HONG v COMMISSIONER OF INLAND REVENUE [2019] NZCA 336

HONG v COMMISSIONER OF INLAND REVENUE [2019] NZCA 336 [26 July 2019]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA649/2018[2019] NZCA 336BETWEEN BOON GUNN HONGAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 2 July 2019Court: Courtney, Venning and Dunningham JJCounsel: Appellant in personM Deligiannis and L K Worthing for RespondentJudgment: 26 July 2019 at 3 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Dunningham J)Introduction[1] Mr Hong is a lawyer. In 2006 he made two loans to clients of his legal practice.In his 2011 income tax return he claimed deductions, having written offthe outstanding amounts of these loans as bad debts.[2] The Commissioner of Inland Revenue (the Commissioner) disallowed andreversed the deductions and imposed further shortfall penalties on the basis thatMr Hong had failed to take reasonable care.1[3] On 29 March 2018, the Taxation Review Authority (the Authority) upheldthe Commissioner's decision.2 It found:(a) the deductions did not fall within s DB 31 of the Income Tax Act 2007(ITA), the exception carved out from the general principle that baddebts are not deductible; and(b) the Commissioner was justified in imposing shortfall penalties unders 141A of the Tax Administration Act 1994 (TAA).[4] Mr Hong then appealed the Authority's decision to the High Court.3However, Jagose J upheld the Authority's decision, describing it as "comprehensive"and "well-reasoned".4 Mr Hong now appeals to this Court.Issues[5] The issues on this appeal are whether the High Court was correct to upholdthe Authority's finding that:(a) Mr Hong was not entitled to claim deductions for the two debts in his2011 income tax return pursuant to s DB 31 of the ITA (and carrythe losses through into his 2012 income tax return)?(b) Section DB 31 of the ITA overrides the general permission to claimdeductions against expenses of a business found in s DA 1 of the ITA,so that when a deduction is denied under s DB 31 it cannot be claimedunder s DA 1?1 Pursuant to s 141A(1) of the Tax Administration Act 1994.2 Hong v Commissioner of Inland Revenue [2018] NZTRA 3.3 Pursuant to s 26A of the Taxation Review Authorities Act 1994.4 Hong v Commissioner of Inland Revenue [2018] NZHC 2539 at [6].(c) Mr Hong was liable to pay shortfall penalties under s 141A of the TAAfor not taking reasonable care?[6] Mr Hong also appeals the High Court's award of costs against him.5The lending[7] Mr Hong is a barrister and solicitor in sole practice. In 2005, a company heowned, Orano Developments Ltd, sold a property for $1,300,000 and he set aside$1,000,000 from the sale proceeds for a fund that he calls his "Benevolence onthe Conscience Loan Fund". In his evidence to the Authority he explained thatthe fund was used to help clients whom he considered would benefit from hisassistance. His criteria for access to the fund were as follows:(a) it was to help longstanding clients;(b) the clients were people who were in financial difficulty but whom hewas "confident" could overcome their difficulties with his help;(c) the clients had to be "good people"; and(d) the need for assistance must be related to a matter that came up inthe course of acting for the client.[8] In return he says the clients had to agree to "do right" by him and pay not justinterest, but also a bonus once he had got them out of their dilemma.[9] Mr Hong kept the operation of the fund confidential, saying he did not want tobe pressured for loans by other clients. He said the ultimate objective of the fund wasto generate higher returns so that he could benefit the Word Wildlife Fund, beingthe charitable organisation he has chosen to leave the funds to in his will.[10] The first of the two loans in question was an unsecured loan for $50,000advanced on or about 12 July 2006 to a Mr Chan (the Chan loan). A document5 Hong v Commissioner of Inland Revenue [2018] NZHC 3077.described as an "Acknowledgment of Loan and Debt" was signed in the followingterms:TO: B G HONG ['BGH'],Barrister & SolicitorsRE: LOAN OF $50,000.00 FROM YOU ME FOR OCEANCITYCHINESE RESTAURANTI, BILL CHAN, SAI KWONG director of Far South Investment Co. Limitedhereby acknowledge as follows:-1. I have requested BGH to loan me some funds as I had overspent fundsrenovating my restaurant OCEANCITY CHINESE RESTAURANT andneed the funds urgently to clear rent and other creditors owed in respectof some of the renovation works as I am unable to source such financefrom usual lending institutions.2. BGH has agreed to advance me a loan to me on terms follows:-a. Amount of loan: $50,000.00;b. Less $1,000.00 owed to you on the restaurant liquor licenceapplication;c. Short term of loan: Repayable on demand with interest at 10%on repayment.3. I undertake to pay back the loan as quickly as I can.4. I, BILL CHAN, SAI KWONG hereby authorise you to pay the net loanadvance of the amounts and to the accounts as follows:-a. $44,000.00 to Far South Investment Co. Ltd [Bank accountdetails]b. $5,000.00 to Bill Chan [Bank account details][11] No part of the debt was repaid, nor was interest paid on it. Mr Chan's company,Far South Investment Co Ltd (Far South), was removed from the companies registerin 2009.[12] Both the Authority and the High Court found that the loan was made toMr Chan personally. However, Mr Hong disputes that finding, saying it was advancedto Mr Chan's company, Far South.[13] The second loan of $300,000 was made by Mr Hong to a Mr Tololi on20 December 2006 (the Tololi loan). The loan was described to be "repayable ondemand with fair interest to [Mr Hong] on repayment". Mr Hong explained thatMr Tololi allowed him to retain surplus funds from other transactions which hehandled for Mr Tololi to reduce the debt. However, a balance of $122,280 was stillowing on this loan when Mr Tololi was adjudicated bankrupt in July 2010.Section DB 31 of the ITA[14] The Commissioner assessed the deductibility of the two loans under s DB 31of the ITA. The relevant parts of that section provide:DB 31 Bad debtsNo deduction (with exception)(1) A person is denied a deduction in an income year for a bad debt,except to the extent to which—(a) the debt is a debt—(i) written off as bad in the income year:(ii) for which the debtor is released from making allremaining payments under the Insolvency Act 2006excluding Part 5, subparts 1 and 2 of that Act, or underthe Companies Act 1993, or under the laws of acountry or territory other than New Zealand, andthe person is required to calculate a base priceadjustment by section EW 29 (When calculation ofbase price adjustment required) for the debt forthe income year:(b) in the case of the bad debts described in subsections (2) to (5),the requirements of the relevant subsection are met.Deduction: financial arrangement debt: dealers and holders(3) A person is allowed a deduction, quantified in subsection (3B), for anamount of a bad debt owing under a financial arrangement to whichthe financial arrangement rules apply, if—(a) the person carries on a business for the purpose of derivingassessable income; and(b) the business includes dealing in or holding financialarrangements that are the same as, or similar to, the financialarrangement; and(c) a requirement of subsection (1)(a) is met for the bad debt; and(d) the person is not associated with the person owing the amountwritten off.[15] To deduct the bad debts in question under this section, Mr Hong needed toestablish:(a) either:(i) the relevant debts were written off as bad between 1 April 2010and 31 March 2011;6 or(ii) the debtors were released from making all remaining paymentsby law, under the Insolvency Act 2006 or the Companies Act1993;7 and(b) he carried on business for the purpose of deriving assessable income;8and(c) that the business included dealing in or holding financial arrangementsthat were the same as, or similar to, the financial arrangement for whichthe deductions are claimed.9[16] The Authority and the High Court held that Mr Hong failed to establish any ofthose requirements. Mr Hong appeals each one of those findings.Were the debts written off during the 2011 income year (s DB 31(1)(a)(i))?[17] Both the Authority and the High Court held that Mr Hong had not satisfiedthem that the debts had been written off during the financial year in which he soughtto deduct the bad debts.6 Section DB 31(1)(a)(i).7 Section DB 31(1)(a)(ii).8 Section DB 31(3)(a).9 Section DB 31(3)(b).[18] To satisfy s DB 31(1)(a)(i) there must be some act to constitute a physicalwrite-off of the debt within the relevant financial year.10 In this case, Mr Hong'sevidence was that he operated a simple single entry accounting system based on Excelspreadsheets. The only spreadsheet which recorded any write-off was the profit andloss spreadsheet for the 2011 income year. Mr Hong gave evidence that his officeadministrator, Ms Chan, had entered the write-offs in the spreadsheet during the 2011income year. However, there was no other evidence of that entry or its timing.Mr Hong did not call Ms Chan to give evidence and the Authority found that hisevidence as to the steps taken by his legal executive was not reliable and held he hadnot established, on the balance of probabilities, that the debt had in fact been writtenoff prior to the end of the 2011 financial year.[19] The High Court agreed with this finding, which was based on a number ofstrands of evidence:(a) Ms Chan, who was said to have made all the computer entries forinclusion in the spreadsheet, was not called to give evidence.An inference was available that what she may have said in evidencewould not have assisted Mr Hong.11(b) The 2011 return was completed at the same time as those for 2006 to2010 and 2012, after the Commissioner initiated an audit of Mr Hongbecause of his failure to prepare returns for those years.(c) The Inland Revenue investigator gave evidence that profit and lossaccounts were usually prepared after the end of the financial year as itwas then that all the final figures were available.(d) On 24 September 2012, Mr Hong advised the Commissioner "[his] staffhad entered all the transaction details for [him] to complete the returnsover this weekend", and sought an extension of time to 1 October 2012to complete the returns.10 Budget Rent A Car Ltd v Commissioner of Inland Revenue [1995] 3 NZLR 90 (HC) at 98–99.11 Ithaca (Custodians) Ltd v Perry Corp [2004] 1 NZLR 731 (CA) at [153].(e) Mr Hong himself had said that he had included the bad debts in the2011 return that was filed in late 2012, "as more or less it was then thatI turned my mind to this".(f) In his notice of response to the Commissioner, Mr Hong did not assertthat Ms Chan had inserted the write-offs in the profit and lossspreadsheet during the 2011 income year but, rather, he favoured a"substance over form" argument in respect of the timing of the physicalwrite-off.12[20] A further strand of evidence relied on by the Authority was the metadata forthe profit and loss accounts which were emailed to the Commissioner on11 October 2012 in the form of soft copy Excel spreadsheets. The investigator statedthat when he checked the metadata, he noted that it showed the spreadsheet thatcomprised the profit and loss account for the year ended 31 March 2011 was createdon 20 September 2012 by Mr Hong. This was the same date as the profit and lossaccounts for the other years.[21] Mr Hong, both in the High Court and before us, challenged the investigator'sability to give evidence about what he found in the metadata and whether this couldbe relied on to support the conclusion that the write-off was only done when the profitand loss account spreadsheet was created. Mr Hong's objections were:(a) this evidence had not been raised in the Commissioner's statement ofposition and therefore infringed s 138G of the TAA; and(b) the investigator's evidence of what the metadata showed wasinadmissible, as it was opinion evidence which could only be providedby an expert.For these reasons, Mr Hong submits his evidence should have been rejected.12 Saying in his Notice of Response dated 21 September 2015 "could IRD use such a lack oftechnicalities to deprive you to (sic) something which at substance to you are entitled to NO".[22] However, s 138G only limits the Commissioner to "the issues andthe propositions of law" that are disclosed in the Commissioner's statement ofposition. As the Authority pointed out, the question of when the loans were writtenoff was always an issue in dispute. Section 138G does not prevent the introduction ofevidence to support the issues raised.[23] We also do not accept that the investigator's evidence of what the metadatarecorded as the time and date of content creation, required expert evidence.The investigator reported what he saw when he looked at the metadata for thespreadsheet and Mr Hong did not dispute that the metadata showed that the 2011 profitand loss spreadsheet was created on 20 September 2012. What Mr Hong wished toargue was that this did not prove when the write off was entered because exactlythe same creation date was found for each of the other spreadsheets which wereincorporated with his returns.[24] In our view, even if Mr Hong is right that does not change the conclusions tobe drawn. As Jagose J accepted, that fact that all the spreadsheets record the same dateand time for the date created suggests the 20 September 2012 spreadsheets are copiesof earlier created documents and brings into question whether 20 September 2012 wasin fact the date of creation.13 However, as Jagose J noted, the Authority's finding ofthe spreadsheets' "true creation date" was distinct from its conclusion that Mr Hongfailed to establish the bad debts were written off during the 2011 income year.14Even if we ignore the evidence of what the metadata showed, the other evidenceidentified at [18]–[19] above points to the profit and loss account spreadsheet beingcreated after the end of the 2011 financial year.[25] We accept that Mr Hong has failed to discharge the onus of demonstrating thatthe write-offs were actually recorded in the spreadsheet during the 2011 income year.13 Hong v Commissioner of Inland Revenue, above n 4, at [13].14 At [14].Were debtors released from making all payments in the 2011 income year(s DB 31(1)(a)(ii))?[26] Having found that Mr Hong has not satisfied the requisite s DB 31(1)(a)(i), weturn to consider the alternative route under s DB 31(1)(a)(ii) that the debtors werereleased, by operation of law, from making all remaining payments. We note thatneither the Authority nor the High Court erroneously treated these as conjunctiverequirements as claimed by Mr Hong. Jagose J clearly approached these asalternatives and confirmed that the Authority had also taken this approach.15[27] The Tololi loan could only satisfy this requirement if Mr Tololi was dischargedfrom bankruptcy under s 304 of the Insolvency Act. Mr Tololi was only dischargedfrom bankruptcy in 2013, which was after the 2011 income year. The Court, therefore,did not err in finding this requirement had not been satisfied in respect of the Tololiloan.[28] Turning to the Chan loan, there was a dispute over whether that loan had beenadvanced to Mr Chan's company, Far South, or Mr Chan in his personal capacity.This finding was important as it determined the entity which had to have had its debtsreleased by operation of law in order to satisfy s DB 31(1)(a)(ii).[29] We are satisfied that the Authority and the High Court were correct to rejectMr Hong's contention that the loan was advanced to Far South and not to Mr Chan.The loan document set out at [10] above makes it clear that the loan was advanced toMr Chan in his personal capacity, as evidenced by the use of personal pronounsthroughout. For example, "I have requested BGH to loan me some funds", "BGH hasagreed to advance me a loan" and, "I undertake to pay back the loan as quickly asI can". The reference to Mr Chan being the director of Far South simply identifies hisoccupation and the payment of part of the monies advanced into the account ofFar South's bank was in accordance with a direction given by Mr Chan.15 At [16].[30] Being satisfied that Mr Chan was the borrower, then again, the Insolvency Actapplies. Mr Chan has never been adjudicated bankrupt and so this provision is notsatisfied.Did the appellant carry on a business of dealing in or holding financialarrangements (whether standalone or as part of his legal practice) (s DB 31(3))?[31] Even if Mr Hong had established one or other of the criteria in s DB 31(1)(a),he still needed to satisfy the criteria in s DB 31(3) to claim deductions for the baddebts. The key issue in dispute here was whether Mr Hong was carrying on a businessfor the purpose of deriving an assessable income which involved money lending.[32] The High Court endorsed the Authority's finding that the appellant's primarybusiness was providing legal services and the lending was a side project to which hegave minimal time and energy.16 Mr Hong's lending activities were therefore neithera standalone business nor part and parcel of his legal practice.[33] In determining whether Mr Hong was in the business of money lending, boththe Authority and the High Court relied on the leading case on what constitutesthe carrying on of a business, Grieve v Commissioner of Inland Revenue.17 The Grievebusiness test involves a two-fold enquiry into:18(a) the nature of the activities carried on; and(b) the subjective profit making intention of the tax payer.Mr Hong disputes the findings of the Authority and the High Court as to whether hemet those requirements.[34] In Grieve it was said that while statements of the taxpayer's intentions may berelevant:1916 At [18(b)].17 Grieve v Commissioner of Inland Revenue [1984] 1 NZLR 101 (CA).18 At 110.19 At 110.actions will often speak louder than words. Amongst the matters which mayproperly be considered in that inquiry are the nature of the activity, the periodover which it is engaged in, the scale of operations and the volume oftransactions, the commitment of time, money and effort, the pattern of activity,and the financial results.[35] Mr Hong's submissions were primarily directed to the Authority's assessmentof these issues which led to it concluding he was not engaged in the business oflending. He explains that the small number of loans he made (the only other client heloaned to being a Mr and Mrs Kinnon) was because he was "stymied" from makingfurther loans by the Kinnons' failure to repay their loan. For this reason, the smallnumber of loans could not be used to make an adverse finding about whether he wasin the business of lending.[36] Similarly, he takes issue with the Authority's findings about the lack ofa commercial basis for his lending. Jagose J made similar findings, noting the lendingactivity was not carried on in an organised and a coherent manner or with sufficientcontinuity and extent. These findings included:(a) Over the period from 2005 when the fund was established to whenthe Commissioner declined the deductions, there were only a verysmall number of loans to three sets of clients.(b) The loans were all extended in the space of one to two years between2005 and 2006.(c) The appellant admitted that he forgot about the Chan loan for a numberof years and was only reminded of it when Mr Chan came back andasked for a further loan. Mr Hong was confused about the number andamounts of the loans extended to both Mr Tololi and Mr Chan.(d) Mr Hong could not produce in evidence any loan or settlementstatements provided to the debtors or other documents showing loanbalance and accrued interest. The only documents provided werethe loan documents in respect of the Chan and Tololi loans.(e) Interest appeared to be payable at the discretion of the borrower.Even where payment of interest was a term of the loan, it did not appearto have been sought, even prior to the default.(f) The only interest income declared in the entire period to 2012 was$28,931 in the 2006 income year.(g) No risk assessments or due diligence was conducted, save forMr Hong's assertion that he only loaned to clients he knew and trusted.(h) Mr Hong did not take any action to enforce recovery of the outstandingloan balances.(i) No security was taken over any property in respect of the lending.Despite describing his arrangement with Mr Tololi as an equitablemortgage, it clearly was not as it did not give him any security overproperty.(j) The loan to Mr Tololi was not extended in the usual way, but rather wasadvanced so that Mr Hong was not in breach of an undertaking givenby Mr Hong as to the ability of his client to settle a property purchase.(k) Mr Hong was familiar with commercial lending, having advancedfunds to another person in 1998 with conventional lendingdocumentation but in contrast, the lending in respect of the consciencefund was not carried out in a similarly commercial manner.(l) Finally, the confidentiality of his lending services speaks against thembeing part of a conventional business activity.[37] Mr Hong made a number of assertions to counter these conclusions, includingthat:(a) his loan acknowledgements were "binding, effective and enforceable";(b) he loaned to longstanding clients that he trusted to save him the "timeof doing extensive due diligence";(c) he considered the Authority placed too much weight on his lack of timecommitment, saying "time is my scarcest commodity";(d) he did have security for the Tololi loan, as the authority he had to deductany surpluses from any sale of Mr Tololi's group's property and usethem to repay the loan was an "equitable mortgage"; and(e) he did not need to advertise his money lending services, as he wasconfident he would have "ample clients in need" who would come tohim for financial assistance.However, Mr Hong's explanations do not overcome the overwhelming evidencewhich, viewed objectively, falls well short of establishing he was engaged inthe business of money lending.[38] While Mr Hong refers to a range of cases in support of his assertion that hemet the business test, we are not satisfied that any of them reflect the totality ofcircumstances in which the present loans were advanced and the claims made.20[39] Despite Mr Hong's repeated assertions that he subjectively intended to makea profit from these activities, we do not consider that Mr Hong was carrying ona lending business for the purpose of deriving assessable income.[40] Instead we agree that this lending was better described as a passive investmentor charitable advancement of funds, which is how the Commissioner characterised it.Mr Hong's profit making intention (while subjectively present) in reality amounted tolittle more than a "hope" that the client would eventually be able to pay interest oreven a bonus to Mr Hong. We consider that the Authority and the High Court were20 Case 5/2011 [2011] NZTRA 1, (2011) 25 NZTC 1-005; Case Z21 (2010) 24 NZTC 14,286 (TRA);Dale v Nichols Constructions Pty Ltd [2003] QDC 453; Budget Rent A Car Ltd v Commissionerof Inland Revenue, above n 10; Case W3 (2003) 21 NZTC 11,014; and Porter Hire Ltd v Blanchett,(2006) 9 NZCLC 264,070.right to find that Mr Hong was not carrying on a money lending business forthe purpose of deriving assessable income.[41] The alternative argument was that it was "part and parcel" of Mr Hong's lawpractice. In this regard, he describes his fund as "circulating capital" which he usesfor "saving my clients, as their survival meant I could continue generating fees fromthem".[42] Jagose J, however, held there was no sufficient connection between Mr Hong'slegal services business and the financial arrangements that he sought to deduct as baddebts. It was not sufficient that the loans at issue happened to be to his clients.As Jagose J noted:21The two services do not naturally or easily co-exist. Mr Hong lending moneyto his clients raises significant issues under the Lawyers and ConveyancersAct (Lawyers: Conduct and Client Care) Rules 2008 – specifically, inaddressing conflicting interests – about which there is no indication Mr Hongis aware or has addressed.[43] He also noted that it is significant that Mr Hong did not use his firm's businessbank account for the lending activities.[44] Mr Hong categorically rejects the risk of acting in a conflict of interest, sayingthat he works on a "conscience to conscience basis" and if clients "cannot pay meI have no issues over such". In his view, there cannot be a conflict of interest whenhis primary concern has been to assist the clients out of their financial dilemma, ratherthan to earn interest.[45] In our view, Mr Hong cannot have matters both ways. If the loans are advancedto clients (whether through his firm or through a separate entity such as his companyOrano Holdings Ltd), there is the potential for a conflict of interest and Mr Hongwould be required to comply with the relevant rules requiring independence, includinga prohibition on engaging in conflicting business activities.22 Prioritising the21 Hong v Commissioner of Inland Revenue, above n 4, at [20].22 Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 at Chapter 5,including in particular rr 5.4 and 5.5.benevolent aspect of the lending over the financial aspect does not remove that riskand, as we have already noted, tells against it being a normal business activity.[46] For these reasons, we uphold the High Court's findings that there is insufficientconnection between Mr Hong's legal services business and the financial arrangementshe seeks to deduct as bad debts to satisfy s DB 31(3).Does s DB 31(1) govern the deductibility of the write off or is it able to consideredunder the general permission in s DA 1?[47] Mr Hong argues in the alternative that if the loans were not deductible unders DB 31(1), both loans should have been able to be deducted under s DA 1, the generalprovision allowing the deductibility of business expenses. Section DA 1 provides:DA 1 General PermissionNexus with income(1) A person is allowed a deduction for an amount of expenditure orloss to the extent to which the expenditure or loss is—(a) incurred by them in deriving—(i) their assessable income; or(b) incurred by them in the course of carrying on a business forthe purpose of deriving—(i) their assessable income; orThis provision is described in the ITA as the "general permission".23[48] Mr Hong argues that the loans in question ought to be deductible underthe general permission as a business loss incurred in the course of his law practice.In support of this submission he points out that the expenditure is used for "saving myclients" so he could "continue generating fees from them".23 Income Tax Act, s DA 1(2).[49] However, Mr Hong has failed to consider the inter-relationship betweens DB 31 and the general permission in s DA 1 as set out at s DA 3. In particular,s DA 3(5) provides:DA 3 Effect of specific rules on general rulesExpress reference needed to override(5) A provision in any of subparts DB to DZ takes effect to overridethe general permission or a general limitation only if it expresslystates that —(a) it overrides the general permission or the relevant limitation;or(b) the general permission or the relevant limitation does notapply.[50] Section DB 31(6)(a) expressly provides that subs DB 31(1) overridesthe general permission in s DA 1. In other words, bad debts are only deductible if theymeet the criteria in s DB 31. For this reason, both the Authority and the High Courtcorrectly identified that when a deduction is denied under s DB 31(1) it is unnecessaryto consider whether it can be deductible under the general permission.Did the Court err in finding that Mr Hong was liable to pay a shortfall penaltyunder s 141A of the TAA?[51] The final ground of Mr Hong's appeal was to argue that the Commissionershould not have imposed a penalty on him under s 141A of the TAA, as he tookreasonable care in taking the tax position he did on the deductibility of the bad loans.[52] Section 141A of the TAA governs the imposition of shortfall penalties where:(a) the taxpayer has taken a tax position;(b) a shortfall arises from the tax position taken; and(c) the taxpayer did not take reasonable care in taking the tax position.[53] The Authority upheld the Commissioner's decision imposing shortfallpenalties of $2,126.74 and $1,242.01 for the years ended 31 March 2011 and31 March 2012 respectively. That decision was upheld by Jagose J, although hedeparted from the Authority on whether Mr Hong should have sought tax advice fromthe tax adviser. He noted that s 141A(2B) provides a "safe harbour", in that a personwill have taken reasonable care if that person relies on an action or advice of a taxadviser engaged by the taxpayer. If a requirement of taking reasonable care is to seekadvice from a tax adviser there would be no "margin" left between the "reasonableperson" and the statutory "safe harbour".24[54] However, he held that Mr Hong had nevertheless failed to do what a reasonableperson in his circumstances would have done, which was to have:(a) taken sufficient steps to understand his obligations as a taxpayercommensurate with the complexity and exceptionality of the taxposition to be taken;(b) kept adequate books and records to substantiate the deductions claimed;and(c) filed returns and paid tax on time.[55] In his view, Mr Hong could also not avail himself of the other safe harbourprovision in s 141A(3) of having taken an acceptable tax position. The position takenby Mr Hong was objectively unacceptable, that is, it could not on rational grounds beargued to be right.25 Without evidence to assert that the debt had been written off inthat income year, or that the debtor was released from making repayment, there wasno basis for claiming a deduction.[56] Because Mr Hong had fallen well short of the standard of care expected oftaxpayers generally, he upheld the (reduced) penalty imposed by the Commissioner.24 Hong v Commissioner of Inland Revenue, above n 4, at [22].25 At [23] citing Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC115, [2009] 2 NZLR 289 at [184].[57] Mr Hong, however, says the Judge was wrong to conclude he had not takenreasonable care in arriving at his view that the debts were deductible, as he tookthe position he did "based on my interpretation of the tax laws, rules and the judicialprecedents". In any event, even if he failed to establish that he had written off the debtson or about June 2010, he had recorded it when he filed his tax returns in 2012, so anysuch shortfall would have been merely "temporary".[58] We accept, as Jagose J held, that it will not always be necessary to take advicefrom a tax adviser to have taken reasonable care. However, while Mr Hong said thathe had undertaken research on the issue, that was, as the respondent pointed out,contradicted by the evidence. Specifically, Mr Hong:(a) acknowledged he was unfamiliar with tax laws and the types ofdeductions in question;(b) failed to recognise the significance of the deductions claimed ascompared with his declared income;(c) did not seek assistance from a tax professional because he said it wasexpensive (rather than because he had researched the position himself);and(d) sent correspondence to the Commissioner which contradicted hisassertion that he undertook his own careful research. For example, inhis letter of 25 March 2013, he refers to wanting to undertake legalresearch on the issues "but did not have enough time to locate anyjudicial precedent/determinations", and asked whether theCommissioner can "point me towards any authorities on this issue".[59] In light of this evidence, Mr Hong's assertion that he did research the positionin advance of claiming the deductions is not accepted. That failure, coupled withthe failure to keep adequate books to substantiate the deductions claimed and to fileincome returns for the entire income period from 2006 to 2012 until October 2012,supports the Authority's and the High Court's conclusion that Mr Hong failed to takereasonable care in taking the tax position that led to the shortfall.[60] Equally, Mr Hong could not claim protection through having taken "anacceptable tax position". That term is defined in the TAA as a position which is notan "unacceptable tax position".26 The latter phrase is defined in s 141B(1) as a taxposition that, viewed objectively, "fails to meet the standard of being about as likelyas not to be correct". As the test is an objective one, Mr Hong's evidence that hebelieved the position taken was correct, or not unacceptable, is irrelevant.In the absence of evidence to establish the criteria for deductibility under s DB 31 hadbeen met, Mr Hong could not demonstrate he had taken a stance that could berationally argued to be right.[61] For these reasons, there was no error in either the Authority or the High Courtupholding the penalties imposed by the Commissioner.Did the High Court err in finding the respondent was entitled to recover costs forpreparation of the common bundle and for travel and accommodation expensesassociated with the High Court proceeding?[62] In a costs judgment issued on 26 November 2018, Jagose J ordered Mr Hongto pay costs on a 2B basis, plus disbursements for transport and accommodationtotalling $813.51.27 Mr Hong takes issue with the costs awarded for preparation ofthe common bundle by the respondent. He also takes issue with the claim foraccommodation and transport costs, saying the Commissioner "had the choice ofengaging counsels (sic) who are resident here in Auckland".[63] However, we accept that because of the difficulties with the bundle ofdocuments Mr Hong prepared for the hearing before the Authority, it was agreedbetween Mr Hong and the respondent that the respondent would prepare the bundlefor the High Court hearing. There was no suggestion that this would be done at nocost. As this was a step taken in the appeal by the respondent, she was entitled to claimthe appropriate daily recovery rate for the time considered reasonable for taking that26 Tax Administration Act, s 3(1).27 Hong v Commissioner of Inland Revenue, above n 5, at [8].step pursuant to r 14.2 of the High Court Rules 2016. The Judge's decision awardingthose costs was entirely consistent with the High Court Rules costs regime and we cansee no basis for overturning or amending it.[64] In respect of the costs claimed for counsel travelling to Auckland and beingaccommodated there, we accept that tax litigation is a specialist area of law.The Commissioner is based in Wellington and had instructed the Revenue team atCrown Law in relation to these proceedings. It was reasonable in the circumstances,given their expertise and experience, to use them at each stage of the proceeding. Inany event, as was said by Clifford J in Commerce Commission v Bay of PlentyElectricity Ltd:28[50] I must also comment that in a very small country such asNew Zealand, I find the concept of "out of town" counsel – particularly inthis commercial area – as being somewhat outdated. Without wishing to raisefurther market definition issues, I would have thought the market for legalservices at this level was a national one. On that basis, the costs of travel andaccommodation are disbursements reasonably incurred and payable as such,unless for some very unusual reason the decision to retain counsel of choicecould be seen as being particularly unreasonable. An example of suchunreasonableness might arise where that decision was itself properly seen asa cost raising exercise.[65] In our view, this reasoning applies with equal force to the present situation andthese disbursements were reasonably incurred in defending the proceedings inthe High Court. There is no basis on which the decision to order these disbursementsas recoverable from the appellant has been shown to be in error.Outcome[66] The appeal is dismissed.Costs[67] The appellant must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements.28 Commerce Commission v Bay of Plenty Electricity Ltd HC Wellington CIV-2001-485-917,4 December 2008.Solicitors:Crown Law Office, Wellington for the Respondent