By Virag Singh
As required under the Tax Administration Act 1994 (TAA), Inland Revenue recently issued its annual report on the application of shortfall penalties “Application of shortfall penalties under the Tax Administration Act 1994 for the year ended 30 June 2021” (2021 SFP Report).
The shortfall penalty regime is one of the most powerful tools Inland Revenue has at its disposal to encourage and enforce compliance with tax laws.
Every year Inland Revenue impose thousands of shortfall penalties amounting to millions of dollars to taxpayers who take incorrect tax positions. To put some figures around it, in the eleven years from 1 July 2010 to 30 June 2021 67,380 shortfall penalties were imposed amounting to a total dollar value of $430,083,681 (after the application of voluntary disclosure and previous good behaviour adjustments).
This article will first provide a brief overview of the shortfall penalties regime before looking at the trends in shortfall penalties between 1 July 2010 and 30 June 2021. The 2021 SFP Report itself only compares data between the years ended 30 June 2020 and 30 June 2021.
Note: The data referred to/graphed in this article is sourced from Inland Revenue’s reports on the application of shortfall penalties pursuant to section 141L of the TAA, for the years ended 30 June 2011 – 2021.
The shortfall penalty regime
Where a taxpayer takes an incorrect tax position, that taxpayer may be liable to pay a tax shortfall penalty. Or to put it another way, if a taxpayer pays an amount of tax that is lower than what Inland Revenue determines the taxpayer owes, that taxpayer may be charged a penalty.
The purposes of the penalties regime (including the civil shortfall penalties regime) as set out in Part 9 of the TAA is to encourage voluntary compliance with tax obligations, ensure impartial and consistent application of penalties and impose penalties at a level proportionate to the seriousness of the non-compliance with tax obligations.
Shortfall penalties are imposed as a percentage of the taxpayer’s tax shortfall. The percentages are determined by reference to a framework that aims to assess the taxpayer’s level of culpability for the shortfall. The table below summarises the range of penalties:
Penalty Type |
Percentage of Tax Shortfall |
Apples when |
---|---|---|
|
|
|
Not taking reasonable care |
20% |
Taxpayer does not take reasonable care in taking a tax position |
Unacceptable tax position |
20% |
Viewed objectively, the tax position fails to meet the standard of being about as likely as not to be correct. Must exceed $50k or 1% of total tax for relevant return period. |
Gross carelessness |
40% |
Doing or not doing something in a way that in all the circumstances suggests or implies complete or a high level of disregard for the consequences. |
Abusive tax position |
100% |
Having met the unacceptable tax position threshold, a taxpayer enters into or acts in respect of arrangements or |
Evasion or similar act |
150% |
Evades the assessment or payment of tax by thetaxpayer or another person under a tax law or a similar act. |
Promoter Penalty |
The sum of the tax shortfalls arising as if the promoter had been the party to the arrangement |
Applies to a ‘promoter’ who has sold, offered,issued or promoted an arrangement to 10 or more persons, where a shortfallpenalty for an abusive tax position is imposed on a party to the arrangement asa result. |
A purpose of the penalties regime to ensure the level of the penalty is proportionate to the seriousness of the breach is met, and as such the amount of a shortfall penalty may be reduced, in some circumstances. A reduction of 100% (in cases where the shortfall penalty imposed is for not taking reasonable care or for taking an unacceptable tax position, or a 75% reduction for other penalties) is available where the taxpayer makes a full unprompted voluntary disclosure to Inland Revenue before the taxpayer is notified of an impending audit or investigation. A 40% reduction in shortfall penalties is available where voluntary disclosures are made post notification, but before, the start of an audit. In 2021 reductions in shortfall penalties payable due to voluntary disclosures totalled $43,352,347. Taxpayers can also benefit from a 50% reduction for “prior good behaviour” (essentially where the taxpayer has not had a penalty of that type in the preceding two years for PAYE, FBT, GST and RWT or four years for other tax types). In 2021 97.3% of shortfall penalties imposed were given a 50% reduction for “prior good behaviour”.
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