A taxing year: How IRD responded to the pandemic while keeping its massive tax system upgrade on track
It could have been a disastrous year for the Inland Revenue Department.
Four years into a six-year, $1.8 billion business transformation project, Inland Revenue had its hands full with phase 4 of the project when the country went into Level 4 lockdown.
Not only did the department need to send most of its 4,000 staff home to run the country’s tax systems from their laptops, but major changes were also required to facilitate the unprecedented volume of payments the government was making to individuals and businesses to support them through the Covid-19 crisis.
This is the second in a three-part series highlighting the projects of finalists in the Business Transformation through Digital and IT section of the CIO Awards 2020. The awards winners will be announced in Auckland on November 24. This series is supported by CIO Awards sponsor ClearPoint.
“When it came to small business loans, we made $600 million available in the first week the scheme was live,” remembers Gary Baird, Inland Revenue’s Deputy Commissioner, Enterprise Services and Chief Technology Officer.
“It was literally six weeks from the minister raising the question of whether it was possible, to literally turning the system on.”
In addition to processing business loans, Inland Revenue had to assist the Ministry of Social Development in distributing $15 billion in wage subsidies. Three months after the wage subsidy applications had opened, the department had answered 353,000 tax-related calls.
On one hand, the timing wasn’t great. On the other, it was fortuitous that coronavirus reared its head at a point where Inland Revenue’s transformation was far enough along to enable such a broad-sweeping government response.
“If this pandemic had occurred even 12–18 months earlier, it is likely that our tax system
would not have been well placed to deal with it,” John Cuthbertson, New Zealand tax leader with Chartered Accountants Australia and New Zealand wrote in the New Zealand Herald in September.
“While IR’s $1.8 billion business transformation project to automate and digitise the country’s tax system has not been without issue on implementation, its versatility has served NZ Inc well,” he added.
As Cuthbertson pointed out, other countries’ tax systems didn’t cope as well. The United States Inland Revenue Service buckled under the weight of requests for Covid assistance payments, leading to delays in getting money to people and processing of tax returns.
What New Zealand had in its favour, says Baird, was the groundwork laid in a multifaceted transformation project that spanned everything from implementing a modern new tax software system, to migrating key services to the cloud, to enabling remote work through uptake of mobile devices and a move to Microsoft 365.
The scale of the transformation
Inland Revenue’s transformation programme is the biggest of its kind in a government department to date, seeking to replace a 30 year-old mainframe system that featured 40 million lines of bespoke COBOL computer code.
“We had 80-plus systems that had to be integrated end to end to provide what people call MyIR,” says Baird.
It was a daunting proposition, but the Inland Revenue team identified a few imperatives in the design stage of the project. There would be no new monolithic bespoke system to replace the old one.
“Quite frankly, we didn’t want anything in our environment, which was internally designed, built and operated. Our selection of a commercial off the shelf product dedicated to tax administration was probably one of our critical upfront decisions,” says Baird.
“That enabled us to significantly simplify the landscape, but equally to add some of those services that are really meaningful from a customer perspective.”
The core tax system is based on GenTax, an integrated tax processing software package provided by US company Fast Enterprises.
Read about how CIO Awards 2020 finalist Countdown re-engineered its entire business to deal with the impacts of the pandemic.
“The platform that we have now is one ecosystem, including the core registry, the front-end customer channel, the back-end business to business gateway and all of the analytics inside as well,” says Baird.
A significant upgrade of Inland Revenue’s data centre operations was required to support the project, which also had the goal of reducing the risk of “operational failure” due to the reliance on old systems.
The decision was made to break the transformation programme down into “deliverable chunks” says Baird. Annual release cycles allowed the team to better manage risk and to deliver customer benefits earlier rather than taking one big bang approach.
Establishing what could be achieved internally and what outside help was needed was also crucial, says Baird.
“We didn’t have inherently in our organisation the capability that we needed to deliver something of this magnitude. So we bought in the right partners.”
Consulting firm Accenture played a key role in advising Inland Revenue through the change management process. Well aware of where previous government IT projects have gone awry, the team paid particular attention to key risk areas, including making sure the technology and process capability was sound and that data migration was completed to a very high standard.
“Those have remained constant areas of focus for us,” says Baird.
“The amount of testing we’ve wrapped around that has been huge.”
Enabling policy agility
While the first phase of the transformation project was delivered back in 2016, Covid-19 gave Baird and his colleagues a chance to really prove their new system’s value.
“We had a real opportunity during Covid to actually deliver on one of our core business case benefits, which was policy agility and speed to meet policy changes.”
That sought after ‘policy agility’, hadn’t always been achieved in the past due to limitations in the core tax system.
“We made significant child support changes back in about 2012,” explains Baird, who has been with Inland Revenue for nearly five years and previously held senior technology and infrastructure management roles at ANZ and DHL.
“But implementing those changes took around three years, with a couple of hundred people on the project, and well north of $100 million in investment.
“We had to make it a lot easier for the government of the day to deliver policy change.”
Another key business driver was to make it easier for people and businesses to deal with the unpopular but unavoidable task of paying their taxes.
“It was about increasing voluntary compliance by making it harder to get it wrong and easier to get it right,” says Baird.
A major part of that was developing systems that allowed the process of calculating tax obligations to be automated. Previously, taxpayers would file a return to find out if they owed Inland Revenue money or were due a refund.
“In order to be able to automatically calculate your tax return at the end of the year, we needed to change the legislation first,” says Baird.
It also necessitated a major behind the scenes integration project with the accounting and payroll systems used by tens of thousands of businesses to facilitate payday filing. Inland Revenue knew that the information it needed to calculate taxes was already sitting in financial systems.
“Whereas in the past, employers used to have to send us a schedule on the 20th of every month of every person on their books and what they’d paid during the month,” says Baird.
“Now all businesses, when they pay their staff, can share that information with us at the same time. We have real-time information to calculate their entitlements and their obligations.”
Inland Revenue opened gateways into the likes of Xero and MYOB to allow GST and income tax to be submitted with the click of a button.
For individual taxpayers, Inland Revenue can now present them with a tax position calculated from that data gathered through the year to present a final position.
“You are in a position to be able to just hit the green button and tell us that it is accurate or advise if there are changes or queries,” says Baird.
Individual taxpayers really started to see that change for the first time last year. Given the scale of the transformation, it was remarkably well received. Still, the tax department learned from lessons from the earlier release of the revamped GST filing system.
What IRD learned
“Although GST went really well, it had some unintended consequences for tax agents,” says Baird.
The process of adapting to the full-digital system “wasn’t ideal” for some agents, he adds. While the kinks were ironed out within a few weeks, it led Inland Revenue to co-opt a number of tax agents into the transformation programme to gain their insights ahead of changes on an ongoing basis.
“It was a lesson that there is often a difference between what you can deliver technically, and what can be absorbed by your staff or your customer base in terms of change and how to actually implement it,” says Baird.
“Feedback is a gift in that respect,” he adds.
While the transformation team had a strong strategic direction, it also had to remain adaptable and willing to change its approach to implementation.
“I can remember when we were heading into the second release and we had some things that logically would have been an enhancement,” says Baird.
“But the impact of that change would have created too significant a burden on customers at the time, so we left them out.”
Knowing your capability and when to ask for help was crucial, says Baird. But simply bringing in consultants and contractors wasn’t enough – it had to fit into the governance framework of the programme.
“I would say, as an executive team, we were across what at times felt like an excruciating amount of detail,” says Baird.
“But it was actually really, really necessary.”
The mandate for change
Changing a nation’s entire tax infrastructure requires political buy-in and the groundwork was laid for that over six years ago under Prime Minister John Key’s National government.
From developing the business case to communicating with ministers, businesses and the public, articulating the value of the project clearly was important.
“We couldn’t afford and nor could the country afford a change in politics to result in the change in this initiative,” says Baird.
“We took specific care to ensure that there was bipartisan support for it and the benefits that it would bring so that we had stability in the programme.”
Clear communication was key as was transparency. Inland Revenue regularly publishes details of the transformation to its website and puts a strong focus on change communications for each phase of delivery.
“How do we let people know that change is coming? When it’s coming? And what it’s going to mean to them individually? Those were the questions we needed to answer.”
While the programme constitutes the country’s biggest government IT project to date, it is very much seen as a wider transformation of Inland Revenue in general, says Baird.
“This hasn’t gone on as a side project to business as usual. This is not about a technology change, or a communications change, or a process change or a policy change. It’s about transforming while delivering on the annual business plan.
“That required true buy-in from the CEO on down.”
It’s a transformation that also has meant dramatic change for Inland Revenue’s own people too. That’s required extensive support of staff to adapt to the new environment and re-skill where necessary. It will result in reduced headcount overall. In the IT department alone, Inland Revenue will end up with around 90 staff, compared to 330 prior to the transformation.
The result is a world-class tax system that is easier to comply with, cuts down on compliance costs for individuals and businesses and is flexible enough to allow for future needs, says Baird.
A tangible result of the change to auto-calculation for the 2018 tax year was that around one million Kiwis who previously didn’t proactively file a tax return, were now engaged with the tax system. It resulted in nearly 600,000 of them actually receiving a tax refund. For the 2019 year, more than 1.3 million people were automatically issued with tax refunds totalling $572 million.
“That cash flow is a massive benefit to the economy. That’s money owed to citizens that we can pay to them directly because we know that they overpaid in tax. They don’t have to come to us first to tell us that,” says Baird.
Between 2017 when the first changes were made and 2019, the reduced compliance needs saved small and medium sized businesses nine fewer hours each a year meeting their tax obligations, equating to $280 million in savings.
Around 97% of tax submissions are now filed electronically. The new infrastructure supports customer-facing online services with 99.4% uptime and by the end of 2019, inland Revenue was reporting $60 million in administrative savings.
Ultimately the better compliance enabled by the new tax system is expected to generate close to $2.9 billion in additional revenue for the Crown by 2023/24.
The transformation programme is $120 million under budget so far and the project’s risk rating was recently reduced. A project that was estimated to cost $1.8 billion is now expected to come in closer to $1.4 billion at completion.
There is still a lot of work to do. Release 4, currently in progress, includes significant changes to student loans and KiwiSaver.
A final release will include changes to the collection and distribution of child support payments, which Inland Revenue administers on behalf of the government. Paid parental leave, unclaimed money and foreign trusts will also be incorporated and there is still significant work to do decommissioning old systems.
The first major upgrade of the new system will also be completed.
The transformation, says Baird, puts New Zealand “at or near the front of the pack”, when it comes to having a best-in-class tax system in place.
“A lot of US states are using the same system, but in those cases, it’s often been more of a technical change-out than a business transformation,” he says.
“We’ve kind of changed out all the complexity for this one ecosystem,” he reflects as the programme nears its completion.
“It’s not a bespoke system and from a strategic perspective that gives us the ability to pivot and deliver new capabilities as they are needed.”
The CIO Awards 2020 Business Transformation through Digital category winner will be announced in Auckland on November 24.