The Tax Penalties Regime in New Zealand for Directors – a Departure from Australian Tax Law Penalties
Although New Zealand law often mirrors the Australian legislative approach, New Zealand does not have a strict director penalty regime comparable to that of Australia.
The Australian Taxation Administration Act 1953 (the Australian Act) comprehensively addresses director liability, with several divisions of the Australian Act devoted to penalties for directors of non-complying companies. Australian directors who have felt the sting of a director penalty notice and the ensuing 21-day deadline upon which personal liability is triggered can attest to the severity of the Australian Act.
In contrast, the New Zealand Tax Administration Act 1994 (the NZ Act) does not single out directors or specifically address director penalties. Directors are subsumed within the definition of “officers” in the NZ Act and penalties can be attributed to both officers and employees of a company.
While the NZ Act previously contained broad provisions dealing with offences for officers and employees which included a number of penalties, in 1996, the New Zealand Parliament enacted sweeping reforms of the NZ Act. Further to substantial consultation, Part XII – Offences and Penalties, was repealed through the Tax Administration Amendment Act (No 2) 1996 and a comprehensive structure of civil and criminal penalties was introduced.
New Zealand’s tax system requires taxpayers to assess their own tax liability and pay amounts in accordance with their self-assessment. The 1996 reforms were enacted to address what was considered inconsistent legislation with unclear legal processes and requirements which did not align with the self-assessing nature of the regime. This structure was criticised for its unfairness to complying taxpayers and for unnecessary transaction costs.
The current penalties structure is designed to encourage taxpayers to comply voluntarily and cooperate with the NZ Inland Revenue Department (Inland Revenue), ensure that penalties are imposed impartially and consistently, and sanction non-compliance effectively and proportionally.
Under the present NZ Act, the penalties which may be applied include:
- Underestimation penalties;
- Late filing penalties;
- Late payment penalties;
- Shortfall penalties; and
- Criminal penalties.
Inland Revenue sets out the details of each penalty fairly comprehensively (http://www.ird.govt.nz/how-to/debt/penalties/). Penalties are meted out at increasing levels of severity based on the significance of the breach.
Some flexibility is offered in relation to the imposition of the lesser penalties. For example, an extension of time to file may be applied for in relation to late filing penalties. Similarly, a grace period is available prior to a late payment penalty being applied if this is the taxpayer’s first late payment in a two-year period, although interest is still incurred from the original due date.
Shortfall penalties are more serious and the shortfall penalty increases in proportion to the seriousness of the breach. The lesser offence of lack of reasonable care is assessed at 20% of the tax shortfall, while evasion, the most egregious type of breach provokes a penalty assessed at 150% of the tax shortfall.
Breaches which trigger shortfall penalties and the standard penalties are as follows:
- Lack of reasonable care (20% of tax shortfall)
- Unacceptable interpretation of tax position (20% of tax shortfall)
- Gross carelessness (40% of tax shortfall)
- Abusive tax position (100% of tax shortfall)
- Evasion (150% of tax shortfall)
For businesses, reasonable care means adequate record-keeping systems and procedures to ensure income and expenditure are properly recorded. Those who have exercised reasonable care but still have a tax shortfall will generally not be subject to a penalty.
Shortfall penalties can be imposed on a company which has failed to withhold or deduct an amount of tax. In this circumstance, liability may be attributed to officers or employees of the company. The onus will be on the officer or employee of the company to prove on a balance of probabilities that they should not be held liable for the tax shortfall of the company.
Inland Revenue will usually issue a Notice of proposed adjustment (NOPA) prior to assessing shortfall penalties, failing which the assessment can be disputed.
Criminal offences attract penalties ranging from monetary fines to imprisonment. They fall into three broad categories as follows:
- absolute liability offences;
- knowledge offences; and
- evasion or similar offences.
Officers, employees or agents commit an offence if they are responsible for the company committing the offence – specifically – if the principal offence was caused by their act or omission, or with their knowledge, or if they have committed actions amounting to evasion. Whether they have knowingly or intentionally committed the offence must be proved beyond a reasonable doubt. Penalties can include up to five years’ imprisonment or a fine of up to $50,000.00. Upon conviction, the liability for the principal offence will extend to the officer, employee or agent and the equivalent penalty will be applied.
Prosecutions generally fall under offences such as failure to register a company for GST and PAYE, failure to return GST and PAYE to Inland Revenue, and failure to file income tax returns. This seems to indicate that the more serious breaches involve documentation, filing and record-keeping offences or offences involving non-payment to employees.
Although New Zealand’s tax penalty approach does not appear as heavy-handed as the Australian director penalty regime, the range of penalties available demonstrates that officers and employees cannot escape liability entirely. Where officers and employees have active knowledge of the breach of the company’s tax obligation, they will generally be liable.
Directors of New Zealand companies would be wise to ensure that the company is meeting its tax obligations including the filing of returns and payments. Outside professional advisors can provide an additional layer of assurance including peace of mind for the directors, and demonstrates to Inland Revenue that the company’s tax obligations are being addressed. The implementation of systems to ensure appropriate record-keeping and internal reporting is also encouraged.