Timing of determining serious hardship

Section 177(1B) of the Tax Administration Act 1994

The Tax Administration Act 1994 has been clarified to ensure that when a serious hardship application is made, the financial position considered by Inland Revenue is the financial position at the date on which the application for relief is made.

Background

The Tax Administration Act 1994 prevents Inland Revenue from recovering outstanding tax to the extent to which recovery would place a taxpayer (natural person) in serious hardship. The Act defines "serious hardship".

Under the debt rules, late payment penalties stop being imposed when a taxpayer contacts Inland Revenue seeking relief. This provision is aimed at encouraging taxpayers to contact Inland Revenue when they are having problems paying their tax. It was intended Inland Revenue would consider the taxpayer's financial position at the time the taxpayer contacts Inland Revenue.

A recent Court of Appeal decision, Larmer⁴, found that serious hardship could be determined at the time of application or, alternatively, at the time the tax became due. Determining serious hardship at the time tax becomes due is not consistent with the policy intent and could lead to inconsistent application of the provision.

The debt rules provide incentives for taxpayers to contact Inland Revenue if they cannot pay their tax. In such cases Inland Revenue can enter an instalment arrangement with the taxpayer and, if necessary, write off part or all of the outstanding amount, for example, when payment would place a taxpayer in serious hardship. To determine if an individual will be placed in serious hardship, Inland Revenue will request relevant details of the person's financial position, for example, details of bank accounts and assets held.

It could in practice be very difficult, and in some cases impossible, for Inland Revenue to determine whether a taxpayer was in serious hardship when the tax became due. This is because this could be a date years before the application for relief is made and it could be difficult to reconstruct a person's affairs. It would also remove the incentive on taxpayers to contact Inland Revenue when they cannot pay their tax.

Key features

New section 177(1B) of the Tax Administration Act 1994 provides that when determining whether recovery would place a taxpayer in serious hardship, Inland Revenue considers the taxpayer's financial position at the date on which the application for relief is made.

Application date

The amendment applies from the date of Royal assent, being 2 November 2012.

⁴ CA61/2012