Time period for refunds under the Income Tax Act 2007
Issue: Agree with proposal in principle
Submission
(New Zealand Institute of Chartered Accountants)
Subject to our submissions on the application date and section 113, set out below, we accept the broad principle underlying the proposed change to limit the time period for claiming tax refunds and charitable tax credits, being to align the refund period with the time bar for reassessment.
Recommendation
That the submission be noted.
Issue: Application date
Submissions
(Ernst & Young, New Zealand Institute of Chartered Accountants)
The repeal of section RM 6 of the Income Tax Act 2007 should be clarified to apply in relation to refunds of income tax for a person’s 2013–14 or later income year. (Ernst & Young)
The wording of proposed new section 41A(6) of the Tax Administration Act 1994 should be revised to clarify when the refund application must be made and definition of the four-year period. Clarification should also be provided on how the amendment to section 41A may apply in relation to any delayed claims for housekeeping payment credits up to the 2011–12 income year. (Ernst & Young)
The application date of the amendment should be delayed so that it applies from the 2016–17 and later tax years. This would align the proposed amendment with the changes to the tax return filing rules enacted in the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012. (New Zealand Institute of Chartered Accountants)
Comment
The proposal means that from the 2013–14 tax year the time period for refunds under the Income Tax Act is reduced to four years from the end of the year in which the assessment is made. The amendment applies to all refunds including those where the refund is for a tax year before 2013–14. A submission suggests that the proposal should apply to assessments only to refunds for a person’s 2013–14 or later tax year. Officials disagree and consider that it would be much simpler for only one refund time period to apply in all cases. To have different time periods apply depending on when tax was assessed would create confusion.
For donations tax credits the bill proposes that the refund must be made within four years from the end of the tax year in which the donation is made. A submission suggests that the proposal apply to gifts made after 1 April 2013. Currently for the many individual taxpayers who are not required to file returns, there is no assessment of tax, the time period in section 108 does not start and therefore there is no time limit for claiming tax credits. As with the submission on the application date for the refund time period under the Income Tax Act above, officials consider it would be much simpler for only one rule to apply in all cases. To have different time periods in perpetuity depending on when the gift was made would create confusion.
One submission suggested that the proposal be delayed to align with the recent amendment to the return filing rules. The proposal to amend the time period for refunds under the Income Tax Act applies more widely than the recent amendments to the return filing rules. Officials consider that these proposals, which affect all taxpayers, should not be delayed.
Recommendation
That the submissions be declined.
Issue: Commissioner amending assessments
Submission
(New Zealand Institute of Chartered Accountants)
The four-year time limit should also apply to amended assessments issued by the Commissioner under section 113 of the Tax Administration Act 1994.
Section 113 should specifically proscribe the Commissioner’s practice of refusing to amend an assessment under section 113 when the taxpayer wishes to change from one valid treatment available under the Revenue Acts to another valid treatment (the so called “regretted choice” approach).
Comment
Section 113 gives the Commissioner the discretion to amend assessments in order to ensure their correctness. While there is specifically no time limit in section 113 on the Commissioner amending an assessment, there are time limits on the Commissioner increasing the amount of an assessment and refunding overpaid tax. Standard practice statement 07/03 Requests to amend assessments sets out the Commissioner’s practice for exercising the section 113 discretion. It clearly refers to the time limits on increasing assessments (paragraph 55) and the time limits on income tax refunds (paragraph 56).
The application of the time bar to the Commissioner’s power to amend assessments was confirmed in Miller v Commissioner of Inland Revenue, (1998) 18 NZTC 13,961 (CA):
The Act confers on the Commissioner the power to make tax assessments (s 19) [of the Income Tax Act 1976 which became section 92 of the Tax Administration Act 1994, since amended] and from time to time to make alterations or amendments to an assessment in order to ensure its correctness (s 23)[now section 113]. But the Commissioner may not exercise that power of amendment after four years from the end of the year in which the original assessment was made except where the taxpayer's return was fraudulent or wilfully misleading or omitted all mention of the income in question or all mention of income from a particular source (s 25)[now section 108]. Except in objection proceedings, an assessment may not be disputed and is conclusively deemed and taken to be correct (s 27) [now section 109]. …
When a taxpayer has two or more options available to them, takes one option and at a later date requests a change to another valid option, there is no error to correct – the position taken is correct. The Commissioner does not have unlimited resources and as noted in the standard practice statement 07/03 Requests to amend assessments:
… the Commissioner does not consider it appropriate to devote resources to correcting optional positions if the preferred positions could have been taken when the taxpayers made the original self-assessments by filing the tax returns. Arguably, to do so would not promote the integrity of the tax system pursuant to section 6(1).
Amending section 113 to proscribe the Commissioner’s practice of “regretted choice” would involve a major change to tax administration. The proposal in the bill concerns the time limit for refunds and is not concerned with amending a long standing core provision such as section 113.
Recommendation
That the submission be declined.
Issue: The amendment does not lead to symmetry
Submissions
(Corporate Taxpayers Group, Deloitte, KPMG, New Zealand Law Society)
The time period for refunds should remain at eight years. While it is correct to say that assessments cannot generally be increased after four years, there is actually a long list of exceptions to this rule which are not mentioned in the commentary to the bill or the associated regulatory impact statement. For example, there is no time limit on the Commissioner if there is a view that a return is fraudulent or wilfully misleading or does not mention income of a particular nature or derived from a particular source. This means there is the potential to nullify the time bar in situations when there is no intended mischief by a taxpayer and therefore can potentially apply to a taxpayer who has made what is essentially a simple mistake or oversight. (Corporate Taxpayers Group, Deloitte)
While this change seems reasonable, we note that the statute bar period can be waived in some circumstances. (KPMG)
The proposal to limit a taxpayer’s right to a refund after the four-year period should not proceed. The playing field is already substantially tilted in the Commissioner’s favour. Whereas the Commissioner can amend a assessment at any time during the four-year period in section 108 of the Tax Administration Act, taxpayers have no right to have an assessment amended once four months have passed since the date they made their assessment (note that in the case of a Commissioner assessment, the period is two months). There are many situations when the Commissioner is able to amend an assessment beyond the four-year period. If the proposal does proceed, it should be subject to appropriate exceptions – for example, relatively large claims. (New Zealand Law Society)
Comment
Officials agree with the comments in submissions that in particular circumstances there is no time limit on the Commissioner for increasing an assessment – for example, when a return is fraudulent or omits income from a particular source.
The limited exceptions to the four-year time bar rule should be seen in the context that the Commissioner is responsible for administering the entire tax system. Matters concerning tax positions taken by a taxpayer are primarily within the knowledge of the taxpayer. One of the principles underlying self-assessment is that taxpayers have more information about their tax liabilities and are therefore in a better position to assess their own tax liability than the Commissioner. The Commissioner audits taxpayers to determine whether their self-assessments are correct or incorrect.
As noted earlier, taxpayers can request that adjustments be made to assessments under section 113 of the Tax Administration Act to ensure their correctness.
Recommendation
That the submissions be declined.
Issue: Specific loss offset and refund rules
Submissions
(Corporate Taxpayers Group, Deloitte)
The loss offset and refund rules need to be revised to ensure that their operation is consistent with the operative provisions in the Act, particularly the petroleum mining rules. (Corporate Taxpayers Group)
There are also a number of circumstances where amended assessments are possible outside the general four-year rule and therefore amending the rules to prevent refunds after a four-year period would not result in symmetry of outcomes for taxpayers and Inland Revenue. (Corporate Taxpayers Group, Deloitte)
Comment
This proposal generally aligns the time period for taxpayers requesting refunds with the time period for the Commissioner increasing an assessment. As noted in one of the submissions:
Regardless of whether this proposal proceeds, arguably sections RM 2, 4 and 6 do not currently work with a large number of provisions in the Act that can require tax adjustments to be made outside of the time bar.
Officials note that this submission raises issues that would require further analysis as part of the Government’s tax policy work programme.
Recommendation
That the submissions be declined.
Issue: Double taxation example
Submissions
(Corporate Taxpayers Group, KPMG)
Inland Revenue could amend a taxpayer’s assessment to correct an underpayment of tax but not allow the overpayment of tax in an earlier year to be corrected to offset the underpayment. (Corporate Taxpayers Group)
It is important that a timing mismatch does not arise. For example, a timing difference that is amended on audit, if Inland Revenue increases the income in a tax year that is inside the four-year limit, and there is a corresponding decrease in income in a tax year that is outside the four-year limit, the refund resulting from the reduced income should not be disallowed. (KPMG)
Comment
One of the submissions contained an example where a taxpayer returned income early in year 1 – the income should have been returned in year 3. When Inland Revenue audited the taxpayer in year 7 the assessment for year 3 was amended but a corresponding adjustment was not made to the year 1 assessment, resulting in the taxpayer being taxed twice on the same income.
Officials consider that such an outcome is inconsistent with the Commissioner’s duty under section 6 of the Tax Administration Act to maintain the integrity of the tax system. In exercising her powers the Commissioner should seek to avoid this outcome by, for example, making appropriate consequential amendments.
The Commissioner has issued an internal instruction to this effect. This internal instruction will be noted in the Tax Information Bulletin article for this reform.
Officials have discussed the issue with the Committee’s independent advisor. Officials will monitor this issue and if such double taxation cases occur will propose an amendment in a future bill.
Recommendation
That the submissions be noted.
Issue: Extend the time period to claim input tax credits
Submission
(Corporate Taxpayers Group)
The time period for claiming input tax credits should be lengthened to four years.
Comment
For GST purposes, the current time period to claim input tax credits is two years as set out in the proviso to section 20(3) of the Goods and Services Tax Act 1985. The issue of the time period for claiming input tax credits raises considerations which are particular and special to GST. These would require quite separate analysis to the proposal in the bill to reduce the time period for refunds under the Income Tax Act to four years.
Recommendation
That the submission be declined.
Issue: Application to foreign tax credits
Submission
(BDO Wellington Limited)
It is unclear how the amendments will affect the application of section 78B of the Tax Administration Act 1994.
Comment
Under section 78B(1) of the Tax Administration 1994, a taxpayer who has a tax credit under section LJ 2 (tax credits for foreign income tax) or section LK 1 (tax credits relating to attributed CFC income) of the Income Tax Act must apply for the credit within four years after the end of the tax year in which the taxpayer would have the credit. The Commissioner has a discretion to extend this period by another two years.
Officials agree with the submission and recommend that the time period for the refund be extended if the Commissioner has exercised her discretion under section 78B and the taxpayer would not otherwise be within the refund period.
Recommendation
That the submission be accepted.
Issue: Overpayment of tax
Submission
(New Zealand Law Society)
When a taxpayer has paid more tax than they were procedurally required to do so, there should be no time limit on the right to a refund. The time limitation in section 108 of the Tax Administration Act on the Commissioner’s power to amend an assessment does not prevent the Commissioner from collecting tax which the taxpayer has admitted it owes, but which it has not paid. Accordingly, there should be no limit on refunds which arise without the need for an amended assessment.
Comment
This proposal in the bill generally aligns the time period for taxpayers requesting refunds with the time period for the Commissioner increasing an assessment. It means that all taxpayers requesting refunds would be treated similarly, as the refund period for personal tax summary taxpayers is currently four years.
The submission is correct in that there is no time limit on the Commissioner collecting tax which the taxpayer has been assessed for but which has not been paid. The time limit is on the Commissioner amending an assessment so as to increase the amount assessed.
This submission raises an existing issue which the proposed amendment does not affect.
Recommendation
That the submission be declined.
Issue: Time bar and extension of time
Submission
(Deloitte)
For taxpayers with an extension of time, tax returns are due by 31 March following the end of the tax year. However, 31 March 2013 falls on Easter Sunday. An Inland Revenue publication has noted that returns can be filed on 2 April 2013. However, it does not mention the impact of doing so, which is that returns filed on 2 April 2013 would be filed in the 2014 tax year and remain open for the Commissioner to amend the assessment for an additional year beyond what the taxpayer may have expected.
Comment
This issue concerns the current application of the time bar and is therefore separate to the proposed amendments which would reduce the time period for income tax refunds to four years.
Recommendation
That the submission be noted.
Issue: Clarification of the application of the time bar to some taxes
Submission
(Deloitte)
There are a number of issues with the application of section 108 of the Tax Administration Act which prevent its clear application to some taxes – for example, an incorrect reference in section 99(2) to the wording in section 108 and the assessment provisions for FBT, ESCT and NRWT not referring to section 108.
Comment
Officials note that this submission raises issues that would require further analysis as part of the Government’s tax policy work programme.
Recommendation
That the submission be noted.
Issue: Refund period under the Stamp and Cheque Duties Act 1971
Submission
(Matter raised by officials)
The time period for refunds in the Stamp and Cheque Duties Act 1971 should also be amended to be consistent with the proposed four-year period in the Income Tax Act 2007.
Comment
Section 86L of the Stamp and Cheque Duties Act 1971 sets out the time period for refunds of overpaid levies or levies paid in error. Currently a person can apply for the refund within eight years of the date of payment.
The time period should be reduced to four years consistent with the proposals in the bill to reduce the time period for refunds under the Income Tax Act.
Recommendation
That the submission be accepted.
Issue: Remedial amendment to section RM 4(1)(c)
Submission
(Matter raised by officials)
Section RM 4(1)(c) of the Income Tax Act 2007 should be amended to refer to “tax year” rather than “income year”.
Comment
Section RM 4(1)(c) of the Income Tax Act 2007 refers to the four-year period “under section 108 of the Tax Administration Act 1994 beginning at the end of the income year in which the assessment was amended has not ended”. Section 108(1)(b) refers to four years that “have passed from the end of the tax year in which the taxpayer provides the tax return”. Section RM 4(1)(c) should be amended to refer to “tax year” rather than “income year”, consistent with section 108.
Recommendation
That the submission be accepted.