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Tax penalty rules change welcome, says Institute

For immediate release 21 March 2006

Tax penalty rules change welcome, says Institute

An inadvertent mistake in a tax return should not cost taxpayers thousands of dollars in penalties, says New Zealand Institute of Chartered Accountants Tax Director Craig Macalister.

Welcoming Revenue Minister Peter Dunne’s announcement yesterday (20 March) that an interim change is to be made to the penalty rules to limit inequitable outcomes, Mr Macalister cited the case of a taxpayer who was penalised $5,000 for declaring GST outputs in his partnership return instead of his trust return – although there was no loss of tax revenue.

Mr Macalister said that, in most of the cases he has seen, errors are inadvertent, not deliberate tax planning, which is the focus of the rules. “It’s like getting a parking ticket for thousands of dollars when your pay-and-display ticket was in the side window of your vehicle instead of the windscreen,” he said.

“Another example is a taxpayer being charged over $7,000 for claiming GST input tax when the sale of the property was technically zero-rated and no GST was payable. However, the other party to the transaction had paid the GST output tax – again, there was no loss of revenue, but nevertheless penalties of thousands of dollars had to be paid.

“Taxpayers have been penalised even if the tax shortfall was identified by the taxpayer and corrected prior to the due date for the tax,” he said.

The Institute’s warnings that the penalty rules for an unacceptable tax position were too broad date back to submissions it made to the Taxation (Maori Organisations, Taxpayer Compliance and Miscellaneous Provisions) Act 2003 that introduced the penalty.

Mr Macalister said that the 2003 legislation was intended to fix a concern IRD had about taxpayers avoiding the unacceptable interpretation penalty. Ironically, the patch IRD rushed through in 2003 was at the expense of compliant taxpayers disclosing inadvertent errors to IRD in good faith, he said.

“The fear of facing a penalty totally disproportionate to any ‘offence’ has undermined taxpayers’ willingness to disclose tax shortfalls in their tax positions to IRD. Although Inland Revenue has always been willing to sit down with the institute and work on improving the rules, its desire to foster voluntary disclosure has been materially impaired and will take some years to recover.

“The change still correctly leaves an obligation on taxpayers to take reasonable care when taking tax positions. However we hope the interim fix will remove most of the inequities associated with the unacceptable tax position penalty. Along with a full review of the penalty rules scheduled for later this year, this is a signal of the Government’s intention to develop a set of penalty rules that better balances the concerns of the revenue with taxpayer perceptions of fairness,” he said.


The New Zealand Institute of Chartered Accountants is this country’s largest professional body, with over 28,000 members.

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