The Tax Disputes and Litigation Review: New Zealand


Tax investigations and disputes are common in New Zealand2 but tax litigation less so.3 This is the result of three factors:

  1. a self-assessment and penalty regime that makes it important for taxpayers to act reasonably in taking a tax position;
  2. a formal tax disputes regime designed to ensure that Inland Revenue arrives at a correct statement of liability, but can also 'burn off' taxpayer resistance when Inland Revenue does not; and
  3. a pragmatic attitude and approach by the courts to tax issues that makes it more likely that the courts will uphold Inland Revenue's position in disputed matters.4

New Zealand's tax system is largely based on taxpayer self-assessment. When a taxpayer who is required to file a tax5 return does so, they are treated as taking a tax position that quantifies their liability until that position is altered as permitted by law. Inland Revenue may accept the self-assessed tax position or correct it but, except in certain extreme cases, such as alleged fraud, Inland Revenue may not reassess a taxpayer outside a four-year time bar6 and without first having undertaken a pre-assessment disputes process that is comprehensively regulated under the Tax Administration Act 1994.7 This means that in most cases Inland Revenue must have decided to query a tax position, have undertaken any necessary investigation and then carried out the disputes process, before being able to assess.

Because of the time pressure this places on Inland Revenue, in many cases Inland Revenue invites a solution that avoids the need to apply its resources to a full investigation and formal dispute. Thus, it will often commence its dealings with a taxpayer with a risk review (see Section II.i). This is avowedly not the start of an investigation and is usually couched in terms that invite the taxpayer to consider the correctness of its position and to make a voluntary disclosure of anything that might be an error. Voluntary disclosures are encouraged with significant penalty reductions and, if they are made prior to the notification of an audit (the stated effect of a risk review), and greatly reduced likelihood of prosecution for tax crimes.8

Not all cases commence with a risk review or can be resolved by disclosure. In this cases, an investigation may be commenced. Inland Revenue has broad powers of investigation, search and seizure.9 They are not the subject of this chapter and fall outside the statutory disputes process. To the extent that the conduct of investigations is subject to judicial review, the very limited ability to challenge an investigation is referred to in Section II.ii (infra).

The disputes process usually follows an investigation by Inland Revenue, from which it concludes that the taxpayer's position is incorrect. In its full form, the process involves the formal exchange of notices between taxpayer and Inland Revenue, a conference phase10 and ultimately (unless a taxpayer opts out) the referral of an unresolved dispute to Inland Revenue's Disputes Review Unit. There, the respective positions of the relevant Inland Revenue investigations team and the taxpayer are independently considered on the papers, and a decision made as to which prevails.11

The whole process is characterised by firm deadlines, where failure to comply leads to a loss of taxpayer dispute rights.12 This means that formal disputes can sometimes be conducted under extreme time pressure. This has led in some cases to informal dispute procedures, pre-dating the first formal exchange of notices.

The disputes process has sometimes been called a 'ritual dance'. It requires taxpayers to respond to Inland Revenue notices on time and with content stipulated in the Tax Administration Act 1994. In some cases,13 content will bind the taxpayer as to the issues and legal arguments that can be advanced in later litigation. The process requires care, attention to detail and efficient management, and can involve considerable cost.

If an assessment emerges from the disputes process, the taxpayer concerned may challenge the assessment before the Taxation Review Authority14 or the High Court of New Zealand. Rights of appeal lie from both, though there are important jurisdictional differences between the Authority and the court.

Commencing disputes

Contentious tax matters arise in three ways. First, Inland Revenue may seek to test a taxpayer's position by undertaking a risk review. This is not an investigation and normally is not dealt with in the same way as a formal dispute. Formal tax disputes follow two distinct phases: pre assessment and post assessment. The pre-assessment phase is the statutory disputes process briefly referred to in Section I (supra). The post-assessment phase is a tax challenge brought by a taxpayer to the Taxation Review Authority or the High Court. In certain limited circumstances, it is possible also to dispute Inland Revenue actions by way of judicial review in the High Court.

i Risk reviews

Inland Revenue employs a range of analytical tools to identify tax positions that present a risk of error. Rather than always commencing a pre-assessment dispute when a risk is identified, Inland Revenue often contacts the taxpayer to invite it to review its position and correct anything that may be mistaken. The invitation to make a voluntary disclosure is an effective means of avoiding Inland Revenue having unnecessarily to commit investigative resources to a matter that could be resolved more simply. The invitation is made more attractive by the fact that the risk review is avowedly not the start of an investigation. Because of that, penalties that might otherwise apply are reduced by between 75 per cent and 100 per cent for any tax discrepancy that is disclosed and corrected on a risk review. Until February 2019, a taxpayer who made a pre-notification voluntary disclosure could rely upon an assurance of non-prosecution for the relevant shortfalls. The Commissioner amended her position in a new standard practice statement, and will now prosecute if non-prosecution could lead to voluntary compliance more generally being undermined. Prosecution following a voluntary disclosure is intended to be exceptionally rare.15

ii Pre-assessment disputes process

If Inland Revenue elects not to deal with a matter by way of risk review or its less formal approach to the taxpayer does not elicit a response, it is likely to start an investigation leading to the pre-assessment disputes process. There is no formal time frame within which Inland Revenue must initiate the formal disputes process. In practical terms, this is affected by the statutory time bar on Inland Revenue issuing a reassessment of tax. However, when that time bar is not imminent, Inland Revenue sometimes tries to agree an adjustment with the taxpayer. This process can be as lengthy and costly as the formal disputes process, which must still be undertaken if an agreed adjustment is not reached.

Broadly speaking, the formal process follows four stages:

  1. the exchange of initial notices between Inland Revenue and taxpayers;
  2. a conference stage;
  3. the exchange of statements of position (SOPs); and
  4. reference to the Disputes Review Unit and determination of the dispute.

The purpose of the disputes procedures is to improve the accuracy of Inland Revenue decisions, reduce the likelihood of disputes by encouraging the full exchange of information, promote early identification of the basis for a dispute and promote prompt and efficient resolution.16 This is achieved by locking the taxpayer and Inland Revenue into a series of exchanges that have to occur within a 'response period', normally of two months, but in some circumstances where the taxpayer is required to issue a first notice, four months.17

Initial notices

Initial notices are called 'notices of proposed adjustment' (NOPAs) and 'notices of response' (NORs).

A NOPA initiates a matter of dispute and may come from Inland Revenue or from the taxpayer when Inland Revenue is permitted to assess without issuing a NOPA. There are 16 instances in which Inland Revenue is not required to issue a NOPA prior to assessing. In practice, those most likely to arise are where there is prima facie evidence of fraud by the taxpayer, issuing a NOPA would be likely to cause the taxpayer to flee New Zealand or otherwise make recovery of tax more difficult, or the taxpayer has failed to file a return.18 Taxpayers will often also use a NOPA to dispute a return filed on a conservative basis and the taxpayer wishes to advance a different tax position without the risk of penalty.19 The content of a NOPA is prescribed by statute.20

Before the expiry of the applicable response period, the person to whom the NOPA is issued must provide a NOR or be deemed to have accepted the previously proposed adjustments and to have lost the right to challenge the resulting assessment.21 The content of a NOR is also prescribed and is designed to join issue with the matters raised in the NOPA, principally by setting out an explanation for why they are considered to be wrong.

Conference stage

The exchange of initial notices sets the stage for discussion, arguments and negotiations between Inland Revenue and taxpayers. Although not part of the statutory disputes regime, the conference stage has proved to be a useful and generally welcome addition to the process because it allows the parties to explain and advocate their respective positions outside the limitations of written documents.

Inland Revenue has placed significant importance on the conference stage as an opportunity to resolve disputes before they escalate too far. Conferences are chaired by trained Inland Revenue facilitators so that the risk of unproductive outcomes is reduced. Facilitators are senior and experienced Inland Revenue officers who have no connection with the case or the Inland Revenue case officers involved in the matter.

The next phase of the disputes process may also be truncated by agreement.22

Exchange of statements of position

If the disputes process continues, the parties exchange binding SOPs. An SOP's binding nature is achieved by the Inland Revenue issuing a disclosure notice,23 the effect of which is to limit the parties to the issues and propositions of law disclosed in the SOPs in any later challenge to an assessment.24

Once again, the content of a SOP is prescribed but a higher standard applies to it The significance of a SOP is twofold. First, unless one of the several exceptions applies, Inland Revenue may not amend an assessment of tax unless it has at least considered the taxpayer's SOP. Second, if the dispute is referred to the Disputes Review Unit, the SOPs that have been exchanged and the materials that accompany them form the basis of its autonomous review and determination of the dispute.

Whether a dispute is referred to review or not is often determined by time. The time bar25 prevents Inland Revenue from increasing an assessment if more than four years has elapsed since the end of the period in which the taxpayer filed the relevant return. Though the time bar may be waived,26 and there may be good reasons for granting a waiver, there is no obligation on a taxpayer to do this.

Determination by the Disputes Review Unit

Like the conference phase, the Disputes Review Unit (formerly known as the Adjudication Unit) has no statutory role in the disputes process. Its role is administrative, and not all disputes are referred to it. The Disputes Review Unit is part of the Tax Counsel Office. It is separate from Inland Revenue's auditing and investigative function and takes a fresh look at disputes, providing decisions on the issues that is distanced from Inland Revenue's investigators.

It is an interesting quirk of the regime that a Disputes Review Unit decision that upholds Inland Revenue's position may be challenged by the affected taxpayer but a Disputes Review Unit decision in favour of the taxpayer may not be challenged by Inland Revenue. This has been described as a 'win, no lose' proposition for the taxpayer.27

iii Post-assessment challenges

A challenge to an assessment must be commenced in one of the two available hearing authorities within the response period that follows the issue of the relevant assessment notice. Subject to limited opportunities to enlarge time, this means that litigation has to be under way within two months of an assessment being issued.

The available hearing authorities are the Taxation Review Authority or the High Court. These are dealt with in more detail in Section III (infra). The procedures of each are set out in comprehensive rules and involve all the usual elements of civil litigation, including discovery, the exchange of written witness statements, written legal submissions and the conduct of hearings on the basis that the taxpayer is plaintiff in the action and the Inland Revenue defendant.

Tax litigation is usually conducted on behalf of Inland Revenue by the Office of the Solicitor General, Crown Law.

iv Judicial review

In some very limited circumstances, it is possible to dispute procedural actions by Inland Revenue through judicial review in the High Court.28 The scope for judicial review has narrowed considerably in recent years. In all but a few instances, the courts prefer that arguments over procedural validity should be taken in the context of a challenge to a substantive assessment, rather than as a separate attack on Inland Revenue.29

The courts and tribunals

The two forums in which a tax challenge can be commenced are the Taxation Review Authority and the High Court. There are important differences between the two, although the practical implications of the differences in conduct of tax litigation are limited.

i Taxation Review Authority

The Taxation Review Authority is a specialist tribunal established by its own legislation30 to hear and determine tax challenges independently of Inland Revenue. It has a non-exclusive first instance jurisdiction, and, although the Taxation Review Authority hears only tax matters and can be expected to have considerable tax expertise, the High Court is generally regarded as the court of first instance in which complex taxation matters should be commenced. The choice of forum is initially the disputant's, but it is not unusual for Inland Revenue to apply to have complex matters moved into the High Court. Moreover, where it is likely that a first instance outcome will be appealed, the courts will usually not want to have three steps of appeal as would occur from the Taxation Review Authority, when two would be normal from the High Court, subject to leave to appeal being granted by the Supreme Court.

The Taxation Review Authority is obliged to hear cases in camera,31 and its decisions are published on the basis that all identifying details of the disputant taxpayer are removed. The press is excluded from all Taxation Review Authority proceedings. That can be a distinct advantage for taxpayers who guard their privacy, but there is no guarantee that such anonymity will survive a Taxation Review Authority decision if the matter is appealed to the High Court. There, the principal of open justice will often prevail unless the protection of commercial secrets warrants continuing anonymity.

The Taxation Review Authority has the status of a commission of inquiry32 and so has an independent authority33 to issue summonses for the attendance of witnesses and the production of documents. Nevertheless, it is bound by the limits imposed under a disclosure notice in the pre-assessment disputes phase,34 and although it has some latitude as to the formality with which it receives evidence,35 it must still operate on the basis that the burden of proof in a tax challenge rests with the taxpayer and under the statutory rules of evidence.36

The Taxation Review Authority has only a very limited jurisdiction to award costs, another characteristic that makes it a popular forum with taxpayers who may wish to test a position without the usual risk of an adverse costs award should the test's resolution be unfavourable. The costs jurisdiction is generally only to admonish bad behaviour, such as failing to appear or failing to give adequate notice of abandonment or settlement of a challenge. Costs do not 'follow the event' as in the courts.

A tax challenge in the Taxation Review Authority is commenced by notice of claim whose content is stipulated and, where there is no procedure stipulated under the Taxation Review Authority Act and regulations, normally proceeds under the rules applicable to civil hearings in the district court.

In the past, the Taxation Review Authority was presided over by a district court judge37 who travelled to the main centres of New Zealand, and sometimes further afield, to hear tax challenges. The present Authority is not a judge, but an experienced tax practitioner who also sits on the Customs Appeal Authority. A review of recent Taxation Review Authority decisions suggests that the time between the last day of hearing and decision is usually about three months. Taxation Review Authority decisions must be given in writing.38

ii The High Court

The High Court is New Zealand's court of general jurisdiction, and it shares first instance jurisdiction to hear tax challenges.39 Unlike the Taxation Review Authority, there is no presumption that tax matters can be heard in the High Court with any degree of privacy. The court is generally reluctant to set aside the principle of open justice, though if an application for confidentiality orders is based on good grounds, such as matters of commercial sensitivity, some protection is likely to be given, though not necessarily for the identity of the disputant.

A tax challenge is commenced in the court by way of statement of claim and proceeds as orthodox civil litigation under the High Court Rules. It is subject to civil discovery40 and the usual range of interlocutory applications and hearings.

High Court judges are not usually specialists in tax. With some exceptions, judges tend to be appointed to the High Court bench from broad generalist backgrounds, rather than from specialities. That reflects a view expressed by a number of senior judges that tax is simply a matter of statutory interpretation and that ordinary litigation processes will sort out the facts to which such interpretation applies. In reality, the generalist quality of the bench can mean that counsel in a tax challenge must often introduce the judge to, and explain, unfamiliar tax concepts.

High Court hearing fees are payable and can be significant if a matter is heard over days or weeks. Costs follow the event, which is to say that the successful party is entitled to an award of costs. Such awards do not usually reimburse the successful party for its full costs. Indemnity costs, namely actual and full costs incurred by the opposing side, can be awarded but usually only because of especially poor behaviour in either bringing or conducting proceedings.

The same sort of review as done for Taxation Review Authority decisions suggests that the time between a hearing in the High Court and a written tax decision being released is usually one to two months, but is often shorter.

iii Conduct of proceedings generally

Whether they are advanced before the Taxation Review Authority or the High Court, tax challenges are subject to case management by the judges. Timetable orders are set, and adherence to them is expected. Evidence in chief is usually submitted to the Taxation Review Authority and court in the form of written briefs that must also be supplied to the opposing party. Document bundles must be settled between the parties, and at first instance the disputant taxpayer usually has the obligation to ensure that the material being relied upon in evidence is available to the Court and Inland Revenue's counsel. The senior courts in New Zealand are moving towards electronic document management prior to and during a hearing, and this is gradually gaining traction in the High Court, but most first instance hearings are still predominantly paper-based.

Tax challenges often require expert evidence. Experts are required to act as servants of the court and not as partisans for the taxpayer or Inland Revenue.

The Taxation Review Authority and court deal with a challenge by way of a fresh consideration of all evidence and argument. They are given the same powers as Inland Revenue to be able to resolve the matter by confirming, cancelling or adjusting an assessment of tax.41 When the matter in issue is not an assessment, the hearing authority acts by directing Inland Revenue to alter its decision to conform with its findings.

iv Rights of appeal

The Taxation Review Authority Act permits any party to appeal a Taxation Review Authority decision, subject to de minimis rules. The appeal is to the High Court but the appellant is required first to file with the Taxation Review Authority a notice of appeal setting out its grounds and then to submit to the Taxation Review Authority a case on appeal, setting out the facts and issues to be determined.42

Appeals from the High Court are to the Court of Appeal. They are commenced by notice of appeal and require a case on appeal comprising the record of the first instance proceedings to be prepared and submitted for a rehearing of the matter. Rehearing means that although evidence is not taken afresh, the written record of evidence at first instance is considered afresh. Most substantive first instance tax decisions of the High Court carry a right of appeal to the Court of Appeal, but where the High Court has heard an appeal from the Taxation Review Authority, a further appeal is by leave only.

The court of final jurisdiction in New Zealand is the Supreme Court. Appeals to this court are by leave only and must evince a matter of general or public importance or general commercial significance. If the Supreme Court is satisfied that an appeal does not meet this threshold, it will treat the decision of the Court of Appeal as having resolved the matter and decline leave.

Penalties and remedies

i Civil penalties

A reassessment of tax gives rise to additional imposts. These include late payment penalties (LPPs),43 use of money interest (UOMI),44 and shortfall penalties (SFPs).45 In most cases, a reassessment is made with a new due date46 so that LPPs are not applied retrospectively, but UOMI will normally be imposed from the original due date for assessed tax. Although UOMI is not a penalty, it is charged at a rate that is about twice commercial rates of interest and so is regarded as punitive. This has led to recognised methods of mitigating UOMI costs, such as purchasing tax from pools maintained by tax intermediaries. UOMI is often a sticking point in resolving disputes. Inland Revenue is seldom ready to compromise over it and will apply tax payments to interest first, so that an underlying core tax debt is not necessarily reduced.

Inland Revenue must consider whether to impose an SFP in each instance of a tax shortfall.47 The SFP may be proposed at the same time as Inland Revenue proposes substantive tax adjustments or it may be held in abeyance to await the outcome of the substantive dispute.48 The time bar that limits Inland Revenue's power to reassess does not apply to SFPs.

SFPs are based on a sliding scale that reflects the relative culpability of the taxpayer in taking the disputed tax position. At the lower end of the scale, a penalty of 20 per cent of the shortfall applies for a failure to take reasonable care or taking an unreasonable tax position. This applies if the position fails to meet the test of being 'about as likely as not' to be correct. The next serious SFP is imposed at 40 per cent of the shortfall for gross carelessness. This requires recklessness as to the correctness or not of the tax position or some other egregious omission by the taxpayer, short of dishonesty. A penalty of 100 per cent of the shortfall applies to an 'abusive tax position', where the dominant purpose is to avoid tax. At the highest level, an SFP of 150 per cent of the shortfall applies in the case of evasion or similar act.49

These penalties are then subject to potentially substantial reductions for voluntary disclosure50 and for prior good taxpayer behaviour.51

In addition to the ordinary range of SFPs, a special promoter penalty applies to those who offer, sell, issue or promote avoidance arrangements to 10 or more persons in a tax year.52

ii Criminal penalties

Tax crimes are prosecuted under the Tax Administration Act 1994 and the Crimes Act 1961. Under the Tax Administration Act 1994, there are three broad categories of offences:

  1. absolute liability offences;
  2. knowledge offences; and
  3. intent offences.

Absolute liability offences

Absolute liability offences cover mundane non-compliance, such as failing to file returns, to keep required documents or to register when required to do so. The penalties imposed upon conviction for these offences are fines only, on a sliding scale up to NZ$12,000 per offence after a second conviction.53

Knowledge offences

Knowledge offences reflect a more serious range of non-compliance, where the offender knows of the relevant obligation and fails to meet it. Some of these offences are the same as absolute liability offences but with a knowledge overlay. They also include, however, more serious offending such as falsification or the provision of misleading information and the misapplication of tax deducted at source under New Zealand's employee Pay As You Earn (PAYE) scheme.

The extent of the required knowledge has been developed in case law. It is not necessary for Inland Revenue to prove more than knowledge of a tax obligation and of the failure to meet it as required. The penalties imposed upon conviction for knowledge offences are a combination of fines and imprisonment. A second and subsequent conviction can attract a fine up to NZ$50,000 per offence and, in some instances, a term of imprisonment for up to five years can be imposed.54 Where a penalty of imprisonment is provided for, the court has available a range of sentencing options from community-based sentences and home detention through to imprisonment.55

Intent offences

Intent offences are essentially the knowledge offences overlaid with a more serious element in that the relevant default has not only occurred knowingly but also with intent to evade the assessment or payment of tax. These offences all carry a maximum sentence of a NZ$50,000 fine and up to five years' imprisonment.56

Offences under the Crimes Act 1961

A number of more serious offences under the Crimes Act 1961 can arise out of tax offending. For instance, using tax filings to obtain refunds and credits to which one is not entitled can be prosecuted under more general heads of fraud and falsification of documents can be prosecuted as forgery.

Tax claims

i Recovering overpaid tax

Because New Zealand's tax system is based on self-assessment, the opportunities are limited for a taxpayer to correct an incorrect tax position that has led it to overpay tax. The starting point is that is that if a taxpayer considers that it has filed an incorrect return, it should use the NOPA procedure (see Section II.ii) to advise Inland Revenue of the need to change its tax position. If that is done within the relevant response period, the matter can be resolved without an issue arising over timing.

That is not always possible, and in some cases an overpayment only becomes apparent because of events that occur later. This commentary deals with three instances, namely where:

  1. there is a case law change that allows a tax concession not previously claimed;
  2. a correction is sought beyond the time that a NOPA could be filed; and
  3. a taxpayer has second thoughts over an available choice of tax position.

Case law change

Largely, unless a taxpayer has actively maintained a dispute or can otherwise bring itself within the NOPA timeline, it will not be permitted to go back and pick up the benefit of case law that arises after their filing.57

Correction out of time for NOPA

A residual discretion is given to Inland Revenue, outside the disputes process, to correct assessments at any time to ensure that they are correct.58 This is subject to the statutory time bar that limits when an assessment to tax can be increased, but there is no limit on the period within which a correction by reducing liability can be made. The Inland Revenue has a wide discretion to amend an existing assessment that may not be correct and substitute another more appropriate assessment. In exercising the discretion, Inland Revenue may take factors into account, such as that the discretion is not intended to be used by taxpayers as a way of circumventing the statutory disputes process or gaming the system, the merits of the case and the resources available to Inland Revenue.59

Regretted choice

Inland Revenue refused in the past to consider its discretion to ensure correctness if it considered that the applicant taxpayer was trying to backtrack on a choice of tax positions that has ended up badly for it. Because it is now clear that Inland Revenue must consider a number of factors, the 'regretted choice' approach, which was used by the Commissioner to simply bowl out a taxpayer's request for relief, is no longer a satisfactory basis on its own for refusing relief. A more nuanced consideration of the competing positions and what led to the choice being made will be required.60

ii Challenging administrative decisions

The limited possibility that judicial review may be available for some administrative decisions has already been covered. For the most part, if a taxpayer considers that administrative defaults have arisen in Inland Revenue, it must raise those in the disputes process and challenge them before a hearing authority, rather than try to pre-empt Inland Revenue in its functions. There are extreme (and possibly theoretical) instances in which judicial review could be used independently of the disputes process to curtail capricious, arbitrary or unreasonable Inland Revenue behaviour. Judicial review is also available to dispute Inland Revenue actions such as the pursuit of information requests made under double tax treaties. However, the focus is on the use and application of the disputes process as the primary means of testing the validity of an assessment. Although the concept of a disputable decision is wider than just an assessment,61 the courts have concluded that a right of challenge is only conferred when an administrative decision translates into an assessed liability.62

This approach is also reflected in the prevailing view that published Inland Revenue practice statements are not binding on Inland Revenue and do not usually give rise to any general legitimate expectation as to how Inland Revenue will behave.63

Because of these limits, there is a greater emphasis on escalating within Inland Revenue complaints about administrative behaviour that is inconsistent with Inland Revenue publications. However, departmental embarrassment can only take a taxpayer so far.

iii Claimants

A tax challenge may only be brought by the person whose tax position is under dispute.64 There may be other parties that are affected by that tax position, but they have no standing to bring a challenge themselves unless they have also taken a tax position and have disputed that to the point a right of challenge arises. This leads to a number of instances in which it is important for the interests of a person affected by the tax decisions of another to be protected by contract.


Costs usually only arise in litigation and have been addressed earlier in this chapter. Outside litigation, Inland Revenue is entitled to charge for its time and attention in the consideration and delivery of binding rulings. The rulings process in relation to alternative dispute resolution is covered in Section VII.

Alternative dispute resolution

i Mediation and arbitration

Outside the facilitated conference stage of the pre-assessment disputes process, there is no recognised arbitration or mediation option to resolve tax disputes.

ii Binding rulings

A well-developed system of short-process, private, and public or product, binding rulings exists to permit taxpayers the opportunity to settle the tax outcomes of a proposed transaction or product ahead of time.65

Any person (including a company, trust or other unincorporated body) in its own right, or on behalf of a person who is yet to come into legal existence, can apply for a private or product ruling. If a ruling is applied for on behalf of a person who is yet to come into legal existence (like a company yet to be incorporated), the person must legally exist before the ruling can be issued.

The main advantage of a private or product ruling is that it is binding on Inland Revenue. If the taxpayer applies the tax law as stated in the ruling, Inland Revenue must follow the ruling, provided the taxpayer satisfies all stated conditions or assumptions. The applicant is not required to follow the ruling.66

In transfer pricing, Inland Revenue may issue a unilateral advance pricing agreement (APA) using the binding rulings process. Bilateral or multilateral APAs are administered under the relevant double tax agreements. Although unilateral APAs are one-sided, should double taxation arise on transactions covered by a unilateral APA, Inland Revenue has published assurance that it will enter into competent authority negotiations with the other jurisdiction on the basis of a unilateral APA position. It considers unilateral APAs to be especially viable where the amounts at stake are small or where most of the transfer pricing risk lies in New Zealand, or both.


i General anti-avoidance rule

Tax avoidance is addressed by a general anti-avoidance rule (GAAR) and specific anti-avoidance rules. This commentary deals only with the GAAR.

New Zealand's GAAR67 addresses tax avoidance arrangements (i.e., arrangements having a more than incidental purpose or effect of tax avoidance) and empowers Inland Revenue to reconstruct the arrangement to the extent required to counter any tax advantage produced by it. The approach of the Supreme Court has recently been summarised thus68 by reference to three major cases.69

A staged test applies. At the first stage, the legal form of the transaction is tested against the ordinary meaning of any relevant specific provisions. At the second stage, the economic substance of the arrangement is considered, both in its constituent parts and as a whole. That arrangement is then tested against a wider view of the purpose of the specific provisions, viewed in the context of the Income Tax Act as a whole. The second stage consists of testing the economic substance of an arrangement against the economic substance Parliament contemplated by the specific statutory provisions.

If the arrangement (or any constituent part of that arrangement) does not fit within the particular provisions (considered in the wider sense) at the second stage, then, viewed objectively, the purpose or effect of the arrangement will be tax avoidance. This gives effect to both the general avoidance provision and the specific provisions, both viewed purposively.

The majority of the court has noted a number of factors that would be relevant to the second stage, parliamentary contemplation or an inquiry. These include the manner in which the arrangement was carried out, the duration of the arrangement and the financial consequences for the taxpayer, artificiality, circularity, non-market transactions and pricing, whether expenditure will in fact be incurred, and the (lack of) effect on a taxpayer's financial position.

There is a third stage (referring to the words 'merely incidental') but the majority of the court considered it would rarely apply.

There is nothing wrong in a taxpayer seeking out a tax advantage as long as it is one that Parliament contemplates would be obtained in the circumstances. However, if an arrangement uses specific tax provisions within the legislation in a way that was not within Parliament's contemplation, it will be tax avoidance, even if a taxpayer technically complies with the specific provisions.

ii Base erosion and profit shifting

New Zealand has enthusiastically supported the work of the Organisation for Economic Co-operation and Development's (OECD) base erosion and profit shifting (BEPS) initiatives. It is signatory to the agreement for global minimum tax, to resolve international taxation of digital economy. Domestically, New Zealand has introduced anti-BEPS measures.70

Double taxation treaties

The approach adopted under New Zealand law to the interpretation and application of double taxation treaties has recently been the subject of two decisions. One dealt with the New Zealand–South Korea double taxation treaty and one with the New Zealand-China double taxation treaty. Both decisions applied well-known principles of purposive interpretation of treaties but also addressed some of the realities about inconsistent treaty language.

i South Korea

In Chatfield,71 Inland Revenue sought information in New Zealand on behalf of South Kore's National Tax Service. The New Zealand party from whom the information was sought applied for judicial review of the Inland Revenue decision to make the request and then sought discovery of the South Korean double taxation treaty information request. The application for discovery was declined and the High Court72 made a number of observations about the interpretation and application of double taxation treaties that were not disturbed on appeal:

  1. Differences in language between treaties is likely because they are negotiated against the background of particular languages, legal systems, historical influences, tax law and wider policies and national expectations.
  2. It cannot be expected that the terms of the double taxation treaties will be expressed with the same precision as ordinary domestic tax legislation.
  3. It should not be assumed that various provisions dealing with a matter common to all double taxation treaties mean the same thing. The particular double taxation treaty in question should be examined in light of its international context and the points (a) and (b). And
  4. On the use of OECD commentary as an aid to interpretation, the court noted: 'Any changes to the Commentaries (where there has been no relevant substantive change to the Model Convention) are to be viewed not as recording an agreement about a new meaning but as reflecting a common view as to what the meaning is and always has been.'

Having made these observations, the court considered whether Inland Revenue could be required to disclose to the applicant the basis on which South Korea had sought information under the double taxation treaty. In issue was the problem that the domestic law's exception from tax secrecy seemed to allow Inland Revenue to release information related to tax challenges (i.e., cases dealing with liability) but not judicial review. The judge considered this in the light of the OECD model double taxation treaty and the commentaries to it.

The judge noted that the model double taxation treaty included six additional words that did not appear in the South Korean double taxation treaty with New Zealand. She construed the New Zealand–South Korea double taxation treaty as if those words were in it, so that the way was cleared for the court to consider whether the Commissioner should meet ordinary expectations of discovery in judicial review. This is an example of a wide interpretation being made of double taxation treaty language, by reference to commentary and to give effect to the broad principles of the double taxation treaty. The High Court subsequently struck down Inland Revenue's request for information on behalf of South Korea, in part because Inland Revenue did not satisfy the court that it had considered adequately the double taxation treaty terms for the exchange of information.73

ii China

In Lin,74 the High Court considered whether a tax sparing credit should be available to a New Zealand resident shareholder of a Chinese company whose income was attributed to the shareholder under New Zealand's controlled foreign company regime. Inland Revenue argued that the wording of the China double taxation treaty excluded the credit, even though it would have been available had the shareholder invested directly in China and not through a company. The court concluded that the language relating to tax credits had effectively been extended by the development of OECD commentary so that tax was creditable (and by extension so was tax spared) if it had been paid in China on income also brought to charge in New Zealand, though the actual taxpayer in each case was a different person.

This case was appealed to the Court of Appeal, which overturned the High Court decision.75 Leave to appeal the approach taken by the Court of Appeal to the interpretation of the double taxation treaty was refused by the Supreme Court.76 A new double taxation treaty was then concluded between New Zealand and China in which the tax sparing arrangements that featured in Lin were excluded.

Areas of focus

i Published work programme

Inland Revenue's current tax policy work programme77 sets out a number of areas of focus. When the programme was published, it focused on productivity, well being and economic growth. The work programme sought to explore the recommendations of the final report of the Tax Working Group (see Section XI) and implement them as appropriate. This included:

  1. a review of the current land rules, particularly in relation to investment property and speculators, land banking and vacant land;
  2. reviewing how to minimise the tax system's impact on businesses and enhance economic performance;
  3. the tax system's role in driving infrastructure investment;
  4. using information gathering to minimise compliance and administration costs;
  5. continuing implementation of the business transformation programme, which focuses on modernising the tax system;
  6. a review of charitable sector taxation and other exemptions;
  7. a review of taxation of digital services; and
  8. general reform, remedial work, social policy packages and environmental taxes.

The investigative focus for Inland Revenue is reflected in the matters on which it reports regularly to its minister. For the past several years, those reports have emphasised the hidden economy, complex issues including aggressive tax planning, fraud and tax compliance in the property sector.78 The 2019 report also emphasised the recent modernisation of the taxation system, including introducing online services for all taxes, automating tax refunds, and a new customer-facing website. Inland Revenue has exceeded its target for common transactions being completed digitally.79

ii Ongoing response to covid-19

The published work programme was considerably disrupted by Inland Revenue's response to the covid-19 pandemic. Beginning in March 2020, Inland Revenue developed and implemented, either by promoted legislation or administrative action, a suite of tax measures designed to ensure that individual and business taxpayers were supported through the worst of the economic fallout from the pandemic (this response and its ongoing significance remains a major focus for the department), which means that for much of 2020 Inland Revenue's investigation and enforcement capacity was redirected into other work, assisting the covid-19 response. Inland Revenue's efforts throughout this time have generally been praised by tax practitioners and may lead to changes in some aspects of tax administration over the longer term. Between April and August 2020, audit, enforcement and recovery activity by Inland Revenue virtually stopped. By early 2021 it had resumed usual levels.

Outlook and conclusions

i Outlook

In September 2020, New Zealand elected a majority Labour Party government, which has since entered into a cooperation agreement with the Green Party, but not a formal coalition. The Labour Party has campaigned on the need for tax reform, and in its previous term in coalition appointed a Tax Working Group to examine and report on aspects of the tax system.

The Tax Working Group was to consider whether:

  1. the tax system operates fairly in relation to taxpayers, income, assets and wealth;
  2. the tax system promotes the right balance between supporting the productive economy and the speculative economy;
  3. there are changes to the tax system that would make it more fair, balanced and efficient; and
  4. there are other changes that would support the integrity of the income tax system, having regard to the interaction of rules for taxing companies, trusts and individuals.80

Certain matters were beyond the Tax Working Group's remit. These include increasing rates for income tax, good and services tax or inheritance tax, changes that would apply to the taxation of a family home or the land under it, and the adequacy of the personal tax system and its interaction with the welfare transfer system. Additionally, the Group was not able to consider the BEPS agenda, for which legislation had recently been introduced.81

The Group issued its final report on 21 February 2019.82 In summary, it made the following high-level suggestions:

  1. the introduction of a broad tax on capital gains;
  2. increasing the role that taxation plays in sustaining and enhancing New Zealand's natural capital through environmental taxation;
  3. changing the loss continuity rules, expanding deductions for 'black hole' expenditure and concessions for infrastructure projects;
  4. increasing tax concessions for the New Zealand Superannuation Fund; and
  5. introducing additional welfare transfers; and
  6. adjusting income tax rates and brackets for low-income individuals.

The Group put forward four illustrative packages for the government's consideration, showcasing potential 'revenue-neutral' packages of tax reform, each focussing on the redistribution of wealth to lower-income individuals. Further, the Group highlighted the following matters requiring significant attention from the government:

  1. the future of work and potential labour market changes;
  2. improving the integrity of the tax system by reducing opportunities for tax avoidance;
  3. increasing the Inland Revenue's data transparency; and
  4. investment in the Inland Revenue's tax policy and technical and investigatory staff.

Most of the matters raised by the Tax Working Group are still under consideration, but some major suggestions have been ruled out. In the lead up to the 2020 general election, the Prime Minister Jacinda Ardern ruled out introducing a capital gains tax under her leadership, citing a lack of public mandate. The same was said regarding a wealth tax, in the face of Green Party policy advocating for such a tax. A number of the Tax Working Group's recommendations are still within the current areas of focus for Inland Revenue, covered in Section X (supra). Apart from that, the new government has legislated to increase the top individual marginal rate of tax to 39 per cent on income exceeding NZ$180,000. That has led to other legislation designed to avoid arbitrage between the new top rate and rates applicable to companies and trusts. These measures began operating on 1 April 2021 or the equivalent tax balance date.

As part of an initiative to increase the information held by Inland Revenue and government on sources and size of wealth, a substantial change to the information that must be routinely filed by trusts was enacted that applies from the 2021-22 tax year onwards. This is seen by some commentators as suggesting government interest in taxing trusts differently, including by way of attribution of income to individuals connected with the trust. Nothing has yet eventuated. In the same vein a special survey project into the affairs of selected high-net-worth individuals and their families has also been initiated, as a precursor to a rolling three-year cycle of updating information on economic (as opposed to taxable) income. This effort is generally seen as signalling future tax moves that will re-examine capital gains, once Prime Minister Ardern has left office, and inheritance taxes, both of which have been absent from the New Zealand tax scene for many decades.

ii Conclusion

The New Zealand system for the resolution of tax disputes is administratively complex, formulaic and cumbersome. It is intended to improve taxpayer compliance and Inland Revenue decision-making and, in combination, reduce disputes in number and longevity. The numbers speak for themselves: while a good many tax matters are disputed, comparatively few are litigated, and, of those that find their way into the courts, the great majority are resolved in Inland Revenue's favour.

That is not to say that there is unfairness or bias in the system. On the contrary, tax disputes are pursued in this country in an environment remarkably free, by some international standards, of influence, unfairness or graft. Instead, the system is doing what was intended. It winnows out matters that ought not to be litigated much earlier than might otherwise be the case. That is achieved by a combination of incentives for better taxpayer decision-making and a greatly improved capability for technical analysis and judgment within Inland Revenue. By and large, that leaves the few cases that are tested each year being the ones that raise issues worthy of judicial consideration.


1 Geoffrey Clews is a senior tax barrister and Head of Chambers at Old South British Chambers, Auckland, New Zealand. The author acknowledges the past contributions to this chapter of Sam Davies and Jordan Curtis, barrister associates at Old South British Chambers.

2 While the precise number of investigations is not reported, in the year to June 2021, the shows that discrepancies amounting to NZ$854 million where taxpayers did not file returns correctly were identified, a figure that has been trending down over the last four years, of which approximately NZ$377 million was ascribed to investigating complex structures and tax interpretation issues, a figure has remained fairly constant over the last three years (Inland Revenue Annual Report 2021). In 2020, 14 audits involving NZ$10 million or more were closed (Inland Revenue Annual Report 2020).

3 At 30 June 2021, Inland Revenue active cases involving interpretations of tax law had dropped somewhat from previous years, and the agency had completed 50 serious prosecutions and a further 97 live tax prosecutions were before the courts (Inland Revenue Annual Report 2021).

4 Inland Revenue won 83.3 per cent of disputes that proceeded to litigation in 2021. But for a drop in 2019, this rate of success has been fairly constant in recent years. (Inland Revenue Annual Reports 2017 to 2021, inclusive.)

5 'Tax' refers to income tax and goods and services tax (New Zealand's equivalent of value added tax).

6 Normally calculated from the end of the reporting period in which the relevant return has been filed. Section 108 and 108A, Tax Administration Act 1994.

7 See, generally, Part IVA, Tax Administration Act 1994.

8 Penalty reductions are under Section 141G, Tax Administration Act 1994. The previous assurance of non-prosecution for evasion disclosed prior to the notification of an audit was withdrawn on advice from the Office of the Solicitor General, Crown Law, that a blanket assurance was unlawful. Now Inland Revenue retains a discretion whether to prosecute or not in cases of 'serious evasion' that could have a negative impact on taxpayer compliance generally. The effect of this on taxpayer disclosure is not yet known.

9 See Part 3, Tax Administration Act 1994.

10 An administrative addition to the process that is not provided for in statute.

11 The disputes review stage is intended to assure taxpayers that investigative officers' decision making is considered with a fresh set of eyes.

12 The usual response period under the process is two months. Although it is possible to seek further time to meet the steps that the process requires, the rules for time extensions make these difficult to obtain.

13 At the statement of position (SOP) phase (see Section II.ii, infra).

14 A first level tribunal operating under its own legislation and presided over by a district court judge.

15 Inland Revenue Standard Practice Statement 19/02.

16 Section 89A, Tax Administration Act 1994.

17 Response periods may be lengthen but only in exceptional circumstances that have been closely confined by statute and the courts.

18 Sections 89C and 89D, Tax Administration Act 1994.

19 Section 89DA, ibid.

20 Section 89F, ibid.

21 Sections 89H and 89I, ibid.

22 In an 'opt-out' provision, Inland Revenue and the taxpayer may agree that the dispute would be resolved more efficiently by being submitted to the court or Taxation Review Authority without the disputes process being completed (Section 89N(1)(c)(viii), Tax Administration Act 1994). Opting out is not usual, but in major disputes where the positions of the parties are clear and it is very unlikely that either will be moved, it is a useful option that allows taxpayer and Inland Revenue resources to be applied more quickly to litigating a dispute that is clearly not otherwise amenable to resolution.

23 Section 89M, Tax Administration Act 1994.

24 Section 138G, ibid.

25 Section 108 and 108A, ibid.

26 Section 108B, ibid.

27 Commissioner of Inland Revenue v. ANZ National Bank Limited (2007) 23 NZTC 21,167 (CA).

28 For actions that are capricious or arbitrary, or unreasonable in the administrative law sense, or where a right of challenge is not conferred by the Tax Administration Act 1994.

29 Senior courts have warned counsel that recourse to judicial review over the available route of tax challenge may result in a personal costs award.

30 Taxation Review Authorities Act 1994.

31 Section 16(4), ibid. See also Case 1/2019 [2019] New Zealand Taxation Review Authority 1, per Sinclair DCJ.

32 By Section 15, Taxation Review Authorities Act 1994.

33 Commissions of Inquiry Act 1908.

34 Section 17(2A), Taxation Review Authorities Act 1994. The Taxation Review Authority may, however, allow new issues and propositions of law in very limited circumstances (see Section 17(2B), ibid.).

35 Section 17, ibid.

36 Section 17(3), ibid., referring to the Evidence Act 2006.

37 The Taxation Review Authorities Act 1994 provides for one or more taxation review authorities to be appointed. They need not be judges, but until recently have been appointed from the District Court bench. The current Taxation Review Authority is not a judge. One disadvantage of the Taxation Review Authority is that, because there is only one judge, decisions tend to reflect that judge's outlook. Practitioners report the Taxation Review Authority as showing a default position that favours Inland Revenue. That may reflect the burden of proof that taxpayers carry in tax matters, but it is unfavourably compared with the track record of past Authorities. Anecdotally, the number of cases coming to the Taxation Review Authority is reducing, which may reflect a reduction in taxpayer confidence in the tribunal.

38 Section 25, Taxation Review Authorities Act 1994.

39 It is one of two hearing authorities under Section 138G, ibid.

40 The court is trying to reduce the extent of required discovery with tailored discovery orders that often apply in tax cases where a good deal of material is exchanged before the challenge commences.

41 Section 138P, Tax Administration Act 1994.

42 Sections 26(2), (3), (5) and (6), ibid.

43 Section 139B, ibid.

44 Imposed under Part 7, ibid.

45 Section 141 et seq., ibid.

46 Section 142A, ibid.

47 Section 141, ibid.

48 This can be affected by the possibility of criminal prosecution, which is ruled out if an shortfall penalty is imposed first.

49 See Sections 141A, 141B, 141C, 141D and 141E, Tax Administration Act 1994.

50 Section 141G, ibid.

51 Section 141FB, ibid.

52 Section 141EB, ibid.

53 Section 143, ibid.

54 Section 143A, ibid.

55 Under the Sentencing Act 2006.

56 Section 143B, Tax Administration Act 1994.

57 In some instances, it is possible to suspend Inland Revenue action on a dispute pending the determination of a test case, but this requires formal recognition of the test and is not always available.

58 Section 113, Tax Administration Act 1994.

59 Westpac Securities NZ Limited v. Commissioner of Inland Revenue [2014] NZHC 3377.

60 Case note,, G D Clews 2015. If a taxpayer has simply made a mistake or has genuinely overlooked a tax advantage that could legitimately have been preserved, it might be due some leniency. The taxpayer that is well resourced and should have known better, and moreover made the error repeatedly without it being noticed may not be dealt with as sympathetically.

61 Section 3(1), Tax Administration Act 1994.

62 Vinelight Nominees Limited v. Commissioner of Inland Revenue (2005) 22 NZTC 19,298.

63 Westpac Banking Corporation v. Commissioner of Inland Revenue (2008) 23 NZTC 21,694.

64 Section 138B, Tax Administration Act 1994.

65 The following commentary is drawn from Inland Revenue's published guide on binding rulings (IR715, February 2020).

66 A ruling will not be binding on Inland Revenue if: (a) there is a material difference between the facts identified in the ruling and the arrangement actually entered into; (b) the applicant materially omits or misrepresents information in the application or when supplying further information; (c) the ruling contains assumptions about future events or other matters that are incorrect, and are material to the ruling; or (d) a condition stated in the ruling is not satisfied (Sections 91EB(2), 91EN(2) and 91FB(2), Tax Administration Act 1994).

67 Sections BG1 and GA1, Income Tax Act 2007.

68 Justice Susan Glazebrook, Statutory Interpretation, Tax Avoidance and the Supreme Court: reconciling the specific and the general (2013), published on Her Honour is a current member of the Supreme Court bench.

69 Ben Nevis Forestry Investments Limited v. Commissioner of Inland Revenue [2008] NZSC 115; Glenharrow Holdings v. Commissioner of Inland Revenue [2009] 2 NZLR 359; Penny v. Commissioner of Inland Revenue [2011] NZSC 95.

70 Taxation (Neutralising Base Erosion and Profit Shifting) Bill 2017.

71 Cases culminating in Chatfield & Co v. Commissioner of Inland Revenue [2017] NZSC 48.

72 At first instance and not disturbed on appeal.

73 Chatfield & Co Ltd v. Commissioner of Inland Revenue [2017] NZHC 3289.

74 Patty Tzu Chou Lin v. Commissioner of Inland Revenue [2017] NZHC 969.

75 Patty Tsu Chou Lin v. Commissioner of Inland Revenue [2018] NZCA 38.

76 Patty Tzu Chou Lin v. Commissioner of Inland Revenue [2018] NZSC 54.

79 Inland Revenue Annual Report 2021, p72.

81 Sections 91EK and 91EL, Tax Administration Act 1994.

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