Standard practice statements: Shortfall penalties

INV-225 Criminal offence - evasion or similar offences (Mar 98)

Introduction

Criminal penalties fall within three categories:

• Absolute liability offences
• Knowledge offences
• Evasion or similar offences

There are also penalties for obstruction and aiding and abetting.

This statement deals with prosecutions by the Commissioner for defaults that fall within the criminal offence category of "evasion or similar offences".

Application

The penalties apply to obligations relating to the 1997/98 and subsequent income tax years and to taxable or dutiable periods commencing on or after 1 April 1997.

Shortfall penalties apply when there is a deficit or understatement of tax, or where a refund or loss is reduced. Defaults in employers' obligations are also considered under shortfall penalties.

The penalty provision is generic in application. This means that it applies to all Inland Revenue Acts (but for Child Support and Student Loans, it applies only to employer obligations).

Purpose

The purpose is to provide a penalty for taxpayers who evade or enable another person to evade the payment of tax. It also covers situations where a refund or payment of tax is unlawfully received.

The penalty provision is generic in application. This means that it applies to all Inland Revenue Acts except Child Support and Student Loans.

Legislation

Section 143B of the Tax Administration Act 1994:

Evasion or similar offence

1. A person commits an offence against this Act if the person -
   1. Knowingly does not keep the books and documents required to be kept by a tax law; or
   2. Knowingly does not provide information (including tax returns and forms) to the Commissioner or any other person when required to do so by a tax law; or
   3. Knowingly provides altered, false, incomplete, or misleading information (including tax returns and forms) to the Commissioner or any other person in respect of a tax law or a matter or thing relating to a tax law; or
   4. Knowingly does not make a deduction or withholding of tax required to be made by a tax law; or
   5. Pretends to be another person for any purpose or reason relating to a tax law, - and does so -
   6. Intending to evade the assessment or payment of tax by the person or any other person under a tax law; or
   7. To obtain a refund or payment of tax in the knowledge that the person is not lawfully entitled to the refund or payment under a tax law; or
   8. To enable another person to obtain a refund or payment of tax in the knowledge that the other person is not lawfully entitled to the refund or payment under a tax law.
   
   
   
2. A person who evades or attempts to evade the assessment or payment of tax by the person or another person under a tax law commits an offence against this Act.
   
   
3. A company does not commit an offence under subsection (1)(d) for knowingly not making a deduction of dividend withholding payment in respect of a dividend derived, if -
   1. The company deducted an estimate of the amount of dividend withholding payment payable; and
   2. The Commissioner is satisfied that -
      1. The company's failure was because it was not practicable for the company to calculate with accuracy, at the time of derivation, under section LF 2 of the Income Tax Act 1994, the amount of underlying foreign tax credit arising with respect to the dividend; and
      2. The estimate is a reasonable one.
   
   
4. A person who is convicted of an offence against subsection (1) or subsection (2) is liable to -
   1. Imprisonment for a term not exceeding 5 years; or
   2. A fine not exceeding $50,000; or
   3. Both.

What is meant by "Evasion or similar" offences?

All offences in this category require the person to have both the knowledge and the necessary "intent" to commit the offence.

Intent is critical to the offence. There must be sufficient evidence to prove "beyond reasonable doubt" that the person not only committed the offence but committed it:

• intending to evade the assessment or payment of the tax by the person or any other person; or
• to obtain a refund or payment of tax in the knowledge that the person was not lawfully entitled to the refund or payment; or
• to enable another person to obtain a refund or payment of tax in the knowledge that the other person was not lawfully entitled to the refund or payment.

Before a person can be prosecuted for an offence under section 143B(1) they must meet two criteria. Firstly, the person must have committed an act which comes within subparagraphs (a) to (e) and secondly, the person must have committed the act with necessary intent, as required in subparagraphs (f) to (h).

Offence

Section 143B(2) provides that a person who evades or attempts to evade the assessment or payment of tax for themselves or another person under a tax law commits an offence against this Act.

Essentially, if a person evades or attempts to evade the assessment or payment of tax and the act or failure to act does not come within the offences listed in subparagraphs (a) to (e) of section 143B(1) then prosecution action can be taken under subsection 143B(2).

Prosecution

Section 149(5), states that if a shortfall penalty has been imposed on a taxpayer for taking an incorrect tax position, the Commissioner may not subsequently prosecute the taxpayer for taking the incorrect tax position.

Prosecution does not preclude the Commissioner from imposing the civil penalty for evasion.  It is not necessary for a taxpayer to be prosecuted before a shortfall penalty is imposed.  As the standards of proof are different.

Taxpayer to be advised of intention

If a prosecution is to be considered, the taxpayer will be advised by letter at the time the Notice of Proposed

Adjustment is issued for the tax shortfall that prosecution action is being recommended.

If it is intended to prosecute and later impose a shortfall penalty, the taxpayer will be advised that after the prosecution, whether or not the prosecution is successful, the imposition of a shortfall penalty will be considered.

Consideration of shortfall penalty after unsuccessful prosecution

Section 149(4) states that a shortfall penalty may be imposed after a prosecution, whether or not the prosecution is successful.

If prosecution action for evasion is unsuccessful, a shortfall penalty can still be imposed for evasion or similar act, because the standard of proof is the balance of probabilities, even though the onus of proof is still the Commissioner.

However, the reason why the prosecution was not successful will be considered. If it was dismissed on technical grounds (for example some procedural matters in the prosecution were not complied with), clearly a shortfall penalty can be imposed. If the evidence available to the court was clearly inadequate, then a shortfall penalty will not be able to be imposed.

Statutory defence - companies and dividend withholding payments

A company can not be convicted of an offence for knowingly not making a deduction of a dividend withholding payment in respect of a dividend derived if it satisfies the criteria set out in section 143E(3). Whether a company satisfies this criteria will be a matter of fact.

Publication of name

Pursuant to section 146(1)(d) of the Tax Administration Act 1994 the name of anyone convicted of evasion will be published in the Gazette.

Voluntary disclosures

Where a taxpayer makes a voluntary disclosure prior to an investigation commencing no prosecution action will be taken and there will be no publication of name in the Gazette.

Burden and standard of proof

The burden of proof rests with the Commissioner. The standard of proof for prosecution is the criminal standard of beyond reasonable doubt.

If there is insufficient proof is held to support a prosecution, consideration will still be given to the imposition of shortfall penalties in its place. The reason being that the standard of proof for shortfall penalties is the civil standard of balance of probabilities.

Penalty

Persons convicted of an offence are liable to:

• imprisonment for a term not exceeding 5 years; or
• a fine not exceeding $50,000; or
• both.

Other reference

An explanation and examples of criminal penalties and other offences and penalties can be found in Tax Information Bulletin Volume Eight, No.7 (October 1996).

Summary

Section 143B of the Tax Administration Act 1994 provides for a criminal offence of evasion or similar offence. Evasion involves a deliberate actions to cheat the revenue. This may include a taxpayer obtaining refunds (tax credits, rebates) knowing that he or she is not lawfully entitled to them and knowingly not accounting for tax deductions to the Commissioner.


Tony Bouzaid
National Manager
Operations Policy

 

 

Date published: 17 Dec 2004

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