Unacceptable tax position

2006 amendments temporarily give the CIR discretion to cancel or not assess the unacceptable tax position shortfall penalty in certain circumstances.

Sections 141A(5), 141KB and 142B of the Tax Administration Act 1994

The amendments give the Commissioner a discretion to either cancel or not assess the unacceptable tax position shortfall penalty in certain circumstances.

The amendments are a short-term measure while further work is being undertaken to develop a long-term solution to certain problems with the unacceptable tax position shortfall penalty. The Minister of Revenue has announced that a discussion document will be released later this year and any necessary amendments included in a subsequent tax bill.

Background

An unacceptable tax position shortfall penalty of 20% of the tax shortfall is assessed if, viewed objectively, the tax position fails to meet the standard of being "about as likely as not to be correct". The penalty is only assessed in cases where the tax shortfall is significant; that is, a shortfall in excess of $20,000 and the lesser of either 1% of the total tax figure or $250,000. The penalty does not apply to tax shortfalls that arise from mistakes in the calculation or recording of numbers in a return.

The shortfall penalty for an unacceptable tax position is therefore intended as a signal to taxpayers who take tax positions where there is a significant amount of tax at stake. The unacceptable tax position standard does not require that the treatment a taxpayer gives to a particular matter must be the better view, or must be more likely than not the correct treatment. Rather, it must be a position to which a court would give serious consideration, but not necessarily agree with. This means that the taxpayer's argument should be sufficient to support a reasonable expectation that the taxpayer could succeed in court.

The current term "unacceptable tax position" results from an amendment to the penalties legislation in 2003. The unacceptable tax position shortfall penalty was previously the "unacceptable interpretation" shortfall penalty. The amendment was necessary because a taxpayer could argue that they had not made an interpretation and therefore the unacceptable interpretation shortfall penalty could not be assessed even when justified in terms of the penalty's objective.

Although this issue was not covered by the bill when it was introduced, the Finance and Expenditure Committee received submissions on this issue. Submitters considered that the unacceptable tax position shortfall penalty could penalise most, if not all, errors in excess of the minimum thresholds. If a taxpayer had made and acknowledged an error, by definition the tax position could not be "about as likely as not to be correct". Submitters argued that this was having an adverse effect on taxpayer behaviour in that it was making them less inclined to disclose errors for correction to Inland Revenue.

Key features

New section 141KB gives the Commissioner a discretion allowing him to either cancel or not assess the unacceptable tax position shortfall penalty. The discretion applies in cases where the Commissioner is satisfied that:

  • the tax position is taken as the result of a clear mistake or simple oversight;
  • the tax shortfall arising from the tax position is or would be subject to a reduced penalty because the shortfall was voluntarily disclosed before notification of a tax audit or investigation or is a temporary shortfall; and
  • it is appropriate that the taxpayer not be liable to pay an unacceptable tax position shortfall penalty in relation to the tax position.

The new section applies retrospectively, back to 1 April 2003, the date on which the unacceptable interpretation shortfall penalty was changed to the unacceptable tax position shortfall penalty. This allows the Commissioner to cancel penalties that have been assessed. The cancellation will be effective from the date on which the penalty was assessed. For penalties assessed before 1 April 2006, taxpayers must make a written request to the Commissioner for the discretion to be exercised. If a penalty which has been paid is cancelled Inland Revenue will pay use-of-money interest on the amount paid.

If the Commissioner determines that a penalty that has been assessed should be cancelled, the Commissioner may consider whether in taking the tax position the taxpayer has failed to take reasonable care. If this is the case the shortfall penalty for not taking reasonable care could be assessed. Under the new section 141A(5) the penalty would be assessed at the time the Commissioner makes the decision that the discretion applies (and not at the time that the unacceptable tax position shortfall penalty was assessed). New section 142B(2) ensures that in such cases the due date for payment of the not taking reasonable care shortfall penalty is not when the tax shortfall was payable, but rather once the Commissioner has notified the taxpayer that the not taking reasonable care shortfall penalty is payable.

The decision on whether the Commissioner exercises his discretion in section 141KB(1) or not is a "disputable decision" for the purposes of the disputes resolution process.

Application date

The amendment applies retrospectively, back to 1 April 2003, the date on which the unacceptable interpretation shortfall penalty was changed to the unacceptable tax position shortfall penalty. If an unacceptable tax position shortfall penalty has been assessed before this amendment was made, and the tax shortfall meets the criteria set out above, Inland Revenue must receive a written request from the taxpayer before 1 October 2006 asking for their penalty to be cancelled.

Inland Revenue has published SPS 06/01 Discretion to cancel or not assess shortfall penalties for taking an unacceptable tax position which sets out the practice for exercising the discretion under section 141KB.