Law proposal prompts tax fears

By BRIAN FALLOW economics editor

A proposed change to the tax laws has raised fears that the four-year limit on when the Inland Revenue can challenge a tax return could disappear.

Thomas Pippos, a tax partner at accountancy firm Deloitte Touche Tohmatsu, which acts for the Corporate Taxpayers Group, says a largely unnoticed proposal buried in a recent discussion document on resolving tax disputes would effectively scrap the statutory time bar.

The time limit does not require a dispute to be resolved within the four years, but at least it gives the taxpayer a clear indication of what problems the IRD has with any tax return and why.

That gives a measure of certainty and finality over tax liabilities which corporate taxpayers, especially, see as very important, Pippos says.

At present, the law prevents the IRD from amending a tax assessment if four years have passed from the end of the income year in which the taxpayer filed the return, unless the return is:

* Fraudulent or wilfully misleading, or

* "Does not mention gross income which is of a particular nature or was derived from a particular source".

The IRD has a couple of problems with the second limb of that test: Taken literally it could apply whether or not it was the taxpayer's intention to omit gross income, and it ignores other elements in calculating a tax liability such as overstating deductions.

The discussion document suggests amending the second limb to refer to "negligence and/or material non-disclosure", as opposed to fraud, which is provided for in the first limb.

But Pippos says that sets the threshold much too low.

An earlier discussion document on the penalties regime, he points out, equates negligence with the lowest level of culpability in the penalties regime, lack of reasonable care.

And it is far from clear what would count as "material" or "non-disclosure".

"If implemented, the proposals will mean there is no effective time bar imposed on the commissioner in a huge number of cases," he said.

Taxpayers would have to hold tax-related information almost indefinitely to be able to substantiate that they had always acted reasonably.

In the case of corporate taxpayers the normal turnover of chief financial officers, chief executives, outside advisers and so on would compound the problem.

Pippos accepts that the existing statutory language is antiquated.

But he says if it is to be changed it should be aligned with the second-gravest level of offence under the penalties regime - an abusive tax position, one step below evasion.