This book is only available in PDF format

Published: 12 March, 2009
Pages: 118

Introduction

Disputes between taxpayers and the Inland Revenue Department (“IRD”) are an inevitable part of an ongoing tax administration process. Importantly, the environment in which tax disputes are resolved is critical to maintaining an efficient tax administration (see in this regard the comments in the Government discussion document “Resolving tax disputes: a legislative review” (July 2003)).

The process of dealing with the IRD when tax affairs are being investigated, or a tax assessment is disputed, needs skilful and careful handling – the process can be drawn out and very complicated, as well as potentially costly. Understanding the process, knowing the strategies to employ at each stage and learning how to avoid the pitfalls, are vital in ensuring that the most beneficial outcomes are achieved in the most cost effective and least stressful way.

This NZLS seminar deals with the main practical and procedural issues that taxpayers can face in a variety of tax dispute scenarios. The main angles we have focussed on in this seminar are: process; strategies; and pitfalls. Understanding each of these stages is crucial in this area. We have attempted to draw out the most important practical issues in relation to each of the following key areas:

• investigation powers of the IRD (chapter 2);
• dispute resolution process under the Tax Administration Act 1994 (“TAA”)
• (chapter 3);
• litigation outside the disputes process in the TAA (chapter 4);
• litigating standard civil disputes (chapter 5);
• penalties (chapter 6);
• settlement of tax disputes (chapter 7).

In the current tax environment, tax base maintenance is an important consideration and is also a very integral component of the IRD’s tax policy work programme. The IRD’s tax base maintenance measures are correlated to the frequency of tax disputes. In the Commissioner of Inland Revenue’s (“Commissioner”) speech to the delegates at the INZCA Tax Conference (October 2007), the following risk assessment areas were identified for 2007-08: aggressive tax planning, evasion, fraud, high wealth individuals, large businesses, GST, and property transactions. The Commissioner also identified the following audit focus areas:

• aggressive tax issues – involving complex financial transactions (in particular the use of hybrid financial instruments), lease provisions (including the use of cross border leases), and intangible property; and
• transfer pricing enforcement programme.

In the most recent Inland Revenue “Briefing for the incoming Minister of Revenue” (November 2008), particular emphasis has been placed on targeting the use of different entities to structure the taxpayer’s affairs in ways which reduce their tax liabilities (page 5), and arrangements which involve escaping higher marginal tax rates which verge into unacceptable tax avoidance (page 39). In the Briefing for the incoming Minister of Revenue, it is specifically indicated that: “significant Inland Revenue and taxpayer resources are being applied to disputes in this area, and it is a current priority for Inland Revenue’s compliance programme” (page 39).

Tax disputes (partly) arise because of the complexity of modern tax legislation – there are many boundary issues. Another important aspect highlighted in the 2008 Briefing was that one of the key factors that contributes to a good tax system is clear and well-understood tax policy and legislation. The following observations were made (at page 7):

Complying with tax liabilities should not be like walking through a minefield where an inadvertent error produces dire consequences. Taxpayers should be able to get on with their affairs while spending as little time and as few resources as possible consulting the Income Tax Act, Goods and Services Tax Act (GST Act) or seeking tax advice. This is helped by having a clear and simple policy framework and clear legislation, which helps not only taxpayers and their advisers but also the courts in coming to clear and consistent decisions.

The ideal position is to move towards a more clear and better understood tax legislation – as this happens then tax disputes will be less frequent.

Unfortunately, tax disputes have the elements of cost and delay, and tend to place a strain on the ability of businesses and individuals, as well as the IRD, to get on with their normal activities. For example, the recent forestry scheme decision on tax avoidance (Ben Nevis Forestry Ventures Limited & Others v CIR [2008] NZSC 115 (the so-called Trinity case)) was decided by the Supreme Court of New Zealand on 19 December 2008. The earliest tax year in dispute was the 1997 tax year – it therefore took a considerable period of time to investigate and then resolve the particular dispute. Similarly, the unrelated GST avoidance case also decided by the Supreme Court on 19 December 2008 (Glenharrow Holdings Limited v CIR [2008] SC 116) took more than 10 years to resolve.

The dispute resolution process, contained in Part IVA of the TAA, is a vital component in the New Zealand tax system. We will comment extensively on the dispute resolution process in chapter 3. As recently as the Supreme Court decision in Ben Nevis, the vitality of the steps in the disputes resolution process were emphasised by court (para 154):

NOPAs, NORs and SOPs are the equivalent of ordinary civil pleadings in the taxation field. Indeed, because of the requirement to specify the legal basis upon which a party takes its stance, NOPAs, NORs and SOPs require a more precise legal articulation of a party’s case than is conventional with ordinary civil pleadings.

As more than 12 years have passed from the introduction of the part IVA rules, we will briefly explore potential reform issues in chapter 3.

Looking at the litigation dimension of a tax dispute, it is unavoidable that some cases will end up in court particularly where the issues are complex and the amounts involved are significant. In terms of setting the scene for the discussion elsewhere in this booklet we note:
There seems to be less tax litigation now but the dollar amounts are much higher – a possible reason for this is the overcomplicated tax disputes procedure where the process can be cumbersome, expensive and slow;

• There seem to be fewer “black letter” cases coming before the courts, and a big trend is for more procedural points being taken on by both the Commissioner and the taxpayers;
• There is a tendency for the Commissioner to take an aggressive approach to litigation, which can become a drain on resources. The attrition rate for taxpayers in terms of exhausting limited resources can be high. The importance of settling tax disputes as a viable alternative therefore takes on a significant dimension in a number of situations (discussed in chapter 7);
• There is a trend to settle more cases than was previously the case, and again this is something we discuss in chapter 7.

Although litigating a case needs to be expertly handled by the right counsel and the right strategies, the pre-litigation stage is crucial. We have extensively covered the IRD’s investigative powers in chapter 2, and have attempted to draw out the importance of the facts in the context of a dispute with particular focus on recent case law.

Penalties and use of money interest considerations are essential to understand in this area, and these are explored in chapter 6.

In this booklet, we have attempted to demystify the various stages and components of the disputes resolution process. We have approached the topics from a practical perspective – taking into account the recent case law developments – bearing in mind the three-pronged approach to disputes: process, strategies and pitfalls. We cannot underestimate the significance of proper planning and approach to handling an IRD investigation and any ensuing tax dispute.

We hope that you find this booklet interesting and of practical assistance.