Correction of minor errors in subsequent returns

2009 amendment allows taxpayers who have made minor errors in a return (involving $500 or less in tax) to correct them in a subsequent return.

Section 113A of the Tax Administration Act 1994

A rule has been introduced to allow taxpayers who have made minor errors in a return (involving $500 or less in tax) to correct them in a subsequent return.

This will help to increase certainty for taxpayers, while reducing their compliance costs and exposure to use-of-money interest and penalties.

Background

The new rule is largely aimed at helping to reduce compliance costs for small and medium-sized enterprises (SMEs) and individuals, although it will apply to taxpayers generally. It was first outlined in the government discussion document, Reducing tax compliance costs for small and medium-sized enterprises, released in December 2007. The rule's introduction was subsequently part of a wider package of tax measures aimed at SMEs in 2009.

As SMEs account for over 95% of New Zealand's businesses it is important that the people who operate them can concentrate on the things that will help their businesses. Reducing the number of tax returns, payments and calculations SMEs have to deal with will help to ease the tax burden they currently face, and free-up some of their time and money to focus on strengthening their businesses.

Taxpayers are required to correctly determine the amount of tax payable under tax laws. If an amount is not correctly calculated, or not paid on time, penalties can apply. Use-of-money interest also generally applies if the correct amount of tax is not paid when due.

Errors are generally required to be corrected in the returns in which they arose. This involves, in addition to the penalty and interest implications noted above, further compliance costs for the taxpayer.

By allowing taxpayers to rectify minor errors they have identified in previous returns by including them in current returns, taxpayers and their agents will be provided with a greater level of comfort in making such changes. This will also reduce the number of interactions taxpayers have with Inland Revenue.

Key features

New section 113A of the Tax Administration Act 1994 allows taxpayers to correct minor errors made in income tax, fringe benefit tax, or goods and services tax returns, in the next subsequent return after discovering the error(s).

A minor error is defined as an error (or errors) that was caused by a clear mistake, simple oversight, or mistaken understanding on the taxpayer's part and that, for a single return, causes a total reduction in the resulting assessment of tax of $500 or less.

For the purpose of calculating the $500 reduction, errors the taxpayer may have for each income tax, fringe benefit tax, or goods and services tax returns are treated separately.

Application date

The new rule applies from 7 December 2009.

Detailed analysis

Under the new rule, when a taxpayer identifies and realises they have made an error or errors caused by a clear mistake, simple oversight or mistaken understanding that results in an underpayment of tax of $500 or less, they no longer need to correct the return in which the mistake arose. Instead, the mistake can be rectified in the next return that is due after the discovery of the error, and the associated tax shortfall caused by the mistake paid along with any tax due from that subsequent return.

In these circumstances the new rule allows the taxpayer to correct the error in this manner. The taxpayer will not be required to specifically notify the Commissioner of the change made.

Example
As a result of a computer inputting error, a taxpayer inadvertently omits a taxable fringe benefit provided to an employee in their FBT return for the quarter ended 31 June 2010. This results in an underpayment of FBT of $245 for this return. The taxpayer, upon discovering the error in August 2010, can now include the taxable fringe benefit in the FBT return for the quarter ended 30 September 2010 and pay the associated shortfall along with any tax due from that return.

Excepted situations

It should be noted that Inland Revenue may review error adjustments when examining taxpayers' records, and may consider limited cases under the compliance and penalties provisions for lack of reasonable care (or more serious penalties if appropriate). An example is if a taxpayer makes a number of habitual adjustments to a number of return periods, or several similar adjustments in varying periods. Such a situation may fall outside the new rule.