Fairer tax treatment proposed by discussion document 4/4

Other issues

Information-gathering powers

32.   What is the proposal?

The Government is proposing that the legislation be amended, in line with the
recommendations of the Committee of Experts on Tax Compliance, to:

• allow documents to be removed from premises for copying;
• clarify that third parties can be required to give reasonable assistance in
  an investigation; and
• allow Inland Revenue to requisition records held by offshore entities
  controlled by a New Zealand resident; and
• give Inland Revenue the discretion to require documents to be sent to a
  specified Inland Revenue office;
• make it clear that Inland Revenue can have access to computers and can copy
  information held on them.

The legislation will also be amended to clarify who may be given authority to
enter a taxpayer's premises.

33.   Why are you proposing these amendments?

The Committee of Experts made a number of recommendations to correct
deficiencies in the Commissioner's information-gathering powers. They noted that
several of those deficiencies were highlighted in the evidence given at the
Winebox inquiry. The Government agrees with these recommendations.

Transfers of excess tax

34.   What is the proposal?

The legislation will be amended to allow Inland Revenue to transfer tax
overpaid by a taxpayer to another period or tax type of the taxpayer, or to
another taxpayer. The legislation will set out the effective date of the
transfer, which will differ depending on the relationship between the person
transferring the tax and the person receiving it.

35.   Why is this needed?

Sometimes taxpayers overpay their tax and ask Inland Revenue to transfer the
excess to satisfy a future or past tax liability of their own. Alternatively,
they may want to transfer the excess to another person. The rules relating to
this are currently not clear. The Government proposes to clarify them.

36.   Why is the effective date of the transfer significant?

Often taxpayers transfer excess tax to satisfy an unpaid tax liability of an
associated taxpayer. Use-of-money interest may be accruing in relation to that
unpaid tax. The effective date of transfer is important because it can affect
the transferee's exposure to use-of-money interest. The proposals allow tax to
be transferred between some associates as at the date of overpayment. This will
mean that the transfer can reduce or eliminate the use-of-money interest on the
unpaid tax. Two further issues relating to shortfall penalties

Taxpayers with agents and breaches of standards of care

37.   What is the problem?

A taxpayer who has relied on the advice of a tax agent will usually be
considered to have taken reasonable care, regardless of the care taken by the
tax agent. Therefore if a tax agent does not take reasonable care and this
results in a tax shortfall, then no shortfall penalty is imposed on either
party. This is also true if a tax agent is grossly careless.

38.   What is the proposal?

That a shortfall penalty for lack of reasonable care or gross carelessness be
imposed on the taxpayer irrespective of whether the taxpayer or their agent
breached the standard.

39.   Why is the change needed?

Legislation does not, and should not, require taxpayers or their agents to be
right in everything they do. The current approach, however, clearly allows
agents to take less than reasonable care in a client's tax affairs. Not
penalising these instances of lack of reasonable care and gross carelessness is
unfair on taxpayers and agents who do manage their tax responsibilities
correctly. It also means there is little incentive for tax agents to take care
so that those who currently breach standards have no reason to improve their
performance. Furthermore, the current approach encourages less honest tax agents
to report errors by their clients as their own, thus ensuring that their client
avoids a shortfall penalty. The overall effect is to erode the standards
expected of taxpayers, endanger voluntary compliance, and decrease revenue.

40.   Why impose the shortfall penalty on the taxpayer?

The discussion document sets out the pros and cons of imposing the penalty on
the taxpayer, the agent, on both parties or for Inland Revenue to determine who
is culpable. On balance it was determined that a better outcome is achieved
where the penalty is imposed on the taxpayer.

41.   But the reason many taxpayers go to agents is the agent's knowledge
of tax?

Yes, however from our discussions with various agents we have concluded that
if an agent is responsible for the breach they will take responsibility for
their actions and pay the penalty. This is what currently happens if a late
payment penalty or a late filing penalty is imposed or use-of-money interest is
charged and the penalty or interest is the result of the agent's actions. The
sustainability of this option, however, depends on agents taking responsibility
for their actions. If this is not the case, the Government considers the next
best option is seeking to hold the agent directly responsible.

Capping the penalty for lack of reasonable care

42.   What is the problem?

The Government is concerned about the application of the lack of reasonable
care penalty to very large errors which are speedily identified and corrected.
Where a tax shortfall is large, the corresponding shortfall penalty is also
large. Then the error is picked up quickly.

43.   What is the proposal?

The Government is proposing the introduction of a $50,000 cap on the
shortfall penalty for lack of reasonable care, in cases where the shortfall is
identified within a two-month period through voluntary disclosure or an Inland
Revenue audit.

Promoter penalties

44.   What is the proposal?

We are proposing the introduction of a penalty aimed at holding promoters of
tax avoidance schemes clearly accountable for their actions. A penalty will be
imposed on promoters of tax investment schemes, in cases where:

• the investment breaches an anti-avoidance provision; or
• the investment leads to the investor having a shortfall penalty for an
  abusive tax position.

The penalty will be based on the total tax impact of the promoter's scheme.
The promoter is usually the party with the greater knowledge of the scheme's tax
effects. Often, the true impact of the scheme may be determined by features that
the promoter is aware of but the investor is not. These undisclosed features may
mean the scheme constitutes tax avoidance and may place the investor at risk of
significant penalties.

45.   Why is the penalty needed?

The proposed penalty is aimed specifically at reducing both the marketing of,
and investment in, tax avoidance schemes.