Arrangements for payment of debt (Apr 01) (WITHDRAWN)

Introduction

This Standard Practice Statement states the Commissioner's practice on providing relief by way of an arrangement when taxpayers are in debt with Inland Revenue. It does not relate to arrangements for payment of child support arrears.

The legislation that allows the Commissioner to enter into arrangements for payment of tax debt was amended on 10 October 2000 to:

• dispense with the requirement that applications for arrangements be made in writing;
• extend the relief provisions to include all taxes and duties (limited exceptions apply);
• remove the requirement to obtain approval from the minister of finance where the amount of relief sought exceeds $50,000.

This Standard Practice Statement refers in part to Tax Information Bulletin Volume Six, No 14 (June 1995), taxpayers in financial difficulties. The TIB should be read as if updated for the legislation changes described above.

Application

This Standard Practice Statement replaces Standard Practice Statement RDC 6 originally published in Tax Information Bulletin Volume Twelve, No 3 (March 2000). This amended Standard Practice Statement applies to applications for relief by way of arrangement made on or after 1 April 2001.

Summary

Section 177 of the Tax Administration Act 1994 specifically allows for relief by way of arrangement for taxpayers who are, or are likely to become liable for payment of tax.

An arrangement can be for one lump sum payment or 2 or more payments (instalment arrangement).

Applications for relief by way of arrangement may be made orally or in writing.

The taxpayer must be in financial difficulties at the time of application. The Commissioner will require relevant financial information to be provided in support of the application.

When considering an application, section 177 requires Inland Revenue to ensure that the relief granted will maximise net present value for tax debts, or will lead to the collection of highest net revenue over time for Student Loan repayment obligation debts.

There is no legislative time limit for an arrangement. However, arrangements will generally be over the shortest period of time in order to maximise the net present value of any recovery.

Penalties and interest will continue to accrue during the term of an arrangement. However, if a taxpayer adheres to the conditions of an arrangement, the penalties will be cancelled from the date the arrangement was entered into. Interest cannot be cancelled and will remain payable.

When Inland Revenue accepts an arrangement, Inland Revenue will issue written confirmation of the arrangement that will set out the taxpayer's obligations and Inland Revenue's obligations.

Legislation

All legislative references are to the Tax Administration Act 1994 (TAA) unless otherwise stated.

Section 177 provides:

177. Discretion to grant relief in cases of financial hardship

1. A taxpayer, or a person on a taxpayer's behalf, may apply for relief if the taxpayer -
   1. Is, or is likely to become, liable for payment of tax; and
   2. Is at the time of applying, in financial difficulties.
2. An application for relief by way of remission must be in writing.
3. If subsection (1) applies, the Commissioner may, if the Commissioner considers it necessary or desirable to do so to maximise the net present value, calculated on the date of the application, of recovery or likely recovery from the taxpayer of the tax, or part of the tax, grant relief to the taxpayer by—
   1. Remitting all or part of the tax; or
   2. Entering into an arrangement with the taxpayer for the payment of all or part of the tax in one or more payments; or
   3. Applying both paragraphs (a) and (b).
4. The Commissioner may, if the Commissioner thinks fit, issue an amended assessment to give effect to any action taken under subsection (3).
5. The Commissioner may cancel all or part of the relief granted under this section if—
   1. The Commissioner has reason to believe that the information provided by the taxpayer to enable the Commissioner to apply this section is misleading in any respect such that the Commissioner considers that it was inappropriate for all or part of the relief to have been granted; or
   2. The Commissioner receives further information relating to the taxpayer's affairs, as they were on the date on which relief was granted, such that the Commissioner considers that it was inappropriate for all or part of the relief to have been granted.
6. If subsection (5) applies, the taxpayer is liable for the payment of the tax as if relief had never been granted.
7. A Commissioner's decision to grant or cancel relief may not be objected to or challenged

Other relevant legislation is contained in:

• section 3 TAA - definition of "tax";
• section 6A TAA - the care and management of taxes;
• section 156 TAA - the mode of recovery of unpaid tax;
• section 183B TAA - cancellation of late payment penalties under instalment arrangement.

Standard Practice

Application for relief by way of arrangement need not be in writing

Inland Revenue is able to enter into arrangements for payment of tax debt over the telephone or following written application. In doing so, it must be established that the taxpayer is in financial difficulties and that the proposed arrangement maximises net present value.

In all cases it will be necessary to obtain financial information, either over the telephone or in writing, to enable these decisions to be made. In some cases, it will be necessary for Inland Revenue to obtain written financial information to verify or further support the information already supplied by the taxpayer.

A taxpayer may start making voluntary payments immediately, before an arrangement has been agreed to (refer to IR262 Let us help you pay your bill). However, any cancellation of penalties only applies from the date the arrangement is agreed to (refer below "Entering into an arrangement").

Amount that is, or is likely to become, liable for payment

A taxpayer may make application for an arrangement for any amount that is in arrears, or any amount that will become due for payment.

In practical terms, a taxpayer making payments towards a tax debt before that amount is due, does not need to enter into an arrangement unless the amount owing will not be paid prior to the due date (refer to IR 262 Let us help you pay your bill ).

If a taxpayer determines that an amount will be outstanding after the due date, then that taxpayer should apply to Inland Revenue prior to the due date for a pre-emptive arrangement to receive the full benefits of the cancellation provisions (refer to "Cancellation of penalties" below for more information).

Definition of "tax"

Section 177 of the Tax Administration Act allows for relief in cases of financial hardship if the taxpayer is, or is likely to become liable for payment of tax. Tax is defined in section 3 of the Tax Administration Act but does not include:

• financial support as defined in the Child Support Act 1991;
• a student loan repayment obligation.

"Tax" also includes use of money interest and civil penalties (late payment, late filing, shortfall and non-electronic filing penalties).

Financial difficulties at the time of application

Section 177 provides for relief for taxpayers who are in financial difficulties at the time of application. Inland Revenue considers "financial difficulties" arise when a taxpayer's financial position is such that debts cannot be paid on time, and either:

• there is a real prospect that creditors will be able to have the taxpayer put into liquidation, or adjudicated bankrupt; or
• the taxpayer's debts are a substantial limitation in carrying out normal income producing activities.

For further discussion on 'financial difficulties' refer to Tax Information Bulletin Volume Six, No 14 (June 1995).

In order for Inland Revenue to determine if a taxpayer is in financial difficulty, Inland Revenue will request details of the taxpayer's financial position, which would normally include details of income and expenditure, assets and liabilities. It may be necessary for Inland Revenue to obtain this information in writing.

On reviewing the information provided, and depending on the amount of debt and/or the length of time of the proposed arrangement, Inland Revenue may request a more detailed breakdown or further information. For example, asset valuations, profit and loss statements, balance sheets, lists of debtors and creditors.

If a taxpayer has the ability to realise assets (eg the ability to refinance, sell property, or surrender insurance policies) to pay the debt, then an arrangement may not be appropriate. However, the size of the debt and the length of time of the proposed arrangement will be taken into account by Inland Revenue when considering an application for an arrangement.

In addition, Inland Revenue will recognise a spouse's "protected interest" in a matrimonial home or any rights protected by the Joint Family Homes Act 1964.

Where the debt is only a few hundred dollars and will be paid within a short period of time, Inland Revenue would not expect property, such as a house to be sold before accepting an instalment arrangement.

Net present value

When considering an application for an arrangement Inland Revenue will consider the net present value of the proposed payments.

The net present value calculation recognises the time value of money — interest, 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. Inland Revenue uses a calculation that involves:

• the amount of payment, multiplied by
• the probability of payment (for risk), divided by
• the discount factor appropriate to the term (for interest).

In order to ensure the net present value of a recovery is maximised, the proposal then needs to be compared to the net present value of other viable options. To achieve this Inland Revenue will compare the net present value of an arrangement against the net present value of other actions ie deferred collection or legal.

Where a proposed arrangement is for an amount less than $10,000 and for less than 12 months duration the Commissioner considers net present value to be maximised when the following conditions are met:

• the proposed arrangement would lead to a monetary return to Inland Revenue;
• write-off or remission would produce less return than the proposed arrangement;
• legal proceedings would produce less return than the proposed arrangement over the same duration;
• Inland Revenue would incur costs by taking legal proceedings.

Where the debt is greater than $10,000 or the proposed arrangement is for longer than 12 months, then a net present value calculation will be required if there are other viable options. A detailed explanation (and examples) of the net present value calculation can be found in Tax Information Bulletin Volume Six, No 14 (June 1995) which sets out Inland Revenue's practice for hardship relief applications.

Other considerations

When considering a request for an arrangement, Inland Revenue will also take into account the following factors:

• whether the proposal is realistic;
• the taxpayer's compliance history;
• the likelihood of future compliance;
• whether the taxpayer previously had and adhered to an arrangement;
• whether the taxpayer has filed all required returns;
• protection of the integrity of the tax system (if a taxpayer is continuing in business, or has a continuing income stream which is not subject to source deductions, then future compliance must also be considered).

Entering into an arrangement

Date arrangement is entered into

The date the arrangement is "entered into" is taken into account when cancelling penalties. Inland Revenue considers two possible dates that can be used are:

• the date the application is received (telephone call or letter); or
• the date that additional information is received in support of the application.

If an application is incomplete Inland Revenue will require any additional information to be received by a set date. Therefore a date will need to be agreed to by Inland Revenue and the taxpayer, otherwise for practical purposes, the arrangement will start on the date that the complete information is received.

Length of arrangement

There is no legislative time limit for an arrangement. However, the Commissioner considers it necessary and desirable, in order to maximise the net present value of any recovery, that arrangements are over a shorter period of time, rather than a longer period of time. This is because the longer the period of time the greater the risk of non-payment and the greater the loss for time value of money.

One or more payments

Relief by way of an arrangement can be by one lump sum payment or payment by instalments. Instalments need not be at regular time intervals or of regular amounts however this may be preferable for ease of payment.

Cancellation of relief

Section 177 (5) provides for relief to be cancelled if:

• information provided by the taxpayer is misleading;
• Inland Revenue receives further information relating to the taxpayers affairs, as they were on the date on which relief was granted; and
• the Commissioner considers it was inappropriate in light of the information received to have granted relief.

By way of examples:

• if a taxpayer advises they were paying rent but in fact they were paying a mortgage on their own home, and had equity in that home, it may not have been appropriate for the Commissioner to have granted relief;
• where a taxpayer has a vested right to income or assets of a trust, and this was not disclosed to the Commissioner.

No right of objection or challenge

There is no statutory right to challenge or object to any decision of the Commissioner to grant or cancel relief under section 177(3) or 177(5).

However if a taxpayer does not agree with the Commissioner's decision not to grant relief, the taxpayer has other review options open to them eg a request for review can be initially made to the Inland Revenue officer involved or their reporting officer, or to the Office of the Ombudsmen. Judicial review may also be an available option.

Arrangements for Student Loan repayment obligations

The definition of tax in section 3 TAA specifically excludes student loan repayment obligations. Therefore Inland Revenue cannot enter into arrangements with taxpayers for repayment of student loan repayment obligations under section 177 TAA.

Inland Revenue considers that when the general recovery provisions, as provided for in section 156 TAA are exercised in conjunction with the Commissioner's discretion under section 6A, the Commissioner is allowed to enter into arrangements for student loan debt, if in the circumstances, there is a reasonable basis for believing that such steps will result in the collection of the highest net revenue over time, having regard to the factors listed in section 6A(3).

To ensure consistency, it is appropriate to have substantially the same criteria and processes for all arrangements. Therefore the criteria the Commissioner will use for arrangements for outstanding student loan repayment obligations are:

• any application for relief by way of arrangement may be made orally or in writing;
• an application for relief must be for an amount that is, or is likely to become, liable for payment;
• the taxpayer must be in financial difficulties at the time of application;
• an arrangement must result in the collection of highest net revenue over time;
• an arrangement can be for one lump sum payment or two or more instalments.

Collection of highest net revenue over time

The "collection of highest net revenue over time" is not defined in the Tax Acts and has yet to be absolutely defined by the Courts. However, it would appear to be more than just collecting "as much as possible in as short a time as possible"; consideration also needs to be given to the continuing collection of revenue over a longer period of time.

For example, a taxpayer may be able to repay a student loan debt by instalment over nine months by continuing in business, and by continuing in business will be able to pay future taxes on time.

However, in a similar example, a taxpayer may be able to repay a student loan debt by instalment over nine months by continuing in business, but the future prospects of that business show that the taxpayer will not be able to meet future taxes on time. This creates the risk of future debt arising. In this instance, some other form of action (such as issuing legal proceedings) may result in the collection of highest net revenue over time.

When considering the collection of highest net revenue Inland Revenue will take into account the factors listed under "Other Considerations"

All arrangements

Cancellation of penalties

If an arrangement has been complied with, section 183B TAA allows the Commissioner to:

• reduce the first late payment penalty by 60% if the arrangement was agreed to before the due date; and
• cancel any late payment penalties incurred on the debt during the term of the arrangement.

Cancellation applies where a debt has been paid by way of one or more payments under an arrangement with the Commissioner.

As cancellation of penalties only applies if a taxpayer has complied with the taxpayer's obligations under the arrangement, the penalties are cancelled at the end of the arrangement. Penalties will continue to be shown on Statements of account until the end of the arrangement.

Interest will continue to accrue and be payable on the debt, throughout the term of the arrangement, as provided by legislation.

Pursuant to section 6A TAA Inland Revenue will also cancel penalties applicable to arrangements for payment of student loan repayment obligations.

Conditions

Any arrangement entered into with Inland Revenue will be subject to certain conditions including:

• all current taxes must be paid, and returns filed, by the due date;
• termination of the arrangement if the terms are not adhered to without prior agreement;
• interest will be charged and payable up to the date of payment in full (taxpayers should contact Inland Revenue for the final instalment amount);
• any credits that arise in the taxpayer's account will be offset against the amount owed;
• late payment penalties incurred during the course of an instalment arrangement will be cancelled, providing all payments are made on time

Adhering to the arrangement

If a taxpayer cannot meet one of the payments by the agreed date, they should contact Inland Revenue to advise the reason that the payment will not be made on time. Any late payment is a breach of the arrangement and Inland Revenue may cancel the arrangement, depending on the reason for the late payment and the number of payments missed.

Reviewing arrangements

Where arrangements are over a long period of time, eg over 12 months, Inland Revenue considers it appropriate to review the arrangement and the taxpayer's circumstances. Such a review will consider whether the arrangement is still appropriate to the taxpayer's financial circumstances and may therefore require updated financial information from the taxpayer.

Making the payments

Inland Revenue prefers that taxpayers pay their instalment arrangement on a regular basis by automatic payment from their bank account. Another option is to make payments to any WestpacTrust branch with cash or by cheque, or to send cheques to Inland Revenue by the agreed dates.

Confirmation

Inland Revenue will issue confirmation of an arrangement in writing. This will include the terms and conditions and the commencement date of the arrangement. If the taxpayer disagrees with any of the terms and conditions they should contact the Inland Revenue officer who issued the confirmation immediately.

This Standard Practice Statement was signed by me on 11 April 2001

Margaret Cotton
National Manager
Technical Standards