Factual reviews

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What you need to know about factual reviews

The factual review process has been established to enhance the utility of binding rulings in situations where a ruling is, or is likely to be, issued subject to a critical factual condition.

The process will give taxpayers an opportunity to obtain a level of certainty from Inland Revenue regarding the likelihood that the condition will be satisfied.

What is the status of a factual review?

A factual review is carried out separately from the binding ruling process, and does not constitute an audit or investigation. The carrying out of a factual review will not affect the Commissioner's ability to make a binding ruling under s 91E(4)(g) of the Tax Administration Act 1994. Whilst a green letter is not legally binding on the Commissioner, it does constitute Inland Revenue's considered view regarding that issue, which will not be subsequently revisited and/or overturned other than in exceptional circumstances.

If a taxpayer disagrees with the outcome of a factual review, the matter can be taken up if and when an audit is subsequently commenced. Further, the relevant condition can be tested through the disputes process in the usual manner.

The period of a factual review will match the period of the associated binding ruling.

What happens when you request a factual review?

On receipt of a factual review request, Inland Revenue will consider whether the eligibility criteria have been satisfied, and will notify the taxpayer accordingly.

How long will a factual review take?

A factual review is an opportunity for taxpayers to enter into a dialogue with Inland Revenue personnel with the relevant experience regarding the likelihood that a factual condition will be satisfied. Personnel will be available for an appropriate amount of time within a 3-month period from the date the request is approved. It is envisaged that during this time there will be ongoing discussion with the taxpayer.

It is hoped that within the allocated time agreement may be reached, or that Inland Revenue is able to reach a concluded view, but neither outcome is guaranteed or a requirement of this process. The 3-month period may be extended in exceptional circumstances, but this will be entirely at the Commissioner's discretion.

Once either an agreement or view is reached, or the amount of time allocated to the factual review has come to an end (if sooner), the outcome of the review will be communicated in writing to the taxpayer. Depending on the timing, this letter may accompany the draft or finalised binding ruling, or may be issued at a later date. Once the outcome of a factual review has been communicated with a taxpayer, no further correspondence will be entered into at that time.

The carrying out of a factual review will only affect the timing of the issue of the related draft or final ruling in exceptional circumstances (ie the issue of a ruling, or completion of the ruling project, will generally not be deferred pending the outcome of the factual review).

Who bears the cost of the factual review?

There will be no charge made by Inland Revenue to the applicant for a factual review. Where Inland Revenue and the taxpayer agree to engage independent external expertise, the cost will be borne by the taxpayer. In all cases, the taxpayer will be responsible for the costs of its own personnel and any advisers or experts used or consulted by it.

Information required for a factual review

The factual review will be based on information provided by the taxpayer for the purposes of the binding ruling application, together with:

  • any relevant information supporting the factual position taken,
  • any models/methodologies (i.e. pricing methodologies, calculations, letters from experts), and
  • any further information requested by Inland Revenue.

Who may apply for a factual review?

Only taxpayers who have applied for a binding ruling may request a factual review. A factual review may be requested in writing at any time prior to or immediately following the issue of the ruling.

In practice, such a request is likely to arise as a result of Inland Revenue's binding ruling team advising of the need for a critical condition to the ruling. However, it is possible that the need for such a condition may be identified as early as the pre-lodgement meeting. In those circumstances, the factual review may be carried out in parallel with the consideration of the binding ruling.

A factual review may be requested in relation to one or more critical factual conditions in the ruling (eg conditions as to value, market rates or generally accepted accounting practice). However, to ensure that the Commissioner's limited resources are applied to the most appropriate and necessary cases, a factual review will only be undertaken in situations where Inland Revenue is satisfied that:

  • the factual condition is both potentially contentious and central to the efficacy of the ruling (eg in situations where the arrangement may not proceed unless the condition can be satisfied),
  • an advance pricing agreement could not be sought in the alternative, and
  • Inland Revenue has sufficient resources available to undertake the review.

In addition, the following will be accorded higher priority:

  • prospective arrangements (i.e. have not yet commenced),
  • there is major commercial significance, and
  • requests by taxpayers who have entered into a Co-operative Compliance Agreement with the Commissioner.

It is expected, given the requirement that the factual condition must be both contentious and central to the efficacy of the ruling, that the number of qualifying requests for factual reviews will be low.

If you wish to apply for a factual review this must be done in writing and sent to rulings@ird.govt.nz

Alternatively, if you do not have access to email the following contact address:

Tax Counsel Office
Inland Revenue
PO Box 2198
Wellington


Who is responsible for the factual review?

The reviews will be undertaken by specialist staff with expertise in the relevant commercial matters (eg valuation and financial modelling). Where Inland Revenue does not retain expertise in a specific discipline, with agreement from the taxpayer Inland Revenue may engage independent external expertise (with the cost to be borne by the taxpayer). Where a condition in a prospective arrangement relates to unknown future variables, the factual review will focus on the relevant methodology and/or accepted commercial principles.

Inland Revenue will ensure consistency between the factual review and the binding ruling (particularly aspects of and the terms of the relevant conditions). If the binding ruling to which the factual review relates is withdrawn, or the conclusion provides a final contrary view, the factual review process will end. If you are issued an interim contrary view, the factual review process may be suspended.


Communication of the outcome of a factual review

The outcome of a factual review will be communicated in writing as either a green (positive), amber (neutral) or red (contrary) letter, as follows:

  • A green letter confirms that Inland Revenue considers that the relevant condition will be, or is likely to be, satisfied. However, the condition will not be removed from the binding ruling. Provided that the taxpayer does not deviate from the factual circumstances that exist when a green letter is issued, Inland Revenue will not seek to further test the condition by way of audit other than in exceptional circumstances.
  • An amber letter indicates that Inland Revenue has not been able to conclude within the amount of time allocated to the factual review that the relevant condition will be, or is likely to be, satisfied. Inland Revenue will not necessarily seek to audit the taxpayer solely as a result of the issue of an amber letter. If the condition is subsequently tested during an audit, the taxpayer will have a further opportunity to engage with Inland Revenue at that time.
  • A red letter indicates that Inland Revenue considers that the relevant condition will not be, or is not likely to be, satisfied, and puts the taxpayer on notice that an audit is likely. If the Commissioner subsequently considers as a result of the audit that the condition is not satisfied, Inland Revenue will then treat the ruling as not applying (in accordance with the binding rulings legislation). It should be understood that even in cases where a red letter is issued, the Commissioner is still required to issue the associated binding ruling including the relevant condition, unless the ruling application is withdrawn.

The outcome of a factual review will not apply in the event of a material omission or misrepresentation relevant to the review. Similarly, the outcome of a factual review will cease to apply if the binding ruling to which it relates ceases to apply (eg because of a material omission or other circumstance within ss 91EB or 91FB of the Tax Administration Act 1994).