Disclosing reportable unpaid tax to credit reporting agencies
(Clauses 103 and 104)
Summary of proposed amendment
The proposed amendment to the tax secrecy rules will allow the Commissioner to disclose a taxpayer’s information and their significant tax debt to approved credit reporting agencies. Before the Commissioner of Inland Revenue can disclose the information, the Commissioner must determine that the taxpayer’s circumstances meet a prescribed criteria and threshold. Once the Commissioner has begun to disclose the taxpayer’s information, the Commissioner (in most circumstances) may continue to do so until the tax debt has been resolved.
While the proposed amendment includes all taxpayers, currently the practical effect of this amendment is that it would be limited to non-individuals (that is, non-natural persons such as registered New Zealand companies). This is because personal information about individuals is regulated by the Credit Reporting Privacy Code of Practice (enabled by the Privacy Act). This code currently prevents credit reporters from receiving tax information about individuals.
The Government’s intention is to apply this amendment to all taxpayers and officials will work with the Office of the Privacy Commissioner on the interaction of the proposed amendment and the Credit Reporting Privacy Code of Practice.
The amendment will come into force on 1 April 2017.
It is proposed that section 81 of the Tax Administration Act 1994 be amended to introduce an exception to tax secrecy for the purpose of communicating certain taxpayer information to approved credit reporting agencies.
In addition, it is proposed that new section 85N is inserted into the Tax Administration Act 1994 to describe items including the type of unpaid tax that would be considered for disclosure, the criteria that establishes whether a taxpayer would be selected for disclosure, the level of information the Commissioner would exchange and how the Commissioner would authorise an entity to receive this information.
For the purposes of the proposed section, the taxpayer must owe an amount of reportable unpaid tax. This is defined as an unpaid amount that is a liability or excess refund of income tax (excluding Working for Families tax credit overpayments), Goods and Services Tax and amounts required to be deducted under the Pay-As-You-Earn rules (including KiwiSaver, student loan and child support deductions, ESCT and RSCT). These amounts would include any civil penalties and use-of-money interest already imposed. This definition would exclude amounts that are under dispute or challenge under the Tax Administration Act 1994.
Before the Commissioner can consider initially disclosing the taxpayer’s information to an approved credit reporting agency, a set of requirements must be met. This criteria includes:
- the reportable unpaid tax is not being considered for relief or remission, or included in an instalment arrangement;
- that the taxpayer has been served a formal notice and at least 30 days have passed; and
- the Commissioner has previously made reasonable efforts to collect the reportable unpaid tax.
In addition, the taxpayer must owe the required quantum of reportable unpaid tax. This threshold is defined as owing a reportable unpaid tax amount of either $150,000 or the amount is more than a year old and the amount is more than 30 percent of the taxpayer’s gross income.
The Commissioner would be required to serve the taxpayer personally, with a formal notice advising them of the amounts of reportable unpaid tax, and provide a 30-day notice period before deciding whether to disclose the taxpayer’s information. This notice would also include information about how the taxpayer can seek relief or remission of the debt. The Commissioner would not issue this notice unless she was confident the taxpayer would continue to meet the criteria and thresholds after the 30-day notice period. The purpose of this notice is to ensure that the taxpayer is made aware that the Commissioner is considering disclosing their information to an approved credit reporting agency. If the taxpayer is a company, the Commissioner would serve the notice on all directors listed with the Registrar of Companies.
Under proposed subsection 85N(3), the Commissioner would also have the option to disclose the taxpayer’s information when the taxpayer has received three notices in a year, and the first two notices were ineffective due to the taxpayer subsequent to receiving the notice making sufficient payments to the reportable unpaid tax to remove themselves from the significant reportable unpaid tax threshold. This section is intended to address the potential issue of a taxpayer avoiding their reportable unpaid tax being disclosed, despite over time the amount of reportable unpaid tax debt continually exceeding the threshold.
Once the taxpayer’s circumstances have met or exceeded the criteria and threshold, the Commissioner may disclose taxpayer information to an approved credit reporting agency.
Under subsection 85N(4), the Commissioner may communicate taxpayer information for the purposes of enabling the approved credit reporting agency to include the tax information on the credit report, and maintain the accuracy of the data held on the credit report.
The Commissioner would disclose key elements about the taxpayer’s reportable unpaid tax. This includes the total amount outstanding for each tax type (expressed within a narrow band) and the age of each tax debt by tax type. Also, the status of the reportable unpaid tax as being under instalment arrangement, if the taxpayer enters into an arrangement subsequent to the initial disclosure.
As part of including the debt information on the taxpayer’s credit report, the Commissioner would need to initially disclose certain taxpayer identification information to enable the approved credit reporting agency to match the taxpayer to their particular credit report. This information would be disclosed for identification and matching purposes only and would not be retained by the approved credit reporting agency after its use.
After the initial disclosure, to maintain the accuracy of the debt information on the credit report, the Commissioner would continue to routinely disclose the current tax debt information. This includes when the amount outstanding falls below the significant reportable unpaid tax threshold, when the taxpayer has submitted an application for relief or remission, or has entered into an instalment arrangement. This subsection is to address the issue that if the Commissioner was to abruptly stop disclosing this information, the last transaction held would quickly become inaccurate.
In addition, the Commissioner may need to disclose taxpayer information for the purpose of evidencing the information held on the credit report. This is because if the taxpayer were to lay a formal complaint with the approved credit reporting agency about the information held about them, the agency may need to approach Inland Revenue and request the taxpayer’s information to support the investigation of the complaint. This may include information that substantiates the reportable unpaid tax debt or that shows the taxpayer was made aware that their debt could be disclosed.
Under subsection 85N(8) and (9), the Commissioner would have authority to approve an appropriate organisation to become an approved credit reporting agency. The Commissioner would either grant or revoke the approval when it would positively affect the integrity of the tax system. An approval would be given after the Commissioner is satisfied that the organisation has the capable systems, processes and safeguards to appropriately handle any taxpayer information furnished by the Commissioner to the organisation. Likewise, an approved credit reporting agency could choose to no longer receive this information and duly notify the Commissioner and request that their approval be revoked. Any approval or revocation would be publicly notified.
Under section 85N(7), the Commissioner is required to annually publish the number of taxpayers who have been subject to action under this provision in the previous year, including the number of taxpayers served and the number of taxpayers who have had their information disclosed, as well as any other items relating to this section the Commissioner considers should be published.
Currently, information about a taxpayer’s tax debt is subject to the rule in section 81 of the Tax Administration Act 1994 that requires Inland Revenue officers to keep secret all matters relating to the Inland Revenue Acts. The Commissioner is therefore unable to disclose this information to third parties unless an exception to the secrecy rule exists. The proposed amendment inserts an exception to these secrecy rules.
The proposed amendment will likely have a positive revenue benefit to the Crown, as potentially affected taxpayers will likely to be reluctant to have their tax debt information disclosed to their creditors. Consequently, the potential action of disclosure may motivate some taxpayers to promptly resolve their tax debt and voluntarily comply with their tax obligations.
Through this disclosure, other businesses will become aware of some taxpayers owing a significant amount of tax debt, and consequently these businesses will receive a more comprehensive view of the taxpayer’s financial position when they are making important commercial decisions.
Whether the debt is enforced by the Commissioner or another trade creditor, the consequences for the indebted business’s other creditors are the same. If Inland Revenue recovers its tax debt, there are fewer funds to repay other creditors. If Inland Revenue enforces its tax debt, the possible wind up of the indebted business affects all creditors. For creditors of a tax-indebted business, unpaid tax debt can represent a similar risk as if the debt was owed to another trade creditor.
In order for businesses to operate, they must regularly enter into commercial arrangements with other businesses. These relationships can bring a certain level of risk. To help mitigate this risk, prudent businesses undertake risk assessments of potential or existing commercial partners, including determining how much debt their potential commercial partner may owe to others. Businesses use this information to help determine whether they are comfortable with the level of risk attached to the commercial partner.
The impact of tax secrecy is that these other businesses that regularly assess the creditworthiness of potential commercial partners are currently unaware of the existence of any tax debt, with some only becoming aware later on when Inland Revenue is enforcing the debt. When the amount of tax debt is significant compared with the size of the business, the impact can be severe.
The proposed amendment represents a trade-off between taxpayer secrecy and reducing the opportunity for compliant businesses to be unexpectedly trading with significantly tax-indebted taxpayers. Certain credit reporters (approved credit reporting agencies) would be provided with limited taxpayer information, so the approved credit reporting agencies could provide this information to potentially affected third parties. This exchange is so only requesting third parties that are undertaking related commercial activities will be aware of the tax debt, and consequently these third parties can use this information to help make better commercial decisions. This approach is considered a less intrusive method of achieving the desired outcome than general publication of the tax debtor information.
Credit reporters are the best vehicle to deliver this information to potentially affected third parties, given that the credit reporters already have established processes, safeguards and mechanisms to ensure that any confidential information and data is carefully managed.
Memoranda of Understanding would be entered into with the approved credit reporting agencies. These agreements would outline the mechanism for securely exchanging taxpayer information, secure information storage, appropriate access by agency staff, and a requirement that approved credit reporting agencies can only hold disclosed tax debt information for five years after the last update placed onto the credit report. This last detail is important as it represents a trade-off between a business’s needs to understand a taxpayer’s credit worthiness, with the taxpayer resolving their reportable unpaid tax and remaining compliant. These items would be further discussed with the approved credit reporting agencies and confirmed in the contractual agreements.
Following enactment, Inland Revenue would implement this policy in a phased approach. In the next few years, the Commissioner would disclose approximately 500 taxpayers a year. This will allow Inland Revenue to firmly establish robust processes and mechanisms while working with modest volumes. In the future, once the Commissioner has a better understanding of the effect of the policy, and having regard for future technology, the Commissioner’s resources and the anticipated behavioural change as a consequence of this policy, the Commissioner may then consider whether, in the long run, these volumes should be revised.
The proposed amendment provides the Commissioner with a proportionate response to the risk that significant reportable unpaid tax has on the wider business community. Where the debt is in the process of being reasonably resolved or is a proportionally small amount, the risk to other businesses is also reduced, so disclosing this information to others would not be considered to outweigh the importance of keeping taxpayer information confidential. In addition to contributing to economic efficiency, the proposed section will potentially incentivise taxpayers to comply with their tax obligations.
In exercising the proposed discretion the Commissioner will, as is the usual course, have regard to her obligation to protect the integrity of the tax system.
Proposed section 85N outlines the required quantum of outstanding reportable unpaid tax, in order for the taxpayer to be considered for disclosure, and when the Commissioner would consider initially disclosing the taxpayer’s information to an approved credit reporting agency.
Significant reportable unpaid tax threshold
Before the taxpayer’s information can be considered for disclosure, the taxpayer must first owe the required quantum of reportable unpaid tax.
The required quantum is the greater of either:
- $150,000 and there is a significant risk that the taxpayer is unable to pay this amount; or
- the unpaid amount has been outstanding for more than a year, and the proportion of the unpaid amount exceeds the taxpayer’s annual gross income for the previous year by 30 percent or more.
The first threshold would allow the Commissioner to disclose reportable unpaid tax that is significant in size. To provide some proportionality, the Commissioner would only consider cases where the taxpayer does not have the financial ability to resolve the debt in the foreseeable future. The proposed provision allows for a different amount to be prescribed by an Order in Council. This flexibility is required to ensure this part of the threshold can be quickly amended if there is a sudden change in the market, and that change would need to be reflected in a revised threshold. The usual Order in Council safeguards would apply, including the 28-day rule and publication.
The second threshold would allow the Commissioner to consider taxpayers when the debt is significant in relation to the size of the taxpayer and has been unpaid for some time. To determine the taxpayer’s annual gross income, the Commissioner will exercise judgement and use available information (including previously filed tax returns and other financial information) to reasonably determine the taxpayer’s gross income for the previous year.
A natural consequence of using the second threshold is that others may be able to indicatively determine the taxpayer’s gross income. The benefit of using this type of threshold is that it can be reasonably targeted towards taxpayers that owe an amount of reportable unpaid tax that is sufficiently significant, compared with the size of their business. This benefit is considered to outweigh the risk.
The inclusion of percentage and fixed dollar thresholds would allow disclosure only in the most significant of circumstances, given the particular taxpayer’s debt and the risk the debt represents to other businesses.
Criteria for initial disclosure
The proposed section requires the taxpayer to owe the required quantum of reportable unpaid tax as well as meet other criteria before the Commissioner can consider initially disclosing the taxpayer’s information.
Under section 85N(2)(c), the Commissioner would only disclose the taxpayer’s information when the Commissioner has already made reasonable efforts to recover the reportable unpaid tax. These reasonable efforts include when the Commissioner has been in recent, meaningful and sustained communication with the taxpayer. These actions would also include when both Inland Revenue and the taxpayer have explored various options to resolve the reportable unpaid tax, without success. These options could include Inland Revenue reviewing the taxpayer’s financial position to determine whether the taxpayer is eligible for relief or when the taxpayer has explored financing options with third-party lenders, without success.
The formal notice would only be issued when the Commissioner is confident that the taxpayer’s circumstances meet the criteria and threshold, and when the Commissioner is confident that the taxpayer would continue to meet the criteria and threshold at the end of the 30-day period. In addition, immediately before the Commissioner initially discloses the taxpayer’s information, the Commissioner will review the taxpayer’s circumstances to ensure that the taxpayer continues to meet the criteria and threshold.
When the taxpayer is in the process of securing finance, or is conducting an ordinary windup of their business, and the Commissioner is confident that it will be successful, these actions would be considered ongoing reasonable efforts.
The Commissioner would be responsible for ensuring the criteria and thresholds are applied consistently.
Bary’s Bricks Limited has over-expanded in recent years and is experiencing significant cashflow problems. With late payment penalties and use-of-money interest, the tax debt of GST and PAYE has grown to over $65,000.
Over the last 15 months, Inland Revenue has worked with the directors to try and resolve the debt; this has included repeatedly talking to the directors to arrange an instalment arrangement or borrow funds to settle the debt. The company’s other creditors are likely to be unaware of the tax debt and may be considering extending their lending or trade credit to the company, to fund further expansion of the company believing that it can be sustainably repaid.
The Commissioner is considering disclosing the taxpayer’s tax debt to the approved credit reporting agencies so other creditors are made aware of the debt and will be able to make more informed commercial decisions. The debt is reportable unpaid tax as it consists of GST and PAYE that is not being disputed, not under arrangement and the Commissioner is not considering an application for relief or remission. Inland Revenue has made reasonable efforts to resolve the tax debt.
The tax debt meets the significant reportable unpaid tax threshold as the company’s annual gross income is only $150,000, giving a percentage of 43 percent.
The directors are personally served the formal notice, giving the company 30 days to attempt to resolve the debt. After 30 days, the company’s circumstances remain unchanged. Inland Revenue subsequently discloses the taxpayer’s information to approved credit reporting agencies.
The Commissioner continues to periodically disclose the taxpayer’s tax debt information in order to maintain the accuracy of the information contained in the credit report.