Raising the bar on interest/penalty remissions and tax debt relief

By Amy Sexton & Campbell Rose

Continuing on with the very topical themes of tax debt and insolvency Inland Revenue has published a draft Standard Practice Statement Options for relief from tax debt (the statement). It updates and, once finalised, will replace SPS 18/04. While the technical framework is largely unchanged, the new statement clarifies but tightens the Commissioner of Inland Revenue’s (Commissioner) approach to applications for relief from tax debt. The statement also outlines the requirements for remission of interest and/or penalties and the circumstances when the Commissioner may consider remission.

Options for financial relief

When people think about “tax debt relief”, they often think first of having tax written off. In practice, write offs are only one (and a limited) option - there is a range of relief mechanisms available depending on the taxpayer’s circumstances.

Instalment arrangements

Probably the most commonly used option, instalment arrangements allow a taxpayer to pay off a tax debt over time or at a later date, usually by making multiple payments. Interest continues to accrue during the term of the instalment arrangement.

Relief for serious hardship (write offs)

Serious hardship relief applies only to natural persons or shareholders of a “relief company” (broadly, where a taxpayer owns 50% or more of the shares, the taxpayer is a shareholder-employee, and the company has five or fewer natural person shareholders). A shareholder of a relief company can apply for serious hardship relief for the company if recovery of the tax debt would place the shareholder in serious hardship.

The statement outlines a two-step approach that the Commissioner uses to consider serious hardship applications:

1. Is there serious hardship?
2. What relief, if any, should be granted?
   

The guidance in the statement explains the very specific criteria that the Commissioner must consider when determining if a taxpayer would face serious hardship. If the answer is “no” to any of the factors listed in the guidance the taxpayer will not meet the test for serious hardship.

If the answer is “yes”, the Commissioner can then consider what relief (if any) should be granted. The relief options are:

• Write off the outstanding debt in full;
• Write off the outstanding debt in part and have the remainder paid under an instalment arrangement; or
• Allow the debt to remain and take steps to bankrupt the taxpayer or liquidate the relief company.
  

Requesting financial relief

While financial relief applications can be made before or after a tax payment due date, it is best practice to apply for relief before a due date as it may help stop some payment penalties from being applied.

Both instalment arrangements and serious hardship relief applications can be made verbally, in writing or via myIR. Simple instalment arrangement applications made through myIR can often be automatically accepted and set up quickly. Where Inland Revenue is likely to undertake a fuller review, the following factors are worth keeping in mind:

• An arrangement should be for as short a period as possible, and generally no more than three years.
• A taxpayer can request that an instalment arrangement be renegotiated, but any renegotiation is treated as a new request for financial relief (and may not be accepted).
• Throughout the term of an instalment arrangement, the taxpayer is expected to meet current tax obligations.
• The Commissioner may cancel an instalment arrangement if false or misleading information has been provided, or if the taxpayer does not meet the arrangement’s ongoing requirements.

Remission of interest and/or penalties

Penalties are intended to encourage voluntary compliance and sanction non-compliance, while use of money interest compensates the Commissioner for the time value of money. The Inland Revenue recognises, however, that in some circumstances charging interest or penalising a taxpayer for an unintended default may undermine voluntary compliance and discourage voluntary disclosure.

In this regard section 183 of the Tax Administration Act 1994 contains a number of remission provisions. We focus below on section 183D (the “consistent with duty to collect the highest net revenue over time” provision).

Section 183D

Section 183D allows the Commissioner to remit interest and/or penalties if satisfied that this is consistent with the duty to collect, over time, the highest net revenue that is practicable within the law. Most penalties are eligible for remission under this provision (except shortfall penalties). When deciding whether to grant remission, the Commissioner must consider:

1. Is remitting the interest and/or penalties consistent with the Commissioner’s duty to collect over time the highest net revenue that is practicable within the law?
2. Does imposing penalties and interest promote compliance, especially voluntary compliance?

A taxpayer’s financial situation must not be taken into account when considering a section 183D remission request. The Commissioner may, however consider:

1. Why did the taxpayer pay or file late?
2. Was the non-compliant action the result of a genuine oversight or a one-off default? (This applies to penalties only as interest will not be remitted in these cases given it is a compensation for the loss of use of money).
3. What other information does the Commissioner consider to be relevant in assessing the application? (Particularly, how will the remission contribute to the collection of the highest net revenue over time and otherwise promote voluntary compliance?).

What happens when the Commissioner says no?

There is no statutory right of challenge for decisions to grant, decline or cancel relief (the statutory disputes process does not apply). However, the statement notes that if a taxpayer considers their circumstances have not been properly taken into account they should raise this with the Inland Revenue officer they have been dealing with, and in the first instance, request a review by that officer’s leader.

Raising the bar

Although much of the underlying framework will be familiar, Inland Revenue’s draft statement draws clearer but tighter boundaries around when relief will (and will not) be granted. The practical implication is a more disciplined approach to both hardship relief and remission requests. In particular, the statement:

• Places greater emphasis on the Commissioner’s duty to collect the highest net revenue over time, reiterating that relief is not available as of right (including in serious hardship contexts);
• Signals a tighter approach to instalment arrangements, with a clear expectation that arrangements are short term (generally not exceeding three years) and that renegotiations may be limited; and
• Clarifies and narrows the acceptable grounds for remission requests, particularly under section 183D, along with an explicit statement that a taxpayer’s financial position is not relevant for section 183D remission.
  

If you would like to discuss tax debt relief options or a remission request, please contact your usual Deloitte adviser.