Chapter 6 - Improving the operation of markets through greater tax transparency

 

• Credit reporting of tax debt
  • Criteria for disclosure of tax debt
  • Who will tax debt be disclosed to?
  • What will be disclosed?
  • Privacy implications
• Information sharing with the registrar of companies
  • Offences regarding which information will be shared
  • What information will be shared?
  • How will information be shared?

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Critical to compliance is taxpayer trust that their information will not be disclosed inappropriately. However, the need to keep tax information secret should be balanced against supporting economic efficiency and growth, and wider government outcomes. Accordingly, there are a number of specific exceptions in the tax secrecy legislation to enable tax information to be disclosed. An example is the provision of tax information to the New Zealand Police relating to serious crime.

The Government has announced two new measures to share information to better protect the New Zealand business community. These measures will disclose information relating to taxpayers with significant tax debts and information relating to taxpayers who may have committed serious offences against the Companies Act 1993. Both measures, while primarily focused on protecting the wider community, also carry tax administration benefits.

Credit reporting of tax debt

Information about tax debt, like all tax information, is subject to the tax secrecy rule set out in section 81 of the Tax Administration Act 1994 (the TAA). Inland Revenue does not disclose information about a taxpayer’s tax debt to others (except where a claim is lodged in court for recovery of the debt). However, there is, in essence, little difference between a tax debt and any other debt a taxpayer may have.

The lack of visibility of tax debt can have a significant impact on other businesses, as they may have made different decisions about dealing with someone had they been aware of the debt. In addition, the non-payment of tax debt can allow non-compliant businesses to unfairly compete against those who are compliant.

The Government has announced that it will introduce legislation to permit the disclosure of tax debt information for the most serious cases of non-compliance to credit reporting agencies. This will apply to significant income tax and GST debt, and to employers’ unpaid PAYE, child support, student loan and KiwiSaver deductions from employees’ salary and wages. Disclosure will enable businesses contemplating providing credit to make more informed commercial decisions, as including tax debt information in a credit check would provide a more comprehensive picture of a business’s total position.

In addition to contributing to economic efficiency, this will reduce opportunities for non-compliant taxpayers to continually fail to address growing tax debt.

Criteria for disclosure of tax debt

It is proposed that legislation will set out the criteria to be met before Inland Revenue shares information with credit reporting agencies, including that:

• The debt is significant;
• The debt is not disputed;
• Reasonable efforts have been made to collect the debt;
• The taxpayer does not qualify for serious financial hardship relief; and
• The taxpayer has been personally served notice of the Commissioner’s intention to disclose debt information to credit reporting agencies, and given 30 days to repay the debt or arrange for repayment.

“Significant debt” is proposed to be defined in regulation as debt relating to income tax, GST or an employer’s PAYE, child support, student loan or KiwiSaver deductions, where the debt is either:

• Overdue by a certain period of months (for example, 18 months) and greater than a set percentage of a taxpayer’s:
  • Gross income; or
  • Unencumbered assets; or
  • Non tax third party liabilities;

or

• New debt that is greater than a certain dollar threshold, (for example, $150,000) and there is a high risk the debt will not be repaid.

The criteria outlined above will ensure that only cases of serious non-compliance are disclosed to the credit reporting agencies. The inclusion of percentage measures and a fixed dollar threshold will allow reporting only when it would be a proportionate response, given the particular taxpayer and the risk their tax debt represents to other businesses. Officials welcome submissions on the criteria, including the appropriate setting of the thresholds and percentages. It is proposed that the significant debt criteria be set out in, and able to be varied by, Order-in-Council.

The Commissioner will be responsible for ensuring the criteria are applied consistently. It is proposed that annual summaries will be published including levels of information that have been shared with credit reporting agencies.

Who will tax debt be disclosed to?

New Zealand has a number of experienced credit reporting agencies. These agencies source credit data and package and provide it either directly to requesting businesses, or to other businesses that provide credit reporting services. The agencies obtain data from a range of sources including private businesses such as banks and other lending institutions, utility and telecommunications providers, and some government agencies including the Ministry of Justice (court fines) and the New Zealand Transport Agency (licence status and demerit point history).

As a result of their experience and access to a wide range of other credit information, the credit reporting agencies are best placed to provide the most comprehensive picture of a business’s credit history. They are therefore considered the most appropriate channel through which to disclose tax debt information. As part of the implementation of this proposal, Inland Revenue will work with credit reporting agencies interested in receiving significant tax debt information to ensure they have the capability to deal with the information securely and effectively.

What will be disclosed?

Three categories of information are proposed for disclosure:

• Identity information – this is required to ensure the credit reporting agency can accurately identify a particular taxpayer and ensure any accompanying debt information is attached to the correct taxpayer. This might include information such as the taxpayer’s name and address, the business’s trading name (if applicable), a company’s date of incorporation, and New Zealand Business Number.
• Existence of tax debt – this information could be presented as a yes/no indicator and would include the date the information was provided to show how current it is.
• Information about the tax debt – this could include tax types, the age of the debt and the total amount represented as a band, for example “$150,000-$175,000”.

The first two categories of information are essential. However, the third category may not be necessary to make other businesses aware of the existence of significant tax debt. Submitters’ views are welcomed on whether additional detail on the amount of tax debt would be beneficial.

Similar to other Inland Revenue information sharing arrangements, a memorandum of understanding will be entered into with each participating credit reporting agency before any information is shared. This will require the agencies to screen Inland Revenue information before it is incorporated into a credit file, to ensure it is matched to the correct file. The credit reporting agencies keep a record of who requests and receives information, and have established processes for updating information. Credit reporting agencies are already required to provide individuals with copies of their own credit information free of charge, upon request.[19]

Privacy implications

Officials have been working with the Office of the Privacy Commissioner to understand the privacy implications of disclosing individuals’ personal information held by Inland Revenue to credit reporting agencies, and by credit reporting agencies to members of the business community.

Credit reporting agencies in New Zealand are subject to a code of practice, the Credit Reporting Privacy Code 2004 (the Code). The Code prescribes privacy standards for the industry to follow when dealing with personal information. Officials continue to consult with the Office of the Privacy Commissioner on the interaction of this measure with the Code.

Officials welcome submissions on the measure generally, and in particular are interested in submitters’ views on:

• The criteria for credit reporting;
• The definition of significant debt; and
• The level of information to be disclosed.

Information sharing with the Registrar of Companies

The Companies Office administers a number of public business registers. In so doing, it oversees some important regulatory requirements which ensure business accountability and responsibility. The Companies Office aims to:[21]

• Promote confidence in the New Zealand business environment by ensuring integrity of registered information;
• Ensure that those who are responsible for fulfilling the statutory duties of registered bodies or individuals comply with those responsibilities; and
• Hold to account those who abuse the privileges of the corporate structure.

The Registrar of Companies (sometimes under various statutory titles such as the Registrar of Friendly Societies or the Registrar of Incorporated Societies) is the statutory officer responsible for establishing and maintaining the various registers, and for taking compliance and enforcement action against those who fail to comply with or breach their statutory obligations.

The Registrar of Companies has the power to collect information in order to administer the Companies Act 1993 (Companies Act),[22] verify compliance and to detect breaches of that Act.[23] Inland Revenue has, on occasion, information that would assist the Registrar of Companies to detect and enforce serious offences under the Companies Act, and assist with the prosecution of these offences. Currently Inland Revenue is unable to share this information and this can mean that non-compliant companies are able to continue to trade and receive a commercial advantage over other compliant businesses. This may cause harm to members of the public, businesses and the New Zealand economy generally when these breaches continue undiscovered for periods of time.

The Government has announced that Inland Revenue will enter into an agreement to provide information to the Registrar of Companies. Inland Revenue will be permitted to share information with the Registrar of Companies where:

• There is reasonable suspicion that a serious offence has been, is being, or will be committed;
• Inland Revenue considers the information will prevent, detect, or provide evidence of, a serious offence that has been, is being, or will be committed; and
• Inland Revenue is satisfied that the information is readily available, it is reasonable and practicable to communicate it, and communication is in the public interest.

This agreement will improve the Registrar of Companies’ ability to enforce serious offences under the Companies Act and hold non-compliant businesses and directors accountable for breaching their corporate responsibilities. This, in turn, will prevent harm to other businesses and individuals, and promote public confidence in the integrity of New Zealand’s business environment.

Improved enforcement of serious Companies Act offences is expected to also provide tax administration benefits. Research undertaken by Inland Revenue into habitual non-compliance has found non-compliance with other government obligations to be a strong predictor of non-compliance with tax obligations.[24] Directors who are seriously non-compliant with their obligations under the Companies Act may also be non-compliant with tax obligations for which they also have responsibility, including the obligations of their company and its employees.

This measure has similar objectives to Inland Revenue’s current information sharing agreement with the New Zealand Police, which enables the sharing of information relating to serious criminal offences. It is intended that the principles reflected in that agreement are incorporated as much as possible into the new agreement with the Registrar of Companies.[25]

Offences regarding which information will be shared

Information sharing arrangements between Inland Revenue and enforcement agencies should balance public interest with tax secrecy and, in the case of information about individuals, privacy interests. It is proposed that, as is the case for Inland Revenue’s information sharing with the New Zealand Police, information sharing with the Registrar of Companies is limited to “serious offences” with a potential maximum penalty of at least 4 years imprisonment.

Inland Revenue has consulted with the Companies Office regarding the serious offences it would most benefit from receiving information about. As a result of these discussions it is proposed that Inland Revenue shares information about the following:

• Serious breach of director’s duty to act in good faith and in best interests of company.[26] This offence is intended to prevent directors acting in bad faith and in a way that harms the interests of a company. A director commits this offence by exercising powers or performing duties as director in bad faith toward the company, believing that the conduct is not in the best interests of the company, and knowing that the conduct will cause serious loss to the company;
• A person authorising or making false statements.[27] This is intended to prevent directors and other persons from knowingly making statements that are materially false or misleading, or from knowingly omitting material information, with regard to required documents and statements and reports relating to company affairs;
• Breach of statutory prohibition from managing company.[28] Prohibition is automatic for a person convicted of an offence in connection with promoting, forming or managing a company or of being convicted of several specified offences.[29] It is a serious offence to breach a statutory prohibition. This offence is intended to prevent prohibited persons from causing further harm to others;
• Breach of a court order disqualifying a person from managing a company.[30] Court orders are intended to prevent directors who have failed to comply with relevant legislation, who have committed fraud, or who have previously behaved recklessly or incompetently as a director from promoting or managing a company for the specified period (these can be permanent or for a period up to 10 years);
• Breach of prohibition by Registrar or Financial Markets Authority (FMA)[31] from managing a company.[32] The Registrar or FMA may prohibit a person from managing a company for up to 10 years. This power may be exercised in respect of directors or persons who took part in management of a failed company, where the Registrar is satisfied that the way in which the company was managed was wholly or partly responsible for its failure;
• Breach of prohibition by Registrar or FMA from managing a company (additional power).[33] Such prohibitions are intended to prevent directors of companies that have been removed from the register for failing to confirm or correct information, providing inaccurate information or persistently and seriously failing to comply with the requirements of the Companies Act or Financial Reporting Act 2011 from being a director or promoter of a company for up to 10 years; and
• Director of failed company being a director of or managing a phoenix company. This prevents directors of failed companies from going on (without the permission of the court) to participate in the management of a phoenix company, or a company with the same or similar name as the failed company.[34]

The penalty for the above offences is a sentence of up to 5 years’ imprisonment or a fine of up to $200,000.[35]

What information will be shared?

Examples of information that Inland Revenue could share include:

• Information Inland Revenue holds on a specified person: This may include their IRD number, entity information, the taxes for which they are registered, income history, tax payment history (including any compliance issues), types of income, expenses, asset and liability information, and actions taken or planned to be taken in relation to the specified person.
• Information Inland Revenue holds on other persons or entities that are associated with, or related to, the specified person: This may include information necessary to understand beneficial ownerships or the nature of the structures the specified person is involved with.
• Information Inland Revenue holds that is aggregated, derived or inferred that is relevant to the specified person (or associated or related persons): This may include judgements about compliance behaviour, and judgements on possible approaches by the specified person to compliance with tax and other legal obligations. Information shared would include documents Inland Revenue may have that would support another agency’s enforcement action.

How will information be shared?

Inland Revenue will share information in response to a request from the Registrar of Companies relating to the enforcement of the offences described above. In the case of offences involving breach of a prohibition or disqualification order, Inland Revenue will also be able to share information proactively that it discovers in the course of its day-to-day operations, which would be of interest to the Registrar of Companies in relation to those offences.

In either case, the party initiating the sharing must have reasonable grounds to suspect that one of the specified serious offences has been, is being, or will be committed. The agency sharing or requesting information must also have reasonable grounds to suspect that the information shared or requested is relevant to the prevention, detection or investigation, or is evidence of, the serious offence or non-compliance. Inland Revenue will also need to ensure any information shared is readily available, and that is practicable and in the public interest that the information is provided to the Registrar of Companies.

Information will be transferred on a case-by-case basis (bulk information transfer is not proposed). The provision of information will use existing administrative mechanisms that provide information regarding serious crime to the New Zealand Police and tax information to other jurisdictions under Double Tax Agreements. A central point in each agency will be responsible for dealing with all requests for information.

A memorandum of understanding between the agencies will be required before any information sharing commences. This will outline the process for requesting and providing information, the protections available and requirements regarding security and use of information.

If the information provided by Inland Revenue is subsequently used in a prosecution, at the time criminal disclosure obligations are triggered, the alleged offender must be informed that information was provided by Inland Revenue. This would enable the affected taxpayer (the alleged offender) to challenge the decision to release the information if they wish. At this point the Court may consider the evidence is inadmissible, either due to a problem with the release of the information or on other Evidence Act 2006 grounds (as is standard in the existing criminal disclosure and evidence admissibility processes).

This approach would have three benefits:

• Preserving the affected person’s privacy interests and rights under section 21 of the New Zealand Bill of Rights Act 1990;
• Ensuring there is judicial scrutiny when the information provided is used, but not burdening the judiciary with every information request or provision; and
• Providing a mechanism to ensure that decisions to release information are robust and appropriate by allowing for decisions to be reviewed.

In addition, should an individual have concerns about how their information has been treated they will be able to either use the internal complaint procedures of Inland Revenue and/or the Companies Office or seek assistance from the Office of the Privacy Commissioner.

19 Rule 6, Credit Reporting Privacy Code 2004.

20 The 18 months and 20% of gross income are used for illustrative purposes only and do not form part of the proposals. These are still to be determined.

21 Companies Office enforcement policy guidelines, 1 July 2013 - https://www.business.govt.nz/companies/about-us/enforcement/policy-guidelines.

22 The sections referred to in the remainder of this chapter relate to the Companies Act unless otherwise stated.

23 Section 365.

24 Habitual Non Complier Tier 1 Analysis, Inland Revenue 2012.

25 While the current agreement with Police is an Approved Information Sharing Agreement (AISA) under part 9A of the Privacy Act, it is not intended that this will be the case for the agreement with the Registrar of Companies. Tax secret information about a company cannot currently be shared under an AISA.

26 Section 138A.

27 Section 377.

28 Section 382.

29 Sections 377-380 and dishonesty offences contained in the Crimes Act 1961.

30 Section 383.

31 Information sharing with the Financial Markets Authority is not currently proposed; however further extensions of serious offence information sharing with other enforcement agencies will likely be considered following the introduction of this measure.

32 Section 385.

33 Section 385A.

34 Section 386A.

35 See section 373(4) and the sections referred to therein.