Terry Baucher is surprised by recent IRD behaviour, suggests debate and Parliament legislating is appropriate for some of it

Terry Baucher is surprised by recent IRD behaviour, suggests debate and Parliament legislating is appropriate for some of it

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irritated at Inland Revenue’s habit of calling or texting clients directly with “reminders”, all too often based on out of date information.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 22 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. 

--------------------

*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

11 Comments

Comment Filter

Highlight new comments in the last hr(s).

This all sounds like medieval practise and just asks to be abused. Why not put the IRD on the same terms as unsecured creditors?

Just one more example of NZ highly anti small business bureaucratic culture - they are expected to act as unpaid tax collectors and are assumed to be guilty until proved innocent.

What frustrates me with IRD is they inevitably go for the little guy who has limited resources to fight. Yet they turn a blind eye to the likes of Google, Facebook, along with many other global organisations who blatantly flaunt the system.

The tax revenue these business avoid through transfer pricing, tax loopholes etc. is enormous, however IRD is scared to "take them to task".

IRD need to grow some balls, throw some money at these things, employ some top notch commercial lawyers, and tax experts and go for the jugular.

Furthermore its only taken IRD what appears a lifetime to finally start honing in on the property sector which is rife with tax avoidance. Investors have enjoyed massive capital gains by adopting negative gearing practices for decades, all whilst the rbnz, and government of the day have been doing there dandiest to ensure the property market doesn't collapse.

The whole thing is laughable.

It's not the IRD Kane02. Its the Government who make the tax laws. Trouble with the Nats is that they prefer the interest of their big business buddies over the interests of New Zealanders.

Actually I think it's the failure to distinguish between lending for a productive purpose (such as building a house or factory, or research and development) or for a parasitic one (bidding to pay more loan interest for existing assets).

If money is borrowed for a productive purpose there is a long term benefit. Both parties benefit. If all that has happened is that one house owner has sold to another and the total debt has gone up then there is no long term benefit - but there is a wealth transfer. Most of our economic and tax confusion can be traced to muddling the two types of transactions up.

Correct in terms of CGT. But it isn't just a National issue. The same could be leveled at Labour.

Taking on FB, Google and the like, this is purely and simply IRDs domain. Most NZ businesses advertise on these platforms to attract domestic customers. The costs are very high. The revenue generated is also domiciled here. Why are google and FB not declaring revenue in NZ? I would have thought it is a no brainer for IRD to challenge. First and foremost IRD should assess, and put the onus on both to prove that the income was generated offshore.

Yes, I agree. I guess my view is these issues arise because of structural flaws in how we approach taxation. If it is fairer, there is less incentive to cheat. If we extended taxation on turnover (eg GST) at a low rate (eg 12%) to all goods and services (including interest and rent payments) this would mean we could lower the rate on the overtaxed parts of the productive economy (eg income tax and company tax).
If company tax on profits was 12% then Google would not need to move their profits offshore and they would instead move jobs here.

At the moment the finance sector is the biggest tax bludger of them all.

what about all the property investors who brought properties then sold them a little time because of a change of circumstances and never paid a cent

When the tax man comes a knockin', be afraid, be very afraid!

Indeed. I think few are fully aware of IRD's powers and the depth of information they have automatic access to.

Its interesting the net result of Sect 157 notices on a debtor to a client whom is in tax arrears would probably be liquidation.... and the liquidator would surely apply to have the payment reversed to ensure repayment of debt in priority... makes me think that the implications are not examined. In respect of the proceeds of crime could a default assessment be seen as enough to use this "nuclear bomb". Ultimately hard line tactics make IRD less approachable which is a shame because as a tax agent I like working with people that have an element of common sense, morality and ethics.

Maybe the IRD has been trying softer methods on these companies in the past to no avail and hence the use of section 157 now? We are not being told the whole story here I suspect.
If not then all they are going to do is force the company out of business, in which case they will possibly get no back taxes at all? Either way, it seems someone doing business with the targeted company is likely to go elsewhere with their business so as to not have to get caught up in the red tape and bad feelings perpetrated by the IRD forcing a strained business relationship between the two businesses.