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Chapter 7 - Providing Rulings and Other Forms of Advice

7.1 A binding ruling application typically requires that Inland Revenue give thorough consideration to the variety of tax issues pertinent to the arrangement. Particularly in the case of an application for a private binding ruling, the Commissioner must rule on all the issues raised in the application unless one of the specific statutory exceptions applies.

7.2 At times this need for comprehensiveness may be at odds with the commercial needs of taxpayers – that is, taxpayers may require a quicker response than Inland Revenue’s decision-making process allows. However, as the decision as outlined in the ruling is binding on Inland Revenue, all matters need to be fully considered to ensure the response is robust and the revenue base is not adversely affected.

7.3 As outlined in chapter one, Inland Revenue is working with the affected sectors to improve the timeliness of the rulings process. However, given the need for Inland Revenue to manage its resources and to protect the revenue base, it cannot provide binding advice in response to all requests. For more general queries, a response may be provided in other formats such as guides or booklets for those completing tax returns.

7.4 In whatever format the Commissioner provides advice, taxpayers should be able to rely on that advice.

7.5 Concerns have been expressed regarding the possible imposition of penalties and interest when taxpayers have relied on advice provided by Inland Revenue other than in the form of a binding ruling.

Unacceptable tax position penalties and use-of-money interest

7.6 A shortfall penalty for taking an unacceptable tax position can be imposed when a taxpayer’s tax position fails to meet the standard of being “about as likely as not to be correct”. The penalty applies when the tax position involves a significant amount of tax.

7.7 Use-of-money interest imposed on a taxpayer is charged when tax is underpaid and compensates the Crown for not having the use of its money.

7.8 It is possible that an unacceptable tax position penalty and/or use-of-money interest may apply if the taxpayer has underpaid their tax, even if this is as a result of having relied on advice provided by Inland Revenue.

7.9 Under the legislation the Commissioner’s ability to remit use-of-money interest is very limited, applying only if the remission would be consistent with the Commissioner’s duty to collect the highest net revenue over time as practicable within the law (section 183D of the Tax Administration Act). The Commissioner’s practice, as set out in SPS 05/10 Remission of penalties and interest, is that interest will be remitted in limited circumstances such as when an Inland Revenue officer has given incorrect advice to the taxpayer, and that advice has directly resulted in the non-compliance. However, this is not the only situation when interest may be remitted. The Commissioner will consider each case on its own merits.

7.10 One of the aims of the tax system is to encourage voluntary compliance and, although it may seem to be stating the obvious, a critical means of achieving this is by taxpayers following the advice provided by Inland Revenue. Officials therefore recommend that the legislation be clarified to ensure that, if the taxpayer has relied on the advice of Inland Revenue, the unacceptable tax position penalty cannot apply. While the current provisions allow use-of-money interest to be remitted, we also consider that the legislation should specifically allow for the remission of use-of-money interest if the taxpayer has relied on the advice of Inland Revenue. The taxpayer would remain liable to pay the underlying tax in either case.

7.11 The advice relied on would need to be provided by Inland Revenue as the official position of the Commissioner or in specific advice to taxpayers. In the first instance it should be clear that the advice was applicable to the taxpayer in the circumstances, and in the second instance it should be clear that all relevant facts were provided by the taxpayer and the advice provided by an appropriately authorised person in Inland Revenue. The advice to be taken into account would generally need to be written although oral advice of a standard nature in relation to a common issue (which in limited cases may include advice provided by a call centre) could also be considered.

7.12 The Commissioner would retain the discretion to determine whether the taxpayer had relied on Inland Revenue’s advice.

Summary of suggested option

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.