CHATFIELD & CO LIMITED V COMMISSIONER OF INLAND REVENUE [2017] NZCA 148

CHATFIELD & CO LIMITED V COMMISSIONER OF INLAND REVENUE [2017] NZCA 148 [1 May 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA531/2016 [2017] NZCA 148BETWEEN CHATFIELD & CO LIMITEDAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 4 April 2017Court: Harrison, French & Brown JJCounsel: R A Rose for AppellantP H Courtney and M J Bryant for RespondentJudgment: 1 May 2017 at 12.15 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant is ordered to pay costs to the respondent for a standard appeal on a band A basis together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Harrison J)Introduction[1] The Korean National Tax Service (NTS) requested the Commissioner of Inland Revenue of New Zealand obtain and exchange certain specified information. The request was made pursuant to a double tax agreement (DTA) between the two countries. The information was required for an investigation into the taxation affairsof 21 Korean tax payers which carried on business here. The Commissioner implemented the NTS request by issuing notices to Chatfield & Co Ltd, the tax agent for the taxpayers in New Zealand, under s 17 of the Tax Administration Act 1994 (the TAA).[2] Chatfield applied to the High Court for judicial review of the Commissioner'sdecision to issue the notices. The company alleged that the Commissioner acted unlawfully, either by breaching its legitimate expectation that she would not issue the notices without first seeking the requisite information from the taxpayers themselves or by failing to take into account certain relevant considerations. Lang J granted the Commissioner's application to strike out all except one of Chatfield's claims.1Chatfield now appeals.[3] The complexity of Chatfield's argument must not be allowed to obscure the simplicity of the sole issue: that is, whether the terms of an operational statement which the Commissioner has issued for the guidance of taxpayers amounts to a limitation on the scope of her particularly broad statutory power to issue the s 17 notices.2Background[4] The DTA between New Zealand and Korea has statutory authority pursuant to the Double Taxation Relief (Republic of Korea) Order 1983. Section BH 1 of the Income Tax Act 2007 is the statutory source of the power to enact double tax agreements into New Zealand law. Ms Courtney for the Commissioner emphasises the relevant words of s BH 1(4) as follows:"Despite anything in this Act ... or in any other Inland Revenue Act or the Official Information Act 1982 or the Privacy Act 1993, a double tax agreement has effect in relation to —...1 Chatfield & Co Ltd v Commissioner of Inland Revenue [2016] NZHC 2289.2 New Zealand Stock Exchange v Commissioner of Inland Revenue [1990] 3 NZLR 333 (CA) at 336–337; approved by the Privy Council in New Zealand Stock Exchange v Commissioner of Inland Revenue [1992] 3 NZLR 1 (PC) at 3–4.(c) the exchange of information that relates to a tax, as defined in paragraphs (a) (i) to (v) of the definition of tax in section 3 of the Tax Administration Act 1994."(Ms Courtney's emphasis.)[5] John Nash, the Manager (International Revenue Strategy) at the National Office of the Inland Revenue Department, explained the number of statutory purposes for which a DTA may be negotiated. Among other things the exchanges assist in determining the tax residence of individuals and entities, taxing rights to income and their correct declaration, the allocation of expenditure between jurisdictions, and the pricing of transactions between associated parties. Mr Nash is the Competent Authority in New Zealand delegated by the Commissioner with responsibility for exchanging information with New Zealand's tax treaty partners.All specific requests to exchange information are governed by art 25 of the DTA.[6] In May 2014 the NTS contacted Mr Nash to initiate the exchange of information process relating to 21 tax payers. By searching her own records and publicly available sources such as the Companies Office and Land Information New Zealand the Commissioner was able to satisfy the NTS request for five of the tax payers. On 7 October 2014 the Commissioner's duly authorised delegate,Ms Beverley Forrest, issued notices to Chatfield to provide information for each of the remaining 15 tax payers. It is not in contest that Chatfield was then registered as the tax agent of all tax payers. Each notice specified different types of information such as copies of financial statements for a number of years, primary documents such as agreements for sale and purchase of land and shares, settlement statements and bank remittance certificates. In some cases explanations were sought for changes in ownership of certain properties.[7] Chatfield refused to comply with the notices. Instead in May 2015 it applied for judicial review in the High Court. After some inconclusive interlocutory activity the Commissioner applied in July 2016 to strike out Chatfield's claim which Lang J heard and determined in September 2016. The Commissioner has not yet taken any of the available statutory steps to enforce compliance with the notices.[8] Two instruments are particularly relevant to Chatfield's claim. First, s 17(1) of the TAA provides:(1) Every person (including any officer employed in or in connection with any department of the government or by any public authority, and any other public officer) shall, when required by the Commissioner, furnish in writing any information and produce for inspection any documents which the Commissioner considers necessary or relevant for any purpose relating to the administration or enforcement of any of the Inland Revenue Acts or for any purpose relating to the administration or enforcement of any matter arising from or connected with any other function lawfully conferred on the Commissioner.[9] Second, the Commissioner has issued a series of operational statements to provide advice and guidance to tax payers, their agents and interested third parties to assist in compliance with the law. Operational Statement 13/02 (OS 13/02) came into effect on 14 August 2013. Its purpose was to outline the procedures followed by the Commissioner when issuing s 17 notices including third party requests. Of particular relevance to Chatfield's claim are these passages:1. This Operation Statement ("OS") outlines the procedures InlandRevenue will follow when issuing notices, including third party requests, under section 17. The section, which relates to requisitionsfor information, is one of Inland Revenue's information-gathering powers. Other information-gathering powers (such as section 16) can be and are used by the Commissioner in conjunction with section 17 but they are not discussed in this OS.Operational practiceSection 17 Notices27. Section 17 gives the Commissioner the power to require persons to produce for inspection documents which the Commissioner considers necessary or relevant for any purpose relating to the administration or enforcement of the Inland Revenue Acts. It is most often used in the context of the investigation of a taxpayer'scorrect tax position, but can also be used, for example, in theliquidation/insolvency situations to obtain information/documents,provided it is not used for improper purposes. However a section 17power cannot be invoked for questionable or improper purpose, suchas to gain advantage over other creditors or for debt recovery.33. The Commissioner will only require disclosure of information considered necessary or relevant and that is reasonably required in the circumstances of the case.Inland Revenue's intention to ensure compliance with the notice41. Generally, Inland Revenue will use a section 17 notice only where it is prepared to invoke statutory remedies in the event of non- compliance.Multiple sources43. Nothing in section 17 precludes Inland Revenue from seeking information from multiple sources and from sources other than the affected taxpayer, whether before or after seeking the information directly from the relevant taxpayer.Requests to persons other than the taxpayer64. Some holders of information, such as banks, are willing to provide information but require Inland Revenue to state its legal authority before they will release the information. Generally, where information is required from persons other than the taxpayer and cooperation is likely, Inland Revenue will initially seek the information by a letter, although the letter may follow a discussion and may contain reference to section 17.65. That letter is not a formal section 17 demand. However, generally where the letter is not complied with, a section 17 notice will be issue so that the third party recipient is informed of the consequences of their non-compliance before such action is taken.[10] Ms Rose for Chatfield places most weight on these provisions:Requests for certain information from tax agents71. Inland Revenue may seek certain information from tax agents under section 17 where it becomes aware of particular transactions or arrangements entered into by taxpayers in order to identify other taxpayers who may have entered into similar transactions or arrangements.72. In the first instance, Inland Revenue will attempt to identify those taxpayers without recourse to requesting information from tax agents. However Inland Revenue may ask tax agents likely to have involvement with the arrangements in question to provide a list ofclients who may have entered into a particular (or similar) arrangement.73. These requests will only be made in limited circumstances and only where it is considered the transactions or arrangements are likely to involve tax avoidance or evasion, or other offences leading to prosecution for offences. Before making such requests to tax agents, investigators must first take all reasonable steps to obtain the necessary or relevant information from the taxpayer(s) or other third parties.74. Before making a request for information, staff will take into account a range of factors including:o The impact of the request on taxpayers' perception of theintegrity of the tax system;o The size of client bases involved, and the practicalities and the relative cost of compliance with the section 17 request;o The level of perceived risk of taxpayers seeking to remove assets or leave the jurisdiction;o The complexity of the arrangement, and the reasonableness of the expectation that the advisor will be able to identify the taxpayers in question;o The level of revenue considered to be at risk;o Inland Revenue's ability to obtain the information from othersources.[11] Chatfield claims: (a) these provisions state the Commissioner's operationalpractice of the circumstances where she will make requests through s 17 notices for certain information from tax agents; (b) in particular the Commissioner would only make information requests of a tax agent in limited circumstances, where she considers the transactions or arrangements are likely to involve tax avoidance or evasion or other offences leading to prosecution; (c) OS 13/02 thus gave rise to a legitimate expectation that before making such requests to tax agents, the Commissioner's investigators will first take all reasonable steps to obtain the necessary or relevant information from the tax payers or other third parties; and (d) she breached this expectation by selecting Chatfield as addressee of the s 17 notices.[12] Additionally or alternatively Chatfield pleads that in making the decision to issue the notices the Commissioner failed to consider: (a) the terms and operational procedure outlined in OS 13/02, especially relating to requests made to tax agents;(b) the limited nature of the tax agent/client relationship; and (c) the DTA, in particular art 25.Decision(a) Legitimate expectation[13] Lang J expressed serious doubts about whether an operational statement such as OS 13/02 could give rise to a legitimate expectation of the type pleaded. The Commissioner's s 17 powers to seek information were very wide. It was he said:3 highly unlikely the Courts would hold the Commissioner to the terms ofany policy or operational statement that had the effect of restricting the use of the powers under s 17 to carry out those functions.[14] The Judge noted also that, while the weight of authority was very much against applying the principle of legitimate expectation as a ground for judicial review in the taxation context,4 it would not be appropriate to strike out the claim solely because this type of claim has not been recognised in New Zealand taxation law.5 He then examined whether OS 13/02 constituted an unambiguous commitment that the Commissioner would not seek information from the tax payer or another third party before issuing a s 17 notice to the tax payers' tax agent. He was satisfiedthat "nothing in OS 13/02 comes close to such a promise or commitment"6 to follow that procedure; and that this ground of review was not seriously arguable and could not possibly succeed at trial.7[15] Chatfield faces two separate hurdles in challenging Lang J's conclusion. First, in order to successfully invoke a claim of legitimate expectation a party must satisfy a number of requirements, the first or threshold of which is an unambiguous commitment or promise by a public authority to follow a certain procedure.8 The interests of good administration require implementation of that unambiguous commitment or promise providing implementation does not interfere with the3 At [21].4 At [17]–[21] and [24].5 At [24].6 At [26].7 At [28].8 Comptroller of Customs v Terminals (New Zealand) Ltd [2012] NZCA 598, [2014] 2 NZLR 137 at [121].authority's statutory duty or powers. In the revenue context this Court hasemphasised that "any scope for invoking legitimate expectation is necessarily limitedby the scheme and purpose of the income tax legislation".9 Specifically, this Court, affirmed by the Privy Council, has rejected claims by taxpayers of a legitimate expectation that they would not be assessed to income tax on certain transactions, based upon operational statements issued by the Commissioner relating to the power to strike down transactions for tax avoidance.10[16] The rationale for that conclusion is beyond challenge. Policy statements prepared for the guidance of taxpayers and the general public could not be elevated to the character of constraints or internal conditions on the Commissioner's statutoryduty. Parliament alone has that authority. The same underlying rationale must apply equally to the exercise of her statutory powers.11 The Commissioner's power todemand information is necessarily broad and extensive because relevant informationis usually within the taxpayer's sole possession and control.12 While it is of particular importance, the only limitation on that power is found in s 17 itself: the Commissioner must be satisfied that the information is necessary or relevant for any purpose relating to the enforcement of the Income Tax Act or any other statutory function. Her satisfaction in that respect is not in contest here.[17] OS 13/02 is no more than a comprehensive and correct explanation of the nature and extent of the Commissioner's statutory power to demand information andthe circumstances in which she proposes to exercise that power. As Ms Courtney submits, Parliament has vested the Commissioner with this operational discretion to decide what information she considers necessary or relevant and how it is to be obtained. But the discretion is not given for the particular purpose of limiting or impinging upon her otherwise broad statutory power.9 Commissioner of Inland Revenue v New Zealand Wool Board (1999) 19 NZTC 15, 476 (CA) at [62].10 Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC) at [26], applied inDandelion Investments Ltd v Commissioner of Inland Revenue [2003] 1 NZLR 600 (CA) at [74] and [75].11 Dandelion Investments Ltd v Commissioner of Inland Revenue, above n 10, at [75].12 New Zealand Stock Exchange v Commissioner of Inland Revenue, above n 2.[18] Ms Rose seeks to circumvent the weight of authority by resorting to other statutory provisions as supplementing the legal framework within which OS 13/02 operates. Examples she cites are the obligation imposed by s 6(1) on the Commissioner to use her best endeavours at all times "to protect the integrity of the tax system"; and that section's specific features including responsibilities to administer the law fairly and impartially and according to the law, and to maintain the confidentiality of tax payers' affairs. The care and management rules introduced by s 6A are also cited. But while these provisions are important, and their enactment reflected an alignment of New Zealand's tax position with the United Kingdom,there is no pleading or suggestion otherwise that they applied relevantly to the Commissioner's decision to exercise her s 17 power in this case.[19] Ms Rose advances a separate submission, although again there is no pleading to this effect, based upon a distinction drawn between information demanded under a s 17 notice which is not required for a domestic purpose and information required tosatisfy a foreign state's request. In the latter instance the terms of the relevant exchange of information agreement in double tax or other information sharing agreements are relevant because such instruments are not self executing and recourse to a requested state's domestic law is necessary. Ms Rose focuses on Art 25 of the DTA which by its terms narrows the nature or scope of information the Commissioner is authorised to exchange. The Commissioner cannot use s 17 to demand information beyond its parameters; if she does, the s 17 notice is invalid.[20] Article 25 itself provides:Article 25Exchange of information1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention insofar as the taxation there under is not contrary to the Convention, as well as to prevent fiscal evasion. The exchange of information is not restricted by Article 1. Any information received by a Contracting State shall be treated as secret in the same manner obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution inrespect of, or the determination of appeals in relation to, the taxes covered by the Convention. Such persons or authorities shall use the information only for such purpose. They may disclose the information in public court proceedings or in judicial decisions.2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation:(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public).[21] Ms Rose submits that the exceptions found in Art 25(2)(a) and (b) apply to limit the Commissioner's s 17 power. She says also in relation to Art 25(1) that issues potentially exist about whether Korea exhausted all local remedies for obtaining the desired information before requesting the Commissioner's assistancesuch that it satisfies the specific threshold of necessity.[22] We reject this submission. Article 25 has the force of a statutory provision in New Zealand, obliging the Commissioner to exchange such information as is necessary for carrying out the provisions of the double tax agreement or Korea'sdomestic laws. Any information received by Korea is to be treated as confidential and subject to an obligation to use it only for the purpose of assessing, collecting, enforcing or determining litigation relating to taxes covered by the convention. Again, while these provisions form part of the legal framework within which the Commissioner exercises her powers and applies the operational statements, there is nothing to suggest that they operated to limit the Commissioner's s 17 power by obliging her first to make demand of the tax payers before requiring Chatfield'scompliance as the tax agent. Nor do they give OS 13/02 any particular force of law. This argument must fail.[23] Second, even if OS 13/02 is capable of constituting a binding representation by the Commissioner limiting the circumstances in which she will exercise herpower, Chatfield's argument must fail when applied to the plain words of the operational statement. Ms Rose does not challenge the test applied by Lang J: that is, in order to give rise to a legitimate expectation the commitment or promise by the Commissioner must provide unambiguously that a s 17 notice would not be issued until the relevant information had been first sought or requested from the tax payers.13 Ms Rose submits, however, that Lang J erred in his construction of the instrument.14 Her focus is on para [71] of OS 13/02. In her submission the word"may" where used in that provision is synonymous with and must read "will only"seek information from tax agents where it relates to an inquiry for a different purpose than satisfying a request under the DTA. In that event the Commissioner must follow the course referred to in para [72] in the first instance without recourse to a s 17 notice. In support she relies upon a statement made by Ellis J in the High Court in related litigation.15[24] We reject this submission. We agree with Lang J that in paras [71]–[79] of OS 13/02 the Commissioner is referring to a limited category of information relating to tax avoidance or evasion or offences likely to lead to prosecution.16 This section of the statement is expressly headed "Requests for certain information from taxagents". Paragraph [73] makes plain beyond argument that the information is of that limited nature, and certainly not the different type of information which the Commissioner is obliged to exchange with the NTS. We are satisfied that the word"may" where used in para [71] bears its orthodox permissive meaning and is no more than an expression of how the Commissioner intends to exercise her power in certain circumstances which do not apply here.[25] Moreover, as Ms Courtney emphasises, para [43] of OS 13/02 is a correct legal recital of the Commissioner's power to seek information from multiple sources including those other than the effected tax payer, such as tax agents, whether before or after seeking information directly from that tax payer. And the passage from Ellis J's judgment to which Ms Rose refers is no more than a recital of her own13 At [25].14 At [26]–[28].15 Chatfield & Co Ltd v Commissioner of Inland Revenue [2015] NZHC 2099, (2015) 27 NZTC 22/04 (HC).16 Chatfield & Co Ltd v Commissioner of Inland Revenue, above n 1, at [26].argument as counsel in the High Court, not an analytical conclusion on its correctness.[26] Before us Ms Rose raised a new argument. She submitted that Lang J should not have exercised his power to strike out the proceeding because further evidence may be available at trial which bears upon the meaning of OS 13/02. She said this question was one of fact.[27] However, there is nothing in Chatfield's pleadings which raises such an argument; nor did Ms Rose identify any document or other piece of evidence which might be relevant to the proper construction of OS 13/02. That question is not one of fact but one of law to be determined according to settled principles of interpretation of the document itself. In our judgment OS 13/02 could not possibly give rise to an unambiguous commitment of the type Ms Rose suggests.[28] In summary, we are satisfied that OS 13/02 is not arguably capable of constituting a legitimate expectation by a taxpayer or its agent that she will limit the circumstances in which she will exercise her discretionary power under s 17 to demand information. Even if we are wrong in that conclusion, we are not satisfied that OS 13/02 could arguably be construed as imposing such a limitation.(b) Relevant considerations[29] Chatfield also appeals against Lang J's conclusion that it was not reasonablyarguable that when exercising her s 17 power the Commissioner failed to take into account or consider, first, the existence of OS 13/02 and the terms and operational procedures outlined in it; and, second, the limited relationship which tax agents as a class characteristically share with their clients.[30] Ms Rose challenges the Judge's first finding on the footing that OS 13/02 is a voluntary representation to the world at large about the procedures the Commissioner will follow and the considerations she will take into account when exercising her power. We endorse Lang J's short answer to that assertion. It mustfollow logically from his primary conclusion on the legitimate expectation claim. OS 13/02 cannot be construed as limiting the circumstances in which theCommissioner will exercise her s 17 power on receipt of a request under the DTA.17It is thus irrelevant whether she did or did not take OS 13/02 into account. Its consideration would have made no difference to her decision.[31] Ms Rose challenges Lang J's second finding that the Commissioner was notrequired to have regard to the nature of the relationship between Chatfield and its tax payer clients18 by relying on ss 3 and 34B of the TAA which acknowledge the important role played by tax agents in the New Zealand tax system. In her submission the scope of a tax agent's relationship with the client focuses on thepreparation of returns of income which are required to be filed. The Commissioner'srelationship with tax agents gives her knowledge of the often confined separate relationship between tax agents and a tax payer, which is an implied relevant consideration when issuing a s 17 notice.[32] We cannot accept this argument. The Commissioner's knowledge of the roleactually played by a tax agent in performing its contractual duties has no relevance to a request of an entirely different nature for documents required for performance of a statutory obligation. In such a case the only relevant consideration, once the Commissioner is satisfied that documents are necessary or relevant, is whether in fact the agent is likely to hold them. There is no suggestion here to the contrary. This submission must fail also.[33] In argument before us Ms Rose raised another proposition, to the effect that the Commissioner should have taken into account the possible reputational damage to Chatfield in complying with the notices. The scope of the argument was not clear but, as we understood it, it was to the effect that a tax agent's reputation among taxpayers may be damaged in this way. We cannot see any merit in this argument which does not justify further consideration.[34] The Commissioner has not cross-appealed against Lang J's decision not to strike out Chatfield's third claim that she issued the notices without taking account of the terms of art 25 and its three express exceptions. On the assumption that the17 At [31].18 At [32].Judge was correct that the Commissioner was required to take Art 25 into account, we record that the only evidence before the Court was that she did in fact take it intoaccount. We refer to Mr Nash's affidavit and the terms of the notices themselves,expressly referring to Art 25. Chatfield should not have made this claim unless it had a proper evidentiary foundation: all Ms Rose could point to was an unspecific assertion by one of Chatfield's Korean employees. Ms Courtney's explanation for the Commissioner's decision not to pursue a cross-appeal, especially where she had initiated the application to strike out, was not persuasive. Nevertheless, we have no jurisdiction to intervene further.Result[35] The appeal is dismissed.[36] The appellant is ordered to pay costs to the respondent for a standard appeal on a band A basis together with usual disbursements.Solicitors:Bell Gully, Auckland for Appellant Crown Law Office, Wellington for Respondent