One of the very first things to look at when considering an Inland Revenue risk review, investigation or a taxpayer’s voluntary disclosure, is the applicability of the statute time bar.
If available, it could mean the Commissioner is unable to reassess an income tax return or GST return to increase the amount of tax payable. In the case of a voluntary disclosure, it will have an impact on how many income years are the subject of the disclosure.
The time bar rules are different for income tax and goods and services tax (GST).
Income Tax Time Bar
The income tax time bar applies to a tax return if four years have passed from the end of the income year in which the tax return was filed. If a tax return has not been filed, the time bar period has not been activated.
In determining the four-year period, in practice one can deduct the time that the dispute process would take to complete before the Commissioner could issue an amended assessment. To calculate this period one assumes a taxpayer will file a Notice of Response to the Commissioner’s Notice of Proposed Adjustment on the last day of the two month response period, that the Commissioner will file a Statement of Position immediately thereafter, and the taxpayer will file their Statement of Position on the last day of the next two month period.
For a 31 March time bar expiry date, effectively the Commissioner would have to issue a NOPA in early December to ensure an amended assessment could be validly issued before the four year time bar period expires on 31 March. On occasions IR investigators can overlook this fact, or if they are conscious of it they will seek a time bar waiver from the taxpayer, and if not signed would likely issue a NOPA immediately. Note there are certain limited scenarios where the Commissioner can simply issue an assessment.
The income tax time bar will not apply if the Commissioner considers the taxpayer’s income tax return filed is fraudulent or wilfully misleading, or the tax return does not mention income of a particular nature or derived from a certain source.
An issue that arises is what constitutes income of a particular nature or source. For example, if a taxpayer has returned some overseas income and makes a voluntary disclosure of a different form of overseas income, has there been an omission of income of a particular nature or source.
GST Time Bar
For GST, the four-year time bar period applies from the end of the GST period in which the GST return was filed. Again it is relevant to take into account the time it would take to complete the disputes process when assessing whether the four year period will be satisfied. Note also there are some provisions in the GST Act which deem a supply to occur at a particular date, such as section 5(23) where an output liability is deemed to occur for a purchaser under a compulsory zero-rated transaction.
The time bar for GST is not available if the Commissioner considers a taxpayer has knowingly or fraudulently failed to disclose all of the material facts necessary to determine the amount of GST payable for the particular GST return.
We have experienced differing views on what constitutes “knowingly” failing to disclose. Some investigators have suggested that simple knowledge of the facts is enough. We would contend that this is not supported by caselaw and that the standard of conduct required is one of knowledgeable intent, akin to having mens rea in a criminal law context. If a taxpayer has made an honest mistake, the filing of a GST return should not be sufficient on its own to amount to knowingly failing to disclose.