COMMISSIONER OF INLAND REVENUE V CHESTERFIELDS PRESCHOOLS LIMITED AND ORS CA607/2008

COMMISSIONER OF INLAND REVENUE V CHESTERFIELDS PRESCHOOLS LIMITED AND ORS CA607/2008 31 August 2010IN THE COURT OF APPEAL OF NEW ZEALAND CA607/2008 CA800/2008 CA271/2009 CA156/2010 [2010] NZCA 400BETWEEN COMMISSIONER OF INLAND REVENUE Appellant AND CHESTERFIELDS PRESCHOOLS LIMITED First Respondent AND D J HAMPTON Second Respondent AND CHESTERFIELDS PARTNERSHIP Third Respondent AND CHESTERFIELDS PRESCHOOLS PARTNERSHIP Fourth Respondent AND ANOLBE ENTERPRISES LIMITED Fifth Respondent Hearing: 25-27 May 2010 Court: Glazebrook, Chambers and Baragwanath JJ Counsel: M S R Palmer, P J Shamy and E Aspey for Appellant D J Hampton and T A Sisson personally G J Harley as counsel assisting the Court Judgment: 31 August 2010 at 4.00 pm Reissued: 16 September 2010: see Minute of 16 September 2010 Effective date of judgment: 31 August 2010JUDGMENT OF THE COURT A The judicial review appeal, CA800/2008, is allowed but only to the extent set out at [178]. In all other respects the appeal is dismissed. B The costs appeal, CA271/2009, is allowed and the question of costs remitted to the High Court to be dealt with in accordance with this judgment. C The Papprill loan and Basecorp loan appeals, CA607/2008 and CA156/2010, are allowed. The 30 September 2008 and the 16 March 2010 orders of Fogarty J allowing the loans are rescinded. D The Commissioner is to pay usual disbursements to the taxpayers with regard to the judicial review appeal. E Costs for a standard appeal on a Band A basis plus usual disbursements are awarded to the Commissioner with regard to the costs appeal, the Papprill loan appeal and the Basecorp loan appeal.____________________________________________________________________ Reasons of Glazebrook and Chambers JJ [1] Reasons of Baragwanath J (dissenting in part) [182]REASONS OF GLAZEBROOK AND CHAMBERS JJ Table of ContentsPara NoIntroduction [1]Background and first judicial review judgment [11]Chesterfields Partnership [11]Chesterfields Preschools Ltd [46]Anolbe Enterprises Limited [53]Remission of penalties [60]The Commissioner's attitude to Mr Hampton [65]Fogarty J's conclusion [79]Relief ordered [82]What the Judge was expecting [84]Budhia decision [94]Revised taxation position after Budhia adjustments [102]Mr Brighty's report [104]Second judicial review judgment [109]The Commissioner's issues [119]The existence of an arrangement [120]Sections 182 and 183A of the TAA [121]Commissioner's submissions [121]Discussion [123]Sections 6 and 6A of the TAA [126]Commissioner's submissions [126]Discussion [128]Anolbe sham issues [130]Setting aside of Budhia decision [133]What should happen now? [135]Stay [146]Conclusion on judicial review appeal [148]Comments on first judicial review judgment [149]Costs judgment [155]Fogarty J's reasoning [155]Commissioner's submissions [158]Our assessment [161]Basecorp loan appeal [168]Papprill loan appeal [173]The grounds of appeal [176]Our assessment [177]Result and costs [178]Introduction[1] Mr Hampton and his former wife, Ms Sisson, have been involved in a number of business ventures run through a number of different entities.1 These appeals relate to the taxation liabilities incurred by those entities and by Mr Hampton personally (referred to collectively in this judgment as the taxpayers). [2] The taxpayers filed judicial review proceedings against the Commissioner (called in this judgment the first judicial review judgment). These proceedings alleged that the Commissioner had not honoured compromise arrangements made with regard to payment of tax and that there should have been earlier recognition of1 Including the first, third, fourth and fifth respondents.refunds of GST. It was contended that these refunds should have led to the remission of penalties on the accounts which were to benefit from the refunds. [3] The first judicial review proceedings were partly successful 2 and the Commissioner was ordered by Fogarty J to reconsider a number of matters. The Commissioner did not appeal against the first judicial review judgment and accepts that he is bound by it, both in terms of legal and factual findings. 3[4] The Commissioner's concession is well made. The doctrine of res judicata ensures that a decision pronounced by a judicial or other tribunal over the cause of action and the parties, which disposes once and for all of the fundamental matters to be decided, cannot be re-litigated between persons bound by the judgment except on appeal. 4 The object of the doctrine has been seen to be based on two grounds of public policy: "that it is in the interest of the State that there should be an end of litigation and [that] hardship [would be caused to] an individual should he be vexed twice for the same cause". 5 It is important to emphasise that the decision need not be correct in fact or law. As recognised by Millet J, the principle of res judicata 'gives effect to the policy of the law that the parties to a judicial decision should not afterwards be allowed to re-litigate the same question even though the decision may be wrong'. 6[5] After the first judicial review judgment Mr Budhia, Manager Assurance (Investigations) of the Inland Revenue Department (the IRD), issued a report dated 5 June 2007. The Commissioner maintains that this report addressed all of the substantive directions of the High Court in the first judicial review judgment and made the decisions required by those directions. In reaching his decisions2 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2007) 23 NZTC 21,125 (HC).3 The Commissioner did herald an application for leave to appeal out of time against the first judicial review application but only if Fogarty J's comments in [155] of his judgment (set out at [79] below) were interpreted as having general application. As they do not have general application, we need say no more about this conditional application. See discussion at [85]-[86]. In any event, we would have refused the application, it being (so far) with no reasonable excuse.4 KR Handley Spencer Bower and Handley Res Judicata (4 th ed, LexisNexis, London, 2009) at 1.5 Lockyer v Ferryman (1877) 2 App Cas 519 (HL) at 530.6 Crown Estate Commissioners v Dorset County Council [1990] Ch 297 (Ch) at 305, cited inMulkerrins v PriceWaterhouse Coopers [2003] 1 WLR 1937 (HL) at 1941.Mr Budhia relied in particular on a 12 April 2007 report from another Inland Revenue officer, Mr Brighty. 7[6] In a judgment in the High Court on 31 October 2007, 8 it was noted by Fogarty J that the application before the Court on that date 9 turned on whether the debt owed to the Commissioner by the taxpayers was likely to be significantly reduced. This in turn depended upon whether Mr Budhia's decision could be challenged. Fogarty J considered that there was a serious argument to be made that Mr Budhia did not give full effect to the first judicial review judgment. Fogarty J identified four alternative routes for challenging Mr Budhia's decision, the first of which was a further application for judicial review. [7] This led to second judicial review proceedings being mounted by the taxpayers in 2008 and, in what we will call the second judicial review judgment,10Fogarty J, on 25 November 2008, upheld the challenge saying that, until the Court was satisfied that the Commissioner had reached an outcome within the limits of the degree where reasonable decision makers may disagree, the Court would not allow the Commissioner to obtain or enforce judgment debts against the taxpayers.11Mr Budhia's decision was set aside and the Commissioner was directed to act upon the first judicial review judgment. [8] The Commissioner appeals against that second judicial review judgment (the judicial review appeal). 12 The Commissioner's contention is that he has fully complied with the first judicial review judgment and that the second judicial review judgment was wrong to say that he had not. He contends that the second judicial review judgment wrongly reinterpreted and extended the first judicial review judgment. He also says that some of the decisions made by Mr Budhia can only be challenged by the statutory challenge route and not by judicial review. The7 There was also a series of reports by a Mr Kettley relating to the GST returns of Anolbe Enterprises Ltd (Anolbe). The discussion of Anolbe's affairs is at [53]-[59] below.8 Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV 2004- 409-001596, 31 October 2007 at [43]–[44].9 This was an application by the taxpayers to set aside Mareva injunctions, a sequestration order and pre-judgment charging orders in the Commissioner's favour.10 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,148 (HC).11 At [96].12 In CA800/2008.taxpayers support the second judicial review judgment as being both the correct interpretation of the first judicial review judgment and correct in substance. [9] The Commissioner also appeals against the judgment of Fogarty J of 1 May 200913 awarding increased costs against the Commissioner in both judicial reviews (the costs appeal). 14 The other two appeals 15 relate to judgments of Fogarty J permitting loans to be advanced by Basecorp Finance Limited (the Basecorp loan appeal) 16 and by Papprill Hadfield and Aldous Solicitors Nominee Company Limited (Papprill) (the Papprill loan appeal), 17 to be secured over properties that are the subject of freezing orders in favour of the Commissioner. The costs judgment and the two judgments in respect of the loans have both been stayed by this Court until the release of this judgment on appeal. 18[10] In order to address all of the appeals, we first set out the factual background. 19 In doing so, we highlight the findings of fact and law made in the first judicial review judgment. We note again that the Commissioner agrees that he is bound by these findings. We then deal first with the appeal against the second judicial review judgment as the other appeals are subsidiary to that appeal.Background and first judicial review judgmentChesterfields Partnership[11] The Chesterfields Partnership (of Mr Hampton and Ms Sisson) ran a preschool business, Chesterfields Preschool, out of properties at 392-396 Manchester13 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,504 (HC).14 In CA271/2009.15 In CA607/2008 and CA156/2010.16 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,032 (HC).17 Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008- 409-722, 16 March 2010.18 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2008] NZCA 420, (2009) 24 NZTC 23,024 (Basecorp appeal). Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2009] NZCA 373, (2009) 25 NZTC 23,750 (Papprill appeal). We extended the stays until the release of this judgment on appeal orally at the hearing.19 We note that on 20 May 2010, the respondents informally applied by memorandum for leave to adduce an affidavit of Ms Sisson dated 18 May 2010 and another by Mr Hampton on 20 May 2010. We did not accept this extra evidence as it did not meet the criteria for being allowed on appeal and there was in any event no formal application for its admission.St, Christchurch. The property at 396 Manchester St had been transferred in 1998 from Mr Hampton's parents to Mr Hampton and Ms Sisson to use as a family home. The consideration for that transfer had been $135,000. [12] In the GST period ending 30 June 1990, Mr Hampton and Ms Sisson transferred the property at 396 Manchester St to the Chesterfields Partnership to run the preschool. The Partnership claimed an input tax credit of $55,533.33. This was paid to the Partnership on 20 August 1990. On 5 September 1990 Mr Hampton wrote to the Commissioner saying that he had made a mistake in the calculation of the input tax credit. He claimed a further $6,941.67. This triggered a tax investigation. [13] As a result of his investigation, the Commissioner took the view that the input tax credit should be limited to $15,000, being one ninth of the original purchase price (of $135,000). This meant that the Partnership was liable to repay $40,533.33 of the input tax credit that had been received. Mr Hampton objected to the re-assessment. The lodging of the objection meant that payment of half of the tax in dispute was deferred. Half (about $20,000) became payable immediately. It was not paid. However, on 6 January 1993 a credit of $8,687.24 arising from the partnership's GST return for the period ending April 1992 was transferred to meet in part the non-deferrable tax obligation.20[14] On 2 December 1992 a settlement of the objection was negotiated, allowing a greater input tax credit of $22,199.99 (rather than the $15,000 contended for by the Commissioner). This meant that the amount to be repaid was reduced to $33,333.34. There was a Taxation Review Authority (TRA) decision on 11 December 1992, determining that the assessment be amended to $22,199.99 and recording the20 The information about the non-deferrable tax came from the affidavit of Mrs Thornley (see at [15] below) filed in the first judicial review proceedings. The Commissioner has, subsequent to the hearing, confirmed that the April 1992 credit of $8,687.24 was applied to reduce the June 1990 GST debt of Chesterfields Partnership on 6 January 1993 with an effective date of 1 May 1992. In the course of investigating that credit, the Commissioner identified an error in the calculation of penalties. The Commissioner had failed to distinguish between the deferrable and non-deferrable portions. This had the effect of overstating the June 1990 unpaid tax arrears as at 16 August 1993 by $6,366.39. As at 12 April 2009, immediately prior to the Budhia decision, the relevant overstatement had increased (through the effects of penalties compounding) to $168,809.32. The Commissioner accepts that it would be appropriate to correct this error.agreement of the parties that the resulting $33,333.34 would be repaid "forthwith".21In the course of the arrangements in respect of this negotiated settlement, there had been some discussion of there being only a ten per cent penalty22 added to the negotiated figure and Mr Hampton says there was also some discussion about the possibility of an instalment payment arrangement. [15] Mr Hampton, however, concedes that it was made clear that the questions of penalty and instalment arrangements were to be negotiated with the Debt and Return Management Unit of the IRD. On 3 December 1992, the day after the TRA consent order, Mr Hampton went to see Mrs Thornley, a legal technical officer in the Debt and Return Management Unit in Christchurch. This was with the goal of reaching an arrangement in relation to the June 1990 period. No arrangement was reached at that time. [16] Aside from this transaction, the GST liabilities of the Partnership had otherwise not been honoured. On 21 July 1993 Mr Nimmo of Audit had been asked by letter to offset any refund due to Anolbe Enterprises Limited (Anolbe), an associated entity, against GST owed by the Chesterfields Partnership and specifically in relation to the GST returns filed for the Partnership for the periods January, February, March and April 1993, with any outstanding refund to be offset against the May/June returns to be filed.23[17] On 16 August 1993 Mr Hampton entered into an arrangement with Mrs Thornley with regard to the GST liabilities of the Chesterfields Partnership that were outstanding for the period from June 1992 to April 1993. The Commissioner agreed to accept one payment of $36,335.08, 24 to be paid on 31 October 1993. Part21 The Taxation Review Authority (Judge Barber) did not consider that it had the power to make an order as to the timing of payment but reserved leave to apply in that regard.22 The Commissioner confirmed after the hearing that an initial ten per cent penalty was added to the June 1990 debt. We understand this was done when the computer records had been adjusted for the settlement (which did not occur until 2000). (We record that we consider the ten per cent penalty referred to would have been intended to be in addition to the additional tax and use of money interest that had accrued.)23 Mr Hampton says that this did not occur and that those instructions were overtaken by the later instructions to use the credits for Chesterfields Preschools Ltd.24 Mrs Thornley says in her affidavit filed in the first judicial review proceedings that the payment of $36,335.08 covered only the payment in full of amounts owing for the June 1992 – April 1993 periods (plus a ten per cent penalty) and that it involved no remission of any other GSTof that payment was to be satisfied by an input tax credit from the next GST period of $20,000. Mrs Thornley was told that this refund was to come from outside the partnership from a company yet to be formed. [18] The refund was in fact to come from the sale of the property at 396 Manchester St and the business run out of it to a Hampton company, Chesterfields Preschools Ltd, in August 1993. It was held by Fogarty J that Mr Hampton had not told Mrs Thornley the full details of this transaction. The Judge found that it was likely that on 16 August 1993, when talking to Mrs Thornley, Mr Hampton was "vague as to what the refund might be". However, the Judge held that it was likely that Mr Hampton was anticipating a refund in excess of $40,000 from that transaction. It appears too that Mrs Thornley was not told that the Chesterfields Partnership had been dissolved concurrent with the separation of Mr Hampton and Ms Sisson in July 1993. 25[19] The Chesterfields Partnership had also been in arrears in respect of PAYE but, apart from the PAYE period of May 1993, these arrears had been met by transferring refunds from the personal income tax returns of both partners to clear all PAYE liabilities. There had, however, been a dishonoured cheque in May 1993 for $2,700 and Mr Hampton was to pay that amount as part of the settlement. 26 The settlement as a whole was also contingent on all future GST and PAYE payments being made on time and the June 1993 GST return being furnished and any amounts owing paid in full. [20] A standard form letter was sent on 16 August 1993 recording the terms of the arrangement. It stated:debt or penalties. This is not the way we would have read at least the standard form letter set out at [20] below and it is not the way Fogarty J understood the arrangement – see at [23] below. Nor does it appear to be the way later IRD officers viewed the arrangement – see eg file notes set out at [35] and [39]. It is clear, however, that the June 1990 period was not included in the Thornley arrangement and Fogarty J made an explicit finding to that effect: see at [23] below. He seems later in the judgment to overlook the finding, however: see at [28] below.25 This information also comes from Mrs Thornley's affidavit filed in the first judicial review proceedings. Since the hearing the Commissioner has amended that figure slightly to $36,335.06.26 We understand from the Commissioner that this was cleared by a physical payment of $2,738.03 on 20 January 1994 and a small net credit transfer of $54.24.Total arrears $ 114,182.66.27This letter is to confirm your instalment arrangement with this Department which will commence on 31/10/1993. Payments are required as follows: 1 single payment(s) of $36,335.08 on 31/10/1993. Provided payments are made in accordance with the above requirements any additional taxes or penalties incurred during the term of the arrangement will be reversed. This arrangement has been accepted on condition that all future liabilities are paid in full by the due date. Should any credit become available in your account it will be used to reduce the term of the arrangement and the instalments required as shown above must continue until the account is cleared. Should there be any default in terms of this arrangement, it will be terminated and recovery action, which may include legal action, will commence without further notice.[21] On 27 August 1993 Mrs Thornley wrote to Mr Hampton and Ms Sisson in more detail as follows:Enclosed is an itemised statement of account as discussed at our interview of 16 August 1993. Included in this is the PAYE account which details the transfers from the 1991 and 1992 income tax returns of both partners to clear all but the May 1993 period. Mr Hampton is to look into the reason for the dishonour of the cheque for $2,700.00 and to reimburse this amount to the department. Mr Coleman is at present on annual leave, but I will consult with him on his return with regard to the June 1990 GST period which had been under objection. This is to ascertain the correct residual figure on which to negotiate an arrangement. In view of this, a negotiated arrangement has been agreed to for the periods June 1992 – April 1993 inclusive. The amount of $36,335.08 is to be paid to the department before 31 October 1993. This is to be made up of a GST refund of approximately $20,000.00 which has yet to be input, and the balance by payments. This arrangement is accepted subject to the June 1993 goods and services return being furnished immediately with payment in full of tax outstanding, plus penalties, all current returns and taxes being furnished and paid as and27 This figure included the June 1990 amount as originally re-assessed. It also included $35,591.66 of penalties related to the June 1990 debt and $6,952.18 of penalties related to the June 1992 - April 1993 periods. The Commissioner has confirmed after the hearing that, had the $33,333.34 settlement figure been in the IRD computer system at the time and the proper distinction between deferrable and non-deferrable tax been made, the total penalties for the June 1990 period would have been $22,360.59.when they fall due and the reimbursement of the dishonoured cheque for $2,700.00 as previously stated. Failure to adhere to any one of these conditions may automatically terminate the arrangement and legal action may commence without further notice for the full amount outstanding at that time.[22] The June 1990 taxation review consent order figure of $33,333.34 was not included in the arrangement because Mrs Thornley thought she did not have an established figure to go on at this time. The assessment for that period had not yet been altered in the computer records to reflect the true figure to be paid. Mrs Thornley was also aware that the Department's lawyers were intending to prosecute Mr Hampton for fraud. A prosecution for intentionally misleading the Commissioner28 in relation to the value of the property at 396 Manchester St did occur and was successful.29[23] Fogarty J found in respect of the discussions with Mrs Thornley that a settlement had been reached for all but the June 1990 period: 30I am quite satisfied that on 16 August 1993 Mr Hampton came to Mrs Thornley with the objective of getting a complete settlement of the Chesterfields Partnership's account and achieved that, bar the GST issue for the 1990 period. However, there would be a common expectation between he and Mrs Thornley at the time that subject to the outcome of the imminent prosecution in respect of that GST return, to be heard in the District Court the following month, the June 1990 period had to be addressed and would be in the near future.[24] On 11 November 1993 Mrs Thornley checked the account. The Partnership had not honoured any of the terms of the arrangement. 31 Fogarty J records that Mrs Thornley reached the view that the arrangement had come to an end. 32 She thus referred the file for debt collection.28 Under s 62(1)(d) of the Goods and Services Tax Act 1985. The allegation was that Mr Hampton had altered a valuation for the property at 396 Manchester St to make it appear that the property was at the date of purchase worth $425,000 as against the $150,000 figure given as at that date in the valuation report.29 An appeal from this conviction was withdrawn and the sentence confirmed by Tipping J in the High Court: Hampton v Inland Revenue Department (1994) 16 NZTC 11,243.30 At [58] of the first judicial review judgment.31 We note, however, that the GST return finally filed on 27 November 1993 for Chesterfields Preschools Ltd (see at [29] below) contained a refund claim which more than covered the agreed sum of $36,335.08. The payment condition was thus arguably met (late), despite the other conditions as to filing etc being breached.32 At [59].[25] The file came under the control of Mr Barry, a debt recovery officer, who issued two letters of demand, one to each partner for payment within ten days of the amount of outstanding tax for the Chesterfields Partnership which then appeared in the Commissioner's records as a sum of $121,011.66. 33[26] On 16 November 1993 Mr Hampton went to see Mr Barry in response to the letters of demand. Mr Barry made a file note of this interview. That file note stated that Mr Barry had been told that the partnership had ceased as at 31 July 1993 and the assets had been sold to Chesterfields Preschool Limited. It was noted that a large GST refund would result from this in the company name and that this would be used to clear the debt of the Chesterfields Partnership, as arranged with Mrs Thornley. Mr Hampton had said that he would file GST cessation and GST returns for the final period of the Chesterfields Partnership when all of the accounts and valuations were complete. The file note states that further action would be deferred until the GST refund was transferred. It also noted that, under the agreement made with Mrs Thornley, there "would appear to be a lot of penalty to remit". The Judge found that it was more probable than not that the content of that file note was conveyed to Mr Hampton. The Judge held: 34Mr Hampton would have been told that further debt collection action would be deferred until the Chesterfields Partnership GST refund was transferred.He would have been encouraged to believe that the remissions of penalty implicit in the August 1993 agreement would take place. It will be recalled that that agreement settled the Chesterfields Partnership liabilities with the exclusion of June 1990 for the sum of $35,000 odd. The June 1990 liability had been previously settled at a sum of $33,000. The Department was threatening a debt collection for a $121,011.66, more than twice those sums.[Emphasis added][27] The Judge effectively found that the Thornley arrangement was still on foot: 35In a substantive sense the arrangement was still on foot. One thing is clear Mr Barry did not reconfirm the view of Mrs Thornley that the arrangement was at an end. He did not tell Mr Hampton that he had to start all over again negotiating a settlement. Such comfort as he did give Mr Hampton went the other way. However, Mr Hampton is wrong to contend that he was given any kind of explicit extension until 30 November 1993, at his meeting with Mr Barry on 16 November 1993. [Emphasis added]33 The increase from the 16 August 1993 figure largely reflects new penalties.34 At [61].35 At [62].[28] It would appear from the passages quoted at [26] and [27] that, despite the qualification in the last sentence of the passage quoted at [27],36 the Judge considered that the Commissioner should only have been pursuing the Partnership for an amount that honoured the (in-substance) arrangement he found had been entered into (ie to settle the outstanding GST liabilities for $36,335.08 plus the negotiated settled sum of $33,333.34 for the June 1990 period) and not for the sum of $121,011.66 referred to at [25] above.37 It appears that the Judge in making this comment may have overlooked the fact that no arrangement as to penalties38 for the June 1990 period had been entered into (and indeed that that period had not been included in the Thornley settlement). 39[29] On 27 November 1993, Mr Hampton wrote a letter to the Commissioner. At the same time, the GST return of Chesterfields Preschool Limited, anticipated in previous discussions, was filed. The return claimed a refund of $52,748.34. The letter of 27 November 1993 explained the underlying basis of this input tax claim, being the purchase not only of the property at 396 Manchester St property but of the preschool business operated at 392 – 396 Manchester St. It then went on:Could you please transfer $36,335.08 to the GST liability of Chesterfields (53 553 109) Partnership in terms of the settlement approved by the Department's Debt collection division. I refer letter dated 16 August 1993 your reference 210209748300. Surplus GST refund should be transferred to the Chesterfields Partnership GST payable of $5,317.00 for the last trading month of July 1993 (GST return enclosed) and $3,835.00 for the months of May and June (also enclosed). The remaining refund payable should be retained with the Chesterfields Preschools Limited account with the Department to pay the forthcoming GST liability for the return period October November due to be filed at the end of December. I estimate that liability to be in the vicinity of $10,000. As with the transfer from Anolbe Enterprises Limited of the input refund from the purchase of 392 Manchester Street as a transfer to the Chesterfields36 That no explicit extension was granted.37 As noted above at [13], a refund of $8,687.24 had been already credited towards the June 1990 debt.38 Including the penalties that had already accrued as at 16 August 1993 (the date of the Thornley arrangement). It was clear that the question of penalty and instalment arrangements were to be negotiated separately: see at [15] above.39 See at [22] above.Partnership without tax implications on the transaction (as agreed) I trust that this arrangement carries the same immunity as is made on that basis. Yours faithfully David Hampton[30] On 1 December 1993 Mr Barry made a file note recording that the taxpayer had called and lodged three GST returns. He referred to the letter of 27 November 1993 asking for the transfer of $36,335.08. The note went on to say this was insufficient to clear all the Chesterfields Partnership debt and that all the refund was to be transferred. It also noted in the file note that the refund resulted from the sale of the Partnership assets to a new company of "essentially the same people". A copy of Mr Hampton's letter was handed to GST audit. [31] On 20 January 1994, Mr Barry transferred the full amount of the credit to the Chesterfields Partnership's account, crediting it to the June 1990 period. His file note says:Tfr of GST credit As requested by T/P the GST refund [of $52,748.34] in the new company Chesterfields Preschool Ltd 61 491 635 has been tfd in reduction of this debt. There are still [sic] periods of debt outstanding plus penalty content (quite high) plus a GST return to be filed for the 31/10/93 period. Unable to contact at this time – assume on holiday. Statement sent showing transfers.[32] The Judge records that Mr Barry, in his affidavit filed in the first judicial review, was adamant that he did not see himself as applying the funds to satisfy the arrangement made with Mrs Thornley. [33] The Judge went on to say that, on 7 March 1994, Mr Barry reviewed the Chesterfields Partnership debt which showed in the system as totalling $79,834.38.40The taxpayers also had at that time debt resulting from unpaid taxes in two other associated entities: Chesterfields Preschools Limited and Anolbe. The Judge notes that the audit section of the Department (Audit) was holding a refund of $36,000 claimed by Anolbe as it was not satisfied with the circumstances surrounding that40 This reflected the GST for the May/June 1993 period of $3,834.88 and for the July/August 1993 period of $5,317.88 as well as additional penalties of some $10,000. It also included the transfer of the Chesterfields Preschools Ltd credit of $52,748.34 and various other adjustments.matter. 41 The Judge records that Audit had an authorisation to transfer part of that refund to reduce Chesterfields Partnership arrears but Mr Barry noted that, regardless, the overall debt would still be substantial.42 After his review of the file, Mr Barry sent a demand for payment for the total outstanding amount in the Chesterfields Partnership account of $79,834.38. [34] As a result of a conversation with Mr Hampton on 9 March 1994, Mr Barry checked with the auditor, Mr Nimmo, on the status of the investigation. Mr Nimmo said that there would be a more in depth investigation of the refund due to Chesterfields Preschools Limited. The Judge records that there was therefore a prospect that the transfers Mr Barry had already made of the credit of $52,748.3443would be reversed. [35] On 7 April 1994, Mr Hampton called into the IRD's offices in Mr Barry's absence. He was interviewed by two other staff members who were not conversant with the case. Mr Barry's file note says:Details of visit – GST arrears T/P called in my absence and was interviewed by Sandra Prescott and Cathy Musson. He has also spoken with Audit - Robert Heslan. T/P insists that the GST is all paid. He basis [sic] his claim on an interview dated 16/8/93 with Valda Thornly [sic] when she told him she would accept $36335-08 in final clearance of all arrears at that time excluding 6/90 GST. T/P has paid the $36000 odd by tfr 1/10/93 from chesterfield Ltd (61 491 635) this I tfd to 6/90 GST period in error – corrected today and periods 6/93, 4/93, 2/93, have been cleared using the $36000 odd. T/P still needs to file 10/93 GST return, PAYE 8/93 and PAYE 6/90. I will put this in writing to him.[36] It is evident from the file note set out above at [35] that Mr Barry transferred the Chesterfields Preschool Ltd credit of $52,748.34 to the later GST periods (of February, April and June 1993), having earlier transferred it to the June 1990 period.44 On the next day, Mr Barry recorded a discussion with Audit which requested that he delay any action because Audit was about to present the file to41 This resulted from a claim with regard to 392 Manchester St (see at [53] below) and a claim with regard to 101 Bishop St (see at [53] below).42 At [68].43 From Chesterfields Preschools Ltd. See at [31] above.44 See at [31] above. Mr Hampton says that this was not done at his direction but it does seem to accord with his instructions in the letter set out at [29] above.Region with a recommendation that Mr Hampton be prosecuted for a number of offences. It was noted that the officer handling the matter was Mr Nimmo and it was recorded by Mr Barry that the letter anticipated in the file note had not been sent to Mr Hampton. [37] From Mr Barry's perspective no further action was taken for some considerable time and on a number of occasions up to and including 15 February 1999 he recorded that the Chesterfields Partnership files remained with Audit and that he was unable to proceed to collection. In the meantime, penalties were still accruing. [38] In September 1994 Mr Nimmo took up a new position with the IRD and ceased his involvement with the file. At about the same time, Mr Aronsen in the Return and Debt Collections Unit was instructed to pursue the overdue taxes and returns of Chesterfields Partnership, Chesterfields Preschools Ltd and Mr David Hampton. When Mr Aronsen took over the file the Departmental records showed the respective indebtedness at $108,108.48, 45 $26,063.69 and $2,819.30 respectively. The Judge notes that on 20 September 1994 Mr Aronsen spoke with Mr Hampton who "seemed to think that he only had to pay $36,665.89 and the balance of Chesterfields Partnership's debt would be written off". [39] On Friday 23 September 1994 Mr Aronsen made an appointment for Mr Hampton to come and see him. As a result of that meeting he made a number of file notes. The first related to the Chesterfields Partnership.46 He said:Mr Hampton came in to see me. He agreed to file the GST returns for 0494, 0594 by this time next week. Gave T/P another de-reg form as the P/Ship has ceased trading. I pointed out that 94 ACC and PAYE was outstanding. These debts amount to $2,098.80. Mr Hampton agreed to make full payment by 7/11/94. I then referred to the 0690 GST debt of $87,147.88. I said that according to my calculations the assessed debt less Cr of $52,748.3445 This figure included, among other things, assessments for the April 1994 and June 1994 periods. The Commissioner says that these figures were default assessments and were later readjusted to reflect the nil returns eventually filed.46 We note Mr Aronsen appears to consider that the Anolbe amounts were to be available for both Chesterfields Partnership and for Chesterfields Preschools Ltd (see at [48] below). There may have been some double counting. Mr Hampton now maintains that he did not authorise the Anolbe credits to be made available to Chesterfields Partnership. If correct, this would mean that some of the June 1990 core tax would have remained outstanding and thus penalties would have continued to accrue on that.amounted to around $17,000.00 only.47 I told Mr Hampton that I was prepared to defer collection this money until the Cr in Anolbe Enterprises had been finalised.If in fact Anolbe is entitled to the Cr then I will be able to clear this p/ships arrears in full. The GST penalties on 0690 should be remitted as T/P met his end of the bargain when he made the agmt with valda [Thornley] on 16/8/93(refer to CNC on that date). The other reason why I am deferring this matter is that the Cr of $52,748.34 that was xferred from Chesterfields Preschool Ltd may yet be disallowed by Audit. Rex advised me that he may reassess this Cr. If this happens then the transfers must be reversed and the credits put back to the company. I am required to defer action until Audit decide on what action they will take. [Emphasis added][40] This file note seems to assume that the June 1990 period was part of the settlement entered into with Mrs Thornley, which was not the case, but it does appear from the file note that Mr Hampton may have been told that there would be no penalties if the input tax credits held up in Audit were released as they would clear the Chesterfields Partnership's GST debt in full.48[41] There was a further meeting on 16 December 1994 and, in the course of that meeting, Mr Aronsen gave Mr Hampton a short handwritten note:Anolbe enterprises Ltd – Accounts ok. Chesterfields P/ship – All GST returns filed. GST to be settled when Anolbe's GST has been finalised. 49David Hampton – All accounts clear 93 Income tax $1,130.50.[42] Mr Aronsen had filed an affidavit in the first judicial review proceedings which disputed that he had reached any agreement or arrangement with Mr Hampton as to any tax arrears of any of the entities. He contended that all he was doing was47 The Commissioner, in his submissions filed after the hearing, has submitted that Mr Aronsen appears to have used the debt amount in the Thornley arrangement of $36,335.08 and then included the core debt for June 1990, $33,333.34, to give a total debt of $69,668.42. From that sum, the Chesterfields Preschool Ltd's September 1993 credit ($52,748.34) appears to have been deducted to give a figure of $16,920.05 – or "around $17,000". Mr Aronsen does not appear to have factored the additional GST for the June 1993 and August 1993 periods. Nor does he appear to have taken into account the credit of $8,687.24 in the April 1992 period that had been applied against the June 1990 debt. We note that Mr Aronsen's calculation seems to have assumed the continuance of the Thornley arrangement.48 There appears to be an assumption that the June 1990 period was under an arrangement as to payment of the core debt only.49 This would have alerted Mr Hampton that Mr Aronsen thought the Anolbe credits were available to clear the Chesterfields Partnership debt, including for the June 1990 period.deferring taking legal action or other debt recovery action for the time being. The Judge referred to this evidence at [95], but said:50There is no doubt that at the time Mr Aronsen had no certainty as to the outcome of the various Audit investigations. But equally, he was of the view that it would be entirely inappropriate to take debt collection action until Audit decided on what action they would take. He was also anticipating that were Audit to accept the returns they would be applied to clear arrears. He anticipated that the Anolbe returns would clear the partnership's arrears in full. The note he believes he gave Mr Hampton on 16 December 1994 was very capable of leaving Mr Hampton with the impression that Chesterfields Partnership account with the Inland Revenue Department was under control and pending Audit decisions. [Emphasis added][43] This appears to us to be a finding that Mr Aronsen gave Mr Hampton the impression that, if the Anolbe refunds survived Audit scrutiny, then the Chesterfields Partnership debt would be cleared totally and that there would be no penalties (provided of course that the $52,784.34 credit was not reversed). 51 In our view, Fogarty J explicitly rejected the submission52 that all that was occurring was a deferral of collection rather than the anticipated honouring of an arrangement relating to the payment of GST and the remission of penalties. [44] Fogarty J made one further comment specifically about the position of Chesterfields Partnership. He said: 53It is also clear that whether he is right or not, Mr Hampton has had firmly fixed in his mind for years a view that Chesterfields Partnership has satisfied what he sees as the August arrangement, and does not owe any tax. He has been remarkably sanguine about the mounting penalties and interest, based on a personal confidence in his view of the world.[45] We also refer to the Judge's more general comments set out at [71], [72] and [74] below, which set out the Judge's view of the role and responsibility of the Commissioner in encouraging Mr Hampton in "his view of the world".50 At [96].51 This credit was never reversed.52 This submission is recorded at [95] of the first judicial review judgment53 At [145].Chesterfields Preschools Ltd[46] Mr Nimmo was advised on 20 July 1993 that the Chesterfields Partnership had been dissolved concurrent with Mr Hampton and Ms Sisson's separation. Mr Nimmo was told that the preschool would continue to trade under Mr Hampton's name. The letter also anticipated the incorporation of Chesterfields Preschools Ltd. This occurred and that company, as noted above at [29], claimed an input tax credit for the purchase of the preschool business from the Chesterfields Partnership. [47] The Judge records that, in his file note of 23 September 1994, 54 under the heading Chesterfields Preschools Ltd, Mr Aronsen noted:Mr David Hampton came in to see me. T/P agreed to have the GST returns for 0594, 0794 filed by this time next week. I then advised Mr Hampton that PAYE for 0893-0294 was outstanding. T/P said he is sure that the PAYE was paid. T/P will check his records and ring me back within a week.[48] The Judge records 55 that Mr Aronsen was aware that Mr Hampton was expecting GST refunds from Anolbe 56 and that Anolbe had authorised those credits to be transferred to pay the PAYE arrears of Chesterfields Preschools Ltd. 57 On inquiry, Mr Aronsen found that the GST returns of Anolbe could not be finalised as there was an open Audit investigation in relation to those refund claims. Audit also advised that it was considering prosecuting Mr Hampton under the Crimes Act for fraud.54 See at [39] above. At the meeting of 23 September 1994, Mr Aronsen also reminded Mr Hampton that he owed $2,819.30 in penal tax in respect of his own tax arrears. Mr Aronsen agreed that the Department would cancel the incremental penalties on his PAYE debt, provided Mr Hampton paid the initial 10% additional tax penalty by 7 November 1994.55 At [87].56 See discussion at [53] and following. The potential credits Mr Aronsen was talking about totalled $36,666.67: ie the input claims referred to at [53] below.57 As noted at fn 44, Mr Hampton now says that he had not authorised the Anolbe credits to be applied to the Chesterfields Partnership. He acknowledges that he had, at the request of Mr Nimmo, added a postscript to the letter dated 27 November 1993 (set out at [29] above) authorising the Anolbe credits to be used to meet any shortfall in meeting the Chesterfields Partnership 16 August 1993 settlement but, as there was no such shortfall, the contingency did not arise. We note, however, that, as at November 1993, on any reckoning amounts were still outstanding for the June 1990 period for the Chesterfields Partnership.[49] The Judge remarked that the note given to Mr Hampton on 16 December 1994 58 did not refer to Chesterfields Preschools Ltd. There was, however, a file note made by Mr Aronsen in respect of that company on 16 December 1994 where he said that the only matter he was concerned about was the PAYE for the company. Mr Aronsen agreed to ring back in January to follow through on the matter and also to discuss the GST account. Mr Aronsen noted, however, that the "GST should be basically clear apart from penalties". [50] The question of the debt owed by Chesterfields Preschools Ltd was followed up on 28 February 1995, but the Judge said "there was no partial resolution". On 20 September 1995 Mr Aronsen noted that the company had a very large GST credit sitting in its account, relating to the March 1995 period, but Audit was not able to tell him whether the credit would be released or not. He thus decided to try and liquidate the company but on 17 October 1995 he deferred that decision. This was because Audit had told him that the case should be resolved before the Christmas break. Mr Aronsen noted:I said I hoped so given that the case had been in Audit's hands for a long period now and nothing positive had come of it. The guts of the matter is: (1) If the Co is entitled to the refund then the debt will be substantially reduced. (2) If the Co is not entitled to it then there shall be a large tax bill to pay. (3) It is not ethical for me to pursue the debts until the refund business has been sorted out.[51] Mr Aronsen went on to say that he had moved the case into "uncollectable" until Audit "get their A into G". On 23 November 1995 Mr Aronsen recorded in a file note that he had advised Mr Hampton that he: 59considered it to be unprofessional for the Department to take over 12 months to act on this case, ie in reference to the Audit case. I said I was not happy for these long delays on our part. Mr Hampton said he did not want to stir things up and he would be prepared to wait for Audit to make up their minds.[52] Again Mr Aronsen noted that he would defer action until Audit had decided whether to allow the March 1995 credit. He agreed to ring back in a month's time. When he had spoken to Audit they said that they were about to attack all of the cases58 See at [41] above.59 The comment also appeared to relate to Anolbe.very shortly and should have an answer within a month. No answer from Audit appears to have emerged but Mr Barry was instructed in October 1998 that he could proceed with debt recovery action with regards to Chesterfields Preschools Ltd. 60Anolbe Enterprises Limited[53] Anolbe was registered for GST and made an input tax credit claim of $21,888.89 for the period ended 31 March 1993 for the purchase of 392 Manchester St from Mr Hampton and Ms Sisson as trustees of a family trust called the Anolbe Family Trust. It appears that there had also been a "sale back" of 396 Manchester St from the Chesterfields Partnership to Mr Hampton and Ms Sisson as individuals in 1993. In January 1994 an input tax credit of $14,777.78 was claimed by Anolbe for the November 1993 period in respect of the purchase of 101 Bishop St. 61[54] After setting out the above, 62 the Judge noted: 63These rather bewildering transactions were viewed with reasonable suspicion by the Audit office then and later.[55] On 8 March 1996 Anolbe was removed from the New Zealand register of companies for non-payment of fees. Mr Hampton voluntarily de-registered Anolbe60 See at [74] of the first judicial review judgment. The Commissioner maintains that by October 1998, but for some $15,000, the March 1995 credit had been applied to reduce Chesterfields Preschools Ltd's existing debt. (Mr Hampton disputes this.) The Commissioner also states that the company's debt, according to a file note of Mr Barry of 6 October 1998, was at that time standing at some $248,903.91. The Commissioner maintains that none of this entity's tax debt is under challenge. Mr Hampton disputes the amount owing and says it is contrary to various statements provided to him by the IRD. He also says that the Anolbe 1993 credits should have been transferred to reduce the amount owing in Chesterfields Preschools Ltd: see discussion at fn 57.61 The Commissioner noted in his submissions at the hearing of the appeal that this property had been sold by Anolbe to Mr Hampton on 1 March 1994 before the original purchase had settled. This should have triggered output tax but on 12 July 1994 Anolbe had filed a nil GST return for the period ended 31 March 1994. Mr Hampton says that the 101 Bishop St property was in March 1994 exchanged for the property at 67 Augusta St which Mr Hampton had contracted to buy from his cousin. The contract relating to 101 Bishop St was, however, at various times cancelled and reinstated.62 And a few matters relating to the Chesterfields Partnership and Chesterfields Preschools Ltd that we have dealt with above.63 At [83].for GST in 1997, with an elected effective date of 1995. 64 As a result, the Commissioner cancelled the GST registration on 1 April 1997 but took the date it was struck off the Companies register as the effective date (8 March 1996). The Judge records that Anolbe continued to own and lease the property at 392 Manchester St and, in November of 1999, completed the settlement for the acquisition of a property at 67 Augusta St, Christchurch. 65[56] On 23 March 2000 Mr Hampton applied to the Registrar of Companies to restore Anolbe to the New Zealand Register which was done in June 2000. On 27 March 2000 Mr Hampton wrote to the Commissioner advising of that application and asking the Commissioner to reinvoke registration of Anolbe for GST as at the date of cancellation. The Judge noted that, included with this letter, were a number of GST returns for the periods March 1996 to March 2000. 66 The returns detailed by the Judge in the first judicial review judgment were: a) $17,777.78 for the period ended September 1999, arising from the purchase of a property at 67 Augusta St; b) $46,666.67 for the period ended March 2000, which related to the purchase of a property at 8 Kahu St, Christchurch; and c) $27,777.77 for the period ended September 2000, which related to the purchase of a property at 63 Augusta St, Christchurch. [57] These were not treated as returns by the Commissioner and the 27 March letter was not treated as an application for re-registration of Anolbe. The Processing Centre treated the returns as correspondence. This was because at the time the company was not re-registered for GST. The re-registration of Anolbe was only considered after Mr Hampton filed a form for the re-registration of Anolbe on64 That the de-registration was voluntary was not mentioned by the Judge. It was portrayed as a decision of the Commissioner resulting from Anolbe being removed from the Companies Register: see at [99] of the first judicial review judgment.65 Quite how Anolbe undertook these transactions as a struck off company is not explained (as noted by Mr Budhia). That Anolbe undertook the 67 Augusta St transaction nevertheless appears to be a finding made by the Judge in the first judicial review judgment.66 It appears from Mr Budhia's report that in fact there were 28 GST returns of Anolbe filed on 27 March 2000, covering periods from 1 October 1995 to 31 March 2000.2 September 2003. The Commissioner re-registered Anolbe on 14 September 2004 but backdated this only to 1 April 2003. [58] The Judge commented that the Commissioner was presenting the difficulties with re-registration as a problem created by Mr Hampton not completing a written application. The Judge commented: 67... It can also be seen as a problem of the Commissioner's own making because Mr Doubleday and Mr Kettle [the Inland Revenue Department Officers involved] were hostile to these "returns"68 when made in 2000 and were content to let the Processing Centre treat them as correspondence.[59] It was noted by Fogarty J that the officers involved had not asked that the informal application for re-registration of 27 March 2000 be formalised by way of completion of the statutory form, despite being in regular contact with Mr Hampton during 2000.Remission of penalties[60] On 20 May 2004 the taxpayers' then solicitors made an application to the Commissioner for remission of penalties under s 183A of the Tax Administration Act 1994 (TAA). The application recorded that there had been long-running negotiations to settle the indebtedness since 2000 and recorded offers that the Department itself had made to settle the disputes: 69a) An offer made on 29 February 2000 to settle the Chesterfields Partnership debt of $281,557.00 for $80,864.06. (This offer was made by Mr Doubleday.) b) An offer made in March 2001 to settle the entire debt of all entities with a payment of $250,000 up front with $100,000 per year for five years, totalling $750,000.67 At [106].68 The returns are those described at [56] above.69 The Commissioner disputes that there were ever any firm offers of settlement, except in relation to Chesterfields Partnership, but this seems to be contrary to the findings made by the Judge in the first judicial review judgment. See at [72] below.c) Verbal offers made during meetings with Mr Hampton and Ms Sisson from 2002 onwards ranging from $600,000-$900,000 in full settlement of all debts for all entities including arrangements for payment over time. [61] It also records that Mr Hampton did not accept these offers. It was noted that, at the time the offers were made, he was caring full time for his mentally ill child, was in the process of separating from his wife and was unable to make coherent decisions about his tax affairs. It also records that he maintained a very genuine belief that he had been mistreated by the Department and the majority of interest and penalties were disputed. The application also recorded an offer made by the taxpayers on 4 May 2004 to settle on the following terms: a) a lump sum payment of $500,000 made by 30 August 2004 or earlier on the settlement of the sale of the properties at 55, 63 and 67 Augusta St; b) a payment of $300,000 on a time plan of $50,000 payable per year over a period of six years; and c) an agreement to employ an accountant for a period of two years to ensure future compliance in respect of Mr Hampton and all the related entities. [62] The solicitors submitted in the application that that offer effectively equated with the core tax of each entity except for the old Chesterfields Partnership. The Department rejected the offer. The application records that on 18 May 2004 Mr Hampton made an open offer by affidavit to settle for $1 million. [63] The application by the taxpayers for the remission of penalties was considered by Mr McNeill as the Commissioner's delegate and his decision was released rejecting the application on 9 June 2004. Mr O'Neill found that none of the elements in s 183A of the TAA were satisfied. He said:I am not satisfied the penalties arose as a result of the daughter's tragic event and ongoing illness. It is just a continuation of a pattern of earlier, consistent and persistent non compliance exhibited both before and after the onset of the daughter's illness. Thus the first element of section 183A is not satisfied.As a consequence did the taxpayers have a reasonable justification or excuse for not furnishing the tax return or an employer monthly schedule, or not furnishing an employer monthly schedule in a prescribed electronic format, or not paying the tax on time?I am not satisfied that your clients do have a reasonable justification or excuse in terms of section 183A(1A)(b) because of the matters I set out above in considering the first element and because they:• are professional people with considerable personal tax acumen and have also employed financial and legal advisors;• have considerable business acumen and are involved in various businesses. Attending to tax matters is an essential part of running a business;• they have set up a new entity since 2000, Chesterfields Preschools Partnership;• own at least 9 properties which are well located and in many cases, are adjoining;• appear to have purchased eight of the properties since being in default in respect of paying tax – six before the year 2000;• prior to 2000 developed a property on the corner of Bishop and Canon Streets, including relocation of a house and building town houses with garages on the front and selling the properties for about $500,000 but instead of paying tax debit with the proceeds, your clients purchased a further property.• appear to have developed properties into preschools since being in default;• purchased two new properties in 2000 and 2003 respectively despite the tax debt;• transferred the ownership of four properties between associated persons or entities since 2000, which in each case involved discharging mortgages and taking out a new mortgage on each property;• since 2000 they have managed seven or eight properties and may have developed properties. Your clients have considerable tax and business acumen and it is apparent that the daughter's tragic event and ongoing illness did not hinder your clients' business activities. I believe they could have conformed with their statutory duties had they chosen to do so and they have no reasonablejustification or excuse in terms if [sic] section 183A(1A)(b). Thus the second element of section 183A is not satisfied. Did the taxpayers correct the failure to comply as soon as possible? I am not satisfied as to the third element as your clients did not correct the failure to comply as soon as possible. Instead, they:• have continued non compliance in respect of the debt by not paying the debt;• have incurred new debt;• have bought two more properties since 2000 instead of paying the tax debt;• own a great deal of property and it seems they could have paid the debt by selling property on the open market;• did not rectify the non filing of some returns until the Commissioner commenced prosecution action in May 2004 despite the written undertaking to file some returns by 30 October 2003 given before Judge Barber in the TRA on 11 August 2003;• had pleaded guilty to failing to furnish returns charges in the 1999 prosecution but nevertheless continued to default so that prosecutions are again in train - court date 24 June 2004. Thus, the third element of section 183A(1A) is not satisfied. After full consideration of the relevant factors, I have no alternative but to decline the application under section 183A of the Tax Administration Act 1994."[64] The Judge found that there was no reviewable error in respect of the decision on that application for remission. He said that: 70With the benefit of hindsight it foundered on the strict limits on powers for remission in s 183A.The Commissioner's attitude to Mr Hampton[65] The Judge recorded that some of the IRD officers "had a sceptical perspective on Mr Hampton's conduct with his entities". 71 He noted that Audit put GST refunds by a number of the entities under investigation after the June 1990 period claim and never reported either way on the outcome. For many years, the70 At [130].71 At [132].whole question of whether or not the transactions relating to the pre-school business were fraudulent was under scrutiny. The Judge conceded that this was still the case to a degree. 72 The Judge also noted a comment by Mr Doubleday (who had filed an affidavit in the proceedings) which was very critical of the tax compliance history of the taxpayers. The Judge stated: 73This is a perspective which echoes the view of Mrs Thornley in August 1993 that Mr Hampton treated the Inland Revenue as a bank. Pursuing that analogy the picture does come to mind of Mr Hampton being the sort of bank customer who is rather casual about overdraft limits and intercompany transfers treating all his separate accounts as one treasury, whether the bank sees it that way or not.[66] The Judge said that the IRD officers were well aware that "all the transactions were between related parties and were all obviously animated by Mr Hampton". 74 It was also noted that, for practical purposes, Mr Hampton seems to have sought to operate all aspects of the family ventures as a group for tax purposes. The Judge went on to say: 75This combination of a casual approach to filing returns and paying tax in arrears, and a myriad of related parties' dealings, overlaid by Departmental suspicion, has led to a quite extraordinary outcome of indebtedness.[67] It was noted that Mr Hampton is a well educated man with a Masters in law in tax but that he and his wife had been successfully prosecuted several times for the failure to file tax returns. 76 It was also noted that, after the June 1990 tax return was resolved, Mr Hampton was subsequently charged with intentionally misleading the Commissioner in relation to the value of 396 77 Manchester St and convicted on that.78[68] The Judge said that, although understandably the officers of the IRD "[had] a rather jaundiced attitude to Mr Hampton and his entities", there was only one conviction for dishonesty, although he noted that Audit had spent years examining72 Ibid.73 At [136].74 At [137].75 At [139].76 At [140].77 Mistakenly noted as 369 Manchester St in the judgment at [140].78 See at [22] above.the prospect of bringing a more wide ranging proceeding for fraud. 79 The Judge noted that Mr Doubleday complained of a history of Mr Hampton re-characterising events to misrepresent history. The Judge placed no weight on those allegations because, with the one exception already noted, that perception had not translated into any convictions. 80 The Judge said, however, that: 81[I]t is quite clear the Mr Hampton is, to put it mildly, an extremely difficult "taxpayer" to deal with. He seeks full advantage of those taxation provisions and interpretations by the Commissioner which allow dealings between related entities. He expects to be able to move credits from one tax paying entity to another on the strength of handwritten letters, filed from time to time.[69] The Judge considered that a significant ingredient of the reluctance of the IRD officers to have any sympathy for Mr Hampton was their belief that the core business of the preschools had always traded profitably. 82 The Judge noted that over a period of time Mr Hampton, through his entities, had acquired quite a lot of real estate in Christchurch, while, in the IRD's mind, forsaking opportunities to retire his taxation debt. The Judge, however, remarked that many of the drawings in the current accounts of Chesterfields Preschools Limited from 1995 to 1998 were journal entries. [70] The Judge went on to say: 83All that said, there is obviously some substance in the department's view that Mr Hampton could have used his access to cash or credit to settle his tax arrears, rather than wait upon the resolution of the numerous GST input claims. Mr Hampton's wish is clearly to pay as little tax as possible. He had had a naive confidence that he can rely upon the benefit of his letters requesting GST refunds to be applied against arrears. He was confident that the GST refunds would sooner or later be approved and then applied as at the date they were raised against core tax liabilities of other entities in the family "group" as at that date. Thus applied they would be rather like the axe at the trunk of a tree of interest and penalties. [Emphasis added][71] The Judge added that the Commissioner needed to appreciate that "rightly or wrongly for long periods of time, particularly between 1993 and 1998, the various officers were treating the debts as uncollectable because of the pending audit79 At [142].80 At [143].81 At [144].82 At [146].83 At [148].assessments of the GST inputs". 84 Audit did not make its decisions promptly and in some, if not most, cases did not make decisions at all in respect of the disputed GST refunds. The Judge said: 85Mr Hampton was given comfort in that respect, and became naively confident his claims would prevail, and that the mounting penalties would be remitted. [Emphasis added][72] The Judge held: 86In the round, Mr Hampton had reasonable expectations that his and his associated entities' total liabilities to the Commissioner were negotiable.The Commissioner was prepared to make significant offers to settle in 2000, 2001 and 2002 onwards. [Emphasis added][73] The Judge considered that the Commissioner had (with the consent of the Minister) a discretion to remit penalties accruing on tax due prior to 1 April 1997 on equitable grounds and that Mr Hampton had effectively made applications for remission before that date. [74] The Judge said: 87Broadly, between 1993 down to at least 1998 the officers responsible for debt collection did not feel it was ethical to attempt debt collection while audit was examining the merit of the input claims. If these input claims were recognised they would carry interest calculated from the date they would have been paid but for the investigation. Further, they would have been credited against debits in various of the associated taxpayer accounts.Further, there was an undoubted readiness on the part of the officers to wipe penalties pertaining to those debit accounts, the payment of which would have been significantly resolved had the GST refunds been acknowledged.[Emphasis added][75] The Judge held that it was never the intention of Parliament that the Commissioner could place GST refund claims under investigation indefinitely. This was conduct contrary to the purpose of giving the Commissioner power to investigate refund input claims with a view to rejecting them. 8884 At [149].85 Ibid.86 At [150].87 At [153].88 At [154].[76] What we take from this discussion in the first judicial review judgment (and the earlier comments made when discussing the particular entities) is that the Judge considered that the delays in this case had been inordinate (and not in accordance with the Commissioner's statutory duties). The Judge considered that the delays were partly explained by the Commissioner's negative attitude to Mr Hampton. [77] The Judge accepted that this negative attitude was justified to a degree in that Mr Hampton did appear to treat the Department as a bank, he did not like paying tax, he had a casual attitude to filing returns and he treated all entities as a group for tax purposes (directing numerous transactions between related parties and expecting action to be taken as to transfers between entities on the basis of handwritten notes). The concern that the taxpayers were trading profitably while not paying the taxes due was also considered by the Judge to be justified to a degree. 89 However, the Judge was prepared only to take into account the actual successful prosecutions, rather than the other assertions of taxpayer misbehaviour. [78] Despite the justifiable criticisms of Mr Hampton, the Judge obviously considered that this did not excuse or explain all the delays. In the Judge's view, the Commissioner and his IRD officers had allowed their negative view of Mr Hampton to cause inordinate delays. Further, Mr Hampton had been given comfort that mounting penalties would be remitted and had a reasonable expectation, based on the settlement offers made by the Commissioner, that his position, and that of his associated entities, was negotiable. 90 These findings were particularly related to the period between 1993 and 1998 but were not, in our view, limited to that period.Fogarty J's conclusion[79] The Judge concluded: 91The Commissioner of Inland Revenue has to accept some responsibility for the state of these taxpayer accounts, in particular the accrual of penalties.On any view of it the level is disproportionate to the seriousness of the breach. In particular the Commissioner has to accept that his officers have89 See at [70] above.90 See at [71], [72] and [74] above.91 At [155].from time to time countenanced recognising input tax refunds under the GST Act and the application of those refunds to debits arising under the same and related accounts. Furthermore, his officers have taken the opportunity to refer the input tax claims for examination thus avoiding the obligation to pay them within 15 days, but the Audit Department has not made decisions. Finally, the Commissioner's officers had an opportunity to respond constructively to the request on 23 March 2000 for the re-registration of Anolbe and to process the associated input claims. Taken together, these past events create a positive duty now on the Commissioner to exercise his discretionary powers, including the power to remit penalties on equitable grounds, so as to achieve an outcome where the penalties in fact sought to be collected are proportionate. That duty may also be overlaid by the recent deterioration in the value of the business and call for a judgment under s 6 and 6A of the TAA as to what in fact can be collected. [Emphasis added][80] The Judge was satisfied that the delays by the IRD officers amounted to a failure to exercise the powers given to the Commissioner to collect tax and that the various neglects or failures cumulatively justified the intervention by the Court by way of judicial review directing the Commissioner to complete processing input claims and to consider associated reduction of penalties and interest payments.92The Judge noted that there was one difficulty in the way of such reconsideration, the problem of the time bar. However the Judge considered that s 4(5B) of the Judicature Amendment Act 1972 (JAA) provided the power to allow that reconsideration. He said that it was just that Mr Hampton and his associated entities did not obtain advantage of the time bar provisions. [81] The Judge had earlier said: 93However, all discretionary powers of the Commissioner, whether implicit, or express, have to be exercised in good faith and for their proper purpose. In that context assurances given by a Commissioner's delegate can in certain circumstances be enforced by way of judicial review exercising the powers under the Judicature Amendment Act to issue directions upon a reconsideration of the position by the Commissioner. The Court must, however, be careful not to usurp the discretion of the Commissioner. However, the Court does have authority to make such decisions and directions as are necessary to ensure that the decisions are made to advance the purpose of the taxation legislation consistent with those standards of fairness mandated expressly or implicitly by the legislation. [Emphasis added]92 At [156].93 At [41].Relief ordered[82] The relief order in the first judicial review judgment was as follows. The Commissioner was directed to: 94a) Reconsider the application for re-registration of Anolbe, treating the application as having been made on 27 March 2000 (on the basis it would have been completed formally had there been an appropriate reaction from the Commissioner's staff on receipt of the letter). b) Consider the legitimacy of all the Anolbe GST returns, including those filed on 27 March 2000 and any other unresolved refund claims by other taxpayers. (The time bar provisions were held not to not apply). c) Apply such refunds as are upheld to the best fiscal advantage of the taxpayers. d) Make a decision under s 182 of the TAA, as preserved by the Taxation (Remedial Provisions) Act 1997, s 103, treating the historic correspondence from and meetings with Mr Hampton as substantive requests for remission, in respect of all the taxpayers, received before 23 September 1997, and in so doing recognise that Mr Hampton was led to believe that the GST input claims he was lodging would be considered and decisions made upon them and refunds lodged to the best advantage of the taxpayers. e) Make a decision under s 183A as to remission in respect of the period that has elapsed while this litigation has been proceeding. [83] The following additional directions were made: a) the Commissioner may, in the usual way, continue to exercise his general powers under s 6 and 6A of the TAA, without derogating94 At [159].from the benefits that would accrue to the taxpayers by reason of the reconsideration of the foregoing matters; b) leave is reserved for further directions; c) the debt collection proceedings continue to be adjourned, pending the outcome of the above directions; and d) costs are reserved.What the Judge was expecting[84] The directions set out at [82](a)–(c) are relatively straight forward. The directions relating to the remission of penalties are less so. These directions have to be read in light of [155] of the first judicial review judgment. There is an issue as to the meaning of that paragraph. [85] We do not consider that the Judge in [155] of the first judicial review judgment was setting out a general proposition that the Commissioner was somehow obliged to consider if the statutory penalties were proportionate. 95 In particular, the Judge cannot be taken as saying that s 139(c) of the TAA provides any such general duty. That is intended to convey that the statutory penalties to which it refers 96 are set at levels that are proportionate to the seriousness of the breach. Section 139 provides:The purposes of this Part are: (a) To encourage taxpayers to comply voluntarily with their tax obligations and to cooperate with the Department; (b) To ensure that penalties for breaches of tax obligations are imposed impartially and consistently; and95 Insofar as we could understand Mr Hampton's submissions on this point, he did not appear to be asserting any general proposition of proportionality. His argument was that proportionality arose in this context because of the Commissioner's delay and because of the arrangements made and the assurances that had been given.96 Section 139 outlines the purposes of Part Nine of the TAA, which deals with penalties. The statutory penalties included within this Part include: late filing penalty for GST returns; non-electronic filing penalty; late payment penalty; imputation penalty tax payable where end of year debit balance; and shortfall penalties.(c) To sanction non-compliance with the tax obligations effectively and at a level that is proportionate to the seriousness of the breach.[86] What the Judge was saying at [155] of the first judicial review judgment was that in this case penalties had to be reduced to the extent that they had accrued as a result of the inordinate delays by the Commissioner and the related assurances and comfort given by him to the taxpayers. In other words, any penalties (including use of money interest) had to relate only to the portion of penalties that were (against that background) the fault of the taxpayers.97[87] We consider that the Judge was expecting the Commissioner to exercise the powers under s 182 of the TAA effectively to place the Chesterfields Partnership in the position it would have been in, had the substantive arrangements he had found existed been adhered to.98[88] There were two (in substance) arrangements found by the Judge in the first judicial review judgment: a) The (continuation of) the Thornley arrangement which related to all but the June 1990 period. Under this arrangement a payment of $36,335.0899 was required to clear all but the May 1993 PAYE amount.100b) The "arrangement" relating to the June 1990 GST period. This is somewhat problematical given that the Judge did not tackle directly the apparent contradiction between the finding that the June 1990 period was not included in the Thornley arrangement and the finding that it had been settled before the TRA for $33,333.34, particularly when it is clear that that settlement explicitly did not include97 If the Judge's comments at [63] of the second judicial review judgment imply a wider reading of [155] of the first judicial review judgment then we reject them. We do not, however, consider that they do imply a wider reading. The Judge saw the obligations under [155] of the first judicial review judgment as arising because of the actions of Departmental officers: see quote at [128] below.98 See for example the passage quoted at [26] above. To the extent that s 182 could not be used the Judge appears to have assumed that ss 6 and 6A would be used.99 Satisfied by the transfer of part of the Chesterfields Preschools Ltd credit. As discussed above at [31].100 See at [19] above.penalties. In light of this contradiction, we consider that the Commissioner would be justified in understanding the finding in the first judicial review judgment as to the June 1990 period settling for $33,333.34 as relating to core debt only: ie as not including penalties accrued up to the point the June 1990 debt was satisfied. This is particularly the case as the June 1990 debt arose through fraud. 101[89] With regard to s 183A, the task was to assess the extent of remission of penalties that should occur during the period of the litigation. This reconsideration would need to take into account, we assume, the fact that there was a bar on the collection of taxation imposed by the Court during this period. [90] While the Judge had upheld the decision not to remit penalties under s 183A made by the Commissioner on 9 June 2004, 102 he does appear to have expected the Commissioner to reconsider the position, taking into account the delays, the assurances and comfort given which gave rise to the "reasonable expectations" that the sums owing were negotiable and the deteriorating financial position of the taxpayers. 103[91] In our view, what the first judicial review judgment required in this regard was for the Commissioner first to assess: the level of inordinate delay, being delay that cannot be explained by the needs of the investigation (noting the particular care that must be invested in any investigation which may result in criminal charges); ordinary workload pressures; 104 any failures of the taxpayers to provide information; any conflicting instructions given; the reasonable suspicion with which the transactions were regarded; 105 and the sheer complexity and confusion surrounding these taxpayers' affairs. The Judge was then expecting that some portion 106 of the101 This conclusion is reinforced by the confusion as to whether there had been instructions to transfer the Anolbe credits to cover the June 1990 debt. See discussion above at fn 46.102 Discussed at [60]–[64] above.103 See at [72] above.104 These were not of course the only files the particular Audit officers were dealing with.105 See at [54] above.106 Given the very confusing nature of the taxpayers' affairs and their clear defaults we would have thought considerable leeway would be accorded to the Commissioner in this regard. The fact that the taxpayers could have used their resources to pay tax (but chose to await the outcome of the investigations) is also a relevant consideration. See at [70] above.penalties for the period of inordinate delay107 would be remitted (using ss 6 and 6A of the TAA if necessary). This direction does not seem to have been limited to the amounts actually in dispute but related more widely to the accounts of the taxpayers generally. 108[92] As Dr Harley, counsel assisting the Court, submitted, the Judge seems to have had in mind a certain minimum percentage of penalties that should be remitted to take account of the Commissioner's responsibility109 for the level of penalties and to take into account the effect of the litigation and the taxpayers' financial circumstances. We do not read this as suggesting that this deteriorating financial situation was in any way the fault of the Commissioner. Indeed, such a finding could not rationally have been made. [93] Given the long history of this matter, 110 rather than undertaking the laborious process of consideration set out above, a pragmatic course may be merely to reduce penalties by a certain percentage across the board. In this regard, a reduction of 15% would, in our view, more than fulfil the requirements of the first judicial review judgment. In saying this, we are not to be taken as mandating this pragmatic approach. Rather we raise it as an alternative solution. It is for the Commissioner to choose whether or not he wishes to adopt this pragmatic approach.Budhia decision[94] As noted above at [3], the Commissioner did not appeal against the first judicial review judgment. Instead, he (through Mr Budhia) proceeded to attempt to comply with the directions in that judgment.107 We note only a portion of penalties should be remitted even for the period of inordinate delay as the taxpayers could clearly have paid the taxes rather than waiting for the result of the investigation and, as we have noted above, this is a relevant consideration (even in terms of the first judicial review judgment).108 We are not to be taken as suggesting, however, that the reductions should necessarily be the same for all taxpayers.109 For example in causing delays and making representations as to the continuation of the arrangements and as to the negotiable nature of the taxation liabilities.110 And the risk that the taxpayer's deteriorating financial position will result in severely reducing the amount available for collection in any event.[95] With regard to the re-registration of Anolbe, 111 Mr Budhia decided to accept Mr Brighty's recommendation to re-register Anolbe as from 8 March 1996 (the original date it was de-registered). He decided to process the 28 returns filed on 27 March 2000 112 and reversed the GST assessment for output tax on the deemed supply of 392 Manchester St that had been made on de-registration. These were effectively the recommendations made by Mr Brighty. 113[96] Of the 28 returns filed on 27 March 2000, 24 were accepted. As to the remaining four, Mr Budhia considered the claimed input tax credits referred to in the first judicial review judgment. 114 He also considered an additional return filed on 13 February 2006 by Anolbe for the period ended 30 September 2004, making a claim for a GST input tax credit of $38,888.89 in respect of the acquisition of 55 Augusta St. In his report, Mr Budhia outlined some issues relating to the ownership of the various properties, including what he saw as conflicting evidence on the ownership from Mr Hampton. He noted that Anolbe was not registered with the Companies Office at the time of the purported purchases of the two Augusta St properties and the Kahu Rd property. [97] Mr Budhia concluded that Mr Hampton (and not Anolbe beneficially) owned the property at 67 Augusta St.115 With regard to 8 Kahu Rd, Mr Budhia considered that this property was Mr Hampton's personal residence and therefore no taxable activity was conducted from it. Mr Budhia was also not satisfied that it was other than Mr Hampton who owned the property. Further, even if Anolbe was entitled to an input tax credit, this was only available to the extent payment had been made and there were doubts as to this. There were also doubts as to the valuation of this property and that at 67 Augusta St. As to the input tax claim relating to 55 Augusta St, Mr Budhia considered this property too was the property of111 See [82](a) above.112 See at [56] above.113 See at [5] above.114 Set out at [56] above.115 But see the Judge's acceptance in the first judicial review judgment that Anolbe had purchased 67 Augusta St: see at [55] above.Mr Hampton. As a result of these decisions, the input tax claims by Anolbe for those periods and with regard to those properties were rejected. 116[98] Mr Budhia did, however, accept Mr Brighty's recommendation that the Commissioner ignore the "imperfections" in Anolbe's GST input tax credit claims for the GST periods ended 31 March 1993 and 30 November 1993.117 He also accepted Mr Brighty's recommendations that: (a) The credits that arose in Anolbe's GST periods ended 31 March 1993 and 30 November 1993 which had previously been transferred against its GST periods ended 31 March 1994, 31 March 1996 and some 16 other periods between 1 April 1993 and 31 March 1996, be transferred against Chesterfields Partnership's GST period ended 30 June 1990, this being to the taxpayers' best fiscal advantage. (b) The last 34 months worth of penalties accrued on Chesterfields Partnership's GST period ended 30 June 1990 be "remitted" on account of transfers that took place which were not to the taxpayers' overall best fiscal advantage: ie they went to periods in the future while penalties continued to accrue on Chesterfields Partnership's debt relating to the GST period ended 30 June 1990. It was noted that this adjustment could not take place until final payment and that it would not actually be a remission. Rather it would be a cancellation. (c) That transfers should be made using the transfer date rules at that time which provided for the effective date of the transfer to be the day after the end of the period in which the GST credit arose. This had the effect of reducing penalties incurred after the effective date of payment in the period to which the credit is transferred. [99] With regard to any further remission of penalties, Mr Budhia said that he agreed with Mr Brighty:116 Mr Budhia's findings on these issues differ in some respects from the series of reports written by Mr Kettley: see fn 7.117 See at [53] above.(a) On balance, no further remission of penalty for Chesterfields Partnership's GST period ended 30 June 1990 was warranted. (b) In relation to Chesterfields Partnership's GST period ended 31 December 1992 118 and the debt that arose in the Partnership's name through the insistence of Mr Hampton and Ms Sisson in May 2000 in successfully trying to avoid Chesterfields Preschools Ltd being liquidated, the fact that no attempt was then made to pay the outstanding debt by either partner in Chesterfields Partnership and that they had used the re-creation of it as a means to avoid the liquidation of Chesterfields Preschools Limited, led to the conclusion that there should not be any remission of penalties in respect of this period as there is nothing fair or equitable to lead to this decision. (c) There should be no further remission of penalties for Chesterfields Partnership, Chesterfields Preschools Limited, Anolbe and Mr Hampton. Mr Budhia commented that it was difficult to see what was fair or equitable enough to warrant any further reduction of penalties, other than those already recommended. It was also considered that, had an application for remission been looked at back during the period 1993 to 1998, the Department would not have agreed to any remission in the absence of payment of the core tax and any penalties that it was not prepared to remit.118 The Commissioner in his supplementary memorandum of 21 July 2010 explains what occurred with regard to that GST period as follows: in summary, it was contended by Mr Hampton in 2000 that the Commissioner had transferred more funds from Chesterfields Preschools Ltd's September 1993 GST period to the Chesterfields Partnership's debt than had been authorised by the taxpayers in 1993. Accordingly, in 2000, a credit balance was created in the tax accounts of Chesterfields Preschools Ltd in the sum of $7,261.26 and identified as being available to that company from 1 October 1993. An equivalent debit balance was created in the tax accounts of Chesterfields Partnership and the 31 December 1992 period was selected as the period to hold the debit. The $7,261.26 reverse transfer created a reconstituted debt in the December 1992 period, with penalties accruing on that amount from 1 October 1993. The Commissioner emphasises that, whichever Chesterfields Partnership GST period had been selected to effect the reverse transfer, the amount of $7,261.26 plus penalties would still have been owing. Mr Hampton maintains that the effect of the original transfer of the $7,261.26 was made in error by Mr Barry. It was also used to pay penalties that should have been cancelled in terms of the Thornley arrangement. We note, however, that there was, as far as we can ascertain, still core tax owing for the June 1990 period at that time. Therefore we do not accept Mr Hampton's submission.[100] Mr Budhia then said:I would also note that the [taxpayers] have hardly been without fault in this case. While we accept the judgment of Justice Fogarty, there is no compelling reason to remit any further amounts than have been suggested by [Mr Brighty] as above. The [taxpayers] have made very little effort to comply and would appear to have gone out of their way to avoid payment in some instances, e.g. Chesterfields Partnership.[101] Mr Budhia went on to consider s 183A of the TAA but saw no reason to revisit Mr McNeill's conclusions on that section. 119 In terms of s 6 and 6A of the TAA, 120 Mr Budhia said:I agree with the conclusion on section 183A referred to in the 28 May 2007 report. No relief is available to the [taxpayers] for the relevant period specified by Justice Fogarty. I also agree that the [taxpayers] need to meet their statutory obligations. I do not consider that there are any grounds made out for relief under sections 6 and 6A of the Tax Administration Act 1994. Accordingly, I do not make any recommendation under these statutory provisions.Revised taxation position after Budhia adjustments[102] Below is a table setting out the effects of the Budhia adjustments:Pre 1 April 1997 debt Reductions Debt after recommended reductionsChesterfields Partnership 121 1,529,808.23 (1,010,733.33) 519,074.90 David Hampton 95,409.46 (0.00) 95,409.46 Chesterfields Preschools Ltd 13,723.72 (0.00) 13,723.72 Chesterfields Preschools Partnership 0.00 (0.00) 0.00 Anolbe Enterprises Ltd (subject to challenge) 200,985.04 419,526.52 620,511.56 Additional effect of Budhia decision (re 392 Manchester St) (191,645.47) (191,645.47)Total pre 1 April 1997 debt 1,839,926.45 (782,852.28) 1,057,074.17[103] It is useful at this point to add a table prepared by the Commissioner after the hearing at our request recording the main Anolbe input tax claims and their fate, both before and after the Budhia report.119 See at [63] above.120 See at [83]a) above.121 These figures have not been adjusted for the error discovered after the hearing. See fn 20.Table of major Anolbe input claims and their resolutionGST return for period ending Date filed Property to which claim related Amount claimedMarch 1993 27 April 1993 392 Manchester Street, Christchurch $21,888.89Result of claim: where and when credits appliedClaim initially placed under audit. While under audit: - On 16 July 1994, $10,042 transferred from Anolbe to Chesterfields Preschools Ltd at Mr Hampton's request. Available credit reduced to $11,846.89. - On 21 April 1998 (Anolbe having been struck off the Companies Register in March 1996 and having de-registered for GST purposes in March 1997), $11,846.89 applied to pay default assessments in several GST periods, raised due to Anolbe's failure to file returns. When returns were filed (March 2000) the assessments were nil and residual credit amount of $11,846.89 revived. On 17 December 2004, following restoration of Anolbe to the Register, Commissioner reassessed May 1993-March 1996 periods for omitted outputs. Assessments immediately disputed (challenge proceeding in HC currently stayed pending decision of this Court). Commissioner applied residual credit amount for March 1993 to set off disputed debt in May 1993-March 1996 periods, with effective date of 1 April 1993. Post-Budhia, the $11,846.89 previously transferred against Anolbe disputed debt was re-applied to Chesterfields Partnership's June 1990 GST debt. November 1993 20 January 1994 101 Bishop St, Christchurch $14,777.78Result of claim: where and when credits appliedClaim initially placed under audit. While under audit, on 21 April 1998 (Anolbe having been struck off the Companies Register in March 1996 and having de-registered for GST purposes in March 1997), $14,777.78 applied to pay default assessments in several GST periods, raised due to Anolbe's failure to file returns. When returns were filed (March 2000) the assessments were nil and credit amount of $14,777.78 revived. On 17 December 2004, following Anolbe's restoration to the Register, Commissioner reassessed May 1993-March 1996 periods for omitted outputs, including failure to account for sale of 101 Bishop St.122 Assessments immediately disputed (challenge proceeding in HC currently stayed pending decision of this Court). Commissioner applied credit amount of $14,777.78 to set off disputed debt in relation to sale of 101 Bishop St. Post-Budhia, the $14,777.78 previously transferred against Anolbe disputed debt was re-applied to Chesterfields Partnership's June 1990 GST debt. September 1999 27 March 2000 67 Augusta St, Christchurch $17,777.78122 Mr Hampton appears to think that [159] of the first judicial review judgment, in setting aside the December 2004 decisions relating to the Anolbe re-registration, also set aside the assessment for the March 1994 period relating to 101 Bishop St. While this may strictly have been the case, we consider that the assessment must be treated as having been revived by the re-registration of Anolbe by Mr Budhia. The pragmatic course may be for the disputed assessment relating to 101 Bishop St to be dealt with at the same time as the Anolbe sham issues. See at [130]–[132] and [134] below.March 2000 27 March 2000 8 Kahu Road, Christchurch $46,666.67 September 2000 15 July 2004 63 Augusta St, Christchurch $27,777.77 September 2004 13 January 2006 55 Augusta St, Christchurch $38,888.89Result of claimsAll four claims disallowed as a consequence of Budhia decision dated 5 June 2007.Mr Brighty's report[104] Given Mr Budhia's reliance on Mr Brighty's report, it is worth briefly noting some of Mr Brighty's reasoning. First, Mr Brighty operated on the basis that the arrangement with Mrs Thornley did not include the debt for Chesterfields Partnership's GST period ended 30 June 1990. He also considered that the Thornley arrangement was not satisfied by the taxpayers, it was not extended by Mr Barry and that no arrangement existed with Mr Aronsen, except to the extent that recovery action (in respect of debts existing at that time) was deferred pending consideration of the GST input tax credits claims.123 Importantly, Mr Brighty considered that, for the purposes of his report, it was not necessary to reconsider the tax account position "as if" any arrangement had been adhered to. [105] Mr Brighty said that he did not understand Fogarty J to be saying that deferral of recovery action automatically equates to remission or that deferral of action by the Commissioner equates to a "repayment arrangement". Mr Brighty noted that much of the debt accumulated by the taxpayers had arisen solely as a result of the failure to file and to pay on time. He considered it significant that much of this debt had arisen after the "deferral" discussions. Where debts had accrued outside the context of any setoff discussions, Mr Brighty considered that the debt accumulation was self-inflicted and the taxpayers must bear sole responsibility. [106] Mr Brighty considered that the ability to pay was an important consideration which should not be lost sight of. He considered it fair to say that, throughout the Commissioner's dealings with the taxpayers, there was never a time when they could not have settled the debts owing, for the simple reason that they had the assets with123 It follows from what we have said above that Mr Brighty was mistaken in these assumptions.which to achieve settlement. The fact they did not do so was, Mr Brighty considered to be, of the taxpayers' choosing. While the escalation of penalties might be unpalatable the reality was that it was not a position of the Commissioner's choosing. Penalties are imposed by operation of law, against amounts which are themselves settled (and, with the exception of one group of periods in this case were not in dispute). [107] Mr Brighty noted that the IRD policy on remission under s 182 was to consider whether, having regard to all the facts, it was "fair" to grant the remission. The policy also provided that no amount was to be remitted until all debts were paid. As to remission of penalties for the Chesterfields Partnership for the period ended 30 June 1990, it was considered that there were various factors regarding this period that needed to be remembered. These were: (a) The tax arose by what basically amounted to a fraud on the Revenue, accomplished by misleading the Commissioner over the value of the property being transferred and Mr Hampton was successfully prosecuted in that regard. (b) The TRA hearing was determined by consent and the objector was ordered to pay $33,333.34 "forthwith". It had not been paid. The debt for this period was not part of the Thornley arrangement. (c) Although the IRD had during the 1990's issued notices showing an incorrect amount due for this period, because the Department computer system had not been updated to take account of the TRA consent order until 7 February 2000, Mr Hampton knew the correct amount of the core tax owing as he had consented to the TRA order. (d) During this whole time the various taxes had been outstanding, the taxpayers had been continuing to expand their business empire and their assets had been increasing in value.[108] With regard to the other entities and to Mr Hampton personally, Mr Brighty took into account a number of considerations in concluding that it was not fair and equitable to remit further penalties. These included: a) The debt officers were told that the tax would be paid by credits arising in other taxpayers' names, namely Anolbe. b) During this whole time it was open to the taxpayers to come in and say 'the estimated refund is $x and I will pay you the difference of $y now'. They never did. c) The taxpayers had always fought any legal action for recovery of the debts. d) It had been legal action or threats of legal action that had been most productive in obtaining payment against the debts owing. e) During the whole time that the various taxes had been outstanding the taxpayers had been continuing to expand their business empire and their assets had been increasing in value. f) There had been continued non-payment of the taxes.Second judicial review judgment[109] We now turn to the second judicial review judgment. 124 The application for judicial review succeeded and, in summary, the findings of the judgment were as follows: a) Fogarty J held that he was satisfied that the Commissioner had not deliberately disobeyed any order or direction of the Court. But he considered it arguable that the Commissioner had "ignored" the directions of the Court.124 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,148 (HC).b) There were two main errors identified in Mr Budhia's response to the first judicial review judgment: the failure to recognise the in-substance continuation of the Thornley arrangement and the failure to remit further penalties in light of the actions of the Departmental officers (under ss 182 and 183A and ss 6 and 6A of the TAA). c) The determination of Mr Budhia was set aside, as were any consequential decisions. d) The Commissioner was redirected to act upon the first judicial review judgment and to reconsider the matters in accordance with the High Court's directions in that judgment, being bound to the reasons of both the first and second judicial review judgments. e) The late discovery125 of the Aronsen notes was seen as a relevant factor to be taken into account in the Commissioner's reconsideration. Leave was reserved to apply to open this matter up to further argument and for the High Court to read the affidavits on the subject.126f) The Judge said that, if the Anolbe sham issues were not settled within one calendar month of this judgment, they were to be set down for hearing in the High Court. g) The stay remained in place. As noted above at [7], the Judge held that, until the Commissioner had properly reached an outcome within the question of degree the Court would not allow the Commissioner to obtain or enforce judgment debts against the taxpayers. To do so125 The Commissioner denies that these were discovered late and says in any event that the taxpayers were aware of the content of those file notes. We are unable to make any findings on this given that it was not fully dealt with by the High Court. We do remark, however, that it is difficult to see how any late discovery of the file notes (even if that were the case) can affect penalties arising before the litigation commenced and we have some difficulty in understanding the relevance after the litigation commenced (and how it could be ruled upon without having read the affidavits).126 Affidavits had been filed on this issue but the Judge did not read them. As this was the case we have not read the affidavits either.would, in the Judge's view, be to enforce the tax statutes beyond the intention of Parliament. [110] As to the errors in Mr Budhia's response, Fogarty J in the second judicial review judgment said that the first judicial review judgment had made a careful examination of the discussions held between various IRD officers and Mr Hampton and examined to what extent "understandings were reached and/or commitments made". The Judge concluded: 127In broad terms while the [taxpayers] did not establish the "arrangements" that Mr Hampton was contending for, the Court found that he had received sufficient assurances/commitments by Inland Revenue officers, which for all practical purposes had the same effect as arrangements.[111] With regard to the remission of penalties, the Judge noted that Mr Budhia's decision did reduce the total indebtedness of the taxpayers but "not significantly from the point of view of the [taxpayers], considering their means". The Judge recognised that, in respect of the Anolbe credits that Mr Budhia allowed, 128 he had transferred these against the Chesterfields Partnership GST period ending 30 June 1990, this being to the taxpayers' best fiscal advantage. However, a consequential effect of that decision was that new debts arose for Anolbe in the GST periods ending 31 March 1994 and for some 17 other periods between 1 April 1993 and 31 March 1996. The effect of the decision had thus been to shift the penalties and interest from the Partnership to Anolbe. The Judge noted that Anolbe had acquired $419,526.52 in terms of overall additional debt. [112] The Judge then went on to consider whether the directions set out at [82](c) and (d) had been complied with. He noted that Mr Budhia considered that there was no case for any further remission of penalties for the taxpayers. The Judge considered that, in coming to that conclusion, Mr Budhia (and Mr Brighty) had misapplied the first judicial review judgment. The Judge said that the comment by Mr Brighty set out at [98] that a deferral of recovery action did not equate to a repayment arrangement was inconsistent with the first judicial review judgment.129127 At [14] of the second judicial review judgment.128 See at [98] above.129 At [37].He held that the first judicial review judgment meant that the taxpayers could rely on the deferral of recovery action to excuse their failure to make timely payment. 130[113] The Judge also said that Mr Budhia was wrong to consider that the directions set out at [82]d) were confined to remissions arising with regard to Anolbe. That was too narrow a reading of the first judicial review judgment. 131 The Commissioner should have (under that direction) considered more broadly the position of all taxpayers at the time of the Aronsen decision not to pursue amounts owing. 132[114] Turning to the direction relating to s 183A, the Judge said that what was required under that direction was not a reconsideration of the grounds advanced and rejected with regard to the previous application. 133 That refusal had, after all, been upheld in the first judicial review judgment. What was required was consideration of remission relating to the period that had elapsed since the litigation had been proceeding. 134 The Judge held that the taxpayers were largely successful in the first judicial review and the "accumulation of interest and penalties occasioned by the litigation [could] hardly be laid at the feet of the [taxpayers]".135 The Judge said that the Commissioner in this context could not rely on the taxpayers' failure to comply. He said: 136That is not a correct interpretation of [the direction set out at [82]c) above] in these circumstances. As the judgment records, Mr Hampton took a naive and confident view that the GST refunds would be recognised. As a result he did not pay the total core debt including the interest and payments. But in the context of his discussions with Mr Aronsen, Mr Barry and with Mrs Thornley, and the assurances and views they expressed to him, his conduct cannot be now characterised by the Commissioner as a failure to comply. [Emphasis added][115] Turning to ss 6 and 6A of the TAA, the Judge said that these sections should have been used to comply with [155] of the first judicial review judgment: 137130 At [45]–[48].131 At [52] and [53].132 At [59].133 Discussed at [60]–[64] above.134 As noted in the direction itself – see at [82]d).135 At [71].136 At [78].137 At [87] and [88].In this case [[155] of the first judicial review judgment] was the final reconsideration. Where, as here, for essentially technical reasons, Mr Budhia had found limits on his discretion in s 182 and in s 183A, an appropriate reading of all the directions together, with [155], should have focussed the mind of the Commissioner's officer on delivering the obligations recognised in [that paragraph] via these two sections, ss 6 and 6A. That would in no way compromise the integrity of the tax system, for the Commissioner was bound as a matter of law to follow the reasoning of the [first judicial review] judgment. It is because of past conduct by his officers that the Commissioner has the obligations collected in [155]. Discharging these will protect the integrity of the tax system. The Commissioner's officers did not see it that way. They fell back on standard office policy guiding the exercise of ss 6 and 6A decisions. It would appear from the materials that were canvassed in oral argument that while the Commissioner is prepared to compromise tax disputes where the outcome is doubtful if it goes to Court, the Commissioner will not compromise debt collection. In this regard the Commissioner's usual approach to debt collection is that once the statute raises debits for interest and penalties they are tax to be collected. That interpretation of the taxation legislation was rejected in the [first judicial review] judgment, in the context of these facts. So it is an error of law to apply the usual policy in disregard of the directions and reasons of the [first judicial review] judgment.[116] The Judge also noted the rejection by Mr Budhia of the Anolbe claims referred to at [56] above. The Judge said that when Mr Budhia rejected the Anolbe returns he had to be finding that the relevant documents were either shams or ineffectual. The Judge said that, as Mr Budhia was dealing with documents created with reference to the law of trusts, the ineffectual argument was unlikely to succeed, as the law favours recognising a trust where there is an attempt to create one. The Judge went on to note that, at no stage in Mr Budhia's reasoning did he refer to the sham test. Rather, Mr Budhia's reasoning proceeded on the basis of an enquiry into the credibility of Mr Hampton. 138 The Judge considered that Mr Budhia did not remind himself that he must find positively that Mr Hampton was creating documents (such as the declaration of trust) knowing that they were false, and intending them to conceal the true nature of a transaction.139[117] The Judge went on:[31] However, in the oral argument the issue really focussed on whether or not Mr Budhia had been consciously applying the sham test, with the stringency embedded in it. It is difficult for the Commissioner to prove that structures are shams, because of the need essentially to138 At [23] of the second judicial review judgment.139 At [38].prove dishonesty.140 Mr Budhia's analysis seemed to proceed on the basis that it was a question simply of Mr Hampton's credibility. Witnesses can be found to be not credible without finding that witnesses were or are dishonest. When the decision-maker appreciates that a sham finding can only be made after a finding of dishonesty the line of enquiry can often be different, and in my view would be in this case. I am left with a clear view that Mr Budhia's decision-making is in error of law because he had not applied the sham test ... [34] This is a significant error of law of very material consequence to the total indebtedness of the [taxpayers]. [Emphasis added][118] Further, the Judge noted that Mr Budhia's finding that Anolbe was not the owner of the various properties did not mean that the transactions did not take place. The three properties were purchased from a third party. It followed that there should be GST input credits derived by Mr Hampton, who Mr Budhia said was the owner. However, Mr Budhia did not go on to consider recognising those credits.The Commissioner's issues[119] The Commissioner has a number of issues with the second judicial review judgment. He says: a) The first judicial review judgment rejected the proposition that the Thornley arrangement was still on foot. The second judicial review judgment therefore extended the findings of the first judicial review judgment in that regard. b) The second judicial review judgment was wrong to hold that further remission under ss 182 and 183A was warranted. c) The second judicial review judgment was wrong to require the use of ss 6 and 6A of the TAA. d) The Anolbe sham issues should have been dealt with by the statutory challenge procedures.140 This is an odd remark. The onus was not on the Commissioner but on the taxpayer.e) The Budhia decision should not have been set aside in its entirety (even if the Commissioner's other submissions are not upheld).The existence of an arrangement[120] The Commissioner submits that Fogarty J extended the terms of the first judicial review judgment when in the second judicial review judgment he held that the first judicial review judgment had held that an in-substance arrangement existed.141 It will have been clear from our discussion of the first judicial review judgment that we do not accept this submission.Sections 182 and 183A of the TAACommissioner's submissions[121] The Commissioner submits that Mr Budhia's decision relating to s 182 was entirely appropriate. Further, the first judicial review judgment did not hold that s 183(1A)(c) was inapplicable "in the circumstances". On the contrary, the first judicial review judgment accepted that the original application foundered on the strict limits on powers of remission in s 183A, including the requirement in s 183A(1A)(c). Those limits did not alter and the taxpayers' failures were not corrected between the first and second judicial review. Nor did the first judicial review judgment find there had been full compliance with taxation laws. It could not plausibly have done so. [122] Fogarty J's views of the "proportionate" outcome notwithstanding, it was not competent for the Commissioner to disregard the relevant (and ongoing) failures of the taxpayers to file tax returns for numerous entities, tax types and tax periods. Further, even had the taxpayers' failures to comply been corrected by the time of Mr Budhia's decision, it could hardly be said that the exercise of the Commissioner's residual discretion (in light of his broader ss 6 and 6A141 See at [110] above.responsibilities) was so unreasonable as to be "demonstrably one which Parliament could not have intended".Discussion[123] As we noted in our discussion above,142 we consider that, in the first judicial review judgment, the Judge was expecting the Commissioner to remit penalties to the extent necessary to honour the in-substance arrangements related to the Chesterfields Partnership that he had found existed. More generally, the Judge was expecting the Commissioner to ascertain the extent of the Audit delays and to apportion blame for those delays and, against that background, make a decision on remission under s 182. 143[124] The Judge explicitly noted that he had not, in the first judicial review judgment, asked the Commissioner to reconsider the McNeill decision on s 183A144(which he had after all upheld in the first judicial review decision). He had, however, asked for a consideration under s 183A of the period since the litigation was in train (and this was clear from the terms of the order). That had not been done. [125] We do note, however, that the first judicial review judgment held that the Commissioner had to accept a share of the blame for the taxpayers' defaults and that the decision not to collect tax (and the related assurances) were effectively held to have excused (at least to a degree) the taxpayers' failures to pay. 145Sections 6 and 6A of the TAACommissioner's submissions[126] The Commissioner submits that the direction set out at [83]a) above was not on its face a direction to reconsider, or for that matter to make, any particular142 At [86].143 Discussed above at [90].144 See at [63] above.145 At [112] above.decision in relation to the taxpayers under ss 6 and 6 A of the TAA. Even read with the passage set out at [79] above (which contained the first suggestion by Fogarty J that ss 6 and 6A might feature in the relief package), the most that could be reasonably taken from the direction was the relevance of pragmatic non-collection considerations in light of the deteriorating financial position of the taxpayers. Mr Budhia therefore went further than either the direction or the relevant reasons in considering whether ss 6 and 6A offered any grounds for "further relief" from tax that would otherwise be collectible. [127] The Commissioner submits that Fogarty J was clearly correct to refrain from positively dictating the outcome of decision making under ss 6 and 6A, but clearly wrong to reject the outcome reached by Mr Budhia because it was inconsistent with his own views on the merits of the particular case. The Commissioner was entitled to weigh his responsibilities under ss 6 and 6A as bearing on his powers and duties in the way he did in relation to the first five directions and must have been entitled to conclude, as the outcome of that process, that the remaining debt could be collected without violence to the integrity of the tax system. Neither ss 6 and 6A of the TAA nor s 4 of the JAA permit the Court to substitute "some generalised notion of fairness" for tax liability imposed by Parliament and lawfully assessed by the Commissioner.Discussion[128] We do not accept the submission that Fogarty J was substituting his notion of "fairness" for the penalties imposed by Parliament. He was requiring ss 6 and 6A to be used 146 to ensure that what he had found to be in-substance arrangements by the Commissioner were honoured, as well as to deal with the inordinate delays on the part of the Commissioner (and related assurances) and with the effect of the review proceedings. The review proceedings had in turn been necessitated by the delays relating to Anolbe and by the Commissioner's failure to honour the in-substance arrangements. That reasoning accords with that in the first judicial review146 To the extent that ss 182 and 183A were unavailable.judgment. 147 We accept Dr Harley's submission that ss 6 and 6A can be used to meet the Commissioner's obligations under the first judicial review judgment.148The taxpayers cannot be left without a remedy for the clear defaults found by Fogarty J in the first judicial review judgment. 149[129] The first judicial review judgment also required consideration of the deteriorating financial situation of the taxpayers. We do not consider that Fogarty J was suggesting that the Commissioner is obliged to limit the collection of taxation owing (including penalties) to avoid the bankruptcy or liquidation of a taxpayer.150The Commissioner may of course take the financial circumstances of a taxpayer into account (for example as part of a general arrangement involving all creditors or if he or she takes the view that this is in the best interests of maximising the collection of tax long term) but it is not an obligation.Anolbe sham issues[130] The Commissioner submits that Fogarty J was wrong to order that the Anolbe sham issues be set down for hearing before the High Court. In the Commissioner's submission, these should have been dealt with by way of the statutory challenge procedures. [131] We accept the Commissioner's submission that judicial review proceedings will rarely be appropriate in taxation matters. 151 We also accept the submission that the rejection of the four Anolbe returns could have been challenged by way of the statutory challenge procedures and Anolbe had been informed of its rights in this regard at the time the returns were rejected. Any statutory challenge is now out of147 Discussed above at [79]–[81].148 Our judgment in this case cannot be taken as providing any guidance on the scope of ss 6 and 6A of the TAA outside of their ability to be used in implementing the first judicial review judgment.149 We note that we are not to be taken as agreeing with the first judicial review judgment in this regard: See at [138]–[154] below.150 See further at [92] above.151 Westpac Banking Corporation v Commissioner of Inland Revenue [2009] NZSC 36, (2009) 24 NZTC 23,435.time unless a purported challenge (which, as we understand, was filed before the relevant decision) is upheld.152[132] We therefore set aside Fogarty J's order that the Anolbe sham issues be set down for hearing before the High Court. For completeness, we remark that it is implicit in the Judge's findings that the Commissioner was required to consider (if on reconsideration he persisted in the view that Anolbe was not the owner of the properties) whether input tax deductions were available to any other taxpayer, including Mr Hampton. In our view, this should now be done.Setting aside of Budhia decision[133] The Judge set aside the whole of Mr Budhia's decision. This included the decision to re-register Anolbe from the date it was originally de-registered. Mr Budhia's decision in that regard appears to be in accordance with the direction set out at [82](a) and (b) and should not have been set aside. 153[134] As a consequence, we are of the opinion that the decision relating to the re- registration of Anolbe should be re-instated. This has the effect of re-instating the decisions on the 28 returns and on 392 Manchester St, as well as the assessment of output tax relating to 101 Bishop St. 154What should happen now?[135] Given the level of confusion there has been with regard to the directions in the first judicial review judgment, we consider it appropriate to give some more guidance on what should occur on the Commissioner's reconsideration on the remission of penalties, as required by the second judicial review judgment.152 We are not to be taken as making any comment on whether that purported challenge is valid or not. We accept that in Fogarty J's decision of 31 October 2007, referred to at [6] above, a second judicial review was heralded as one possible means of challenging the Budhia decisions. However, this judgment was after the end of the statutory timeframe. It thus cannot provide any excuse for not using the statutory challenge procedures.153 The taxpayers have no issue with the appeal being allowed to this extent.154 See above at [95]–[96] and at fn 122 above. A challenge to the assessment of output tax for 101 Bishop St is, we understand, currently before the High Court (but stayed pending the outcome of this appeal).[136] As noted in our discussion of the first judicial review judgment, 155 Fogarty J held there to be an in-substance continuation of the Thornley arrangement (with all penalties remitted). As to the June 1990 period, we have noted the conflicting findings 156 and have concluded that the first judicial review judgment must be taken to have held that this period should be settled for the agreed sum of $33,333.34 with penalties up to the date of payment (or credit transfer) being left in place. 157Mr Budhia's calculations should therefore have been done on this basis. [137] After the hearing, we asked the Commissioner to recalculate the Chesterfields Partnership GST liability on the assumption that the June 1990 GST period was settled for $33,333.34 and that no penalties were to be added to that figure and that all the other GST periods up to May 1993 (including the December 1992 period) were settled for $36,335.06 (with no penalties).158 The Commissioner was also asked to adjust these primary calculations to produce two alternative scenarios: (a) Alternative scenario 1, in which the primary calculations include penalties accrued in the settled periods up to 16 August 1993. Those calculations are adjusted to reflect the deferrable/non-deferrable tax distinction. (b) Alternative scenario 2, in which the primary calculations include penalties accrued in the settled periods up to the effective date of any credit transfer. Again, those calculations were adjusted to reflect the deferrable/non-deferrable tax distinction. [138] In completing all the calculations the two Anolbe credits (for the March 1993 and November 1993 GST periods respectively) 159 and the Chesterfields Preschools155 See, for example, at [28], [43] and [88] above.156 At [88]b).157 See at [28], [40], [43] and [88]b) above.158 This is a very slightly lower total figure than the $36,335.08 figure referred to above because the Commissioner understands the references to the latter figure in the Department's documents to have reflected an error in addition of the component amounts.159 Since the hearing Mr Hampton appears to be taking issue with the transfers of the Anolbe credits to the Chesterfields Partnership but their transfer seems to us to be required by the Judge's direction in the first judicial review judgment set out at [82]c) above – ie it is to the best fiscal advantage of the taxpayers that these credits are applied to the earliest tax arising.Ltd credit (for the September 1993 GST period) were to be diverted for Chesterfields Partnership's benefit. [139] The Commissioner provided the results of his calculations 160 in a table in a form which allows the results to be compared with the table set out at [102] above:Chesterfields Partnership Pre 1 April 1997 debt [A]12 April 2007 debt after adjustments [B]Change in debt [A – B]Post Budhia figures – per Brighty and Budhia reports $1,529,808.23 $519,074.90 $1,010,733.33 Primary calculations $1,529,808.23 ($723.44) $1,530,531.6767 Alternative scenario 1 $1,529,808.23 $108,066.39 $1,421,741.8484 Alternative scenario 2 $1,529,808.23 $111,904.58 $1,417,903.6565[140] The revised primary calculations in this updated table, while taking into account an additional debt of $179,566.50 in the December 1992 period, 161 also take into account the cancellation of 34 months' worth of penalties in that period recommended by Mr Brighty. [141] The Commissioner notes that the decisions made by Mr Brighty and Mr Budhia were not purely arithmetical but involved the exercise of judgment. If the assumptions made by Mr Brighty and Mr Budhia are changed then there will need to be a further exercise of judgment. The Commissioner submits that this means that it will not simply be a matter of revising the calculations in the manner set out at [139]. While we accept this is the case, we are concerned that, with the160 The Commissioner's calculations were spreadsheet-based. They have not been duplicated in the Inland Revenue systems because "what if" scenarios are not able to be made. The Commissioner endeavoured to ensure that the calculations were as accurate as they could be in the time available and the same methodology was applied for all three scenarios. The detail of the calculations was not provided and so Mr Hampton has not had an opportunity to check the calculations or to comment on their accuracy. Given that the Commissioner does not guarantee the accuracy of the figures provided and we (and Mr Hampton) have not seen the underlying calculations, we do not endorse the figures contained in the judgment. They are provided for illustrative purposes only.161 The Commissioner did not explain in his memorandum where he derived this figure from and so we are unable to endorse it. We do, however, in principle endorse the Commissioner's approach of adjusting for the 2000 reversal of the application of the Chesterfields Preschools Ltd credit to the December 1992 period, discussed above at fn 118. This is because, as we understand it, that reversal took place at Mr Hampton's request while we understand there to have been core tax outstanding for the June 1990 period. Any endorsement of the Commissioner's approach must, however, be provisional as we have not seen the underlying calculations, we have not heard oral argument on the point and we have not had the benefit of the views of the High Court.worsening financial position of the taxpayers, 162 the Commissioner may not be able to collect even the taxation that is clearly due. It follows therefore from what we say above at [136], that the Commissioner could use the Scenario 2 calculations without any further reconsideration (except to the extent that they reflect any penalties accruing on other than the June 1990 debt that arose before the transfer of the Chesterfields Preschools Ltd credit and except for any corrections to the calculations). 163[142] The first judicial review judgment also required the Commissioner more generally to factor in remission of penalties to recognise the Commissioner's responsibility for delay (and the related assurances) and for the effect of the litigation. The Commissioner at the hearing handed up a document explaining the delay in processing the GST returns in the following terms: 164a) The delay is about ten years from 1994 to 2004. The first judicial review judgment at [76] identifies the relevant GST periods for Anolbe. The judgment notes that the refunds were allowed in December 2004. 165b) Of these, only the March 1993 and November 1993 periods are in issue, being the relevant GST periods for which refunds had been marked to pay other debt.166c) The Commissioner sought information regarding these GST claims from Mr Hampton. 167 The Commissioner maintains that no satisfactory replies were received.162 Mr Hampton in his supplementary submissions after the hearing attempted to place the blame for the taxpayers' financial difficulties on the Commissioner. These submissions went beyond the scope of the Court's request for further submissions. We do, however, wish to make it clear that in our view the Commissioner does not bear responsibility for the taxpayers' financial position. To the extent that financial position is affected by taxation debts, this is a direct consequence of the taxpayers' failure to pay the taxes as they fell due.163 We would expect the full calculations to be provided to Mr Hampton for him to provide any comments to the Commissioner before the calculations are finalised.164 We gave the opportunity to Mr Hampton to comment on this after the hearing: see [13] of our Minute of 30 June 2010. His reply concentrated on the issue of 101 Bishop St, see fn 122.165 At [113].166 At [78], [80] and [82] of the first judicial review judgment.167 At [83]–[85].d) Anolbe was struck off the Companies Register on 8 March 1996 and was not reinstated until June 2000. This means that for four years there was no taxpayer. e) Mr Hampton voluntarily de-registered Anolbe for GST in 1997 with an elected effective date of 1995. The Commissioner used the date Anolbe was struck off as the effective date. f) At the time, Anolbe had outstanding GST returns (which were not filed until 27 March 2000). Default assessments had been raised (these were cancelled then reinstated) and the GST tax credits were applied to clear those. g) Thereafter the account was considered closed by the Commissioner due to Anolbe's non-existence. h) Anolbe was reinstated to the Companies Register in June 2000. Mr Hampton sought re-registration for GST prior to Anolbe's restoration to the Companies Register. i) There then ensured a lengthy correspondence between Anolbe and the Commissioner as to the proper GST re-registration date, with the formal application to re-register being made in September 2003. j) It appears that Mr Hampton was ambivalent as to the date of GST re-registration.168k) The GST refund in November 1993 would be offset by a GST obligation arising with regard to the sale of 101 Bishop St in March 1994, effectively offsetting the refund. At best the refund was "available" for four months.169168 The Commissioner refers to a letter from Mr Hampton dated 25 May 2000. We also note that in the same letter Mr Hampton alerts the Commissioner to the sale of 101 Bishop St.169 We cannot resolve this issue as the 101 Bishop St output tax assessment is before the High Court.[143] The Commissioner submits (and we accept) that, while on the face of it there is a ten year delay, once the effects of the Anolbe de-registration and re-registration are removed from the calculation the delay is under three years: November 1995 to March 1996 (16 months) and September 2003 to December 2004 (13 months). 170[144] What is now required is for the Commissioner to apportion blame for that delay. 171 We note in this regard that the Commissioner also needs to factor in the delay resulting from his failure to re-register Anolbe in 2000, which, in the first judicial review judgment, was held to be largely the Commissioner's fault.172 A portion of the penalties relating to the period of inordinate delay should then be remitted 173 across the board for all taxpayers. [145] As a separate exercise, the Commissioner should consider the remission of penalties incurred while the litigation was proceeding. In this regard, the fact that the Commissioner has not been able to collect the tax because of High Court orders is relevant. While the taxpayers could have paid at least the tax that was not in dispute the fact they did not do so cannot, in terms of the reasoning of the first judicial review judgment,174 be placed totally at their door. The Court (and the Commissioner) must take some responsibility. We agree with Fogarty J that the fact that the taxpayers were largely successful in the first judicial review is relevant in that regard.Stay[146] Fogarty J has restrained the Commissioner from collecting any of the taxation owed by the taxpayers until the first judicial review judgment has been complied with. In our view, this is unreasonable. The Commissioner should be able to collect170 We also accept the submission that this coincides with Mr Brighty's 34 month cancellation for the Chesterfields Partnership.171 As noted at fn 106, given the very confusing nature of the taxpayers' affairs, their clear defaults and Mr Hampton's fraud, we would have thought considerable leeway would be accorded to the Commissioner in this regard.172 See discussion at fn 64.173 We refer back to our comments in fn 107 and 108 See also the possible pragmatic solution to the general remission of penalties proposed at [93].174 We are not to be taken as agreeing with that reasoning: See at [149]-[154] below.immediately (at the least) the core tax owing which is not in dispute (and some portion of the associated penalties). [147] We had hoped to have the Commissioner provide calculations in this regard (on the most favourable assumptions for the taxpayers) but it did not prove possible in the timeframe. 175 If these calculations can be provided to the High Court, however, we would expect the order would be varied to allow immediate collection of the undisputed core tax and some associated penalties.Conclusion on judicial review appeal[148] We now summarise, in general terms, our principal conclusions: (a) The Commissioner is bound by Fogarty J's first judicial review judgment. (b) Fogarty J in the first judicial review judgment found two in-substance arrangements existed between the taxpayers and the Commissioner.176He also found the Commissioner partly responsible for the taxpayers' delays in payment, a finding based on departmental delays and related assurances given to Mr Hampton. (c) The first judicial review judgment required the Commissioner to reconsider the taxpayers' affairs on the basis that there were two in-substance arrangements. It also required the Commissioner, in his reconsideration of the taxpayers' liabilities, to apportion blame for the delays and remit or cancel penalties to reflect the department's share of the responsibility for the delays and also the related assurances given to Mr Hampton. 177 The Commissioner failed to do this.175 Given that these penalties relate to core tax which is not under dispute we would have thought that the percentage of any write off of penalties for inordinate delay of the Commissioner would be very small, even taking into account that the Commissioner is bound by the first judicial review judgment. We also see no reason why the normal rules as to collection should not apply to tax (and penalties) in dispute.176 See above at [88].177 However, see above at [93] for the pragmatic course that could be taken to fulfil the requirements of the first judicial review judgment.Fogarty J was thus correct to hold in the second judicial review judgment that the Commissioner had erred in these respects. (e) However, the Anolbe sham issues should have been dealt with by way of the statutory challenge procedures. Fogarty J's order that these issues be set down for hearing in the High Court is accordingly set aside. (f) The Judge wrongly set aside the decision to re-register Anolbe from the date it was originally de-registered, as this was in accordance with the first judicial review judgment's direction. This aspect of the decision is accordingly reinstated, with consequential effects on certain returns and assessments.178Comments on first judicial review judgment[149] We make it clear again that this judgment is predicated on the fact that the Commissioner is bound by the findings of fact and law in the first judicial review judgment because he did not appeal against it. Although this is the case, we take the unusual step of making some comments on some aspects of the first judicial review judgment in case that judgment is treated as having precedential value for other cases. It does not. The decision should be treated as confined to its unusual facts. [150] We do note, however, that there is nothing odd in the finding in the first judicial review judgment that the Commissioner is bound by an arrangement he or she had entered into. The Commissioner has power to enter into arrangements 179and, having done so, must abide by them. Given this, there is also nothing necessarily untoward about requiring the Commissioner to abide by what are effectively representations that an arrangement still subsists. [151] As this is not an appeal against the first judicial review judgment, we do not need to consider whether we would have upheld the Judge's finding that an178 See above at [134].179 Auckland Gas Co Ltd v Commissioner of Inland Revenue [1999] 2 NZLR 409 (CA) at 417.insubstance arrangement existed, in the face of repeated non-compliance by the taxpayers and their failure to pay accepted taxation obligations. We also do not need to consider whether, in the light of that non-compliance, it was open for the taxpayers to rely on the equivocal comments of various IRD officers as being representations as to the continuation of an arrangement, the terms of which they knew they had breached. [152] We comment further that, absent the first judicial review judgment, we would have accepted the Commissioner's submission that a refusal to exercise powers under ss 6 or 6A of the TAA would not normally be a prime candidate for review proceedings. We also would have accepted the submission that the finding in the first judicial review equating a decision not to collect tax with an implied arrangement to remit penalties was surprising. It may be irrational to treat the IRD as a bank 180 (given the high cost of funds) but, if a taxpayer does so, then the consequence is a high cost of money. With any other lender an agreed period of not collecting sums payable would not equate to an agreement to forego interest for that period.181 There is no obvious reason why the Commissioner should be in a different position. [153] Further, absent the first judicial review judgment, we would have accepted the Commissioner's submission that it would be very rare for the powers under ss 6 and 6A of the TAA to be used to remit penalties in circumstances where s 183A does not apply. Possible examples where it might occur are where a dispute exists as to the legal basis for claiming the core tax owing182 or where remission occurs as part of any general (or particular) creditor arrangements in an insolvency or bankruptcy. [154] In a voluntary compliance and self-assessment regime, it is difficult to envisage other circumstances where penalties associated with core tax that a taxpayer knows is owing and which he or she has deliberately not paid would be remitted, whatever the actions of the Commissioner had been. In summary, absent180 See at [65] above.181 Indeed often penalty interest rates would kick in.182 The Commissioner's policy regarding the use of ss 6 and 6A covers situations of settlement of taxation disputes.the first judicial review judgment, we would have found Mr Brighty's reasoning relating to the remission of penalties 183 compelling.Costs judgmentFogarty J's reasoning[155] The costs issues for both judicial review judgments were argued in 2009.184Fogarty J did not order indemnity costs against the Commissioner, accepting that "the first judgment was complex and to a degree open to interpretation" and that the Commissioner's officers did not intend to ignore or disobey the directions of the Court.185 The Judge considered, however, that the IRD officers "did not consider that they were obliged to adopt the reasons underpinning those directions". 186 The Judge said that this was "a significant error of law and in my view was one of the principal reasons for the need for the second judicial review". 187 It was accepted by the Judge that the failure of the Commissioner's officers to give appropriate consideration to the reasoning could not be laid wholly on his officers. 188[156] Fogarty J found that the "complexity" of the first judicial review was sufficient to warrant an "uplift of 50 per cent" under r 14.6(3)(a). 189 This uplift was taken from a blanket Band C costs scale. The 50 per cent figure in the first judicial review was discounted by 20 per cent on the basis that Fogarty J considered that the taxpayers had been "largely successful" in the first judicial review. 190[157] The Judge viewed the second judicial review as an "exceptional case" in which the Commissioner had failed to comply with directions of the Court and taken unnecessary steps, warranting a 75 per cent uplift under r 14.6(3)(b)(i) and (ii)183 As set out at [104]–[108] above.184 Chesterfield Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,504 (HC).185 At [13].186 At [8].187 At [12].188 At [13].189 At [37].190 At [48]–[50].and (d). 191 Once again this uplift was taken from a blanket Band C costs scale and Fogarty J explicitly stated that the exceptional nature of the case justified a reversal of the onus so that the Commissioner would be required to persuade the Court why Band C would not apply to a particular step.192 It was also stated that, while in the normal course the actual costs invoiced should not be considered, the second judicial review was not a normal case. 193 With regard to the uplift, the Judge reasoned that an uplift of 50 per cent could not pretend to come close to current charging, and the second judicial review involved a set of circumstances where a higher award than 50 per cent was justified. 194Commissioner's submissions[158] The Commissioner submits that the High Court erred in relation to both costs awards in: a) reversing the onus of proof in determining the appropriate band; b) applying a blanket Band C classification; c) failing to consider relevant matters such as the conduct of the respondents and considering irrelevant matters such as the actual costs incurred; d) awarding significant and clearly unjustified increases from scale costs; and in e) arriving at total figures that were, in the circumstances, manifestly excessive. [159] In relation to the first judicial review, the Commissioner submits that the High Court specifically erred in:191 At [33].192 At [25], referring to [112] of the second judicial review judgment.193 At [25].194 At [33].a) awarding costs in relation to periods when the taxpayers were unrepresented by counsel; and in b) discounting scale costs (already increased by 50 per cent) by only 20 per cent, despite, among other things, the Commissioner's complete success on five of six pleaded causes of action. [160] In relation to the second judicial review, it is submitted that the High Court specifically erred in justifying Band C costs, and a further 75 per cent uplift from those costs, by reference to the actual costs incurred by the taxpayers.Our assessment[161] We agree that it was for the taxpayers to show, for the first judicial review, why relevant steps in the proceedings meant that there should be a Band C classification (and indeed, based on complexity, a further uplift). As stated by this Court in Paper Reclaim v Aotearoa International Ltd, a blanket assessment for banding is not desirable, nor even possible under the High Court Rules. 195 This Court emphasised that this is especially the case where a party is arguing for a blanket Band C categorisation, and it was stated that, if a party wants other than Band B, that party must demonstrate why a normal time for that particular step would be insufficient. 196 We agree that the Judge gave no proper reasons for his conclusions on banding or the further uplift with regard to the first judicial review. [162] We also agree that costs could not be awarded for periods when the taxpayers were unrepresented by counsel.197 It is not, however, clear from the judgment itself that this happened. 198 Further, the point was not explicitly taken in the High Court. This matter will, however, be able to be addressed when costs are reconsidered in the High Court.195 Paper Reclaim v Aotearoa International Ltd [2007] NZCA 544, 18 PRNZ 743.196 At [35]. See also McLachlan v Mercury Geotherm Ltd (in rec) CA117/05, 4 December 2006 at [62]–[63]; Beach Road Preservation Society v Whangarei District Council (2001) 16 PRNZ 13 (HC) at [8]–[9].197 See generally, Re Collier (A Bankrupt) [1996] 2 NZLR 438 (CA).198 Apart from the two days granted to counsel for "background assistance" at the trial: see at [37] of the costs judgment.[163] We do not accept the proposition that the taxpayers were largely unsuccessful in the first judicial review. Given the fact that in substance the alleged arrangements were held to be in place, Fogarty J was justified in considering the taxpayers had largely been successful in that review. [164] With regard to the second judicial review, we agree that it was for the taxpayers to show why relevant steps in the proceeding meant that there should be a Band C classification. There is no mandate in the High Court Rules for reversing the onus, even for exceptional cases. We also agree that the Judge erred in placing reliance on the actual costs incurred. As noted by this Court in Holdfast NZ Ltd v Selleys Pty Ltd, where increased costs are being considered, the focus must remain on the notional solicitor or counsel appropriate for the category of proceeding, not the actual solicitor or counsel involved or the costs actually incurred by the party claiming costs. 199[165] As stated by this Court in Bradbury v Westpac Banking Corp,200 increased costs can be awarded where there is a failure to act reasonably. Thus, while we accept that the fact that we have dismissed the appeal could justify increased costs under r 14.6(3)(b)(i), we also accept the Commissioner's submission that, if either of r 14.6(3)(b)(i) or (ii) applied, Fogarty J should have considered the extent to which any failure of the Commissioner to act reasonably (as distinct, in particular, from any such failure by the taxpayers) contributed to the time or expense of the proceeding. Only to that extent could any percentage uplift from scale have been justified. 201[166] Finally, we do not agree that the IRD officers considered themselves free to ignore the reasons underpinning the directions in the first judicial review. In our view, they did understand their duties in this regard. They had merely misunderstood the requirements of the first judicial review judgment. This was, in our view, understandable, given, as Fogarty J noted, the complexity of that judgment199 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) at [48]. See also the discussion at [40]–[42].200 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [27].201 In making these comments we are not to be taken as commenting upon whether or not the uplift that was applied by the Judge was appropriate. Whether the uplift was appropriate will have to be considered by the Judge again in light of this judgment and further submissions.and the fact that aspects of it were open to interpretation. 202 This will need to be taken into account in any reconsideration of the costs position. [167] The appeal relating to costs is allowed and the question of costs is remitted to the High Court to be determined in light of this judgment.Basecorp loan appeal[168] By judgment issued on 30 September 2008,203 Fogarty J granted the taxpayers' application (which the Commissioner opposed) for approval to their borrowing of $108,500 from Basecorp (a third-tier lender), secured against property that was subject to the Court's freezing orders in favour of the Commissioner. The terms of the loan exposed the taxpayers to high interest and finance costs and subjected the properties to the risk of diminution of value and loss, as a result of mortgagee sales. [169] The Commissioner appealed against the approval order and this Court stayed execution of the order pending determination of the appeal. Mr Hampton has since indicated that the loan is a "dead duck". However, in the absence of evidence demonstrating that that is so or a consent order rescinding the judgment (as a result of which the Commissioner could safely discontinue the appeal), the Commissioner pursues the appeal, lest the proposal is "resurrected". [170] In summary, the Commissioner submits that Fogarty J erred in approving this secured loan. That is essentially because the Judge: a) Failed, in deciding to grant approval to the loan, to have regard to the apparent or likely insolvency of the taxpayers and their inability to service their existing indebtedness let alone repay it (without further borrowing) and therefore their inability to take on further such indebtedness and to service and repay it. The Judge also failed to take202 See at [155]. The complexity and difficulties of interpretation will also be obvious from our discussion of that judgment above.203 Chesterfields Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,032 (HC).into account the impact of all of this on the secured assets subject to the freezing order and the purpose for which it was imposed; b) Failed to have proper regard to the commercial effects of the proposed loan (and, in particular, the high finance cost of 30% pa or more, albeit met in the first instance by capitalising six months interest), including the risks to the borrower of mortgagee sale and incurrence of compounding interest at a high rate, penalties and costs; c) Undermined the purposes of the freezing order by allowing the asset to be encumbered and thereby jeopardised, with risk of its dissipation and loss and did so in the absence of adequate evidence to support the application. d) Allowed such a secured loan unconditionally, without imposing any mechanism to ensure that that part of the loan was applied only for the purpose of amalgamating titles to land or ensuring that the law firm Minter Ellison Rudd Watts was paid and only those purposes (assuming those purposes were valid purposes). [171] We accept these submissions and in particular that set out at [170]d) above. The failure to provide any assurance as to the use of the borrowed funds was a major reason for this Court granting the Commissioner's request for a stay. In the decision of 13 October 2008 204 this Court said:[9] Immediately after Fogarty J issued his judgment on 3 October 2008, the Commissioner filed an application for a stay in this Court. Given the imminent termination of the High Court stay order, this Court heard from counsel by telephone on Friday 10 October 2003. During that telephone hearing we indicated to counsel that we were minded to decline the Commissioner's application for a stay, so long as arrangements were put in place to provide assurance that the money drawn down from Basecorp was used only to pay legal fees and for the costs associated with the proposal to amalgamate titles of properties subject to the freezing order. [10] As already noted, the Commissioner had already signalled that he would be seeking assurances of that kind in the High Court. We granted a further stay until 5 pm on Monday 13 October 2008, to allow counsel for the204 Commissioner of Inland Revenue v Chesterfields Preschools Limited [2008] NZCA 420.respondents to obtain instructions and to provide undertakings which gave the assurance sought by the Court. [11] Counsel for the respondents filed a memorandum, as required, by 13 October 2008. But it did not contain undertakings of the kind sought by the Court. Counsel noted that he and the respondents had agreed on the terms of a proposed undertaking. But the principal respondent, Mr Hampton, had simultaneously advised counsel that he intended to lodge an appeal to the Supreme Court on behalf of the respondents on the basis that the conduct of the Commissioner on bringing the appeal was unlawful as the Commissioner had failed to disclosed to the Court conduct concealing relevant information. He said that this was not a new concern of the respondents and that it would, to an extent, be traversed in the judicial review proceedings in the High Court next week. He said he had advised the respondents of this and the fact that the issue was not justiciable before this Court or the Supreme Court. [12] However, counsel said he had been advised by Mr Hampton that the appeal would be lodged once this Court's stay decision was available and, in those circumstances, counsel could not logically give an undertaking as this Court had made it clear during the telephone conference on 10 October that any undertaking would be a condition of the application for the stay being dismissed. He also noted that he could not be sure that the respondents would practically allow him to meet the terms of the proposed undertaking (which would require his firm to receive the loan money and ensure it was disbursed only for the authorised purposes). Counsel said that he had advised the respondents of the need for him to explain to this Court why an undertaking could not be given, and that they had advised their understanding of the position and consented to him disclosing these matters to the Court. [13] This left the Court in the position that it had no assurance that the money to be borrowed from Basecorp would be used only for the purposes of paying legal fees and paying for the amalgamation of titles, which were the purposes for which the loan was authorised by the High Court. In those circumstances we accept the Commissioner's submission that it would be wrong to allow the loan money to be drawn down in circumstances where there appear to be valid reasons for the Commissioner to appeal against the decision allowing the loan without safeguards as to the use of the loan money, and the failure to grant a stay would render that appeal right nugatory. We have to say we are surprised by the turn of events, because we anticipate that the sort of assurances we were seeking as a condition of refusing a stay and allowing the loan to be drawn down were very similar to those which the High Court would have been asked to impose in any event. [14] It was for these reasons that we granted the stay order sought by the Commissioner.[172] There has been no change since the stay judgment and accordingly there are no grounds to allow the loan transaction to proceed. The Commissioner's appeal must be allowed.Papprill loan appeal[173] Fogarty J's judgment of 16 March 2010 205 determined an application by the taxpayers for consent to raise finance from Papprill by giving security over a property subject to one of the freezing orders made in favour of the Commissioner.206 Fogarty J noted that the Commissioner: 207[Is] likely to eventually obtain judgment for a significant sum. In the meantime this Court has set its face against IRD having all assets frozen, which was their aim then, and so far as I can tell, continues to remain their aim.[174] Fogarty J granted a brief interim stay of execution of the judgment. This Court subsequently on 30 March 2010 granted a more extended stay of execution "pending the hearing of the appellant's appeal against that judgment or such later date as the Court which hears that appeal may determine". 208 The Court accepted that failure to stay the consent order would render the Commissioner's appeal nugatory and saw this as a "significant factor". 209 The Court saw, on balance, "a reasonably strong case" for granting the stay. 210[175] Mr Hampton, in his affidavit in support of the application relating to the Papprill loan, deposed that the purposes for which the Papprill loan was sought were: a) meeting interest cost on the advance ($15,000); b) meeting associated loan fees ($2,000); c) repaying an advance from Goldband Finance Ltd; d) personal educational fees at Glasgow University, Scotland ($10,000);205 Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008- 409-722, 16 March 2010.206 The property at 67 Augusta St.207 At [5].208 Commissioner of Inland Revenue v Chesterfields Preschools Limited [2010] NZCA 113, (2010) 24 NZTC 24,169.209 At [27].210 At [31].e) meeting living expenses while in the United Kingdom and the expenses of getting to the United Kingdom ($10,500); f) purchase of a vehicle ($5,000); g) preparation of outstanding tax returns ($5,000); and h) development of real estate properties at Augusta St, Christchurch ($7,000).The grounds of appeal[176] The Commissioner repeats his submissions with regard to the Basecorp loan and adds: a) The taxpayers' financial situation must have deteriorated even further. They are unable to service existing loans and Mr Hampton is unemployed. b) The taxpayers obtained, without prior Court approval or notice to the Commissioner, a secured loan from Goldband Finance Ltd, in breach of the freezing order. c) The taxpayers have failed to make full disclosure: for example the National Bank letter of demand, and formal notice. d) The lending is not for the purpose of obtaining legal advice but principally to fund Mr Hampton studying law at Glasgow University and his living expenses in Scotland including the purchase of a car there. Any such expenditure is extraordinary (contrary to the notion of "ordinary living expenses").Our assessment[177] We accept the Commissioner's submissions. The appeal must be allowed.Result and costs[178] The judicial review appeal is allowed but only to the extent the Commissioner's re-registration of Anolbe is confirmed (and as a consequence the decisions relating to 392 Manchester St and the 28 returns filed are reinstated, as well as the decision relating to 101 Bishop St). We also set aside Fogarty J's order that the Anolbe sham issues be set down for hearing, but we require the Commissioner to consider whether input tax deductions were available to any other taxpayer, including Mr Hampton. In all other respects the appeal is dismissed. We refer, however, to our comments on the first judicial review judgment at [149]-[154] and in particular the fact that the first judicial review judgment should not be treated as having any precedential value. [179] The costs appeal is allowed and the question of costs remitted to the High Court to be dealt with in accordance with this judgment. [180] The Papprill loan and Basecorp loan appeals are allowed. The 30 September 2008 and the 16 March 2010 orders of Fogarty J allowing the loans are rescinded. [181] The Commissioner is to pay usual disbursements to the taxpayers with regard to the judicial review appeal. Costs for a standard appeal on a Band A basis plus usual disbursements are awarded to the Commissioner with regard to the costs appeal and the Papprill loan and Basecorp loan appeals.REASONS OF BARAGWANATH J[182] I am grateful for the careful overview provided by Glazebrook and Chambers JJ with which I substantially agree. But, because I consider the first judgment of the High Court did not make factual findings capable of constituting res judicata in certain respects on which the respondents rely, I would have allowed the Commissioner's appeal in full, save on one point. That concerns the need for the Commissioner to make a finding, not in my view made by the first judgment or by Mr Budhia on review, whether the sums of $36,335.08 and $33,333.34 held to beagreed to be payable for general tax liability and GST liability respectively for June 1990 respectively ([88] above) should be treated as paid by reason of setoff against credits in favour of the respondents; and to make consequential adjustments. I consider the issue estoppels extend only to agreement as to the existence of the arrangements and quantum of the respective settlement sums and not to treating those sums as having been paid.The first judgment[183] Since no challenge to the application of the penalties regimes of the Income Tax and GST statutes and their remission procedures may be made save by judicial review, the respondents were procedurally justified in adopting that course for that purpose. [184] Moreover since there was no appeal against the first judgment it is res judicata and, at least in the absence of any argument of overriding illegality, 211 it is to be treated as effective for whatever it has determined despite any error of fact or law. Our principal task is to determine what it decided. [185] At [155] of its first judgment the High Court made certain findings to which I have added comment in parentheses: (a) The Commissioner has to accept some responsibility for the state of the respondents' tax accounts, in particular the accrual of penalties. [But there was no finding of what that responsibility should be.] (b) The Commissioner's officers agreed to recognise certain input tax credits under the GST Act and their application to debits arising under the respondents' accounts. [There was no finding as to what the result of such process would be.]211 See KR Handley Spencer Bower and Handley: Res Judicata (4th ed, LexisNexis, London, 2009) at [8.33] and [17.20]ff.(c) Such officers referred input tax payments for examination under s 46 of the GST Act, thereby (in the Judge's words) "avoiding the obligation to pay them within 15 days", but thereafter wrongly failed to make decisions upon the payments so referred; [The Court made no finding that the ultimate decisions would afford a net benefit to the respondents.] (d) The officers also "failed to respond constructively to [a] request on 23 March 2000 for the re-registration of Anolbe and to process the associated input claims". [There was no finding of what the result of such response would be.] (e) This conduct gave rise to:212a positive duty on the Commissioner to exercise his discretionary powers, including the power to remit penalties on equitable grounds, so as to achieve an outcome where the penalties in fact sought to be collected are proportionate. That duty may also be overlaid by the recent deterioration of the value of the business and call for a judgment under s 6 and 6A of the TAA as to what in fact can be collected. [There was no finding of what the result of such process would be.][186] The High Court gave as its reason for such conclusions that the conduct amounted to failure properly to exercise the powers:213Those powers have to be exercised for their proper purpose. The various neglects or failures cumulatively justify intervention by this Court by way of judicial review directing the Commissioner to complete processing input claims, and to consider associated reduction of penalties and interest payments.[187] Its orders by way of relief included: (a) the Commissioner's decision in respect of Anolbe be set aside;212 At [61].213 First judgment at [156].(b) the Commissioner should reconsider the decision, treating it as made on a specified date; (c) he should consider the legitimacy of all the Anolbe GST returns and other refund claims by the respondents without regard to time bars; (d) he should apply such refunds as are upheld to the best fiscal advantage of the respondents; (e) he should make a decision under s 182 of the TAA recognising that Mr Hampton was led to believe the GST input claims he was lodging would be dealt with to best advantage to the respondents; (f) he should make a decision under s 183A as to remission in respect of the period of the litigation; (g) he might exercise his powers under ss 6 and 6A without derogating from the benefit to the respondents of the foregoing; and (h) the Commissioner's debt collection proceedings were further adjourned pending the outcome of the foregoing.Commissioner's response to the first judgment[188] The Commissioner's officers responded to the first judgment first by a report by Mr Brighty who analysed the decision and made recommendations for review of the assessments. His advice was then substantially adopted by Mr Budhia who in June 2007 as the Commissioner's delegate made fresh substantive decisions.The procedural decision of 31 October 2007[189] A Mareva injunction imposed to protect the Commissioner's position was challenged by an interlocutory application made by the respondents. On 31 October2007 the Judge granted the application. 214 He considered there were serious grounds for contending that Mr Budhia's June 2007 decisions were made in breach of the High Court's first judgment. He stated that one way to challenge that decision was by further application for judicial review. He mentioned among other options that of using the statutory procedure of Notice of Proposed Amendment. 215The second application for judicial review[190] The respondents adopted the judicial review option suggested by the Judge and made a further application.The second judgment[191] The Judge granted the respondents' application for review of Mr Budhia's decision which he set aside. He held: (a) Mr Budhia erred in rejecting Mr Hampton's evidence that he held three properties as agent for Anolbe in the face of documentation supporting that contention. He held that Mr Budhia failed to apply the correct legal test of sham stated in Official Assignee v Wilson, 216 that there must be an intention to conceal the true nature of the transaction. He found there to be error of law and directed reconsideration in the High Court of the decision. (b) Mr Budhia failed properly to apply the direction of the first judgment summarised at [186] above, requiring reappraisal of the application of s 182 of the TAA. (c) Mr Budhia erred in failing to grant relief in terms of the direction in [155] of the first judgment by reading the limitations on ss 182 and 183A in the light of ss 6 and 6A.214 Chesterfields Preschools Ltd v Commissioner of Inland Revenue HC Auckland CIV-2004-409- 001596, 31 October 2007 at [43]–[44].215 TAA, s 89B.216 Official Assignee v Wilson [2007] NZCA 122, [2008] 3 NZLR 45 (CA) at [26].(d) He directed the Commissioner to act on the first judgment and awarded him costs. (e) He stayed enforcement of judgment debts against the respondents pending compliance with the directions.The Commissioner's appeal[192] The principal appeal by the Commissioner is against the second judgment. Other appeals are against an increased costs order made against the Commissioner and judgments permitting loans to be secured against properties of the respondents which are subject to freezing orders in favour of the Commissioner.Discussion[193] At the heart of the appeal are the following sections of the tax legislation: (a) section 46 of the Goods and Services Tax Act 1985 which requires the Commissioner to make an input tax payment within 15 days unless, the Commissioner being unsatisfied with a return, an investigation is made in accordance with that section; (b) sections 6 and 6A of the Tax Administration Act 1994 (TAA) which impose on Ministers and officers responsibility to protect the integrity of the tax system; 217(c) the sections which impose automatic generation of additional tax where there is delay in payment; 218(d) section 139 of the TAA (now repealed) which stated:Purposes of this PartThe purposes of this Part are—217 Reproduced at [202] below.218 Income Tax Act 1976, s 398(2); GST Act, s 41(1); Tax Administration Act, s 139 (all now repealed).(a) To encourage taxpayers to comply voluntarily with their tax obligations and to co-operate with the Department; and (b) To ensure that penalties for breaches of tax obligations are imposed impartially and consistently; and (c) To sanction non-compliance with tax obligations effectively and at a level that is proportionate to the seriousness of the breach.(e) the sections which confer power to grant relief by way of remission or postponement of additional tax.219[194] In construing legislation the Court will apply as far as practicable the settled presumptions of the common law. They include the requirement that, subject to any inconsistent provision, those who exercise public authority will do so with reasonable promptness.220[195] The Judge has held that Mr Budhia erred in the re-analysis of the respondents' tax liability, stating that he did not comply with the directions given in the unappealed first judgment. [196] It is however clear that, with one exception, Mr Budhia attempted a comprehensive reconsideration. On the basis that his first judgment found the August 1993 Thornley arrangement as to the $36.335.08 in GST and PAYE was determinative of tax liability generally and the arrangement as to $33,333.34 was determinative of GST liability for June 1990, in his second judgment Fogarty J directed the Commissioner to reconsider the effect of the arrangements. For reasons stated at [206]ff below I do not share what I take to be the view of Fogarty, Glazebrook and Chambers JJ, that in his first judgment Fogarty J found as a fact that the arrangements were wholly determinative, because in my opinion the judgment made no finding giving rise to res judicata on whether the respondents were entitled to set off other GST credits against the unchallengeable $36,335.08 in respect of tax generally and $33,333.34 in respect of the June 1990 GST period. But I agree that Mr Budhia failed to proceed on the basis of Fogarty J's finding that the two arrangements were determinative of liability, and failed to reconsider entitlement to219 TAA, s 139(4) (now repealed); TAA, s 182 (now repealed); TAA, s 183A (now repealed).220 Padfield v Minister of Agriculture, Fisheries and Food [1968] AC 997 (HL).setoff. He thereby erred in law. I would have directed the Commissioner to reconsider the setoff issue and recalculate on the basis of the conclusion. That point aside, I see no ground on which Mr Budhia's decision can be shown to be irrational, factually erroneous (within the limits of fact-finding on judicial review) or otherwise illegal. So it is in my view otherwise unassailable in relation to penalties and remission. [197] The second judgment asserts that the Budhia review resulted in a "disproportionate" charge to the respondents and is thus unlawful as infringing the first judgment which required proportionality. But I do not read [155] of the first judgment as setting up a rule of proportionality at odds with Parliament's formula. There is thus no need to consider whether in such circumstances principles of public policy would limit the extent to which the judge-made principle of res judicata could be permitted to operate. 221[198] The legislation does not contain any general or free-standing principle of proportionality as a measure of what tax liability shall be. On the contrary it states with considerable particularity: (a) how tax liability is incurred; (b) what penalties accrue as a result of delay in payment; and (c) the scope for remission. [199] I repeat the passage at [155] of the first judgment which propounds:a positive duty on the Commissioner to exercise his discretionary powers, including the power to remit penalties on equitable grounds, so as to achieve an outcome where the penalties in fact sought to be collected are proportionate.221 Thrasyvoulou v Secretary of State for the Environment [1990] 2 AC 273 (HL).It goes on to refer to the possible application of ss 6 and 6A. The passage does not state a sense of "disproportionate" inconsistent with that of s 139(c) of the TAA. 222Use of a statutory term usually suggests an intention to adopt its statutory meaning. [200] Counsel as amicus outlined for us the factual setting within which the legislation, not least s 139, falls to be interpreted. The Commissioner's latest Annual Report records that in the fiscal year ending 2009 he collected about $49 billion, $39 billion from income tax and $10 billion in GST. His department handled over 4 million items of correspondence, 4.4 million telephone calls, 9.3 million on-line enquiries and 8 million payments. It processed 2.6 million income tax returns and just over 3 million GST returns, 40 per cent electronically. The basic administrative precept of both income tax and GST is that the taxpayer bears the obligation of providing the Commissioner with accurate returns and other information and making payment on due date. It is true that the Commissioner has a reciprocal obligation to make GST refunds within the 15 day period unless unsatisfied with a return, in which case the Commissioner may investigate further. 223 If there is delay in doing so the taxpayer is entitled to compensating interest. And if on statutory review or appeal the Commissioner is shown to have taken an erroneous position, the Taxation Review Authority or Court will set aside the erroneous assessment and replace it with one that is correct. Interest is payable on the latter, not the former. [201] A taxpayer may not treat the Commissioner as a funding source, delay in paying what is due, and then argue that the interest penalty imposed on all late- payers should be the subject of dispensation. The Judge found: 224 some substance in the department's view that Mr Hampton could have used his access to cash or credit to settle his tax arrears, rather than wait upon the resolution of the numerous GST input claims.But if to any extent the Commissioner was in breach of his s 46 obligation to accept such claims, the respondents were pro tanto entitled to treat that amount as setoff against tax liability.222 Reproduced at [85].223 GST Act, s 46.224 At [148] of the first judgment.[202] As the Judge noted in his first judgment, 225 the statutory powers of remission are expressed narrowly. Section 183A, allowing remission for reasonable cause, requires the taxpayer to establish absence of fault; s 182 which does not contain that limitation confines to $5,000 the mitigation the Commissioner may make without Ministerial authority. A Minister who has not acted unlawfully cannot be compelled by the Court to increase the $5,000 limit. The Minister has not been joined as party to this proceeding and no order can be made except against the Commissioner. Sections 6 and 6A state:6 Responsibility on Ministers and officials to protect integrity of tax system(1) Every Minister and every officer of any government agency having responsibilities under this Act or any other Act in relation to the collection of taxes and other functions under the Inland Revenue Acts are at all times to use their best endeavours to protect the integrity of the tax system. (2) Without limiting its meaning, the integrity of the tax system includes— (a) Taxpayer perceptions of that integrity; and (b) The rights of taxpayers to have their liability determined fairly, impartially, and according to law; and (c) The rights of taxpayers to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other taxpayers; and (d) The responsibilities of taxpayers to comply with the law; and (e) The responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and (f) The responsibilities of those administering the law to do so fairly, impartially, and according to law.6A Commissioner of Inland Revenue(1) The person appointed as chief executive of the Department under the State Sector Act 1988 is designated the Commissioner of Inland Revenue. (2) The Commissioner is charged with the care and management of the taxes covered by the Inland Revenue Acts and with such other functions as may be conferred on the Commissioner. (3) In collecting the taxes committed to the Commissioner's charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the225 At [130].Commissioner to collect over time the highest net revenue that is practicable within the law having regard to— (a) The resources available to the Commissioner; and (b) The importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and (c) The compliance costs incurred by taxpayers.[203] Save as otherwise constrained by statute an officer of the Crown, such as the Commissioner, is to be presumed to possess the powers of a natural person. 226 These include the ability to settle disputes, whether or not the subject of litigation, to best advantage. 227 The limitations imposed by ss 182 and 183A relate to cases where the tax liability is clear. Where it is not the policy of ss 6 and 6A is confirmatory of the general presumed power. That power must equally extend to settling on best terms with an insolvent. So insofar as the Commissioner's staff has been held by the first judgment to have reached settlement with the respondents the settlement is binding without the need to consider to what extent res judicata may override statutory policy. [204] I agree with the assessment of Glazebrook and Chambers JJ228 that the first judgment found: (a) as to tax liability generally, there was agreement between the Commissioner and the respondents that payment of $36,335.08 would clear all but the June 1990 GST debt and the May 1993 PAYE debt; (b) as to the June 1990 GST period, there was further agreement that payment of $33,333.34, which was to be paid "forthwith", would settle the core debt (although not interest); and (c) as to remission, the Commissioner should reassess to what extent his officers had been responsible for inordinate delay in acknowledging226 Attorney-General v Mair [2009] NZCA 625 at [169].227 Albeit subject to the Crown's obligation to act with propriety: Solicitor-General v Miss Alice[2007] 2 NZLR 783 (HC).228 At [87]–[91].GST credits and reconsider the application of s 183A in the light of ss 6 and 6A. [205] Neither agreed sum was ever paid specifically by the respondents. Their position is that these sums and thus the penalties said to result from them are covered by GST credits which the Commissioner has wrongly failed to acknowledge. This issue was not addressed by Fogarty J in his first judgment, nor by Mr Budhia. On that point I consider a further finding by the Commissioner is needed. [206] While the Judge considered that there was inordinate delay on the part of the Commissioner's officers, in my opinion there was no such specific finding to that effect as could give rise to res judicata. The same is the case with the respondents' deteriorating financial position. Spencer Bower states: 229A decision is not final which leaves the parties in doubt as to their rights and liabilities ...As I note at [185] above, the Judge's factual findings did not determine those rights and liabilities. There was no specific finding as to, inter alia, the Commissioner's responsibility for the increase in penalties and interest or the respondents' liability to pay tax once the GST input credits had been processed as directed. [207] Beyond the two findings as to the $36,335.08 and $33,333.34, in respect of which res judicata exists, the directions at [159] of the first judgment left specific fact-finding to the Commissioner. I respectfully differ from the opinion of Glazebrook and Chambers JJ 230 that the first judgment made a comprehensivefinding constituting res judicata that the Commissioner had to accept a share of the blame for the taxpayers' defaults. The judgment did not in my view make such factual findings on the point; I read it as stating that, if on the further enquiry the Court directed the facts are as the respondents contend, relief should follow. But the respondents did not obtain any such findings from the Judge in his first judgment.229 At [5.11].230 At [123].[208] It is for that reason that, except that he proceeded on the basis that the August 1993 Thornley arrangement and the arrangement as to the June 1990 GST had no effect and as to the need to reconsider whether the respondents were entitled to setoff in respect of those arrangements, I am not persuaded that Mr Budhia's conclusions have been shown to be irrational or to have entailed evident mistake which would justify relief by way of judicial review. [209] Had the first judgment required the Commissioner to give particular effect to the deteriorating position of the respondents it would no doubt have created res judicata. But on my reading it did not and does not. [210] For the reasons stated at [204]–[208] I consider there should be further consideration by the Commissioner whether the August 1993 Thornley arrangement and the arrangement relating to the June 1990 GST period were subject to setoff and nothing else. [211] In all respects other than those stated above I concur with the judgment of Glazebrook and Chambers JJ.Solicitors: Crown Law Office, Wellington for Appellant