Binding rulings regime - proposed changes
Tax Alert - July 2017
By Campbell Rose and Virag Singh
The Binding Rulings regime under the Tax Administration Act 1994 (“the TAA”) came into effect from 1 April 1995. Since then the regime has undergone a number of changes, the most material of which have sought to clarify the instances in which the Commissioner of Inland Revenue (“CIR”) can or cannot provide a ruling.
In its discussion document issued in December 2016, Making Tax Simpler - Proposals For Modernising The Tax Administration Act – A Government Discussion Document (“the Discussion Document”), the Government has proposed further changes to the binding rulings regime. Specifically, the Discussion Document notes that:
“As a first step towards Inland Revenue rationalising its advice products, the Government proposes to widen the scope of the rulings regime to make it more flexible, and to make it more affordable for small and medium-sized enterprises.”
The proposals in the Discussion Document relating to binding rulings are discussed below. On balance these are helpful, and particularly so in an environment where there is significant value in obtaining certainty in respect of a tax position.
Reduce the cost
The first proposal is to reduce the fees charged by Inland Revenue for providing binding rulings, with the goal of making rulings more accessible for small and medium-sized enterprises. Two options have been put forward to achieve fee reductions:
- A single flat application fee for all ruling applications.
- A graduated schedule of application fees depending on the size or type of entity applying for the ruling.
Under the proposed changes, the current hourly rate fee structure would be removed.
Any changes that would allow the binding rulings regime to be accessible to more taxpayers are welcome. We agree with the Government’s understanding in the Discussion Document that the fees currently charged are a significant barrier to smaller business and individuals accessing the regime. There is at least a perception amongst some SME taxpayers that the binding rulings regime is a luxury that can only be afforded by larger corporate taxpayers. In our experience, cost is one of the primary reasons why SME taxpayers do not proceed with making binding ruling applications to obtain certainty on their tax positions.
An alternative option that could be considered from a cost perspective is basing a fee structure on a combination of the size of the taxpayer and the potential amount of tax in respect of which certainty is being obtained.
Post assessment rulings
Currently, a ruling application cannot be made following an assessment. The Discussion Document notes that the reason for this prohibition is that assessment issues were seen to be in the domain of the disputes regime. The proposal seeks to allow post-assessment binding rulings and notes that the practical effect of this would be to deliberately blur the boundary between a ruling and a dispute.
This proposal is a positive move away from taxpayers becoming unnecessarily trapped within the Inland Revenue friendly disputes process. There are good policy reasons to allow post assessment binding rulings. One obvious benefit of this change is that, upon making a self-assessment, taxpayers can have a tax position on a discrete issue confirmed through a ruling. This would immunise that tax position from later audit activity. Secondly, where taxpayers do not agree with Inland Revenue’s view or interpretation of a tax law, they can take a filing position in accordance with that view or interpretation and then upon file a notice of proposed adjustment requesting Inland Revenue to amend their self-assessment. While this provides the taxpayer with protection from shortfall penalties, it does trigger the expensive disputes resolution process which is not a productive use of time for either the taxpayer or the CIR. A post assessment binding ruling would eliminate this cumbersome and expensive process in those circumstances. Another point to consider will be whether a post assessment binding ruling potentially could also be treated as a voluntary disclosure which would entitle the taxpayer to a reduction in shortfall penalties in certain circumstances.
The post assessment proposal also appears to extend to the disputes resolution stage. This would cover any reviews, investigations, audits and the disputes resolution process itself. In a separate section of the Discussion Document, Inland Revenue has acknowledged that allowing binding rulings following assessment, “including during the formal disputes process”, would be one measure to reduce taxpayer burn-off. This would be a very welcome change. Taxpayers have been encountering aggressive audit activity which often ultimately leads to a protracted, disruptive and expensive disputes process resulting in taxpayer burn-off. Allowing an independent set of legal minds within Inland Revenue to rule on issues post assessment should allow swift conclusion to the review, investigation, audit or the disputes process
Extending the scope of rulings – other proposals
1. Purpose of taxpayer
Currently, a ruling cannot be provided to clarify “the purpose” of a taxpayer. It is proposed to remove this prohibition in relation to certain provisions of the Income Tax Act 2007.
While no further information is provided on this, it is again a move in the right direction. The purpose of the rulings regime is to provide certainty for taxpayers on the application of tax law. Tax laws are in some cases dependent on the purpose of the taxpayer – such as the land taxing provision under section CB 6 of the Income Tax Act 2007. Ultimately it is incumbent on the taxpayer to provide the CIR with all relevant information to consider and issue a binding ruling. This should be no different when determining the purpose of a taxpayer. This has the potential to make for a more interactive two-way process, with an even greater focus on the collection of relevant facts and meetings/interviews with taxpayers, in order to ensure that the CIR can comfortably conclude and therefore rule on purpose issues.
The Discussion Document proposes relaxing the requirement that a ruling can only be issued on an “arrangement” - but only to the extent of allowing the CIR to give certainty on some specific quasi-factual matters. This would include matters such as whether a person is resident in New Zealand. Again, this is a sensible step given that the application of tax laws to a taxpayer does not always involve an “arrangement”.
3. Rulings and the financial arrangements rules
Without providing any further guidance, the proposals seek to clarify the connection between rulings and determinations issued in respect of the financial arrangement rules.
The Discussion Document notes that this may lead to the CIR ruling on certain matters rather than issuing determinations, and may possibly lead to replacing financial arrangement determinations with private or product rulings.
4. Assumptions and conditions
Rulings are often based on certain assumptions and conditions when issued. The Discussion Document proposes clarifying the role of assumptions and conditions in rulings, their differences, when they should be used as well as when a ruling does not apply because a condition or assumption is breached. Again, given the significant value that rulings provide for taxpayers, this clarification will be welcome, and should ensure that taxpayers even more critically appreciate the dimensions of the ruling that it is essential to verify (and in some cases continue to verify/confirm) in order for the ruling to apply or remain applicable.
In the current climate of uncertainty around how tax laws are being interpreted and applied by Inland Revenue investigators, any changes to the binding rulings regime that can make the process flexible in application and accessible from a cost perspective will be beneficial for taxpayers. These proposals are therefore a move in the right direction.
The proposals are (not entirely unexpectedly) light on the finer details and the devil will be in the detail of any changes introduced in a tax bill. There would be a number of other consequential changes required to the TAA as a result of these changes to realise their full potential.
We strongly recommend that our clients obtain binding rulings in appropriate circumstances, to secure certainty for their tax positions. The Deloitte Tax Disputes and Rulings team has extensive experience working closely and successfully with clients and Inland Revenue to obtain binding rulings. If you require further information on making a binding ruling application or would like to discuss further, please feel to contact your Deloitte client service team in the first instance. Alternatively, please feel free to contact the Tax Disputes and Rulings team directly:
Partner – Tax
+64 4 495 3918
Partner – Tax
+64 9 303 0990