Tax law change reduces the cost of being a little bit late

By BRIAN FALLOW

Measures intended to cut compliance costs for business are included in a tax bill introduced to Parliament yesterday.

Among other things, the legislation will:

Provide some relief from the late payment penalty for those who miss their deadline by only a few days.

Cancel incremental late payment penalties where taxpayers are meeting their obligations under an instalment arrangement.

Move the payment of GST on fringe benefits from GST returns to Fringe Benefit Tax returns.

The measures, if passed, will take effect from April 1, 2002.

A spokesman for Revenue Minister Michael Cullen said the Inland Revenue Department did not think it could make the necessary system changes in time to apply the measures from April 1 next year.

Late payment penalties now start at 5 per cent as soon as the due date for payment passes.

The bill would reduce that to 1 per cent for the first week, after which the extra 4 per cent would apply.

Submissions to the parliamentary inquiry into Inland Revenue last year suggested the penalty was seen as harsh when applied to taxpayers who were basically honest but who failed to comply by only a few days.

The incremental late payment penalty now continues to build up on outstanding tax, even if the taxpayer has made an instalment arrangement with the IRD.

It is cancelled only once all the money owed has been paid.

If a taxpayer defaults on the arrangement, the whole procedure is cancelled and all the accumulated incremental penalties are reinstated. The result, the department says, is that a partial, possibly small, failure to comply with the terms of the arrangement could result in a disproportionate penalty.

The bill cancels the incremental late payment penalties for each month that taxpayers comply with their obligations under instalment arrangements.

Including the payment of GST on fringe benefits in FBT returns should eliminate the risk of employers forgetting to include the payment in a GST return and thereby incurring penalties for the oversight, says the department.

The bill also gives effect to policies announced in May.

It makes restrictive covenants and exit inducements taxable, and taxes certain distributions from trusts to children under 16 at 33 per cent, rather than at the child's marginal tax rate.