John Wright
Under-Secretary to the Minister of Revenue

15 August 2001

The discussion document in general

1.   Why is the review taking place now?

The current compliance and penalties legislation was introduced with effect from the 1997-98 income year. As part of the generic tax policy process the post-implementation review began as scheduled in late 1999. The need for the review was highlighted further during the Finance and Expenditure Committee inquiry into the powers and operations of the Inland Revenue Department. Many of the recommendations made by the Committee were included in the review's terms of reference.

2.   How does the review fit into the tax simplification process?

This discussion document is the third in the tax simplification series. The first two were More time for business and Maori Organisations. This discussion document is intended to reduce compliance costs by providing rules that are clearer and fairer.

3.   This document focuses on the recommendations made by the Finance and Expenditure Committee, and there is no discussion of technical issues. Are there no technical issues?

This document represents the work done to date. It is anticipated that another discussion document will be released next year and will, amongst other things, address numerous technical issues relating to the detail of the legislation. Submissions on issues that people would like considered in the next stage of the review are welcome now.

4.   Why are there two closing dates for submissions?

The legislation for the proposals relating to debt and hardship and transfers of excess tax will be included in a taxation bill to be introduced late this year. So that submissions can be considered before the bill is introduced, the closing date for submissions for these proposals is 21 September 2001. The closing date for submissions on all other matters is 21 November 2001.

Finance and Expenditure Committee recommendations

Debt and hardship

5.   What is proposed?

The Government is proposing that the current debt and hardship rules be clarified and in particular:

• propose that Inland Revenue's role be to maximise the recovery of outstanding tax, but not if:
  - recovery represents an inefficient use of Inland Revenue's resources; or
  - a taxpayer is placed in serious hardship;
• "serious hardship" will be defined and will list both circumstances which meet that test and circumstances which do not;

• if Inland Revenue can collect more of the debt over time through an instalment arrangement than from bankruptcy or liquidation, then Inland Revenue would be required to enter the instalment arrangement and any amount not recovered will be written off as unrecoverable;

• there will be fairer instalment arrangements including provision that late payment penalties will stop when a taxpayer contacts Inland Revenue stating they want to negotiate payment of the debt;

• amounts not recovered will be written off permanently and will not be able to be reinstated.

6.   Will these proposals apply to all taxes?

Yes, with the exception of child support. Child support payments may be passed on to the custodial parent and are paid for the support of children. If child support debt was written off the children involved would suffer and the principles of the scheme would be undermined.

7.   Who would the proposal affect?

Any taxpayer who finds they have tax debts that they are unable to pay. The rules have been designed to encourage taxpayers who find they cannot pay their tax on a due date, to contact Inland Revenue at the earliest opportunity.

8.   Why is the change needed?

A number of deficiencies were highlighted during the Finance and Expenditure Committee Inquiry, especially in the area of write-off of tax debt. The current legislation was designed in the 1930s and hasn't been reviewed since it was introduced. The Government concluded that there are a number of problems with the current rules in that they are unclear and due to their uncertainty may lead to taxpayers being treated inconsistently.

9.   One of the major concerns of the Committee was in relation to "write-off". What are you proposing in this area?

As currently applied by Inland Revenue, "write-off" means that no action is taken to collect the debt. However, late payment penalties and use-of-money interest continue to accrue. If Inland Revenue finds that a taxpayer's financial position has improved, action can be taken to recover the amount written off, including any penalties and interest accrued. The Government is proposing that the legislation list the situations where a tax debt may be written off. Once an amount is written off there will be no grounds for the amount to be reinstated.

10.   When will tax debt be written off?

Under the proposal the legislation will detail a number of circumstances in which tax may be written off:

• bankruptcy;

• liquidation;

• a company being struck off the Companies Office register;

• confirmation of the distribution of a deceased taxpayer's estate;

• a taxpayer cannot be found;

• the debt relates to a taxpayer that cannot be identified;

• administrative error; and

• situations where Inland Revenue considers there is a limit on the amount recoverable.

The final criterion includes debts written off if this would result in serious hardship for the taxpayer or it is not practicable to collect the full amount. Amounts will also be written off if Inland Revenue considers the tax unrecoverable.

11.   What are some examples of serious hardship?

The discussion document proposes that "serious hardship" be defined to include:

• deprivation of necessities according to normal community standards; or

• not being able to acquire a basic standard of food, clothing, medical supplies, accommodation, education for children or dependants, and other basic requirements.

"Serious hardship" will also be defined to exclude:

the mere imposition of an obligation to pay tax;
the prospect (or likelihood) of bankruptcy or liquidation;
the limitation of social activities and entertainment; and
the loss of access to goods or services of an expensive nature or standard.

Shortfall penalties

Good behaviour

12.   What is the proposal?

The Committee recommended that a past history of good behaviour be taken into account when deciding whether to impose a penalty. Rather than simply providing that the penalty not apply if a taxpayer has a past history of good behaviour, the Government is proposing that the lack of reasonable care penalty be reduced to 10 percent, if the breach is the taxpayer's first breach of a required standard of behaviour. If the taxpayer subsequently does not take reasonable care within seven years, the shortfall penalty for any subsequent breach would be imposed at 20 percent.

13.   Why not simply provide that the penalty not apply if a taxpayer has a past history of good behaviour?

We are concerned that the "norm" for taxpayers could become one of only taking care after having been audited, or taxpayers would breach the standard now and then but not sufficiently to be seen as a "bad" taxpayer. This approach would be seen as inequitable by those taxpayers who do maintain compliance standards. The Government is concerned that such a proposal would also reduce voluntary compliance.