For many years, tax pooling legislation assumed that taxpayers would always file tax returns, and any errors or omitted tax would be dealt with for pooling under the “increased amount of tax”. In time Inland Revenue realised that many taxpayers, such as salary and wage earners, don’t have to file tax returns. But if they later identified that they had another type of taxable income (such as foreign trust income), they couldn’t use tax pooling to settle the liability as they hadn’t filed an original return.
Inland Revenue created the right for taxpayers to apply for Commissioner’s discretion to use tax pooling where a return for RWT or Income tax hadn’t been filed, and the taxpayer filed a voluntary disclosure which included the underpaid tax. But from 2009 until 2022, the discretion only covered these two tax types – RWT and income tax.
In 2022, Inland Revenue accepted that the discretion should be extended to other tax types. It is not uncommon to find taxpayers who had not been aware of a liability (often a withholding tax or FBT) and so had never filed returns for those taxes. Without the ability to use tax pooling, some chose not to report the errors to Inland Revenue, or to report them going forward, rather than rectifying the past. So Inland Revenue amended section RP 17B to allow the Commissioner’s discretion to be used for other tax types including ones we often get asked about such as GST, FBT, and RWT and NRWT. In 2025, AIL was added to the list of tax types.
The full list of tax types that can be used for Commissioner’s discretion is:
- ESCT
- FBT
- Further income tax
- GST
- Imputation penalty tax
- Income tax
- NRWT
- PAYE
- RSCT
- RWT
- AIL
It’s good to note the PIE tax is treated as income tax, and can be transferred to IRD as INC.
There are some criteria that determine whether a taxpayer can get Commissioner’s discretion. The most important of these is that Inland Revenue has to be satisfied that the taxpayer was not deliberately failing to comply with their tax obligations.
These are the rules for using tax pooling for a voluntary disclosure where no return has been filed:
- The voluntary disclosure must be filed within a reasonable time frame of identifying the error. What is a reasonable time frame? Inland Revenue considers it will be about 3 months.
- The taxpayer must notify Inland Revenue before they receive any notice of an audit by Inland Revenue.
- The Commissioner must be satisfied that the new liability was not caused because the taxpayer didn’t take reasonable care with their tax obligations.
Inland Revenue has set out their criteria for granting discretion in TIB Volume 34, Number 5 at page 33. Here is a summary of their discussion.
The relevant parts of the TIB state the following
The requirements to be met to be able to use tax pooling are:
- The person must make a voluntary disclosure of a “new liability”, not being a liability that arose from a return by the person, or an assessment of the person, made before Inland Revenue has made any contact with the person or their agent.
- The person must notify the Commissioner, which results in an assessment of, or obligation to pay, the new liability.
- The voluntary disclosure must be made within a reasonable time after the earliest time the person or their agent became aware of the new liability, and before the date of notification of the Commissioner or the person is notified of a pending tax audit or investigation or that a tax audit or investigation has started.
- The Commissioner must be satisfied that the new liability did not arise as a result of a choice by the person not to comply with the person’s obligations under the Inland Revenue Acts or as a result of a failure by the person to take reasonable care to comply with those obligations.
There are two aspects of these requirements that could create some uncertainty:
- the voluntary disclosure must be made “within a reasonable time” after the earliest time that the person or the person’s agent is aware of the person’s new liability, and
- the new liability must not arise as a result of a choice by the person not to comply with the person’s obligations under the Inland Revenue Acts or as a result of a failure by the person to take “reasonable care” to comply with those obligations.
Both these tests will be fact dependent, but some guidance is provided below.
Within a Reasonable Time
Generally, “within a reasonable time” will be within a period of less than three months. However, the circumstances of the specific taxpayer will also be considered. Inland Revenue considers the phrase means that provided the taxpayer applies at the earliest opportunity after they or their agent becomes aware of the liability, then the test will be met. There are limited situations where a request for relief outside this time frame may still have been made “within a reasonable time”. Ultimately it will depend on the circumstances of the particular case. However, the circumstances of the taxpayer would need to be such that they could not have reasonably advised Inland Revenue within three months. For example, sickness or injury that extended beyond the three-month period and made them unable to make a voluntary disclosure may still satisfy “within a reasonable time”.
This is yet to be determined and guidance around this will be issued but early indications are 4 weeks would be reasonable and 4 months is likely not to be. Discussions we’ve had with the Revenue indicate that you can file the voluntary disclosure without having quantified the error if you need more time to do so as it is the notification of the error within a reasonable time frame that is important. This will be useful where you may have identified a system error that means a return hasn’t been filed but you’re not yet sure how long the error has been occurring and therefore what the value of the error will be.
The new liability also cannot be as a result of a choice not to comply e.g., you deliberately chose not to file the return or from a lack of reasonable care to comply with your obligations.
If you’d like to know more, please contact our team of tax pooling specialists.