New Zealand should take notice of simplified tax disputes processes in other jurisdictions.
Spoken in the context of how two children may respond very differently to the same parenting style, the sentiment is essentially that a ‘one size fits all’ approach can produce wildly different results. It’s an apt metaphor for the New Zealand tax dispute process - our ‘one size fits all’ approach to resolving tax disputes, irrespective of their complexity, the amount in dispute, or the nature of the taxpayer, can be devastating to taxpayers that lack the resources and expertise to fully participate in the compulsory process.
Tax disputes in New Zealand typically arise when a taxpayer and Inland Revenue disagree on an issue following an Inland Revenue investigation or audit. The disputes procedure involves a number of statutorily prescribed and administrative steps, which, on average, take approximately 635 days to work through. That is in addition to the investigation or audit (which could take years), and before the matter is brought before a court. For large corporates, dealing with the Inland Revenue and the formal process is usually part and parcel of being in business. However, for small businesses, facing a tax dispute might very well be the most stressful, costly and time consuming activity they have had to deal with in business.
Take, for example, the small restaurateur in, say Tauranga, who has built their business from scratch, or put all of their savings into an existing business. They work hard, employ staff, work late hours, and file their tax returns as required. They are then audited. Inland Revenue determines that, because the restaurant has a lower cash take than a similar restaurant in, say, Christchurch, the Tauranga restaurant must be taking cash from the till and not declaring it. Inland Revenue therefore requires that Restaurant Tauranga prove they have not received the same percentage of cash take as Restaurant Christchurch. An impossible task, right? Yet that is what Inland Revenue requires in order to close the audit. The onus is on the taxpayer to prove Inland Revenue wrong, even when Inland Revenue’s evidence is purely based on yardsticks. This can be hugely challenging for taxpayers with limited resources. If they can’t prove Inland Revenue wrong (which in this instance would require proving a negative), the next step is usually the arduous 635 day disputes process.
At the moment in New Zealand there isn’t one. But there have been positive steps taken in other jurisdictions which are targeted at simplifying tax disputes for small taxpayers, which New Zealand should take note of.
The Australian Taxation Office has an in-house facilitation for small businesses and individuals with less complex disputes at the audit and objection stages. It also has an early assessment and resolution process for all cases lodged with the Administrative Appeals Tribunal and a triage process which for some issues which leads to more efficient dispute resolution generally.
The United Kingdom has introduced a Tribunal system for tax disputes, which divides tax cases into four categories from ‘default paper cases’ (for issues such as such as late filing penalties, which are generally be dealt with by written submissions through the court), to basic cases (which are generally disposed of after a hearing with minimal exchange of documents before the hearing), then standard and complex cases (which typically involve large sums and detailed case management).
Canada runs an informal appeal procedure in the Tax Court of Canada for small disputes, and a triage type of process for objections to the Canada Revenue Agency, which is based on level of complexity of the tax dispute.
By contrast, all taxpayers in New Zealand, regardless of their size, or the size of their tax dispute, must go through the same process. Many taxpayers with small tax disputes are either ‘burnt off’ through the dispute process or may not even challenge Inland Revenue’s position, having to accept their fate.
Changes to the administration of the disputes system, particularly for small taxpayers, were recommended by the Tax Working Group, but were, for the most part, rejected by the Government. That must be very disappointing for small taxpayers. Other commentators have noted that it is simply bad administration to have a tax system that involves such a degree of cost and complexity leading to taxpayers being financially and emotionally burnt off and so unable to pursue genuine disputes.
As tax dispute experts, we can assist all taxpayers faced with the daunting task of battling the Inland Revenue. However, for many, engaging professional help is onerous and frankly can cost a lot more than the tax at stake. In an age where cutting compliance costs and simplifying processes through technology is at the forefront of Government programs, perhaps it is time to consider a shortened, or simplified tax disputes process for small taxpayers.