Did you know that every time you file a tax return, whether GST, PAYE, FBT or income tax, you are taking a tax position and can be penalised if that position is later found to be incorrect? You do not have to gain any financial benefit for a penalty to apply.
The two most common penalties that taxpayers incur are the "Lack of Reasonable Care" penalty and the "Unacceptable Tax Position" penalty. Both of these penalties are outlined below:
Lack of Reasonable Care
The penalty for not taking reasonable care when adopting a tax position is 20% of the tax shortfall that arises.
For example, a taxpayer is careless in claiming in the wrong GST return, GST on an asset purchased for $90,000.00. The tax shortfall is therefore the GST claimed of $10,000.00 and the 20% penalty would be $2,000.00.
In general terms, where a taxpayer engages the services of a tax agent or accountant to assist with the completion of a tax return, the taxpayer will have taken reasonable care and the penalty won’t apply.
Unacceptable Tax Position
A taxpayer is liable to pay a shortfall penalty of 20% of the tax shortfall if the taxpayer takes an unacceptable tax position and the tax shortfall arising from the taxpayer’s tax position is more than both:
- $20,000.00; and
- The lesser of $250,000.00 and 1% of the taxpayer’s total tax figure for the relevant return period. A taxpayer takes an "unacceptable tax position" if, viewed objectively, the tax position fails to meet the standard of being about as likely as not to be correct.
A taxpayer takes an "unacceptable tax position" if, viewed objectively, the tax position fails to meet the standard of being about as likely as not to be correct. A tax payer does not take an unacceptable tax position merely by making a mistake in the calculation or recording of numbers in a return.
Penalties May be Reduced
These penalties may be reduced in the following circumstances (the percentage reduction is shown in brackets):
- Voluntary Disclosure (40% or 75%); or
- Timing Difference (75%); and
- Good Behaviour (50%); and
- Penalty capped at $50,000.00 (provided the error is either voluntarily disclosed or discovered by the Inland Revenue within prescribed time limits).
NOTE: Only one reduction is possible for voluntary disclosure and timing differences (e.g. temporary shortfalls). Other rules apply.
No Discretion to Remit
The Inland Revenue has no power or discretion to remit these penalties, except under limited hardship grounds. While it is possible to argue against the application of the Lack of Reasonable Care penalty (as the word "reasonable" is subjective in nature), it is much more difficult to argue against the application of the Unacceptable Tax Position penalty.
As these penalties apply to any tax position taken in a tax return, it is imperative to ensure that your accounting and financial systems are robust to mitigate unnecessary risk of penalties applying. In particular, the scope of the Unacceptable Tax Position is so wide that it will penalise most errors where the tax at stake is more than $20,000.00. The Institute of Chartered Accountants is currently discussing the scope of this penalty with the Inland Revenue in an attempt to limit its scope to more reasonable bounds.
If you are at all uncertain about the tax effect of any transaction, we strongly advise that you discuss the matter with a Horwath adviser prior to filing a tax return to ensure that these penalties are not incurred.
This article was contributed by Horwath Porter Wigglesworth Ltd, Chartered Accountants & Business Advisors. For further information, visit their website at www.horwath.co.nz.
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