WHITE v COMMISSIONER OF INLAND REVENUE [2023] NZHC 2368

WHITE v COMMISSIONER OF INLAND REVENUE [2023] NZHC 2368 [29 August 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2022-404-1334[2023] NZHC 2368UNDER the Judicial Review Procedure Act 2016IN THE MATTER of an application for judicial reviewBETWEEN ANTHONY JAMES WHITEApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 7 February 2023Supplementary submissions received 24 February 2023Appearances: S M Kilian for ApplicantM Deligiannis and R Duncan for RespondentJudgment: 29 August 2023JUDGMENT OF PETERS JThis judgment was delivered by Justice Peters on 29 August 2023 at 3 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate: ...................................Solicitors: Kilian & Associates, AucklandTe Tari Ture o te Karauna | Crown Law, Wellington[1] The applicant, Mr White, seeks judicial review of a decision by the respondent,the Commissioner of Inland Revenue ("Commissioner"), declining his application toamend his income tax assessments for the years ended 31 March 2010 to 2018inclusive ("application").[2] The applicant seeks review on grounds that:(a) the Commissioner failed to consider relevant considerations and tookinto account irrelevant considerations;(b) the decision was unreasonable; and(c) the Commissioner predetermined the application.[3] The applicant seeks a declaration that the decision was invalid; an orderquashing the decision; an order directing the Commissioner to reconsider the matter;and such further relief as may be required.[4] The Commissioner's case is that none of the grounds of review is made out,that he applied the relevant law correctly, and that it was reasonably open to him todecline the application.Section 113 Tax Administration Act 1994[5] The applicant made his application under s 113 of the Tax Administration Act1994 ("TAA"). Section 113 provides:113 Commissioner may at any time amend assessments(1) Subject to section 89N [a reference to Part 4A], the Commissionermay from time to time, and at any time, amend an assessment as theCommissioner thinks necessary in order to ensure its correctness,notwithstanding that tax already assessed may have been paid.(2) If any such amendment has the effect of imposing any fresh liabilityor increasing any existing liability, notice of it shall be given by theCommissioner to the taxpayer affected.[6] Thus the Commissioner has a discretion to amend an assessment as theCommissioner thinks necessary to ensure the correctness of that assessment. In thepresent case, the Commissioner declined to amend the assessments as he did notconsider correct assessments would result under the Income Tax Act 2007 ("ITA").Background[7] In October 2015, the applicant, by his then accountants, filed income taxreturns for the years ended 31 March 2010 to 31 March 2015. The applicant also madea voluntary disclosure of matters pertaining to GST.[8] The Commissioner assessed the applicant for income tax and GST on the basisof those returns, and imposed late filing and late payment penalties and interestcharges. I have made a point of saying the assessments were the product of theapplicant's returns and reflected his calculation of the tax due, because the applicant'saffidavit and the submissions for the applicant suggest that the assessments were theInland Revenue's ("IR") own work. They were not. The assessments derived fromthe applicant's returns, and the tax assessed to be due was as identified in thosereturns.1[9] The applicant did not pay the sum due from him and in September 2017 theCommissioner commenced proceedings against him in the District Court. InApril 2018, the Commissioner obtained judgment by default against the applicant inthe sum of $55,140.95.[10] In October 2018, another firm of accountants filed returns for the applicant forthe years ended 31 March 2016 to 31 March 2018. The Commissioner again assessedthe applicant on the basis set out in those returns and, as before, imposed penalties andinterest charges.Proceedings for adjudication[11] The applicant still not having paid the sum due from him, in May 2021 theCommissioner commenced bankruptcy proceedings and, in November 2021, applied1 Tax Administration Act 1994, s 3(1).for an order adjudicating the applicant bankrupt. By this time, the applicant's arrearswere approximately $77,000.[12] The application to bankrupt the applicant is still on foot. The applicant isopposing the application on the basis the sum claimed is incorrect.[13] In the course of the proceedings, the applicant indicated, not for the first timeapparently, that he proposed to make an application for amendment under s 113.Associate Judge Sussock ordered the applicant to make any such application promptly,which he did by letter of 29 March 2022. The application, lodged by Kilian &Associates ("KAL"), was accompanied by 300 pages of documents and soughtamendments for the years ended 31 March 2010, and 2014 to 2018 inclusive.2Application pursuant to s 113 Tax Administration Act 1994[14] To put the application under s 113 in context, the applicant's income tax returnsdisclosed assessable income by way of salary and from Work and Income.[15] The application sought to bring about a reduction in assessable income byclaiming the benefit of deductions for expenses that the applicant had paid in therelevant years. Had the Commissioner granted the application in its entirety, the sumdue from the applicant would have been substantially reduced, and KAL's letter to IRindicated that the applicant would then pay the reduced sum.[16] The applicant sought deductions for two forms of expense. The first was forexpenses the applicant claimed to have incurred in deriving income in 2010 and 2018,for instance for motor vehicle and telecommunications expenses. The second was forexpenses that the applicant had paid on behalf of companies or entities with which hewas associated, being Newcastle 1954 Ltd, Audio Visual Communication Ltd,Hexham Holdings Ltd, and the Rowland Gill Trust ("Newcastle", "AVCL","Hexham", and "trust" respectively).32 The years ended 2011, 2012 and 2013 can be put to one side as nothing of consequence was soughtin respect of those years.3 By the time of the application, each of these companies had been removed from the register ofcompanies — AVCL in 2016, Newcastle in 2018, and Hexham in 2021. Their removal has somerelevance to what follows.Receipt by Inland Revenue[17] The application was assigned to Mr Ian Phillips of IR. Mr Phillips, anexperienced IR employee of some 40 years' standing, has delegated power todetermine an application made pursuant to s 113 TAA and, in his affidavit in thisproceeding, he sets out the course he took to determine the application. This includeddiscussing the application with Mr McMurtrie, the IR Collections Officer responsiblefor dealing with the applicant's arrears and bankruptcy proceedings, and reviewingIR's files relating to the applicant and related companies.[18] In his affidavit, Mr Phillips gives a summary of the applicant's dealings withIR. It is fair to say the applicant's history is one of consistent non-compliance. Thisincludes the applicant and the entities referred to above being late to file returns, ifthey have filed them at all; the applicant being required to make a voluntary disclosureof GST-related matters; Newcastle, of which the applicant was the sole director andshareholder (and which features below), claiming and receiving a GST refund ofapproximately $65,000 to which it was not entitled; and a criminal prosecution of theapplicant following an IR investigation of Newcastle.4[19] As I have said above, one of the grounds on which the applicant is seekingreview is that Mr Phillips predetermined the application. This submission is basedlargely on this part of Mr Phillips' affidavit, in which he discusses the IR's dealingswith the applicant.[20] I can deal with this submission now. In short, I am not satisfied there is anybasis for concluding or inferring that Mr Phillips predetermined the application. Itwas necessary for him to review the files to put the application and the various entitiesin context. The process Mr Phillips undertook to determine the application can onlybe described as painstaking. It cannot be said he resolved from the outset to refuse it.[21] Turning to the application itself, Mr Phillips' evidence is that he identified thesources of income the applicant had disclosed in his returns, this being relevant to the4 IR prosecuted the applicant for knowingly providing false information and for failing to provideinformation to the Commissioner when required to do so, intending to evade the payment of tax.The applicant pleaded guilty to the charges in late 2017 or thereabouts.applicant's entitlement to the deductions sought; reviewed the folder of documentsthat accompanied the application; and considered, and retained throughout, a hardcopy of SPS 20/03.Standard Practice Statement – SPS 20/03[22] SPS 20/03 is IR's standard practice statement regarding the exercise of thediscretion conferred by s 113 TAA. It anticipates that a request under s 113 will beconsidered in four consecutive phases, terminable at any one of them.[23] Phase one requires an initial examination of the request, this being intended tofilter a "clearly correct" request from one which is "clearly incorrect". Part of thisphase also requires consideration of whether the taxpayer has provided all requiredinformation. Mr Phillips considered that insufficient information had been providedbut that he would be able to determine the application as a matter of principle, so hemoved to phase two. This requires a decision as to whether to devote the IR's limitedresources to further consideration of a request when it is unclear that granting therequest will result in a correct assessment. Mr Phillips resolved that he would proceedto consider the request, given the adjudication proceedings and Associate JudgeSussock's order.[24] This brought Mr Phillips to phase three. Phase three requires consideration of"whether a correct assessment will result from the requested amendment". Theguidance at this phase, relevant to this case, is that the requested position must beconsistent with the Commissioner's view of the law on the facts available. If it is,phase four requires consideration of whether to exercise the discretion to amend. Ifnot, or if the position is unclear, the request is to be declined.[25] At phase three Mr Phillips conducted what he describes as a "full analysis ofthe merits of the proposed adjustments including a consideration of the requestedposition relative to the Commissioner's view of the law". Mr Phillips carried out ayear-by-year analysis of what had been claimed against what was known of theapplicant's affairs. That year-by-year analysis is set out at length in Mr Phillips'affidavit.[26] Mr Phillips concluded the amendments sought would not result in correctassessments and that the application should be declined:Conclusion reached144. I reached the conclusion that the Application's proposed adjustmentsshould not be made. I did not consider that the proposedadjustments would result in correct assessments. The applicanthimself acknowledges at para 13 of his affidavit that the proposedadjustments may not be correct as some of the proposed deductionsmay have already been taken into account.145. The main issue I identified was that the underlying income wasincome of AVCL, Newcastle, the Rowland Gill Trust and the newHexham Holdings Limited. While the Application proposeddeductions for expenditure that may have otherwise been deductibleexpenditure, the Application did not address the fact that theunderlying income was derived by other parties. It is those parties (ifanyone) that would be entitled to claim the deductions. Those partieswould have needed to either record advances made to the applicant,as he paid expenses on their behalf, or alternatively, the expenditurecould have been reimbursed. The opportunity to generate anentitlement to a large number of the proposed deductions has been lostwith the removal of AVCL, Newcastle and Hexham Holdings Limitedfrom the Companies Office register.146. Based on my year by year analysis of the claims, I could find noreason to allow any of the deductions. At this point I concluded myconsideration under Phase Three of SPS 20/03. Having formed theview that the Application should be declined, consideration underPhase Four was not required.Decision to decline the application[27] Mr Phillips conveyed the decision declining to amend the assessments by letterof 17 May 2022. Mr Phillips advised that he had considered the application byreference to SPS 20/03, and that he was not satisfied that allowing the deductionsclaimed would result in a correct assessment of the applicant's income tax liabilitiesfor the years in question.[28] The reasons Mr Phillips gave for this conclusion were as follows.Deductions[29] First, under the ITA, the applicant was not entitled to the benefit of thedeductions that he sought.[30] A deduction is available to a taxpayer if, first, the "general permission" ins DA 1 ITA is satisfied and, secondly, if none of the "general limitations" in s DA 2deny the deduction.[31] The general permission is satisfied if the expense is incurred in derivingassessable and/or excluded income:DA 1 General permissionNexus with income(1) A person is allowed a deduction for an amount of expenditure or loss,including an amount of depreciation loss, to the extent to which theexpenditure or loss is—(a) incurred by them in deriving—(i) their assessable income; or(ii) their excluded income; or(iii) a combination of their assessable income andexcluded income; or...General permission(2) Subsection (1) is called the general permission....[32] Mr Phillips advised the applicant was not entitled to a deduction in respect ofexpenses he had paid on behalf of Newcastle, AVCL, Hexham or the trust because hehad not "incurred" these expenses. The expenses in question had been incurred bythose companies or the trust and only they could deduct for them.[33] Mr Phillips advised that the sums the applicant had paid on behalf of thoseentities represented advances by him to them, and he returned to this point at theconclusion of his letter, saying:The Application relates to expenditure, some of which might have beendeductible if your client had arranged his affairs differently. I refer to theexpenses paid from his personal account for costs relating to the MerwoodLane property. While that property was owned by other related parties –Newcastle and then the Trust, they were the only parties who could haveclaimed the deductions.The standard procedure where a shareholder pays for company expenditure isfor the company to reimburse the shareholder for that expenditure. Thecompany can claim a deduction for the reimbursing payment. That paymentis exempt income to the shareholder.[34] As I said above, the applicant also sought the benefit of deductions in respectof expenses he personally had incurred in deriving income in the 2010 and 2018income years. As to this type of expense, Mr Phillips advised that the employmentlimitation in s DA 2(4) ITA denied the deduction. There is a dispute about this whichI address below, as the applicant submits that the deduction is permitted by s CW 17ITA.Double counting[35] Secondly, Mr Phillips referred to the fact that the applicant had already claimedsome expenses when calculating his taxable income in the 2015 to 2017 income years.Mr Phillips stated that the applicant had not provided sufficient information as to theexpenses that had already been claimed and those now claimed, so as to avoid doublecounting.[36] The applicant himself acknowledges the possibility of double counting in [13]of his affidavit in support of this application, in which he says:I did appreciate that my calculation might not all be correct and that theCommissioner may have taken some of the expenses into account, but withouthaving a clear idea as to what the Commissioner did and did not take intoaccount for his assessments, I was and I am still unable to reconcile theaccounts properly.[37] I have already made the point that it was the applicant's own returns whichgave rise to the assessments. It was and is for him to say what he took into accountwhen he filed his returns. However, as Mr Phillips sets out in his affidavit, it is clearthat the applicant had deducted for some expenses when filing his returns. Forinstance, in one example Mr Phillips gives, in the year ended 31 March 2017 theapplicant's bank statements show he received $22,223 from one source, but onlyreturned income from that same source of $5,267. That could only be correct if theapplicant himself had made deductions in arriving at his assessable income. In theapplication, however, the applicant sought further deductions for that same financialyear of more than $53,000. This state of affairs is not explained in the application (norin the applicant's affidavit for that matter). In those circumstances, it is not surprisingthat Mr Phillips considered there was a risk of double counting.Dividend[38] Mr Phillips' third reason for declining the application was that it failed to takeaccount of what he considered to be an additional liability for income tax, over andabove that already owed, of approximately $52,917. This liability was said to arisefrom a transaction in June 2015 between Newcastle and the applicant in respect of aresidential property referred to as "Merwood".[39] Newcastle went into voluntary liquidation on 12 June 2015. At the time,Newcastle owed $65,878 in GST arrears. Two days prior to the appointment ofliquidators, Newcastle sold Merwood to the applicant at an undervalue. Some sixweeks after that, the applicant sold the property to the trustee of the trust, that trusteebeing the applicant.[40] As to this, Mr Phillips said in his letter:Your client transferred the Merwood Lane property from Newcastle to himselffor $900,000 on 10 June 2015. The sale price was below market value at thattime. An independent valuation of this property in May 2015 shows that themarket value of the property was $1,225,000. The Commissioner considersthat the difference between the two amounts, about $165,217, represents atransfer of value from Newcastle to your client as the sole shareholder. Yourclient derived a dividend under sections CD 4 to CD 6 of the ITA. TheApplication does not include this omitted dividend income, which would giverise to additional income tax liability of about $52,917. Therefore, theCommissioner will not exercise her discretion under section 113 of the TAAto accept the Application in relation to the expense claims for the 2014 to 2017income years because your client has failed to comply with tax obligations inrespect of the sale of the Merwood Lane property.[41] This part of Mr Phillips' letter is contentious for two reasons.[42] One is that, on the applicant's submission, the dividend to which Mr Phillipsrefers does not arise in fact, and that it constitutes an irrelevant consideration whichhe ought not to have taken into account. I address this submission below.[43] The second arises from the sentence beginning "Therefore". Counsel for theapplicant, Mr Kilian, submits this sentence evidences that the sole reason behind therefusal to amend the assessments was the applicant's (apparent) failure to declare thisdividend income. Thus Mr Kilian submits that I should focus on that reason to theexclusion of the others referred to in the letter.[44] Counsel for the Commissioner, Ms Deligiannis, does not accept thissubmission for the applicant. She acknowledges that the sentence is unfortunatelyworded, in that it may suggest the sole reason for the refusal was the failure to accountfor the additional income. However, Ms Deligiannis referred me back to Mr Phillips'statement at the outset of the letter, in which he prefaced his remarks by saying:... These are the reasons for [the decision to decline] ...[45] Accordingly, Ms Deligiannis submits that it is necessary to have regard to allthe reasons Mr Phillips gave for his decision to decline the application.[46] It is not entirely clear to me what Mr Phillips intended by commencing thatsentence "Therefore", nor why he was singling out the 2014 to 2017 years.Regardless, reading the letter as a whole, I am satisfied that each matter identified inthe letter caused Mr Phillips to conclude that the amendments proposed would notresult in a correct assessment.Availability of judicial review[47] There is no dispute that judicial review is available in relation to a decisionunder s 113.5 The Court will, however, be slow to interfere in the proper exercise ofthe Commissioner's statutory duties and discretions, or in decisions which involve theexercise of judgment in the statutory framework.65 Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR153; and Charter Holdings v Commissioner of Inland Revenue [2016] NZCA 499, (2016) 27NZTC 22-075 at [59].6 Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18,583 (HC) at [73]-[74];Submissions/discussionFailure to consider material relevant considerations and taking into account materialirrelevant considerations[48] To succeed on this ground, the applicant must establish that Mr Phillips failedto consider a relevant consideration or had regard to one that was irrelevant, thatomission or consideration being material to the decision reached.7[49] The relevant considerations said to have been overlooked are s CW 17 ITA andss 6 and 6A TAA.Sections DA 2 and CW 17 Income Tax Act 2007[50] I referred in [34] above to Mr Phillips' statement that some of the deductionsclaimed were precluded by s DA 2(4), which provides:DA 2 General limitationsEmployment limitation(4) A person is denied a deduction for an amount of expenditure or lossto the extent to which it is incurred in deriving income fromemployment. This rule is called the employment limitation.[51] However, Mr Kilian submits that s CW 17(2) ITA applies in the present case,and prevails over s DA 2(4), but that Mr Phillips did not consider it. Section CW 17(2)provides:CW 17 Expenditure on account, and reimbursement, of employeesExempt income: reimbursement(2) An amount that an employer pays to an employee in connection withthe employee's employment or service is exempt income of theemployee to the extent to which it reimburses the employee forexpenditure for which the employee would be allowed a deduction ifthe employment limitation did not exist.[52] As Ms Deligiannis submits, the application of s CW 17 in the present case isnot self-evident. She submits that the critical test is whether the applicant would be7 CREEDNZ Inc v Governor-General [1981] 1 NZLR 172 (CA) at 207.allowed a deduction if the employment limitation did not apply, that is if there is anexus between the income derived and the expenditure incurred. Ms Deligiannissubmits that, although Mr Phillips did not refer specifically to s CW 17, it is apparentfrom his affidavit that he turned his mind to the required nexus.[53] Ms Deligiannis also submits that s CW 17(2) requires evidence that thepayment said to be exempt is reimbursement of such an expense, and there is no suchevidence in the present case.[54] I accept Mr Kilian's point that Mr Phillips' reference to s DA 2(4) appearssimply to rule out the deduction claimed as a matter of principle. That is, in fact, theeffect of s DA 2(4) in any event. Section CW 17(2) deals with a different matter, whichis to categorise a reimbursing payment of the type described as "exempt" (from incometax). I am not persuaded that Mr Phillips overlooked that point of principle becausehe makes express reference to it at the end of his letter, in the paragraphs quoted in[33] above.[55] The simple answer to this point, however, is Ms Deligiannis' secondsubmission. There is no evidence that the applicant was reimbursed any expense soincurred. Nor was a claim to that effect made in the application. The applicant soughtthe benefit of deductions, not exempt income. If the applicant considered some of hisreceipts to be exempt pursuant to s CW 17(2), that ought to have been said andestablished in the application, and it was not.[56] To conclude on this point, on the evidence before me, I am not persuadeds CW 17(2) was a relevant consideration.Sections 6 and 6A Tax Administration Act 1994[57] The applicant's next submission is that Mr Phillips failed to give properconsideration to the "overarching" obligations in ss 6 and 6A TAA, often referred toas the "care and management" provisions, but instead focused on the provisions of theITA to which I have referred, so as to deny the applicant the deductions claimed.[58] Sections 6 and 6A TAA provide:6 Responsibility of Ministers and officials to protect integrity of taxsystemBest endeavours to protect integrity of tax system(1) Every ... officer of any government agency having responsibilitiesunder this Act ... in relation to the collection of tax and for the otherfunctions under the Inland Revenue Acts must at all times use theirbest endeavours to protect the integrity of the tax system.Meaning of integrity of tax system(2) Without limiting its meaning, the integrity of the tax systemincludes—(a) the public perception of that integrity; and(b) the rights of persons to have their liability determined fairly,impartially, and according to law; and(c) the rights of persons to have their individual affairs keptconfidential and treated with no greater or lesser favour thanthe tax affairs of other persons; and(d) the responsibilities of persons to comply with the law; and(e) the responsibilities of those administering the law to maintainthe confidentiality of the affairs of persons; and(f) the responsibilities of those administering the law to do sofairly, impartially, and according to law.6A Commissioner's duty of care and managementCare and management(1) The Commissioner is charged with the care and management of thetaxes covered by the Inland Revenue Acts and with such otherfunctions as may be conferred on the Commissioner.Highest net revenue practicable within the law(2) In collecting the taxes committed to the Commissioner's charge, anddespite anything in the Inland Revenue Acts, it is the duty of theCommissioner to collect over time the highest net revenue that ispracticable within the law having regard to—(a) the resources available to the Commissioner; and(b) the importance of promoting compliance, especiallyvoluntary compliance, by all persons with the Inland RevenueActs; and(c) the compliance costs incurred by persons.[59] The applicant submits that Mr Phillips misunderstood the obligations imposedby ss 6 and 6A and, in essence, that Mr Phillips ought to have recognised that he couldlook beyond the strict provisions of the ITA to correct the assessments as sought. Theapplicant submits that Mr Phillips would have known that the applicant will be able toput himself in a position to obtain the benefit of the exemptions or deductions by, inessence, "going the long way round": restoration of the affected companies(Newcastle, AVCL and Hexham) to the register of companies; the companies makingtheir own application pursuant to s 113 TAA to claim deductions for expenses incurred(Mr Kilian submits that it is inevitable the companies will be allowed the deductions);thereby reducing the salary or income allocated to the applicant, which in turn willreduce his income tax; and the applicant then making a further application to amendunder s 113.[60] The gist of Mr Kilian's submission is that this could have been avoided hadMr Phillips appreciated the importance and significance of ss 6 and 6A. Also, theconvoluted process referred to in the previous paragraph uses more resources thannecessary, which s 6A eschews. Mr Kilian does not say so expressly, but it is implicitin his submission that it was open to Mr Phillips to disregard the provisions of the ITAgiven the reference in s 6A(2) to "despite anything in the Inland Revenue Acts", andto proceed on the basis that, sooner or later, the applicant would have the benefit ofthe amendments now sought.[61] Ms Deligiannis submits that there is no evidence that Mr Phillips overlookedss 6 and 6A. On the contrary (and as both counsel submit) there is discussion of ss 6and 6A in SPS 20/03. The provisions and what they require of the Commissionerin toto are summarised at the outset of SPS 20/03. They are then referred to again ingreater detail in a later section of the document.[62] I accept that ss 6 and 6A are relevant in principle to an application under s 113.However, I also accept Ms Deligiannis' submission that there is no evidence thatMr Phillips overlooked these provisions. Rather the evidence is to the contrary.Mr Phillips expressly says in his affidavit that he evaluated the application under thesesections in deciding that he would proceed to consider the application under phasethree. In my view, there are no circumstances in which ss 6 and 6A could compel theCommissioner to allow an application under s 113 which required him to overlookapplicable provisions of the ITA.[63] Accordingly, I am not persuaded that relevant considerations were overlookedin determining the application for amendment.Irrelevant considerations[64] The irrelevant considerations said to have been taken into account are, first, areference by Mr Phillips in his letter to s 149A TAA and, secondly, the income taxconsequences for the applicant of the transfer of Merwood at an undervalue.8Section 149A Tax Administration Act 1994[65] As to the first, at the outset of this letter, Mr Phillips states that the applicanthad:... failed to satisfy the onus of proof on the balance of probabilities undersection 149A(1) of the TAA that allowing deductions for the expenses claimedin the Application would result in the correct income tax liabilities for the2010, 2014 to 2018 income years ...[66] Section 149A(1) TAA provides for the standard of proof in civil proceedingsrelating to the imposition of penalties. It has no application to a request under s 113.Mr Phillips acknowledges this error in his affidavit. I am not persuaded anything turnson it.Transfer at undervalue[67] The more significant point relates to the income tax liability that Mr Phillipsconsidered arose as a result of Newcastle's sale of the Merwood property to theapplicant at an undervalue.[68] In particular circumstances, including the present, a transfer of property by acompany to a shareholder at an undervalue constitutes a "transfer of company value"8 There is no dispute that the property was transferred at an undervalue.under s CD 5 ITA and as such is a dividend by virtue of s CD 4 and income in thehands of the shareholder.[69] On its face, Newcastle's transfer of the property to the applicant was at anundervalue of $325,000.[70] In his letter, Mr Phillips refers to a shortfall of $165,217. Unfortunately,Mr Phillips does not explain that amount in his letter. However, as I understand it, thatsum reflects events subsequent to the transfer, as follows.[71] By agreement of 16 July 2015, so about six weeks after the transfer, theapplicant agreed with the liquidators that he would repay the amount of the undervaluein instalments.[72] Mr Phillips acknowledges in his affidavit that at the time he declined theapplication under s 113 he was not aware of all of the payments that the applicantmade to the liquidators by 31 March 2016. As I understand it, and it is fair to say thatthis is not well explained in Mr Phillips' affidavit either, the applicant had paid morethan Mr Phillips gave him credit for, meaning that Mr Phillips overstated the incometax liability that arose.[73] As it turns out, the applicant defaulted on some of the instalments due fromhim under his agreement with the liquidators but ultimately the liquidators did recoverall of the shortfall when Merwood was sold in June 2017.[74] The issue which arose before me was whether the agreement to repay and/orthe liquidators ultimate recovery affected the applicant's liability for income tax onthe amount of the dividend received in the year ended 31 March 2016.[75] There was considerable dispute at the hearing before me as to this point.Matters were left on the basis counsel would seek to reach an agreed position but filefurther submissions if unable to do so, as proved to be the case.Subsequent submissions[76] Mr Kilian's submission is that the effect of the agreement to repay, entered intoas it was in the same financial year as the transfer, is that the applicant did not receivea dividend at all, and therefore no income tax liability arises. Alternatively, if adividend was received, it was reversed by ss CD 41 and/or 42 ITA, in which case againno income tax liability arises. In either case, Mr Phillips was in error in this part ofhis letter.[77] Ms Deligiannis submits the repayment is irrelevant; there was transfer ofcompany value as defined in s CD 5(1); and that by s CD 4 this constituted a dividend.[78] The first issue is whether a dividend accrued to the applicant on the sale andthat depends on whether there was a transfer of "company value" to the applicant.Mr Kilian submits there was no transfer, because of the repayment.[79] Section CD 5(1) ITA provides:CD 5 What is a transfer of company value?General test(1) A transfer of company value from a company to a person occurswhen—(a) the company provides money or money's worth to the person;and(b) if the person provides any money or money's worth to thecompany under the same arrangement, the market value ofwhat the company provides is more than the market value ofwhat the person provides.[80] It is not apparent to me that a subsequent restoration of the value transferred orpart thereof can affect whether a transfer has taken place in fact. The effect ofs CD 5(1) is that the transfer of value occurs on provision of money or money's worthto the shareholder. As Ms Deligiannis submits the transfer, and thus the dividend, ariseby operation of law at the time of transfer.[81] The next issue is the effect, if any, of the agreement to repay or repayment infact under ss CD 41 and 42.[82] Mr Kilian submits each applies to reverse the dividend.[83] Section CD 41 applies in either of the instances below:CD 41 Adjustment if amount repaid laterWhen released debt repaid(1) If the release by a company of a shareholder's obligation to pay moneyto the company has been treated as a dividend and the released amountis later repaid to the company, this section applies to the extentnecessary to ensure that—(a) the dividend is disregarded for the purposes of this Act; and(b) the resulting refunds are made.When close company expenditure repaid(2) If any expenditure of a close company that shareholders in thecompany believed on reasonable grounds was only for the benefit ofthe company is nevertheless a dividend and the expenditure is laterrepaid to the company, this section applies to the extent necessary toensure that—(a) the dividend is disregarded for the purposes of this Act; and(b) the resulting refunds are made.[84] Mr Kilian does not say why s CD 41 applies in the present case. I acceptMs Deligiannis' submission that what occurred in this case falls outside ss CD 41(1)and (2).[85] Section CD 42 provides:CD 42 Adjustment if additional consideration paidDifferences from market value(1) If a dividend from a company arises because of a difference betweenthe market value of property provided by or to the company and theconsideration paid for it, the dividend is disregarded for the purposesof this Act if the conditions in subsections (2) to (4) are met.Market value(2) The consideration paid must have been an amount that the companyconsidered was the market value, having taken reasonable steps at thetime of the transaction to ascertain a market value.Difference paid(3) The recipient of the dividend must have later paid to the company—(a) sufficient additional consideration to reflect the actual marketvalue of the property at the time of the transaction; or(b) a refund of any excess consideration paid by the company.Accounts adjusted(4) Any necessary adjustments must have been made to the accounts ofthe company and the recipient for the additional consideration orrefund.[86] The transaction in this case is within the ambit of s CD 42(1) but the dividendis only to be disregarded if the conditions in ss CD 42(2) to (4) are met. AsMs Deligiannis submits, they are not. On the evidence, Newcastle could not haveconsidered it received market value at the time. A valuation obtained only a few weeksprior to the sale to the applicant valued the property at $1,225,000 (s CD 42(2)); theapplicant paid the shortfall not to the company but to the liquidators, who applied thefunds to pay unsecured creditors and liquidators' costs (s CD 42(3)); and the necessaryaccounting adjustments have not been made, regardless of whose responsibilities thoseadjustments might be — Newcastle's or the liquidators' (s CD 42(4)).[87] Drawing these points together, although Mr Phillips may have overstated in hisletter the additional income tax liability resulting from the dividend, on the face ofthese provisions the liability to which he referred existed and thus he did not take intoaccount an irrelevant consideration.[88] Accordingly, this ground of review is also not established.Predetermination/unreasonable decision[89] I have already addressed the submission that Mr Phillips predetermined theapplication in [20] above.[90] An unreasonable decision is one that is outside the bounds of reason.9 Theapplicant contends the decision is unreasonable for the same reasons advanced above.9 Webster v Auckland Harbour Board [1987] 2 NZLR 129 (CA) at 131.This submission has no prospect of success given the evidence before me and theprovisions of the ITA.Discretionary remedy[91] Ms Deligiannis submits, even if a ground of review had been made out, therewould be good grounds for declining relief in this particular case. This is because onher submission it would be pointless to remit the application under s 113 back to theCommissioner, as the same refusal could be expected.[92] I do not propose to express a view on this given the conclusion I have reached.Relief or the refusal of it might depend in large part on the ground of review identified.Result[93] I dismiss this application for judicial review. The parties may makesubmissions on costs if they are unable to agree.Peters J