Late payment penalty
(Clause 114)
Summary of proposed amendment
The proposed amendment specifies that Inland Revenue will no longer impose a 1% monthly incremental late payment penalty on unpaid tax from Goods and Services Tax (GST), income tax and Working for Families tax credits overpayment. This amendment states that this will only apply to future tax periods.
Application date
The amendment will come into force on 1 April 2017.
Key features
Proposed section 139B(2) of the Tax Administration Act 1994 provides that a taxpayer that does not pay by the due date an amount of tax, would no longer incur the 1% incremental late payment penalty, if the unpaid tax resides in one of the described tax periods.
If the unpaid tax liability does not reside in one of the described tax periods, there would be no change and the taxpayer would continue to incur the incremental late payment penalty as imposed by the current rules.
This amendment identifies the relevant tax types and tax periods as follows:
- GST tax periods ending after the 24 March 2017;
- provisional tax and income tax for the 2017–18 or later income years; and
- Working for Families tax credit overpayments for the 2017–18 or later income years.
Most taxpayers have a GST taxable period that ends on the last day of a month. However, under section 15E(2) of the Goods and Services Tax Act 1985, some taxpayers may be approved by the Commissioner to have a GST taxable period that may end up to seven days before or after the last day of the month. The proposed amendment looks to include taxpayers that have a GST taxable period that may end up to seven days before 31 March 2017. This is to ensure that these taxpayers benefit from this amendment.
The proposed amendment includes overpayments of Working for Families tax credits when the instalments have been determined to be overpaid and recoverable under sections MF 5 and MF 6 of the Income Tax Act 2007, or when the overpayment was by way of the taxpayer having their Working for Families tax credit entitlement later reviewed and reassessed.
Background
Currently, when a taxpayer has failed to pay their tax liability by the tax period’s due date, the taxpayer will incur late payment penalties, from the first day after the due date. The unpaid tax is imposed with an initial late payment penalty consisting of a 1% penalty one day after the due date, and another one-off 4% penalty seven days later. One month after, a 1% incremental late payment penalty will be imposed. This incremental late payment penalty will be imposed repeatedly each additional month the tax remains unpaid. As a result, the late payment penalties accrue incrementally and indefinitely thereafter. Use-of-money interest (UOMI) is also imposed from the day after the original due date.
The longer the tax is outstanding, the more late payment penalties and UOMI are imposed. After two years, the combined penalties and UOMI can aggregate to more than 50 percent of the original tax owed. While late payment penalties encourage timely payment, there is a point at which the accumulated penalties and UOMI can overwhelm taxpayers.
The proposed amendment to section 139B(2) means taxpayers who fail to pay their GST, Working for Families tax credit overpayment or income tax liability by the due date, for the described tax periods will continue to incur an initial late payment penalty and continue to incur UOMI.
Many Working for Families tax credit recipients receive their entitlement in instalments throughout the year, based on an estimate. Sometimes that estimate is found to be inaccurate, resulting in the recipient receiving more than they are entitled to. These overpayments are treated as tax payable. Therefore, at the end of each tax year, after the due date, they incur late payment penalties and UOMI. Many recipients are on low incomes, and would struggle to repay debt that accumulates quickly due to the recurring imposition of the incremental late payment penalty.