We may charge you a shortfall penalty if you underpay your tax because your return is wrong, or if you don’t file a return you should have filed.
There are five types of shortfall penalty, each with its own penalty rate.
Reasonable care
Reasonable care is about making sure you meet your tax obligations. You need to have good recording systems to make sure income and spending are properly recorded. You need to make sure you’re giving any tax agents the right information.
When deciding if you have not taken reasonable care, we consider:
- the complexity of the law and transaction
- the amount and seriousness of the shortfall
- accidental errors
- professional advice you received
- the difficulty and expense of taking precautions against a shortfall occurring
- your age, health and background.
If you’re a business customer, we’ll also consider:
- the size and nature of the business
- the internal controls in place
- the business's record keeping practices
- any systems failures.
The penalty for not taking reasonable care is 20% of the tax shortfall.
Unacceptable tax position
A tax position is a decision that you might make when filing a tax return. Tax positions are sometimes used to reduce or delay paying tax.
An ‘unacceptable’ tax position is a decision you've made that's more likely to be wrong than right. Unacceptable tax positions cannot be seriously considered by a court as being reasonable decisions.
A penalty will be charged when the tax shortfall:
- resulted from a tax position that was more likely to be wrong than right
- is in income tax
- is more than both $50,000 and 1% of the taxpayer’s total tax figure for the relevant return period.
The penalty for an unacceptable tax position is 20% of the resulting tax shortfall.
Gross carelessness
In tax matters, ‘gross carelessness’ is when you've shown:
- no care managing your tax
- little or no thought to the consequences
- unreasonable behaviour leading to a high risk tax shortfall.
- The gross carelessness payment penalty is not based on whether you were careless on purpose or by accident.
The penalty for gross carelessness is 40% of the resulting tax shortfall.
Adopting an abusive tax position
An abusive tax position is a tax position used for the main purpose of not paying tax. The penalty for abusive tax positions is 100% of the resulting tax shortfall.
If you promote, offer, sell or issue a tax arrangement to 10 or more investors in a tax year and it involves an abusive tax position, you will be liable for a promoter penalty.
The promoter penalty will be the sum of the tax shortfalls your investors could have obtained. This means that if the arrangement affects income tax, the promoter penalty is calculated on the maximum tax-related benefits of each investor at the rate of 39 cents in the dollar.
If a promoter is penalised, the penalty on the investors is reduced from 100% to 20%.
Tax evasion
Tax evasion may involve:
- evading the assessment or payment of tax, on your own or another's behalf
- using deducted or withheld tax for anything other than its lawful purpose
- failing to make a legally required deduction or withholding tax
- getting a refund or payment of tax that you know you are not entitled to
- enabling someone else to get a refund or payment of tax you know they are not entitled to.
The penalty for evasion is 150% of the resulting shortfall.
In some cases, we would prosecute instead of asking you to pay the evasion shortfall penalty. This could mean imprisonment for up to five years and a fine of up to $50,000.
If you’re an employee acting on behalf of your employer, you would face a penalty if you:
- fail to deduct or withhold tax for them
- use tax for anything other than payment to Inland Revenue.
In practice, a senior employee who issues an order to do this may be held accountable.
Raising shortfall penalty amounts
A shortfall penalty may be increased by 25% for obstructing an Inland Revenue officer. Obstruction may include:
- refusing reasonable access to your business premises
- destroying relevant records
- lying and falsifying details
- deliberate delays to frustrate enquiries.
There is also a criminal penalty for obstruction.