Instalment arrangements for payment of tax debt (Mar 00) (WITHDRAWN)
Withdrawn statement SPS RDC-6 Instalment arrangements for payment of tax debt. Statement provided for historical purposes only.
This statement has been withdrawn and is provided for historical purposes only.
This Standard Practice Statement states the Commissioner's practice on providing relief by way of instalment arrangement when taxpayers are in debt with Inland Revenue. It does not relate to instalment arrangements for payment of child support arrears by non-custodial or custodial parents.
The Tax Administration Act 1994 specifically allows for relief by way of instalment arrangement for income tax and fringe benefit tax. Other provisions of the Tax Acts give managerial discretion to Inland Revenue to enter into instalment arrangements for tax types other than income tax and fringe benefit tax.
Applications for relief by way of instalment arrangement must be 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, Inland Revenue is required to consider whether the relief granted will maximise net present value for income tax and fringe benefit tax, or will lead to the collection of highest net revenue over time for other tax types.
There is no legislative time limit for an instalment 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 the arrangement. However, if a taxpayer adheres to the conditions of the 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 instalment arrangement, Inland Revenue will issue written confirmation of the arrangement that will set out the taxpayer's obligations and Inland Revenue's obligations.
This Standard Practice Statement applies from 1 April 2000.
All legislative references are to the Tax Administration Act 1994 (TAA) unless otherwise stated.
Section 177 provides for relief in cases of financial hardship by way of remission or instalment arrangement. The provisions discussed are those that apply to instalment arrangements.
The criteria for section 177 to apply are:
- the application for relief must be in writing
- the application must be for any amount that is, or is likely to become, liable for payment
- the tax must be income tax imposed under section BB 1 Income Tax Act 1994 (ITA), and/or fringe benefit tax
- the taxpayer must be in financial difficulties at the time of application
- the relief must be necessary or desirable in order to maximise net present value
- any arrangement must be in two or more instalments.
The other related provisions of section 177 are:
- relief may be cancelled
- there is no right of objection or challenge
- relief of more than $50,000 requires Ministerial approval.
Other relevant legislation is contained in:
- 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.
Instalment arrangements for income tax and fringe benefit tax
Application for relief to be made in writing
Legislation states that an application for relief must be made in writing. However it is consistent with Inland Revenue's strategic business direction for discussion on ways of repaying tax debts (including instalment arrangements), to be held over the telephone. Inland Revenue may discuss repayment amounts, timeframes and surrounding circumstances with the taxpayer but any arrangement cannot be accepted by Inland Revenue without an application in writing. Any discussion held over the telephone will be subject to receipt of the written application and supporting documentation.
A taxpayer may start making voluntary payments immediately, before an arrangement has been agreed to (refer to IR 262 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 instalment 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 instalment 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 instalment arrangement to receive the full benefits of the cancellation provisions (refer to "Cancellation of penalties" below for more information).
Income tax imposed under section BB 1 Income Tax Act 1994 and fringe benefit tax
Section 177 applies to income tax imposed under section BB 1 ITA and fringe benefit tax. Section BB 1 ITA refers to income tax imposed on taxable income. Section 177 therefore also applies to provisional tax instalments (section MB 12(1) ITA), non-resident withholding tax (section NG 17(2) ITA) and specified superannuation contribution withholding tax (section NE 7(2) ITA) as these revenues are specifically deemed to be income tax under section BB 1 ITA.
Financial difficulties at the time of application
Section 177 provides for relief for taxpayers who are in financial difficulty 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 adjudged bankrupt; or
- the taxpayer's debts are a substantial limitation on 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, the following information must be provided by the taxpayer:
Individuals not in business
- a statement of financial position (IR 40)
Individuals in business (including partners and trustees)
- a statement of financial position (IR40*)
- a cashflow forecast (IR40A*)
- a written request for an instalment arrangement setting out the proposal for repayment
- a cashflow forecast for the next three months (IR40A*)
- a statement of assets and liabilities (IR110*)
* At the time of preparation of this Standard Practice Statement new forms were being developed, namely a "Statement of financial position - business customers" and a "Twelve month cashflow forecast".
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 instalment 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 instalment arrangement. Where there are assets that could be realised (eg if the debt is only a few hundred dollars and will be paid within a couple of months, then 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 instalment 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 options. To achieve this Inland Revenue will compare the net present value of an instalment arrangement against the net present value of other actions ie deferred collection or legal proceedings.
Where a proposed instalment 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 instalment arrangement would lead to a monetary return to Inland Revenue
- write-off or remission would produce less return than the proposed instalment arrangement
- legal proceedings would produce less return than the proposed instalment 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. A detailed explanation (and examples) of the net present value calculation can be found in Tax Information Bulletin Volume Six, No. 14 which sets out Inland Revenue's practice for hardship remission applications.
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
- the date that additional information is received in support of the application.
If an application is incomplete, and additional information is required, then that additional information needs to be received within a reasonable time if the original date is to apply. Inland Revenue considers "reasonable time" to be such length of time as may fairly, properly, and reasonably be allowed or required, having regard to the nature of the information required and to the surrounding circumstances. Generally Inland Revenue will require 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 instalment arrangement. However, the Commissioner considers it necessary and desirable, in order to maximise the net present value of any recovery, that instalment 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.
Two or more instalments
Any relief by way of arrangement must be in two or more instalments. An application to make a single lump sum at a future date will not meet the legislative requirements of an instalment arrangement. Instalments need not be at regular time intervals or of regular amounts however this may be preferable for ease of management.
Cancellation of relief
Legislation provides for relief to be cancelled if the information provided by the taxpayer is misleading to an extent which renders it inappropriate for the Commissioner to have provided that 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.
- another scenario could be where a taxpayer has a vested right to income or assets of a trust, and this was not disclosed to the Commissioner.
The Commissioner will also cancel any relief granted if the Commissioner receives further information relating to the taxpayer's affairs at the date relief was granted, which renders it inappropriate for the Commissioner to have granted relief.
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(1) or 177(3).
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 made to the Inland Revenue officer involved or to the Office of the Ombudsmen. Judicial review may also be an available option.
Relief of more than $50,000
The Minister of Finance must approve any instalment arrangement over $50,000, either specifically with respect to a case, or generally with respect to any class of case. In July 1999 the Minister of Finance approved a class of case for instalment arrangements comprising taxpayers whom:
- have income tax and fringe benefit tax debt greater than $50,000
- meet the criteria of section 177
- have a good compliance history
- are likely to comply with their future tax obligations
- have the ability to pay the debt.
Taxpayers who meet all these criteria will not need to have their application for relief approved by the Minister. Where taxpayers do not meet these criteria and the Commissioner considers the taxpayer should have an instalment arrangement, the application will need to be approved by the Minister.
Instalment arrangements for GST, PAYE and other revenues
Care and management in conjunction with the recovery of unpaid tax
As stated above section 177 only applies to income tax and fringe benefit tax. Inland Revenue considers that when the general recovery provisions, as provided for in section 156, are exercised in conjunction with the Commissioner's discretion under section 6A, the Commissioner is allowed to enter into instalment arrangements for taxes not covered by section 177, 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).
The Commissioner has exercised his discretion, and will accept instalment arrangements for other tax types, namely GST, PAYE, ACC, self-employed ACC, family assistance, child support deductions, student loan deductions and repayments, resident withholding tax, and gaming machine duty.
Collection of highest net revenue over time
The "collection of highest net revenue over time" is a complex concept. It 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 needs to also be given to the continuing collection of revenue over a longer period of time.
For example, a taxpayer may be able to clear a tax debt by instalment over nine months by continuing in business, and by continuing business will be able to pay future taxes on time.
However, in a similar example, a taxpayer may be able to clear a tax 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:
- whether the proposal is realistic
- the taxpayer's compliance history
- the likelihood of future compliance
- whether the taxpayer previously had and adhered to an instalment arrangement
- whether the taxpayer has filed all required returns
- whether the arrangement maximises the recovery from the taxpayer
- 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 instalment arrangements under care and management
To ensure consistency, it is appropriate to have substantially the same criteria and processes for all instalment arrangements. Therefore the criteria the Commissioner will use for instalment arrangements for these tax types are:
- any application for relief by way of instalment arrangement is to be made 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 - refer to page 3 of this Standard Practice Statement for the financial forms that are to be used
- instalment arrangements must result in the collection of highest net revenue over time
- any arrangement must be for two or more instalments
There is no statutory right to challenge or object to the Commissioner's decision.
However if a taxpayer does not agree with the Commissioner's decision, the taxpayer has other review options open to them eg a request for review can be made to the Inland Revenue officer involved or to the Office of the Ombudsmen. Judicial review may also be an available option.
Cancellation of penalties
If an arrangement has been complied with, section 183B allows the Commissioner to:
- reduce the first late payment penalty by 60% if the arrangement was agreed to before the due date
- cancel any late payment penalties incurred on the debt during the term of the arrangement.
As cancellation of penalties only applies if a taxpayer has complied with the taxpayer's obligations under the instalment 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.
Inland Revenue will advise all the conditions of the arrangement, including:
- automatic termination of the arrangement if the terms are not adhered to without prior agreement
- all current taxes must be paid, and returns filed, by the due date
- late payment penalties incurred during the course of the arrangement will be cancelled, providing all payments are made on time
- 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.
Adhering to the arrangement
If a taxpayer cannot meet one of the payments by the agreed date, then 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.
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 instalment arrangement is still appropriate to the taxpayer's financial circumstances.
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 of an instalment arrangement will be made in writing. The terms and conditions will be included.
This Standard Practice Statement was signed by me on 8 March 2000.