IR switches off old tax system, as verdict given on $1.5 billion overhaul

Friday, 3 December 2021

Some of Inland Revenue's decommissioned First computer system, that has now been switched off.

Business groups have joined Inland Revenue in labelling the public sector’s biggest-ever computer project a success, after IR switched off its First computer system following a five-year transition to new technology.

On Wednesday, contractor Unisys unplugged the mainframe computers at its data centres in Auckland and on the Kapiti Coast that ran the tax system for more than 20 years.

The phased switch to a new software system built by US company Fast Enterprises called Start has gone hand-in-hand with tax rules designed to ensure people and businesses are taxed more accurately through the year, and has seen IR’s workforce shrink from 5662 in June 2016 to fewer than 4000 today.

With only a little tidying up left to do, including migrating some ‘legacy’ data, IR chief executive Naomi Ferguson said that the cost of the Business Transformation (BT) project was likely to come in at a little under $1.5 billion, including staff and other internal and consulting costs.

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Inland Revenue deputy commissioner of transformation Greg James provided a high level of transparency throughout the BT project, including proactively releasing the business case for the project at the outset.

That is under its $1.7b capital and operational budget, which had included some leeway for contigencies.

Figures released by IR suggested that, on some measures, the project could already be close to paying for itself.

As of the end of June, IR estimated that BT had saved small and medium-sized businesses a cumulative $640m in compliance costs, shaved $205m off IR’s own administrative costs, and achieved the expectation of bringing in $570m of extra Crown revenue.

The latter was in part by weeding out unentitled claims for tax refunds.

Those cumulative gains are expected to ratchet up in future years.

But Ferguson said the changes brought about by BT had also resulted in automatic refunds going out to about 600,000 people who had not previously claimed them under the old system.

“Ninety per cent of refunds go out to people who earn less than $70,000 a year and that money will have been really valuable to them”.

The technology switch had also delivered benefits on which it was hard to put a dollar-figure, she said.

Those included enabling IR to quickly implement and evolve Covid relief schemes such as Resurgence Support Payments, which would not have been possible within First, she said.

In 2012, IR candidly described its Cobol-based First system as being “spaghetti-like” and hard to adapt.

“It is like a house full of appliances connected to electricity by a cable full of intertwined wires. When you change or disconnect one wire it can be difficult to tell what appliances in the house will be affected,' it said then.

One of the big benefits of BT for individual taxpayers has been automatic tax refunds.

But Ferguson would not provide any reassurances that the effective completion of the transformation project would spell an end to periodic long waits for people calling IR’s call centres.

She said call-waiting times were a narrow measure on which to judge the department’s performance, when most of its dealings were conducted through digital channels.

BusinessNZ chief executive Kirk Hope said IR had delivered “a world class tax administration infrastructure”.

But he said it should not mark an end to IR trying to drive costs out of tax administration and tax compliance.

John Cuthbertson, New Zealand tax leader at Chartered Accountants Australia and New Zealand (Caanz), said the BT project had “absolutely been a success”, notwithstanding issues with its third stage in 2018, when accountants reported big problems logging on to Inland Revenue's MyIR system.

“Beyond that, everything's pretty much gone to schedule and it has done what it was said it was going to do – and come in under budget, which is one of those things that's very rare in IT.”

Cuthbertson called on IR to deepen its engagement with the private sector to build on the success of the system.

”There should be a recognition that it's a two-way effort, with not just an expectation that all the innovation will come from the private sector.

“Often after these big projects you have a cutback IT budget going forward, which is not ideal because you do still need to be able to innovate,” he said.

Contracts provided to outcourced call centre staff working at IR offices left a bitter taste in 2018.

Ferguson said IR had been working with ministers on a ‘green paper’ that was likely to be published early next year and that would address the issue of what was next.

That might include steps to make tax compliance easier for the self-employed, she said.

“I think that's going to be one of the things that we now think ahead about.”

IR was happy to discuss any ideas on how to work with the private sector on future opportunities, she said.

Some human-resources practices that were bound up in the BT project attracted controversy.

These included the questionable treatment of outsourced call centre workers hired to help out at times of peak demand during the transition, and IR’s decision to ask 860 of its staff to undertake psychometric testing during a process in which it asked those staff to apply for new jobs.

In 2018, Stuff sighted umbrella contracts provided by IR contractor Madison Recruitment that appeared to provide outsourced call centre workers with little security over their terms of employment and which one worker described as “quite possibly the worst I have come across in my life'.

The contracts prompted queries to IR from then revenue minister Stuart Nash.

Ferguson said it was not her expectation at present that IR would make use of significant numbers of outsouced call centre workers in future.

BT also exposed one big skeleton in IR’s cupboard, when it emerged during the transition that about 1.5 million people had been paying the wrong rates of tax on the likes of Kiwisaver investments – some of them for many years – in a situation it was not able to fully unwind.

Deputy commissioner Greg James, who managed the BT project, said it had shown the importance of building confidence and trust internally and with stakeholders, and partnering with the right people, when carrying out large IT projects.

James provided a high level of transparency over the BT project’s goals and progress from the outset.

Fast Enterprises had performed exceptionally well, he said.

A team of about 40 or 50 staff from the company would stay on in New Zealand, after the remaining legacy systems and data were migrated, from June next year, to support and further develop Start, he said.

Start should last at least as long as First had done, James said.

“My intuition says that it's here to stay because it's going to continue to get refreshed every couple of years because of the research and development that Fast themselves are putting into it.”