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01 Oct 1999

Payment of debt by compulsory deductions from bank accounts (Oct 99) (WITHDRAWN)

Withdrawn statement RDC-3 Payment of debt by compulsory deductions from bank accounts. Statement provided for historical purposes only.


This statement has been withdrawn and is provided for historical purposes only.


This standard practice statement outlines Inland Revenue's position on the use of deduction notices for deductions from bank accounts. Inland Revenue has recently reviewed the format of the notices, how they are applied and interpretation of parts of the legislation. Changes were also required to accommodate the requirements of the new interest regime.

This statement covers:

  • monitoring of bank accounts
  • overdraft facilities
  • joint bank accounts
  • interest
  • term investments
  • income tested benefits

Application date

This policy applies to all deduction notices issued from 1 November 1998.


Section 157 of the Tax Administration Act 1994 allows deductions of tax from payments due to a defaulting customer. When a customer fails to pay any income tax, interest or civil penalty the Commissioner may issue a written notice to any person, instructuring that person to deduct funds from any amounts payable to the defaulting customer. The deductions may be a lump sum or instalments. Daily interest may also be deducted from the date of the written notice, until the amount in default has been deducted.


A customer has not paid income tax and penalties for the year ended 31 March 1997. An investigation into the case reveals that the customer has a bank account with sufficient funds to clear the amount in default. The Commissioner forwards written notice to the bank to deduct the full amount.

The following legislation is similar in content to section 157 of the Tax Administration Act 1994:

  • Section 43 of the Goods and Services Tax Act 1985
  • Section 46 of the Student Loan Scheme Act 1992
  • Section 43 of the Accident and Rehabilitation Act 1992
  • Section 46 of the Accident Compensation Act 1982
  • Section 12 of the Gaming Duties Act 1971
  • Section 130 of the Accident Rehabilitation and Compensation Insurance Act 1992
  • Section 154 of the Child Support Act 1991

Monitoring of bank accounts

In the past when a deduction notice was placed on a bank account, the account was frozen and Inland Revenue required the bank to monitor the account daily. This would continue until Inland Revenue lifted the notice or the amount in default was fully paid. This has caused the banks some problems with their relationship with some customers and the cost involved in monitoring.

After discussions with the Bankers' Association it has been agreed that the banks will not be required to monitor the accounts daily or to freeze activity on customers' accounts. However, if there is an exceptional case where Inland Revenue considers daily monitoring to be necessary, we will ask the bank to make deductions for a specific period. Inland Revenue's requirements will be discussed with the bank at the time.


The customer has a large debt, which has been outstanding for some time. Inland Revenue is aware that the customer is expecting to receive funds from an overseas source. It is known that payment will be made in the first week of the month, but the exact day of payment is not known. Inland Revenue will consult with the bank concerned and request that the account be monitored for the first week of the month.

Overdraft facilities

Inland Revenue cannot, by making a deduction from a bank account, put a customer into, or further into overdraft.

If Inland Revenue issues a deduction notice on an account which is in credit and the customer attempts to evade it by transferring funds to an overdraft, then the notice will take priority.

Joint bank accounts

Previously the Commissioner applied deduction notices to a joint account if the signatory was "either or".

This practice has recently been considered by the High Court in ANZ Banking Group (New Zealand) Limited v CIR (Unreported CP326/97). The Commissioner applied a deduction notice to a joint account. The bank refused to release the funds to the Commissioner, arguing that section 157 did not give the Commissioner the power to obtain funds from a joint bank account. The judge ruled that the Commissioner could not obtain funds from a joint account by way of a deduction notice.

The Commissioner is not appealing the decision and we will no longer apply deduction notices to any joint accounts. However, the Commissioner does have the power to deduct money from joint bank accounts under Section 155 of the Child Support Act 1991.

Family support

Section KD 4(4) of the Income Tax Act 1994 states that when an overpayment has occurred the person who received the overpayment and their spouse (if they were the spouse throughout the income year to which the overpayment relates) are jointly and severally liable for the overpayment. This allows the Commissioner to recover the overpayment as if it were payable by the spouse. The Commissioner is therefore able to apply a deduction notice to an account in the name of the spouse or a joint account in the name of the recipient and the spouse.


Section 157(1A) was introduced to reflect the new interest regime effective from 1 April 1997.

This section now allows the Commissioner to make deductions of daily interest starting on the date of the notice and ending on the day on which the amount in default has been deducted. Section 157(1B) requires the bank to calculate the daily interest if requested.

Term investments

Inland Revenue may seize money that is held in a term investment before the date that the investment is due to mature. This may result in a reduced rate of interest on the investment.

Investment portfolios

Inland Revenue may seize money that is in investment portfolios e.g. superannuation schemes. However, once the money is converted into units (no longer cash), Inland Revenue cannot access these by way of a deduction notice.


If a bank fails to make deductions required and there were funds available Inland Revenue has the power to prosecute parties who do not act on deduction notices.