Grace periods

Sections 3(1), 139B(5B) and (5C) of the Tax Administration Act 1994

Two amendments have been made to the late payment penalty grace period:

• The grace period will apply to the first default identified by Inland Revenue.
• If the taxpayer enters a pre-emptive instalment arrangement, the grace period will not apply.

Background

The Taxation (Business Taxation and Remedial Matters) Act 2007 amended the late payment penalty to provide a grace period under which Inland Revenue notifies a taxpayer the first time a payment is late rather than imposing an immediate late payment penalty. If payment is not made by a certain date, the penalty will be imposed.

The rule ensures that those taxpayers who are usually compliant, but have inadvertently missed a payment, do not have late payment penalties imposed on them. In these cases, the penalty was disproportionately high compared with the severity of the breach. The effect of the rule is to give consideration to the taxpayer’s previous record of compliance before imposing the late payment penalty.

Key features

Application to the first default identified

It is possible for Inland Revenue to apply a grace period and then determine that the grace period should have been applied to an earlier period. For example, when a return is filed late, and a grace period has already been applied to a subsequent return when it should have been applied to the late return. To ensure that the taxpayer benefits from the grace period, the amendment ensures the grace period will be applied to the first default identified by Inland Revenue.

Pre-emptive instalment arrangements

To encourage taxpayers to contact Inland Revenue as soon as possible, the second stage of the initial late payment penalty is not imposed if a taxpayer enters an instalment arrangement before the due date for payment of tax (this is known as a pre-emptive instalment arrangement).

To provide a further incentive for taxpayers to contact Inland Revenue as soon as possible, the amendment ensures the grace period will not apply for the period when a pre-emptive instalment arrangement is entered into but will apply at a later date if the taxpayer inadvertently misses a payment. The amendment also reinforces the policy of the grace period - to ensure that taxpayers who inadvertently miss a payment are not penalised.

Application date

The amendments apply to late payments of tax that are due on or after 1 April 2008.