SPS 06/02
Issued
10 May 2006

Writing off outstanding tax (May 2006) (WITHDRAWN)

Withdrawn statement SPS 06/02 - Writing off outstanding tax. Statement provided for historical purposes only.

Withdrawn

This statement has been withdrawn and is provided for historical purposes only.

In the item titled SPS 06/02 Writing off outstanding tax published under the section "Standard practice statements" in the Tax Information Bulletin, Volume 18, No 5 (June 2006), pp 55-64, please note that paragraph 63 is incorrect.

Paragraph 63 of the standard practice statement should read:

  1. If Inland Revenue considers that recovery of part, or all of the outstanding tax would not represent an efficient use of administrative resources, then pursuant to section 176(2)(a), the outstanding tax would be written off.

Paragraph 63 in the attached SPS has now been corrected.

Introduction

  1. This Standard Practice Statement (SPS) sets out Inland Revenue's practice for granting financial relief by permanently writing off outstanding tax.

Contents

  1. Set out below are the headings of key issues discussed in this SPS:
Heading Paragraph number

Introduction

1

Contents

2

Application

3 to 6

Summary

7 to 12

Background

13 to 15

Legislation

16

Discussion

 

 

The interaction between sections 6(1), 6A and 176(1)

 

Maximising recovery of outstanding tax

17

The relationship between sections 6(1), 6A and 176(1)

18 to 22

 

 

Writing off outstanding tax

 

The financial relief application

23 to 25

Considering the taxpayer's application

26

Instances where Inland Revenue must write off outstanding tax

27 to 29

Writing off outstanding tax of taxpayers (being natural persons) due to serious hardship

30 to 41

Factors relevant to the consideration of financial relief

42 to 45

Net present value calculation

46 to 49

Writing off a company's outstanding tax

50 to 54

Struck-off companies

55 to 59

Writing off a trust's outstanding tax

60 to 62

 

 

Other issues relevant to writing off outstanding tax

 

Inefficient use of Inland Revenue's resources

63 to 65

Writing off small amounts of outstanding tax

66 to 67

Net losses and excess imputation credits

68 to 74

Instances where Inland Revenue will not write off outstanding tax

75 to 79

Reinstatement of outstanding tax

80 to 81

Reversal of write-off

82

 

 

Standard Practice

83 to 95

Application

  1. This SPS applies to all write-offs of outstanding tax from 10 May 2006. It replaces SPS RDC 620 Writing off tax debt originally published in Tax Information Bulletin Vol 14, No 11 (November 2002) and other past Inland Revenue practices.

  2. This SPS does not apply to financial support as defined in section 2(1) of the Child Support Act 1991 (ie child support payable and/or domestic maintenance payable under that Act) or to student loan repayment obligations. However, this SPS applies to an amount payable by a payer, as defined in section 153 of the Child Support Act 1991, under Part X of that Act.

  3. Please refer to SPS 05/11 Instalment arrangements for payment of tax debt for further details on Inland Revenue's practice on providing relief under sections 177, 177A and 177B of the Tax Administration Act 1994 (TAA). The SPS was published in Tax Information Bulletin Vol 17, No 10 (December 2005) and is available on Inland Revenue's website at www.ird.govt.nz.

  4. Unless specified otherwise, all legislative references in this SPS refer to the TAA.

Summary

  1. Taxpayers who cannot afford to pay their tax may apply to Inland Revenue for financial relief under section 177(1).

  2. Inland Revenue will negotiate with taxpayers to determine as soon as possible whether or not the taxpayers are eligible for financial relief and to what extent. Where Inland Revenue is unable to make an immediate decision on granting relief, the taxpayers may be required to provide additional relevant information (such as financial information) and will be required to file outstanding returns in support of the application.

  3. Inland Revenue may write off amounts that cannot be recovered. Furthermore, Inland Revenue must write off outstanding tax due to:

    • bankruptcy, or

    • liquidation, or

    • when a taxpayer's estate has been distributed.

  4. An amount written off may be reinstated if:

    • Inland Revenue receives, by operation of law, additional funds in respect of a taxpayer after the taxpayer becomes bankrupt, is liquidated or if additional funds due to the taxpayer's estate are discovered after the taxpayer's estate has been distributed (section 177C(4)), or

    • the outstanding tax was written off on the grounds of serious hardship and the taxpayer for whom the outstanding tax was written off is adjudged bankrupt or placed in liquidation within a year of the amount being written off (section 177C(7)(a) and (b)), or

    • the outstanding tax was written off on the basis of false or misleading information provided by the taxpayer (section 177C(7)(c)).

  5. Inland Revenue cannot write off outstanding tax if the taxpayer was liable to pay a shortfall penalty for taking an abusive tax position under section 141D(2) or evasion under section 141E(1) or a similar act in relation to the outstanding tax.

  6. Subject to Inland Revenue's power to reverse a write-off under section 177C, Inland Revenue now writes off outstanding tax permanently. Inland Revenue will not provisionally write off outstanding tax.

Background

  1. Since the publication of SPS RDC 620 Writing off tax debt, sections 14, 177(1), 177A(3) and 177C(6) have been amended. Sections 14B, 177C(5B) and 177C(5C) have also been inserted into the TAA.

  2. Furthermore, the High Court decisions in Raynel v CIR (2004) 21 NZTC 18,583, Clarke & Money v CIR (2005) 22 NZTC 19,165, McLean v CIR (2005) 22 NZTC 19,231, W v CIR (2005) 22 NZTC 19,602 and Rogerson v CIR (2005) 22 NZTC 19,260 have clarified how Inland Revenue may exercise the discretion under sections 177(1) and 177C and explained their relationship with sections 6 and 6A.

  3. This SPS sets out Inland Revenue's standard practice in light of these legislative changes and the recent case law.

Legislation

  1. The relevant legislative provisions are:

    • section LB 2 of the Income Tax Act 2004, and

    • sections 14B, 138E, 139B, 139BA, 141D, 141E, 174AA, 176, 177, 177A to 177C.

Discussion

Maximising recovery of outstanding tax

  1. Inland Revenue has a duty to maximise the recovery of outstanding tax from a taxpayer pursuant to section 176(1). Inland Revenue is therefore obliged to compare the value of the likely recovery from accepting taxpayers' proposals with any other viable options for recovery. In some cases, it is clear which option will maximise recovery. In other cases, there may be options that could yield similar returns. Accordingly, it is necessary to determine which option will maximise recovery.

The relationship between sections 6(1), 6A and 176(1)

  1. While Inland Revenue must maximise recovery of outstanding tax from taxpayers, this duty is subject to the overriding obligations in section 6 to protect the integrity of the tax system and section 6A to collect over time the highest net revenue that is practicable within the law.

  2. In Raynel v CIR, Randerson J referred to the following general principles in respect of sections 6 and 6A:

    • Section 6A(3) is to prevail over other provisions in the Inland Revenue Acts including section 176.

    • The obligation to collect the highest net revenue is not absolute. Inland Revenue is only required to take steps to recover that are practicable and lawful.

    • Inland Revenue is required to have regard to the resources available, the importance of promoting compliance (especially voluntary compliance) by all taxpayers, and the compliance costs incurred by taxpayers.

    • Sections 6 and 6A(3)(b) emphasise that there is a broader public interest in the integrity of the tax system and in ensuring that taxpayers meet their obligations.

  3. Section 176(1) is to be read subject to section 6 and section 6A(3). Section 176(1) does not relieve Inland Revenue officers of their duties under section 6(1) to use their best endeavours to protect "the integrity of the tax system" and under section 6A to collect over time the highest net revenue that is practicable within the law. Although Inland Revenue will consider each application for financial relief on its own merits, the duty to protect the integrity of the tax system will in certain cases require Inland Revenue to take action that (in the short term) might not be considered to maximise recovery of the revenue.
  1. When a negotiated agreement for payment of all or part of the outstanding tax would yield more than bankruptcy or liquidation action, Inland Revenue will usually enter into the negotiated agreement. Any amount not recoverable under the agreement will be written off at the time the agreement is entered into. However, as Randerson J noted in Raynel v CIR Inland Revenue may take enforcement actions against the taxpayer and may not enter into a negotiated agreement. This would be done, for example to preserve the integrity of the tax system and promote voluntary compliance by other taxpayers. This may be where there is a "flagrant and on-going failure to comply with the taxpayer's obligations and where recovery is dubious or is likely to result only in a relatively minor proportion of the overall debt being recovered."

  2. For example, a taxpayer has outstanding tax of $100,000 and makes an offer of $75,000 to settle the arrears over a period of three years. Inland Revenue considers that bankruptcy would only yield $50,000 and that there are no other viable avenues for recovery. In this instance, Inland Revenue would consider writing off $25,000 and entering into an instalment arrangement over three years for $75,000.

The financial relief application

  1. Taxpayers may apply for financial relief pursuant to section 177(1). The financial relief may be in the form of:

    • an instalment arrangement for all of the outstanding tax, or

    • an instalment arrangement for part of the outstanding tax and a write-off of the remaining balance (a partial write-off), or

    • a write-off of all of the outstanding tax.

    (Please also refer to SPS 05/11 Instalment arrangements for the payment of tax debt.)
     

  2. Taxpayers can apply by telephone or in writing (including by facsimile and secure email on Inland Revenue's Online Correspondence Service) for a write-off of outstanding tax on the grounds of serious hardship.

  3. In some cases, Inland Revenue will require taxpayers to apply for financial relief by notice in writing under section 177(2). For example, where the taxpayer's serious hardship is caused by a number of factors which require evidence in writing or where the taxpayer has related parties, such as a partnership or company, that have outstanding tax to pay. Pursuant to section 14B, where taxpayers are required to apply for financial relief by giving notice in writing to Inland Revenue, the taxpayers may do so by:

    • delivering the notice in person to an Inland Revenue office, or

    • issuing the notice by facsimile to an Inland Revenue office, or

    • sending an email on Inland Revenue's Online Correspondence Service, or

    • sending the notice to an Inland Revenue office by post.

Considering the taxpayer's application

  1. Upon receipt of an application for writing off outstanding tax, Inland Revenue may:

    1. Accept the taxpayer's request.

      Once the request is accepted and outstanding tax is written off, the taxpayer will receive written notification. This will include:

      • the tax type(s), the relevant period(s) and the amount(s) of outstanding tax written off, and

      • the remaining net losses and/or excess imputation credits carried forward, after these have been extinguished, and/or

      • the outstanding tax under an instalment arrangement plus interest, when a taxpayer is granted a partial write-off of outstanding tax and the balance remaining is placed under an instalment arrangement.

      However, the written notification will not include the exact amount of interest payable by the taxpayer under the instalment arrangement. This is because the total amount of interest payable may vary with the interest rate and/or increased instalment payments during the course of the arrangement.

      When a taxpayer proposes to make a lump sum payment in full settlement of outstanding tax on a specific future date, Inland Revenue will notify the taxpayer in writing of the total amount of outstanding tax and interest that the taxpayer must pay on that date.

    2. Seek further information from the taxpayer.

      When considering an application for serious hardship, Inland Revenue must assess the taxpayer's financial circumstances based on the information provided. Inland Revenue may ask taxpayers to provide additional information and will also require them to file any outstanding returns.

      Inland Revenue must, under section 6(1), have regard to protecting the integrity of the tax system to ensure fairness to all taxpayers.

      If additional information is required, Inland Revenue will allow the taxpayer reasonable further time to comply with the request. However, if the taxpayer provides the required information outside the time allowed, the receipt of the information will be treated as a new request for financial relief.

      For example, a taxpayer has outstanding income tax for the 2004 tax year. The taxpayer applies for outstanding tax to be written off on the grounds of serious hardship. The taxpayer's income tax return for the 2004 tax year shows a net loss carried forward. However, the 2003 income tax return is yet to be filed. Inland Revenue may require the taxpayer to provide additional information such as the calculation of the net loss and to file the income tax return in the 2003 tax year before accepting the taxpayer's request for financial relief.

    3. Make a counter offer.

      When a taxpayer requests a write-off of outstanding tax, Inland Revenue may make a counter offer to the taxpayer. This will occur when Inland Revenue considers the taxpayer can afford to make a lump sum payment or enter into an instalment arrangement for part of the outstanding tax and therefore a partial write-off is more appropriate.

    4. Decline the taxpayer's request.

      Inland Revenue may decline to accept a taxpayer's request for a write-off if it is considered that the taxpayer is able to pay the outstanding tax in full. For example, a taxpayer has term deposits or other investments or the ability to borrow sufficient funds to pay the outstanding tax.

      Inland Revenue may also decline to accept a taxpayer's request for a write-off if the taxpayer has not provided sufficient information to support their request.

      Where Inland Revenue declines the taxpayer's request for financial relief, both initial and incremental late payment penalties will be imposed and interest will accrue as if the taxpayer had not made the request.

Instances where Inland Revenue must write off outstanding tax

  1. Inland Revenue must write off amounts that cannot be recovered from a natural person due to bankruptcy.

  2. When a person is bankrupt, Inland Revenue will write off outstanding tax that cannot be recovered upon receipt of:

    • a final dividend, or

    • advice from the Official Assignee that there will be no dividend to Inland Revenue,

    provided that Inland Revenue does not challenge the Official Assignee's advice. Furthermore, pursuant to section 177C(2)(b), Inland Revenue must write off a company's outstanding tax that cannot be recovered if the company is in liquidation. Please refer to paragraph 54 for more details.

  3. When an estate has been distributed, Inland Revenue must write off the outstanding tax upon receipt of confirmation from the administrator that the estate has been distributed.

Writing off outstanding tax of taxpayers (being natural persons) due to serious hardship

  1. Taxpayers (being natural persons) applying for financial relief on the grounds of serious hardship pursuant to section 177(1) should explain why recovery would place them in serious hardship. The application should include supporting financial information.

  2. Written applications will not be required when it is evident from information already available that recovery would place the taxpayers in serious hardship. This may happen where taxpayers request relief by way of an instalment arrangement but an examination of the information obtained reveals that repayment, even by way of an instalment arrangement, would place the taxpayers in serious hardship.

  3. Inland Revenue will consider each application made pursuant to section 177(1) on its own merits, subject to the overriding obligations in section 6 to protect the integrity of the tax system and section 6A to collect over time the highest net revenue that is practicable within the law.

  4. Section 177A defines "serious hardship". In order for Inland Revenue to determine if an individual would be placed in serious hardship, Inland Revenue will request relevant details of the person's financial position. These may include and are not limited to:

    • details of income and expenditure,

    • assets and liabilities,

    • a 12-month cash flow projection,

    • asset valuations,

    • a statement of financial performance,

    • a statement of financial position,

    • a list of debtors and creditors.

  5. Pursuant to section 177A(1)(a) in considering whether taxpayers, being natural persons, will be placed in serious hardship, Inland Revenue will have regard to the following:

    • whether the taxpayers will be unable to meet minimum living expenses according to normal community standards, or

    • the cost of medical treatment for an illness or injury of the taxpayers or the taxpayers' dependants, or

    • a serious illness suffered by the taxpayers or the taxpayers' dependants, or

    • the cost of education for the taxpayers' dependants.

  6. Whether a person is a taxpayer's "dependant" for the purposes of paragraph 34 will be determined on a case-by-case basis. In determining dependency issues, Inland Revenue will consider:

    • whether the person is dependent on the taxpayer for financial support, and

    • what degree of financial support is provided by the taxpayer, and

    • to what extent providing financial support affects the taxpayer's ability to meet minimum living expenses according to normal community standards.

  7. Pursuant to section 176(2)(b), Inland Revenue may not recover outstanding tax to the extent that the recovery would place taxpayers, being natural persons, in serious hardship. However, where taxpayers apply for financial relief and their financial difficulties are a result of their obligation to pay outstanding tax, the taxpayers will not meet the grounds for serious hardship under section 177A(1)(a). This is because serious hardship does not include financial difficulties that arise from the taxpayer's obligation to pay tax under section 177A(1)(b). The serious hardship rules should not be regarded as a means of avoiding the obligation to pay tax. To allow otherwise would compromise the integrity of the tax system.

  8. Pursuant to section 177A(1)(b), serious hardship does not include financial difficulties that arise because:

    • the taxpayers are obligated to pay tax, or

    • the taxpayers may become bankrupt, or

    • the taxpayers' or the taxpayers' dependants' social activities and entertainment may be limited, or

    • the taxpayers are unable to afford goods or services that are expensive or of a high quality or standard according to normal community standards.

  9. Regarding the last bullet point in paragraph 37, while normal community standards must be considered in the context of the wider community of all New Zealand, the actual expenditure of taxpayers in different parts of the country may vary due to, for example higher or lower housing costs, commodity or travel expenses. When calculating taxpayers' minimum living expenses, Inland Revenue will consider the costs of food, heating and accommodation in accordance with normal community standards based on information provided on a geographical basis by Statistics New Zealand.

  10. In some situations, a decision on financial relief can be made immediately. In others, further information may be required. Pursuant to section 177(4), taxpayers must provide the information within 20 working days (although a longer period may be allowed by Inland Revenue). Incremental late payment penalties will not be imposed under section 139B(2B) during this period, provided financial relief is granted. If taxpayers request the write-off before the payment due date, the 4% initial late payment penalty under section 139B(2A)(b) will also not be imposed. However, interest will continue to accrue on a daily basis. (Please refer to SPS 05/10 Remission of penalties and interest, which was published in Tax Information Bulletin Vol 17, No 9 (November 2005) and is available on Inland Revenue's website at www.ird.govt.nz.)

  11. In some instances, taxpayers may be able to pay part of the outstanding tax, but recovery of the full amount would place the taxpayer in serious hardship. In these cases, Inland Revenue will negotiate a lump sum payment or an instalment arrangement with the taxpayers and write off the irrecoverable amount. The irrecoverable amount will be written off at the time the instalment arrangement is entered into.

  12. For example, a taxpayer has outstanding tax of $8,000 and has been putting funds aside to clear this amount by the due date. However, at the due date they have only managed to save $2,000 towards this amount. Due to the taxpayer's financial circumstances, any payment over and above the $2,000 they have saved would cause difficulty in meeting their day-to-day living expenses. Inland Revenue accepts the lump sum payment of $2,000 and writes off the balance on the grounds of serious hardship as it is not feasible for Inland Revenue to enter into an instalment arrangement for payment of the outstanding $6,000.

Factors relevant to the consideration of financial relief

  1. Inland Revenue may have regard to a number of factors when considering applications for financial relief. In Clarke & Money v CIR, Priestley J referred to the following factors as relevant to the exercise of the discretion under section 177:

    1. the circumstances which led to the taxpayers' outstanding tax,

    2. the nature and extent of the taxpayers' co-operation and negotiating stance,

    3. the speed with which the taxpayers have provided requested information, and the extent of that information, and

    4. Inland Revenue's duties under sections 6 and 6A.
  1. In Raynel v CIR, Randerson J noted that where there has been a flagrant and on-going failure to comply with the taxpayers' obligations and where recovery is dubious or is likely to result only in a relatively minor proportion of the overall outstanding tax being recovered, Inland Revenue may be justified in initiating or continuing enforcement proceedings to secure the wider interests identified by the legislation.

  2. In Rogerson v CIR, Potter J held that Inland Revenue is entitled to consider the whole history of compliance and non-compliance by the taxpayer in the context of the obligation to preserve the integrity of the tax system.

  3. Pursuant to section 138E(1)(e)(iv), there is no statutory right to challenge or object to any decision of Inland Revenue to grant or cancel relief. However, if taxpayers do not agree with Inland Revenue's decision not to grant relief, the taxpayers may request that the decision be reviewed by the officer involved or their superior officer. The decision may also be reviewed by the Ombudsman or by way of judicial review.

Net present value calculation

  1. Whilst unnecessary in most circumstances, one method of distinguishing between alternative repayment options is to apply a net present value calculation.

  2. A net present value calculation recognises the time value of money, as well as the probability of payment (risk). The proposed payments are discounted for the time value of money and for the likelihood of receiving the money. Inland Revenue needs to determine the amount, date, and probability of each payment and apply an appropriate discount rate. The discount rate is calculated from published government stock rates.

  3. Inland Revenue uses a calculation that multiplies the amount of payment by the probability of payment (for risk), divided by the discount factor appropriate to the term (for interest).

  4. Please refer to the appendix to Tax Information Bulletin Vol 6, No 14 (June 1995) for:

    • the methodologies for determining the discount rate, probabilities of payment and net present value, and

    • examples of assessments of the probabilities of payment being made in particular circumstances.

Writing off a company's outstanding tax

  1. Serious hardship generally applies to natural persons only. A company cannot apply for outstanding tax to be written off on the grounds of serious hardship. However, Inland Revenue may take into account whether the recovery of outstanding tax would place a shareholder who owns, or two shareholders who jointly own, 50% or more of the shares in a company or a shareholder-employee of a close company in serious hardship.

  2. A "close company" for these purposes means a company which has five or fewer natural persons whose voting interest(s) or market value interest(s) in the company exceed 50% and is not a special corporate entity.

  3. Pursuant to section 177C(1), Inland Revenue may also write off a company's outstanding tax if it is consistent with the duty to maximise recovery under section 176(1), subject to the overriding obligations in section 6 to protect the integrity of the tax system and section 6A to collect over time the highest net revenue that is practicable within the law. In some cases, Inland Revenue may enter into an instalment arrangement for part of the company's outstanding tax and then write off the remaining balance.

  4. For example, a close company owes outstanding tax of $300,000 and its only asset is a debit balance in the principal shareholder's current account of $300,000. If the company were placed into liquidation, the $300,000 in the current account would be called up. The shareholder's personal assets are a house valued at $290,000 and a car valued at $7,000. Inland Revenue recognises that any action taken to liquidate this company could place the shareholder in serious hardship. The company agrees to pay to Inland Revenue the sum of $220,000, borrowed against the principal shareholder's home. The balance of the outstanding tax will be written off, as collection of the amount would cause the shareholder serious hardship.

  5. When a company is in liquidation, Inland Revenue will write off outstanding tax that cannot be recovered upon receipt of:

    • a final distribution, or

    • advice from the liquidator that there will be no distribution to Inland Revenue,

    provided that Inland Revenue does not challenge the liquidator's advice.

Struck-off companies

  1. Inland Revenue officers may discuss with a person who was, immediately before a company was removed from the New Zealand register at the Companies Office (commonly known as "struck-off"), a director or authorised officer of the company, matters relating to outstanding returns and tax arising prior to the company being struck off.

  2. Inland Revenue will consider an application for writing off outstanding tax by a shareholder, director or authorised officer of a struck-off company after they have restored the company's New Zealand register at the Companies Office.

  3. Inland Revenue cannot consider an application for financial relief of a struck-off company prior to the restoration of the company's New Zealand register. This is because the struck-off company ceases to be a person and therefore is not a taxpayer when it has been removed from the New Zealand register. In some cases, Inland Revenue may restore the company to the New Zealand register for purposes such as recovering outstanding tax or prosecuting company directors for failing to account for PAYE.

  4. In other cases, Inland Revenue may not restore the company to the New Zealand register. Inland Revenue may apply to the High Court for an appointment of a liquidator to liquidate the struck-off company under section 327 of the Companies Act 1993. For example, Inland Revenue may do so even if there is no prospect of recovering the outstanding tax from the struck-off company. (Please refer to paragraph 54 regarding writing off the outstanding tax of a liquidated company).

  5. However, Inland Revenue may also consider a write-off of a struck-off company's outstanding tax that cannot be recovered pursuant to section 177C subject to the overriding obligations in section 6 to protect the integrity of the tax system and section 6A to collect over time the highest net revenue that is practicable within the law.

Writing off a trust's outstanding tax

  1. A trust cannot apply for outstanding tax to be written off on the grounds of serious hardship pursuant to section 177(1)(a) either itself and/or by its trustees. Serious hardship generally applies to natural persons only and the Commissioner generally considers that a trustee of a trust is not acting as a natural person in that capacity.

  2. However, Inland Revenue may consider writing off a trust's outstanding tax pursuant to section 177C(1) if that tax cannot be recovered. In determining whether a trust's outstanding tax is irrecoverable, Inland Revenue will also consider whether the trustees can satisfy the outstanding tax in their capacity as trustees or personally. If Inland Revenue cannot recover the outstanding tax from the trust or its trustees, the outstanding tax will be considered as irrecoverable for the purposes of section 177C(1).

  3. Inland Revenue will exercise its discretion to write off under section 177C(1) on a case-by-case basis and subject to the obligations in section 6 to protect the integrity of the tax system and section 6A to collect over time the highest net revenue that is practicable within the law.

Inefficient use of Inland Revenue's resources

  1. If Inland Revenue considers that recovery of part, or all of the outstanding tax would not represent an efficient use of administrative resources, then pursuant to section 176(2)(a), the outstanding tax would be written off.

  2. This is consistent with Inland Revenue's duty pursuant to section 6A(3) to collect over time the highest net revenue that is practicable within the law having regard to the resources available to Inland Revenue.

  3. However, taxpayers cannot require that outstanding tax be written off simply because they consider that collection would result in an inefficient use of Inland Revenue's resources. The provision of relief under section 176(2)(a) is discretionary and acknowledges that Inland Revenue has limited resources to collect outstanding tax and, in some instances, the cost of collection may be higher than the outstanding tax. A decision to write off on the basis that recovery would represent an inefficient use of Inland Revenue's resources will be made on a case-by-case basis. Again, pursuant to section 6A(3)(b), Inland Revenue will consider the effect of the proposed write-off on overall compliance, from an efficiency perspective.

Writing off small amounts of outstanding tax

  1. Inland Revenue may permanently write off outstanding tax under section 174AA(a) where the balance of the tax payable is not more than $20. In exercising its discretion Inland Revenue may consider the factors referred to in this SPS.

  2. Inland Revenue can only reverse a write-off or reinstate outstanding tax under section 177C. Inland Revenue will not reinstate outstanding tax written off under section 174AA(a).

Net losses and excess imputation credits

  1. From the 2005-06 income year onwards, pursuant to section LB 2(3B) and (3C) of the Income Tax Act 2004, a taxpayer, who is not:

    1. a company,

    2. a trustee (other than the Maori trustee),

    3. a Maori authority, or

    4. a taxpayer whose imputation credits giving rise to the credit of tax is category A income of the trustee of a group investment fund,

    must carry any excess imputation credits forward. In determining such a taxpayer's application for writing off outstanding tax, Inland Revenue will consider whether the taxpayer has net losses and/or excess imputation credits carried forward from a previous year.

  2. Pursuant to section 177C(5), if Inland Revenue writes off outstanding tax for a taxpayer with net losses, Inland Revenue must extinguish all or part of the taxpayer's net losses, by dividing the amount written off by 33% and reducing the net losses by that amount.

  3. If the taxpayers have excess imputation credits carried forward from a previous year, then pursuant to section 177C(5B) all or part of these tax credits will be extinguished on a dollar-for-dollar basis when outstanding tax is written off.

  4. When the taxpayers (except those listed in paragraph 72) have both net losses and excess imputation credits carried forward from a previous year, the net losses will be extinguished first. It should be noted that the taxpayers' net losses and/or excess imputation credits can be extinguished even if the outstanding tax written off is of a type other than income tax.

  5. For a taxpayer who is:

    1. a company,

    2. a trustee (other than the Maori trustee),

    3. a Maori authority, or

    4. a taxpayer whose imputation credits giving rise to the credit of tax is category A income of the trustee of a group investment fund,

    only net losses will be extinguished if the taxpayer applies for writing off outstanding tax and Inland Revenue accepts the application.

  6. Taxpayers must file all earlier outstanding tax returns (ie outstanding returns relating to tax years prior to the tax year in which the outstanding tax arises) before their application for a write-off of outstanding tax will be considered. Any net losses and/or excess imputation credits will not be extinguished under section 177C(5) and (5B) until all outstanding tax returns are filed. Inland Revenue may then calculate the net losses using the taxpayers' most recently filed income tax return.

  7. For example, in July 2005, a taxpayer applies for writing off their outstanding income tax for the 2005 tax year. The taxpayer's 2002 income tax return shows net losses carried forward to the 2003 tax year. However, the 2003 and 2004 income tax returns remain outstanding. The outstanding tax will not be written off and the net losses will not be extinguished until the 2003 and 2004 income tax returns are filed.

Instances where the Inland Revenue cannot write off outstanding tax

  1. Pursuant to section 177C(3), Inland Revenue cannot write off outstanding tax if the taxpayer was liable to pay, in relation to that outstanding tax, a shortfall penalty for, either taking an abusive tax position under section 141D(2) or evasion under section 141E(1) or a similar act. This means that recovery action to collect both the shortfall penalty and the underlying tax will continue even if recovery would place a taxpayer in serious hardship.

  2. Inland Revenue will distinguish between outstanding tax arising from such assessments and other arrears so that part of the taxpayer's total outstanding tax may be written off if the required criteria are met, leaving the tax to which the shortfall penalty applies and the penalty itself outstanding. The outstanding tax that cannot be written off due to section 177C(3) also includes late filing and payment penalties imposed, and use-of-money interest accruing, on the underlying tax that was subject to the shortfall penalty for evasion or taking an abusive tax position.

  3. Inland Revenue must protect the integrity of the tax system while also trying to maximise recovery of outstanding tax. (Please refer to paragraphs 18 to 22 for the discussion on the relationship between sections 6(1), 6A and 176(1).) Where section 177C(3) applies, Inland Revenue will consider other options for recovering the underlying tax and shortfall penalty, such as an instalment arrangement if negotiated by the taxpayer. Please refer to SPS 05/11 Instalment arrangements for the payment of tax debt.

  4. For example, a taxpayer has outstanding GST for the 31 March 2004 return period and also has outstanding income tax for the 2004 tax year including a shortfall penalty for taking an abusive tax position. In this instance, where the criteria for serious hardship are met, the outstanding GST can be written off. However, the outstanding income tax will not be written off, regardless of whether recovery will cause serious hardship.

  5. The application of section 177C(3) is suspended when taxpayers challenge the imposition of a shortfall penalty for taking an abusive tax position or evasion in a hearing authority. This is because the taxpayers are not liable to pay the shortfall penalty during the challenge. However, Inland Revenue will not consider writing off the taxpayers' outstanding tax until after the hearing authority has ruled on the issue of the imposition of the shortfall penalty.

Reinstatement of outstanding tax

  1. Pursuant to section 177C(4) Inland Revenue may only reinstate all or part of outstanding tax that has been written off if Inland Revenue receives, by operation of law, additional funds in respect of the taxpayer:

    • after the taxpayer has become bankrupt or has been liquidated, or

    • if additional funds due to the taxpayer's estate are discovered after the taxpayer's estate has been distributed.

  2. For example, Inland Revenue writes off a bankrupt taxpayer's outstanding tax under section 177C(2) after the Official Assignee declares that no dividend will be payable and closes the file. The Official Assignee subsequently discovers a previously unknown bank account with a credit balance. The Official Assignee makes a dividend payment to the creditors. In this instance Inland Revenue will reinstate the outstanding tax under section 177C(4) and credit the dividend received to the taxpayer's account.

Reversal of write-off

  1. In addition to section 177C(4), section 177C(7) allows Inland Revenue to reverse a write-off in the following circumstances:

    • the taxpayer, being a natural person, declares bankruptcy within a year of the outstanding tax being written off on the grounds of serious hardship.

    • the taxpayer, being a natural person, is subject to bankruptcy proceedings brought by a creditor within a year of the outstanding tax being written off on the grounds of serious hardship.

    • the taxpayer, being a company, is liquidated within a year of the outstanding tax being written off on the grounds of serious hardship.

    • the taxpayer, being a company, is in the course of being liquidated within a year of the outstanding tax being written off on the grounds of serious hardship.

    • the outstanding tax was written off on the basis of false or misleading information provided by the taxpayer, for example, where a taxpayer has unreasonably overstated outgoings or understated income or where a taxpayer has a vested right to income or assets of a trust, and this was not disclosed to Inland Revenue.

Standard Practice

  1. Upon receipt of taxpayers' applications for writing off outstanding tax, Inland Revenue has four options:

    1. accept the taxpayers' request, or

    2. seek further information from the taxpayers, or

    3. make a counter offer, or

    4. decline the request.

  2. Inland Revenue will take into account the following factors when considering taxpayers' applications for a write-off of outstanding tax:

    1. Whether the proposal will place the taxpayers, being natural persons, in serious hardship.

    2. Whether the value of the taxpayers' proposals when compared to other options would maximise the recovery of outstanding tax from the taxpayers.

    3. Whether the taxpayers are in a position to pay all or part of the outstanding tax immediately.

    4. Whether the taxpayers have filed all required returns.

    5. Whether other relevant factors exist (such as those identified in paragraphs 42 to 45).

  3. When considering taxpayers' applications, Inland Revenue may require the taxpayers to provide additional information within 20 working days (or such longer period that may be allowed by Inland Revenue). This may include financial information and will include the filing of any outstanding returns.

  4. Taxpayers must provide the required information within the allowed timeframe. Information received outside the allowed timeframe will be treated as a new request for financial relief. If Inland Revenue subsequently declines to grant financial relief to the taxpayers, both initial and incremental late payment penalties will be imposed and interest will accrue as if the request for financial relief had not been made.

  5. Inland Revenue may permanently write off outstanding tax under section 174AA(a) where the balance of the tax payable is not more than $20.00. In exercising the discretion Inland Revenue may consider the factors referred to in this SPS.

  6. Inland Revenue cannot write off outstanding tax if the taxpayers were liable to pay a shortfall penalty for taking an abusive tax position under section 141D(2) or evasion under section 141E(1) or a similar act in relation to the outstanding tax.

  7. A trust cannot apply for outstanding tax to be written off on the grounds of serious hardship pursuant to section 177(1)(a) either itself and/or by its trustees. Serious hardship applies to natural persons only and the Commissioner generally considers that a trustee of a trust is not acting as a natural person in that capacity.

  8. However, Inland Revenue may consider writing off a trust's outstanding tax pursuant to section 177C(1) if that tax cannot be recovered. In determining whether a trust's outstanding tax is irrecoverable, Inland Revenue will also consider whether the trustees can satisfy the outstanding tax in their capacity as trustees or personally. If Inland Revenue cannot recover the outstanding tax from the trust or its trustees, the outstanding tax will be considered as irrecoverable for the purposes of section 177C(1).

  9. When writing off outstanding tax, Inland Revenue must extinguish all or part of any net losses carried forward from the taxpayers' most recent income tax return and/or any excess imputation credits.

  10. Where the taxpayers (except those listed in paragraph 72 of the SPS) have both net losses and excess imputation credits carried forward from a previous year, the net losses will be extinguished first.

  11. Taxpayers must file all earlier outstanding tax returns before their applications for a write-off of outstanding tax will be considered. Any available net losses and/or excess imputation credits will not be extinguished under section 177C(5) and (5B) until all outstanding tax returns are filed. Inland Revenue may then calculate the net losses using the taxpayers' most recently filed income tax returns.

  12. When Inland Revenue writes off outstanding tax, the taxpayers will be notified in writing of the financial relief granted and of the remaining value of any net losses or excess imputation credits carried forward.

  13. Pursuant to section 138E(1)(e)(iv), there is no statutory right to challenge or object to any decision of Inland Revenue to grant or cancel relief. However, if taxpayers do not agree with Inland Revenue's decision not to grant relief, the taxpayers may request that the decision be reviewed by the officer involved or their superior officer. The decision may also be reviewed by the Ombudsman or by way of judicial review.

This Standard Practice Statement is signed on 10 May 2006.

Graham Tubb National Manager,
Technical Standards