Not paying employer monthly schedule (EMS) amount penalty

Sections 141ED(3)(ab), (5B) and (5C) of the Tax Administration Act 1994

A number of minor amendments have been made to the EMS penalty to ensure that the rules reflect the policy intent. The changes are:

• A late payment penalty is no longer imposed on the EMS penalty.
• Employers wishing to enter an instalment arrangement will not be subject to the EMS penalty when they are negotiating an arrangement.
• If the amount on the EMS changes, the EMS penalty is calculated using the lesser of the corrected figure and the unpaid amount.
• The legislation now sets out a rule for the application of a payment when an EMS penalty has been imposed.
• The EMS penalty is not assessed in the same way as the tax to which it relates and the Commissioner does not have to give a notice of assessment to the taxpayer.

Background

An EMS penalty is imposed when an employer files an employer monthly schedule but does not pay some or all of the tax it should. The penalty was introduced in 2008 and is aimed at encouraging employers to comply by providing an incentive for them to pay tax associated with employer monthly schedules on time. It is imposed each month if the tax is not paid or the employer has not entered an instalment arrangement.

Key features

Imposition of the late payment penalty on the EMS penalty

A late payment penalty is imposed when taxpayers do not pay their tax, and any previous penalties imposed, on time. It too is imposed each month the amount remains unpaid. Before the amendment, the EMS penalty was also subject to the late payment penalty.

To ensure that penalties do not accumulate too quickly, and are not disproportionate to the non-payment amount, the EMS penalty is no longer subject to the late payment penalty.

The amount of tax not paid will still be subject to late payment penalties as well as use-of-money interest.

Negotiation periods

Currently, an employer who files an employer monthly schedule but does not pay the tax may be liable to an EMS penalty. Before the penalty is imposed taxpayers are warned that if they do not pay or enter an instalment arrangement a penalty will be imposed in the following month.

To encourage employers to enter instalment arrangements, under the new amendment the EMS penalty will not be imposed when an employer is negotiating an instalment arrangement. If an instalment arrangement is not entered into or payment is not made, the employer will be warned and the EMS penalty will then be imposed.

Corrected amounts

The EMS penalty was previously imposed on the lesser of the unpaid amount and the amount shown on the EMS when it is filed. Following the amendment, if the employer corrects the schedule, the penalty will be calculated on the lesser of the corrected amount and the unpaid amount.

Ordering rule for payment

Under the new rule, if an EMS penalty has been imposed and a payment is then made, the payment is first applied to the EMS penalty and then to the core tax owing. If the payment were not applied to the penalty first, there would be an incentive for taxpayers to pay the core tax and allow the penalty to remain outstanding with the risk of the penalty never being paid.

Similar rules apply for late payment penalties and use-of-money interest.

Assessment of the EMS penalty

Under section 94A(2), a shortfall penalty is assessed in the same way as the tax to which it relates, and under section 111, the Commissioner must give a notice of assessment to the taxpayer. The EMS penalty is a shortfall penalty. However, unlike other shortfall penalties it is imposed each month that an EMS amount is not paid and is therefore more like a late payment penalty.

Before an EMS penalty is applied, the employer is warned. When the penalty is applied, the employer receives another letter and a statement setting out the penalty and the core tax. Therefore it is not necessary to send a separate notice of assessment. Section 94A has been amended to provide that the EMS penalty is not assessed in the same way as the tax to which it relates and the Commissioner does not give a notice of assessment to the taxpayer. This means that the EMS penalty and the late payment penalty are imposed in the same way.

Application date

The amendments apply to tax positions taken on or after 1 April 2008.