SPS 15/03
Issued
24 Nov 2015

Writing off outstanding tax (WITHDRAWN)

Statement SPS 15/03 sets out the Commissioner's practice for granting financial relief by permanently writing off outstanding tax.

Withdrawn

This statement has been withdrawn and is provided for historical purposes only.

Introduction

Standard Practice Statements describe how the Commissioner of Inland Revenue will exercise a statutory discretion or deal with practical issues arising out of the administration of the Inland Revenue Acts.

This statement sets out the Commissioner's practice for granting financial relief by permanently writing off outstanding tax using the Commissioner's discretionary power under s 177C of the Tax Administration Act 1994 (the TAA). For relief purposes, outstanding tax includes any civil penalty and use-of-money interest.

Unless specified otherwise, all legislative references in this statement refer to the TAA. The relevant legislative provisions are:

  • s 3, 6, 6A, 14B, 138E, 139B, 139BA, 141D, 141E, 174AA, 176, 177, 177A to 177C; and
  • s LE 3 of the Income Tax Act 2007.

Application

Taxpayers are encouraged to contact Inland Revenue as soon as possible if they think that they may have trouble paying their tax in full by the due date, or that they may experience serious hardship, so that the options for financial relief can be discussed. Taxpayers need not wait for a due date to pass before applying for financial relief.

The form of the application

Taxpayers who wish to apply for financial relief may do so by telephone or in writing (including mail sent through Inland Revenue's secure online services). Once an application is received, the Commissioner will determine whether the outstanding tax can be written off on the grounds of serious hardship.

In some cases, the Commissioner will require that the application for financial relief is made in writing (rather than verbally) under s 177(2). This may be where a taxpayer's inability to pay the outstanding tax is caused by a number of factors that require evidence in writing or when a taxpayer has related parties, such as a partnership or company, that have outstanding tax to pay. Where a taxpayer is required to apply for financial relief in writing, they may do so by:

  • delivering the notice in person to an Inland Revenue office during office opening hours;
  • sending the notice by facsimile to an Inland Revenue office;
  • sending mail through Inland Revenue's secure online services; or
  • sending the notice by post to:

    PO Box 39050
    Wellington Mail Centre
    Lower Hutt 5045.

For child support purposes, this statement applies to an amount payable by a "payer", as defined in s 153 of the Child Support Act 1991. That is, a person required to withhold money in accordance with a deduction notice issued by Inland Revenue. However, this statement does not apply to "financial support", as defined in s 2(1) of the Child Support Act 1991 (that is, child support and/or domestic maintenance payable under that Act) or to student loan repayment obligations1.

This SPS applies to write-off decisions made on or after 24 November 2015. This statement replaces SPS 06/02 Writing off outstanding tax,which was published in Tax Information Bulletin Vol 18, No 5 (June 2006): 55.

Reviewing a decision

Section 138E(1)(e)(iv) provides that there is no statutory right of challenge to any decision of the Commissioner to grant relief, decline to grant relief, or to cancel relief.

However, if a taxpayer is concerned that their circumstances have not been given proper consideration, they should raise their concern and ask for the decision to be reconsidered. If a taxpayer is still not satisfied, they also have the option to have a decision reviewed by the Office of the Ombudsman or by way of judicial review.

If a taxpayer is not satisfied with the level of service they have received, they can obtain more information about the Inland Revenue Complaints Management Service or phone 0800 274 138 (Monday to Friday between 8am and 5pm).

Summary

  1. This statement sets out the factors the Commissioner of Inland Revenue will take into account when considering whether to write off outstanding tax.
  2. Taxpayers who cannot afford to pay their tax in full may apply to Inland Revenue for financial relief under s 177(1). It is better to contact Inland Revenue as early as possible to discuss the options for resolving the debt.
  3. Inland Revenue will negotiate with a taxpayer to determine as soon as possible whether they are eligible for financial relief, what form of relief may be provided and the extent of relief.
  4. Upon receiving a taxpayer's application for financial relief, the Commissioner has four options:
    1. accept the taxpayer's request;
    2. seek further information from the taxpayer (this may include financial information and the filing of any outstanding returns);
    3. make a counter offer; or
    4. decline the request.
  5. The Commissioner will take into account the following factors when considering whether to write off outstanding tax:
    • whether the taxpayer is in a position to pay all or part of the outstanding tax immediately;
    • whether collection of the outstanding tax (in full or part) will place the taxpayer, being a natural person, in serious hardship;
    • whether the value of the taxpayer's proposal, when compared to other recovery options, would maximise the recovery of outstanding tax from the taxpayer;
    • whether the taxpayer has filed all required returns; and
    • any other relevant factors.
  6. To help the Commissioner make a decision on granting relief, a taxpayer may be required to provide additional relevant information (such as financial information) and will also be asked to file any outstanding returns.
  7. If further information is requested, the taxpayer must provide that information within 20 working days (or within any longer period allowed by the Commissioner). Information received outside that timeframe will be treated as a new request for financial relief.
  8. If the Commissioner subsequently declines to grant financial relief, initial and incremental late payment penalties will be imposed and interest will accrue, as if the request for financial relief had not been made.

Amounts to be written off

  1. The Commissioner must write off outstanding tax that cannot be recovered in the event of a:
    • bankruptcy;
    • liquidation; or
    • distribution of a taxpayer's estate.
  2. The Commissioner has the discretion to write off outstanding tax that cannot be recovered. Where it is agreed that part of the outstanding tax will be paid under an instalment arrangement and the balance written off, the write-off will be made at the time the instalment arrangement is entered into.
  3. Section 177C(3) prohibits the write off of outstanding tax (including the shortfall penalty imposed) when a taxpayer is liable to a shortfall penalty for an abusive tax position under s 141D(2) or evasion or a similar act under s 141E(1).
  4. Any tax write-off will be permanent unless:
    • the taxpayer, being a natural person, declares bankruptcy, or is subject to bankruptcy proceedings being brought by a creditor, within a year of the outstanding tax being written off on the grounds of serious hardship;
    • the taxpayer, being a company, is liquidated, or in the course of being liquidated, within a year of the outstanding tax being written off on the grounds of serious hardship; or
    • the tax was written off on the basis of false or misleading information provided by the taxpayer.
  5. The Commissioner may permanently write off outstanding tax under s 174AA(a) when the balance of the tax payable is less than $20.
  6. When a taxpayer enters into an insolvency arrangement under voluntary administration or the "no asset procedure" provisions of the Insolvency Act 2006, the Commissioner will not consider writing off outstanding tax until the taxpayer has been released from debts covered by their insolvency arrangement. Once they are released from their debts, the balance of related outstanding tax will be written off on the basis that it is not recoverable.
  7. A natural person acting as a trustee can apply for financial relief under s 177(1)(a) in respect of the trust's tax debt that the trustee is personally liable for. Any relief that the Commissioner provides to an individual trustee does not extend to other trustees who are jointly and severally liable for payment of a trust's taxes. The Commissioner will action a write-off in such circumstances after all other avenues for collection have been exhausted.

Tax losses and imputation credits

  1. If the Commissioner decides to write off outstanding tax, she must extinguish all or part of any tax losses carried forward and/or any imputation credits from the taxpayer's most recently filed return of income, to the extent of the write-off.
  2. When a taxpayer has both tax losses and imputation credits carried forward from a previous year, the losses will be extinguished first.
  3. For the Commissioner to accurately determine the value of any losses or imputation credits, a taxpayer must file all outstanding returns of income before a write-off of outstanding tax will be considered.
  4. When the Commissioner writes off outstanding tax, the taxpayer will be notified of this in writing and, if losses or imputation credits remain, the value of any tax losses or imputation credits carried forward.

Discussion

  1. Taxpayers may apply for financial relief under s 177(1). The financial relief may be in the form of:
    • an instalment arrangement for all of the outstanding tax;
    • an instalment arrangement for part of the outstanding tax and a write-off of the remaining balance (a partial write-off); or
    • a write-off of all of the outstanding tax.

Considering a taxpayer's application

  1. Section 3(1) defines "outstanding tax" as tax that is payable before or after a due date. Therefore, taxpayers need not wait for a due date to pass before applying for financial relief.
  2. Upon receiving an application for financial relief, the Commissioner may:
    • accept that not all the outstanding tax will be collectable and consider that a partial or full tax write-off is appropriate in the taxpayer's circumstances;
    • seek further information from the taxpayer;
    • make a counter-offer; or
    • decline the taxpayer's request.

Consider that a write-off is appropriate

  1. The initial late payment penalty payable on outstanding tax under s 139B(2)(a) is charged in two stages – 1% payable on the day after the due date, and 4% payable seven days after the due date. The 1% initial late payment penalty will apply regardless of a request for relief being received before the due date. In addition, interest (charged on a daily basis) is payable on the outstanding tax after the due date. However, if the taxpayer requests financial relief before the payment is due, the second stage 4% initial late payment penalty will not be charged from the date a request for relief is received and/or while an instalment arrangement is maintained.
  2. If the outstanding tax is written off, the taxpayer will be advised of that in writing. That notification will include:
    • the tax type(s), the relevant period(s) and the amount(s) of tax written off; and
    • any remaining net losses and/or excess imputation credits carried forward (see discussion at [83] to [87]); and/or
    • where applicable, the amount of outstanding tax under an instalment arrangement, including any amount of use-of-money interest.

Seek further information from the taxpayer

  1. When considering an application for financial relief, the Commissioner will consider the taxpayer's financial circumstances by looking at the information provided with the application, as well as information already held by Inland Revenue. However, the Commissioner may also ask the taxpayer to provide further information. The Commissioner will also ask that any outstanding returns be filed (if applicable).
Examples

A taxpayer has outstanding income tax for the 2013 tax year and applies for relief on the ground that the payment will place them in serious hardship. Their income tax return for the 2013 tax year shows a net loss carried forward from an earlier period. However, the 2012 income tax return is yet to be filed.

The Commissioner will require the taxpayer to file their 2012 income tax return, and perhaps provide other information, before a decision can be made on the taxpayer's request for financial relief.

  1. Under s 177(4), if further information is required, the taxpayer needs to provide this information within 20 working days (or a longer period as allowed by the Commissioner). If the further information is not provided until after the time allowed, that information will be treated as a new request when it is received.
  2. Under s 139BA, incremental late payment penalties will not be imposed while waiting for the additional information, provided financial relief is granted. Use-of-money interest will continue to be accrued and charged for this period, even if relief via an instalment arrangement is granted. If relief is provided via a write-off of outstanding tax, the related use-of-money interest will also be remitted under s 183E.

Make a counter-offer

  1. After reviewing all the information (including additional information that may have been requested), the Commissioner may make a counter offer. This may occur where she considers that:
    • the taxpayer can afford to make a lump-sum payment; or
    • a partial write-off is more appropriate, as an instalment arrangement for part of the outstanding tax can be entered into.

Decline the taxpayer's request

  1. Commissioner will decline the taxpayer's request for a write-off if she considers the taxpayer is able to pay the outstanding tax in full or that an instalment arrangement is a better option. For example, the taxpayer may have term deposits or other investments that can be used, or the taxpayer may have the ability to borrow money to pay the outstanding tax.
  2. The Commissioner may also decline a taxpayer's request for a write-off if they have not provided sufficient information to support their request.
  3. When the Commissioner declines a taxpayer's request for financial relief, both initial and incremental late payment penalties will be imposed, and use-of-money interest will accrue, as if the taxpayer had not made the request.

Factors relevant to the consideration of financial relief

  1. The Commissioner may have regard to a number of factors when considering applications for financial relief. In Clarke & Money v CIR,2 Priestley J referred to the following factors as relevant to the exercise of the discretion under s 177:
    1. the circumstances that led to a taxpayer's outstanding tax;
    2. the nature and extent of a taxpayer's co-operation and negotiating stance;
    3. the speed with which a taxpayer has provided requested information and the quality of that information; and
    4. the Commissioner's duties under ss 6 and 6A(3).

Maximising the recover of outstanding tax

  1. Under s 176, the Commissioner has a duty to maximise the recovery of outstanding tax from a taxpayer. The Commissioner is therefore obliged to compare the value of the likely recovery from accepting a taxpayer's proposal to 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.

The relationship between the duties in s 176 and ss 6 and 6A

  1. While s 176 provides that the Commissioner must maximise recovery of outstanding tax, this duty is subject to the overriding obligations to protect the integrity of the tax system (s 6) and to collect over time the highest net revenue that is practicable within the law (s 6A). Interpretation Statement IS 10/07 Care and management of the taxes covered by the Inland Revenue Acts provides the Commissioner's view on the application of ss 6 and 6A.3
  2. In Raynel v CIR4, Randerson J referred to the following "general compromise" approach to the application of ss 6 and 6A:
    • The obligation to collect the highest net revenue is not absolute. The Commissioner is required to take practicable and lawful steps to recover revenue.
    • The Commissioner is required to have regard to the resources available to her, the importance of promoting compliance (especially voluntary compliance) by all taxpayers, and the compliance costs incurred by taxpayers.
    • Sections 6 and 6A(3)(b) emphasise that there is a broader public interest in the integrity of the tax system and in ensuring that taxpayers meet their obligations.
  3. Although the Commissioner will consider each application for financial relief on its own merits, the duty to protect the integrity of the tax system will sometimes require the Commissioner to take action that (in the short term) might not be consistent with the requirement to maximise recovery of outstanding tax.
  4. When a negotiated agreement for payment of all or part of the outstanding tax (such as an instalment arrangement) would yield more than bankruptcy or liquidation action, the Commissioner will usually enter into such an agreement. Any amount not recoverable under the agreement will be written off at the time the agreement is entered into.
Examples

A taxpayer has outstanding tax of $100,000 and makes an offer to pay $75,000 over 3 years. The Commissioner considers that bankruptcy would yield only $50,000 and that there are no other viable avenues for recovery. In this instance, the Commissioner would consider writing off $25,000 and entering into an instalment arrangement over three years for $75,000.

Alternatively, a taxpayer has significant outstanding tax as a result of evasion and offers part payment of the tax owing. Information available to Inland Revenue indicates the taxpayer has accumulated an investment property that they could dispose of or use as collateral to raise funds to settle their arrears. As the tax shortfall was due to an evasion offence, the Commissioner is not able to write off the outstanding tax. She would decline the offer and pursue other options.

  1. Randerson J, in Raynel, further noted that, in certain circumstances, the Commissioner may be justified in initiating or continuing enforcement proceedings to secure the wider interests identified by the legislation. This is where there has been a flagrant and on-going failure by a taxpayer to comply with their tax obligations and where recovery is dubious or is likely to result only in a relatively minor proportion of the overall outstanding tax being recovered.
  2. In Rogerson v CIR,5 Potter J held that the Commissioner is entitled to consider a taxpayer's whole history of compliance in the context of the obligation to preserve the integrity of the tax system.

Inefficient use of the Commissioner's resources

  1. Consistent with the Commissioner's duty under s 6A(3), s 176(2)(a) provides that the Commissioner may not recover outstanding tax if the recovery of the outstanding tax would be an inefficient use of her limited resources. This includes the Commissioner's ability to write off tax under s 177C.
  2. However, a taxpayer cannot require that outstanding tax be written off under s 176(2) simply because they consider that collection would be an inefficient use of the Commissioner's resources. It is for the Commissioner to determine how her limited resources are allocated.
  3. There will be some instances where the cost of collection may be higher than the outstanding tax. Consistent with the Commissioner's obligations under ss 6 and 6A to protect the integrity of the tax system, promote compliance and collect over time the highest net revenue, recovery action may still be considered appropriate.
  4. Decisions to write off are made on a case-by-case basis and will take into account the effect of the proposed write-off on the overall compliance of all taxpayers, not just the taxpayer who has outstanding tax.

Instances where the Commissioner must write off outstanding tax

  1. Under s 177C(2)(a), the Commissioner must write off amounts that, because of bankruptcy, cannot be recovered.
  2. When a person is bankrupt, the Commissioner will write off outstanding tax that cannot be recovered upon receiving a final dividend or advice from the Official Assignee that there will be no dividend to Inland Revenue (provided that we do not challenge the Official Assignee's advice).
  3. Under s 177C(2)(b), the Commissioner must write off a company's outstanding tax that cannot be recovered because the company is in liquidation.
  4. When an estate has been distributed, the Commissioner must write off any outstanding tax that cannot be recovered upon receiving confirmation from the administrator that the estate has been distributed. However, if, for example, the estate has forgiven a debt owing to the estate without having regard to the estate's ability to meet its tax obligations, the Commissioner may seek payment from the administrator of the estate.

Serious hardship

  1. Under s 176(2)(b), the Commissioner may not recover outstanding tax to the extent that the recovery would place a taxpayer, being a natural person, in serious hardship.
  2. A natural person who applies for financial relief under s 177(1)(a) on the grounds of serious hardship must be able to explain why recovery would place them in serious hardship. The application should include supporting financial information.
  3. The Commissioner will consider each application on its own merits, bearing in mind her obligations to protect the integrity of the tax system (s 6) and to collect over time the highest net revenue that is practicable within the law (s 6A).

Applying the serious hardship provisions

  1. Under s 177A, when a taxpayer applies for financial relief, the Commissioner must consider whether recovery of the outstanding tax would place the taxpayer (being a natural person) into serious hardship. The reason why that tax is outstanding is not taken into account in determining serious hardship.
  2. Section 177A(3) also states that compliance, and non-compliance, with tax obligations must not be considered by the Commissioner when making a decision as to whether a taxpayer would be in serious hardship.
  3. Under s 177A, the Commissioner makes the decision whether recovering the outstanding tax would place a taxpayer in serious hardship by considering the taxpayer's financial information she holds on the date of the decision. After allowing for payment of a relevant amount of outstanding tax, the Commissioner must determine whether the financial information shows that the taxpayer would likely have significant financial difficulties.
  4. The taxpayer is likely to have significant financial difficulties if, after the application, the following occurs:
    • the taxpayer or their dependant has a serious illness;
    • the taxpayer would be unlikely to meet minimum living expenses estimated according to normal community standards of cost and quality;
    • the taxpayer would be unlikely to meet the cost of medical treatment for an illness or injury of the taxpayer, or of their dependant; or
    • the taxpayer would be unlikely to meet the cost of education for their dependant.
  5. The Commissioner may also take into account any other factors she thinks relevant. What those other relevant factors may be will depend on a taxpayer's individual circumstances.
  6. While "normal community standards of cost and quality" must be considered in the context of the wider community of all New Zealand, the actual expenditure of taxpayers in different parts of the country may vary. When calculating a taxpayer's minimum living expenses, the Commissioner will consider the costs of food, heating and accommodation in that taxpayer's area, based on information provided by Statistics New Zealand.
  7. Whether a person is a taxpayer's "dependant" will be determined on a case-by-case basis. In determining dependency, the Commissioner will consider:
    • whether the person depends on the taxpayer for financial support;
    • what degree of financial support is provided by the taxpayer; and
    • to what extent providing financial support affects the taxpayer's ability to meet minimum living expenses according to normal community standards.

Financial information

  1. To determine whether a taxpayer would be placed in serious hardship, the Commissioner will request relevant details of that taxpayer's financial position. The requested financial information may include, among other items:
    • details of income and expenditure (including income and expenditure in relation to relationship property, family and spousal income where appropriate);
    • assets and liabilities (including relationship property);
    • a 12-month cash flow projection;
    • asset valuations;
    • a statement of financial performance (a profit and loss statement);
    • a statement of financial position (a balance sheet);
    • a list of debtors and creditors, including how much is owed to or by the taxpayer, and any vested interest held in another entity (such as a trust).
  2. Written applications for write-off will not be required when it is evident from information already available to the Commissioner that recovery would place a taxpayer in serious hardship. This may happen where a taxpayer requests relief by way of an instalment arrangement, but the information provided shows that repayment, even by way of an instalment arrangement, would place them in serious hardship.

Part payment of outstanding tax

  1. In some instances, a taxpayer may be able to pay part of the outstanding tax, but recovery of the full amount would place the person in serious hardship. In these cases, the Commissioner may negotiate a lump-sum payment and/or an instalment arrangement with the taxpayer, with the possibility of writing off any amount considered to be irrecoverable. The irrecoverable amount will be written off at the time the instalment arrangement is entered into.
Examples

A taxpayer has outstanding tax of $8,000 and has been putting funds aside to clear this amount by the due date. However, at the due date they have only managed to save $2,000 towards this amount. The taxpayer has the ability to pay $2000 more if it is spread out over 3 months, otherwise they will have difficulty in meeting day-to-day living expenses.

Provided there are no other feasible options for recovery of tax, the Commissioner would accept the lump-sum payment of $2,000, enter into an instalment arrangement for the additional $2,000 and write off the balance of unpaid tax on the grounds of serious hardship.

Writing off a company's outstanding tax

  1. The Commissioner may also write off a company's outstanding tax under s 177C(1). This is if doing so is consistent with the duty to maximise recovery under s 176(1), subject to the obligations in ss 6 and 6A. As with individuals, Inland Revenue may enter into an instalment arrangement with the company for part of the company's outstanding tax and then write off the remaining balance.
  2. When a company is in liquidation (provided Inland Revenue does not challenge the liquidator's advice), the Commissioner must write off outstanding tax that cannot be recovered upon receiving:
    • a final distribution; or
    • advice from the liquidator that there will be no distribution to Inland Revenue.

Serious hardship and relief companies

  1. Serious hardship generally applies to natural persons only. A company cannot apply for outstanding tax to be written off on the grounds of serious hardship.
  2. However, the Commissioner will have to consider whether the recovery of outstanding tax owed by a company would cause serious hardship for a shareholder who:
    • alone or jointly with one other person, owns 50% or more of the shares in the company; or
    • is a shareholder-employee of a relief company.
  3. Section 3(1) defines a "relief company", in relation to a taxpayer, as a company in which:
    • the taxpayer owns 50% or more of the shares; or
    • the taxpayer and 1 other person jointly own 50% or more of the shares; or
    • the taxpayer is a shareholder-employee, and the company has five or fewer natural persons whose total voting or market value interests in the company exceed 50% and it is not a special corporate entity.
Examples

A relief company owes outstanding tax of $300,000 and its only asset is a debit balance in the principal shareholder's current account of $300,000. The shareholder's personal assets are a house and a car. Inland Revenue recognises that any action taken to liquidate this company would place the shareholder in serious hardship. The company agrees to pay Inland Revenue the sum of $220,000, borrowed against the principal shareholder's house. The balance of the outstanding tax will be written off, as collection of the amount would cause the shareholder serious hardship.

Struck-off companies

  1. The Commissioner cannot consider an application for financial relief of a company that has been removed from the New Zealand register at the Companies Office (been struck off) until that company is restored to the register. This is because the struck-off company has ceased to be a person and therefore is not a taxpayer.
  2. When a company has been struck off, the Commissioner can discuss outstanding tax matters with a person who was a director or authorised officer of the company immediately before it was struck off.
  3. In some cases, the Commissioner may apply to have the company restored to the New Zealand register in order to recover outstanding tax.
  4. The Commissioner may apply to the High Court for appointment of a liquidator to liquidate the struck-off company under s 241 of the Companies Act 1993. The Commissioner may do so even if there is no prospect of recovering the outstanding tax from the struck-off company.

Voluntary administration

  1. When a company seeks an arrangement with creditors under the voluntary administration provisions, the process is subject to the rules in the Companies Act 1993.
  2. Where the watershed meeting with creditors has resolved that a company may proceed to execute a deed of company arrangement (deed), all parties to the deed are bound in respect of claims as at the "cut-off day". The company is released from its debts to the extent provided in the deed under s 239ACW of the Companies Act 1993.
  3. As a deed may be varied by the creditors or terminated by the court or by creditors, there is no certainty of the amount of tax that will be recovered until the deed moratorium period has elapsed. Consequently, alternative recovery action or write-off will not be considered unless the court or creditors have cause to have the deed overturned. If a deed is terminated, the Commissioner may consider other ways to recover any outstanding tax under s 156 or consider whether the tax should be written off under s 177C(1) on the basis that money received under the deed was the best outcome.
  4. Any subsequent tax outstanding (for example, on-going GST or PAYE obligations not met) during the period of the deed will be the liability of the voluntary administrator within the agreed parameters of Inland Revenue's expectations. Alternatively the Commissioner may reject the proposed deed or an application may be made to the court to overturn the deed. Outstanding tax not recovered under the deed is quantified when the agreed term for a deed has expired and following a final report from the voluntary administrator to the Registrar of Companies advising of the dividend paid to creditors.
  5. As the voluntary administration process is governed by the provisions under the Companies Act 1993, the Commissioner will not consider the financial relief provisions under s 177C until the term of the deed has elapsed and a company has been released from debts to the extent provided in the deed. The Commissioner will then write off the balance not collected under s 177C on the basis that the tax is irrecoverable.

Writing off a trust's outstanding tax

  1. Trustees are personally liable for trust debts (including tax debts). Consequently, if there is insufficient trust property to pay a trust debt, a trustee may have to pay the debt out of their own resources.
  2. When there is more than one trustee of a trust, those trustees are jointly and severally liable for the trust's tax obligations.
  3. Trustees, in their capacity as natural persons, may experience serious hardship as a result of having to meet a trust's tax debt from their personal resources. The Commissioner will consider serious hardship applications from natural person trustees on a case by case basis and may write off tax on grounds of serious hardship when no other avenue is available for collection.

No asset procedure

  1. The "no asset procedure" is a one-off process that provides a fresh start to natural persons. The no asset procedure is available as an alternative to bankruptcy for those people who have insufficient income and no assets left to sell to repay debts from $1,000 up to $40,000. The no asset procedure is governed by rules under Part 5 of the Insolvency Act 2006.
  2. Unless the Commissioner has cause to persuade the Official Assignee to reject or overturn the no asset procedure, any tax owed by a taxpayer who is subject to the procedure is effectively frozen and the Commissioner cannot take any recovery action.
  3. Once a taxpayer has been released from debts covered by a no asset procedure, the Commissioner will then write off the balance of the outstanding tax under s 177C(1) on the basis that it is irrecoverable.

Writing off small amounts of outstanding tax

  1. The Commissioner may permanently write off outstanding tax under s 174AA(a) when the balance of the tax payable is $20 or less.
  2. If it is established later that a taxpayer's assessment or related use-of-money interest calculation was wrong, the Commissioner must amend the taxpayer's account to show the correct tax payable. It follows that any earlier write-off made under s 174AA may also be adjusted to the correct amount of tax payable.

Tax losses and excess imputation credits

  1. Sections 177C(5), 177C(5B), 177C(5C) and 177C(6) cover what happens when the Commissioner writes off outstanding tax for a taxpayer who has tax losses or imputation credits carried forward from a previous year.
  2. If the Commissioner writes off outstanding tax for a taxpayer who has net losses, part or all of the taxpayer's tax losses will also be extinguished. The amount extinguished is calculated by dividing the amount written off by 0.33 (if the taxpayer is not a company) or 0.28 (if the taxpayer is a company) and reducing the tax losses by that amount.
  3. If the Commissioner writes off outstanding tax for a taxpayer who has imputation credits carried forward from a previous year, all or part of these credits will be extinguished on a dollar-for-dollar basis.
  4. When a taxpayer has both tax losses and imputation credits carried forward from a previous year, the net losses will be extinguished first. A taxpayer's tax losses and/or imputation credits can be extinguished even if the tax written off is not income tax.
  5. The Commissioner needs to know the correct value of losses or imputation credits when making the adjustments required after writing off outstanding tax. Therefore, a taxpayer must file all outstanding tax returns (that is, outstanding returns relating to tax years prior to the tax year in which the outstanding tax arises) before their application for a write-off will be considered. The Commissioner will then calculate the tax losses using the taxpayer's most recently filed income tax return.
Examples

In July 2014, a taxpayer asks that their outstanding income tax for the 2014 tax year be written off due to financial difficulties. The taxpayer's 2012 income tax return shows tax losses carried forward to the 2013 tax year. However, the 2013 income tax return remains outstanding.

The write-off will not be considered until the taxpayer has filed their 2013 income tax return, as this will enable the Commissioner to have a full picture of the taxpayer's circumstances.

When the Commissioner cannot write off outstanding tax

  1. Under s 177C(3), the Commissioner cannot write off outstanding tax if a taxpayer is liable to pay, in relation to that outstanding tax, a shortfall penalty for taking an abusive tax position under s 141D(2) or for evasion or a similar act under s 141E(1), irrespective of whether the taxpayer has been assessed for the shortfall penalty.
  2. With the exception of some prosecution cases, in all instances where a taxpayer is liable to pay a shortfall penalty for either an abusive tax position or evasion, it is the Commissioner's practice for that shortfall penalty to be assessed.
  3. However, with respect to prosecution cases, s 149(5) provides that the imposition of a shortfall penalty precludes the subsequent prosecution of the taxpayer for that tax position. Therefore, the Commissioner's practice is not to assess a shortfall penalty in such cases until after the prosecution has been concluded, at which time the Commissioner has a discretion under s 149(4) whether to assess a shortfall penalty. A decision not to assess the shortfall penalty does not mean that the taxpayer was not "liable to pay" the relevant shortfall penalty for the purposes of s 177C(3).
  4. The Commissioner will distinguish between outstanding tax arising from such assessments and other outstanding tax so that part of a taxpayer's total outstanding tax may be written off if the required criteria are met, leaving the tax to which the shortfall penalty applies and the penalty itself outstanding. The other outstanding tax may include any late filing/late payment penalties imposed and accrued use-of-money interest that is payable in the same period as the tax shortfall and related shortfall penalty.
  5. When s 177C(3) prevents a write-off, the only other situation where the Commissioner has the ability to write off the tax shortfall and related penalty is under s 177C(2); that is, in situations of bankruptcy, liquidation or where a taxpayer's estate has been distributed.
Examples

A taxpayer has outstanding GST for the 31 March 2014 return period and income tax for the 2013 year. The outstanding income tax of $85,000 includes core tax of $25,000 and a tax shortfall and shortfall penalty amounting to $60,000 for taking an abusive tax position.

The taxpayer meets the criteria for serious hardship, so the outstanding GST may be written off.

However, the outstanding tax and penalty amounting to $60,000 cannot be written off, as the taxpayer is "liable to pay" a shortfall penalty for taking an abusive tax position in relation to that outstanding tax. The Commissioner can write off the $25,000 portion of the outstanding tax that is not related to the abusive tax position and related shortfall penalty.

  1. Consideration of a write-off application will be suspended when a taxpayer challenges the imposition of a shortfall penalty for taking an abusive tax position or evasion in a hearing authority. The Commissioner will not consider writing off that taxpayer's outstanding tax until after the hearing authority has made its ruling.

Reinstatement of outstanding tax

  1. Under s 177C(4), the Commissioner may only reinstate tax that has been written off if:
    • she receives, by operation of law, additional funds in respect of a taxpayer after that taxpayer has become bankrupt or has been liquidated; or
    • additional funds due to a taxpayer's estate are discovered after that taxpayer's estate has been distributed.
Examples

The Commissioner writes off a bankrupt taxpayer's outstanding tax under s 177C(2) after the Official Assignee declares that no dividend will be payable. The Official Assignee subsequently discovers a previously unknown bank account with a credit balance and makes a dividend payment to creditors. The Commissioner will reinstate the outstanding tax under s 177C(4) to the extent of the dividend payment and credit the money received to the taxpayer's account.

Reversal of a write-off

  1. Section 177C(7) allows the Commissioner to reverse a write-off made on the grounds of serious hardship when:
    • the taxpayer, being a natural person, declares bankruptcy or is subject to bankruptcy proceedings being brought by a creditor, within a year of the outstanding tax being written off on the grounds of serious hardship; or
    • the taxpayer, being a company is, within a year of the outstanding tax being written off on the grounds of serious hardship, liquidated or in the course of being liquidated; or
    • tax was written off on the basis of false or misleading information provided by the taxpayer.

This Standard Practice Statement is signed on 24 November 2015.

 

Rob Wells
LTS Manager - Technical Standards


1 For Inland Revenue's practice on providing financial relief by way of instalment arrangement, please refer to SPS 11/01 Instalment arrangements for payment of tax. In addition, SPS 15/02 Remission of penalties and use-of-money interest explains that interest will continue to accrue on any outstanding tax on a daily basis. Inland Revenue may provide financial relief by remitting penalties or interest rather than writing off assessment debt.
2 Clarke & Money v CIR(2005) 22 NZTC 19,165 (HC).
3 This statement is published in Tax Information Bulletin Vol 22, No 10 (November 2010): 17 and available on Inland Revenue's website.
4 Raynel v CIR (2004) 21 NZTC 18,583 (HC).
5 Rogerson v CIR (2005) 22 NZTC 19,260 (HC).