Chapter 5 - Timeframes
This chapter focuses on whether the issuing of a disclosure notice and SOP by the Commissioner should be subject to a statutory timeframe.
Although it concludes that administrative guidelines are sufficient at the current time, it also discusses what form any future legislation on this issue might take.
Finally, the chapter suggests some minor amendments to the Taxation Review Authority Regulations to align timeframes between the TRA and the High Court.
5.1 The Commissioner generally has four years from the end of the tax year in which the return was filed to undertake any investigation of a taxpayer’s affairs and complete the disputes process to the point where an amended assessment can be issued.
5.2 Concerns have been raised that this timeframe should incorporate appropriate intermediate deadlines that the Commissioner must meet – particularly relating to the Commissioner’s disclosure notice and associated SOP, for which there are no statutory timelines.
Arguments for imposing timeframes
5.3 The arguments for imposing specific timeframes on the Commissioner include the following:
- Excessive delays undermine the integrity of the tax system and go against the aims of the Richardson Committee. In this sense, the non-financial aspects of a tax dispute are also important. Disputes with Inland Revenue can have a negative effect on the particular taxpayer (for example, a business may not take on additional employees until it is certain of its financial position) as well as an emotional impact on the people concerned.
- The Commissioner is subject to some time limits, but not all. The “playing field” should be level: if timeframes apply to taxpayers at each step then they should equally apply to the Commissioner.
- UOMI continues to run through the course of a dispute, irrespective of which party is primarily responsible for any delay. The lack of timeframes on the Commissioner provides an incentive to delay the process. In other words, delay is effectively a means by which taxpayers can be “burnt off” by the continued accumulation of UOMI.
Arguments for not having timeframes for the Commissioner’s SOP
5.4 One of the main recommendations of the Richardson Committee was that disputes should have every opportunity to be resolved before reaching the courts. It is therefore important that any timeframes placed on the various steps of the process for each party do not hinder this objective and, instead, encourage resolution. Key to this is the conference phase of the process, which could be compromised by adherence to statutory timeframes.
5.5 Other considerations are:
- Strict timeframes around the issue of a disclosure notice and a SOP may encourage Inland Revenue staff to front-load the dispute, by including material in the NOPA which should otherwise have been placed in the SOP. This would lessen the possibility of a speedy resolution of the dispute, and the costs (including UOMI) would be largely unchanged.
- Disputes that take the longest are generally more complex and can have the highest potential revenue impact. Single statutory timeframes would need to take into account these cases and, as a result, may cause unnecessary delays in smaller disputes.
- Because the statutory marker (the issue of a NOR) is followed by the administrative conference phase, there are dangers in applying a strict timeframe on the issuing of a SOP. For example, if the Commissioner were to have a set number of months to produce a SOP, the taxpayer could be motivated to ensure that the conference phase was a protracted one. This is because the longer the conference phase lasted, the less time the Commissioner would have to draft the SOP.
5.6 Fixing the perceived problem again comes down to whether the system could be improved more meaningfully by administrative change or legislative amendment. Several options are discussed below.
5.7 As we noted earlier, administrative solutions have the advantage of providing a degree of certainty to taxpayers, while allowing the Commissioner to deal with the process in a way that ensures maximum flexibility to address difficult circumstances.
5.8 The revised SPSs state that the period between the receipt of a taxpayer’s NOR and the issue of the Commissioner’s SOP will be, on average, approximately seven months, subject to the facts and the complexity of the dispute. The seven month period is broken down as follows:
- one month to consider the taxpayer’s NOR and initiate the conference phase;
- three months for the conference phase itself;
- three months following the conclusion of the conference to prepare a disclosure notice and SOP.
5.9 If meeting the recommended timeframe is not possible (for example, if the facts or law are complex, the dispute could be precedential or Crown Law involvement is necessary), approval must be obtained from a senior manager and the taxpayer must be advised of the new estimated date for the issue of the SOP.
5.10 There is little difference in theory between the way a taxpayer-initiated dispute is conducted and one that is initiated by the Commissioner. For taxpayer-initiated disputes, the Commissioner must issue a NOR within two months of receipt of a NOPA. The taxpayer then has a further two months to reject the NOR. If the Commissioner’s NOR is rejected and the Commissioner wishes to continue with the dispute, the conference phase will begin. The revised SPS suggests an average four-month conference period for taxpayer-initiated disputes (one month following the receipt of a taxpayer’s rejection of the Commissioner’s NOR to set up the conference and three months for the conference itself). Again, this is subject to the facts and complexity of the dispute.
Will administrative practices change?
5.11 Under the suggested change, it is anticipated that there will be fewer exceptions to the administrative guidelines being met because:
- any amendment to soften the application of the EER (discussed in the previous chapter) will go some way to relieving pressure on the production of the SOP; and
- the publication of the revised SPSs will create clearer, more detailed guidance for Inland Revenue staff, which should result in more emphasis being placed on meeting the recommended deadlines. The Commissioner expects any decision to extend the deadline would be more than just a “rubber stamping” of an investigator’s decision to extend time.
5.12 In Chapter 3 we raised the possibility of legislating for the conference, and concluded that it was not desirable at this stage. Not legislating for timeframes would, from a practical perspective, be more consistent with this view.
5.13 While legislation would reduce flexibility in the administration of a dispute, on the positive side, taxpayers would know that their dispute would not be left to sit indefinitely. The Commissioner would know that documents have to be produced by a certain date (with consequences for not doing so) and would be able to allocate resources in a manner that progresses all disputes within a consistent timeframe.
5.14 Although our preference is for an administrative approach, the following discussion looks at how legislated timeframes may work, should that option be preferred.
The legislative option
5.15 Any statutory timeframe would need to be flexible enough to cater for both very complex disputes and disputes where the statutory time-bar is likely to be a serious consideration.
5.16 Bearing in mind that timeframes would also need to allow time for both the conference and the drafting of the SOP, the most feasible legislative option would appear to be to codify the current administrative timeframes for these phases. As mentioned above, Inland Revenue currently anticipates that a total of seven months is needed between the receipt of a taxpayer’s NOR and the issue of the Commissioner’s SOP.
5.17 While we have noted that a statutory timeframe could provide an incentive for taxpayers to lengthen the conference phase, seven months (including the conference phase) is a reasonable length of time for the Commissioner to ascertain the cooperativeness or otherwise of a particular taxpayer.
5.18 Another possible risk with a single legislated timeframe is that relatively simple disputes could be delayed until the end of the seven-month period. If the conference is shortened or is seen as unnecessary, this statutory timeframe effectively allows the Commissioner up to seven months to draft the SOP, which is unduly long. This risk needs to be factored against the certainty that a back-stop date for this part for the process would provide for taxpayers.
Extending the deadline
5.19 There will always be disputes where a lengthy conference phase is necessary and in the best interests of all parties. Imposing a strict timeframe on these disputes could result in the Commissioner being forced to abridge a constructive conference in order to allow time to draft a SOP. This could mean that settlement negotiations (with the potential to end the dispute) could be abandoned in favour of an option that would add both time and costs to the dispute.
5.20 To ensure that a legislative approach retained some administrative flexibility for the most complex cases, one option could be to use the seven-month timeframe and give the Commissioner the ability to extend this, perhaps by a maximum of two months. A two-month period is based on an assumption that the majority of documentation should be complete or nearing completion within the original seven months. Any extension should therefore be of a sufficient time to allow completion of these documents without causing unnecessary further delay.
5.21 In the event that this further period was needed, the Commissioner would, before the seven-month deadline, advise the taxpayer of:
- the decision to extend the deadline;
- the reasons for doing so; and
- the revised deadline.
5.22 Internal guidelines may need to be drafted to ensure that the “easy” option of extending for two months is not used as a default. Any decision to extend the deadline should still ensure that the disclosure notice and SOP are issued at the earliest opportunity.
5.23 For taxpayer-initiated disputes, there is currently no obligation on the Commissioner to produce a SOP at the same time as the disclosure notice. As a result, if a time limit is to be set for the issue of the disclosure notice, it may not need to factor in time for drafting the Commissioner’s SOP.
5.24 However, factored against this consideration is that, generally speaking, taxpayer-initiated disputes are received with little warning. Although the Commissioner has a statutory requirement to respond to a taxpayer’s NOPA (by way of NOR) within two months, it can be difficult to undertake an entire investigation within this timeframe. Any statutory timeframe for the conference may therefore need to take into account the fact that the initial investigation may not be complete at the time the Commissioner’s NOR is issued.
5.25 The NZICA-NZ Law Society submission argues that the possible imposition of UOMI (in the event that increased tax is payable following the outcome of the dispute) can be a major factor in the overall cost of a tax dispute. The submission considers that there should be scope to suspend UOMI when inaction by the Commissioner has caused a delay in a dispute.
5.26 The timeframes set out in the revised SPSs have been set because they are considered to be reasonable for completing the relevant steps in the process, without sacrificing thoroughness or quality. More rigid adherence to these timeframes in future should result in fewer delays in the process.
5.27 We do not favour a legislative suspension of UOMI for the delays in the process that do nevertheless arise. UOMI is a “no fault” concept, designed to be administratively workable by ensuring that exceptions are kept to a minimum. Practically speaking, any provision that suspended UOMI would need to relate back to a particular statutory “event” – for example, the taxpayer’s NOR. If UOMI were to be suspended within the administrative timeframe for the issue of a SOP, this would effectively penalise the Commissioner even if the length of the conference phase or complexity of the dispute provided an acceptable rationale for the administrative timeframe not being adhered to.
5.28 We note, in any event, that it is the Commissioner’s practice to exercise a degree of discretion when quantifying UOMI. Generally, where an undue delay in the process is attributable to Inland Revenue, an appropriate remission of UOMI will be made to reflect this.
5.29 The imposition of a statutory deadline on the Commissioner for issuing a SOP would mean that no consideration would need to be given to the suspension of UOMI. This is because the likely consequence of any failure to meet a statutory timeframe would be that the Commissioner was deemed to accept the position set out in the taxpayer’s NOR.
Other minor regulatory amendments
5.30 We have identified the following issues concerning timeframes in the Taxation Review Authorities Regulations where changes could be made:
- amending Regulation 11 to reduce the time that the Commissioner has to file a Notice of Defence from 40 working days to 25 working days. This would align the filing requirement in the TRA with that of the High Court; and
- amending Regulation 28 to require the TRA to set a date for a directions hearing within 35 working days of the filing of the notice of claim (at present, this date has to be at least 90 days after filing or another date agreed by the parties). The directions hearing in the TRA was introduced prior to the “track” system for cases being introduced in the High Court. However, it seems appropriate to bring the timing requirements for tax cases in line with those for case management conferences of “standard track” cases in the High Court. In any event, there does not appear to be great justification for having timing discrepancies between the TRA and the High Court, given that both can be the hearing authority of first instance for tax cases.