When tax pooling requires the Commissioner’s discretion
We are often asked “Can I buy tax credits for old income tax or non-income tax, if a return hasn’t been filed for the period previously?” The answer is that you may be able to. But first, let’s review the contexts in which tax is purchased.
Approximately 85% of tax credits purchased are for income tax and purchased within 75 days of the taxpayer’s terminal tax date.
The second most common scenario – approximately 10% – are tax credits purchased for older income tax, or non-income tax. This occurs when a return has been filed but a reassessment results from an audit or voluntary disclosure. In this situation the taxpayer can purchase the increased amount of tax required. The legislation is black and white in these scenarios.
A very small proportion of tax credits – less than 5% – are purchased for income tax beyond 75 days after terminal, or non-income tax where a return has not been previously filed. The provisions in the legislation outline that this is strictly at the Commissioner’s discretion.
Tax types where discretion can be granted
The Commissioner can only grant discretion for two tax types – Income tax and RWT/DWT. The reason for this is that the submission made to the Finance and Expenditure Committee (FEC) some years ago only included these two tax types and Inland Revenue didn’t have time to consider the impact of other tax types. So only INC and RWT/DWT were written into the legislation.
Let’s take a closer look at these two tax types:
Income Tax test
The legislation includes a three-part test. If the taxpayer is applying for discretion to buy income tax credits, they must pass all three parts of the test:
- The increased tax must have arisen as a result of an event or circumstance beyond the person’s control.
- The person must have reasonable justification for not filing the return on time.
- The person must have a good compliance history (filing and paying) for the two income years prior to the income year in which the voluntary disclosure is made.
Withholding Taxes test
Applications for discretion to buy credits for DWT seem to be measured more leniently. Primarily the Commissioner is considering:
- Whether it’s a genuine oversight vs a planned delay. This is largely judged on compliance history.
- Whether the application for discretion is being made too far from the original due date.
In October 2011, the Tax Information Bulletin (TIB) Vol 23, No. 8 outlined a case that would pass the discretion test for income tax:
- John immigrated to NZ five years ago to retire.
- He sought the advice of an advisor to ensure his NZ obligations were met.
- John had extensive foreign investments but was incorrectly advised that because these were being taxed in the countries in which they were held, he was not required to file NZ tax returns and return the income.
- John considered himself to be a “non-filing taxpayer” as he had no other income.
- By chance John discovered the advice he had received was incorrect.
- John engaged a tax agent who confirmed the advice was incorrect, that he had always been a “filing taxpayer”, and should have filed IR3 returns for all years he had been a NZ resident declaring his overseas income (and claim any overseas tax paid).
John’s tax agent made a voluntary disclosure, filing the last five years together with an application to use tax pooling. The Commissioner granted discretion, accepting that John did what any other reasonable person would be expected to do, that he had a reasonable excuse for not filing, and he took immediate steps to make a voluntary disclosure.
How to apply for discretion
Regardless of whether the taxpayer has an income tax liability or a RWT/DWT liability, the process to apply to the Commissioner for discretion is the same.
Simply outline the case in a few paragraphs and email to firstname.lastname@example.org. Be sure to include the taxpayer’s details so their compliance history can be reviewed. The tax pooling team that review these cases will usually reply within 7-10 days.
Here is a sample letter (dated Oct 2018) which resulted in discretion granted to purchase tax credits for DWT. Their client was able to save $520 in interest and successfully avoided late payment penalties.
To whom it concerns
We are the accountants for Taxpayer X [IRD number included] and have recently completed the Company’s 2018 accounts.
A dividend was declared and paid via the shareholders’ current accounts on 1 October 2017 – this occurred immediately prior to a major shareholding change within the Company. It has become apparent that the payment of DWT and filing of the IR4K were overlooked at the time. We have since filed the IR4K return.
In regards to payment of the DWT of $23,562.72 (due 20 November 2017), we request Inland Revenue’s discretion to buy tax using tax pooling.
Can you please advise whether we are able to proceed with the tax purchase?
It’s not uncommon to see DWT cases granted discretion, however income tax cases are few and far between.
It’s a straightforward process to apply for discretion and you’ll get a decision relatively quickly. We strongly recommend that you apply through the right channels – directing your request to the investigator is not appropriate and could be challenged.
In summary, if you believe the taxpayer passes the tests outlined above, we encourage you to apply for discretion. The interest savings can be significant on past tax liabilities. Keep us informed in the process, we’re here to help you every step of the way.
- RP 17B (10)
- Tax Information Bulletin (TIB) Vol 23 No 8 Oct 2011, Pages 43 - 45