Chapter 7 - Exceptional circumstances
This chapter suggests that the definition of “exceptional circumstances” be amended so that taxpayers who have demonstrated an “intention to dispute” can also submit documents after the response period. It also suggests that decisions should continue to be made by the Commissioner and those decisions should be “disputable”.
7.1 The consequences of not meeting a statutory timeframe set out in the disputes process are serious: the defaulting party is deemed to accept the position adopted by the other. As a result, a taxpayer who fails to issue a NOPA, respond in time to the Commissioner’s NOPA, disclosure notice, SOP or assessment within the statutory timeframe will generally be liable for the tax, penalties and interest sought by the Commissioner. Similarly, if Inland Revenue fails to respond to a taxpayer NOPA in time, the Commissioner will be deemed to accept the revised tax position proposed. If this deemed acceptance occurs, the dispute is at an end.
7.2 The exception to this rule is if “exceptional circumstances” apply. The exceptional circumstances rules are ameliorating provisions that blunt the otherwise harsh effects of statutory timeframes. If exceptional circumstances exist, a notice issued by the taxpayer or Commissioner that is issued out of time will be treated for the purposes of the TAA as if it had been given within the applicable response period. 
7.3 The idea of an exceptional circumstances test will always give rise to an inherent tension. Although statutory timeframes are considered essential to ensure that the disputes process is navigated in a timely and efficient manner, there will be situations when a late response is justified and the party to the dispute should not be unduly penalised for failing to meet a deadline. However, ameliorating provisions should not be so weak as to allow a taxpayer with any excuse to issue notices out of time. To do so would give rise to ongoing uncertainty about the tax position and additional administrative and other costs. The key is therefore in finding a system that best accommodates the two competing objectives.
7.4 For taxpayers, the tests for exceptional circumstances are set out in sections 89K(3) and 138D(2). Section 89K(3) applies to the “dispute documents” – that is, the NOPA, NOR and SOP. Section 138D(2) applies to a challenge in a hearing authority to a disputable decision.
7.5 Under section 89K, the Commissioner has a discretion to accept late documents if an event beyond the taxpayer’s control provides them with a “reasonable justification” for not meeting the deadline.
7.6 For acts or omissions of agents of disputants, an exceptional circumstance exists only if it results from an event outside the control of the agent, and its effect could not have been avoided by compliance with accepted standards of business organisation and professional conduct.
7.7 In both cases, the Commissioner also has a discretion to accept documents if the lateness is minimal. The Commissioner interprets this discretion as meaning he will generally accept documents that are only one to two days late and if the other factors relevant to the exercise of the discretion under section 89K(1) are satisfied. 
7.8 The tests in section 138D are broadly similar to those in section 89K. A key difference, however, is who makes the decision on whether exceptional circumstances exist. Under section 89K, the decision is made by the Commissioner whereas, under section 138D, the decision is made by the hearing authority. Most case law on exceptional circumstances focuses on section 138D, with an acknowledgement that the existence of exceptional circumstances should be applied consistently wherever it is used in the TAA. 
7.9 Because it is always the taxpayer that issues challenge proceedings, the exceptional circumstances test that applies to the Commissioner applies only to “dispute documents”, and is only relevant if the Commissioner is late in filing a NOR (this being the only timeframe for the Commissioner’s documents).
7.10 Section 89L, which applies to the Commissioner, focuses on whether circumstances beyond the control of Inland Revenue provide a reasonable justification for lateness. An exceptional circumstance also includes a change in tax law made during the response period. To be eligible to issue a NOR after the response period, the Commissioner must apply to the High Court, within the two-month response period, for an order that exceptional circumstances exist.
7.11 There have been numerous cases that involve an application to the hearing authority under section 138D. The Court of Appeal, in CIR v Fuji Xerox New Zealand Ltd outlined the approach it considered should be taken in considering when exceptional circumstances exist: 
- Identification – The hearing authority must identify the events or circumstances relied on by the disputant and ascertain whether they were beyond the disputant’s, or their agent’s, control.
- Evaluation – For the events that are beyond the control of the taxpayer, or their agent, the hearing authority must then evaluate whether those events provide a reasonable justification for not commencing the challenge proceedings within the response period.
- Discretion – If the events do provide a reasonable justification, the hearing authority retains a residual discretion not to allow the challenge to commence.
Problems with the current rules
7.12 The NZICA-NZ Law Society submission considers that:
- The existing exceptional circumstances test is too strict, and the test that applies to agents is even stricter. This may result in genuine disputes being unable to be advanced because the taxpayer cannot convince the Commissioner to exercise his discretion (under section 89K) in their favour.
- The Commissioner can apply to the High Court if exceptional circumstances are considered to exist, whereas the decision on whether the taxpayer has exceptional circumstances is made by the Commissioner. Associated with this is that any decision of the Commissioner is not “disputable”, meaning that taxpayers must have the decision judicially reviewed to have any chance of it being overturned.
- There is a disparity between the tests that apply to the Commissioner and the taxpayer. The Commissioner has an additional “exceptional circumstance” if there is a change in tax law during the response period. 
7.13 This chapter considers these concerns in turn. However, as a starting point, we note that we do not believe that the tests that apply to the Commissioner and the taxpayer should be in perfect symmetry. The Commissioner is a statutory office, with the wider responsibility for revenue collection through the efficient operation of the tax system. This role makes it appropriate that any possible failure to meet statutory requirements be considered by a court. For the taxpayer, the concern is instead for the right mechanism being in place so that there can be an objective consideration of the issue.
Intention to dispute
7.14 The NZICA-NZ Law Society submission argues that the discretion to accept late documents should be extended to circumstances when there is evidence of an intention to dispute, or when an error has been made and the time delay is not significant in the circumstances. This idea has merit because taxpayers with a genuine grievance should not generally be precluded from pursuing the matter.
7.15 The idea of a test based on an intention to dispute has its genesis in case law. The principal case in New Zealand is Gisborne Mills Ltd v CIR.  Although Gisborne Mills was decided before the introduction of the current disputes process, it nevertheless provides support for the proposition that continual assertion of a contrary position is sufficient to maintain a dispute.
7.16 The taxpayers in Gisborne Mills were members of a consortium of exporters. The Commissioner assessed on the basis that a particular tax incentive was no longer available. Another exporter successfully pursued a challenge to the ruling to the High Court. Despite the other exporter receiving a favourable decision from the Court, the Commissioner refused to retrospectively amend the taxpayer’s assessments because they had not made a formal challenge. The taxpayers sought to have that decision of the Commissioner judicially reviewed.
7.17 The High Court (Robertson J) upheld the taxpayer’s application and referred the decision back to the Commissioner. An important part of the Court’s reasoning was that the taxpayers:
- had “consistently asserted that they were entitled to the export incentive…”. This was “in marked distinction to a person who, never having contemplated seeking a benefit under the taxing legislation, endeavours to take advantage of a matter when they become aware of a decision affecting another taxpayer”; and
- had “in an informal way been involved in the [previous case] and were, throughout the period, objectors in fact, if not in law”.
7.18 Although “intention to dispute” is a difficult concept to articulate in legislation, there are merits in having a test that provides some leeway to a taxpayer who misses a deadline but who nevertheless has demonstrated that they have an unresolved grievance. This test could co-exist with the current exceptional circumstances test, so that late documents could be accepted either when there was a clear intention to dispute before the end of the response period, or when exceptional circumstances existed.
7.19 While an intention test is inherently subjective, it could be interpreted by reference to objective criteria set out in the legislation. Any list of possible indicators should not be exhaustive, because it is impossible to anticipate the number of circumstances that may apply to individual taxpayers.
7.20 The central tenet of any test should be that the taxpayer demonstrates they have, before the deadline, clearly communicated an intention to formally dispute the matter on certain grounds and have not subsequently modified that position.
7.21 To support this general proposition it may be helpful to consider the following further factors:
- The taxpayer has responded to any Inland Revenue correspondence (whether by phone or in writing) and has attended scheduled meetings regarding the dispute and consistently asserted their contrary position regarding the substantive issues.
- The taxpayer has complied with other parts of the disputes process and their overall tax obligations (for example, if the late document in question is the taxpayer’s SOP, the fact that they have filed a timely NOR should count in their favour).
- The taxpayer has corresponded with other relevant parties regarding the dispute – for example, the Minister of Revenue, the Ombudsman or Inland Revenue’s Complaints Management Service.
7.22 An application would not be accepted if the degree of lateness was unjustified in the circumstances, or it was considered to be designed to defeat the application of the time period or to frustrate the disputes process itself. An example might be a taxpayer who contacts the Commissioner close to a deadline to confirm they intend to dispute, but then does nothing further for some considerable time, effectively rendering the timeframe meaningless. To counter such risk, new rules may be needed to extend the Commissioner’s statutory time-bar if the Commissioner cannot complete the disputes process as a result of delay that is clearly attributable to a taxpayer’s actions.
7.23 In addition, a taxpayer who sought to retrospectively take advantage of a favourable court decision for another taxpayer would not have an intention to dispute if they had not previously kept their own dispute “live”. This approach is consistent with the Court’s view in Gisborne Mills.
7.24 We consider that taxpayers who engage tax agents should still be able to use the “intention to dispute” test. It may even be that the Commissioner will view the engagement of a tax agent specifically to manage the dispute as evidence in determining whether there was actually the requisite intention to dispute. This would also ensure that taxpayers are not unduly prejudiced by seeking the assistance of tax agents.
7.25 We have considered whether an “intention to dispute” test should contain a final date after which documents would not be accepted and the Commissioner’s tax position would be deemed to be accepted. The problem with this approach is that there is a risk this date could become the default date for all filings.
7.26 As a result, we consider that this is a matter best left to the discretion of the Commissioner, possibly subject to a requirement that the progress of the dispute is not unduly delayed. Taxpayers will still have the two-month response period in which to prepare their documents and will still be able to have their circumstances considered under the “exceptional circumstances” test in the event of situations genuinely beyond their control (such as sudden illness or a natural disaster affecting the taxpayer’s locality). We therefore suggest that the combined test should be a matter that the Commissioner considers upon application from a taxpayer. If this suggestion is adopted, administrative guidelines as to the application of the test may be needed.
Agents and the current exceptional circumstances test
7.27 We believe that the current exceptional circumstances test for agents works well. Although it imposes a higher standard on tax agents, it is not usual for the law to “expect more” from people who are acting in a professional capacity in a highly skilled environment. The recent TRA decision in Case Z25 shows that agents should be able to rely on the exceptional circumstances test in appropriate situations. 
How should “exceptional circumstances” decisions be made?
7.28 The NZICA-NZ Law Society submission considers that taxpayers should have a general ability to apply to the Court for an extension of time (as the Commissioner has under section 89N(3)).
7.29 We do not agree that a hearing authority should be the first port of call for taxpayers who claim exceptional circumstances (or an intention to dispute). There will always be cases when there is obviously an exceptional circumstance that has prevented the timely production of the relevant document. There is no need to involve the courts in these cases; a decision to accept late documents can be made more cheaply and easily by the Commissioner. Similarly, when the taxpayer clearly has an intention to dispute, the suggested indicators would mean that the Commissioner was in a good position to make the necessary decision.
7.30 The question therefore is whether the taxpayer should be able to appeal an exercise of the Commissioner’s discretion. Under current law, an exceptional circumstance decision is not a “disputable decision”. The only option for a taxpayer who disagrees with the Commissioner’s decision on the existence of an exceptional circumstance is therefore to have that decision judicially reviewed.
7.31 The Court of Appeal has confirmed that the established principles of judicial review in tax cases (being, essentially, dishonesty or deliberate maladministration) should not be widened, and that the use of judicial review in other than extreme cases is an abuse of process.  As a result, judicial review places a very high burden of proof on to a taxpayer who is looking to have a decision reviewed by the Court, and is also likely to involve considerable expense (both for the taxpayer and the Commissioner seeking to defend the decision).
7.32 As discussed in the previous chapter, disputable decisions for tax purposes should generally be decisions that relate to matters that directly impact on the tax liability.
7.33 In our view, judicial review is too cumbersome a tool to deal with what should be a fairly simple administrative matter that would normally be made by the Commissioner in the first instance. The preferable approach is to allow instead for the consideration of exceptional circumstances to be a disputable decision.
7.34 Making the Commissioner’s decision on exceptional circumstances “disputable” has a number of advantages:
- It is analogous to a “typical” disputable decision in that it directly impacts on the quantum of tax payable by the taxpayer. Deemed acceptance of the Commissioner’s decision results in all tax, interest and penalties becoming payable immediately.
- The provisions by which disputable decisions are challenged in a hearing authority are well understood by the Commissioner and taxpayers (and their agents).
- The general jurisdiction of the TRA is well-equipped to deal with challenges of this kind.
7.35 Making an exceptional circumstances decision disputable may involve the following consequential changes:
- A rule to confirm that, if the matter was decided in favour of the taxpayer (so that the dispute continued), it would then fall back into the relevant stage of the disputes process for that process on the substantive issue to continue.
- A suspension of the time-bar (and any relevant intermediate disputes process timeframes) for the period between when the Commissioner’s decision is made and resolution of the matter by the courts.
Change in the law
7.36 Section 89L(3)(b) clarifies that a change in tax law is a circumstance beyond the control of the Commissioner. This section is phrased as being “for the avoidance of doubt” and was introduced to provide for circumstances when the Commissioner is confronted with a new law but there is insufficient time to consider its application to the dispute in question.
7.37 As the Commissioner is an officer of the executive branch of government, a change in law is undoubtedly beyond the control of the Commissioner, which explains the fact that it is phrased as only being for the avoidance of doubt.
7.38 There is equally little doubt that a change in tax law (however affected) would also be a circumstance beyond the control of a taxpayer. Therefore, we consider there is scope for the provision to be removed or be extended so that it also applies to the taxpayer.
25 SPS 08/01: Disputes resolution process commenced by the Commissioner of Inland Revenue, para 201. See also further examples of the exercise of this discretion in Tax Information Bulletin, Volume 8, No. 3, 1996, Questions and Answers.
26 Treasury Technology Holdings Ltd v CIR (1998) 18 NZTC 13,752; Milburn NZ Ltd v CIR (1998) 18 NZTC 14,005; Fuji Xerox NZ Ltd v CIR (2001) 17,470 (CA); Hollis v CIR (2005) 22 NZTC 19,570; and Balich v CIR (2007) 23 NZTC 21,230.