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Disputes process

Removing the small claims jurisdiction of the TRA

Sections 3(1), 89E, 89N(1)(vii), 138N(2) and 138O of the Tax Administration Act 1994; sections 13A(b)(ii), 13B and 26A(2) of the Taxation Review Authorities Act 1994; regulations 2, 5, 7, 12(2), Part 3, 27(2), 28(b) and the schedule to the Taxation Review Authorities Regulations 1998

Key features

These provisions have been amended or repealed to reflect the fact that the right to have a dispute heard before the small claims jurisdiction of the Taxation Review Authority (TRA) has been removed.


The small claims jurisdiction of the TRA was established in 1996 as part of the major overhaul of the tax disputes system that took place at that time. The aim of establishing the small claims jurisdiction was to provide taxpayers with a truncated process whereby simple disputes could be heard quickly.

The small claims jurisdiction was used less than 10 times between its establishment and the introduction of the Taxation (Tax Administration and Remedial Matters) Bill 2010. There may be numerous reasons why taxpayers did not elect to use this forum, including that the eligibility criteria were relatively restrictive and there was no appeal right against a decision of the TRA acting in its small claims capacity.

The removal of the small claims jurisdiction should not impede the access of smaller tax disputes to the judiciary. An Inland Revenue standard practice statement (SPS 10/04) sets out a number of criteria under which the Commissioner will agree to a truncated disputes process. From a small claims perspective, the key criterion is that a truncated process will be agreed to when the core tax in dispute is under $75,000. This practice will allow taxpayers to have a dispute heard by the TRA's general jurisdiction at around the same time as they would have been able to elect to the small claims jurisdiction under the repealed provisions. The Commissioner intends to release new standard practice statements on the disputes process that reflect these legislative changes. It is anticipated that, under these revised standard practice statements, the $75,000 threshold will be applicable to both taxpayer- and Commissioner-initiated disputes.

It is also important to note that the TRA acting in its general jurisdiction is not necessarily more formal than the TRA acting in its small claims jurisdiction. Taxpayers are able to represent themselves if they wish. As a Commission of Inquiry, the TRA has considerable flexibility in the procedures adopted, including the ability to ask questions to ensure that the "right" result is reached, irrespective of the tax or legal expertise of the presenting parties.

Application date

A taxpayer's right to elect for their dispute to be heard in the small claims jurisdiction was removed from 29 August 2011.

Evidence exclusion rule

Section 138G of the Tax Administration Act 1994; sections 17(2A) and 17(2B) of the Taxation Review Authorities Act 1994

Key features

The evidence exclusion rule (EER) is contained in section 138G of the TAA. If a tax dispute reaches a hearing authority, the EER previously limited the parties to the issues, propositions of law, facts and evidence contained in their respective Statements of Position (SOP). This rule has been relaxed so that the parties are now only limited to the issues and propositions of law contained in their SOP.


When a party to a tax dispute issues a SOP, section 89M of the TAA requires the SOP to contain:

  • an outline of the facts on which they intend to rely;
  • an outline of the evidence on which they intend to rely;
  • an outline of the issues they consider will arise; and
  • the propositions of law on which they intend to rely.

Section 138G reinforced these requirements by providing that, if SOPs have been issued and the dispute reached a hearing authority, the parties could only raise the facts, evidence, issues and propositions of law disclosed in their SOP (subject to some discretion afforded to the hearing authority).

The EER was designed to encourage an "all cards on the table" approach to tax disputes. If a party is prevented from using undisclosed material in court, they are effectively compelled to provide the other party with all the material they have that supports their contentions. Another way of looking at the issue is that the EER prevented "trial by ambush", where one party could choose to withhold key information until the dispute has reached the courts.

The policy underlying the EER remains relevant. However, the EER in its previous form had the unintended consequence of encouraging parties to a dispute to produce very lengthy SOPs. The party issuing the SOP may include every potentially relevant fact or piece of evidence in their SOP for fear of being denied the ability to raise information at the court stage. This in turn necessitates the other party having to respond to the relevant parts of the original SOP, as well as set out the differing interpretation and version of events. The result is that SOPs can be large unwieldy documents, a significant portion of which may be irrelevant to the ultimate resolution of the dispute.

The amendments therefore relax the EER so that parties will still be bound to the issues and propositions of law contained in their SOP, but not the facts and evidence. This should allow the parties to enter the challenge phase of a dispute knowing that the dispute has been adequately framed, by issues and propositions of law that cannot easily be amended. However, parties will have more flexibility to introduce new facts and evidence at the hearing authority stage. It is important to note that relaxing the EER does not alter the requirements of the SOP - meaning that the parties are still required to provide an outline of the facts and evidence on which they intend to rely. The difference is that whether new facts and evidence can be raised will be left to the discretion of the relevant hearing authority.

The changes do not affect disputes that reach a hearing authority for which SOPs have not been issued (that is, a truncated dispute). Such disputes remain outside the scope of the EER.

Application date

The EER is relaxed in respect of disputes when a disclosure notice was issued on or after 29 August 2011.

Exceptional circumstances

Sections 3(1), 89K, 89L, 108 and 108A of the Tax Administration Act 1994

Key features

The circumstances in which the Commissioner can accept documents filed out of time in the disputes process have been widened and rules put in place to make the Commissioner's refusal to accept late documents challengeable in the TRA.

The exceptional circumstances test for the Commissioner has also been amended to bring it more in line with the test that applies to taxpayers.


The disputes process requires a taxpayer to produce certain documents within a statutory "response period". If documents are not received within the response period the taxpayer is treated as having accepted the position adopted by the Commissioner. This effectively results in the dispute coming to a close in the Commissioner's favour.

However, a taxpayer can file a document outside the response period when exceptional circumstances exist. Exceptional circumstances generally exist when an event outside the control of the taxpayer has prevented the timely filing of a document. An example of an exceptional circumstance is a natural disaster that affects the taxpayer's immediate environment. However, the courts have considered other instances to determine where the boundaries of exceptional circumstances lie, particularly in the context of the similarly worded test in section 138D of the TAA.1

The definition of "exceptional circumstances" in section 89K has not actually been amended. Instead the circumstances in which late documents can be accepted have been expanded to include situations where the Commissioner considers that the disputant has a demonstrable intention to enter into or continue the disputes process at the relevant time. It is anticipated that forthcoming revised standard practice statements on the disputes process will set out in more detail how the Commissioner intends to interpret this provision.

The revised rule applies to the three response periods that apply to a taxpayer engaged in the disputes process under Part IVA. These are the response periods for rejecting a Notice of Proposed Adjustment (NOPA) from the Commissioner, issuing a NOPA and issuing a Statement of Position (SOP). The expanded test does not apply to the response period for issuing a challenge under section 138, in particular, the exceptional circumstances test under section 138D(2) remains unchanged.

If the Commissioner does not exercise the discretion to accept a late document in favour of the taxpayer, the Commissioner must issue a refusal notice, advising the taxpayer of that decision, within one month of the taxpayer sending the relevant notice.2 In the event that the Commissioner fails to issue a refusal notice within that one-month period, such a notice is treated as being provided at the expiry of that month.3

Receipt of an actual or deemed refusal notice allows the taxpayer the right to challenge the notice in the TRA (and the definition of "challenge" in section 3(1) has been updated to reflect this). The challenge must be filed with the TRA within two months of the refusal notice. Because section 89K(6) confers a direct challenge right, the taxpayer is not required to dispute the refusal notice through the issue of a NOPA. In other words, there is no need to start an entirely separate dispute in respect of the refusal notice - any disagreement over the notice can be challenged directly in the TRA.

To reflect the fact that the substantive dispute will effectively be "on hold" in the event that a refusal notice is challenged, the statutory time bars in sections 108 and 108A have been extended to include this period. The extension will be for the period between the date of the refusal notice and the date the subsequent challenge is judged successful by a court or, alternatively, the date the Commissioner concedes.

The exceptional circumstances test that applies to the Commissioner, in section 89L(3), has also been amended to remove reference to changes to a tax law, a new law or a court decision made during the response period.

Application date

The revised exceptional circumstances test applies from 29 August 2011.

Challenge notices

Sections 3(1), 89H, 89J, 89L, 89M, 89P and 138B(3) of the Tax Administration Act 1994

Key features

A statutory notice called a "challenge notice" has been introduced to mark the conclusion of a taxpayer-initiated dispute. These challenge notices will form the basis for any subsequent challenge in the courts. The Commissioner must issue a challenge notice within four years of a dispute being commenced.


Under the previous rules, a taxpayer could effectively opt-out of a dispute they had initiated at any time following receipt of the Commissioner's Notice of Response (NOR). This created an asymmetry between disputes initiated by the Commissioner and those initiated by a taxpayer.

Under a Commissioner-initiated dispute (ie, a dispute where the NOPA is issued by the Commissioner), the combined effect of Part IVA was that the Commissioner could generally not issue an amended assessment until after the SOPs had been exchanged. By contrast, a taxpayer could technically initiate a dispute with a NOPA, wait for the Commissioner's NOR and then immediately challenge the assessment in the TRA.

This result created many difficulties. By definition, the Commissioner was generally not aware of an impending taxpayer-initiated dispute until the NOPA was received. The Commissioner therefore had only the two-month response period for the NOR to essentially reach a final view of the adjustment proposed. This runs counter to the "all cards on the table" philosophy underlying the disputes system-especially when it is considered that the Commissioner may wish to conduct an audit as well as issue the NOR within the two-month response period.

To ensure that the full disputes process is followed irrespective of which party commenced the process (other than in defined circumstances, such as when the parties agree to a truncated process), a "challenge notice" has been created to mark the conclusion of a taxpayer-initiated dispute.4 A challenge notice must state that the Commissioner will not be issuing an amended assessment that includes or takes into account the adjustment proposed by the taxpayer and that a challenge may proceed.5 The challenge notice is therefore equivalent to an amended assessment for taxpayer-initiated disputes and signals the end of the disputes process under Part IVA and the start of the challenge process under Part VIIIA.

Like an amended assessment, a challenge notice has a time period within which it must be issued. Given that an amended assessment must be issued within four years of the end of the tax year in which the relevant return is provided, section 89O imposes a similar four-year restriction on the challenge notice. The four-year period commences on the date the taxpayer issues their NOPA. If the Commissioner fails to issue a challenge notice within the four-year period, the taxpayer's proposed adjustment is deemed to be accepted.6

Under section 89N(3), the Commissioner cannot issue an amended assessment until after the taxpayer's SOP has been considered, unless an exception listed in section 89N(1)(c)applies. To create a parallel for the issue of a challenge notice, section 89P(3) provides that a challenge notice cannot be issued until after the Commissioner has issued a SOP, with the exceptions in section 89N(1)(c) still being relevant. No challenge notice is necessary to the extent that a dispute has ended.7

If exceptional circumstances exist, the Commissioner can apply to the High Court for an extension of the four-year timeframe for issuing a challenge notice.8

To reflect the existence of the challenge notice, the challenge provisions in section 138B(3) have been amended. A taxpayer can now challenge an assessment when they have issued a NOPA only if the Commissioner has issued a challenge notice. This rule replaces the previous regime (discussed above) under which a taxpayer could opt-out of such disputes after receipt of any "written disputable decision" from the Commissioner rejecting a proposed adjustment.

Consistent with the policy of completing the full disputes process in appropriate cases, section 89M has also been amended to clarify that the Commissioner must issue a SOP in response to a taxpayer's SOP in a taxpayer-initiated dispute.

Application date

Because the challenge notice is only relevant for taxpayer-initiated disputes, these changes apply in respect of disputes for which a taxpayer's NOPA was issued after 29 August 2011.

Remedial disputes changes

Definition of "disputable decision"

Section 3(1) of the Tax Administration Act 1994

The definition of "disputable decision" has been amended to avoid a duplication that previously existed and to confirm that most notices provided by the Commissioner as part of the disputes process are themselves not "disputable decisions". This is to avoid the possibility of, for example, a SOP being treated as a disputable decision, which can itself be the subject of a taxpayer NOPA. The Act already provides mechanisms to respond to disputes documents.

Application date

This change applies from 29 August 2011.

Extinguishing tax losses

Section 89C(1b) of the Tax Administration Act 1994

Section 89C lists a number of circumstances where the Commissioner is able to issue an amended assessment without having to first issue a NOPA. Subsection (1b) has been added to clarify that the Commissioner does not need to issue a NOPA when the Commissioner has made a decision to write-off tax debt under section 177C. This clarifies that write-off decisions are not intended to be subject to the dispute process.

Application date

This change applies from 29 August 2011.

TRA regulations

Regulations 4 and 11(2) of the Taxation Review Authorities Regulations 1998

Regulation 4 has been amended so that it refers to the District Court Rules currently in force, being the District Court Rules 2009. Regulation 11(2) has been amended so that the Commissioner must file and serve a notice of defence within 25 working days of service of a notice of claim (previously 40 working days). This aligns the TRA timeframes with those that operate for standard track proceedings in the High Court.

Application date

This change applies from 29 August 2011.

Shortened process for taxpayer initiated disputes in limited circumstances

Section 138B(4) of the Tax Administration Act 1994

Two of the situations in which the Commissioner can bypass the disputes process under section 89C are:

  • when the relevant facts and law are identical to those for another assessment for the taxpayer in another period;
  • when the assessment will correct a tax position taken by the taxpayer as a consequence of a tax position taken by another taxpayer.

The first of these covers circumstances where a taxpayer has adopted the same tax position in more than one tax period. The second relates to when one taxpayer's position is dependent on the position of another taxpayer, for example, when losses have been transferred between group companies and the denial of those losses will automatically mean they were unable to be transferred. The Commissioner being able to bypass the disputes process in these circumstances reflects that a second dispute may be unnecessary if the outcome is entirely contingent on the result of another dispute.

The new section 138B(4) provides a mirror process for taxpayer-initiated disputes. Under section 138B(4), the taxpayer must notify the Commissioner in writing setting out the proposed adjustment and sufficient details to identify how the adjustment fits into one of the two categories for a fast-track procedure. The two categories are broadly identical to those available to the Commissioner under section 89C (discussed above):

  • The adjustment is in relation to a matter for which the material facts and relevant law are identical to those for another assessment for the taxpayer for another period.
  • The adjustment corrects a tax position taken by the taxpayer or an associated person as a consequence or result of an incorrect tax position taken by another taxpayer-
  • in either case when the other position is the subject of, or was the subject of, court proceedings.

In appropriate cases, this process should allow these subsequent disputes to "catch up" to the main dispute so that the hearing authority can consolidate them if it sees fit.

Application date

Because these truncated proceedings are only relevant for taxpayer-initiated disputes, these changes apply in respect of disputes for which a taxpayer's NOPA was issued after 29 August 2011.


1 See, for example, TRA No 11/09 (2011) 25 NZTC 1-002 (in respect of section 89K) and CIR v Fuji Xerox NZ Limited (2002) 20 NZTC 17,470 (CA) (in respect of section 138D).

2 Section 89K(4)

3 Section 89K(5)

4 "Challenge notice" is now a defined term in section 3(1)

5 Section 89P(4)

6 Sections 89H(4) and 89J(2)

7 Section 89P(2)

8 Section 89L(1)

Date published: 05 Dec 2011

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