Late payment of employer monthly schedule amounts
2007 amendment introduces a graduated penalty that applies when an employer has filed an employer monthly schedule but not paid the associated tax.
Sections 141E, 141ED, 149(2), 149(5), 183A(1)(i), 183D(1)(bd) and 183F(1)(bb) of the Tax Administration Act 1994
A new graduated penalty has been introduced that applies when an employer has filed an employer monthly schedule but not paid the associated tax and replaces the shortfall penalties that might apply in these circumstances. Inland Revenue will contact the employer and, if payment or an arrangement for payment is not made, a 10 percent penalty will be imposed. This reduces to 5 percent if the employer pays the outstanding amount within one month of the penalty being imposed. If the payment is not made, the process repeats itself - that is, another 10 percent penalty is imposed, which reduces to 5 percent if payment is made or an instalment arrangement is entered into within one month. The penalty is capped at 150 percent - the rate of the shortfall penalty for evasion.
One of the basic tax obligations of employers is to withhold PAYE on behalf of their employees and pay the PAYE and other amounts deducted to Inland Revenue by specific dates. If the employer fails to pay Inland Revenue on time, penalties will apply. Non-payment of these amounts may be regarded more seriously than failure to pay other taxes, as they place a special responsibility on the employer to make payment on behalf of the employee.
The penalties that may generally apply in relation to this obligation include late filing penalties, late payment penalties, shortfall penalties for evasion and prosecution.
The discussion document, Tax penalties, tax agents and disclosures, noted that when considering non-compliance in relation to these obligations there are a number of possible scenarios, including:
- employers who have some or all of their employees outside the PAYE system;
- employers who pay the amounts deducted to Inland Revenue but do not file the employer monthly schedule; and
- employers who file the employer monthly schedule but do not pay the deductions to Inland Revenue.
In relation to the first scenario, it was considered that the penalty rules should continue to apply. In the second scenario, penalties would be limited because the tax is paid. In the third situation, when the employer files the schedule but does not pay the amount deducted, the previous rules gave rise to a number of concerns:
- Distortionary outcomes in different situations: A taxpayer with a good record of tax compliance incurred the same (or a higher) level of penalty as a taxpayer with a record of non-compliance. An employer who failed to file an employer monthly schedule could be eligible for a 75 percent reduction for voluntary disclosure, while an employer who filed an employer monthly schedule, but did not pay, was not eligible for any voluntary disclosure penalty reduction as disclosure had already occurred. This effectively provided a disincentive for employers to file.
- A lack of opportunity for taxpayers to correct non-compliance: The shortfall penalty for evasion could be imposed the day after the amounts deducted have not been paid to Inland Revenue, leaving taxpayers with little opportunity to address non-payment.
- A perception that the current rules may be harsh: In theory, taxpayers could incur shortfall penalties for evasion (150 percent of the unpaid amount) plus the initial late payment penalties, even if payments were made only a few days late.
The amendment introduces a new penalty aimed at encouraging employers to pay any outstanding amounts associated with employer monthly schedules by providing better incentives to comply.
The new penalty is intended to better reflect the degree of seriousness shown by employers in meeting their PAYE obligations, while adopting a more graduated approach is intended to provide better incentives for taxpayers to correct any non-compliance.
Shortfall penalties for evasion will not be imposed if the employer files the employer monthly schedule but does not pay the amounts deducted. Instead, Inland Revenue will contact the employer to establish the reason for the non-payment and offer to assist the employer to establish or enhance its systems to ensure future compliance.
Inland Revenue is required to notify the employer that a 10 percent shortfall penalty for not paying the employer monthly schedule amount will be imposed if payment, or an arrangement for payment, is not made within a month.
If the employer does not make the payment or enter an instalment arrangement, the shortfall penalty of 10 percent of the unpaid amount will be imposed. If the amount is paid within a month of the penalty being imposed, the penalty will reduce from 10 percent to 5 percent.
If payment is not made, the process repeats itself - that is, another 10 percent penalty will be imposed, which will reduce to 5 percent if payment is made within a month. The penalty will not exceed 150 percent in total - the rate of the shortfall penalty for evasion.
This penalty is aimed at encouraging employers to pay the outstanding tax associated with an employer monthly schedule. Compliance includes entering into an instalment arrangement. If the employer enters an instalment arrangement the new penalty does not apply, unless the employer defaults on an instalment arrangement. In this case, the penalty is imposed at 10 percent, with no reduction to 5 percent.
The normal late payment penalties, use-of-money interest and ability to prosecute continue to operate in the normal manner.
The new penalty does not apply if a receiver or liquidator is appointed after the end of the return period and they have insufficient funds to pay the outstanding amount. Inland Revenue already has a debt priority in relation to PAYE, which ensures that liquidators and receivers adopt the measures available towards payment of amounts deducted from employees to Inland Revenue.
The penalty can be written off under the debt and hardship rules, and can be remitted for reasonable cause (section 183A) and if remission is consistent with Inland Revenue's duty to collect the highest net revenue over time (section 183D). As is the normal practice with penalties, the penalty is not imposed on amounts of less than $100.
The amendment applies to tax positions taken on or after 1 April 2008.