Annual Report 2007: Part two - Key business results
Managing our debt portfolio
We actively manage our debt portfolio to collect overdue revenue and payments, which helps to improve compliance and maintain the community's confidence in the tax system. This includes using risk analysis and intelligence tools to assist in the debt collection process, and ensure focus on the collection of higher risk debt, including that arising from audits and complex, deliberate non-compliant cases.
Composition of overdue debt
The overdue debt described below consists of tax debt, overdue student loan repayments and debts arising from Working for Families Tax Credits. Child support debt is dealt with separately and not included in the total.
Total overdue debt was $3,663 million at the end of June 2007, an increase of 4.2% over the June 2006 figure. Inland Revenue compares favourably to other OECD countries when using internationally recognised measures of debt management effectiveness. The growth in the size of our debt portfolio over recent years reflects:
- buoyant economic conditions, which have resulted in an increase in revenue assessed over the past five years
- growth in our customer base, for example, income tax registrations were up 3.7% in 2006-07
- a shift in taxpayer's attitude to being in debt, reflecting a similar trend associated with New Zealand household indebtedness
- our focus on auditing avoidance schemes, which has led to an large increase in tax liabilities being deferred or under dispute in the courts. These taxpayers have been taking aggressive tax positions.
- interest and penalty growth, which make up 44% of all debt.
Figure 5 -
Components of overdue debt
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| Total overdue debt | $3,663 million |
| Increase in past year | $148 million |
| Non-collectable debt | $1,756 million |
| Increase in past year | $121 million |
| Debt under instalment | $783 million |
| Increase in past year | $17 million |
| Net collectable debt | $1,124 million |
| Increase in past year | $10 million |
Over the last five years Inland Revenue has become more efficient at collecting debt. Our collection rates have increased 9% faster than overdue debt growth, and customer instalment arrangements have increased substantially. This year, 81% of new debt cases were closed within six months of the due date.
Collectable debt is debt Inland Revenue can reasonably expect to collect. Growth has been minimal, reflecting strong collection management activity throughout the year. Collectable debt includes:
- debt being repaid under instalment ($783 million compared to $766 million last year)
- net collectable debt where collection action has started or is pending ($1,124 million compared to $1,114 million last year).
Non-collectable debt is debt that cannot currently be collected. It includes:
- debt deferred or under dispute in the courts ($698 million, compared to $739 million last year). Much of this debt relates to litigation following tax audits.
- assessments made by Inland Revenue in the absence of a return filed by a taxpayer, known as default assessments, of $716 million compared to $670 million last year. This increase reflects the higher number of outstanding returns and the growth of our taxpayer base. The growth in default assessments is especially apparent for system-generated GST assessments.
- tax owing that is subject to bankruptcy, liquidation or receivership ($194 million compared to $92 million last year). The increase in 2006-07 reflects both business conditions in the year and the action we have taken to deal with taxpayers who have used complex structures to get GST refunds to evade payment of output tax.
- debt identified as possibly eligible for write-off ($148 million compared to $134 million last year).
Figure 6 -
Percentage of debt cases and total debt by debt value
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Figure 7 -
Total overdue debt by tax type[9]
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Figure 6 shows that a large portion of the debt portfolio relates to a few taxpayers with outstanding debt cases greater than $1 million. Figure 7 shows that the tax debt component (GST, income tax and PAYE) accounts for a very high proportion of the total overdue debt, (89%). The changes in composition of debt show that income tax and student loan debt has declined while GST debt has increased.
Greater flexibility in assessing penalties
Legislation enacted in 2006 gave Inland Revenue discretion not to assess penalties in cases where tax shortfalls were the result of a clear mistake or simple oversight and if certain other criteria were met. In 2006-07 Inland Revenue used its discretion in over 340 cases and decided not to apply penalties of nearly $3 million.
Overdue student loan repayments
At 30 June 2007 there were 72,638 borrowers with overdue repayments totalling $158.3 million (14.5% of all borrowers and 1.8% of the face value of all outstanding loans). The amount of overdue repayments fell by $95.8 million in 2006-07, mainly due to the student loan amnesty introduced in April 2006 and then extended for an additional year.
The student loan amnesty offered the opportunity to non-resident student loan borrowers to make a fresh start on their student loan. Borrowers who were eligible for the amnesty either had their late payment penalties reversed or penalties were not charged up to 1 April 2007.
Figure 8 -
Overdue student loan repayments
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Working for Families Tax Credits debt
This year, Working for Families Tax Credits debt increased to $158 million from $152 million in 2005-06. At the same time, the total amount of Working for Families Tax Credits distributed by Inland Revenue (IR) and the Ministry of Social Development (MSD) has risen 51% from $1,525 million to $2,297 million.
Figure 9 -
Ratio of Working for Families Tax Credits debt to distributions
| 2005 $ million |
2006 $ million |
2007 $ million | |
|---|---|---|---|
| Total distributions by IR and MSD | 1,001 | 1,525 | 2,297 |
| Total debt |
172 | 152 | 158 |
| Debt as a percentage of total distributions | 17.2% | 10.0% | 6.9% |
It's important for us to help people receive their correct entitlements. We continually look for ways to assist customers to "get it right" when supplying us with information. We introduced a new risk profiling and proactive contacts service in October 2006, enabling us to check customer accounts to ensure as many as possible avoid an under or over payment. If we identify customers as being at risk of receiving incorrect payments, we contact them and give them the information they need to receive their correct entitlements.
Child support debt
At 30 June 2007, total New Zealand child support debt was $1,167.4 million, an increase of $84.0 million from last year[10]. Of the $84.0 million increase in total child support debt, $13.6 million (16%) is assessment and $70.4 million (84%) is penalties.
Figure 10 -
Child support debt position
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| Total NZ child support debt | $1,167 million |
| Growth in past year | $84.0 million |
| Growth in past year (%) | 7.8% |
| Assessment debt | $456 million |
| Growth in past year | $13.6 million |
| Growth in past year (%) | 3.1% |
| Penalty debt | $711 million |
| Growth in past year | $70.4 million |
| Growth in past year (%) | 11.0% |
The Child Support Amendment Act 2006 allows a partial write-off of late payment penalties, provided the non-custodial parent complies with their payment programme. The first write-off of penalties under the Act took place in the fourth quarter of 2006-07.
The reciprocal agreement for the collection of child support with the Australian Child Support Agency (ACSA) has been in place since July 2000. We received additional funding to transfer a further 4,000 cases to Australia between October 2005 and June 2007. This has almost doubled the number of cases administered on our behalf by ACSA over the last two years.
| Cases |
Debt owed $ million |
Collections this year $ million | |
|---|---|---|---|
| New Zealand cases handled by Australian Child Support Agency | 8,387 | 273.4 | 13.3 |
| Australian cases handled by New Zealand Child Support | 4,434 | 41.4 | 8.8 |
Uncollectable debt has reduced from $348 million to $241 million since 30 June 2006. There has been a corresponding increase in debt under the reciprocal agreement from $161 million to $273 million. This is primarily because a number of New Zealand customers have been located, through the reciprocal agreement, by the ACSA and their debts have been reassessed based on their actual earnings.
Figure 12
Components of child support debt[11]
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Uncollectable debt - debt where repayments are unlikely in the foreseeable future because the debtor is in hospital or prison, or cannot be located after rigorous efforts.
Under instalment arrangement - debtors who have an arrangement with us to make regular repayments.
Not yet under arrangement - for those who remain unwilling to make regular repayments, we consider legal action. Our options for legal action include distress warrants, charging orders, examinations and arrest warrants.
Reciprocal agreement - debt of New Zealand paying parents living in Australia under collection by the ACSA.
9 2005-06 percentages are in brackets.
10 This figure does not include $30.2 million debt being collected on behalf of the Australian Child Support Agency from Australian paying parents who live in New Zealand.
11 2005-06 percentages are in brackets.
Date published: 23 Oct 2007
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