By Terry Baucher*
In its 2015 Annual Report Inland Revenue announced it had been able to reduce the total amount of overdue tax debt from $5.471 billion at 30 June 2014 to $5.153 billion at 30 June 2015.
This included collecting $4.7 billion from debt cases over the year, an increase of $600 million from the 2013-14 year.
Much of how Inland Revenue achieved this result is through good business practice: intervene early and don’t let the problem escalate.
It hasn’t gone smoothly however; I and many other tax agents have been irritated at Inland Revenue’s habit of calling or texting clients directly with “reminders”, all too often based on out of date information.
As part of its tax gathering activities Inland Revenue has been springing a few unwelcome surprises through the use of powers specifically available to it and others originally intended for another purpose.
One such surprise was when a client received a deduction notice under section 157 of the Tax Administration Act 1994. It was the first such notice I have seen after twenty two years of practice.
The deduction notice my client received required him to deduct 100% from payments made to one of his suppliers. The supplier in question apparently owed almost $100,000 in tax, penalties and use of money interest.
The supplier later advised me that at least three other customers had received similar notices.
Ponder what processes Inland Revenue would have followed in this case. Firstly, it obtained details of the defaulting taxpayer’s bank records, determined who was making regular payments to it and then cross-referenced that information with Inland Revenue’s own records. Once it had identified the defaulting taxpayer’s key customers Inland Revenue then issued the relevant section 157 deduction notices.
It’s a good example of how thorough Inland Revenue will be in exercising its powers. Quite by coincidence, in the same week a colleague reported that one of his clients had also received a section 157 notice. This time it was for one of the client’s employees and the sum outstanding was the grand total of $157.60. The deduction rate applicable was a rather more reasonable 20%, the maximum allowable under the section in relation to deductions from employees.
It’s worth noting that as well as income tax, GST and associated penalties and interest, section 157 deduction notices can be issued in relation to child support and student loan payments and gaming duties.
Although new to me, section 157 notices have been part of Inland Revenue’s armoury for at least 40 years now. It more frequently uses section 157 deduction notices to require banks to make deductions from their customers’ accounts which from 2010 includes accounts in joint names.
Inland Revenue’s practice on the use of deduction notices is set out in Standard Practice Statement SPS 11/04. Although a bank can be required to pay over the entire credit balance of an account, deductions can’t be made from an overdrawn account or exceed the credit balance available.
As to how many deduction notices Inland Revenue issues, in response to a (rejected) submission to Parliament in 2010 by the New Zealand Institute of Chartered Accountants, Inland Revenue officials noted: “Since 1 July 2007 Inland Revenue has issued approximately 9,000 deduction notices to banks.”
But sometimes Inland Revenue considers its powers under section 157 are not enough so recently it has begun using powers not specifically intended for its use. Last month, an accountant contacted me seeking assistance after the police served one of his clients with a restraining order under the Criminal Proceeds (Recovery) Act 2009 (“the CPRA”). The order prevented the sale of three properties owned by the client and related entities.
Again, it was the first such order either the accountant or I had seen. The CPRA seems to be the nuclear bomb of the criminal justice system. It’s intended to counter organised crime by establishing a regime for the forfeiture of property which “proposes to;
a) eliminate the chance for persons to profit from undertaking or being associated with significant criminal activity;
b) deter significant criminal activity; and
c) reduce the ability of criminals and persons associated with crime or significant criminal activity to continue or expand criminal enterprise…”
What makes the CPRA so powerful is that under section 4 the Act applies “WITHOUT THE NEED FOR A CONVICTION” (my emphasis). The key to using the CPRA to either restrain or seize assets, is therefore what represents “significant criminal activity”.
The term is defined by section 6 of the CPRA as meaning: “an activity engaged in by a person that if proceeded against as a criminal offence would amount to offending— a) that consists of, or includes, 1 or more offences punishable by a maximum term of imprisonment of 5 years or more; or b) from which property, proceeds, or benefits of a value of $30,000 or more have, directly or indirectly, been acquired or derived.”
Under section 143B of the Tax Administration Act, tax evasion is punishable by imprisonment of up to five years so tax evaders would appear to be caught under the CPRA. But even without that specific provision note that the CPRA applies to anyone who evaded tax of $30,000 or more.
To put that in context a GST registered person who didn’t declare $100,000 of income over a four or five year period, would appear to be fair game under the CPRA. Why, given its ability to deduct funds under section 157, would Inland Revenue use the CPRA? The answer appears to be because Inland Revenue can only issue a deduction notice in respect of tax in default. But in a tax evasion case the tax has not yet been assessed so the taxpayer is not in default.
Therefore, from Inland Revenue’s perspective, applying for a restraining order under the CPRA is a quick way of ensuring any tax eventually found due will be recovered. This also makes it a very useful negotiating tool during an audit. I therefore expect to see Inland Revenue make increasing use of the CPRA’s powers.
An order under the CPRA will be a real shock to any recipient. The question is whether it is right that Inland Revenue makes use of such orders when it already has very extensive powers specifically available to it.
If Inland Revenue wants similar powers to those within the CPRA shouldn’t Parliament explicitly legislate for that? Then a proper debate can be held about whether those powers are appropriate. In the meantime tax evaders should be very wary and start getting their affairs in order.