Evasion or similar act (Mar 98) (Withdrawn from 1 April 2003, in relation to tax positions taken on or after 1 April 2003).

This statement applies to tax position taken before 1 April 2003.

Introduction

A shortfall penalty is a penalty imposed as a percentage of a tax shortfall, or deficit or understatement of tax, which results from certain actions on the part of a taxpayer.  The law divides these actions into five categories of fault, or breach, with a specified penalty rate for each category as listed below:

These penalty rates are non-negotiable and where a default occurs the applicable penalty must be imposed. A taxpayer does however have the right to challenge the decision to impose a shortfall penalty but not the amount of penalty.

This statement deals with defaults that fall within the shortfall penalty category of "evasion or similar act".

Application

The penalties apply to obligations relating to the 1997/98 and subsequent income tax years and to taxable or dutiable periods commencing on or after 1 April 1997.

Shortfall penalties apply when there is a deficit or understatement of tax, or where a refund or loss is reduced.  Defaults in employers' obligations are also considered under shortfall penalties.

The penalty provision is generic in application.  This means that it applies to all Inland Revenue Acts (but for Child Support and Student Loans, it applies only to employer obligations).

Purpose

The purpose of the evasion or similar offence shortfall penalty is to provide a penalty for taxpayers who evade the assessment or payment of tax for themselves or others, or who knowingly misapply a deduction or withholding tax, or who knowingly do not make tax deductions, or who obtain a refund or assist others to obtain a refund to which they know they are not entitled.

Legislation

Section 141E of the Tax Administration Act 1994:

Evasion or similar act -

1. A taxpayer is liable to pay a shortfall penalty if, in taking a tax position the taxpayer -
   
   
   1. evades the assessment or payment of tax on their own behalf or on behalf of any another person; or
   2. knowingly applies or permits someone else to apply a deduction or withholding of tax which they were required to make to the Commissioner; or
      
      
   3. knowingly does not make a deduction or withholding of tax which they are required to make; or
      
      
   4. obtains a refund or payment of tax knowing that they are not lawfully entitled to the refund or payment; or
      
      
   5. enables another person to obtain a refund or payment of tax, knowing that the other person is not entitled to the refund or payment.
   
   
   
2. No person shall be chargeable with a shortfall penalty under subsection (1)(b) if that person satisfies the Commissioner that the amount of the deduction has been accounted for, and that the person's failure to account for it within the prescribed time was due to illness, accident, or some other cause beyond the person's control.
   
   
3. If a taxpayer enables another person to obtain a refund or payment of tax, knowing that the other person is not lawfully entitled to the refund or payment under a tax law, the taxpayer is liable to pay to the Commissioner an amount equal to the shortfall penalty that would have been imposed if the other person's tax position had been the taxpayer's tax position.
   
   
4. The penalty payable for evasion or a similar act described in subsection (1) is 150% of the resulting tax shortfall.

Discussion

At the top end of the scale of non-compliance is a wilful or knowing breach of an obligation.  The civil penalty for tax evasion applies to all tax types.

Tax evasion involves a deliberate attempt to cheat the revenue.  This may include a taxpayer obtaining refunds (tax credits, rebates) knowing that he or she is not lawfully entitled to them or knowingly not accounting for tax deductions to the Commissioner.

Generally speaking there are two categories of behaviour that are subject to the shortfall penalty under the provisions of section 141E.  Subsections (1)(b) to (e) require only knowledge of the breach, whereas breaches within subsection (1)(a) require the knowledge and intent to evade.

Taxpayer enables another to obtain a refund

Section 141E(1)(e) provides that a shortfall penalty is payable if the taxpayer "enables another person to obtain a refund or payment of tax, knowing that the other person is not entitled to the refund or payment".

However, because the shortfall penalty is a fixed percentage of the taxpayer's tax shortfall, no penalty would normally be able to be imposed, as it is the recipient of the refund or payment who has incurred a tax shortfall, not the taxpayer.  Subsection (3) overcomes this problem by deeming that "the taxpayer is liable to pay to the Commissioner an amount equal to the shortfall penalty that would have been imposed if the other person's tax position had been the taxpayer's tax position."

Prosecution

Section 149(5) states that if a shortfall penalty has been imposed on a taxpayer for taking an incorrect tax position, the Commissioner may not subsequently prosecute the taxpayer for taking the incorrect tax position.

Prosecution does not preclude the Commissioner from imposing the civil penalty for evasion.  It is not necessary for a taxpayer to be prosecuted before a shortfall penalty is imposed as the standards of proof are different.

Consideration of shortfall penalty after unsuccessful prosecution
Section 149(4) states that a shortfall penalty may be imposed after a prosecution, whether or not the prosecution is successful.

If prosecution action for evasion is unsuccessful, a shortfall penalty can still be imposed for evasion or similar act, because the standard of proof is the balance of probabilities, even though the onus of proof is still on the Commissioner.

However, the reason why the prosecution was not successful will be considered.  If it was dismissed on technical grounds (for example some procedural matters in the prosecution not complied with), clearly a shortfall penalty can be imposed.  If the evidence available to the court was clearly inadequate, then a shortfall penalty will not be able to be imposed.

If it is intended to prosecute a taxpayer and later impose a shortfall penalty, the taxpayer will be advised that after the prosecution, whether or not the prosecution is successful, the imposition of a shortfall penalty will be considered.

Tax deduction offences

Under section 141E, a shortfall penalty for evasion includes tax deduction offences (including Child Support and Student Loan deductions).  This is both knowingly not deducting tax and knowingly not accounting for tax deducted.  Taxpayers can also be prosecuted for a knowledge offence under section 143A for either of the above (knowingly not deducting tax and knowingly not accounting for tax deductions) or under section 143B for evasion for not deducting tax.

Statutory defence

Section 141E(2) provides that a shortfall penalty is not chargeable for failure to account for deductions to the Commissioner if the taxpayer is able to prove that:

• the amount of the tax deduction has been accounted for, and
• the taxpayer's failure to account for the tax within the prescribed time was due to illness, accident or other cause beyond the person's control

These points have to be met for the taxpayer to be excused from any liability.

Beyond the person's control
Beyond control does not include such circumstances as financial reasons, or the actions of staff.  It may however include such circumstances as hospitalisation, accidents, illness, and other such causes.

Circumstances beyond one's control cannot be a continuing defence, i.e., it cannot be used as a defence month after month.

Factors to consider
Some of the factors that may be considered are:

• Length of time deducting and awareness of obligation to make payments by the due date
• Who is responsible for drawing up deduction details and forwarding payment by the due date
• Reason/s why the deductions were not paid by the due date
• Was the taxpayer aware that payment had not been made by the due date and that an offence was being committed?
• When did they become aware that payment had not been made and what steps were taken to rectify the situation?
• For what purpose(s) were the deductions used when not paid by the due date?

Publication of name

Section 146(1)(b) of the Tax Administration Act 1994 requires that the name of anyone liable to pay a shortfall penalty for evasion will be published in the Gazette.

This will not occur however in the case of a voluntary disclosure prior to an investigation commencing.

Burden and standard of proof

A taxpayer has the right to challenge the decision to impose a shortfall penalty through the disputes process.  If the issue can not be resolved through the disputes process the taxpayer has the normal rights of review through the courts.

The burden of proof, in civil proceedings relating to the imposition of the evasion or similar act shortfall penalty, rests with the Commissioner.  The standard of proof for imposition of a shortfall penalty for evasion is the "balance of probabilities".

Standard rate of penalty

The standard rate of penalty payable for evasion or a similar act is 150% of the resulting tax shortfall.

This rate may be adjusted by varying rates in the following circumstances:

• voluntary disclosure before or during an audit
• voluntary disclosure at the time of return filing
• temporary tax shortfalls
• obstruction

Other reference

An explanation and examples of shortfall penalties and other offences and penalties can be found in Tax Information Bulletin Volume Eight, No.7 (October 1996).

Summary

Section 141E of the Tax Administration Act 1994 provides that a taxpayer who evades or enables another person to evade the payment of tax is liable to pay a shortfall penalty of 150% of the resulting shortfall.

Situations where a refund or payment of tax is unlawfully received are also covered.

A shortfall penalty is not chargeable if the taxpayer is able to prove to the satisfaction of the Commissioner that:

• the amount of the tax deduction has been accounted for, and
• the taxpayer's failure to account for the tax within the prescribed time was due to illness, accident or other cause beyond the person's control.

Where the taxpayer enables another person to obtain a refund or payment of tax, knowing that the other person is not entitled to the refund or payment, the taxpayer is liable to pay to the Commissioner an amount equal to the shortfall penalty that would have been imposed if the other person's tax position had been the taxpayer's tax position.



Tony Bouzaid
National Manager, Operations Policy
March 1998