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Binding rulings

LEGISLATION SHOULD ENCOURAGE THE COMMISSIONER TO RULE

Submission

(New Zealand Institute of Chartered Accountants)

The overall policy intent of the changes is supported. However, the overall statutory scheme of the binding rulings regime needs to be reset to encourage the Commissioner to rule as the default or starting position. More specifically, the amendments to the rulings regime should ensure that:

  • the changes encourage the Commissioner to issue a binding ruling rather than decline to rule;
  • the Commissioner does not use his powers of restriction unnecessarily; and
  • there is consistency of application of the law by the Commissioner and the Crown.
Comment

The binding rulings system is aimed at providing certainty for taxpayers in assessing their tax liabilities. Officials agree that restrictions to this ability need to be justifiable. Relevant factors to take into account in setting any restrictions are the need to protect the revenue base and the need for consistency in interpreting tax laws.

Several proposals in this bill are aimed at improving taxpayer certainty by clarifying when the Commissioner can rule (for example, the amendments to the prohibition of ruling on questions of fact and the discretion not to rule when a similar matter is subject to appeal). Other proposals are aimed at expanding the circumstances when a ruling can be made (for example, allowing the Commissioner to make a binding ruling in favour of one tax type only, even though the application relates to more than one or allowing promoters to apply for rulings).

None of the proposals in the bill give the Commissioner greater powers to decline to rule than currently exist.

Recommendation

That the submission be noted.

 

QUESTIONS OF FACT

Issue: Matters on which the Commissioner cannot rule

Submission

(Corporate Taxpayers Group, KPMG, New Zealand Institute of Chartered Accountants)

While it is accepted that the Commissioner should not generally be expected to be an “expert” in items (b) – (d) (of the definition of “proscribed question”) the Commissioner should be able to rule on these matters on the basis that he is satisfied with the level of evidence provided by a taxpayer in support of either:

  • their intention;
  • the value of something; or
  • what is commercially acceptable practice.

Inland Revenue operational/audit staff are expected to satisfy themselves of these matters on a daily basis, routinely deciding whether to audit a taxpayer or when undertaking an audit. Therefore we believe it is reasonable and appropriate to enable the Commissioner to provide a view outside of an audit context on the above matters. (Corporate Taxpayers Group)

Inland Revenue should be able to issue binding rulings on any matter on which it can make an assessment (for example, questions of fact, commercially acceptable practice, and generally accepted accounting practice). (KPMG)

Consistent with our view that the statutory scheme of the binding rulings regime should be designed to encourage the Commissioner to rule, the Commissioner should not be prohibited from giving a ruling in relation to a person’s purpose or intention (proposed paragraph (b) of the definition) or what is commercially acceptable practice (proposed paragraph (d) of the definition). (New Zealand Institute of Chartered Accountants)

Comment

Under the Tax Administration Act 1994 taxpayers who seek rulings (currently private, product and status rulings) are not required to follow the ruling, whereas Inland Revenue must apply the law as set out in the ruling.

Officials consider there is some validity to the submitters’ questioning the argument that the Commissioner does not have expertise in relation to matters such as valuation and commercially acceptable practice. However, the more general question is how Inland Revenue applies its resources. If the Commissioner were to rule on a very broad a range of matters, the time taken to make binding rulings would increase. This is not the outcome sought by submitters.

Officials consider that it is important to differentiate the rulings process from the process of considering a taxpayer’s self-assessment. We note that an audit or investigation occurs after a taxpayer has made their tax self-assessment and factual matters can be the subject of more lengthy debate and expert evidence may be called for. In a ruling the Commissioner rules on the facts as provided by the taxpayer. The ability for taxpayers to seek binding rulings was intended to enable them to gain certainty in undertaking the self-assessment process. Hence binding rulings have a specific purpose rather than being a general source of assistance from Inland Revenue.

Revenue risks will arise if the Commissioner, owing to resource constraints and the need to respond in a timeframe that meets the taxpayer’s business needs, is forced to make an early determination about the facts. This risk is compounded by the complexity and large dollar amounts involved in many rulings applications. This risk would arise when the facts turn out not to be as presented and the Commissioner has to argue that the ruling will not apply. The Commissioner can do this only if the arrangement is materially different from the arrangement identified in the ruling or there was a material omission or misrepresentation in the application for the ruling.

If the arrangement being ruled on is prospective the Commissioner could not sensibly determine questions of fact since something must be in existence for it to be a fact. We note that rulings are not limited to prospective transactions, however, for pragmatic reasons.

Recommendation

That the submission be declined.

 

Issue: Discretion to rule on intention and value

Submission

(New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)

The Commissioner should be given the option to provide a ruling regarding a person’s purpose or intention, or what is “commercially acceptable practice”. (New Zealand Institute of Chartered Accountants)

The general rule that the Commissioner cannot rule on questions of fact should be retained, but the Commissioner should have the discretion to rule on, for example, a taxpayer’s intention, purpose, or the value of a business or asset.
(PricewaterhouseCoopers)

Comment

The list of criteria under which the Commissioner has a discretion not to rule is very limited. Giving the Commissioner a discretion in relation to proscribed questions of fact would reduce certainty about the issues the Commissioner can rule on. This would defeat the objective of the proposals which is to clarify what constitutes a question of fact.

Recommendation

That the submission be declined.

 

Issue: Commercially acceptable practice

Submission

(New Zealand Institute of Chartered Accountants)

If the purpose of prohibiting the Commissioner from ruling on what is commercially acceptable practice is to prevent the Commissioner from dictating what is or is to be “commercially acceptable practice”, the Institute agrees with the proposed amendment. If this is so the wording of paragraph (d) of the definition of “proscribed question” should be reworded to clarify its meaning.

Comment

Currently the Commissioner may not rule if the application for the ruling would require the Commissioner to form an opinion as to generally accepted accounting practice or to form an opinion as to a commercially acceptable practice. Officials note that the current scope of the exclusion for commercially acceptable practice is unclear.

The proposal clarifies that the exclusion for commercially acceptable practice is limited to where that term is used in tax legislation (such as in the rules relating to the tax treatment of financial arrangements). It does not therefore prevent the Commissioner from ruling on broader matters such as the application of the general anti-avoidance provision. Ruling on anti-avoidance matters may require the Commissioner to consider the commerciality of the arrangement and the Commissioner should not be restricted in doing so.

Recommendation

That the submission be declined.

 

Issue: Proposal should not proceed

Submission

(Ernst & Young)

The proposed new definition of “proscribed facts” and the resulting amendments are not necessary and do not provide any further certainty or clarity for taxpayers but may open more scope for argument as to the extent to the Commissioner’s powers in relation to binding rulings.

Comment

Under current sections 91E(4)(a) and 91F(4)(a) the Commissioner is prohibited from ruling on questions of fact. The Commissioner can rule on the facts as presented by the applicant, but cannot determine the correctness of the facts.

The submission appears to consider that the provisions should and do allow the Commissioner to rule on the application of the general anti-avoidance provisions in the income tax and GST legislation.

On an alternative interpretation of sections 91E(4)(a) and 91F(4)(a), however, 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 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.

Recommendation

That the submission be declined.

 

Issue: Use of “may”

Submission

(New Zealand Institute of Chartered Accountants)

The interpretation of the word “may” in the context of sections 91E(3), (4) and 91F(3), (4) should be clarified.

Comment

The context of sections 91E (which allows the Commissioner to make private binding rulings on request) and 91F (which allows the Commissioner to make product rulings) provide sufficient clarity for the legal interpretation of the words “may” and “may not” as they are variously used in those sections.

In sections 91E(4) (which lists the circumstances when the Commissioner may not make a private ruling) and 91F(4) (which lists the circumstances when the Commissioner may not make a product ruling), the words “may not” clearly introduce mandatory prohibitions, despite “may”, on its own (that is, when “may” is unqualified by “not”), usually conveying discretion or permission.

In sections 91E(3) and 91F(3), the word “may” is not qualified by “not”. It therefore introduces a discretion and is intended to do so.

Recommendation

That the submission be declined.

 

TREATMENT OF INFORMATION

Issue: Response to proposal

Submission

(New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)

The Institute supports the proposed amendment which clarifies that the Commissioner may make a ruling based on the facts provided by the applicant and may inquire as to the correctness or existence of fact provided by the applicant, but is not required to do so. (New Zealand Institute of Chartered Accountants)

The proposed change should not be enacted. (PricewaterhouseCoopers)

Comment

The bill proposes that the Commissioner cannot rule as to whether a fact is correct or exists. The proposal clarifies that the Commissioner must make a ruling based on the facts provided by the applicant. If there is something apparently incorrect in the application, the proposal allows the Commissioner to question this but he is not required to do so.

The PricewaterhouseCoopers submission is concerned that the last aspect of the proposal does not sit comfortably with the proposal to introduce “proscribed questions of fact”.

The aspect of the proposal that is causing concern allows the Commissioner to inquire as to the correctness of facts when there is an obvious error in the application. However, this should save time and money for both the Commissioner and the applicant.

Recommendation

That the submission be declined.

 

ABILITY TO RULE WHEN THE MATTER IS SUBJECT TO A CASE BEFORE THE COURTS

Issue: The restriction should be removed

Submission

(KPMG, New Zealand Institute of Chartered Accountants)

Inland Revenue should be able to issue binding rulings on matters before the courts. (KPMG)

The restriction on issuing a ruling when the matter is the subject of a dispute by way of objection, challenge, or appeal should be removed altogether. (New Zealand Institute of Chartered Accountants)

Comment

The Commissioner has a discretion under which he can decline to rule “if the matter on which the ruling is sought is subject to an objection, challenge or appeal, whether in relation to the applicant or to any other person”. The provision is expressed in general terms and its scope, particularly the term “matter” is unclear. The provision does not allow for an unduly narrow interpretation such as requiring an identical transaction and the same or an associated taxpayer. At the other extreme, it would be inappropriate to apply it to all instances when an issue arises that is commonly determined in a transaction – for example, the application of the general anti-avoidance provision – as that would allow the Commissioner to turn down any ruling application on that issue. This lack of clarity does not give businesses certainty.

The bill proposes that the Commissioner’s discretion not to rule on matters before the courts be limited to cases involving substantially similar issues or arrangements. Therefore, while it is proposed to retain the discretion, it is being substantially narrowed.

Narrowing, or removing, the discretion further would mean that the Commissioner would be required to rule in an area of law that is uncertain. This could result in taxpayers obtaining inconsistent outcomes. It could also result in revenue risks were the Commissioner forced to rule before a similar arrangement in existence at the same time had been tested by the courts. This is particularly so given the inability of the Commissioner to investigate facts in the rulings context (which officials recommend should be retained).

Recommendation

That the submission be declined.

 

Issue: The term “substantially the same” should be defined

Submission

(New Zealand Institute of Chartered Accountants)

The term “substantially the same” should be defined in the legislation or replaced with a more precise term.

Comment

The proposal narrows the scope of current section 91E(3)(b) in that it would no longer apply to a “matter on which the ruling is sought” but rather to “an arrangement on which the ruling is sought or a separately identifiable part of the arrangement, substantially the same as the arrangement subject to the objection, challenge or appeal”.

The word “substantial” has been interpreted by the courts and officials understand that this imports a high threshold. There is no reason to think that the word “substantially” would be interpreted differently. Given the differing factual scenarios that could arise under the proposed new rule, officials do not consider that further definition would be particularly helpful. We note that the term “substantially” is used elsewhere in tax legislation and that an attempt at further definition has not been made there either.

Recommendation

That the submission be declined.

 

Issue: Should not apply to separately identifiable parts of the arrangement

Submission

(Ernst & Young, KPMG)

The references to separately identifiable parts of the arrangement should be deleted. (Ernst & Young)

The effect of the proposed amendment on an arrangement which is only partly the subject of a court dispute needs to be clarified. (KPMG)

Comment

The Ernst & Young submission notes that “the tax treatment of a “separately identifiable part of an arrangement” may differ significantly, depending on the rest of the arrangement of which it is part”.

Officials agree and note that ruling on a separately identifiable part of the arrangement rather than the whole arrangement will be at the Commissioner’s discretion.

However, we consider that the references to separately identifiable parts needs to be retained for those cases when there are differences in the arrangement being considered but the principal underlying feature in both is the same.

Recommendation

That the submission be declined.

 

Issue: The definition of “arrangement” should be widened

Submission

(New Zealand Institute of Chartered Accountants)

The definition of “arrangement” in section 3 should be widened for the purposes of the rulings regime.

Comment

The definition of “arrangement” in section 3 of the Tax Administration Act 1994 is already very broad. The same definition is used in the rulings regime and the general anti-avoidance provision and in the financial arrangement rules. A rulings “arrangement” has the additional feature of allowing the Commissioner to include in it “facts that the Commissioner considers are material or relevant as background or context”.Officials are not aware of any problems with the current definition. Basing the rulings regime on the “arrangement” concept seems appropriate as it is a regime to provide certainty and this can be achieved by ensuring consistency with usage in other areas of the law.

Recommendation

That the submission be declined.

 

Issue: The arrangement should be the same arrangement

Submission

(Ernst & Young, New Zealand Law Society)

Any such inability or discretion to rule should be limited to situations where the court proceedings are already in train and relate to the specific arrangement and parties who are seeking the rulings. (Ernst & Young)

Sections 91E(3)(b) and 91F(3)(b) should be confined to situations in which the challenge proceedings concern the same arrangement and the particular tax laws on which the ruling is sought. (New Zealand Law Society)

Comment

The legislation currently gives the Commissioner a discretion not to rule if the matter on which the ruling is sought is subject to appeal. The proposal narrows the current legislation in that it would no longer apply to a “matter on which the ruling is sought” but rather an arrangement on which the ruling is sought or a separately identifiable part of the arrangement, substantially the same as the arrangement subject to the objection, challenge or appeal”.

If the Commissioner’s discretion were exercised only in relation to the same arrangement and parties, a ruling could be sought, and given in relation to another arrangement covering the same issues as those being appealed, resulting in inconsistent outcomes for the parties. This would reduce certainty for the parties and give rise to the revenue and other risks officials identified earlier.

Recommendation

That the submission be declined.

 

Issue: Guidelines

Submission

(KPMG)

Inland Revenue should publicly release guidelines on what factors are taken into account in the exercise of the discretion.

Comment

Officials consider that the factors that would be taken into account in exercising this discretion are not general – that is, the exercise of the discretion will be considered on a case-by-case basis. We consider that it would be difficult to compile a useful list of facts that would determine two particular arrangements in a ruling application and a dispute to be substantially the same. Each case would involve an individual judgement based on the particular facts and their degree of similarity.

Recommendation

That the submission be declined.

 

Issue: The Commissioner should be required to notify an applicant that the issue is before the courts

Submission

(KPMG, New Zealand Institute of Chartered Accountants)

If Inland Revenue exercises that discretion, it should inform the taxpayer of its position on the tax law involved. (KPMG)

As part of this amendment the legislation should require the Commissioner to notify the applicant that the issue is before the court and what Inland Revenue’s position is. (New Zealand Institute of Chartered Accountants)

Comment

The 1994 discussion document, Binding Rulings on Taxation, explained the policy intention of the discretion in section 91E(3)(b) and noted that “Inland Revenue will notify the applicant that the issue is before the court and what Inland Revenue’s position is”. The proposal to notify the applicant did not proceed.

As the provision applies to ruling and dispute arrangements that may involve different parties, such a requirement could be contrary to taxpayer secrecy, including under section 81.

In practice, Inland Revenue will advise an applicant affected by the provision about the dispute if the dispute is in the public domain (for example, a decision is under appeal). If both the ruling and disputed arrangement are entered into by the same person, Inland Revenue is obviously able to discuss the relevant issues.

Recommendation

That the submission be noted.

 

MASS MARKETED AND PUBLICLY PROMOTED SCHEME RULINGS

Issue: Authority of person making a statutory declaration

Submission

(New Zealand Institute of Chartered Accountants,)

The legislation should stipulate the level of authority of the person who is to make the statutory declaration of the promoter.

Comment

The proposal requires the person making the application, being the promoter of the arrangement, to make a statutory declaration. Any person signing the declaration is therefore doing so on behalf of the promoter. If they are falsely representing the promoter other sanctions will be available. Specifying in the legislation the minimum level of authority seems to be unnecessary.

Recommendation

That the submission be declined.

 

Issue: Definition of “promoter”

Submission

(New Zealand Institute of Chartered Accountants,)

The definition of “promoter” should be amended and supporting administrative practices within the Inland Revenue Department should be put in place to confirm the scope of the proposal and to ensure that a consistent view is adopted of who or what a “promoter” is.

Comment

There is a definition of “promoter” already in section 141ED(1) of the penalty provisions in the Tax Administration Act 1994. The definition provides that a “promoter” means:

  • (a) A person who is a party to, or is significantly involved in formulating, a plan or programme from which an arrangement is offered; or
  • (b) A person who is aware of material and relevant aspects of the arrangement and who sells, issues or promotes the selling or issuing of, the arrangement, whether or not for remuneration.

This proposal will use the same definition in sections 91FC and 91FD.

Recommendation

That the submission be declined.

 

DECLINING TO RULE WHEN AN ARRANGEMENT IS THE SUBJECT OF A DISPUTE

Issue: Extension of proposal to audits

Submission

(New Zealand Institute of Chartered Accountants)

The amendment to allow the Commissioner to make a ruling if the application relates to an arrangement that is being disputed, provided the application for the ruling relates to a different tax type from that being disputed, should be extended to cases when the Commissioner is auditing or investigating the taxpayer and not limited to tax type.

Comment

Under section 91E(4)(ga) the Commissioner may not make a private ruling if the application relates to an arrangement that is being disputed by way of a notice of proposed adjustment (NOPA). This provision ensures that there is no overlap between the disputes resolution process and the binding rulings regime. It also ensures that certainty for the taxpayer about the Commissioner’s position is maintained.

The section is being amended to provide an exception to this prohibition which will apply if the application for the ruling relates to a different tax type from that being disputed.

In an audit or dispute, factual matters can be the subject of more lengthy debate and expert evidence. In a ruling, the Commissioner rules on the facts as provided by the applicant may be used. The arrangement is often prospective.

Any questions over the correct tax treatment of an arrangement are best resolved in the audit or dispute context if these have begun. Considering a binding ruling application can involve considerable resources on Inland Revenue’s part and is not necessarily conducive to the speedy resolution of an audit or dispute. Currently the disputes process is being reviewed to further facilitate resolution; having the taxpayer able to apply for a binding ruling at the same time may be detrimental to this process.

We also note that the proposal in relation to disputes only applies when the tax type on which the ruling is sought is not being disputed. In an audit situation one tax type may be audited initially but the other tax types subsequently considered. Ruling on a particular aspect of a taxpayer’s assessment could undermine the audit process. This risk is not a concern in the disputes context.

Recommendation

That the submission be declined.

 

Issue: Taxpayers should be able to seek a ruling when they have self-assessed

Submission

(KPMG)

Taxpayers should be able to request a binding ruling for the current tax period after their self-assessment for the current tax period.

Comment

Rulings may be sought only on prospective arrangements or on arrangements in relation to which the taxpayer has not made the relevant self-assessment and has therefore not taken the relevant tax position.

As we have noted, officials consider that it is important to differentiate the rulings process from the process of considering a taxpayer’s self-assessment. Once the self-assessment is undertaken, the taxpayer may be either subject to audit or (within a four-month period) file a taxpayer-initiated notice of proposed adjustment. Officials have noted that in the case of an audit that process is better suited for reaching an outcome. If the concern is with the taxpayer notice of proposed adjustment, the issue would be best dealt with as part of the Government’s current review of the tax disputes process.

Recommendation

That the submission be declined.

 

Issue: Application date

Submission

(Ernst & Young)

The changes should apply to all applications which have not been declined on the paragraph 91E(4)(ga) ground, or which have not been finalised and issued, before enactment of the bill.

Comment

Section 91E(4)(ga) is being amended to provide an exception to the prohibition on ruling on disputed arrangements that are the subject of a NOPA. The exception will apply if the application for the ruling relates to a different tax type from that being disputed. Currently, the proposal will apply from the date the bill is enacted.

Officials are unaware of any reason for the proposal not to apply to ruling applications which have already been lodged but have not yet been declined or finalised by the time the bill is enacted.

Recommendation

That the submission be accepted.

 

A RULING THAT FAILS IN PART

Issue: Agree with proposal

Submission

(KPMG, New Zealand Institute of Chartered Accountants)

The bill’s amendments that are intended to allow taxpayers to rely on a binding ruling in part, based on tax type, are sensible and agree with our previous submissions on the binding rulings system. (KPMG)

The Institute supports the proposed amendment as it allows taxpayers to rely on parts of a ruling that they apply without having to apply all the rulings made by the Commissioner in relation to the arrangement. (New Zealand Institute of Chartered Accountants)

Comment

Currently under section 91EB(2) a binding ruling involving material differences with the arrangement actually undertaken is treated as fully invalid even if those differences are material only to certain aspects of the ruling. An example is when a ruling relates to both GST and income tax and the material differences relate only to the GST issues.

Amendments are proposed so that a ruling can be made invalid in part rather than only in full. The partial validity will apply if not all tax types ought to be affected by a general invalidity. The proposal will provide greater flexibility in the rulings process.

Recommendation

That the submission be noted.

 

Issue: Application of proposal to rulings on more than one tax law

Submission

(New Zealand Institute of Chartered Accountants)

The scheme of the rulings regime should be reconsidered to confirm that the amendment achieves the desired objective of requiring a taxpayer to apply all the Commissioner’s rulings in relation to a tax type and the tax position(s) being considered.

Comment

Officials consider that a ruling which has two issues (for example, deductibility and assessability or a ruling on more than one tax) is only one, not two, rulings.

In other words, under the amended legislation, Inland Revenue’s practice of treating a ruling on a number of issues as one ruling will remain unchanged. The legislation will, however, allow a ruling that is taxpayer-positive for one tax type and taxpayer-negative for another to apply when it relates to the positive outcome only.

Recommendation

That the submission be declined.

 

Issue: Application date

Submission

(Ernst & Young, KPMG)

The changes should apply to all applications which have not been finalised and issued before enactment of the bill. (Ernst & Young)

The amendments are limited to binding rulings whose application is received after the date of Royal assent for the bill. This limitation is inconsistent with the purpose of the bill to increase certainty. We submit that all existing rulings should be able to take the benefit of the amendments at any time after the date of Royal assent. (KPMG)

Comment

Officials agree that the application date of the amendments to section 91E(4)(ga) as they relate to allowing a partially accepted application should be amended to extend to all existing rulings.

Recommendation

That the submission be accepted.

 

PUBLICATION OF NOTIFICATION OF BINDING RULINGS IN THE GAZETTE

Issue: Agree with proposal

Submission

(New Zealand Institute of Chartered Accountants)

The Institute agrees with the proposal to no longer require the Commissioner to publish notification of rulings in the Gazette and instead publish this information in a publication chosen by the Commissioner.

Comment

The binding rulings legislation requires Inland Revenue to notify the making and withdrawal of public and product rulings in the Gazette. Public and product binding rulings are also published in full in Inland Revenue’s Tax Information Bulletin (TIB). The TIB is available on Inland Revenue’s website and a paper copy can be requested. The TIB will continue to be the main vehicle for publication.

The bill proposes to replace the requirements that the Commissioner publish the making and withdrawal of public and product rulings in the Gazette with requirements that the Commissioner publish this information in a publication chosen by the Commissioner.

Recommendation

That the submission be noted.

 

Issue: Other provisions which should be amended

Submission

(New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)

There are other sections in the Tax Administration Act 1994 requiring the Commissioner to publish the making or revocation of determinations that have been omitted from the bill. The amendment should be extended to notifications of extension of public rulings (section 91DD(2)) and status of product rulings (section 91GG(2)(a)). (New Zealand Institute of Chartered Accountants)

The reference to “the Gazette” in the following sections should also be replaced with the phrase “a publication chosen by the Commissioner” in sections 91AAl(4)(b), 91AAK, 91DD(1) and 91GG(2). (PricewaterhouseCoopers)

Comment

Similar amendments should be made to the following sections in the Tax Administration Act 1994:

  • 91AAK (Notice of setting economic rate);
  • 91AAQ (Determination of insurer as a non-attributing active CFC); and
  • 91AAR(6) (Determination relating to eligible relocation expenses).

However section 91AAF(6), 91AAG(7) and 91AAI(4) provide for the revocation of provisions effective the day after publication in the Gazette. The Gazette is published weekly. The Tax Information Bulletin, for example, is published in most cases monthly. Officials therefore consider, due to the frequency of the Gazette’s publication, these sections should continue to refer to the Gazette. The issue will be considered further at a later date.

Recommendation

That the submission be accepted.

 

Issue: Specification of publication

Submission

(PricewaterhouseCoopers)

The Commissioner should be required to specify the publication(s) that notices will be published in.

Comment

It is not necessary to specify the publication in which the Commissioner will publish notices. The Commissioner will publish the notices in an appropriate publication. Naming, for example, the Tax Information Bulletin, in legislation or regulation would mean that if the name of the publication changed the legislation or regulation would need to be updated.

Recommendation

That the submission be declined.

 

UNACCEPTABLE TAX POSITION PENALTIES AND USE-OF-MONEY INTEREST

Issue: Agree with proposal

Submission

(Corporate Taxpayers Group, KPMG, New Zealand Institute of Chartered Accountants)

The changes made to remove both penalties and use-of-money interest where a taxpayer has relied on the advice of the Inland Revenue are supported. (Corporate Taxpayers Group)

KPMG agrees with the proposed amendments clarifying that if a taxpayer has relied on official advice from Inland Revenue, the unacceptable tax position penalty and use-of-money interest cannot apply. (KPMG)

The Institute agrees with this proposal in principle. (New Zealand Institute of Chartered Accountants)

Comment

A shortfall penalty for taking an unacceptable tax position can be imposed when a taxpayer’s tax position fails to meet the standard of being “about as likely as not to be correct”. The penalty applies when the tax position involves a significant amount of tax. Use-of-money interest imposed on a taxpayer is charged when tax is underpaid and compensates the Crown for not having the use of its money.

It is possible that an unacceptable tax position penalty and/or use-of-money interest may apply if the taxpayer has underpaid their tax, even if this is as a result of having relied on advice provided by Inland Revenue.

Proposed sections 120W and 141B(1D) and a definition of “Commissioner’s official opinion” are included in the bill to ensure that taxpayers who rely on official Inland Revenue advice will not be subject to use-of-money interest or to the unacceptable tax position penalty. The provision will apply to advice provided orally or in writing by the Commissioner as the official position of Inland Revenue and which is applicable specifically to the taxpayer (with all the relevant facts having been provided by the taxpayer).

The amendment will not apply to advice that is in the form of a private binding ruling. As the ruling is binding on the Commissioner, the taxpayer, in following the ruling, is already not be subject to interest or the unacceptable tax position penalty.

Recommendation

That the submissions be noted.

 

Issue: Application to Commissioner’s public statements

Submission

(Corporate Taxpayers Group, KPMG, New Zealand Institute of Chartered Accountants, New Zealand Law Society)

The legislation should be extended to situations where the taxpayer has relied on general advice provided by Inland Revenue, such as commentary provided in Inland Revenue publications or on its website. (Corporate Taxpayers Group)

The bill should extend the exemptions from use-of-money interest and the unacceptable tax position penalty to taxpayers who rely on general statements. (KPMG)

The amendment should be extended to apply to the Commissioner’s publicly released statements. (New Zealand Institute of Chartered Accountants)

The proposed new safe harbour relating to reliance on the “Commissioner’s official opinion” should extend to written guidance published by the Commissioner, if applicable to the particular taxpayer and their particular circumstances. (New Zealand Law Society)

Comment

If the proposal were to extend to general guidance or statements Inland Revenue will not necessarily be able to determine whether a taxpayer did or did not at the relevant time rely on the advice. Alternatively, the taxpayer may interpret a general statement in a way that Inland Revenue would not agree fitted their particular case.

The unacceptable tax position penalty and use-of-money interest (which is intended to apply generally to underpayments rather than as a penalty) would therefore be relatively simple to avoid. This in turn would undermine the voluntary compliance objectives of these measures.

Section 183D of the Tax Administration Act 1994 allows the Commissioner to remit use-of-money interest if remission is consistent with the Commissioner’s duty to collect over time the highest net revenue that is practicable within the law. The Commissioner’s standard practice statement 05/10 sets out the Commissioner’s practice in granting remission of penalties and interest. The Commissioner will remit use-of-money interest in limited circumstances, such as when an Inland Revenue officer has given incorrect advice to the taxpayer, and that advice has directly resulted in the non-compliance. The Commissioner considers each case on its merits.

The remission provisions are therefore available to taxpayers and will be applied by the Commissioner if appropriate when reliance on general guidance or statements has resulted in the taxpayer taking an incorrect position.

Recommendation

That the submission be declined.

 

Issue: Scope of the proposal

Submission

(Ernst & Young, New Zealand Institute of Chartered Accountants)

There needs to be clarification of the respective scope and commencement of the two new proposed provisions, of the interaction between them and of what will constitute “official departmental advice” and a “Commissioner’s official opinion”. The proposed new subsection 120AA(3) of the Tax Administration Act should apply only to relieve taxpayers from use-of-money interest on underpaid tax and should not prevent them being credited with use-of-money interest when tax has been overpaid when relying on the Commissioner’s advice or opinions. (Ernst & Young)

The consequences of relying on the “Commissioner’s official opinion” or “official departmental advice” should be the same. A person who overpays income tax as a result of relying on the official advice or opinion of the Commissioner should be entitled to receive use-of-money interest. (New Zealand Institute of Chartered Accountants)

Comment

Officials agree that the scope of the proposal needs to be clarified. If a taxpayer overpays tax, Inland Revenue should pay use-of-money interest. Both provisions should apply to oral and written advice from Inland Revenue which is provided specifically to the taxpayer. Officials recommend that clause 67 be omitted.

Recommendation

That the submission be accepted by removing clause 67.

 

Issue: Phrases should be defined

Submission

(New Zealand Institute of Chartered Accountants)

The term “official departmental advice” should be defined.

Further definition is required on what is meant by “advice that is standard in nature” and the term “common tax issue”.

Comment

Officials are recommending that the clause containing the phrases “official departmental advice”, “advice that is standard in nature” and “common tax issue” be omitted. Defining these terms in the legislation would in any case be difficult.

Recommendation

That the submission be declined.

 

Issue: “Solely” should be deleted from the proposal

Submission

(Ernst & Young)

The word “solely” should be deleted from the proposed new section 120W.

Comment

Under the proposed changes a taxpayer is liable to pay penalties and use-of-money interest to the extent to which these arose solely because the taxpayer relied on the Commissioner’s official opinion. The inclusion of “solely” imposes an almost impossible test – if the taxpayer had relied on advice from a number of sources, including Inland Revenue, the taxpayer would not have relied on advice “solely” from Inland Revenue and could be subject to penalties and interest. Officials agree that “solely” should be deleted.

Recommendation

That the submission be accepted.

 

Issue: Application date

Submission

(New Zealand Law Society)

The Committee should also give consideration to bringing forward the application date of this safe harbour, so that it may apply to tax positions taken on or after the date of Royal assent, at least for opinions published as guidance for the general public or a particular group of taxpayers.

Comment

As noted previously, these proposals do not cover public statements, but rather advice provided orally or in writing by the Commissioner as the official position of Inland Revenue and which are applicable specifically to the taxpayer. In this more limited context the issue does not arise.

Recommendation

That the submission be declined.

 

Issue: Guidelines

Submission

(PricewaterhouseCoopers)

Inland Revenue should provide guidelines for how this provision will operate, for example, it should explain the steps that a taxpayer is required to take when seeking to rely on the Commissioner’s official opinion.

Comment

Inland Revenue usually provides information to taxpayers about how key administrative processes operate following the enactment of legislation affecting those processes. The submission will therefore be considered for this purpose.

Recommendation

That the submission be noted.

 

CHARGING FOR BINDING RULINGS

Issue: Agree with proposal

Submission

(New Zealand Institute of Chartered Accountants)

The Institute agrees with this proposal.

Comment

Private, product and status binding rulings all incur fees that are based on recovering the cost of providing the ruling. Currently, Inland Revenue may in exceptional circumstances, at the Commissioner’s discretion, waive in whole or in part any fee payable by an applicant. More flexibility is required for the exercise of the waiver.

Currently, the fees assume a GST-inclusive rate of 12.5% and do not take into account the fact that binding rulings issued to non-residents outside New Zealand may be zero-rated under the Goods and Services Tax Act 1985 and making the ruling more costly if the non-resident is not GST-registered.

The bill proposes an amendment to the Tax Administration (Binding Rulings) Regulations 1999 to provide for a more flexible fee-waiver provision based on what the Commissioner considers is fair and reasonable. The fees for zero-rated supplies of binding rulings will be reduced by the tax fraction of the fee.

Recommendation

That the submission be noted.

 

Issue: Guidelines

Submission

(New Zealand Institute of Chartered Accountants)

Guidelines on what the Commissioner would consider to be fair and reasonable circumstances for a fee waiver would be helpful. To ensure the policy intent of the amendments is applied in practice, a wide interpretation of “fair and reasonable” should be adopted.

Comment

The bill proposes that the waiver provision be amended based on what is fair and reasonable in the circumstances and having regard to the nature of the issues that are the subject of the application, the level of skill and experience required in the consideration of the application, and any other relevant factors. Officials consider that guidelines would be difficult to draft as what the Commissioner considers “fair and reasonable” must be determined on a case-by-case basis.

Recommendation

That the submission be declined.

 

OTHER MATTERS

Issue: Time limit

Submission

(New Zealand Institute of Chartered Accountants)

Time limits should be imposed on the Commissioner in the binding rulings process.

Comment

Inland Revenue has conducted an administrative review of the rulings process, and consulted with interested groups about ways in which concerns relating to timeliness can be addressed. Inland Revenue is undertaking more up-front consultation with the applicant to ensure the issues are clearly identified, allocating some ruling applications to areas of the department other than the Office of the Chief Tax Counsel and aiming to complete rulings within three months of receipt of the application.

The issues raised in a binding ruling application can be numerous and complex, therefore some flexibility in the timeframes may be needed in exceptional cases. If the legislation were amended to set out a time limit for binding rulings and the deadline could not be met, the Commissioner would issue a negative ruling – and if the taxpayer chose to withdraw the ruling application or not follow the ruling, the taxpayer would not be provided with any certainty.

Recommendation

That the submission be declined.

 

Issue: Content and notification of a public ruling

Submission

(New Zealand Institute of Chartered Accountants)

The legislation should be amended to state that all public rulings will apply only on a prospective basis.

Comment

Currently the Commissioner is not restricted in his ability to rule retrospectively. This may not seem desirable to taxpayers. However, in practice ruling retrospectively is only done to ensure that there is certainty when there would otherwise be a “gap” between the expiry of one ruling and the issuing of another.

Inland Revenue is aiming to ensure that a replacement ruling is issued on or before the previous one expires.

Recommendation

That the submission be declined.

 

Issue: Application of ruling after expiry

Submission

(New Zealand Institute of Chartered Accountants)

The Tax Administration Act 1994 should be amended to confirm the application of a public ruling in the period after the date of expiry to the date the ruling is reissued.

Comment

The submission is inconsistent with one of the key aspects of the scheme and purpose of the binding rulings legislation. The regime is intended to give the Commissioner the option of ruling for a period of time (section 91DA(1)(e)(i)) or indefinitely (section 91DA(1)(e)(ii)). Given the option of taking a binding position for a period, this means that once a ruling expires it will have no effect. The Commissioner may in those circumstances decide to “reissue” a ruling for a further period or indefinitely. In some cases he may decide not to reissue or replace a ruling at all. This could be for a range of reasons – for example, if the legislation has changed, or the arrangement does not occur or occurs so infrequently as to make the ruling largely redundant.

An automatic extension would not sit comfortably with rulings that needed to be changed or that were not appropriate for reissue.

Currently, the Commissioner does have the power to extend an expired ruling (section 91DD). This power has been exercised only once or twice but does allow the possible continuation of a view without needing to formally consult as would be the case if the ruling was reissued.

Recommendation

That the submission be declined

 

Issue: Definitions

Submission

(New Zealand Institute of Chartered Accountants)

The definitions “Commissioner’s official opinion”, “Promoter”, and “Proscribed question” should be added to section 91B or included in the main body of the legislation as part of the substantive provisions that refer to these terms.

Comment

The issue of the placement of definitions is much wider than that of how the particular definitions referred to in the submission are placed. It requires a more comprehensive consideration of this structural aspect of the Tax Administration Act 1994 and needs to be considered further.

Recommendation

That the submission be noted.