Double Tax Agreement on pensions not discriminatory
2010 case note - complaint of possible discrimination on jurisdictional grounds struck out - double tax agreement, pensions, unacceptable tax position.
Income Tax Act 1994, Taxation Review Authorities Act 1994
The Taxation Review Authority (TRA) struck out the taxpayer's complaint of possible discrimination on jurisdictional grounds, but cancelled the shortfall penalties which had been imposed by the Commissioner.
Impact of decision
There are no implications in terms of the decision on the core tax.
The decision appears to permit reference to the taxpayer's sincerity and subjective considerations in determining whether a tax position is unacceptable (see paragraphs  and ). The Commissioner respectfully considers that this is irreconcilable with section 141B(1) of the Tax Administration Act 1994 (TAA), which expressly provides for an objective approach. However, as the decision also notes that the case was "unusual" and "borderline", it is expected that the decision can be considered restricted to its particular facts and that there will be no implications in terms of the approach taken to determining the acceptability of tax positions. It remains the Commissioner's position that taxpayers' sincerity and their subjective considerations are irrelevant to the acceptability or otherwise of their tax positions.
The taxpayer is a British national and a New Zealand (NZ) tax resident. He received pensions from the United Kingdom (UK) in 2003 and 2004. Under the NZ/UK Double Taxation Agreement (DTA), pensions are taxed in the country of residence (NZ in this case), and not at the source (UK in this case). This treatment differs from most of NZ's other DTAs (which tax at source), and differs from the treatment in the Organisation for Economic Cooperation and Development (OECD) model DTA convention.
The taxpayer did not return the income received from his UK pensions in his 2003 and 2004 tax returns. The taxpayer was subsequently issued with assessments incorporating the UK pension amounts. He was also assessed with shortfall penalties for taking an unacceptable tax position.
The taxpayer challenged the assessments, arguing that:
- the NZ/UK DTA provides that any difficulties in the application of the DTA will be resolved by mutual agreement between the parties;
- because NZ taxes income at higher rates than the UK, the taxpayer was disadvantaged in comparison to recipients of pensions from countries other than the UK, and that disadvantage might be unlawfully discriminatory;
- therefore, because of the possibility of unlawful discrimination, there must be some difficulty or doubt in the application of the DTA; and
- therefore the Commissioner made a disputable decision in not resolving the difficulty or doubt by mutual agreement under the terms of the DTA.
The taxpayer sought resolution of the "difficulty and doubt" on the application of the treaty, through:
- an adequate explanation as to why the treatment is lawful;
- the Commissioner agreeing with the UK revenue that the taxpayer's pension be taxed in the UK and not in NZ; or
- the Commissioner agreeing to tax the taxpayer's UK pension at the rates of tax applicable in the UK.
In the course of the dispute, attempts were made by the Commissioner to satisfy option a) above, but the taxpayer was not satisfied with the answers provided.
The Commissioner applied to strike out the claim insofar as it related to the assessments on the basis that the TRA does not have jurisdiction to determine the proceedings. The Commissioner argued that resolution of the taxpayer's complaint would require a determination on the discrimination point, an issue that can only be considered by the Human Rights Review Tribunal (HRRT).
The Commissioner accepted that the TRA had jurisdiction to determine whether the shortfall penalties for taking an unacceptable tax position had been correctly imposed.
Jurisdiction of the Taxation Review Authority
The TRA agreed with the Commissioner that it did not have jurisdiction to determine the taxpayer's complaint. The claim was struck out insofar as it related to the tax assessments.
The TRA noted at  and  that it does not have jurisdiction to make declarations of inconsistency in terms of the Human Rights Act, it does not have jurisdiction to overturn an assessment on the grounds that the legislative basis for the assessment is discriminatory, and does not have the jurisdiction to direct the Commissioner to enter into bilateral discussions with the UK over the application of the DTA.
The TRA agreed with the Commissioner that the TRA and HRRT are statutory creations and that each operates within defined statutory frameworks:
- The resolution of complaints of alleged discrimination is, in the first instance, the task of the Human Rights Commission (HRC).
- In the event the HRC is unable to resolve such complaints, they are to be determined by a specialist judicial body, namely the Tribunal.
- Where the complaint concerns the interpretation and/or application of an enactment, the only available remedy is a declaration of inconsistency. Acts cannot be defeated or misapplied by reason of such inconsistency.
- The TRA's function is to determine challenges to the correctness of assessments made by the Commissioner.
- Correctness is not a discretionary matter. The TRA has no dispensing power.
While the claim was struck out for lack of jurisdiction, the TRA noted, obiter, that the assessments appeared to be correct in any case.
The TRA disagreed that the taxpayer had taken an unacceptable tax position, and cancelled the penalties that the Commissioner had assessed, stating:
-  I do not find the stance of the disputant in this case to be unacceptable. As I have indicated above, viewed objectively it is understandable that this disputant thinks he is correct on the issues dealt with above. A Court needs to give serious consideration to the matters raised by the disputant in this case. They are not simple issues. I think his arguments are sufficient to support a reasonable expectation for him that he could have succeeded. The factors to be considered under section 141B(7) of the TAA do not alter that view of mine. Although it is a little difficult for the disputant to meet the standard of being about as likely as not to be correct, this unusual case can be regarded as borderline and enabling a robust approach to the issue of shortfall penalties.