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Inland Revenue

Tax Policy

Chapter 7 – Customers with unusual circumstances

This chapter discusses proposed changes that would apply across:

  • Working for Families Tax Credits;
  • child support;
  • student loans; and
  • KiwiSaver.

Summary of proposals in this chapter

  • Introduce general principle-based discretions for the different social policies administered by Inland Revenue.
  • Develop guidance for Inland Revenue staff on when to apply discretions.

Designing processes for the majority of customers

Families and individuals face numerous situations which impact on their ability to pay or receive the various social policy payments. To try to legislate for all these possibilities would result in lengthy and complex legislation which would not aid customers’ understanding of the rules. Instead it would more likely risk misinterpretation. Even then new situations could arise that had not been catered for.

Inland Revenue is aware of cases when a very small number of customers are in situations not covered by the law, or the law applies a process that results in the policy objectives not being achieved in their situation (even though it works appropriately for everyone else).

If a simple legislative amendment is possible this will always be the preferred approach. However, it may not always be possible and, even when it is possible, the time needed to pass legislation means some customers may face significant financial difficulties in the interim.[27] Currently, legislation provides very specific and focused authority for Inland Revenue to determine how specific processes should apply to an individual. These are generally referred to as discretions and are relatively common in child support.

The Government proposes to provide Inland Revenue with additional authority to work with customers who have unusual circumstances in order to achieve the intended policy outcome for the specific social policies. Legislative discretion, as part of understandable and accessible legislation that covers the vast majority of customers and situations, is considered to be the most effective mechanism for ensuring policy outcomes for these customers and the Crown.

Whether to have specific or general discretions in law

There are two approaches that could be used: specific discretions targeting specific issues or general discretions that apply more broadly. Most current discretions are specific and have been introduced in response to particular issues. However, as they are narrow in application they can exclude customers in similar situations.

Rather than developing very specific discretions in an adhoc fashion over time as issues arise, the Government proposes to set in place more principle-based general discretions for the specific social policies Inland Revenue administers. For example, there could be discretion that allows the Commissioner to determine in-work status for Working for Families Tax Credits that would allow for very unusual working arrangements to be recognised for customers who would otherwise be ineligible. There would be guidance for Inland Revenue staff on when and how discretionary authority should be used.

It is important to note that discretions would not be used as a permanent solution to patch up incomplete policy – the first and best preference is to improve the policy settings and the legislation when a simple solution exists.

Discretions would be used when it is determined:

  • there is no other existing remedy that would cater for the unusual circumstance;
  • the circumstance is at odds with the basic assumptions in the law; and
  • the policy outcome is not being achieved.

Unusual circumstances difficult to legislate in advance

Legislation and policy inherently rely on some basic assumptions that do not hold for a small number of people. They are also based on what lawmakers currently understand and anticipate will happen. History shows how difficult it is to anticipate changes in technology or society.

The types of assumptions inherent in social policy legislation administered by Inland Revenue are:

  • all children have legal guardians or parents;
  • individuals subject to the law are within New Zealand’s range of authority to administer the law;
  • individuals can be uniquely identified, found and contacted;
  • people are not constrained from complying with the law, for example, because of natural disasters or acts of war;
  • people will actively participate;
  • if people do the right thing, they will get the right outcome; and
  • people have full capacity to "act", for example, they are capable of making payments and filling in forms.

Parliament has provided Inland Revenue with some broad discretion as part of the recent child support reforms. As an example, the child support legislation assumes that a qualifying child has two parents and that they are not living together. Legislation is written on that basis. However, there are cases when the child is cared for by a "non-parent caregiver" and the parents are still living together, or there is only one parent of the child to make a child support formula assessment against. In these situations the legislation gives authority to Inland Revenue to modify the application of the law to fit the actual facts of the case so the correct policy outcome is achieved.[28]

Unusual circumstances can be thought of as situations that:

  • have not been considered or foreseen by lawmakers;
  • are not considered significant enough to specifically legislate for; or
  • are inconsistent with the assumptions inherent in the legislation.

Other aspects that would indicate that unusual circumstances exist are:

  • small numbers affected (potentially only one person) – if a significant number of people are affected the better solution would be to legislate;
  • infrequent – situations would be rare, as it is not efficient to set up processes that might never be used again; and
  • incorrect outcomes – following the law gets to an outcome that is inconsistent with the policy intent, usually due to an unforeseen combination of factors and the complexities of the person’s life.

Principles that would govern application of discretion

In applying a discretion to an unusual circumstance Inland Revenue would need to consider in the context of the circumstance:

  • equity – given the unique facts of the case, whether substantive justice has been achieved in a way that maintains equity between customers;
  • fairness – whether the outcome is what would be expected considering everything that has an effect on the situation; and
  • reasonableness – whether it is rational and acceptable to the average person facing that situation.

Inland Revenue would also need to take into account the rights and interests of all affected or potentially affected parties, any risks to the integrity of the law, the impact on customer compliance, the degree to which the policy objectives are not being met and the resources available to address the issue.

In general, it is expected that the use of a discretion would be applied to the customer’s benefit and that it would not be used to remove or reduce a social policy entitlement or to impose or increase a social policy obligation. However, as child support is basically money going from one person to another it would not be possible to require the use of a discretion for child support to benefit all affected customers. In these situations the discretion would look at what is necessary to achieve the right policy outcome in that unusual situation. The child support legislation already includes provisions for affected parties to challenge the outcome of a discretion by formally objecting.

The approach here complements the discussion in Chapter 6 of Proposals for modernising the Tax Administration Act discussion document on the role of the Commissioner and the proposal to allow more administrative flexibility in limited circumstances, for example, cases when the relevant legislation does not adequately deal with a particular situation owing to the complexity of the legislation.

Making greater use of regulations

The Proposals for modernising the Tax Administration Act discussion document also discussed a potential greater use of regulation in tax administration. The Social Security Legislation Rewrite Bill, currently before Parliament, sets out regulation making powers to cover a variety of areas, including how discretions would be applied or the criteria that would need to be considered. The intention is that "matters relating to detail and administration will be more appropriately located in delegated legislation to provide an appropriate degree of flexibility and responsiveness to changes in society".[29]


7.1 Do you support the proposal for more principle-based general discretions for the specific social policies with guidance for Inland Revenue staff on how it is to be applied?

7.2 What do you think are the key principles that should govern how Inland Revenue applies the discretion?

7.3 Should more use be made of regulations to set out criteria that Inland Revenue must consider?


27 Or the specific unusual case may no longer exist by the time legislation is passed and implemented.

28 Section 7B of the Child Support Act 1991.

29 From the Explanatory Note of the Social Security Legislation Rewrite Bill.