Inland Revenue is to be allowed to waive penalties when people disclose inadvertent errors in their tax returns, in a move welcomed as pragmatic and overdue.
Ahead of a more comprehensive review of the penalties regime later this year, Revenue Minister Peter Dunne has announced a legislative patch that will give the IRD greater flexibility in imposing penalties for taking an unacceptable tax position.
He said the penalty - 20 per cent of the shortfall - should not generally apply to those who made a clear mistake or simple oversight and then tried to rectify it.
The relief will be available if the taxpayer voluntarily discloses the mistake, but not if the IRD finds it first, and if the Commissioner of Inland Revenue considers it "appropriate".
New Zealand Institute of Chartered Accountants tax director Craig Macalister was concerned at just how the IRD would interpret that. Nonetheless the institute welcomed the change. "We have been pounding our fists on the table over this for years," he said.
The penalties regime was supposed to underpin the self-assessment, voluntary compliance system, but as people were punished for innocent errors they owned up to, that was being eroded, he said.
"There had been a big change in behaviour, to disclose if an error had been identified. That is in the interests of the IRD and the taxpayer," he said.
"But many people have been stung so heavily in situations where there was absolutely no loss of revenue at all that it is starting to change behaviour back the other way."
Deloitte tax partner Thomas Pippos said the change might reflect the arrival of a new Revenue Minister who was a little closer to the ground and had fewer claims on his time than his predecessor, Michael Cullen.
He said the IRD was wary of provisions requiring it to exercise judgment, preferring rules that were as cut and dried and objective as possible, reducing the risk of inconsistencies.
The problem with that approach was that innocent mistakes could be punished harshly.
Pippos also welcomed the fact that the change would be retrospective. It applies to shortfall penalties imposed since April 2003, provided taxpayers apply before October 1 this year.
The law was changed in 2003, altering the original 1996 penalty for an "unacceptable tax interpretation" to an "unacceptable tax position".
Officials had said that it was too easy for taxpayers to argue that they were not interpreting the law.
"This amendment recognises that the  amendment may have been wider than intended and gives the commissioner some flexibility to allow taxpayers to have their positions reviewed," said a spokeswoman for Dunne.
WHY PEOPLE GET ANGRY
* A farmer's marriage breaks up and the farm is sold. His wife used to do the tax returns. He discloses the sale of the farm in the wrong GST return, for the farming partnership instead of a trust. The IRD gets its tax but he still gets a $5000 penalty.
* A man buys some land. His tax accountant contacts the vendors' solicitor to ask if they are registered for GST and is told they are. The buyer's GST return is filed on that basis, claiming an input tax credit. But it turns out the vendors are not GST-registered. The buyer cops a penalty, which his tax agent pays.
* A taxpayer lodges a GST return, discovers an error, contacts the IRD and pays the correct amount by the due date. But he is still penalised for having taken an unacceptable tax position, however briefly.By Brian Fallow Email Brian