Disputing or challenging a PAYE determination made under section NC 1 (2) of the Income Tax Act 1994

Section 138M, Tax Administration Act 1994 -- Wrong PAYE deduction determination a ground for challenge

Summary

Under section NC 1(2) of the Income Tax Act 1994, the Commissioner can determine whether and to what extent a payment is subject to PAYE.  It is not possible to dispute or challenge such a determination under the tax statutes.  But an employer or an employee who receives an assessment of tax deductions (or a notice of proposed adjustment proposing one) issued by the Commissioner can dispute the notice of proposed adjustment or challenge the assessment in the usual way on the ground that a section NC 1(2) determination on which it is founded is wrong in fact or in law.  There is no other basis in the tax statutes for disputing or challenging a section NC 1(2) determination.

The question

Section NC 1(2) of the Income Tax Act 1994 provides that, if any question is raised as to whether or not a source deduction payment is wholly or partly subject to the PAYE rules, it shall be determined by the Commissioner.  We have been asked whether and how a person might contest such a determination, and under what authority does the Commissioner issue an assessment of tax deductions.

The Commissioner's view on the right to contest a section NC 1(2) determination

Under sections 138B and 138C of the Tax Administration Act 1994 a person can challenge an assessment issued to them or any other disputable decision that affects them.  But section 138E(1)(e)(i) of the Tax Administration Act 1994 bars any right of challenge on a matter that, by a provision in the PAYE rules is left to the determination of the Commissioner.  Section NC 1(2) is part of the PAYE rules.  Therefore it is not possible to challenge a section NC 1(2) determination.

The disputes procedures are set out in Part IVA of the Tax Administration Act 1994.  They begin with the issue of a notice of proposed adjustment (a "NOPA").  Setting aside section 89D(4), which relates only to GST matters, you can only issue a NOPA in respect of an existing or proposed assessment or a disputable decision.  Therefore, you can only begin an income tax dispute in respect of an existing or proposed assessment or a disputable decision.

A section NC 1(2) determination is the Commissioner's decision that a payment, or part of it, is subject to tax deductions.  It does not quantify the amount of the tax deductions liability.  Because quantification of the amount of the liability is a necessary element of a tax assessment, a section NC 1(2) determination is not an assessment.  And paragraph (b)(iii) of the definition of "disputable decision" in section 3(1) of the Tax Administration Act 1994 excludes from the definition any decision of the Commissioner that you cannot challenge.  Thus, because you cannot challenge a section NC 1(2) determination, it is not a disputable decision.

Therefore a section NC 1(2) determination is not one of the things in respect of which you can issue a NOPA, so that you cannot begin a dispute in respect of a section NC 1(2) determination.

The result is that you cannot directly dispute or challenge a section NC 1(2) determination under any tax statute.  But section 138M of the Tax Administration Act 1994 provides a way of effectively challenging or disputing a section NC 1 determination.  Section 138M provides:

138M. Wrong PAYE deduction determination a ground for challenge - A disputant may-

1. Dispute a notice of proposed adjustment; or
2. Challenge an assessment-
   that is issued by the Commissioner in respect of a tax deduction on the basis of a determination made under section NC 1 of the Income Tax Act 1994, on the ground that the determination is wrong, whether in fact or in law.

This does not authorise a direct dispute or challenge of a section NC 1(2) determination, but if the Commissioner issues you with a NOPA or an assessment in respect of tax deductions, you can dispute the NOPA or challenge the assessment on the ground that a determination it is based on is wrong in fact or in law.  That is, you cannot challenge a section NC 1(2) determination unless the Commissioner has issued a NOPA or an assessment in respect of tax deductions based on the determination.

The courts and the Taxation Review Authority have not considered this question under the Tax Administration Act 1994, but they have considered it under prior legislation.

In Marmont v CIR (27 February 1968) unreported, Supreme Court, Auckland Registry, M 122/62, Justice Speight found that there was an assessment of tax deductions and that under section 6(4) of the Income Tax Assessment Act 1957 (the original antecedent to section 138M) Mr Marmont could object to an assessment of tax deductions on the basis that a PAYE determination that it was based on was wrong in fact.  Marmont supports the view that the Commissioner can assess tax deductions and that you can contest a PAYE determination by challenging an assessment based on it.

The decisions in Geothermal Energy New Zealand Ltd v CIR (1979) 4 NZTC 61,478 (Supreme Court, Beattie J), Case N11 (1991) 13 NZTC 3,084 (Bathgate DJ) and Case N58 (1991) 13 NZTC 3,447 (Bathgate DJ) confirm that you cannot directly contest a PAYE determination.  In Geothermal, Justice Beattie found that there was no right under the Income Tax Act 1976 to object to the determinations, but made declarations on the substantive issue because, in the special circumstances of the case, it was desirable both in the public interest and the interest of the parties that he should do so.  He made the declarations under the Declaratory Judgments Act 1908 and not under any tax law.  In Case N58, Judge Bathgate also found that there was no right to object to the determination.  Nonetheless, he dealt with the substantive question on the basis that, knowing there was no right of objection, the parties had indicated that they wanted to proceed with the dispute and would follow his determination (subject to appeal).  In Case N11, Judge Bathgate said that employers are assessed for tax deductions, and that no assessment had been issued in that case.  But in Case N11 the matter ceased with Judge Bathgate's finding that there was no right of objection because there was no assessment.

The employee's assessment

The fact that a section NC 1(2) determination has been made does not bar the employee from exercising their separate dispute rights arising from the annual assessment of their income and the income tax on it.  In the Commissioner's view, that would be a dispute with a different disputant, on a different assessment.

The Commissioner's view on the authority to assess tax deductions

There is no explicit authority in the Income Tax Act 1994 or the Tax Administration Act 1994 for the Commissioner to issue an assessment of tax deductions.  But paragraph (a)(iii) of the definition of "tax" in section 3(1) includes "any other amount payable to the Commissioner under a tax law" and therefore includes tax deductions.  Section 106(1) of the Tax Administration Act 1994 gives the Commissioner the power to issue an assessment of "tax" as so defined.  Therefore it gives the Commissioner the power to issue assessments of tax deductions.

Section 106(1) applies if a person fails to furnish a return, or if the Commissioner is not satisfied with the return made by a person.  These are the only circumstances in which an original assessment of tax deductions would be required - in other cases the employer or liable employee declares and quantifies the liability for tax deductions.

Section 113(1) of the Tax Administration Act 1994 provides that the Commissioner may amend an assessment at any time to ensure its correctness.  Therefore it gives the Commissioner the power to issue amended assessments of tax deductions.

Section NC 13(1) of the Income Tax Act 1994 gives the Commissioner the power in limited circumstances to reduce the amount of the liability for tax deductions from past or future source deduction payments.  A decision made by the Commissioner under section NC 13(1) of the Income Tax Act 1994 after the end of a pay period, specifying the amount of the tax deductions in respect of an employee for the pay period in a fixed amount and not subject to any terms or conditions will quantify the tax deductions liability.  In such a case, the section NC 13(1) decision would be an assessment of tax deductions.

The assessment (whether under section 106(1) or section 113(1) of the Tax Administration Act 1994 or section NC 13(1) of the Income Tax Act 1994) is made when the Commissioner or a delegate, taking into account the relevant facts then in their possession and intending that it be final and not merely tentative, provisional, subject to adjustment or conditional, ascertains the amount of tax deductions that an employer or an employee is liable to make and account for to the Commissioner.  But the right to challenge the assessment of tax deductions arises only if the assessment is issued.  The assessment is issued when it is formally made known to the person to whom it is directed by notice of assessment.  The Commissioner can remove any room for debate as to whether the assessment is issued by giving notice of the assessment according to section 14 of the Tax Administration Act 1994, though this is not mandatory and notice may be given in some other way: Hieber & Ors v CIR (2002) 20 NZTC 17,774 (High Court, Baragwanath J).

Previous published statements of the Commissioner's view on these questions

Page 13 of Tax Information Bulletin Volume 3 No 1, July 1991 states that "as the law currently stands 'Notices of Deficient Tax Deduction' should be treated as though they are assessments for the purposes of the objection procedure".  That statement is confirmed.

Page 26 of Tax Information Bulletin Volume 8, No 3 (August 1996) -

• Incorrectly states that a PAYE determination is a disputable decision, and the statement is withdrawn in that respect; and
• Correctly states that an employer or an employee may challenge an assessment or reject a NOPA that relates to a PAYE deduction determination, and the statement is confirmed in that respect.  However it is emphasised that only the person to whom the NOPA or assessment of tax deductions is issued can contest it under the tax statutes.