Less than a week after finding out about her debt, she agreed to sell the property to a UK-based telecommunications company, Elite, for $847,000, on the condition Elite pay no deposit, no interest, and could pay the property off in 25 yearly payments, starting a full year after settlement.
But last month Judge Paulsen cancelled the sale and transferred the property to the Official Assignee, who can sell the house to pay back the tax debt.
Tax consultant Terry Baucher told the Herald that Amber’s plan likely cost her at least half a million dollars, compared to if she had simply sold the property normally and paid off her debts.
IRD’s tax debt spokesman Richard Philp said it was important to note the difference between tax avoidance and tax evasion.
“Tax evasion is a form of tax fraud that involves the use of illegal methods to conceal income or information from IR,” he said.
“As far as Inland Revenue is concerned tax avoidance relates to a person or business taking a tax position with the main purpose of avoiding tax - whether directly or indirectly.”
New Zealand’s total tax debt at June 30, 2023, was just under $5.8 billion, he said.
“That’s nearly 20 per cent higher than at the same time last year. The bulk of that is GST and Income Tax debt. Pressures from the challenging economic environment have caused income streams for businesses to stop or slow down, resulting in some businesses not being able to meet their tax obligations, preferring to pay other bills instead.”
A 20 per cent rise in the tax debt equates to about $1 billion.
“We did defer some proactive debt recovery during the pandemic and after recent extreme weather events and that is likely to be a contributing factor to the percentage increase in debt,” Philp said. “We have been progressively increasing our proactive work recently to address the growth in tax debt.”
The most common way to avoid paying tax is to not file or pay on time, but only a relatively small proportion of customers do this.
“Our records show that as of June 30, 2023, 88 per cent of tax payments were made on time.”
More people are also choosing to pay by instalment, with 162,946 instalment arrangements set up in the year ending June 30, 2023, compared to 137,955 in the 2021-2022 year.
“When a person or business does not pay the full amount of tax by the due date, they immediately expose themselves to late payment penalties and use of money interest,” Philp said.
The penalties accrue in three stages. There is a 1 per cent penalty on the day after payment due date, 4 per cent on the seventh day, and 1 per cent every month.
“Use of money interest is charged at the current rate of 10.91 per cent. Interest gets calculated daily on underpaid tax, is not compound nor included when calculating late payment penalties.”
How the ‘scheme to defeat the IRD’ backfired
Mila Amber had been living at the property at 46 Weka St, Nelson, and operating a bed and breakfast out of it until the end of 2017, but developed a “scheme to defeat the IRD” after being told she owed at least $110,000 in taxes, penalties and overpaid tax credits.
The figure was later amended to nearly $365,000.
Her only way to pay the debt was through selling her property, but the way she sold it meant she never accrued enough money for the IRD to meaningfully recover any of the unpaid tax. She was later made bankrupt.
In the recent Wellington High Court decision, Judge Paulsen noted on an interest rate of 4 per cent, had Amber received the full amount of money for the property at settlement and invested it, she would have made more than $30,000 in interest in the first year alone.
Instead, Amber remained living in the property and paying rent with a reduced ability to make income.
Tax consultant Terry Baucher told the Herald the story is “really quite staggering”.
“I think this is an example of people thinking the Inland Revenue are stupid ... It’s completely underestimating it.”
Baucher said if Amber had sold the property and paid off her debts, she would have had a deposit for another home. Assuming she did not still owe a mortgage on the property, she had lost out on at least half a million dollars, he estimated.
On top of that, she had bankruptcy on her permanent record and would remain under the watchful eye of IRD if she ever wanted to start a business again. Baucher said the ongoing psychological pressure from such a situation would also be “pretty grim”.
Melissa Nightingale is a Wellington-based reporter who covers crime, justice and news in the capital. She joined the Herald in 2016 and has worked as a journalist for 10 years.
