Temporary shortfalls

Section 141I(3) of the Tax Administration Act 1994

The legislation has been clarified to reflect Inland Revenue's practice in relation to temporary tax shortfalls. An amendment has been made so that a tax shortfall will be treated having been "permanently reversed or corrected" if it appears from the taxpayer's actions or through operation of law that the shortfall will be remedied. For a shortfall to be considered "temporary" it must be permanently reversed or corrected within four years of the tax position being taken.

Background

A shortfall penalty is reduced by 75 percent if the tax shortfall is temporary. The legislation sets out what is meant by "temporary".

When the compliance and penalty rules were first introduced, there was considerable criticism relating to the imposition of shortfall penalties in cases where there had been little or no fiscal risk. This problem was particularly obvious when a GST refund check was made by Inland Revenue and a timing difference was detected. The rules reducing the penalty for temporary shortfalls require the taxpayer to permanently reverse or correct the situation in a subsequent tax-return period. However, in some cases, there was little or no opportunity for this to occur.

Inland Revenue's Standard Practice Statement INV-231, released in May 1998, dealt with this concern. The legislation requires that the temporary shortfall is:

... permanently reversed or corrected before the taxpayer is first notified of a pending tax audit or investigation

The Standard Practice Statement states that:

... the Commissioner will accept that a tax shortfall has been permanently reversed or corrected if:

• it appears from the taxpayer's actions that steps taken will remedy the tax shortfall; or
• through operation of law or circumstances, the matter will reverse itself.

The legislation has been clarified to reflect Inland Revenue's practice.

Key features

The legislation has been amended, in line with current practice, to ensure that the reduction for a temporary shortfall applies even though the opportunity has not yet arisen to deal with it in a subsequent return, if:

• it appears from the taxpayer's actions that steps taken will remedy the tax shortfall; or
• through operation of law or circumstances, the matter will reverse itself.

The amendment also requires the temporary shortfall to be permanently reversed or corrected within four years of the tax position being taken.

Application date

The amendment applies to tax positions taken on or after 1 April 2008.

Due date for payment of tax