Investigations You are a chartered accountant and tax manager for a medium sized Christchurch-based accounting firm. Predominantly

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Investigations

You are a chartered accountant and tax manager for a medium sized Christchurch-based accounting firm. Predominantly your clients are based in the Christchurch region. Around two years ago you were contacted by Sarah Kelly, company director and majority shareholder of Kelly Engineering Ltd (KEL) and you now provide KEL with tax and compliance advice. KEL specialises in bespoke engineering for new residential and commercial buildings. Their products include manufactured steel beams for construction and decorative steel applications.

KEL have had strong sales for several years. They currently have five permanent staff, including Sarah's husband John (who is also a director and has a 30 per cent shareholding in KEL).

Inland Revenue have been actively auditing the Christchurch construction industry over the past few years. They recently received anonymous information that KEL had grossly under declared their business income.

Inland Revenue have issued section 17 Tax Administration Act 1994 (TAA 1994) Notices to Provide Information to several Christchurch-based businesses (and some private home-owners) as a result of their investigation into the tax affairs of KEL. A section 17 TAA 1994 warrant is about to be exercised on the business premises of KEL and the home of Sarah and John Kelly, the two directors.

Sarah Kelly calls you on your mobile phone in a rather distressed state. Inland Revenue Customer Compliance Specialists (CCS) have arrived at their home wanting to access the premises to obtain any records that may relate to KEL's business tax affairs. Sarah is the office manager of KEL and was at home about to leave for work when Inland Revenue arrive. Sarah was about to set the house alarm as she was leaving. The Kelly's have two pet dogs (Bingo and Lily) who are barking at the arrival of Inland Revenue staff. Bingo and Lily are left at the house while John and Sarah are at work. John Kelly, who is the factory manager of the business, has just arrived at the premises of KEL.

Inland Revenue arrive at the KEL business premises just as John Kelly is making a cup of coffee for himself in the business tea room. He tells the Inland Revenue officers they have no right to be on KEL property and he demands that they leave immediately. He refuses to talk with the Inland Revenue staff.

REQUIRED:

With reference to legislation, case law and Inland Revenue materials advise Sarah and John Kelly. Your answer should include reference to relevant paragraphs of applicable Inland Revenue operational statements such as OS 13/01 [The Commissioner of Inland Revenue's search powers] and OS 13/02 [Section 17 notices].

Advise your client on their rights regarding:

(i) Inland Revenue Customer Compliance Specialists searching Sarah and John Kelly's private home. There is a laptop computer in the home office. The laptop computer is password protected.

(ii) Sarah Kelly quickly gets a USB pen drive (memory stick) out of the home office desk drawer and places it in her jacket pocket. One of the Inland Revenue staff see her place the USB pen drive in her jacket. When confronted Sarah Kelly says the USB pen drive contains family photographs and private information only.

(iii) What assistance does John Kelly, the KEL factory manager, have to give the Inland Revenue Customer Compliance Specialists who have arrived at the KEL business premises? Does he have to answer any questions? What if John Kelly refuses to cooperate with the Inland Revenue staff that have arrived at the KEL premises?

(iv) Correspondence between KEL and you as their tax advisor. The correspondence includes taxation advice documents as well as sales and purchase documentation and annual accounts information.

(v) Correspondence between KEL and their solicitor with respect to the purchase of a block of residential land and legal advice regarding a property sales dispute likely to head to court.

(vi) Assume instead that the Kelly family home was unoccupied and locked when Inland Revenue arrived. Inland Revenue wish to access the property. Advise your client of the steps that could be taken by Inland Revenue.