Pitfalls of owing Inland Revenue

Last updated 05:00 27/01/2015

Geordie Hooft

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A couple of interesting and somewhat contrasting news stories caught my attention over the recent holiday break.

OPINION: The first reported an improvement in the average time taken by New Zealand businesses to pay their bills. Smaller businesses perform best, taking around 38 days to pay. The managing director of software accounting company Xero was quoted as saying that a smaller business is more likely to have an ethos of service and loyalty.

About the same time, it was reported that tax debt is rocketing, particularly in the provinces. The report noted that overall debt owed to Inland Revenue is just over $5 billion, up from around $4.5b in 2008-09. Labour's Stuart Nash has called for an amnesty, citing the debt levels as evidence of economic hardship and deprivation. He also claimed the debt was largely owed by small-to-medium businesses owners, rather than large corporates.

Put the two stories together, and it suggests that small-to-medium business owners have a strong sense of loyalty to their suppliers but less regard for the tax department. While that may be understandable, if true, it can be an expensive attitude.

Inland Revenue is probably the only creditor that a business will have that has a statutory basis for charging late payment penalties and interest. Generally, a late payment penalty of 1 per cent is added immediately after the due date, with a further 4 per cent added a week later. An additional 1 per cent is added to the accumulating balance every month thereafter. Use of money interest is also charged on the total unpaid balance. The current interest rate is 8.4 per cent.

On occasion, a cash-strapped business does have to prioritise where its limited resources are applied. Often, the view may be that if it is a choice between paying a supplier (who might cease deliveries if left unpaid) and paying the tax man, it's the supplier that has to come first. That's commercial thinking but the consequences may be disastrous - especially if the unpaid taxes are other people's tax, such as PAYE and KiwiSaver deductions.

It may also seem easier to get away with not paying tax. A guaranteed way to get a supplier's attention is to not pay them. There will be phone calls and demands. In contrast, it often appears that Inland Revenue will only send out computer-generated statements for a considerable period before there's any human intervention. By then, penalties and interest will have considerably escalated the original debt.

There are solutions to dealing with tax payments. These include planning through budgeting and forecasting, and the use of tax pooling services such as tax financing.

As with any creditor, an open and honest dialogue with Inland Revenue can be beneficial - especially if it is initiated on a timely basis. They do have some discretion to review debt, including writing off penalties, in cases of genuine economic hardship and circumstances beyond a taxpayer's control. They have limited discretion for writing off interest.

That said, Inland Revenue is ultimately guided by an overriding duty to "collect over time the highest net revenue that is practicable". To do so, the Commissioner must have regard to promoting taxpayers' voluntary compliance with the tax rules. That is a balancing act. For the tax system to work requires all taxpayers to have faith that the rules are being applied fairly. That means ensuring taxpayers comply with their obligations.

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It also means that a general amnesty is unlikely to work. Why play by the rules when it becomes abundantly clear that others are allowed to get away with breaking them?

- The Press

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