Law briefs: Bank vault wide open to IRD's long grasp

The comment is often made that something is as safe as the Bank of England.

That may be true in many cases, but if the Inland Revenue Department is involved, the safety of the bank can be no protection.

The department has wide powers to obtain payment of tax owed to it, a fact recently illustrated by Herald reports that dividend payouts by an electricity supplier might be intercepted in the case of those with outstanding tax bills.

These tax collection powers include the right to compel a third party holding money for a taxpayer to pay all or part of that amount in satisfaction of the taxpayer's tax bill.

For example, if Joe Citizen owes $5000 in income tax and his bank holds $7000 in his personal account, the IRD can require the bank to pay it $5000 directly.

Bank accounts are obvious targets for the IRD when tax remains unpaid.

This procedure has obvious benefits of speed and simplicity for the tax collector, but to protect the citizen the law imposes some limits on the IRD's powers.

One reason for the restrictions is that the taxpayer owing the unpaid tax might not be the only person affected by a raid on the bank account.

Many people hold accounts jointly with their spouses or business partners.

In 1987, an Australian court ruled invalid a notice from the Australian Tax Office requiring a Sydney bank to transfer money from a savings account held jointly by three individuals.

Each person had been assessed for a one-third share of the total tax bill.

But the ATO could not lawfully ask the bank to hand over the total tax owed by all three people.

The joint account meant that the money in the account was not held for any one individual, it was held for them all.

The IRD and New Zealand banks have since agreed upon the policies to be followed when a notice to deduct is issued against a taxpayer's bank account.

Except when the law expressly allows, notices are not to be issued for joint accounts when a tax debt is owed by only one of the account holders.

A recognised exception is the reclaiming of overpaid family support.

Another example is that the notice cannot be used to put the taxpayer into overdraft, or to increase an existing overdraft.

However, compulsory deductions can be made from a term investment before the maturity date of that investment.

Before the IRD can issue a notice to deduct by a third party, the taxpayer must have defaulted in payment of income tax, interest on that tax, or any tax penalties.

But what is meant by a default?

What if the taxpayer disputes his or her liability to pay the tax which has been assessed?

Can the IRD collect the amount allegedly owing before a court rules on the issue?

In a recent case, the IRD issued a notice to deduct half the tax said to be owing.

The taxpayer, who disputed the tax assessed to him, argued that no income tax was properly payable until either a court had confirmed his liability to pay, or he had accepted that liability.

He contended that income tax was defined as income tax imposed under the New Zealand Income Tax Act 1994.

But a tax liability that was disputed could not be said to have been imposed. No tax was imposed until a court gave a final decision on the issue of liability.

Therefore, until that time, a failure to pay the disputed tax could not amount to a default justifying a notice to deduct.

The High Court held the notice was valid.

The IRD had anticipated the taxpayer contesting the tax assessment by seeking to recover only half the amount in dispute.

The law requires a taxpayer to pay half the amount of tax assessed even if he or she disputes that any tax is owing.

Another limit on the IRD's powers to collect tax directly from a bank account relates to foreign currency.

An Australian court has ruled that the ATO has no power to compel a bank to deduct money held on behalf of a taxpayer when the money in the account is in a foreign currency. This legal position has not been tested in New Zealand, but it is likely the same result would be reached.

Income tax in New Zealand is paid in New Zealand dollars.

To require a bank to convert money held in a foreign currency and then pay over the New Zealand equivalent could go beyond the powers of the IRD.

* CCH New Zealand is a tax, business and law publisher based in Auckland. For further information check their website or phone 0800 500-224.

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