First published in Taxation Today, October 2011.
In this article, Bell Gully analyse the recently enacted new general exception to Inland Revenue's secrecy obligations, and further consider a draft standard practice statement released in September 2011 dealing with how the new provisions are to be applied.
Tax secrecy provisions have been a constant feature of the New Zealand tax system since the enactment of the Property Assessment Act 1879. The Court of Appeal has stated that the tax system "...rests on the assurance provided by stringent official secrecy provisions that the tax affairs of taxpayers are solely the concern of the Revenue and the taxpayers and will not be used to embarrass or prejudice them."1
The current secrecy provisions are found in s 81 of the Tax Administration Act 1994 (TAA 1994) and provide that, as a general starting point, Inland Revenue officers must maintain (and assist in maintaining) the secrecy of all matters relating to various tax acts administered by the Commissioner of Inland Revenue (CIR).
At the same time, the TAA 1994 recognises that the duty to maintain secrecy cannot be absolute and unqualified. The TAA 1994 therefore provides an extensive list of specific exceptions to the general secrecy rule. For instance, disclosure of information which is prima facie confidential is permitted if it is for the purposes of a prosecution under the Crimes Act 19612 or for communicating with the Serious Fraud Office.3
In addition to these numerous specific exceptions, there is also a general exception which provides that disclosure is permitted if it is for the purpose of carrying into effect the Inland Revenue Acts and various other tax-related legislation.
Inland Revenue has recently come to the view that these exceptions do not give it a broad enough discretion to disclose information. To address this perceived problem, a new general exception to Inland Revenue's secrecy obligation has been inserted into the TAA 1994 by the Taxation (Tax Administration and Remedial Matters) Act 2011 (which received Royal assent on 19 August 2011).
The CIR also recently released a draft standard practice statement entitled Application of Discretion in Section 81(1B) of the Tax Administration Act 1994 - The Secrecy Provisions. The draft statement outlines the process that Inland Revenue staff must follow when considering whether the new general exception to the secrecy rule applies.
This article will first consider the operation of the old general exception to the tax secrecy rule and why it was thought necessary to enact an additional general exception. It will then go on to analyse the new provisions and Inland Revenue's commentary on how they are to be applied.
The old general exception
As noted earlier, s 81 of the TAA 1994 provides that Inland Revenue officers must maintain (and assist in maintaining) the secrecy of all matters relating to the specified tax legislation. The provision goes on to state that Inland Revenue officers "... must not communicate any such matter, except for the purpose of carrying into effect that legislation." (Emphasis added.) For convenience, this is referred to in this article as the old general exception.
That exception was considered by the Court of Appeal in Knight v Barnett. In that case, officers of Inland Revenue had on two occasions intercepted and taped conversations between an accountant and a client who visited his office wearing a listening device. The purpose of the recordings was ostensibly to establish the veracity of corruption allegations against an Inland Revenue officer.
On discovering this surreptitious recording, the accountant brought a civil claim against officers of Inland Revenue for damages and demanded that certain documents (arising out of inquiries into the incident by Inland Revenue and the Police) be discovered for the purposes of the civil proceedings. Inland Revenue invoked the secrecy provisions in force at the time and argued that, because disclosure would not be for the purpose of carrying into effect the Inland Revenue Acts, the documents in question could not be produced. The accountant filed an application for an order requiring Inland Revenue to produce the documents. Richardson J held that discovery of such documents by the CIR in the course of litigation was for the purpose of carrying into effect the Inland Revenue Acts and that the CIR therefore had to comply with the ordinary obligations of a litigant to make discovery of relevant documents:4
It is also inevitable that the administration and operation of the Inland Revenue Department, a major department of state with a staff of over 5,000 persons, operating expenses in the current financial year of some $355 million and assets estimated at $126 million, and dealing with over two million taxpayers and their advisors, will give rise to other litigation by and against the Commissioner as head of the department. ... In my view the conduct of such litigation is a proper function of the Commissioner in carrying into effect the Inland Revenue Acts.
The scope of the general exception to the secrecy rule was further clarified in Westpac Banking Corporation Ltd v Commissioner of Inland Revenue  NZSC 24, (2008) 23 NZTC 21,896. The Westpac case stemmed from tax avoidance proceedings brought by the CIR against various banks. The broad issue was whether the tax secrecy provisions prevented the CIR from using information it held about the business affairs of one bank, for the purposes of litigation involving another bank. In discussing the scope of the old general exception, the Supreme Court noted that "[d] isclosure is not permitted unless, and to the extent that, it is reasonably necessary for the performance of the Commissioner's statutory functions."5 (emphasis added.)
Despite successfully circumventing the secrecy rule in the Westpac case, Inland Revenue subsequently indicated that the "reasonably necessary" test established in the Westpac case does not provide "sufficient flexibility"6 for Inland Revenue and that it creates a "measure of uncertainty".7
To remedy this perceived defect, the new general exception to the secrecy rule was enacted in August 2011.
The new general exception
Broadly speaking, the new exception8 gives the CIR the discretion to communicate a matter (which is prima facie confidential) if the communication is (a) for the purpose of executing or performing a duty of the CIR or supporting the execution or performance of such a duty; and (b) is reasonable, having regard to five factors, namely:
- The CIR's obligation at all times to use best endeavours to protect the integrity of the tax system; and
- The importance of promoting compliance by taxpayers, especially voluntary compliance; and
- Any personal or commercial impact of the communication; and
- The resources available to the CIR; and
- The public availability of the information.
The first step therefore is to consider whether the proposed disclosure is for the purpose of executing or performing a "duty of the Commissioner" or for supporting the same. In other words, there must be a nexus between the proposed disclosure and the CIR's duties. Under s 81(8)(b), the duties of the CIR include any power or function of the CIR and anything lawfully done to administer, implement, improve, research, or reform the tax system. This list is wide-ranging but it is not exhaustive and there are other activities which may potentially fall within the ambit of the CIR's duties.
To establish the purpose of a proposed disclosure, it appears that the CIR will look to the "primary purpose" of that disclosure. Inland Revenue poses an example in the standard practice statement in which the police request Inland Revenue to supply information on a particular individual suspected of drug dealing. The police intend to use the information to determine whether the individual has sufficient income to support his standard of living. The police will provide Inland Revenue with any information obtained during the investigation which would help Inland Revenue to assess the correct amount of tax.
It would prima facie appear that disclosing the information to the police would therefore assist the CIR in performing his duty to collect the correct amount of tax. However, Inland Revenue has indicated that the "primary purpose" of the disclosure would be to enable the police to investigate the taxpayer's affairs rather than to allow the CIR to assess the correct amount of tax (even though that may be one of the results). As such, Inland Revenue suggests that disclosure would not be justified in such a scenario.
Assuming it is established that the primary purpose of a communication is indeed to execute or perform a duty of the CIR or to support the same, then the next point to consider is whether that communication is "reasonable" having regard to that purpose and to the five factors listed above. It is to be noted that the test is one of "reasonableness" (as opposed to reasonable necessity). The CIR has stated that this is intended to relax the previous threshold for disclosure.9
In considering whether a disclosure is reasonable, the CIR has stated that all five factors must be taken into consideration. There will often be tension between the individual factors and, depending on the particular circumstances, one factor may be determinative while another may be immaterial. Inland Revenue's commentary on each factor is considered in more detail below.
The CIR's obligation at all times to use best endeavours to protect the integrity of the tax system
The CIR's duty to protect the integrity of New Zealand's tax system is the first factor which must be considered under the new provisions. The "integrity of the tax system" is inclusively defined in s 6(2) of the TAA 1994. The definition lists the various drivers which are considered to impact on the integrity of the tax system. These include matters such as taxpayers' perceptions of the integrity of the tax system, the responsibilities of taxpayers to comply with the law, and the rights of taxpayers to have their liabilities determined fairly, impartially, and lawfully. The observation can be made that these drivers in themselves can clash and the result is that, before any of the other five factors have even been considered, a fairly convoluted balancing exercise has to be undertaken which gives Inland Revenue a lot of leeway to justify the preferred outcome.
The importance of promoting compliance by taxpayers, especially voluntary compliance
The CIR has stated that voluntary compliance is the cornerstone of the New Zealand tax system. It therefore seems that this factor may play an important role when an Inland Revenue officer is deciding whether or not to disclose a matter. In some respects, the CIR appears to take quite a utilitarian approach in the interpretation of this factor. The CIR notes that even if a communication would have an adverse effect on the voluntary compliance of one taxpayer, making that communication may be justified if it will promote voluntary compliance among a greater number of other taxpayers.
Any personal or commercial impact of the communication
When considering the personal or commercial impact of a communication, the CIR has indicated that it is necessary to take into account the effect of the disclosure from the taxpayer's point of view. For instance, publicly stating that a taxpayer is subject to an Inland Revenue investigation may adversely affect that taxpayer's commercial interests; and this has to be weighed against the other factors when deciding whether the disclosure is reasonable.
The CIR has stated that if the information in question is in the form of aggregated data which is anonymous, then the personal or commercial impact of its release may be considered negligible. Furthermore, if a taxpayer gives consent to the release of the relevant information then that may also suggest that the personal or commercial impact of the disclosure would be insignificant. Despite this, the CIR has noted that the existence of taxpayer consent will not automatically mean that the information in question will be released – the other factors still need to be duly considered.
The resources available to the CIR
Disclosing certain information might have a positive effect on the resources of Inland Revenue, in which case disclosure might be more justifiable. For instance, releasing certain information might indirectly enhance the resources available to the CIR if it increases compliance amongst taxpayers and therefore removes the need for additional audit work and compliance monitoring.
However, disclosing a matter may also have a negative effect on the resources available to the CIR. For example, it may be too difficult and expensive for Inland Revenue to compile the relevant information. In such a case, disclosure would be less justifiable.
The public availability of the information
The CIR has said that the public availability of information will often be a determinative factor. If the information is already in the public domain, it is unlikely that disclosure will be prohibited. However, the particular circumstances of the taxpayer (as well as the other four factors) will always need to be considered.
The CIR has indicated that there will be circumstances where disclosure may not be justifiable even though the information is already publicly available. For instance, if the information in question was obtained and disseminated improperly (through a breach of confidence, for example) then it might be considered inappropriate for Inland Revenue to add to the wrong by making a further public communication of the information.
From a practical point of view, the new provisions give the CIR a much wider discretion in deciding whether information which is prima facie confidential can be released. For taxpayers, this could be both positive and negative, depending on their particular circumstances.
The secrecy provisions have often been invoked by taxpayers seeking to prevent Inland Revenue from releasing sensitive information. In the Westpac case, for instance, the taxpayer tried to prevent Inland Revenue from disclosing documents relating to the taxpayer's business affairs for the purposes of litigation involving another party. In such cases, the new general exception arguably gives Inland Revenue more scope to disclose matters which have traditionally been considered confidential.
In the past, the secrecy provisions have also been invoked by Inland Revenue to justify withholding information from taxpayers who have made requests for disclosure. As mentioned earlier, in Knight v Barnett Inland Revenue used the secrecy provisions to argue that it did not have to discover certain documents needed by the taxpayer for the purposes of civil proceedings brought against Inland Revenue. In such cases, the new general exception may give the taxpayer more room to argue that disclosure is justifiable.
Importantly, however, it should be noted that the new general exception is discretionary – and, historically, it has proven difficult to challenge the exercise of a discretion by the CIR. The main options available to a person seeking to challenge a decision made under the secrecy provisions would probably be to initiate judicial review proceedings or to make a complaint to the Ombudsman alleging that Inland Revenue improperly exercised its discretion. These options have had limited success in the past.
In light of the greater flexibility provided by the new general exception to the secrecy rule, Inland Revenue has provided assurances that decisions to disclose information will be the subject of legal advice and will be made by officials whose seniority is appropriate to the sensitivity of the information. How the new provisions will be applied in practice remains to be seen, however.
The deadline for making comments on the draft standard practice statement is 28 October 2011.