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Developments in Tax Disputes Procedure – Another Step Backwards ...
Developments in Tax Disputes Procedure – Another Step Backwards ...
(Co-Authored with Mark Keating, Auckland University Faculty of Commercial Law)
The statutory disputes procedure in Part IVA Tax Administration Act 1994 has now been in operation for 15 years. The aim of that procedure is to promote an "all cards on the table" approach to dispute resolution, whereby the exchange of information in prescribed forms will enable the parties to understand (and therefore hopefully resolve) any dispute over the interpretation and application of the tax laws. The process dictates the exchange of a series of prescribed documents and envisages opportunities for discussion and independent review within the Inland Revenue Department (“IRD”) before an assessment is raised. In effect, the dispute regarding an assessment must now occur before that assessment is made.
The disputes procedure is made up of a combination of prescriptive statutory requirements with rigid timeframes and non-binding administrative steps. How this mix of rules operates in practice has also been determined by the courts in a string of procedural disputes taken by taxpayers in the past decade. Accordingly, navigating the disputes procedure is far from
straightforward - and recent legislative and administrative changes only complicate matters further.
In November 2010 IRD issued two comprehensive Standard Practice Statements explaining Departmental practice and setting out its view over how the procedure should operate. More recently, in September 2011 the Income Tax (Tax Administration and Remedial Matters) Act 2011 enacted a number of amendments to the statutory procedure. As discussed below many of those changes were implemented despite the unanimous opposition of taxpayers and their representatives.
The tax disputes procedure is vital to the health of the New Zealand tax regime. It provides the only method for resolving disagreements over the tax liability of citizens. As such, the procedure must not only be accessible for all taxpayers but must manifestly be seen as fair and reasonable. Unfortunately, while the aims of the procedure are laudable, it is widely recognised the current New Zealand procedure has failed.
The paper will review recent developments with the disputes regime. In particular, it will examine the contentious decision to remove the right for taxpayers to opt-out of that process in favour of focusing their resources on the inevitable challenge. The paper also considers the removal of the small-claims jurisdiction of the Taxation Review Authority and changes to the procedural rules in the TRA. It will also discuss the recent relaxation of the secrecy provisions governing what taxpayer information IRD can release publicly. Finally, the paper considers changes to the status and procedural rules governing the operation of the Taxation Review Authority.
Tax Disputes Regime
The disputes procedure in Part IVA provides a compulsory code for settling tax disputes. Section 109 provides that the disputes and subsequent challenge proceedings are the sole methods for contesting the correctness (and arguably the validity) of an assessment. Accordingly, attempts by taxpayers to contest either their assessment or the subsequent tax liability in any other forum is not permitted. Taxpayers who fail or elect not to follow all steps required under the Tax Administration Act are thereby precluded from disputing an assessment.
This harsh conclusion was confirmed by the Supreme Court in Allen v CIR. There the taxpayer, relying upon IRD published policy, had neglected to follow the pre-litigation disputes procedure but instead had directly filed challenge proceedings in the TRA. Those proceedings were ultimately struck out for non-compliance with the pre-litigation disputes procedure which was found to be both compulsory and a prerequisite to challenging an assessment. The Supreme Court unanimously concluded:
“Of course there is no general obligation to issue a NOPA because there is no general obligation to dispute an assessment. If however a taxpayer wishes to dispute an assessment the disputes procedure must be complied with and that involves the filing of a return and the issuing of a NOPA.”
Inland Revenue have been vigilant in ensuring taxpayers dispute tax assessments only through the statutory disputes procedure. The Department will not permit taxpayers to utilise alternative forms of dispute resolution or other types of proceedings to resolve tax disputes. As a result, the operation of that procedure is a matter of considerable importance to all taxpayers and is one of the most concrete manifestations of the integrity of the tax system. The tax disputes procedure is vital to the health of the New Zealand tax regime. It provides the only method for resolving disagreements over the tax liability of citizens. As such, the procedure must not only be accessible for all taxpayers but must manifestly be seen as fair and reasonable. When taxpayers lose faith in the fairness and integrity of that procedure, the operation of the entire tax regime is called into question. This point was expressed by one of the Big Four accounting firms recently in the following terms:
“The tax system needs a sound disputes process which allows taxpayers and Inland Revenue to resolve differences in interpretation of fact and law. This is important because taxpayers’ perceptions of the fairness of the tax system rely on how the law is applied to them. If Inland Revenue’s interpretations are considered to be aggressive or incorrect and those positions are unable to be tested, taxpayers will lose faith in the system.”
Unfortunately (as seen below) in the authors’ view, the failings in the current disputes regime and IRD’s refusal to address them mean we are approaching that point. The planned Ministerial Review of the operation of the disputes procedure scheduled to take place two years hence cannot come soon enough.
Critics of the current disputes regime
As early as 2002 taxpayers and their advisers began complaining about the operation of the disputes regime. One leading critic noted:
“[for] most taxpayers, unless the numbers involved are significant, the burden and resulting cost of participating in the dispute resolution procedure are sufficient to dissuade them from proceeding.”
In 2005 a prominent tax barrister proposed substantial reform to the statutory disputes procedure, stating:
“The pre-litigation tax dispute resolution process in New Zealand is highly complicated. It has many stages and creates the potential for disputes to go on for long periods of time at significant cost. … The disputes procedure is clearly unsatisfactory …”
In 2008 the Tax Committees of the New Zealand Law Society (NZLS) and the New Zealand Institute of Chartered Accountants (NZICA) made a rare Joint Submission (NZLS/NZICA Joint Submission) to the Minister of Revenue strongly criticising the disputes process and recommending extensive reform. The background to that joint submission was explained by the-then Chair of the NZLS Tax Committee:
“It is unprecedented for the Tax Committees of NZICA and NZLS to work together on proposals for change in the way we have with the joint submission. This highlights the level of concern we have that the disputes process is simply not working as it should.”
The Joint Submission concluded that “the current disputes procedure is an abject failure … [and] fails the majority of taxpayers” and therefore “fundamental changes are necessary to make the disputes resolution procedure achieve their objectives and operate in a workable way”. The Submission concluded that tax practitioners “have serious concerns about the current procedures and believe changes are required urgently.”
That criticism came despite a comprehensive review of the operation of the disputes regime by IRD in 2004, leading to a number of statutory amendments to the procedure in 2005. However the Joint Submission found these reforms had not fixed the system:
“Both the Society and NZICA have for some time been concerned about the effectiveness of the disputes resolution procedure and challenge procedures … the changes made to the procedure [in 2004] have not in the Society’s and NZICA’s view resolved the problems with the disputes resolution procedures. … the procedures … have not cured the problems identified by the Richardson Committee [in 1993].”
Central to the criticism was the increasing cost of applying the procedure. The Joint Submission noted:
“[T]he disputes resolution process has led to increased costs for taxpayers, rather than reduced costs. The increased costs apply to taxpayers across the board — small claims and also those in larger cases. … Taxpayers are choosing not to pursue disputes as a consequence. … Effectively taxpayers are ‘burned off’ by the high costs imposed by the disputes resolution procedures.”
As a result, the Joint Submission concluded:
“We are seeking some fundamental changes to the legislation which we believe are necessary to make the disputes resolution procedure achieve their objectives and operate in a workable way.”
Unfortunately, none of the statutory reforms recommended in the Joint Submission were adopted. Not surprisingly complaints about the procedure continued. For instance, all submissions made earlier this year in relation to the Taxation (Tax Administration and Remedial Matters) Bill before Parliament questioned the workability of the disputes regime. A large number of submitters considered “that taxpayers are being ‘burnt off’ by an overly long and elaborate disputes process.” For instance, PriceWaterhouseCoopers submitted:
The current disputes procedure is ineffective as a resolution process and the policy objectives of the disputes procedure are not being met. The Government should carry out a review of the effectiveness of the disputes resolution procedure and consider changes accordingly.
IRD continue to reject those complaints on the grounds any problems can be resolved by improvements to its administration of the disputes procedure, which it believes “will result in a more efficient and satisfactory process, particularly for smaller disputes.” These improvements mainly focus upon establishing stricter (though not mandatory) timeframes for the progression of the dispute and the introduction of internal facilitators to the conference phase.
Despite those changes, discontent remains. Much tax litigation continues to revolve around not whether a tax position is correct but how the procedure for resolving that dispute should be applied. This increase in procedural litigation was noted by Crown Law in its Annual Report to Parliament for 2007:
“There are also a steady number of cases involving process. These are often related to the statutory tax disputes process.”
What this increase in procedural litigation demonstrates is how much effort is being devoted by taxpayers to wrestling with the disputes procedure. In many cases taxpayers are unable (or unwilling) to dispute their substantive tax liability or the correctness of their assessment but instead are compelled (or chose) to fight about the proper operation of the disputes procedure itself.
This dim view of the disputes procedure appears to be shared by senior members of the judiciary. Most vocally, the Hon Sir William Young, President of the Court of Appeal has repeatedly criticised the complexity and efficacy of the current procedure. Writing extra-judicially in 2009 Young P concluded:
“This process is undoubtedly exacting, extensive and thus expensive from the point of view of taxpayers. Rather oddly, it is constituted in part by statute and in part by departmental practice, from which the Commissioner from time to time departs. ... A very large portion of recently decided cases involve process disputes and comparatively few address the actual tax liability of the taxpayer. Perhaps this is associated with the accuracy of the assessments which the disputes process produces. But I cannot help but think that the process also serves to burn off some taxpayers. ... If there is a problem, I do not think the answer lies in more add-ons to a process, which is already sufficiently complex. A possible solution may be to strip the required statutory process back to the bare essentials of assessment and challenge, and leave everything else to the departmental practice, with either party free to short circuit the process in favour of judicial determination. That would reduce the expense and time associated with tax disputes”,
A growing number of other commentators have likewise called for simplification of the disputes procedure, mainly by abandoning (or making optional) the SOP and Adjudication phases of the current procedure. The desire has been to free taxpayers from a lengthy and repetitive system almost entirely controlled by the Department. Instead, there has been a near universal demand for more direct access to the courts for taxpayers wishing to contest an assessment or proposed reassessment. One commentator recommended:
“the time and cost of the disputes resolution process appear to have a chilling effect on litigation. It has been suggested that taxpayers ought to be able to elect to go the challenge process, which takes the matter to the TRA or High Court, without being forced to engage in the disputes resolution procedure.”
Nevertheless, the Commissioner remains deaf to these proposals, rejecting all submissions for simplification of the present system.
Officials agree there can be some repetition in the content of a NOPA/NOR and SOP. However, it is considered that the SOP is an important document in focussing the dispute for the adjudication process and any subsequent court proceedings. ... In any event, a degree of repetition does not necessarily equate to significant time or compliance costs for the disputants. Having a single SOP that contains all the relevant issues and propositions of law to which the EER applies is considered preferable to supplementing the initial disputes documents, which may have been superseded by subsequent discussions.
Unaccountably, Inland Revenue dismissed calls for wholesale reform of the disputes procedure on the grounds:
“Although many concerns have been raised about the administration of the disputes process and how much of the process should be explicitly legislated for there have been previously no serious suggestions the fundamentals of the process should be revised.”
Instead, Inland Revenue maintain the system is working as intended, and what problems exist will be resolved by better administration of the system by the Department:
“Administrative changes recently introduced by Inland Revenue and the legislative amendments proposed in the Bill [which the Department acknowledged were universally opposed by all submissions] should significantly improve the effectiveness of the disputes process and better align it with the stated policy objectives.
How IRD conducts tax disputes under the procedure are set out in two lengthy Standard Practice Statements issued in November 2010:
- SPS 10/04 Disputes resolution process commenced by the Commissioner,
- SPS 11/04 Disputes resolution process commenced by the taxpayer.
These Statements are largely descriptive of the statutory provisions and the relevant administrative steps involved. Significantly, that Statement is intended only as “a reference guide for taxpayers and Inland Revenue officers” and makes it clear that it is not binding on IRD and will only be followed “where possible”.
Unfortunately, many taxpayers remain sceptical of the benefits from IRD’s tinkering with administration of the process. This view was expressed by a leading law firm which stated:
The concern with administrative changes is that the Commissioner has argued (successfully) before the Courts that he is not required to follow his own policies and administrative practices, with the consequence that taxpayers no longer have confidence that the Commissioner will adhere to his policies and practices. This criticism has largely been dismissed, and legislative amendments [sought by taxpayers to fundamentally improve the regime] have been kept to a minimum.
IRD insists the revised procedure must be given further time to prove itself. It will hold a review of the effectiveness of the process in approximately two years’ time. Accordingly, while the current disputes procedure is widely viewed by commentators as (in the words of Young J) “undoubtedly exacting, extensive and thus expensive”, it is apparent the system will not be improved in the foreseeable future.
Removal of taxpayer opt-out
The most significant reform to the procedure enacted by the Taxation (Tax Administration and Remedial Matter) Act 2011 was the removal of the unilateral right of taxpayers to opt-out of the procedure in favour of focusing their resources on the inevitable challenge. This opt-out right was not expressly provided for under the previous legislation but arose implicitly under s 138B(3), which gave the taxpayer a right to challenge the Commissioner’s refusal to amend their assessment in the manner they proposed follow the Commissioner’s rejection of the taxpayers NOPA. Effectively, after the exchange of the NOPA and NOR in disputes initiate by the taxpayer, that taxpayer could commence a challenge under Part VIIIA. The subsequent steps in the statutory disputes process therefore fell away.
Significantly no equivalent opt-out existed for taxpayers in disputes initiated by the Commissioner. The introduction of s 89N in 2005 explicitly required the Commissioner to complete the full process for those disputes. Only when the parties agreed that completion of the process was not required could taxpayers commence a challenge. This effectively required the taxpayer to obtain the Commissioner’s permission to opt-out of the post-NOR steps in the statutory process.
The Department has publicly stated that few taxpayers exercised the unilateral opt-out right for taxpayer initiated disputes. Nevertheless, for reasons that have never been satisfactorily explained, IRD determined to legislatively remove that option for taxpayers. Henceforth, taxpayers may not commence challenge proceedings for taxpayer initiated disputes until the Commissioner has issued a “challenge notice”. This notice amounts to the Commissioner’s determination of the dispute by refusing to grant the adjustment proposed by the taxpayer. It is the equivalent of the Commissioner’s reassessment of the taxpayer by approving the adjustment proposed by IRD. In effect, until the Commissioner has reached a final decision and issued a notice recording that determination, the taxpayer cannot commence a challenge.
It must be presumed that any “challenge notice” will generally be issued by the Adjudication Unit only at the completion of the dispute process. In this regard, the removal of the unilateral opt-out brings taxpayer initiated disputes into line with Commissioner initiated disputes, which must complete the disputes process by virtue of s 89N. In this way, the full process must now be completed for all disputes with determined by the Adjudication Unit before taxpayers gain the right to challenge that decision. Officials explained the rationale for this reform as follows:
The changes ... are designed to ensure that, unless an exception applies, the full process is followed irrespective of whether the Commissioner or the taxpayer initiated the dispute. It is intended that the challenge notice be equivalent to an amended assessment for taxpayer-initiated disputes; that is, the final step in the process that launches the challenge right (a right to begin litigation).
Despite the fact this unilateral opt-out was seldom used, its removal generated strong opposition from taxpayers and their advisers during the process of the Bill. All submissions called for the creation of a similar opt-out right for taxpayers engaged in Commissioner initiated disputes. Officials summarised these submissions as follows:
Taxpayers should be given a legislative right to opt out of disputes initiated by the Commissioner. This would allow taxpayers the opportunity to progress the matter directly to court in situations when the taxpayer sees little benefit from engaging in the full disputes process. This opt-out right could take effect either immediately after the exchange of the NOPA and NOR (PricewaterhouseCoopers, Russell McVeagh) or after the conference phase (Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants/New Zealand Law Society). Taxpayers in disputes of less than $50,000 should have the right to opt out at any time. (KPMG)
Unfortunately, officials flatly rejected those proposals. Again, IRD maintains all concerns can be addressed by administrative procedures:
Inland Revenue has very recently introduced fundamentally revised systems to administer disputes. These processes are set out in two standard practice statements (SPSs) and include improved documentation, bilateral opt-out guidelines and most significantly, independently facilitated conferences. It is anticipated that the revised administration will result in a more efficient and satisfactory process, particularly for smaller disputants.
The applicable policy regarding opting-out of the tax disputes procedure is contained in SPS 10/04. It explains that “the Commissioner and the taxpayer can agree in writing not to complete the disputes process if they are satisfied that the dispute can be more efficiently resolved at a hearing authority (referred to as ‘opt out’).” However, IRD policy is clear the opt out should seldom be exercised and therefore its agreement will be given only in narrow circumstances. These are where:
- the total amount of tax in dispute is $75,000 or less (except where the dispute is part of a wider dispute);
- the dispute turns on issues of fact only (eg facts that are to be determined by reference to expert opinions or valuation);
- the dispute concerns facts and issues that are waiting to be resolved by a court; or
- the dispute concerns facts and issues similar to those previously considered by the Adjudication Unit.
None of these criteria are contained in the Act, nor is their rationale clearly explained in the policy. For instance, there is no justification for why the arbitrary ceiling of $75,000 was adopted. Furthermore, this $75,000 figure is cumulative so may be exceeded if a dispute involves a number of separate issues that are each of low value but have a combined total that exceeds the threshold. It is hard to understand why a single small dispute would warrant the opt-out while a number of separate small disputes do not.
An obvious problem for many taxpayers when applying the final criteria is that generally taxpayers will not know “what matters have been considered by the Adjudication Unit”. As discussed below, the Commissioner continues to refuse to publish even redacted versions of Adjudication Reports, so taxpayers will invariably remain uninformed as to what similar matters have been considered in previous disputes involving other taxpayers. In the absence of taxpayers being able to consider previous Adjudication Reports, whether and to what extent their own dispute raises “similar issues” cannot possibly be determined. Accordingly, unless IRD itself volunteers that information (which is unlikely, given the policy expressly refers to the requirement to maintain secrecy in respect of other taxpayers’ disputes), taxpayers have no way of knowing whether a matter in dispute has previously been considered. As such, that ground of opt-out for taxpayers is hollow.
Interestingly IRD mandate that “disputes on tax avoidance issues will not meet the ‘issues of fact’ requirement” on the grounds tax avoidance cases “involve analysing mixed questions of law and fact.” In effect, IRD has determined it will not agree to taxpayer requests to opt-out for tax avoidance disputes, presumably on the grounds such disputes are more efficiently dealt with by completing the disputes process and being determined by the Adjudication Unit. If so, that stance is directly contrary to the reasoning of both the High Court and the Court of Appeal in the ANZ case, which upheld the Commissioner’s decision not to refer the structured finance dispute to the Adjudication Unit for determination. The High Court “[did] not consider that it is realistic to expect that the matters in issue in these proceedings could be resolved in the Adjudication Unit” and concluded that the Court was a more “expeditious and efficient” venue to determine the matters in issue. The Court of Appeal confirmed that decision. Accordingly, IRD’s rationale for refusing taxpayers the right to opt-out for tax avoidance disputes must be questioned.
Even when taxpayers meet the narrow criteria for opt-out approval, IRD requires that:
“the Commissioner must be satisfied that the taxpayer has participated meaningfully during the conference phase. ... This means that the Commissioner will not agree to opting out unless there has been a conference. In addition to attending the conference, the Commissioner considers that a taxpayer will have participated meaningfully during the conference phase”.
Finally, even if all those requirements are met, IRD will only agree to an opt-out if the taxpayer has agreed “to sign a declaration that all material information relating to the dispute has been provided to the Commissioner.” Neither of these additional criteria is found in the legislation. Rather, it seems they are merely required as a matter of IRD convenience.
IRD’s view of how the policy will be applied in practice was explained by officials as follows:
The new opt-out guidelines are likely to result in more cases being truncated and therefore less need for the taxpayer to apply to court. In addition, taxpayers now know when the Commissioner will agree to a truncated process, providing comfort about whether a particular dispute will go through a truncated or the full disputes process. In cases when the dispute is not specifically covered by the opt-out guidelines, taxpayers will still be able to request that the Commissioner agree to opt out.
Despite that optimistic view, the combined effect of the policy is that taxpayers engaged in a dispute are required to meet narrow, non-statutory criteria unilaterally imposed for the convenience of IRD before they will be granted permission to abandon the remainder of the statutory procedure and commence a challenge. This puts IRD in the position of gate-keeper for when taxpayers may have access to the courts to contest their tax assessments. This stance raises concerns under s 27(3) New Zealand Bill of Rights Act 1990, which guarantees all citizens the “right to justice”:
(3) Every person has the right to bring civil proceedings against, and to defend civil proceedings brought by, the Crown, and to have those proceedings heard, according to law, in the same way as civil proceedings between individuals.
Given the near-total absence of timeframes on the Commissioner during a dispute (particularly for disputes initiated by the taxpayer, which are generally not subject to the operation of the statutory four-year time bar), IRD’s control over the procedure potentially undermines the taxpayer’s right to bring challenge proceedings. This concern was summarised by officials as follows:
The proposal to introduce a “challenge notice” should not proceed. Because the proposals do not provide any certainty that a challenge notice will be issued at all, they effectively require the Commissioner to give “permission” before the taxpayer can issue a challenge in the courts. This breaches section 27(3) of the Bill of Rights Act 1990, which protects a citizen’s right to bring civil proceedings against the Crown in the same way as civil proceedings against individuals.
The potential Bill of Rights concern was acknowledged by officials when the Bill was reported back to Parliament:
“The changes are not intended to provide a block to taxpayers appearing before the courts. However, officials have been advised by Crown Law that the disputes process cannot be indefinite without raising Bill of Rights Act 1990 concerns, and the lack of statutory timeframes in the taxpayer-initiated disputes process does raise the theoretical possibility of the process stagnating.”
To alleviate this concern a new time-limit was in s 89P to require the Commissioner to determine a dispute initiated by the taxpayer and issued either a reassessment or a challenge notice within four years from the date of the taxpayer’s original NOPA. If a challenge notice is not issued within that four year period, the Commissioner is deemed to have accepted the adjustment proposed by the taxpayer in that original NOPA, and must reassess the taxpayer accordingly. The adoption of the four year period was intended “to ensure symmetry between the taxpayer-initiated and Commissioner-initiated disputes processes.”
The combined effect of these changes is that taxpayers are now obliged to complete the full disputes process for all taxpayer initiated disputes, which may drag on for four years before the Commissioner is obliged to make a final decision, yet the taxpayer has now lost the right to opt-out of that procedure to commence challenge proceedings. This result is far from satisfactory as justice delayed is often justice denied.
In an attempt to pacify taxpayers about potentially long delays, officials note:
The recently released Inland Revenue SPSs set out timeframes for each intermediate step of the disputes process. If these administrative timeframes are not going to be met, approval from a senior Inland Revenue manager is required. This increased accountability on Inland Revenue staff has resulted in timeframes being met in all but a few instances. In those instances the documents have been issued as soon as possible after the timeframe has lapsed.
However, it is noteworthy that IRD rejected all submissions that would actually have imposed statutory timeframes on the Commissioner’s conduct of disputes. Instead official explained:
Administrative timeframes allow Inland Revenue staff to appropriately allocate resources to particular disputes. If rigid statutory timeframes were in place, there is a risk that smaller disputes will be reprioritised, and potentially extended out, to ensure that larger disputes meet the statutory timeframe.
It is also worth noting that, although timeframes are not provided for each step of the disputes process, the Commissioner is nevertheless subject to the four-year statutory time-bar for amending assessments. Given that most disputes arise following an Inland Revenue audit of past years’ activities, adhering to this time-bar will in many cases be sufficient motivation for the Commissioner to advance the dispute in a timely manner.
Based on that reasoning, officials ensured the progress of disputes remains a matter for IRD administrative discretion:
Although submitters consider reliance on administrative practices to be inferior to a legislative right, officials are concerned that legislating for administrative practice can have unforeseen consequences and result in further litigation about the application of any new provision. It is expected that the revised administrative practices (as set out in the SPSs) will result in a more satisfactory disputes process for taxpayers.
Nevertheless, despite this optimism, and the plea that “these SPSs should be given an opportunity to work ... [so] the revised administrative systems have been given time to ‘bed in’” the Minister of Revenue has confirmed a review “of the effectiveness of the administrative opt-out guidelines (and other key administrative measures) be conducted in approximately two years’ time.” Given continued problems with the disputes procedure, the authors consider this review cannot come soon enough. Such a review should not simply tinker with or look to refine the existing procedure but should consider as a matter of first principle whether the current procedure has merits and what steps (if any) should be retained. Furthermore, that review should be conducted by a genuinely independent party (possibly a member of the judiciary, as with Richardson J’s original Organisational Review in 1993) and not simply by officials with a vested interest in retaining the current procedure.
In those cases where a bilateral opt-out actually occurs the consequence would be that there is no restriction at law to the parties’ ability to have resort to new arguments and raise new issues at trial – Zentrum Holdings Ltd. Some comfort is given to taxpayers by SPS 10/04 which advises that the Department will not rely on any alternate basis for assessing to that contained in its NOPA unless that basis has been raised and discussed in the conference, and will provide a letter confirming its grounds for the amended assessment when the assessment is issued.
Change to “Evidence” exclusion rule
The Tax (Tax Administration and Remedial Provisions) Act 2011 also made a small but significant change to the “evidence exclusion rule” found in s 138G. That rule previously ensured both taxpayers and the Commissioner could only raise in challenge proceedings “the facts and evidence, and the issues arising from them, and the propositions of law” included by either party in their SOPS.
That requirement was enacted to ensure full disclosure of all relevant information in order to prevent “trial by ambush”. It was backed up with the sanction that any matter not disclosed in the SOP could not be relied upon by that party in any subsequent challenge proceedings. This rule naturally grew out of the aim of the disputes procedure to ensure full and frank disclosure of all issues by both parties “putting all cards on the table”.
Unfortunately, the evidence exclusion rule was (often rightly) blamed for the unwieldy length of SOPs whereby both parties included any potentially relevant matters for fear of omitting something that may later need to rely upon. SOPS became increasingly complex and lengthy as both parties “threw in the kitchen sink” rather than risk missing anything. As a result, the rule became a common cause for complaint.
Not surprisingly, the rule itself became a cause for argument. Either taxpayers or the Commissioner would allege an item of evidence or a particular line of argument could not be advanced by the other party because it had not been included in the SOP. Examples of such arguments are found in Penny & Hooper (as to the precise scope of the alleged “tax avoidance arrangement”) and Radio Works Ltd (where evidence not included in the SOP still had to be made available on discovery).
To date, no case had actually invoked the evidence exclusion rule to exclude vital evidence or relevant arguments that one party sought to rely upon. It must be remembered that taxpayers will always know their own facts better than the Commissioner, and presumably therefore be able to marshal their arguments accordingly. As such, it is unlikely that taxpayers would find themselves in breach of s 138G and thereby be prevented from relying upon relevant evidence. Rather, despite the availability of wide information gathering powers, it was always more likely to be the Commissioner that found himself disadvantaged by the strict application of this exclusion rule. Accordingly, it is not surprising that the rule has recently been relaxed.
This exclusion rule in s 138G no longer applies to “evidence” but instead now only applies to the legal issues and propositions of law raised in the SOP. As such it is no longer an “evidence exclusion rule” at all but instead deals solely with the legal arguments upon which the parties seek to rely. This change is a significant relaxation of the exclusion rule. While it will undoubtedly allow the parties to be less concerned over what evidence must now be included in the SOP, it will not lessen the incentive to include every possible argument or legal authority that might be relevant.
In addition, the size and comprehensiveness of SOPs is driven by their use as the vehicle for determining disputes at the Adjudication stage. This non-legislated phase of the disputes resolution process uses the SOP for each party as the basis for judging the case. The natural tendency of any professional advisor, knowing that the case is to be judged on the papers and there is no opportunity to address the tribunal, is to include everything which might potentially be relevant. Consequently what could otherwise be a simple document becomes grotesquely swollen. Its non-legislated status means that the Adjudication stage is peculiarly invisible when reform to the legislative process is considered. In the authors’ opinion, the justification for this stage, let alone the way in which it is undertaken, deserves serious and critical consideration.
Repeal of TRA Small Claims Jurisdiction
The recent Act also repealed the small claim jurisdiction of the TRA previously found in s 138K. That jurisdiction permitted taxpayers with disputes involving less than $30,000 of tax to abandon the disputes procedure and apply directly to the TRA for a decision. That decision was then binding on both parties and not amenable to appeal. In effect, the TRA stood in the role of the Adjudication Unit to finally determine these disputes. As the dispute was not subject to a SOP or referred to the Adjudication Unit, it was intended to be a quicker and cheaper procedure for resolving low value disputes.
Unfortunately, while the idea of establishing a separate stream-lined procedure for small disputes had merit, most commentators agreed the procedure was flawed and few taxpayers availed themselves of this option. Accordingly, the small claims jurisdiction has been repealed. IRD explained:
“smaller claims should generally be handled differently from complex, larger ones. However, we do not agree that separate legislative and court processes are required to resolve problems with smaller claims Instead, we consider that good administrative practices, coupled with the inherent flexibility of the TRA as a hearing authority, provide the appropriate outcome.”
As noted above, taxpayers with disputes involving less than $70,000 will generally be permitted to opt-out of the full disputes procedure and therefore may proceed to the TRA without having to complete the full disputes procedure. Therefore removal of the statutory small claims jurisdiction may have little practical differences for these taxpayers. However, the concern remains that the administrative opt-out right is entirely a matter for the Commissioner’s discretion, and taxpayers are entitled to be sceptical of the view that “within the New Zealand system, officials consider that administrative solutions are preferable to a separate legislative system for small claims.”
It may well be that the small claims jurisdiction was a product of a different era. In the early 1990s, when the Richardson review took place, there were still many low value cases progressing through the TRA. This was a result of a number of factors – Fourth Schedule deductions cases still being heard, the then new GST system’s limits being tested, a less sophisticated IRD audit strategy. Those factors no longer exist, and there are consequently far fewer low-value disputes.
Interestingly, much of the justification relied upon by IRD for the decision to repeal the small claims jurisdiction was reliance on the TRA’s role as a commission of enquiry, with all the associated flexibility in its procedures. As such, note the recent changes to the TRA rules (discussed below).
It has long been recognised and accepted that the confidentiality of taxpayer information is sacrosanct. IRD must acted, and been seen to act, to the highest standards of secrecy regarding information provided by taxpayers. Voluminous information flows into the tax offices but almost no information flowed out, except in well recognised and statutorily sanctioned circumstances.
Inland Revenue recognise strict secrecy is a cornerstone of an efficient tax regime. The very definition of the “integrity of the tax system” in s 6 of New Zealand’s Tax Administration Act 1994 (NZTAA) enshrined “the rights of taxpayers to have their individual affairs kept confidential” and “the responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers”.
To implement this confidentiality s 81 imposes strict obligations on the Commissioner and his staff to maintain the secrecy of taxpayers’ affairs. All officers are expected to maintain high standards of secrecy and harsh penalties apply to those who breach secrecy. The rationale behind this section is well summarised by Richardson J in Knight v Barnett:
“Without an army of inspectors a tax system inevitably depends very substantially on the willingness of taxpayers to provide proper and timely tax information to the Revenue. … It rests on the assurance provided by stringent official secrecy provisions that the tax affairs of taxpayers are solely the concern of the Revenue and the taxpayers and will not be used to embarrass or prejudice them. That fundamental premise underlies the secrecy provisions of the income tax legislation in New Zealand”.
This requirement recognises the sensitive nature of information provided by taxpayers to IRD and endeavours to protect the confidentiality of that information. It addresses the tension between the unfettered access to taxpayer information necessary for IRD to administer the tax system and the expectation by taxpayers that their affairs remaining confidential.
When and how the Commissioner may (or must) disclose taxpayer information was recently the subject of litigation. As part of the procedural wrangling in the Structured Finance litigation the banks contested IRD’s right to disclosure confidential information about other banks dealings. The Supreme Court upheld the Commissioner’s right to disclose the confidential information to assist his litigation.
“Disclosure is not permitted unless, and to the extent that, it is reasonably necessary for the performance of the Commissioner's statutory functions. This approach … recognises that information concerning third party taxpayers' affairs is a valuable resource in verifying correctness of returns and that it would be inimical to the integrity of the tax system if the Commissioner were restricted from using it where that use is reasonably necessary in order for him to exercise his functions effectively. Tax secrecy is also an important value which should be accommodated unless the Commissioner's case would be prejudiced.”
The Supreme Court’s decision in Westpac strengthened the Commissioner’s hand regarding the right to disclose taxpayers’ confidential information when it is considered necessary for the purpose of enforcing the Revenue Acts. Provided the Commissioner considers disclosure necessary, it may be disclosed – and neither the secrecy provisions nor public interest immunity will preclude it. Accordingly, taxpayers have little say and almost no control over the disclosure of their confidential information if the Commissioner considers it warranted.
The result of this decision was that it is generally for the Commissioner to determine what is required to carry into effect the Revenue Acts. This reasoning is consistent with the line of cases that it is solely for the Commissioner to determine what information is “necessary and relevant” for the purposes of a statutory information request, and the Courts will not generally interfere with that determination. Nevertheless it would be concerning if the Commissioner had an unfettered discretion as to what information should be released and when. It would be improper if the secrecy rule became a tactical tool for the Commissioner against which taxpayers have little defence.
In Westpac the Supreme Court appears to have reserved for itself the right to review whether the Commissioner has correctly made the decision to release confidential information.
“His judgment of when it is reasonably necessary for him to use documents identifying taxpayers, in the context of litigation, is always entitled to respect but may of course be reviewed prior to or during a trial for non-compliance with the Act. Independently the court will take such steps as it considers appropriate to protect taxpayer confidentiality in the way the material is deployed in the course of the proceedings.”
“Section 81 prescribes when confidential taxpayer evidence may be given or ordered to be given. It may be ordered only when it is necessary for the purposes of carrying the Inland Revenue Acts into effect. I am prepared to accept that as a necessary corollary, it may be ordered only to the extent that is necessary for that purpose.”
Likewise McKay J referred to the limit on any disclosure warranted under the exception:
“That principle [of secrecy] is recognised in s 81 itself, subject to the statutory exception. Squibb recognises that the exception applies only "when necessary" for the purpose of carrying into effect the tax Acts, and does not extend to permit disclosure beyond what is necessary.”
However, the Commissioner has obviously chafed at even those narrow limitations on the power to disclose taxpayer information. As a result, IRD has now introduced another general exception to the secrecy rules that authorise the Commissioner to publicly release taxpayer specific information. Section 81(1B) now permits the release of confidential taxpayer information for the purpose of facilitating the Commissioner to carry out his duties. That wide purpose is supplemented by a number of specific criteria to guide the Commissioner in determining whether a public release of the information is warranted as part of his duties. These criteria are:
(i) the Commissioner’s obligation to protect the integrity of the tax system; and
(ii) the importance of promoting compliance by taxpayers, especially voluntary compliance; and
(iii) any personal or commercial impact of the communication; and
(iv) the resources available to the Commissioner; and
(v) the public availability of the information.
The need for this new exception is uncertain and has not been fully explained by IRD. Given the wide scope of the existing general exception recognised in Westpac there can be few circumstances when the Commissioner’s discretion over the disclosure of information would not already be authorised. The only identifiable instance in which the new exception may potentially apply would be the Commissioner’s decision to make public comments in the media where he considers the integrity of the tax system somehow warrants it. In those circumstances, the Commissioner would now be authorised to publicly disclose taxpayer specific information in a manner that hitherto has not been considered possible or appropriate. The SPS detailing the scope of this new exception explains:
“One purpose behind the introduction of the s 81(1B) was to expand the circumstances in which IR can disclose information (whether of a taxpayer specific or general nature) where disclosure is not necessarily linked to the direct administration of the Inland Revenue Acts. A decision to disclose under s 81(1B) may be made in response to a request from a third party for information, but also enables IR to proactively disclose information to third parties (including the media) where it considers the exception applies.”
Not surprisingly, this new exception was opposed by taxpayer groups as “inappropriately broad” because there was “very little practical restriction on the information Inland Revenue could communicate.” Most submissions identified the commercial risks faced by taxpayers if the Commissioner disclosed their confidential affairs to competitors or the public.
Of particular concern was that IRD should not have the ability to publicly release taxpayer information to justify its own actions or to counter public statements made by taxpayers. For instance, on this point NZICA submitted that some form of waiver ought to be required from the taxpayer before its affairs could be made public by IRD:
The bill commentary envisages that Inland Revenue could make public information about a taxpayer if it decided it had been slighted in the media. ... Currently Inland Revenue cannot respond when a taxpayer is casting aspersions in the media. If the taxpayer were able to waive their secrecy rights and did not do so this would give the media and the public an indication of the weight that should be placed on the taxpayer’s statements. This assumes that Inland Revenue would be able to say that the taxpayer has not waived their right to secrecy. Consider that Inland Revenue has demonstrated that it is not above making a pre-emptive strike even when the particular taxpayer is not involved.
This submission suggested IRD should not be able to simply disclose information to correct any inaccuracies in the taxpayer’s public statement but should simply be limited to identifying that errors exist and stating that the taxpayer has refused to allow IRD to correct those errors. In rejecting this limited response by IRD officials considered it was:
“unlikely that a taxpayer, having made damaging comments about Inland Revenue in the media, would then agree to Inland Revenue disclosing information relating to their affairs. ... Inland Revenue is not proposing to make pre-emptive media statements. Media comment is only envisaged when the taxpayer has made incorrect statements that are considered damaging to the integrity of the tax system. Such comment is likely to be extremely limited – for example, a statement to the effect that the taxpayer has not disclosed all the relevant facts or information. Officials further note that any comment in the media would require careful consideration, even when it was considered appropriate under the criteria in the proposed section 81(1B).”
The enactment of s 81(1B) provides IRD with a significant power to counter any public criticism by ensuring it may now produce any contrary information or explanations that support its approach. If a taxpayer stands up in the media to criticise its conduct, IRD can now fight fire with fire. However, this is a slippery slope and it would be concerning if this power had a chilling effect on taxpayers’ right to publicly criticise IRD where criticism is warranted.
Disclosure of tax agent behaviour to professional body
IRD has long been concerned it could not punish misbehaviour or unprofessional conduct by tax agents that it became aware of while administering the tax system. In effect, whatever misconduct a tax agent may have committed, the Commissioner was prevented by the secrecy obligations in s 81 from disclosing that conduct to the agent’s relevant professional body. This resulted in the perception that the Commissioner was powerless to act against tax agents who had breached their professional or ethical duties.
To remedy that perceived problem, new s 81B was introduced, which now permits the Commissioner to disclose information to a tax agent’s professional body where that person has:
· breached the rules relating to the non-disclosure of tax advice documents, or
· engages in conduct that would permit the Commissioner to refuse to list that person as a tax agent.
In such cases, the Commissioner is now authorised to disclose information about that agent’s conduct to their professional body, presumably so that body can undertake appropriate disciplinary action. Not surprisingly, few submissions pm the Bill spoke out in support of misbehaving tax agents or against this new provision. However, it is important that IRD exercise this new power with great discretion so as not to create a climate of fear among tax professionals that they are likely to face complaints by IRD to their professional body simply for doing their job and advancing the interests of their clients. Many advisers know they are required by clients to advance arguments of uncertain merit or defend unmeritorious tax positions. But that is the job of a tax advisor – and should not expose that advisor to complait by IRD. Rather, genuine default should be established by IRD, not mere suspicion, before the provision is applicable. It is hoped the tax agent concerned would have both been appraised of the allegations against them by IRD and given the opportunity to respond to those concerns before any complaint to the professional body is laid.
Publication of Adjudication Reports
Taxpayers have long sought publication, even in redacted form, of Adjudication Reports. These Reports represent the Commissioner’s considered view of the law on particular issues and therefore would be of considerable guidance to taxpayers and their advisers in the conduct of subsequent disputes. The call for release by IRD of redacted Adjudication Reports was expressed by officials as follows:
Given the increasing trend for tax disputes to be determined without public court hearings or decisions, the Commissioner should publish appropriately redacted adjudications reports to promote better information and transparency for taxpayers. Making this information available in forms that do not prejudice taxpayer confidentiality would better inform taxpayers about the basis of the Commissioner’s views on a range of technical matters. Taxpayers would therefore be better informed in taking their own tax positions.
The failure to publish Adjudication Reports seems indefensible. Such publication would also giving substance to the existing right for taxpayers to apply for the Commissioner’s agreement to opt-out of the disputes procedure if the issue has previously been the subject of an Adjudication Report (discussed above). Publication of those Reports would inform taxpayers of what issues have previously been considered by the Adjudication Unit and whether that decision is applicable to them or can be validly distinguished. Given the new exceptions to secrecy introduced in the Act, many taxpayer submissions called for the release of these reports as advancing the integrity of the tax system.
Sadly, despite the clear logic of the need for Adjudication Reports to be publicly available, IRD has again refused to publish them. Officials explain:
This matter has been raised with Inland Revenue previously. Officials are considering whether redacted adjudication reports could be published, taking into account the need to protect the interests of both the taxpayer and the Commissioner. The Commissioner is concerned to ensure that any publication would not elevate the status of adjudication decisions above what they are – which is that they are simply specific decisions on one taxpayer’s facts, having regard to the arguments made in that single dispute, and they are not binding rulings.
Later officials conclude:
Inland Revenue is considering the competing arguments for publishing redacted adjudication reports. However, given that adjudication itself is not legislated for, there seems little benefit in legislating for publication of the subsequent reports. As such, officials consider this is a matter that is best dealt with through ongoing dialogue between the Institute and the relevant areas of Inland Revenue.
These explanations ring hollow. Given the statutory and administrative amendments IRD has introduced to ensure virtually all disputes complete the full disputes procedure and progress for determination by the Adjudication Unit it is inexplicable that it would now suggest those Reports should not carry any weight with taxpayers. Quite simply, as IRD has mandated that Adjudication is compulsory for most disputes, the decisions issued by that Unit should be publicly available. Presumably having required most taxpayers to submit their dispute to the Adjudication process, the correlation must be that the resulting Reports determining those disputes should be available to all taxpayers to evaluate the merits of the arguments. The authors cannot escape the impression that IRD is simply attempting to shelter its own decision-making from scrutiny by the wider tax community. It is hoped this refusal to publish Adjudication Reports is quickly reversed and such decisions become publicly available.
Changes to TRA Procedure
To accompany the then-new Part VIIIA procedure, new Taxation Review Authority Regulations were promulgated in 1998.
Regulation 4 of those regulations helpfully provided that:
To the extent that they are not inconsistent with these regulations, or the provisions of the Taxation Review Authorities Act 1994, or the Tax Administration Act 1994, the District Courts Rules 1992 apply to the commencement, interlocutory steps, and conduct of proceedings in the Authority as if those proceedings were civil proceedings in the District Court.
This provision imported the machinery of District Court litigation into the regulations, and, for example, enabled the routine making of orders at the initial Directions Hearing. These orders typically covered the making of discovery and inspection orders and exchange of briefs of evidence.
However, effective 29 August 2011, Regulation 4 was amended to refer to the new District Court Rules 2009 instead of the 1992 rules. This introduces wholly undesirable complexity, because instead of the old District Court Rules, which were very similar to High Court civil litigation, and which complimented the Part IVA process (as intended by the Organisational Review Committee), the new Rules provide for information disclosure in a form which is somewhat similar to the Statement of Position, but not the same.
The new District Court Rules 2009 emphasise cost-effective settlement, in response to the high settlement /abandonment rate in District Court civil proceedings. That is no doubt sensible for disputes which have not – unlike tax disputes – undergone a lengthy pre-litigation alternative dispute resolution process.
The most significant amendments to the new rules are:
- Discovery has all but been replaced by “information capsules”, exchanged early in the claim. Discovery is still available, though only by application
- Virtually all pretrial steps are conducted by filling in prescribed forms; there are no formal pleadings
- Unlike discovery, parties do not have to disclose documents adverse to their claim in their information capsules
- Interlocutory applications are only available with the leave of the Court.
While the process for bringing a TRA claim is specifically provided for in the regulations, there is no process for discovery or exchange of briefs. Consequently, the “information capsule” process will have to be applied.
The purpose of the information capsule is to inform the other party of the essential nature of the case and to disclose the information intended to be relied upon. These capsules are served on the other side, but not filed unless the next step – an intention to continue called a “Notice of Pursuit of Claim” – is filed.
Each party verifies on oath the contents of his or her information capsule, which must:
- Inform the other party of the essence of the party’s case and disclose the evidence relied upon
- Explain why any offer has been rejected
- List witnesses the party intends to call and include “will say” statements for each
- List or describe the essential documents supporting the party’s case.
Proceeding with the claim
If the taxpayer wishes to pursue the claim he or she must file and serve a “notice of pursuit of claim”, filing the information capsules at the same time.
The new District Court Rules envisage three different types of trial:
A short trial (rules 2.44 and 2.45), where a claim involves a modest amount, or is relatively uncomplicated and can proceed to a hearing quickly. Evidence is given orally.
A judicial settlement conference followed by:
· A simplified trial with affidavit evidence and no cross-examination unless a notice to cross-examine that witness has been given. Parties are allowed only one expert for each specialist discipline unless the Court orders otherwise, or
- A full trial - which largely follows the procedure set out in the High Court Rules subject to judicial direction.
It remains wholly unclear how these new rules will be applied in context. No real thought or guidance from Inland Revenue is apparent.
It is to be hoped that the TRA will apply a sensible and pragmatic approach, recognising that much of the “information capsule” will have been covered already by the Statement of Position, to which the parties are in any case bound. The absence of discovery, while relieving parties from a procedural burden, gives Inland Revenue a one-sided advantage (it can compel discovery through section 17 of the TAA, at least pre-litigation). The procedures for simplified and short trials will be interesting to observe in practice.
When one stands back, the 15 years over which the Part IVA and Part VIIIA processes have come into effect and been subject to various legislative and administrative tweaks look like an elongated and excruciating disaster movie. Things only get worse; now we have a wholly inappropriate District Court procedure grafted onto the process, seemingly without any thought as to the consequences. One wonders when, if ever, the Department will cease denying the obvious and accept that the experiment has failed and the disputes resolution process requires full redesign not adhoc and cosmetic tinkering.
See SPS 10/04 Disputes resolution process commenced by the Commissioner and SPS 11/04 Disputes resolution process commenced by the taxpayer.
J Shewan, “Protecting the Integrity of the Tax Act: The Practitioner’s Perspective”, (Paper presented at the Institute of Chartered Accountants of New Zealand 2002 Tax Conference, Christchurch, 11-12 October 2002).
G Blanchard, “The Case for a Simplified Tax Dispute Resolution Process”, (2005) Vol 11:4 New Zealand Journal of Taxation Law and Policy 417.
Taxation Committee of NZLS and National Tax Committee of NZICA, “Joint Submission: The Disputes Resolution Procedures in Part IVA of the Tax Administration Act 1994 and the Challenge Procedures in Part VIIIA of the Tax Administration Act 1994”, (Wellington, August 2008).
Paragraph 1 of the covering letter to the NZLS/NZICA Joint Submission, n 10.
See n 10, p 2; p 4, para 1.4; and p 5, para 2.1.
See n 10, p 6, para 2.1(d).
Crown Law, Report of the Crown Law Office for the Year Ended 30 June 2004, (Wellington, October 2004), p 10.
For instance, see G Blanchard, “The Case for a Simplified Tax Dispute Resolution Process”, (2005) Vol 11:4 New Zealand Journal of Taxation Law and Policy 417; M Keating, “Tax Disputes Procedure: Time for a Change”, NZJTLP Vol 14, No 4, Dec 2008; A Maples in “Tax Disputes Procedure Failing Small Taxpayers”, NZJTLP Vol 16, No 4, December 2010; J Dunn, “Re-solving Tax Disputes”, NZLawyer, issue 101, 14 November 2008.