Disputes resolution process commenced by the Commissioner of Inland Revenue (June 08) (WITHDRAWN)

This item also appears in Tax Information Bulletin Vol 20, No 6 (July 2008).

Introduction

1. This Standard Practice Statement ("SPS") sets out the Commissioner's rights and responsibilities with a taxpayer in respect of an adjustment to an assessment when the Commissioner commences the disputes resolution process.
   
   
2. Where a taxpayer commences the disputes resolution process, the Commissioner's practice is set out in SPS 08/02: Disputes resolution process commenced by a taxpayer.
   
   
3. This SPS has been updated due to changes made to the law under:
   
   1. the Taxation (Savings Investment and Miscellaneous Provisions) Act 2006, and
      
   2. the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006, and
      
   3. the Taxation (Business Taxation and Remedial Matters) Act 2007, and
      
   4. the Income Tax Act 2007, and
      
   5. the relevant case law decided since SPS 05/03: Disputes resolution process commenced by the Commissioner of Inland Revenue was published.
   
   
4. The Commissioner regards this SPS as a reference guide for taxpayers and Inland Revenue officers. Where possible, Inland Revenue officers must follow the practices outlined in this SPS.

Application

5. This SPS applies from 10 June 2008. SPS 05/03: Disputes resolution process commenced by the Commissioner of Inland Revenue continues to apply from its commencement date up to 10 June 2008.
   
   
6. Unless specified otherwise, all legislative references in this SPS refer to the Tax Administration Act 1994 ("TAA").

Background

7. The tax disputes resolution procedures were introduced in accordance with the recommendations of the Richardson Committee in the Report of the Organisational Review of the Inland Revenue Department (April 1994) and were designed to reduce the number of disputes by:
   1. promoting full disclosure, and
      
   2. encouraging the prompt and efficient resolution of tax disputes, and
      
   3. promoting the early identification of issues, and
      
   4. improving the accuracy of decisions.
   
   
8. The disputes resolution process ensures that there is a full and frank communication between the parties in a structured way within strict time limits for the legislated phases of the process.
   
   
9. The disputes resolution process is designed to encourage an "all cards on the table" approach and the resolution of issues without the need for litigation. It aims to ensure that all the relevant evidence, facts and legal arguments are canvassed before a case proceeds to a court or hearing authority.
   
   
10. In accordance with the objectives of the disputes resolution process, the Commissioner (unless a statutory exception applies under section 89C or 89N(1)(c)) must go through the disputes resolution process before the Commissioner can issue an assessment.
    
    
11. The disputes resolution process was introduced in 1996 and reviewed in July 2003. There have been changes made to the disputes resolution process following recent legislative amendments and cases since 2005.
    
    
12. The early resolution of a dispute is intended to be achieved through a series of steps specified in the TAA. The main elements of those steps are:
    
    1. a notice of proposed adjustment ("NOPA"): this is a notice that either the Commissioner or taxpayer issues to the other advising that an adjustment is sought in relation to the taxpayer's assessment, the Commissioner's assessment or other disputable decision (the requisite form is the IR770 Notice of proposed adjustment).
       
    2. a notice of response ("NOR"): this must be issued by the recipient of a NOPA if they disagree with it (the preferred form is the IR771 Notice of response).
       
    3. a disclosure notice and statement of position ("SOP"): the issue of a disclosure notice by the Commissioner triggers the issue of a SOP. Each SOP must provide an outline of the facts, evidence, issues and propositions of law with sufficient details to support the position taken. Each party must issue a SOP (the requisite form is the IR773 Statement of position). The SOP is an important document because it limits the facts, evidence, issues and propositions of law that either party can rely on if the case proceeds to court to what is included in the SOP (unless a hearing authority makes an order that allows a party to raise new facts or evidence under section 138G(2)).
    
    
13. There are also two administrative phases in the process - the conference and adjudication phases. If the dispute has not been already resolved after the NOR phase, the Commissioner's practice will be to hold a conference, unless the parties agree to abridge the conference phase (please see paragraphs 228 to 232 of the SPS). A conference can be a formal or informal discussion between the parties to clarify and, if possible, resolve the issues.
    
    
14. If the dispute remains unresolved after the SOP phase, the Commissioner will refer the dispute to adjudication, except in certain circumstances. Adjudication involves an independent review of the dispute by Inland Revenue's Adjudication Unit which was formed to provide an internal but impartial review of unresolved disputes. Adjudication is the final phase in the process before the taxpayer's assessment is amended (if it is to be amended) following the exchange of the SOPs.

Contents

Disputes resolution process commenced by the Commissioner of Inland Revenue

The disputes resolution process is set out in the following diagram.

Click on the image below to see a full sized view

Summary of key actions and indicative administrative time frames

15. Set out below is a summary of the key actions and administrative time frames where a disputes resolution process is commenced by the Commissioner of Inland Revenue.
    
    
16. These actions and time frames are intended to be administrative guide lines for Inland Revenue officers. Any failure to meet these administrative time frames will not invalidate subsequent actions of the Commissioner, or prevent the case from going through the disputes resolution process.

Standard practice and analysis

The Commissioner must issue a NOPA before making an assessment

17. The Commissioner must issue a NOPA before making an assessment (including an assessment of shortfall penalties but excluding other civil penalties and interest), unless an exception to the requirement that a NOPA be issued applies under section 89C.
    
    
18. Nevertheless, even if the Commissioner, in a very unlikely event, made an assessment in breach of section 89C, the assessment would be regarded as being valid under section 114(a).
    
    
19. Each exception under section 89C can apply independently or together depending on the circumstances. However, the Commissioner can also choose to issue a NOPA before making an assessment notwithstanding that an exception under section 89C applies.

A disputable decision

20. The Commissioner will generally issue a NOPA before issuing an assessment that takes into account a disputable decision.
    
    
21. For example, the Commissioner issues a notice of disputable decision to a taxpayer who is a director and shareholder of a company advising that the company's loss attributing qualifying company election for the 2007 tax year is invalid because it is received late. However, the company's loss calculation and assessment for the 2007 tax year are not affected. The Commissioner intends to issue an assessment to the taxpayer that takes into account the notice of disputable decision by disallowing the company's losses that the taxpayer has claimed. The Commissioner will issue a NOPA to the taxpayer before making the assessment.

Exceptions

Exception 1: The assessment corresponds with a tax return

22. Section 89C(a) reads:
    

    The assessment corresponds with a tax return that has been provided by the taxpayer.

23. The application of section 89C(a) is limited under the self-assessment rules. Generally, a taxpayer makes an assessment and files a tax return that includes that assessment. If the taxpayer's assessment is supported by the information in the tax return and any underlying source documents that the taxpayer has provided and the Commissioner agrees with the taxpayer's return and assessment there is no need for the Commissioner to invoke the disputes resolution process.
    
    
24. In these circumstances, instead of issuing a notice of assessment the Commissioner will issue a statement of account that confirms the taxpayer's assessment. The statutory response period for the purposes of the disputes resolution process will commence from the date that Inland Revenue receives the taxpayer's assessment.
    
    
25. Sometimes, if there is a deficiency in the taxpayer's tax return, the Commissioner will issue an assessment without first issuing a NOPA to the taxpayer because section 89C(a) applies. For example, the Commissioner can issue an assessment, where the taxpayer has provided all their income details but omitted to calculate their income tax liability in the tax return.

Exception 2: Simple or obvious mistake or oversight

26. Section 89C(b) reads:

    The taxpayer has provided a tax return which, in the Commissioner's opinion, appears to contain a simple or obvious mistake or oversight, and the assessment merely corrects the mistake or oversight.

27. This exception is intended to apply to a simple calculation error or oversight that Inland Revenue's Processing Centres generally discover with computer edits and simple return checks. This maintains the status quo for the many assessments arising in this situation.
    
    
28. The Commissioner will generally treat the following as a simple mistake or oversight:
    
    1. an arithmetical error, and
       
    2. an error in transposing numbers from one box to another in a tax return, and
       
    3. double counting, such as inadvertently including in the taxpayer's income the same item twice, and
       
    4. not claiming a rebate to which the taxpayer is entitled or that was incorrectly calculated, for example, the low income rebate for a taxpayer.
    
    
29. A "simple or obvious mistake or oversight" can be determined on a case-by-case basis with no dollar limit. The Commissioner may consider whether this exception applies irrespective of whether the taxpayer has requested that the Commissioner makes an amendment under section 113 or applies the exception under section 89C(b).
    
    
30. Where the Commissioner issues an assessment to correct a taxpayer's simple or obvious mistake or oversight, the Commissioner may consider imposing shortfall penalties on the taxpayer, if there is a tax shortfall and the taxpayer has committed one of the culpable acts, for example, lack of reasonable care and not relied on the action or advice of their tax advisor for the purposes of section 141A(2B).

Exception 3: Agreement to amend previous tax position

31. Section 89C(c) reads:
    

    The assessment corrects a tax position previously taken by the taxpayer in a way or manner agreed by the Commissioner and the taxpayer.

32. This situation can occur if the issue is raised by either the Commissioner or the taxpayer. There is no need to issue a NOPA because no dispute arises.
    
33. If the Commissioner proposes the adjustment, this exception cannot apply unless the taxpayer accepts the adjustment. For the purpose of section 89C(c), the agreement between the parties can be oral, although, generally, the Commissioner's practice will be to seek written agreement. Section 89C(c) applies if Inland Revenue officers can demonstrate that the Commissioner and taxpayer have agreed on the proposed adjustment.
    
    
34. However, if the parties agree on only one adjustment and dispute others in respect of the same assessment, the Commissioner cannot issue an assessment on the basis of the agreed adjustment because the tax position is not necessarily correct.
    
    
35. Where a taxpayer proposes an adjustment outside the disputes resolution process and the Commissioner agrees, for example a taxpayer makes a request to amend an assessment, the particulars must be recorded in writing and state that the assessment is made in accordance with the Commissioner's practice on exercising the discretion under section 113. (Please see SPS 07/03 Requests to amend assessments.) The Commissioner must also consider if shortfall penalties are applicable.

Exception 4: The assessment otherwise reflects an agreement

36. Section 89C(d) reads:
    

    The assessment reflects an agreement reached between the Commissioner and the taxpayer.

     

37. The same procedures apply for sections 89C(c) and (d). However, the agreement that the parties reach does not have to relate to a tax position that the taxpayer has previously taken.
    
    
38. For example, the taxpayer has disputed but now agrees that they are a "taxpayer" for the purpose of the definition in section YA 1 of the Income Tax Act 2007 ("ITA 2007") and has not provided a tax return. The Commissioner will issue an assessment to the taxpayer under section 89C(d) to reflect this agreement. The Commissioner must also consider whether shortfall penalties are applicable.
    
    
39. An example is where, pursuant to section 6A, the Commissioner settles a tax case and disputes resolution process. In such cases, the Commissioner will usually enter into an individual settlement deed and agreed adjustment in writing with the taxpayer to confirm the settlement.
    
    
40. The Commissioner will then give effect to that settlement deed and agreed adjustment by issuing an assessment to the taxpayer under section 89C(d) without first issuing a NOPA.
    
    
41. This is notwithstanding that the assessment does not necessarily reflect the Commissioner's own view of the correct tax position.(The Commissioner can also issue an assessment under section 89C(c).)

Exception 5: Material facts and law identical to court proceeding

42. Section 89C(db) reads:
    

    The assessment is made in relation to a matter for which the material facts and relevant law are identical to those for an assessment of the taxpayer for another period that is at the time the subject of court proceedings.

43. Pursuant to section 89C(db), the Commissioner can issue an assessment to the taxpayer in relation to the other period that is the subject of court proceedings, without first issuing a NOPA. The Commissioner does not have to follow the disputes resolution process for the same issue in the other period because the matter is before the court to resolve. A dual process towards resolution does not need to be adopted. The Commissioner will also consider whether shortfall penalties are applicable.
    
    
44. However, a taxpayer who has been issued with an assessment in relation to another period under section 89C(db), can dispute that assessment by issuing a NOPA to the Commissioner under section 89D within the applicable response period.
    
    
45. Section 89C(db) is intended to reduce compliance costs. Notwithstanding this provision, the Commissioner can elect to issue a NOPA in respect of the other period in order to resolve the dispute through the disputes resolution process.

Exception 6: Revenue protection

46. Section 89C(e) reads:
    

    The Commissioner has reasonable grounds to believe a notice may cause the taxpayer or an associated person -

    
    

    (i)  To leave New Zealand, or

    
    

    (ii)  To take steps, in relation to the existence or location of the taxpayer's assets, making it harder for the Commissioner to collect the tax from the taxpayer.

47. This exception is intended to ensure that the revenue is protected in the relevant circumstances. Section 89C(e) does not require that the taxpayer has physical possession of their assets.
    
    
48. If Inland Revenue officers apply the exception under section 89C(e), this should be supported by evidence of the "reasonable grounds" relied on (for example, the taxpayer's correspondence with third parties, application to emigrate overseas and any transcripts of interviews with the taxpayer, etc.)

Exception 7: Fraudulent activity

49. Section 89C(eb) reads:
    

    The Commissioner has reasonable grounds to believe that the taxpayer has been involved in fraudulent activity.

50. Pursuant to section 89C(eb), a taxpayer has been involved in a fraudulent activity if they have:
    
    1. engaged or participated in, or has been connected with, any fraudulent activity that would have tax consequences for them, and
    2. acted deliberately with the knowledge that they were acting in breach of their legal obligations and did so without an honest belief that they were so entitled to act.
    
    
51. If the taxpayer has not been convicted of an offence relating to a fraudulent activity section 89C(eb) can still apply provided that the Commissioner believes on reasonable grounds that the taxpayer has been involved in a fraudulent activity.
    
    
52. For example, the Commissioner intends to issue an assessment for the 2007 tax year to a taxpayer who carries on business as an advertising agent. The taxpayer arranges advertising for his clients for which he receives a commission payment from the advertising providers. The taxpayer requires an initial payment from his clients from which he subsequently deducts any advertising costs that are incurred. The taxpayer advises his clients that the only remuneration that he receives for his services is the commission paid to him by the advertising providers.
    
    
53. However, the Commissioner is aware that the taxpayer's practice has been to obtain a discount from the advertising provider but not disclose this discount to his clients or deduct the amount of the discount from the amount charged to the client for the advertising. The taxpayer would then retain the difference between the amount charged to the taxpayer and the actual cost of the advertising to supplement the commission actually received from the advertising provider. The Commissioner was advised by one of the taxpayer's clients that the taxpayer has not been passing onto them discounts obtained from an advertising service provider and the Commissioner has confirmed this after making further enquiries.
    
    
54. In this circumstance, the Commissioner considers that the taxpayer has been involved in fraudulent activity. The Commissioner can issue to the taxpayer an assessment of income tax for the 2007 year that includes all the taxpayer's assessable income without first issuing a NOPA pursuant to section 89C(eb).
    
    
55. This is because the Commissioner has reasonable grounds to believe that the taxpayer has been involved in fraudulent activity based on the information provided by the taxpayer's client and the Commissioner's own enquiries.
    
    
56. If Inland Revenue officers apply the exception under section 89C(eb), this should be supported by sufficient evidence of the "reasonable grounds" relied on. For example, evidence that verifies that the taxpayer may have or has committed an offence and, therefore, has been involved in fraudulent activity. The evidence does not have to be absolute proof but, merely sufficient to verify the "reasonable grounds".

Exception 8: Vexatious or frivolous

57. Section 89C(f) reads:

    The assessment corrects a tax position previously taken by a taxpayer that, in the opinion of the Commissioner is, or is the result of, a vexatious or frivolous act of, or vexatious or frivolous failure to act by, the taxpayer.

58. If Inland Revenue officers apply this exception, this should be supported by documentation that evidences:
    
    1. the action or inaction giving rise to the tax positions previously taken, and
       
    2. why that action is considered to be vexatious or frivolous and any shortfall penalties/prosecution consideration. Examples of a tax position taken as result of a vexatious or frivolous act are a tax position that is:
       1. clearly lacking in substance, for example, where the taxpayer continues to take the same position that has previously been finalised, or
          
       2. motivated by the sole purpose of delay.
    
    
59. Where this exception applies, the Commissioner must also consider the imposition of shortfall penalties in respect of the taxpayer's tax position resulting from a vexatious or frivolous act.

Exception 9: Taxation Review Authority or court determination

60. Section 89C(g) reads:

    The assessment is made as a result of a direction or determination of a court or the Taxation Review Authority.

61. For the purpose of section 89C(g), a direction or determination includes any court or Taxation Review Authority ("TRA") decision that affects the particular taxpayer in relation to a specific tax period and a court decision on a "test case" that applies to the taxpayer irrespective of whether they were a party to the test case.
    
    
62. The Commissioner must retain a copy of the direction or determination to support the application of this exception. In these circumstances, the Commissioner will endeavour to make an assessment including imposing shortfall penalties, within two weeks after receiving the written direction or determination. However, if the direction or determination relates to a test case the Commissioner can issue an assessment within the period specified under section 89O(5).

Exception 10: "Default assessment"

63. Section 89C(h) reads:

    The taxpayer has not provided a tax return when and as required by a tax law.

64. If section 89C(h) applies because the taxpayer has failed to provide a tax return the Commissioner can make an assessment or amended assessment pursuant to section 106(1) (commonly known as a "default assessment").
    
    
65. Where a taxpayer seeks to dispute a default assessment through the disputes resolution process, the taxpayer must, within the applicable response period (that is, four months from the date that the default assessment is issued):
    
    1. provide a tax return in the prescribed form for the period to which the default assessment relates (pursuant to section 89D(2C) for GST and section 89D(2) for all other tax types) notwithstanding that the tax return will not include the taxpayer's assessment, and
       
    2. issue a NOPA to the Commissioner in respect of the default assessment.
    
    
66. The requirement to provide a tax return in respect of a default assessment made under section 106(1) before issuing a NOPA is an additional requirement of the disputes resolution process. This ensures that the taxpayer has provided the information that is required by the tax law before they are entitled to dispute the assessment.
    
    
67. If the Commissioner agrees with the taxpayer's NOPA and tax return, the Commissioner will generally amend the default assessment by exercising the discretion under section 113 subject to the statutory time bar in section 108 and any other relevant limitations. However, if the Commissioner does not agree with the taxpayer's tax return and NOPA the Commissioner can decide to not amend the default assessment and issue a NOR instead.
    
    
68. If a taxpayer cannot provide a NOPA because they are outside the applicable response period to dispute a default assessment or do not want to enter into the disputes resolution process they must still provide a tax return.
    
    
69. Although the Commissioner does not have to amend the initial assessment on receipt of the tax return from a defaulting taxpayer, the Commissioner can exercise the discretion to amend under section 113 subject to the time bar in section 108 or 108A and any other relevant limitations on the exercise of that discretion.
    
    
70. If the Commissioner decides not to exercise the discretion under section 113 to amend the default assessment on the basis of the tax return provided, the Commissioner can issue a NOPA in respect of the default assessment under section 89B(1) where, for example, new information received from the taxpayer suggests that the default assessment is incorrect. Any NOPA must be issued within two months after the date that the default assessment was issued.
    
    
71. The Commissioner is not precluded from further investigating an amended assessment issued on the basis of the taxpayer's tax return and, if necessary, issuing a NOPA to the taxpayer.

Exception 11: Failure to make or account for tax deductions

72. Section 89C(i) reads:
    

    The assessment is made following the failure by a taxpayer to withhold or deduct an amount required to be withheld or deducted by a tax law or to account for an amount withheld or deducted in the manner required by a tax law

73. This exception is intended to address a taxpayer's failure to withhold, deduct or account to the Commissioner for an amount of tax including PAYE, schedular payments to non-resident contractors (formerly withholding payments) and resident withholding tax ("RWT"). The Commissioner must also consider whether shortfall penalties are applicable.
    
    
74. The Commissioner may not apply this exception if there is a dispute that involves statutory interpretation (for example, whether a particular item attracts liability for RWT) and/or shortfall penalties.

Exception 12: Non-assessed tax return

75. Section 89C(j) reads:

    The taxpayer is entitled to issue a notice of proposed adjustment in respect of a tax return provided by the taxpayer, and has done so.

76. If a taxpayer proposes an adjustment in a NOPA with which the Commissioner agrees, the Commissioner can issue an assessment without first issuing a NOPA. This exception only applies to an adjustment that the taxpayer has proposed in their NOPA under section 89DA(1) within the applicable response period.

Exception 13: Consequential adjustment

77. Section 89C(k) reads:
    

    The assessment corrects a tax position taken by the taxpayer or an associated person as a consequence or result of an incorrect tax position taken by another taxpayer, and, at the time the Commissioner makes the assessment, the Commissioner has made, or is able to make, an assessment for that other taxpayer for the correct amount of tax payable by that other taxpayer

78. If transactions affect multiple taxpayers, whether in the same way or in related but opposite ways, the Commissioner can reassess any consequentially affected taxpayers under section 89C(k), if an assessment is, or could be issued to some of the taxpayers for the correct amount of tax payable. This is notwithstanding that the consequentially affected taxpayers have not agreed to the amended assessments.
    
    
79. However, those taxpayers subject to the amended assessments can still issue a NOPA to dispute the consequential adjustment if they are within the applicable response period. The Commissioner must also consider whether shortfall penalties are applicable.
    
    
80. Section 109(b) deems any assessment that the Commissioner makes to be correct and, therefore, the Commissioner can make any consequential amendment under section 89C(k) accordingly. However, the Commissioner must be satisfied that there is a direct consequential link between the taxpayers before making any consequential adjustment. For example:
    
    1. Group loss offsets: if a loss company has claimed losses to which it is not entitled and the Commissioner has amended the loss company's loss assessment to disallow those losses, pursuant to section 89C(k), the Commissioner can also make a separate assessment for the profit company that has incorrectly offset the loss company's losses against its profits.
       
    2. GST: the supplier and recipient of a supply have incorrectly assumed that a transaction was GST-exempt. The Commissioner later agrees that the recipient was entitled to a GST input tax credit and issues an assessment to them allowing the credit.The Commissioner can also issue an assessment to the supplier under section 89C(k) in respect of the output tax on the value of the supply.
       
    
    
81. However, in practice, the Commissioner can also issue a NOPA to all the taxpayers affected in such cases.

Taxpayer can dispute an assessment that is issued without a NOPA

82. The Commissioner can issue an assessment without first issuing a NOPA under section 89C in the circumstances outlined above. Although the Commissioner must always endeavour to apply the exceptions under section 89C correctly, any assessment made in breach of section 89C will still be treated as valid under section 114(a).
    
    
83. Where the Commissioner issues an assessment without first issuing a NOPA whether or not in breach of section 89C, the taxpayer can dispute the assessment through the disputes resolution process under section 89D(1). (Please see SPS 08/02: Disputes resolution process commenced by a taxpayer.)
    
    
84. However, where the Commissioner issues a NOPA to a taxpayer and they accept the proposed adjustment by written agreement or are deemed to accept the proposed adjustment, then section 89I(1) precludes the taxpayer from challenging the assessment.
    
    
85. However, section 89I cannot apply if the Commissioner and taxpayer have agreed on an adjustment before entering into the disputes resolution process. The parties can dispute the amended assessment, notwithstanding the previous agreement.

When the Commissioner can issue a NOPA

86. Section 89B specifies when the Commissioner can issue a NOPA.
    
    
87. Under section 89B(1) the Commissioner can issue one NOPA for multiple issues, tax types and periods. Alternatively, the Commissioner can issue multiple NOPAs for the same issue and period, consistent with the obligation to correctly make an assessment within the four-year statutory time period.
    
    
88. A NOPA is not an assessment. It is an initiating action that allows open and full communication between the parties. If possible, the taxpayer will be given the opportunity to settle a dispute by entering into an agreed adjustment with Inland Revenue before the Commissioner issues a NOPA.
    
    
89. However, the Commissioner or taxpayer is not precluded from issuing a NOPA in respect of any amended assessment that the Commissioner issues to reflect the agreed adjustment within the applicable response period.
    
    
90. A NOPA forms a basis for ensuring that the Commissioner does not issue an assessment without some formal and structured dialogue with the taxpayer in respect of the grounds upon which the Commissioner will issue any assessment or amended assessment (McIlraith v CIR (2007) 23 NZTC 21,456).
    
    
91. Once an investigation has commenced, the intended approach must be discussed with the taxpayer.If the Commissioner decides to issue a NOPA to a taxpayer, the responsible officer must endeavour to advise the taxpayer of this proposed approach within five working days before the date that the NOPA is issued to allow the taxpayer time to consider their position and/or seek advice. However, the taxpayer can also be advised earlier.
    
    
92. The Commissioner should ensure that any issues relating to the same period and tax type are kept together in the dispute.
    
    
93. The Commissioner can also exercise certain statutory powers (for example, issuing a section 17 notice) after a dispute has commenced and will continue to investigate the facts that relate to the dispute.
    
    
94. If the parties agree upon some and dispute other proposed adjustments for the same tax period and type, the Commissioner cannot issue an assessment that reflects any agreed adjustment already accepted under section 89J(1) until all the remaining disputed issues are resolved (even if the Commissioner does not pursue the disputed issue further) or determined by the Adjudication Unit. That is, the Commissioner will not issue a "partial" or "interim" assessment under section 89J(1) if the Commissioner is not satisfied that the assessment is correct.
    
    
95. However, where the statutory time bar is about to fall due, the Commissioner can issue an assessment to reflect both the agreed and disputed adjustment, provided that the requirements in section 89N are met. (Please see paragraphs 146 to 188 for further discussion.)
    
    
96. Where it is practicable, Inland Revenue officers will contact the taxpayer or their tax agent within 10 working days after the NOPA is issued to ensure that it has been received. Inland Revenue officers making written contact should comply with section 14.

Exceptions to the statutory time bar

(a)  Time bar waivers

97. If it is contemplated that the disputes resolution process cannot be completed before the statutory time bar period for amending an assessment commences, the parties can agree in writing pursuant to section 108B(1)(a) to waive the time bar by up to 12 months to enable the full disputes resolution process to be applied.
    
    
98. The taxpayer can also give written notice to the Commissioner and waive the time bar for a further six months after the end of the 12-month period under section 108B(1)(b) to allow sufficient time for the dispute to progress through the adjudication process. This notice must be given to the Commissioner within the initial 12-month period.
    
    
99. If the time bar is waived, the taxpayer must be advised in writing that:
    
    1. a NOPA will be issued, and
       
    2. the disputes resolution process will be followed.
       
    
    
100. To be effective, a statutory time bar waiver must be agreed in writing on the prescribed form (IR775 Notice of waiver of time bar) and delivered to the Commissioner before the relevant four-year period expires.
     
     
101. The statutory time bar waiver only applies to those issues that the parties have identified and understood before the initial statutory time bar. Other issues not so identified will still be subject to the original statutory time bar, unless section 108(2) or 108A(3) applies. (Please see paragraph 107 in this SPS.)

(b)  The Commissioner's application to the High Court under section 89N(3)

102. If a NOPA has been issued and the disputes resolution process cannot be completed before the statutory time bar period expires, the Commissioner can apply to the High Court for more time to complete the process. (Please see the discussion regarding section 89N(3) in paragraphs 175 to 186 of this SPS.)
     
     
103. However, where the Adjudication Unit has insufficient time (that is, before the statutory time bar arises or further time allowed under section 108B(1) to fully consider a matter submitted to it expires) the Adjudication Unit will return the matter to the responsible officer to decide whether to issue an assessment or amended assessment or accept the taxpayer's position. Section 89N(2)(b) allows the Commissioner to amend an assessment at any time after the Commissioner has considered the taxpayer's SOP in relation to the particular period. (Please see paragraph 144 for further discussion.)

(c)  Exceptions under section 89N(1)

104. When a NOPA has been issued, the Commissioner will follow the disputes resolution process unless an exception under section 89N applies. (The application of section 89N is discussed in detail later in paragraphs 141 to 185 of the SPS.) The Commissioner must obtain and document administrative approval for any departure from the full disputes resolution process.

Limitations on the Commissioner issuing a NOPA

105. Under section 89B(4), the Commissioner cannot issue a NOPA:
     1. if the proposed adjustment is the subject of challenge proceedings, or
        
     2. after the statutory time bar has expired.
     
     
106. The time bar that arises under sections 108 and 108A prevents the Commissioner from issuing an assessment that increases the amount assessed. The Commissioner can still issue an assessment that decreases the amount of the initial assessment subject to the limitation on refunding overpaid tax under sections RM 2(1) of the ITA 2007 and 45(1) of the Goods and Services Tax Act 1985.
     
     
107. However, the Commissioner is not subject to the statutory time bar that arises under sections 108 and 108A, if the Commissioner considers that the taxpayer has:
     
     1. provided a fraudulent or wilfully misleading tax return (section 108(2)(a)), or
        
     2. omitted income for which a tax return must be provided that is of a particular nature or source (section 108(2)(b)), or
        
     3. knowingly or fraudulently failed to make a full and true disclosure of the material facts necessary to determine their GST payable (section 108A(3)).
     
     
108. Furthermore, the Commissioner is not subject to the statutory time bar that arises under section 108 if a taxpayer has a remaining tax credit to which section LA 6(1) of the ITA 2007 applies and the Commissioner seeks to amend an assessment or determination to give effect to section LA 6(3) of the ITA 2007 (section 108(3B)).
     
     
109. When considering whether the exception under section 108(2)(b) applies, the Commissioner will disregard omissions of relatively small amounts of income by applying the principle of de minimis non curat lex (Babington v C of IR (1957) NZLR 861).
     
     
110. The Commissioner accepts that the time bar ensures finality in relation to assessments, is a key protection for most taxpayers and the exclusions from its protection must be only invoked if there is an adequate basis in fact and law to support their operation. Section 89B(4)(b) requires that the Commissioner initially decides whether an exception to the time bar applies, for example, whether a tax return is fraudulent or wilfully misleading, before determining whether a NOPA can be issued under section 89B(1).
     
     
111. Any opinion that the Commissioner forms regarding the application of the exceptions to the time bar must be honestly held and reasonably justifiable on the basis of the evidence available and the relevant law. The decision must be clearly documented and include reference to the grounds and reasoning on which it is based. Any decision that is made under section 108A is not, in itself, a disputable decision.
     
     
112. The Commissioner is generally limited to a four-year period within which a taxpayer's assessment can be increased following an investigation or in certain other circumstances. In respect of a dispute, the assessment is amended (if necessary) after the disputes resolution process is completed. The Commissioner will endeavour to undertake the various steps involved in the process within the four-year period.
     
     
113. Section 89B(4)(a) applies to individual proposed adjustments. Where the proposed adjustment is the subject of court proceedings, the Commissioner cannot issue a NOPA in respect of those proposed adjustments. However, the Commissioner can issue a separate NOPA to the taxpayer in relation to the same tax period provided it relates to a different adjustment.
     
     
114. For example, a taxpayer challenges the deductibility of feasibility expenditure in the 2006 tax year pursuant to section 138B. The Commissioner can also issue a NOPA to the same taxpayer in relation to the tax treatment of a bad debt in the same tax year.

Contents of the Commissioner's NOPA

115. A NOPA is the document that commences the disputes resolution process. It is intended to identify the true points of contention and explain the legal or technical aspects of the issuer's position in relation to the proposed adjustment in a formal and understandable manner. This will ensure that information relevant to the dispute is quickly made available to the parties. Section 89F(1) and (2) specifies the content requirements for any NOPA that the Commissioner may issue.
     
     
116. Under section 89F(1)(b), the NOPA must be in the prescribed form (IR770 Notice of Proposed Adjustment). Any NOPA that the Commissioner issues must identify, in sufficient detail the adjustment proposed and explain concisely the facts and law that relate to the adjustment and how the law applies to the facts. When preparing a NOPA, the Commissioner should avoid repeating facts, arguments or using unnecessary detail.
     
     
117. Section 89F(2)(b) requires that the NOPA states the key facts and law concisely and in sufficient detail. The Commissioner must ensure that the document is relatively brief and simple to enable the parties to quickly progress the dispute without incurring substantial expenses or excessive preparation time but also detailed enough to explain all the issues relevant to the dispute.
     
118. The Commissioner should identify (but not reproduce in full) the relevant legislation and legal principles derived from leading cases. These references should be in sufficient detail to clarify the grounds for the proposed adjustment. However, lengthy quotations from cases should be avoided.
     
     
119. The Commissioner considers that Inland Revenue has a statutory obligation to inform a taxpayer adequately, but recognises that the matters relevant to the dispute will be set out in greater detail at the SOP phase if the dispute is not resolved.
     
     
120. Therefore, what is included in a NOPA or NOR is not conclusive as between the parties because they can introduce further grounds or information or adjust the quantum of the proposed adjustments later in the disputes resolution process (CIR v Zentrum Holdings Limited (2006) 22 NZTC 19,912). However, the parties cannot propose another adjustment involving new grounds and a fresh liability at the SOP phase.
     
     
121. The Commissioner must always endeavour to issue a NOPA that has sufficient details, is of a high standard and has been considered by a legal adviser. The Commissioner must endeavour to advise the taxpayer during the conference phase of any new grounds, information or reduction in quantum that will be introduced in the SOP.
     
     
122. If the Commissioner decides to increase the quantum of any proposed adjustment after the NOPA is issued the Commissioner must issue a new NOPA to the taxpayer.
     
     
123. Although candid and complete exchanges of information are implicit in the spirit and intent of the disputes resolution process, the Commissioner's practice will be to ensure that the NOPA is, within those limits, as brief as practicable.
     
     
124. The content of any NOPA that the Commissioner issues must satisfy all the requirements specified in section 89F(2)(a) to (c).

Identify adjustments or proposed adjustments - section 89F(2)(a)

125. The Commissioner must consider in respect of each proposed adjustment:
     
     1. the income amount or impact of the adjustment, and
        
     2. the tax year or period to which the proposed adjustment relates, and
        
     3. whether use-of-money interest will apply.
     
     
126. The Commissioner will also consider whether shortfall penalties and/or other appropriate penalties of lesser percentages apply. That is, where sufficient evidence is held to support the imposition of the penalties and this can be justified (by reference to any relevant guidelines.)
     

Shortfall penalties

127. Shortfall penalties are separate items of adjustment that must be explained and supported in the same manner as the underlying tax shortfall. Section 94A(2) also requires that shortfall penalties must be assessed the same way as the underlying tax. However, although assessments of shortfall penalties relate to the underlying tax they are not subject to the time bars that arise under section 108 or 108A.
     
     
128. Where there is sufficient evidence to suggest that shortfall penalties should be imposed, the relevant Inland Revenue officer must ensure that the shortfall penalties are proposed in the same NOPA as the substantive issues. However, the officer can dispense with this practice if any the following exceptions applies:
     
     1. the evidence supporting the imposition of shortfall penalties does not become available until after the Commissioner has issued the NOPA on the substantive issues. In such circumstances, a separate NOPA may be issued in respect of the shortfall penalties at a later stage.
        
     2. before entering into the disputes resolution process, a taxpayer has accepted the proposed adjustment in relation to the substantive issues, but not accepted the imposition of the shortfall penalties. In this circumstance, the Commissioner may still issue a NOPA to the taxpayer for the proposed penalties.
        
     3. the taxpayer makes a voluntary disclosure of the substantive issues to the Commissioner and the only disputed issue relates to the imposition of the shortfall penalties.
        
     4. prosecution action is being considered and shortfall penalties also apply because the taxpayer has committed one of the culpable acts (for example, evasion), in most instances the Commissioner must first complete any prosecution action against the taxpayer before the shortfall penalties can be imposed.
        
        Pursuant to section 149(5), if shortfall penalties have been imposed the Commissioner cannot subsequently prosecute the taxpayer for taking the incorrect tax position unless the shortfall penalties are imposed under section 141ED. Therefore, the Commissioner may omit proposing shortfall penalties in a NOPA if prosecution is being considered as an option. The Commissioner must issue a new NOPA in respect of any shortfall penalties that are to be imposed after the prosecution.
     
     
129. Furthermore, the Commissioner cannot propose shortfall penalties at the SOP phase if they were not previously proposed in the Commissioner's NOPA

State the facts and law - section 89F(2)(b)

Facts

130. To provide a concise statement of facts, the Commissioner must focus on the material factual matters relevant to the legal issues. This includes, for each proposed adjustment, the facts relevant to proving all arguments made in support of the adjustment including any facts that are inconsistent with any arguments that the taxpayer has previously raised.
     
     
131. The Commissioner should endeavour to state all the material facts in brief, so as to avoid irrelevant detail or repetition. For example, where the parties both know the background to the disputed issues, a summary of the facts in the NOPA will suffice. Where possible, the Commissioner will refer to and/or append any documents that have previously set out the facts on which the Commissioner relies.
     
     
132. Although the Commissioner will make every attempt to be concise in the NOPA, the Commissioner considers that the explanation of the material facts should be relative to the complexity of the issues.

Law

133. Under section 89F(2)(b) the Commissioner must state the law concisely by including an outline of the relevant legislative provisions and principles derived from leading cases that affect the proposed adjustment.
     
     
134. It is sufficient that the Commissioner explains the nature of the legal arguments without providing lengthy quotations from the relevant case law.

How the law applies to the facts - section 89F(2)(c)

135. The Commissioner must apply the legal arguments to the facts to ensure that the proposed adjustment is not a statement that appears out of context. The application of the law to the facts must be stated concisely and logically support the proposed adjustment.
     
     
136. The Commissioner must outline all relevant materials and arguments (including alternative arguments) on which the Commissioner intends to rely. If more than one argument supports the same or a similar outcome, the NOPA must include all the arguments.
     
     
137. The evidence exclusion rule under section 138G(1) does not apply to the issues, facts, evidence and propositions of law that are raised in the Commissioner's NOPA. That is, the Commissioner is not restricted to raising the same issues, facts, evidence and propositions of law that are specified in the NOPA at the SOP phase or in challenge proceedings that the taxpayer has commenced where a disclosure notice has not been issued.

Time frames to complete the disputes resolution process

138. If the Commissioner has commenced the disputes resolution process by issuing a NOPA to a taxpayer and the dispute remains unresolved, where practicable, the Commissioner must negotiate a time line with the taxpayer to ensure that the dispute is progressed in a timely and efficient way.
     
     
139. Although not statutorily required, agreeing to a time line is a critical administrative requirement that requires both parties to be ready to progress the dispute in a timely manner. The parties should endeavour to meet the agreed time line. Where there are delays in the progress of the dispute the responsible officer will manage the delay including any relationship with internal advisers and liaise with the taxpayer.
     
     
140. If the negotiated time line cannot be achieved, the Commissioner must enter into a continuing discussion with the taxpayer to either arrange a new time line or otherwise keep them advised of when the disclosure notice and SOP will be issued. This is consistent with the purpose of the disputes resolution process which is to promote the prompt and efficient resolution of disputes. Therefore, the failure to negotiate or adhere to an agreed time line will not prevent a case from progressing through the disputes resolution process in a timely manner.
     
     
141. In addition to the above administrative practice, the Commissioner is bound by section 89N(2). Under that provision, if a NOPA has been issued and the parties cannot agree on the proposed adjustment, the Commissioner cannot amend an assessment without completing the disputes resolution process unless any of the exceptions in section 89N(1)(c) apply. These exceptions are explained in paragraphs 146 to 186 of this SPS. If any of these exceptions apply the disputes resolution process will end and the dispute will not go through the adjudication phase.
     
     
142. Although not a statutory requirement, where practicable, it is the Commissioner's administrative practice to complete the adjudication phase for the purpose of resolving a dispute after the SOP phase.
     
     
143. However, if the adjudication phase cannot be completed (for example, because the statutory time bar is imminent), section 89N(2)(b) allows the Commissioner to amend an assessment after considering the taxpayer's SOP.
     
     
144. Inland Revenue officers must adequately consider the facts and legal arguments in the taxpayer's SOP before they decide whether to amend an assessment. Whether a SOP has been adequately considered will depend on what is a reasonable length of time and level of analysis for that SOP given the circumstances of the case (for example, the complexity of the issues).
     
     
145. Thus a simple dispute may only take a couple of days to consider adequately while a complex dispute could take a few weeks. If the statutory time bar is imminent the Inland Revenue officer will consider the taxpayer's SOP urgently.

Section 89N - exceptions - when an assessment can be issued without completing the disputes resolution process

146. If a NOPA has been issued and the dispute is unresolved, the Commissioner can issue an assessment without completing the disputes resolution process under the following circumstances:

Exception 1: In the course of the dispute, the Commissioner considers that the taxpayer has committed an offence under an Inland Revenue Act that has had the effect of delaying the completion of the disputes resolution process (section 89N(1)(c)(i)).

147. Section 89N(1)(c)(i) reads:
     

     (i)  the Commissioner notifies the disputant that, in the Commissioner's opinion, the disputant in the course of the dispute has committed an offence under an Inland Revenue Act that has had an effect of delaying the completion of the disputes process:

148. The exception applies where the Commissioner may need to act quickly to issue an assessment because the Commissioner considers that the taxpayer has committed an offence under an Inland Revenue Act that has caused undue delay to the progress of the dispute.
     
     
149. For example, in the course of a dispute a taxpayer obstructed Inland Revenue officers in obtaining information from the taxpayer's business premise under section 16. The Commissioner will advise the taxpayer in writing that the Commissioner considers that they have committed an offence under section 143H. The offence has the effect of delaying the completion of the disputes resolution process meaning that the Commissioner does not have to complete that process and can amend the taxpayer's assessment under section 113.
     
     
150. Another example of when the exception may apply is where, in the course of a dispute, a taxpayer wilfully refuses to attend an enquiry made under section 19 on the date specified in the Commissioner's notice. In these circumstances, the Commissioner will advise the taxpayer in writing that the Commissioner considers that they have committed an offence under section 143F that has had the effect of delaying the completion of the disputes resolution process. The Commissioner can then exercise the discretion to amend the taxpayer's assessment under section 113 without completing the disputes resolution process.
     
     
151. In order to apply this exception, Inland Revenue officers must form an opinion that is honestly and reasonably justifiable on the basis of the evidence available. The Inland Revenue officer's decision must be clearly documented and stipulate the grounds and reasoning on which it is based.

Exception 2: A taxpayer involved in a dispute, or person associated to them, may take steps to shift, relocate or dispose of the taxpayer's assets to avoid or delay the collection of tax, making the issue of an assessment urgent (section 89N(1)(c)(ii) and (iii)).

152. If the Commissioner has reasonable grounds to believe that the taxpayer or a person associated with them ("associated person") intends to dispose of assets in order to avoid or defer the payment of an outstanding or pending tax liability, the Commissioner can urgently issue an assessment to the taxpayer. Sections 89N(1)(c)(ii) & (iii) read:
     

     (ii)  the Commissioner has reasonable grounds to believe that the disputant may take steps in relation to the existence or location of the disputant's assets to avoid or delay the collection of tax from the disputant:

     
     

     (iii)  the Commissioner has reasonable grounds to believe that a person who is, under the 1988 version provisions in subpart YB of the Income Tax Act 2007, an associated person of the disputant may take steps in relation to the existence or location of the disputant's assets to avoid or delay the collection of tax from the disputant:

153. In order to issue an assessment on the basis of either of the above exceptions, Inland Revenue officers must record any relevant correspondence and evidence (for example, the directors' written instructions to shift the company's assets overseas, evidence of electronic wiring of funds to overseas countries, transcripts of interviews with the taxpayer, etc) or other grounds for the reasonable belief.

Exception 3: The taxpayer involved in a dispute or a person associated with them involved in another dispute involving similar issues has begun judicial review proceedings in relation to the dispute (section 89N(1)(c)(iv) and (v)).

154. Section 89N(1)(c)(iv) and (v) reads:
     

     (iv)  the disputant has begun judicial review proceedings in relation to the dispute:

     
     

     (v)  a person who is, under the 1988 version provisions in subpart YB of the Income Tax Act 2007, an associated person of the disputant and is involved in another dispute with the Commissioner involving similar issues has begun judicial review proceedings in relation to the other dispute:

155. These exceptions apply to any judicial review proceedings that are brought against the Commissioner. In judicial review proceedings, the parties' resources are likely to be directed away from advancing the dispute through the disputes resolution process.
     
     
156. For the purpose of section 89N(1)(c)(v), an associated person of a taxpayer under the 1988 version provisions in subpart YB of the ITA 2007 may be involved in a similar issue to the taxpayer even if the issue relates to a different revenue type. In other circumstances, the revenue type may be the same. For example, if the dispute between the Commissioner and taxpayer relates to PAYE issues, but the dispute between the Commissioner and person associated with the taxpayer relates to income tax the taxpayer may still be involved in similar issues to the person associated with them.
     
     
157. Even if the two disputes relate to the same revenue type, section 89N(1)(c)(v) will not apply in some circumstances. For example, the dispute with the taxpayer relates to the tax treatment of entertainment expenditure, whereas the dispute with the person associated with the taxpayer relates to the capital and revenue distinction of merger expenditure. The Commissioner would not regard these two disputes as involving similar issues.

Exception 4: The taxpayer fails to comply with a statutory requirement for information relating to the dispute (section 89N(1)(c)(vi)).

158. Section 89N(1)(c)(vi) reads:
     

     (vi)  during the disputes process, the disputant receives from the Commissioner a requirement under a statute for information relating to the dispute and fails to comply with the requirement within a period that is specified in the requirement:

159. Generally, a taxpayer provides information to Inland Revenue voluntarily. However, when this does not occur the Commissioner can seek information from the taxpayer under a statutory provision, for example section 17 or 19. (The Commissioner's practice regarding section 17 is currently set out in SPS 05/08 Section 17 Notices.) The requirement for statutory information will specify the period within which the information must be provided. This period will allow the taxpayer reasonable and sufficient time to comply.
     
     
160. Where the taxpayer does not comply with a formal requirement for information that relates to the dispute (for example, as a tactic to delay the progress of the disputes resolution process), the Commissioner can issue an assessment to the taxpayer without first completing the disputes resolution process.

Exception 5: The taxpayer elects to have the dispute heard by the TRA acting in its small claims jurisdiction (section 89N(1)(c)(vii)).

161. Section 89N(1)(c)(vii) reads:
     

     (vii)  the disputant elects under section 89E to have the dispute heard by a Taxation Review Authority acting in its small claims jurisdiction:

162. A taxpayer can issue a NOPA to the Commissioner under section 89D or 89DA or a NOR rejecting the Commissioner's NOPA under section 89B (please see SPS 08/02: Disputes resolution process commenced by a taxpayer).
     
     
163. At the same time, under section 89E(1)(a) the taxpayer can elect in their NOPA or NOR that the TRA acting in its small claims jurisdiction should hear any unresolved dispute arising from the NOPA (whether issued by the Commissioner or taxpayer), if the amount in dispute is $30,000 or less. Any such election is irrevocable, final and binding on the taxpayer. In this case, the full disputes resolution process does not have to be followed.

Exception 6: The parties agree in writing that the dispute should be resolved by the court or TRA without completing the disputes resolution process (section 89N(1)(c)(viii)).

164. Section 89N(1)(c)(viii) reads:
     

     (viii)  the disputant and the Commissioner agree in writing that they have reached a position in which the dispute would be resolved more efficiently by being submitted to the court or Taxation Review Authority without completion of the disputes process:

165. Under this exception, where the Commissioner or taxpayer commences the disputes resolution process, the parties can make such an agreement in writing before either party issues their SOP. This would occur, for example, if the parties could incur excessive compliance and administrative costs in completing the full disputes resolution process relative to the amount in dispute.
     
     
166. This exception allows the taxpayer to bring challenge proceedings against the Commissioner. Where this exception applies to disputes that the Commissioner or taxpayer has commenced (that is, after the parties have made the requisite agreement), the parties must have exchanged a NOPA and NOR before the taxpayer can bring challenge proceedings under section 138B(1) or (3).

Exception 7: The parties agree in writing to suspend the disputes process pending the outcome of a test case (section 89N(1)(c)(ix)).

167. Section 89N(1)(c)(ix) reads:
     

     (ix)  the disputant and the Commissioner agree in writing to suspend proceedings in the dispute pending a decision in a test case referred to in section 89O.

168. Section 89O(2) allows a dispute to be suspended pending the result of a test case. Pursuant to section 89O(3), the parties can agree in writing to suspend the dispute from the date of the agreement until the earliest date that:
     
     1. the court's decision is made, or
        
     2. the test case is otherwise resolved, or
        
     3. the dispute is otherwise resolved.
     
     
169. If the parties agree to suspend the disputes resolution process, any statutory time bar affecting the dispute is stayed. The Commissioner can then make an assessment that is consistent with the test case decision. (However, the taxpayer is not precluded from challenging the Commissioner's assessment under section 89D(1), even if it is consistent with the test case decision.)
     
     
170. The Commissioner must issue an amended assessment or perform an action within the time limit specified in section 89O(5).
     
     
171. Section 89O(5) reads:
     

     The Commissioner must make an amended assessment, or perform an action, that is the subject of a suspended dispute by the later of the following:

     (a)  the day that is 60 days after the last day of the suspension:

     (b)  the last day of the period that -

     (i)  begins on the day following the day by which the Commissioner, in the absence of the suspension, would be required under the Inland Revenue Acts to make the amended assessment, or perform the action; and

     (ii)  contains the same number of days as does the period of the suspension.

172. If the statutory time bar arising under section 108 or 108A is imminent, section 89O(5) allows the Commissioner more time to complete the disputes resolution process.
     
     
173. For example, the Commissioner commences a dispute and on 1 March 2007 agrees with the taxpayer in writing to suspend the disputes proceedings pending the decision in a designated test case. The disputed issue is subject to a statutory time bar that commences after 31 March 2007 and the taxpayer does not agree to delay its application under section 108B(1)(a). A decision is reached in the test case on 31 July 2007.
     
     
174. The Commissioner must make an amended assessment or perform an action that is the subject of the suspended dispute by 29 September 2007. This date is calculated as follows:
     
     1. The suspension period commences on the date of the agreement (1 March 2007) and ends on the date of the court's decision in the test case (31 July 2007). This is a period of 153 days.
        
        
     2. The last date that the Commissioner can make an amended assessment falls on the later of the following two dates:
        
        
        1. 29 September 2007, that is 60 days after the date that the suspension period ends on 31 July 2007 pursuant to section 89O(5)(a), and
           
           
        2. 31 August 2007, that is 153 days after the period commences on 1 April 2007 pursuant to section 89O(5)(b).

Exception 8: The Commissioner applies to the High Court for an order to allow more time to complete or dispense with the disputes process.

175. Section 89N(3) reads:
     

     ... [T]he Commissioner may apply to the High Court for an order that allows more time for the completion of the disputes process, or for an order that completion of the disputes process is not required.

176. The Commissioner envisages that this exception will be used if section 89N(1)(c) does not apply and there are exceptional circumstances.
     
     
177. Any application made by the Commissioner under section 89N(3) must be based on reasonable grounds. Whether there are reasonable grounds will depend on considerations such as the complexity of the issues in the dispute, whether the taxpayer has caused delays, the dispute involves large amounts of revenue or there were significant matters in the dispute that were unforeseen by either party and provided a justification for the delay.
     
     
178. For example, due to unusual circumstances the Commissioner does not learn about a proposed adjustment until late. Further delays by the taxpayer and the need for the Commissioner to obtain significant legal advice means that the Adjudication Unit cannot consider the dispute before the time bar starts. In this circumstance, the Commissioner may apply to the High Court for an order that allows more time for the disputes process to be completed under section 89N(3). (Note: This is only an example of a possible unforeseen situation and it is anticipated that there will be a wide variety of circumstances under which an application under section 89N(3) will be appropriate.)
     
     
179. The Commissioner's application to the High Court under section 89N(3) is subject to statutory time limits. The Commissioner must apply before the four-year statutory time bar falls due.
     
     
180. The Commissioner must also issue an amended assessment within the time limit specified in section 89N(5). Section 89N(5) reads:
     

     If the Commissioner makes an application under subsection (3), the Commissioner must make an amended assessment by the last day of the period that -

     
     

     (a)  begins on the day following the day by which the Commissioner, in the absence of the suspension, would be required under the Inland Revenue Acts to make the amended assessment; and

     
     

     (b)  contains the total of -

     
     

     (i)  the number of days between the date on which the Commissioner files the application in the High Court and the earliest date on which the application is decided by the High Court or the application or dispute is resolved:

     
     

     (ii)  the number of days allowed by an order of a court as a result of the application.

181. Section 89N(5) allows the Commissioner more time to complete the disputes resolution process where the statutory time bar under section 108 or 108A is imminent.
     
     
182. For example, the Commissioner commences the disputes resolution process. On 1 March 2007 the Commissioner applies to the High Court under section 89N(3) for an order allowing more time to complete the process. The disputed issue is subject to a statutory time bar that commences after 31 March 2007 and the taxpayer does not agree to delay its application under section 108B(1)(a). On 30 June 2007, the High Court makes an order that allows the Commissioner's application and gives the Commissioner 30 further days to complete the disputes resolution process.
     
     
183. Pursuant to section 89N(5), the Commissioner must make an amended assessment by 30 August 2007. This date is calculated as follows:
     
     1. The Commissioner would have one month to make the amended assessment before the statutory time bar commences. That is, 1 March 2007 to 31 March 2007. The period during which an amended assessment must be made under section 89N(5)(a) commences on 1 April 2007.
        
     2. The period during which the assessment must be made includes 122 days, that is the period between 1 March 2007 and 30 June 2007 (the date of the decision) under section 89N(5)(b)(i) and the 30-day period allowed by the High Court order under section 89N(5)(b)(ii). This is a total of 152 days.
        
     3. The Commissioner must issue an amended assessment to the taxpayer on the date that is 152 days from 1 April 2007. That is, by 30 August 2007.
     
     
184. During the period from 1 March to 30 August 2007, the parties may continue to attempt to resolve the dispute. This may include exchanging SOPs and going through the adjudication process.
     
     
185. The above example indicates that the Commissioner has more time to complete the disputes resolution process. The time bar will not commence until 30 August 2007.
     
     
186. Where the Commissioner applies to the High Court under section 89N(3) for an order to truncate the disputes resolution process, the Commissioner must issue an assessment within the period as calculated under section 89N(5). Applying the same facts as in the above example, the Commissioner must issue an assessment to the taxpayer by 30 August 2007.

Application of the exceptions in section 89N(1)(c)

187. The Commissioner's practice is that the parties must endeavour to resolve the dispute before or via the adjudication process. If this is not possible and any of the eight exceptions in section 89N(1)(c) apply the Commissioner can amend an assessment without completing the whole disputes resolution process, that is, before the parties accept a NOPA, NOR or SOP that the other has issued, or the Commissioner has considered the taxpayer's SOP. This will conclude the disputes resolution process and the dispute will not go through the Adjudication phase.
     
     
188. In this circumstance, the taxpayer can challenge the Commissioner's assessment by filing proceedings in the TRA (either acting in its general or small claims jurisdiction) or the High Court within the applicable response period, that is, within two months starting on the date that the notice of assessment is issued (please see paragraph 166 of this SPS).

Taxpayer's response to the Commissioner's NOPA: NOR

189. If a taxpayer disagrees with the Commissioner's proposed adjustment, then, under section 89G(1), they must advise the Commissioner that any or all of the proposed adjustments are rejected by issuing a NOR within the two-month response period. That is, within two months starting on the date that the Commissioner's NOPA is issued. The Commissioner interprets this as requiring Inland Revenue's receipt of the NOR within the response period.
     
     
190. For example, if a NOPA is issued on 8 April 2007, the taxpayer must advise the Commissioner that it is rejected by issuing a NOR to the Commissioner for receipt on or before 7 June 2007. However, taxpayers are encouraged to issue their NOR to the Commissioner once they have completed it.
     
     
191. The Commissioner will make reasonable efforts to contact the taxpayer or their tax agent two weeks before the response period expires to ascertain whether the taxpayer will issue a NOR in response to the Commissioner's NOPA. Such contact may be made by telephone or letter.
     
     
192. Section 89G(2) specifies the content requirements of a NOR. The taxpayer must state concisely in the NOR:
     
     1. the facts or legal arguments in the Commissioner's NOPA that they consider are wrong, and
        
     2. why they consider that those facts and arguments are wrong, and
        
     3. any facts and legal arguments that they rely upon, and
        
     4. how the legal arguments apply to the facts, and
        
     5. the quantitative adjustments to any figure proposed in the Commissioner's NOPA that results from the facts and legal arguments that the taxpayer relies upon.
     
     
193. In respect of the requirement under section 89G(2)(c) that the taxpayer specifies the facts and legal arguments upon which they are relying, the taxpayer can also refer to legislative provisions, case law and any legal arguments that are raised in the Commissioner's NOPA. The taxpayer does not have to refer to different legislative provisions, case law and legal arguments.
     
     
194. Pursuant to section 89G(2)(e), the requirement for a quantitative adjustment establishes to what extent the taxpayer considers that the Commissioner's adjustment in the NOPA is incorrect. This amount need not be exact, however, every attempt should be made to ensure that it is as accurate as possible. The amount in dispute can be altered, as the dispute progresses irrespective of whether the parties have agreed on the new figure.

Deemed acceptance

195. Under section 89H(1), if the taxpayer:
     
     1. has not issued a NOR within the two-month response period, and
        
     2. there are no exceptional circumstances as defined in section 89K(3),
        
        the taxpayer is deemed to have accepted the adjustment that is proposed in the Commissioner's NOPA and section 89I applies. The Commissioner will usually advise the taxpayer that the deemed acceptance has occurred within two weeks after the two-month response period expires.
     
     
196. Pursuant to section 89I(2), the Commissioner must include or take into account each proposed adjustment that the taxpayer accepts or is deemed to accept in a notice of assessment issued to the taxpayer.

Exceptional circumstances under section 89K

197. Section 89K(3) reads:
     

     (a)  an exceptional circumstance arises if-

     
     

     (i)  an event or circumstance beyond the control of a disputant provides the disputant with a reasonable justification for not rejecting a proposed adjustment, or for not issuing a notice of proposed adjustment or statement of position, within the response period for the notice:

     
     

     (ii)  a disputant is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or more statutory holidays falling in the response period:

     (b)  an act or omission of an agent of a disputant is not an exceptional circumstance unless-

     
     

     (i)  it was caused by an event or circumstance beyond the control of the agent that could not have been anticipated, and its effect could not have been avoided by compliance with accepted standards of business organisation and professional conduct;

     
     

     (ii)  the agent is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or more statutory holidays falling in the response period.

198. The legislation defines exceptional circumstances very narrowly. The cases regarding "exceptional circumstances," such as Treasury Technology Holdings Ltd v CIR (1998) 18 NZTC 13,752, Milburn NZ Ltd v CIR (1998) 18 NZTC 14,005, Fuji Xerox NZ Ltd v CIR (2001) 17,470 (CA), Hollis v CIR (2005) 22 NZTC 19,570 and Balich v CIR, unreported High Court, Auckland Registry, CIV 2006-404-4113, 21 February 2007 are also relevant.
     
     
199. The case law confirms that the definition of "exceptional circumstances" in sections 89K(3) and 138D should be applied consistently. The following guidelines have emerged from the case law:
     
     1. a taxpayer's misunderstanding or erroneous calculation of the applicable response period will usually not be regarded as an event or circumstance beyond the taxpayer's control under section 89K(3)(a)
        
     2. an agent's failure to advise their client that they have received a notice of assessment or other relevant document that causes the taxpayer to respond outside the applicable response period will not generally be considered to be an exceptional circumstance under section 89K(3)(b) (Hollis v CIR)
        
     3. an exceptional circumstance can arise if the taxpayer has relied on misleading information regarding the applicable response period given to them by the Commissioner that has caused them to respond outside that response period (Hollis v CIR).
     
     
200. The Commissioner will only accept a late NOR on rare occasions. Please see Tax Information Bulletin Vol 8, No 3 (August 1996) for some examples of situations that can be an "exceptional circumstance" beyond a taxpayer's control.
     
     
201. The exception for lateness as a result of statutory holidays is self explanatory. The Commissioner can also accept a late NOR if the Commissioner considers that the lateness is minimal, that is, the document was only one to two days late and the other factors relevant to the exercise of the discretion under section 89K(1) are satisfied. (Please see discussion in paragraph 203.)
     
     
202. For example, the response period ends on Saturday and the taxpayer provides a NOR on the following Tuesday. The Commissioner treats the response period as ending on Monday on the basis of section 35(6) of the Interpretation Act 1999 and accepts that the lateness of the NOR was minimal. That is, the Commissioner has received the NOR within one to two days of Monday, the last day of the response period. If the response period ended on Friday and the taxpayer provided the NOR on the following Monday, the Commissioner would also accept that the lateness is minimal.
     
     
203. Besides the degree of lateness, the Commissioner considers that the exercise of the discretion under section 89K(1) requires that the following factors are also taken into account:
     
     1. the date on which the NOR was issued, and
        
     2. the response period within which the NOR should be issued, and
        
     3. the real event, circumstance or reason why the taxpayer failed to issue the NOR within the response period, and
        
     4. the taxpayer's compliance history in relation to the tax types under consideration (for example, has the taxpayer paid tax or filed a tax return or NOR late in the past?)
     
     
204. For example, a taxpayer issues a NOR to the Commissioner two days after the applicable "response period" has expired. The taxpayer does not provide a legitimate reason for the lateness. The taxpayer also has a history of filing late NORs within the minimal allowable lateness period (that is, up to two days outside the applicable "response period") and has been advised on the calculation of the "response period" on more than one occasion.
     
     
205. Although the degree of lateness was minimal on each occasion, the Commissioner would not accept the taxpayer's NOR in this circumstance. This ensures that the section 89K(3)(b)(ii) exception is not treated as an extension of the "response period" in all circumstances.
     
     
206. The Commissioner will consider a taxpayer's application made under section 89K(1)(b) after receiving the relevant NOR or SOP. The responsible officer will document the reasons for accepting or rejecting the taxpayer's application and advise the taxpayer of their decision in writing within 15 working days after Inland Revenue receives the application.
     
     
207. The taxpayer must provide reasons to support their claim that exceptional circumstances exist under section 89K(3). The taxpayer should address the factors referred to in paragraph 203. If the reasons provided are unclear, the Commissioner may require further information and give the taxpayer an opportunity to provide that information before determining whether section 89K applies.
     
     
208. If the Commissioner rejects a taxpayer's application made under section 89K to treat a NOR or SOP as made within the response period, the taxpayer will be deemed to have accepted the proposed adjustment made in the Commissioner's NOPA. (Any decision that the Commissioner makes under section 89K is not a "disputable decision".)

Receipt of a taxpayer's notice of response

209. When Inland Revenue receives a taxpayer's NOR, it will usually be forwarded to the responsible officer within five working days after its receipt. Upon receipt, the responsible officer will ascertain and record the following:
     
     1. the date on which the NOR was issued, and
        
     2. whether the NOR has been issued within two months starting on the date that the Commissioner's NOPA is issued, and
        
     3. the salient features of the NOR including any deficiencies in its content.
        
        
210. Where it is practicable, the Commissioner will advise the taxpayer or their tax agent by telephone or in writing within 10 working days that Inland Revenue has received the NOR.
     
     
211. The Commissioner will make reasonable efforts to advise the taxpayer or their tax agent within one month after receiving the NOR whether the NOR is being considered or has been accepted, rejected in full or in part.
     
     
212. Where the NOR is accepted in full, the Commissioner will usually issue to the taxpayer written confirmation that the NOR has been accepted in full and, if applicable, a notice of assessment within one month after advising that the NOR is accepted.
     
     
213. If the Commissioner must investigate further before deciding to accept or reject a NOR, the responsible officer will regularly update the taxpayer or their agent on the progress of the further analysis or enquiry work that is undertaken.

Deficiencies in the content of the notice of response

214. Where Inland Revenue has received a NOR that it considers has deficiencies (that is, the requirements under section 89G(2) are not met), the responsible officer will take reasonable steps to make the taxpayer correct the information in the NOR before the response period expires.
     
     
215. The taxpayer will be advised as soon as practicable that the NOR is invalid unless rectified and the additional or correct information must be provided within the response period.
     
     
216. The taxpayer will also be advised when the response period expires and that those deficiencies must be rectified to validate the NOR by then or within the minimal lateness period allowed pursuant to section 89K(3)(a)(ii) (please see paragraph 201) and whether the Commissioner intends to provide any additional information to the taxpayer.
     
     
217. Taxpayers are encouraged to issue their NOR immediately after they have completed it because they could have insufficient time to rectify any invalidities or deficiencies if the response period is due to expire.
     
     
218. If a taxpayer does not provide the correct information in respect of a deficient NOR before the response period expires, they will be deemed to have accepted the proposed adjustment under section 89H(1), unless any of the exceptional circumstances under section 89K applies. This will conclude the dispute and preclude the taxpayer's right to challenge the adjustments before the High Court or TRA.

Conference

Conduct of a conference

219. Generally, if a dispute remains unresolved after the NOR phase, the conference phase will follow. The Commissioner will usually initiate the conference phase in a timely manner, that is within one month after the taxpayer's NOR is received. However, the Commissioner will not seek to advance the disputes resolution process by commencing the conference phase before the taxpayer's NOR has been fully considered.
     
     
220. If the start of the conference phase is delayed (for example, to allow legal advice to be obtained) the responsible officer will keep the taxpayer informed regarding the progress of the conference. The suggested average time frame for the conference phase is three months. However, this time will vary depending on the facts and complexities of the specific cases.
     
     
221. A conference is not statutorily required. Rather, the conference phase is an administrative process that aims to clarify and, if possible, resolve the disputed issues. However, the conference phase should not be used by either party to the dispute for the purpose of delaying the completion of the disputes resolution process.
     
     
222. The conference should be conducted in a way that is sufficiently flexible and consistent with the taxpayer's wishes and any other relevant factors such as the scope of the investigation. The Commissioner will establish a time frame to meet with the taxpayer and their advisors and, sometimes, if necessary, Inland Revenue officers will meet with the taxpayer immediately after considering further information. Where appropriate the conference can be adjourned to allow the parties to reconsider the positions that they have taken in the dispute.
     
     
223. A conference can range from a telephone call to several face-to-face meetings between the parties. If the parties are relying on expert evidence the experts may also attend the conference. All discussions in the conference must be recorded or otherwise documented (to provide the best record of such discussions and promote the free flow of conversation) and a consensus reached if possible.
     
     
224. Any discussions between the parties in the conference can include an agreement on facts, common grounds on which the dispute can proceed, a time frame for completing the disputes resolution process and an agreed adjustment. Recordings of discussions can be made on audio or video tape, MP3 and CD recorders, the FTR Gold system or by using any other suitable audio or visual technology. Any negotiations between the parties after the "on record" discussion of the disputed issues during the conference will be treated as being on a without prejudice basis if an agreement is not reached.
     
     
225. When a dispute remains unresolved after the conference phase has been completed, the Commissioner must issue a disclosure notice together with a SOP pursuant to section 89M(3) without any unnecessary delay.
     
     
226. The conference phase is not necessarily complete just because the parties have held the final meeting. For example, the parties may need further information or to consider further submissions made at the meetings. This will dictate when the Commissioner issues a disclosure notice. Also, the parties can engage in further discussions during or after the SOP phase to attempt to resolve some or all of the disputed issues.

Legal and other advisers attending a conference

227. If a dispute is not settled earlier, the parties can obtain expert legal or other tax advice during the conference phase in addition to any legal or other advice previously obtained. These advisers can attend any meetings in relation to the dispute. The advisers may also revisit some items that the parties have previously discussed (but not agreed to in writing or otherwise accepted).

Conference not held or abridged

228. The Commissioner considers that the conference phase is an important part of the disputes resolution process and will always attend a conference if requested by the taxpayer. If the parties are not in the same location the conference can be held at a place that is convenient for both parties.
     
     
229. In some circumstances, the Commissioner will not hold further discussions or a conference, notwithstanding that the Commissioner has not reached an agreement with the taxpayer.
     
     
230. However, the disputes resolution process will not be finished, because the disclosure notice and SOP phases will still be undertaken. A dispute that is not resolved in the SOP phase will generally be referred to adjudication for determination.
     
     
231. A conference can be dispensed with or abridged in one or more of the following situations, if:
     
     1. there are revenue losses incurred as a result of delaying tactics that the taxpayer used to frustrate the collection of tax and the completion of the disputes resolution process, or
        
     2. the Commissioner is satisfied that the taxpayer or their agent is acting in a frivolous or vexatious manner. For example, where the taxpayer or their agent is setting unreasonable demands about the time, place, or terms of such meeting(s), or conducts themselves unreasonably at any meeting, or
        
     3. the taxpayer contests the Commissioner's policy and it is agreed to disagree or that a conference would not benefit the parties, or
        
     4. the taxpayer advises the Commissioner that they want to dispense with the conference.
     
     
     
232. Where it is practicable, the Commissioner will advise the taxpayer or their tax agent of the decision regarding whether or not the conference phase will be dispensed with or abridged in writing within seven days of that decision being made. The reasons for the final decision must be documented.

Disclosure notice

233. The Commissioner must issue a disclosure notice under section 89M(1), unless the Commissioner:
     
     1. does not have to complete the disputes resolution process because any of the exceptions under section 89N(1)(c) apply (please see earlier discussion), or
        
     2. does not have to complete the disputes resolution process because the High Court has made an order that the dispute resolution process can be truncated pursuant to an application made by the Commissioner under section 89N(3), or
        
     3. has already issued to the taxpayer a notice of disputable decision that includes or takes into account the adjustment proposed in the NOPA pursuant to section 89M(2).
        
        
234. Pursuant to the definition in section 3(1), a disputable decision is:
     
     1. an assessment, or
        
     2. a decision that the Commissioner makes under a tax law, except for a decision:
        
        1. to decline to issue a binding ruling, or
           
        2. that cannot be the subject of an objection or challenge, or
           
        3. that is left to the Commissioner's discretion under sections 89K, 89L, 89M(8), (10) and 89N(3).
           
           
235. When issuing a disclosure notice the Commissioner must also provide to the taxpayer the Commissioner's SOP (as discussed below) and include in the disclosure notice a reference to section 138G and a statement regarding the effect of the evidence exclusion rule pursuant to section 89M(3).
     
     
236. The Commissioner will usually advise the taxpayer two weeks before issuing the disclosure notice and SOP that these documents will be issued to them.
     
     
237. Where practicable, the Commissioner will contact the taxpayer shortly after the disclosure notice and SOP are issued to ascertain whether the taxpayer has received these documents.
     
     
238. If the taxpayer has not received the Commissioner's disclosure notice, for example, due to a postal error or an event or circumstance beyond the taxpayer's control, the Commissioner will issue another disclosure notice to the taxpayer. In this circumstance, the response period within which the taxpayer must respond with their SOP will commence from the date that the Commissioner issued the initial disclosure notice.
     
     
239. Where the taxpayer cannot issue a SOP within the applicable response period, they may issue a late SOP with an explanation of why it is late. The Commissioner will consider the late SOP in terms of the discretion under section 89K(1). (Please see paragraphs 197 to 199 for further discussion).

Evidence exclusion rule

240. A disclosure notice is the document that triggers the application of the evidence exclusion rule. The Commissioner must explain the effect of the evidence exclusion rule and refer to section 138G in the disclosure notice, because this is one of the guiding principles of the disputes resolution process (please see paragraph 260 for further discussion).

Issue of a disclosure notice

241. The Commissioner can issue a disclosure notice at any time on or after the date that either party issues their NOPA.
     
     
242. Usually, the Commissioner will issue a disclosure notice after receiving a NOR, following the conference phase and in accordance with the time line agreed with the taxpayer.
     
     
243. The Commissioner's practice is to issue a disclosure notice within three months after all enquiries are concluded and the conference phase has been completed.
     
     
244. However, at times the Commissioner cannot issue a disclosure notice where, for example, the relevant Inland Revenue officer is still collecting additional information or further investigating the taxpayer. The responsible officer must ensure that any information gathering and investigative activity is not excessive and the disclosure notice is issued promptly once the information gathering or investigation is complete. The responsible officer will advise the taxpayer two weeks before issuing a disclosure notice that it will be issued to them.
     
     
245. In these circumstances, the relevant officer should use one of the relevant statutory provisions to obtain any information needed to complete the conference or disclosure notice and SOP phases to ensure that the disputes resolution process is conducted in a timely and efficient manner.
     
     
246. Where a disclosure notice is issued earlier (for example, the facts are clear, the taxpayer has agreed on the disputed issues or a conference is not required) the reasons must be documented and explained to the taxpayer.
     
     
247. When deciding whether to issue a disclosure notice before the conference phase has been completed, Inland Revenue officers must be aware that, if the taxpayer discloses any new or novel matters in their SOP, they only have two months to reply under section 89M(8) barring a High Court application before the two-month period expires. (Please see section 89M(10)).

Statement of position

248. Pursuant to section 89M(3), when the Commissioner commences the disputes resolution process, the Commissioner must issue a SOP to the taxpayer together with the disclosure notice.
     
     
249. When the disputed issue relates to a tax type that is subject to the statutory time bar (for example, income tax, GST, etc) that falls within the current income year, the parties will endeavour to complete the disputes resolution process before the time bar starts. The parties can agree to a statutory time bar waiver if they have issued a SOP to each other and there is insufficient time to complete the adjudication process.
     
     
250. However, if no such agreement is reached, section 89N(2)(b) allows the Commissioner to advance to the next stage if the Commissioner has considered the taxpayer's SOP and completed the compulsory elements of the disputes process. The Commissioner can amend the assessment by exercising the discretion under section 113.
     
     
251. Whether the Commissioner has adequately considered a SOP will depend on what is a reasonable length of time and level of analysis for that SOP given the circumstances of the case (for example, the length of the SOP and the complexity of the legal issues).
     
     
252. Thus a simple dispute could only take a couple of days to consider adequately while a complex dispute could take a few weeks. If the statutory time bar is imminent the Inland Revenue officer will consider the taxpayer's SOP urgently.

Contents of a SOP

253. Generally, the contents of a SOP are binding. This is because matters that proceed to court are subject to the "evidence exclusion rule" which limits the parties to the facts, evidence (excluding oral evidence), issues and propositions of law that either party discloses in their SOP unless a court order is made under section 138G(2) allowing new facts and evidence to be raised.
     
     
254. However, a mistaken description of facts, evidence, issues or propositions of law and submissions made in the SOP can later be amended if the parties agree to include additional information in the SOPs under section 89M(13).
     
     
255. Under section 89M(4) the SOP must be in the prescribed form (IR773 Statement of position). The SOP must contain sufficient detail to fairly inform the taxpayer of the facts, evidence, issues and propositions of law that the Commissioner wishes to rely on.
     
     
256. The minimum content requirements for a SOP under section 89M(4) are an outline of the relevant facts, evidence, issues and propositions of law. However, to allow the Adjudication Unit to successfully reach a decision, the SOP must also contain full, complete and detailed submissions.
     
     
257. An outline that consists of a frank and complete discussion of the issues, law, arguments and evidence supporting the argument is implicit in the spirit and intent of the disputes resolution process. (In very complex cases a full explanation of the relevant evidence and summary of less relevant evidence will be accepted.)
     
     
258. The disputes resolution process does not require that relevant documents are discovered or full briefs of evidence or exhaustive lists of documents exchanged. Rather, providing an outline of relevant evidence in the SOP will ensure that both parties appreciate the availability of evidence in respect of the factual issues in dispute. The Commissioner should ensure that an outline of any expert evidence on which they intend to rely is included in the SOP.
     
     
259. Submissions made in the NOPA phase must be sufficiently concise to enable the parties to progress the dispute without incurring substantial expense. However, at the SOP phase, if the issues are unresolved and likely to proceed to a court for resolution, then full, complete and detailed submissions should be made.
     
     
260. Subject to section 138G(2), the evidence exclusion rule prevents the court considering arguments and evidence that are not included in:
     
     1. the SOP, or
        
     2. any additional information that:
        
        1. the Commissioner provides under section 89M(8), that is deemed to be part of the Commissioner's SOP under subsection (9), and
           
        2. the parties provide pursuant to an agreement under section 89M(13), that is deemed to be part of the provider's SOP under subsection (14).
           
           
261. Section 89M(6B) reads:
     

     In subsection 4(b) and 6(b), evidence refers to the available documentary evidence on which the person intends to rely, but does not include a list of potential witnesses, whether or not identified by name.

262. Pursuant to section 89M(6B), only documentary evidence and not potential witnesses must be listed in the SOP. Any witnesses' identities will continue to be protected without undermining the effect of the evidence exclusion rule.
     
     
263. If the SOP discusses shortfall penalties it must also state any other appropriate penalties of lesser percentages and shortfall penalty reductions (for example, voluntary disclosure or previous behaviour reductions) as alternative arguments. This ensures that the appropriate penalties are assessed in all cases. However, the Commissioner cannot propose shortfall penalties at the SOP phase that have not previously been proposed in the Commissioner's NOPA.

Receipt of a taxpayer's SOP in response

264. Where the Commissioner has issued a disclosure notice and SOP, the taxpayer must, subject to section 89M(11), issue a SOP within the two-month response period that starts on the date that the disclosure notice was issued.
     
     
265. Therefore, the Commissioner cannot consider a document that the taxpayer purports to issue as a SOP before the Commissioner has issued the disclosure notice because it will not have been issued within the response period. The taxpayer should resubmit this document after the disclosure notice is issued.
     
     
266. Pursuant to section 89M(11), the taxpayer can apply to the High Court within the response period for more time to reply to the Commissioner's SOP. The taxpayer must show that they had not previously discussed the disputed issue with the Commissioner and, thus, it is unreasonable to reply to the Commissioner's SOP within the response period.
     
     
267. The Commissioner will make a reasonable effort to contact the taxpayer or their tax agent two weeks before the response period expires to determine whether the taxpayer will issue a SOP in response to the disclosure notice. Such contact can be made by telephone or in writing.
     
     
268. The taxpayer's SOP will be referred to the responsible officer within five working days after Inland Revenue receives it. Upon receipt, the responsible officer will ascertain and record the following:
     
     1. the date on which the SOP was issued, and
        
     2. whether the SOP has been issued within the relevant response period, and
        
     3. the SOP's salient features including any deficiencies in its content.
        
        
269. Where it is practicable, Inland Revenue will acknowledge the taxpayer's SOP as received within 10 working days after receiving it. However, the Commissioner will advise the taxpayer or their agent of any deficiencies in the SOP's content as soon as practicable.
     
     
270. A taxpayer who has issued a SOP outside the applicable response period can apply for consideration of exceptional circumstances under section 89K. The reasons for accepting or rejecting the application must be documented and the responsible officer will make reasonable efforts to advise the taxpayer of the decision in writing within 15 working days after Inland Revenue receives the taxpayer's application.
     
     
271. A taxpayer is deemed to have accepted the Commissioner's SOP if they do not reply to it with their own SOP within two months after the date that the disclosure notice is issued and none of the exceptional circumstances under section 89K apply. Where practicable, the Commissioner will usually advise the taxpayer that deemed acceptance has occurred within two weeks after the date that the response period for the disclosure notice expires.

The Commissioner's response

272. Pursuant to section 89M(8), the Commissioner can, within two months after the taxpayer's SOP is issued, provide to the taxpayer additional information in response to matters that they have raised in their SOP.
     
     
273. The Commissioner can only provide additional information in response to new or novel information or arguments that the taxpayer has raised in their SOP or agreed to add to their SOP under section 89M(13). The Commissioner cannot add further information simply because it was omitted from the Commissioner's SOP (for example, information that was received under a section 17 notice after the SOP was issued).
     
     
274. The additional information must be provided as far as possible in the same format as the SOP to which it relates (that is, in accordance with section 89M(4)). As mentioned above, the additional information can include documentary evidence but not lists of potential witnesses.
     
     
275. If the Commissioner intends to provide additional information to the taxpayer under section 89M(8), the Commissioner will usually advise the taxpayer or their tax agent of this within two weeks after the taxpayer's SOP is received. However, the timing of this advice can vary depending on the facts and complexity of the dispute. The additional information provided under section 89M(8) is deemed to be part of the Commissioner's SOP. Thus, the evidence exclusion rule under section 138G applies to the additional information.
     
     
276. The taxpayer cannot reply to the additional information that the Commissioner provides, unless the parties agree that additional information will be accepted under section 89M(13).

Agreement to include additional information

277. Either party can agree to include additional information in their SOP under section 89M(13) at any time during the disputes resolution process including after the dispute has been referred to the Adjudication Unit. Although there is no statutory time limit, the Commissioner's practice is to allow one month (from the date that the Commissioner provides additional information under section 89M(8)) for such an agreement to be reached and information provided.
     
     
278. However, before agreeing to a request made by the taxpayer under section 89M(13) the Commissioner will consider the taxpayer's prior conduct and whether they could have provided the information earlier through the application of due diligence.
     
     
279. The Commissioner will usually also consider the materiality and relevance of the additional information and its capacity to help resolve the dispute and may decide to take it into account in coming to an assessment. In this circumstance, both parties will be expected to cooperate in resolving the relevance and accuracy of any such material. The Commissioner may wish to apply resources to verification and comment and this will be considered by the adjudicator.
     
     
280. If a taxpayer's request to include additional information in their SOP is declined, the reasons must be documented with detailed reference to the taxpayer's conduct, level of cooperation before the request was made and why the information was not provided earlier. The responsible officer will also advise the taxpayer or their tax agent of the reasons why their request was declined.
     
     
281. Any agreement to add further information to the SOP will be made subject to the taxpayer agreeing that the Commissioner can include a response to the additional information to the SOPs, if required, within an agreed time frame.
     
     
282. Any additional information that the parties provide under section 89M(13) will be deemed to form part of the provider's SOP under section 89M(14). Thus, the evidence exclusion rule under section 138G applies to the additional information.

Preparation for adjudication

283. The Adjudication Unit is part of Inland Revenue's Office of the Chief Tax Counsel and represents the final step of the disputes resolution process. The adjudicator's role is to review unresolved disputes by taking a fresh look at a tax dispute and the application of law to the facts in an impartial and independent manner and provide a comprehensive and technically accurate decision that will ensure the correctness of the assessment.
     
     
284. Generally, the adjudicator will make such a decision within four months after the case is referred to the Adjudication Unit. However, this will depend on the number of disputes that are before the Adjudication Unit, any allocation delays and the technical, legal and factual complexity of those disputes. (For further information on the time frame for adjudication of disputes please see the article titled "Adjudication Unit - Its role in the dispute resolution process" that was published in the Tax Information Bulletin Vol. 19, No. 10 (November 2007).)
     
     
285. The adjudication process is an administrative (rather than a legislative) one. Recent judicial comments have been made in C of IR v Zentrum Holdings Limited and Another, Ch'elle Properties (NZ) Limited v CIR (2004) 21 NZTC 18,618 and ANZ National Bank Ltd and others v C of IR (No. 2) (2006) 22 NZTC 19,835 indicating that, as a matter of law, it is not strictly necessary for Inland Revenue officers to send all disputes to the Adjudication Unit for review and Inland Revenue officers are not necessarily bound by the Adjudication Unit's decisions.
     
     
286. Notwithstanding the above judicial comments, if the parties have not agreed on all the issues at the end of the conference and disclosure phases or to truncate the disputes resolution process under section 89N(1)(c)(viii), it is the Commissioner's policy and practice that all disputes are to be sent to the Adjudication Unit for review, irrespective of the complexity or type of issues or amount of tax involved unless any of the following exceptions arise:
     
     1. the Commissioner has considered the taxpayer's SOP for the purposes of section 89N(2)(b) and referred the dispute to the Adjudication Unit for their preliminary consideration and the Adjudication Unit has determined that it has insufficient time to reach a decision in respect of the dispute before a statutory time bar would prevent an assessment from being increased (please see paragraph 250 to 252 for further discussion), or
        
     2. any of the legislative exceptions specified in section 89N(1)(c) apply (please see paragraphs 146 to 188for further discussion) so that the Commissioner can amend an assessment without first completing the disputes resolution process, or
        
     3. the High Court has made an order that the disputes resolution process can be truncated pursuant to an application made by the Commissioner under section 89N(3) (please see paragraphs 175 to 186 for further discussion).
     
     
287. The decision not to refer the case to adjudication must be made by an Inland Revenue officer with a senior level of authority in Service Delivery (for example, at the time of writing this SPS the delegation was with Assurance Manager level or above). In respect of the first exception mentioned in paragraph 286(a) it is necessary that the parties have exchanged a SOP and it is a matter solely for the Adjudication Unit to determine whether it has insufficient time to fully consider the dispute.
     
     
288. Thus, during the course of a dispute, the Commissioner can issue an amended assessment to the taxpayer, for example, if the parties have agreed under section 89N(1)(c)(viii) to abridge the adjudication phase. Furthermore, before the dispute is referred to the Adjudication Unit, the taxpayer can request that the Commissioner issues an amended assessment and then challenge that assessment under section 138B(1).
     
     
289. If the dispute is to be referred to the Adjudication Unit, the Commissioner should not issue an assessment or amended assessment before the adjudication process is completed unless a time bar is imminent. In this circumstance, the responsible officer will prepare a cover sheet that will record all the documents that must be sent to the Adjudication Unit.
     
     
290. The cover sheet together with copies of the documents (NOPA, NOR, notice rejecting the NOR, conference notes, both parties' SOP, additional information, material evidence including expert opinions and a schedule of all evidence held) and any recordings of discussions held during the conference must be sent to the Adjudication Unit.
     
     
291. If the dispute is to be referred to adjudication, the responsible officer will issue a letter together with a copy of the cover sheet to the taxpayer before sending the submissions, notes and evidence to the Adjudication Unit. The cover sheet and letter are usually completed within one month after the date that the Commissioner's reply to the taxpayer's SOP (if any) is issued or the response period for the taxpayer's SOP expires.
     
     
292. The purpose of this letter is to seek concurrence on the materials to be sent to the adjudicator - primarily in regard to documentary evidence that has been disclosed at the SOP phase. This letter will allow no more than 10 working days for a response.
     
     
293. Once the taxpayer has concurred on the materials to be sent to the Adjudication Unit, those materials will be so forwarded. However, if no response is received from the taxpayer the materials will be forwarded after the 10 working days allowed for the taxpayer's response have elapsed. The adjudicator may also contact the parties after the initial materials have been received to obtain further information.
     
     
294. Where an investigation has covered a number of issues, the cover sheet will outline any issues that the parties have agreed upon and any issues that are still disputed. The adjudicator will only consider the disputed issues and not those issues that have been agreed upon.
     
     
295. Generally, the adjudicator only considers the materials that the parties have submitted. They do not usually seek out or consider further information, unless it is relevant. The adjudicator may consider such additional information notwithstanding that the parties have not agreed that the provider can include this information in their SOP under section 89M(13).
     
     
296. However, any additional material that the parties have not disclosed in their SOP (or agreed to include in their SOP under section 89M(13)) cannot later be raised as evidence in court because the evidence exclusion rule in section 138G(1) will apply (as discussed in paragraphs 260 to 262).

Adjudication decision

297. Once a conclusion is reached, the Adjudication Unit will advise the taxpayer and responsible officer of the decision. The responsible officer will implement any of the Adjudication Unit's decisions and follow up procedures where required including issuing a notice of assessment to the taxpayer where applicable.
     
     
298. Where the Adjudication Unit makes a decision against the Commissioner, the Commissioner is bound by and cannot challenge that decision. The dispute will come to an end.
     
     
299. Where the Adjudication Unit makes a decision against the taxpayer, they can challenge the assessment (whether made by the Commissioner or taxpayer) or disputable decision if they are within the applicable response period.
     
     
300. If the Commissioner has commenced the disputes resolution process, the taxpayer, if disagreeing with the adjudicator's decision and any later notice of assessment or amended assessment that is issued, can file proceedings in the general jurisdiction of the TRA or the High Court if any of the following conditions under section 138B(1) is met:
     
     1. the assessment includes an adjustment that the Commissioner has proposed and the taxpayer has rejected within the response period, or
        
     2. the assessment is an amended assessment that imposes a fresh or increases an existing liability.
        
        
301. A taxpayer can also challenge an assessment that the Commissioner issues before the dispute goes through the adjudication process (for example, when an exception under section 89N(1)(c) applies).
     
     
302. The taxpayer must file proceedings with the TRA or High Court within the two-month response period that starts on the date that the Commissioner issues the notice of assessment or amended assessment.
     
     
303. If applicable, the responsible officer will implement any decision made by the hearing authority and follow up procedures where required including issuing a notice of assessment or amended assessment to the taxpayer.

This Standard Practice Statement is signed on 10 June 2008.

Graham Tubb
Group Tax Counsel
Legal and Technical Services