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NZ Tax Evasion Penalties
Failure to meet your tax obligations may result in civil penalties, criminal penalties, or, worst case scenario, both. For example, evade tax is both a criminal and civil penalty. NZ tax law requires that your returns be filed on time, else, pay a late filing penalty which can keep increasing depending on your net income. The penalty for an Employer Monthly Schedules (EMS) is $250 flat. The penalty on your GST returns is $50 if your accounting basis is payments and $250 for hybrid or invoice.
So What Is A Civil Penalty?
A penalty that is imposed by IRD, not the court. Some examples include:
⇒ Late filing penalties.
⇒ Non-electronic filing penalties.
⇒ Late payment penalties.
⇒ Shortfall penalties.
And What Is Criminal Penalty?
A penalty which is imposed by the court upon conviction of criminal offences. Some examples include:
⇒ Tax evasion.
⇒ Tax obstruction.
⇒ Aiding a person to commit an offence.
Tell Me More About Late Filing Penalties
IRD urges you to file your tax returns on time. If you don’t, you may have to pay a late filing penalty, which is also sometimes called a 'fine'. Inland Revenue will contact you beforehand if a penalty is going to be imposed. In some cases, you can still avoid the penalty if you have a valid reason for not filing your return on time.
Acceptable reasons include:
⇒ Illness or accident.
⇒ Unable to obtain information needed to complete your return.
Once a penalty has been imposed it must be paid within 30 days from the date of the statement warning you of the penalty, or by the end-of-year tax system.
How Much Is The Penalty Amount?
The amount of penalty depends on your net income. But typically, they are grouped together under three penalty bands:
⇒ Below 100,000 ($50 penalty).
⇒ Between $100,000 to $1 million ($250 penalty).
⇒ More than $1 million ($500 penalty).
⇒ The late filing penalty for a reconciliation statement is $250.
The late payment penalty consists of an initial penalty for paying tax late and a monthly incremental penalty on the amount owed.
The initial late payment penalties are calculated on the amount of late or unpaid tax. The initial penalty is 5% of the unpaid tax and comprises a 1% penalty the day after the due date, and 4% penalty of the total outstanding amount not paid within a week of the due date.
Late payment penalties are not charged on unpaid tax of $100 or less.
An additional penalty of 2% per month and 1% (on a compounding basis) applies to the outstanding amount of any unpaid tax and penalties.
What If I Have Financial Difficulties?
In this case, Inland Revenue may choose to remit you tax or enter into special payment arrangements. If you had contacted them before the due date, then the 4% penalty (incremental late payment penalty) can be waived.
What are shortfall penalties?
A shortfall penalty is imposed on an unpaid income tax that should have been included in the original tax calculation. There are five categories of behaviour that decide the penalty to be applied. The penalty increases in proportion to the seriousness of the breach. These categories are:
⇒ Failure to take reasonable care (20% penalty).
⇒ Adopting an unacceptable interpretation (20% penalty).
⇒ Gross carelessness (40% penalty).
⇒ Abusive Tax Position, where shortfall exceeds $10,000 (100% penalty).
⇒ Evasion (150% penalty).
What Is Aiding Someone To Commit An Offence?
If you aid, abet, incite, or conspire with another person to commit an offence, you will be liable to the same criminal penalties applied to the principal offender. Penalties for knowingly offending include:
⇒ Imprisonment for a maximum of 5 years; and
⇒ Up to $50,000 for each offence.
What Is Tax Obstruction?
Do not obstruct Inland Revenue before with their enquires. If you obstruct Inland Revenue before calculating your correct tax obligations, an additional penalty of 25% on the unpaid tax can be imposed on you. You are entitled to contact your tax agent before allowing them to enter your premises.
Keep in mind, with us, you will not have to worry about this scenario at all.
Can There Be Any Reductions In Penalties?
Yes, penalties can be reduced if you disclose your tax shortfall. However, the timing of the disclosure is critical. You should disclose your situation to IRD:
⇒ At the time of taking the unacceptable tax position — you will receive a 75% penalty reduction.
⇒ Before notice of an investigation — you will receive a 75% penalty reduction.
⇒ After notice of an investigation, but before the investigation starts — you will receive a 40% penalty reduction.
Isn't There A Grace Period?
Yes. After running your business for the first 2 years and you are late for your first payment, IRD will grant you a short grace period to make your payments. If you do not pay, then the late payment penalty is imposed from the due date and interest will still apply.
This grace period doesn’t apply to child support, student loans, KiwiSaver, tax credits or provisional tax avoidance due dates.
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