A large portion of the population has at some time in their lives engaged in some form of dishonesty or theft but few are ever caught. There are few who could claim to have never taken something that did not belong to them or, for example, never evaded tax by paying someone in cash or never broken copyright rules by sharing an illegally downloaded television series.
While laws generally reflect a society’s mores, the arrival of the internet has challenged traditional models of ownership of certain types of property – most notably intellectual property relating to software, games, movies and music. Downloading many of these files, often dubbed ‘file sharing’, is illegal but it is so widespread that it is not viewed in the same way as stealing a physical object such as a DVD from a store. A 2010 estimate put lost revenue for the film industry due to internet piracy at $70 million. Widespread acceptance of file sharing is often rationalised with the line that ‘everyone else is doing it’. As the public’s actions and attitudes are not aligned with the law, policing this type of dishonesty crime is likely to prove very challenging for some time to come.
In 2011 the Copyright (Infringing File Sharing) Amendment Act proscribed illegal downloading and uplifting of copyright material and set up a system whereby those doing this could be fined after three warnings. This legislation made internet service providers the watchdogs of illegal downloading by requiring them to issue warnings and cease providing a service to repeat offenders. This has not been seen as an effective way to control illegal downloading of copyright material.
The Ministry of Business, Innovation and Employment (MBIE) initiated a review of the Copyright Act 1994 in 2017. The review intended to look at issues of fair use, safe harbour schemes and illegal downloading of film and television content. InternetNZ welcomed the review, arguing that current legislation was not fit for purpose. Their deputy chief executive, Andrew Cushen, described New Zealand's current copyright law as 'iPod law in a smart phone world.'1
Tax evasion is the deliberate non-payment of legal tax obligations (paying cash for trade services for which GST is neither charged nor paid) or not declaring earned income. While many people do not see these actions as criminal, they do involve breaking the law.
Tax avoidance involves using accountants and lawyers to exploit loopholes and accountancy techniques to minimise tax payments. These practices are complex and their legality is often open to interpretation.
High profile tax evader
Some prominent personalities have engaged in tax evasion. In 2014 Alex Swney, the chief executive of Auckland’s business association, Heart of the City, and a former Auckland mayoral candidate, pleaded guilty to tax evasion of $2.8 million and misappropriating $2.5 million from Heart of the City.
In the early 2000s the BNZ, ASB, ANZ-National, and Westpac banks faced a massive tax bill of $2.2 billion over transactions seen to be tax evasion by the government. They used a mechanism defined as ‘structured finance’ to reduce their tax. After five years of legal wrangling the companies reached an agreement to settle with Inland Revenue in 2009. The cost to the government of pursuing this case was about $40 million.
Those who have access to companies, trusts or portfolio investment entities can sometimes reduce their levels of taxation by directing their income to these entities. This could explain why a study in 2010 found that only half of the 100 wealthiest individuals in New Zealand were paying the highest marginal tax on their income.
In 2011 the payment of earned income into special entities was challenged by a Supreme Court ruling after Inland Revenue charged two orthopaedic surgeons of paying their salaries into companies and family trusts to lower their income and avoid a higher personal tax rate.
Tax avoidance by multi-national companies has also been the focus of attention. Multi-national companies have been able to avoid paying company tax on income generated in New Zealand by shifting these profits to parent companies based in countries that have lower company tax rates. Legislation passed in June 2018 will make it more difficult for these companies to avoid paying tax on profits generated in New Zealand. Tax revenue is estimated to increase by $200 million a year as a result.
It is very difficult to estimate the extent of tax evasion. In 2016/17 New Zealand’s total tax revenue was $75.6 billion. The revenue lost through evasion or avoidance is probably at least several billion dollars as the size of New Zealand’s hidden economy has been estimated at around 6–10% of the formal economy. Many individuals do not see tax evasion as wrong, even though it is illegal. However, a recent online survey of New Zealanders enrolled in a major retail rewards programme indicated that people were more critical of tax evasion than benefit fraud. The high visibility of prosecutions for serious tax evasion may be one of the key reasons for these trends and could have prompted a revision of earlier tolerant attitudes towards tax evasion.
Matter of perception
Those engaging in tax evasion are less likely to receive a prison sentence for defrauding the state than beneficiaries, even when the amount of money involved is significantly larger. Whereas receiving benefits to which you are not entitled is clearly defined as ‘benefit fraud’, tax evasion is often referred to as ‘tax discrepancies’ rather than fraud.
International tax evasion
Controversy relating to tax evasion, tax avoidance and money laundering through tax-exempt foreign owned or ‘offshore’ trusts has led to increasing scrutiny of foreign trusts in New Zealand. From 21 February 2017 a foreign trust with one or more New Zealand trustees must register with Inland Revenue and file annual disclosure returns. Foreign trusts can still be tax exempt as long as their income is generated outside of New Zealand and they meet disclosure requirements. Inland Revenue announced that it would pass on the information about these foreign trusts to other countries.
In late 2016 there were 11,750 foreign trusts in New Zealand. In mid-2017 only 3,000 foreign trusts had registered for tax exemption under the new regulations. This suggests that some of the pre-existing foreign trusts had been wound up, or that overseas trustees had replaced New Zealand trustees and the trust transferred to another country. This increased regulation of foreign trusts is to ensure that New Zealand is not a ‘tax-haven’ and has robust information about tax-exempt foreign trusts. Existence of this detailed information is also a way to counter money laundering – hiding money generated through criminal activity by disguising its origins.