Tax investigations by Inland Revenue
Satisfying the investigator as to queries during investigation is the
best way to prevent a dispute from escalating. Inland Revenue has considerable and wide
ranging powers to require financial and tax information from taxpayers and other persons
(eg NZ Stock Exchange and NBNZ v CIR (1991) Privy Council general
fishing information requests regarding customers). Failure to comply with
information requests within the specified time limits can have serious consequences and
affects for the taxpayer or person concerned, including future evidence exclusion.
Tax disputes before assessment
A complex, mandatory, statutory procedure for tax disputes precedes the
issuance of an assessment by Inland Revenue. The disputes procedure involves a notice of
proposed adjustment (nopa), a notice of response (nor), a commissioner statement of
position (csop), and a taxpayer statement of position (tsop). Taxpayers have two month
response periods for providing a nor and a tsop, which documents must address various
specified matters (such as facts, legal issues, tax laws and legal propositions being
relied on). Issue limitation and evidence exclusion rules apply to subsequent court
challenges for issues and evidence not specified in the statements of position. The
statements of position (csop and tsop) are considered by Inland Revenue's adjudication
unit, which unit makes the Inland Revenue's assessment decision.
There are special rules for challenging tax assessments through court
proceedings (eg as to time limit for commencing a challenge, being 2 months from the
earlier of the Inland Revenue adjudication report or an assessment). Such rules apply
along side the general rules for conducting litigation in the Taxation Review Authority,
the High Court, the Court of Appeal and the Supreme Court (including rules as to costs
recovery by the successful party and security for costs : for security for costs in a tax
case see Reefdale v CIR (2004)). A taxpayer may elect to commence a
challenge in the High Court (eg State Insurance v CIR (1990)
share-swap gains on insurer's capital account; Withey v CIR (1998)
a tax avoidance case and subsequent new due date case), or in the Taxation Review
Authority (eg Case V9 (2001). Appeals from cases in the High Court are to
the Court of Appeal (eg CIR v Dewavrin Seagard (1994) foreign
exchange gains/loss, hedging contracts and the accruals rules; Hill v CIR (1994)
deductibility of forestry expenditure), and from there to the Supreme Court (that
has now replaced the Privy Council (see CIR v Mitsubishi : Privy Council
1994 warranty provisions held to be tax deductible).
Taxation Review Authority (TRA) hearings
The Taxation Review Authority is a specialist taxation court, operating
at a district court level, but which handles the full range (small to large) tax disputes
(eg Case U17 (1999) tax residence and double tax treaty). A TRA
case differs from a High Court case in that a taxpayer's name is confidential in the
reporting of TRA cases, and the general position is that there is no costs recovery for
the successful party in the TRA. Cases commenced in the TRA can be transferred to the High
Court : see CIR v XXX (2005, 23 May, E France J). Appeals from the TRA
are made to the High Court and from there to the Court of Appeal, and from there to the
Supreme Court (previously Privy Council). The special TRA rules on confidentiality and
costs do not apply on the appeal of a TRA decision.
Declaratory Judgments Act cases
The Declaratory Judgments Act provides a basis for seeking a judgment
on a tax issue that is outside of the normal assessment challenge process, but has
features that limit its availability: see Pacific Trawling v MOF & CIR (2005)
GST input credits; Housing New Zealand Ltd v CIR (1999) GST
and residential housing.
Tax Warranty disputes
While most tax disputes will be between a taxpayer and Inland Revenue,
disputes also arise between persons over the interpretation and application of tax
warranties in contracts, and particularly over GST.
Negotiation of tax settlements
Securing settlement of a tax dispute by negotiated agreement, rather than by litigation,
is often preferable to leaving resolution in the hands of the court. If Inland Revenue
cannot be persuaded as to the merits of the taxpayers position at the investigation
stage or the nor stage (see above), perhaps the best opportunity for settlement arises in
the period after preparation of the taxpayers case, but before the case is heard by
a judge, because that is the time Inland Revenue lawyers are in the best position to
assess realistically the Inland Revenues chances of success.
Binding Ruling applications
A statutory procedure is available for seeking a binding ruling from Inland Revenue for an
arrangement or an impending arrangement. The process relies upon full disclosure of the
details of the arrangement and of its taxation consequences, and fees are payable to
Inland Revenue for the application, and for the time taken by Inland Revenue to consider
the application. Alternatively, non-binding rulings may also be sought.
General tax advice (eg income tax & GST)
So called shortfall civil penalties may be imposed on taxpayers by Inland
Revenue in various circumstances (eg not taking reasonable care: 20% of tax shortfall;
unacceptable interpretation : 20% of tax shortfall; gross carelessness : 40% of tax
shortfall; abusive tax position : 100% of tax shortfall; evasion : 150% of tax shortfall).
The shortfall penalties, which are severe, make the taking advice on potentially
contentious tax filing positions by a taxpayer an important step.
(Robbie was taxpayers counsel, or one of them, in the cases
referred to above)