Term of reference A
To review the powers of the Commissioner of Inland Revenue to assess and collect income tax pursuant to the Tax Administration Act 1994 and other relevant Acts and to assess whether these powers are justified
- Overview of the Commissioner’s powers
- Statutory powers generally appropriate
- Manner in which powers exercised problematic
- Time bar period should be more comprehensive
- Burden of proof
- Ability of taxpayers to access their personal files
- Operation of care and management provisions needs assessing
- Delegation of authority not monitored appropriately
Overview of the Commissioner’s powers
The primary objective of the department, as contained in section 6A (3) of the TAA, is “to collect over time the highest net revenue that is practicable within the law”. In order to do this, the Commissioner has been granted wide powers under the TAA. To enable the Commissioner to carry out his tax administration functions he is able to delegate his powers to officers of the department.
The Commissioner’s information-gathering powers include the power to access land and buildings, the power to request information in writing and the power to require a person to give evidence under oath before the Commissioner or to seek an inquiry before a District Court Judge.
The power of the Commissioner to access any property is only restricted in the case of private dwellings. Before the Commissioner can enter a private dwelling without the occupier’s consent a warrant must be obtained from a judicial officer. We understand that it is very rare for the department to make a formal written demand for access to someone’s premises. In most cases the prior agreement of the occupier is obtained.
The Commissioner is required to assess the taxable income and income tax liability of all taxpayers. If a taxpayer does not file a return, the Commissioner may make an assessment of the amount on which the Commissioner believes tax ought to be imposed and of the amount of such tax. This is known as a default assessment.
If, after an initial assessment is issued, the Commissioner audits a taxpayer and determines that the income as originally returned should be adjusted, the Commissioner has the authority to issue amended assessments. Adjustments can be made at any time with the taxpayer’s agreement. However, if agreement is not forthcoming the Commissioner must follow the disputes resolution process.
Generally, the Commissioner may alter an assessment only within four years from the end of the income year in which the taxpayer provided the return. However, if the Commissioner considers that the tax return filed by the taxpayer is fraudulent or wilfully misleading or does not mention income of a particular nature or derived from a particular source, the Commissioner can amend a return at any time.
Powers to impose penalties and grant relief from payment
Under legislation the Commissioner is able to apply penalties for non-payment or under-payment of tax and is also able to remit, write-off and defer payment of tax subject to conditions. We examine the Commissioner’s powers and operations in this regard under term of reference B in this report.
Statutory powers generally appropriate
While the Commissioner’s powers are extensive, we consider that, by and large, these powers are appropriate for the role the Commissioner is required to undertake. The department is bound to enforce compliance on the part of all taxpayers. Not to do so would seriously damage the integrity of the tax system and undermine the system of voluntary compliance. The extent of the Commissioner’s powers is necessary to ensure that reluctant taxpayers meet their obligations. Those powers ensure that taxpayers who willingly pay their tax are not disadvantaged or required to pay a disproportionate share of the tax burden.
The powers of the Commissioner are similar to those conferred upon tax collectors in similar jurisdictions, such as, Australia, Canada, the United Kingdom and the United States. Furthermore, the department’s powers are not excessive when compared to other State agencies which operate in revenue collection and enforcement environments.
While the powers of the Commissioner are generally appropriate we do consider that some steps need to be taken with respect to the penalties regime and the Commissioner’s powers to enter into arrangements with errant taxpayers. We comment further on these matters later in the report.
We considered various aspects relating to the powers of the Commissioner and make the following comments and recommendations.
Manner in which powers exercised problematic
Many submissions to the inquiry suggest that it is the manner in which the department exercises its powers rather than the extent of those powers which is at issue. The New Zealand Law Society (NZLS) points out that the tax paying community’s perception of the way in which the powers are exercised is almost as important as the reality of the extent of those powers. Voluntary compliance is a fundamental feature of the tax system. Taxpayers must believe that the tax system is fair and reasonable and that disputes will be dealt with in a fair and impartial manner.
While we acknowledge that examples of the department misapplying its powers are relatively rare, when they do occur they are a significant issue for the taxpayers involved. During our hearings we heard from a number of taxpayers whose dealings with the department caused them great emotional distress and financial hardship. While fault was not always onesided, the department in our view sometimes dealt with these taxpayers in a heavy-handed and dictatorial fashion. When the department’s officers act towards taxpayers in such a way it can only serve to undermine the integrity of the tax system.
We note there have been a few recent decisions of the Courts and the Taxation Review Authority (TRA) which demonstrate the misapplication of the department’s powers. For example, a very recent decision of the TRA contains a number of severe criticisms of the department’s performance. Judge Willy refers to a “saga of obfuscation and delay on the part of the Commissioner”. He states that the Commissioner failed in his duty to be fair in the exercise of his tax collecting function. Criticisms of the behaviour of the department’s personnel were also made in a recent High Court decision. It should be noted that both cases are under appeal.
The most recent report of the department on the health of tax administration, contains survey information that indicates that a relatively high proportion of taxpayers believe that the department targets its enforcement action unfairly on “ordinary people” rather than those who pose the most significant risk to the revenue base. This may be a consequence of perceptions that the department is heavy-handed in the use of its powers in its dealings with smaller taxpayers, especially small businesses. We can understand how this perception has arisen.
It is our view that the recommendations contained in this report and the policy announcements made by the Government in the wake of our inquiry will put in place a set of meaningful checks and balances in the relationship between the department and taxpayers, which should help address the negative perceptions now in place.
Time bar period should be more comprehensive
We share the concerns of the NZLS that the exceptions to the four-year time-bar period are too wide. The time-bar period for the Commissioner to issue an amended assessment is inapplicable if the Commissioner believes that the tax return filed by the taxpayer is fraudulent or misleading or does not mention gross income which is of a particular nature or was derived from a particular source, and in respect of which a tax return is required to be provided.
These limitations can result in a taxpayer having an open-ended and potentially crippling exposure to an unknown tax liability. Additionally, situations can arise where a taxpayer has the onus of proof in relation to an assessment by the department but no longer has the necessary records to successfully dispute that assessment. The TAA imposes a seven-year record retention requirement on most taxpayers. We do not consider that the department should be empowered to issue an amended assessment beyond the period for which the taxpayer is required by the law to retain records, unless the Commissioner suspects fraud or wilfully misleading non-disclosure. The open-ended nature of the Commissioner’s power to issue amended assessments is too wide, especially given the strict nature of the penalties regime.
We recommend to the Government that the TAA be amended to provide a clear four-year time-bar in relation to all taxes except where the Commissioner has reasonable grounds to suspect a return to be fraudulent or wilfully misleading.
Burden of proof
The New Zealand tax system is based on taxpayer self-assessment and voluntary compliance. Since the taxpayer has the primary access to information used in preparing a tax return, the burden of proof falls on the taxpayer. This is consistent with the rationale behind self-assessment and is the practice in both Australia and the United Kingdom.
We received a significant number of submissions calling for the burden of proof to be reversed. Several of these related to disputes with the department over amended assessments and highlighted difficulties in ascertaining from the department the basis on which the assessments had been made. Submitters also pointed to an unwillingness on the part of the department to reassess tax liabilities with the taxpayers concerned.
NZLS and the Institute of Chartered Accountants of New Zealand (ICANZ) also recommend the burden of proof be reversed. NZLS maintains that, given the high level of disclosure which is required of taxpayers under the self-assessment system, the department already has access to considerable taxpayer information. NZLS submits that because of the increased obligations on taxpayers to disclose information to the department, and the increased range of penalties which can apply, the burden of proof should be reversed, except in cases where taxpayers are clearly not complying. NZLS recommends that where a taxpayer has complied with the law, but the department seeks to amend that assessment, the onus should be on the department to prove that liability—at least to a "prima facie" standard. This would greatly assist in achieving a perception of fairness in the tax laws.
ICANZ is of a similar view. It notes the increased obligations on taxpayers and the increased range of penalties and recommends the burden of proof be shifted to the Crown, except as regards the provision of information.
The Committee of Experts on Tax Compliance (the Committee of Experts), however, supports the placement of the onus of proof on taxpayers, except for civil penalties for evasion. The main justification for this is, as noted above, that taxpayers have more information about their tax liabilities and are, therefore, in a better position to assess their own tax liability than the department. This approach is consistent with the taxpayer’s obligation to determine correctly the amount of tax payable which is central to the policy of self-assessment. The Committee of Experts, however, recognises the potential for an undue burden being placed on taxpayers who want to refute an amended assessment.
The Committee of Experts notes that if a taxpayer is able to prove on the balance of probabilities that the department’s assessment is excessive by at least a certain amount, the court should be able to reduce the department’s assessment by that amount. The Committee of Experts recommends the law be amended to provide expressly for this.
The department submits that any proposal to shift the onus of proof to the Commissioner would need to ensure that risks to the revenue are minimised. In practical terms this would involve implementation of safeguards to ensure the Commissioner had access to information regarding taxpayers’ affairs sufficient to sustain the burden of proof. The department argues that to ensure the Commissioner had the necessary information, record-keeping requirements would need to be increased, increased penalties for failure to keep records would be needed, and audit activity would need to increase. These requirements would increase administration costs for the department and compliance costs for the taxpayer.
We note that recent legislative changes have been made to the burden of proof in the United States, shifting the burden from the taxpayer to the Secretary to the Treasury. The shift only applies to individuals and small businesses. Taxpayers must also satisfy a number of conditions to ensure relevant information is provided to the Secretary before the burden of proof is shifted. As the changes are relatively new, there is little information on how the new rules are affecting taxpayers. However, it is probable that satisfying the preconditions will be both costly and unpalatable for taxpayers and will outweigh the benefits from having the burden of proof shifted.
On balance most of us agree the onus of proof should remain with the taxpayer. We are not convinced, however, by the argument that the taxpayer is the only one with all the information available to assess his or her potential tax liability. The department has broad powers to collect information relevant to determining the liability of a taxpayer and has almost unlimited access to records during a taxpayer audit. We have taken account of the many examples given to us by taxpayers who have been confronted with amended assessments of apparently insupportable amounts and the subsequent difficulties encountered in trying to understand the basis for the assessment.
We agree that if the burden of proof is to remain with the taxpayer, there must be a test on the department to ensure that only properly calculated and substantiated assessments are issued to taxpayers who comply with their obligations. This could take the form of a “prima facie” standard as recommended by NZLS or the legislative amendment proposed by the Committee of Experts.
We recommend to the Government that the burden of proof should remain with the taxpayer but that consideration be given to establishing a “test” for the department to meet to ensure that only properly calculated and substantiated amended assessments are issued to complying taxpayers.
Some of us consider that the burden of proof should be placed on the Commissioner. In civil matters where a debt is asserted, it is up to the party making the assertion to prove the debt on the balance of probabilities. Some of us can see no reason why the same burden should not apply to the Commissioner. We agree with the NZLS that the reversed burden of proof on tax matters results in a “guilty until proven innocent” approach and coupled with the harsh penalties regime means that taxpayers can be placed in intolerable positions trying to refute positions taken by the department which may have no substance. We consider that this is a matter worthy of further investigation by the next Finance and Expenditure Committee.
Ability of taxpayers to access their personal files
The secrecy provisions of section 81 of the TAA under which the department must operate make it difficult for taxpayers to get access to information held about them by the department. When the burden of proof rests with the taxpayer, it is doubly difficult for taxpayers to refute tax liability assessments if they cannot access this information.
The Privacy Commissioner submits section 81 of the TAA should be amended to allow individuals access to information held by the department about them. The need for secrecy is not in dispute, but the Privacy Commissioner considers that where this is in conflict with the right of individuals to get information held about themselves, then the provision should go no further than is required to meet the need for secrecy. To highlight this conflict, the Privacy Commissioner provided us with examples of complaints which his office was not able to pursue because the taxpayers concerned were denied access to information held about them by the department. Privacy principle 6 provides for individuals to access personal information held about them. The principle behind this is the recognition of an individual’s entitlement to some degree of personal autonomy. At the very least it allows an individual an opportunity to correct information held about them which might be inaccurate.
In terms of the Privacy Act 1993, section 7 (2) (a) provides that nothing in principle 6 derogates from any provision contained in any Act which imposes a prohibition or restriction on the availability of personal information. Section 81 is such a provision and therefore prevails over the access rights contained in principle 6. For the Privacy Commissioner this means that he is unable to take some complaints any further and they are referred to the Ombudsman to investigate the department’s exercise of its discretion on whether or not to release information for the purpose of carrying into effect the Inland Revenue Acts.
Section 81 does provide for exceptions and it is the view of the Privacy Commissioner that a further exception be added to allow for access to personal information. In recommending this, the Privacy Commissioner suggests that any amendment be worded so that it refers to disclosure of information by the department in response to a request by the individual concerned under privacy principle 6. We agree. A more general exception might lead to inroads into the obligation of secrecy. The proposed amendment would also ensure the procedural provisions of the Privacy Act 1993, the review provisions involving the Privacy Commissioner and the Complaints Review Tribunal, come into play.
Disclosure, however, should not be absolute. Safeguards would be required to prevent disclosure of information from an informant, or to ensure the information is not being coerced for use by a third party. We think a commonsense approach is required in this situation. The justification that a taxpayer needs to be assured that all his or her details are kept confidential by the department should not apply when it is the taxpayer who is seeking the information.
As a further protection, the Privacy Commissioner recommends that an electronic footprint be incorporated into the department’s files. This is done in Australia and acts as a deterrent to unauthorised disclosure. The Australian Tax Office requires the mandatory use by its officers of an electronic technical support system. The purpose of which is, inter alia, to manage casework, monitor performance, and to meet the standards of confidentiality which are set out in the Taxpayers’ Charter.
We recommend to the Government that section 81 of the TAA be amended to allow for access to personal information but that this provision be linked to requests for information by the individual concerned under privacy principle 6.
We recommend to the Government that an electronic footprint be inserted in the department’s files to record who accesses individual taxpayers’ details.
Operation of care and management provisions needs assessing
Several submissions raised questions as to the extent of the Commissioner’s powers under the “care and management” provisions in section 6A of the TAA. Care and management involves managerial discretion as to the use of statutory powers in a cost effective manner. In 1994 the Organisational Review Committee, chaired by Sir Ivor Richardson, addressed the practicalities of operating the tax system with limited resources and the fundamental importance of voluntary compliance to tax collection. The care and management provisions are the result of recommendations of the Organisational Review Committee. Section 6A (3) of the TAA encapsulates the provisions. It reads:
In collecting the taxes committed to the Commissioner’s charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to—
(a) the resources available to the Commissioner; and
(b) the importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and
(c) the compliance costs incurred by taxpayers.
The legislation recognises that it is not possible for the Commissioner, acting with limited resources, to collect every cent of due taxes.
NZLS points out that uncertainty has arisen as to the precise scope of section 6A. The department exercises its discretion at the strategic and policy levels. It is not exercised by individual tax officers in respect of individual taxpayers. The department argues that this is because the duty to collect the highest net revenue operates at the macro level of the tax system and because consistency in the use of discretion is necessary to maintain the integrity of the tax system.
In two recent Court of Appeal judgments there has been specific judicial comment on the department’s application of the care and management provisions. These clearly indicate that the discretion in section 6A should be exercised by the department at both the general policy level and at the level of specific tax disputes. By adopting this approach the department would have increased flexibility to settle debts.
We consider that it is important that the status and effect of the care and management provisions be determined. While we note that there are potential dangers from the point of view of consistency of approach in operating discretion on a case by case basis, we agree with ICANZ, NZLS and other submitters that the department’s current interpretation of the provisions is too restrictive from both a legal and policy perspective. Consistency can be achieved through the development of guidelines together with a regular review of the exercise of that discretion.
We note that the department acknowledges that changes need to be made to its approach to the settlement of tax issues after assessment.
We recommend that the department review its approach in respect of the care and management provisions in light of recent Court of Appeal decisions, with a view to amending its internal guidelines to make it clear the Commissioner can exercise discretion on a case by case basis. We do not consider, however, that an amendment to the TAA to deal explicitly with the issue is necessary.
Delegation of authority not monitored appropriately
Section 7 of the TAA allows the Commissioner to delegate any or all of his powers to officers of the department and we have concerns that these delegated powers are applied inconsistently. Clearly the delegation of powers is necessary to properly administer the tax system. Most powers are delegated to functions, not to individual officers. NZLS points out that the greatest potential cause of inappropriate exercise of the department’s powers is inappropriate delegation. ICANZ suggests that it is not uncommon for officers to exercise delegated powers in a manner inconsistent with the Commissioner’s stated policies. Evidence we received from taxpayers supports this assertion. For example, the policies for instalment arrangements are inconsistently applied across offices, with some offices being overly restrictive relative to the department’s stated policies.
Having policies applied inconsistently between units or offices of the department creates uncertainty for taxpayers. Furthermore, as a general principle, taxpayers in similar circumstances should be treated the same. We accept that at times it may be appropriate for officers to use their discretion when applying delegated authority. However, when delegated powers are used in a manner inconsistent with stated policies the reasons for such a departure should be recorded and reported to the Commissioner. The Commissioner should then report regularly to the Minister of Revenue (the Minister) and Parliament on the exercise of delegated powers.
We recommend that the Government review the procedures for monitoring the delegation of the powers of the Commissioner.
4 New Zealand Wool Board v CIR (1999) 19 NZTC 15,082
5 Inland Revenue Health Report, December 1998
6 CIR v Auckland Gas Company Limited (1999) 19 NZTC 15,027 and Chatham Islands Enterprise Trust v CIR (1999) 19 NZTC 15,075.