Special powers to remedy legislative anomalies re-introduced
Tax Alert - April 2019
By Hamish Tait
Special new provisions that will give Inland Revenue the power to quickly make minor, temporary ‘fix ups’ to tax law have recently been re-introduced to Parliament, after being comprehensively re-drafted.
This article briefly outlines the history of this proposal, discusses the changes that have been made from what was originally proposed, and comments on the merits of the proposed new powers.
Where did this proposal come from?
As outlined in our August 2018 Tax Alert, draft legislation was originally introduced to Parliament in June 2018 which included provisions that would grant the Commissioner of Inland Revenue (the Commissioner) additional powers to remedy “legislative anomalies”. A legislative anomaly (which was a defined term in the original draft legislation) was essentially an issue with tax legislation which meant that the words could not be interpreted consistently with the underlying policy intent. It was proposed that the new powers would be an extension of the Commissioner’s “care and management” responsibilities in the Tax Administration Act 1994, which charge the Commissioner with the “care and management of the taxes covered by the Inland Revenue Acts”.
The specific new powers that were proposed were the ability for the Commissioner to:
- Recommend to the Minister of Finance that regulations (i.e. an Order-in-Council) be made by the Governor-General to remedy a legislative anomaly;
- Make a determination as to how a legislative anomaly should be treated; or
- Take certain “administrative action” to mitigate the effect of a legislative anomaly.
However, in November 2018, Inland Revenue officials recommended to the Finance and Expenditure Select Committee (the FEC) that the proposed provisions should be removed from the Bill. This was because Inland Revenue officials were still considering the draft wording of the provisions, and were in discussions with the Government’s Legislation Design and Advisory Committee to ensure they were consistent with the Committee’s guidelines on legislation containing “Henry VIII clauses” (i.e. laws granting someone other than Parliament the power to change or suspend laws). Agreeing to Inland Revenue’s recommendation, the FEC stated “[w]e consider that a very cautious approach is warranted with respect to these powers to ensure that Parliament’s law-making authority is appropriately respected”.
The draft provisions have now been comprehensively redrafted, and have been inserted into the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill, via Supplementary Order Paper No. 193 (the SOP) which was released on 6 March 2019. Submissions closed on this Bill in March 2019, and the proposals are now being considered by the FEC.
What powers are now being proposed?
From a general tax policy perspective, the new proposals in the SOP remain broadly unchanged from the original draft. In particular, it will still be possible for legislative anomalies to be temporarily remedied either by way of a regulation (on the recommendation of the Minister of Finance) or by way of decision made directly by the Commissioner.
Pleasingly, the provisions have been substantially redrafted to be much clearer for the reader, and are now structured in a more logical way.
Some substantive changes have also been made to the provisions in the SOP. As a result, now only the following two specific powers are proposed in the updated draft:
- Regulations: The Minister of Finance may recommend that an Order-in-Council be made by the Governor-General which provides that a provision of the Inland Revenue Acts (i.e. a tax law) does not apply or applies with conditions, or which grants an exemption from such a provision; and
- Exemptions: The Commissioner may grant an “exemption” from a tax law.
Notably, the previously proposed powers for the Commissioner to make a determination or to take an administrative action have now been replaced in the SOP with the power to grant an “exemption”. An exemption is to be a “legislative instrument” that is a “disallowable instrument” (i.e. it must be presented to the House of Representatives for review and scrutiny, as with regulations/Orders-in-Council). This should mean that there will be more oversight over the granting of exemptions by the Commissioner than there would have been with determinations or administrative action.
The key distinction between using a regulation or an exemption appears to be that regulations would be required where the issue had fiscal implications (because the exemption power may not be used where any fiscal implications are more than negligible). A Cabinet paper published with the SOP also refers to an exemption not being used where the matter is “sensitive”, although this does not appear to be articulated in the legislation itself. A regulation may also be retrospective for a longer time period than an exemption, as discussed below.
In all other respects, the requirements and restrictions on the exercise of the two modification powers will be similar, and are also largely unchanged from the original proposals. In summary, these are that any modification (whether it is a regulation or an exemption):
- Must be optional for a taxpayer to apply (i.e. a taxpayer can choose to disregard the modification if it is unfavourable);
- Must apply “generally” unless it is stated to apply to a particular class of persons or circumstances (i.e. it may not expressly apply to a specified taxpayer);
- May only last for up to two income years after the income year in which the modification comes into force (i.e. essentially up to three income years);
- For a regulation, may apply retrospectively for up to four income years prior to the income year in which it comes into effect, or for an exemption, may apply retrospectively to the beginning of the income year in which it comes into effect;
- May only be made if the Minister / Commissioner is satisfied that the modification is reasonably necessary to fix an obvious error, give effect to the intended purpose of a tax law, resolve ambiguity or to reconcile an inconsistency;
- May not be broader than reasonably necessary to resolve the issue and must be the most appropriate way of doing so; and
- Must be subject to a consultative process of at least 6 weeks (formerly 4 weeks under the original proposals), unless there is “a case of urgency”.
Finally, we note that there is no longer an express requirement that Inland Revenue consider whether a formal legislative amendment is required (recognising the modification is a temporary stopgap only). However, it seems implicit in the proposals that Inland Revenue officials would do this.
Are the new powers appropriate?
In an ideal world, there would be no need for the proposed new powers, as draft tax legislation would consistently be subject to an extensive consultation process allowing ample opportunity for errors and ambiguities to be corrected. However, given the increasing volume and complexity of new tax legislation in recent times (the timing of which is sometimes dictated by political considerations), a suitably fulsome consultation process is not always undertaken. Unless this changes, it seems that taxpayers and tax advisers must accept that legislative anomalies will continue to arise.
With that in mind, the proposed powers should be seen as a welcome development. It is hoped that they will allow legislative anomalies to be quickly and effectively remedied in a consistent and transparent way.
Although some have questioned whether it is appropriate for the Commissioner or the Minister of Revenue to be able to change tax laws without Parliament’s approval, there are a number of specific restrictions and safeguards that apply to limit the scope of the powers. The most important of these (which critically has been retained through the redrafting process) is that the regulations or exemptions must be optional to apply. This should provide ample protection for taxpayers and prevent them from being adversely impacted by any changes. Further, the empowering provisions essentially only allow laws to be suspended, rather than allowing new substantive laws to be created. In this respect, it arguably puts the power on par with, for example, the securities law exemption powers held by the FMA, which have been around in various forms for many years. Finally, following the redraft, a clear “Purpose of remedial powers” provision has been included in the draft SOP, which makes it abundantly clear the purpose of the powers is only to provide the “flexibility to temporarily remedy or mitigate” a legislative anomaly: they may be used for minor ‘fix ups’ only.
It is also worth noting that, at present, the Commissioner’s “care and management” responsibilities are the primary way that anomalies are ‘fixed’ (pending a remedial legislative amendment). Often this will take the form of the Commissioner stating that she will not devote resources to investigating certain breaches of a tax law. However, there can be little or no transparency over the exercise of this discretion, and taxpayers cannot generally rely on it where a specific issue in a tax return has been identified by an Inland Revenue investigator. With this in mind, the proposed new powers should be seen as a welcome development to help set more clearly defined processes for remedying anomalies, as well as increasing transparency and oversight of those remedies.
It is pleasing to see that following the redrafting process the new legislation is now clear, logically set out and easier to understand. However, there are a number of areas that are not specifically dealt with in the legislation, on which Inland Revenue will need to provide guidance, including:
- The nature of legislative anomalies that it will be appropriate to remedy. It would be useful if the Commissioner could provide some examples of specific scenarios that may arise where the Commissioner envisages she would use the power;
- When the Commissioner considers that she will be unable to grant an exemption (and regulations will therefore be required); and
- The process for notifying Inland Revenue of a legislative anomaly or requesting the exercise of the modification power.
It would be useful for guidance to be published on these matters so that taxpayers can understand the practical implications of the new power, and to help ensure the powers are used fairly and consistently.