The background for the introduction of the Compliance and Penalty Regime can be traced back to the review of the Inland Revenue Department, chaired by Sir Ivor Richardson.144 Richardson pointed out that New Zealand was moving towards a tax system of self- assessment, under which individuals and companies would assess their own tax liability and pay tax according to the requirements of the law. 145 As shown in Diagram 3.1146 and 3.2147, the Compliance and Penalty Regime was an integral part of its objectives of collecting the highest net revenue over time under a self-assessment system.
144 See n 115. 145 See n 115. 146 See n 115 Para 2.6. 147 See n 115.
Diagram 3.1: Elements of Self-Assessment System (Part 1).
Principal objective of IRD is to collect the highest net revenue practicable within the law.
File Returns on time
Accurately report taxes, deciding whether and how
the law applies.
Pay tax due. The Crown relies on three elements to meet its objectives.
Three general obligations on taxpayer in a self-assessment environment.
Diagram 3.2: Elements of a Self-Assessment System (Part 2).
Self-Assessment relies on taxpayers meeting their obligations voluntarily.
Legislative Structure:
- Sets and validated standards of behaviour. - Imposes costs on non-compliance. - Provides incentives for compliance.
-Penalties and incentives
Design Principles Fairness Efficiency Clarity Effectiveness Monetary penalties. Non-monetary Penalties. Use of money of Interest. Many Factors influence voluntary compliance. Prime objective of a compliance regime is to maximise voluntary compliance.
Components of a compliance regime Remove opportunity for non- compliance. Increase IRD’s capacity to detect non- compliance and recover debt. Educate and reform taxpayers.
A number of issues needed to be considered in designing the penalty regime. In particular, if the new Compliance and Penalty Regime was not seen to be fair, it would undermine voluntary compliance by taxpayers. The new regime therefore required a trade-off between compliance and the administrative costs. The principles of reforms were initially outlined in a discussion document issued in August 1994.148 In April 1995, the Government then issued a second document which contained detail proposals and draft legislation for further consultation.149
It was fundamental that under self-assessment, taxpayers must be aware of their primary tax obligations which required a corresponding obligation should they fail in their responsibility to determine the correct amount payable and paying it on time. To reinforce taxpayer self-assessment, and their tax liability, it was necessary to set a standard that taxpayers were legislatively obliged to meet. As a result, the founding principle for the new regime was “reasonable care”. This legal concept became the basic standard that all taxpayers must exercise in fulfilling any tax obligation, i.e. taxpayers must take the same level of care that a reasonable person would take in the same circumstances.
What is “reasonable” depends on the facts and circumstances of each situation, including the person’s experience, education and skills. It equates to the concept of negligence in the civil law of torts, for which the jurisprudence was well established. It recognized a balance between the need for returns to be correct and the recognition of the difficulties that taxpayers may face in ensuring that they are correct. The reasonable care standard was a fluid concept as it:150
“recognises the distinct characteristics of individual taxpayers and the different burdens placed on them. Applying a standard of reasonable care does not require that a taxpayer actually foresaw that the breach or default would cause a shortfall; it simply requires that a reasonable person in those circumstances would have foreseen the shortfall as a reasonable probability.”
148 See n 115.
149 Inland Revenue Taxpayer Compliance, Standards and Penalties 2: Detailed proposals and Draft Legislation. A Government Discussion Document (April 1995).
This new regime was to apply to everyone and force taxpayers to think about those obligations honestly, repeatedly and regularly. The Compliance and Penalty Regime also required individual taxpayers to determine their tax liability involving the interpretation of tax laws and its application to the situation. The policy behind these standards was to ensure that not only taxpayer obligations would be met, but it would also increase the robustness of the tax base and the fairness of the tax system with the introduction of comprehensive penalties.
There is much wisdom in enacting this standard of primary obligations,151 as the Revenue’s goal was to establish a regime of legal principles so that taxpayers who breach those legal principles would be penalized.152 These standards were to be achieved by:
Signalling clearly what was expected of both taxpayers and their advisors;
Increasing the effectiveness of incentives to comply with tax laws and imposing costs on those who do not comply; and
Linking taxpayer obligations with sanctions for non-compliance to improve compliance with the tax laws.
This regime of standards and consequences created a philosophy behind the compliance strategy, which was sadly lacking in the past.153 The enforcement activities of Inland Revenue, would apply to those taxpayers who failed to comply with the set legal standards.
In enacting this regime, Inland Revenue had to be able and willing to offer a sustainable and precise level of certainty in respect of its interpretation of the penalty provisions. The publication of the Standard Practice Statements in respect of Part IX of the Tax Administration Act 1994 provided taxpayers with Inland Revenue’s interpretation of these
151 See n 25.
152 Section 15A and 15B of the Tax Administration Act 1994 sets out those obligations.
153 Previously, no Inland Revenue publication existed that sets out a connection between why tax penalties were imposed and a standard that the Inland Revenue expected of its taxpayers.
new penalty provisions.154 Linked to these publications was an obligation by Inland Revenue to make it as simple as possible for the imposition and administration of any penalties.155