Remission of penalties and interest (Dec 97) (WITHDRAWN)

Introduction

Legislation introduced in 1997 consolidates the rules for remissions. The changes apply to all taxes and duties, but not to student loan and child support repayments.

The objective of imposing a penalty is to maximise voluntary compliance. Taxpayers who have complied see that non-complying taxpayers are penalised. Non-complying taxpayers are provided with an incentive to comply in the future. The penalty regime is therefore principally about fairness.

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 policy penalises complying taxpayers and may ultimately affect voluntary compliance. However, allowing an unfair penalty to stand will also impact on voluntary compliance. The issues are complex and this practice statement will assist the decision making process.

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

Application dates

This policy applies to:

• remission requests received before 23 September 1997 and the penalty / interest was charged after 1 April 1997
• remission requests received on or after 23 September 1997 for all penalties / interest, other than those charged in relation to ACC employer and earner premiums.
• remission requests received for ACC employer and earner premiums for periods starting on or after 1 April 1997.

Strict criteria must now be met

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 can't be remitted. The taxpayer's circumstances will have already been taken into account when considering the imposition of the penalty.

All legislative references in this statement are to the Tax Administration Act 1994.

Remission for reasonable cause

(Legislation - Section 183A)

"(1) The Commissioner may remit a late filing penalty or late payment penalty or any imputation penalty tax imposed under section 140 b or any dividend withholding payment penalty tax imposed under section 140 c if -

1. The Commissioner is satisfied that the late filing or late payment was caused by an event or circumstance beyond the control of the taxpayer that provides the taxpayer with a reasonable justification or excuse for not providing the tax return or paying the tax on time; and
2. The taxpayer files the required tax return or pays the unpaid tax 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, late payment penalty or any imputation penalty (imposed under section 140B) or any dividend withholding payment penalty tax.

• Application can be made under Section 183A, regardless of the Act under which the penalty was imposed (except for penalties on student loan and child support repayments).
• The request must be in writing and the taxpayer may be required to produce relevant information (Section 183H). It is envisaged that Inland Revenue would request additional information only in circumstances when there is insufficient information available in the original application and there is difficulty deciding if the case meets the "reasonable cause" criteria.
• There is no right to dispute the Commissioner's decision.

Policy

Remission will only occur if the taxpayer is able to provide reasonable justification for the failure.

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

Application of Policy

In deciding whether remission is appropriate the Commissioner will consider:

1. Has the penalty been correctly imposed?
2. Has the taxpayer paid the tax (or filed the return) in question?
3. Why did the taxpayer pay (or file) late?
4. Was the failure caused by an event or circumstance that was -
   • an accident or a disaster?
   • illness or emotional or mental distress?
   When considering the above-mentioned circumstances or events the Commissioner will use the following definitions:
   • accident - an event that is without apparent cause or 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? Were measures put in place to ensure that this situation does not recur in the future (where appropriate)?
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 failure 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

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 imposed 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 imposed.

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

Circumstance Beyond Agent's Control

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

"(1) The Commissioner may remit -

1. A late filing penalty; and
2. A late payment penalty; and
3. 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, late payment penalty or any imputation penalty (imposed under section 140B) or any dividend withholding payment penalty tax and interest payable under Part VII. There is no requirement to remit all three (late filing penalty, late payment penalty, interest). Each case will be considered on its merits.
• Application can be made under Section 183D, regardless of the Act under which the penalty was imposed (except for penalties on student loan and child support repayments).
• The request must be in writing and the taxpayer may be required to produce relevant information (Section 183H). It is envisaged that Inland Revenue will request additional information only in circumstances when there is insufficient information in the original application and the Commissioner needs to substantiate the assertion made by the customer to be able to make an informed decision.
• There is no right to dispute the Commissioner's decision.

Policy

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 failure.

Interest will only be remitted if an Inland Revenue officer has given incorrect advice to the taxpayer, and that advice has directly resulted in the failure. Interest will not be remitted when the cheque has gone astray in the post.

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 Policy

In deciding whether remission is appropriate the Commissioner will consider:

1. Has the penalty or interest been correctly imposed?
2. Has the taxpayer paid the tax (or filed the return) in question?
3. Why did the taxpayer pay (or file) late?
4. Was the failure because of a genuine oversight or a one-off situation? Remitting a penalty for a "reliable" taxpayer who failed to comply due to a genuine oversight or "one-off" situation recognises that penalising a compliant taxpayer for a small failure 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 he considers interest is compensation to the Revenue for the loss of funds on timely deposit.
   
   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 failure? If an officer(s) 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 only 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. The tax must be paid as soon as the error is established.
6. Any other information that the Commissioner considers relevant in assessing the application.

Examples

The following are all examples where the penalty would be remitted.

Wrong advice

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.

One-off situation

An employer has a computer system set up for PAYE/wage records. A virus is detected on the 19th day of the month when the IR 66N was due to be filed and paid on the 20th. The software developer was called but had not fixed the problem until the 21st when the monthly data was extracted and the IR 66N completed and forwarded to Inland Revenue with payment. The late payment penalty had been imposed and a request was made for remission.

Genuine Oversight

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 end of year reconciliation.

The new person arrived in early March and found the wage records in a terrible mess. The person completed and balanced the reconciliation and forwarded it to Inland Revenue by 20 April, and had intended to enclose the monthly PAYE for March in the same envelope. Unfortunately the IR 66N and the cheque were caught up in some papers and were not discovered until 22 March. The IR 66N and cheque were promptly delivered to the nearest Inland Revenue office with supporting documentation and an accompanying letter requesting remission.

Interest

A taxpayer is advised of an incorrect date for PAYE and incurs interest and a late payment penalty. As the late payment penalty was caused by Inland Revenue error; both interest and the late payment penalty 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.

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 in the very unlikely situation 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 imposed 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 imposed 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.

Summary

1. Penalties exist to provide fairness to the tax system.
2. Remission provisions are needed to allow the Commissioner to accommodate circumstances in which a penalty is not appropriate. Because penalties encourage customers to feel that the tax system is fair, the procedures used in handling cases by Inland Revenue should cause customers to feel that they have been justly treated, regardless of the outcome. Inland Revenue will weigh the particular circumstances that exist in each individual case against policy. The circumstances of the taxpayer will be taken into account.
3. The legislation will be applied in a manner that is not only fair to compliant taxpayers but is seen to be fair. Inland Revenue recognises that penalising a compliant taxpayer for a small failure is counterproductive and may actually reduce voluntary compliance.
4. Application for remission must be made in writing.
5. Late payment penalty and late filing penalty will be remitted if the Commissioner is satisfied that the failure 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. Interest will be remitted only if Inland Revenue has given a taxpayer incorrect advice which has directly 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.
7. Remission applications will be considered only when the return and tax have been paid.
8. The legislation does not permit a remission to be granted under Section 183A or 183D for financial reasons.