Payment of shortfall penalty using losses (Mar 98) (WITHDRAWN)
Withdrawn statement INV-245 Payment of shortfall penalty using losses. Statement provided for historical purposes only.
This statement has been withdrawn and is provided for historical purposes only.
This statement deals with the situation where a taxpayer in a loss situation can elect to use losses to pay shortfall penalties. The losses may be either:
- current year losses
- losses carried forward from previous periods.
The penalties apply to obligations relating to the 1997/98 and subsequent income tax years. There is however no requirement that the losses utilised are incurred in these years.
Section IG 10 of the Income Tax Act 1994:
Losses may be used to pay penalties
(1) A taxpayer may elect to use a net loss of the taxpayer to pay a shortfall penalty assessed in respect of an income tax liability, if -
- The net loss available to be offset against net income of the taxpayer in the income year of the shortfall penalty; and
- The taxpayer notifies the Commissioner of the election within the due date period for the payment of the shortfall penalty.
(1A) A wholly-owned group of companies may elect, in the manner provided in subsection (1), to apply a loss incurred by a company in the wholly-owned group in payment of a shortfall penalty imposed on any company in that group.
(2) If a taxpayer makes an election under subsection (1) in relation to current year losses and the Commissioner subsequently issues a determination of net loss confirming that the net losses are available to be offset in the current year, the time that the net losses are offset will be the time of the election.
(3) Each dollar of net loss that is used to pay a shortfall penalty
- Counts as an amount equal to one dollar multiplied by the tax rate; and
- Will, from the date the loss is used, no longer be available for use by a person.
(4) For the purposes of subsection (3), the term ‘tax rate' means the rate of tax or lowest marginal rate of tax that would apply to the taxpayer during the return period to which the relevant tax shortfall relates, if the taxpayer had tax to pay.
(5) In this section, ‘income year' includes any part of a year that, by virtue of section IF 1 or section IG 2, may be taken into account for loss continuity or group purposes.
Current year losses
A taxpayer who has no losses carried forward from prior years, or has insufficient losses to eliminate both tax and penalty, but who expects to have losses in the current year, can elect to use those losses, even though the final loss for that current year has not been established.
Section IG 9A(2) provides that if the taxpayer does incur sufficient losses for that current income tax year, then the shortfall penalties will be deemed to have been paid by the due date. However, if at the end of the income year the taxpayer does not incur sufficient losses, late payment penalties and interest will be imposed on the tax shortfall penalty that should have been absorbed by the losses.
Notification to the Commissioner
If a taxpayer wishes to use losses to offset income tax shortfall penalties they must notify the Commissioner of this intention prior to the due date of the shortfall penalty.
Notification may be in either written or verbal form.
Only available for income tax shortfall penalties
Losses can be used only to offset against shortfall penalties on income tax shortfalls. They are not available to be offset for example, against shortfall penalties on PAYE as this is not income tax to the employer.
Losses can only be used to offset income tax penalties as losses are, as defined in the Income Tax Act 1994, "available to be offset against assessable income". Therefore, as penalties which relate to anything other than income tax are not assessable income items, the losses cannot be offset against them.
Section IG 10(1A) provides that a company in a whollyowned group of companies may apply a loss in payment of a shortfall penalty imposed on any company in that group.
Loss must be available in year penalty imposed
It should be noted that losses must be available in the year in which the shortfall penalty is imposed. For example, if adjustments are made to the 1998 return and penalties imposed in 2000, losses must be available in 2000.
Loss conversion Individuals
When dealing with an individual the lowest marginal tax rate applying to the taxpayer in the year in which the shortfall penalty exists is the rate used to calculate the offset value of the losses.
When dealing with a company or other taxable entity the tax rate applying to the taxpayer in the year in which the shortfall penalty exists is the rate used to calculate the offset value of the losses.
Loss not available for future offset
Section IG 10(3)(b) provides that if losses are used in this way, they are not available to be offset against future income.
Under Section IG 10 of the Income Tax Act 1994 a taxpayer in a loss situation can elect to use losses to pay shortfall penalties. Losses can be used only to offset against shortfall penalties on income tax shortfalls.