SPS 05/10
Issued
17 Oct 2005

Remission of penalties and interest (October 2005) (WITHDRAWN)

Withdrawn SPS 05/10 - Remission of penalties and interest (October 2005). Statement provided for historical purposes only.

Withdrawn

This statement has been withdrawn and is provided for historical purposes only.

This statement also appears in Tax Information Bulletin Vol 17, No 9 (November 2005), and is referenced in SPS 15/02 - Remission of penalties and use-of-money interest.

Introduction

  1. This Standard Practice Statement (SPS) sets out the Commissioner's practice in respect to granting remission of penalties and interest under sections 183A, 183ABA and 183D of the Tax Administration Act 1994.

Application

  1. This SPS applies to remission requests received on or after 17 October 2005. It replaces SPS RDC 600 Remission of penalties and interest , which was originally published in Tax Information Bulletin Vol 14, No 12 (December 2002).
     
  2. This SPS does not apply to:
     
    • shortfall penalties (except those imposed by section 141AA of the Tax Administration Act 1994), and
       
    • penalties and interest charged on payments by non-custodial or custodial parents under the Child Support Act 1991, and
       
    • student loan repayments.
  3. Unless specified otherwise, all legislative references in this SPS refer to the Tax Administration Act 1994.

Summary

  1. Applications for remission under sections 183A and 183D should be made in writing and should be accompanied by supporting information.
     
  2. The Commissioner will remit under section 183A where he is satisfied that the non-compliance has been caused by an event or circumstance that provides reasonable justification or excuse for the omission, and the omission was rectified as soon as practicable.
     
  3. The Commissioner will remit under section 183ABA where:
     
    • a taxpayer is significantly affected by a "qualifying event", and
    • the taxpayer has applied for remission of the penalties and/or interest as soon as practicable, and
    • the Commissioner is satisfied that the effect on the taxpayer of the occurrence of the qualifying event makes the remission equitable.

     
  4. The Commissioner will remit under section 183D if the Commissioner is satisfied that remission is consistent with the duty to collect over time the highest net revenue that is practicable within the law. Generally, the Commissioner will grant remission of penalties where there was a genuine oversight, a "one-off" situation, or incorrect advice was given by an Inland Revenue officer that led to the taxpayer not filing their return or paying the tax on time.
     
  5. The Commissioner will remit interest in limited circumstances such as where an Inland Revenue officer has given incorrect advice to the taxpayer, and that advice has directly resulted in the non-compliance. However, this is not the only situation in which interest may be remitted. The Commissioner will consider each case on its own merits.
     
  6. Remission applications under sections 183A and 183D will only be considered when the returns relevant to the remission requests have been filed and the tax has been paid.
     
  7. Sections 183A and 183D do not permit remission to be granted for financial reasons. Requests for financial relief are dealt with under sections 176 and 177.

Background

  1. Taxpayers are obliged to pay their taxes by the due date. Penalties provide an incentive to all taxpayers to comply with the law. Use-of-money interest provides compensation for the time value of money and compensates the taxpayer or Inland Revenue for the use of money over time.
     
  2. Remission provisions are needed to allow Inland Revenue to accommodate circumstances in which charging a penalty or interest is inappropriate. The procedures Inland Revenue use should ensure taxpayers have been justly treated regardless of the outcome. Inland Revenue will weigh the particular circumstances that exist in each taxpayer's case against the standard practice.
     
  3. Legislation governing remission of penalties and interest is contained in sections 183A, 183ABA and 183D. These sections do not apply to penalties and interest charged on payments by custodial or non-custodial parents, student loan repayments or to shortfall penalties except shortfall penalties imposed by section 141AA.
     
  4. The legislation governing imposition and non-imposition of penalties is contained in Part IX of the Tax Administration Act 1994. For further details regarding non-imposition of penalties please refer to a separate SPS on instalment arrangements for payment of tax debt.
     
  5. Remission will occur when the tax, penalty or interest is correctly charged at the time but it is decided to relieve the taxpayer of the liability to pay. Cancellation will occur when the tax, penalty or interest was correctly charged at the time but a provision of the legislation relieves the taxpayer from the obligation to pay, such as the successful completion of an instalment arrangement. Reversal will occur when the tax, penalty or interest should not have been charged in the first place. For further details regarding imposition of penalties please refer to a separate SPS on instalment arrangements for payment of tax debt.

Legislation

  1. The relevant legislative provisions are:
     
    • sections 140CB, 141AA, 183A, 183ABA and 183D, and
    • section OB 1 of the Income Tax Act 2004 (definition of "qualifying event").

Discussion

Remission for reasonable cause 

  1. Section 183A applies to:
     
    • a late filing penalty
    • a non-electronic filing penalty
    • initial and incremental late payment penalties
    • imputation penalty tax
    • dividend withholding payment penalty tax
    • Maori authority distribution penalty tax
    • a shortfall penalty imposed by section 141AA.

     
  2. The Commissioner may impose Maori authority distribution penalty tax under section 140CB, where a Maori authority fails to pay further income tax as a result of a debit balance in the Maori authority credit account at the end of the year. The amount of the penalty tax is 10% of the amount of further income tax.
     
  3. Pursuant to section 141AA, a person is liable for a shortfall penalty of $250 for each return period if:
     
    1. the person fails to deduct non-resident contractors withholding tax from a contract payment made to a non-resident contractor, and
       
    2. the non-resident contractor is not liable to pay income tax on the contract payment due to a double tax agreement or other reasons.


    The shortfall penalty imposed under section 141AA is limited to a maximum of $1,000 for each return period.
     
  4. Section 183A does not apply to interest or shortfall penalties (except those imposed by section 141AA).
     
  5. The Commissioner may remit penalties mentioned in paragraph 18 if satisfied that the penalties arose as a result of an event or a circumstance beyond the taxpayer's control and the taxpayer is able to provide in writing reasonable justification for the late filing, non-electronic filing, late payment or failure to deduct non-resident contractors withholding tax. Furthermore, the taxpayer must have filed the return and paid the tax as soon as practicable after the event or circumstance.
     
  6. The term "reasonable" must be applied to the event or circumstance. This is an objective test.
     
  7. Case law has determined that whether an event or circumstance provides a taxpayer with reasonable justification for failing to meet their obligations, the event or circumstance relied on by the taxpayer must firstly be identified. It must then be determined whether the event or circumstance was beyond the control of the taxpayer, and whether the event or circumstance provides the taxpayer with reasonable justification. See CIR v Fuji Xerox New Zealand Limited (2001) 20 NZTC 17,470.
     
  8. Section 183A expressly excludes a taxpayer's financial position from the definition of event or circumstance. Requests for financial relief are dealt with under sections 176 and 177.
     
  9. In deciding whether remission is appropriate the Commissioner will consider the following:
     
    1. Has the penalty been correctly charged?
       
    2. Has the taxpayer paid the tax (and filed the return) in question?
       
    3. Why did the taxpayer pay or file late, or not file (electronically or otherwise)?
       
    4. Was the non-compliance caused by an event or a circumstance that was beyond the control of the taxpayer? An event or circumstance may include:
       
      • an accident or a disaster
      • illness or emotional or mental distress.
         
  10. When considering the above-mentioned events or circumstances, Inland Revenue will use the following definitions:
     
    • accident - an event that is without apparent cause or is unexpected
    • disaster - sudden or great misfortune or a calamity
    • illness - state of being ill
    • emotional distress - disturbance of the mind, mental sensation or state
    • mental distress - of the mind, done by the mind, affected with mental disorder.

     
  11. Other factors to consider include:
     
    1. Has this event or circumstance occurred before? Where appropriate, have measures been put in place by the taxpayer to ensure that this situation does not recur in the future? If a similar event occurred in the past, this factor will be taken into account when considering the taxpayer's current request for remission of penalties and interest.
       
    2. Was the tax paid or return filed as soon as practicable (as soon as is feasible and realistic) or was there no reasonable basis for delay? This will depend on the circumstances of each case. Specifically, was the default corrected as soon as possible after the event or circumstance passed?
       
    3. Was the non-compliance the result of an act or omission of the taxpayer's agent? Did an event or circumstance beyond the control of the agent cause the non-compliance? Could the default have been avoided by compliance with accepted standards of business organisation and professional conduct?
       
    4. Any other information that Inland Revenue considers relevant in assessing the application.


    Examples:

    Emotional or mental distress (late filing penalty)
    A taxpayer's return was due on 7 July. The return was near completion and the taxpayer's previous compliance history was exemplary. However, prior to the due date his daughter became seriously ill and was hospitalised. Her condition steadily deteriorated and the family spent a great deal of time at the hospital where she was in intensive care until the first week in September. The taxpayer was unable to contact Inland Revenue during this time.

    During this time a reminder notice was issued advising the taxpayer that a late filing penalty would be charged if his current year's income tax return was not filed within 30 days. He filed the overdue return in mid-October, along with a letter from his daughter's doctor verifying her illness and hospitalisation, after the penalty was charged.

    In these circumstances, the taxpayer filed the return three months after the due date, but given the "events and circumstances" this would be considered a

    Circumstances beyond the taxpayer's control (non-electronic filing penalty)
    An employer is set up for, and has been sending, employer monthly schedules for the last six months. A fire destroys the work premises on the date before it was planned to transmit the current month's schedule. As a back-up to the computer system, the employer has a printed copy of the file stored off-site. The employer decides to copy these details onto a paper-based schedule so that the schedule and payment would reach Inland Revenue on time. The taxpayer provided a report from the New Zealand Fire Service confirming the date and location of the fire and that the fire destroyed the computer system. Any non-electronic filing penalty would be remitted as the event was "beyond the control" of the taxpayer.

    Circumstance beyond agent's control (late payment penalty)

    An agent was entrusted to pay a client's income tax by the due date of 7 April, as the taxpayer would be overseas at the due date. The cheque was made out for the correct amount, signed and post-dated. The cheque was given to the agent and placed in the office safe. The night before 7 April the office was burgled and the safe and its contents were destroyed. The client's agent provided a New Zealand Police report verifying the date and location of the burglary and that the safe and its contents were destroyed. This is considered to be an event beyond the agent's control.

Remission in circumstances of a "qualifying event" 

  1. Section 183ABA applies to:
    • late filing penalty
    • non-electronic filing penalty
    • initial and incremental late payment penalties
    • interest (also commonly known as "use-of-money interest").

     
  2. Section 183ABA does not apply to shortfall penalties.
     
  3. Section 183ABA allows the Commissioner to remit the type of penalties and interest as mentioned in paragraph 29, where:
     
    1. a taxpayer is significantly affected by a "qualifying event" (see paragraphs 33 to 39 ), and
       
    2. the taxpayer has applied for remission of the penalties and/or interest as soon as practicable, and
       
    3. the Commissioner is satisfied that the effect on the taxpayer of the occurrence of the qualifying event makes the remission equitable.
       
  4. Taxpayers may be unable to comply with their tax obligations when a "qualifying event" significantly affects them in the following ways:
     
    • The taxpayers' records have been destroyed and thus, the taxpayers are unable to file tax returns.
    • The taxpayers are unable to access their records, as in the case of evacuation or destruction of a home or business.
    • The taxpayers were unable to make payments or file returns because of higher priorities created by the "qualifying event", such as assisting other victims.

     
  5. Section 183ABA applies only when there is a "qualifying event" as defined under section OB 1 of the Income Tax Act 2004. The extreme climatic conditions that occurred during February 2004 and the storm event that occurred during the month of July 2004 in the Bay of Plenty area were defined as "qualifying events".
     
  6. Section 183ABA may also apply to future qualifying events. These are naturally-occurring events in respect of which a state of emergency is declared and the Governor-General by an Order in Council declares the naturally-occurring event to be a qualifying event.
     
  7. However, section 183ABA only applies to naturally-occurring events, such as floods or storms. It does not apply to incidents of rioting or civil unrest.
     
  8. Once a qualifying event is declared all significantly affected taxpayers qualify. Whether a taxpayer is significantly affected by a qualifying event requires consideration of the relativity of the taxpayer's situation to the qualifying event, and whether the taxpayer was highly or substantially affected as a result of the event.
     
  9. Relief may be granted if the effect on the taxpayer of the qualifying event occurring makes it equitable that the penalty or interest be remitted. In Ebrahimi v Westbourne Galleries Limited (1973) AC 360, Lord Wilberforce defined equitable as involving considerations of a personal character arising between one individual and another, which made it unjust or inequitable to insist on legal rights, or to exercise them in a particular way. Therefore, Inland Revenue will consider remission of penalties and interest where the taxpayer's personal situation makes it unjust or unfair not to remit penalties or interest.
     
  10. While the legislation does not fix any time limit for a taxpayer to seek remission the taxpayer should apply for the remission in writing as soon as practicable. Case law defines the term "as soon as practicable" to mean " as soon as is feasible or realistic". This will depend on the circumstances of each case.
  11. However, the Commissioner generally considers that taxpayers should apply for the remission of penalties and/or interest within six months from the occurrence of the "qualifying event".

    Examples:

    Whether a taxpayer is significantly affected by a qualifying event (late filing penalty)
    The Governor-General has declared a flood in the Bay of Plenty area as a qualifying event. A taxpayer resides in Auckland and owns business premises in the Bay of Plenty . All the taxpayer's business records were stored in the business premises. The flood destroyed the business records and the taxpayer could not file the tax return by the due date. A late filing penalty is imposed on the taxpayer. The taxpayer provides supporting evidence (for example, a report on the damaged business premises from the insurance company with whom the taxpayer was insured and photos of the taxpayer's business premise after the flood) verifying that his business records were destroyed by the flood. The taxpayer's request for penalty remission will be accepted because Inland Revenue considers the taxpayer is significantly affected by the qualifying event and that it is equitable for the penalties to be remitted.

    Applying the same facts as above but where the taxpayer's business records were stored in Auckland and the taxpayer's business premises were unaffected by the flood. In this case, the taxpayer's request for penalty remission will not be accepted because Inland Revenue considers the taxpayer is not significantly affected by the qualifying event.

    Whether the taxpayer applied for the remission as soon as practicable (late filing penalty)
    The Governor-General has declared a storm in the Auckland area as a qualifying event. A taxpayer's business premises were severely damaged by the storm. The taxpayer was unable to access his records and file a tax return until two months later. Due to the taxpayer's oversight, another seven months elapsed before the taxpayer applies for remission of the late filing penalty. In this case, the Commissioner will not exercise the discretion to remit the penalty because the taxpayer did not apply for the remission as soon as practicable.

Remission consistent with collection of highest net revenue over time 

  1. Section 183D applies to:
     
    • a late filing penalty
    • a non-electronic filing penalty
    • initial and incremental late payment penalties
    • a shortfall penalty imposed by section 141AA
    • interest.

     
  2. Section 183D does not apply to shortfall penalties except those imposed by section 141AA (see paragraph 20 ). There is no requirement to remit all of the penalties and interest. Each case will be considered on its own merits.
     
  3. The Commissioner is required by law to collect the highest net revenue over time, having regard to the resources available, the importance of promoting voluntary compliance and compliance costs incurred by taxpayers. The Commissioner recognises that pursuing the collection of penalties in some circumstances will not meet his legal duty. Those circumstances are where one of the above-mentioned penalties is imposed because of:
     
    • a genuine error, or
    • a "one-off" situation, or
    • incorrect advice given by Inland Revenue which has directly resulted in the non-compliance.

     
  4. Section 183D is the primary provision under which interest can be remitted. Section 183E also provides for remission of interest but only where the underlying tax is remitted.
     
  5. Under section 183D, the Commissioner may exercise his discretion to remit the total interest payable or part of the interest payable. Section 183D expressly prevents a taxpayer's financial circumstances from being taken into account.
     
  6. Interest will be remitted in limited circumstances such as where an Inland Revenue officer has given incorrect advice to the taxpayer, and that advice has directly resulted in the non-compliance. However, this is not the only situation in which remission of interest may be granted.

Remission due to unintended legislative changes and other reasons 

  1. The Commissioner must consider each case on its own merits. For details regarding remission of interest arising from an unintended legislative change, please refer to the separate SPS on penalties and interest arising from unintended legislative changes.
     
  2. When considering remission under this section, the taxpayer's financial situation cannot be taken into account. It was not intended that this section be used to remit penalties and interest remaining from longstanding arrears when the taxpayer has financial difficulties and eventually can only pay the core tax or the core tax plus minimal penalties. These cases are dealt with under sections 176 and 177. Refer to the separate SPSs on instalment arrangements for payment of tax debt and writing off tax debt.
     
  3. The taxpayer must have filed the relevant tax return and paid the tax prior to the remission request.
     
  4. In deciding whether remission is appropriate Inland Revenue will consider the answers to the following:
     
    1. Has the penalty or interest been correctly charged?
       
    2. Has the taxpayer paid the tax (or filed the return) in question?
       
    3. Why did the taxpayer pay (or file) late, or not file electronically?
       
    4. Whether the non-compliant action was the result of a genuine oversight or a one-off situation:
       
      • Remitting a penalty for a taxpayer who has not complied due to a genuine oversight or "one-off" situation recognises that penalising a taxpayer for a small failure to comply is counter-productive and may actually reduce voluntary compliance.
         
      • Requests for remission because of a genuine oversight or a one-off situation apply to penalties only. Inland Revenue will not remit interest in these cases as interest is compensation to the Revenue for the use of the money over time.
         
      • Interest charged because of a third party default will generally not be considered for remission. In these situations the Commissioner considers the taxpayer should look to that third party for compensation.
         
    5. Has Inland Revenue given incorrect advice to the taxpayer, or was there an error in an Inland Revenue publication, which has resulted in the non-compliance?

      If an Inland Revenue officer has given incorrect advice to a taxpayer (for example, the taxpayer has directly been given an incorrect date or amount for tax payment) or the taxpayer relies on incorrect information contained in an Inland Revenue publication, the imposition of the penalty may adversely affect future compliance by the taxpayer or other taxpayers. However, this does not apply to misinterpretations of what is written in an Inland Revenue publication.
       
    6. Has Inland Revenue contributed to the quantum of interest as a result of excessive delay (such as computer processing problems)?
      If there have been computer delays in the issuing of a statement of account and the taxpayer has made a payment including interest based on their own calculations the additional interest accrued may be remitted in full or in part.
       
    7. Any other information that Inland Revenue considers relevant in assessing the application. In particular, Inland Revenue will wish to understand how the remission would contribute to collection of the highest net revenue over time and otherwise promote voluntary compliance.


    Examples:

    One-off situation (late filing penalty and late payment penalty)
    An employer has a computer payroll package set up to prepare the employer monthly schedule for ir-FILE. A computer virus was detected on 4 August when the schedule was due for transmission on 5 August. The software developer was called but the problem was not fixed until 7 August when the schedule was prepared and transmitted. On the same day, the remittance slip and payment were sent together with the software developer's report confirming when the virus was detected; the actual location of the virus in the computer system; the effect of the virus on transmission of the employer monthly schedule; and when the problem was finally resolved. The late filing and late payment penalties would be remitted, as this would be a situation beyond the taxpayer's control.

    Genuine oversight (late payment penalty)
    A new office person had been hired by an employer as a wages clerk. The new person's duties included preparing the wages, maintaining the wage records and preparing the employer monthly schedules and remittances.

    The new person arrived in early March and found the wage records in a terrible mess. The person completed and balanced the employer monthly schedule and forwarded it to Inland Revenue by 20 April, and had intended to enclose the monthly remittance for March in the same envelope. Unfortunately, the remittance and the cheque were caught up in some papers and were not discovered until 24 April. The remittance and cheque were promptly delivered to the nearest Inland Revenue office with supporting documentation explaining the background circumstances leading to the oversight and an accompanying letter requesting remission. Remission of the late payment penalty would be granted under section 183D as a genuine oversight.

    Incorrect advice (late payment penalty)
    A small business taxpayer registered for GST and was a six-monthly payer. However, as business improved the taxpayer elected to file GST returns two-monthly. The taxpayer sought the advice from the nearest Inland Revenue office but, unfortunately, confusion arose over the date the next return was due to be filed, resulting in the imposition of a late payment penalty. The taxpayer sought penalty remission and provided supporting documentation confirming the name of the Inland Revenue officer who gave the advice, the date of obtaining that advice and the contents of that advice. Remission of the late payment penalty would be granted under section 183D due to incorrect information being given by Inland Revenue.

    Incorrect advice (interest)
    A taxpayer is advised of an incorrect date for PAYE and incurs a late payment penalty and interest. As the late payment penalty and interest were caused by Inland Revenue's error, both the late payment penalty and interest would be remitted. However, the taxpayer would be expected to provide evidence to support that incorrect information was given by Inland Revenue. Relevant evidence may include the name of the Inland Revenue officer who gave the advice, the date of obtaining that advice and the contents of that advice.

    Incorrect advice (partial remission of interest)
    A taxpayer rang Inland Revenue to find out what interest was accruing on their 2005 income tax account, as they had just received a statement of account showing some interest payable. The due date for the actual income tax was shown as 7 February 2006 . They were advised that interest was not accruing so the taxpayer did not make payment immediately. Subsequently, the taxpayer was charged further interest.

    Remission was applied for on the grounds that they would have paid immediately had they known of the ongoing liability. Remission of interest was granted in part – the interest that had accrued until the time the taxpayer telephoned Inland Revenue was still payable. However, the taxpayer would be expected to provide evidence to support that incorrect information was given by Inland Revenue. Relevant evidence may include the name of the Inland Revenue officer who gave the advice, the date of obtaining that advice and the contents of that advice.

    One-off situation (late filing penalty and late payment penalty)
    A taxpayer had tax arrears comprising core tax of $3,000 when the taxpayer left New Zealand in April 1998. However, the taxpayer was unaware of the tax arrears, as the statement of account was sent to the taxpayer's New Zealand residence after he had left the country. When the taxpayer returned to New Zealand in 2005, the taxpayer discovered the imposition of late filing penalty, late payment penalties and interest to a total of $40,000. The taxpayer's financial circumstances would not meet the requirements for relief for serious hardship. Inland Revenue may consider remitting the late filing penalty and late payment penalties as a one-off situation once the taxpayer has provided supporting documentation confirming the taxpayer's New Zealand address and his date of departure and re-entry into New Zealand.

Standard Practice

The following standard practice applies.

  1. When considering the remission provisions of penalties and interest, Inland Revenue considers it important to treat both the taxpayer requesting the remission and all other taxpayers fairly. A lenient remission practice penalises complying taxpayers and may ultimately affect voluntary compliance. However, allowing an inappropriate penalty to stand will also impact on voluntary compliance. Inland Revenue recognises that penalising a taxpayer for a small non-compliant action is counterproductive and may actually reduce voluntary compliance.
     
  2. Applications for remission under sections 183A and 183D should be made in writing and should be accompanied by supporting information.
     
  3. The Commissioner will remit under section 183A:
     
    • a late filing penalty
    • a non-electronic filing penalty
    • initial and incremental late payment penalties
    • imputation penalty tax
    • dividend withholding payment penalty tax
    • Maori authority distribution penalty tax (see paragraph 19)
    • a shortfall penalty imposed by section 141AA (see paragraph 20).


    where he is satisfied that the non-compliance has been caused by an event or circumstance that provides reasonable justification or excuse for the omission, and the omission was rectified as soon as practicable.
     
  4. The Commissioner will remit under section 183ABA:
     
    • late filing penalty
    • non-electronic filing penalty
    • initial and incremental late payment penalties
    • interest (also commonly known as "use-of-money interest")


    where:
     
    1. a taxpayer is significantly affected by a "qualifying event" (see paragraphs 33 to 39 ), and
       
    2. the taxpayer has applied for remission of the penalties and/or interest as soon as practicable, and
       
    3. the Commissioner is satisfied that the effect on the taxpayer of the occurrence of the qualifying event makes the remission equitable.

     
  5. The Commissioner will remit under section 183D:
     
    • a late filing penalty
    • a non-electronic filing penalty
    • initial and incremental late payment penalties
    • a shortfall penalty imposed by section 141AA
    • interest,


    if to do so is consistent with collection of the highest net revenue over time.
     
  6. Interest will be remitted in extremely limited circumstances such as where an Inland Revenue officer has given incorrect advice to the taxpayer, and that advice has directly resulted in the non-compliance. However, this is not the only situation in which interest may be remitted. The Commissioner must consider each case on its own merits.
     
  7. Remission applications under sections 183A and 183D will only be considered when the returns relevant to the remission requests have been filed and the tax has been paid.
     
  8. Sections 183A and 183D do not permit remission to be granted for financial reasons. Requests for financial relief are dealt with under sections 176 and 177. For further details refer to the relevant SPSs on instalment arrangements for payment of tax debt and writing off tax debt.

This Standard Practice Statement is signed on 17 October 2005 .

Graham Tubb
National Manager, Technical Standards