Dealing with tax debt sooner, not later
Keeping on top of tax payments and tax debt is important, especially in hard economic times, writes Murray McClennan in Taxing Times.
With interest and late payment penalties the total debt from unpaid taxes can double in less than four years. The current interest rate charged by Inland Revenue is 8.4 per cent.
Late payment penalties are applied at 5 per cent for the first month and 1 per cent a month cumulatively thereafter.
It is often cheaper to borrow money to clear tax debt or fund current payments. Inland Revenue will often allow instalment arrangements for repayment of tax debt.
Alternatively, in some situations it may be possible to buy tax credits from a tax pooling agency. The advantage of buying tax credits for the actual dates of overdue tax payments is that no late payment penalties are payable.
In the 12 months to June 30, 2011, $785.5 million in tax, interest and late payment penalties was written off by Inland Revenue.
The main reasons tax debt is partly or fully written off are: Bankruptcy of an individual or liquidation of a company; To repay the debt would create financial hardship; or The amount owed is not worth the cost of collecting or there is little chance of recovering it.
In considering any application for tax write-off Inland Revenue must consider:Its duty to maximise the recovery of outstanding tax;Its obligation to compare the value of the likely recovery from accepting a taxpayer's proposal with any viable options for recovery;The obligation to protect the integrity of the tax system; andThe requirement to collect the highest net revenue that is practicable within the law over time.
Inland Revenue is under greater pressure to collect outstanding tax debt. Often it is better to contact Inland Revenue rather than waiting for Inland Revenue to contact you about tax debt so as to enter into a workable solution.
» Murray McClennan is director of Tax Central Ltd, a specialist tax consulting firm.
The Southland Times