flows at an appropriate discount rate.Fair values will differ from carrying values due to changes in market interest rates, as the carrying value is not adjusted for such changeswhereas the fair value was calculated on a discount rate that was current at 30 June 2011. At that date, the fair value was calculated ona discount rate of 7.10% whereas a weighted average discount rate of 7.11% was used for the carrying value. The difference between fairvalue and carrying value does not represent an impairment of the asset.The comparative figures for the fair value reconciliation in Note 3 and the table below have been restated to include updated information.This is only a disclosure item and has no impact on the financial schedules.2010–11 2009–10Fair valueFair value ($000) 6,443,000 5,589,600Discount rate 7.10% 7.67%Impact on fair value of a 1% increase in discount rate ($000) (373,000) (320,000)Impact on fair value of a 1% decrease in discount rate ($000) 426,000 365,400The Student Loan Scheme Annual Report contains more information on the student loan scheme.In 2010–11 there was a reversal of impairment of the student loan asset totalling $94.0 million, increasing the value of the student loanasset (in 2009–10 there was an impairment expense of $257.2 million). The current year impairment is mainly driven by the Budget 2011policy decision to hold the repayment threshold constant. This policy decision increased the forecast future repayments of borrowersresulting in a reversal of impairment. Macroeconomics effects and data and modelling still had an impact this year. Data is still verysensitive to small changes in certain areas as can be seen from the table on page 137.136 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

2010–11 2009–10$000 $000Sources of impairmentChange in demographic profile of participants (21,000) (57,800)Experience variance (1,000) (23,000)Interest unwind calculation (1,000) –Legislative changes 95,000 64,800Macroeconomic effects 52,000 (29,100)Repayment threshold calculation (4,000) –Remaining model and data (26,000) (212,100)Total sources of impairment 94,000 (257,200)The remeasurement adjustment portion of the impairment reversal totals ($51.0) million. The Schedule of Expenditure and the note aboveincludes remeasurement adjustments in the impairment figure. However, the Statement of Appropriations excludes remeasurementadjustments.The remeasurement relates to changes in the macro-economic assumptions used for the valuation of the receivable.Credit riskCredit risk is the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid, causing the schemeto incur a loss.The student loan scheme does not require borrowers to provide any collateral or security to support advances made. As the totalsum advanced is widely dispersed over a large number of borrowers, the student loan scheme does not have any material individualconcentrations of credit risk.The credit risk is reduced by collection of compulsory repayments through the tax system.Interest rate riskInterest rate risk is the risk that the value of financial instruments will fluctuate due to changes in interest rates. Changes could impact onthe Government’s return on loans advanced. The interest rate and the interest write-off provisions attached to student loans are set bythe Government.NOTE 4: REFUNDABLES AND PAYABLESRefundables and payables are recognised at their nominal value as they are due within 12 months. The nominal value is considered toapproximate their fair value.Taxes refundable represent refunds due to taxpayers as a result of assessments being filed. Refunds are issued to taxpayers once accountand refund reviews are complete.2010–11 2009–10$000 $000KiwiSaver payable 913,783 871,509Paid parental leave payable 4,327 3,932Research and development tax credits payable 95,817 110,280Taxes refundable 2,723,672 2,223,687Total refundables and payables 3,737,599 3,209,408ird.govt.nzPART 8FINANCIAL SCHEDULES – CROWN AS ADMINISTERED BY INLAND REVENUE137

NOTE 5: UNCLAIMED MONIESUnder the Unclaimed Money Act 1971, entities (eg, financial institutions, insurance companies) hand over money not claimed after sixyears to Inland Revenue. The funds are repaid to the entitled owner on proof of identification.NOTE 6: RESERVE SCHEMES2010–11 2009–10$000 $000Adverse event income equalisation 108 75Environmental restoration 51,650 50,892Income equalisation 175,007 156,152Total reserve schemes 226,765 207,119The adverse event income equalisation scheme operates in addition to the income equalisation scheme. Interest at a rate of 6.5% is paid ondeposits. Deposits can be withdrawn immediately, but are transferred to the main income equalisation account if not withdrawn within12 months of the deposit.The environmental restoration account allows businesses to set aside money to cover restoration costs for monitoring, avoiding, remedyingor mitigating the detrimental environmental effects which may occur in later years. Interest at a rate of 3% is paid on the deposit while it isheld in the scheme. Payment is made when the environmental restoration costs are incurred.The income equalisation scheme allows taxpayers in the farming, fishing and forestry industries to make payments during the year by wayof income equalisation deposits. Interest is paid at a rate of 3%, provided that no withdrawals are made within 12 months of the date of thedeposit.NOTE 7: ACCIDENT COMPENSATION COLLECTION2010–11 2009–10$000 $000Earner premium – employees – provisional 1,701,367 1,456,017Total accident compensation collection 1,701,367 1,456,017NOTE 8: EVENTS AFTER BALANCE DATENo events have occurred between the balance date and date of signing these financial schedules that materially affect the financialschedules.138 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

AUDIT REPORTird.govt.nzAUDIT REPORT139

INDEPENDENT AUDITOR’S REPORTTo the readers of Inland Revenue’s financial statements, non-financial performance information and schedules ofnon‐departmental activities for the year ended 30 June 2011.The Auditor-General is the auditor of Inland Revenue (the Department). The Auditor-General has appointed me, Ajay Sharma, using thestaff and resources of Audit New Zealand, to carry out the audit of the financial statements, the non-financial performance informationand the schedules of non-departmental activities of the Department on her behalf.We have audited:""the financial statements of the Department on pages 88 to 117, that comprise the statement of financial position, statement ofcommitments, statement of contingent liabilities and contingent assets as at 30 June 2011, the statement of comprehensive income,statement of changes in equity, statement of departmental expenses and capital expenditure against appropriations, statement ofunappropriated expenditure and capital expenditure and statement of cash flows for the year ended on that date and the notes to thefinancial statements that include accounting policies and other explanatory information;""the non-financial performance information of the Department that comprises the statement of service performance on pages 57 to 85and the report about outcomes on pages 10 and 22 to 25; and""the schedules of non-departmental activities of the Department on pages 120 to 138 that comprise the schedule of assets, scheduleof liabilities and schedule of contingent assets and liabilities as at 30 June 2011, the schedule of expenditure, statement of expenditureagainst appropriations, statement of unappropriated expenditure, schedule of revenue, schedule of trust monies and the schedule ofmovements between departments for the year ended on that date and the notes to the schedules that include accounting policies andother explanatory information.OpinionIn our opinion:""the financial statements of the Department on pages 88 to 117:••comply with generally accepted accounting practice in New Zealand; and••fairly reflect the Department’s:−−financial position as at 30 June 2011;−−financial performance and cash flows for the year ended on that date;−−expenses and capital expenditure incurred against each appropriation administered by the Department and each class ofoutputs included in each output expense appropriation for the year ended 30 June 2011; and−−unappropriated expenses and capital expenditure for the year ended 30 June 2011.""the non-financial performance information of the Department on pages 10 and 22 to 25 and 57 to 85:••complies with generally accepted accounting practice in New Zealand; and••fairly reflects the Department’s service performance and outcomes for the year ended 30 June 2011, including for each class ofoutputs:−−−−its service performance compared with the forecasts in the statement of forecast service performance at the start of thefinancial year; andits actual revenue and output expenses compared with the forecasts in the statement of forecast service performance at thestart of the financial year.""the schedules of non-departmental activities of the Department on pages 120 to 138, fairly reflect:••the assets, liabilities, contingent assets and liabilities as at 30 June 2011 managed by the Department on behalf of the Crown; and••the revenues, expenditure, expenditure against appropriations, movements between Departments, unappropriated expenditureand trust monies for the year ended on that date managed by the Department on behalf of the Crown.Our audit was completed on 22 September 2011. This is the date at which our opinion is expressed.140 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

The basis of our opinion is explained below. In addition, we outline the responsibilities of the Commissioner and our responsibilities, andwe explain our independence.Basis of opinionWe carried out our audit in accordance with the Auditor-General’s Auditing Standards, which incorporate the International Standardson Auditing (New Zealand). Those standards require that we comply with ethical requirements and plan and carry out our audit toobtain reasonable assurance about whether the financial statements, the non-financial performance information and the schedules ofnon‐departmental activities are free from material misstatement.Material misstatements are differences or omissions of amounts and disclosures that would affect a reader’s overall understanding ofthe financial statements, the non-financial performance information and the schedules of non-departmental activities. If we had foundmaterial misstatements that were not corrected, we would have referred to them in our opinion.An audit involves carrying out procedures to obtain audit evidence about the amounts and disclosures in the financial statements,the non-financial performance information and the schedules of non-departmental activities. The procedures selected depend onour judgement, including our assessment of risks of material misstatement of the financial statements, the non-financial performanceinformation and the schedules of non-departmental activities, whether due to fraud or error. In making those risk assessments, weconsider internal control relevant to the Department’s preparation of the financial statements, the non-financial performance informationand the schedules of non-departmental activities that fairly reflect the matters to which they relate. We consider internal control in orderto design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectivenessof the Department’s internal control.An audit also involves evaluating:""the appropriateness of accounting policies used and whether they have been consistently applied;""the reasonableness of the significant accounting estimates and judgements made by the Commissioner;""the appropriateness of the reported non-financial performance information within the Department’s framework for reportingperformance;""the adequacy of all disclosures in the financial statements, the non-financial performance information and the schedules ofnon‐departmental activities; and""the overall presentation of the financial statements, the non-financial performance information and the schedules ofnon‐departmental activities.We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements, the non-financial performanceinformation and the schedules of non-departmental activities. We have obtained all the information and explanations we have requiredand we believe we have obtained sufficient and appropriate audit evidence to provide a basis for our audit opinion.ird.govt.nzAUDIT REPORT141

Responsibilities of the CommissionerThe Commissioner is responsible for preparing:""financial statements and non-financial performance information that:••comply with generally accepted accounting practice in New Zealand;••fairly reflect the Department’s financial position, financial performance, cash flows, expenses and capital expenditure incurredagainst each appropriation and its unappropriated expenses and capital expenditure; and••fairly reflect its service performance and outcomes;""schedules of non-departmental activities, in accordance with the Treasury Instructions 2010 that fairly reflect those activities managedby the Department on behalf of the Crown.The Commissioner is also responsible for such internal control as is determined is necessary to enable the preparation of financialstatements, non-financial performance information and schedules of non-departmental activities that are free from material misstatement,whether due to fraud or error.The Commissioner’s responsibilities arise from the Public Finance Act 1989.Responsibilities of the AuditorWe are responsible for expressing an independent opinion on the financial statements, the non-financial performance information and theschedules of non-departmental activities and reporting that opinion to you based on our audit. Our responsibility arises from section 15 ofthe Public Audit Act 2001 and the Public Finance Act 1989.IndependenceWhen carrying out the audit, we followed the independence requirements of the Auditor-General, which incorporate the independencerequirements of the New Zealand Institute of Chartered Accountants.Other than the audit, we have no relationship with or interests in the Department.Ajay SharmaAudit New ZealandOn behalf of the Auditor-GeneralWellington, New Zealand142 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

Matters relating to the electronic presentation of the audited financial statements, statement of serviceperformance and schedules of non-departmental activitiesThis audit report relates to the financial statements, statement of service performance and schedules of non-departmental activities ofthe Inland Revenue for the year ended 30 June 2011 included on the Inland Revenue’s website. The Inland Revenue’s Chief Executive isresponsible for the maintenance and integrity of the Inland Revenue’s website. We have not been engaged to report on the integrity of theInland Revenue’s website. We accept no responsibility for any changes that may have occurred to the financial statements, statement ofservice performance and schedules of non-departmental activities since they were initially presented on the website.The audit report refers only to the financial statements, statement of service performance and schedules of non-departmental activitiesnamed above. It does not provide an opinion on any other information which may have been hyperlinked to or from the financialstatements, statement of service performance and schedules of non-departmental activities. If readers of this report are concerned with theinherent risks arising from electronic data communication they should refer to the published hard copy of the audited financial statements,statement of service performance and schedules of non-departmental activities as well as the related audit report dated 22 September2011 to confirm the information included in the audited financial statements, statement of service performance and schedules of nondepartmentalactivities presented on this website.Legislation in New Zealand governing the preparation and dissemination of financial information may differ from legislation in otherjurisdictions.ird.govt.nzAUDIT REPORT143

ADDITIONAL INFORMATIONird.govt.nzADDITIONAL INFORMATION145

FIGURE A –COMPONENTS OF OVERDUE DEBT BY TAX TYPES (AT JUNE 2011)Debt type$millionIncometaxGST PAYE StudentloansWorkingforFamiliesOthertaxTotaldebt1 Yearchange1 Yearchange(%)Non-collectable debtDeferred $542.1 $113.8 $21.2 $0.7 $1.7 $7.1 $686.6 –$43.2 –6% 1,524Insolvency $161.4 $377.5 $160.6 $0.4 $0.3 $17.6 $717.7 –$24.0 –3% 2,889Pending write-off $144.1 $80.7 $21.5 $46.3 $10.7 $4.5 $307.7 $114.9 60% 9,220Total non-collectable debt $847.6 $571.9 $203.3 $47.4 $12.7 $29.1 $1,711.9 $47.6 3% 13,633Collectable debtInstalments $418.6 $367.1 $116.9 $107.6 $126.3 $10.2 $1,146.6 $208.9 22% 174,811Residual collectable debt $941.6 $969.5 $302.5 $256.7 $136.1 $57.1 $2,663.5 $114.9 5% 201,503Total collectable debt $1,360.2 $1,336.6 $419.3 $364.3 $262.4 $67.3 $3,810.2 $323.9 9% 376,314Total debt $2,207.8 $1,908.5 $622.6 $411.7 $275.1 $96.4 $5,522.1 $371.5 7% 389,9471 year change $49.7 $99.1 $90.3 $87.0 $36.7 $8.7 $371.5 – – 26,1331 year change (%) 2% 5% 17% 27% 15% 10% 7% – – 7%Collectable debt/total debt 62% 70% 67% 88% 95% 70% 69% – – 97%Instalment debt/total debt 19% 19% 19% 26% 46% 11% 21% – – 45%Customers with debt 167,113 104,804 31,905 100,225 70,241 25,378 n/a – – –* A customer may have more than one overdue tax type within their Inland Revenue debt case, so they may be represented under more than one tax type.** Due to rounding, some figures in this table differ from other parts of this report.Totaldebtcases146 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

FIGURE B –AGE AND VALUE OF OVERDUE DEBT (AT JUNE 2011)Case value and caseweighted age bands0–6monthsDebt type ($million)6–12months1–2years> 2yearsTotal 0–6months6–12monthsDebt casesNon-collectable debt< $1K $0.3 $0.1 $0.2 $0.3 $0.8 787 221 709 639 2,356$1K–$5K $1.1 $0.7 $1.5 $3.7 $7.1 474 256 640 1,367 2,737$5K–$10K $0.9 $0.7 $4.4 $4.4 $10.4 130 97 681 608 1,516$10K–$50K $3.4 $4.6 $35.4 $37.7 $81.2 159 192 1,975 1,542 3,868$50K–$100K $2.7 $4.8 $19.5 $45.1 $72.1 38 69 265 625 997$100K–$500K $8.1 $17.6 $102.6 $228.1 $356.4 35 77 458 1,050 1,620$500K–$1million $9.4 $8.0 $53.3 $131.8 $202.5 13 11 78 190 292>$1million $56.8 $73.6 $120.1 $730.9 $981.4 15 16 49 167 247Total non-collectable debt $82.7 $110.1 $337.2 $1,181.9 $1,711.9 1,651 939 4,855 6,188 13,633Collectable debt< $1K $27.7 $3.6 $7.6 $5.2 $44.2 99,991 12,732 25,743 13,416 151,882$1K–$5K $130.5 $29.8 $50.2 $63.0 $273.4 56,910 11,195 19,295 23,191 110,591$5K–$10K $82.5 $40.1 $110.9 $86.4 $319.9 12,024 5,674 16,500 12,040 46,238$10K–$50K $181.2 $143.3 $343.5 $438.8 $1,106.9 9,371 6,767 19,134 19,241 54,513$50K–$100K $68.2 $66.5 $132.9 $270.3 $538.0 991 962 1,897 3,895 7,745$100K–$500K $112.0 $123.2 $279.1 $368.0 $882.3 602 665 1,522 2,144 4,933$500K–$1million $32.1 $22.2 $58.3 $67.8 $180.4 46 35 84 98 263>$1million $87.3 $34.7 $67.9 $275.2 $465.1 27 15 33 74 149Total collectable debt $721.5 $463.4 $1,050.5 $1,574.8 $3,810.2 179,962 38,045 84,208 74,099 376,314Total debt $804.2 $573.5 $1,387.7 $2,756.7 $5,522.1 181,613 38,984 89,063 80,287 389,9471–2years> 2yearsTotalird.govt.nzADDITIONAL INFORMATION147

FIGURE C –AGE OF CHILD SUPPORT DEBT (AT JUNE 2011)Weighted case ageDebt value$ millionDebt value(%)Debtcases% ofDebt casesUnder arrangement0–6 months $14 0.6% 16,337 11.5%6–12 months $25 1.1% 13,627 9.6%1–2 years $57 2.5% 15,416 10.9%> 2 years $1,027 45.2% 40,492 28.6%Total $1,123 49.4% 85,872 60.7%Uncollectable0–6 months $0 0.0% 8 0.0%6–12 months $0 0.0% 2 0.0%1–2 years $0 0.0% 23 0.0%> 2 years $311 13.7% 2,381 1.7%Total $311 13.7% 2,414 1.7%Not yet under arrangement0–6 months $13 0.6% 16,884 11.9%6–12 months $21 0.9% 6,086 4.3%1–2 years $50 2.2% 7,683 5.4%> 2 years $754 33.2% 22,525 15.9%Total $837 36.9% 53,178 37.6%Grand total $2,271 100.0% 141,464 100.0%FIGURE D –TELEPHONE SERVICE FACTOR2007–08 2008–09 2009–10 2010–11Priority queues – calls answered within one minuteBusiness (other) 69.3% 79.5% 87.1% 82.1%Employer 62.3% 66.1% 83.9% 72.4%KiwiSaver 81.7% 75.5% 76.2% 72.0%Receivables 54.8% 55.9% 68.4% 65.4%Student loans 67.1% 79.3% 92.5% 96.3%Other priority 74.5% 74.5% 85.1% 70.4%Total 67.7% 67.0% 77.9% 71.0%General service queues – calls answered within four minutesChild support 92.4% 96.6% 83.9% 81.2%General business 50.5% 57.3% 70.3% 73.3%General families and individuals 47.1% 60.1% 71.1% 70.6%GST 56.7% 69.5% 82.8% 79.0%Student loans 57.3% 71.2% 78.7% 72.5%Tax agent 64.8% 65.6% 82.9% 84.5%Other general 81.4% 89.7% 78.1% 86.1%Total 59.1% 70.8% 76.4% 76.5%148 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz

FIGURE E –EMPLOYEE DISTRIBUTION BY BUSINESS UNITBusiness unitNumber of staffService delivery 4,370 (77%)Information design and systems 604 (11%)Corporate services 479 (8%)Policy advice 104 (2%)Office of the Chief Tax Counsel 73 (1%)Business transformation 15 (0%)Note: The full-time equivalent (FTE) total is larger than sum of business units because two FTEs report to the Commissioner ratherthan to a specific business unit.FIGURE F –EEO STATISTICS BY ETHNICITYBusiness unitNumber of staffNew Zealand European/Pākehā 2,477European 380Māori 433Asian 493Pacific peoples 199Other 45Not specified 1,952Note: Includes full-time and part-time equivalent staff.FIGURE G –HISTORICAL EXPENDITURE ON CONSULTANTS AND CONTRACTORS2006–07$ 0002007–08$ 0002008–09$ 0002009–10$ 0002010–11$ 000Expenditure on consultants and contractors 50,378 70,688 59,232 30,829 35,173% of total operating expenditure 9.5% 11.6% 9.0% 5.1% 5.5%% of total capital and operating expenditure 8.3% 9.8% 8.2% 4.7% 5.2%ird.govt.nzADDITIONAL INFORMATION149

FIGURE H –EXPENDITURE ON CONSULTANTS AND CONTRACTORS2009–10 2010–11ActualActual$ 000 $ 00013,559 Information technology 14,8297,922 Specialist advice and project management 13,127943 HR and change management services 7441,941 Tax issues 7804,419 Property 2,9361,294 Research 1,660155 Communications 257596 Other 83930,829 Total consultants and contractors 35,173FIGURE I –PROPERTY INFORMATION (AT 30 JUNE) * 2007 2008 2009 2010 2011Accommodation area (m 2 ) 111,131 133,193 122,345 121,496 121,481 **Other area (m 2 ) 6,864 7,720 5,764 5,147 5,519Total area leases (m 2 ) 117,995 140,913 128,109 126,643 127,000Vacant accommodation (m 2 ) 0 0 4,407 719 13,862 ***Vacant as a % of total 0.0% 0.0% 3.4% 0.6% 10.9%Average space occupied per person (m 2 ) 19.1 21.5 18.8 21.1 18.5Annual rental per person ($) 4,437 4,903 5,231 5,446 5,909Utility costs per person ($) 874 916 906 939 857Occupancy cost per person ($) 5,311 5,819 6,136 6,385 6,766Notes*Some data for prior periods has been revised.**Includes Inland Revenue’s main building in Christchurch, which is presently unoccupied due to the earthquakes. It does not include other temporaryaccommodation that is presently being used in Christchurch.***Relates to changes in 2010–11, including leaving buildings in Wellington as part of the long-term accommodation solution. 95% of the vacant leases are due toexpire within the next year.150 NEW ZEALAND INLAND REVENUE ANNUAL REPORT 2011 ird.govt.nz