INV-295
Issued
14 Apr 2004

Reduction of shortfall penalties for previous behaviour (Apr 04) (under review) (WITHDRAWN)

Withdrawn statement SPS INV-295 Reduction of shortfall penalties for previous behaviour. Statement provided for historical purposes only.

Withdrawn

This statement has been withdrawn and is provided for historical purposes only.

Introduction

  1. This Standard Practice Statement sets out the Commissioner's practice for reducing shortfall penalties for previous behaviour.

Application

  1. This Standard Practice Statement applies from 1 April 2004 in respect of tax positions taken on or after 1 April 2000 except for cases where a taxpayer is liable to pay a shortfall penalty before the date of Royal assent of the Act (26 March 2003), in which case the shortfall penalty is not reduced in relation to previous behaviour.

  2. This Standard Practice Statement must be read in conjunction with the Standard Practice Statements setting out the Commissioner's practice on imposing and reducing shortfall penalties.

  3. Please note that at the time of publication of this SPS, the Taxation (Annual Rates, Venture Capital and Miscellaneous Provisions) Bill 2004 has been introduced and proposes to rewrite section 141FB of the Tax Administration act 1994 to improve its comprehensibility.  It also proposes to broaden the application of section 141FB to take into account offences under sections 143 to 145 when determining a taxpayer's previous behaviour.

Background

  1. The Finance and Expenditure Committee recommended that:

    "....a past record of "good behaviour" be taken into account when deciding whether to impose a penalty" [1]

  2. The Committee of Experts on Tax Compliance also considered this issue.  Its report recommended that:

    " - the government should specifically require the review team to report on: whether the government's performance expectations of taxpayers are reasonable; whether and to what extent, a past record of 'good behaviour' should be taken into account in deciding to impose penalties or to escalate enforcement, - " [2]

  3. This matter was also considered by the Ministerial Panel on Business Compliance Costs.  In its report it stated:

    "The policy of imposing tax collection obligations on employers/small businesses, and then punishing them with penalties for getting it wrong builds strong resentment from those that have good 'track records'." [3]

  4. The government canvassed these issues in its discussion document Taxpayer compliance, standards and penalties: a review, released in August 2001.  The discussion document noted that applying a test for good behaviour and determining whether taxpayers had met that test would incur considerable compliance and administrative costs.  The government wanted to ensure that any tests could be applied consistently to all taxpayers.

  5. Any probation period needs to be sufficiently long to indicate that the taxpayer's behaviour has changed, yet short enough to not excessively burden the taxpayer.  Following consultation on the bill, the government considered that in the case of GST, fringe benefit tax, PAYE and resident withholding tax a two-year period is sufficiently long for a regular taxpayer to demonstrate improved compliance behaviour and a four-year period was appropriate for other revenues.

  6. The government considered that applying the previous behaviour reduction provision to all shortfall penalties would have the following benefits:

    • Taxpayers see that those taxpayers who repeatedly offend are more harshly penalised, reflecting their failure to begin complying voluntarily.

    • A concern that the shortfall penalty rates are excessive is addressed.  (Especially in relation to voluntary disclosures where the rules are seen as penalising taxpayers who are attempting to comply.)

    • The shortfall penalty rate for first time evasion is aligned with the rate for evasion in Australia and Canada.

  7. Section 141FB of the Tax Administration Act 1994 was enacted to give effect to the recommendations outlined in the discussion document Taxpayer compliance, standards and penalties: a review including that a tax payer's past compliance should be taken into account when imposing shortfall penalties.

Legislation

Tax Administration Act 1994

141FB REDUCTION OF PENALTIES FOR PREVIOUS BEHAVIOUR

141FB(1) A shortfall penalty, payable by a taxpayer, under section 141E, for evasion or a similar act is reduced to 50% of the penalty that would otherwise be payable under that section if the taxpayer has not previously been liable to a shortfall penalty that:

  1. Related to the same type of tax as does the current penalty; and
  2. Was for evasion or a similar act; and
  3. Was not reduced for voluntary disclosure by the taxpayer; and
  4. Was eligible for a reduction under this subsection.

141FB(2) A shortfall penalty payable by a taxpayer under any of sections 141A to 141D (called in this section the current penalty) is reduced to 50% of the penalty that would otherwise be payable under those sections if, after the date specified in subsection (3) and before the date on which the taxpayer becomes liable for the current penalty, the taxpayer has not been liable to pay a shortfall penalty that:

  1. related to the same type of tax as does the current penalty; and
  2. If the current penalty is for
    1. (repealed)
    2. Gross carelessness or taking an abusive tax position, was for evasion or a similar act or for gross carelessness or for taking an abusive tax position:
    3. Not taking reasonable care or taking an unacceptable tax position, was a shortfall penalty; and
  3. Was not reduced for voluntary disclosure by the taxpayer; and
  4. Was eligible for a reduction under this subsection.

141FB(3) The date referred to in subsection (2) precedes the date on which the taxpayer becomes liable for the current penalty by

  1. 2 years, if the current penalty relates to the taxpayer's application of the PAYE rules, to fringe benefit tax, to goods and services tax, to resident withholding tax; or
  2. 4 years, if the current penalty relates to any other type of tax.

141FB(4) For the purpose of subsection (2), if a taxpayer is liable for shortfall penalties that relate to tax shortfalls of which the Commissioner becomes aware as a consequence of a single investigation or voluntary disclosure, all the shortfall penalties are treated as a single combined penalty.

In this Standard Practice Statement, all legislative references are to the Tax Administration Act 1994 unless otherwise specified.

Please note that at the time of publication of this SPS, the Taxation (Annual Rates, Venture Capital and Miscellaneous Provisions) Bill 2004 has been introduced and proposes to rewrite section 141FB of the Tax Administration act 1994 to improve its comprehensibility.  It also proposes to broaden the application of section 141FB to take into account offences under sections 143 to 145 when determining a taxpayer's previous behaviour.

Discussion

  1. The Taxation (Maori Organisations, Taxpayer Compliance and Miscellaneous Provisions) Act 2003 was enacted on 26 March 2003 and it amended, among other things, the shortfall penalty provisions in the Tax Administration Act 1994.

  2. The amendments included a reduction of shortfall penalties if, within certain specified probation periods, the taxpayer has not been liable to pay a shortfall penalty on a tax shortfall identified during an Inland Revenue audit. 

  3. The probation periods are the previous two years in the case of GST, fringe benefit tax, PAYE and resident withholding tax, or four years in the case of all other tax types.

  4. There is no probation period in the case of a shortfall penalty imposed under section 141E (evasion or a similar act) - all subsequent breaches by the taxpayer will be penalised at the higher rate.

  5. If a taxpayer voluntarily discloses a tax shortfall, disclosure of that shortfall does not lead to higher rates of shortfall penalties applying to subsequent breaches, whether those subsequent tax shortfalls are voluntarily disclosed or not.  It is only when the taxpayer has been audited and a shortfall penalty is imposed that the probation period begins.

Application date

  1. The shortfall penalty reduction provision applies to tax positions taken on or after 1 April 2000, except for those cases where a taxpayer is liable to pay a shortfall penalty before the date of Royal assent of the Act (26 March 2003), in which case the shortfall penalty would not qualify for the previous behaviour reduction.  This date was chosen to ensure that tax shortfalls identified after the date of enactment but relating to tax periods after 1 April 2000 benefit from the previous behaviour provision.

Clean slate

  1. All taxpayers start with a "clean slate".  If a taxpayer has had a shortfall penalty imposed before 26 March 2003, when s141FB was enacted, that penalty is not taken into account in determining whether a subsequent shortfall penalty will qualify for the previous behaviour reduction.

Standard Practice

  1. This Standard Practice details the following:

    • the reduction
    • application date
    • tax types
    • exception
    • grouping of shortfall penalties
    • shortfall penalties and the disputes process.

The reduction

  1. Shortfall penalties are reduced by 50% if, within the preceding specified probation periods, the taxpayer has not been liable to pay a shortfall penalty on a tax shortfall for the same tax type identified during an Inland Revenue audit.

  2. If, a taxpayer had been liable to pay a shortfall penalty in respect of an earlier tax shortfall which was not reduced for voluntary disclosure and was eligible for a previous behaviour reduction, then any subsequent shortfall penalties for the same or a lesser shortfall penalty imposed within the probation period, in respect of the same revenue type, will not qualify for the previous behaviour reduction.

  3. For the purposes of this SPS, "audits" include income tax audits, investigations, payroll audits, GST refund checks, payroll and GST registration checks and any other type of review.

  4. For the purposes of this SPS, the date a taxpayer is liable to pay a shortfall penalty is deemed to be the due date for payment of the shortfall penalty.

Application date

  1. The previous behaviour reduction provision applies to tax positions taken on or after 1 April 2000, except for those cases where a taxpayer is liable to pay a shortfall penalty before the date of Royal assent of the Act (26th March 2003) in which case the shortfall penalty would not qualify for the previous behaviour penalty reduction.

The probation period

  1. The probation periods are the previous:

    • two years - in the case of GST, fringe benefit tax, PAYE and resident withholding tax; or

    • four years - in the case of all other tax types.

  2. The probation period runs from the due date for payment of the reduced shortfall penalty.

  3. The date that the taxpayer takes a tax position that gives rise to the subsequent penalty determines whether or not the subsequent tax shortfall is within the probation period or not.

  4. There is no probation period in the case of an evasion shortfall penalty - any subsequent evasion shortfall penalties will not qualify for the previous behaviour reduction.

  5. Voluntary disclosures by taxpayers do not count against previous behaviour.  It is only when the taxpayer has been audited by Inland Revenue and a shortfall penalty (excluding an evasion shortfall penalty) is imposed that the probation period begins.

Example 1 [4]

A taxpayer files an income tax return and omits income from a particular source.  After filing the return the taxpayer voluntarily discloses that he has omitted income - the shortfall penalty is reduced by 75% for the voluntary disclosure and 50% for previous behaviour.  The taxpayer is not audited.  In the next two returns the taxpayer omits income and subsequently discloses the omission, on both occasions the shortfall penalty is reduced by 75% for the voluntary disclosure and 50% for previous behaviour.

INV 295 Example 1

 

Example 2

Similar to Example one, however Inland Revenue decides to audit the period following the first voluntary disclosure and a shortfall penalty for evasion is imposed.  This shortfall penalty is reduced by 50% for previous behaviour.  In the subsequent period the taxpayer makes a voluntary disclosure and the shortfall penalty is reduced by 75% because of the disclosure.  Again Inland Revenue audits the period following the disclosure and a shortfall penalty for evasion is imposed.  This shortfall penalty is not reduced.  In a subsequent period the taxpayer voluntarily discloses omitted income and the shortfall penalty is reduced by 75% because of the disclosure.

INV 295 Example 2

 

The shortfall penalty on the subsequent tax shortfall does not have to be imposed within the probation period; it is the tax shortfall that must occur within the period for the higher penalty rate to apply.

NB: there is no probation period in respect of evasion shortfall penalties - any subsequent evasion penalty will not be eligible for a good behaviour reduction.

Tax types

  1. The previous behaviour reduction provision applies separately to each type of tax, such as PAYE, income tax and GST.  Therefore, a penalty imposed in relation to one tax type does not mean that the taxpayer automatically faces a higher penalty rate for another tax type.

Example 3

Inland Revenue audits a taxpayer and identifies a GST shortfall which qualifies for the previous behaviour reduction.  This breach (for GST) will not preclude the taxpayer from receiving a previous behaviour reduction for a subsequent income tax shortfall identified during an Inland Revenue audit.

Exception

  1. Breaches of the lack of reasonable care and unacceptable tax position standards do not start the probation period for subsequent shortfall penalties for gross carelessness, abusive tax position or evasion.  But these higher penalties do start the probation period in relation to subsequent lesser penalties. 

Grouping of shortfall penalties

  1. Where there is more than one tax shortfall arising as a result of a single investigation or voluntary disclosure, they are grouped and effectively treated as one shortfall penalty.

Example 4

Inland Revenue audits several GST periods and finds a number of discrepancies.  The shortfall penalties are treated as a single combined penalty for the purpose of determining whether the taxpayer qualifies for a previous behaviour reduction.  The probation period runs from the date the reduced penalty is imposed.

Shortfall penalties and the disputes process

  1. Where the Commissioner has issued a Notice of Proposed Adjustment (NOPA) incorporating shortfall penalties with a 50% reduction and the case is proceeding through the disputes process, any shortfall penalties arising in respect of the same tax type but for a different period should not be imposed until after the dispute is resolved.  This will ensure that when the result of the dispute is known, the 50% previous behaviour reduction is appropriately imposed.

This Standard Practice Statement was signed by me on 14 April 2004

Margaret Cotton
National Manager
Technical Standards

[1] Inquiry into the Powers and Operations of the Inland Revenue Department: Report of the Finance and Expenditure Committee, New Zealand House of Representatives, October 1999, page 4 - recommendation 7 and page 27.

[2] Tax Compliance, Committee of Experts on Tax Compliance, December 1998, paragraph 12.7.

[3] Finding the Balance: Maximum Compliance at Minimum Cost, Final Report of the Ministerial Panel on Business Compliance Costs, July 2001, page 121.

[4] Please note, the examples in this Standard Practice Statement are intended to illustrate how the Commissioner may apply the practice set out in this Standard Practice Statement - they do not set practice in themselves.