Well, Excuse Me!

Q: What's the definition of a good tax accountant?

A: Someone who has a loophole named after him.

-McMaster Accounting Society

Time Taxpayers Stopped Being Sorry for Asking

by Brent Gilchrist

Small business owners lose a lot of sleep for fear of exposing themselves to Inland Revenue, so it's not surprising that many rulings are requested by tax advisers on a general basis without the client's name being given.  But now it seems that Inland Revenue wants name and IRD number before it is prepared to consider any request for the commissioner's view on anything.

A recent case demonstrates the frustration at trying to get a handle on Inland Revenue's view of a tax law without triggering a tax audit.  A motelier is selling his business and part of the deal is that he gets $100,000 for assigning the lease of the property which his business leases from the land owner.  The simple question he asked of his accountant was whether the amount was taxable.

The accountant concluded that an Inland Revenue ruling stated clearly that the proceeds in such cases are tax free but that the matter was not certain because Inland Revenue has publicly stated that its rulings manual is out of date so should not be relied on.

Deciding that it was too risky to proceed without knowing whether the Inland Revenue policy was still current, the motelier asked his accountant to write to Inland Revenue.  The letter backgrounded the deal and stated: "Please confirm that the commissioner's policy as outlined in the Technical Rulings Manual is current policy."  A straightforward and reasonable question which required a "yes" or "no" answer.  The request did not ask the commissioner to bind himself to a decision on this case, it just asked if the particular policy could still be relied on.

Back comes the answer: "Unfortunately the department is unable to give a nonbinding ruling without knowing the name and Inland Revenue number of your client."  Of course the motelier was reluctant to make himself known to the taxman as - though not so much concerned at having to pay the tax - the last thing he needed was Inland Revenue involving itself in the sale and making the buyer nervous.

Why did the Inland Revenue want to know his name and IRD number just to be able to confirm an existing ruling?

The other choice was for the motelier to ask for a binding ruling so that Inland Revenue had no chance to say "yes" and then some time later say "no" and ask for tax with interest.  But you must pay Inland Revenue for binding rulings and most applications will need the input of a tax specialist, so the process is not cheap and the delay can be several months.  In my experience, the binding rulings process has ended up being of little practical use for small businesses.

The problem with involving Inland Revenue on the more informal non-binding rulings basis is that the officers set the task of answering these requests do not generally have the experience and resources as their binding rulings big brothers in national office.  So they are more likely to take the view that there must be doubt for the question to be asked, so the answer should be "no."

This requires the taxpayer to prove his case by being forced to declare the income and start the formal and costly disputes resolution process.  In the past such officers would rely on the rulings manual but now they have been told it is out of date.

So here are the motelier's choices:

bulletJust pay tax on the $100,000 and lose sleep wondering why he paid $30,000 to Inland Revenue when its own rulings say no tax is payable.
bulletKeep quiet and lose sleep wondering if Inland Revenue will ever question the matter and tax the $100,000 up to 10 years later with interest and perhaps penalties.
bulletProvide Inland Revenue with his name and IRD number and lose sleep wondering if he just volunteered for a tax investigation and perhaps a lost sale through a nervous buyer.

In my view, it is simply not acceptable for Inland Revenue to have a public manual ruling on a particular matter, to publish a general disclaimer stating the manual cannot be relied on because it is out of date, and to seek details of taxpayers who may be relying on the rulings before telling them if the ruling is current.  If the manual is out of date then it should be updated promptly.  Inland Revenue has no problem in applying out-of-date policy statements when it suits.  The taxpaying public needs to know what Inland Revenue's view is on general tax laws without having to expose themselves to a tax audit just for asking.

It's time for Inland Revenue staff to lose some sleep by spending some overtime updating their policy statements or else confessing that they no longer know how to keep up to date with the tax laws they so often ruthlessly enforce.

Brent Gilchrist is managing director of consultancy Gilchrist Taxation.  His column, Tax Talk, alternates with Peter Cullen's on employment issues.

Source: The Dominion Wednesday 24 November 1999

This rather reminds me of the situation at the Companies Office (see Straight from the Source, Pretty Please) - in my opinion, another example where government employees are not performing their jobs as designed and the populace, paying for a service and needing to depend on that service, are left without that support.

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