Taxman caught short

Photo / Paul Estcourt

Inland Revenue Department applications to liquidate troubled companies plummeted to almost zero at one point last year as the department ran short of legal funds.

In the third quarter of last year the day of reckoning was postponed for several hundred struggling firms, apparently because IRD diverted its legal budget to other things.

Based on advertisements in the New Zealand Gazette compiled by liquidators Waterstone Insolvency, IRD applied to put fewer than 10 companies into liquidation in September last year.

That compares with more than 100 applications from other creditors, which generally track the IRD numbers.

Inland Revenue applications peaked at about 125 in March, but by August that number had dropped to just a handful.

Even in the corresponding period in 2008 - before the worst of the recession hit - liquidation applications from the department were running at about 75 a month.

But last year the taxman may have had bigger fish to fry.

In July, the IRD won a High Court tax avoidance case against the Bank of New Zealand.

The bank was ordered to pay back $661 million following its use of structured finance transactions between 1998 and 2005.

Then in October, Westpac lost a similar High Court challenge from the IRD, and has been ordered to pay back nearly $1 billion.

The banks agreed to settle the cases with the IRD in December.

Dennis Parsons, director of Indepth Forensic in Hamilton, one of the firms appointed to handle IRD liquidations, said the work started to dry up around April.

Although IRD did not say it in so many words he understood it had been caught short on its legal budget. "They sort of did in a roundabout way, but it was all unofficial."

Tauranga insolvency practice Rodewald Hart Brown handled IRD liquidations in its area for 10 years until the department put the work out to tender two years ago and awarded contracts to a few specific firms.

Partner Kenneth Brown said it was "well known around the traps" that IRD's legal fund had run low last year.

This kind of dip was a new phenomenon. "I hadn't seen it at any time like that."

PricewaterhouseCoopers handles a large share of the IRD's liquidation work. It declined to comment.

Graham Tubb, acting group manager assurance for Inland Revenue, said that at the start of each year the department estimated an approximate amount required to undertake various legal actions as part of its collection activities.

"In order to manage its overall budget, Inland Revenue has the discretion to apply funds to various priorities depending on the circumstances being addressed at a particular point in time. Accordingly, there can be a range of factors that influence the amount of funding applied to legal work."

IRD still had funds available for bankruptcy and liquidation proceedings at the end of the 2009 year, he said.

Liquidators say the number of IRD applications has started to climb again. There were around 75 last month.