Omitted Income and Shortfall Penalties – What You Need to Know
Learn about Inland Revenue’s recent decision on omitted income and GST shortfalls, and what it means for property developers and businesses.
A recent Inland Revenue adjudication (TDS 25/21) has highlighted the serious consequences of failing to properly return GST when property or other business assets are sold.
The case in brief
A partnership purchased a property for development and claimed GST input tax credits.
Later, the property was sold in two parts: one half to an associated company (B Ltd), and one half to one of the partners.
Inland Revenue’s audit found that GST output tax should have been returned at market value, since the sales were to associated parties and were not zero-rated.
The taxpayer argued the transactions were zero-rated, but provided no evidence to support this.
The decision
The Tax Counsel Office (TCO) decided that:
GST output tax was payable on the first sale (a half share of the property) at market value.
The partnership’s GST registration should remain in place until all property sales were completed.
The taxpayer was liable for a shortfall penalty for gross carelessness.
Why the penalty?
The TCO concluded that the partners were experienced in business and should have known the GST consequences. By failing to document or evidence their position, they showed a high level of disregard for the risk of a tax shortfall.
As a result, Inland Revenue imposed a 40% penalty for gross carelessness, reduced by 50% because of previous compliance behaviour.
Key takeaways for businesses and property developers
Associated party transactions must be valued at market value for GST purposes.
Zero-rating land transactions requires evidence – e.g. proof the purchaser is GST-registered and intends to use the land for taxable activity.
Always keep proper documentation (sale and purchase agreements, GST registration confirmations, correspondence).
A lack of evidence can lead not just to paying GST and interest, but also significant penalties.
Final thoughts
This case is a reminder that Inland Revenue places a high standard on taxpayers, particularly where property transactions and GST are involved. If you’re unsure about how GST applies, it’s far better to seek advice before filing, rather than risk penalties later.