AOKAUTERE LAND HOLDINGS LIMITED v THE COMMISSIONER OF INLAND REVENUE [2023] NZHC 1839

AOKAUTERE LAND HOLDINGS LIMITED v THE COMMISSIONER OF INLAND REVENUE [2023]NZHC 1839 [13 July 2023]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2023-485-129[2023] NZHC 1839UNDER the Judicial Review Procedure Act 2016IN THE MATTER OF an application for judicial reviewBETWEEN AOKAUTERE LAND HOLDINGSLIMITEDApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 4 July 2023Counsel: J K Mahuta-Coyle for the ApplicantK I S Naik-Leong and C Walmsley for the RespondentJudgment: 13 July 2023JUDGMENT OF GWYN J(Discovery)Introduction[1] This is an application for specific discovery in the context of a judicial reviewapplication. The substantive proceeding is set down for hearing on 31 August 2023.[2] In the substantive proceeding Aokautere Land Holdings Ltd (ALHL) seeksjudicial review of the decision of the Commissioner of Inland Revenue(Commissioner) to issue a deduction notice under s 157 of the Tax Administration Act1994 (TAA) to the Liquidators of Vey Group Ltd (in liquidation and receivership)(Vey). The s 157 Notice required the Liquidators to pay amounts payable by Vey toALHL to the Commissioner.[3] ALHL's application for specific discovery was originally filed on 26 May2023, but was amended by a further application dated 30 June 2023. The documentssought in the amended application are set out at Appendix One to this judgment. Anamendment to the first category of documents was proposed by counsel at the hearing.That amendment is discussed at [62] below.[4] The applicant asserts that the documents sought are "limited to thosedocuments that explain the specific reasoning process that the Commissioner engagedin in order to conclude to exercise its statutory powers to issue default assessmentsand subsequently the s 157 notice."[5] The Commissioner opposes the amended application and says that thedocuments sought are not relevant to the issues pleaded in the statement of claim andthat the Commissioner has disclosed the evidence relevant to his exercise of s 157 ofthe TAA by initial disclosure and by providing affidavit evidence from Maire BridClancy and Miranda Jane Law.[6] The plaintiff applicant has not filed any evidence in support of the applicationfor discovery.BackgroundALHL[7] ALHL was incorporated on 26 March 2015 and registered with Inland Revenue(IR) for income tax and goods and services tax (GST) on that date.[8] ALHL has carried on a business of land development and subdivision since itsincorporation.[9] On 8 September 2020, no income tax having been filed for ALHL since itsincorporation, IR issued a notification of audit letter to the then director of ALHL,Kane Davidson.[10] No response was received to the notification of audit letter and no income taxreturns were filed by ALHL, prior to 2 February 2021, when IR issued a "DefaultAssessment" (DA) cover letter to ALHL. The DA cover letter noted that ALHL wasrequired to file returns and make payments on time and listed the overdue returns andwhen they were due.[11] The DA cover letter also stated that because ALHL had not filed the specifiedreturns it would receive notices of assessment, under s 106 of the TAA, based oninformation IR held about the company's income from the sale of land in each of the2016 to 2020 income years. The cover letter said if ALHL wanted to dispute theassessments it must file a notice of proposed adjustment (NOPA) together with its taxreturns, within four months of the assessment issue date shown on the notices ofassessment.[12] The Commissioner then assessed ALHL with default assessments (DAs) unders 106 of the TAA, for the income tax years ended 31 March 2016 to 31 March 2020(ALHL DAs).[13] The total income tax amount owed by ALHL for the ALHL DAs was$2,711,198.19. The notices of assessment were issued on 3 February 2021.[14] On the last page of each of the notices of assessment it stated:If you don't agree with the assessment, you must formally dispute it withinfour months of the date of issue of this notice. You'll need to send us a Noticeof proposed adjustment IR770 form.[15] ALHL's tax agent electronically filed nil income tax returns on 13 April 2021,but these were not seen by the IR officer until 21 June 2021.[16] ALHL did not dispute the ALHL DAs by issuing a NOPA with its nil returns,within the prescribed four-month timeframe.[17] Accordingly, on 21 June 2021 IR issued a letter to ALHL notifying it that theALHL DAs for the 2016 to 2020 income years were deemed to be accepted and thisfinalised the income audit of the 2016–2020 income tax periods.[18] On 10 August 2021 ALHL's tax agent re-filed nil returns for ALHL. No NOPAwas filed by ALHL.Vey liquidation[19] On 18 March 2022 the Liquidators of Vey filed an originating applicationseeking orders as to sale of a property at Webb Street, Wellington (the property) andfor directions in the liquidation of Vey. There were two mortgages registered againstthe property: the first in favour of Daryn Turvey (who had constructed the building onthe property), the second in favour of ALHL.[20] The Commissioner was served with a copy of the Liquidators' originatingapplication but did not participate in the application or seek to be joined as a party. Asat 3 May 2022 the Commissioner was a creditor of Vey in the amount of $380,923.41.[21] The High Court decision in the originating application (Sale Orders Decision)was delivered on 27 September 2022, reissued on 7 October 2022.1[22] The Sale Orders Decision included directions that:2(a) the Liquidators were to sell the property; and(b) apply the proceeds of sale and any funds to pay ALHL $60,445.10 andthe amounts owed by Vey to ALHL pursuant to the loan agreementdated 9 December 2016.[23] Mr Fugle and ALHL sought orders staying execution of the Sale OrdersDecision pending determination of their appeal to the Court of Appeal. On6 December 2022 the High Court dismissed the stay application.3 Subsequently,ALHL abandoned its appeal of the Sale Orders Decision.1 Fisk v Turvey [2022] NZHC 2462.2 At [140] and [145(b)].3 Fugle v Fisk [2022] NZHC 3253.[24] On 7 December 2022 the Liquidators accepted a tender offer from ALHL forthe property, with a settlement date of 21 December 2022.[25] On 22 December 2022 the Commissioner issued the s 157 Notice to theLiquidators, requiring them to pay the amounts payable to ALHL to the Commissioner.[26] The s 157 Notice stated that the amount to deduct was the lesser of either alump sum of $2,962,658.74 or the funds available.[27] The Liquidators then sought further directions from the Court as to distributionof the sale proceeds. In the Liquidators' memorandum they confirmed that the amountto pay to ALHL was $1,185,458.37 and sought a direction from the Court as to whetherthe amounts owing to ALHL pursuant to the Sale Orders Decision were to be paid toIR in accordance with the terms of the s 157 Notice, or to ALHL, in accordance withthe Sale Orders Decision.[28] On 30 January 2023 the Commissioner was joined to the Liquidators'application as a first interested non-party, in order to provide comment to the Court onthe s 157 Notice. Mr Mahuta-Coyle made submissions on the application, on behalfof ALHL.[29] By judgment dated 27 February 2023 (the Implementation of Sale Ordersjudgment),4 I directed the Liquidators to comply with the s 157 Notice and pay theamount of $1,185,458.37, being the amount payable to ALHL, to the Commissionerto be credited against ALHL's outstanding income tax liability.[30] ALHL did not seek leave to appeal the Implementation of Sale Ordersjudgment.[31] On 28 February 2023 the Liquidators paid the Commissioner $1,185,458.37 asrequired by the s 157 Notice.4 Fisk v Turvey [2023] NZHC 308.ALHL's case[32] ALHL's statement of claim, dated 16 March 2023, pleads two causes of action.The first is legitimate expectation. ALHL claims that, by exercising his s 157 power,the Commissioner undermined ALHL's legitimate expectation of compliance with theterms of the Commissioner's policy, as set out in Commissioner's Statement CS 20/04:The Disputes Resolution Process and Fair Trial Rights,5 which states that, generally,the Commissioner will not require a taxpayer to take steps to dispute a tax assessmentwhere a related criminal prosecution has commenced or is contemplated.[33] The legitimate expectation is said to be that ALHL was not required to disputethe Commissioner's default assessments while the Commissioner was contemplatingprosecuting, or was prosecuting, Mr Fugle and/or entities related to him (and thencommence such prosecution). In addition, the legitimate expectation is said to be thatALHL would not be the subject of civil enforcement action by way of the s 157 Notice.[34] The second, alternative, cause of action is that in the particular circumstances,the Commissioner's use of the s 157 power after a judgment had been rendered inrelation to monies payable to ALHL,6 is unreasonable.[35] At the core of ALHL's case is that a prosecution investigation commenced byIR on 27 October 2020, in relation to Mr Fugle and Woodgate Ltd (Woodgate),included ALHL as an entity associated with Mr Fugle. ALHL's substantive case isthat "its obligation to dispute the default income tax assessments issued by theCommissioner within specified statutory timeframes (and to be subjected toenforcement of those assessments) was suspended by dint of the Commissioner'scriminal investigation into Mr Fugle."[36] In support of that submission, Mr Mahuta-Coyle refers to the followingcorrespondence between IR and Mr Fugle and his barrister in March 2021.5 Commissioner's Statement The Disputes Resolution Process and Fair Trial Rights (CS 20/04), 22July 2020.6 Fisk v Turvey, above n 1, the decision resulting from the liquidators of Vey seeking orders anddirections relating to the liquidation and sale of a property located in Webb Street, Wellingtonwhich was owned by Vey.[37] On 1 March 2021 Raymond Anderson for IR emailed Mr Fugle in response toMr Fugle's email of the same date. In that email, Mr Anderson said: As you know, the Commissioner is considering taking prosecution actionagainst Woodgate and you in respect of the GST refund arrangement.Consequently, to protect your fair trial rights, that civil dispute is required tobe put on hold. Further, the Commissioner's prosecution actionconsiderations do not relate solely to the Woodgate GST refund arrangement,they also include non-compliance by other entities you control. [38] By email of 2 March 2021, Ms Clancy for IR emailed David Weaver(Mr Fugle's barrister) in response to a letter from Mr Weaver about the audit ofWoodgate's GST return. Ms Clancy said:With regard to prosecution action, as you know, legal services recommendedprosecution of Woodgate and Mr Fugle in respect of the Woodgate GSTarrangement be considered. However, prosecution considerations do not onlyinvolve Mr Fugle and Woodgate. Other non-compliance with tax obligationsby your client and his associates is also relevant. The investigation into thisis ongoing and a decision about prosecution will not be made until thatinvestigation is complete.[39] The applicant says that ALHL was "an associate" and an entity "controlled" byMr Fugle, as referred to in the 1 March and 2 March correspondence. IR was awareof that relationship. Because IR's ongoing investigation potentially encompassedALHL, ALHL also was entitled to protect its fair trial rights by not disputing the ALHLDAs issued by IR by filing a NOPA.[40] The applicant says its legitimate expectation — consistent with theCommissioner's own policy in CS20/04 — was that the Commissioner would notrequire ALHL to take steps to dispute the tax assessment while the related criminalinvestigation was still on foot. The applicant relies on R v Safi.7The respondent's case[41] The Commissioner says that the documents sought in the amended discoveryapplication are not relevant to the issues pleaded and/or have already been addressedin the documents and evidence filed for the Commissioner.7 R v Safi [2018] NZDC 19698.[42] The Commissioner says that ALHL was not within the scope of theCommissioner's criminal investigation relating to the Woodgate GST default. Thatinvestigation was specific to Woodgate and Mr Fugle, in relation to Woodgate's GSTliability.[43] That evidence is that at the time the ALHL DAs were issued the Commissionerwas not contemplating prosecuting Mr Davidson or ALHL. Woodgate and Mr Fugle,in his capacity as director of Woodgate, were formally advised in writing by theCommissioner that "criminal proceedings [were] being contemplated against [them]".The Commissioner's evidence is also that the prosecution in contemplation wasspecific to the GST refund arrangement in the GST return filed by Woodgate in theGST return period ended 31 June 2018 (the GST Return). There was no open audit onMr Fugle for his personal tax affairs at the time the ALHL DAs were issued.[44] Nor did the Commissioner otherwise make a commitment to ALHL that hewould not take debt collection action. For that reason, the policy in CS 20/04 does notapply, nor is there any other basis for the applicant's alleged legitimate expectation.[45] Ms Clancy's affidavit sets out the "specific reasoning process" engaged in bythe Commissioner in exercising the s 157 TAA power. Ms Clancy's affidavit alsodeposes that issuing the ALHL DAs was the sole focus of the Commissioner with aview to the Commissioner being able to collect that income tax believed to be owedby ALHL.[46] The Commissioner also says that, even if ALHL was within the scope of theCommissioner's criminal investigation, the use of the Commissioner's enforcementpower (in this case, through the issue of a s 157 Notice) may be necessary if there is asignificant risk of the dissipation of assets or non-payment after any dispute process isconcluded.88 See Commissioner's Statement, above n 5, at [15] which states (under the heading Outstandingtax): "However, where it is considered that a delay in collection will result in a significant risk thatthe tax will not be paid, the Commissioner may take steps that she considers necessary to ensurethe payment of tax and/or prevent the dissipation of assets."Possible prejudice to ongoing investigation[47] On 2 June 2023 the Commissioner notified Mr Fugle and Woodgate that hehad decided not to pursue prosecution action against them in relation to the GSTReturn filed on behalf of Woodgate. The Commissioner advised Woodgate that hewould be continuing the civil dispute including the proposal to impose a shortfallpenalty for evasion.[48] On 9 June 2023 the Commissioner issued notification of audit letters toMr Fugle, ALHL and the KCMK and JW (No 2) Trust, of which Mr Fugle is a trustee.[49] On 9 June 2023 the Commissioner notified Mr Fugle that he would be thesubject of an audit in relation to the income tax periods of 1 April 2015 to 31 March2022. Part of this audit would consider what income Mr Fugle may have derived fromALHL.[50] The Commissioner says that if the Court considers the documents sought in theamended application are relevant to the substantive judicial review, he is concernedthat disclosure to ALHL and Mr Fugle of those documents is likely to prejudice theCommissioner's ongoing investigation into the tax affairs of ALHL and Mr Fugle,referred to above. While any document would need to be considered individually, ifany document is likely to prejudice the Commissioner's investigation, theCommissioner says he will not be required to comply with the discovery order, inaccordance with s 18 of the TAA.[51] Under s 18 the Commissioner has a duty to "keep confidential all sensitiverevenue information and must not disclose the information unless the disclosure is apermitted disclosure that meets the requirements of sections 18D to 18J."9Relevant principles[52] As this proceeding is an application for judicial review, s 14(2)(h) of theJudicial Review Procedure Act 2016 applies.9 Tax Administration Act 1994, s 18(1).[53] I accept the submission that, as in an ordinary proceeding, the test for discoveryin a judicial review proceeding remains relevance and proportionality. However, thoserequirements are particularly important in judicial review.10[54] Further, as Williams J explained in Ririnui v Landcorp Farming Ltd (No 1):11Discovery is not usually granted in judicial review proceedings, for the mostpart because it is unnecessary. Public authorities usually disclose relevantdocumentation in affidavit evidence without the need for specific orders. And,as it is often said, judicial review is intended to be a short and simple meansby which to test the legality of public sector decision-making affectingordinary citizens. [55] ALHL's amended application is brought under rr 8.8, 8.12 and 8.17 of the HighCourt Rules 2016. Rule 8.19, providing for application for particular discovery, is alsorelevant, by analogy. In Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd,12the Court set out a four-step approach for considering an application for particulardiscovery:(a) Relevance and importance.(b) Grounds for believing the documents exist and are within the party'scontrol. This will often be a matter of inference.(c) Proportionality: The Court is required to balance the likely time andcost of discovery against its potential value. Broader considerations,such as the amount at issue, the resources of the parties and delay arealso relevant.(d) Weighing and balancing the first three steps, is an order appropriate.The Court retains an overriding discretion.10 Te Runanga o Ngati Awa v Attorney-General HC Wellington CIV 2006-485-1025, 28 March 2007at [6].11 Ririnui v Landcorp Farming Ltd (No 1) [2014] NZHC 732 at [5].12 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR600, at [8]–[14], cited and applied in Talley's Group Ltd v Biomex Trustees Ltd [2023] NZHC 1732at [12].Assessment[56] The applicant does not allege that the Commissioner advised ALHL thatcriminal proceedings had commenced or were contemplated against ALHL beforeALHL was next required to issue a disputes document.13[57] Nor is there a claim that ALHL advised the Commissioner it had elected not tofile an outstanding disputes document until the question of prosecution was resolved.14It appears that the first time ALHL communicated to the Commissioner that it did notissue a NOPA in order to protect its fair trial rights was in its written submissions of17 February 2023 filed in the Liquidators' application for further directions, which ledto the Implementation of Sale Orders Decision.[58] Nor is there a claim that the Commissioner, by way of CS 20/04,15 made someother commitment to ALHL that he would not take debt collection steps.[59] The evidence already filed for the Commissioner directly addresses whether,at the relevant times, ALHL was within the scope of the Commissioner's criminalinvestigation related to the Woodgate GST default and the "specific reasoningprocess" engaged in by the Commissioner in exercising the s 157 power.[60] As I have noted, the applicant has not filed any evidence in support of thesubstantive judicial review application, or this discovery application. I understoodfrom counsel that the applicant has no current intention to file any evidence.[61] In those circumstances the applicant cannot assert that it has grounds forasserting that further documents exist, in terms of the second of the four steps relevantto a discovery for particular discovery.16[62] At the hearing Mr Mahuta-Coyle advised that ALHL would be prepared toamend the first category of its application to provide:13 Commissioner's Statement, above n 5, at [5].14 At [8] and [14].15 At [14] and [15].16 At [55].Documents held as at the date of the Default Assessments (2 February 2021)that address whether or not the investigation being conducted by theCommissioner into Mr Leslie Fugle and any entities associated with himincluded Aokautere Land Holdings Limited.[63] Mr Mahuta-Coyle says that the documents sought in subsequent categories ofthe amended application merely flesh out that first category.[64] It seems to me that, even on the basis of a modified application, the applicanthas the same difficulty: the Commissioner's evidence already addresses the issue.[65] It is difficult to characterise this discovery application as other than a fishingexpedition, searching for a factual basis on which ALHL might retrospectively pin its"legitimate expectation", in circumstances where the ALHL DAs were not opposed atthe time, despite clear notification from the Commissioner of the appropriate statutoryprocedure for doing so. It will of course be for the Court hearing the substantivejudicial review application to determine whether the concept of legitimate expectationhas application in the particular circumstances of this case.17[66] I conclude that the documents sought by the applicant, and not alreadyprovided by the Commissioner, are not relevant to the claim. Nor has the applicantprovided any basis on which the Court could conclude that there are sufficient groundsfor believing that further documents as sought in fact exist.[67] Given that finding it is not necessary to address the Commissioner'ssubmission about the application of s 81 of the TAA.Outcome[68] The application for specific discovery is dismissed.Gwyn JSolicitors:Dewhirst Law, WhanganuiCrown Law, Wellington17 See for example Lalli v Attorney-General [2009] NZAR 720 (HC).Appendix OneIn relation to Aokautere Holdings Limited:(a) Documents held as at the date of the Default Assessments (2 February2021) that address the category of investigation being conducted by theCommissioner into Mr Leslie Fugle and any entities associated withhim;(b) A copy of any prosecution memorandum/sufficiency of evidencememorandum in relation to/or related to/or associated with ALHL;(c) Copy of the default assessment submission for ALHL; and(d) All core task assurance submissions in respect of making the defaultassessments for ALHL.