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