Tax Penalties



We have in New Zealand what is described as a self-assessed taxation system whereby taxpayers report to IRD in the form of a taxation return what they believe their taxable income position to be, having applied the provisions of the Income Tax Act, the Goods and Services Tax Act, sundry other taxation legislation and tax cases.  In order that taxpayers can focus on the need to file these returns accurately (and not to do otherwise by deliberately or without due care and attention, understating their income position), the tax laws provide a range of penalties that IRD can apply for "getting it wrong" (whether intentionally or otherwise).


The penalties take three general forms:

  • for under-stating the amount of taxation payable (shortfall penalties)

  • for paying tax late (late payment penalties)

  • for paying insufficient tax on due dates (where Use of Money can be charged - strictly speaking not a penalty as such but instead, a charge by IRD for the taxpayer's use of "its" money)

Depending on the nature of the income understatement, the penalties can range from between 20% and 150% of the tax that has been understated.  At the top end of the penalties is imprisonment for taxation evasion. 

The late payment penalties are applied on the basis of an immediate 1% penalty for the first 7 days of lateness and thereafter, a further 4%.  For each month thereafter that the tax remains unpaid, a further 1% penalty is added.  For matters of tax shortfall that arise from failures that go back say 5 years, the cumulative effect of shortfall penalties, late payment penalties and IRD imposed interest can be quite significant, adding to the initial unpaid tax by multiples.

Clearly, penalties should be avoided at all costs which is where accountants provide a significant service to the taxpaying community.