Money: IRD may turn down binding ruling request

By Denham Martin

Taxwise


I have applied for a private ruling on an existing arrangement. It is my understanding that the IRD will not accept my application and advise me to withdraw it. I understand that if I do not withdraw my application the IRD will decline to make a ruling on the basis that I have not supplied enough information. I feel that I have supplied enough information to justify a favourable ruling. Can I challenge the IRD on this? I feel I am entitled to get some certainty on how the tax laws should apply to this arrangement.

C. A., Auckland Applying for a binding ruling is one of the few methods of seeking certainty on how the IRD will apply tax laws to an arrangement.

Once the IRD issues a ruling in respect of an arrangement, the IRD is then bound to adopt the tax position set out in the ruling for a prescribed period.

Unless the IRD has grounds for declining a ruling, the IRD must issue you with a ruling in response to your application.

Once a ruling has been made you cannot appeal against it. You have no right of challenge to the ruling itself in terms of the disputes procedures provided in the tax legislation.

As a matter of practice, before issuing you with an unfavourable ruling, the IRD is likely to indicate that the ruling is not going to be favourable. This gives you an opportunity to withdraw the ruling application.

Upon withdrawal you are left with no certainty other than to say that the IRD does not look upon your tax position favourably. You are left with uncertainty as to the tax position to take when filing. Essentially, two options are available:

* File on the basis of your interpretation of how the taxation laws apply to your arrangement; or

* File on the basis of how the IRD has indicated the taxation laws will apply to your arrangement.

If you take the first option, you would be exposed to the risk of the IRD issuing you with a Notice of Proposed Adjustment (NOPA) with a view to assessing you on the basis of how the IRD believes the taxation laws apply.

As a consequence of being issued with a NOPA, the usual disputes procedures provided in the tax legislation would be available to you. However if you are ultimately unsuccessful in the dispute, you may also be exposed to the risk of incurring a shortfall penalty.

If you take the second option, you would need to issue the IRD with a NOPA in order to initiate the usual disputes procedures. You can issue the NOPA once the IRD has issued an assessment based on your return.

A shortfall penalty is unlikely to apply because in filing your return you have followed the IRD's indication of how the taxation laws apply.

If you choose not to withdraw your ruling application, the IRD may decline to issue you with a ruling.

The IRD has grounds for declining to issue a ruling where insufficient information has been made available.

If you do not think that the IRD has made out the ground for declining a ruling application, you are entitled to dispute the IRD's decision by applying for judicial review. Alternatively you may seek a declaratory judgment - broadly, a declaration of the court as to how a statute will apply to a given set of facts.

* Denham Martin is the principal of Denham Martin and Associates, lawyers specialising in advice on taxation and related matters.