IRD CONCENTRATING ON CASH ECONOMY

The Inland Revenue Department has revealed more details of its strategy for cracking down on the "hidden economy" - jobs done for cash and similar activities designed to disguise how much income is really being earned.

The department recently released its second annual compliance focus report, and once again it has the hidden economy in its sights. It plans to use around a third of the extra $119 million allocated to it in the Budget for investigation activities on tracking under-the-table earnings. It has already hired more staff to concentrate on this.

Group Manager Assurance of IRD Martin Scott said. "We make use of a number of different data sources to identify suppressed income. For example, a painter would buy his raw materials from certain places that offered a trade discount. Based on how much paint you buy we can determine, broadly speaking, what your income should be. The crackdown on the cash economy would follow a similar pattern to the way IRD focused on internet trading, he said.

First, the department wanted to make people more aware of their responsibilities.

Secondly, it would contact individual taxpayers and ask them to come forward with their correct position. Then it would investigate.

There had been concern from small retailers that people were undercutting them by trading online and avoiding tax.

"We now regularly download about 3 million transactions at a time off the internet. We're then able to compare those to the records that we have."

Traders who were "at the very far end of some significant sales and no return" were investigated straight away.

IRD received a lot of anonymous information and it always followed up on that by contacting the taxpayer concerned directly.

It encouraged people to voluntarily put things right because tax evasion or fraud attracted penalties of 150 per cent. "If you come and disclose to us there are substantial reductions on those penalties."

Scott also urged consumers to always demand a legitimate invoice. Without it they had no comeback if anything went wrong, and in the case of things like house repairs it could have insurance implications.

People did try to massage their income to remain eligible for benefit payments, and IRD kept an eye on that: "If we think it would lower people's perception of the integrity of the tax system then we focus on it."

 

DIRECTORS DUTIES

While companies provide limited liability and are considered a separate legal entity, directors can become personally liable if they breach their duties. These duties have become increasingly important in light of the recent financial downturn. When there is financial uncertainty, directors are more likely to make decisions for which they could be held liable. This in turn gives rise to increased media attention.  

Recently there have been numerous reports of the Securities Commission taking proceedings against directors of finance companies for misleading investors. Under the Securities Act these directors face fines of up to $500,000 in civil proceedings, and up to five years imprisonment or fines of up to $300,000 in criminal proceedings. Therefore directors need to be aware of their obligations to the company.  

Duties under the Companies Act 1993

The key duties, found in Part 8 of the Companies Act 1993 sections 131-137, include the following:

• The duty to act in good faith and in the best interests of the company.

• The duty to use their powers for the purpose for which they were conferred and not for any ulterior motive.

• The duty to act in accordance with the obligations under the Companies Act 1993 and the company’s constitution.

•  That a director must not agree to cause, or allow the company’s business to be conducted in a manner that is likely to create a substantial risk of serious loss. To determine this the court will look at what an ‘ordinary prudent director’ would have done in the circumstances.

•   The duty not to take on any obligations unless it is believed on reasonable grounds that the company will be able to perform those obligations when required to do so, and

• The duty to use the reasonable care, diligence and skill that a reasonable director would exercise in the circumstances.  

Directors must actively ensure that they are meeting their obligations. The recent case FXHT Fund Managers Ltd v Oberholster held that directors who are not actively engaged in the company or ‘sleeping directors’ can be liable. In this case the inactive director was held liable for a breach of his duty of care even though it was his co-director who defrauded investors. Initially he was not aware of his co-director’s dealings, but as soon as he became aware he reported the matter to the authorities; however he was still held liable.  

Similarly in Lewis v Mason and Meltzor the directors relied on a manager and did not exercise sufficient control over the company’s financial position or the day to day running of the company. It was found that reliance on a manager does not excuse a director from liability and the directors were ordered to contribute to the Company’s debts.

 

Summary

The above cases show the need for directors to take positive steps to discharge their obligations under the Companies Act, and be proactive directors who are aware of and adhere to the duties imposed on them.