There are some areas in the exposure draft that we consider require review. These are discussed further below.

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1 4 February 2011 Team Manager, Technical Services Office of the Chief Tax Counsel National Office Inland Revenue Department PO Box 2198 Wellington Dear Sir/Madam SPS ED0124 Instalment Arrangements for Payment of Tax We have reviewed the above draft standard practice statement. When finalised it is intended that this exposure draft will replace standard practice statement SPS 05/11, Instalment arrangements for payment of tax debt. We note that the content of the exposure draft is broadly the same as SPS 05/11. Some parts of the discussion are simplified and clarified and there are a few additional comments added (refer paragraph 36, first bullet point under heading Decline the request ; paragraphs 74 and 75; discussion on provisional tax in paragraphs ; discussion on instalment arrangements for taxes collected by third parties in paragraphs ; discussion on implications of default with instalments in paragraphs ). The other notable difference between the exposure draft and SPS 05/11 is that the finalised SPS will not apply to student loan repayment arrears; the current SPS does. We agree with this change. General comment The Institute supports the Commissioner maintaining the SPSs regarding the management of tax debt. As this is an important feature of our tax system the more guidance that is available to taxpayers the better, especially in these difficult economic times. However it is critical to the successful and efficient operation of the system that the spirit of the SPS is followed in practice. It has recently been brought to our attention that this is not always so 1. The Institute is aware of cases where taxpayers requests for an instalment arrangement were declined with no reason. This type of behaviour, together with the fact that there are no sanctions on the Commissioner for not following his own practice statements, undermines the policy intent of the tax debt rules and disregards the Commissioner s duty to collect over time the highest net revenue that is practicable within the law. It is crucial the finalised exposure draft is applied in practice to actively encourage voluntary compliance and to promote the integrity of the tax system. There are some areas in the exposure draft that we consider require review. These are discussed further below. 1 NZICA press release, 7 December Tower Building, 50 Customhouse Quay, Level 7, PO Box 11342, Wellington 6142, New Zealand, P , NZICA, www. nzica.com

2 Summary Reference should be made to section 176 of the Tax Administration Act 1994 (TAA) and discussion included on how these items relate to sections B. The exposure draft should consider the commentary and examples in Tax Information Bulletin, Vol 14, No 11 (November 2002), pp and confirm whether or not this item still represents the Commissioner s policy. A discussion should be included on the relationship between the tax debt rules and the care and management provisions, sections 6 and 6A of the TAA. The SPS should state clearly: how information obtained from other sources will be verified; how the relationship between the taxpayer and their tax agent will be managed when considering an instalment arrangement; Inland Revenue s approach if a taxpayer has a trust or a current account; and the practice that will be applied in cases where it is not feasible for the taxpayer to file all outstanding tax returns. For completeness the exposure draft should state in what circumstances the Commissioner will require a taxpayer to apply for financial relief on the grounds of serious hardship by notice under section 177(2) of the TAA. The discussion regarding when the Commissioner will decline the request for an instalment arrangement needs to be clarified and consolidated. A reasonable approach should be adopted when considering the implications of defaulting on an instalment arrangement. The exposure draft should advise how an instalment paid in advance will be treated. Some suggestions are made to improve the user-friendliness of the statement. Reference to section 176 TAA The SPS should refer to and include a discussion of section 176 of the TAA. As currently drafted the exposure draft appears to make only an inadvertent reference to this section in paragraph 54. The current tax debt rules were enacted in The governing principle underpinning these rules is section 176. Briefly section 176 provides that the Commissioner must maximise the recovery of outstanding tax from a taxpayer. However recovery is not to be made to the extent that it is an inefficient use of the Commissioner s resources; or if recovery would place a taxpayer, being a natural person, in serious hardship. It is in this context that sections B of the TAA is to be interpreted. Therefore we believe it is fundamental that a discussion of section 176 be included in the SPS. Tower Building, 50 Customhouse Quay, Level 7, PO Box 11342, Wellington 6142, New Zealand, P , NZICA, www. nzica.com

3 Tax Information Bulletin (TIB) item It would be helpful if a reference was made to the item in Tax Information Bulletin, Vol 14, No 11 (November 2002), pp This item was released after the enactment of the current tax debt rules. The TIB item has a useful discussion of the background and events leading to the tax debt rules and includes illustrative examples. It also confirms that the tax debt rules assist the Commissioner in fulfilling his duty to collect over time the highest net revenue that is practicable within the law. This is done by allowing the Commissioner to agree to an instalment arrangement with a taxpayer and/or to write off tax debt. The two options are not mutually exclusive; rather, they complement each other. The relationship between the rules for instalment arrangements and write off is a key part of the underlying policy of the tax debt rules; accordingly, this should be highlighted in the exposure draft. In our view this TIB item sets out the context in which sections B should be applied. Therefore this TIB item should be included in the final SPS and a statement made confirming whether or not the item still represents the Commissioner s policy. Relationship with sections 6 and 6A TAA Following on from our first submission we believe discussion regarding the relationship between sections 176, 6 and 6A of the TAA should be included more prominently in the SPS. The nature of the tax debt rules are such that the application of sections 6 and 6A (the care and management provisions) will inevitably be raised 2. As presently drafted there is only a brief mention of the care and management provisions in paragraphs 20 and 64. Discussion clarifying the relationship between the tax debt rules and the care and management provisions would be helpful for readers. Further the release in October 2010 of Interpretation Statement IS 10/07 Care and Management of the Taxes Covered by the Inland Revenue Acts section 6A(2) and (3) of the Tax Administration Act 1994, increases the need for this discussion. In IS 10/07 a number of examples are given and references made in the context of the tax debt rules (for example paragraphs 66, 130, , ). Paragraph 61 of IS 10/07 states that it is the Commissioner s view that section 6A(2) and (3) were enacted to make clear that the Commissioner was under no obligation to act inconsistently with the rest of the Inland Revenue Acts, and that instead he has the duty of maximising the net revenue collected over time. This view is further emphasised in paragraphs 109 and 129 of the interpretation statement. Given the inter-relationship between the tax debt rules and the care and management provisions this view should be reconciled with the wording in section 176(1) of the TAA (i.e., that the Commissioner must maximise the recovery of outstanding tax from a taxpayer). 2 See Raynel v CIR (2004) 21 NZTC 18,583; Clarke & Money v CIR (2005) 22 NZTC 19,165; McLean v CIR (2005) 22 NZTC 19,231; Rogerson v CIR (2005) 22 NZTC 19,260; W v CIR (2005) 22 NZTC 19,602.

4 Statements made in the exposure draft will also require amendment as a result of our suggestion. For example: Paragraph 19 of the exposure draft states that where the Commissioner can recover more through an instalment arrangement than from bankruptcy or liquidation action, an instalment arrangement may be accepted. Taking into account the Commissioner s view expressed in IS 10/07 we consider the statement made in paragraph 19 should say that an instalment arrangement must be entered into. Paragraph 20 of the exposure draft refers to Raynel v CIR and sections 6(1) and 6A(3)(b) of the TAA. The last sentence in this paragraph implies that in some cases the Commissioner will not agree to an instalment arrangement but will instigate liquidation/bankruptcy proceedings if doing so would protect the integrity of the tax system or promote voluntary compliance. In our view liquidation/bankruptcy proceedings does not preserve the integrity of the tax system in these difficult economic times, nor does it maximise the revenue collected over time. These duties should not be used as an excuse to decline to enter into an instalment arrangement. Paragraph 35 of the exposure draft states when deciding whether or not an instalment arrangement will be agreed to the Commissioner will consider the taxpayer s historical and prospective income, payments to other creditors and the industry in which they are working. It is not clear why these criteria are relevant and how, by taking these into account, the Commissioner is at the same time fulfilling his duty to collect over time the highest net revenue that is practicable within the law. Paragraphs of the exposure draft sets out what considerations will be taken into account if an application for an instalment arrangement is made by a taxpayer who has not met their obligations under a previous instalment arrangement. In our view the care and management provisions should also be considered here. Also adding in commentary as we suggest would demonstrate consistency of interpretation and application of the tax law within Inland Revenue. Points to clarify In our view the following need to be clarified: how information obtained from other sources will be verified; how the relationship between the taxpayer and their tax agent will be managed when considering an instalment arrangement; Inland Revenue s approach if a taxpayer has a trust or a current account; and the practice that will be applied in cases where it is not feasible for the taxpayer to file all outstanding tax returns. Information from other sources It is stated in paragraph 33 of the exposure draft that the Commissioner may obtain

5 information from other sources to enable consideration of a taxpayer s wider financial situation. In our view the statement should go on to say how the Commissioner will verify the correctness of this information. Further we consider that if Inland Revenue is to rely on this information taxpayers should be: advised that the information has been provided to the Commissioner; and allowed to comment on the reliability and correctness of that information. The information obtained from other sources may influence the Commissioner s decision on whether or not an instalment arrangement will be agreed to. Therefore it is crucial that the information is correct and reliable. Safe guards should be put in place to ensure that situations such as those which arose in Case Z29 3 do not happen in the context of the tax debt rules. Relationship between taxpayer and tax agent Despite the discussion in paragraphs in the exposure draft under the subheadings, Whether the taxpayer s proposal is realistic and whether the taxpayer is likely to comply with their current/future tax obligations, we believe the SPS should clearly state that the Commissioner will not enter into an instalment arrangement that the taxpayer cannot meet. Through communications with our members the Institute is aware of cases where arrangements that the taxpayer cannot possibly meet have been agreed to. In some cases this happens because the taxpayer s tax agent was not aware that the taxpayer had approached Inland Revenue directly to negotiate an instalment arrangement or that such an arrangement had been entered into. The arrangement is therefore doomed before it has begun. Such arrangements are defaulted on before the tax agent has the opportunity to be involved and Inland Revenue is caught in the middle. While we appreciate this situation stems from the relationship between the taxpayer and their tax agent, we believe it would be helpful to the success of the operation of the tax debt rules and improve efficiencies if Inland Revenue practice was such that it avoided becoming collateral damage. A possible solution could be that when the Commissioner initiates recovery of the tax debt the Commissioner undertakes to contact the taxpayer s tax agent in the first instance. However if the taxpayer approaches Inland Revenue directly about their tax debt the practice will be that the taxpayer will be strongly advised and encouraged to involve their tax agent in the instalment arrangement process. In addition if the taxpayer seeks an instalment arrangement without the knowledge of their tax agent Inland Revenue should be put on notice that there may be an increased likelihood of the arrangement being defaulted on. Should this eventuate the taxpayer should not be disadvantaged if another instalment arrangement is subsequently applied for. Trusts and current accounts As currently drafted the wording of paragraph 64 of the exposure draft strongly suggests that taxpayers with access to investment funds, beneficial interests, shareholder current accounts or trusts may be deliberately preventing the recovery of tax debt. In the majority 3 (2010) 24 NZTC 14,407. In this case the Commissioner relied unsuccessfully on the statements of a number of persons of questionable character, including convicted criminals, to support reassessments of income tax and GST on the grounds of tax evasion involving a fraudulent invoice-writing scam.

6 of cases this is not so. It should not be assumed that just because a taxpayer is a settlor or beneficiary of a trust the taxpayer is involved in a tax avoidance arrangement. If the trust is long standing or there is nothing in the circumstances to suggest tax avoidance Inland Revenue should not force taxpayers to sell trust assets to pay tax debt or use the existence of a trust as a reason to decline a request for an instalment arrangement. Our comments also apply to taxpayers with a current account. We believe the principles established in W v CIR (2005) 22 NZTC 19,602 are relevant here and should be considered; that is, the Commissioner must direct himself properly in law as to the meaning and operation of section 176. Further the Commissioner must make a determination fairly, reasonably and according to law and give proper and adequate consideration to the case made by the taxpayer. The Institute believes that a clear statement is required in the exposure draft to confirm how the existence of the items listed in paragraph 64 will influence the Commissioner s decision on whether or not an instalment arrangement will be entered into. Filing outstanding tax returns It is stated in paragraphs 32 and 66 of the exposure draft that the Commissioner will require taxpayers to file all outstanding tax returns before an instalment arrangement will be agreed to. In our view this should not be a blanket rule. The reasons for the outstanding returns should be considered. For example it may be that the taxpayer s financial position is such that the tax agent has suspended services due to unpaid accounts. This would lead to a dead lock situation in that the taxpayer is unable to file the tax returns and an instalment arrangement will not be agreed to so nobody gets paid. This achieves nothing. The Commissioner s practice should allow for these types of situations so that interim arrangements can be put in place and recovery action can be initiated. Further the reference to tax returns should also refer to the taxpayer s self-assessment under section 92 of the TAA. Application by notice In accordance with section 177(2) of the TAA the Commissioner has the power to require a taxpayer, or a person on the taxpayer s behalf, to apply for financial relief on the grounds of serious hardship by notice. The requirements for giving notice to the Commissioner are set out in section 14B of the TAA. Paragraph 24 of SPS 05/11 discusses these requirements. There is no mention of either section 14B or section 177(2) in the exposure draft. For completeness we believe there should be a brief discussion included. In addition the discussion should provide guidance on when the Commissioner s discretion under section 177(2) would be exercised. Declining a request Paragraph 36 of the exposure draft sets out the circumstances in which the Commissioner will decline a request for an instalment arrangement. Some of these are provided for in the TAA while others are not. We consider there are a number of places in this discussion that require clarification in this regard.

7 In addition it would improve the relationship between Inland Revenue and taxpayers if, before receipt of written notification that the request for an instalment arrangement has been declined, the taxpayer is contacted by phone to inform them of the decision. Inland Revenue should be prepared to talk about their decision and encourage open dialogue. See also our comments later in our submission regarding placement of this subject. Must should be will The first sentence in paragraph 36 reads: The Commissioner must not enter into an instalment arrangement: We believe the word must should be replaced with will to reflect that the bullet points that follow are not all enacted in the TAA. Declining request for instalment arrangement because of serious hardship The third bullet point in this discussion states that a request to enter into an instalment arrangement will be declined if 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). As currently drafted this statement implies that this is the statutory position. This is not correct. These exceptions apply to requests to write off outstanding tax under section 177C of the TAA, not a request to enter into an instalment arrangement under section 177B. This should be clarified. Under section 177A(2) of the TAA the Commissioner may take into account whether the recovery of outstanding tax would place: a shareholder who owns, or two shareholders who jointly own, 50% or more of the shares in a company in serious hardship; or a shareholder-employee of a close company in serious hardship. The exposure draft should: Explain the reason for section 177A(2). Clarify the relationship between section 177B(1) and section 177A(2). State what the Commissioner s practice will be if an instalment arrangement is applied for by the company/close company and the shareholders/shareholder-employee is already in serious financial hardship. The last mentioned situation is highly likely in this current economic environment and should be addressed. If an instalment arrangement is not entered into will the Commissioner agree to a write off? As earlier noted the application of sections 177A and 177B should be such that the underlying policy objectives of the tax debt rules are reinforced. On this basis the Institute believes the correct approach is that an instalment arrangement and/or write off will be agreed to.

8 As currently drafted paragraph 30 of the exposure draft leaves readers hanging. It sets out the position under section 177B of the TAA but it does not go on to say what the Commissioner will do if the criteria for serious hardship is met. Concerns regarding consideration of request The exposure draft states that 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. The Institute considers it will be more helpful if the reference to Inland Revenue was replaced with a reference to a person at a certain level or division within Inland Revenue; for example, the handling officer s manager or team leader. It is critical that there be a process to escalate within Inland Revenue taxpayer concerns/complaints in this area. This process should be transparent to taxpayers. During joint presentations with the Institute in 2009 on the management of tax debt 4, Inland Revenue indicated that it is appropriate for the contact details of relevant Inland Revenue staff to be made available to resolve tax debt issues. The names and contact phone numbers of tax debt managers should be available on the Inland Revenue web site. Defaulting on an instalment arrangement The exposure draft includes a statement that defaulting on an instalment arrangement may not end the arrangement provided the taxpayer contacts the Commissioner promptly, is cooperative, and the Commissioner is satisfied the taxpayer is making their best effort to meet their tax obligations (paragraphs ). The Institute agrees with this view and emphasises the importance of Inland Revenue taking a reasonable approach with taxpayers who have defaulted. In our view it is important for the Commissioner to look at why the instalment arrangement was not adhered to. Defaultment should not be used as an excuse for liquidation or bankruptcy. See also our earlier submission regarding the impact of the relationship between taxpayer and tax agent. The exposure draft also considers defaultment in paragraphs A cross-reference here to paragraphs would be helpful. Payments in advance The exposure draft is silent on the implications of a taxpayer paying an instalment in advance. Will this payment be treated as an overpayment and left as a credit in the period it is paid? When the due date for payment of the next instalment arrives will the credit be applied to this date or will the system record a missed payment? For example, say a taxpayer is required to pay instalments of $200 on the first of each month to clear a PAYE debt. On 1 July the taxpayer pays $400 for instalments due on 1 July and 1 August. Will the full amount of $400 be credited to the 1 July period? On 1 August will the $200 paid in advance on 1 July be credited to the 1 August period or will Inland Revenue record a missed payment for 1 August? In our view payments made in advance should be credited to the period to which they relate. 4 Tax in Hard Times Managing Client Tax Debt.

9 Structure As currently drafted the exposure draft is difficult to read. The summary is not really a summary and there are parts of the discussion that need to be consolidated. We suggest the following: Shorten the summary section. Move the legislation section to the end as an appendix to the item. Consolidate the discussion regarding when a request for an instalment arrangement will be declined. Summary Paragraphs 8 27 inclusive make up the summary of the exposure draft. This discussion covers almost three pages and is longer than the statement of the standard practice itself in paragraphs In our view the summary paragraphs should be reviewed and indepth discussions should be moved to the Discussion section. For example, paragraph 13 discusses the definition of serious hardship and paragraph 20 discusses Raynel v CIR. This type of detail should not be included in a summary. A reference to later paragraphs would suffice. Legislation Most taxpayers do not require reference to legislation. They will be reading the SPS to determine the Commissioner s practice. To improve user-friendliness of the item it would be helpful if this section was moved to the end as an appendix. Other legislative provisions that should be included are: Section 176 of the TAA (as earlier submitted). Sections 177C 177D of the TAA (to complete the landscape of the tax debt rules). Section 3 of the TAA, paragraph (d) of the definition of tax (this is a specific definition for the purpose of sections 176, 177, and 177A 177D). Reasons for declining a request As discussed earlier in our submission paragraph 36 includes a bullet point list of when the Commissioner will not enter into an instalment arrangement. Paragraph 36 is actually a discussion of section 177(3) of the TAA. This section sets out the Commissioner s statutory options when he receives an application for an instalment arrangement. The statutory criteria for declining to enter into an instalment arrangement is set out in section 177B(2) of the TAA. Discussion of this provision is comprised in paragraphs Other considerations (not statutory) are also discussed in paragraphs In our view the above should be consolidated so all considerations whether it be statutory, case law or practice, is found in one place. As currently drafted it is easy for readers to miss important information.

10 Other We have identified the following miscellaneous items in the exposure draft: Paragraph 12 this paragraph refers to section 177B of the TAA and confirms that the Commissioner cannot enter into an instalment arrangement with a taxpayer (being a natural person) to the extent that the arrangement would place that person in serious hardship. The statement should go on to say that in this situation there may be grounds for the debt to be written off under section 177C. Paragraph 14 this paragraph states the outstanding tax covered by an instalment arrangement request needs to be quantified via a return or assessment. As earlier submitted taxpayers are required to make an assessment of their tax under section 92 of the TAA. Therefore or in this statement should be replaced by and. Paragraph 15 a reference to an assessment under section 92 of the TAA is also required at the beginning of this paragraph. As currently drafted it mentions only tax returns. The second sentence in this paragraph suggests taxpayers will be encouraged to make voluntary payments towards their anticipated tax liability. It would be helpful if there was also a statement that reconciles this with the requirement for the Commissioner to set a new due date under section 142A of the TAA; in particular, how section 142A(3)(c) may impact the Commissioner s consideration of an instalment arrangement. The last sentence in this paragraph states that late payment penalties will accrue until such time returns are filed and negotiation on payment options can commence. In our view the statement should confirm what the late payment penalties will accrue on; is it the outstanding tax or the outstanding tax and late payment penalties combined? Paragraph 19 this paragraph confirms that where the Commissioner can recover more through an instalment arrangement than from bankruptcy/liquidation action, an instalment arrangement may be accepted. This statement should be qualified by a reference to the Commissioner s duty to maximise the amount of revenue collected over time. Paragraph 44 this paragraph says the Commissioner will not commence recovery action for the outstanding tax during a negotiation period. An explanation of what is meant by negotiation period should be added. Paragraph 57 this paragraph discusses time limits for the completion of an instalment arrangement. There is no specific legislative time limit nor does the exposure draft give any. It would be helpful if a guideline were given; for example, two years. Paragraph 66 this paragraph states: In order to ascertain the taxpayer s full tax debt Inland Revenue will require any outstanding returns to be filed. This may occur if the outstanding tax debt relates to assessments made by the Commissioner... For consistency, the word may (in the second sentence) should be replaced with will. Paragraph 76 this paragraph states that Inland Revenue will only apply credits that subsequently arise in a taxpayer s account to the tax debt under an instalment

11 arrangement when requested to do so by the taxpayer. We consider this statement should also confirm that the credits will be applied only to a revenue type agreed to by the taxpayer. Similarly related entities should be treated separately; in other words, a credit arising in one entity should not automatically be transferred to another related entity with outstanding tax under an instalment arrangement. Paragraphs these paragraphs discuss the provisional tax rules. The discussion in paragraphs are not relevant to the tax debt rules and should be deleted from the final statement. Paragraph 105 should be moved to the section on Pre-emptive instalment arrangements. Paragraph 116 this paragraph should reiterate how an application for an instalment arrangement can be made as set out in paragraph 10 (i.e., whether by writing, telephone, etc). Should you have any questions regarding this submission please contact me. Yours sincerely Lindsay Ng Tax Manager P: E: lindsay.ng@nzica.com F: