Remission of penalties and interest (Sep 99) (WITHDRAWN)

Introduction

Legislation introduced in 1997 consolidated the rules for remissions of penalties and interest. The legislation applies to all taxes and duties, but not to student loan and child support repayments. The legislation was amended in 1998 to include remission of the non-electronic filing penalty.

When considering these remission provisions the Commissioner considers it important to have in mind fair treatment for both the taxpayer requesting the remission as well as all other taxpayers. A lenient remission practice penalises complying taxpayers and may ultimately affect voluntary compliance. However, allowing an unfair penalty to stand will also impact on voluntary compliance.

This standard practice statement sets out the relevant legislation, practical issues and the Commissioner's practice.

All legislative references in this statement are to the Tax Administration Act 1994, unless otherwise stated.

Application date

This Standard Practice Statement replaces Standard Practice Statement RDC 2 originally published in TIB Vol 9 No. 13 December 1997. This amended Standard Practice Statement applies to remission requests received on or after 6 September.

Summary

1. Penalties exist to provide fairness to the tax system. Interest compensates the taxpayer or the Commissioner for use of money over time.
   
   
2. Remission provisions are needed to allow the Commissioner to accommodate circumstances in which a penalty is not appropriate. The procedures Inland Revenue uses should ensure taxpayers have been justly treated, regardless of the outcome. Inland Revenue will weigh the particular circumstances that exist in each individual case against the standard practice. The circumstances of the taxpayer will be taken into account.
   
   
3. The legislation will be applied in a manner that is fair to compliant taxpayers. Inland Revenue recognises that penalising a compliant taxpayer for a small non-compliance is counterproductive and may actually reduce voluntary compliance.
   
   
4. Application for remission must be made in writing.
   
   
5. Late filing penalty, non-electronic filing penalty, and late payment penalty will be remitted if the Commissioner is satisfied that the non-compliance has been caused by:
   
   
   • an event or circumstance that provides reasonable justification for the omission
     
   • genuine oversight and confusion or a one off situation
     
   • incorrect advice given by Inland Revenue.
   
   
6. The only situation identified to date where interest will be remitted (in whole or in part) is where an Inland Revenue officer has given incorrect advice to the taxpayer which has directly caused a return or payment to be made late or a schedule to be filed non-electronically, and the taxpayer can substantiate to Inland Revenue's satisfaction that they were given the incorrect advice.
   
   
7. Remission applications will be considered only when the return has been filed and/or the tax has been paid.
   
   
8. Sections 183A and 183D do not permit remission to be granted for financial reasons.

Application for remission

All applications must be made in writing. There are two main grounds for remission:

• Remission may occur if an event or circumstance provides the taxpayer with reasonable justification for not meeting their obligations.
  
• Remission may occur if it is consistent with the collection of highest net revenue over time. Interest remissions can only be considered under this ground.

Shortfall penalties cannot be remitted under sections 183A and 183D.

Remission for reasonable cause

Legislation - Section 183A - Sub-section (1) has been replaced by a new sub-section (1) and (1A), that apply to penalties that arise on or after 1 April 1999.

1. This section applies to a late filing penalty, a non-electronic filing penalty, a late payment penalty and imputation penalty tax imposed by section 140 b, and a dividend withholding payment penalty tax imposed by section 140c.

1A. The Commissioner may remit the penalty if the Commissioner is satisfied that -

1. A penalty to which this section applies arises as a result of an event or circumstance beyond the control of the taxpayer; and
2. As a consequence of that event or circumstance the taxpayer has reasonable justification or excuse for not furnishing the tax return or an employer monthly schedule, or not furnishing an employer monthly schedule in a prescribed electronic format, or not paying the tax on time; and
3. The taxpayer corrected the failure to comply as soon as practicable.

2. Without limiting the Commissioner's discretion under subsection (1), an event or circumstance may include -

1. an accident or a disaster; or
2. illness or emotional or mental distress.

3. An event or circumstance does not include -

1. An act or omission of an agent of a taxpayer, unless the Commissioner is satisfied that the act or omission was caused by an event or circumstance beyond the control of the agent -
   1. That could not have been anticipated; and
   2. The effect of which could not have been avoided by compliance with accepted standards of business organisation and professional conduct; or
2. A taxpayer's financial position.

Practical issues

• Remissions under this section apply to late filing penalty, non-electronic filing penalty, late payment penalty, imputation penalty, or any dividend withholding payment penalty tax.
• The request must be in writing and the taxpayer may be required to produce relevant information. Generally Inland Revenue will only request additional information when there is insufficient information available in the original application and further information is necessary to determine if the case meets the "reasonable cause" criteria.
• There is no right to dispute the Commissioner's decision.

Standard Practice

Remission will only occur if the taxpayer is able to provide reasonable justification for the late filing, non-electronic filing, or late payment.

The term "reasonable" must be applied to the event or circumstance. This is an objective test, which requires that it be reasonable for a person in the taxpayer's position not to have complied.

Application of Practice

In deciding whether remission is appropriate the Commissioner will consider:

1. Has the penalty 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. Was the non-compliance caused by an event or circumstance that was –
   
   
   • an accident or a disaster?
     
   • illness or emotional or mental distress?
   
   
   When considering the above-mentioned events or circumstances the Commissioner 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.
   
   
5. Has this reason been used before? Where appropriate, have measures been put in place by the taxpayer to ensure that this situation does not recur in the future?
   
   
6. Was the tax paid or return filed as soon as "practicable" (as soon as it can be done, and as soon as is feasible and realistic)? This will depend on each case, specifically was the default corrected as soon as possible after the event or circumstance passed?
   
   
7. Was the non-compliance an act or omission of the taxpayer's agent? Did an event or circumstance beyond the control of the agent cause it? Could the default have been avoided by compliance with accepted standards of business organisation and professional conduct?
   
   
8. Any other information that the Commissioner considers relevant in assessing the application.

Examples

Emotional or Mental Distress (late filing penalty)
Taxpayer's return was due on 7 July. The return was near completion and the taxpayer's previous compliance history was exemplary. However, leading up 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.

During this time a reminder notice had been 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 ignored the notice but filed the overdue return in the middle of October, along with documentation verifying his daughter's illness/hospitalisation, after the penalty had been 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 "practicable" time frame.

Circumstances Beyond the Taxpayer's Control (non-electronic filing penalty)
An employer is set up for, and has been sending, electronic 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. 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 February, 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 February the office was burgled and the safe blown up – the safe's contents were destroyed. The client's agent produced supporting documentation. This is considered to be an event beyond the agent's control.

Remission consistent with collection of highest net revenue over time

Legislation - Section 183D - Sub-section (1) has been amended to include paragraph (aa); it applies to penalties that arise on or after 1 April 1999.

1. The Commissioner may remit -
   
   a. - A late filing penalty; and
   aa. - A non-electronic filing penalty; and
   b. - A late payment penalty; and
   c. - Interest under Part VII -
   payable by a taxpayer if the Commissioner is satisfied that the remission is consistent with the Commissioner's duty to collect over time the highest net revenue that is practicable within the law.
2. In the application of this section, the Commissioner must have regard to the importance of the late payment penalty, the late filing penalty and interest under Part VII in promoting compliance especially voluntary compliance, by all taxpayers with the Inland Revenue Acts.
3. The Commissioner must not consider a taxpayer's financial position when applying this section.

Practical issues

• Remissions under this section apply to late filing penalty, non-electronic filing penalty, late payment penalty, imputation penalty, dividend withholding payment penalty tax, and interest payable under Part VII. There is no requirement to remit all of the penalties and interest. Each case will be considered on its merits.
  
• The request must be in writing and the taxpayer may be required to produce relevant information. Generally Inland Revenue will only request additional information when there is insufficient information in the original application and further information is necessary to substantiate the assertions made by the taxpayer, to be able to make an informed decision.
  
• There is no right to dispute the Commissioner's decision.

Standard Practice

The Commissioner is required by law to collect over time as much revenue as possible in a timely manner, but with underlying emphasis on voluntary compliance by all taxpayers. The Commissioner recognises that pursuing the collection of penalties in some circumstances will not meet his legal duty. Those circumstances are where a penalty is charged because of:

• a genuine error
  
• a "one-off" situation
  
• wrong advice given by an officer of Inland Revenue which has directly resulted in the non-compliance.

The only situation identified to date where interest will be remitted is where an Inland Revenue officer has given incorrect advice to the taxpayer, and that advice has directly resulted in the non-compliance.

Section 183D expressly prevents a taxpayer's financial circumstances being taken into account. The hardship provisions deal with such situations.

Remissions under section 183D apply to recent events. It was not intended that this section be used to remit penalties 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 the hardship provisions.

Application of Practice

In deciding whether remission is appropriate the Commissioner will consider:

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. Was the non-compliance because of a genuine oversight or a one-off situation? Remitting a penalty for a "reliable" taxpayer who did not comply due to a genuine oversight or "one-off" situation recognises that penalising a compliant 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. The Commissioner will not remit interest in these cases as interest is compensation to the Revenue for use of the money over time.
   
   Interest charged because of a default by a third party does not fall into this category. In this situation the Commissioner considers the taxpayer should look to the third party for compensation.
   
   
5. Has Inland Revenue given incorrect advice to the taxpayer, which has resulted in the non-compliance? If an officer of Inland Revenue has given the wrong advice, the imposition of the penalty may adversely affect future compliance by the taxpayer or other taxpayers. This is due to the adverse impact that imposing a penalty would have on a taxpayer's perceptions of the integrity of the system eg where the taxpayer has been given the incorrect date, or amount, for payment and can substantiate to Inland Revenue's satisfaction that they were given the incorrect advice. The tax must be paid in full as soon as the error is established.
   
   Section 183D is the only provision under which interest can be remitted. Interest will be remitted if Inland Revenue has given a taxpayer incorrect advice which caused a return or payment to be made late and the taxpayer can substantiate to Inland Revenue's satisfaction that they were given the incorrect advice. Under this section, an interest remission will be made in whole or in part. The tax must be paid as soon as the error is established.
   
   Has Inland Revenue contributed to the problem with excessive delay (such as computer processing problems)? If interest has been accruing on an account that would have been cleared, but for problems caused by computer processing, and the taxpayer has made a conscious effort to pay interest that they calculated as accruing, and the calculation was incorrect, then Inland Revenue may consider an interest remission in part. The tax must be paid as soon as the delay is resolved.
   
6. Any other information that the Commissioner considers relevant in assessing the application.

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- filing. A serious virus is detected on the 4th August when the schedule is due for transmission on the 5th. The software developer is called but the problem is not fixed until the 7th when the schedule was prepared and transmitted. On the same day the remittance slip and payment were also sent. 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 24th April. The remittance and cheque were promptly delivered to the nearest Inland Revenue office with supporting documentation 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 person registered for GST and was a six-monthly payer. However as business improved the person elected to file GST returns two-monthly. The person 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. 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 error; both the late payment penalty and interest would be remitted. However the taxpayer would be expected to provide evidence to support the contention that the incorrect information was given by Inland Revenue.

Incorrect Advice (partial remission of interest)
A taxpayer rang Inland Revenue to find out what interest was accruing on their 1998 income tax account, as they had just received a Statement of Account showing some interest payable, but the due date for the actual income tax was shown as due 7 February 1999. They were advised that interest was not accruing so the taxpayer didn't 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 by the taxpayer. However the taxpayer would be expected to provide evidence to support the contention that the incorrect information was given by Inland Revenue.

Automatic cancellation/remission

There are two provisions for automatic cancellation of penalties and remission of interest:

1. Section 183B - Cancellation of late payment penalties under instalment arrangement. Broadly, if a taxpayer meets all obligations under an instalment arrangement all incremental penalties incurred after the date that the instalment arrangement is entered into are cancelled at the successful completion of the instalment arrangement.
   
   
2. Section 183E - Remission of interest if unpaid tax remitted. Where the underlying tax is remitted the interest is also remitted.

The Commissioner will also reverse interest when a retrospective change to legislation caused the position taken by a taxpayer to become incorrect after it was taken. In this situation a new due date for payment would be made, and the interest would be cancelled.

Difference between remission, cancellation and reversal

Remission: occurs when the tax, penalty or interest is correctly charged at the time but a decision has been made to relieve the taxpayer of the liability to pay.

Cancellation: occurs 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: the tax, penalty or interest should not have been charged in the first place.

This Standard Practice Statement was signed by me on 31st August 1991.

Michael Rapson
Manager, Technical Standards