Interest and penalties

(Clauses 31, 43, 45, 47, 48, 50, 52 and 54)

Summary of proposed amendments

The amendments outline the circumstances when a taxpayer using AIM would be liable for use-of-money (UOMI) interest and shortfall penalties.

Application date

The proposed amendments will apply for the 2018–19 and later income years.

Key features

Proposed new section 120 KBC of the Tax Administration Act provides that when a taxpayer makes the payments as calculated by their AIM-capable software, they will not have any UOMI exposure should the year-end residual income tax result in a different tax liability. If a taxpayer pays less than what the AIM-capable software calculates, then UOMI will be imposed between the time of underpayment and terminal tax date. This also requires that the taxpayer has not engaged in a provisional tax interest avoidance arrangement.

The definition of “tax position” in section 3(1) (kb) of the Tax Administration Act 1994 is being amended to include the use of the AIM approach and the software product of an approved AIM provider.

The “reasonable care” provisions still apply to AIM taxpayers but proposed amendments to section 141B of the Tax Administration Act 1994 will mean that a taxpayer does not take an unacceptable tax position by merely using the AIM approach and an approved AIM-capable accounting system. They may still be subject to an unacceptable tax position penalty in other areas of their tax affairs. Those who are paying AIM provisional tax using a large business AIM-capable system or who have been approved to continue using AIM as their income has grown over $5 million, will continue to be subject to the unacceptable tax position.

Proposed section RC 5C provides that where an AIM provisional taxpayer has been removed from AIM they will be required to use the estimate method and will be subject to UOMI charges.

Section 119 of the Tax Administration Act 1994 is being amended to insert paragraph (cb) to allow the Commissioner to determine the amount of provisional tax due if the tax liabilities calculated were not “reasonably accurate” assessments of the tax liabilities for the taxpayer’s relevant income and expenditure.

No UOMI will be payable by the Commissioner on overpaid provisional tax under section 120VB of the Tax Administration Act 1994.

Detailed analysis

Exposure to UOMI can be seen by businesses as unfair. Even if a business ends up paying the right amount of provisional tax during the year they can still incur UOMI. AIM will remove this possibility.

If a business using AIM to calculate and pay provisional tax does not pay the total tax liability for the year in full during the year, UOMI will not be applied unless the business has failed to pay the instalments as calculated under AIM.

It is expected that businesses who use AIM will either no longer have terminal tax liabilities (on the basis that their tax payments will be made in near real-time, and based on actual results), or there will be a small difference between their provisional tax payments and their final liability. As the last provisional tax payment date is after balance date, this may allow any shortfall to be identified and paid by the final instalment.

However under AIM, if the taxpayer pays less than the amount calculated by the software for any instalment, UOMI will apply on the shortfall between what the software calculated and what they paid.

Late payments of tax may also attract late payment penalties as applied under the current rules. If there is a large variation between provisional tax paid under AIM and a taxpayer’s year-end terminal tax liability, Inland Revenue will consider whether or not reasonable care has been taken in the preparation of the provisional tax payments throughout the year. Amendments to section 141B provide that AIM taxpayers are not liable for unacceptable position penalties unless they are a larger taxpayer using a large business AIM-capable system. This reflects the greater fiscal risks associated with this larger taxpayer group.

It is not intended that Inland Revenue will penalise taxpayers as they come to understand a new provisional tax calculation method but rather that the accuracy of the method and its users will grow over time.

Example 1

Tussock Ltd has been paying its provisional tax using AIM. On its third AIM provisional tax payment date, the software calculated that Tussock Ltd owed $500 in provisional tax to Inland Revenue and submitted the Statement of Activity showing this amount to be due. Instead of paying $500 to Inland Revenue, Tussock Ltd only paid $100.

Tussock Ltd will be liable for UOMI and shortfall penalties on the $400 underpayment until it is paid or the business’s terminal tax date, whichever falls first.

Example 2

Cameo Ltd is a small jewellery company using AIM to pay its provisional tax. It calculates its provisional tax payments using software, and makes the payments accordingly. At year-end the company meets with its accountant who discovers their depreciation was calculated incorrectly and a bad debt had not been written off, resulting in additional income tax due of $300. Cameo Ltd pays this amount of terminal tax and has no UOMI or shortfall penalty applied. As these errors are simple oversights it is likely Cameo has taken reasonable care in the calculation of its tax liability.

Example 3

Tiger Corporation is a large fishing company that uses specialised Inland Revenue-approved fishing industry software. It has discovered that if it categorises its catch in different fish quantities and qualities it can lower its income tax liability. Upon receipt of the company’s Statement of Activity and audit queries, this misuse of the company’s software is bought to Inland Revenue’s attention.

Tiger Corporation (as a large AIM-capable taxpayer) would be removed from AIM, placed in the estimate method, be subject to UOMI and late payment penalties on what the company’s income was determined to be by the Commissioner. It is also likely the company would be considered to have taken an unacceptable tax position in the calculation of its tax liability.