ACCENT MANAGEMENT LIMITED AND ORS V THE COMMISSIONER OF INLAND REVENUE CA CA32/06

ACCENT MANAGEMENT LIMITED AND ORS V THE COMMISSIONER OF INLAND REVENUE CA CA32/06 11 June 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA32/06 [2007] NZCA 231BETWEEN ACCENT MANAGEMENT LIMITED BEN NEVIS FORESTRY VENTURES LIMITED BRISTOL FORESTRY VENTURES LIMITED CLIVE RICHARD BRADBURY GREENMASS LIMITED GREGORY ALAN PEEBLES ESTATE OF THE LATE KENNETH JOHN LAIRD LEXINGTON RESOURCES LIMITED REDCLIFFE FORESTRY VENTURES LIMITED Appellants AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 4 September 2006 Court: William Young P, O'Regan and Robertson JJ Counsel: G J Judd QC for Appellants D J White QC and J H Coleman for Respondent Judgment: 11 June 2007 at 3 pmJUDGMENT OF THE COURT A The appeal is dismissed. B The appellants are ordered (jointly and severally) to pay to the Commissioner costs of $6,000 and usual disbursements.REASONS OF THE COURT(Given by William Young P)Introduction[1] This case arises out of a complex forestry investment which is usually referred to as "the Trinity scheme". The forest in question is due to be harvested in or around 2048. The tax efficacy of this scheme was challenged by the Commissioner of Inland Revenue. The present appellants were some of a larger group of investors in the scheme who challenged the Commissioner's assessments. The trial was scheduled to begin on 16 August 2004. Shortly before trial, a number of documents associated with the set-up and operation of a company associated with the Trinity scheme were obtained by the Serious Fraud Office in the British Virgin Islands and made available to the Commissioner. When these documents surfaced, some of the taxpayers challenging the assessments settled with the Commissioner. This occurred on the Thursday before the trial was due to begin. The appellants did not settle. Instead they went to trial and this resulted in a judgment delivered on 20 December 2004 in which Venning J found against them: Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC). [2] Having gone to trial and lost, the appellants applied to the Judge to recall his judgment, essentially relying on inconsistency between the Commissioner's stance at trial and the terms on which he settled with the other taxpayers. This application failed and the appellants now appeal to this Court against the refusal of Venning J to recall his primary judgment. [3] In subsequent sections of this judgment we will discuss: (a) The factual background; (b) The legal basis upon which the Commissioner acted; (c) The appellants' complaints; and(d) The merits of the appellants' recall application.Factual background[4] The details of the Trinity scheme are addressed in a judgment we are delivering simultaneously, see Accent Management Ltd & Ors v Commissioner of Inland Revenue [2007] NZCA 230. For this reason we will dispense with a full discussion of the factual background. [5] Those who invested in the Trinity scheme usually did so via loss attributing qualifying companies (LAQCs). The tax losses incurred by the LAQCs were attributed to their shareholders. [6] The investors were assessed by the Commissioner on a basis which: (a) Reversed deductions which they had claimed in the 1997 and 1998 tax years in relation to insurance and licence fee premiums, the bulk of which are to be paid in 2047 and 2048; and (b) Imposed shortfall penalties of 100% on the relevant tax shortfalls for the 1998 year both on the LAQCs and their shareholders. [7] Those who settled with the Commissioner on the eve of trial did so on terms which: (a) Allowed what were described as de mimimis deductions in relation to the paid portion of the insurance premium (of $26.14 per hectare, presumably per year); (b) Otherwise reversed all deductions in relation to insurance and licence fee premiums;(c) Allowed deductibility for what were described as "silviculture expenditure" (an allowance which has been made available to all investors including the appellants); (d) Permitted the taxpayers to deduct in 2048 against the proceeds of sale of the trees the licence fee premium, to the extent that it is paid; (e) Did not impose any penalties on the LAQCs; (f) Imposed shortfall penalties of 10% on the shareholders of the LAQCs on the relevant tax shortfalls; and (g) Involved an acceptance that the investors had been "carrying on a forestry business" for the purposes of s DL 1 of the Income Tax Act 1994. These settlements were effected by amended assessments. [8] A number of other investors in the Trinity scheme had earlier settled with the Commissioner. Other investors have settled since the High Court judgment was released. Broadly speaking, the earlier the settlements, the better the terms for the investors, this difference being reflected in the amounts assessed as shortfall penalties. [9] When the appellants went to trial, they were obviously aware of the settlements which had been reached. They maintain, however, that they were not aware of the terms of the settlements until October 2005 and on 18 November 2005 they applied to Venning J for an order recalling his judgment.The legal basis upon which the Commissioner acted[10] Traditionally the Commissioner was seen as having little discretion as to the collection of taxes (other than as was specifically conferred by statute, for instanceby s 177C of the Tax Administration Act 1994). In Brierley Investments Ltd v Bouzaid [1993] 3 NZLR 655 (CA) Richardson J observed (at 659):The income tax legislation proceeds on the premise that in the interests of the community the commissioner is to ensure that the income of every taxpayer is assessed and the tax paid . The commissioner cannot contract out of those obligations. No doubt, and as contemplated under the State Sector Act 1988 and the Public Finance Act 1989, resource limitations will at times affect the nature and extent of the investigation undertaken to quantify the statutorily imposed liability for tax and the efforts made to pursue recovery. But the commissioner does not have a general dispensing power. He (or she) cannot opt out of the obligation to make the statutory judgment of the liability of every taxpayer under the Act.It is common ground that on this approach it would not have been open to the Commissioner to have acted in the way in which he has. [11] Subsequently an organisational review committee chaired by Sir Ivor Richardson considered tax policy generally and its report (The Organisational Review of the Inland Revenue Department, April 1994) led to the enactment of ss 6 and 6A of the Tax Administration Act 1994. Those sections provide:6 Responsibility on Ministers and officials to protect integrity of tax system(1) Every Minister and every officer of any government agency having responsibilities under this Act or any other Act in relation to the collection of taxes and other functions under the Inland Revenue Acts are at all times to use their best endeavours to protect the integrity of the tax system. (2) Without limiting its meaning, the integrity of the tax system includes— (a) Taxpayer perceptions of that integrity; and (b) The rights of taxpayers to have their liability determined fairly, impartially, and according to law; and (c) The rights of taxpayers to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other taxpayers; and (d) The responsibilities of taxpayers to comply with the law; and (e) The responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and(f) The responsibilities of those administering the law to do so fairly, impartially, and according to law.6A Commissioner of Inland Revenue(1) The person appointed as chief executive of the Department under the State Sector Act 1988 is designated the Commissioner of Inland Revenue. (2) The Commissioner is charged with the care and management of the taxes covered by the Inland Revenue Acts and with such other functions as may be conferred on the Commissioner. (3) In collecting the taxes committed to the Commissioner's charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to— (a) The resources available to the Commissioner; and (b) The importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and (c) The compliance costs incurred by taxpayers.[12] The expression "care and management" used in s 6A(2) comes from the corresponding United Kingdom legislation which was discussed in Inland Revenue Commissioners v National Federation of Self-Employed and Small Businesses Ltd[1982] AC 617 (HL). [13] Section 6A(2) has been considered in four reported cases Chatham Islands Enterprise Trust v Commissioner of Inland Revenue [1999] 2 NZLR 388 (CA),Auckland Gas Co Ltd v Commissioner of Inland Revenue [1999] 2 NZLR 409 (CA),Attorney-General v Steelfort Engineering Co Ltd (1999) 1 NZCC 55,005 (CA) andFairbrother v Commissioner of Inland Revenue (1999) 19 NZTC 15,548 (HC). These cases all support the view that the Commissioner may settle tax litigation on a basis which does not necessarily correspond to the Commissioner's view of the correct tax position. [14] For present purposes, it is sufficient to refer to Auckland Gas Co. At issue was a question of costs. The Commissioner who had been unsuccessful sought to resist normal costs consequences on the basis that he had only restricted rights to settle tax litigation. At 417, Richardson P observed:The right to challenge assessments for tax is central to the functioning of the tax system in our society. So, too, are the principles underlying ss 6 and 6A which are designed to protect the integrity of the tax system in an environment where the Commissioner is required to operate within limited resources in the care and management of all the functions committed to the Commissioner's charge. It does not follow that they call for a special and different approach to costs awards in High Court tax litigation than applies generally in civil cases. On the contrary, to continue the practice which has developed in the High Court leads to unfairness and uncertainty. In that regard both the taxpayer and the Commissioner operating under the care and management responsibilities imposed by ss 6 and 6A are entitled to make sensible litigation, including settlement, decisions. We do not endorse the restricted view of the Commissioner's ability to settle a taxation dispute contended for .[15] This represents an undoubted shift from the approach adopted in Bouzaid. The change in policy is justified by recognition that the Commissioner has limited resources and the function of collecting "over time the highest net revenue that is practicable within the law". Major tax litigation is expensive and places a heavy strain on the human resources available to the Commissioner. The Commissioner must be permitted to make rational decisions as to how those resources can be best deployed. Further, "sensible litigation, including settlement, decisions" must necessarily allow for litigation risk. [16] Is it open to the Commissioner to give effect to a settlement by an amended assessment. On this point s 89C of the Tax Administration Act is of controlling significance:89C Notices of proposed adjustment required to be issued by CommissionerThe Commissioner must issue a notice of proposed adjustment before the Commissioner makes an assessment, unless— (d) The assessment reflects an agreement reached between the Commissioner and the taxpayer; .This section provides authority for the Commissioner to issue an assessment which reflects an agreement with the taxpayer rather than the Commissioner's own view of the correct tax position.The appellants' complaints[17] The appellants have a number of overlapping complaints about what has happened. Broadly the contention is that the Commissioner must be consistent and is not entitled to discriminate between taxpayers depending on their willingness to settle litigation. The contention was reinforced by a number of more specific arguments. The power to compromise litigation asserted by the Commissioner involved a claim to exercise a "dispensing power" which would be contrary to s 1 of the Bill of Rights Act 1688 (UK). Sections 6 and 6A of the Tax Administration Act do not confer such a power. The Commissioner should be presumed not to have been exercising a "dispensing power" when he settled with the other taxpayers. Accordingly, he should not take a stronger line against the appellants than he did against otherwise similarly situated taxpayers who were prepared to settle. The inconsistency between assessments affecting the appellants and other taxpayers should be corrected by treating the appellants on the same basis as those who had settled. Finally, there is an allegation that the appellants were denied "equal treatment" because they were not offered the same settlement terms as those offered to other taxpayers. [18] Mr Judd QC was not altogether clear on where a recall of the judgment would lead. He wished to be in a position to explore in more detail the circumstances in which the settlements occurred and the state of mind of the assessing officer who issued the amended assessments. But it was not obvious to us how such an exercise would result in a better outcome for the appellants unless, in some way, the Commissioner could be required to offer to the appellants the same terms as he settled on with the other taxpayers. [19] We have some difficulty with the logic of this. In the end the correctness or otherwise of the assessments affecting the appellants depends on judgments made by the courts and not the opinion of the Commissioner. The correctness of the assessments against the appellants was upheld by Venning J and, in the judgment which we are delivering simultaneously, we dismiss the appeal against that judgment. On this basis, the appellants' complaints do not go to the merits of thedispute between them and the Commissioner but rather to the appropriateness of the Commissioner's settlements with the other taxpayers. If it were the case that the Commissioner under-taxed the other taxpayers, why would this justify the courts requiring the Commissioner to under-tax the appellants? Indeed we conclude that the whole issue is collateral to the merits of the dispute between the appellants and the Commissioner. [20] More importantly, the Commissioner is entitled to settle tax cases commercially; this is for the reasons and based on the authorities referred to in [12] – [15] above. We are likewise satisfied that such a settlement can be given effect to by an amended assessment under s 89C(d). Given these conclusions, we see no reason why the settlements and amended assessments need to reflect the Commissioner's view of the correct tax position. In our opinion the arguments advanced by Mr Judd to the contrary fall foul of the authorities referred to in [12]. We note that in his judgment dismissing the recall application, Venning J dismissed Mr Judd's argument on the very much the same basis. [21] There is some dispute in the affidavits as to whether the Commissioner was prepared to settle with the appellants and why settlement negotiations were not initiated. In the absence of oral evidence it is not possible to resolve that dispute but it does seems likely that the Commissioner's willingness to settle and the terms he was prepared to accept were influenced not only by the timing of settlement (in relation to the progress of the High Court proceedings) but also his perception of the culpability of particular taxpayers. As well, the Commissioner did not initiate negotiations but rather responded to approaches from taxpayers. [22] We do not see it as appropriate for us, at the instance of the present appellants, to review the litigation strategy adopted by the Commissioner in relation to other taxpayers. Nor is it appropriate to allow the appellants (who, after all, lost the case) to achieve a judicial review of the Commissioner's decision (if there was one) not to settle with them on discounted terms. To embark on the course suggested by Mr Judd would carry the risk of adding unnecessary layers ofcomplexity to tax litigation, along with the unpalatable prospect of delay-inducing satellite litigation.The merits of the appellants' recall application[23] The conclusions so far reached mean that the recall application was rightly dismissed by Venning J. It is an application which was, in any event, far from meritorious. [24] While the appellants did not know the detail of the settlements effected by the other taxpayers, they did know that the settlements had occurred. They had been aware of settlement negotiations. It also seems likely enough that they were aware of other settlements involving some Trinity scheme investors who were not involved in the litigation which commenced on 16 August 2004. They must have recognised that it was at least likely that the Commissioner had been prepared to settle on terms which were more favourable than the assessments which he was seeking to defend against them. Yet they did not approach the Commissioner with a view to settling their cases. Having lost the case, they now seek to be treated as if they had settled.Conclusion[25] The appeal is dismissed. The appellants are (jointly and severally) to pay the Commissioner costs of $6,000 and usual disbursements.Solicitors: Wynyard Wood, Auckland for the Appellants Crown Law Office, Wellington, for the Respondent