Inland Revenue’s extensive powers of collection and its use of deduction notices
- Inland Revenue’s extensive powers of collection and its use of deduction notices
- Triggering a dividend through misunderstanding tax implications of transaction
- Terminal tax payment options
As the recent story about the arrest of a student loan debtor at the border revealed, Inland Revenue has quite extensive powers to chase debt.
One of the powers it uses very frequently but which is not particularly well known, is the power to request require a person to deduct money from a payment due to another person and pass it through to Inland Revenue.
These ‘Deduction notices’ are issued under Section 157 of the Tax Administration Act 1994 and Inland Revenue makes quite extensive use of them. In the year to 30 June 2019, for example, nearly 57,000 taxpayers had deduction notices issued against them. Now these notices are usually issued to banks and employers, but the object of today’s discussion is that they can be issued to other persons such as customers and suppliers.
I recently came across one such case. A client approached me and advised they had fallen behind payments on their PAYE. This is a not untypical story. Cash flow suddenly dries up, but you still have to pay PAYE and GST. The amount owed was under $50,000 and was not what I would regard as terribly significant, certainly compared with other cases I’ve handled.
What Inland Revenue did was it issued a deduction notice to one of his customers which said was ABC owes us $X and we require you to deduct $Y from any payment that you are to make to him. Now, can you imagine if you are a business and you receive a notice that one of your customers is behind on their tax? What are you likely to do? You’re likely to be concerned about your own payment schedule.
What happened for my client was that his customer took the decision to restrict the amount of work it was going to give in the future, effectively wiping out my client’s margin. And that will probably be the death knell for my client’s business.
Issuing a deduction notice is quite a big step. As I said, it involves going to a third-party supplier and saying basically this customer is in trouble. So, naturally the recipient of such a notice will take steps to protect themselves. It’s also, you could say, a massive breach of privacy, but you could probably also make a counterargument that businesses don’t want to be acting as unpaid bankers for other businesses that are struggling.
Now, the issue that has emerged in this instance is that Inland Revenue did not follow its own procedures. When we asked for a copy of the deduction notice in question Inland Revenue did not have it on file. This was a “manual notice” and Inland Revenue don’t issue many of these. For the year to June 2019, there were some seventeen hundred such notices issued, according to an Official Information Act request I made to Inland Revenue on the matter.
Generally speaking, Inland Revenue’s processes around the use of deduction notices require that the debt must have existed for 12 months before they take what is a fairly extreme step. That wasn’t the case either for my client. These cash flow issues had emerged quite recently.
So, we have an issue here where Inland Revenue haven’t followed the procedures at all. Furthermore, no attempt appears to be made to try and organise an arrangement plan, and after the notice was issued no copy was actually sent to a client. Copies of such notices are by law meant to be sent to a defaulting taxpayer.
Now Inland Revenue needs to have powers to enforce debt collection, and it does have extensive powers. But those powers must be applied properly and in accordance with the law and Inland Revenue’s own procedures. And that didn’t happen in this case. And the consequences are that the business has been hit hard, basically losing one of its major customers. And that will probably be sufficient to put the company out of business. And as a consequence of that, Inland Revenue is possibly not likely to recover the full amount that it was owed. So, it will probably turn out to be a rather counterproductive action on its part.
Now there’s a fine line to be drawn between Inland Revenue making proper use of its extensive powers and abusing those powers. And in my view, Inland Revenue crossed that line in this case. Of equal concern is the likelihood that it will bear no consequences for those actions. And that is simply wrong.
Now, moving on, you may have seen in last Saturday’s Herald a story about the unfortunate taxpayer who invested in a overseas exchange traded fund, and then had 33%, or over two thousand dollars deducted in tax when the fund was wound up.
Now, this is one of those situations involving unintended consequences which I see quite frequently. It so happened this week I encountered three similar cases where taxpayers had made assumptions about how a particular transaction would be taxed and then found out that wasn’t the case.
“It ain’t so much the things you don’t know that get you in trouble. It’s the things you know that just ain’t so.”
And that quote probably should be written into the Tax Act, because that’s exactly what I see regularly.
All the problematic transactions I encountered this week involved companies. In each case, the New Zealand tax implications of the structure were either ignored or widely misunderstood. And as a result, the effect was to trigger a dividend and a substantial tax liability. Fortunately, we’re probably going to be able to manage the fallout from each of these cases.
Two of the cases involved companies with an overseas element. Now, the provisions in the Income Tax Act around dividends are extremely broad and taxpayers frequently misunderstand how broad those provisions are.
The golden rule for any payment made by a company to a shareholder or an associate of a shareholder is that it is probably a taxable dividend and therefore withholding taxes may apply. Keeping that in mind would have saved my clients a considerable amount of bother. The warning is if you’ve got any transactions involving distributing money or changing shareholdings by using, say, the company to buy back shares as was attempted in one of these cases, you are likely to trigger adverse tax consequence. I know it sounds like a plug for my services but get advice before you do so. And incidentally, watch out for any Companies Act implications because these were also overlooked.
And finally, Friday was the due date for payment of terminal tax for the year ended 31st March 2019. That’s for anyone who is not linked to a tax agent or who has had the extension of time arrangements available to taxpayers linked to tax agencies withdrawn.
Following up from my first story this week if you are having difficulties with making your payments today, get in touch with Inland Revenue and explain the circumstances and see if you can enter into an arrangement. Inland Revenue, believe it or not, is actually quite flexible around these issues and can be quite reasonable if approached quickly enough.
Secondly, another alternative is to use tax pooling to manage the payment. Check out the podcast episode I had with Chris Cunniffe of Tax Management New Zealand about tax pooling.
For example, right now cash flow is tight for a lot of people in the wake of Christmas. But through Tax Management New Zealand, and other tax pooling entities, the opportunity exists to make use of their services and mitigate the impact of paying the tax late and reduce the interest payable.
Just finally, a quick note that people should be aware that as of 1st March, Inland Revenue will no longer accept cheques for payment of taxes.
Now the last time I looked cheques were still legal tender under the Bills of Exchange Act. And yes, cheques might be greatly inconvenient for Inland Revenue, but it is a government agency and a substantial proportion of its ‘customers’ (as it likes to call them), are elderly or either don’t actually make extensive use of, or are uncomfortable, using online payments.
So, I think the arbitrary withdrawal of cheques is something that should never have been allowed to happen. It’s discriminatory. Although I can see Inland Revenue’s point of view, if we are all now customers and as we all know the customer is always right, then if customers want to pay by cheque that should be good enough.
Well, that’s it for The Week in Tax. I’m Terry Baucher and you can find this podcast on my website, www.baucher.tax, or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, have a great week. Ka kite āno.