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[This item was issued by the Office of the Chief Tax Counsel on 28 September 2007. It was previously released for public consultation as exposure draft QB0041].
Tax Administration Act 1994 ("TAA"), section 91E(4)(g) - Private Rulings
All legislative references in this item are to the TAA unless otherwise stated.
We have been asked whether the Commissioner has a discretion to make a private ruling as to how the tax laws apply to a taxpayer and to an arrangement where that taxpayer is being audited or investigated, or whether the relevant provision is a mandatory prohibition.
Section 91E(4)(g) prohibits the Commissioner from making a private ruling where the Commissioner is auditing or investigating. The Commissioner does not have a discretion in such circumstances.
Under section 91E(1), the Commissioner must make a private ruling on how a taxation law applies, or would apply, to a person and to the arrangement for which a ruling is sought. An arrangement that is the subject of a private ruling application may also be the subject of an audit or investigation by Inland Revenue at the same time. This would result in two different parts of Inland Revenue concurrently considering the same arrangement. In such situations, section 91E(4)(g) provides that the Commissioner "may not" make a private ruling as to how a taxation law applies to the person and to the arrangement.
Section 91E(1) provides:
91E(1) Subject to section 91EF, the Commissioner must make a private ruling on how a taxation law applies, or would apply, to a person and to the arrangement, whether a single or a recurring arrangement, for which the ruling is sought.
Section 91E(4) provides:
91E(4) The Commissioner may not make a private ruling if -
(g) The Commissioner is auditing or investigating how the taxation law applies to the person and to the arrangement for a period or a tax year to which the proposed ruling would apply; or
Section 91E(4)(g) states that the Commissioner may not rule if there is an audit or investigation as to how the taxation law applies to the person and to the arrangement for a period or a tax year to which the proposed ruling would apply.
We have been asked whether the use of the words "may not" in section 91E means that the Commissioner has a discretion to rule in the circumstances outlined in the section, or whether it prohibits the Commissioner from ruling.
The Concise Oxford English Dictionary (11th ed, 2004) defines "may" as:
1 expressing possibility 2 expressing permission 3 expressing a wish or hope.
Thesame dictionary defines "not" as:
adv. Used chiefly with an auxiliary verb or 'be' to form the negative.
The dictionary definition indicates that the term "may" can express either a possibility, permission, or a wish. Which meaning is appropriate depends on the context in which the word is used. It seems unlikely in the context of a statute governing tax administration that either of meanings 1 or 3 were intended. Particularly because section 91E(4)(g) follows section 91E(1), which imposes a requirement to rule, the use of the word "may" suggests "expressing permission" is the intended meaning. "Not", expressing the negative following an auxiliary verb, would appear to suggest that "may not" means no permission or a prohibition.
For reasons set out below, the context in which the term "may not" is used within the TAA and within section 91E itself supports interpreting "may not" as a mandatory prohibition rather than a discretion.
The context of section 91E(4) within section 91E indicates that the Commissioner has no discretion to rule where any of the circumstances within the subsection apply.
Section 91E(1) places an obligation on the Commissioner to make binding rulings; subsections (3) and (4) provide exceptions to this obligation. Section 91E(3) states that the "Commissioner may decline" to rule in certain circumstances. The use of the words "may decline" appears to give the Commissioner a discretion as to whether or not to rule. The context of the phrase "may decline", used in section 91E(3), indicates more clearly than section 91E(4) that the Commissioner is being empowered with a discretion by the Act. It is arguable that if Parliament had intended that the Commissioner was to have a similar discretion under section 91E(4) then the same words would have been used.
Some of the exceptions set out in both subsections (3) and (4) require an exercise of the Commissioner's judgement to determine if the subsection applies, while others have no such element explicit in their application. However, whereas subsection (3) states "the Commissioner may decline to make a private ruling", subsection (4) states "the Commissioner may not make a private ruling". The only rational grounds for a distinction between the wording chosen in subsections (3) and (4) is that those in subsection (3) were meant to be discretionary, while those in subsection (4) are obligatory. It is considered then that if the circumstances fall within subsection (4) the Commissioner cannot make a ruling.
The view that Parliament intended "may not" to denote a denial of permission, as in "cannot", in section 91E(4)(g) is further illustrated by amendments made to the regime, such as the enactment of section 91E(4)(ga). The disputes resolution process came into force on 1 October 1996, 18 months after the binding rulings regime on 1 April 1995. It therefore became necessary to insert paragraph (ga) into the TAA to accommodate the disputes resolution process. To this extent, it is stated in the commentary on the Taxation (Accrual Rules and Other Remedial Matters) Bill 1998:
The policy intent behind the binding rulings legislation is that it should not overlap with existing dispute resolution procedures. Section 91E (4) will be amended to clarify that a binding ruling cannot be sought on an arrangement that is within the scope of a NOPA. [Emphasis added]
That this later amendment was inserted to ensure the binding rulings regime could not interfere with the dispute resolution process indicates that the Commissioner is not meant to have a discretion to rule where the situations in section 91E(4) arise. It suggests that the drafters considered "may not" equates to "cannot" in section 91E(4), because the circumstance outlined in paragraph (ga) is clearly one where the Commissioner is not meant to have a discretion to rule.
In other provisions of the TAA "may not" indicates cannot. For example, section 89B(4) provides:
The Commissioner may not issue a notice of proposed adjustment -
(a) If the proposed adjustment is already the subject of a challenge; or
(b) After the expiry of the time bar that, under -
(i) Sections 108 and 108B; or
(ii) Sections 108A and 108B, -
applies to the assessment. [Emphasis added]
Section 108(1), in turn, provides:
Except as specified in this section or in section 108B, if -
(a) A taxpayer furnishes an income tax return and an assessment has been made; and
(b) 4 years have passed from the end of the tax year in which the taxpayer provides the tax return, -
the Commissioner may not amend the assessment so as to increase the amount assessed. [Emphasis added]
The associated provision relating to GST, section 108A(1) provides:
Subject to this section and section 108B, if a taxpayer provides a GST tax return for a GST return period and an assessment has been made, the Commissioner may not amend the assessment to increase the amount assessed if 4 years have passed from the end of the GST return period in which the tax return was provided. [Emphasis added]
In Simunovich Fisheries Limited v Commissioner of Inland Revenue & Anor (2001) 20 NZTC 17,065 Priestley J noted that section 108A(1) prohibits the Commissioner from issuing further assessments beyond a stipulated period. At page 17,083 he states:
 The four-year time limit contained in s 108A(1) must be seen in the context of that provision and the statutory regime generally. The legislative policy is to stipulate a period beyond which the Commissioner cannot issue further assessments which have the effect of increasing the amount of tax payable. ...
 In examining analogous provisions, Tipping J in Dandelion Investments Limited v C of IR (2000) 19 NZTC 15,585 at p 15,588, adopting perhaps the perspective of the taxpayer, saw the policy this way:
Clearly Parliament intended that after four years the Commissioner could not issue any further assessments increasing the amount of tax beyond the amount of the last valid assessment made within the four years.
Sections 89B(4), 108(1) and 108A(1) use "may not" in a context where the Commissioner is not permitted to either issue a Notice of Proposed Adjustment ("NOPA") or raise an assessment.
This indicates that the term "may not" also prohibits the Commissioner from ruling in section 91E(4).
In summary, interpreting the term "may not" as imposing a prohibition on the Commissioner ruling is consistent with how the phrase is used in other sections of the TAA, namely sections 89, 108 and 108A where it is also used as a prohibition.The context of section 91E(4) within section 91E also indicates that the Commissioner has no discretion to rule where any of the circumstances within the subsection apply. The Commissioner not having the discretion to rule in such circumstances ensures that private rulings do not overlap or interfere with other procedures within Inland Revenue.
Therefore, the words used in section 91E(4)(g) and the context indicate that the Commissioner is prohibited from ruling, where an arrangement is subject to an audit or investigation.
In addition, it is considered that section 91E(4)(g) can apply any time up to the Commissioner making a ruling, even if the taxpayer's ruling application was submitted before the audit commenced. However, it is noted that section 91E(4)(g) applies where "the Commissioner is auditing or investigating". Therefore, it only applies if an arrangement is currently being audited or investigated.