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Inland Revenue

Tax Policy

Chapter 3 - Opting out of the disputes process

This chapter outlines the arguments for and against a right for taxpayers to unilaterally opt out of the disputes process. It notes that the proposed opt-out guidelines should give a considerably larger number of taxpayers the ability not to follow the full disputes process. While the chapter does not recommend a unilateral opt-out, it considers what legislation for a unilateral opt-out may look like if it were ultimately concluded that this was desirable. Consistently with this conclusion, it recommends removing the existing taxpayer right of unilateral opt-out (which exists for taxpayer-initiated disputes).

3.1 Barring a limited number of exceptions, the full disputes process is intended to be followed so that the various steps can fulfil their role of ensuring disclosure by the parties of the facts and arguments and, therefore, possible resolution of the dispute before it goes to court. Applying the full process generally means that the dispute has been considered by the Adjudication Unit.

3.2 The Richardson Committee also saw the disputes process being complied with in full as an important element in ensuring that any amended assessment was “right first time”.

Unilateral opt-out provision

3.3 One of the suggestions raised in the NZICA-NZ Law Society submission is that taxpayers, following the NOPA and the NOR, should have a unilateral right to opt out of the disputes process by electing that the matter go straight to a hearing authority. Some examples of when a right of unilateral opt-out would be justified have been suggested:

  • when the claim is “small”;
  • when the point at issue is the subject of an Inland Revenue dispute that is being litigated with another taxpayer; and
  • when the same taxpayer is in more than one dispute in relation to the same issue (for example, when the same position has been adopted across more than one tax period).

3.4 The submission alternatively suggests that taxpayers have a right equal to the Commissioner’s right to apply to the Court for an order that the completion of the disputes process is not required. [4]

3.5 The proposals in the submission contained the following arguments:

  • Given that the adjudication process is largely for the benefit of the taxpayer, they should not be compelled to participate in it if they don’t perceive any benefits from doing so.
  • Proceeding straight to a hearing authority may (if the dispute is likely to end up there anyway) result in the dispute being resolved faster, lessening taxpayer exposure to shortfall penalties and use-of-money interest (UOMI) in the event of an unfavourable outcome.

3.6 Given the resource constraints placed on the courts, it could, however, be argued that it is best to keep all disputes out of court that do not logically belong there. While appreciating that there will always be differences of opinion over whether a particular dispute belongs in court, less tax litigation is highly desirable in reducing the time and costs for all parties. Specifically, resolutions that take place outside of traditional litigation (generally referred to as “alternative dispute resolution”) tend to have the following advantages in:

  • reducing filings;
  • encouraging settlement;
  • reducing both hearing-related as well as case preparation costs by narrowing the issues that require judicial consideration; and
  • developing sustainable solutions that are less likely to be subject to repeated re-litigation. [5]

3.7 These objectives are similar to those established by the Richardson Committee. Given the weight of the arguments, there are two further questions:

  • Is it necessary to have a unilateral opt-out?
  • Would a unilateral opt-out improve the current system?

Is unilateral opt-out necessary?

3.8 Taxpayers have, since 2005, had the option to seek the opt-out agreement provided for in section 89N(1)(c)(viii). As discussed in the previous chapter, it is anticipated that the administration of this opt-out would be greatly assisted by the proposed new opt-out guidelines.

3.9 These guidelines (set out in the revised SPS for Commissioner-initiated disputes) will provide taxpayers with a degree of certainty on whether their dispute will be required to go through the full disputes process. The proposed $75,000 core tax threshold means that for many taxpayers the opt-out process will in effect be available. As we have noted, the other criteria, such as the issue being one of fact, similar cases being in front of the courts and the Commissioner’s discretion to agree to opt-out in other cases, will make the opt-out process more broadly available.

3.10 Under the terms of the opt-out guidelines, it is therefore likely that there will be a considerable number of disputes that proceed directly to a hearing authority following a conference. This will result in a much less compelling case for a unilateral opt-out.

Would a unilateral opt-out be an improvement to the current system?

3.11 Given the increase in the number of disputes that are likely to be eligible for bilateral opt-out, the question is whether a unilateral opt-out would be an improvement to the process for the remainder of tax disputes.

3.12 The role of the Adjudication Unit becomes more prominent in larger disputes: taxpayers are likely to be more willing to bear the costs in the event of the Adjudication Unit finding in their favour, and both parties are likely to welcome the opportunity of a review being undertaken by technically skilled staff not previously involved in the dispute.

3.13 The contents of the revised SPSs regarding the preparation of disputes documents and conduct at the conference phase are designed to ensure that disputes are focussed and, where possible, resolved during the administrative phases of the process – rather than resorting to the courts. The adjudication process is a further step in the process at which resolution can occur.

Legislating for the opt-out

3.14 Granting taxpayers a unilateral opt-out right raises the question of where in the disputes process the opt-out right should be available. The NZICA-NZ Law Society submission appears to suggest that for small claims, the right should exist at any stage and for all other cases, the right should exist after the exchange of the NOPA and NOR (presumably irrespective of whether the dispute is taxpayer- or Commissioner-initiated).

3.15 Even if the right applied after the exchange of the NOPA and NOR, there are further matters to consider. Irrespective of the size or complexity of the dispute, the conference is an important forum for the exploration of arguments, exchange of information and discussion of options on how to proceed with the dispute. Any opt-out right that existed immediately after the rejection of a NOR would allow the taxpayer to circumvent the conference phase, which could detract from the objective of avoiding court, and the related costs, where possible.

3.16 A potential way around this would be to legislate for a conference phase (a proposal supported by the joint submission) and then allow for a unilateral opt-out right after the conference phase.

3.17 If the conference were legislated for, the purposes of the conference and the procedures that it entails would also need to be included. These purposes would differ from case to case. Some may be used predominantly for exchange of legal arguments and information, while others may explore settlement options. Legislating for desired outcomes during this phase could, unless carefully drafted, result in further litigation about the respective requirements.

3.18 It is anticipated that the facilitation of conferences (as detailed in the revised SPSs) will assist in the conference being a venue for constructive dialogue. Legislating for desired outcomes may detract from any improvements that could result from this process.

3.19 The other difficulties in legislating for a conference relate to the logistical differences between disputes. In particular:

  • The “conference” is often more akin to a series of discussions, rather than a single session.
  • The discussion can take place across a range of timeframes and forums (for example, face-to-face, telephone or video-conference).
  • Any meetings that do take place can be formal or informal in nature.

3.20 If legislation were nevertheless considered desirable, this might be achievable by keeping the legislation limited to:

  • a requirement that the parties “meet” (in any forum) at least once (for body corporate taxpayers, the person attending would have to be authorised to commit the taxpayer to a course of action); and
  • the taxpayer signing a statement to the effect that all information relevant to the dispute had been provided.

3.21 This would allow a significant degree of flexibility in terms of available forums and discussion points, and would provide the Commissioner with some comfort that all information needed to contest any subsequent court challenge was available.


3.22 We consider that the current process (which will be supplemented by the revised SPSs) should be departed from only if the alternative offers a substantial improvement. Although we see merits in taxpayers having a unilateral opt-out right, it does not seem to represent a vastly superior process for the majority of disputes. This conclusion is further supported by our view that a unilateral opt-out right would need to be accompanied by legislating for the conference phase. Given the desire to keep legislative change to a minimum (to maintain administrative flexibility and reduce the cost of disputes about the process), legislating for something that can be capably dealt with through administrative measures appears counter-productive.

3.23 Although every disputant clearly has a right to their “day in court”, this has to be balanced against the policy objective of reducing unnecessary tax litigation. The bilateral opt-out provisions appear to provide the best balance between these two, occasionally competing, ideas.

3.24 As a result, we believe that legislation to provide for a unilateral opt-out for Commissioner-initiated disputes is unnecessary.

Court order not to complete the disputes process

3.25 The NZICA-NZ Law Society submission also suggests including a matching taxpayer ability to the Commissioner’s ability under section 89N(3) to apply to the High Court for an order that completion of the disputes process is not required. [6] The Commissioner’s view on this provision is set out in SPS 08/01 and reiterated in the revised SPSs.

3.26 Section 89N(3) is used in practice as either a revenue-protection provision, which prevents taxpayers from unduly delaying the process when they know that the time-bar may work in their favour, or as a cost-saving mechanism when there are numerous substantially similar disputes that are not suitable for test case treatment.

3.27 Given the administrative constraints that the Commissioner places on the ability to truncate the process under section 89N(3), we do not consider that a matching taxpayer right is warranted. In addition, taxpayers are free to approach the Commissioner with a proposal that completion of the disputes process is not required. The Commissioner has the ability to treat such a proposal as an opt-out request and may use the residual discretion outlined in the opt-out guidelines to agree to the request if none of the main opt-out criteria are met.

3.28 Further, the opt-out guidelines cater for disputes where the issue is already being considered by the courts. As a result, we anticipate that the use of section 89N(3) to truncate the process will become rarer.

3.29 As a final point, we note that section 89M(11) currently provides taxpayers with the capacity to apply to the High Court for more time to respond to the Commissioner’s SOP. Because SOPs are generally the most detailed documents produced by the parties, it is important that this provision is retained to give taxpayers the opportunity to respond to new propositions put forward by the Commissioner at the SOP stage. Likewise, it is important that sections 89M(13) and (14) are retained, so that additional information can be added to SOPs, with the agreement of the other party.

Section 138B(3)

3.30 As a result of the conclusion that a unilateral opt-out right for the taxpayer is not desirable, we believe that section 138B(3) should be repealed or amended. In circumstances when the dispute has been initiated by the taxpayer, this section effectively provides taxpayers with a unilateral opt-out immediately following receipt of the Commissioner’s NOR. The existence of section 138B(3) produces a discrepancy between disputes that are taxpayer-initiated and those that are Commissioner-initiated. It is because of this section that the opt-out guidelines have not been reproduced in the revised SPS for taxpayer-initiated disputes – there is little point having guidelines when the taxpayer can circumvent them through the challenge provisions.

3.31 A taxpayer-initiated NOPA must be issued within four months of the date on which the original self-assessment is received by Inland Revenue. [7] In practice, taxpayer-initiated NOPAs tend to occur when a taxpayer is aware of potential ambiguity in the law: they will self-assess on a conservative basis and then immediately propose an adjustment to that assessment.

3.32 Although this practice has the advantage of bringing potential legislative anomalies to the attention of Inland Revenue, its result (being a unilateral opt-out right for taxpayers) is inconsistent with our view regarding unilateral opt-out measures more generally. Following our suggested amendment to section 138B(3), it is anticipated that the bilateral opt-out procedures set out in the opt-out guidelines will be incorporated into the revised SPS for taxpayer-initiated disputes, so that they will apply irrespective of which party produced the NOPA.


4 The Commissioner’s ability to apply for such an order is contained in section 89N(3).

5 Ministry of Justice website:

6 Section 89M(3) also allows the Commissioner to apply for an order to allow more time to complete the disputes process. However, such an application is not directly relevant for these purposes.

7 Section 89DA. The four-month response period is the general timeframe. For R&D tax credits, the response period is two years (see section 89AB(3)(b).