This article explains when Inland Revenue may allow taxpayers to use Tax Traders to reduce interest and penalties after making a voluntary disclosure
In situations where a voluntary disclosure has been made, but no previous return for the tax type has been filed, the Commissioner of Inland Revenue (IR) has discretion to allow a taxpayer to purchase tax from Tax Traders to reduce their interest cost and, if applicable, eliminate late payment penalties.
Broadly speaking, if seeking Commissioner’s discretion, IR must be satisfied that:
- A taxpayer has been taking reasonable care to comply with their tax obligations. The ‘reasonable care’ test is like that used when applying shortfall penalties. It involves establishing what a reasonable person would do in the same circumstances, considering the taxpayer’s age, health, and background.
- The voluntary disclosure relates to a new liability, not a liability that arose from a return by your client or an assessment of your client.
- The voluntary disclosure is made within a reasonable time after your client becomes aware of the new liability, and before IR has contacted them. ‘Reasonable time’ is generally around three months after the knowledge of any new tax liability, although this will be determined on a case-by-case basis by IR.
- Your client notifies the Commissioner of the details of the new liability and the notification results in an assessment of the new liability or in an obligation to pay the new liability.
If your client satisfies all criteria above and receives Commissioner's discretion, then Tax Traders can assist with the following:
- Income tax
- GST
- Withholding taxes (RWT, NRWT)
- Employment-related taxes (PAYE, FBT, ESCT, RSCT)
- Further income tax
- Imputation penalty tax
- Approved issuer levy.
IR considers each application for Commissioner’s discretion on a case-by-case basis, although we've seen inconsistencies on how it applies the rules.
If you believe you have good justification for your client to seek Commissioner's discretion and have had your request declined, feel free to contact our team as we may be able to assist.
Legislative references: RP 17B (12), (13) and (14) of the Income Tax Act 2007
Criteria
Broadly, using tax pooling in these circumstances is subject to the following criteria:
- The taxpayer makes a voluntary disclosure of a new liability (not being a liability that arose from a return by the taxpayer or an assessment of the taxpayer);
- The voluntary disclosure is made before Inland Revenue has contacted the taxpayer;
- The taxpayer notifies the Commissioner of the details of the new liability and the notification results in an assessment of the new liability or in an obligation to pay the new liability;
- The voluntary disclosure is made within a reasonable time after the taxpayer becomes aware of the new liability, and before the date in (c) (with a reasonable time generally being around three months after knowledge of any such new liability (although what is a reasonable time will be determined on a case-by-case-basis)); and
- The Commissioner must be satisfied the new liability did not arise as a result of a choice by the taxpayer not to comply with their obligations under the Inland Revenue Acts or as a result of a failure by the taxpayer to take reasonable care to comply with those obligations.
The 'reasonable care' test in (e) above is similar to that used when applying shortfall penalties – this involves establishing what a reasonable person would do in the same circumstances, considering the taxpayer’s age, health, and background.