Inland Revenue provided incomplete advice therefore was unreasonable to decline remission application
Provisional taxpayer advised by IRD of date tax due—advice relied on was wrong—late provisional tax resulted in ‘Use of Money Interest’ imposed by IRD—remission sought on grounds that taxpayer relied on IRD advice—remission declined as advice considered to be correct on the basis of details originally provided by taxpayer—Ombudsman formed view that information provided by IRD was correct but incomplete therefore decision to decline remission application unreasonable—partial remission appropriate in circumstances
An employee received share options as part of his remuneration package from his employer. He decided to exercise those options on three separate occasions during the 2000 tax year. The employee was aware that exercising the share options gave rise to taxable income. As a result, he said he had contacted the Inland Revenue Department (IRD) several times by telephone during that tax year to clarify when the income tax on the share option income should be paid. He said he had been verbally advised on each occasion that he did not have any provisional tax liability because of his previous tax year position and that his tax for the 2000 tax year only needed to be paid by the terminal tax date of 7 February 2001.
However IRD later contacted the employee advising that his 2000 tax year income level, because of the exercise of the share options, was such that he was in fact a ‘provisional taxpayer’ for that year. Given that he had not paid any provisional tax payments during the year, IRD imposed ‘Use of Money Interest’ (UOMI) on top of the year-end tax balance. This UOMI calculation took into account the period commencing with the first provisional tax due date.
The employee applied to IRD for remission of the UOMI on the basis that the advice originally provided to him by IRD call centre staff was incorrect and his provisional tax, which he had since paid, was late as a direct consequence of his reliance on that advice. IRD declined the employee’s remission application and the employee requested an Ombudsman investigation into the matter.
The Ombudsman noted that section 183D of the Tax Administration Act 1994 gives the Commissioner discretion to remit interest. The exercise of this discretion is ‘a matter of administration’ which an Ombudsman is able to review under the Ombudsmen Act. The Ombudsman wrote to IRD advising that he intended to commence an investigation into whether the discretion was properly exercised in this case. As a first step he requested IRD’s comments on the issue.
IRD advised that it had no record of the three call centre conversations the employee claimed to have had. However, on the basis of the information the employee said he provided during those calls to IRD staff, IRD said the advice given was correct. Had further information concerning the employee’s circumstances been provided, including the value of the share options or his concerns about possible interest complications, the IRD officers would have had reason to research and advise on the UOMI implications should the money not be paid until the terminal tax due date.
The Ombudsman then confirmed with the employee that at no time did he mention the value of the shares, nor query the possibility of interest payments that may be incurred, nor was he ever asked by IRD call centre staff to clarify his tax position. However, the Ombudsman commented that the employee could have helpfully volunteered additional details relating to his tax situation when he talked to IRD, which would have allowed the full position to be clarified.
IRD argued that the employee had resources available to him that could have given him the full advice had he disclosed all the facts, including an information booklet, a tax agent and IRD staff. Further, IRD noted that the employee had periodically been a provisional taxpayer since 1997 and was already somewhat aware of the possibility of incurring UOMI as he had previously incurred such interest in the 1998 tax year as a result of exercising share options. In these circumstances, IRD maintained that this was a case where the legislation and IRD’s policy apply.
The Ombudsman noted that the employee was not linked to a tax agent during the period when he telephoned IRD and the extent of any tax knowledge he may have had as a result of previous tax liabilities clearly did not assist him with the present matter.
After examining the circumstances in which the advice was received, the Ombudsman then considered the relevant provisions regarding remission. Section 183D of the Tax Administration Act 1994 gives the Commissioner discretion to remit interest and the IRD’s Standard Practice Statement sets out the policy in relation to UOMI remission. IRD stated that:
Section 183D is the only provision under which interest can be remitted. Interest will only be remitted if Inland Revenue has given a taxpayer incorrect advice which caused a return or payment to be made late and the taxpayer can substantiate to Inland Revenue’s satisfaction that they were given incorrect advice. The tax must be paid as soon as the error is established.
IRD advised the Ombudsman that it works on the basis that the intent of the legislation was to limit its application to extreme or unusual circumstances. It said a high threshold must be met to qualify because of the intent of the use of money interest regime which is not to penalise but to compensate for the use of money over time. A lenient remission practice penalises complying taxpayers and may ultimately affect voluntary compliance. IRD submitted that the remission provisions therefore require the Commissioner to consider remission in association with his duty to collect the highest net revenue that is practicable within the law, taking into account the importance of promoting compliance by all taxpayers, not just the employee.
The Ombudsman noted that the employee appeared at all times to be genuinely seeking information from IRD to establish his tax situation and to meet his tax obligations. The employee provided an affidavit stating that he was always in a position to pay the tax owed. Further, there was no evidence of any ulterior motive on his part. There was, however, a significant and relevant gap of fundamental information provided to the employee by the IRD call centre.
It was the Ombudsman’s view that while IRD’s advice to the employee may have been technically correct, it was incomplete and had not allowed the employee to appreciate the significance and implications of his situation. The Ombudsman considered that it was inadequate for IRD staff to expect all taxpayers to provide full information without appropriate enquiry on IRD’s part. Had the IRD staff asked the most important and relevant question of the employee, which was whether his 2000 year tax would be $30,000 or more, then the likely tax position he was enquiring about would no doubt have been quickly revealed and the proper advice regarding his tax obligations would have been given. The necessary payments would then have been made at the appropriate times, thereby avoiding UOMI. This question was not asked and the incomplete answers provided by IRD staff to the employee’s questions led directly to him not being aware of his tax and potential UOMI exposure.
As a result, the Ombudsman formed the view that IRD’s decision, in exercising its discretion under section 183D to decline the employee’s application for UOMI remission, was unreasonable.
IRD accepted that it had a duty of care which it had not properly met in this particular case and agreed to review its existing policy in this matter. IRD also agreed to a partial remission of the UOMI.
IRD has discretion to make an ex-gratia payment in a situation where the Commissioner is of the view that a taxpayer has incurred quantifiable costs as a result of unreasonable actions of the department. In the circumstances of this case, IRD advised that it was prepared to offer the employee an ex-gratia payment in respect of a portion of the costs he had incurred, the amount of which was to be discussed directly between IRD and the employee.
This case note is published under the authority of the Ombudsmen Rules 1989. It sets out an Ombudsman’s view on the facts of a particular case. It should not be taken as establishing any legal precedent that would bind an Ombudsman in future.