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As indicated above, section 104 of the Insolvency Act 1967 and the Seventh Schedule to the Companies Act 1993 set out lists of creditors who receive preferential status in personal bankruptcies and corporate insolvencies respectively.

The lists of priority debts include a number of debts to the Crown such as:

• The Commissioner of Inland Revenue in respect of unpaid GST (section 42(2)(a) of the Goods and Services Tax Act 1985 in respect of personal bankruptcies and Part III of the Goods and Services Tax Act 1985 in respect of corporate insolvencies);
• Duty as defined by section 2(1) of the Customs and Excise Act 1996 (section104(1)(e)(iv) of the Insolvency Act 1967 in respect of personal bankruptcies and the Seventh Schedule to the Companies Act 1993 in respect of corporate insolvencies);
• Debts owing under the Radiocommunications Act 1989, by operation of section183(4) of that Act;
• Levies payable to the Ministry of Agriculture and Fisheries under the Fisheries Acts and
• In respect of corporate insolvencies only, non-resident withholding tax and resident withholding tax deductions made under the NRWT and RWT rules under the Income Tax Act 1994.

In its the report, the Commission considered:

• The criteria which ought to be applied in determining whether any particular debt should be afforded preferential status; and
• Whether the existing preferences under section 104 of the Insolvency Act 1967 and the Seventh Schedule to the Companies Act 1993 can be justified on the criteria recommended;
• The Commission made the following general observations: Section 6A of the Tax Administration Act 1994 requires the Commissioner of Inland Revenue to collect the highest net revenue over time that is practicable within the law having regard to the resources available, the importance of promoting compliance and the compliance costs incurred by taxpayers;
• A preference is not necessary to protect the tax base. This is because Crown agencies have powers to collect tax, duties and levies and to impose penalties and interest or seek security for payment. Protection of the revenue base would be better achieved through exercising these powers in a timely fashion;
• The Crown is not an involuntary creditor. The Legislature has decided that the tax, duties and levies should be collected on its behalf. In addition, even if the Crown were an involuntary creditor, many other involuntary creditors do not receive preferential status.

In relation to the Crown debts, the Commission concluded that the preferential entitlements to GST, customs duty and levies under the Fisheries Acts and the Radiocommunications Act should be abolished. The Commission's reasoning was as follows:

• GST is not a debt analogous to a trustee's obligation to account to a beneficiary, because taxpayers who collect GST do not have to keep it separate from other monies. The obligation to pay GST is analogous to the obligation to pay income tax. There is no preference in relation to income tax so, in order to be consistent, there should not be one in respect of GST;
• The priority afforded to customs duties should be abolished because no anomalies will result from removing it; there is no evidence to suggest that preferential recovery by a creditor provides an incentive for the debtor to pay the duties promptly; and there are ample alternative remedies available to the New Zealand Customs Service to protect itself should the preference be abolished.
• The preference in relation to fisheries duties should be abolished because the only argument advanced for its retention was that arrears of levies arise from an illegal activity (i.e. fishing above quota) and the claim represents the recovery of stolen money. The Commission noted that no other claims for loss against thieves receive preferential treatment and, consequently, this argument was unsustainable. Furthermore, a preference in such a case could only be justified if the person who stole the money stood in a fiduciary position to the Crown.
• The preference in relation to debts owing under the Radiocommunications Act 1989 should be abolished because the Commission saw nothing to differentiate a levy under this Act from any general tax. The Ministry also notes that no arguments were advanced during previous consultation to support retaining this preference.

The Commission recommended that the preferential status of NRWT and RWT in corporate insolvencies under the Companies Act 1993 should be retained and extended to personal bankruptcies under the Insolvency Act 1967 because:

• The payments are made on behalf of a third party. Removing the preference would cause injustice to taxpayers who order their affairs on the assumption that payments have been made.
• It would be unjust to allow the assets of an insolvent to be swollen through the use of money which the debtor ought to have paid to the Commissioner on behalf of a third party.
• The Commission could see no reason why the preference should not be applied consistently in both bankruptcy and liquidation.

The Commission also recommended that the priority afforded to PAYE deductions made by a company under the Income Tax Act 1994 should be abolished and replaced by a gross priority for wages of $6,000 plus the PAYE component. This was because if an employee's wages are to be given priority, the tax component of those wages should also have priority. Further, it would be unfair to an employee who has acted in good faith on the assumption that their employer has paid tax to be put at risk of being personally pursued for the debt.

However, the Ministry notes that these proposals may have a significant effect on Crown revenue and on the behaviour of Crown agencies, businesses and consumers. Unpaid tax undermines the integrity of the revenue base and is a loss to all members of society.

A change in the status of revenue-related claims may lead to a change in the public perception of the revenues involved, which, in turn could affect future collections.

The Ministry will seek detailed comments from all affected Departments before finalising its recommendations. Public submissions are also welcomed.

The Commission also made recommendations in relation to child support deductions (cf The section of the 163 Child Support Act 1991), student loan deductions (cf the Student Loan Scheme Act 1992) and accident compensation levies. The Commission concluded that the priority afforded to all three payments could be justified on the grounds that:

• They are deductions from wages of third parties who are likely to have ordered their affairs on the basis that the payments have been met; and
• The money has not been applied for the purpose of paying the third party's debt so it would be unjust to allow these monies to be used to swell the assets available to the general body of creditors when it would be commercially impracticable to impress funds with a trust.

Notwithstanding this, the Commission recommended abolishing specific priorities and replacing them with a general provision in terms of the current clause 2(d) of the Seventh Schedule to the Companies Act 1993. The Commission believes that such a provision would give creditors a greater incentive to regularly monitor payment of the debt on a regular basis and take timely action to cover arrears. This incentive would flow from the fact that the Commissioner of Inland Revenue's priority would be restricted to the maximum amount of PAYE payable on the net wage priority of $6,000 and to deductions from wages (for child support etc) that have not been paid in accordance with the authority given to the employer. Furthermore, it would simplify the current preferential regime by enabling the priority to be stated in a succinct manner and to apply across the board to all relevant deductions authorised by the employee.

The Ministry supports this recommendation to the extent that it seeks to clarify and consolidate the law into a single provision. If adopted, the priorities afforded to child support deductions, student loan deductions and compensation levies because of their unique status as statutory trust monies, would continue. The Ministry suggests, however, that these priorities be consolidated into a single provision, as recommended by the Law Commission. It should be noted that previous submissions did not tackle this proposal in any detail, and further submissions are welcomed.