Penalties: A Comparison of the Old and the New

To understand the background to the Compliance and Penalty Regime, one needs to compare the previous legislation dealing with offences to understand the logic of the legislation contained in the new sections 143 to 148 of Part IX of the Tax Administration Act 1994 as set out below in Table 3.1.156

Table 3.1 Comparison of Old and New Penalties Regimes. Nature of Offence ITA 1976/GST Tax Act 1985 (old) Penalty Imposed

TAA 1994 (New) Penalty Imposed

Failure to retain or provide records

s416 ITA 1976 Monetary Fine s143 Monetary Fine Knowledge

offences

s416 ITA 1976 Monetary Fine s143A or s143B Monetary Fine or imprisonment. Criminal Fraud No section

applicable

s143A or s143B Monetary Fine or imprisonment Obstruction s416[1][c]

s62[1][i] GST Act 1985

Monetary Fine s143H Monetary Fine Aiding or abetting s416[e] ITA 1976 s62[1][p], 62[5] GST Act 1985

Monetary Fine s148 Monetary Fine or imprisonment.

       154

 A Standard Practice Statement describes how Inland Revenue will exercise a statutory discretion or deal with practical issues arising out of the administration of the Inland Revenue Acts available at www.ird.govt.nz/technical/tax/standards (as at 30 August 2010). 

155 _{See n 115, Para 3.3 and Para 3.10.} 

The original tax offences legislation was primarily contained in section 416 of the Income Tax Act 1976 and in respect of GST offences, in Section 62 of the GST Act. The Compliance and Penalty Regime logically consolidated these two diverse sections into one comprehensive part of the Tax Administration Act 1994.157

In respect of tax fraud, the original Acts were “silent” as regards any monetary fine or custodial sentence.158 Rather, the Inland Revenue would refer the case for prosecution to the Police or Serious Fraud Office. Those two authorities would then lay charges primarily under section 229B of the Crimes Act 1961.159 Under sections 143A or section 143B of the Tax Administration Act 1994, the Commissioner could now pursue criminal fraud and seek custodial sentences to be imposed by the Courts.

The primary motivation behind the new Compliance and Penalty Regime can be explained further in that the civil penalties did not exist to raise revenue.160 Rather, the civil penalties were to enforce voluntary compliance. Civil penalties act as a signal to taxpayers that voluntary compliance is the norm and that non-compliance is unacceptable. This signal is particularly relevant in a self-assessment tax environment. Taxpayers and their advisors had to understand that these standards were required to be met and a penalty will occur if they fail to meet the required standard.161

However, it is important that the penalty provisions, its administrative practice, costs of administration and its practical application complement the efficient operation of the tax

157 _{Offences contained in sections 143C, 143D, 143E which deals with secrecy, s143F Inquiries, s143GO} Court orders, s144 Stamp Duties, s145 offences for which no specific penalty imposed, s147 Employees and s147B directors and offices of foreign companies have not been included in the comparisons.

158 _{The Income Tax Act 1976 contained three penal provisions that allowed for maximum sentences of up two} years imprisonment. Firstly, for supplying false information with respect to interests in foreign controlled companies or trusts. Under section 416B(2A) and relating to resident withholding tax, non-resident withholding tax or source deduction payments under Section 416B(1). Finally under section 368 of the Income Tax act 1976 in relation to PAYE offences a term of 12 months imprisonment.

159 _{See Appendix 3 section 229A Crimes Act 1961.}

160 _{Section 141A to 141E of Part IX Tax Administration Act 1994 dealt with monetary penalties for lack of} reasonable care, unacceptable tax interpretation, gross carelessness and tax evasion.

system. This meant that the standards enacted by Inland Revenue had to be enforceable, capable of being imposed without undue costs on the tax administration and taxpayers.162

The standards which taxpayers are expected to meet in interpreting and applying the laws were introduced with effect from the 1997-1998 income years, and were contained in sections 141A through 141E of the Tax Administration Act 1994.163

The penalties imposed under the provisions of sections 141A through 141E of the Tax Administration Act 1994 fulfil a number of functions. They include a reminder of appropriate community standards in meeting one’s taxation obligations, an incentive to complete tax obligations, punishment for non-compliance, a deterrent for future non- compliance; and a defining boundary line to support the overall integrity of the tax system.164

The other contentious issue was to the onus of proof. It must be borne in mind that the onus of proof165 applies to establish the facts of the case, not the law as applied to the facts.166 From a policy rationale, the Inland Revenue’s justification for placing the onus of proof upon the taxpayer was that the tax positions taken by a taxpayer are first and foremost within the knowledge of the taxpayer. Proper record-keeping, full and honest disclosure and conformity with tax law were all matters within the taxpayer’s control.

Retaining the onus of proof upon the taxpayers is also consistent with the rationale for self- assessment that is, taxpayers had more information about their tax liabilities and are, therefore, in a better position to assess their own tax liability than the Commissioner.

162 _{See n 115, Para 3.3} 

163 _{The Tax Administration Act (No 2) 1996 (1996 No 56), enacted 26 July 1996 (with effect from the 1997-} 1998 income year).

164 _{See n 115, Para 3.6.}

165 _{Meulen’s Hair Stylists v Commissioner of Inland Revenue (1963) NZLR 797 (NZSC) and McGregor J and} Godfrey Allan Ltd v DCIR (1980) 4 NZTC 61,548: (1980) 3 TRNZ 533.

As the Court of Appeal in Buckley & Young v Commissioner of Inland Revenues said:167

“the Commissioner could not sensibly be expected to bear the onus of proof of matters which originate with the taxpayer and which usually are peculiarly within his knowledge and power. Thus there are sound if not compelling practical reasons why the legislation requires him to provide satisfactory evidence to support his calculation of his assessable income.”

In cases involving evasion, hindrance and criminal prosecution, that onus would lie with the Commissioner.168 The penalties legislated for in respect of evasion, hindrance and criminal prosecution were to be treated in the same way as criminal law. This was formulated as a trade-off between fairness and efficiency implicit in the law.

In discharging these tax obligations, it was not intended to be onerous. Rather, taxpayers were expected to take extra care in interpreting the legislation if there is a significant amount of tax at stake.169

167 _{(1978) 2 NZLR 485; 78 ATC 6019: 9 ATR 106 (CA).}

168

 See n 115, Para 6.10 and 6.47.