Requests to amend assessments (Aug 02) (WITHDRAWN)

Introduction

This Standard Practice Statement sets out the circumstances when the Commissioner may exercise the discretion to amend assessments to ensure correctness.

Application

This Standard Practice Statement (SPS) applies from 1 September 2002.

This SPS applies to the exercise of the Commissioner's discretion under section 113 of the Tax Administration Act 1994 (referred to as "section 113" in this SPS) and section 27(2) of the Goods and Services Tax Act 1985 (referred to as "section 27(2)" in this SPS).

This SPS replaces all previous statements on the Commissioner's practices when exercising the discretion under section 113, including those contained in SPS INV-300 Acceptance of late objections under section 126 of the Tax Administration Act 1994 (March 1997).

SPS INV-500 Taxpayer amendments to tax returns, Tax Information Bulletin, Vol 11, No 9 (October 1999) is withdrawn from the above application date.

This SPS should be read in conjunction with SPS INV-490 GST returns – correcting minor errors (and clarification), ( Tax Information Bulletins, Vol 10, No 6 (June 1998) and Vol 11, No 2 (February 1999) respectively) and SPS INV-251 Voluntary Disclosures (Tax Information Bulletin, Vol 14, No 4).

Legislation

Section 113 of the Tax Administration Act 1994 provides:

113 Commissioner may at any time amend assessments

113(1) [Amendments at any time] The Commissioner may from time to time and at any time make all such alterations in or additions to an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.

113(2) [Fresh liability] If any such alteration or addition has the effect of imposing any fresh liability or increasing any existing liability, notice of it shall be given by the Commissioner to the taxpayer affected.

Section 27(2) of the Goods and Services Tax Act 1985 provides:

27(2) [Alterations] Subject to sections 108A and 108B and Part IVA of the Tax Administration Act 1994, the Commissioner may from time to time and at any time make all such alterations in or additions to an assessment made under this section as the Commissioner thinks necessary to ensure the correctness of the assessment, notwithstanding that tax already assessed may have been paid.

Summary

Section 113 and section 27(2) enable the Commissioner to amend assessments to ensure correctness.  This allows the Commissioner to amend assessments when the Commissioner considers an assessment contains an error or following the application of the disputes provisions contained in Part IVA of the Tax Administration Act 1994 (TAA).

Inland Revenue considers section 113 and section 27(2) operate alongside the disputes resolution process provisions (disputes provisions) contained in Part IVA of the TAA.  The disputes provisions provide the procedures for resolving disputes between the Commissioner and taxpayers.  Accordingly it is not appropriate for the Commissioner to exercise his discretion under section 113 and section 27(2) when the amendment is the subject of a dispute, however an assessment can be amended following completion of the disputes process or to reflect an agreed adjustment.

When the Commissioner considers an assessment contains a genuine error, and there is no dispute, the Commissioner can exercise the discretion to amend the assessment to correct the error.  Inland Revenue considers section 113 and section 27(2) provide the power to amend assessments where genuine errors have been made.

This SPS is directed at those instances where genuine errors have been made.  It does not provide a mechanism for circumventing the disputes resolution process.  The Commissioner will amend an assessment, on a case by case basis, when the Commissioner is satisfied that a genuine error was made and that none of the limitations outlined in this SPS apply.

This SPS has been prepared to assist with consistency and understanding how the Commissioner will exercise the discretion to amend assessments following taxpayer requests.

Discussion

Section 113 and section 27(2) contain a broad discretion allowing the Commissioner to amend assessments to ensure correctness.  They provide little guidance as to how the Commissioner should exercise this discretion in practice.  Accordingly it is also necessary to look at the scheme of the legislation and at case law.

Decision to consider request

Case law indicates the Commissioner cannot be compelled to either amend an assessment or investigate a claim that an assessment is in error.  The power in that regard is for the Commissioner to voluntarily exercise.  See Commonwealth Agricultural Services Engineers Ltd (In Liquidation) v CIR [1926] 38 CLR 289, CIR v Wilson (1996) 17 NZTC 12,512 and Lawton v CIR (2002) 20 NZTC 17,531.

Where the Commissioner is not satisfied that an assessment contains an error, the Commissioner cannot be compelled to amend an assessment.  See Wood v CIR (1999) 19 NZTC 15,255.  Case law also indicates that if the Commissioner does decide to consider a claim by a taxpayer that an assessment is in error the Commissioner does not have an absolute obligation to amend the assessment when an error has been verified.  See CIR v Wilson (1996) 17 NZTC 12,512 and Lawton v CIR (2002) 20 NZTC 17,531.

Case law further indicates section 113 can be invoked after a dispute has been initiated or where there is no dispute that an assessment is in error.  See O'Neil & Ors v CIR (2001) 20 NZTC 17,051.

These cases refer specifically to section 113, however the principles are applicable to the exercise of the discretion in section 27(2).

Limitations

The Tax Administration Act 1994 contains provisions that impose time limits on increasing assessments.

• sections 107A & 108 (time bar for amendment of assessments) - the Commissioner cannot increase tax assessments after 4 years from the end of the income year in which the taxpayer provides the tax return.  Section 113 is subject to these legislative time limits when increasing tax liabilities.
• section 108A (time bar for assessment of GST) - the Commissioner cannot increase an assessment of GST after four years from the end of the GST period for which the return was provided or assessment made.

Furthermore, through the operation of section MD 1(1) of the Income Tax Act 1994 (ITA), the Commissioner is prevented from refunding amounts of overpaid tax (excluding GST) after 8 years from the end of the year in which the original assessment was made.  Any refunds arising from the operation of section 113 are also subject to this legislative time limit.

Section 45 of the GST Act prevents the Commissioner refunding amounts of overpaid GST after 8 years from the end of the taxable period in respect of which the assessment was made.  Refunds arising from the reduction of a GST liability under section 27(2) are also subject to this legislative time limit.

In broad terms, the Commissioner cannot be compelled to action a taxpayer's request to amend an assessment.  However, the Commissioner does have a duty to correct errors verified by the Commissioner where to do so is consistent with the Commissioner's duty under sections 6 and 6A (care and management provisions) of the TAA and such amendment is within the limits set out in this Standard Practice Statement.

Care and management considerations

It is important to recognise that the Commissioner does not have unlimited resources to undertake lengthy verification processes to determine whether assessments should be amended.  When meeting the duty to collect over time the highest net revenue that is practicable within the law, section 6A(3) of the TAA requires the Commissioner to consider: the resources available to the Commissioner; promoting compliance, especially voluntary compliance, by all taxpayers; and compliance costs.  Accordingly it is consistent with the Commissioner's duty under section 6A(3) for the Commissioner to limit the amount of time that will be spent investigating a request for an assessment to be amended.  Ensuring a balance between time spent considering requests to amend assessments and other activities is consistent with the duty to protect the integrity of the tax system under section 6 of the TAA.  By providing full information to evidence their requests, taxpayers are assisting the Commissioner to uses resources efficiently.

By having a practice of amending assessments to ensure correctness where genuine errors have been made, the Commissioner is ensuring fairness to all taxpayers – to those taxpayers who have made a genuine error and to those taxpayers who get their returns or assessments correct the first time.  This also promotes integrity in the administration of the tax system.

Principles

The following principles have been established as the basis for the Standard Practice set out below:

• Generally, arithmetic, transposition and other types of genuine errors verified by the Commissioner will be corrected – subject to statutory time limits, care and management considerations and other limitations set out in this SPS.
  
  
• Where a taxpayer is requesting the Commissioner to amend an assessment, the taxpayer must provide all relevant information with the request.
  
  
• All relevant factors must be taken into account when the Commissioner is considering a taxpayer's request to amend an assessment.  In some cases the length of time that has passed since the error was made may be a relevant factor, however it may not necessarily determine whether the Commissioner will amend or not.
  
  
• Taxpayers cannot compel the Commissioner to amend an assessment.
  
  
• If the Commissioner is satisfied that an assessment contains a genuine error the Commissioner does not have an absolute obligation to amend the assessment.
  
  
• Whether something is a genuine error is determined by the Commissioner.  A genuine error in an assessment is something that has resulted in the taxpayer paying the incorrect amount of tax – either too much or too little.
  
  
• Generally the Commissioner will not amend an assessment while the proposed amendment is the subject of a dispute.  However an assessment can be amended to reflect an agreed adjustment.
  
  
• Interest will apply to tax that has been underpaid or overpaid.
  
  
• A taxpayer is liable to a shortfall penalty where they have not met the requisite standards of care.

Standard Practice

The following standard practice has been developed from the above principles.

Taxpayer's requests

A taxpayer or their agent requesting the Commissioner amend an assessment to correct a genuine error, is required to supply the Commissioner with all relevant information to evidence the claim at the time the request is made, including:

• tax type and period containing the error
• amount of tax in error
• nature of the error
• how the error occurred
• how and why the error was identified
• action required to ensure correctness.

Types of errors
Common errors may be arithmetic or transposition errors.  There may also be other types of errors which are clear and genuine.

Considering requests

When considering taxpayer requests to amend assessments the Commissioner must take into account all relevant factors on a case by case basis.

Where a taxpayer or their agent claims an assessment contains a genuine error, Inland Revenue will:

• determine whether the request is clear
• request the taxpayer or their agent clarify a request that is not clear.

The Commissioner will amend an assessment when the Commissioner considers all of the following are met:

• the request is clear
• all information has been provided
• the error has been verified by the Commissioner
• the amendment is within the time limits (see below)
• none of the other limitations apply (see below).

Where the Commissioner is not satisfied that a genuine error exists or considers one or more of the limitations apply, the Commissioner will not amend an assessment.  Where such a decision is made, Inland Revenue will advise the taxpayer or agent of the decision and the reasons for the decision.

Limitations

The following are limitations on the exercise of the Commissioner's discretion to amend assessments.

Time limits
The Commissioner can only increase a tax assessment within 4 years from the end of the income year in which the taxpayer provided the tax return.  For GST, the 4-year period runs from the end of the GST return period for which the GST return was provided or the assessment was made.

The Commissioner can only make a refund of excess tax/GST within 8 years from the end of:

• the year in which the assessment was made in the case of tax (excluding GST); or
• the taxable period in respect of which the assessment was made in the case of GST.

Interpretation of legislation in issue
When the interpretation of legislation is in issue, the Commissioner does not consider it appropriate to amend an assessment outside the disputes resolution process.  Interpretations of legislation should properly be considered in the disputes resolution process.

Not a genuine error
If, after considering all relevant information, the Commissioner is not satisfied that a genuine error was made, the Commissioner will not amend an assessment.  For example, the facts may indicate a tax position was adopted rather than a genuine error having occurred.

Requests following Court, TRA or adjudication decisions, or Rulings
When a taxpayer requests amendment of an assessment to reflect a decision affecting the same or another taxpayer, the Commissioner will generally not amend the assessment.  However when exercising the discretion, the Commissioner will take into account all relevant factors including:

• whether the taxpayer has consistently asserted that they are entitled to a deduction (in contrast to a taxpayer who never sought a deduction in the past, but who becomes aware of a decision affecting another taxpayer and tries to avail themselves of it)
• whether the taxpayer has been associated with a claim or action against Inland Revenue on an issue relevant to the request
• whether Inland Revenue has told the taxpayer that the outcome of a particular issue would be applied to the taxpayer.

Requests following change in Commissioner's practice
When a taxpayer requests amendment of an assessment to reflect a change in Commissioner's practice, the Commissioner will generally not amend the assessment.  However, the Commissioner will take into account all relevant factors and taxpayers will be notified when the Commissioner will exercise his discretion to amend assessments in these circumstances.

Current dispute
When the requested amendment is the subject of a current dispute the Commissioner will not make the amendment unless the amendment is to reflect an agreed adjustment.

Regretted choice (choice between valid options)
Where a taxpayer requests the Commissioner to change an assessment from one valid option to another, there is no error to correct.  Accordingly the assessment will not be amended.  This is a matter of regretted choice.  An example of regretted choice is where a taxpayer chooses one of several options for the calculation of a tax liability and subsequently requests to change that option.

If however, the taxpayer can prove that the taxpayer's return erroneously reflected their choice then the Commissioner may consider the request to amend the assessment.

Amended returns
Although a taxpayer's request does not have to be in any particular form, Inland Revenue will not accept amended returns to correct errors.  However, an amended tax calculation may be provided in support of a request to amend.  When correcting minor errors in GST returns, see Standard Practice Statement INV-490 GST returns – correcting minor errors (and clarification), Tax Information Bulletins Vol 10, No 6 (June 1998) and Vol 11, No 2 (February 1999) respectively.

Tax agents may use the Inland Revenue Tax agents' request form (IR 796) when requesting amendment of assessments.  However, to ensure all relevant information is provided to Inland Revenue, it may be necessary to provide information in addition to the information provided on the form.

General

Shortfall penalties
Where the request to amend an assessment meets the requirements for a voluntary disclosure, any applicable shortfall penalties will be reduced pursuant to section 141G of the TAA.

Fresh liability
If any alteration or addition to an assessment imposes a fresh liability or increases an existing liability, then the Commissioner will give notice to the taxpayer affected.

This Standard Practice Statement was signed by me on 8th August 2002.

Margaret Cotton
National Manager
Technical Standards