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What is Electronic Sales Suppression Software?

The IRD has recently launched a widely publicised crack-down on Electronic Sales Suppression Software (ESS) tools. This has obviously prompted a lot of questions, mostly, what is electronic sales suppression software? As an honest business person and responsible taxpayer, you can be forgiven for not knowing what ESS is, how it works, or why the IRD may be cracking down on this. So to help, we’ll let you know some of these essentials.

What are Electronic Sales Suppression Software Tools?

Electronic sales suppression (ESS) tools are software products that work to alter your sales records to artificially lower sales figures. Essentially, the tools create two sets of books. One set has all the information as per actual sales made. The other set, has an altered set data that has much lower sales figures, therefore, much lower profit and much less tax to pay on that profit.

The software doesn’t just come up with a second ledger with a different number for sales. That would be too crude, easily caught at audit and much easier for agencies like IRD to prove criminal tax evasion. The software goes so much further than just creating a less profitable set of figures.

The software targets both internal and external records, filing systems, and transactions to delete, alter or simple not record at all, selected sales data. There is growing evidence of the use of ESS tools globally to alter, understate and conceal revenue for the purposes of tax evasion. This has prompted the IRD to take action to ensure fairness is maintained in our local tax system.

“There is no other purpose to ESS tools other than to facilitate tax evasion or money laundering,” says IRD spokesperson Tony Morris. “ESS tools seriously undermines the integrity of the tax system and IRD has an obligation to honest businesses to stamp out its use.”

How Much Trouble Can ESS Tools Get You Into In NZ?

The IRD has recently been able to get a lot of changes to tax legislation passed to assist with the integrity of the tax system. Much of this was necessary with the new 39% tax bracket creating an unbalanced tax system that is more likely to encourage abusive tax positions, tax avoidance or tax evasion. However, some of the new provisions were specifically to target technological advances like ESS that seek to undermine the integrity of the tax system.

Penalties for Developing or Supplying ESS Tools in NZ

It is now a criminal offense under the Tax Administration Act 1994 (TAA) to manufacture or supply an ESS tool. As a result, the TAA now outlines a penalty of up to $250,000 for anyone convicted of manufacturing or supplying a suppression tool.

Penalties for Acquiring or Possessing ESS Tools in NZ

The TAA now sets a new criminal offense for acquiring or possessing a suppression tool. Anyone convicted is now liable for a penalty of up to $50,000.

Additionally, there is a civil penalty applicable of $5,000 for acquisition or possession of an ESS Tool.

You can read more in the IRD Revenue Alert.

All of these new penalties are on top of the existing penalties for tax avoidance and evasion. This means that you not only get your ESS penalty but are also liable to pay all the back taxes avoided, plus interest, plus additional short-fall payment penalties of 150% of the evaded tax.

If all this is still making your head scratch, good. You definitely don’t want to be caught making, supplying, possessing or using any ESS tools. However, if you’d like to reach out to talk to an MBP Tax Advisor about this in more detail, feel free to reach out to us or book in a chat.

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