Section 113 of the Tax Administration Act 1994 provides that the Commissioner “may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness”. A recent decision of the High Court (Westpac Securities NZ Limited v Commissioner of Inland Revenue) considers the scope of that power. A copy of the Court’s decision is available here.
In summary, the Court ruled that, where a taxpayer adopts a correct (that is, legally available) but disadvantageous, tax position, the Commissioner has the power under section 113 to amend the taxpayer’s assessment so as to negate that disadvantage by adopting another correct tax position.1 The Court also ruled that section IC 5(4) of the Income Tax Act 2007 (which provides that an election by one company to make available a net loss to another company in the same group is irrevocable) does not preclude Inland Revenue from amending the assessments under section 113 so as to alter a loss offset election.
Two companies in the Westpac group (“Westpac Trust Securities” and “Westpac Securities”) were at the relevant times operating in the United Kingdom. Both paid UK tax on the profits of their UK operations.
New Zealand law allows a credit against New Zealand tax for the tax paid in the United Kingdom (an "FTC"). But FTCs can be used only to offset a New Zealand tax liability in the income year in which the FTC arises.
In returns for the relevant income tax years, net losses from other companies in the Westpac group were offset against the net income of Westpac Trust Securities and Westpac Securities. A consequence of the net losses being offset was that those two companies would be unable to use FTCs that would otherwise have been available.
Westpac asked the Commissioner to exercise her section 113 power to amend the relevant assessments by reversing the loss offsets made in favour of Westpac Trust Securities and Westpac Securities, so as to allow the FTCs to be used. The Commissioner declined to do so for two reasons:2
- She considered that the making of the loss offset elections was a legally valid option under the legislation and therefore not “a genuine error” within the terms of her Standard Practice Statement 07/03 and so did not fall within the power of amendment conferred on her by section 113 as the elections had not resulted in incorrect tax positions being taken.
- Neither Westpac nor the Commissioner could, in her view, revoke the loss offset elections due to the irrevocable nature of such elections resulting from section IC 5(4).
Westpac applied for judicial review, seeking a declaration that, as a matter of law, the Commissioner is able to amend the relevant assessments. The case raised what the Court described as a “classic question of judicial review: has the decision-maker correctly interpreted the statutory provision providing the power of decision making”.3
The Court's decision
The Court concluded that the Commissioner had not correctly interpreted her section 113 power, and that as matter of law she is able to exercise her discretion under section 113 to correct the Westpac returns in the manner Westpac had sought.
The critical issue was what is meant by “correctness” in the context of the section 113 power to amend an assessment “in order to ensure its correctness”. In summary, the Court’s reasoning was that:
- Section 113 contains no reference to error as a prerequisite for the exercise of the Commissioner’s discretion. Rather, the wording focuses on the result of the Commissioner’s amendment being a correct assessment.4
- The concept of correctness is not necessarily a binary one. In an appropriate context multiple positions may be “correct” in the sense of being free from error, true or accurate, though only one position may be most appropriate for a particular situation.5
- Therefore, on the plain wording of section 113, the Commissioner is not precluded from amending an assessment which is, on one understanding, correct, to an alternative position that is also correct if that alternative is most appropriate for a particular situation.6
- This approach is supported by the role section 113 has in the Tax Administration Act. Section 113 is the primary amendment power available following utilisation of the disputes process and also plays a broader role in the self-assessment scheme enabling the Commissioner to correct undisputed errors, or make amendments at the Commissioner’s or taxpayer’s initiative outside of the time period in which the disputes resolution procedures are available. Earlier case law had also emphasised the broad role that section 113 has, and therefore its broad scope.7
The Court then considered the Commissioner's argument that in the particular case where loss offset elections are at issue, section IC 5(4) precludes Inland Revenue from amending the relevant assessments under section 113 so as to alter a loss offset election on the basis that such elections are “irrevocable”. The Court held that section IC 5(4) does not preclude the Commissioner from amending, under section 113, loss offset elections a taxpayer has made. In summary, the Court’s reasons were:
- The role of the section 113 power necessitates that it not be unduly constrained. It follows that this power should not lightly be said to be constrained by the irrevocable nature of an election in the Income Tax Act.8
- The Court accepted Westpac’s argument that section IC 5(4) is to clarify that although the form of an election to offset a loss is a unilateral choice by a taxpayer, that choice cannot unilaterally be revoked. If one taxpayer alone could revoke the election, the Commissioner would be left with the practical difficulties of pursuing the other taxpayer in order to make a consequential amendment to its assessment. But those same considerations do not apply to preclude the Commissioner from amending an irrevocable election as the Commissioner can simply consider the presence or absence of such factors when determining whether or not to exercise her discretion.9
As the Court observed in addressing the Commissioner’s section IC 5(4) argument, the Income Tax Act contains a number of elections, with the consequence that there will often be more than one “correct” (in the sense of “legally available”) tax position available to the taxpayer. The Court’s judgment confirms that the section 113 power is broad enough to enable the Commissioner to amend an assessment even if the position the taxpayer seeks to amend is one that was “legally available”.
As the Court acknowledged, however, the Commissioner retains the discretion to exercise or not exercise the section 113 power. “There could be any number of valid reasons why the Commissioner may decline to exercise her discretion in situations of regretted correct tax positions, including where the taxpayer appears to be gaming the system.”10 The Commissioner has issued guidance on the factors she will take into account in deciding whether to exercise that discretion,11 and early last year initiated a public consultation process on the updating of that guidance.12
While the decision in the Westpac case does not address in detail how the Commissioner’s discretion should be exercised in particular cases, it does address the threshold issue as to the scope of the section 113 power. Consistently with earlier case law, the Court has confirmed that the section 113 power is a broad one, and in doing so has provided a comprehensive analysis of the scope and purpose of section 113.
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