Call for cap on compounding tax penalties

Call for cap on compounding tax penalties

Following the prosecution and imprisonment of a Nelson Caf owner for failure to account for PAYE deductions, the New Zealand Institute of Chartered Accountants has renewed its call for a cap on the amount of interest and penalties that can be charged on an amount of unpaid tax.

The Institute's view is that the amount of interest and penalties on unpaid tax should be capped at three times the amount of the core tax debt at the most. In the case of a Nelson caf owner the core tax debt of $204,000 had risen to $807,502, almost four times the amount of the original debt. In another example the Institute is aware of, the core tax debt of $2,000 increased to $30,000, whilst the core tax remained unpaid.

The Institute's Tax Director, Craig Macalister, noted that the current law on penalties and use of money interest meant that core tax debt left outstanding grew by 30% for the first year outstanding and 25% for each subsequent year. This is before the imposition of any shortfall penalties and, in the case of failure to account for PAYE deductions, any prosecution action with consequent fine and imprisonment penalties, as illustrated in the case of the Nelson caf owner.

Mr Macalister said that taxpayers who find themselves in debt to IRD should contact IRD as soon as possible to discuss the options that are available for payment of the debt. While Inland Revenue are very willing to enter into discussion with taxpayers, Mr Macalister stated that taxpayers tend to put off contacting IRD. This could be for many reasons, but, Mr Macalister noted, IRD are a lot more flexible in dealing with debt than was the case some years ago in some cases the matter may be able to be dealt with over the phone. The sooner contact is made with IRD: the sooner IRD can stop the penalty and use of money interest clock if an instalment arrangement is entered into.

However, Mr Macalister stated that the Institute is aware of cases that fall through the cracks: either because taxpayers ignore the IRD statements and bury their heads in the sand, or they struggle to keep their business afloat and repay the IRD debt, or the taxpayer does not actively manage the debt. Mr Macalister added "once a person slips into (or back into) tax debt and the penalty and interest clock is left ticking away, they can be left in a hopeless situation with a debt so large that liquidation or bankruptcy is the only option left for the taxpayer or IRD, which is not in anyone's best interest".

The penalty and use of money interest clock should not keep running beyond a certain point it creates no incentives for taxpayers to pay the core tax debt. The Institute is aware of a recent case when the taxpayer opted for bankruptcy because it was the most effective way of getting on top of the situation.

The Institute noted that, while a recent amendment to the legislation meant that an element of "common sense" had been introduced into the charging of one of the civil shortfall penalties, there is a considerable amount of work to be done to ensure our tax penalty rules drive the right behaviour. It is hoped that following the issue of a discussion document on penalties later this year that further practical amendments can be made. "A better balance needs to be struck" concluded Mr Macalister.

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