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Standard practice statements: General statements

SPS 05/02 - Income Tax Act 2004 - Penalties and interest arising from unintended legislative changes (Jun 05)

Introduction

  1. This Standard Practice Statement (SPS) sets out the treatment of shortfall penalties and use of money interest when a tax position is taken under the Income Tax Act 2004 (ITA 2004) and a confirmed unintentional legislative change gives rise to a tax shortfall.

Application

  1. This SPS applies from the 2005/2006 and subsequent income years.

Background

  1. The ITA 2004 was enacted on 7 May 2004 and represents the third stage of a program to progressively rewrite New Zealand's income tax legislation to make it clear and easy to understand. The ITA 2004 applies from the 2005/2006 income year.

  2. The ITA 2004 is the Income Tax Act 1994 (ITA 1994) in rewritten form and no change is intended from the pre-existing law except as specifically listed in Schedule 22A of the ITA 2004 as an identified policy change.

  3. When reporting back on the Bill that would become the ITA 2004, the Finance and Expenditure Committee (FEC) noted that unintended legislative changes may still arise due to the difference in language from the ITA 1994. The FEC recommended the appointment of an independent committee to review submissions regarding any differences between the Acts and recommend appropriate action to the government. The Rewrite Advisory Panel (the Panel), which advised on the rewrite of the ITA 1994, has taken on this role. Details of the Panel and the unintended legislative change process are contained in the Panel statement RAP 001 "Process for resolving potential unintended legislative changes in the Income Tax Act 2004". This statement is able to be viewed on the Panel's website at www.rewriteadvisory.govt.nz.

  4. The FEC received submissions expressing concern about shortfall penalties and use of money interest (interest) arising from unintended legislative changes made during the rewrite process. Transitional provisions enacted in the 2004 Act carry over the interpretation of the 1994 Act when the meaning arising under the 2004 Act is unclear or gives rise to an absurdity. Inland Revenue's advice to the FEC was that taxpayers who incur tax shortfalls as a result of an unintended legislative change will still be required to meet their tax obligations but should not be subject to penalties and any interest where reasonable care has been taken.

  5. Accordingly this SPS sets out Inland Revenue's practice regarding the imposition of penalties and interest when an unintended legislative change results in a tax shortfall for a taxpayer. Unintended legislative changes will generally be reversed by amending legislation. Although the Government will take account of the advice of the Panel, ultimately the final decision is that of the Government. The Government may decide that the unintended legislative change should be retained. The outcome of all unintended legislative change submissions can be followed on the log on the rewrite advisory panel website, at the address above.

Legislation

Income Tax Act 2004

YA 3   Transitional provisions-
Reference to this Act can include earlier Act
(1)   A reference in an enactment or document to this Act, or to a provision of it, is to be interpreted as a reference to the Income Tax Act 1994 (or to the Income Tax Act 1976), or to the corresponding provision of the earlier Act, to the extent necessary to reflect sensibly the intent of the enactment or document.
Reference to earlier Act can include this Act
(2)   A reference in an enactment or document to the Income Tax Act 1994 (or to the Income Tax Act 1976), or to a provision of that earlier Act, is to be interpreted as a reference to this Act, or to the corresponding provision in this Act, to the extent necessary to reflect sensibly the intent of the enactment or document.
Intention of new law
(3)   Except when subsection (5) applies, the provisions of this Act are the provisions of the Income Tax Act 1994 in rewritten form, and are intended to have the same effect as the corresponding provisions of the Income Tax Act 1994.
Old law is interpretation guide
(4)   Except when subsection (5) applies, in circumstances where the meaning of a taxation law that comes into force at the commencement of this Act (new law) is unclear or gives rise to absurdity,-
  (a) the wording of a taxation law that is repealed by section YA 1 and that corresponds to the new law (old law) must be used to determine the correct meaning of the new law; and
  (b) it can be assumed that a corresponding old law provision exists for each new law provision.
Limits to subsections (3) and (4)
(5)   Subsections (3) and (4) do not apply in the case of-
  (a) a new law specified in schedule 22A (Identified policy changes); or
  (b) a new law that is amended after the commencement of this Act, with effect from the date on which the amendment comes into force.

Tax Administration Act 1994

141A.   Not taking reasonable care-
(1)   A taxpayer is liable to pay a shortfall penalty if the taxpayer does not take reasonable care in taking a taxpayer's tax position (referred to as "not taking reasonable care'') and the taking of that tax position by that taxpayer results in a tax shortfall.
(2)   The penalty payable for not taking reasonable care is 20% of the resulting tax shortfall.
(3)   A taxpayer who [takes an acceptable tax position] is also a taxpayer who has taken reasonable care in taking the taxpayer's tax position.
(4)   Subsection (3) and section 141B(1B) do not exclude a taxpayer who makes a mistake in the calculation or recording of numbers in a return from being liable for a penalty for not taking reasonable care.
 
141B.   Unacceptable tax position-
(1)   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.
(1B)   A taxpayer does not take an unacceptable tax position merely by making a mistake in the calculation or recording of numbers in a return.
(2)   A taxpayer is liable to pay a shortfall penalty if the taxpayer takes an unacceptable tax position and the tax shortfall arising from the taxpayer's tax position is more than both-
  (a) $20,000; and
  (b) the lesser of $250,000 and 1% of the taxpayer's total tax figure for the relevant return period.
 
183D.   Remission consistent with collection of highest net revenue over time-
(1)   The Commissioner may remit-
  (a) A late filing penalty; and
  (aa) A non-electronic filing penalty; and
  (b) A late payment penalty; and
  (bb) A shortfall penalty imposed by section 141AA; and
  (c) Interest under Part 7-

payable by a taxpayer if the Commissioner is satisfied that the remission is consistent with the Commissioner's duty to collect over time the highest net revenue that is practicable within the law.

(2)   In the application of this section, the Commissioner must have regard to the importance of the late payment penalty, the late filing penalty, and interest under Part 7 in promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts.
(3)   The Commissioner must not consider a taxpayer's financial position when applying this section.

Discussion

Transitional Provisions

  1. The transitional provisions are contained in Part Y of the ITA 2004. The basic premise as reinforced in section YA 3(3) is that the ITA 2004 is the ITA 1994 in rewritten form. Apart from the identified policy changes and subsequent amendments, the provisions in the ITA 2004 are intended to have the same effect as the corresponding provisions in the ITA 1994. The intent is to preserve case law and Inland Revenue practice and policy statements made under the ITA 1994 so they can be applied to interpret the ITA 2004.

  2. The ITA 2004 has full effect from the 2005/2006 income year and from this time must be used instead of the ITA 1994. In general taxpayers must consider and apply the ITA 2004 on its own terms.

  3. However, in situations where the meaning of a provision of the ITA 2004 is unclear or gives rise to an absurdity, the wording of the former provision under the ITA 1994 is to be used to determine the correct meaning of the new law (section YA 3(4)). In general terms the Commissioner's statements in respect of the ITA 1994 may be relied upon -  however this will not always be the case, for example, where the legislation has changed or there is a change in case law.

  4. If it is considered that the wording in the ITA 2004 gives rise to a change in meaning from the ITA 1994, a submission can be made to the Panel identifying the potential unintended legislative change (refer Panel statement RAP 001).


  5. Section YA 3(5) excludes from the transitional provisions intended changes as listed in Schedule 22A (Identified policy changes) and it also excludes any amendments made to the ITA 2004 after the commencement of the new Act from the application date of the amendment. Therefore if an amendment is retrospective back to the commencement date of the ITA 2004 then the transitional provisions will not apply from that commencement date. In these situations the normal rules of statutory interpretation will apply.

  6. If the meaning of the words in the ITA 2004 are clear, then the tax position that a taxpayer takes in their return should be based on the meaning of the words in that Act. This is the case even if the tax liability is greater than was thought to be the case under the ITA 1994. If, on the other hand, it is reasonably believed that the words are unclear or lead to an absurd result, reference should be made to the ITA 1994 to ascertain the meaning of the ITA 2004.

  7. In taking a tax position under the ITA 2004, if there is any material doubt about the meaning of the law, a taxpayer is entitled to assume that a provision that has not been amended since the introduction of the Act and not included in Schedule 22A has the same effect as the corresponding provision in the ITA 1994.

Shortfall Penalties

  1. If a tax shortfall subsequently arises due to an unintended legislative change from the corresponding provision in the ITA 1994 then it is reasonable that the taxpayer will not have to pay interest on the tax shortfall or be liable to a shortfall penalty.
  2. To avoid a shortfall penalty, a taxpayer will still have to take reasonable care in taking a tax position whether or not they are applying a Commissioner's published statement. In addition, the taxpayer will need to have taken an acceptable tax position. An acceptable tax position is a tax position that meets the standard of being about as likely as not to be correct. This means that the position taken by the taxpayer should have around or close to a 50% chance or more of being upheld in court.

Interest

  1. Interest is automatically calculated when the taxpayer's account is assessed with the correct amount of tax. A taxpayer who incurs a tax shortfall as a result of an unintended legislative change will receive a statement showing interest charged. This cannot be prevented.

  2. However section 183D of the Tax Administration Act 1994 (TAA) allows the Commissioner to remit interest if the Commissioner is satisfied that remission is consistent with the Commissioner's duty to collect the highest net revenue that is practicable within the law. In applying section 183D the Commissioner must have regard to the importance of interest in promoting compliance, especially voluntary compliance, by all taxpayers.

  3. The Commissioner considers that enforcing the payment of interest in situations where taxpayers incur a tax shortfall as a result of an unintended legislative change would be to the detriment of encouraging voluntary compliance among taxpayers.

  4. A taxpayer seeking a remission of interest under section 183D of the TAA is required by section 183H of the TAA to make an application in writing requesting the remission.

Standard Practice

Tax Shortfall due to an unintended legislative change

  1. a taxpayer incurs a tax shortfall as a result of an unintended legislative change in the ITA 2004, no shortfall penalty will be charged and the taxpayer will be entitled to apply in writing to the Commissioner for a remission of interest.

  2. The taxpayer will still need to have taken reasonable care and an acceptable tax position.

  3. To obtain a remission of the interest charged, a taxpayer will need to write to the Commissioner requesting remission as this is a legislative requirement.

  4. The taxpayer will still be required to pay the shortfall of tax by the due date that is set for it.

  5. The Commissioner has identified two scenarios when a shortfall incurred by a taxpayer is a result of an unintended legislative change to the ITA 2004:

Scenario 1

In taking a tax position in their tax return, a taxpayer applies the ITA 2004 as the law is clear. An unintended legislative change from the ITA 1994 is later identified and confirmed by the Panel. On advice by the Panel, the Government amends the ITA 2004 retrospectively to be consistent with the ITA 1994. As a result of the amendment, a tax shortfall arises. It is established that the taxpayer has taken reasonable care and an acceptable tax position.

Comment

In this situation, the taxpayer had taken an interpretation based on the words in the ITA 2004. The tax shortfall that subsequently arose is solely due to the unintended legislative change and the Government's decision to amend the ITA 2004 retrospectively. In this instance no shortfall penalty will be imposed and the taxpayer will be entitled to a remission of interest upon written application to the Commissioner.  

Scenario 2

In taking a tax position in their tax return a taxpayer is required to have regard to the wording of the corresponding provisions of the ITA 1994 as the law in the ITA 2004 is unclear or leads to an absurd result. An unintended legislative change in the ITA 2004 is later identified and confirmed by the Panel. The Government decides not to amend the ITA 2004. As a result, a tax shortfall arises. It is established that the taxpayer has taken reasonable care and an acceptable tax position.

Comment

In this scenario the law in the ITA 2004 is not clear or leads to an absurdity. As required under section YA 3(4), the taxpayer has used the law in the ITA 1994 to interpret the meaning of the law in the ITA 2004. However, it is later established by the Panel that the meaning of the law in the ITA 2004 is different from that of the corresponding provision in the ITA 1994. The Government decides to retain the new meaning. Thus the tax shortfall that the taxpayer consequently incurs does not arise due to any fault of the taxpayer. No shortfall penalty will be imposed and the taxpayer will be entitled to a remission of interest upon written application to the Commissioner.

Tax Shortfall not due to an unintended legislative change

  1. Outside the 2 scenarios above and this SPS, a taxpayer's liability to shortfall penalties and interest will be considered on a case by case basis according to normal principles. This will include the situations where an unintended legislative change is confirmed by the Panel but the tax shortfall incurred by the taxpayer did not arise due to the unintended legislative change. Rather, the tax shortfall arose as a result of an incorrect interpretation by the taxpayer.

  2. There will also be instances where an unintended legislative change is not confirmed by the Panel. In this case, it will be clear that a tax shortfall incurred by the taxpayer did not arise due to an unintended legislative change but is the result of an incorrect interpretation by the taxpayer.

  3. These cases are no different to any other case when a tax shortfall arises. Whether a taxpayer incurs a shortfall penalty will be decided on the facts of each case, and whether the taxpayer took reasonable care and an acceptable tax position.

  4. Interest charged on the shortfall will be payable along with the outstanding tax. Generally, no remission of interest will be allowed. However the taxpayer will still have the right to apply in writing to the Commissioner for a remission of interest and each case will be considered on its on merits in accordance with the relevant Standard Practice Statement (currently RDC 600 "Remission of penalties and interest" ).

  5. By way of contrast to the two scenarios covered above, below are four scenarios that are outside the SPS. The first two are when there is a confirmed unintended legislative change but the tax shortfall that arises is not a result of the unintended legislative change. The following two are when a potential unintended legislative change is not confirmed:

Unintended legislative change confirmed by the Panel.

Scenario 3

A taxpayer takes a tax position under the ITA 2004 as the law is clear. The tax position taken by the taxpayer is not correct and a tax shortfall arises. An unintended legislative change is later identified and confirmed by the Panel. However, the Government decides not to amend the ITA 2004. It is established that the taxpayer has taken reasonable care and has an acceptable tax position.

Comment

The taxpayer has interpreted the ITA 2004 in taking their tax position. An unintended legislative change has been confirmed but the law in the ITA 2004 is not changed. The tax position that the taxpayer has taken is an incorrect interpretation of the ITA 2004 and the tax shortfall is not due to the unintended legislative change. There will be no shortfall penalty charged but interest will be payable. This scenario highlights the need to have particular regard to the wording of the ITA 2004. An acceptable tax position based on the ITA 1994 will not necessarily give rise to an acceptable tax position under the ITA 2004.

Scenario 4

A taxpayer interprets the law in the ITA 1994 in taking a tax position in their return as the corresponding provision in the ITA 2004 is unclear or leads to an absurd result. An unintended legislative change in the ITA 2004 is later identified and confirmed by the Panel. The Government decides to amend the ITA 2004 retrospectively to be consistent with the ITA 1994. Nevertheless, a tax shortfall arises as a result of an incorrect interpretation of the ITA 1994. It is established that the taxpayer has taken reasonable care and has an acceptable tax position.

Comment

As directed by section YA 3(4) the taxpayer has used the ITA 1994 to ascertain the meaning of the corresponding provision in the ITA 2004 as it is unclear or leads to an absurd result. The ITA 2004 is amended to have the same effect as the ITA 1994 but the taxpayer still has a tax shortfall that is the result of an incorrect interpretation of the provision in the ITA 1994, not the unintended legislative change. There will be no shortfall penalty but interest will be payable.

Potential unintended legislative change not confirmed by the Panel

Scenario 5

A taxpayer applies the law in the ITA 2004 in taking a tax position in their return as the law is clear. A potential unintended legislative change is identified but is not confirmed by the Panel. The tax position taken by the taxpayer is not correct and a tax shortfall arises. It is established that the taxpayer has taken reasonable care and has an acceptable tax position.

Comment

This case is similar to scenario 3 but the Panel has decided that there is no unintended legislative change in the ITA 2004. The taxpayer has a tax shortfall from taking an incorrect interpretation of the ITA 2004. There will be no shortfall penalty but interest will be payable. As with scenario 3, this scenario highlights the need to have regard to the wording of the ITA 2004 when taking a tax position, even when it is thought that there has been an unintended legislative change.

Scenario 6

A taxpayer interprets the law in the ITA 1994 in taking a tax position in their return as the corresponding provision in the ITA 2004 is unclear or leads to an absurd result. A potential unintended legislative change is later identified but not confirmed by the Panel. A tax shortfall arises as a result of an incorrect interpretation of the unchanged ITA 1994. It is established that the taxpayer has taken reasonable care and an acceptable tax position.

Comment

This case is similar to scenario 4 but the Panel has decided that there is no unintended legislative change in the ITA 2004. The taxpayer has incurred a tax shortfall from taking an incorrect interpretation of the law. There will be no shortfall penalty but interest will be payable.

  1. Please note that all six scenarios have been based on the assumption that the taxpayer has taken reasonable care and has an acceptable tax position when taking their tax position. In cases where a taxpayer has not taken reasonable care or has an unacceptable tax position, a shortfall penalty will be imposed.

  2. The following matrix summarises the Commissioner's practice when a tax shortfall arises. This matrix assumes reasonable care and an acceptable tax position.

Scenario

Unintended change confirmed?

Unintended change reversed
retrospectively?

Shortfall penalties?

Remission of Interest?

1 - Relies on new law

Yes

Yes

No

Yes

2 - New law unclear and relies on old law

Yes

No

No

Yes

3 - Relies
on  new law

Yes

No

No

No

4 - New law unclear and relies on old law

Yes

Yes

No

No

5 - Relies on new law

No 

N/A

No

No

6 - New law unclear and relies on old law

No 

N/A

No

No

Overpayments by a taxpayer

  1. If a taxpayer has an overpayment due to any of the scenarios outlined in the table above the normal rules, as they pertain to the Commissioner paying the taxpayer interest, will apply.

Savings - existing documents and publications

  1. All references to the ITA 1994 in existing documents and publications such as standard practice statements and booklets should be read as references to the ITA 2004 and all policies and practices contained within these documents should be applied to the corresponding provisions in the ITA 2004.

This Standard Practice Statement is signed on 15 June 2005.

Graham Tubb
National Manager
Technical Standards

 

 


Date published: 17 Jun 2005

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