On 1 April 1995, binding rulings on taxation laws became a reality in New Zealand. Ten years on the binding rulings regime has undergone remedial legislative reform, although no comprehensive overhaul has been undertaken (debate continues over whether such reform is necessary). The legislative scheme reflects largely the theoretical ideal for a formally binding regime (with a few exceptions, such as, in my view, the lack of an appeal facility) and in this sense can be used as a benchmark for comparing other regimes internationally.1 In practice, the New Zealand binding rulings regime has some significant shortcomings, which in part has seen the regime become a victim of its own success, a result of a severe shortage of resources, including experienced revenue personnel.
In this article I commence in section II with a brief background to the development of the binding rulings regime in New Zealand, and follow this in section III with a discussion on the purposes of the regime. A brief overview of the key features of the regime follows in section IV. Section V considers aspects of the interpretation and scope of the regime, and the legal status of rulings. In section VI, I review the performance of the Adjudication and Rulings Group using criteria from the Inland Revenue Department's (‘IRD') Annual Reports. Section VII offers some concluding observations.
II. Background to New Zealand's Binding Rulings Regime - A Cautious Start
Binding rulings were first introduced into New Zealand's taxation legislation in April 1995 as Part VA of the Tax Administration Act 1994 ('TAA1994').2 Binding rulings are a new concept for taxation law and practice in New Zealand, but follow strong precedent from other jurisdictions, including Australia and Sweden. Variations in the legislative framework prevail throughout rulings regimes internationally. Countries such as Canada, Germany, the Netherlands and the United States have retained an administrative rulings system.3 Prior to the enactment of the binding rulings regime in New Zealand, the United Kingdom rulings procedure was closely analogous to the New Zealand administrative system.4
An early call for a binding rulings regime emerged in 1986,5 although momentum was not evident until 1990 when the Tax Simplification Consultative Committee ('Waugh Committee') recommended that there be a binding rulings regime.6 The Waugh Committee's proposals were for a revenue neutral regime, since this was a fundamental requirement of the Waugh Committee's terms of reference. The Government's reaction was to direct that Treasury and IRD officials undertake a study of implementing a change in the law to create a rulings regime that was binding on the Commissioner of Inland Revenue ('the Commissioner'). The initial reaction to the concept from the IRD was negative, with the Commissioner stating that a binding rulings regime was not appropriate and it would create two laws.7 Other reasons for the unenthusiastic reaction were the necessary significant review of internal administrative procedures and the lack of resources to operate an effective binding rulings regime. The Government's response to the calls for a binding rulings system was an announcement in the 1992 Budget8 that it was its intention to introduce a binding rulings regime to deal with the uncertainty created by the possibility of a change in view of the Commissioner.
Within this environment, tax was recognised by the Government as a critical component of the business operating environment and integral to the structuring and execution of business arrangements. Despite these political overtures, a formal proposal did not emerge until 7 June 1994, when a discussion document9 on the proposed regime was introduced for public examination as part of the Generic Tax Policy Process.10 The document proposed that the Commissioner be able to issue rulings on the interpretation of taxation law which bind the Commissioner on the future application of that law.
Submissions were invited from interested parties and were received from fifteen groups and individuals. Support for the concept was overwhelming, although changes were recommended. Following consideration of the submissions, draft legislation was introduced to Parliament in December 1994 as part of the Taxation Reform (Binding Rulings and Other Matters) Bill 1994.11 Submissions were received by the Finance and Expenditure Committee (‘FEC’) and returned to Parliament as recommended changes to the TAA 1994.12 Royal assent was received on 10 April 1995, with the
regime effective from 1 April 1995. The resulting legislation initially at least was modelled on aspects of the earlier Australian binding rulings regime introduced in 1992.
III. Purpose of Binding Rulings
The introduction of the statutory regime was to give effect to a 1992 Budget announcement of the Government's intention that a binding rulings system on tax matters would be set in place. The purpose of the statutory framework for binding rulings is setoutin s 91A. Specifically, s 91Aprovides two major and two minor (yet associated) purposes. Binding rulings are intended to provide taxpayers with certainty about the way that the Commissioner will apply taxation laws. In the discussion document which initially outlined the Government's proposals, two categories of certainty were identified: transaction certainty13 and compliance certainty.14 Transaction certainty was described as the form of business certainty that arises when taxpayers know in advance the tax treatment of their proposed transactions. Compliance certainty is the reassurance given to taxpayers that the arrangement will not be subject to a higher tax liability provided the terms of the arrangement are not different to that contemplated by the ruling.
The second major purpose behind introducing binding rulings was to assist taxpayers in meeting their obligations under the law. An example of the effective implementation of this purpose was evident following enactment of the proposals in the discussion document on taxpayer compliance, standards and penalties.15 Under the proposals, a taxpayer who relied on an applicable binding ruling would have an absolute defence against any penalty for an 'unacceptable interpretation' .16 However, this was not carried through to the Taxpayer Compliance, Penalties and Disputes Resolution Bill 1995 and the ensuing legislation.17 However, there is a good argument that if a taxpayer relies on a valid and applicable binding ruling then this should be regarded as taking an acceptable interpretation, since this interpretation was 'acceptable' to the Commissioner. Section 91A also makes reference to the regime recognising the importance of collecting the taxes imposed by Parliament and the need for full and accurate disclosure by taxpayers who seek to obtain binding rulings. As a consequence of the certainty afforded to taxpayers through the availability of binding rulings, strict disclosure requirements will be imposed upon taxpayers.
Two subsidiary benefits were identified by the Government in the discussion document:18 reduced litigation (resulting in lower administrative costs19 and compliance costs,20 as well as improved relations between the IRD and taxpayers), and improved and faster flows of information to the IRD concerning trends in taxpayer behaviour and 'grey' areas in the law.
IV. Overview of Key Features (Scheme) of the Regime
The Commissioner is able to issue four types of binding rulings: public rulings, private rulings, product rulings, and, from 20 May 1999, status rulings on the application of a change in the law on an existing private ruling or product ruling. In the process of making a private ruling or a product ruling, the Commissioner has the discretion to make assumptions and impose conditions. For resource reasons, private rulings were initially limited to specific arrangements entered into after the issue of the ruling by the Commissioner. From 1 April 199621 the regime was extended to enable the Commissioner to provide private rulings on current and completed arrangements.22 Taxpayers or their agents, who apply for a private ruling, product ruling, or status ruling, are required to comply with strict application and disclosure requirements and a failure to comply will lead to non-application of the ruling. There is a statutory right for the applicant to consult with the Commissioner prior to the issue of a private ruling, product ruling, or status ruling if the content of the proposed ruling differs from that requested by the applicant.
The Commissioner will be bound to assess taxpayers in accordance with the position taken in an applicable public ruling, private ruling, product ruling, or status ruling, all within the constraints of any assumptions and conditions. Taxpayers, however, will not be bound by a ruling, but until 20 May 1999, applicants were required to disclose in their returns that they have applied for a private ruling and whether or not they followed it.23
They were also obliged, until 20 May 1999, to disclose any material difference between the arrangement described in the private ruling, and the actual arrangement.
All rulings will apply to the arrangements entered into for the period for which the ruling is issued, although the period for which the ruling has application may be extended where the original ruling was either a public ruling, or a product ruling, until 20 May 1999.24 Public rulings since 17 October 2002 may be made for an indefinite period.25 The Commissioner is able to withdraw a ruling or a ruling may cease to have effect, following a change in a taxation law. Withdrawals may not be retrospective in effect and the withdrawal cannot apply before notification of the withdrawal has been provided to the applicant. A withdrawal cannot be effective before the expiry of the period for which the ruling applies if the arrangement has been entered into before the withdrawal.26 Tax law changes, however, may cause retrospective cancellation of the application of a ruling. Status rulings are a new type of ruling that appeared with the enactment of the Taxation (Accrual Rules and Other Remedial Matters) Act 1999. The Commissioner may issue a status ruling upon application concerning whether an amendment or repeal of a taxation law, that is stated as applying in the private ruling or product ruling, has changed the way that the law applies in that ruling.27
All public rulings and many product rulings are published in full in the IRD's Tax Information Bulletins ('TIBs').28 Thus while many product rulings are published in full in the TIBs, others are just noted in the New Zealand Gazette.29 Private rulings are not published, but where the content of a private ruling raises an issue of wider significance to taxpayers generally, the Commissioner may decide to issue a public ruling reflecting the approach taken in that private ruling.30 Status rulings on aproductruling are notified in the Gazette and generally published within two months of notifying the applicant.31 Private rulings, product rulings and status rulings32 are charged for on what is loosely termed a 'full cost-recovery' basis, which for the purposes of the regime until 25 August 1999, implies a non-refundable application fee of $210 (including GST), an hourly rate thereafter of $105 (including GST) and reimbursement of certain fees and disbursements.33 From 26 August 1999, the fees increase to a non-refundable application fee of $310 (including GST), an hourly rate thereafter of $155 (including GST) and reimbursement of certain fees and disbursements.34 The Commissioner must provide an estimate of the fees payable in excess of the application fee and must advise the taxpayer of the likely date for issue of the ruling if this is expected to be longer than 4 weeks after receipt of a complete application. The Commissioner may waive all or part of the fees payable by the applicant.
The process of obtaining a binding private ruling, product ruling or status ruling can be illustrated as follows:35