2007 amendment enables IR to treat overlapping return periods as the same period for an associated person, allowing a tax refund to be used to reduce a shortfall.
Section 141(7) and (7B) of the Tax Administration Act 1994
This amendment enables Inland Revenue to treat return periods that overlap as the same return period for associated persons, allowing a tax refund to be used to reduce an associated person's tax shortfall.
Occasionally, taxpayers include transactions in the wrong entity's return - for example, in an associated person's return. Because they do not know they have included the transaction in the wrong return, the tax shortfall does not show up when reconciliation is undertaken. These shortfalls are often not voluntarily disclosed because the taxpayer is unaware they have occurred and the shortfall cannot be considered "temporary".
If there is a tax shortfall in one taxpayer's return and, as a result, an associated taxpayer's return is adjusted, resulting in an entitlement to a refund or an increased refund, the refund may be used to reduce the tax shortfall of the associated taxpayer. However, before this amendment, the returns had to be for the same tax type and return period.
Problems arose when the return periods were not the same - for example, when one associated taxpayer filed the GST return on odd months and the other associated taxpayer filed on even months. Because the return periods were not the same, the refund could not be used to reduce the tax shortfall. The amendment allows periods that overlap to be treated as the same return period for an associated taxpayer.
The earlier provision also applied only when adjustment resulted in a refund or an increased refund for the second taxpayer. The provision now also applies when the adjustment results in less tax to pay for the second taxpayer.
Inland Revenue will now be able to treat return periods that overlap as the same return period for associated persons, allowing a tax refund to be used to reduce an associated person's tax shortfall. This discretion will not apply when the tax shortfall arises as the result of an abusive tax position or evasion - for example, if a taxpayer knowingly claimed an input tax credit in the wrong entity to claim the refund early.
The provision also applies when the adjustment results in less tax to pay for the second taxpayer.
The amendment applies to tax positions taken on or after 1 April 2008.