Tax compliance intiatives - limited amnesties

Section 226B of the Tax Administration Act 1994

Inland Revenue has been given the ability to offer limited amnesties to specific industries where tax evasion is a significant concern.

Background

The discussion document, Options for dealing with industry-wide tax evasion, was released in August 2004.

The discussion document noted that New Zealand's tax laws contain severe penalties for evasion. This can make it difficult for people who have failed to meet their tax obligations in the past and who want to comply with the law to come forward and sort out their tax affairs. The document also noted that the existing rules did not deal with the problem of industry-wide tax evasion because the rules were designed to apply to individual businesses. This failed to recognise that a different approach to promoting compliance may be required when evasion becomes commonplace within an industry.

The discussion document recommended that Inland Revenue be given the ability to offer limited amnesties to specific industries in which tax evasion is a significant problem. Following the amnesty, the affected industry would be subject to increased audit, and any tax shortfalls detected would face the full range of penalties and other sanctions provided in the legislation.

Key features

Under the new rules, an affected person will have to pay tax on previously undisclosed income from the specific industry for two years (covering the current filing year and the year before that).

Inland Revenue will be able to offer a limited amnesty to a specific targeted industry or activity. The terms of the offer will specify the taxes that are included in the amnesty and a period in which a person can come forward under the amnesty. It will also be clearly communicated that after the amnesty offer expires, investigations and audits of the affected industry will begin. The amnesty will apply to those who have undisclosed income earned from the targeted industry.

The overall determination of the person's liability for the period being assessed will include use-of-money interest and shortfall penalties. The shortfall penalties will be reduced by 75 percent for voluntary disclosure and 50 percent for previous good compliance, if appropriate.

The amnesty will apply only to income from the specific industry. If an affected taxpayer discloses income from another source, the two-year limit will not apply to that other income. The assessment of this income will also include use-of-money interest and possible shortfall penalties. If the income is not disclosed and the taxpayer is investigated, the full rate of the relevant shortfall penalty may apply.

Any consequential effects of disclosing income for family assistance, student loans and child support liabilities will also be included in the assessment.

Having qualified for one amnesty, a taxpayer cannot then qualify under another amnesty. This is because the objective of the amnesty is to give affected taxpayers a single opportunity to come forward and start to comply.

Affected taxpayers coming forward under an amnesty will not be prosecuted under the amendment.

Application date

The amendment applies from 19 December 2007 (the date the bill was enacted).