Amending assessments – Commissioner’s revised statement
December 2015 Tax Alert
By Emma Marr
Inland Revenue has released a new version of draft standard practice statement “SPS ED0162: Standard practice – Requests to amend assessments” (draft SPS). The new draft takes into account submissions on the original draft released in March 2014, and recent Court decisions on section 113 of the Tax Administration Act 1994, in particular the High Court decision in Westpac. For more analysis, refer to our earlier Tax Alert article on the original statement and the Westpac decision.
The Commissioner of Inland Revenue (Commissioner) has a discretion under section 113 (s. 113) to amend assessments to ensure their correctness. The draft SPS sets out the process the Commissioner will follow when considering s. 113 requests.
The overarching principle is that the Commissioner will evaluate each request in the light of her care and management obligations in sections 6 and 6A of the Tax Administration Act. This will include considering the compliance history of the taxpayer making the request and, if this is viewed as poor by the Commissioner, the Commissioner may consider that granting the request would not promote taxpayer perceptions of the integrity of the tax system. (An example of this principle in action isthe more recent decision in Charter Holdings which appeared to hinge on the fact that the taxpayer had a very poor compliance history and was therefore denied the opportunity to re-open returns in order to carry forward losses that otherwise would have been available to them).
The draft SPS outlines a two-step process that the Commissioner will follow when assessing a s. 113 request. The first step is to confirm that the assessment will be correct after it has been amended as requested. Notably, in light of the decision in Westpac, the Commissioner has (generally speaking) abandoned the concepts of “genuine error” or “regretted choice”, meaning that the focus has moved to whether the assessment will be correct once amended, rather than whether it is already correct or the reason for the error. However, some remnants of “genuine error” and “regretted choice” remain, as discussed below.
If the Commissioner is satisfied that the amended assessment will be correct, the second step is for the Commissioner to consider whether to exercise her discretion to amend the assessment. This involves four phases.
Phase 1: The Commissioner will consider whether the error is clear and obvious, and would require only minimal resources to resolve. If so, it will be dealt with immediately and without further consideration, provided all information has been provided. If the taxpayer is in dispute or under investigation, the period is time-barred, the amendment is contrary to the Commissioner’s view of the law, or the amendment can be made by the taxpayer in a later period, the Commissioner is unlikely to consider the request further.
Phase 2: If the request is not dealt with at Phase 1, the Commissioner will consider whether to apply her limited resources to consider the request further. If the facts or legal position are not clear, or the Commissioner believes the taxpayer is using the s. 113 process to circumvent the disputes process, the request will be declined.
At this point in the process the Commissioner acknowledges that, following the decision in Westpac, she can amend an assessment from one correct position to another correct position. However, on the basis of certain comments in Westpac regarding whether a “well resourced”, “sophisticated” and “well advised” taxpayer in that case had “erred”, the Commissioner concludes that in deciding whether to grant a request under s. 113 she can consider:
- the “class” of the taxpayer and how well equipped they are to comply with their obligations to correctly self-assess;
- whether the taxpayer erred through an “oversight” or simply changed their mind. If it is the latter, the Commissioner is less likely to amend the assessment. Clearly although the concepts of “genuine error” and “regretted choice” are no longer explicitly included in the draft SPS, in effect these appear to remain a consideration for the Commissioner.
We comment on this approach further below.
Phase 3: The Commissioner will consider whether a correct assessment will result from the amended assessment. This step appears to be superfluous, as it simply repeats step one, which must be satisfied before the Commissioner even considers embarking on the four phase process.
Phase 4: Finally, the Commissioner will consider whether there is any residual reason not to exercise her discretion to amend the assessment and, if she believes granting the request will undermine the integrity of the tax system, she will not grant the request. This gives the Commissioner considerable discretion to deny amendment requests.
In a welcome nod to practicality, the Commissioner will accept requests to amend obvious arithmetical, transposition or keying errors either in writing or by telephone, and requests with a tax effect of $10,000 or less may also be made by telephone. More complex requests or those having a tax effect over $10,000 must be made in writing.
A key message for large corporates arising from the revised draft SPS appears to be that a higher standard of care is required than that applied to smaller taxpayers, to support an amendment request – i.e. the nature of and resources available to a taxpayer will be an important factor taken into account by the Commissioner when considering s. 113 requests.
In our view, the draft SPS has elevated the comments in Westpac regarding the “sophistication” of a taxpayer beyond their intended meaning, to almost acquire the status of a rule or test. The comments arguably did not form the core of the judge’s decision, and it is not clear what weight ought to be given to this factor (or the implications either way, in relation to whether the Commissioner’s discretion should be exercised).
In the context of an otherwise compliant taxpayer with multiple and complex tax obligations, we do not think it is fair to deny a taxpayer’s amendment request simply because they are, relative to other taxpayers, more “sophisticated”. Every taxpayer operates under constrained resources, just as the Commissioner does. It is relevant in this respect that taxpayers only have four months to amend an assessment themselves (i.e. outside the s. 113 process), whereas the Commissioner has four years to adjust a taxpayer’s position.
Unsurprisingly, the draft SPS states that the Commissioner will always apply resources to consider a voluntary disclosure – i.e., if a taxpayer’s request is going to result in additional tax payable, it will always be considered. The tightly prescribed regime for considering s. 113 requests, when compared with a blanket “willingness” to consider every voluntary disclosure, seems at odds with the Commissioner’s stated aim that she will consider all s. 113 requests in light of her obligation to encourage voluntary compliance and bearing in mind perceptions of integrity of the tax system.
“…the purpose of [the late objection mechanism – analogous to section 113] is to allow consideration of a challenge to the adjustment on the ground that the income tax liability has been overstated. That is particularly important in a system which attaches so much significance to voluntary compliance by all taxpayers with the Inland Revenue Acts and which, to maintain goodwill, has to be seen to be operating fairly.” [emphasis added]
In the interests of maintaining the perception of fairness and encouraging voluntary compliance, we would welcome a draft SPS that offered a more clearly balanced approach to considering taxpayers’ requests to amend assessments, regardless of whether the economic benefit of that amendment lies with the taxpayer or the Commissioner.
Please contact your usual Deloitte adviser if you would like to discuss the draft SPS further.
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