Disputes resolution process

Sections MD1(1), MD1(2), MD(2B) of the Income Tax Act 1994 and Income Tax Act 2004; definition of "response period" and "disputable decision" in section 3(1), sections 89C(db) and 89C(eb), 89DA(2), 89E(1), 89F, 89G(2), 89K(1)(a)(ii), 89K(1)(a)(iii), 89K(1)(b)(ii)(A), 89K(1)(b)(ii)(B), 89K(1)(d), 89K(3)(a) and (b), 89M(1), 89M(6B), 89M(7), new sections 89N and 89O, 108B(1), 108B(1B), 113(1), 138B(3) and 138F of the Tax Administration Act 1994; the proviso to section 20(3) and section 45 of the Goods and Services Tax Act 1985; section 13B(1)(a) of the Taxation Review Authorities Act 1994 and regulation 18(5) of the Taxation Review Authorities Regulations

 

Introduction

Amendments give effect to proposals outlined in the government discussion document "Resolving tax disputes: a legislative review", which was released in July 2003.

The framework within which tax disputes are resolved has been amended to ensure that the process is meeting its intended objectives.

To provide greater certainty and consistency for both Inland Revenue and taxpayers in relation to their returns, amendments have also been made to the refund periods for income tax and goods and services tax.

Background

Over the last decade a broad package of tax administration reforms has been introduced in response to developments such as increased technology and self-assessment. The areas of reform include:

• tax simplification, including removal of the requirement for most wage and salary earners to file returns;
• compliance and penalties legislation;
• binding rulings;
• a progressive rewrite of the income tax legislation; and
• the introduction of legislation supporting taxpayer self-assessment.

It was within this environment of tax administration reform that the disputes resolution process was introduced, in 1996, in response to the recommendations of the Organisational Review of the Inland Revenue Department, which was chaired by Sir Ivor Richardson.

The disputes procedures at that time were perceived as deficient in that they did not adequately support the early identification and prompt resolution of issues leading to tax disputes. A new disputes resolution process was subsequently introduced to deal with these concerns.

The resolution of a dispute is achieved through a series of steps prescribed in legislation, the main elements of which are:

• A notice of proposed adjustment (NOPA). This is a notice by either the Commissioner or a taxpayer to the other that an adjustment is sought in relation to the taxpayer's self-assessment.
• A notice of response (NOR). The NOR is a notice of response issued by the party receiving the NOPA if they disagree with the NOPA.
• A disclosure notice and statement of position (SOP). A disclosure notice triggers the issue of a SOP. A SOP contains the detailed facts and legal arguments to support the position taken and, again, is issued by both parties. It is an important document because it limits the parties to their respective facts and arguments if the case goes to court - this limitation is referred to as the "evidence exclusion rule".

The prescribed documents are intended to encourage an all "cards on the table" approach to dispute resolution that ensures that all the relevant evidence, facts, and legal arguments are canvassed before a case goes to court. There are also two administrative phases in the process - the conference and adjudication phases. The conference is a relatively formal meeting between Inland Revenue and the taxpayer which aims to clarify and, if possible, resolve the issues. Adjudication involves the independent consideration of the dispute by Inland Revenue and is the final phase in the process before the taxpayer's assessment is amended.

 

The process is set out in Figures 1 and 2.

Figure 1: Disputes resolution process commenced by the Commissioner

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Figure 2: Disputes resolution process commenced by a taxpayer

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The 2003 discussion document

The government discussion document "Resolving tax disputes: a legislative review" was released on 2 July 2003 for public comment. The purpose of the discussion document was to ensure that the government's objective of making the dispute resolution procedure fairer, faster and generally more efficient was being supported by the legislation. The review therefore focused on particular ways in which the legislative process could be improved for both taxpayers and Inland Revenue. It recognised, however, that the process for resolving disputes is dependent on efficient administrative practices and noted that Inland Revenue is undertaking a separate review of these practices.

The document covered five broad subject areas:

• the need for the Commissioner to follow the full process set out in the legislation;
• the content and the level of detail of the various documents required by the Commissioner and the taxpayer during the dispute;
• the increasing incidence of taxpayers seeking to adjust their own returns in relation to issues that are likely to be disputed;
• providing certainty regarding timeframes, including timeframes for GST; and
• miscellaneous issues.

The document outlined the objective of the review as being to ensure that the administration is operating efficiently at the lowest possible cost and to promote voluntary compliance as a result of disputes being handled fairly and resolved promptly.

Changes recommended at select committee

A significant change at the Finance and Expenditure Select Committee stage, when the bill introducing the amendments was being considered, was made to the proposal to require the issue of a NOPA to claim an input tax credit within two years if a credit had not been claimed in the correct period. This provision was changed instead to allow a two-year period to claim an input tax credit in a current period return. Outside of the two-year period, an unlimited time to claim an input tax credit in a current period return will be allowed in limited prescribed circumstances.

Another significant change was to remove from the proposals a provision which would clarify and extend the circumstances in which the Commissioner could override the four-year statute bar in making an assessment.

Key features

Completing the process

Amendments to ensure that the various steps required to facilitate the resolution of a dispute are completed include:

• New section 89N clarifies that the Commissioner of Inland Revenue must, other than in prescribed circumstances, apply all the legislated steps of a dispute
• Section 108B replaces the current six-month period within which the parties may agree to extend the time available for a dispute with a 12-month period with the ability for the taxpayer to extend that period for a further six months; and
• Section 89K expands the circumstances in which a document that is provided late by the taxpayer will be accepted by the Commissioner.

Improving efficiency and cost-effectiveness

A number of amendments aim to ensure that the disputes resolution process is more accessible to taxpayers and that the costs incurred in preparing the various documents are no greater than is necessary for each particular case. Amendments aimed at achieving this include:

• simplifying the documentation required by both parties to progress a dispute (amended sections 89F and 89G);
• requiring a more detailed document when a NOPA is issued by a taxpayer (section 89F);
• extending the time for taxpayers to initiate a dispute to their self-assessment from two months to four months (amendment to the definition of "response period" in the TAA);
• introducing a more accessible small claims process which includes raising the threshold for such cases from $15,000 to $30,000 and clarifying that a "precedent" case is one that has wider implications for other taxpayers (sections 13B of the Taxation Review Authorities Act 1994, 89E of the TAA and regulation 18 of the Taxation Review Authorities Regulations 1998); and
• allowing the disputes process to be stayed pending the outcome of a test case if both parties agree (new section 89O).

Timeframes for refunds

The revised timeframes for refunds are based on the need to manage government revenue risk and the need to ensure that tax is correctly paid. To achieve this, the timeframes within which tax refunds are allowed (sections MD1(1)and MD1(2) and MD 1(2B) of the Income Tax Act 1994 and Income Tax Act 2004 and section 45 of the GST Act) have been amended to provide for a four-year period to claim a refund. An eight-year refund period will remain when the overpayment of tax is due to clear mistake or simple oversight.

GST input tax deductions

The proviso to section 20(3) of the GST Act has been amended to give taxpayers two years, from the earlier of the date of the invoice or payment, to claim an input tax credit in a current period return rather than the unlimited time previously available to taxpayers.

Outside of that two-year period, taxpayers will be able to claim an input tax credit in a current period return only if the failure to claim the credit arose from the following circumstances:

• a clear mistake or simple oversight by the taxpayers;
• the inability by the taxpayer to obtain a tax invoice;
• there has been a dispute over the quantum of the invoice that was not resolved within the two-year period; and
• it is found only later that a supply is taxable and the taxpayer had not claimed the related input tax credits.

Application dates

The amendments to the disputes procedures will apply to disputes commenced under Part IVA of the Tax Administration Act 1994 on or after 1 April 2005, the time of commencement usually being the issue of a notice of proposed adjustment by either Inland Revenue or the taxpayer, with the following exceptions:

• Amendments to timeframes within the process (the response periods) will apply to notices issued on or after 1 April 2005. If the response period relates to a GST return, the amendments apply to notices issued in relation to GST return periods starting on or after 1 April 2005.
• Amendments relating to income tax refunds will apply from the 2004-05 income tax year. Amendments relating to GST refunds and current period input tax deductions will apply for GST taxable periods starting on or after 1 April 2005.
• Amendments relating to situations where an assessment can be issued without starting the disputes process apply to assessments for which notices are issued on or after 1 April 2005.
• Amendments to the challenge procedures apply from the date of enactment, 21 December 2004.

Detailed analysis

Starting the disputes process

Timeframe for taxpayer-initiated notice of proposed adjustment - definition of "response period"

In recognition of the requirement on taxpayers to provide detailed information to the Commissioner when they initiate a dispute, the definition of "response period" in section 3(1) of the TAA has been amended to give taxpayers four months - instead of two months - to initiate a dispute to their self-assessment, or to dispute a notice of assessment issued by the Commissioner. The period will apply from the date a taxpayer's notice of assessment is received at an office of Inland Revenue. If a taxpayer is issuing a NOPA to their self-assessment, the date of their notice of assessment will be provided to the taxpayer through the issue of a return acknowledgement letter.

In the definition of "response period", the provision of a two-month period starting on the date of issue of a notice from the disputant rejecting an adjustment proposed by the Commissioner is being removed because it is redundant.

Efficency and cost effectiveness measures

The documentation required as part of the disputes process - sections 89F and 89G

The content of the notice of proposed adjustment is prescribed in section 89F. The amended section 89F requires that both documents issued by the taxpayer or the Commissioner must contain sufficient detail to identify the issues arising between the parties and be in the prescribed form. The section then details further requirements, depending on whether the document is issued by the Commissioner or the taxpayer.

Section 89F(2) requires the Commissioner to identify the adjustments and provide a concise statement of the key facts and law in sufficient detail to ensure the taxpayer is informed of the grounds of the Commissioner's NOPA. The reference to "concise statement of the key facts and law" means that the document should be relatively brief, but at the same time cover all the issues relevant to the dispute. The Commissioner must also state how the law applies to the facts to ensure the proposed adjustment, and the arguments used to support it, are consistent with the proposed facts.

Section 89F(3) requires the taxpayer NOPA to identify the adjustment made to the assessment. The NOPA must also provide a statement of the facts and the law in sufficient detail to inform the Commissioner of the grounds for the NOPA, a statement of how the law applies to the facts and copies of all material documentary evidence that the taxpayer is aware of at the time the notice is issued in support of the claim.

The need for the taxpayer to provide more detail than the Commissioner in a NOPA was highlighted in chapter 5 of the July 2003 discussion document. The amendment recognises that, because of the greater level of detail that will be required, potential disputes may be resolved at an earlier stage - ideally, without the need for further investigation.

Section 89G(2) requires a notice of response to state concisely the facts, law and arguments the issuer considers to be wrong in the NOPA and the reasons for this. The issuer of the response notice must also include any facts and legal arguments relied on and how the arguments apply to the facts.

Finally, the issuer of the NOR must state concisely an adjustment to any figure referred to in the NOPA that results from the facts and legal arguments relied on in the NOR. This requirement ensures that the NOR responds fully to the NOPA. There is no requirement that the amount referred to be final. As the dispute progresses, the amount in dispute may be altered reflecting the outcome of a conference or other discussions between the parties.

These amendments will ensure that there is a balance between allowing some flexibility for taxpayers and the Commissioner of Inland Revenue in preparing the documents, so that costs are reduced, and ensuring that both parties have all the information required to adequately address the issues raised in the dispute.

The requirement that the legal arguments are applied to the facts will ensure that the proposed adjustment is not a statement which appears out of context in relation to the rest of the document but is, rather, a logical conclusion.

Test cases - new section 89O

New section 89O has been inserted into the TAA to allow for the suspension of a dispute following the outcome of a test case. The section will apply if a dispute between a taxpayer and the Commissioner has been identified and the Commissioner has designated a case involving another taxpayer as a test case.

If the section does apply, the taxpayer and the Commissioner may agree to suspend the dispute from the date of the agreement if there is similarity between the facts and questions of law in the dispute and the case that has been designated as a test case. In such a case, any time bars affecting the dispute are stayed until the earliest of the date of the court's decision, the date on which the test case is otherwise resolved, or the date on which the dispute is otherwise resolved. In agreeing to suspend the dispute, the taxpayer agrees to be assessed (or not as the case may be) on the basis of the test case. In such a case, any time bars affecting the dispute are extended by the period of the suspension.

Enabling the Commissioner to designate a case as a test case earlier in the disputes process will reduce administrative and compliance costs that might otherwise arise if the case involves, say, a taxpayer who is one of a number involved in a single scheme or in a series of similar transactions.

This new test case procedure for disputes does not affect the taxpayer's ability to challenge the assessment through the court process.

Small claims process

The government considered that cost should not be a deterrent to using the disputes process, especially for smaller taxpayers, for whom the cost of progressing the dispute may far outweigh the amount of tax in dispute.

An amendment to section 89E and consequential amendments to the Taxation Review Authorities Act 1994 and the Taxation Review Authorities Regulations 1998 are intended to make the small claims process more accessible to taxpayers by:

• raising the threshold for the amount of tax in dispute from $15,000 to $30,000 (section 89E(1) of the TAA and section 13B(1)(a) of the Taxation Review Authorities Act 1994); and
• clarifying that "precedent" means the case will be of precedence for taxpayers other than the taxpayer in question (Regulation 18(5) of the Taxation Review Authorities Regulations 1998).

Completing the process

New section 89N

The Commissioner is generally limited to a four-year period within which to amend a taxpayer's assessment following an investigation or in certain other circumstances. In cases involving a dispute the assessment is amended following the completion of the disputes process, which must occur within the four-year period (unless the parties agree to a time bar waiver).

New section 89N requires the Commissioner to follow all the legislated steps of the disputes process, other than in specific circumstances. Completing the process means considering the taxpayer's statement of position whether in a Commissioner-initiated dispute or a taxpayer-initiated dispute, before issuing an amended assessment. This requirement is contained in section 89N(2).

The process does not have to be completed before an assessment is issued, in the following circumstances:

• The Commissioner notifies the disputant that, in the Commissioner's opinion, the disputant, in the course of the dispute committed an offence under an Inland Revenue Act that has effectively delayed the process (89N(1)(c)(i)).

An alleged offence committed by a taxpayer may mean the Commissioner needs to act quickly and issue an amended assessment.

• A taxpayer involved in a dispute, or an associated person of the taxpayer, may take steps as to the location of the taxpayer's assets to avoid or delay the collection of tax (89N(1)(c)(ii) and (iii)).

The exception relating to the location of the taxpayer's (or an associated person of the taxpayer's) assets is designed to address the risk of the taxpayer or associated person of the taxpayer seeking to dispose of assets which may be required to meet an outstanding tax liability, and the issue of an assessment becoming urgent.

• The taxpayer has begun judicial review proceedings in relation to the dispute or an associated person of the taxpayer involved in another dispute involving similar issues has begun judicial review proceedings (89N(1)(c)(iv) and (v)).

The exception for judicial review proceedings reflects that the parties' resources may be directed away from progressing the dispute through the process towards addressing the facts and issues in the judicial review application.

• During the dispute, the taxpayer fails to comply with a request under a statute for information relating to the dispute and fails to comply within the period that is specified in the request (89N(1)(c)(vi).

Failure by a taxpayer to comply with a request for information if it is necessary to resolve the dispute or to comply with another matter relating to the dispute may, similarly, delay the progression of the dispute within the four-year time bar.

• The taxpayer elects to have the dispute heard by the Taxation Review Authority acting in its small claims jurisdiction (89N(1)(c)(vii)).

The small claims process is a simpler separate process when the dispute is intended to be resolved without completion of the full disputes process.

• The taxpayer and the Commissioner agree in writing that the dispute should be resolved by the court or the Taxation Review Authority without the completion of the disputes process (89N(1)(c)(viii)).

In some disputes, particularly those involving less tax in dispute and/or less complex issues, both parties may agree that it is more efficient to have the case resolved in the court or the Taxation Review Authority.

• The taxpayer and the Commissioner agree in writing to suspend the dispute pending a decision in a separate test case that is being challenged (89N(1)(c)(ix)).

If the taxpayer and the Commissioner agree in writing to suspend the disputes process pending the outcome of a test case, the process should not be followed.

Application to the High Court

Section 89N(3) provides for the Commissioner to apply to the High Court for an order to allow more time for completion of the dispute, or to allow the disputes process not to be completed.

An order from the High Court would be sought if the Commissioner considered that there were reasonable grounds, other than those specifically prescribed, for not having followed the full statutory process. Whether or not there were reasonable grounds could depend, for example, on the complexity of the issues, whether the taxpayer had caused prolonged delays and whether there were significant matters that were unforeseen by either party that provided a justification for delay.

New section 89N(4) states that the application to the High Court must be made within the four year timebar.

New section 89N(5) states that if an application is made, the period of time in which an amended assessment must be made is the total of:

• the four-year timebar - the time within which the Commissioner should have made the amended assessment in the absence of the application; and
• the period of time that starts on the date of the application (made within the time bar) and ends on the earliest of:
  • the date of the High Court's decision of the application:
  • the date on which the application is otherwise resolved:
  • the date on which the dispute is otherwise resolved; and
• any further period directed by the court

Commissioner may at any time amend assessments - section 11

The new section will not affect the Commissioner's ability to agree to make an adjustment to an assessment in cases, for example, of clear mistake or simple oversight. Therefore the Commissioner will still be able to amend an assessment under section 113 (which contains the general power to amend assessments) within the four-year statute bar but subject to new section 89N.

Disclosure notices - section 89M

A disclosure notice is a simple document which triggers the application of the "evidence exclusion" rule. The rule restricts what the Commissioner and the disputant may raise in a court challenge to matters raised in their respective statements of position.

An amendment to section 89M requires that disclosure notices must be issued, except in situations where the Commissioner does not have to complete the disputes process. To address the consequential issue with regard to the protection of witnesses, new subsection 89M(6B) will clarify that "evidence" when referring to the evidence exclusion rule will refer to the available documentary evidence and does not include a list of witnesses or types of witnesses. Therefore witnesses in sensitive cases will continue to be protected, without undermining the effect of the evidence exclusion rule. The amendment will also provide more flexibility for the presentation of evidence when cases are being prepared before they go to court.

An amendment to section 89M(7) clarifies which document the disputant is deemed to accept - depending on whether the taxpayer or the disputant initiated the dispute - if the taxpayer does not respond within the response period for the statement of position.

Four-year time bar waiver period - section 108B

The Commissioner is generally limited to a four-year period within which to amend a taxpayer's assessment following an investigation of the taxpayer or in certain other circumstances.

Previously, taxpayers could agree to extend this four-year time bar by up to six months if more time was required to complete the disputes process. The extension takes the form of a waiver, which must be in the prescribed form and signed and delivered to the Commissioner by a taxpayer before the expiry of the relevant four-year period.

Section 108B(1) extends this six-month period to 12 months to provide sufficient time to complete the disputes process in cases where this time is needed. Again, the extension will apply only when the parties agree. The taxpayer can extend the 12-month period by a further six-month period. This additional six months would not need to be agreed with Inland Revenue

Section 108B(1B) states that the Commissioner will not be able to raise new issues during the waiver period that are not identified and known to both parties before the start of the period.

Exceptional circumstances - section 89K

The exceptional circumstances provision allows the Commissioner to accept a late document within the response period if exceptional circumstances apply. The current definition of "exceptional circumstance" was thought to be too restrictive and has, therefore, been extended.

Section 89K has been amended to give the Commissioner the discretion to accept a late document, including a statement of position, outside of the applicable response period if the lateness is minimal or the document is late owing to one or more statutory holidays falling within the response period

 

Timeframes

Timeframes for refunds of excess tax

The refund provisions in the Income Tax Act 1994 and Income Tax Act 2004 (sections MD1(1), MD1(2) and MD(2B)) and section 45 Goods and Services Act 1985 have been amended to limit the eight-year refund period to four years.

If the Commissioner is satisfied that the taxpayer has paid excess tax and four years have not passed from the end of the income year or GST return period in which the taxpayer provided the return, the Commissioner must refund the overpayment.

The Commissioner may extend the period to eight years if the overpayment of tax is due to clear mistakes and simple oversights, and for rebate claims. Retaining the eight-year period in cases of clear mistake and simple oversight protects existing taxpayer rights to refunds.

Refunds will still be allowed to be paid by the Commissioner outside of those time limits if application is made to the Commissioner before the expiry of the applicable time limit.

GST input tax deductions

The proviso to section 20(3) of the GST Act has been amended to provide for an unconditional two-year time frame from the date of an invoice or payment (whichever is earlier) to claim an input tax deduction in a current period return.

Outside of that two-year period, taxpayers will be able to claim an input tax credit in a current period return in certain limited situations only. There will be an unlimited time to claim an input tax credit in a current period return for the following circumstances:

• The failure to claim the credit was due to the taxpayer's inability to obtain a tax invoice.

Failure to claim a credit due because the taxpayer was unable to obtain a tax invoice is self-explanatory. Taxpayers should also note that section 24(1) of the GST Act requires that a supplier must, at the request of the registered recipient, provide the recipient with a tax invoice within 28 days of the making of the request.

• The failure to claim the credit has arisen because there is a dispute over the amount of the invoice that is not resolved within the two-year period.

• The failure to claim the credit arises when only later it is found that a supply is taxable and the taxpayer had not claimed the related input tax credits

• The failure to claim the credit was due to clear mistake or simple oversight.

If the taxpayer has not claimed the input tax credit within two years and none of the circumstances as outlined above apply, the taxpayer may apply to the Commissioner for an agreed adjustment. The Commissioner can adjust a return, subject to the general four-year timebar, within the period in which the input tax credit should have been claimed.

Minor amendments

Disputable decision

A clarification to the definition of "disputable decision" in the interpretation section of the TAA excludes from the definition particular sections of the disputes process that are left to the discretion of the Commissioner.

The decisions left to the Commissioner's discretion that will not be disputable decisions include:

• section 89K, relating to late actions occurring within the response period;
• section 89L, which allows the Commissioner to apply for a High Court order to issue a notice rejecting an adjustment proposed by a taxpayer that the Commissioner has accepted or is deemed to have accepted;
• section 89M(8), which allows the Commissioner to provide additional information to the Commissioner's statement of position in response to the disputant's statement of position;
• section 89M(10), which allows the Commissioner to apply for a time extension to reply to a disputant's statement of position; and
• section 89N(3), which allows the Commissioner to apply to the High Court for an order allowing more time to complete the process, or that completion is not required.

The amendments ensure that only substantive issues are disputed and that issues about the process cannot be disputed under the process.

 

When assessments can be issued without a NOPA - section 89C

Section 89C lists the circumstances when the Commissioner may make an assessment without issuing a NOPA. They include when the assessment reflects an agreement between the Commissioner and the taxpayer or when the Commissioner believes a notice may cause the taxpayer to leave New Zealand.

Two new subsections have been added to the list of circumstances when the Commissioner may issue an assessment without first issuing a NOPA. New section 89C(db) enables the Commissioner to issue an assessment made in relation to a matter that is identical to an assessment of the taxpayer for another income year that is at the time subject to court proceedings. In this situation the disputes process would have been completed in relation to the earlier assessment, and the purpose of the amendment is to reduce the compliance and administrative costs of going through the process again.

New section 89C(eb) provides that an assessment can be issued if the taxpayer has left New Zealand and may have been involved in fraudulent activity. The new subsection extends the current exception for situations where a notice may cause the taxpayer to leave New Zealand.

Minor amendments to the challenge procedures - sections 138B(3)(b) and 138F(1)

Section 138B(3) allows taxpayers to challenge an assessment when the Commissioner has rejected (by issuing a notice of response) a notice of proposed adjustment issued by the taxpayer and the Commissioner does not subsequently issue an amended assessment. The taxpayer must file proceedings within the response period of the written disputable decision from the Commissioner, which may include another form of written correspondence by the Commissioner.

Some confusion has arisen for taxpayers in respect of the response period of the written disputable decision from the Commissioner provided for in section 138B(3)(b). Taxpayers can challenge an assessment if they file proceedings within that response period. This written disputable decision was not intended to be restricted to the notice of response referred to in section 138B(3)(a).

Therefore the amendment clarifies this point by providing that the reference to "within the response period of the written disputable decision from the Commissioner" is not restricted to the notice of response issued by the Commissioner.

The effect of the amendment is that the full disputes process will more clearly be provided for in the case of a taxpayer-initiated dispute as the time for challenging the Commissioner's decision will not be limited to the two months after the Commissioner's notice of response.

Section 138F(1) gives taxpayers the right to challenge an assessment made by the Commissioner that takes account of a disputable decision. This section does not then provide for a response period within which the challenge must be commenced because there is no cross-reference to section 138B, which does provide a response period.

The amendment clarifies that for a challenge made under the section to be effective, the taxpayer must commence the challenge within the response period from the date of the Commissioner's notice of assessment.