OPINION: As many business taxpayers will be aware, Inland Revenue is a publisher of a prolific amount of information, writes Craig Macalister in Taxing Times.
We cannot really blame Inland Revenue for this.
Our laws are becoming increasingly complex and on top of administering tax law, Inland Revenue now administers several of the Government's social policy initiatives, such as student loans, KiwiSaver, child support and working for families.
It is not to be unexpected then that a large amount of material is required to be published to assist taxpayers. Indeed in a self- assessment tax environment, it is entirely appropriate that the commissioner keeps taxpayers informed of their responsibilities and entitlements.
However, what happens when Inland Revenue publishes something that gives taxpayers incorrect advice or information?
Over the years Inland Revenue has maintained the position that its views in its publications do not represent the law, and thus if a publication is wrong, Inland Revenue is not bound to that view.
I recollect an amusing incident many years ago when I worked at Inland Revenue.
At the time, Inland Revenue had published a pamphlet on the taxation of gains made on the sale of shares.
In the publication, it said that if a taxpayer made a loss on the disposal of shares that, had it been a gain, the loss would be deductible for tax purposes. This view, that the losses were deductible, was not universally shared within Inland Revenue.
I recall one of the senior legal people at Inland Revenue religiously throwing the offending pamphlets in the rubbish when they appeared at the public counter.Inland Revenue continues to maintain that they will not be bound by statements made in their publications.
In Inland Revenue's Care and Management Interpretation Statement issued in November 2012, Inland Revenue reiterated that an Inland Revenue publication was not a binding ruling and that "the Commissioner is not legally bound to apply the interpretation it contains".
Against that background, a recent High Court case was heard that concerned a painting partnership and its failure to deduct withholding tax from payments made to contractors engaged to undertake the actual painting work.
In short, the partnership engaged the contractors under an arrangement to supply labour and materials.
Under the withholding payments regulations, as they then were, payments for services rendered under arrangements which are wholly or substantially for the supply of labour in connection with the decoration of buildings were subject to a 20 per cent withholding unless the contractor supplied an exemption certificate. This is the case still.
Thus, arguably, even though the contract painters supplied their own materials, withholding tax should have been deducted as the contract was substantially for the supply of labour. Inland Revenue pursued the taxpayer for some hundreds of thousands of dollars of unpaid withholding tax.
The taxpayer took Inland Revenue to court and argued that the IRD form, IR330, stated for that period, that withholding tax only needed to be deducted from labour-only contracts. The form did not specify that the services subject to tax were services "substantially" for the supply of labour.
The issue at the High Court was the sincerity of the taxpayer in relying on Inland Revenue's IR330. The court found that the taxpayer had honestly relied on the IR330 form when deciding not to deduct withholding tax.
Thus, it seems that, despite Inland Revenue's ardent position that its forms have no legal standing, this may now be in doubt after this decision. In my view this is the correct outcome.
Craig Macalister is tax principal at accounting firm Crowe Horwath. He can be contacted on 03 211 3355.
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