While most taxpayers sensibly strive to avoid getting into a formal dispute with Inland Revenue, one consequence of our complex and often uncertain tax laws is that taxpayers and Inland Revenue will inevitably disagree from time to time. When that happens, taxpayers have the choice of accepting whatever tax liability Inland Revenue seeks to impose (an outcome which, in the long run, or where the amounts involved are significant, should not be acceptable to any taxpayer or its shareholders) or invoking a disputes process. The existence of a well-functioning, efficient and fair procedure for tax disputes should therefore be of interest to all taxpayers.
The current pre-litigation disputes process, which took effect in 1996, contains a series of steps which parties are required to complete prior to a dispute being able to be referred to Court. The process is summarised in the attached diagrams. Two remarkable features of the process are, first, that it can often take over two years from the date a dispute commences (by issue of a notice of proposed adjustment ("NOPA")) to complete the process, enabling a taxpayer to then commence proceedings in the Taxation Review Authority or High Court, and second, that throughout that pre-litigation disputes process, Inland Revenue effectively acts as both player and referee - aside from the possibility of judicial review (which is now only available in very limited circumstances in tax matters) there is no possibility of having an impartial third party intervene. To put the timeframes in perspective, for a tax dispute of average complexity Inland Revenue will often spend around a year gathering information prior to a dispute commencing. And if the matter does get to Court, it is tending to take at least 18 months from the date proceedings are filed for the case to be heard (again, for a case of average complexity).
Thus, from the point at which Inland Revenue starts investigating a particular transaction or issue until the taxpayer gets its "day in Court" can typically take five years, and that excludes appeals. Even sophisticated and well resourced taxpayers could find themselves ground down by such a process. For most individuals, as well as SMEs (small and medium sized enterprises - often seen as the backbone of the economy) the process creates almost impossible hurdles, regardless of how strong the taxpayer's position is on the substantive matter in dispute.
There has for some time been concern about how the tax disputes process is operating. In particular, the current process is seen as leading to "taxpayer burn-off" for the reasons described above, as the costs and delays involved in disputing a tax liability often cause taxpayers to give in before a dispute reaches Court. Related to this is the concern that the pre-litigation disputes procedures are unbalanced, in that the Commissioner's non-compliance with certain steps may not matter, whereas the consequence of non-compliance by taxpayers may be the forfeiture of the right to further dispute the matter. In addition, the Commissioner does not have the same time limits as taxpayers for complying with certain steps in the process, resulting in delays that the taxpayer can do nothing about. These concerns led the New Zealand Law Society and New Zealand Institute of Chartered Accountants to make a joint submission to Government in August 2008 calling for change.
The Government has now responded to that submission with the release of an Officials' Issues Paper "Disputes: a review", and draft Standard Practice Statements on administrative processes associated with the disputes process.
The Issues Paper favours retaining much of the disputes framework as an administrative rather than a legislated process.1 Notably, this includes recommending that there continue to be no legislated time frames for the Commissioner to complete the various milestones in the disputes process, such as production of a statement of position ("SOP"). Instead, officials propose the administrative solution of setting out indicative time frames in the draft Standard Practice Statements. For example, in disputes initiated by the Commissioner the indicative time frames would result in approximately seven months from receipt of the taxpayer's notice of response ("NOR") to the production of the Commissioner's SOP.2 However, some significant amendments to the Tax Administration Act 1994 are recommended in the Issues Paper, including:
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removing taxpayers' limited right to unilaterally opt out of the disputes process and move directly to challenge proceedings (currently available where the taxpayer has initiated the disputes process). The Issues Paper views a unilateral right to opt out on the part of the taxpayer as not being desirable in light of the objective of reducing unnecessary tax litigation;3
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relaxing the evidence exclusion rule (which currently limits the parties in Court proceedings to the facts, evidence, issues and propositions of law that are disclosed in their SOPs) so that it only applies to issues and propositions of law;4 and
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amending the test case procedure to allow the High Court to designate test cases (rather than this being left to the discretion of the Commissioner), or removing the test case procedure entirely and relying on the Court rules for representative actions.5
As compared to the current Standard Practice Statements, the draft revised statements include:
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guidelines for when the Commissioner will agree to a taxpayer's request to opt out of the disputes process and move directly to challenge proceedings.6 Officials expect this will result in a much greater number of disputes proceeding directly to Court.7 However, the guidelines include, as a threshold requirement, a requirement that the taxpayer has "participated meaningfully" in a conference with the Inland Revenue (meaning that the dispute must proceed to at least the conference phase before the Commissioner will agree to an opt out request);8
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new guidelines designed to encourage Inland Revenue to produce short, accurate and plain language NOPAs, NORs and SOPs;9
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an expanded description of the "basic ground rules"10 for the conference phase of the disputes process, for example describing the "conference facilitator" that is now available at the request of taxpayers (ie a senior Inland Revenue officer not previously involved in the dispute, acting as "independent internal facilitator").11
A significant theme underlying the Issues Paper is a preference for the use of published Standard Practice Statements and internal procedures, rather than legislative rules, to ensure that the disputes process operates consistently with the policy objectives. A difficulty with this approach is that experience shows that Inland Revenue can and will, on occasion, depart from its standard practice. A well-known example was the decision by Inland Revenue and Crown Law to prevent ANZ National Bank from having its dispute concerning its structured finance transactions considered by Inland Revenue's Adjudication Unit.12 The Commissioner's counsel argued that the Adjudication Unit was a less suitable forum than the High Court for considering that dispute given (among other things) the complexity of the issues and large dollar amounts involved. The Court of Appeal held that because Adjudication was an internal process of Inland Revenue and was not legislated, referral of disputes to Adjudication was not mandatory.
Many of the proposed changes, such as greater independence in the choice of test cases, requiring more concise NOPAs, and strengthening the conference process through the use of facilitators, are to be welcomed. But in other respects the proposals do not go far enough in addressing duplication of cost and effort (as between the pre-litigation disputes procedures and the Court process) and more generally concerns regarding taxpayer "burn-off".
One point the Issues Paper touches on, but does not sufficiently explore, is that since the pre-litigation disputes process was first introduced in 1996, developments in the case management of civil litigation have reduced opportunities for trial by ambush, and provide greater opportunities for parties to understand each other's position on contested issues well in advance of a case going to trial. One minor example is that Judges often require the parties to file, at an early stage of the proceedings, a statement of points in issue. These developments are significant in the context of tax disputes for two reasons. First, there tends to be overlap between the pre-litigation disputes process (eg, the exchange of NOPA and NOR, and of SOPs) and the litigation process (exchange of statement of claim and statement of defence, and filing a statement of issues). Second, there must now be less justification for restricting a taxpayer's right to opt out of the pre-litigation disputes process and proceed straight to Court.
Accordingly, aspects worthy of submission include:
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There should be a unilateral right for taxpayers to opt-out of the pre-litigation process and commence proceedings either immediately following Inland Revenue's provision of a NOPA or, at the latest, after the conference held following exchange of a NOPA and NOR. It is unacceptable that taxpayers should be forced to follow a lengthy disputes process, typically taking over a year, before being permitted access to the Courts.
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For taxpayers who do not opt-out, referral of the dispute to Adjudication should be mandatory. This is on the basis that there needs to be some upside to taxpayers in return for the expense associated with completing the pre-litigation disputes process.
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The costs to taxpayers of having to meet two different document disclosure regimes (Inland Revenue information requests in the pre-litigation phase, and the discovery process in the litigation phase) need to be addressed, and some thought given to stream-lining the two processes.
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Thought should be given to developing, through the Courts, a practice note which would provide guidelines for the case management of tax cases, recognising that tax cases are different from other civil litigation in that there is a specialised pre-litigation disputes procedure and that Inland Revenue has broad information gathering powers which it will almost always exercise prior to a dispute reaching the Court. Such a practice note has been adopted by the Federal Court of Australia, and is credited with having significantly reduced the time that Australian tax cases are taking to get to a hearing.
Submissions in relation to the draft Standard Practice Statements and Issues Paper are called for by 20 August 2010. Both the draft Standard Practice Statements and the Issues Paper may be accessed here.
