Good behaviour

(Clauses 110 and 111)

Summary of proposed amendments

Amendments to the Tax Administration Act 1994 will give effect to the recommendations outlined in the discussion document Taxpayer compliance, standards and penalties: a review that taxpayers' past compliance should be taken into account when imposing shortfall penalties.

The rate of the shortfall penalty for lack of reasonable care and unacceptable interpretation will be reduced to 10 percent if within the previous four years the taxpayer has not been liable to pay a shortfall penalty on a tax shortfall identified during an audit for the same type of offence. For example, if a taxpayer is audited, a tax shortfall is ascertained and a shortfall penalty for not taking reasonable care is imposed and within four years of that audit the taxpayer again does not take reasonable care, the shortfall penalty on that subsequent breach will be imposed at the rate of 20 percent.

The shortfall penalty on the subsequent offence does not have to be imposed within the four-year period; it is the offence that must occur within the four years for the higher penalty rate to apply. The discussion document proposed that this period be seven years. Submissions on the discussion document expressed concern that this period will be too long. The government agrees and has reduced the period to four years.

This amendment will apply separately for each type of tax. For example, the rate of the shortfall penalty imposed on a taxpayer for not taking reasonable care in relation to GST will not be affected by a previous breach of the reasonable care test in relation to another tax type such as income tax.

Application date

The proposed amendments will apply on or after 1 April 2003.

Key features

Sections 141A and 141B will be amended to reduce the rate of the shortfall penalties for not taking reasonable care and unacceptable interpretation to 10 percent. Taxpayers who are audited and are found to have breached either of these standards, and within four years of the audit breach the standard again, will have the subsequent breach penalised at the current rate for the shortfall penalty of 20 percent.

Background

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]

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]

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]

The government addressed all of these concerns 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 was also concerned as to how such a test could be applied consistently to all taxpayers.

As a way of taking into account good behaviour at low compliance and administrative costs, the government proposed that the lack of reasonable care shortfall penalty be reduced to 10 percent if the breach was the taxpayer's first breach of that standard. Submissions on the discussion document recommended that "good behaviour" be taken into account when imposing all shortfall penalties. The government agreed in part and extended the proposal to apply also to unacceptable interpretations. The government considers that given the culpability associated with breaches of the other standards, good behaviour should not be a factor that is taken into account when imposing shortfall penalties for gross carelessness, taking an abusive tax position or evasion.

Submissions also expressed concern that the proposal could discourage voluntary disclosures for tax shortfalls. The government agrees with the concerns raised in submissions. In order to resolve this issue the original proposal has been amended so that if a taxpayer voluntarily discloses a tax shortfall, disclosure of that shortfall will not lead to higher rates of shortfall penalties applying to subsequent breaches, whether those subsequent offences are voluntarily disclosed or not. It will only be when the taxpayer has been audited and a shortfall penalty is imposed that the "probation" period will begin.

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