Administration of the late payment penalty rules

(Clauses 112 and 113)

Summary of proposed amendment

The proposed amendments will enable Inland Revenue to continue to administer the late payment penalty grace period during the period in which tax types are operated out of two Inland Revenue software platforms. As part of Inland Revenue’s Business Transformation programme, Inland Revenue’s current computer platform, FIRST, will be replaced with a new software system known as “START”. This will occur in four stages. The amendments will enable the Commissioner of Inland Revenue to ignore defaults in payment if:

  • doing so is necessary due to tax types being administered from different systems as a result of the coexistence of FIRST and START; and
  • doing so would not result in the imposition of a penalty that is greater than would otherwise have been imposed (had she not ignored these defaults in payment).

Application date

The proposed amendments will come into force on the date of enactment.

Key features

Amendments to sections 139B(1)(b) and 139B(1)(c), and proposed new section 139B(1B) of the Tax Administration Act 1994, introduce a discretion into the provisions setting out whether a taxpayer is entitled to a grace period from late payment penalties. Proposed new section 139B(1B) provides that this discretion may only be exercised when the following two conditions are satisfied:

  • ignoring the failure to pay tax on time is necessary as a result of resource constraints imposed on the Commissioner during the period of coexistence of two Inland Revenue software platforms; and
  • this would not result in a greater penalty being imposed than the taxpayer would otherwise be liable for if the Commissioner were not to ignore this failure to pay tax on time.

An amendment to section 138E will mean that certain rights of challenge do not apply to section 139B.

Background

The current tax rules impose a late payment penalty if a taxpayer does not pay on time. If, however, the taxpayer has punctually paid all relevant taxes due in the two years before the default in question, the Commissioner must first issue a notice to the taxpayer specifying a further date for payment of the unpaid tax, before a late payment penalty can be imposed. This gives the taxpayer a grace period in which to pay the amount owing before late payment penalties are imposed.[21]

Application of the late payment penalty grace period is determined on the basis of the taxpayer’s previous compliance in terms of the payment of tax across all relevant tax types (such as GST, income tax and PAYE deductions).[22]

The transition from Inland Revenue’s FIRST to START system will be done on a tax-type basis, in four stages, with GST being transferred in early 2017 and income tax, FBT and PAYE scheduled to be transferred in 2018. This raises an issue in relation to the late payment penalty grace period, as the current legislative framework for the application of the penalty requires the Commissioner to consider the taxpayer’s compliance history across all applicable tax types. As information relating to the taxpayer’s tax compliance history and payment activity will reside in two software systems, it will be difficult for the Commissioner to look across all applicable tax types to determine whether the taxpayer is entitled to a grace period without significant manual intervention.

Detailed analysis

The discretion in new section 139B(1B) will enable the Commissioner to look only at tax information about a taxpayer’s compliance history held in the system from which the tax type in payment default is being administered.

As tax types are transitioned to the new START system, a “compliance history indicator” will also be brought across to show when the taxpayer is next entitled to a grace period, based on the date they last paid late. The “compliance history indicators” will hold the taxpayer’s payment history from two years prior to the tax type being brought across to START to the date of transition for tax types that have been administered from FIRST up to the date of transition. For example, the indicator that is transferred to START at the same time as GST would hold the taxpayer’s payment history from two years before the date on which GST is transferred to START to the date of transfer in relation to income tax, GST, FBT and PAYE. During Stage 1 of Inland Revenue’s Business Transformation programme, this indicator would be used to determine whether the taxpayer is entitled to a grace period when they default on a GST payment (when the GST period in question is a period after the date on which GST was transferred to START). If the taxpayer defaults on a payment for a tax type that is still being administered through FIRST, the compliance history held in FIRST at that time will be used to determine whether the taxpayer is entitled to a grace period.

This means that at a given point in time, the information held in START will be information contained within the compliance history indicator and information relating to the taxpayer’s payment compliance with tax types being administered out of START from the date they were transitioned to START. The information held in FIRST will be information relating to the taxpayer’s payment compliance in relation to all tax types up to the date they were transitioned to START.

Examples

The following examples assume that the taxpayer’s only payment defaults are those specifically stated.

  1. The date is 31 August 2017. Judy is a small business owner who fails to pay her GST liability by the 28 August 2017 due date. She was two weeks late in paying her PAYE liability by the 20 June 2017 due date. As the PAYE period in which she defaulted occurred after GST and the compliance history indicator were transferred to START, this PAYE information will not be visible in START. In accordance with proposed section 139B(1B), the Commissioner will be able to ignore Judy’s PAYE default in determining whether she should be entitled to a grace period in relation to the late payment of her GST liability due by 28 August 2017. This means that the Commissioner will grant Judy a grace period, giving her a further 30 days to pay her GST liability.
  2. The date is 31 August 2017. Kiri is a small business owner who fails to pay her PAYE liability by the 20 August 2017 due date. She was also two weeks late in paying her GST liability by the 28 June 2017 due date. As the GST period in which she defaulted occurred after GST was transferred to START, this information will not be visible in FIRST. In accordance with proposed section 139B(1B), the Commissioner will be able to ignore Kiri’s GST payment default in determining whether she should be entitled to a grace period in relation to the late payment of her PAYE liability due on 20 August 2017. This means that the Commissioner will grant Kiri a grace period, giving her a further 30 days to pay her PAYE liability.
  3. The date is 30 June 2017. Amir is a small business owner who fails to pay his PAYE liability (of one period) by the 20 June 2017 due date. He was two weeks late in paying last year’s income tax liability, due 7 April 2016. As PAYE will still be being administered within the FIRST system, information on Amir’s income tax payment default will be able to be considered by the Commissioner in determining whether he should be entitled to a grace period in relation to his PAYE payment default. This means he will not be entitled to a grace period, and a late payment penalty will automatically be imposed.
 

[21] If the taxpayer does not make payment within that notified further period, the late payment penalty is imposed from the day after the due date, as would have been usual.

[22] The late payment penalty grace period applies to all tax types except the following: child support, student loan scheme, tax credits (formerly known as rebates), certain types of provisional tax, KiwiSaver voluntary employer contributions and complying fund debt referred to Inland Revenue from the Financial Markets Authority.