Ensuring the correctness of assessments
Westpac Securities NZ Limited & Ors v CIR  NZHC 3377
Section 113 of the Tax Administration Act 1994 is one of those laws that seems to promise a great deal but in the hands of the Inland Revenue has been routinely scaled back. It allows the Commissioner of Inland Revenue to make changes to assessments, apparently without regard to the time and other limits that might affect that ability, to ensure that her assessments are correct.
The interaction of section 113 with other tax laws has been a source of uncertainty and debate for years. For instance, how does such an open ended provision, with apparently no time limits, sit alongside the time bar that prevents the Commissioner from making assessments which increase a liability outside a period of 4 years from filing the relevant return? Surely if the Commissioner believes an increased assessment would be the correct one, the open ended right to amend would trump the time bar?
The uneasy tension involved with section 113 has led to it being read down and applied in narrower circumstances than taxpayers might have thought or liked. Some of the limitations are in the statute and some are administrative. In relation to the time bar, section 113 applies subject to the Commissioner’s obligation where possible to complete the tax disputes process. If she can’t do that because she is time barred, then she is also locked out of section 113 and so can’t use it as a back door to overcome the time bar.
But taxpayers have also been unable to use the section as a “side wind”. They cannot invoke it to skirt the prescriptive way in which tax disputes have to be fought. If they have not run the gamut of the tax disputes process, then taxpayers cannot simply skip to section 113 and ask the Commissioner to “correct” an assessment with which they disagree.
The Commissioner, ever wary of taxpayers trying to game the system, developed a number of practice limitations around section 113. They included that the section would not be used to allow a taxpayer to reverse a “regretted choice”. In other words if a taxpayer had options for how to treat a transaction and chose one of those, the fact that the choice proved unsatisfactory in hindsight did not allow the Commissioner to change the position. In short when it came to the choices available under tax law, you lived and died by the ones you made, without hope of a section 113 resurrection. Allied with this was the Commissioner’s view that for the section to be invoked, the tax position that had been taken must be incorrect. After all, the power conferred by section 113 was to ensure the correctness of assessments, so that if an assessment was already correct, though it might be one of a number of correct positions that could be taken, there was nothing on which the section could bite.
The High Court has now found that the Commissioner has read down section 113 too far, especially in relation to available choices and the idea that the section can only be used to correct the incorrect. Instead the Court has said that there is nothing in the section that limits it to the situation where the tax position to be addressed is wrong. All that is required is that the end point that the Commissioner is asked to move to, ie the amended assessment that she is asked to make, is a correct one.
The case that deals with this is Westpac Securities. Over a number of years the Westpac group had applied losses in a way that meant the income of one of its entities was reduced. That entity had however been operating in the UK and had paid tax there. As a result it was entitled to Foreign Tax Credits that could have been applied in New Zealand against the income which had already been sheltered by losses.
The important difference was that the FTCs could not be carried forward. If they were not used in the year they arose, then they were lost forever. By contrast losses could be carried forward, subject to continuity requirements, so that if they were not used immediately they survived to be used another day. Westpac obviously wanted to go back to the years in which they had offset losses, reverse those offsets and apply FTCs, and then leave the losses to be carried forward to later years.
The Commissioner refused to entertain the request to use section113 to do this, arguing that Westpac had made its (correct) bed and must lie in it. The matter was taken on judicial review in what the Judge held was a classic case for review, when it was alleged that the decision maker (the CIR) was misinterpreting the law under which the statutory power of decision making arose. The Court upheld Westpac’s view that the Commissioner was applying too narrow an interpretation of section 113 and remitted the question of its request back to the Commissioner to reconsidered taking account of the Court’s findings.
Those findings do not amount to a wholesale opening of section 113 by any means. But they do mean that the Commissioner can be asked to assist a taxpayer whose choice of tax positions, each of which may be correct, leads to disadvantage. Section 113 may be an avenue for the taxpayer to try to put that right. The Commissioner is not however compelled to “correct” the assessment in question, because there may be a number of factors which affect whether the discretion which is conferred by section 113 should be applied in the circumstances of the case. What is important is that the “regretted choice” approach, which was used by the Commissioner to simply bowl out a taxpayer’s request for relief under section 113, is not a satisfactory basis on its own for refusing relief. A more nuanced consideration of the competing positions and what led to the choice being made will be required. If a taxpayer has simply made a mistake or has genuinely overlooked a tax advantage that could legitimately have been preserved (as Westpac argued) it might be due some leniency. The taxpayer who is well resourced and should have known better, and moreover made the error repeatedly without it being spotted (as the Court hints of Westpac in the judgment) might not be dealt with as sympathetically.
© G D Clews, 2015