Over the past few years there has been a pronounced improvement in the manner in which Inland Revenue selects and conducts its investigations.
There has been an increased focus on data analysis, comparisons to statistical norms, and use of external information such as land transfer data. As a result there is an increasing need to consider how IRD might approach a particular transaction or issue.
In cases where the position is unclear or the dollars involved are material, consideration needs to be given to approaching IRD beforehand to seek their approval or view to treat something in a particular way. This can occur by approaching IRD for a ‘private binding ruling’ or a ‘non-binding indicative view’.
Both processes are positive and collaborative, as IRD generally are focused on determining the correct position under the law. In contrast, if IRD approach the matter ‘after the fact’ through the course of an investigation there may be more focus on proving a tax shortfall exists; and their view of the law can feel as though it is bending to accommodate that outcome. It can become emotional, as each party becomes increasingly entrenched in their view, giving rise to significant cost to defend a position and if the taxpayer is unsuccessful, penalties could apply. Too often the incremental cost will exceed what it would have cost to approach IRD before-hand.
A private binding ruling provides the highest degree of comfort, because if successful, the outcome is binding on IRD. This provides peace of mind that a different individual from IRD won’t take a different view in the future. The binding rulings process is not subject to a legislated timeframe within which one must be provided, however IRD work to a timeframe of 3 months and are very good at meeting that time frame. They are also willing to provide early indications of their expected view if required for the purpose of a particular transaction that may be occurring. IRD do charge a fee to provide a binding ruling, it does so at an hourly rate of approximately $160 per hour. The total IRD cost for a ruling is generally about $15k – $20k. This cost must be considered in light of the tax involved and the comfort otherwise associated with taking a particular position. When this is balanced with the downside risk of IRD disputing the treatment in the future it quickly becomes reasonable.
A further option is to acquire an indicative view. It’s understood IRD will consider issues through this process if it will take 20 hours or less. IRD don’t charge for providing an indicative view, however the outcome is not binding. Irrespective of the fact that the IRD is not bound by the outcome, from a practical point of view it should provide a high degree of comfort. It would be unusual for an alternative view to later be taken by IRD, and if this did occur, the fact that an indicative view was acquired should provide a strong negotiating position when asserting no penalties should be charged.