Tax law on compliance and penalties to be reviewed
The Government today announced the terms of its review of the tax law relating to taxpayer compliance and penalties.
Revenue Under-secretary John Wright said the review would assess how well the legislation is achieving its objectives.
"The compliance and penalty legislation in the Tax Administration Act has four main aims," Mr Wright said. "It should deter non-compliance with the law, be understandable and fair, be flexible yet consistent, and be administered consistently.
"The review will look at how well the legislation does that, and identify areas where improvement is needed.
"The legislation, which came into effect in 1997, sets out the obligations of taxpayers and the tax standards they are expected to meet. It prescribes standard penalties across all taxes and duties for not complying with the law.
"The new legislation replaced a collection of tax rules that had built up over many years. The rules had gaps in coverage and were inconsistent in their application. For example, some actions attracted a penalty for certain kinds of taxes but not for others, while there were major inconsistencies in the size of penalties for similar defaults.
"Now that the new legislation has had three years to bed in, it is timely to review it.
"A further incentive is to respond to criticism of aspects
of the legislation, mainly that it is too harsh or lacking
in flexibility. For this reason the review will pick up on
the relevant recommendations of the 1998 report of the
Committee of Experts on Tax Compliance, and last year's
report of the Finance and Expenditure Committee's inquiry
into the powers and operations of Inland Revenue. Both
inquiries made valuable contributions to understanding where
the legislation could be improved.
''Changes inspired by their recommendations form part of a recently introduced taxation bill. They include the reduction of the incremental penalty for late payment from 2 percent to 1 percent, and the extension of relief provisions to all taxes, both of which introduce greater lenience and flexibility into the administration of the legislation.
"The public will be able to have its say on any changes arising from the review well before they are drafted into legislation. A discussion document seeking public submissions on proposals is planned for February of next year," John Wright said.
ENDS
Attached: Terms of reference for the review of the compliance and penalties legislation and timeline.
Terms of
reference for the review of the compliance and penalties
legislation
The review is to assess how well the
compliance and penalties legislation is achieving its
objectives, which encompass being:
1. effective in
deterring non-compliance and encouraging remedial
action;
2. understandable and fair, and perceived as
such;
3. appropriately flexible and consistent; and
4.
consistently administered.
The review will identify areas where improvements can be made to better achieve the objectives of the compliance and penalties legislation.
In relation to the objectives above, the review will consider the following issues:
Effective in deterring non-compliance and encouraging remedial action
Whether there has been any change in compliance behaviour
caused by the new legislation.
Whether a past
record of “good behaviour” should be taken into account when
deciding whether to impose a penalty, and if so how; whether
the Inland Revenue Department needs to exercise a greater
degree of flexibility when applying shortfall penalties;
whether shortfall penalties should apply when it is
determined that the taxpayer has made an inadvertent
error.
Whether the legislation sets standards
clearly. For example, what constitutes “lack of reasonable
care” or “unacceptable interpretation”? How late filing
penalties, late payment penalties and shortfall penalties
are applied, including whether the levels of late filing
penalty are appropriate given the different taxpayer groups.
Whether the rates of shortfall penalties are appropriate, by
being fair while deterring non-compliance and encouraging
remedial action. Whether the standards imposed on agents are
appropriate.
In relation to sections 16 and 17
of the Tax Administration Act 1994, whether:
- Section 17
should be amended to deem the records of an offshore entity
controlled by a New Zealand resident to be under the control
of that New Zealand resident.
- Section 17 should be
amended to remove the words “necessary or relevant”.
-
Section 17 should be amended to give the Commissioner the
discretion to require that documents requisitioned under
that section should be sent to an Inland Revenue
office.
- Section 16 should be amended to allow documents
to be removed from premises for copying and to be returned
as soon as practicable.
- Section 16(2) should be amended
to clarify that it applies to third parties.
The
method by which use-of-money interest is calculated to
determine whether changes which can be made to the interest
rates for overpayments and underpayments in order to reduce
the differential between the rates are
appropriate.
Whether there are circumstances
that require relief from the use-of-money interest
rules.
In relation to write-offs, whether there
should be a time limit on the reinstatement of a debt;
whether, if the present policy continues, the term
“write-off” should be replaced by wording that more
accurately describes the policy (for example, “provisional
write-off”); whether it is necessary for the write-off
provisions to be contained in the Inland Revenue Acts.
Whether there should be no penalties for
voluntary disclosures.
The criteria for entering
into instalment arrangements, reporting to the Government on
the matter.
Whether there should be the option
of having an annual GST return based on figures from the
financial statements, with GST payments during the year
being regarded as provisional. In the case of GST returns
it may only be when the annual accounts are completed that
GST errors are identified. Taxpayers are potentially
exposed to penalties.
Whether Inland Revenue
should be required to reinforce internally and publicly the
principle that if a taxpayer (or advisor) has not
interpreted the legislation a penalty for unacceptable
interpretation cannot apply.
Whether there
should be penalties on temporary shortfalls.
The
wider remission powers of the Commissioner in respect of
use-of-money interest to cover the situation where the
taxpayer did not have the benefit of the use of the funds or
no economic benefit was gained; the Commissioner’s split
rate approach and its validity.
Understandable and fair, and perceived as such
Whether the fairness of the
penalties provisions is apparent to all taxpayers, and
taxpayers that comply can see that those who do not comply
are adequately penalised.
Whether the
Government’s performance expectations of taxpayers are
reasonable.
Whether the debt hardship and
instalment arrangement provisions are adequate and the rules
for offsetting overpayments or tax credits against
underpayments or tax debits are adequate.
Whether the Tax Administration Act 1994 should be amended to
provide a clear, four-year time bar in relation to all taxes
except where the Commissioner of Inland Revenue has
reasonable grounds to suspect a return to be fraudulent or
wilfully misleading.
The process by which
assessments can be challenged, in particular considering
whether a time limit should be placed on the Commissioner of
Inland Revenue when addressing a taxpayer’s Notice of
Response.
The concept of encouraging the
retention, on file, of particulars of tax situations and
their rationale if some uncertainty is involved; the issue
of requiring disclosure if the tax at risk in a tax position
exceeds a specified threshold (such disclosure would be
required to be accompanied by sufficiently informative
statements on the tax situation at issue and the tax
position taken); the role of record keeping versus
disclosure to the Commissioner and the appropriate treatment
of such disclosure.
Whether incentives could be
provided to taxpayers to ensure that they pay off their debt
in the shortest timeframe they can afford. For example, the
use-of-money interest rate could reflect the term of the
instalment arrangement.
Whether the remission
provisions can be applied to companies.
Appropriately flexible and consistent
Whether the legislation
minimises compliance costs where possible and is consistent
with the proposals in the discussion document Less Taxing
Tax.
The extent of any lack of consistency in
the application of the compliance and penalties legislation,
owing to unclear or uncertain legislation.
Whether there should be more flexibility in considering
remission and hardship.
Whether Inland Revenue
should be required to develop an administrative solution to
the problem whereby a taxpayer claiming GST in the wrong
entity may be harshly penalised, despite there being no
economic disadvantage to the Government (or advantage to the
taxpayer); whether such administrative measure then requires
to be embodied in the law by a suitable legislative
change.
Consistently administered
Whether the
penalties legislation and administrative practices
complement the efficient operation of the tax system, are
practicable and aim to keep compliance and administration
costs as low as possible; whether the compliance and
penalties legislation is integrated with various initiatives
such as Inland Revenue’s Audit 2000 and self-assessment
projects.
The extent of any lack of consistency
in Inland Revenue administration. A separate report from
the Operations Group will be sent to the Government
outlining any administrative issues identified and the
priorities in finding solutions.
Timeline
The timeline for this review is as follows:
September 2000 Draft paper for discussion on initial policy options
February 2001 Issue discussion document (or similar) for consultation
November 2001 Introduction of bill
April 2002 Implementation
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