Content Standards for Notice of Proposed Adjustment and Notice of response (Jul 99) (WITHDRAWN)
Withdrawn statement SPS INV-150 Content Standards for Notice of Proposed Adjustment and Notice of response. Statement provided for historical purposes only.
This statement has been withdrawn and is provided for historical purposes only.
This Standard Practice Statement sets out the Commissioner's practice applied to the content standards for Notices of Proposed Adjustment and Notices of Response
This Standard Practice Statement applies from 1 August 1999.
The Disputes Resolution rules introduced an open, "all cards on the table" approach to tax disputes, with the aim of resolving tax disputes fairly, quickly and efficiently. The process requires the exchange of certain information between the Commissioner and a taxpayer, and begins when one party issues a Notice of Proposed Adjustment ("NOPA") to the other. If the recipient of the NOPA disagrees with the proposed adjustment, that party must reject any or all of the proposed adjustments within a two month response period by issuing a Notice of Response ("NOR"). If a NOR is not issued within that timeframe and there are no exceptional circumstances as defined in the Tax Administration Act 1994 the NOPA recipient is deemed to have accepted the proposed adjustments in the NOPA.
There has been some confusion about what information must be in the NOPA and NOR. This has lead to claims that a NOPA or NOR was invalid because of alleged information shortcomings, and on occasion resulted in the deemed acceptance of proposed adjustments because the response period expired before alleged deficiencies could be made good. This is a critical outcome for a taxpayer; deemed acceptance finalises the dispute and the taxpayer no longer has the right to challenge the Commissioner before the Courts.
The Commissioner does not consider deemed acceptance in these circumstances appropriate or in keeping with the stated aims of the disputes resolution rules. To remove some of the misconceptions and help taxpayers who wish to dispute assessments or proposed adjustments, this standard practice statement sets out the relevant tax laws, the Commissioner's practice on applying those laws, and associated practical issues.
All legislative references are to the Tax Administration Act 1994 ("the Act").
Section 89F gives a list of content headings for a NOPA, and section 89G(2) gives a similar list for a NOR. Both sections incorporate a standard which governs the content headings and acts as a guide to the amount and quality of the information required. These are guidelines, so they are flexible and permit NOPA and NOR to have a wide variance in content, style and detail, with the result that the amount and quality of information they contain can vary considerably and still comply with the law.
When information provided under the content headings is full and complete (i.e.of a high quality) problems and misunderstandings are unlikely to arise. They are more likely to occur when information content is minimal or of a lesser quality.
From 1 April 1999, the tax laws which govern the content of a NOPA and a NOR are as follows:
89F A notice of proposed adjustment must be in the prescribed form and contain, with sufficient detail to reasonably inform the recipient, -
(a) The items in a disputable decision or a tax return that the issuer of the notice proposes should be adjusted; and
(b) The tax laws on which the adjustments are based; and
(c) An outline of the facts giving rise to the adjustments; and
(d) The legal issues arising in respect of the adjustments; and
(e) The propositions of law relied on or distinguished in respect of the adjustments.
89G(2) A response notice must, with sufficient detail to reasonably inform the recipient,-
(a) Specify the items in the notice of proposed adjustment that the issuer of the response notice considers to be in error; and
(b) Specify the tax laws on which the issuer of the response notice relies; and
(c) Outline the facts contained in the notice of proposed adjustment that the issuer of the response notice considers to be in error; and
(d) Outline any further facts on which the issuer of the response notice relies; and
(e) Outline any additional legal issues that the issuer of the response notice considers arise in respect of the notice of proposed adjustment; and
(f) State the propositions of law relied upon in respect of the response notice.
The standard for NOPA content is defined by the wording "must ... contain, with sufficient detail to reasonably inform the recipient" which precedes and governs the required content list. The same standard, only this time without the word "contain", precedes and governs the required content list for the NOR.
Essentially, each standard requires a NOPA or NOR issuer to provide enough factual and relevant details for the recipient of the notice to understand why a tax adjustment or determination is proposed or rejected. Case law when applied to the words "sufficient detail to reasonably inform" indicates that the circumstances and background to a dispute must be taken into account. These include any information already available or known to the recipient of a NOPA or NOR.
Previously it was suggested that NOPA and NOR content should have enough detail to inform a reader who lacked prior knowledge of the disputed issue. This viewpoint overlooked an important factor in the disputes resolution process, i.e. that the Commissioner and a specific taxpayer (whether or not through a tax agent or legal advisor) are always the issuer and recipient of a NOPA and a NOR. (Which party is the issuer and which is the recipient depends on who began the process.) In most instances, before this there will have been some form of interaction between the two; e.g. the taxpayer will have issued a NOPA following receipt of the Commissioner's assessment of a return filed by the taxpayer, or a determination such as tax residency status. If the Commissioner has issued the NOPA, this is likely to have followed a GST audit, income tax or other investigation involving the taxpayer.
However the dispute started any earlier interaction between Commissioner and taxpayer would be evidence that both parties had entered the disputes resolution process with an awareness of the issues in dispute. These and other circumstances, including whether the taxpayer is represented by a tax agent or legal advisor, should be considered when the standards of sections 89F and 89G(2) are applied to the content of NOPA and NOR.
The Commissioner believes he has a statutory obligation to inform taxpayers fully which goes beyond that required by sections 89F and 89G(2). In keeping with that wider obligation, Inland Revenue will always attempt to issue NOPA and NOR which are complete, fully detailed and of a high standard. A frank and complete exchange of information by both parties is implicit in the spirit and intent of the disputes resolution process. Inland Revenue therefore expects that taxpayers, their tax agents and legal advisors, will to the best of their ability also issue complete and fully detailed NOPA and NOR.
The disputes resolution process was neither intended nor designed to be unduly difficult or costly for taxpayers who want to dispute a tax matter. However, the reality is that some taxpayers may struggle with the requirements, particularly if they do not have professional assistance. While Inland Revenue encourages taxpayers to issue NOPA and NOR with a high standard of information content, it would be unrealistic to expect this in every instance.
The issuer of a NOPA or a NOR is not bound by or restricted to the content of that notice. However, it must contain sufficient relevant information to satisfy the legislative requirement that it "reasonably inform" the intended recipient. Although Inland Revenue prefers and encourages a high standard of NOPA and NOR content, mere brevity and lack of precision do not nullify a notice which directs the attention of the recipient to the necessary information. The following examples show how this can be achieved:
Content standard for taxpayer-generated NOPA
From 1 April 1999 section 89F requires taxpayers (including tax agents and legal advisors) to use an IR 210 Cover Sheet when issuing a NOPA. Inland Revenue recommends using the full IR 210 to complete the NOPA, as this form covers each of the content headings listed in section 89F. Using the full form is optional; taxpayers may instead complete the NOPA by way of a letter or typewritten sheets attached to the IR 210 cover sheet.
Whichever option is used the NOPA should include all available relevant information In keeping with the aim and spirit of the disputes resolution process, this should be as complete and detailed as is possible. Following the format of the IR 210 form by listing each content heading and responding to each in turn will ensure that nothing is omitted.
Some examples of how to inform the Commissioner and satisfy the requirements of tax law follow. Note that the examples are not exclusive and that other possibilities exist:
(a) The items in a disputable decision or a tax return that the issuer of the notice proposes should be adjusted
Inland Revenue needs to know the type and amount of each proposed adjustment as well as the tax return period involved. Reference should be as specific as possible e.g. "Increase 1998 travel expenditure by $1,500 to $4,365"; "1999 Repairs and Maintenance understated by $3,615"; or "Outputs overstated by $5,000 June/July 1998". Directing Inland Revenue to an earlier letter which clearly sets out information about the type and amount of proposed adjustment is also acceptable, e.g. "Determination of Loss (date)"; or "See my/your letter (date)".
(b) The tax laws on which the adjustments are based
Wherever possible, identify the particular tax laws relating to the proposed adjustment. A taxpayer who does not have access to a copy of the tax laws through a tax agent, legal advisor, Citizens Advice Bureau, or local library etc. can ask Inland Revenue for help. Should our help be sought, then subject to the information supplied by the taxpayer, Inland Revenue may suggest certain tax laws could apply and will provide a photocopy of these. Any decision about application and use of a particular tax law in the context of their NOPA or NOR remains with the taxpayer.
However, a general reference such as "The Income Tax Act" or "The Goods and Services Tax Act" is also acceptable if it is clear from the type of proposed adjustment and overall content of the NOPA that certain tax laws will be involved, e.g. a dispute involving depreciation in year of sale (1998) must involve section EG 1(2) of the Income Tax Act 1994. In some instances, reference to the content of a disputed income tax or GST return may also direct the Commissioner's attention to the relevant tax laws.
(c) An outline of the facts giving rise to the adjustments
In practice most taxpayers tend to provide more rather than less information under this heading. Inland Revenue encourages and prefers this approach, as it helps us to understand the taxpayer's point of view and ensures that we have the correct facts. The law requires an "outline" i.e. a description omitting details. This can be in the form of a brief statement e.g. "The four wheel drive was purchased for use only in my plumbing business" or "I am able to claim 100% depreciation and expenses because the mower was bought for the factory lawns". When the adjustment item has been discussed in previous correspondence, reference to this by date(s) or a statement such as "For the reasons previously given, the Commissioner was wrong in fact and in law to treat profit from the sale of 24 Red Dwarf Drive, Galaxy, as 1998 taxable income" is also acceptable.
(d) The legal issues arising in respect of the adjustments
These are the questions to be decided and answered about the matters in dispute. There may only be one legal issue in a dispute or there may be several. The questions can take any form, and be simply put, e.g. "Am I able to claim 100% of expenses and depreciation for the four wheel drive?" Also acceptable is a statement such as "Tax law allows me to claim 100% of four wheel drive expenses and depreciation".
Often, the information provided under headings (a), (b) and (c) will indicate what the legal issues are.
(e) The propositions of law relied on or distinguished in respect of the adjustments
Under this heading, statements are made about how the law supports the proposed adjustments in the particular situation. The statements have more value when made not merely as a statement of opinion, but supported by reasoning and authority such as tax laws or case law i.e. Court decisions about how the law should be applied. Although other authorities can be used to illustrate support or acceptance for the taxpayer's view, e.g. IRD rulings, TIB articles, etc. they carry less weight. "Distinguished" means showing why a particular tax law or Court decision which would usually apply, does not in these particular circumstances. Within the disputes resolution process a proposition of law includes any or all of the following:
- reference to tax laws, e.g. "Section DH 1(2) of the Income Tax Act 1994 allows 100% expenditure and depreciation deduction for business vehicles", "Section BD 2(1)(b)(ii) of the Income Tax Act 1994 applies", or "See tax laws"
- case law (Court decisions) e.g. " Case N8 (1991) 13 NZTC 3,052"
- publications, e.g. "TIB Volume Nine, No.8 at page 12"
- IRD rulings, public or policy statements, etc.
- a simple statement e.g. "The four wheel drive is a business vehicle, and its repairs and maintenance costs are deductible"
Inland Revenue encourages taxpayers to identify and include relevant propositions of law in their NOPA, although we realise that this may not always be possible. If no specific propositions of law are included, we will treat the tax laws referred to in the NOPA as being the propositions of law on which the taxpayer has relied.
Content standard for taxpayer-generated NOR
Preparing a NOR involves more precise attention to information detail than preparing a NOPA. Inland Revenue recommends using an IR 210A when preparing a NOR, to ensure that each content heading listed in section 89G(2) is considered. Use of this form is optional; taxpayers may complete a NOR by way of a letter or typewritten sheets. Whichever option is used, all available relevant information should be included in the NOR. In keeping with the aim and spirit of the disputes resolution process, this should be as complete and detailed as is possible. Following the format of the IR 210A by listing each content heading and responding to each in turn will ensure that nothing is omitted.
Some examples of how to provide sufficient information to inform the Commissioner and comply with tax law follow. Note that the examples are not exclusive and other possibilities exist:
(a) Specify the items in the notice of proposed adjustment that the issuer of the response notice considers to be in error
Although it can be helpful to do so, a NOR issuer is not required to say why an item is in error (disputed) under this heading. The information supplied elsewhere in the NOR should explain why the item is disputed.
The word "specify" in the heading means each disputed item must be identified. There are several ways of doing this. If the taxpayer disagrees with all the proposed adjustments in the NOPA, a statement such as "The proposed adjustments are wrong" will make this clear. If one or more of a number of proposed adjustments are disagreed with, each must be identified, e.g. "Items a, c, e, and f are wrong", or "Proposed adjustment amounts of $6,259.00, $3,400.00 and $1,321.00 are incorrect".
When the disagreed adjustments include several which can be combined together under a recognisable description, (e.g. adjustments which obviously all relate to vehicle repairs and maintenance) a statement such as "Repairs and maintenance items totalling $5,690.00" with separate identification of the other disputed adjustments is acceptable.
(b) Specify the tax laws on which the issuer of the response notice relies
The word "specify" again requires the NOR issuer to identify the tax laws relied on. Frequently these will be the same tax laws as the Commissioner has relied on in his NOPA, although the two parties disagree about how they should apply in the particular circumstances. When this occurs, a reference to the NOPA with a comment such as "See NOPA" or "As stated by the Commissioner" is sufficient.
A NOR issuer may consider tax laws other than those quoted in the Commissioner's NOPA apply. In this situation the Commissioner must be given at least the relevant Parts of the Act, section references, or enough information under this heading or elsewhere in the NOR for him to be able to identify the tax laws the issuer has relied on.
(c) Outline the facts contained in the notice of proposed adjustment that the issuer of the response notice considers to be in error
The NOR issuer is not required to say under this heading why any fact may be in error (although this would be helpful) merely to identify those which are. The information supplied under the next heading (d) should explain why a NOPA fact is disputed.
Only an outline is needed; directing the Commissioner's attention to the relevant paragraph, page number, or any other recognisable feature is one way to indicate which facts are in error. If none of the facts in the NOPA are in error, writing "Facts agreed" makes this clear, and is preferable to leaving that section of the IR 210A NOR blank.
(d) Outline any further facts on which the issuer of the response notice relies
The NOR issuer should show here any facts to be considered which were not included in the NOPA. The Commissioner needs to know why any NOPA fact is disputed. He also needs to be told about facts he has overlooked or did not know when the NOPA was prepared, as additional information or new information may be all that is needed to resolve the dispute. As in the NOPA examples, this can take several forms, including a brief statement; e.g. "The four wheel drive was used only in my plumbing business. I have two other cars available for private use". Reference to correspondence in which the additional facts were discussed, or interviews and meetings where proceedings were tape-recorded and/or a subsequent transcript agreed, would also be adequate. (Dates should be given in each instance.)
If facts were correctly stated in the NOPA and there are no additional facts to be taken into account, no entry is needed under this heading. However writing "none" or "not applicable" clarifies this to the Commissioner.
(e) Outline any additional legal issues that the issuer of the response notice considers arise in respect of the notice of proposed adjustment
As with a NOPA, these are the questions that need to be answered about the matters in dispute. A NOR issuer may consider there are legal issues over and above those in the NOPA as a result of additional facts not considered by the Commissioner, or the application of tax laws on which the Commissioner has not relied.
Because only an outline is required, the information provided about additional facts and tax laws can make the Commissioner aware of further legal issues. If a question is asked or a statement made in everyday language e.g. "Am I allowed a deduction under section BD 2(1)(b) for factory floor repairs? or "Can I claim the cost of driveway repairs as home office expenses?" it will alert the Commissioner to any additional legal issues.
(f) State the propositions of law relied upon in respect of the response notice
As with a NOPA, a simple statement or reference to tax laws, Court decisions, publications or IRD rulings and statements that the taxpayer considers support rejection of the proposed adjustments is required. If the taxpayer relies on the Commissioner's propositions of law, statements such as "See NOPA" or "Refer Commissioner's propositions of law" clarify this.
If this section of the IR 210A is left blank, any reference in the NOR to tax laws will be treated as a reference to the propositions of law on which the taxpayer is relying.
The examples give some guidance on the nature and quantity of information to include in a NOPA or NOR for it to comply with the standards required by the law. They are not exclusive; other possibilities exist and at all times regard must be had for the circumstances surrounding the dispute. Inland Revenue recommends that where possible, taxpayers seek professional guidance with the preparation of these notices.
As demonstrated by the examples Inland Revenue intends to apply as broad an interpretation to the content of taxpayer-generated NOPA and NOR as the standards permit. Where necessary, we will ask taxpayers to clarify or expand aspects of their notice by providing additional information. Inland Revenue considers that this approach has a basis in case law and is consistent with the aims of the disputes resolution rules.
Similarly, when the response period remaining permits we will ask taxpayers to provide any information needed to bring their document to the relevant minimum content standard. In this situation, the information must be written and issued to Inland Revenue prior to the end of the notice response period, otherwise the taxpayer will not have issued a NOPA or a NOR. To avoid the possibility of taxpayers finding they have run out of time before essential information can be provided, we recommend the issue of NOPA and NOR earlier rather than later in the response period.
Only in the exceptional circumstances defined in section 89K(3) can the Commissioner accept a late notice as having been given within the response period.
Note that the requirements for the third document of the disputes resolution process – the statement of position (SOP) described in section 89M – are much more formal and restrictive than those of section 89F for the NOPA and section 89G(2) for the NOR. Where Inland Revenue has issued a Disclosure Notice, and the outcome of the process is unfavourable to the taxpayer who challenges the Commissioner's position before the Courts, both taxpayer and Commissioner will be limited by section 138G(1) to the contents of their respective SOP. Only in very unusual circumstances will the Courts allow the introduction of additional evidence, issues, or propositions of law not previously contained in the SOP.
When Commissioner and taxpayer have exchanged and rejected NOPA and NOR, and it seems likely the dispute will proceed to adjudication (the final stage of the disputes resolution process) Inland Revenue strongly urges taxpayers to seek professional assistance before attempting to prepare an SOP.
This Standard Practice Statement was signed by me on 12 June 1999.
Manager, Technical Standards