Chapter 1 - Overview
1.1 Modern tax systems rely on taxpayers assessing their own tax obligations so that tax is collected fairly, efficiently and in a way that minimises the overall cost to the economy. Since the early 1990s, New Zealand has progressively introduced a self-assessment system by using modern administrative practices and by legislating various administrative functions to help taxpayers undertake self-assessment. One such measure is our binding rulings system.
1.2 The binding rulings system was introduced in 1992 following the recommendation of the 1989–90 Tax Simplification Consultative Committee. The recommendation reflected the need for businesses to ensure that the tax consequences of a transaction are clear and, if Inland Revenue has given advice, that the advice will not change. This is particularly important when a business enters a complex tax arrangement.
1.3 The need for certainty is ongoing and is particularly relevant in the current economic climate.
1.4 This issues paper focuses on legislative concerns with the current binding rulings system that are of a clarifying or remedial nature. A number of possible solutions are suggested, aimed at ensuring that the legislation as far as possible supports, or at least does not impede, the timely delivery of binding rulings.
Purpose and background
1.5 In broad terms, a binding ruling will set out how Inland Revenue will apply tax laws to a particular arrangement. Taxpayers are not required to follow the ruling. However, if the taxpayer chooses to follow the ruling, Inland Revenue must apply the tax laws as set out in the ruling.
1.6 There are two principal benefits for taxpayers in obtaining a binding ruling:
- greater certainty about the tax implications of their business decisions; and
- assistance in knowing how to comply with the tax law.
1.7 The current binding rulings system has been reviewed by government from time to time and this has resulted in some minor legislative changes over the years. There is no indication that the system requires a fuller review or overhaul at present. However, several commentators have raised questions relating to the time it takes Inland Revenue to issue a binding ruling. These questions have been about administrative rather than legislative matters, and are currently under discussion between Inland Revenue and representatives of the legal, accounting and business sectors. This paper focuses on certain legislative matters involved in Inland Revenue issuing binding rulings.
1.8 This issues paper has been prepared by officials from the Policy Advice Division of Inland Revenue and from the Treasury, as part of a consultation process. It seeks readers’ views on how the law might be changed to achieve this result, and on the workability of the solutions explored here. Submissions will be taken into account when we make formal recommendations to the Government on the final form of the changes, with any amendments included in the next available tax bill.
Summary of suggested options
Scope of binding rulings (Chapter 3)
Replace the current general prohibition on ruling on questions of fact (contained in section 91E(4)(a) of the Tax Administration Act 1994) with a more limited list of factual matters on which the Commissioner cannot rule. They would include:
- A person’s intention or purpose – for example, in relation to the acquisition of land. (This would not include the purpose of an arrangement under anti-avoidance legislation.)
- A determination of the value of anything – other than under the transfer pricing provisions, which are specifically excluded from the ambit of section 91E(4)(a).
- What “commercially acceptable practice” is for the purpose of any provision of subpart EW (the financial arrangements rules) that refers to commercially acceptable practice. This exception would clarify the application of section 91E(4)(j) which could consequentially be removed.
An alternative option is to give the Commissioner a discretion not to rule in relation to questions of fact (accompanied by a limitation to the scope of commercially acceptable practice).
Charging for binding rulings (Chapter 4)
Introduce a more flexible fee-waiver provision based on what is fair and reasonable in the circumstances.
Allow only one consultation period or one conference for the provision of, or a request for, additional information.
Reduce the fees for binding rulings supplied to non-residents outside New Zealand by 1/9th if the supply is zero-rated.
Mass-marketed and publicly promoted scheme rulings (Chapter 5)
Allow promoters of arrangements, or those with a similar interest to that of a promoter, to apply for a product ruling for prospective arrangements.
Require promoters to declare the correctness of the information they provide and/or be automatically subject to the promoter penalty in certain cases.
Other matters (Chapter 6)
Clarify the Commissioner’s discretion not to rule on matters before the courts by:
- limiting its application to cases involving identical or substantially similar arrangements, facts or issues; or
- basing the exercise of the discretion on factors such as the need for consistency in relation to specific common issues, integrity of the tax system and compliance and administrative cost reduction.
Provide an exception to the prohibition on ruling if the arrangement involves two or more tax types and is the subject of a notice of proposed adjustment.
Clarify that if a ruling is made on two or more tax types, and the ruling fails for one tax type, it will still be binding on the Commissioner for the other type or types.
Remove the requirement to notify the making and withdrawal of public and product rulings in the Gazette and require that Inland Revenue publish notification in a suitable format.
Providing rulings and other forms of advice (Chapter 7)
Clarify that if the taxpayer has relied on official advice from Inland Revenue, the “unacceptable tax position” penalty and use-of-money interest cannot apply.
How to make a submission
1.9 Officials invite submissions on the matters raised in this issues paper. Submissions should be made by 28 August 2009 and be addressed to:
Binding rulings review
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Or email [email protected] with “Binding rulings review” in the subject line.
1.10 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.
1.11 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.