New Zealand’s tax system follows self-assessments concepts. This means that it is the taxpayers responsibility to ensure that they are correctly calculating their tax, and have taken the reasonable care to do so.
If a tax return has been lodged incorrectly or there are details missing from it that are needed, the taxpayer may not have paid the amount of tax that they are actually required to. If this is the case, the taxpayer can incur a penalty against them which is known as a shortfall penalty.
This penalty is charged as a percentage of the tax shortfall, which is the difference between tax property payable by the taxpayer and the lowest amount of tax that would have been payable by the taxpayer if it were assessed on the basis of the taxpayer’s return.
Generally there are five types of shortfall penalties that may be applied to taxpayers.
Essentially, the taxpayer must ensure that they are meeting their tax obligations accordingly. Good recording systems should be in place to ensure that their income and spending are properly recommended, as tax agents need access to the right information.
When deciding whether or not the taxpayer has taken reasonable care, Inland Revenue will consider:
- The complexity of the law and transaction
- The amount and seriousness of the shortfall
- Accidental errors
- Professional advice the taxpayer may have received
- The difficulty and expense of taking precautions against a shortfall occurring
- The age, health and background of the taxpayer
Business customers will also receive additional consideration. This could include:
- The size and nature of the business
- The internal controls in place
- The business’s record keeping practices
- Any system failures
The shortfall penalty rate for not taking care is 20% of the tax shortfall.
Unacceptable tax position
Decisions that are made by taxpayers when filing a tax return are known as a tax position. These are sometimes used to reduce or delay paying tax. “Unacceptable” tax positions are decisions that may have been made that are more likely to be wrong rather than right. Courts cannot seriously consider any of unacceptable tax positions as being reasonable decisions.
A penalty will be charged when the tax shortfall:
- Resulted from a tax position that was more likely to be wrong than right
- Is in income tax
- Is more than both $50,000 and 1% of the taxpayer’s total tax figure for the relevant
Unacceptable tax positions incur a penalty of 20% of the resulting tax shortfall.
Gross carelessness in taxation matters is when the taxpayer has shown:
- No care in managing their tax
- Little or no thought to the consequences
- Unreasonable behaviour leading to a high risk tax shortfall
The gross carelessness payment is not affected or based on whether or not the taxpayer was careless on purpose or by accident. The penalty for gross carelessness is 40% of the resulting tax shortfall.
Adopting an abusive tax position
If a taxpayer uses a tax position for the main purpose of not paying tax, it is known as an abusive tax position. Abusive tax positions receive a penalty of 100% of the resulting tax shortfall.
If they promote, sell or issue a tax arrangement to 10 or more investors in a tax year, and it involves an abusive tax position, they may also be liable for a promoter penalty. However, the investors may reduce their penalty rate from 100% down to 20% if the promoter of the abusive tax position is penalised.
Tax evasion is a serious offense, and can either be a penalty payment of 150% of the tax shortfall or a criminal prosecution (which could result in imprisonment of up to five years and a fine of up to $50,000).
Tax evasion may involve:
- Evading the assessment or payment of tax on your own or another’s behalf
- Using deducted or withheld tax for anything other than its lawful purpose
- Failing to make a legally required deduction or withholding tax
- Getting a refund or payment of tax that you know you are not entitled to.
- Enabling somebody else to get a refund or payment of tax you know they are not entitled to
Employees who act on behalf of their employer could face a penalty if they fail to deduct or withhold tax for them, or use tax for anything than payment to Inland Revenue.
Shortfall penalties can be increased by 25% if an Inland revenue officer is obstructed in the process of ascertaining. You may also be criminally penalised for obstruction, if you:
- Refuse reasonable access to your business premises
- Destroy relevant records
- Lie or falsify details
- Deliberately delaying in order to frustrate enquiries.
To avoid getting into this situation, speak with us to ensure that your tax return is correct and lodged properly. We’re here to help you.