Time period for refunds under the Income Tax Act 2007

Sections CD 40, CD 41, OB 71, OB 72, OB 72B, OP 6, RM 2, RM 10, RM 13, RM 17, RM 22, RM 23, RM 26, RM 28 and RM 33 of the Income Tax Act 2007; sections 41A, 125, 138E and 184 of the Tax Administration Act 1994; section 202 of the Student Loan Scheme Act 2011 and section 86L of the Stamp and Cheque Duties Act 1971

An amendment has been made to reduce the time period when refunds can be claimed under the Income Tax Act 2007 to four years from the year of assessment.

Background

If too much tax has been paid, the excess amount is refundable to the taxpayer. Over the years, the time periods for requesting refunds under the Income Tax Act have varied from between three and eight years.

The refund period was aligned with the time bar (four years) in 1944. At the time, it was considered that the time period for a taxpayer to claim a refund should be aligned with the time period for the Commissioner to amend an assessment. With the introduction of PAYE in 1957, the refund period was increased to six years in recognition of the possibility that employers could make mistakes in their calculations. It was increased to eight years in 1968. In 2004, the refund period was amended to four years from the date of assessment, with an eight-year period applying when the overpayment resulted from a clear mistake or simple oversight.

The longer periods for refunds were established in an era when the administrative environment was based on assessments carried out by the Commissioner. Departing from four years for a refund was aimed at ensuring taxpayers were not unduly prejudiced by any errors made by employers or the Commissioner when the PAYE scheme was introduced (as systems were not then computerised).

The time limits on refunds of tax paid in excess, and on the Commissioner amending assessments when insufficient tax has been paid, are a trade-off between achieving finality and ensuring the correct amount of tax has been paid.

In a modern tax administration environment an eight-year refund period was not consistent with the policy objective of reaching a balance between the finalising of a taxpayer's tax position at the earliest practicable stage and the accuracy of that position.

The time limit on the Commissioner to increase an assessment of tax is generally four years from the year of assessment. The Commissioner requires a period in which to determine the accuracy of taxpayer assessments. Setting the time period for refunds at four years has aligned the time period for taxpayers requesting refunds with the time period for the Commissioner increasing an assessment.

This approach also means that taxpayers requesting refunds will be treated similarly. The refund period for taxpayers who are personal tax summary taxpayers is four years. Now all taxpayers will have a refund period of four years from the year of assessment.

The new refund period is similar to that in other jurisdictions, for example, the time period in the United States is three years, and in the United Kingdom, Ireland and Australia it is generally four years.

During the Select Committee process, one of the submissions set out an example where a taxpayer returned income early in year 1 - the income should have been returned in year 3. When Inland Revenue audited the taxpayer in year 7 the assessment for year 3 was amended but a corresponding adjustment was not made to the year 1 assessment, resulting in the taxpayer being taxed twice on the same income.

Officials consider that such an outcome would not be consistent with the Commissioner's duty under section 6 of the Tax Administration Act to maintain the integrity of the tax system. In such a case it would be generally appropriate not to amend the assessment to prevent double taxation of the same amount of income, and therefore minimise associated compliance and administration costs.

The Commissioner has issued an internal instruction to this effect.

Key features

The Income Tax Act 2007 has been amended to reduce the time period for refunds under the Act to four years from the year of assessment. This time period will apply consistently to all refunds.

For the donations tax credit which is refunded separately from the income tax process, the time period for taxpayers requesting refunds is four years from the end of the tax year in which the donation was made.

The time period can be extended to a maximum of six years if the Commissioner exercises her discretion under section 78B of the Tax Administration Act 1994 to allow a longer period when a taxpayer has a tax credit under section LJ 2 (tax credits for foreign income tax) or section LK 1 (tax credits relating to attributed CFC income).

The time period for refunds under the Stamp and Cheque Duties Act 1971 has also been limited to four years.

Application dates

For refunds claimed under the Income Tax Act 2007 the amendment applies to refunds for a taxpayer's 2013-14 or later tax year. This means that the current refund time periods continue to apply to refunds for a person's 2012-13 or earlier tax year.

The time period for requesting refunds for the donations tax credit will become four years from the end of the tax year in which the donation was made. This change applies to donation tax credit claims in the 2014-15 and later tax years.