SPS 11/04
Issued
29 Apr 2011

Compulsory deductions from bank accounts

Statement SPS 11/04 sets out IR's practice on the use of deduction notices issued to banks requiring them to make deductions from their customers' accounts.

This statement also appears in Tax Information Bulletin Vol 23, No 5 (June 2011).

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 issued to banks requiring them to make deductions from their customers’ accounts.

Application

  1. This SPS outlines the Commissioner's powers to require a bank to make deductions from amounts that are payable, or will be payable, to a taxpayer who has arrears. This statement applies to deduction notices issued to banks under the following enactments:
    • Tax Administration Act 1994 ("the TAA")
    • Child Support Act 1991 ("the CSA")
    • Gaming Duties Act 1971 ("the GDA")
    • Goods and Services Tax Act 1985 ("the GSTA")
    • Student Loan Scheme Act 1992 ("the SLSA").
  2. This SPS applies to deduction notices issued from 29th April 2011. It replaces SPS 09/01 published in TIB Vol. 21, No. 2 (April 2009), which is withdrawn with effect from the date of this SPS.

Legislation

  1. The relevant sections which grant the Commissioner the power to issue a deduction notice are as follows:
    • Section 157 of the TAA
    • Section 151(2) of the CSA
    • Section 154 of the CSA
    • Section 12L of the GDA
    • Section 43 of the GSTA
    • Section 46 of the SLSA.

Discussion

  1. A deduction notice is an important debt collection tool for Inland Revenue. The relevant legislative provisions grant the Commissioner of Inland Revenue ("Commissioner") the power 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.
  2. Amounts payable includes all monies deposited with a bank to the credit of the taxpayer, including funds on term deposit even though that term may not be due to mature.
  3. Inland Revenue will not require deductions from a bank account that would put the taxpayer into, or further into, overdraft. Although 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.
  4. The deduction notice may require deductions to be made by the way of lump sum or by instalments, and will require the bank to check their customer's account(s) and deduct any funds according to the notice. If no funds are available the bank is required to advise Inland Revenue.
  5. 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.
  6. The notice will continue to apply until a deduction is made by the bank in respect of a notice requiring deduction by lump sum, or in respect to an on-going notice, until the amount required pursuant to the notice has been deducted or the notice is either revoked or withdrawn by Inland Revenue.
  7. With recovery of funds under the TAA, GDA,GSTA and SLSA, deductions made by the bank are held in trust for the Crown until they are forwarded to Inland Revenue. 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 that bank.
  8. Furthermore, Inland Revenue has the power to prosecute the bank for not complying with the terms of the deduction notice under section 157A of the TAA. 
  9. The bank does not however, incur liability in this manner if they fail to comply with a deduction notice for child support arrears under section 168(2) of the CSA.

Standard Practice

Decision to issue a deduction notice

  1. The decision to take any debt collection action, including the use of a deduction notice, is made only after consideration of all relevant information, including any previous communication between the department and the taxpayer, the amount and the age of the arrears and any known hardship or hardship likely to be experienced by the taxpayer.
  2. Inland Revenue will not issue a deduction notice for tax arrears that are subject to an instalment arrangement between the taxpayer and the Commissioner, so long as the arrangement is being adhered to by the taxpayer.

One-off and on-going notices

  1. The deduction notice may require deductions to be made either in a lump sum (one-off notice) or by instalments (on-going notice).  The manner of the deduction will be specified in the notice. The bank is required to forward the deducted funds to Inland Revenue according to the date specified on the notice.

Account monitoring

  1. A deduction notice issued under the appropriate act may require deduction from amounts held on the date of the notice, or from amounts deposited after the date of the notice. Inland Revenue is able to require daily monitoring of accounts where it is considered necessary. If Inland Revenue does require daily monitoring this will be communicated to the bank at the time of issuing the deduction notice.
  2. Inland Revenue acknowledges that compliance with a deduction notice can result in a cost to the bank, especially if constant monitoring of their customers' account(s) is required.  In light of this, daily monitoring will only be requested where such monitoring is considered necessary.
  3. If daily monitoring is required, it will usually be for a maximum of 10 working days.  However, Inland Revenue reserves the right to require an account to be monitored over a longer period where that may be necessary. If a longer period of monitoring is required, this will be communicated at the time of issuing the deduction notice.

Deductions from joint bank accounts

  1. A deduction notice issued under the TAA, GDA, GSTA and SLSA can be placed on joint bank accounts when the money is able to be withdrawn from that account by the defaulting person without the signature or other authorisation of the other joint bank account holder(s).
  2. A deduction notice can only be placed on a partnership account in respect of the partnership's liability as a taxpayer under the relevant act. A partnership account is defined in section 157(12) of the TAA as a joint account that files a return of income under section 33(1) of the TAA. A deduction notice cannot be placed on a partnership bank account to satisfy a partner's personal tax liability.

What is "other authorisation" for the purpose of account access?

  1. The term "other authorisation" as used in the TAA, GDA, GSTA and SLSA1, ensures that deduction notices can, and will be, applied to accounts which are accessed electronically. This ensures that any alternative methods of account authorisation are not excluded from the scope of deduction notices.

Deductions for Child Support arrears

  1. Under section 154 of the CSA, the Commissioner is able to require banks to make deductions from money payable to a liable parent. Under section 155 of the CSA this deduction power extends to money held in joint bank accounts in the name of the liable parent and one or more other persons, when the liable parent can draw from that account without the signature of the other person(s). Overpayments made to payees may also be recovered in the same manner as liable parent debt under section 151(2) of the CSA.
  2. The absence of the term "other authorisation" in the CSA does not change the construction of the law. The Electronic Transactions Act 2002 achieves functional equivalence with regard to electronic and paper transactions and in setting up their banking arrangements, the taxpayer consents to the use of an electronic signature to authorise transactions. Therefore, the omission of the term "other authorisation" in the CSA does not exclude the ability to place a deduction notice on accounts based electronically.

Deductions for Working for Families tax credits

  1. Section MF 5(2) of the Income Tax Act 2007 provides that both the primary caregiver and their partner or spouse throughout the income year to which the overpayment relates, are jointly and severally liable for any overpayment of Working for Families tax credits. The Commissioner may place a deduction notice on the bank accounts of the primary caregiver and/or their spouse for the income year, and any joint account held in the names of either the primary caregiver or the spouse for the income year.

Term investments

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

Prosecution

  1. 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 the bank for not complying with the terms of the deduction notice under section 157A of the TAA.

 

This Standard Practice Statement is signed on 29th April 2011.

 

Rob Wells
LTS Manager, Technical Standards
Legal and Technical Services


1 The term "other authorisation" for the purposes of section 46 of the SLSA, has been introduced through reference of sections 157 to 165 of the TAA.