Taxwise: IRD's time bar waiver keeps assessment clock running

What are the consequences of a taxpayer signing a "time bar waiver" that has been received from Inland Revenue?

JD, Milford

When a taxpayer files a tax return, Inland Revenue must assess the taxpayer for any tax due on the basis of that return and any other information known to Inland Revenue.

Inland Revenue may also reassess a taxpayer if it believes the original assessment to be incorrect. This typically occurs after Inland Revenue audits a taxpayer and finds discrepancies in the tax return.

However, Inland Revenue has a fixed period of time within which it may increase a tax assessment. This restriction is known as the time bar. At present, the time bar is four years from the end of the income year in which the taxpayer filed the tax return. Obviously, if the taxpayer never files a return, the time bar clock never starts to count down.

The time bar applies in all cases except where the return filed by the taxpayer is "fraudulent or wilfully misleading" or omits income.

A similar time bar exists in relation to GST. At present, it is four years from the end of the GST return period in respect of which the return was filed or an assessment made.

The time bar will not apply in relation to GST, if the taxpayer "knowingly or fraudulently" failed to make full and true disclosure to Inland Revenue of its GST position.

While the time bar can run in relation to GST without a return having been filed (as it can run from an assessment being made), where the taxpayer has not filed a return it is unlikely that adequate disclosure would have been made to gain the protection of the time bar.

A time bar waiver is an extension of the time bar for an additional period of up to six months. Such a waiver must be granted on a prescribed form (IR210E or IR210F) and delivered to Inland Revenue before the expiry of the original time bar period.

The benefit of a time bar waiver for taxpayers is that it removes the need for Inland Revenue to issue a tax (re)assessment before the original time bar period expires, which allows information to be gathered and presented to Inland Revenue. This should be contrasted to having to enter into the formal dispute process if an assessment was issued.

If a taxpayer does not waive the time bar, Inland Revenue must make a genuine tax assessment based on the information known at the time.

It cannot assess that taxpayer on an arbitrary basis as such an arbitrary assessment would be invalid.

The High Court, however, recently found certain time bar waivers to be invalid because the statutory authority to grant them did not exist at the time they were given.

These waivers are those delivered to Inland Revenue before November 17, 1998, that were made with respect to income tax returns filed before April 1, 1997.

Subject to Inland Revenue successfully appealing against that decision, any taxpayer can rely upon it to refute a tax (re)assessment made during the invalid waiver period.

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

Click here for Herald Online Olympic News