SPS 11/01
Issued
16 Feb 2011

Instalment arrangements for payment of tax (WITHDRAWN)

SPS 11/01 sets out IR's practice when considering applications for financial relief by way of an instalment arrangement which may include one or more payments.

Withdrawn

This statement has been withdrawn and is provided for historical purposes only.

This statement also appears in Tax Information Bulletin Vol 23, No 2 (March 2011).

Introduction

  1. This Standard Practice Statement (SPS) sets out Inland Revenue's practice when considering applications for financial relief by way of an instalment arrangement under section 177 of the Tax Administration Act 1994 ("TAA").
     
  2. An instalment arrangement may include one or more payments and the payment amounts may vary to reflect the taxpayer's changing cashflow or circumstances. See paragraphs 74 to 79 for more information on payments.
     
  3. For child support debt or student loan repayment arrears, refer to SPS 11/02 (Child Support Debt - Requesting an instalment arrangement) or SPS 11/03 (Student Loans - Relief from repayment obligations).
     
  4. SPS 06/02 - Writing off outstanding tax, published in April 2006, provides details on Inland Revenue's practice on writing off outstanding tax.

Contents

The headings of the key issues discussed in this SPS are set out below:

Headings Paragraphs
Introduction 1 to 4
Contents -
Application 5 to 7
Summary 8 to 26
Legislation 27
Discussion 28 to 116
 - Making requests to the Commissioner 28 to 36
 - Considering the request 37
 - Timeframe for responding 38 to 70
 - Cancellation of an instalment arrangement 71 to 73
 - Payments 74 to 79
 - Reviewing instalment arrangements 80 to 84
 - Imposition of late payment penalty 85 to 94
 - Pre-emptive instalment arrangements 95 to 96
 - Instalment arrangements for payment of tax where returns are not filed 97 to 100
 - Provisional tax 101 to 106
 - Instalment arrangements entered into after tax is due for payment 107 to 108
 - Instalment arrangements for taxes collected by third parties 109 to 113
 - Default with instalments may not undo an instalment arrangement 114 to 116
Standard Practice 117 to 128

Application

  1. This SPS applies to applications for relief by way of instalment arrangements made on or after 16 February 2011. It replaces SPS 05/11 - Instalment arrangements for payment of tax debt published in Tax Information Bulletin Vol 17, No 10 (December 2005).
     
  2. There are separate SPSs setting out Inland Revenue's practice in considering requests for financial relief for student loan repayment debt and child support arrears as these are not covered by the financial relief or serious hardship provisions in the TAA.
     
  3. Unless specified otherwise, all legislative references in this SPS refer to the TAA.

Summary

  1. Taxpayers are encouraged to contact Inland Revenue at the earliest opportunity if they think that they may have trouble paying their tax in full by the due date so that options for payment, which may include an instalment arrangement, can be discussed.
     
  2. Early contact may also minimise the imposition of late payment penalties as some penalties are not imposed when an application seeking financial relief is being considered.
     
  3. Section 177 allows a taxpayer to apply for financial relief by requesting to enter into an instalment arrangement. These applications may be made by telephone, in writing, or by electronic means.
     
  4. The Commissioner will negotiate with the taxpayer to determine what method of payment best suits the taxpayer's financial circumstances. However, section 177B provides that the Commissioner must not enter into an instalment arrangement with a taxpayer (being a natural person) to the extent that the instalment arrangement would place that person in serious hardship.
     
  5. "Serious hardship" is defined under section 177A and means significant financial difficulties that arise because of:
    • the taxpayer's inability to meet minimum living expenses according to normal community standards; or
    • the cost of medical treatment for an illness or injury of the taxpayer or the taxpayer's dependant(s); or
    • a serious illness suffered by the taxpayer or the taxpayer's dependant(s); or
    • the cost of education for the taxpayer's dependant(s).
       
  6. The outstanding tax covered by an instalment arrangement request needs to be quantified through a return or an assessment for the penalty suppression under section 139BA to apply, and to enable the Commissioner to commence negotiation.
     
  7. However, in cases where the relevant returns have not been filed, negotiation of an instalment arrangement for the affected return periods will generally not commence until the outstanding returns have been received by Inland Revenue. An exception is provisional tax payable calculated in accordance with the rules in subpart RC of the Income Tax Act 2007.1 In other cases taxpayers will be encouraged to make voluntary payments towards their anticipated tax liability.  Late payment penalties will accrue (unless the Commissioner has made an assessment) until such time returns are filed and negotiation on payment options can commence.
     
  8. The Commissioner will require relevant information to be provided in support of the application. This will include financial information and will also generally require the filing of any related outstanding returns. If this information is not contained in the taxpayer's initial application, the Commissioner may ask for further information.
     
  9. Upon receipt of a taxpayer's application for an instalment arrangement the Commissioner has four options. He may accept the request, seek further information from the taxpayer, make a counter offer, or decline the request.
     
  10. The Commissioner's authority to enter into instalment arrangements for the payment of tax debt under section 177 is further qualified by the requirement to maximise the recovery of tax debt from a taxpayer, but not if:
    • recovery would represent an inefficient use of the Commissioner's resources; or
    • the instalment arrangement would place the taxpayer, who is a natural person, in serious hardship.
       
  11. Where the Commissioner is likely to recover more through an instalment arrangement than from bankruptcy or liquidation action, an instalment arrangement will generally be entered into.
     
  12. In Raynel v CIR2 it was noted that the obligation to maximise recovery of outstanding debt from a taxpayer is not an absolute obligation. Rather the Commissioner's duty is to be approached on "a pragmatic basis with proper regard to the likely benefits and the costs of achieving them". It was also considered that this obligation does not relieve Inland Revenue officers from their duty under section 6(1) to use their best endeavours to protect the integrity of the tax system. It was further noted the Commissioner is required under section 6A(3)(b) to have regard to the importance of promoting voluntary compliance by all taxpayers with the Inland Revenue Acts. Taxpayers can expect that appropriate and firm action will be taken against non-complying taxpayers and that this principle may override any proposed instalment arrangement.
     
  13. Under section 139B, the initial late payment penalty is applied in two steps. There is an initial late payment penalty of 1% on the unpaid tax which is applied on the day after the due date. A further late payment penalty of 4% is added at the end of the sixth day after the due date on any tax that remains unpaid at that date.
     
  14. The two-step penalty provides an incentive for taxpayers to contact Inland Revenue at the earliest opportunity to discuss payment options when they may have problems with making full payment of taxes by the due date.
     
  15. Monthly incremental penalties will not be charged while a debt is under an instalment arrangement, provided that the taxpayer complies with the terms of that instalment arrangement. This applies from the date on which the taxpayer contacts Inland Revenue seeking an instalment arrangement for outstanding tax following the filing of their return or an assessment being made.
     
  16. Use-of-money interest will continue to accrue during the term of an instalment arrangement. It provides an incentive for the taxpayer to repay the debt as quickly as possible.
     
  17. When the Commissioner enters into an instalment arrangement, the terms will be confirmed with the taxpayer to ensure that both parties clearly understand their obligations. Confirmation will usually be made using the same method of communication that the taxpayer used for their application. However, for more complex cases, it will be preferable to issue a letter which sets out the obligations and agreed terms for future reference by the taxpayer.
     
  18. The taxpayer may renegotiate an instalment arrangement at any time. However, the Commissioner may only do so after two years have elapsed from the date the instalment arrangement was entered into.
     
  19. The Commissioner may cancel an instalment arrangement if the taxpayer has provided false or misleading information, or if the taxpayer is not meeting their obligations under the instalment arrangement. When an instalment arrangement is cancelled because the taxpayer provided false or misleading information, monthly incremental penalties will be imposed retrospectively as if the instalment arrangement had not been entered into.

Legislation

  1. The relevant legislative provisions are sections 139B, 139BA, 177, 177A and 177B of the TAA:
139B Late payment penalty
(1) This section applies to a taxpayer if and to the extent that the taxpayer does not pay by the due date (the default date) an amount of tax (the unpaid tax), calculated by the taxpayer as payable or for which the taxpayer is assessed, and-
  (a) the unpaid tax is provisional tax or a penalty relating to a failure to pay provisional tax:
  (b) ignoring any failure to pay for which a penalty or interest is remitted under section 183AA, the taxpayer has failed to pay on time an amount of tax due for payment in the period-
  (i) beginning with the later of 1 April 2008 and the day 2 years before the default date; and
  (ii) ending before the default date:
  (c) ignoring any failure to pay for which a penalty or interest is remitted under section 183AA, the taxpayer has paid on time all amounts of tax due for payment in the period referred to in paragraph (b) and-
  (i) the Commissioner gives the taxpayer a notice setting a further date for payment of the unpaid tax; and
  (ii) the taxpayer does not pay the unpaid tax before the date that is the earlier of the further date and the date that is 1 month after the date of the notice.
(2) The taxpayer is liable to pay a late payment penalty consisting of-
  (a) an initial late payment penalty equal to the total of-
  (i) 1% of the unpaid tax; and
  (ii) 4% of the amount of tax to pay at the end of the sixth day after the day on which a penalty under subparagraph (i) is imposed; and
  (b) an incremental late payment penalty equal to 1% of the amount of tax to pay determined on each day that falls 1 month after a day on which a penalty is imposed under-
  (i) this subsection:
  (ii) subsection (2A)(a) or (2B) as they were before the enactment of section 243 of the Taxation (Business Taxation and Remedial Matters) Act 2007.
(2A) Repealed.
(2B) Repealed.
(3) An initial late payment penalty is added to the unpaid tax to which it relates-
  (a) on the day after the default date for the unpaid tax, if it is imposed under subsection (2)(a)(i):
  (b) at the end of the sixth day after the day referred to in paragraph (a), if it is imposed under subsection (2)(a)(ii).
(3A) Repealed.
(3B) The part of an initial late payment penalty imposed under subsection (2)(a)(ii) is not to be added if the Commissioner has exercised powers available under section 157 of this Act or section 43 of the Goods and Services Tax Act 1985 or any similar tax law before the end of the 6th day after the day on which an initial late payment penalty is imposed under subsection (2)(a)(i) and has received the tax withheld or deducted in accordance with the requirements of a notice issued as a result of the Commissioner exercising those powers.
(4) An incremental late payment penalty is to be added to the tax to pay to which it relates on the day after the last day of successive monthly intervals during which the tax to pay remains unpaid.
(5) If an incremental late payment penalty would, apart from this subsection, be added to any tax to pay on a date that does not exist in a month, the penalty is to be added to the tax to pay on the last day of the month.
(5A) An incremental late payment penalty is not to be added if, for a month during which the tax to pay remains unpaid, the Commissioner has exercised powers available under section 157 of this Act or section 43 of the Goods and Services Tax Act 1985 or any similar tax law and has received the tax withheld or deducted in accordance with the requirements for the month of a notice issued as a result of the Commissioner exercising those powers.
(5B) A taxpayer is liable to pay a late payment penalty under subsection (2) in relation to a default date if-
  (a) the Commissioner has given the taxpayer a notice of a further date for the payment of unpaid tax under subsection (1)(c)(i); and
  (b) after giving the notice, the Commissioner becomes aware of a default by the taxpayer that arose before the date of the notice; and
  (c) the further date for payment referred to in paragraph (a)-
  (i) falls outside the period referred to in subsection (1)(b); and
  (ii) should have been given in relation to the default referred to in paragraph (b).
(5C) If the taxpayer enters into an instalment arrangement for the default under section 177B and a late payment penalty is imposed under section 139BA(1), the taxpayer is treated for the purposes of this section as paying on time, to the extent of the default, the amount of tax due for payment.
(6) In this section and section 139BA-
  (a) The term tax to pay means, at any time, an amount equal to the unpaid tax together with any late payment penalty that has been imposed in whole or in part in respect of the unpaid tax, to the extent that at that time the amount remains unpaid:
  (b) The unpaid tax is deemed to be the last part of any tax to pay, that a taxpayer pays:
  (c) The term unpaid tax includes an amount of tax that must be withheld or deducted and paid to the Commissioner under a tax law but does not include a late payment penalty or a shortfall penalty imposed under section 141ED.
139BA Imposition of late payment penalties when financial relief sought
(1) If a taxpayer has outstanding tax and contacts the Commissioner seeking financial relief before the due date, the Commissioner must impose the late payment penalty under section 139B(2)(a)(i) on unpaid tax but must not impose the late payment penalty under section 139B(2)(a)(ii).
(2) If a taxpayer has outstanding tax and contacts the Commissioner seeking financial relief on or after the due date, the Commissioner must not impose an incremental late payment penalty on unpaid tax on and after the date of the request.
(3) Subsections (1) and (2) apply until the earlier of-
  (a) the date that the Commissioner makes a decision not to give financial relief; and
  (b) the last day of the response period allowed by section 177(4) if the taxpayer does not provide the information sought or respond to a counter offer.
(4) If an instalment arrangement is entered into, an incremental late payment penalty is not to be added if, for a month during which the tax to pay remains unpaid, the taxpayer complies with all of their obligations under the arrangement.
(5) If an instalment arrangement is cancelled on the basis of false or misleading information provided by the taxpayer, the Commissioner must impose those late payment penalties not imposed as if the instalment arrangement had not been entered into.
(6) If financial relief is not given, the Commissioner must impose those late payment penalties not imposed as if the request for financial relief had not been made.
177 Taxpayer may apply for financial relief
(1) A taxpayer, or a person on a taxpayer's behalf, applies for financial relief by either-
  (a) making a claim stating why recovery of outstanding tax would place the taxpayer in serious hardship; or
  (b) requesting to enter into an instalment arrangement with the Commissioner by telephone or in writing.
(2) The Commissioner may require a taxpayer, or a person on a taxpayer's behalf, to apply for financial relief under subsection (1)(a) by notice.
(3) Upon receiving a request, the Commissioner may-
  (a) accept the taxpayer's request; or
  (b) seek further information from the taxpayer; or
  (c) make a counter offer; or
  (d) decline the taxpayer's request.
(4) A taxpayer has 20 working days, or a longer period allowed by the Commissioner, to provide the information sought or to respond to a counter offer.
(5) If the Commissioner receives information or a response from a taxpayer outside the time period allowed under subsection (4), the receipt of the information or the response will be treated as a new request for financial relief.
177A Definition of serious hardship
(1) In this section and sections 176, 177, 177B and 177C, serious hardship, in relation to a taxpayer, being a natural person,-
  (a) includes significant financial difficulties that arise because of-
  (i) the taxpayer's inability to meet minimum living expenses according to normal community standards; or
  (ii) the cost of medical treatment for an illness or injury of the taxpayer or the taxpayer's dependant; or
  (iii) a serious illness suffered by the taxpayer or the taxpayer's dependant; or
  (iv) the cost of education for the taxpayer's dependant; and
  (b) does not include significant financial difficulties that arise because-
  (i) the taxpayer is obligated to pay tax; or
  (ii) the taxpayer may become bankrupt; or
  (iii) the taxpayer's, or the taxpayer's dependant's, social activities and entertainment may be limited; or
  (iv) the taxpayer is unable to afford goods or services that are expensive or of a high quality or standard according to normal community standards.
(2) The Commissioner may take into account whether the recovery of outstanding tax would place-
  (a) a shareholder who owns, or 2 shareholders who jointly own, 50% or more of the shares in a company in serious hardship; or
  (b) a shareholder-employee of a close company in serious hardship.
(3) For the purpose of subsection (2), close company means a company that satisfies paragraphs (a) and (c) of the definition of "close company" in section YA 1 of the Income Tax Act 2007.
177B Instalment arrangements
(1) The Commissioner must not enter into an instalment arrangement with a taxpayer to the extent that the arrangement would place the taxpayer in serious hardship.
(2) The Commissioner may decline to enter into an instalment arrangement if-
  (a) to do so would not maximise the recovery of outstanding tax from the taxpayer; or
  (b) the Commissioner considers that the taxpayer is in a position to pay all of the outstanding tax immediately; or
  (c) the taxpayer is being frivolous or vexatious; or
  (d) the taxpayer has not met their obligations under a previous instalment arrangement.
(3) A taxpayer may renegotiate an instalment arrangement at any time.
(4) The Commissioner may renegotiate an instalment arrangement at any time after the end of 2 years from the date on which the instalment arrangement was entered.
(5) The renegotiation of an instalment arrangement is treated as if it were a new request for financial relief.
(6) The Commissioner may cancel an instalment arrangement if-
  (a) it was entered into on the basis of false or misleading information provided by the taxpayer; or
  (b) the taxpayer is not meeting their obligations under the arrangement.
(7) Despite sections LA 6(2) and LH 2(6) of the Income Tax Act 2007, a taxpayer with an instalment arrangement who is meeting their obligations under it may choose to have an amount of refundable tax credit remaining for a tax year paid to them rather than used under the ordering rules set out in those sections.

Discussion

Making requests to the Commissioner

  1. A taxpayer may apply for financial relief under section 177. That relief may be in the form of a request for an instalment arrangement and/or a request to write-off of all or part of a tax debt. See SPS 06/02 - Writing off outstanding tax (or any subsequent replacement) for details on Inland Revenue's practice on writing off tax debt.
     
  2. Under section 177B, the Commissioner must not enter into an instalment arrangement if the recovery of the tax debt from a taxpayer would place that person in serious hardship. This can only apply to a taxpayer who is natural person because "serious hardship" is defined in section 177A and that definition only applies to natural persons.
     
  3. Generally, taxpayers may apply for an instalment arrangement by telephone, in writing, or by the Inland Revenue website on-line service. In some cases, however, the Commissioner may require taxpayers to apply in writing.
     
  4. The tax payable needs to be quantified before the Commissioner can consider an application for an instalment arrangement. Taxpayers with outstanding returns and no assessment for the related debt will need to file the outstanding returns before any instalment arrangements can be agreed to.
     
  5. Taxpayers are required to provide supporting financial information. The information can be supplied either orally or in writing, subject to the Commissioner's discretion on how the information should be presented for consideration. An IR590 form3, available on the Inland Revenue website at www.ird.govt.nz/forms-guides, provides a guide to the information the Commissioner will generally require. The Commissioner may also obtain information from other sources to enable consideration of a taxpayer's wider financial situation. In some cases, Inland Revenue may already hold adequate financial information about the taxpayer and further financial information may not be required.
     
  6. Taxpayers requesting an instalment arrangement for outstanding tax that has not been quantified by filing a return with Inland Revenue (as part of the self-assessment process or for which an assessment has not been made), will be encouraged to make voluntary payments towards their anticipated tax liability. Once the relevant returns are received or assessments are made, negotiation can be commenced to consider an instalment arrangement. Late payment penalties will continue to accrue until the outstanding returns are received by Inland Revenue and the negotiation period can commence.
     
  7. A negotiation period follows receipt of a taxpayer's request for an instalment arrangement and the period when the Commissioner considers their request, up to an agreement being reached or the request being declined. A negotiation period can also lapse when a taxpayer fails to provide the information requested, or does not respond to a counter offer, within 20 working days, (or a longer period allowed by the Commissioner).
     
  8. Business taxpayers may be required to provide cash flow forecasts and budgets to support the proposed instalment arrangement.
     
  9. The Commissioner will also take into consideration the taxpayer's compliance history for payments and returns. Other factors which will be taken into consideration include the taxpayer's historical and prospective income, payments to other creditors and the industry in which they are working.

Considering an application for an instalment arrangement

  1. Upon receipt of an application for an instalment arrangement, the Commissioner has four options.
Accept the taxpayer's request

When an instalment arrangement is accepted, details will be confirmed with the taxpayer or their agent. This will include:

  • the agreed repayment amount and frequency; and
  • the commencement date of the instalment arrangement; and
  • any other terms and conditions under the instalment arrangement negotiated between Inland Revenue and the taxpayer.

If the taxpayer or their agent disagrees with any of the terms and conditions, they should discuss those concerns promptly with the Inland Revenue officer handling the request.

Seek further information from the taxpayer

If the Commissioner requires additional information it must be provided within 20 working days of the Commissioner asking for the information - although a longer period may be agreed if circumstances require it.

If information is received outside the time period allowed, the late response is likely to be treated as a new request.

Make a counter offer

The Commissioner may make a counter offer to the taxpayer where:

  • the Commissioner considers that the taxpayer's financial circumstances show that the taxpayer can make instalments at a higher amount than proposed by the taxpayer in the application; or
  • the Commissioner considers that the taxpayer's financial circumstances shows that the taxpayer may be over-extending themselves and reduces the proposed instalments to a lesser amount than proposed by the taxpayer in the application; or
  • the Commissioner considers that to accept instalments based on the amount the taxpayer offers to pay would place the taxpayer (being a natural person) in serious hardship. In which case the Commissioner may make a counter offer to accept instalments of a lesser amount.
Decline the request

The Commissioner must not enter into an instalment arrangement if doing so would place a taxpayer, being a natural person, in serious hardship. However an exception arises where the taxpayer is liable to pay, in relation to a tax debt, a shortfall penalty for either an abusive tax position under section 141D(2), or evasion or a similar act under section 141E(1). In these circumstances, the Commissioner will have regard to his greater duty to protect the integrity of the tax system. Recovery action to collect the shortfall penalty, late payment penalties, use-of-money interest and the underlying tax will continue even if recovery would place a taxpayer in serious hardship.

Further, the Commissioner is unlikely to enter into an instalment arrangement where:

  • the outstanding tax has not been quantified (for the period an instalment arrangement has been sought) by the filing of the relevant return or issue of an assessment; or
  • recovery would represent an inefficient use of the Commissioner's resources; or
  • it is considered that the taxpayer is able to pay the debt in full. For example, a taxpayer has term deposits or other investments or the ability to borrow sufficient funds to pay the tax debt immediately, or the taxpayer has assets which can be sold and the funds used to pay the outstanding tax; or
  • the Commissioner considers that more can be recovered by commencing bankruptcy or liquidation proceedings; or
  • the taxpayer has not met their obligations under a previous instalment arrangement and/or the Commissioner is not satisfied a proposed instalment arrangement is their best effort to pay the tax debt.

If the Commissioner declines a request for an instalment arrangement the taxpayer will be advised of the reasons for the decision. Although the TAA does not confer any right to a taxpayer to challenge this decision, where a taxpayer is concerned that their circumstances have not been given proper consideration they should raise their concern with the officer handling their request or by telephoning Inland Revenue.

Timeframe for responding

  1. If the Commissioner is unable to make a decision on granting relief immediately or requires further information, or makes a counter offer, the taxpayer will be advised accordingly.
     
  2. Generally, the taxpayer must provide any information requested or respond to Inland Revenue's counter offer within 20 working days. However, the Commissioner may allow a longer period to respond if circumstances require it. For example, where a taxpayer is having difficulties in obtaining the required information. Where further time is necessary, the taxpayer should contact Inland Revenue before the 20 working day period expires to request an extension of the response period. Inland Revenue will consider such a request on its own merits, taking into account the reason for the taxpayer's difficulty in providing the information or responding to the counter offer and whether it is reasonable for the request to be granted.
     
  3. Incremental late payment penalties and in some cases, part of the initial late payment penalties will not be imposed during the response period. However, use-of-money interest will continue to accrue on a daily basis.
     
  4. If the information or response to the Commissioner's counter offer is not provided within the negotiated timeframe, late payment penalties will be imposed as though no application had been made.
     
  5. If the information is provided outside the response period, the Commissioner is likely to treat this as a new request, unless there is good reason why the taxpayer has been unable to provide the information, or has not responded to the Commissioner's counter offer, within the timeframe. Possible reasons could include illness, or involvement in an accident or an adverse event which prevented the taxpayer from contacting Inland Revenue to request further time to provide the information.
     
  6. If the Commissioner, upon receipt of the information requested, declines to enter into an instalment arrangement, any late payment penalties not imposed during the negotiation period will be imposed as though no application for financial relief had been made.
     
  7. The Commissioner will not commence recovery action for the outstanding tax during a negotiation period. However, if recovery action had already commenced prior to the application, the Commissioner will advise the taxpayer whether this recovery action will continue during the negotiation period.
     
  8. For example, a taxpayer may already be paying a tax debt by way of an instalment arrangement and may contact the Commissioner to discuss a reduction in the instalment amount. In this instance, the Commissioner will discuss with the taxpayer whether the current instalment arrangement is to continue until such time as a new instalment arrangement is successfully negotiated.
     
  9. If the taxpayer incurs further debt during the negotiation period, the additional tax debt may be added to the total tax debt under negotiation provided the relevant returns are filed or assessments have been made.
     
  10. When considering a request for an instalment arrangement, Inland Revenue will take into account the following factors:
Whether the proposal will place the taxpayer, being a natural person, in serious hardship
  1. The Commissioner must take the taxpayer's circumstances into account, and cannot enter into an instalment arrangement with a taxpayer who is a natural person, to the extent that the instalment arrangement would place that taxpayer in serious hardship.
     
  2. "Serious hardship" is defined under section 177A and means significant financial difficulties that arise because of:
    • the taxpayer's inability to meet minimum living expenses according to normal community standards; or
    • the cost of medical treatment for an illness or injury of the taxpayer or the taxpayer's dependant(s); or
    • a serious illness suffered by the taxpayer or the taxpayer's dependant(s); or
    • the cost of education for the taxpayer's dependant(s).
       
  3. Serious hardship does not include financial difficulties that arise because:
    • the taxpayer is obligated to pay tax; or
    • the taxpayer may become bankrupt; or
    • the taxpayer's, or the taxpayer's dependant's social activities and entertainment may be limited; or
    • the taxpayer is unable to afford goods or services that are expensive or of a high quality or standard according to normal community standards.
       
  4. Whether a person is a taxpayer's "dependant" will be determined on a case-by-case basis. In determining dependency issues, the Commissioner 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 impacts on the taxpayer's ability to meet minimum living expenses according to normal community standards.
       
  5. The Commissioner may take into account whether the recovery of a tax debt would place a shareholder in serious hardship. For the purpose of this part, a shareholder is a person who owns, or two persons who jointly own, 50% or more of the shares in a company, or a shareholder-employee of a close company. A "close company" for these purposes means a company which has five or fewer natural persons whose voting interests or market value interests in the company exceed 50% and are not a special corporate entity.
     
  6. For further discussion on consideration of serious hardship, see the separate SPS 06/02 - Writing off outstanding tax (or any replacement).
Whether the instalment arrangement would maximise the recovery of tax debt from the taxpayer
  1. Inland Revenue has a duty to maximise the recovery of tax debt from a taxpayer. The Commissioner is therefore obliged to compare the likely recovery from entering into an instalment arrangement 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.
     
  2. The Commissioner will look at all options available for payment of tax debt when considering a request for an instalment arrangement and may, for example, make a counter offer suggesting that the person sells property or arranges other finance, to pay their tax debt more promptly. In addition, the Commissioner will not be confined by requests to consider hardship situations with the benefit of hindsight and ignore a person's current circumstances or opportunities to make payment.
     
  3. Whilst it is not necessary in most circumstances, one method of distinguishing between alternative repayment options is to apply a net present value calculation. The calculation looks at the time value of money and the probability of payment (risk) when considering how much tax debt the taxpayer is able to pay and the length of time required to repay the tax debt.4
     
  4. The legislation imposes no time limit on when an instalment arrangement must be completed. However, Inland Revenue considers that instalment arrangements should be for as short a period of time as possible. This is because the longer the term of the instalment arrangement, the greater the risk of non-payment. Also the taxpayer pays less use-of-money-interest when an instalment arrangement is for a shorter time.
     
  5. The Commissioner will also consider whether the proposed instalment arrangement would lead to a monetary return to Inland Revenue greater than any amount likely to be received if legal proceedings were initiated. In situations where taxpayers have a poor compliance history and/or more debt can be collected from a bankruptcy or liquidation, legal proceedings will be a consideration.
Whether the taxpayer is in a position to pay all of the tax debt immediately
  1. The Commissioner will not enter into an instalment arrangement where it is apparent the taxpayer is able to pay the outstanding tax immediately. A decision on this factor will be based on the financial information provided by the taxpayer and any further enquiries the Commissioner considers necessary.
Whether the taxpayer is being frivolous or vexatious
  1. This includes situations the Commissioner may decline to enter into an instalment arrangement, where:
    • Inland Revenue considers the taxpayer is not seriously contemplating entering into and/or complying with an instalment arrangement; or
    • previous requests for instalment arrangements have been declined and the taxpayer provides the same information when requesting a further instalment arrangement.
Whether the taxpayer has met their obligations under a previous instalment arrangement
  1. Where a taxpayer has previously entered into an instalment arrangement and has not met their obligations under that instalment arrangement, the Commissioner may decline to enter into a further instalment arrangement.
     
  2. In reaching this decision, Inland Revenue will also take into account:
    • the length of time since the previous instalment arrangement;
    • whether the previous instalment arrangement was realistic;
    • any changes in the taxpayer's position over that time;
    • whether there are any other factors likely to indicate that the taxpayer is more likely to meet their obligations if an instalment arrangement is agreed to this time.
       
  3. See paragraphs 114 to 116 for further information on default on instalment arrangements.
Whether the taxpayer's proposal is realistic
  1. A decision on this factor will be made based upon the financial information provided by the taxpayer and any further information the Commissioner considers necessary. The Commissioner will consider whether the taxpayer can reasonably afford to repay the outstanding tax debt at the rate detailed in the taxpayer's application.
     
  2. The Commissioner must, under section 6(1), have regard to protecting the integrity of the tax system and will be conscious of the possibility of taxpayers re-arranging their affairs by reducing personal assets or deliberately concealing assets overseas, or by some other method intended to prevent recovery of tax debt and to achieve a settlement with the Commissioner. For example, access to investment funds, beneficial interests, shareholder current accounts or trusts.
Whether the taxpayer is likely to comply with their current/future tax obligations
  1. An important feature of acceptance of any instalment arrangement by the Commissioner is that the taxpayer will still be able to meet their current and future tax obligations. The Commissioner is unlikely to agree to an instalment arrangement that would mean the taxpayer would incur further tax debts with Inland Revenue. For example, if a taxpayer is continuing in business, whether the instalment arrangement would allow the taxpayer to meet their ongoing income tax, and GST obligations as they arise?
Whether the taxpayer has filed all required returns
  1. Generally, Inland Revenue will require that any outstanding returns are filed before the amount of tax that is due can be quantified. However, where the outstanding tax can be calculated using the rules in Subpart RC of the Income Tax Act 2007, an instalment arrangement may be agreed to prior to the returns being filed.5
     
Other relevant factors that the Commissioner may consider appropriate in considering an application for an instalment arrangement
  1. In Clarke & Money v Commissioner of Inland Revenue6 it was considered the following factors are relevant to the exercise of the discretion under section 177:
    • the circumstances which led to the taxpayer's tax debts;
    • the nature and extent of the taxpayer's co-operation and negotiating stance;
    • the speed with which the taxpayer has provided requested information, and the extent of that information; and
    • the taxpayer's degree of compliance in providing information.
       
  2. In Raynel v Commissioner of Inland Revenue7, it was noted that where there has been 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, the Commissioner may be justified in initiating or continuing enforcement proceedings to secure the wider interests identified by the legislation.
     
  3. In Rogerson v Commissioner of Inland Revenue8, it was also considered the taxpayer's compliance history was a factor relevant to the Commissioner's exercise of the discretion to grant financial relief.

Cancellation of an instalment arrangement

  1. Under section 177B(6), the Commissioner may cancel an instalment arrangement where:
    • the instalment arrangement was entered into on the basis of false or misleading information provided by the taxpayer.

      For example, where a taxpayer has deliberately overstated outgoings or understated income; or where a taxpayer has omitted certain relevant information, for example, a vested right to income or assets of a trust, and this was not disclosed to the Commissioner.
       
    • the taxpayer is not meeting their obligations under the instalment arrangement.
       
  2. If an instalment arrangement is cancelled because false or misleading information was provided, any late payment penalties not imposed under the instalment arrangement will be reinstated in full.
     
  3. If an instalment arrangement is cancelled due to the terms not being met, incremental late payment penalties will be imposed (on a monthly basis) from the date the taxpayer ceased to meet their repayment obligations. Late payment penalties not charged while the instalment arrangement was being complied with will not be reinstated.

Payments

  1. Inland Revenue will negotiate with the taxpayer to determine the frequency and method of payment. These will be set taking into account both the taxpayer's financial circumstances and a rate which maximises the recovery of the tax debt from the taxpayer.
     
  2. Instalment amounts may be set to reflect a taxpayer's cashflow and do not need to be equal amounts. An instalment arrangement can include a lump sum payment to settle tax debt at an agreed future date.
     
  3. There is no set time frame for an instalment arrangement other than to collect the tax debt as soon as possible with regard to a taxpayer's financial circumstances.
     
  4. Inland Revenue will apply credits that subsequently arise in a taxpayer's account to the tax debt under an instalment arrangement unless the taxpayer, requests to have the amount paid to them.
     
  5. A taxpayer may start making voluntary payments at any time, without contacting the Commissioner to request an instalment arrangement. However, in these situations the taxpayer will not be eligible for any relief from late payment penalties.
     
  6. If after commencing voluntary payments, the taxpayer subsequently contacts Inland Revenue to request an instalment arrangement, if the request is granted, the non-imposition of penalties will apply from the date the taxpayer contacted Inland Revenue requesting an instalment arrangement.

Reviewing instalment arrangements

  1. A taxpayer may renegotiate an instalment arrangement at any time.
     
  2. The Commissioner may only initiate renegotiation of an instalment arrangement after the end of two years from the date on which the instalment arrangement was entered into.
     
  3. Where the Commissioner does initiate a review, the process will consider whether the instalment arrangement is still appropriate to the taxpayer's financial circumstances and may therefore require updated financial information from the taxpayer.
     
  4. The date the instalment arrangement is entered into is the date the instalment arrangement is accepted by the Commissioner or the taxpayer accepted a counter offer from the Commissioner. The details of an instalment arrangement will be confirmed by the Commissioner, including any conditions attached. For example, compliance with current and future tax obligations.
     
  5. Should a taxpayer default with their instalment arrangement, the Commissioner will look to salvage the instalment arrangement whenever possible, provided the taxpayer is making a genuine effort to pay their debt.

Imposition of late payment penalties

  1. Late payment penalties imposed under section 139B comprise initial late payment penalties and incremental late payment penalties.
     
  2. The initial late payment penalty is a two-step penalty being:
    • An initial late payment penalty of 1% imposed on the day after the tax is due; and
    • A second initial late payment penalty of 4% imposed seven days after the due date, if the tax debt remains outstanding.
       
  3. An incremental late payment penalty of 1% is imposed on the balance of tax debt each month.
     
  4. Late payment penalties will be imposed by law on tax not paid by the due date. Taxpayers who may have difficulty meeting their obligations should talk to Inland Revenue as early as possible to discuss payment options. This will minimise the imposition of penalties.
     
  5. Relief from late payment penalties does not apply until the outstanding tax for which an instalment arrangement is requested, can be substantiated as a result of a return being filed by a taxpayer or an assessment raised by the Commissioner (as required by law).
     
  6. No incremental late payment penalties are charged once the Commissioner has entered into an instalment arrangement provided the repayment obligations under the instalment arrangement are met.
     
  7. The agreed instalment arrangement amount is the minimum amount that is payable. Extra payments are not used as credits towards future monthly obligations. Instead they are applied to reduce the term of the instalment arrangement and the amount of interest payable.
     
  8. If a taxpayer misses an instalment they face late payment penalties on the entire amount of the debt that remains unpaid - not just the amount of the missed instalment.
     
  9. If taxpayers consider they may not be able to maintain an instalment arrangement due to changed circumstances or unexpected living/business expenses, they should contact Inland Revenue to renegotiate that instalment arrangement. This may prevent penalties being imposed should the taxpayer default on the instalment arrangement.
     
  10. If the Commissioner declines the request for an instalment arrangement, the late payment penalties will be imposed as if the taxpayer had not made the request.

Pre-emptive instalment arrangements

  1. For the purpose of this SPS, pre-emptive instalment arrangements are situations where taxpayers seek instalment arrangements before the tax is due.
     
  2. Where the taxpayer contacts the Commissioner seeking an instalment arrangement before the tax is due, the 1% initial late payment penalty must be imposed once the due date for payment of the tax has passed9. However, the following 4% initial late payment penalty will not be imposed when negotiation is underway or an instalment arrangement is entered into.

Instalment arrangements for payment of tax where returns are not filed

  1. The Commissioner is unlikely to agree to an instalment arrangement in respect of anticipated outstanding tax where the related returns have not been filed and no assessment has been made. However, where the outstanding tax is provisional tax calculated using the rules in Subpart RC of the Income Tax Act 2007, an instalment arrangement may be agreed to prior to the returns being filed.
     
  2. In other cases, until outstanding taxes are quantified or an assessment is made, taxpayers will be encouraged to make voluntary payments towards their estimated tax liability.
     
  3. Negotiations for an instalment arrangement can only start once a taxpayer is able to quantify their outstanding tax, or where the Commissioner is able to issue an income statement (for example, Working for Families tax credit overpayments) or appropriate assessment.
     
  4. Where a taxpayer's returns are completed but not filed, the Commissioner cannot initiate the negotiation period or suppress penalties until the relevant returns are received by Inland Revenue or an assessment has been made, to quantify the outstanding tax for which an instalment arrangement is requested.

Provisional tax

  1. Provisional tax payments are interim payments on account for income tax for the current year. Provisional tax is generally calculated based on a taxpayer’s income tax liability from the previous year, although their actual liability is assessed when returns are filed after the year end. Provided taxpayers have calculated provisional tax payable in accordance with the provisional tax rules under subpart RC of the Income Tax Act 2007, requests for a related instalment arrangement will be considered by Inland Revenue.10
     
  2. Inland Revenue acknowledges some taxpayers will have cash flow difficulties and there are options available to assist them to spread payments or adjust their liability as appropriate to their changed circumstances.
     
  3. The provisional tax rules allow taxpayers to base their provisional tax payments on a percentage of their GST taxable supplies. Taxpayers may elect to align provisional tax payments with their cash flow and also reduce their exposure to use-of-money interest. Taxpayers with cash-flow problems will be encouraged to consider this method of payment should they have a problem with making standard payments for provisional tax.
     
  4. Taxpayers who have experienced a downturn in business sales, may choose to re-estimate their provisional tax liability to better reflect their likely tax liability for the current year. Care is required when making a re-estimation to ensure that it is fair and reasonable. Taxpayers may be liable to penalties and/or interest if they don't take reasonable care when they estimate their provisional tax.
     
  5. Taxpayers may also make voluntary payments towards their provisional tax liability. Once their return is filed for the income year to establish what residual income tax is payable, they can then request an instalment arrangement should there be further tax to pay. A shortfall in voluntary payments and a taxpayer's provisional tax liability may also incur late payment penalties and interest charges.
     
  6. When taxpayers request a pre-emptive instalment arrangement for the payment of provisional tax instalments, the Commissioner will advise them to consider all options available. The Commissioner will discuss the options available with taxpayers to agree on the most appropriate solution for their circumstances and, if satisfied a genuine cash flow problem exists, will agree to an instalment arrangement for payment of provisional tax. 11
     

Instalment arrangements entered into after tax is due for payment

  1. Where the taxpayer contacts the Commissioner to request an instalment arrangement after the due date for payment, late payment penalties will be imposed up to the date of the taxpayer's request.
     
  2. If all tax obligations under the instalment arrangement are fulfilled, these instalment arrangements will not incur any further late payment penalties following the taxpayer's request.

Instalment arrangements for taxes collected by third parties

  1. People who collect taxes on behalf of the Crown (for example, employers deducting tax from wages and GST-registered persons charging GST) have an obligation to pay these taxes to the Commissioner, in full and on time. The implications of not doing so are serious and can be viewed as misappropriation of Crown funds.
     
  2. Anyone in these categories who anticipates problems with payment of the monies collected on behalf of the Crown should contact Inland Revenue as early as possible.
     
  3. The Commissioner will consider the reasons for payment not being made on time and may accept an instalment arrangement for their tax debt where genuine cash flow problems exist.
     
  4. Instalment arrangements will be considered only where the tax debt can be quantified and there is no serious risk to the Crown if recovery action is deferred.
     
  5. An employer may be liable to pay a 10% monthly shortfall penalty, in addition to late payment penalties, when they don't pay the amount calculated on their employer monthly schedule by the due date. When they pay the amount outstanding or enter into an instalment arrangement, the last 10% monthly shortfall penalty imposed will reduce to 5%, and no further shortfall penalty is imposed while an instalment arrangement is being complied with. If an employer defaults on an instalment arrangement, they will be liable to a 10% monthly shortfall penalty from the month they cease to comply with the instalment arrangement.

Default with instalments may not undo an instalment arrangement

  1. A taxpayer's circumstances can change for reasons outside their control, for example, an unforeseen household expense or default by debtors can erode their cash flow and ability to maintain an instalment arrangement.
     
  2. In these circumstances taxpayers should contact the Commissioner promptly to discuss an adjustment to their instalment arrangements. So long as the Commissioner is satisfied a taxpayer is making their best effort to meet their tax obligations, further discussion will be encouraged to review options to recover debt.
     
  3. If a taxpayer is not cooperative, the Commissioner may cancel an instalment arrangement and pursue other remedies available to collect the tax debt.

Standard Practice

  1. Taxpayers should contact the Commissioner at the earliest opportunity if they think they will have trouble paying their tax by the due date. Options for payment can be discussed which may include an instalment arrangement if they are unable to pay their tax in full.
     
  2. Upon receipt of a taxpayer's application for an instalment arrangement, the Commissioner has four options:
    1. Accept the taxpayer's request; or
    2. Seek further information from the taxpayer; or
    3. Make a counter offer; or
    4. Decline the request.
       
  3. The Commissioner will take into account the following factors when considering a taxpayer's application for an instalment arrangement:
    1. Whether the tax payable can be quantified;
    2. Whether the proposal will place the taxpayer, being a natural person, in serious hardship, or cause financial difficulties for other taxpayer entities;
    3. Whether the instalment arrangement would maximise the recovery of tax debt from the taxpayer;
    4. Whether the taxpayer is in a position to pay all of the tax debt immediately;
    5. Whether the taxpayer is being frivolous or vexatious;
    6. Whether the taxpayer has met their obligations under a previous instalment arrangement;
    7. Whether the taxpayer's proposal is realistic;
    8. Whether the taxpayer is likely to comply with their current/future tax obligations;
    9. Whether the taxpayer has filed all relevant returns for the period of the instalment arrangement requested; and
    10. Other relevant factors that the Commissioner may consider appropriate.
       
  4. When considering a taxpayer's application for an instalment arrangement, if the Commissioner requires further information, the taxpayer has 20 working days (or a longer period where allowed by the Commissioner) to provide the information requested.
     
  5. The taxpayer must provide the information requested within the required timeframe, or request further time from the Commissioner, to preserve the application for an instalment arrangement. Failure to provide the information requested is likely to result in the expiry of the negotiation period and lapse of the application. This means that the initial late payment penalty and the monthly incremental late payment penalty will be imposed on their tax debt.
     
  6. When the Commissioner accepts an instalment arrangement or, the taxpayer accepts a counter offer, the confirmation will include the terms and set out both the taxpayer's and the Commissioner's obligations under the instalment arrangement. Confirmation may be made by telephone or electronic means consistent with the method used by the taxpayer for their application. For a complex instalment arrangement the Commissioner is likely to set out the details of the instalment arrangement in writing.
     
  7. Where the taxpayer applies for an instalment arrangement before the tax is due for payment and the Commissioner accepts the application, the initial late payment penalty of 1% will be imposed on the tax debt.
     
  8. Regardless of the Commissioner accepting an instalment arrangement, use-of-money interest will accrue daily on the tax debt while it remains unpaid.
     
  9. Where the taxpayer applies for an instalment arrangement after the tax is due and the Commissioner accepts the application, the initial late payment penalty of 1% and if applicable the initial 4% will be imposed on the tax debt. In addition, any incremental late payment penalties imposed up to the date of the taxpayer's request are also payable. Use-of-money interest will also accrue daily on the tax debt that remains unpaid.
     
  10. The taxpayer may renegotiate an instalment arrangement at any time. The Commissioner may do so only after the end of two years from the date on which the instalment arrangement was entered into.
     
  11. The Commissioner may cancel an instalment arrangement if it was entered into on the basis of false or misleading information. In these cases, the late payment penalties will be imposed as if the instalment arrangement had not been entered into.
     
  12. Default on payment of an instalment may not undo an overall instalment arrangement. When the Commissioner is satisfied a taxpayer is making their best effort to meet their obligations, the terms of an instalment arrangement may be varied for recovery of the tax debt.

 

This Standard Practice Statement is signed on 16 February 2011.

 

Rob Wells
LTS Manager, Technical Standards
Legal and Technical Services

 


1 Highlighted text inserted July 2012.
2 Raynel v CIR (2004) 21 NZTC 18,583
3 Restyled IR590 form replaced previous IR40 form (May 2012).
4 The methodologies for determining the discount rate, probability of payment and net present value are outlined in the appendix to Tax Information Bulletin Vol 6, No. 14 (June 1995), Appendix, Addendum C.
5 Highlighted text inserted July 2012.
6 In Clarke & Money v Commissioner of Inland Revenue (2005) 22 NZTC 19,165
7 Raynel v CIR (2004) 21 NZTC 18,583
8 Rogerson v Commissioner of Inland Revenue (2005) 22 NZTC 19,260
9 Penalty must be imposed under section 139BA
10 Highlighted text inserted July 2012.
11 Highlighted text inserted July 2012.