Compulsory deductions from bank accounts (WITHDRAWN)

This statement also appears in Tax Information Bulletin, Vol 21, No 2 (April 2009).

Introduction

1. This Standard Practice Statement ("SPS") sets out Inland Revenue's practice on the use of statutory notices (referred to in this statement as "deduction notices") which are from time-to-time issued to banks requiring them to make deductions from their customers' accounts.

Application

2. This SPS applies to deduction notices issued under the following enactments:
   • Tax Administration Act 1994 ("TAA")
   • Goods and Services Tax Act 1985 ("GST Act")
   • Child Support Act 1991 ("CS Act")
   • Student Loan Scheme Act 1992 ("SLS Act")
   • Gaming Duties Act 1971 ("GD Act")
3. This SPS applies to deduction notices issued from 12 March 2009. It replaces SPS RDC 3.1, published in TIB Vol.11, No.7 (August 1999), which is withdrawn with effect from the date of this SPS.

Legislation

4. The relevant sections and enactments are as follows:
   • Section 157 of the TAA
   • Section 43 of the GST Act
   • Section 154 of the CS Act
   • Section 46 of the SLS Act
   • Section 12L of the GD Act.

Discussion

5. A deduction notice is an important debt collection tool for Inland Revenue. The relevant legislative provisions grant to the Commissioner of Inland Revenue ("Commissioner") wide powers to require a third party to make deductions from amounts that are payable, or will become payable by that third party, to a taxpayer who has tax arrears. The deduction notice may require deductions to be made by way of a lump sum or by instalments and will require the third party to forward the amount deducted to Inland Revenue by the date specified in the notice.
6. Inland Revenue will not issue a deduction notice in respect of tax arrears that are the subject of an instalment arrangement between the taxpayer and the Commissioner.
7. An amount payable by the third party includes money deposited with a bank to the credit of the taxpayer. It includes funds deposited on current account as well as funds on fixed and unfixed deposit. A deduction notice will apply to all deposits the bank receives from the day the deduction notice is received by the bank and will continue to apply until it is revoked or withdrawn.
8. A deduction notice may require deductions to be made to cover daily interest. The interest starts on the date of the deduction notice and ends on the day on which the amount required to be deducted, has been deducted. If interest is to be calculated the rate of interest will be advised in the deduction notice.
9. Deductions made by the bank are held in trust for the Crown until they are forwarded to Inland Revenue. Section 157(9) of the TAA, and sections 43(8) and 43(9) of the GST Act state that a bank is charged with holding in trust for the Crown amounts that become payable to a taxpayer from the time when the bank receives a deduction notice until the time when the deduction is required to be made by the notice. In addition, section 46 of the SLS Act refers back to the recovery provisions of section 156 to 165 of the TAA and will apply in respect of outstanding student loan debts.
10. If the deduction is not made by the bank, the amount required to be deducted is recoverable by Inland Revenue from the bank as if it were tax payable by the bank.
    

Standard Practice

Joint Accounts

11. In most cases, Inland Revenue is not able to issue a deduction notice to obtain funds from a joint account in respect of a tax debt owed by one of the joint bank account holders. The High Court case of Commissioner of Inland Revenue v ANZ Banking Group (New Zealand) Limited (1998) 18 NZTC 13,643 concerned a deduction notice issued by Inland Revenue in respect of a joint account that the taxpayer held with his wife. In concluding that the bank was not required to make the deductions, the Court stated that the wife's rights in respect of the joint account could not be over-ridden unless by express statutory provision.
12. Notwithstanding the above, Inland Revenue reserves the right to issue a deduction notice in relation to a joint account where both parties jointly have tax arrears (for example, in a partnership) or where each party has separate tax arrears (and neither are under an instalment arrangement).
13. Further, Inland Revenue reserves the right to issue a deduction notice on a joint account that is being used by one of the account holders to hide funds with the intention to defeat attempts by Inland Revenue to recover tax arrears. For example, where Inland Revenue is able to demonstrate that cheques for a business have been deposited to a joint, non-business account. This will be restricted to cases where those funds can be separately identified from those of the other party of the account.

Overpaid Working for Families tax credits

14. Inland Revenue may also issue a deduction notice on a joint account where there has been an overpayment of a Working for Families tax credit. Where this has occurred the person who received the overpayment (the recipient) and their partner or spouse (if they were the partner or spouse throughout the income year to which the overpayment relates) are jointly and severally liable for the overpayment: section MF 5(2) Income Tax Act 2007. Inland Revenue is therefore able to issue a deduction notice for an account in the name of the partner or spouse or for a joint account in the name of the recipient and the partner or spouse.
    

Child Support debts

15. Another situation where Inland Revenue may issue a deduction notice is in relation to child support debt. Section 128 of the CS Act provides that any amount of financial support payable under the CS Act is a debt due to the Crown. Similar to section 157 of the TAA, section 154 of the CS Act allows the Commissioner to issue a deduction notice to a third party requiring them to make deductions from money payable to liable parents for a child support debt. Any amount deducted under a deduction notice is deemed by section 167(2) of the CS Act to be held in trust for the Crown.
16. Section 155 of the CS Act extends this to money held in joint accounts in the name of the liable parent and one or more other persons, where the liable parent can draw from that account without the signature of the other person

Gaming Machine Duty

17. Section 12K of the GD Act 1971 provides that any gaming machine duty is recoverable as a debt due to the Crown.
18. Section 12L of that Act allows the Commissioner to issue a deduction notice to a third party where a person is in default in payment of any gaming machine duty, and any amount deducted is to be paid to Inland Revenue by the date specified in the deduction notice. Any amount deducted under a deduction notice is deemed to be held in trust for the Crown until it is paid to Inland Revenue: section 12L(6)
    

Prosecution

19. If a bank fails to make the deductions required by the deduction notice, and there was an amount payable, or an amount became payable, Inland Revenue has the power to prosecute for not complying with the terms of the deduction notice under section 157A of the TAA.

Account Monitoring

20. Under sections 6 and 6A of the TAA, the Commissioner has a responsibility to protect the integrity of the tax system and to collect the highest net revenue practicable over time while having regard to resources, the importance of promoting compliance and compliance costs faced by taxpayers. Inland Revenue acknowledges that compliance with a deduction notice results in costs to banks, especially if constant monitoring of their customers' accounts is required in all instances.
21. With this in mind, Inland Revenue will not usually require banks to conduct daily monitoring of their customers' accounts to comply with a deduction notice. Banks will only be required to check the account of their customer on receipt of a deduction notice and deduct any funds that are available at that time. If no funds are available, the bank will only need to advise Inland Revenue of this fact and will not be required to check the account any further.
22. However, Inland Revenue reserves the right to require daily monitoring of bank accounts where that is considered necessary. If Inland Revenue decides that daily monitoring is necessary, this will be communicated to the bank concerned at the time of issuing the deduction notice.
23. If daily monitoring is to be undertaken it will usually be for a maximum of 10 working days, although, from time-to-time Inland Revenue may request a bank to monitor an account over a longer period where it is considered necessary. The period of monitoring will be communicated to the bank at the time of issuing the deduction notice

Term Investments

24. A deduction notice will apply to money that is held in a term investment whether or not that investment is due to mature.

Overdraft facilities

25. Inland Revenue cannot, by requiring a deduction to be made from a bank account, put a taxpayer into, or further into overdraft.
26. If Inland Revenue issues a deduction notice for an account which is in credit and the taxpayer attempts to avoid complying with that notice by transferring funds from that account so that it will go into overdraft then the deduction notice will take priority.

This Standard Practice Statement is signed on 12 March 2009.

Rob Wells
LTS Manager
Technical Standards