Report to the Treasurer and Minister of revenue - by a committee of experts on tax complianceBill Birch Treasurer
Report to the Treasurer and Minister of revenue
By a committee of experts on tax compliance
Chapter 10 -
Assessments and Disputes Resolution
10.1 In this section, the committee considers whether the time bar in section 108 of the Tax Administration Act 1994 for the amendment of assessments by the Commissioner should be suspended when a section 17 notice has been issued, or when judicial review proceedings have been instigated. Moreover, when the time bar is suspended, whether the period for retaining records should be extended.
10.2 Section 108 provides that when a taxpayer has provided a tax return and has been assessed, the Commissioner may not amend the assessment to increase the tax liability once four years have passed from the end of the year in which the tax return was provided. However, this time bar does not apply if the Commissioner considers that a tax return provided by a taxpayer is fraudulent, or wilfully misleading, or omits mention of gross income of a particular nature, or from a particular source. Section 108 represents a compromise between the correct determination of tax liabilities, and the desirability of achieving finality in the tax affairs of honest taxpayers.
10.3 Clause 30 of the Taxpayer Compliance, Penalties, and Disputes Resolution Bill introduced in 1995 would have suspended the time bar for amendment of assessments for the period between the issue of a section 17 notice and the taxpayer's compliance with it, and for the period of any judicial review proceedings. This amendment was deferred pending release of the Davison Commission's report.
10.4 Although the committee generally supports the compromise between accuracy of assessment and certainty for honest taxpayers, it considers that it would be desirable to suspend the time bar when the Commissioner issues a section 17 notice in which the taxpayer is advised that non-compliance will result in such suspension. The committee favours the suspension of the time bar for the period between one month after the issue of a section 17 notice and the taxpayer's compliance with the notice. Any reassessment made during the period following the normal time bar, which is equal to the period of suspension, should affect only matters based on or related to the information sought in the section 17 notice. Such a suspension would provide an additional incentive for taxpayers to comply with section 17 requisitions in a timely manner.
10.5 The committee does not consider it necessary for the time bar to be suspended for the period of any judicial review proceedings. Generally, the instigation of judicial review proceedings should not prevent the Inland Revenue Department from continuing its normal investigative activities. If the department has any doubts on this matter, it should seek directions from the court. If problems arise because time is running out, the proper approach is for the department to make sure the court is aware of the time bar. Although interim injunctions affecting the department can be granted ex parte, motions to rescind them can be heard by the courts very quickly.
10.6 Associated with the Commissioner's powers to obtain information under section 17 is the statutory requirement for taxpayers to retain information about their income tax affairs for a specified period. The importance placed on this requirement is shown in the statement of taxpayers' primary tax obligations in section 15B of the Tax Administration Act 1994: taxpayers must keep all necessary information and maintain all the necessary records required under the tax laws. The main record-keeping requirement for business taxpayers is contained in section 22 of the Tax Administration Act 1994, that business records must be kept for seven years after the end of the income year to which they relate.
10.7 The committee considers that any statutory minimum record-keeping period should be extended by any period for which the time bar is suspended. If not, any suspension of the time bar could be futile, if the records that the Commissioner needed for reassessment had been disposed of because the period for retaining records had expired during the course of obtaining information by requisition under section 17.
10.8 The committee recommends that the time bar for amending assessments should be suspended for the period between one month after the issue of a section 17 notice in which the taxpayer is advised that non-compliance will result in such suspension, and the taxpayer's compliance with the notice. Any reassessment made during the period following the normal time bar, which is equal to the suspension period, would affect only matters based on or related to the information sought in the section 17 notice. The committee also recommends that the statutory minimum periods for keeping records should be extended by the period the time bar is suspended.
10.9 Section 149A of the Tax Administration Act 1994 places the onus of proof in all civil proceedings on the taxpayer178. This section corresponds to section 18 of the Taxation Review Authorities Act 1994 which relates to the former objection procedures. If a taxpayer disputes an assessment, the taxpayer must prove on the balance of probabilities that the assessment concerned is incorrect.
10.10 The main justification for placing the onus of proof on the taxpayer is that matters concerning the tax position taken by a taxpayer are primarily within the knowledge of the taxpayer. It would be very difficult and costly for the Commissioner to discharge the onus of proof. This approach is consistent with the rationale for self-assessment, that is, taxpayers have more information about their tax liabilities and are, therefore, in a better position to assess their own tax liability than the Commissioner. In Buckley & Young v CIR, the court said:
The Commissioner could not sensibly be expected to bear the onus of proof of matters which originate with the taxpayer and which usually are peculiarly within his knowledge and power. Thus there are sound if not compelling practical reasons why the legislation requires him to provide satisfactory evidence to support his calculation of his assessable income.179
10.11 Placing the onus of proof on taxpayers is also consistent with the primary obligation of taxpayers to determine correctly the amount of tax payable180. The committee agrees with these reasons and considers that the onus of proof in all civil proceedings, except for civil penalties for evasion, should lie with the taxpayer.181
10.12 A taxpayer who wishes to challenge an assessment made by the Commissioner is required to prove not only that the Commissioner's assessment is wrong, but by how much it is wrong182. The committee considers that if a taxpayer is able to prove on the balance of probabilities that the Commissioner's assessment is excessive by at least a certain amount, the court should be able to reduce the Commissioner's assessment by that amount. This point has not been tested in the courts, and the law is not clear on it. As the committee considers that, in principle, a taxpayer should succeed with this argument, it considers that the law should be clarified.
10.13 The committee, therefore, recommends that first, the onus of proof in civil proceedings, except for civil penalties for evasion, should continue to lie with the taxpayer, and secondly, that the law should be clarified expressly to provide that if a taxpayer is able to prove on the balance of probabilities that the Commissioner's assessment is excessive by at least a certain amount, the court should reduce the Commissioner's assessment by that amount.
10.14 Taxpayers may instigate judicial review proceedings either to restrain the Commissioner from taking certain action, or to have the court declare invalid an action that has been taken. However, section 109 of the Tax Administration Act 1994 is a major obstacle to such proceedings. The section expressly precludes taxpayers disputing an assessment outside the objection or challenge procedures contained in Parts VIII and VIIIA of the Tax Administration Act 1994. Section 109 also deems an assessment to be correct for all purposes except in relation to a challenge to the assessment under the statutory appeal procedures.
10.15 Recent cases show that judicial review is appropriate in only limited cases in challenging the conduct and decisions of the Commissioner. Section 109 has been held not to preclude the court from entertaining judicial review applications, but recourse to such proceedings is generally available only in exceptional circumstances, such as cases alleging an abuse of process.
10.16 In Golden Bay Cement Company Ltd v CIR183, the Court of Appeal held that section 109 precluded any challenge to the correctness of an assessment outside the specific statutory appeal procedures in the Tax Administration Act 1994, but did not preclude judicial review proceedings challenging the process followed by the Commissioner in the exercise of the statutory power to make assessments. McKay J, delivering the judgment of the court, stated:
Once an assessment has been made, then whether or not it is correct it can only be challenged in proceedings on objection. Where the issue is not the correctness of an assessment, but the very existence of the power to make it, [section 109] will not prevent the court from determining whether the purported assessment is in fact an assessment in terms of the Act. As was pointed out by Richardson J in this court in CIR v Canterbury Frozen Meat Co Ltd (1994) 16 NZTC 11,150, there is a distinction between challenging the correctness of an assessment on the one hand, and the process followed and the character of the resulting decision on the other.184
10.17 The court reviewed Commonwealth authority and, following the reasoning of the Privy Council in Harley Development v CIR185, commented that when specific statutory appeal procedures are already available, such as those under the Tax Administration Act 1994, it will only be in exceptional cases, typically involving an abuse of powers, that the courts will entertain an application for judicial review of a decision that has not been appealed through those specific statutory procedures. The court rejected the argument that the 'validity' of an assessment was distinct from its 'correctness' (which counsel for the taxpayer conceded could be challenged only under the specific statutory appeal procedures) and that matters going to 'validity' were properly amenable to challenge through judicial review proceedings. McKay J stated:
Once the taxpayer has been notified in proper form that an assessment has been made in purported exercise of the Commissioner's powers, that assessment will be treated as valid until a court rules otherwise. Until then it has at least a de facto operation, and cannot be treated as if non-existent: Love v Porirua City Council  2 NZLR 308 (CA) at p 311. Section 30 [Income Tax Act 1976] is intended to provide the primary means by which an assessment or apparent assessment can be challenged. If the taxpayer wishes to challenge it, whether as to its correctness or as to its validity, he is able to do so by the objection procedure.186
10.18 If the courts did not adopt a presumption of validity of assessments made by the Commissioner, every assessment could be open to attack by way of judicial review. The reasoning of the Court of Appeal on this aspect is consistent with case authority on judicial review proceedings outside the tax arena: official decisions must be presumed to be valid and legitimate until declared invalid by a court.
10.19 The approach taken by the Court of Appeal in Golden Bay was endorsed by the court in its subsequent decisions in BNZ Finance Ltd v Holland187 and New Zealand Wool Board v CIR188. When an assessment has been made and notified in proper form to a taxpayer, both 'validity' and 'correctness' can be challenged only under the specific statutory appeal procedures, unless exceptional circumstances exist.
10.20 However, in BNZ Finance, the court noted that the restriction imposed by section 109 on judicial review proceedings is triggered only when an assessment has been made. Judicial review proceedings therefore, could be more easily undertaken in the pre-assessment stage. Golden Bay involved an assessment that in the opinion of the Court of Appeal could and should have been pursued under the specific statutory appeal procedures. But in BNZ Finance, the Commissioner had not yet purported to make an assessment. The statutory appeal procedure was, therefore, not available. Consequently, nothing in the Golden Bay decision, and nothing in the income tax legislation, in particular, section 109, precluded an application for judicial review.
10.21 The Court of Appeal in BNZ Finance noted that under section 4 of the Judicature Amendment Act 1972, an application for judicial review may be made in relation to the proposed or purported exercise of a statutory power, as well as to the actual exercise of such power. It is not necessary for an applicant to wait until a body or person does something outside its jurisdiction before seeking relief. Richardson P, delivering the judgment of the court, stated that:
The intention to make an assessment does not have the presumption of validity which attaches to an apparent assessment until such time as the apparent assessment is declared invalid.189
10.22The court, therefore, held that the general immunity from judicial review for assessments does not extend to the proposed exercise of the Commissioner's statutory power to make assessments.
10.23 The committee understands that recently the number of judicial review proceedings brought against the Commissioner has decreased. This reduction could be due to two factors. First, recent Court of Appeal decisions indicate that judicial review is available only in a limited number of cases. Secondly, the use of money interest provisions apply from the original due date. Before the 1996-97 income year, in the absence of use of money interest, taxpayers had an incentive to apply for judicial review, because even if the application were unsuccessful, the taxpayer had the use of the Crown's money during the period of the proceedings. This incentive has now been removed.
10.24 The committee considers that the present availability of judicial review generally represents a proper equilibrium between the taxpayer and the Commissioner, and is sensible and rational, considering the specific statutory appeal procedures in the tax legislation.
178 Except for civil penalties for evasion under section 141E.
179 (1978) 3 NZTC 61,271 at 61,283
180 Section 15B(a), Tax Administration Act 1994
181 The committee is aware of the reform enacted this year in the United States which has reversed the onus of proof in relation to small taxpayers in certain circumstances so that it now lies on the tax ad-ministration. However, for the reasons given above, the committee has declined to recommend this approach for New Zealand.
182 Aspro Ltd v C of T  AC 683; C of T v McCoard  NZLR 263; Babington v CIR  NZLR 861; Europa Oil (NZ) Ltd (No 2) v CIR (1974) 1 NZTC 61,169; Buckley & Young Ltd v CIR (1978) 3 NZTC 61,271
183 (1996) 17 NZTC 12,580
184 At page 12,584
185 STC 440
186 (1996) 17 NZTC 12,580 at 12,585
187 (1996) 17 NZTC 12,658
188 (1997) 18 NZTC 13,113
189 (1996) 17 NZTC 12,658 at 12,660