Grace periods

Issue: Pre-emptive instalment arrangements

Submission

(Matter raised by officials)

If the taxpayer enters a pre-emptive instalment arrangement, the grace period should not apply.

Comment

The Taxation (Business Taxation and Remedial Matters) Act 2007 amended the late payment penalty to provide a grace period under which Inland Revenue notifies a taxpayer the first time a payment is late rather than imposing an immediate late payment penalty. If payment is not made by a certain date, the penalty will be imposed.

To encourage taxpayers to contact Inland Revenue as soon as possible, the second stage of the initial late payment penalty is not imposed if a taxpayer enters an instalment arrangement before the due date for payment of tax (this is known as a pre-emptive instalment arrangement).

To provide a further incentive for taxpayers to contact Inland Revenue as soon as possible, officials recommend that the grace period is not applied for the period when a pre-emptive instalment arrangement is entered into but would apply at a later date if the taxpayer inadvertently misses a payment. This amendment also reinforces the policy of the grace period – that it ensures that taxpayers who inadvertently miss a payment are not penalised.

Recommendation

That the submission be accepted.

Issue: Application to the first default identified

Submission

(Matter raised by officials)

The grace period should apply to the first default identified by Inland Revenue.

Comment

It is possible for Inland Revenue to apply a grace period and then determine that the grace period should have been applied to an earlier period. For example, when a return is filed late, and a grace period has already been applied to a subsequent return when it should have been applied to the late return.

To ensure that the taxpayer benefits from the grace period, the grace period should be applied to the first default identified by Inland Revenue.

Recommendation

That the submission be accepted.