Weekend Money: Taxwise by Denham Martin

Little-known clauses confer sweeping power on official
Inland Revenue can take an asset or right as a security for fulfilment of tax obligations. Moreover, the commissioner cannot be held responsible if his negligence with the security leads to loss.

Unbeknown to most taxpayers, the Commissioner of Inland Revenue has had the power, since October 1996, to take securities against the performance of tax obligations.

What are tax obligations? What is the extent of the power to take securities?

The phrase "tax obligations" refers to a taxpayer's liability or obligation under a tax law, which means any provision of the Inland Revenue Acts. This in itself illustrates that "tax obligations" is to be construed very widely as a "catch-all" phrase.

It extends beyond simply paying tax that is due.
Specific examples of taxpayers' obligations include:

* Correctly determining the amount of tax payable.

* Keeping all necessary information and maintaining all necessary accounts or balances required under the tax laws.

* Disclosing to the commissioner in a timely and useful way all information (including books and records) that the tax laws require the taxpayer to disclose.
* Cooperating, to the extent required by the Inland Revenue Acts, with the commissioner in a way that assists the exercise of the commissioner's powers under the tax laws.

* Complying with all the other obligations imposed on the taxpayer by the tax laws.

So the "obligations" for which the commissioner can take "security" are numerous.

The security may be a mortgage over a house, a charge over an asset, a personal guarantee or indemnity agreement.

If the taxpayer defaults on the tax obligation for which the security was taken, the commissioner may enforce the security.

Along with the power to take securities, the commissioner has an ability to specify the terms and conditions on which the security is given.

The act contains no express requirement that those terms and conditions be reasonable.

But, like all statutory powers, it is implicit that the commissioner must exercise the power lawfully and reasonably for the purposes for which it was conferred.

What if the taxpayer suffers a loss in relation to the asset or right subject to the security?

Under the act, the commissioner is liable only where he is guilty of wilful misconduct in dealing with that asset or right.

The effect of this is that the commissioner cannot be held liable for negligence or even gross negligence.

Liability arises only where the commissioner intends such a loss, or deals with the secured asset or right with reckless indifference as to whether his dealing will result in loss.

In practice, taxpayers have limited opportunity to seek recovery of any losses arising from the commissioner's dealing with the secured asset.

Where the commissioner wishes to take a security over an asset which is already subject to a security, another issue arises: can the commissioner can take priority over an existing security holder?

In certain situations, specific legislation may govern the priority of securities. For example, the Chattels Transfer Act 1924 and the Companies (Registration of Charges) Act 1993. The general rule is that the security interest that is created first will take priority, unless the conduct of the earlier security holder has led the later security holder to acquire his interest on the premise that the earlier interest did not exist.

Unless the commissioner obtains the consent of earlier security holders, his security will rank behind their securities.

But if the Personal Property Securities Bill is passed in its present form, the new law, rather than the general rule or any specific regime, will govern security interests over all property (other than land and some ships).

The commissioner's power to take securities has so far not been used widely.

Whether this will change remains to be seen.

The powers of the commissioner are being considered by the Finance and Expenditure Select Committee.

Until any changes are implemented as a result of the committee's findings, taxpayers should be aware of the existence of the power as one that the commissioner could exercise against them.

* Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.