Liberalisation of tax penalties proposed
A discussion document released today by Finance Minister Dr Michael Cullen and Revenue Minister Peter Dunne proposes liberalising a range of tax penalties and associated legislation.
"The idea behind the proposed changes is to encourage voluntary compliance by having tax penalties that reflect the seriousness of the offence," Mr Dunne said.
"People comply with the law more willingly when they see it as reasonable, and see that compliance is the norm and non-compliance is punished.
"Tax penalties vary according to the level of offence. Those for having a tax shortfall, for example, can range from 20% for not taking reasonable care, to 150% for evasion.
"The discussion document examines the current rules on tax penalties and identifies several areas where the rules could be clearer, more consistent and better targeted at promoting voluntary compliance.
"It looks at options for relaxing penalties when people have genuinely tried to do the right thing but failed, while using the full force of the law on people who have made no attempt to comply.
"Given the importance of tax agents in upholding voluntary compliance, the discussion document proposes updating the definition of 'tax agent' to exclude people who do not meet defined standards of behaviour – such as those who have been convicted of a crime of dishonesty.
"As a result, Inland Revenue would be able to withhold recognition of someone as a tax agent if it considered that necessary to protect the integrity of the tax system. Such a measure would have benefits for both the tax administration and relevant professional associations, which have their own integrity standards.
"The discussion document argues for prescribing a limited number of circumstances when a shortfall penalty for not taking reasonable care is imposed on taxpayers who use a tax agent.
"The penalty for having an unacceptable tax position would apply only to income tax, thus excluding GST and withholding taxes from its scope.
"As an incentive to comply, the law would be amended to require Inland Revenue to alert late payers if it is their first offence, rather than automatically penalising them for being late.
"As a further incentive, shortfall penalties for not taking reasonable care or for taking an unacceptable tax position would not be imposed if the taxpayer concerned made a voluntary disclosure of the shortfall before being notified of a pending tax audit or investigation. That would have to occur within two years of the taxpayer taking the position.
"The shortfall penalty for underpayments of PAYE would be graduated for employers who filed an employer monthly schedule but did not pay the associated PAYE on time.
"Other proposed changes include replacing automatic default assessments with a potential $250 penalty on GST returns that are filed late, repeal of the threshold for having an abusive tax position, and a number of clarifications of the law.
"The major reform of the penalty rules in 1997 made them more consistent across all types of tax. Now the aim is to build on that reform, ensuring that we have penalties that match the seriousness of the offence," Mr Dunne said.
The discussion document, "Tax penalties, tax agents and disclosures", is available at www.taxpolicy.ird.govt.nz. Submissions close on 30 November 2006.
Contact: Ainslie Fenwick, Tax advisor, Tel: 04 471 9720