The amendments will apply from the date of enactment.
The amendments introduce the following changes:
- The rule that the Commissioner cannot rule on questions of fact (sections 91E(4)(a) and 91F(4)(a)) will be replaced with a rule that the Commissioner cannot rule on “proscribed questions” which include the existence or correctness of facts.
- Specific exclusions from ruling in relation to the taxpayer’s intention, the value of anything and what constitutes “commercially acceptable practice” will also be included as proscribed questions on the basis that they are likely to require the Commissioner to rule on the existence or correctness of facts.
- The Commissioner may make a ruling based on the facts provided by the applicant. The Commissioner may also inquire as to the correctness or existence of the facts provided by the applicant, but is not required to do so.
An underlying principle of the binding rulings legislation is that the Commissioner should not have to determine whether facts provided by an applicant for a ruling are correct. Under sections 91E(4)(a) and 91F(4)(a) the Commissioner is therefore prohibited from ruling on questions of fact. On a literal interpretation of this provision it could be argued that the Commissioner is prohibited from making a ruling when doing so would expressly or implicitly require particular facts to be found to exist. In that case, the Commissioner may be unable to rule on fact-dependent issues such as the application of the general anti-avoidance provision or specific anti-avoidance provisions. Such a broad interpretation would, however, be inconsistent with the understanding and application of the binding rulings provisions by taxpayers, tax practitioners and Inland Revenue since the binding rulings regime was introduced in 1994. The inability to obtain a binding ruling on questions of avoidance would reduce certainty for businesses.
To ensure that the Commissioner can rule on tax avoidance, the relevant legislation is being replaced with a rule that the Commissioner cannot rule on proscribed questions, including the existence or correctness of facts. The Commissioner can, however, rule on the basis of facts that are assumed to exist from the application for the ruling. Proscribed questions also include the taxpayer’s intention, the value of anything and what constitutes commercially acceptable practice.
To remove any inference that the Commissioner is unable to rule on tax avoidance (which would defeat the main purpose of the proposed change) the exclusion for commercially acceptable practice will be limited to where that term is used in the tax legislation.