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The binding rulings process –the price of certainty

Author: Iain Bradley and Veronica Harley

In 2010 Inland Revenue introduced an enhanced binding rulings process after widespread criticism that the process was taking too long and was too costly with many taxpayers questioning its value.  Two years on, the enhanced process appears to be working much better which is supported by the reduction in time taken to issue a ruling and a steady increase in the number of taxpayers applying for a ruling as they regain confidence in the process.  In this article we explore when it may be appropriate to apply for a binding ruling and what taxpayers can expect from this enhanced process.

What is a binding ruling and why would you want one?

Taxpayers may telephone Inland Revenue for advice on the tax treatment of an issue, but at the end of the day Inland Revenue is not bound by this advice. Even public statements such as interpretation statements, guidelines and “questions we’ve been asked” are not strictly binding on the Commissioner although she will tend to follow such statements as a matter of practice.   Obtaining a binding ruling is a way for taxpayers to achieve certainty in relation to a tax position they might be contemplating. 

A binding ruling is Inland Revenue’s interpretation of how a tax law applies to a particular arrangement.  If a binding ruling applies to a taxpayer and they choose to follow it, Inland Revenue is bound by it provided the taxpayer has entered into the arrangements as described and complied with any conditions to the ruling. 

Binding rulings are typically applied for when the tax law is unclear, where a transaction contemplated is unusual, controversial or complex, impacts a large number of people such as employees, shareholders or customers, or simply when the dollars involved are material.  Because there is a cost involved (more on this aspect later) binding rulings tend to be used mostly in relation to larger enterprises where the tax at stake is significant.  Historically, small to medium enterprises have not tended to use the binding rulings process as they have not had the resources to pay for what has tended to be an expensive and protracted process.  However the new enhanced process may entice more small to medium businesses to consider this as an option.

Taxpayers can apply for a private or product ruling.  A private ruling is specific to a particular taxpayer or group of taxpayers named in the ruling and is confidential between the Inland Revenue and the applicant.  A product ruling will apply to all consumers of a particular product where an arrangement is entered into by a number of people on the same terms.  These are not confidential and are published in the Inland Revenue’s Tax Information Bulletin publication and on its website.

Another type of ruling is an “Advance Pricing Agreement”, which is an agreement between a taxpayer and the Inland Revenue about transfer pricing matters.  An advance pricing agreement can be made with Inland Revenue as well as tax authorities in other jurisdictions. 

Pre-lodgement meetings

An improvement in the binding rulings process is the inclusion of a “pre-lodgement meeting” for which Inland Revenue do not charge.  Inland Revenue strongly recommends that the taxpayer and advisor meet with Inland Revenue prior to lodging the ruling application to:

  • enable the Inland Revenue to get a preliminary understanding of the arrangement;
  • discuss the scope of the ruling;
  • let the taxpayer know what information needs to be provided with the ruling; and
  • discuss timeframes and fees

This meeting can help taxpayers decide whether to proceed with the ruling application and how to submit the best application possible, which will save time and costs.

Timeframe and costs

The average time taken for consideration of a ruling by Inland Revenue is currently around three months from the date of submitting a completed application.  However it will be around the six month mark if the application concerns more than eight legal issues, there hasn’t been a pre-lodgement meeting or it’s an advance pricing agreement.   Things like not submitting enough information up front or delays in responding to requests for further information will hinder the process and result in a higher charge from Inland Revenue.

The initial application fee is $316.90 (incl. GST) which covers the cost of an initial review to determine that the application is valid and complete.  After the first two hours, an hourly fee of $158.45 (incl. GST) is charged for all applications except advance pricing agreements.  This fee is in addition to the fees that a tax advisor would charge for making the application and liaising with the Inland Revenue.  The level of fee may depend on which area of Inland Revenue the ruling is allocated to.  Applications will either be allocated to the Taxpayer Rulings Unit of the Office of the Chief Tax Counsel (Taxpayer Rulings), appropriate personnel within the Service Delivery group or to both as a joint project.  Service Delivery will tend to deal with the black letter law questions and Taxpayer Rulings pretty much everything else (including any questions around tax avoidance).

We are advised by Inland Revenue that the average fee for the 2011/12 financial year for a ruling dealt with by Taxpayer Rulings is just under $20,000 (incl. GST) and for Service Delivery, $10,000 (incl. GST).  If a ruling requests a view on tax avoidance, this aspect alone could cost around $15,000 (incl. GST).

What helps make the process go smoothly?

The key is to provide all relevant documents and supporting legal documentation upfront together with a thorough description and analysis of the arrangement.  To the extent that any arrangement has a question about avoidance, then the section BG 1 analysis should follow the draft section BG 1 interpretation statement. While this draft statement has not been finalised, we understand Inland Revenue is nonetheless following this as an internal guideline in the meantime. 

As part of speeding up the new process, Inland Revenue now has a policy of relying more explicitly on the taxpayer’s statement of facts.  This puts the onus back on taxpayers to ensure the facts stack up and the arrangement is implemented exactly as described.  The Inland Revenue won’t rule on whether the facts are correct or exist, what a taxpayer’s purpose or intention is, what the value of something is or what is commercially acceptable practice.  In this regard we are aware that Inland Revenue is currently challenging the market value used in a transaction subject to a binding ruling and therefore taxpayers need to be comfortable with any valuations that are material to the arrangement being ruled on.

In light of this issue, Inland Revenue are now offering (subject to available resources) a new product called a “factual review”.  This enables taxpayers to gain certainty regarding the satisfaction of one or more critical factual conditions or assumptions in the ruling (e.g. conditions or assumptions as to value, market rates or generally accepted accounting practice).  This process is undertaken by the Assurance function of Service Delivery and commenced at any time prior to or immediately following the issue of the ruling.  Service Delivery will test the conditions in a ruling and issue a traffic light coloured letter at the end of this review (generally within 3 months).  A green letter is issued where the review is positive, an orange letter is issued in neutral situations and a red letter is issued if Inland Revenue has real concerns about the facts.

Inland Revenue is willing to meet taxpayers and their advisors to discuss the binding ruling if Inland Revenue indicates it is likely to give a negative ruling.  This gives taxpayers a chance to provide more argument in support of their tax position.  However there is a limit to these meetings.  Inland Revenue‘s current policy is that taxpayers have only “one further bite at the cherry” to persuade the Inland Revenue as to the merits of their ruling.

Indicative views

Despite the enhanced process, the cost and timeframe to achieve a binding ruling may still present a barrier to some taxpayers.  In other cases a binding ruling may not assist a taxpayer or may not be able to be applied for (there are limitations on certain issues that a ruling can be applied for).  Depending on the tax risk appetite of the taxpayer, they may be willing to accept an “indicative view” as providing a limited level of comfort about an arrangement.

The Service Delivery area of Inland Revenue has provided non-binding “indicative views” since 2008, generally to large taxpayers.   Indicative views usually involve a meeting and a brief letter to Inland Revenue outlining the issue.  Inland Revenue will then spend no more than 20 hours of analysis to reach an indicative view on the issue.  Indicative views cannot be used for complex, contentious or avoidance issues.  These reviews can also be useful where the taxpayer wants to gauge Inland Revenue’s opinion on a matter before submitting a binding ruling application.

The ability for a taxpayer to obtain an indicative view is subject to Inland Revenue having available resources to consider the issue, something which is likely to become an increasing issue.


Overall we believe the process is definitely working much better and we would encourage taxpayers to consider these options where certainty or greater comfort on a tax position is desirable.  A number of factors will come into play here – time, commercial considerations, cost and the tax risk appetite of the taxpayer.  For more information on binding rulings, factual reviews or indicative views, please contact your usual tax advisor.

Tax Alert November 2012 Contents:

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