Fairness at issue in tax debt write-offs

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More than three-quarters of a billion dollars in tax debt was written off because taxpayers were unable to pay it in the year ended June 2011, the Inland Revenue Department has revealed.

Taxpayers owing a total of $785,461,679 were let off in the year. That's an increase of more than $118 million from the amount written off in June 2010 - when the IRD gave up on collecting $666,825,453.

For the year ending June 2009, $722,366,586 was written off. But one tax expert said the IRD may be too heavy-handed.

There are four main reasons a business or individual may be let off a tax debt: if an individual is bankrupted; if a company is liquidated; if an entity is in financial hardship; or for administrative reasons the amount owed is not worth the IRD chasing, or it is deemed there is no chance of recovering it.

Much of the tax write-off debt is from companies going into liquidation, which forces the entire debt to the IRD to be wiped.

NZ Institute of Chartered Accountants tax director Craig Macalister said his concern was that some businesses that could have been kept afloat and eventually traded their way back into profitability were being forced into liquidation by the IRD.

The IRD is not at the top of the list of most liquidated business' creditors. Because of that, the tax recouped could be comparatively small, he said. "There are cases going to liquidation where there is a question of whether they should be."

Macalister said it was often preferable to have a situation in which a business offered to pay part of the debt - and have another part written off - than be forced out of business and have the lot wiped.

"But there's every incentive to encourage the commissioner [of Inland Revenue] to liquidate rather than keep people in business."

He said the commissioner had to balance the need to collect maximum revenue with the need to maintain the integrity of the system, but there was too much emphasis on the latter.

"It's a significant concern, not just from the revenue perspective but for the functioning of the economy as a whole."

Paul Dunne, of KPMG, said it could be hard to gauge whether write-offs were for the right reason. "It's quite difficult to get debt performance information to measure whether this is the right outcome. There's a real risk that people think it's not fair that some people have debts written off and others work hard and borrow to pay their taxes. It's important that the commissioner is not only fair but seen to be fair."

The rules around tax debt write-offs were changed in 1990 after a select committee special hearing. During the downturn of the 1990s, there were concerns people had committed suicide over their tax debt and that the rules were too harsh.

Labour's revenue spokesman, David Clark, said he could understand why some wage and salary earners who paid PAYE may feel hard-done-by that someone could start a business, rack up debt, then claim hardship to avoid paying tax. "People in genuine hardship need to be treated with compassion."

He said the country needed entrepreneurs willing to take risks and having the option to write off tax debt was part of that. "But if avoidance or evasion is going on, we need to address that."

Clark said the country's economic conditions were not set up to help people get ahead.

Macalister said the level of tax debt write-off was a sign of the ongoing effects of the economic downturn. "If the IRD isn't getting paid you can bet other businesses aren't being paid, either."