Tax Updates: 14 October 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at [email protected].

Don’t pay, and we can just take

Inland Revenue (IR) has recently issued a draft standard practice statement (SPS), providing updated guidance to you all about their authority to issue a deduction notice to a third party to recover outstanding amounts of tax owed by you. The SPS has a reference of ED0245 and is a 15-page read if the content is of interest to you. The updated SPS, when finalised, will replace the existing SPS 21/01.

Deduction notices can be issued under any of the following:

• Tax Administration Act 1994 (TAA);

• Child Support Act 1991;

• Gaming Duties Act 1971;

• Goods and Services Tax Act 1985;

• Student Loan Scheme Act 2011.

The deduction notice can require the third party to simply make a single lump sum deduction or, alternatively, to make regular instalment deductions. Once a deduction notice has been issued, it will continue to apply:

• until a deduction is made in respect of a notice requiring deduction by lump sum;

• where an ongoing deduction notice exists until the amount required under the notice has been deducted; or,

• until the Commissioner revokes the notice.

A third party who then makes the required deductions holds those amounts in trust for the Crown, and should they then fail to pay the withheld amount to IR, they can then be fully pursued for the amount as if they were the taxpayer with the arrears owing. Additionally, the third party can be prosecuted by IR for not complying with a deduction notice.

Usually, IR will attempt to warn you before issuing a deduction notice, and such notices will usually only be issued after all other attempts to collect the debt owing have been unsuccessful.

It is important to note that debts owed by another taxpayer, in respect of which you have a joint and several liability (for example, as trustee of a trust or a partner of a partnership), can result in a deduction notice being issued to you personally. However, in the reverse scenario, the partnership should never have a deduction notice issued to a third party who owes the partnership an amount in relation to the personal tax debts of a partner.

Now IR is unlikely to (but still entitled to) issue a deduction notice where:

• a taxpayer has made an application for financial relief that the Commissioner is considering;

• a taxpayer has a tax liability and is keeping to an instalment arrangement;

• the taxpayer or Commissioner has initiated the disputes process under Part 4A of the TAA for the period(s) under dispute; or,

• a taxpayer is challenging an assessment through the courts, and the tax is deferred (tax is deferred after the taxpayer files a Statement of Claim or Notice of Claim with the court).

When a deduction notice is issued to a third party who is the employer of the taxpayer, the deduction is limited to the greater of:

• the lesser of 10% of the tax liability per week;

• 20% of the gross salary or wages payable to the taxpayer on each pay day; or,

• $10 per week.

The above thresholds apply for all debts except those concerning Child Support arrears, where the notice will require the lesser of the deduction amount specified or 40% of the net payment under the PAYE rules. Note that a deduction notice under the Child Support Act 1991 overrides any other deduction notice.

Finally, a word of warning regarding joint bank accounts. If an account holder can withdraw funds from the bank account absent any signature or authority from other account holders being required, then a deduction notice can be applied to any funds sitting in the joint account.

If you would like to make a comment on the draft SPS, the closing date is 15^th November 2024.w charts and examples to illustrate the commentary. If you would like to make a comment with respect to either item, the closing date is November 6^th.  

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.