Right of non-disclosure for tax advice

Sections 17A, 20B-20G, and 81B of the Tax Administration Act 1994

A statutory right not to disclose certain confidential documents, has been introduced for tax advice provided by tax advisors. It applies to communications between advisors and taxpayers for the main purpose of providing or receiving tax advice.

The non-disclosure right is subject to a number of exclusions such as for factual information, debt collection advice, accounting and tax work papers and matters of fraud. Tax advice does not include such matters as valuation and investment advice. The amendments do not affect legal professional privilege.

Inland Revenue has issued a Standard Practice Statement providing guidelines on how the non-disclosure right will operate.

Background

Under the Tax Administration Act 1994, professional privilege has been available to lawyers for confidential communications with their clients about tax matters. This means that information that is subject to privilege is not required to be disclosed to Inland Revenue. The same right of non-disclosure has not been available to chartered accountants and other tax advisors who have a similar tax advice function to that of lawyers. There have been administrative protocols that govern the means by which Inland Revenue should seek access to information held by accountants but no statutory right of non-disclosure.

However, accountants should be able to give candid and independent advice to their clients, as lawyers do, without the need to disclose that advice to Inland Revenue. The benefit of enabling this to occur is that the advice can promote voluntary compliance by taxpayers with the tax system and give rise to a consequent reduction in compliance and administrative costs.

In May 2002 a government discussion document, Tax and Privilege: a proposed new structure, was released for public consultation. The new amendments, while aiming to achieve the same objectives, differ from the earlier proposals set out in the 2002 discussion document.

Key features

New section 20B of the Tax Administration Act 1994 introduces a non-disclosure right for certain confidential documents created between tax advisors and their clients when the Commissioner is seeking disclosure of these documents under the information-gathering powers contained in sections 16-19 of the Tax Administration Act 1994. Such documents ("tax advice documents") are subject to the non-disclosure right if they are brought into existence for the main purpose of giving or receiving advice on New Zealand tax laws. A document that is created for the purpose of committing or promoting an illegal or wrongful act such as fraud does not qualify for the right of non-disclosure.

The right of non-disclosure belongs to the affected taxpayer. This means that taxpayers may withdraw the non-disclosure claim if they choose to provide the relevant tax advice documents to Inland Revenue.

To qualify for the non-disclosure right, the taxpayer's advisor who provided the tax advice needs to be subject to the code of conduct and disciplinary processes of an organisation (an "approved advisor group") that has been approved by Inland Revenue and meets certain other criteria.

New section 20D sets out the rules for claiming the right of non-disclosure. It must be claimed in writing and must include a brief description of the document and the name of the tax advisor who provided the tax advice. The taxpayer (or the tax advisor on the taxpayer's behalf) will need to make the claim within a specific period. This is generally within 28 days from the date that the Commissioner issued the information demand.

New section 20F provides that certain information ("tax contextual information") must be disclosed from the tax advice documents if the Commissioner requires such a disclosure. If it is necessary for proper administration of the revenue, a request for the tax contextual information may be made at the same time as the original information demand is issued.

In most cases, however, when a claim for non-disclosure is made in response to an information demand, only those documents not subject to the non-disclosure right will be required to be produced initially. Inland Revenue will assess that material provided it includes the details provided in the claim for non-disclosure to determine whether it is sufficient to complete the investigation. Disclosure of tax contextual information will be required when the information provided is insufficient.

Examples of tax contextual information are:

• factual information relating to transactions entered into by the taxpayer, including information about the purpose of the transaction;
• accounting and tax work papers that contain information which supports the financial statements and/or the tax return;
• matters concerning the collection of tax debts.

This information must be disclosed by way of a statutory declaration by the tax advisor in a form prescribed by Inland Revenue. This form is the IR 520.

A number of remedies are available if the progress of an investigation is deliberately impeded through abuse of the non-disclosure rules. If a tax advisor is convicted of any of these offences, a court may order that the advisor be barred from making statutory declarations of tax contextual information.

The secrecy provisions have also been amended to allow Inland Revenue to advise the approved advisor group if a recognised tax agent breaches the rules relating to non-disclosure - for example, by making a false statutory declaration.

Inland Revenue has issued a Standard Practice Statement providing guidelines on how the non-disclosure right will operate.

Application date

The new non-disclosure right will apply to requests for information made after the date of enactment.

Detailed analysis

Section 20B: No requirement to disclose tax advice document

Certain communications are not required to be disclosed under Inland Revenue's information-gathering provisions (sections 16-19 of the Tax Administration Act).

The non-disclosure right applies to a "book or document" that is a "tax advice document". The term "book or document" is defined to include:

• ... all books, accounts, rolls, records, registers and papers, and other documents, and all photographic plates, microfilms, photostatic negatives, prints, tapes, discs, computer reels, perforated rolls or any other type of record whatever."

The definition includes both paper and electronic communications such as letters, reports, memos,
file-notes, mails and electronically stored data.

Under section 20B(2) a document is eligible to be a tax advice document if it is:

• confidential; and
• created by a person for the main purpose of instructing a tax advisor who is a member of an approved advisor group to provide advice on tax laws; or
• created by a tax advisor, or an employee of a tax advisor's firm, if the document was brought into existence for the main purpose of:
  • recording research and analysis that is performed for the main purpose of enabling the tax advisor to give tax advice on tax laws to a taxpayer about the taxpayer's own affairs; or
  • giving advice on tax laws by the tax advisor to a taxpayer about the taxpayer's own affairs, or recording the advice given.

The term "tax law" is a defined term in section 3 of the Tax Administration Act and means:

• a provision of the Inland Revenue Acts or an Act that an Inland Revenue Act replaces;
• an Order in Council or a regulation made under another tax law;
• a non-disputable decision; and
• in relation to an obligation to provide a tax return or a tax form, also includes a provision of the Accident Rehabilitation and Compensation Insurance Act 1992 or a regulation made under that Act or the Accident Insurance Act 1998 or a regulation made under that Act or the Injury Prevention Rehabilitation and Compensation Act 2001 or a regulation made under that Act.

Accordingly, the tax advice must be about New Zealand tax rules, as they affect the taxpayer in question. Advice about the effect and application of tax laws in other jurisdictions will not be subject to the non-disclosure right.

Advice given for the furtherance of illegal or wrongful acts, or in relation to impending or future illegal or wrongful acts, is specifically excluded from the non-disclosure right by section 20B(2)(c). This includes fraud and tax evasion.

Under subsection (3) a tax advice document must satisfy the following criteria:

• it must be eligible to be a tax advice document under subsection (2), as described above; and
• a valid claim for non-disclosure must be made under section 20D, and the taxpayer on whose behalf the non-disclosure right is claimed must satisfy the requirements of section 20E (attachments to tax advice documents) and section 20F (disclosure of tax contextual information) if required.

The term "tax advisor" is defined in subsection (4) as a natural person who is subject to the code of conduct and disciplinary processes of an "approved advisor group".

Section 20C: Treatment of document

Documents that may be eligible for the non-disclosure right will be treated as tax advice documents from the time an information demand is made. If no claim for the right is made, this status will cease when the taxpayer informs Inland Revenue that no claim is to be made, or on the date the claim is required to be made by.

If a claim is made for the non-disclosure right, the status as a tax advice document will cease when:

• the District Court rules that the document is not a tax advice document; or
• the taxpayer agrees in writing that the document is not a tax advice document; or
• the taxpayer withdraws the claim; or
• the approved advisor group advises that the tax advisor was not a member of the group at the relevant time.

While a document is treated as a tax advice document, a copy of the tax advice document must be held by the tax advisor in a secure place.

Section 20D: Claim that document is a tax advice document

Consistent with the fact that the non-disclosure right belongs to the taxpayer, a claim for the right must be made by the taxpayer or the tax advisor on the taxpayer's behalf. If the tax advisor makes the claim, he or she must certify that they are authorised to act on the taxpayer's behalf.

If the tax advice document was prepared by the taxpayer, the claim must include a brief description of the form and contents of the document, the name of the tax advisor and the date of the document. If the tax advice document was prepared by the tax advisor, the claim must include a brief description of the form and content of the document, the name of the tax advisor, the name of the approved advisor group, the statute and type of revenue to which the advice relates, and the date of the document.

A claim relating to an information demand under section 16 (Commissioner may access premises to obtain information) or section 16B (Powers to remove and copy documents) must be made by the day on which Inland Revenue exercises the right to inspection or removal, or a later date that has been agreed by the Commissioner.

If the information demand is issued under section 17 (Information to be furnished on request of Commissioner) the claim must be made by the later of the date when information is required to be provided, or 28 days after the date in the information demand.

If the information demand is made under section 17A (Court orders for production of information or return), section 18 (Inquiry before a District Court Judge) or section 19 (Inquiry by Commissioner) the claim for the non-disclosure right must be made by the date when the information is required to be produced.

Section 20E: Document included in tax advice document

Attachments that exist independently of the tax advice document (created for a different purpose than the tax advice subject to non-disclosure) will not be protected unless they qualify for non-disclosure in their own right. For example, a sale and purchase agreement attached to a non-disclosable document would not be subject to non-disclosure. However, attachments that form part of the non-disclosable document (and do not have separate existence) will be treated as part of the tax advice document.

Section 20F: Tax contextual information

Even though the tax advice document is protected from disclosure, a description of tax contextual information included in the document may need to be disclosed by way of a statutory declaration made by an authorised tax advisor. The statutory declaration should reflect the tax advisor's view of the relevant transaction. If the tax advisor wishes to disclose the information verbatim from the tax advice document, this is acceptable.

Generally, the initial information demand will not include a requirement to disclose tax contextual information. However, such a requirement may apply if it is considered necessary for the proper administration of the revenue. In most cases, a demand for tax contextual information will not be made until the disclosable material and a claim for non-disclosure has been received and analysed. Generally only if that material does not provide sufficient information to complete the investigation will a subsequent demand be made for the disclosure of the tax contextual information from the tax advice documents.

If an information demand is made under section 16 (Commissioner may access premises to obtain information) or section 16B (Power to remove and copy documents) and the taxpayer claims the right of non-disclosure, the taxpayer (via their authorised tax advisor) will be required to disclose the tax contextual information from those tax advice documents by the date determined by the Commissioner.

If the original information demand is made under section 17 (Information to be furnished on request of Commissioner) the description of tax contextual information must be provided by the later of:

• the date prescribed by the Commissioner; or
• 28 days after the date given in the information demand requiring disclosure of the tax contextual information.

If the information demand is made under section 17A (Court orders for production of information or return), section 18 (Inquiry before a District Court Judge) or section 19 (Inquiry by Commissioner) the disclosure must be made by the date when the information is required to be produced.

"Tax contextual information" means:

• facts or assumptions which are provided to a taxpayer in contemplation of actual transactions entered into by the taxpayer, or a similar transaction being investigated by Inland Revenue;
• steps involved in the performance of a transaction actually entered into by the taxpayer, or a similar transaction being investigated by Inland Revenue;
• advice that does not concern the operation and effect of tax laws (for example, valuation and investment advice);
• advice on the collection of tax debts;
• facts or assumptions relating to non-tax advice; and
• accounting and tax work papers that contain information which supports the financial statements and/or a tax return of a taxpayer.

The statutory declaration must be made by a tax advisor who has authority to act on behalf of the taxpayer, and has not been barred from making statutory declarations. A court could bar the advisor if he or she is convicted of an offence under:

• section 111 of the Crimes Act 1961 (false statements or declarations);
• section 143(1)(b) of the Tax Administration Act 1994 (not supplying information when required to do so by a tax law);
• section 143A(1)(b) or (c) of the Tax Administration Act 1994 (knowingly not supplying information when required to do so by a tax law, or providing altered, false, incomplete or misleading information);
• section 143B(1)(b) or (c) of the Tax Administration Act 1994 (knowingly not supplying information for the purpose of evading tax, or providing altered, false, incomplete or misleading information); or
• section 143H of the Tax Administration Act 1994 (obstruction).

Section 20G: Challenges

The taxpayer or Inland Revenue can apply to a District Court Judge for an order determining whether:

• the document is a tax advice document; or
• information provided is tax contextual information; or
• a more detailed or better description of tax contextual information is required.

The District Court judge may require the document to be produced to the court.

An application for the court order may be made in the course of a section 18 inquiry to the judge who is holding the inquiry.

Secrecy

New section 81B provides that Inland Revenue may divulge information to an approved advisor group about a member who breaches the non-disclosure rules. This will allow the approved advisor group to take disciplinary action, if required against the offending tax advisor

Consequential amendments

Section 17A, which relates to court orders for production of information or returns, is being amended. Currently, under subsection (7), a court may order that information should be produced to the court and reviewed in order to determine whether an order should be made for the information to be provided to Inland Revenue, and whether the information is subject to legal professional privilege. Subsection (7) has been amended to provide a similar rule in relation to the non-disclosure right.