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Tax penalties discussion welcomed, but overdue

18 October 2006

Tax penalties discussion welcomed, but overdue

The tax paying community could breathe a sigh of relief at proposals in a new Inland Revenue discussion document, says the tax director of the Institute of Chartered Accountants.

Craig Macalister says the Institute is welcoming an Inland Revenue discussion documented on taxation penalties, released yesterday. The proposals effectively eliminate shortfall penalties for the two most common shortfall penalty types.

"Inland Revenue's schoolboy-like enthusiasm for imposing penalties, as well as the breadth of the shortfall penalty regime, seriously compromises people's perception of the tax system's fairness, which consequently undermines voluntary compliance," says Mr Macalister.

The current shortfall penalty regime goes further than penalising inappropriate taxpayer behaviour, it penalises taxpayers for doing the right thing. For example, the Institute is aware of cases when taxpayers notified Inland Revenue of an error very shortly after filing a return and before the actual due date, yet Inland Revenue still imposed the maximum penalty possible.

The severity of the penalty regime has put off many taxpayers from admitting mistakes. It is simply too expensive to confess. In a system that tries to encourage voluntary compliance this is simply not good enough.

Disappointingly, the Government has failed to address issues around child support penalties. Child support laws impose high late-payment penalties in lieu of use-of-money interest, but the custodial parent doesn't see a cent of it.

Regrettably, Government does not propose to stop the clock running on penalties and use-of-money interest accruing on taxpayers' overdue debts. The Institute believes penalties and use-of-money interest should be capped at a level sufficient to penalise, but not to the point when the only option for the taxpayer is liquidation or bankruptcy.

The Institute of Chartered Accounts believe the proposals in the discussion document will go a long way to addressing some of the inequities with the penalty regime. The penalty rules need to be capable of delivering outcomes that strike the right balance between penalising taxpayers for inappropriate behaviour and recognising compliant taxpayers that make innocent errors.


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