Application of discretion in section 81(1B) of the Tax Administration Act 1994 - the secrecy provisions

SPS 11/07 outlines factors IR must take into account to ensure a consistent approach is taken by staff when disclosing information relating to the CIR's duties.

This statement may be cited as "Standard Practice Statement 11/07: Application of discretion in section 81(1B) of the Tax Administration Act 1994 - the secrecy provisions".

This Standard Practice Statement also appears in Tax Information Bulletin Vol 24, No 1 (February 2012).

All statutory references are to the Tax Administration Act 1994, unless otherwise specified.

Introduction

Section 81 of the Tax Administration Act 1994 (the "TAA") protects from disclosure by Inland Revenue ("IR") by requiring that all matters which come to the knowledge of any Inland Revenue officer are to be kept secret. The section has recently been amended to provide IR with a broader discretion to communicate information relating to the Commissioner's various duties and functions, after a number of factors have been considered. This Statement outlines the factors that IR must take into account and the process it will follow to ensure there is a consistent approach taken by IR staff when exercising the discretion and before making those disclosures.
Section 6 of the TAA confirms that all IR employees have an on-going duty to protect the integrity of New Zealand's tax system. An important way in which the tax system's integrity is protected is by IR not disclosing tax secret information it has received about a taxpayer to someone else. There are criminal sanctions that can be imposed if an IR employee fails to comply with those secrecy obligations.¹ The TAA goes so far as to protect all information, including that which does not identify specific taxpayer affairs, unless the disclosure is for reasons clearly relating to administration of the Inland Revenue Acts.
It is also recognised that in order to protect the integrity of the tax system IR will in some circumstances be required to disclose tax secret information to third parties such as the courts, other government agencies and other third parties (sometimes including the general public). The TAA has always contained a number of exceptions that specifically allowed IR to disclose certain information. Those exceptions are mainly contained in section 81(4) of the TAA.
Those provisions remain in force. However, recent amendments to section 81² have expanded the circumstances in which IR can disclose tax secret information. The new provision, section 81(1B), is intended to give IR more flexibility to make disclosures when administering the tax system. Broadly, it is a discretionary power which allows for disclosure where that communication:
1. is for executing or performing a duty of the Commissioner or supporting the execution or performance of such a duty; and
2. is reasonable, having regard to five specific factors contained in section 81(1B)(b).
This Statement will provide guidance to IR staff as to when this new provision might result in IR disclosing such information, and outline the steps IR will take before making that disclosure to ensure maximum consistency. Before that it briefly examines how the new exception interacts with the other exceptions to the secrecy provisions. The contents are as follows:
- Paragraphs 6 and 7 outline the relevant statutory provisions;
- Paragraphs 8 to 14 note the general structure and exceptions to the secrecy rules that still apply and how they interact with the new rules;
- Paragraphs 15 to 18 provide guidance on the new definition of "duty of the Commissioner";
- Paragraphs 19 to 33 discuss the five factors that must be weighed up in determining whether a disclosure is reasonable;
- Paragraphs 34 to 36 summarise how IR sees the application of section 81(1B) operating in practice; and
- An appendix contains a number of examples that may assist in understanding the secrecy provisions

The legislative provisions

The revised framework governing tax secrecy and enabling IR to disclose taxpayer specific information is contained in subsections 81(1), (1B), (1C) and (8) which respectively state:

81 Officers to maintain secrecy

(1)	An Inland Revenue officer must maintain, and must assist in maintaining, the secrecy of all matters relating to the legislation described in subsection (1C), and the officer must not communicate any such matter, except for the purpose of carrying into effect that legislation or under subsection (1B).
(1B)	Despite subsection (1), an Inland Revenue officer may communicate a matter if— the communication is for the purpose of executing or performing a duty of the Commissioner, or for the purpose of supporting the execution or performance of such a duty; and the Commissioner considers that such communication is reasonable with regard to the relevant purpose described in paragraph (a), and with regard to the following: the Commissioner's obligation at all times to use best endeavours to protect the integrity of the tax system; and the importance of promoting compliance by taxpayers, especially voluntary compliance; and any personal or commercial impact of the communication; and the resources available to the Commissioner; and the public availability of the information.
(1C)	For the purposes of subsection (1), the legislation is— the Inland Revenue Acts, or another Act that is or was administered by or in Inland Revenue: the Accident Compensation Act 2001, the Injury Prevention, Rehabilitation and Compensation Act 2001, the Accident Insurance Act 1998, the Accident Rehabilitation and Compensation Insurance Act 1992, or the Accident Compensation Act 1982: the New Zealand Superannuation Act 1974: any Act that imposes taxes or duties payable to the Crown.
(8)	In this section,— Inland Revenue officer,— means a person who is employed in the service of Inland Revenue; and includes— a person employed in the service of the Government of an overseas country or territory who is for the time being attached or seconded to Inland Revenue: a person formerly employed in the service of Inland Revenue: duty of the Commissioner includes a power of the Commissioner and also a function of the Commissioner, as well as anything done within the law to- administer the tax system: implement the tax system: improve, research, or reform the tax system.

As noted below, nothing in the operation of section 81(1B) impacts on other secrecy exceptions contained in the TAA. Accordingly, the particular exceptions contained in sections 81(3) and (4) and 81BA remain relevant and applicable whether or not section 81(1B) is engaged. Sometimes a disclosure might be made under either subsections (1B) or (4), for example.

The general secrecy rule and its exceptions

Section 81(1) still provides the important general rule that IR employees must maintain the secrecy of all matters relating to the Inland Revenue Acts obtained from customers or any other sources. However, as with its prior version, section 81(1) also contains a general exception to that secrecy requirement. This allows disclosure where it is for the purpose of "carrying into effect" the revenue Acts. Case law on the earlier version is likely to remain relevant.
In this regard, the Supreme Court considered the former version of section 81(1) in Westpac Banking Corporation Ltd v CIR (2008) 23 NZTC 21,896. There the Supreme Court noted at paragraph [69] that:
Disclosure is not permitted unless, and to the extent that, it is reasonably necessary for the performance of the Commissioner's statutory functions.
Although the case itself dealt with a relatively unusual situation involving disclosure of third-party tax secret information in a complex litigation, the Supreme Court noted that this test was a straightforward legal standard. The test of "reasonable necessity" does however create a measure of uncertainty.
The general rule in section 81(1) is now however also subject to the new discretion contained in section 81(1B), which takes on a central role. It is intended to enable disclosures which are reasonable (as opposed to reasonably necessary) in terms of the discretion enacted.
This raises the issue of the relationship between the exception contained in section 81(1B) and the exception contained in section 81(1) - or indeed the exceptions specified in 81(3) or (4). IR considers that while some disclosure may only be made on the authority of subsection (1B), there will be many circumstances where a disclosure that falls within the new provision would equally be authorised under the other exceptions allowing disclosure. In those circumstances, IR might rely on another applicable exception without regard to the balancing act required by section 81(1B).
Similarly, the fact that a general subject area might be dealt with in subsection (4) will not affect or constrain the use of subsection (1B). If a closely related communication was not specifically covered by subsection (4), it might still be reasonably made if it satisfies the requirements of subsection (1B). In this regard, subsection (4) cannot be read as an exhaustive code.
One purpose behind the introduction of section 81(1B) was to expand the circumstances in which IR can disclose information (whether of a taxpayer specific or of a general nature) where disclosure is not necessarily linked to the direct administration of the Inland Revenue Acts. A decision to disclose under section 81(1B) may be made in response to a request from a third party for information, but it also enables IR to proactively disclose information to third parties (including the media) where it considers that the exception applies

Standard Practice and Analysis

The discretion - a duty of the Commissioner

As noted above, in order to exercise the discretion contained in section 81(1B), IR must be satisfied that the proposed disclosure or communication will comply with two statutory tests. The first is (subsection (1B)(a)) that the communication's purpose is either to execute or perform "a duty of the Commissioner", or it is to support such an act - whether or not it provides a benefit to the recipient. IR considers this means that the communication will be authorised for instance where it assists an IR employee perform the duties and functions described in section 81(8).
The new definition of "duty of the Commissioner" is inclusive and also extends the concept to "anything done within the law to":
"administer", "implement", "improve, research or reform" the tax system.
In relation to this extended definition, the duty (eg, researching or reforming the tax system) must be itself "within the law". This merely means that the Commissioner must act within his own powers, and consistently with any constraints or prohibitions imposed by law (other than under section 81(1)) when undertaking any of the actions listed.
Subsection (1B) not only applies in relation to such actions but it also extends to anything done to "support" the carrying out of any such actions. This allows disclosure where there is not a direct execution or performance of a duty as such but the disclosure is supporting the execution or performance. For instance, supporting work being conducted by third parties to research aspects of the tax system might in some cases warrant the disclosure of otherwise tax secret information.
There must be a nexus between the communication and the Commissioner's duties. So, where the communication will only serve the purpose of assisting another party perform its functions and cannot reasonably be linked to performing or supporting the performance of any of the Commissioner's duties (as defined), the test in subsection (1B)(a) will not be met. In those circumstances, the communication cannot be supported by subsection (1B). However, where the communication will assist a third party and at the same time support, perform or execute a relevant duty of the Commissioner, the communication may potentially be made, after consideration of the relevant discretionary criteria in subsection (1B)(b).

The discretion - the factors which must be balanced

Once the first test is satisfied, IR still needs to objectively satisfy itself that the proposed disclosure is "reasonable" (in performing or supporting the execution or performance of a Commissioner's duty) having regard to five listed factors. Those factors are:
1. the Commissioner's "best endeavours" obligation to protect the integrity of the tax system;
2. the importance of promoting compliance by taxpayers, especially voluntary compliance;
3. any personal or commercial impact of the communication;
4. the resources available to the Commissioner; and
5. the public availability of the information
Before considering each factor a number of general preliminary comments can be made:
1. The test for determining whether the communication can be made is one of reasonableness. This is an objective standard. The threshold is less onerous than the "reasonably necessary" test stated in Westpac above, meaning that greater disclosure is potentially permissible.
2. The test requires that all five of the specified factors are taken into account in any decision to disclose. There may be circumstances where one or two of the factors appear immaterial but they still need to be taken into account and given appropriate weight.
3. Often, there will be tension between (and within) the various factors with some factors favouring disclosure while others suggesting non-disclosure. IR cannot pre-determine particular weightings for each of the factors.
4. That said, there will be circumstances where a particular factor is so relevant that it effectively determines whether the communication should be made or not. An example is where the information is already publicly available elsewhere. In most of these instances (even if it was secret when it came into IR's hands) there would be little risk in releasing it (refer to the fifth factor above) to the recipient particularly if it is of a general and non-taxpayer-specific nature. However, that factor still needs to be weighed in each decision. For example IR will not be likely to confirm or deny the tax status of a particular person about whom public statements have been made by others. For another example, where there is a public debate about an industry's entitlement to deduct say research and development costs, and IR is asked to assist in the debate by providing to the industry details of a particular taxpayer's research and development approach (which was deductible). Such a step, which might slightly assist the promotion of voluntary compliance by the taxpayer's competitors, could well prejudice the taxpayer's business. The adverse commercial impact of the communication far outweighs its benefits, and this factor would preclude disclosure, notwithstanding the other factors

Factor 1 - Protecting the tax system's integrity

The first matter considered is whether the disclosure is consistent with the Commissioner's obligation to use best endeavours at all times to protect the "integrity of the tax system". That term is defined in section 6(2) of the TAA to include:
1. taxpayer perceptions of that integrity; and
2. the rights of taxpayers to have their liability determined fairly, impartially, and according to law; and
3. the rights of taxpayers to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other taxpayers; and
4. the responsibilities of taxpayers to comply with the law; and
5. the responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and
6. the responsibilities of those administering the law to do so fairly, impartially, and according to law.
It is clear that, particularly in relation to IR's secrecy requirements, there are different drivers that impact on the integrity of the tax system. The right of the taxpayer and the responsibility of IR to keep information confidential are only two of the factors mentioned in section 6. These may clash with the obligation of a taxpayer to comply with the law and IR's obligation to administer the law fairly. Other taxpayers' perceptions of the tax system's integrity are also relevant.
For example, misleading public statements made by a taxpayer that he or she has been trying to settle a tax dispute with the Department for years to no avail, or making untrue statements of fact about the conduct of an investigation. The general body of taxpayers may think negatively of IR and the tax system if they assumed that IR was acting improperly. Therefore, IR may potentially issue a statement that the taxpayer had not provided all relevant facts, and that had contributed materially to IR's not having concluded the dispute, which would allow taxpayers to take a more informed view of the situation.

Factor 2 - Promoting voluntary compliance

The second factor considered is promoting voluntary compliance in New Zealand. This factor is referred to in the Commissioner's care and management responsibilities contained in section 6A of the TAA (in general, refer to Interpretation Statement IS 10/07). This includes collecting the highest net revenue having regard to:³
the importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts...
The promotion of voluntary compliance is a cornerstone of the New Zealand tax system. As such, it will be an important factor to consider in any decision as to the reasonableness of disclosure as opposed to non-disclosure. However, as with protecting the tax system's integrity, tensions may arise in considering the voluntary compliance of the individual taxpayer as against taxpayers more generally. Communicating information about a specific taxpayer may adversely affect that taxpayer's commitment to voluntary compliance, but it may enhance the compliance behaviour of others. In this regard, it is important to note that IR's responsibility is to promote compliance amongst all taxpayers. As such, an adverse impact on an individual taxpayer may still be justifiable in some cases, if IR considers the disclosure will promote voluntary compliance more generally. For example, IR already makes media statements about taxpayers convicted in the courts for serious tax offending.

Factor 3 - The communication's personal or commercial impact

The third factor to be considered in determining whether a communication is reasonable is the potential impact that communication may have personally or commercially. This requires looking at the communication more specifically from the perspective of an affected taxpayer or potentially a group of taxpayers. This may in some cases justify discussion with the taxpayers potentially affected. For example, a statement by IR that a particular taxpayer is the subject of an IR investigation or dispute may negatively impact on that taxpayer's reputation or business, or share price perhaps. In such circumstances, the question becomes whether the other factors reasonably favour disclosing the information notwithstanding that consequence.
However, it is not necessarily the case that all IR communications under section 81(1B) will have an adverse commercial impact on a taxpayer. There may be circumstances where the affected taxpayer would like the tax secret information to be disclosed. So where a taxpayer has requested that IR make the disclosure, this factor will carry significant weight in assessing the personal or commercial impact of the disclosure. Consent is therefore a significant factor, but not necessarily an overriding one. IR may, for instance, consider on balance that public comment on a taxpayer's personal affairs could have an adverse effect on voluntary compliance in the circumstances. IR would normally release information directly to the taxpayer concerned rather than to a third party on their behalf.
This factor may carry much less weight where the communication deals with anonymous, aggregated data, perhaps relating to a large industry or area. In those circumstances, where the potential commercial impact on a particular member of the industry is much less, it is unlikely that this factor would be given much weight. On the other hand, this factor would be more significant if the taxpayer is more readily identifiable and the information relates to a smaller industry or locality.

Factor 4 - IR's resources

The use of IR's resources is another factor also referred to in the care and management responsibilities of the Commissioner in section 6A of the TAA. In terms of section 81(1B), this factor enables IR to have proper regard to the impact that a communication may have on its own resources. Such an impact could be either positive or negative.
For example, a communication may be an effective way to improve the compliance behaviour of a group of taxpayers. The communication may reduce the need for audit, amendment of assessments and possible penalties. Further, IR's investigative resources may be freed up in the future to do other work.
The use of resources factor may also be relevant in terms of determining the level of internal (and sometimes external) resource required to obtain the information requested. This can be extremely expensive, and the resources may well be better used elsewhere.

Factor 5 - The information is otherwise publicly available

This factor may be given a significant weighting in favour of disclosure if the information is publicly available. However, there may be circumstances where the information is theoretically publicly available but would involve the use of considerable cost or time to obtain. In such cases, the public availability factor may carry less weight in favour of disclosure. Arguably, the publication of industry income benchmarks, or other aggregated statistical data, sourced from public sources, could still be otherwise restricted by the normal secrecy requirements. However, subsection (1B) allows for such disclosure provided that the disclosure is reasonable having regard to all five factors in section 81(1B)(b).
It may also be the case that the tax secret information has been made available to the public by someone other than IR in circumstances where the information has been improperly obtained. In those circumstances, IR may decide not to disclose the tax secret information even though it is otherwise publicly available, when it considers the other four factors above.

How the provisions will work in practice

The expanded secrecy rules are intended to allow IR a greater ability to disclose tax secret information in appropriate circumstances, broadly where disclosure will assist the integrity of the tax system. With the greater flexibility of the secrecy rules, IR recognises that the decision to make disclosures under section 81(1B) needs to be made by senior staff. The process will be as follows:
1. The decision-maker must be satisfied that the communication satisfies the criteria;
2. The decision to communicate tax secret information should be the subject of legal advice.
Although a proposed communication is related to the duty of the Commissioner within the new discretion, IR can still decide not to make the communication after balancing the various factors. For example, IR may decline to use its discretion where it was thought that making a public statement about inaccurate information made public by a taxpayer would merely lead to a public debate about that taxpayer's tax affairs, without leading to any material benefit to the tax system. As such, the more sensitive or wide-reaching any potential communication from IR is, the more likely more senior management will be involved in the decision to communicate - particularly if the disclosure would tend to identify a taxpayer or small group of taxpayers.
A decision-maker required to determine whether a communication can or should be made must note the following:
1. The general rule and starting point is that an officer must maintain secrecy in all tax secret matters relating to the Inland Revenue Acts unless an exception is identified.
2. Is there a specific exception in section 81(4) that may apply? If there is, disclosure may occur.
3. Does the exception relating to courts or tribunals in section 81(3) or that in the new section 81BA (relating to inter-governmental disclosures) apply? If either applies, the disclosure may occur.
4. If there is no specific exception, does the general exception of "carrying into effect that legislation" in section 81(1) apply?
5. The final step is to consider if section 81(1B) applies. This requires a conclusion that both statutory tests are satisfied in relation to the relevant communication. In this regard, the above commentary will be required to be considered in accordance with the policies outlined here before concluding that the disclosure is:
  1. for the purpose of executing or performing a duty of the Commissioner or supporting the execution or performance of such a duty;
  2. reasonable in relation to that duty;
  3. reasonable having taken into account each of the five relevant factors.

This Standard Practice Statement is signed on 23 December 2011.

Graham Tubb
Group Tax Counsel - Assurance

Appendix - Examples

The Appendix contains examples that are intended to assist IR employees and taxpayers understand how the new secrecy exception might operate in practice. They are not intended to provide general statements as to when IR will and will not disclose taxpayer information under section 81(1B). The circumstances and content of each potential disclosure will dictate whether IR can and will rely on section 81(1B) to communicate. Therefore, IR employees should still consider the guidance discussed above before deciding whether section 81(1B) applies even where they consider the communication is consistent with one of these examples.

Example 1: Disclosure to the New Zealand Police

IR is approached by New Zealand Police with a request for information on an individual who is suspected of dealing in drugs. The information sought is specific in terms of income returned by the individual for tax purposes. The Police intend to use this information to conduct further investigations to determine if the individual has sufficient income to support his standard of living and advise that they will report the results of their investigation to IR to enable it to assess the correct amount of tax.

Does the request satisfy the provisions of section 81 to release the information to the Police?

Section 81(1): Information may be released for the purpose of carrying into effect legislation described in subsection (1C)

Does the disclosure meet the criteria in relation to subsection (1) legislation?

No, it is not reasonably necessary for the purpose of carrying into effect the tax legislation.

Section 81(4): Information may be released in specific cases

Does the disclosure fall within one of the exceptions in paragraphs (a)-(u)?

No - none of the specific exceptions apply in this case.

Section 81(1B): Information may be released if it relates to a duty of the Commissioner having regard to five factors

Section 81(1B)(a) - Step One

Whether the communication is for the purpose of:

executing or performing a duty (defined in section 81(8)(b)) of the Commissioner, or
the supporting of such a duty?

Is it for the purpose of executing or performing a duty, power or function of the Commissioner?	No. The duty, power or function in question is that of the Police, not IR.
- Administer the tax system:	No. While the Police may eventually provide IR with information that impacts on the taxpayer's tax obligations, the primary purpose is to enable the Police to investigate the taxpayer's affairs.
- Implement the tax system:	No - as above.
- Improve, research, or reform the tax system:	No.
Does it support the execution or performance of any of the above?	No. It does not seem to "support" any of those matters - again the nexus between the communication and IR's duties appears too tenuous to justify the conclusion that it would "support" those duties.

Accordingly, the inquiry would stop here - the information cannot be disclosed.

The same conclusion is likely to be reached where requests for information are received from other government agencies or third parties in circumstances where the information would not be covered by a specific exception and does not also assist IR in administering or implementing the tax system (see example 3 below). Because subsection (1B)(a) will never be satisfied, there is no need to consider Step Two of the section 81(1B) test i.e. the balancing exercise in paragraph (b).

Example 2: Media statements

A promoter of an innovative financial product has made statements in the product's prospectus and other promotional material that suggests the product is the subject of a binding ruling from IR. However, while the promoter applied for a binding ruling, this was not granted by IR as it did not comply with the relevant tax law. IR is considering issuing a statement to the media that it has not issued a binding ruling on the financial product.

Can that information be released under section 81?

Section 81(1): Information may be released for the purpose of carrying into effect legislation described in subsection (1C)

Does the disclosure meet the criteria in relation to subsection (1) legislation?

This is uncertain. It is arguably not reasonably necessary for the purpose of carrying into effect any of the legislation.

Section 81(4): Information may be released in specific cases

Does the disclosure fall within one of the exceptions in paragraphs (a)-(u)?

No, none of the specific exceptions apply in this case.

Section 81(1B): Information may be released if it relates to a duty of the Commissioner having regard to five factors

Section 81(1B)(a) - Step One

Whether the communication is for the purpose of:

executing or performing of a duty (defined in section 81(8)(b)) of the Commissioner, or
supporting of such a duty?

Is it for the purpose of executing or performing a duty, power or function of the Commissioner?	No. Confirming that a ruling has not been issued is arguably a step removed from the ruling process, which might be considered part of administering the tax system.
- Administer the tax system:	No - for the same reason above.
- Implement the tax system:	No - for the same reason above.
- Improve, research, or reform the tax system:	No.
Does it support the execution or performance of any of the above?	Yes. The administration and implementation of the tax system requires a robust binding ruling system. If IR does not correct the misinformation currently in the public domain, the binding ruling regime's reputation may be diminished.

Section 81 (1B)(b) - Step Two

The Commissioner considers that such communication is reasonable with regard to the relevant purpose described in subsection (a) and with regard to the following factors.

Is the request reasonable when considered on balance under the factors under section 81(1B)(b)?
The integrity of the tax system; and	Yes. The integrity of the tax system requires a robust binding ruling system. This will be undermined if IR does not challenge a statement about obtaining a ruling that is untrue.
The importance of promoting compliance by taxpayers, especially voluntary compliance; and	Yes for taxpayers more generally. The communication will protect the reputation of the ruling system - so encourages more taxpayers to use it. The communication may adversely impact on the promoter’s voluntary compliance.
Any personal or commercial impact of the communication; and	The product is likely to be adversely affected by the communication. Conversely, each potential investor may be better off by not investing in the product as a result of IR’s intervention.
The resources available to the Commissioner; and	Minimal resource will be required to make the disclosure.
The public availability of the information.	The information is not currently publicly available.

The communication would seem reasonable in relation to supporting administration of the tax system - it is merely stating that as a matter of fact there is no binding ruling on the product. The proposed communication does not, for example, outline why IR thinks the tax laws relied on by the promoter do not apply to the financial product.

The communication by IR to the media is reasonable having regard to the factors set out in section 81(1B) and the information should be released.

Example 3: Sharing data with Treasury

Treasury is working jointly with IR on tax policy development. It is considered that it would be worthwhile to share with Treasury tax information for such purposes in the GST area. Specifically, they have asked for information on the number of GST investigations relating to the sale of real property.

Can that information be released under section 81?

Section 81(1): Information may be released for the purpose of carrying into effect legislation described in subsection (1C)

Does the disclosure meet the criteria in relation to subsection (1) legislation?

No, it is not reasonably necessary for the purpose of carrying into effect the GST Act. The information relates to the future amendments of the Act rather than the present carrying into effect of the Act.

Section 81(4): Information may be released in specific cases

Does the disclosure fall within one of the exceptions in paragraphs (a)-(u)?

No. Section 81(4)(e) only allows the release of information to Treasury for revenue forecasting but not for developing tax policy.

Section 81(1B): Information may be released if it relates to a duty of the Commissioner having regard to five factors

Section 81(1B)(a) - Step One

Whether the communication is for the purpose of:

executing or performing a duty (defined in section 81(8)(b)) of the Commissioner, or
the supporting of such a duty?

Is it for the purpose of executing or performing a duty, power or function of the Commissioner?	No. The duty, power or function in question is arguably that of the Treasury, not IR.
- Administer the tax system:	No. It might impact on the future administration of the tax system but not the current tax system.
- Implement the tax system:	No - as above.
- Improve, research, or reform the tax system:	Yes. The development of tax policy by IR jointly with Treasury is done to improve research and reform the tax system.
Does it support the execution or performance of any of the above?	To the extent there was any doubt, the disclosure to Treasury could also be seen as "supporting" IR's duty to improve, research or reform the tax system.

Section 81 (1B)(b) - Step Two

The Commissioner considers that such communication is reasonable with regard to the relevant purpose described in subsection (a) and with regard to the following factors.

Is the request reasonable when considered on balance under the factors under section 81(1B)(b)?
The integrity of the tax system; and	Yes. In order to maintain the integrity of the tax system, it is necessary to review current tax policy and research and develop new policy on an on-going basis to keep up with best practices in tax administration.
The importance of promoting compliance by taxpayers, especially voluntary compliance; and	Yes. The information will lead to more robust GST legislation in the area of land transactions and encourage greater compliance.
Any personal or commercial impact of the communication; and	This is likely to be a neutral factor as Treasury is only at the stage of developing tax policy and the impact may not necessarily be adverse.
The resources available to the Commissioner; and	Minimal resource will be required to make the disclosure.
The public availability of the information.	The information may not be publicly available.

The request by Treasury is reasonable having regard to the factors set out in section 81(1B) and the information should be released.

Example 4: Discussions with tax pooling intermediary

There are a number of criteria that must be satisfied before IR can accept a transfer of funds from a tax pooling intermediary on behalf of a tax agent or its advisor. Where IR considers that one or more of the criteria are not satisfied, can IR communicate the reasons for rejecting the transfer with the tax pooling intermediary? What if during the course of that conversation, the tax pooling intermediary asked for details of the taxpayer's tax payments over the course of a year.

Section 81(1): Information may be released for the purpose of carrying into effect legislation described in subsection (1C)

Does the disclosure meet the criteria in relation to subsection (1) legislation?

No, it is not reasonably necessary for the purpose of carrying into effect the Income Tax Act. The communication could be made with either the taxpayer or tax agent directly, so it is not reasonably necessary.

Section 81(4): Information may be released in specific cases

Does the disclosure fall within one of the exceptions in paragraphs (a)-(u)?

No. Section 81(4)(lb) allows for communication regarding the details of a deposit but does not extend further. In addition, it is generally unlikely, that any other specific exception will apply.

Section 81(1B): Information may be released if it relates to a duty of the Commissioner having regard to five factors

Section 81(1B)(a) - Step One

Whether the communication is for the purpose of:

executing or performing of a duty (defined in section 81(8)(b)) of the Commissioner, or
the supporting of such a duty?

Is it for the purpose of executing or performing a duty, power or function of the Commissioner?	Possibly. It has some connection with the Commissioner’s duty in the collection of taxes.
- Administer the tax system:	Possibly for communicating the reason for rejecting a transfer. Not for providing taxpayer tax payment details more generally.
- Implement the tax system:	As above.
- Improve, research, or reform the tax system:	No.
Does it support the execution or performance of any of the above?	To the extent that there is an argument that the communications do not enable IR to perform or execute its duty to collect tax payments via the tax pooling arrangement, the communication regarding the reasons for rejection would “support” that duty. However, the same conclusion would not be drawn for communicating any more general details about the taxpayer’s tax payment history. The latter communication would not fall within section 81(1B)(a).

Section 81 (1B)(b) - Step Two

The Commissioner considers that such communication is reasonable with regard to the relevant purpose described in subsection (a) and with regard to the following factors.

Is the request reasonable when considered on balance under the factors under section 81(1B)(b)?
The integrity of the tax system; and	The tax pooling system is an important way in which tax payments are made. Any communication that makes that process run efficiently bolsters the tax system's integrity.
The importance of promoting compliance by taxpayers, especially voluntary compliance; and	Similar to the above - voluntary compliance involves ensuring tax is paid on time. The tax pooling system supports this and the communication enables those transfers to occur more efficiently.
Any personal or commercial impact of the communication; and	This is likely to be a neutral factor as both parties are already aware of what the taxpayer wants to achieve (i.e. a transfer). The communication is essentially trying to ascertain whether this can occur.
The resources available to the Commissioner; and	Minimal resource will be required to make the disclosure.
The public availability of the information.	The information will not be publicly available.

The communication of the reasons for rejecting the transfer is reasonable having regard to the factors set out in section 81(1B)(b) and can therefore occur. However, as previously noted, the exception would not extend to the disclosure of the taxpayer's history of tax payments.

Example 5: Disclosing competitor's information

IR is investigating an industry to determine whether participants in the industry are properly returning all of their income. A number of taxpayers are arguing that IR has no basis for determining what amount of income their business is generating and what their net profits are. It is proposed to disclose the tax return and accounts of a fully compliant competitor to those taxpayers.

Is IR entitled to disclose that information?

Section 81(1): Information may be released for the purpose of carrying into effect legislation described in subsection (1C)

Does the disclosure meet the criteria in relation to subsection (1) legislation?

No. While there may be circumstances where third-party information will be disclosed it is not reasonably necessary for the purpose of carrying into effect the Income Tax Act. The non-compliant taxpayer's position can be determined through investigating its affairs and through the use of general industry information.in any case.

Section 81(4): Information may be released in specific cases

Does the disclosure fall within one of the exceptions in paragraphs (a)-(u)?

No, none of the specific exceptions apply in this case.

Section 81(1B): Information may be released if it relates to a duty of the Commissioner having regard to five factors

Section 81(1B)(a) - Step One

Whether the communication is for the purpose of:

executing or performing a duty (defined in section 81(8)(b)) of the Commissioner, or
the supporting of such a duty?

Is it for the purpose of executing or performing a duty, power or function of the Commissioner?	Possibly. It has some connection with the collection of the correct amount of taxes.
- Administer the tax system:	Arguably. IR is more likely to get a non-compliant taxpayer to agree to return the proper tax if it can show actual evidence of a compliant taxpayer's tax affairs.
- Implement the tax system:	No.
- Improve, research, or reform the tax system:	No.
Does it support the execution or performance of any of the above?	To the extent that there is an argument that the communications do not allow IR to perform or execute its duty to collect tax, the communication would seem to "support" that duty.

Section 81 (1B)(b) - Step Two

The Commissioner considers that such communication is reasonable with regard to the relevant purpose described in subsection (a) and with regard to the following factors.

Is the request reasonable when considered on balance under the factors under section 81(1B)(b)?
The integrity of the tax system; and	It could be argued that the tax system's integrity is improved by attempting to bring non-compliant taxpayers within the tax system. However, it is harmed by disclosing information about a taxpayer's tax affairs to a direct competitor.
The importance of promoting compliance by taxpayers, especially voluntary compliance; and	As above - compliance might be improved in relation to the non-compliant taxpayers. However, it will not be improved in relation to the taxpayer whose information is disclosed - nor will the general body of taxpayers be encouraged to comply if the information is going to end up in the hands of their competitors.
Any personal or commercial impact of the communication; and	The taxpayer whose information is disclosed is likely to be adversely affected by the disclosure.
The resources available to the Commissioner; and	Minimal resource will be required to make the disclosure.
The public availability of the information.	The information will not be publicly available.

After balancing the above factors, it is concluded that the communication is not reasonable having regard to the factors set out in section 81(1B)(b). In particular, a disclosure of such specific information about a taxpayer's tax affairs will have an adverse commercial impact on it. Competitors will discover sensitive information about them and there is no guarantee it will influence those competitors' attitude to compliance or not. In addition, the possible negative impact this will have on how taxpayers generally feel about the confidentiality of the information held by IR bolsters the conclusion that the communication should not occur.

1: See section 143C of the Tax Administration Act.

2: Introduced in the Taxation (Tax Administration Remedial Matters) Act 2011. A further provision allows for certain information to be shared with other government agencies. We do not deal with those provisions here.

3: See section 6A(3)(b).