What must we know about tax penalties as a taxpayer in New Zealand？

- Tax penalties from IRD

As a taxpayer in New Zealand, no matter whether you are an individual or running a business, you may have encountered such a situation, for instance, the original tax of $3,000 to be imposed to $8,000 due to your ignorance or carelessness. Therefore, a taxpayer needs to understand the tax regime from IRD. File and pay tax on time are obligations for all taxpayers in New Zealand.  Here we will first provide a brief overview of the penalties regime from IRD.

The following are the main reasons for tax penalties:

1.      Late filing penalties

2.      Late payment penalties

3.      Shortfall penalties

4.      Criminal Penalties

Late filing penalties, depend on the type of return you should file.

Income Tax	Penalty
Less than $ 100,000	$50
$100,000 – $1,000,000	$250
More than $1,000,000	$500

GST	Penalty
Payment	$50
Invoice	$250
Hybrid	$500

PAYE	Penalty
	$250

Late payment penalties, will be charged in stages as follows:

·         1% the day after the due date

·         4% 7 days later

·         1% each month when the tax to pay remains overdue (on some taxes)

 

Shortfall penalties will be imposed based on the taxpayer’s level of culpability for the shortfall.

Shortfall penalty	Standard
Not taking reasonable care	20%
Unacceptable tax position	20%
Gross carelessness	40%
Adopting an abusive tax position	100%
Evasion	150%

Example:

A company left out $10,000 income from their Company income tax return. This means they have a tax shortfall of $2,800 (the company tax rate is 28%).

you will be charged by IRD with a 40% shortfall penalty, which says $1,120 (to be considered as “Gross Carelessness”), and extra interest will be added. If you can convince IRD that the mistake is “not taking reasonable care”, there will be a possibility for IRD to reduce the penalty to 20%. But the interest (UMOI) will still be added.

Everyone makes mistakes, it is not avoidable. If you voluntarily disclose your mistakes in your return before IRD discovers it, instead of risking IRD finding it during an audit, the shortfall penalty may be reduced or remitted. But have to say, the interest (UOMI) is not able to be exempt.

If your cash flow doesn’t allow you to pay taxes on time or in full, in this case, you can apply for an instalment payment, IRD will remit the penalty on the day of your first instalment payday. However, the interest resulting from the late payment or shortfall payment will still be calculated.

All in all, as a business owner who is different from employees, it is crucial to be aware that the balance in the business account does not 100% belong to you. If you accidentally touch the red line of IRD, there will be an unexpected financial loss.

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