CH'ELLE PROPERTIES (NZ) LTD V COMMISSIONER OF INLAND REVENUE CA CA266/05

CH'ELLE PROPERTIES (NZ) LTD V COMMISSIONER OF INLAND REVENUE CA CA266/05 18 July 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA266/05 [2007] NZCA 299BETWEEN CH'ELLE PROPERTIES (NZ) LIMITED Appellant AND COMMISSIONER OF INLAND REVENUE Respondent Hearing: 31 August 2006 Court: Chambers, Robertson and Ellen France JJ Counsel: D G Hayes for Appellant R J Ellis and S J Reeves for Respondent Judgment: 18 July 2007 at 4.30 pmJUDGMENT OF THE COURT A The appeal is dismissed. B The appellant must pay to the respondent costs of $4,000 plus usual disbursements. We certify for second counsel. REASONS OF THE COURT(Given by Chambers J)Table of ContentsPara NoIntroduction [1]Factual circumstances as pleaded [3]The issues [19]The first cause of action [22]The second cause of action [28]The third cause of action [37]Replying to the statement of position out of time [40]Adding issues to the Adjudication Unit's report [48]The fourth cause of action [52]The fifth cause of action [60]The sixth cause of action [63]Two other possible causes of actionMisfeasance in a public office [68]Conversion [72]Conclusion [73]Introduction[1] This is an appeal against a decision of Keane J striking out the appellant's combined claim for judicial review and damages: (2005) 22 NZTC 19,622. [2] The appellant contends that the application for judicial review and the associated claims in tort and under the New Zealand Bill of Rights Act 1990 (NZBORA) should not have been struck out as the causes of action were tenable and not an abuse of process.Factual circumstances as pleaded[3] The background to the present proceeding and appeal lies in a tax dispute between Ch'elle Properties (NZ) Limited, the appellant, and the Commissioner of Inland Revenue. The tax in dispute is goods and services tax levied under the Goods and Services Tax Act 1985. The tax dispute itself has been the subject of separate proceedings through the Taxation Review Authority, the High Court, and this court. The essential issue in those proceedings was whether Ch'elle had devised an arrangement which amounted to tax avoidance under s 76 of the GST Act. The authority and both courts have held that s 76 was engaged. [4] The present proceeding, which was commenced after the High Court rejected Ch'elle's position on the tax dispute, purports to challenge certain things the Commissioner did in the course of the tax dispute. In essence, Ch'elle alleges the Commissioner acted unlawfully. Ch'elle seeks a variety of remedies.[5] Before setting out the causes of action Ch'elle relies on in the present proceeding and the issues arising on this appeal, we need to set out the essential factual background. In particular, we need to focus on what Ch'elle and the Commissioner did at each step of the tax dispute. We have taken the "facts" from Ch'elle's statement of claim and a draft amended statement of claim. This is, of course, the conventional approach on any strike-out application. In this particular case, however, the Commissioner as defendant does not appear to dispute what is alleged to have happened. [6] We note a caveat: the following account is somewhat simplified so far as details of the underlying tax dispute are concerned. That is because full details of the tax dispute are irrelevant to this challenge to the Commissioner's process. Those readers interested in the underlying tax dispute itself should refer to the High Court's and this court's decisions on the tax dispute: [2004] 3 NZLR 274 and [2007] NZCA 256 respectively. [7] In August 1998, Ch'elle entered into an agreement with M W Developments to purchase a property in Edgeworth Road in Glenfield on Auckland's North Shore. Two similar transactions in relation to other properties on the North Shore were entered into later that year by Ch'elle. [8] On 21 May 1999, Ch'elle entered into conditional agreements with 114 individual companies. By these agreements, Ch'elle purchased 114 lots in a subdivision in Dominion Road, Papakura (the Papakura properties). Ch'elle was to pay a total price of $80 million; in other words, an average of about $700,000 per contract. But settlement was deferred for between 10 and 20 years. [9] Each of the vendor companies issued an invoice to Ch'elle for the total ultimate price. [10] In June 1999, Ch'elle filed a GST return for the period ending 31 May 1999 claiming input tax credits of $398,333 in relation to 13 property transactions. These were the three transactions on the North Shore and ten of the 114 Papakuratransactions. The Commissioner of Inland Revenue did not pay out the amount claimed. [11] On 20 October 1999, Ch'elle filed a further GST return for the period ending 31 July 1999. It claimed approximately $9 million in input tax credits in relation to the remaining 104 properties. [12] On 28 January 2000, the Commissioner issued a notice of assessment allowing the first credit claimed and paid into Ch'elle's principal shareholder's bank account $377,495, being the balance then due plus interest for late payment. That shareholder transferred the money into Ch'elle's account with Westpac Banking Corporation. [13] On 8 February 2000, however, the Commissioner sent a letter to Ch'elle, advising the sum should not have been paid. The following day, an Inland Revenue officer presented an IR474A form to Westpac, pursuant to which the $377,495 was transferred back to the Commissioner. The Commissioner uses the IR474A form when exercising his powers under s 43 of the GST Act. That section confers various powers on the Commissioner when he is dealing with "defaulting" taxpayers. [14] On 14 March 2000, the Commissioner issued notices of proposed adjustment and assessment disallowing both claims on the grounds that the overall scheme constituted tax avoidance and was void under s 76 of the GST Act. [15] Ch'elle disputed the Commissioner's assessments by a response notice issued on 11 May 2000. That was the first step in the dispute process between Ch'elle and the Commissioner. [16] Subsequently the Commissioner referred this dispute to his Adjudication Unit. That unit's report essentially upheld the Commissioner's contention that the overall scheme constituted tax avoidance. [17] In January 2002 Ch'elle filed a notice of claim with the Taxation Review Authority. The authority issued its decision on 3 April 2003: 21 NZTC 11,212. Itupheld the Commissioner's argument that the arrangement in this case was caught by s 76: at [207]. The authority made no findings concerning the three North Shore transactions: at [208]. The authority said it would resolve the tax position concerning those properties if the parties were unable to do so. Appeals from that decision to the High Court and then this court have failed. We refer in these reasons of judgment to those tax challenge proceedings as "the challenge proceeding". [18] After the High Court decision in the challenge proceeding, Ch'elle commenced a separate High Court proceeding: HC AK CIV 2004-404-3000. This is the proceeding in respect of which Keane J delivered the decision currently under appeal. This proceeding was a mixed claim, partly public law (judicial review) and partly private law. As we have indicated, the Commissioner successfully applied to have this proceeding struck out.The issues[19] The six causes of action in this proceeding were: (a) three judicial review claims alleging illegality; (b) a claim for damages in negligence; (c) a claim for damages arising from a breach of statutory duty; and (d) a claim for NZBORA damages. [20] Rule 186 of the High Court Rules gives the court the power to strike out proceedings. The jurisdiction is exercised sparingly and only in clear cases where the court is satisfied that all the relevant material is before the court and the proper assistance from the parties required to enable the court to reach a definite conclusion has been received. A claim should be struck out only if it is so clearly untenable that it could not possibly succeed, is futile or is an abuse of process. Before there is a strike-out, opportunity to amend should be considered where, on the facts, a viable avenue to seek relief exists.[21] After Keane J's decision, Ch'elle filed a draft amended statement of claim. Ms Ellis, for the Commissioner, advised she did not oppose our considering that draft, as she accepted that "no court wants to strike out a claim which could potentially succeed if properly reformulated": Hobson v Attorney-General [2007] 1 NZLR 374 at [146] (CA). As she observed, the differences between the statement of claim as considered by Keane J and the draft amended claim are "minimal". We shall consider the draft when analysing the six causes of action. (All references in these reasons to paragraph numbers in the statement of claim are references to the paragraph numbers as they appear in the draft.)The first cause of action[22] The first cause of action alleges the Commissioner acted "illegally and ultra vires" when he caused Westpac on 9 February 2000 to transfer back to the Commissioner the $377,495 the Commissioner had paid to Ch'elle a week or so before. Ch'elle acknowledges that the Commissioner is given certain powers to have money extracted from defaulting taxpayers' bank accounts under s 43 of the GST Act, but alleges that the circumstances permitting the exercise of those powers did not pertain in this case. In respect of this wrong, Ch'elle seeks two remedies: (a) A declaration the Commissioner acted "illegally" when withdrawing the money from Ch'elle's bank account; and (b) A declaration that the Commissioner is unlawfully in possession of the $377,495. [23] The Commissioner accepts for the purposes of the strike-out application that he did act unlawfully in withdrawing the money, as the correct statutory procedure was not followed. But the Commissioner argues this is now all water under the bridge, given his subsequent decision that the entire arrangement amounted to tax avoidance, a decision since vindicated by the Taxation Review Authority, the High Court, and now this court. In those circumstances, Ms Ellis argues the issue has become moot and the remedy sought futile.[24] In view of this court's decision in the challenge proceeding, the second declaration is clearly unavailable. The Commissioner is now rightly in possession of the sum of $377,495, which is not and never should have been "the property" of Ch'elle. As to the first declaration, we consider it would also be unavailable now. Ms Ellis submitted the declaration sought "would be both empty and inherently misleading". She submitted it would be empty on the basis that "the Commissioner could not now do anything to remedy that unlawfulness". She submitted it would be "inherently misleading" given that it has since been established Ch'elle was not entitled to the money concerned – "it was the Commissioner's all along". We agree with that submission. [25] Ms Ellis went on to say the position "might have been different had review proceedings been brought at the time of the alleged infractions – prior to the challenge proceedings". She submitted that in that event, "a court might (if the infractions were found proven) have declared that the Commissioner should repay any money that had been taken without authority". We agree. She further submitted that, even in that event, however, the benefit of the declaration would have been illusory. That is because, when subsequently tax avoidance was established, Ch'elle would have been obliged to repay the Commissioner, with interest at the statutory rate. Again, we agree. [26] We have not overlooked the possibility that this court's decision as to tax avoidance may not be the last word. But even if we are reversed by the Supreme Court, this cause of action would be unnecessary. That is because the Commissioner would in that event be bound to pay to Ch'elle not only the $377,495 but also the balance of Ch'elle's GST claim, together with interest at the statutory rate. Declaration (a) will be completely subsumed within that much greater victory. [27] In our view, Keane J was right to strike out the first cause of action.The second cause of action[28] Ch'elle's second cause of action is said to be based on "unreasonableness and illegality". This cause of action is based on two alleged wrongs on the Commissioner's part. [29] The first relates to the Commissioner's treatment of Ch'elle's GST return for the period ending 31 May 1999. Ch'elle alleges that return indicated Ch'elle was entitled to a refund under s 20(5) of the GST Act. Accordingly, the Commissioner was bound to make that refund within 15 working days following the day on which the return was received by the Commissioner: see s 46(1). Section 46 went on to provide certain circumstances in which the Commissioner was entitled to defer making the refund or to refuse to make it at all, but those circumstances, Ch'elle alleges, did not pertain here. [30] Once again, the Commissioner accepts for the purposes of the strike-out application that he failed to follow the correct s 46 procedure if he wished to defer making the refund while he investigated the accuracy of Ch'elle's GST return. But, as with the first cause of action, the Commissioner argues this too is now all water under the bridge, given his subsequent decision that the entire arrangement amounted to tax avoidance. Ms Ellis repeated her argument that the issue had become moot and the remedies sought futile. [31] In respect of this wrong, Ch'elle sought two remedies: (a) A declaration the Commissioner acted illegally in withholding the GST refund due to it pursuant to its GST refund claim for the GST period ending 31 May 1999; and (b) A declaration that the Commissioner is illegally holding the sum claimed on that GST return. [32] It will be seen that these declarations to a large extent mirror the declarations sought on the first cause of action: see [22] above. Our view on these remedies is thesame as for the first cause of action. In view of this court's decision in the challenge proceeding, the second declaration is clearly unavailable. The Commissioner owes Ch'elle nothing. He was entitled to take appropriate steps "to counteract any tax advantage" obtained by Ch'elle from or under its s 76 arrangement. [33] As to the first declaration, we consider it would also be unavailable now. The reasons are the same as we gave when dismissing the claim for the first declaration sought under the first cause of action: see [24] above. The comments made above at [25] and [26] also apply in this case. [34] Ch'elle's second complaint under this cause of action refers to the Commissioner's failure to make a timely refund following presentation of the GST return for the period ending 31 July 1999. The same declarations are sought with respect to this alleged wrong. The reasons why these declarations are unavailable are the same as those given above. [35] We stress again that we accept that this court's decision in the challenge proceeding is not necessarily the last word on Ch'elle's GST liability or entitlements. If the Supreme Court were to hold that these arrangements were not caught by s 76, then presumably Ch'elle will receive the refunds it has claimed, plus interest. This cause of action will add nothing to Ch'elle's statutory entitlement. [36] Keane J was correct to strike out this cause of action.The third cause of action[37] Ch'elle alleged that the Commissioner breached his duty under s 6(2)(f) of the Tax Administration Act 1994 (the TA Act), which requires him to act fairly, impartially and according to law in undertaking the assessment and adjudication process. The four breaches alleged, and the findings of Keane J, were as follows: (a) unlawful altering of computer records – this was conceded but found to have been rectified by the authority's decision;(b) replying to the statement of position out of time – the judge found the reply was in time; (c) adding issues to the decision of Inland Revenue's Adjudication Unit contrary to s 138G of the TA Act – the judge upheld the decision of Rodney Hansen J in the challenge proceeding that the Commissioner was not bound by the reasoning of the unit and hence was free to depart from it; (d) issuing a notice of proposed adjustment that was in contravention of s 89B(4) of the TA Act – the Commissioner conceded this point. The judge found that this was not cured by the authority's decision but that, as the Commissioner had withdrawn and did not rely on the notice, it was of no consequence. [38] Keane J struck out the application to make a declaration of invalidity, as sought by Ch'elle, on the basis that the authority's hearing cured any procedural problems in the previous assessment. He determined that the appellant was attempting to make a collateral attack on the objection procedure. [39] Before us, Mr Hayes, for Ch'elle, advanced only alleged breach (b) with any vigour. Alleged breach (c) warranted one sentence in Mr Hayes's written submissions. Alleged breaches (a) and (d) did not feature at all. We shall consider alleged breaches (b) and (c) in turn.Replying to the statement of position out of time[40] Ch'elle alleges that, on 13 November 2000, the Commissioner issued a disclosure notice and statement of position: claim, para 44. It is common ground that these documents were issued pursuant to s 89M of the TA Act. [41] On 18 December 2000, Ch'elle issued the Commissioner with its statement of position: claim, para 47. Again, it is common ground that Ch'elle's document was issued pursuant to s 89M(5).[42] The crucial paragraph in the claim (for current purposes) is para 48, which reads: On the 15th February 2001 the [Commissioner] issued a notice of reply to [Ch'elle's] SOP [statement of position]. This notice of reply was issued approximately 23 working days after the response period provided for in section 89M(8) and section 89M(10) of the [TA Act] and was therefore unlawful. [43] Mr Hayes submitted before us that the Commissioner, by adding to his statement of position after the statutory "response period", acted unlawfully. The additional material contained in the Commissioner's 15 February 2001 response ("the Commissioner's response") was later that year considered by the Adjudication Unit, which then delivered a ruling unfavourable to Ch'elle's position. [44] Ch'elle's allegation is that the Commissioner "acted illegally" by issuing the reply after the response period: claim, para 146. As a consequence, the Adjudication Unit considered "matters and issues [it] was statutorily precluded" from considering: claim, para 147. The Commissioner's decision based on the adjudication report was thus illegal: claim, para 148. [45] The problem with this argument is that the Commissioner's response was not out of time. Under s 89M(8), the Commissioner had two months in which to respond to Ch'elle's statement of position. The two month period starts on "the date of issue of a disputant's statement of position": see definition of "response period", as it was at the material time, in s 3(b). There is no dispute Ch'elle issued its statement of position on 18 December 2000. The Commissioner's response, being issued on 15 February 2001, was accordingly in time. [46] That is exactly what Keane J found: at [70]. Mr Hayes, in his submissions to us, was unable to explain how Keane J's decision was wrong. His Honour was not wrong. It appears Mr Hayes has misinterpreted s 89M in that he has calculated the Commissioner's response period from the date of the Commissioner's statement of position (13 November 2000), rather than from the date of Ch'elle's statement of position, as the statute requires.[47] This part of the third cause of action is clearly unsustainable.Adding issues to the Adjudication Unit's report[48] The remaining complaint under this cause of action is that the Commissioner has "presented arguments to the authority and the High Court (in this dispute) which are contrary to his own determinations (at adjudication), and which determinations are binding upon him": claim, para 155. [49] In brief, the argument is that the Commissioner could not advance arguments either before the authority or on subsequent appeals which differed from the position taken in the adjudication report. Mr Hayes had taken exactly this point before the High Court in the challenge proceeding. Rodney Hansen J explained why the point had no merit: [2004] 3 NZLR 274 at [27]-[32]. Keane J, in the present proceeding, resolved this issue against Ch'elle on the basis of Rodney Hansen J's reasoning: at [72]-[73]. [50] Ch'elle did not appeal that finding of Rodney Hansen J in its appeal to this court in the challenge proceeding. It cannot now raise that same point in the present proceeding: it is res judicata. Quite apart from that, however, we are satisfied Rodney Hansen J was right on this point. Section 138G of the TA Act does not require the Commissioner to be bound by the reasoning of the Adjudication Unit. [51] The third cause of action was correctly struck out.The fourth cause of action[52] The pleading of this cause of action, even by the standards of this statement of claim, is deficient. Ch'elle pleads:166 The Defendant (by statute) owed a duty of care to the Plaintiff. 167 The Defendant breached that duty of care. 168 The Plaintiff suffered loss.[53] The statutory origin of the alleged duty of care is unstated. In any event, of course, a cause of action in the tort of negligence arises from the imposition of a duty of care by common law, not statute. There is no allegation as to what it is the Commissioner needs to be careful of. No particulars of breach are provided. [54] Keane J carefully analysed the alleged duty of care, and found no such duty existed: at [77]-[107]. We do not intend to repeat His Honour's reasoning: in essence, we agree with it entirely. [55] Mr Hayes made no attempt to challenge Keane J's essential reasoning. He cited not a single case in support of this alleged novel duty of care (whatever it was). [56] Rather, he dealt with Keane J's reasoning only peripherally. He submitted that Keane J's "finding that a claim for negligence would fail [was] basedon the premise that challenge proceedings would remedy any act of the Commissioner". That was not the basis of His Honour's reasoning at all. The principal ground on which the cause of action was struck out was the undesirability of imposing a duty of care on the Commissioner, given the elaborate statutory construct within which the Commissioner and taxpayers interrelate. [57] Secondly, Mr Hayes challenged the correctness of the following passage in Keane J's judgment:[96] To accord to the taxpayer an ability either to challenge or to counteract an assessment by common law action in negligence, as McKay J said in [City Centre Properties Inc v Canada [1993] FCJ No 1260], could only subvert the creditor-debtor relationship between Commissioner and taxpayer, and the intricate balance achieved by the statutory scheme between efficacy, accountability and due process.[58] Mr Hayes did not explain why that paragraph was in error. We think it is right; it is part of the reason why the courts should not impose a common law duty of care. [59] Keane J applied the correct legal test, surveyed the appropriate authorities and correctly applied the legal principles to the facts. We confirm the strike-out.The fifth cause of action[60] The fifth cause of action is headed "Breach of statutory duty". The statutory duty relied on is said to be ss 45 and 46 of the GST Act. These are sections which require the Commissioner to make refunds of excess tax in certain circumstances. The factual underpinning of this cause of action is the assertion that Ch'elle was entitled to refunds of GST pursuant to its GST returns for the periods ending 31 May 1999 and 31 July 1999. [61] This cause of action is, with respect, completely misconceived. If those refunds were properly payable, then Ch'elle does not need to (and cannot) rely on the tort of breach of statutory duty for their payment. If, on the other hand, those refunds were not due, then this cause of action could not possibly succeed. Either way, the tort of breach of statutory duty has no role. [62] Mr Hayes relied on Commissioner of Inland Revenue v Sea Hunter Fishing Limited (2001) 20 NZTC 17,478 (CA), but that was not a case based on breach of a statutory duty. The taxpayer in that case had sued the Commissioner in debt, based on a cheque which the Commissioner had issued but then stopped prior to payment. A claim in debt is one claim Ch'elle has never advanced. Whatever chance of success it might once have had is certainly long since past.The sixth cause of action[63] The final cause of action relied on s 27 of the NZBORA, subs (1) of which reads as follows:Every person has the right to the observance of the principles of natural justice by any tribunal or other public authority which has the power to make a determination in respect of that person's rights, obligations, or interests protected or recognised by law.[64] Essentially Ch'elle pleads under this head all the "wrongs" previously pleaded and considered in these reasons for judgment: the illegal removal of money from Ch'elle's Westpac account; the illegal withholding of the GST refunds; and the four defects of process referred to in the third cause of action: see [37] above. Underthis cause of action, Ch'elle seeks damages of more than $80 million (just as it does in negligence and breach of statutory duty). [65] Keane J considered this cause of action could not succeed because, in his view, "the consistent tendency of authority [was] that s 27(1) [did] not extend beyond securing procedural fairness": at [121]. In addition, he considered that, if there had been any breach of natural justice on the part of the Commissioner before the assessments were issued, such breach had now been cured by means of the objection process: at [122]. [66] We prefer not to express an opinion as to the ambit of s 27(1) or as to the circumstances in which compensation under NZBORA may be awarded. That is because, for the reasons given above, either the alleged wrongs were not committed or, if they were, no loss has arisen from them. [67] This cause of action was properly struck out.Two other possible causes of actionMisfeasance in a public office[68] The following paragraph appears in the claim:17 During this Review [of Ch'elle's GST return for the period ending 31 May 1999] the Commissioner's delegated investigator [who is named] stated during an interview with Mr Ashby, the (then) director of [Ch'elle's] Vendors at 107 Becroft Drive, Forrest Hill, that his speciality was tax avoidance and he said "and I never lose". He added that he would destroy Mr Ashby and any other party(ies) working with him.[69] Mr Hayes acknowledged this did not amount to a pleading of misfeasance in a public office – an understatement with which we concur. He said though that Ch'elle should be given an opportunity to amend its statement of claim to include a new cause of action of misfeasance in a public office. He submitted that "the background threat alleged at para 17" could be the basis of this new cause of action.[70] There was no such pleading, however, in the draft amended statement of claim. The named delegated officer is not a party to this proceeding. Further, it would seem that the putative cause of action is now statute barred in any event. Rule 187(3) of the High Court Rules forbids the introduction of a fresh cause of action which is statute barred. [71] We are not prepared to consider the addition of a new cause of action in circumstances where all the existing causes of action have been properly struck out.Conversion[72] During the course of the hearing, we discussed with counsel the possibility that the Commissioner's action in removing the $374,495 from Ch'elle's bank account constituted the tort of conversion. Again, that was not pleaded, however. We think it inappropriate to consider it further on this appeal.Conclusion[73] All causes of action were properly struck out. The appeal must accordingly be dismissed. [74] We have reduced costs from the normal $6,000 to $4,000. That reflects the fact we heard this appeal at the same time as the appeal in the challenge proceeding. In the challenge proceeding, the Commissioner has received full costs for a one day appeal. We consider in this case only a top-up is required to reflect the preparation time for this appeal. That preparation time would have been quite extensive.Solicitors: Peter E Newfield, Auckland, for Appellant Crown Law Office, Wellington