Proposed Information Sharing Reforms Between Inland Revenue and MBIE to Strengthen New Zealand’s Business Integrity and Tax Compliance

The Inland Revenue Department and the Ministry of Business, Innovation, and Employment (MBIE) have issued a discussion document in October 2024, with a response due by December 2024. This proposed change aims to improve information sharing between the two agencies to ensure the integrity of New Zealand’s tax system.

Currently, certain information does not reach the Companies Office, and Inland Revenue wants to enhance the system to allow better information sharing between the two agencies. For instance, when a company's tax return is filed with Inland Revenue, which includes income as a shareholder salary, the ACC is notified. And when the company is stuck off from the company’s office the IRD is notified. This indicates some level of information sharing is already in place. However, the new proposal seeks to expand this to strengthen the tax system’s integrity.

What is Changing?

The proposal includes measures to combat "phoenix companies." The government is concerned about unethical or illegal business practices by some company directors, often referred to as phoenix companies. “Phoenixing” occurs when a director transfers assets to an associated company at below-market value to deceive creditors. For example, a director of a pharmaceutical export business might create a new company with a similar name and transfer assets to it without acknowledging the liabilities, leaving creditors unable to claim what they are owed. The Companies Office currently lacks visibility of such activities. While anecdotal evidence of phoenix companies exists in New Zealand, the scale of the problem is unclear due to limited quantitative data.

Phoenixing may also occur when a company sells its assets or simply abandons the company, leaving debts unpaid. The government is concerned that these harmful practices continue, especially when repeated, as they damage the integrity of the tax system and the wider economy.

Change: Prohibiting Acting as a Director

The new proposal would enable Inland Revenue to share information with MBIE that could help identify and take action against phoenix companies. Inland Revenue would be authorized to provide MBIE with information to prohibit certain individuals from acting as directors and to prosecute offenses under the Companies Act 1993.

Currently, while Inland Revenue investigators have access to certain information, they are legally unable to prevent a person from being a director of a newly formed company in a similar industry. Personal bankruptcy can sometimes take years to finalize, limiting enforcement options. The new information-sharing provision would allow the Companies Office to prohibit a person from being a director when:

• The individual has been a director of a company that failed due to mismanagement.
• MBIE orders disqualification due to specific offenses.

At present, when Inland Revenue prosecutes a director for non-compliance, it cannot legally share this information with MBIE. Consequently, MBIE's Market Integrity Branch may remain unaware of individuals who should be considered for prohibition, allowing such individuals to continue their activities and undermining the tax system’s integrity.

Second Major Change: Information Sharing with the Companies Office

Inland Revenue holds information about New Zealand businesses that currently cannot be shared with other agencies. This includes contact details, industry segment, business type, and size. MBIE’s Business and Consumer Branch could use this information to reach businesses directly with tailored government and private sector support, including compliance requirements and available resources.

The absence of such an agreement limits the agencies’ ability to provide targeted services. During the COVID-19 pandemic, an exemption under the Tax Administration Act allowed Inland Revenue to share some business information with MBIE’s Business and Consumer Branch, which proved beneficial. The new information-sharing agreement would enable MBIE to contact businesses in non-compliance more effectively.

Policy and Framework Development

While this change does not directly impact businesses, it indirectly benefits them by enabling both agencies to develop policy frameworks more effectively. Both agencies collect data to inform policy development; however, without information-sharing capabilities, they cannot access each other’s data. Going forward, the proposed changes would allow the agencies to create more targeted policy interventions and accurately measure policy impacts on New Zealand businesses.