Contentious tax matters arise in three ways. First, IR may seek to test a taxpayer's position by undertaking a risk review. This is not an investigation and is not normally dealt with in the same way as a formal dispute. Formal tax disputes follow two distinct phases: pre assessment and post assessment. The pre-assessment phase is the statutory disputes process briefly referred to in Section I. The post-assessment phase is a tax challenge brought by a taxpayer in the TRA or the High Court. In certain limited circumstances, it is possible also to dispute IR actions by way of judicial review in the High Court.i Risk reviews
IR employs a range of analytical tools to identify tax positions that present a risk of error. Rather than always commencing a pre-assessment dispute when a risk is identified, IR often contacts the taxpayer to invite it to review its position and correct anything that may be mistaken. The invitation to make a voluntary disclosure is an effective means of avoiding IR having unnecessarily to commit investigative resources to a matter that could be resolved more simply. The invitation is made more attractive by the fact that the risk review is avowedly not the start of an investigation. Because of that, penalties that might otherwise apply are reduced by between 75 per cent and 100 per cent and an assurance of non-prosecution applies to any tax discrepancy that is disclosed and corrected on a risk review.ii The pre-assessment disputes process
If IR elects not to deal with a matter by way of risk review or its less formal approach to the taxpayer does not elicit a response, it is likely to start an investigation leading to the pre-assessment disputes process. There is no formal time frame within which IR must initiate the formal disputes process. This is affected in practical terms by the statutory time bar on IR issuing a reassessment of tax. However, when that time bar is not imminent, IR sometimes tries to agree an adjustment with the taxpayer. This process can be as lengthy and costly as the formal disputes process, which must still be undertaken if an agreed adjustment is not reached.
Broadly speaking, the formal process follows four stages:
- the exchange of initial notices between IR and taxpayers;
- a conference stage;
- the exchange of statements of position (SOPs); and
- reference to the DRU and determination of the dispute.
The purpose of the disputes procedures is to improve the accuracy of IR decisions, reduce the likelihood of disputes by encouraging the full exchange of information, promote early identification of the basis for a dispute and promote prompt and efficient resolution. This is achieved by locking the taxpayer and IR into a series of exchanges that have to occur within a 'response period', normally of two months, but in some circumstances where the taxpayer is required to issue a first notice, four months.Initial notices
These are called a notice of proposed adjustment (NOPA) and a notice of response (NOR). A NOPA initiates a matter of dispute and may come from IR or from the taxpayer when IR is permitted to assess without issuing a NOPA. There are 16 instances in which IR is not required to issue a NOPA prior to assessing. In practice those most likely to arise are where there is prima facie evidence of fraud by the taxpayer, issuing a NOPA would be likely to cause the taxpayer to flee New Zealand or otherwise make recovery of tax more difficult or the taxpayer has failed to file a return. Taxpayers will often also use the NOPA to dispute a return that has been filed on a conservative basis and the taxpayer wishes to advance a different tax position without the risk of penalty.
The content of a NOPA is prescribed by statute and must:
- identify the tax adjustments that are proposed;
- provide a statement of facts and the law in sufficient detail to inform the opposing party of the grounds for the proposed adjustment;
- state how the law applies to the facts; and
- include copies of 'significantly relevant' documents.
Before the expiry of the applicable response period, the person to whom the NOPA is issued must provide a NOR or be deemed to have accepted the previously proposed adjustments and to have lost the right to challenge the resulting assessment. The content of a NOR is also prescribed and is designed to join issue with the matters raised in the NOPA, principally by setting out an explanation for why they are considered to be wrong. There have been some instances where poor content has led to IR arguing that a notice is invalid, but the threshold is relatively low as long as the main requirements for content are met.The conference stage
The exchange of initial notices sets the stage for discussion, argument and negotiation between IR and taxpayers. Although not part of the statutory disputes regime, the conference stage has proved to be a useful and generally welcome addition to the process because it allows the parties to explain and advocate their respective positions outside the limitations of a written document.
IR has placed significant importance on the conference stage as an opportunity to resolve disputes before they escalate too far. The conferences are conducted with trained IR facilitators in the chair so that the risk of unproductive outcomes is reduced. Facilitators are senior and experienced IR officers who have no connection with the case or the IR case officers. While they are not able to impose a resolution on case officers, facilitators will suggest that they reconsider IR's position on taxpayer arguments when that seems necessary and set a time within which further exchanges should take place. The conference stage may be adjourned more than once when the parties consider it prudent or productive to continue talking, rather than move to the next phase of the disputes procedure.
The next phase of the disputes process may also be truncated by agreement. In an 'opt-out' provision, IR and the taxpayer may agree that the dispute would be resolved more efficiently by being submitted to the Court or TRA without the disputes process being completed. Opting out is not usual, but in major disputes where the positions of the parties are clear and it is very unlikely that either will be moved, it is a useful option that allows taxpayer and IR resources to be applied more quickly to litigating a dispute that is clearly not otherwise amenable to resolution.Exchange of SOPs
If the disputes process continues, the parties exchange 'binding' SOPs. Their binding nature is achieved by the issue by IR of a 'disclosure notice', the effect of which is to limit the parties to the issues and propositions of law disclosed in the SOPs in any later challenge to an assessment.
Once again, the content of a SOP is prescribed but a higher standard applies to it. While initial notices have to provide sufficient detail to 'advise' the recipient of the notice, a SOP must 'fairly advise' the recipient, at least in outline form, of the facts, issues, evidence and propositions of law that are relied on. The significance of a SOP is twofold. First, unless one of the several exceptions applies, IR may not amend an assessment of tax unless it has at least considered the taxpayer's SOP. Second, if the dispute is referred to the DRU, the SOPs that have been exchanged and the materials that accompany them form the basis of its autonomous review and determination of the dispute.
Whether a dispute is referred to review or not is often determined by time. The disputes process can be time-intensive, and unless IR has planned its process carefully, it can face pressure to complete a dispute to the minimum expected stage before the statutory time bar on reassessment falls. The time bar prevents IR from increasing an assessment if more than four years has elapsed since the end of the period in which the taxpayer filed the relevant return. Though the time bar may be waived, and there may be good reasons for granting a waiver, there is no obligation on a taxpayer to do this.Determination by the DRU
Like the conference phase, the DRU (formerly known as the Adjudication Unit) has no statutory role in the disputes process. Its role is administrative, and not all disputes are referred to it. The DRU is part of the Office of the Chief Tax Counsel and part of IR's National Office. It is separate from IR's audit/investigation function and takes a fresh look at the dispute, providing a decision on the issues that is distanced from IR's investigators.
There are limits to the DRU's role. It will not make judgements of credibility because its consideration is 'on the papers' and so it defers to investigators' conclusions on credibility. It follows IR policy and so does not reconsider matters where the correctness of the policy is in issue. The DRU produces reports that are generally of high technical standard and, even if it finds against a taxpayer, its consideration of the issues often provides useful additional information that can be taken further into the post assessment challenge phase. DRU reports are usually produced in a timely way.
As to that, it is an interesting quirk of the regime that a DRU decision that upholds IR's position may be challenged by the affected taxpayer but a DRU decision in favour of the taxpayer may not be challenged by IR. This has been described as a 'win, no lose' proposition for the taxpayer.iii Post-assessment challenges
Broadly speaking, a taxpayer must have completed the minimum requirements of the pre-assessment disputes process to have the right to mount a challenge to an assessment. That challenge must be commenced in one of the two available 'hearing authorities' within the response period that follows the issue of the relevant assessment notice. Subject to limited opportunities to enlarge time, this means that litigation has to be under way within two months of an assessment being issued,
The available hearing authorities are the TRA or the High Court. These are dealt with in more detail in Section III. The procedures of each are set out in comprehensive rules and involve all the usual elements of civil litigation, including discovery, the exchange of written witness statements, written legal submissions and the conduct of hearings on the basis that the taxpayer is plaintiff in the action and the IR defendant.
Tax litigation is usually conducted on behalf of IR by the office of the solicitor general, Crown Law (CL). CL has a hybrid role as both advocate for IR and protector of the public interest in revenue matters. This can lead to CL advancing arguments in litigation that are at odds with the position adopted by IR. This makes the binding nature of SOPs important, though, as seen, they are not always completed.iv Judicial review
In some very limited circumstances it is possible to dispute procedural actions by IR through judicial review in the High Court. The scope for judicial review has narrowed considerably in recent years. In all but a few instances, the courts prefer that arguments over procedural validity should be taken in the context of a challenge to a substantive assessment, rather than as a separate attack on IR. This stems from a suspicion that judicial review would otherwise allow taxpayers to game the system, especially considering the tight time frames within which IR must investigate, conduct and resolve a dispute, whether by concession or assessment.