Guest Post: Publishing Tax Debt – A Good Idea?

A guest post from a reader:

Publishing tax debt is not a good idea … it is a great idea.

Businesses in New Zealand rely on information in order to make trading decisions.  Information is obtained by word of mouth and on publicly accessible platforms such as printed newspapers and websites.

Deciding who to trade with and when to cease trading and or change terms of trade (such as cash on supply) is one critical area where a business relies on quality, reliable information in order to make sound trading decisions.  Use of signed terms of trade that allow the business to access a customer’s financial information such as credit reports is one way business gets good information to assist with trading decisions.  Credit reporting agencies such as Veda are a useful source of information for businesses to determine if who they propose to trade with has a good credit history.  Credit history can be a good indicator of how the trading relationship may go.  Using Veda’s published debt information can also be useful to check up on a debtor during a trading relationship, if there is cause for concern.

A big hole in this information pipeline is the debtor’s tax debt.  Historically IRD has not published individual entities tax debts.  The tax secrecy laws have prevented this from happening.  When businesses go bust many creditors express dismay when they see that IRD is a creditor with a large debt owed.  Many businesses comment that if they had known the extent of the tax debt they would not have traded with the insolvent business or they at least would have amended the terms on which they would trade with the debtor.  To rub salt into the wounds, IRD has preferential status for tax debt such as GST and PAYE, meaning they get first dibs if the liquidator or Official Assignee manages to realise some assets.

There is a glimmer of hope on the commercial horizon.  Section 85N of the Tax Administration Act 1994 was inserted into the legislation on 1 April 2017.  Section 85N of the Tax Administration Act 1994 allows Inland Revenue to share tax debt information with approved credit reporting agencies where the debt is over $150,000.  The aim is to increase visibility of tax debt and enable more informed business decisions.  Of course, in the private sector a creditor can post a debt with a credit reporting agency as soon as there is a default and no matter what the sum.  IRD on the other hand is constrained by the legislation and IRD’s internal policy when determining when to publish debt.

In addition to the prescribed debt level of $150,000 tax debt, information will only be shared when:

• the debt is owed by the taxpayer (duh);
• the debt has been overdue for a year and, is 30% or more of the taxpayer’s assessable income for the 12 months before disclosure;
• the debt is not disputed;
• there is no agreement for repayment in place;
• IRD has made reasonable efforts to collect the debt; and
• IRD has given the taxpayer notice of the intention to publish the debt and 30 days to sort it in some way.

Hmmm, a fair few hurdles to jump before IRD get to the point of actually publishing the debt.  Although, the hurdles are not so different to steps a commercial operation would take.  So, how is it going then? 

On 24 October 2017 IRD published an article entitled Auckland company becomes first to have tax debt reported.  You can access the article here.  Reading between the lines there are some concerning aspects to how IRD are utilising this new legislative tool. 

It has taken nigh on seven months to report the first tax debt.  Why so long and why only one?  The article gives some hints as to why.  IRD states, on the basis of one company being reported, that “the new powers have proven to be a useful deterrent for companies in a similar situation.  IRD also state that “there are more cases in the pipeline, which meet the same criteria as the company in Auckland.”  What this seems to mean is that IRD are taking interim steps to secure payment and avoid the risk of debt being published rather than just going ahead and publishing tax debt once the criteria are met.  That is their prerogative.   The publishing of the article is probably part of this approach – make an example of one taxpayer to send a message to others, a sort of waving the stick approach.

The IRD approach is concerning.  The point of the legislation was to address the issue of business being in the dark about tax debts of taxpayers they trade with and the negative impact that has on their businesses.  IRD in the article refer to this issue stating “[IRD]has heard from many frustrated creditors over the years, which have done business with companies unaware they had a significant tax debt on the books.”  Well, taking a piecemeal approach to publishing tax debt is not going to address this mischief or defect that the legislation was passed to remedy (that’s fancy legal speak referring to the mischief rule).  IRD seem to be oblivious to the purpose of the legislation.  In their article they state “anyone running a check on a company will then be able to see these [tax debt] details.”  Ahh, no they won’t.  If a uniform and concerted approach to publishing all taxpayer tax debt that meets the criteria is not taken business will be no better off than they are now.  They may even be worse off.  If they rely on credit reports where publishable tax debt is not published then they will be misled and lulled into a false sense of security.

It gets worse.  IRD go on to state “this is how debt reporting happens in the commercial world so it’s good for us as government debt collectors to have this ability too.”  With respect, this is not how it happens in the commercial world.

How does the commercial world operate?  If we are honest about it the commercial world operates fairly inconsistently.  However, the savvy operators actually take a similar approach to what the legislation requires IRD to do (but without caps on debt level).  They set a period after which debt is enforced, say 120 days overdue.  They ensure it is not disputed and they are usually open to setting up some sort of arrangement to sort the debt.  After taking reasonable debt collection approaches they also usually put the debtor on notice that the debt will be published or they use an alternative notice such as a bankruptcy notice or statutory demand.  This notifies that the debt is being enforced to bankruptcy or liquidation, as the case may be.  The other critical thing they do is act consistently.  Step by step working the debt and doing what they threaten, publishing all defaulters.  There is no point waving a stick if you are not prepared to beat someone with it – in a commercial sense that is.  The savvy commercial approach ensures other creditors become aware as debt is published with credit reporting agencies and notices of intention to bankrupt or liquidate are published. 

Of the IRD criteria (see points (a) to (f) above) you would expect there to be a large number of taxpayers (who meet the necessary debt level) that already tick all the boxes apart from being served notice of intention to publish.  It would not be difficult for IRD to extract all these taxpayers that meet the (a) to (e) criteria, serve them with a 30 day intention to publish notice (criteria (f)) and then publish taxpayer debt for those taxpayers that don’t sort their debt by payment or agreed instalment arrangement within that notice period.  Voila, all done. And going forward, any taxpayer that meets the criteria in future gets the same notice and opportunity to sort their debt before it is published.

If that approach were taken by IRD the business community would be well placed in making commercial trading decisions with regard to taxpayers (companies and individuals) who have significant outstanding tax debt.  There are other benefits from taking this approach.  IRD will collect more tax debt more efficiently.  Many of these taxpayers will sort their tax debt either during the notice period or after the tax debt is published.  If they can’t the path to bankruptcy or liquidation, as the case may be, will shorten.  As grim as that may seem it is a good thing that the commercial world would welcome.

It is also highly likely that other creditors now aware of the tax debt position of the taxpayer will take their own steps to liquidate or bankrupt for debts owed to them.  Currently, IRD bears the cost of most liquidation and bankruptcy applications in New Zealand.  This is largely due to other creditors simply being unaware of the tax debt of the taxpayer and the taxpayer’s overall financial position. Unfortunately, it does not look like IRD will operate like the “commercial world” as they claim.  IRD instead state in the article that “[they] hope businesses will make the appropriate effort to clear their tax debt so that we don’t have to use this tactic more often.”  With that debt collection tactic approach, and what looks like a company tax debt only approach, it looks like the glimmer of hope on the horizon will fade away and business will remain largely in the dark with respect to the tax debts of the people they trade with.