Interpretation of section 113: The Commissioner's ability to correct assessments
2014 case note – CIR's ability to correct assessments under s 113 of the Tax Administration Act - discretion, irrevocability, correct assessment.
The Commissioner of Inland Revenue's ("the Commissioner") ability to exercise her discretion in s 113 of the Tax Administration Act 1994 ("TAA") is not limited to amendments made to correct an assessment previously in error. Section 113 can also be applied to amend an assessment that is not incorrect and substitute another more appropriate assessment. Also, the Court held that the fact that an election made by the taxpayer was irrevocable did not limit the Commissioner's ability to exercise s 113.
Case Impact Statement
This judgment confirms that the Commissioner's power to amend assessments in s 113 of the TAA is not limited by the "correctness" of the previous assessment; the Commissioner has a wide discretion to amend an existing assessment which may not be incorrect and substitute another more appropriate assessment. Further, the Court held that the irrevocability of elections in s IC 5(4) of the Income Tax Act 2007 ("ITA") did not preclude the Commissioner from exercising the s 113 discretion.
The judgment also indicates that in the exercise of the discretion the Commissioner may take into account factors such as that s 113 is not intended to be used by taxpayers as a way of circumventing the statutory disputes process or "gaming the system", the merits of the case, and the resources available to the Commissioner.
The Commissioner is currently considering the impact of this decision on her Standard Practice Statement (SPS 07/03) Requests to amend assessments. In the interim, the Commissioner will continue to apply SPS 07/03 having regard to this decision.
The plaintiffs were all members of the Westpac group of companies ("Westpac"). Four of the group's companies elected to offset losses against the income of Westpac Securities NZ Ltd and WestpacTrust Securities NZ Ltd, which resulted in the latter companies being unable to use foreign tax credits that subsequently became available to them.
Westpac applied to the Commissioner under s 113 of the TAA for the Commissioner to amend the assessments of the relevant companies so that the losses could be offset elsewhere.
The Commissioner declined the request on the basis that s IC 5(4) of the ITA provides that loss offset elections are irrevocable and that provision applied equally to Westpac and the Commissioner; and that Westpac's elections were legally valid options which had resulted in correct assessments and so did not fall under her s 113 power to correct. In making the latter decision, the Commissioner also relied on the distinction drawn in her Standard Practice Statement (SPS 07/03) between genuine errors and regretted choice and decided that Westpac's case was one of regretted choice.
Westpac applied for judicial review of that decision.
Clifford J, referring to the dictionary definition of "correct" as meaning "free from error, true, accurate" or "in accordance with fact, truth, or reason" or "meeting the requirements of a particular situation", noted the concept of correctness was not necessarily a binary one. Clifford J concluded that, on a plain reading of s 113, the Commissioner was not precluded from amending an assessment which was on one understanding correct to ensure it is nevertheless accurate or most appropriate for a particular situation.
Clifford J considered this analysis was confirmed when s 113 was viewed in the context of the TAA and ITA as a whole. He reviewed the purpose of the self-assessment regime, the Commissioner's care and management provisions in ss 6 and 6A of the TAA, the disputes process and the circumstances in which the Commissioner may amend an assessment in ss 113A, 113B and 113C. He concluded from this review that the Commissioner's power to amend assessments was Parliament's recognition of the competing interests in a self-assessment tax system: that while taxpayers were obliged to self-assess correctly, amendments may still be necessary to ensure the integrity of the tax system is upheld.
Finally, Clifford J examined case law and the legislative history of s 113, noting that its predecessor (s 23 of the Income Tax Act 1976) provided the relevant power was to make all "alterations in or additions to" an assessment. The essence of the provision had remained the same and the previous authority on the interpretation of s 23 remained applicable. He noted that the Court of Appeal had emphasised the broad scope of s 23 and held that the Commissioner was not precluded from using s 113 to amend an assessment where there are a number of correct tax positions (Wire Supplies Ltd v Commissioner of Inland Revenue  NZCA 224,  3 NZLR 458). Equally, Wylie J had noted the unfettered nature of the s 113 discretion (Arai Korp Ltd v Commissioner of Inland Revenue  NZHC 958, (2013) 26 NZTC 21-014).
Taken together, Clifford J held that neither the authorities, nor the wording or purpose of s 113, required an amendment only where an incorrect tax position was taken. Further, he considered the integrity of the tax system would be undermined if the Commissioner was precluded from looking behind a correct tax position to consider whether the assessment needs correcting. It might be the case that allowing a taxpayer to amend a self-assessment was more consistent with the policy underpinnings of the legislation.
Accordingly, Clifford J held that the s 113 power was not limited in the way the Commissioner had argued. However, he also held it was not limited in the way Westpac had argued: that is, between a situation where the taxpayer makes a choice that with the benefit of hindsight is demonstrated to be less advantageous to an alternative position, and an error that would have been apparent at the time to a taxpayer with a proper appreciation of the relevant facts and law. His Honour considered that distinction would be a factor relevant to whether the Commissioner would exercise her discretion, rather than a limitation on the power itself. Relevant factors would also include the fact that s 113 is not intended to be used as a way of circumventing the disputes process, the merits of the case and the resources available to the Commissioner. Clifford J indicated that the fact that Westpac was a well-resourced taxpayer was also a relevant consideration.
Clifford J accepted Westpac's argument that s IC 5(4) of the ITA applied only to the taxpayer and not the Commissioner. His Honour agreed that the section was there to clarify that although the form of an election is a unilateral choice by one taxpayer, it would be impractical if that taxpayer could unilaterally revoke its choice as the election affected two taxpayers. However, that consideration did not apply to preclude the Commissioner from exercising her discretion under s 113.
Further, it would be impractical given the extensive number of situations in which the Commissioner may need to exercise her s 113 power, including resolving a dispute with a taxpayer, for her to be precluded in resolving that dispute from amending an irrevocable election.
Clifford J held that the Commissioner may consider whether to exercise her discretion under s 113 to correct Westpac's assessments in the manner requested by Westpac. However, whether she would exercise her discretionary power in that way was a matter for her and outside the scope of the Court's judgment.
Tax Administration Act 1994, Income Tax Act 2007