Annual Report 2008: Part two - Key business results
Our debt portfolio
Effective management of Inland Revenue's debt portfolio6 is an important contributor to improving compliance and maintaining community confidence in the tax system. This section gives information on the size and composition of our debt portfolio and the main factors that have influenced its growth in recent years.
Debt has increased over recent years against a background of rising revenue and consistent increases in the taxpayer base. Over the last four years the total number of customers has grown by 16% and total revenue has increased by 35%. There has also been a shift in New Zealanders' attitude to being in debt, which is reflected in the increase in household indebtedness over time.
Customers' ability to pay on time with limited funds means that Inland Revenue competes with customers' other obligations, including homeowners making mortgage payments and companies paying suppliers to stay in business.
Recent OECD research shows that New Zealand's gross debt to net revenue collections ratio is in line with countries with similar tax systems[7]. New Zealand's figure is equal lowest amongst our International Debt Management Committee (IDMC) partners.[8]
Over the last five years Inland Revenue has become more efficient at debt collection. Our collection rates have increased 13% faster than overdue debt growth, and 83% of new debt cases are closed within six months of the due date.
Figure 7 -
Components of overdue debt
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At 30 June 2008 total overdue debt was $4,412 million, of which 41% or $1,814 million relates to penalties and interest, with the core assessment debt $2,597 million.
The following are key elements when assessing the composition of the outstanding debt and equate to 63% of the outstanding debt:
- $917 million (21%) is under instalment arrangement and in the process of being collected
- $709 million (16%) is deferred debt or under dispute in the courts. Much of this debt relates to proactive litigation from Inland Revenue following tax audits. The key driver is ensuring compliance behaviour, with the likelihood of collection often limited
- $740 million (17%) is default assessment made in the absence of a return filed by a taxpayer. This is a proactive action by Inland Revenue to encourage customers to comply if they have not filed a return
- $401 million (9%) is tax owing that is subject to bankruptcy, liquidation, receivership or write-off. This is influenced by the actions we take to deal with taxpayers who have used complex structures to evade payment of tax.
The collectable component of the debt portfolio is $2,562 million. This includes debt under instalment arrangement and cases where collection activity is under way or pending.
In 2007-08 total overdue debt increased by $749 million (20.4%) from the previous year. $504 million of the $749 million increase in debt occurred in the fourth quarter of the year. Before this, growth throughout the first nine months was 6.6%.
The $504 million growth in debt during the fourth quarter of the year was mainly driven by an increase in collectable debt. This occurred mainly after the 7 April 2008 tax agent terminal due date, when $315 million income tax became overdue. Reasons for the fourth quarter growth include:
- Increasing use by businesses of tax pooling facilities, creating temporary debt positions while we wait for advice from taxpayers using pooling facilities.
- The new grace period under our compliance and penalty rules became effective on 1 April 2008, giving a grace period to taxpayers with a good payment history. The new rules will delay repayments in the short term, but are expected to increase voluntary compliance in the long term.
- A $47 million (31%) increase in student loan debt, relating to the 31 March final instalment date for overseas-based borrower assessments. Through our data matching process with the New Zealand Customs Service we have been able to identify more overseas-based borrowers who previously would not have received assessments.
Our enhanced interventions have resulted in a 7.8% increase in debt case closures this year, and a 13.5% increase in returns finalised. We are continuing to focus on earlier engagement and preventing customers getting into debt.
Figure 8 shows that tax debt (GST, income tax and PAYE) accounts for a high proportion of the total overdue debt (88%). The composition of debt has remained stable in the last year.
| 2006-07 | 2007-08 | |||
|---|---|---|---|---|
| $ million | $ million | |||
| Income Tax | 1,636 | 45% | 1,941 | 44% |
| GST | 1,357 |
37% |
1,629 |
37% |
| PAYE | 254 |
7% |
312 |
7% |
| Student loan | 158 |
4% |
207 |
5% |
| Working for Families Tax Credits | 158 |
4% |
169 |
4% |
| Other | 100 | 3% |
154
|
3% |
Overdue student loan repayments
At 30 June 2008, overdue student loan repayments were $207.1 million, an increase of $48.8 million from last year. This is 2.4% of the nominal value of outstanding loans - $8.6 billion at year end.
Overdue repayments decreased by $95.8 million in 2006-07, compared to the $48.8 million increase this year. The decrease in 2006-07 was mainly due to penalties being reversed or not applied because of the amnesty on late payment penalties. Eligible borrowers who did not apply for the amnesty by 31 March 2008 had a one-off penalty applied to their accounts for 2007-08. Further information on the amnesty is on page 27.
There were 105,312 borrowers with overdue repayments, 19.9% of all borrowers. 33,162 borrowers with overdue repayments were overseas (away from New Zealand for 183 days or more). Overseas borrowers had $64.4 million in overdue repayments, 31.1% of the total overdue.
Working for Families Tax Credits debt
This year Working for Families Tax Credits debt increased to $169 million from $158 million in 2006-07. Debt as a percentage of total distributions has declined over the last four years. The interventions we use to ensure that people receive their correct Working for Families Tax Credits entitlements are set out on page 28.
|
2005 $ million |
2006 $ million |
2007 $ million |
2008 $ million |
|
|---|---|---|---|---|
| Total distributions by IR and MSD | 1,001 | 1,525 | 2,297 | 2, 644 |
| Total debt | 172 | 152 | 158 | 169 |
| Annual debt growth | - | (11.6%) | 3.9% | 6.9% |
| Debt as a percentage of total distributions | 17.2% | 10.0% | 6.9% | 6.4% |
Child support debt
At 30 June 2008, total New Zealand child support debt was $1,335.8 million, an increase of $168.4 million from last year.[9] Of the $168.4 million increase in total child support debt, $37.9 million (22.5%) is assessment and $130.5 million (77.5%) is penalties. The overall portion of assessment debt is reducing each year, going from 41% in 2006 to 38% this year.
The main factors contributing to the increase in debt were:
- pressure on household incomes from external economic conditions which impacted on the collection of child support debt in general
- the effect of the bulk tracing exercise undertaken for us by the Australian Child Support Agency. Liable parents who were previously assessed on default income amounts or had their debt classed as uncollectable were reassessed based on their actual income earned. In most cases this resulted in an increase in debt and represented $31.6 million of the $168.4 million increase in child support debt.
A significant percentage of child support debt is more than five years old. However, we are required to collect all outstanding assessments, even where recovery may be unlikely. This includes bankruptcy, where the debt cannot be written off and must still be recovered. We can expect a level of debt growth because the only provision for writing off a valid assessment is when the liable parent has died. Another issue, common to overseas child support administrations, is people becoming more mobile, which makes it challenging to locate liable parents.
Figure 10 -
Child support debt position
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The provisions in the Child Support Amendment Act 2006 allow a partial write-off of late payment penalties, provided the liable parent complies with their payment programme. The first write-offs took place in the fourth quarter of 2006-07. This year we wrote off $26.8 million for 31,641 liable parents.
The reciprocal agreement for the collection of child support with the Australian Child Support Agency has been in place since July 2000. Details of the reciprocal agreement are included in figure 11.
| Total debt cases |
Debt owed
|
Collections this year $ million |
|
|---|---|---|---|
| New Zealand cases handled by Australian Child Support Agency | 9,393 | 320.2 | 20.6 |
| Australian cases handled by New Zealand Child Support | 3,457 | 40.0 | 9.3 |
6Our debt portfolio includes tax debt, overdue student loan payments and Working for Families Tax Credits debt. Child support debt is dealt with separately and not included in the total. Note that the Crown financial schedules in Part six do not include overdue student loan payments.
7 OECD, Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (2006). An updated version of the series containing more recent data is due for publication in December 2008.
8 IDMC is an international committee that meets on an informal basis to share best practice on debt management. Countries include Australia, the United Kingdom, Canada, New Zealand and the United States of America.
9 This figure does not include $40.0 million debt being collected on behalf of the Australian Child Support Agency from Australian paying parents who live in New Zealand. Note that the Crown financial schedules in Part six show only penalties.
Date published: 15 May 2009
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