Tax Disputes Resolution Process

The disputes procedure in Part IVA of the Tax Administration Act 1994 provides a compulsory code for resolving issues over the interpretation and application of the tax laws between the taxpayers and the Commissioner if they are unable to agree.

The process is designed to resolve disagreements as quickly as possible through:
• early identification of all issues,
• full disclosure of the facts and evidence, and
• consultation between the taxpayers and the Commissioner.

The disputes process can be initiated by a taxpayer if the taxpayer:
• disagrees with a disputable decision or assessment made by the Commissioner, or
• wants to propose an adjustment to the taxpayer’s tax return.

This is called a taxpayer-initiated dispute.

The Commissioner can also start the disputes process if the Commissioner disagrees with a return the taxpayer has filed and has been unable to resolve the issue with the taxpayer. The Commissioner cannot simply issue an assessment (with certain exceptions) without going through the disputes process, before that assessment is made. This is called a Commissioner-initiated dispute and follows a slightly different process.

The aim of the disputes process is to encourage an “all cards on the table” approach and the resolution of issues without the need for litigation. It is made up of a combination of prescriptive statutory requirements with rigid timeframes and non-binding administrative steps. It dictates the exchange of a series of prescribed documents within strict timeframes. Taxpayers who fail or elect not to follow all steps required under the disputes process are precluded from disputing an assessment. 

A Notice of Proposed Adjustment (“NOPA”) is the usual first step in the formal tax disputes resolution process. It starts a complicated statutory process and triggers the noted timeframes. The NOPA must contain information about the tax adjustments the Commissioner (or the taxpayer as the case may be) wants to make, the facts on which she relies, and the legal arguments. Once this is received a taxpayer has two months to provide the Commissioner with a Notice of Response (“NOR”). If the taxpayer misses the deadline, the taxpayer loses their dispute rights unless extraordinary circumstances exist. The NOR must state how the taxpayer disagrees with the Commissioner’s NOPA and must follow a prescribed form and content.

The NOPA and NOR are not binding documents but they set the scene for the next stage in the process. Normally, a conference will take place to discuss the parties’ differences and if the dispute remains unresolved after the conference phase, the Commissioner will issue a disclosure notice and a binding Statement of Position (“SOP”). The taxpayer has another two months from the issue of the Commissioner’s SOP to respond with their own.

SOP’s are extremely important. They must contain all of the facts, issues and legal arguments the parties want to rely on in any later tax challenge before the Courts. With some limited exceptions, if facts, issues and arguments are not contained in the SOP’s from either party, they cannot be raised at a later stage in proceedings. This makes it very important to prepare these documents with legal input from a professional adviser.

If the Commissioner does not accept a taxpayer’s SOP the Commissioner will refer the dispute to the Disputes Review Unit, an independent adjudication section within Inland Revenue. The adjudicators will then decide if they accept the Commissioner’s or the taxpayer’s position. If they accept the Commissioner’s position, they will issue an assessment which confirms the Commissioner’s proposed adjustment.

Alternatively, if the Commissioner is faced with a possible time bar, they may skip the adjudication stage. The Commissioner is entitled to assess, provided they have received and considered the taxpayer’s SOP, without the matter being referred to adjudication.

Navigating through the disputes process is far from straightforward – it is complicated and time consuming. The whole process is characterised by firm deadlines, where failure to comply leads to a loss of taxpayer dispute rights. The usual response period under the process is two months. Although it is possible to seek further time to meet the steps that the process requires, the rules for time extensions make these difficult to obtain. This means that formal disputes can sometimes be conducted under extreme time pressure. The complexity of the process requires care, attention to detail, efficient management and can involve considerable cost. It is highly recommended that the taxpayers engage a tax lawyer to advise and manage tax disputes. This is especially important if complex tax issues are involved.

Grayson Clements Legal have the expertise to help with all aspects of tax disputes process and preparing NOPAs, NORs and SOPs.