Inland Revenue goes back-to-basics with a new standard practice statement on the voluntary disclosure regime

Tax Alert - February 2019

Taxpayers who find they have slipped up will need to be aware of a new draft statement released in December 2018, on
how Inland Revenue assesses whether a voluntary disclosure has been made.

Making a voluntary disclosure can result in full elimination or a significant reduction of shortfall penalties that might otherwise apply – so it’s important to understand Inland Revenue’s view on what constitutes making a full voluntary disclosure of the details of a tax shortfall.

The draft standard practice statement (SPS ED0201) sets out the factors that the Commissioner of Inland Revenue will
take into account. The statement takes a back-to-basics approach and is focused on clarifying some of the more complex aspects of the voluntary disclosure regime that arise in practice. It largely demonstrates a pragmatic approach being taken by Inland Revenue, which is reflective of encouraging voluntary compliance including through voluntary disclosures.

This article covers some of the key issues addressed by the draft SPS, and our initial comments. Submissions on the draft SPS closed at the end of January 2019, so it will be interesting to see if further improvements are made in the course of finalising the SPS.

The voluntary disclosure regime

To encourage voluntary compliance under New Zealand’s self-assessment system, Inland Revenue applies shortfall penalties against taxpayers taking an incorrect tax position, which range between 20% (for lack of reasonable care) through to 150% (for evasion) of the amount of the tax shortfall.

The ‘carrot’ to Inland Revenue’s ‘stick’ is found in the voluntary disclosure regime, which allows for these penalties
to be reduced or eliminated if taxpayers voluntarily provide information to correct a tax position before an investigation is
notified or begins. The draft SPS notes that “low value” unprompted disclosures will not be liable to a shortfall penalty at
all (meaning whether there has been a voluntary disclosure is largely moot) – in this respect it is worth noting that “low
value” is necessarily a relative concept: what is low value should presumably be considered in the context of a taxpayer’s overall business and tax function’s nature, size, complexity and so on.

Is there a tax shortfall, and do you believe that the disclosure you are making is correct?

The first essential element of a voluntary disclosure is that there must be a tax shortfall. If there is no shortfall and the
taxpayer wants to amend a return in another way (for example to pay less tax), then the taxpayer has to follow a different process. In addition, the taxpayer has to be proposing that the tax position be changed to one that is correct – a voluntary disclosure is not a “negotiation”. This is in response to what the Commissioner sees as an increasing trend for taxpayers to make a voluntary disclosure to merely propose a (potential/future) tax position, or as a prelude to disputing a tax position, or where a taxpayer seeks to place conditions on the disclosure – though a taxpayer remains free to legitimately change their mind later.


The draft SPS goes beyond the current standard practice statement, SPS 09/02 (which states that a disclosure must be unconditional), by clarifying the Commissioner’s practice in various situations where a taxpayer is not committed to the “all cards on the table” approach of the voluntary disclosure regime. From a policy perspective the Commissioner’s approach is difficult to argue with, and is not surprising given Inland Revenue’s view that some taxpayers use the risk review process to “wait and see” if errors might be uncovered, at which point a voluntary disclosure is made before any audit/investigation formally commences. The draft SPS takes a pragmatic approach to changes in circumstances (e.g. new facts become available, or a court decision changes the position etc), although the timing of making a revised/new disclosure may impact the amount or availability of penalty reduction. The draft SPS also implicitly clarifies that disputing the category of shortfall penalty applicable does not make a voluntary disclosure ‘conditional’.

Does your disclosure set out all the details of a tax shortfall?

The second essential element of a full voluntary disclosure is that it provides a clear statement of sufficient details of a
tax shortfall to enable the Commissioner to reassess the tax. A tax shortfall is the difference between the tax effect of the
tax position taken by a taxpayer and the correct tax position, if that difference results in an increase in the tax payable by
the taxpayer (or a decrease in a tax benefit, such as a loss).

The Commissioner’s practice is to see a tax return as comprising a number of tax positions so that a single return can have multiple “incorrect tax positions” requiring separate disclosures. Similar logic is applied to different tax years and to different tax types.

The voluntary disclosure must: explain the facts and circumstances leading to the tax shortfall; set out the calculation of the tax shortfall; and include basic information identifying the taxpayer, the tax period and type, and any further relevant information.


Importantly, the draft SPS confirms that a “full” voluntary disclosure is made where a taxpayer “attempts to quantify the amount of the tax shortfall to the best of their ability” and then fully co-operates with the Commissioner to determine the correct amount in a timely manner. Therefore where additional detail is required, the disclosure can still be considered “full”
from the time it was initially submitted – this should presumably also be the case if (for example) a particular item is inadvertently omitted in the initial disclosure where multiple positions/years/tax types (and so a significant amount of data/information) are concerned. It clarifies that the disclosure rules only apply to tax types covered by the audit notification (where relevant), which is helpful.

While largely consistent with previous guidance, the focus on quantification provides additional clarity on the practicalsteps involved in making a “full” disclosure. The draft SPS supports taxpayers making genuine efforts to quantify disclosures and work with the Commissioner. This approach makes sense – the regime should encourage voluntary compliance and the
commencement of a dialogue between taxpayer and Inland Revenue as early as possible. Hopefully Inland Revenue will make only reasonable requests of taxpayers in terms of their co-operation and timing, where a staged/“drip-feed” approach is adopted – and will not unreasonably capitalise on the making of a voluntary disclosure to (for example) commence an audit/investigation into other tax types or periods etc.

Consequential adjustments

The draft SPS accepts that a disclosure is still a “full” voluntary disclosure if the Commissioner has to notify a taxpayer of consequential adjustments to the disclosure (e.g. requesting that the disclosure be updated to reflect the impact of an income tax position correction on a GST return) – if the relevant details were inadvertently omitted and the taxpayer provides the additional information required in a timely fashion. It is positive to see this voluntary compliance-focussed approach from Inland Revenue in the draft SPS.

Does your disclosure reveal new information?

The third essential element is that the disclosure uncovers new information to the Commissioner. Because taxpayers cannot actually know everything that the Commissioner knows, the test is whether it is reasonable for the taxpayer to believe the information is unknown to the Commissioner. If a taxpayer is objectively “clearly aware” that the Commissioner already knows about a tax shortfall, it won’t be a voluntary disclosure. A taxpayer can be considered to be “clearly aware” if:

  • The Commissioner has expressly advised the taxpayer of the shortfall, or
  • The taxpayer can clearly infer that the Commissioner knows based on the “facts and circumstances” of their interactions.


While the ‘awareness-based-on-inference’ concept is stated to be a “high bar” that will be applied only rarely, we do have some concerns that it potentially could be used by Inland Revenue to dispute the validity of a voluntary disclosure – which in turn could feed into a negotiation to settle a dispute. We would prefer that this concept is removed from the draft SPS
or is more clearly defined with clear examples to ensure that the operation of the voluntary disclosure regime has a high degree of certainty and fairness.

The draft SPS includes an example of a situation when a taxpayer might make a voluntary disclosure even after Inland Revenue has been in contact about a particular tax position. However, the example goes on to note that no  voluntary disclosure is made where Inland Revenue advises the taxpayer at the outset that they believe there was a tax shortfall. The example seems to be referring to a specific tax shortfall that is adjusted by assessment; but there is a potential slippery slope here. For example, is the intention that no voluntary disclosure can be made where it is objectively clear that Inland Revenue believes that there will be “a” tax shortfall (of any amount, but relating to a particular factual scenario/tax type), a tax shortfall of an approximate amount (say within the bounds of materiality), or a specific tax shortfall that equates or very closely aligns with the actual shortfall? Presumably given the “high bar”, only the latter can be intended – i.e. not Inland Revenue simply raising an issue.

Are you making the disclosure voluntarily?

The fourth and final essential element is that a disclosure must actually be voluntary.

The draft SPS identifies that there are limited instances in which a taxpayer may be obliged to provide information to the
Commissioner and therefore may not be making a disclosure voluntarily. Where information is provided under compulsion (e.g. in response to a section 17 notice), it remains possible to subsequently or additionally make a “voluntary” disclosure – unless the information provided to the Commissioner clearly shows the tax shortfall without further investigation being required on Inland Revenue’s part. Additionally, the draft SPS notes that not all communications from Inland Revenue create an obligation – some communications may simply ‘generally suggest’ a course of action without an
obligation (in which case a resulting disclosure would still be ‘voluntary’).


We are pleased to see that Inland Revenue has fleshed out the relationship between the voluntary disclosure regime, the risk review process, and sections 17 and 15B of the Tax Administration Act 1994. The draft SPS takes a pragmatic approach in confirming that there will only be limited occasions where making a disclosure is not likely to be seen as “voluntary”, and clarifies that simply filing a new or amended return will not likely on its own satisfy the requirement to provide full details of a tax shortfall.

Changes to prosecution guidance

In the previous guidance, SPS 09/02, the Commissioner committed to not considering prosecution where a pre-
notification voluntary disclosure is properly made, and that “Inland Revenue may consider prosecution” for post-notification

The draft SPS makes two changes. First, while taxpayers will prima facie not be subject to prosecution for pre-notification disclosures, the Commissioner reserves the ability to prosecute in rare cases where “voluntary compliance [is] more generally being undermined”. Secondly, concerning post-notification disclosures, the Commissioner “will consider prosecution” (as opposed to “may”).


Overall these changes mean that Inland Revenue is more likely to prosecute taxpayers voluntarily coming forward to correct their tax positions. We hope that Officials will consider the underlying policy considerations reflected in the regime, especially the desire to promote voluntary compliance and ensuring the tax administration system is efficient with a high degree of certainty. The risk of uncertainty in the outcome of a disclosure will dis-incentivise the use of the voluntary disclosure regime.


Overall, the draft SPS makes useful strides in clarifying some complex questions that arise in practice when a voluntary
disclosure is being considered. There are still some ‘fish-hooks’ in making a voluntary disclosure whether before or after Inland Revenue interaction occurs – so we recommend getting in touch with your usual Deloitte adviser as soon as the need arises in this area.

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