Skip to Content

myIR, payments and more

Technical tax area
Ngā tūmomo whakataunga me ngā aratohu
Questions we've been asked: Shortfall penalties

Do the statutory time bar provisions apply to shortfall penalties?
Issued June 2004

We have been asked to consider whether the statute bar provisions apply to shortfall penalties.


Section 113 of the Tax Administration Act 1994 ("TAA"), gives the Commissioner authority to make any alterations to an assessment or determination in order to ensure the correctness of that assessment or determination, notwithstanding that the tax already assessed may have been paid. The Commissioner's power to amend assessments for income tax (section 108) and GST (section 108A) is subject to a 4 year time limit. Under the statute bar provisions, when an income tax or GST return is furnished and an assessment has been made based on the return that has been furnished, the Commissioner is then barred from amending that assessment so as to increase the tax after the expiration of 4 years from the end of the income year in which the return is provided in the case of income tax or from the end of the return period in respect of which the return was provided or assessment made for GST.

The issue of whether the statute bar provisions apply to shortfall penalties arises when an assessment of a shortfall penalty is made under section 94A. Under section 94A a shortfall penalty is to be assessed "in the same way" as the tax to which it relates. The issue is whether section 94A means that if the time bar provisions apply to a particular tax type then the time bar provisions also apply to any shortfall penalty imposed on that tax.

When the substantive tax has not been assessed by statute bar

It is worth recalling that it will only be possible to impose a shortfall penalty where there is a "tax shortfall".  A "tax shortfall" is the difference between the "taxpayer's tax position" and the "correct tax position" for the return period.  The "taxpayer's tax position" is most commonly going to be what has been returned by a taxpayer in their tax return.  The "correct tax position" is defined in the TAA as meaning the "correct tax position established under one or more tax laws."  Where the operation of section 108 prohibits an increase in the assessment of tax after the statute bar date, and in conjunction with section 109 (which provides that the particulars of an assessment are correct in all respects, except on objection or challenge), then the "correct tax position" will not be greater than the "taxpayer's tax position" and there will be no "tax shortfall".  Therefore, where there is a substantive tax position that the Commissioner considers wrong, but that position cannot be amended due to the statute bar, it is that position that is deemed correct by section 109, so there will be no "tax shortfall" and no ability to impose a shortfall penalty after the statute bar date.

It might be thought, in response to this section 109 argument, that section 94A(3) is relevant.  Section 94A(3) of the TAA provides that the Commissioner may assess a shortfall penalty before or after unpaid tax has been assessed, or has become assessable or payable, or has been paid.  This provides that a shortfall penalty can apply to a matter that has not yet been assessed.  However, the provision appears to apply to shortfalls that are yet to be assessed, but that could be assessed, rather than "shortfalls" than cannot be assessed due to a statute bar of the substantive tax.  Section 94A(3) was enacted to allow the Commissioner to proceed with a shortfall penalty proposal, without having to wait for the substantive matter to be finally resolved.  None of this, however, relates directly to the situation where the substantive tax is statute barred.  In such a case, as discussed above, the Commissioner will not be able to establish a "tax shortfall", based on that definition and its interaction with section 109.

When the substantive tax has been assessed by statute bar

If, however, the substantive tax has been assessed prior to the statute bar, the question is whether a shortfall penalty can be imposed beyond the statute bar of that underlying substantive tax.  An analysis of the statute bar provisions, section 94A and the surrounding provisions, shows that:

  • When reading the statute bar provision on its own, where an income tax or GST return has been furnished and an assessment made based on that return, the Commissioner is barred from amending that assessment after the expiration of 4 years. The specific references to income tax and GST and the bar on amending those assessments suggest that the provisions were intended to apply specifically to income tax and GST assessments only.
  • This view is also supported by the wording of section 94A(2), which states that the shortfall penalty is to be assessed separately from the tax itself. Therefore, where an income tax or GST assessment has been made the Commissioner is barred from amending that assessment (income tax or GST) and not from amending the shortfall penalty assessment.
  • Further, under the statute bar provisions the Commissioner is only prevented from amending an "assessment". By virtue of the definition of an "assessment" in section 3(1), an "assessment" has to be an assessment of "tax". The definition of "tax" does not include a "civil penalty". The definition of a "civil penalty" includes a "shortfall penalty". Therefore, as the statute bar provisions only apply to assessments of "tax" they do not apply to assessments of shortfall penalties. That is, such an assessment is not an assessment of "tax".
  • The statutory context of the other (non-income tax and GST) assessment provisions of the TAA (sections 93 - 104) is also relevant.  In particular, for all the other types of tax that are assessed under these provisions of the TAA, there is a provision in the Income Tax Act ("ITA") which deems the particular tax to be treated as income tax for the purposes of the ITA and the TAA (with minor exceptions).  There is, however, no such provision in either the ITA or TAA deeming shortfall penalties to be income tax.  Indeed, the definition of "tax" in section 3(1) of the TAA specifically excludes a "civil penalty", and a "civil penalty" is defined to include a shortfall penalty.  Therefore, it appears that Parliament has made sure the provisions of the TAA (including section 108) apply to different taxes by inserting deeming provisions into the particular regimes of the ITA.  The absence of such an explicit deeming for shortfall penalties, and indeed the contra-indication, suggests that provisions relating to "income tax" (including section 108) were not to apply to a shortfall penalty.


For the reasons stated above, it is considered that sections 108 and 108A do not apply to assessments of shortfall penalties. Section 94A does not import the statute bar provisions (section 108 and section 108A) into the assessment of shortfall penalties. The Commissioner is not time barred from issuing an assessment for a shortfall penalty or from amending assessments of shortfall penalties, as long as there is a "tax shortfall" by the statute bar date.