Short process rulings

It is inevitable that at some stage a person will undertake a transaction where the applicable tax treatment is complex or unclear. This could be due to a complex factual scenario, new legislation, new Inland Revenue commentary, or the existence of complex or poorly drafted legislation.

An option to mitigate risk and acquire certainty is to apply to Inland Revenue for a ruling in which Inland Revenue agrees, on a binding basis, how the law will apply to a specific situation. There are a few different types of rulings. Prior to 1 October 2019, businesses would typically apply for a private binding ruling. However, with an Inland Revenue cost of around $10k – $20k (depending on the issue), plus advisor fees to prepare the application they are more commonly acquired by large businesses or wealthy individuals and involve large tax amounts.

This changed from 1 October 2019 when the ‘short-process ruling’ was introduced – these make for an interesting proposition.

Inland Revenue charges a set amount of $2,000 for a short process ruling. This makes the cost very reasonable and in some cases could be less than what a tax advisor would charge to advise that a matter is unclear.

There are eligibility criteria to satisfy:

  • The applicant must have an annual gross income of less than $20m.
  • If the applicant is a company, that is a member of a group of companies, the gross turnover of the group must be less than $20m.
  • The tax involved in relation to the subject of the short-process ruling must be less than $1m.

There will also be the cost of preparing the application and responding to any questions Inland Revenue raise as they work through the matter. But overall, the cost and the process is not onerous.

This only leaves the question of whether to apply for a short process ruling. There are both strategic and emotional elements to this question.

If the question is whether a tax deduction is available for a particular expense, a person has the option of taking the deduction anyway, knowing it is unclear, and knowing Inland Revenue may challenge it if they identify it. That is an ordinary commercial decision. However, a short process ruling application may be successful and will provide
peace of mind that the deduction can be claimed and cannot be challenged later. The downside though, is that if Inland Revenue takes a conservative view of the law they may decide the tax deduction is not available. Now in that scenario a person could withdraw the ruling and take the deduction anyway, but the deduction is being taken with the knowledge that Inland Revenue disagrees and there may be a greater risk of review by virtue of the short process ruling being applied for in the first place.

Notwithstanding the pros and cons of applying for a short process ruling, they provide a very cost-effective way to resolve uncertainty and should always be considered an option.