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Relaxation of tax penalties

Date 17 October 2006

Relaxation of tax penalties – better late than never

Brahma Sharma, KPMG Tax Partner, today welcomed the release of the Government’s Discussion Document proposing changes to the penalties rules. One of the most significant changes is the decision that shortfall penalties will not be imposed when a taxpayer voluntarily discloses a tax shortfall to Inland Revenue.

Mr Sharma said that currently there is a 75% reduction for a voluntary disclosure. However, even with that reduction, there is little incentive for taxpayers to disclose errors, especially as there is also a reduction of 75% for a temporary shortfall of tax. The proposals mean that a taxpayer who discovers a genuine error will be able to disclose this to the Revenue without fear of being lumbered with a potentially significant penalty.

Mr Sharma said that the harsh effects of imposing penalties where taxpayers voluntarily disclose errors, in particular the fact that it discourages taxpayers from coming forward, had been pointed out to Government and officials repeatedly throughout the last 10 years of the current penalties regime “but at least there is now recognition of the harsh effects of the penalties regime and an attempt to rectify the problem.”

Other proposals in the Discussion Document include introducing restrictions on the ability to be recognised as a tax agent and changing the scope of the reasonable care and unacceptable interpretation penalties, as well as the introduction of a late payment penalty for GST.

The Discussion Document and its proposals has been signalled over the last few months, and in Mr Sharma’s view it is provides an opportunity for significant reform in an area that causes taxpayers and advisors considerable angst and in some cases hardship.


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