Cost of living payment

Letter to Mr Peter Mersi, Commissioner of Inland Revenue

29 August 2022

Mr Peter Mersi
Te Tumu Whakarae mō te Tāke / Commissioner of Inland Revenue
Te Tari Taake / Inland Revenue

Tēnā koe Peter

COST OF LIVING PAYMENT

The Government announced an $800 million Cost of Living Payment (COLP) as part of Budget 2022 to support low- to medium-income people facing increased cost of living pressures due to inflation. Inland Revenue is responsible for making payments totalling $350 to eligible people on 1 August, 1 September, and 1 October 2022.

After the first payment was made on 1 August 2022, my Office became aware of reports that payments had been made to people who did not meet the eligibility criteria, as they were either overseas or deceased. Nicola Willis MP also wrote to me raising concerns about these payments. She asked me to investigate to:

  • identify the scale of the mispayments;
  • consider whether payments to people who do not meet the criteria are outside the appropriation;
  • consider the legality of the Government’s position on recovery of mispayments; and
  • consider the adequacy of the policy process.

It is not my role to express a view on the policy intent or the scope of the COLP, or to form a view on the legality of the Government’s decisions about recovering any mispayments.

As Controller and Auditor-General, I assess whether public spending is within the scope and amount of appropriations (spending authority) set by Parliament. In this case I have needed to determine whether payments made to ineligible people were outside the scope of the appropriation and consequently unlawful. I am conscious that the next payment is due at the beginning of September and wanted to provide a response to the concerns raised before then.

I am also interested in ensuring good stewardship of public money.

My Office sought information from Inland Revenue to better understand the decisions made and how it implemented the COLP. We discussed the issue of whether the payments were outside the scope of the appropriation with both Inland Revenue and the Treasury. I have used information gathered from relevant departmental and Cabinet documents and discussions with Inland Revenue and the Treasury to inform my view on the expenditure and administration of the COLP. This letter reflects the outcome of the information gathered and the discussions with Inland Revenue and the Treasury.

Summary

I have concluded that the payments made to ineligible people do not constitute unappropriated expenditure. However, in my view, good stewardship of public money required greater care when designing and implementing the COLP – ensuring that the criteria were clear and that the data used by Inland Revenue was adequate. I have a number of concerns about these matters.

In this letter, I outline that:

  • Speed and expediency were prioritised over certainty and accuracy.
  • There is a lack of clarity about what “present in New Zealand” means.
  • Using a physical address in New Zealand as a proxy for being present in New Zealand is problematic.
  • Inland Revenue does not know, and has said it may never know, how many ineligible people might have received the payment.

In my view, Inland Revenue should now consider what steps it can take to identify how many ineligible people have already received payments. I encourage Inland Revenue to also focus on future payment tranches to ensure that payments are reaching only the people the Government intended them to go to. I also encourage Inland Revenue to remind ineligible recipients that they are obliged to repay any payment received immediately.

After discussions with my staff, Inland Revenue told me that it is now assessing what system refinements it can make for the subsequent payments and has updated its website and letters to make it clear that ineligible recipients are required to return the payments immediately.

This letter is in four parts. The first outlines what the Government agreed. The second outlines my understanding of how Inland Revenue went about implementing the COLP. The third discusses my view on whether the payments made to ineligible people constituted unappropriated expenditure. The fourth sets out my overall comments on how Inland Revenue implemented the COLP.

1.  What the Government agreed

This part sets out what we know about what officials advised Ministers and Cabinet about the eligibility requirements for the scheme, and any constraints on the ability to assess or determine that eligibility.

When officials developed options for the COLP they considered how best to give effect to the Government’s intent to provide support quickly and without an application process. By 25 March 2022, Inland Revenue had decided that the scheme would use existing data held by Inland Revenue to determine eligibility.

On 11 April 2022, Cabinet agreed a scheme which was designed to deliver the COLP as swiftly and easily as possible. The main eligibility criteria for people to receive the payment were that they:

  • Had net income of less than $70,000 in the 2021/22 tax year.
  • Were not eligible to receive the Winter Energy Payment (WEP).
  • Were aged 18 or over.
  • Were both a New Zealand tax resident and present in New Zealand.
  • Were not incarcerated.

It was not intended that the payment would be made to people who had died.

The COLP applies to an estimated 2.1 million New Zealanders. Payment eligibility is based on Inland Revenue’s data for the 2021/22 tax year. People without a tax assessment are excluded, and people who have not filed a return by the due date will not receive payments until after they have filed.

Cabinet agreed that Inland Revenue would assess eligibility monthly in case people’s eligibility changed between the payments. Payment would be provided only to individuals who are both a New Zealand tax resident and present in New Zealand and would only be made to New Zealand bank accounts.

Cabinet also agreed that payments would be non-recoverable unless Inland Revenue determined the information on which payment was based was fraudulent or wilfully misleading.

The April Cabinet paper about the scheme did not include the risks in relying on Inland Revenue’s information to establish whether people met the criteria. However, Inland Revenue had earlier advised the Ministers of Revenue and Finance that its information might not be up to date, that it could not verify whether someone was living at the New Zealand address recorded in Inland Revenue’s system, and that there was a risk that some people might receive the payment who should not.

We understand that due to the speed at which the legislation was developed, a Regulatory Impact Assessment was not completed. Instead, Inland Revenue produced a Supplementary Analysis Report on 4 May 2022 to accompany the legislation.1 This report stated that a key consideration was that the scheme had to be administratively efficient and minimise the costs to Government in delivering and administering the payment. Inland Revenue noted that some of the information it holds might not be up to date, which meant there was a risk that some eligible people might not receive the payment and, conversely, some ineligible people might receive it. The report noted that “due to the narrow scope of the commissioning, including timeframes for developing officials’ advice, the range of options considered in this analysis is limited”. The Taxation (Cost of Living Payments) Bill was introduced and passed on 19 May 2022, amending the Tax Administration Act 1994 and the Income Tax Act 2007 to enable the Commissioner of Inland Revenue to use existing powers to administer the scheme. The Bill did not contain the eligibility criteria for the payments. The criteria were set out on Inland Revenue’s website.

On 22 July 2022, Inland Revenue issued a Special Report,2 which stated that Inland Revenue would determine eligibility based on the information it held (“tax assessment, employment income, bank account details, date of birth, tax residency status, incarceration status and date of death information”) and assess eligibility by running checks before the August, September, and October payments. People could opt out of receiving the payment by calling Inland Revenue or via their online account. Overpayments would not be pursued unless fraudulent or wilfully misleading information was provided, and section 7AAA of the Tax Administration Act 1994 required that an ineligible recipient immediately repay the money.

2. How did Inland Revenue implement the criteria?

We asked Inland Revenue about the sources of data that it is using to assess eligibility. Inland Revenue told us that it does not have a perfect dataset for any single criterion, but that it carried out its responsibilities based on the best information currently available to it. Most information in the tax system is provided by taxpayers who, when submitting that information, attest to the accuracy of the information supplied.

Present in New Zealand: Inland Revenue decided that the taxpayer’s physical address as registered on its database for correspondence purposes was the best proxy evidence of that person being present in New Zealand. The address field is the street address the taxpayer provided when they last updated the information for tax purposes.3

Tax residency: Inland Revenue holds information about tax residency (which does not indicate that a person is present at any particular point in time), which is either self-assessed and declared by the taxpayer or results from a tax audit.

Age over 18: Taxpayers provide their date of birth, accompanied by supporting evidence, when an IRD number is applied for.

Whether a person has died: Some information is derived from data matching. Inland Revenue receives a weekly data match from the Department of Internal Affairs of people who have died. Inland Revenue may also be advised by a family member, estate executor, or tax agent that a person has died, in which case Inland Revenue will validate that information.

Incarceration status: The Department of Corrections provides a monthly data match of the people who are in prison.

3. Are payments to people who do not meet the criteria within appropriation?

The Controller and Auditor-General is often referred to as a “watchdog” on Government spending. An important part of the watchdog aspect is the Controller role. In the Controller role, I provide assurance to Parliament and New Zealanders on the extent to which the Government has spent public money in line with Parliament’s authority. Before spending public money, the Government must have:

  1. the legal authority to take the proposed action;4 and
  2. the authority to expend public money for the purpose of performing the action.

If there is reason to believe that expenses have been incurred for a purpose that is not within the scope of the appropriation, the Public Finance Act 1989 authorises the Controller to take several actions, including directing payments should be stopped or that the relevant Minister must report to the House.

In my Controller role, I had to reach a view on the purpose for which Inland Revenue made the initial COLP payments (including payments to ineligible individuals) and assess whether that purpose is within the scope of the COLP appropriation. The scope of the appropriation for the COLP payment in Vote Revenue is:

This appropriation is limited to payments to individuals to address the cost of living in accordance with Cabinet decisions.

The scope of the appropriation was therefore determined by reference to criteria set out in the Cabinet minute. The criterion that has been problematic is recorded in the Cabinet minute as: “agreed to provide the payment only to individuals who are both New Zealand tax residents and present in New Zealand.”

As mentioned, media reports indicate (and Inland Revenue has confirmed) that an unknown number of individuals who were not “present in New Zealand” on 1 August 2022 received the initial COLP payment. This raises the question about whether payments that did not meet the “present in New Zealand” criterion were outside the scope of the appropriation for the COLP payments and therefore unappropriated (and consequently unlawful).

Inland Revenue advises that the Commissioner made payments having regard to the eligibility requirements using the physical address on record, stated country of tax residence, and New Zealand-sourced income from the 2022 tax assessment that taxpayers provide as part of the Inland Revenue self-assessment process. Inland Revenue told us that it cannot reasonably know all facts or information about tax residence or presence in New Zealand, particularly since the COLP does not require people to apply or to supply new information.

Inland Revenue considers that it has reasonably ascertained eligibility when the payment was made, that its actions are lawful, and payments to people who were not present in New Zealand do not constitute unappropriated expenditure.

Payments made for purpose of the appropriation

After considering the matter carefully, I have reached the view that the payments to people who were not present in New Zealand is not unappropriated expenditure. I have reached that conclusion on the basis that there is no evidence that Inland Revenue made the payments for any other purpose than to discharge its statutory duty to administer the COLP scheme in accordance with Cabinet’s decision. It applied the criteria despite the data it used being inadequate to evidence whether individuals were “present in New Zealand”. The payments were therefore within the scope of the appropriation and were lawful.

In reaching this view, however, I had a number of concerns about the lack of clarity in the criterion used, the inadequacy of the evidence to establish whether the payments were being made to individuals who met that criterion, and that public money has been paid to people who were not eligible to receive it. I address these concerns below.

4. My view of how the COLP was implemented

Inland Revenue told us that it had to establish a delivery system to make payments to eligible people as quickly and as efficiently as possible. Recently I have commented on the Strategic Tourism Assets Protection Programme that prioritised speed and expediency over certainty and accuracy. There may be justification for doing this, but it is still important to be sure that public money is being spent appropriately, and in accordance with the key policy intent.

As I outline below, I am concerned about the uncertainty of what “present in New Zealand” is intended to mean, and the accuracy and fitness for purpose of the information used to determine that. I would expect there to be specificity and certainty when spending public money.

As I have said recently in relation to the Strategic Tourism Assets Protection Programme, where there are criteria, it is important that they are sufficiently clear to enable decision makers to apply them accurately and to assess whether they have been met.

Clarity of criteria

The criterion that a person be “present in New Zealand” can be interpreted in several ways. It could be interpreted to mean that a person had to be physically present in New Zealand on the day of the eligibility assessment, or “normally present in New Zealand”, or able to be out of the country for up to 28 days (such as in the case of the Winter Energy Payment). Inland Revenue told us that “present in New Zealand” meant people who had a New Zealand address in Inland Revenue’s system at the time the eligibility checks were done. However, the criterion – as set out in the Cabinet minute – was unclear.

Use of data to apply criteria

The use of the physical address field as a proxy for being “present in New Zealand” was problematic. It is not clear to me that using this field is good evidence to determine that someone is present in New Zealand, regardless of which meaning is used. For any number of reasons, a person might not be at that address and there is little way of being sure the person was in New Zealand and eligible for the payment.

Inland Revenue already holds information about income or whether someone receives a benefit. Other information is established by way of existing data matching agreements for a specified purpose – for example, whether taxpayers have died or are incarcerated. Inland Revenue also carries out data matching with Customs to determine whether borrowers with student loans or who receive, or have, child support obligations have gone overseas for more than six months.

In contrast, the street address information is provided by taxpayers to Inland Revenue whenever required or necessary. This data does not directly correlate with whether a person was physically present at the time of the eligibility assessment. Further, 3.1 million New Zealanders have their tax automatically assessed by Inland Revenue, meaning that there are fewer circumstances in which taxpayers actively engage with Inland Revenue, prompting them to provide updated information.

Inland Revenue told the Ministers of Revenue and Finance that it could not verify whether someone was living at a New Zealand address. Inland Revenue said that there was a risk that payments were based on an inaccurate and incomplete dataset, meaning that some people might receive the COLP who were not eligible. As we noted above, the Cabinet paper did not include the risks in relying on Inland Revenue’s information to establish whether people met the criteria when Cabinet agreed the policy for the COLP.

What could have been done differently?

We asked Inland Revenue whether it considered any other ways in which it could ascertain whether individuals met the criterion “present in New Zealand”. I noted that, from when the criteria were developed in March and approved by Cabinet in April to when the first payment was made on 1 August, Inland Revenue had several months to consider how robust its data was, how closely it could demonstrate that all the key criteria of the scheme were met, and what other data sources could have been used to further verify the information it held.

I also noted that the Cabinet minute recorded that: “Inland Revenue will report back to Cabinet to request additional funds if the implementation of the policy settings, or a change in the policy settings, necessitates a more complex and therefore more expensive system solution.” However, Inland Revenue told my staff that it interpreted this to mean a further request could be made if further work needed to be done to the START system5 to implement the payments.

A new data match with Customs may have been one way for Inland Revenue to ensure more up-to-date information about who was present in New Zealand and therefore eligible to receive the payment. Inland Revenue said that by 25 March it had already decided it would rely only on existing data, as it had formed a view internally that data matching would have added complexity and possibly taken longer. We understand that Inland Revenue formed this view independently, without engaging with Customs or other relevant parties, such as the Privacy Commissioner. The decision to rely on existing data was then reflected in the advice to Cabinet and formed the basis for how Inland Revenue operationalised the payment. Inland Revenue said the timeframe for implementing the payment, and the size of the dataset, contributed to its inability to enhance or validate the data it held to determine eligibility.

Inland Revenue told me that it is assessing what system refinements, including exploring the use of Customs data, it can make for the subsequent payments.

Scale of the problem and approach to recovery

I am concerned that the Government does not know how significant the scale of payments to ineligible people is. The Minister of Revenue has been quoted by media as saying that it could be around 1% of payments. Inland Revenue told my staff that it is doing some work to improve the accuracy of future payments, but does not know, and may never know, how many ineligible people might have received the payment. This is, in my view, unacceptable.

Inland Revenue is not able to provide assurance that it has paid the COLP only to those individuals who were intended to receive it and not to those who were ineligible. In my view, the public can reasonably expect Inland Revenue to consider what steps it can take to better identify the scale of any payments to people who may not have been eligible.

Cabinet agreed that the Commissioner of Inland Revenue would not actively pursue repayment of any mispayments unless fraudulent or wilfully misleading information was provided. Section 7AAA of the Tax Administration Act requires that ineligible people who receive the payment immediately repay it. The Inland Revenue website does state this, but in my view, Inland Revenue might want to consider whether to communicate this message and its expectation for repayment more proactively.

Concluding comments

The COLP was developed to achieve the Government’s objective of supporting low- to middle-income workers experiencing increased living costs due to inflation. Although criteria were set to manage the scope and scale of support that would be provided, for the reasons set out above they have not resulted in the funding being provided only to people who met the eligibility criteria. In my view, good stewardship of public money required greater care when designing and implementing the COLP – ensuring that the criteria were clear and that the data used by Inland Revenue was adequate.

I understand that Inland Revenue is considering changes for subsequent payments to better align with the eligibility criteria and to identify people who might be more likely to not be present in New Zealand. I encourage Inland Revenue to review the payments made to date, and to focus on future payment tranches to ensure that the payments are reaching only the people that Government agreed the payment should go to.

I thank Inland Revenue and the Treasury for the assistance provided to us during our work.

Given the public interest in this matter, I will publish this letter on my website.

Nāku noa, nā

John Ryan
Controller and Auditor-General

Cc: Ms Caralee McLiesh
Te Tumu Whakarae mō Te Tai Ōhanga/Secretary to the Treasury

1: Typically, a Regulatory Impact Assessment would accompany the Cabinet Paper, but due to the compressed timeframe the supplementary analysis report was submitted to the Cabinet Legislation Committee with the draft Bill and Departmental Disclosure Statement.

2: The Special Report provided explanatory information about the Taxation (Cost of Living Payments) Bill.

3: When taxpayers are sent a tax assessment, they are asked to update any information that is out of date or incorrect, which includes the address field.

4: “This legal authority may be an inherent legal power possessed by the Government, it may be one conferred by statute, or it may be a combination of both” (McGee, David, Parliamentary Practice in New Zealand 4th ed., chapter 31).

5: Inland Revenue’s taxpayer account management system.

Letter to Ms Nicola Willis MP

29 August 2022

Ms Nicola Willis MP
Parliament Buildings

Tēnā koe Ms Willis

COST OF LIVING PAYMENTS

Thank you for your letters of 3 and 26 August 2022.

The Government announced an $800 million Cost of Living Payment (COLP) as part of Budget 2022 to support low- to medium-income people facing increased cost of living pressures due to inflation. After the first payment was made on 1 August 2022, my Office became aware of reports that payments had been made to people who did not meet the eligibility criteria, as they were either overseas or deceased. You wrote to me raising concerns about the cost of living payments and asked me to investigate to:

  • identify the scale of the mispayments;
  • consider whether payments to people who do not meet the criteria are outside the appropriation;
  • consider the legality of the Government’s position on recovery of mispayments; and
  • consider the adequacy of the policy process.

As Controller and Auditor-General, I am interested in ensuring good stewardship of public money. I also assess whether public spending is within the scope and amount of appropriations (spending authority) set by Parliament.

Staff from my Office have met with Inland Revenue and the Treasury to talk about the scheme and the payments. We have also reviewed relevant briefings, the Cabinet papers and related material. As a result of that work, I have written to the Commissioner of Inland Revenue about what I have seen and my views, and I intend to publish that letter on our website at 2 pm. I have briefly summarised below what my letter to the Commissioner says about the issues you asked me to look into.

Scale of mispayments

I am concerned that the Government does not know how many payments might have been made to ineligible people. While I am unable to direct Inland Revenue to take any specific action, I have suggested that Inland Revenue consider what steps it can take to identify how many ineligible people have already received payments. I have also suggested Inland Revenue to focus on future payment tranches to ensure that the payments are reaching only the people the Government intended the payment go to. Inland Revenue told me it is considering changes to better align subsequent payments with the eligibility criteria, but does not know, and may never know, how many ineligible people might have received the payment.

Payments were made for the purpose of the appropriation

I have concluded that the payments made to ineligible people do not constitute unappropriated expenditure. I have reached that conclusion on the basis that there is no evidence that Inland Revenue made the payments for any other purpose than to discharge its statutory duty to administer the COLP scheme in accordance with Cabinet’s decision. It applied the criteria despite the data it used being inadequate to evidence whether individuals were “present in New Zealand”. The payments were therefore within the scope of the appropriation.

In reaching this view, however, I have also expressed concerns about the lack of clarity in the criterion used (being “present in New Zealand’), and the inadequacy of the evidence to establish whether the payments were being made only to individuals who met that criterion. In my view, good stewardship of public money required greater care when designing and implementing the COLP – ensuring that the criteria were clear and that the data used by Inland Revenue was adequate.

Repayment

Cabinet agreed that the Commissioner of Inland Revenue would not actively pursue repayment of any mispayments unless fraudulent or wilfully misleading information was provided. However, I note that section 7AAA of the Tax Administration Act requires that ineligible people who receive the payment immediately repay it. In my letter, I have suggested that Inland Revenue consider whether to communicate this message and its expectation for repayment by ineligible people more proactively.

Inland Revenue told me that it is assessing what system refinements it can make for the subsequent payments and has updated its website and letters to make it clear that ineligible recipients are required to immediately return the payments.

Legality and adequacy of the policy process

You asked me to investigate the legality of the Government’s decision not to recover mispayments, and to look into the adequacy of the policy process. It is not my role to express a view on the policy intent or the scope of the COLP, or to form a view on the legality of the Government’s decisions about recovering any mispayments.

Thank you for writing to me.

Nāku noa, nā

John Ryan
Controller and Auditor-General