Law Briefs: IRD not all-powerful on question of assessments

By JILLIAN LAWRY

Everyone knows that Inland Revenue has more comprehensive powers of investigation than the police.

But there are some limits on the commissioner's power to issue a tax assessment or an amended assessment.

Take the following situation: Inland Revenue Department inspectors have conducted a GST audit of your company and advised that they have found a large discrepancy (in the IRD's favour). You did not realise that GST should have been collected on the particular transaction, which took place about four years ago. A GST assessment is issued.

Many taxpayers do not realise the IRD cannot make an assessment or increase the GST previously assessed if more than four years have passed from the end of the GST period in which it should have been paid.

An exemption to this four-year rule is where Inland Revenue believes the taxpayer has knowingly or fraudulently failed to make a full and true disclosure of all the material facts necessary to determine the amount of GST payable.

Another exemption is where the taxpayer has agreed to extend the time-bar by up to six months.

In terms of the knowingly or fraudulently argument, the onus of proof is on the IRD to establish the requisite standard. The "knowingly" count would require Inland Revenue to establish that company officers knew they had not made proper disclosure, so it could calculate the correct amount of GST.

The issue also arises as to whether the company was reckless in failing to ensure that the person responsible for the GST return was able to calculate GST properly.

In order to establish recklessness, Inland Revenue would need to prove the company knew there were errors and deliberately ignored the situation.

On the fraudulent count, Inland Revenue would need to show that company officers acted deliberately in breach of GST obligations.

The situations where a taxpayer elects to waive the statutory time-bar really arise where the IRD is still within the four-year period. This is because the department is likely to issue an assessment even if a taxpayer does not agree to sign a waiver.

In that case, a taxpayer may agree to the extension where it considers the disputes resolution procedure could be useful or where there is another case before the court which is likely to resolve the particular issue.

Returning to the problem. You may be in a position to argue the assessment is invalid if:

* The GST should have been returned more than four years ago.

* Inland Revenue agrees that the company has not knowingly or fraudulently failed to make full disclosure.

As part of the process it may be necessary to review the company records for discussion (if any) on whether GST should be returned on the supply.

A similar limitation applies over income tax assessments.

The commissioner cannot issue an amended assessment increasing a tax liability once four years have elapsed since the end of the year in which the tax return was filed.

The limitation does not apply in circumstances where:

* The commissioner considers the tax return to be fraudulent or wilfully misleading.

* The return omits mention of gross income of a particular nature or from a particular source.

Thus, it can sometimes be in a taxpayer's best interests to file a tax return promptly. This is especially so in the case where a taxpayer is concerned about the treatment of a particular tax issue.

As long as none of the exemptions apply, the IRD cannot issue a valid assessment if it is statute-barred from doing so. The courts have shown they will protect the taxpayer, once statute-barring applies.

* CCH (NZ) Ltd is a tax, business and employment law publisher based in Auckland. For further information, visit the CCH website or phone 0800 500 224. Jillian Lawry is consultant editor at CCH (NZ) Ltd.

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