Tax Administration Act 1994 - Section 91E(4)(f) and self-assessment
QB 08/01 considers self-assessments where the taxpayer files a return before lodging a ruling application regarding a transaction and year covered by that return.
Section 91E(4)(f) of the Tax Administration Act 1994 states that the Commissioner may not make a private ruling if an assessment has been made relating to the person, the arrangement, and a period or an income year to which the proposed ruling would apply, before the ruling application has been received by the Commissioner. Under the Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001, with effect from 24 October 2001, and with application to the 2002/03 and subsequent income years, taxpayers are required to assess their own income tax liability. Where a taxpayer has filed a tax return that contains their assessment before lodging a binding ruling application regarding a transaction and year that is covered by the return, does section 91E(4)(f) apply to the taxpayer's self-assessment?
When a taxpayer has made a self-assessment before a private ruling application has been received by the Inland Revenue Department section 91E(4)(f) applies.
- Unless otherwise specified, all legislative references are to the Tax Administration Act 1994.
- A taxpayer may apply for a private ruling that involves a transaction and year for which the taxpayer has already made a self-assessment. Section 91E(4)(f) states that the Commissioner may not make a private ruling if an assessment has been made relating to the person, the arrangement, and a period or an income year to which the proposed ruling would apply, before the ruling application has been received by the Commissioner. The rationale behind section 91E(4)(f) is that if a transaction has been the subject of an assessment, then any dispute over the correct tax treatment of that transaction should be resolved under the tax disputes resolution procedures (Inland Revenue Department, Binding Rulings on Taxation: A Discussion Document on the Proposed Regime, June 1994).
Application of relevant statutory provisions
- Section 91E(4)(f) states:
(4) The Commissioner may not make a private ruling if -
- An assessment relating to the person, the arrangement, and a period or a tax year to which the proposed ruling would apply has been made, unless the application is received by the Commissioner before the date an assessment is made.
- Section 91E(4)(f), therefore, applies when an income tax return has been filed and an assessment has been made before the Commissioner has received the application for the ruling.
- Section 3, the interpretation section, defines "assessment" to include:
an assessment of tax made under a tax law by a taxpayer or by the Commissioner:
- A reference in the Act, therefore, to an "assessment" means an assessment made by the Commissioner or an assessment made by the taxpayer (ie, a self-assessment).
- Section 15B outlines a taxpayer's tax obligations. Section15B(aa) states:
A taxpayer must do the following:
(aa) if required under a tax law, make an assessment:
- Part 3 of the Act refers to information, record-keeping and returns. Section 33 relates to annual returns of income from taxpayers. Section 33(2) states:
(2) A return must contain a notice of the assessment required to be made under section 92.
- Sections 92 and 92B provide for self-assessment and are in Part 6 of the Act relating to assessments. Sections 92(1) and (2) and 92B(1) and (2) (as amended by section 112 of the Taxation (Venture Capital and Miscellaneous Provisions) Act 2004) state:
92 Taxpayer assessment of income tax
- A taxpayer who is required to furnish a return of income for a tax year must make an assessment of the taxpayer's taxable income and income tax liability and, if applicable for the tax year, the net loss, terminal tax or refund due.
- An assessment under this section is made on the date on which the taxpayer's return of income is received at an office of the Department.
92B Taxpayer assessment of GST
- A taxpayer who is required under the Goods and Services Tax Act 1985 to provide a GST tax return for a GST return period must make an assessment of the amount of GST payable by the taxpayer for the return period.
- An assessment under this section is made on the date on which the taxpayer's GST tax return is received at an office of the Department.
- On the basis of the above provisions, it is considered that section 91E(4)(f) applies to both Commissioner-made assessments and taxpayer self-assessments.
- Section 91E(4)(f) applies if an assessment has been made before the ruling application has been received by the Commissioner. "Assessment" is defined as an assessment of tax made by a taxpayer or by the Commissioner. There is an obligation on a taxpayer under section 15B(aa) to make an assessment, if required to do so under a tax law. Sections 92 and 92B stipulate that a taxpayer must make an assessment. Section 92(2) states that an assessment is made on the date on which the income tax return is received at an office of the Inland Revenue Department. The income tax return contains the taxpayer's assessment. The same is true of GST.
Background policy of self-assessment legislation
- As noted above, self-assessment was brought into the legislation through the Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001 with effect from 24 October 2001, and with application to the 2002/03 and subsequent income years. The rationale behind the changes to the legislation was that, in practice, taxpayers self-assess their liability for tax as part of meeting their return filing obligations. Also, taxpayers are in the best position to assess their liabilities as they have the best information about their activities.
- This rationale was described in "Taxpayer self-assessment", Tax Information Bulletin Vol 13, No 11 (November 2001), on page 45:
Our tax administration practices are based on the idea that taxpayers have the best information about their own activities. As such, taxpayers are better placed than the Commissioner to assess their tax liabilities by making the appropriate calculations and furnishing their returns each year. Inland Revenue automatically processes these returns and issues notices of assessment generally reflecting the information on each return. This approach is supported by audit processes, which in some cases will mean that the Commissioner amends an assessment.
Despite these practices, self-assessment has not, until now, been reflected in the tax legislation. Instead the tax legislation has been written as if it were the Commissioner who actually performed all assessment activities.
Legislating for self-assessment provides a more consistent framework for our tax laws by aligning the legislation with practice. In this way, taxpayer's obligations are now provided for more clearly and directly in our tax laws.
- The most significant change to the legislation was that section 92 was amended to require taxpayers to assess their taxable income and income tax liability. The Tax Information Bulletin item stated, on page 47:
Requiring taxpayers to make assessments
The most significant change is that former section 92 of the Tax Administration Act, which required the Commissioner to make all income tax assessments, has been replaced with a requirement for taxpayers to assess their taxable income and income tax liability.
Definition of "assessment"
The definition of "assessment" has, for the purpose of the Income Tax Act and consequently the Tax Administration Act, been amended to reflect that either the taxpayer or the Commissioner may be performing the assessment function, depending on the context. The definition also includes all amendments to assessments; these can only be made by the Commissioner, although taxpayers can propose adjustments.
- It is also noted that there are provisions in the Act that are limited to Commissioner-made assessments. For example, sections 111(1) and 114 refer only to Commissioner-made assessments and state:
111 Commissioner to give notice of assessment to taxpayer
- As soon as conveniently may be after making an assessment the Commissioner shall cause notice of the assessment to be given to the taxpayer:
Validity of assessments
An assessment made by the Commissioner is not invalidated -
- through a failure to comply with a provision of this Act or another Inland Revenue Act; or
- because the assessment is made wholly or partially in compliance with -
- a direction or recommendation made by an authorised officer on matters relating to the assessment:
- a current policy or practice approved by the Commissioner that is applicable to matters relating to the assessment.
- These provisions can be contrasted with section 92(1), which is limited to a taxpayer self-assessment (quoted in paragraph 9).
Binding rulings and disputes resolution regimes
- Section 91E(4)(f) refers to an assessment having been made, and does not refer explicitly to either a Commissioner-made assessment or a taxpayer self-assessment. The definition of "assessment" in section 3 includes both Commissioner-made and taxpayer-made assessments.
- It is noted that when section 91E(4)(f) was introduced with the rest of the binding rulings regime in 1994, only the Commissioner could make an assessment. The power to self-assess was enacted in 2001. However, although this was the position in 1994, it is also noted that one of the general principles of interpretation is that "the law is always speaking". The Interpretation Act 1999 sets out several principles of interpretation, including section 6, which states:
6 Enactments apply to circumstances as they arise
An enactment applies to circumstances as they arise.
- Based on the analysis above, it is considered that section 91E(4)(f), therefore, applies to both types of assessment.
- The conclusion reached that section 91E(4)(f) is applicable to self-assessment is also consistent with the roles of the binding rulings regime and the disputes resolution process in facilitating taxpayer compliance.
- The rulings regime exists primarily for prospective transactions to enable taxpayers to obtain certainty, and thus comply with their tax obligations. When a taxpayer has already filed their return and made an assessment, the disputes resolution process is available to the taxpayer, should the Service Delivery Group disagree with the assessment. There was a clear legislative policy that the disputes resolution process would be available to ensure that disputes were resolved in these situations, and that the rulings regime would generally be available for situations that were contemplated or occurred before assessment.
- It is concluded that section 91E(4)(f) applies in the situation where a taxpayer has filed their income tax return or their GST tax return and made a self-assessment before the Inland Revenue Department has received the ruling application. This is because:
- the definition of "assessment" in the Act refers to Commissioner-made assessments or self-assessments, and this definition applies in respect of section 91E(4)(f);
- taxpayers make self-assessments under sections 92(1) and 92B(1), which state (under sections 92(2) and 92B(2)) that the date of assessment is the date the taxpayer's return is received at an office of the Department; and
- the applicability of section 91E(4)(f) to self-assessments is consistent with the clear policy intent to introduce self-assessment, and the legislative policies behind the binding rulings regime and the tax disputes resolution procedure.