THE COMMISSIONER OF INLAND REVENUE V CONTRACT PACIFIC LIMITED CA CA759/2008

THE COMMISSIONER OF INLAND REVENUE V CONTRACT PACIFIC LIMITED CA CA759/2008 4 December 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA759/2008 [2009] NZCA 568BETWEEN THE COMMISSIONER OF INLAND REVENUE Appellant AND CONTRACT PACIFIC LIMITED Respondent Hearing: 3 November 2009 Court: Hammond, Chambers and Robertson JJ Counsel: M S R Palmer and M Deligiannis for Appellant R B Stewart QC and G J Harley for Respondent Judgment: 4 December 2009 at 2.30 p.m.JUDGMENT OF THE COURT A The appeal is allowed. B The judgment of the High Court is set aside. C The appellant is entitled to costs in the High Court, to be fixed by that court if agreement cannot be reached. D The respondent must pay the appellant costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Robertson J) [1] The Commissioner of Inland Revenue ("the Commissioner") appeals a decision of Duffy J ((2008) 24 NZTC 23,092), in which judgment was entered for Contract Pacific Limited ("Contract Pacific") in the sum of $6,669,061.74, being the balance of a credit adjustment claim of GST previously paid. [2] The case turns on the interpretation of the Goods and Services Tax Act 1985 ("the GST Act") and the Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001 ("the 2001 Act"). The particular matters in issue are: (a) whether the Commissioner, when investigating Contract Pacific's GST return, satisfied the time limits contained in s 46(5) of the GST Act; and (b) if the time limits were satisfied, whether Contract Pacific had already been "paid a refund" under s 241(6) of the 2001 Act, which would avoid the requirement for back-payment of GST.Factual background[3] Contract Pacific sold New Zealand holiday packages to overseas wholesalers, who on-sold the packages to overseas retailers, who then on-sold the packages to overseas holiday-makers. The holiday-makers enjoyed the benefit of the services in New Zealand. Travel agents providing these schemes were named "inbound tour operators" or "ITOs". [4] Contract Pacific, between July 1993 and April 1999, included in its charge to its customers GST at the standard rate of 12.5 per cent and in turn filed GST returns on the basis that it was required to account for GST at the standard rate of 12.5 percent of the value of supplies made to overseas wholesalers. Other ITOs did not add GST to their charges and filed GST returns on the basis that supplies made to overseas wholesalers were "charged at the rate of 0%" under the (former) s 11(2)(e) of the GST Act. [5] In May 1999 a law change confirmed that if the benefit of services was enjoyed in New Zealand, GST was payable at the standard rate on those services. The legislation was only prospective in its effect, which left a GST loophole: ITOs whose services were used in New Zealand prior to 1999 were still zero-rated for GST for that earlier period. The loophole was not immediately detected. [6] On 26 June 2000, Contract Pacific filed a GST return seeking a reassessment and refund of GST paid from 1993 to 1999, which totalled $7,353,396.94. As Duffy J noted, once interest and other adjustments for the relevant tax period were added to the claimed refund, the entire refund amount came to $7,542,295.51 (at [11]). [7] On 10 July 2000, the Commissioner wrote to Contract Pacific advising that it was withholding payment of the refund pending an investigation into the claim. This communication was timely notice of the Commissioner's intention to investigate as required under s 46(5) of the GST Act. [8] A halt was placed on Contract Pacific's account in the Commissioner's computer system. [9] An investigation into the claim was convened. There was correspondence in October 2000. On 19 January 2001 the parties had a meeting at which the Commissioner requested further information about the claim. Contract Pacific provided the information in a letter dated 24 January 2001. [10] On 5 February 2001 the halt on the account automatically expired. The expiry went undetected by staff. The computer system generated and issued Contract Pacific with a notice of assessment and refund cheque for $7,542,295.51 (the figure represented the GST claim plus additional costs).[11] The notice and the cheque were issued in error. The Commissioner realised the error on 9 February 2001 and placed a stop on the cheque. The stop payment occurred about 14 February 2001, before the cheque was drawn down by Contract Pacific. [12] In April 2001, the Solicitor-General recommended that legislation be enacted to remedy the loophole in the GST system that was left by the law change of May 1999. The Taxation (Annual Rates, Taxpayer Assessment and Miscellaneous Provisions) Bill was introduced on 2 April, and on 14 May 2001, the Government announced it would amend the Bill to give it retrospective application to 1 October 1986 (see s 241(4) of the 2001 Act). As Duffy J noted, giving the legislation retrospective effect would "put beyond doubt the liability of registered persons to pay GST in the circumstances giving rise to the dispute" (at [21]). Section 251(2A) of the 2001 Act provided that ITOs such as Contract Pacific were required to back pay GST if the performance of the services was received in New Zealand. [13] However, to ameliorate the effect of the 2001 Act, s 241(6)(a) provided that if the Commissioner had paid a refund of GST, this did not need to be reimbursed. Only those companies who had not paid GST or whose claims were still being processed were required to pay GST as from October 1986 or when the services were supplied by the company (whichever was the later). [14] After the 2001 Act came into force on 24 October 2001, the parties entered into an agreed adjustment of $873,233.77, being a portion of the original claim relating to facilitation fees paid up to 30 April 2000. A GST assessment for the period ending 28 February 2001 allowed the refund for the facilitation fee as agreed. [15] The Commissioner's file was closed in November 2001. [16] In April 2005, the Commissioner received a letter from Contract Pacific requesting payment of the balance of the original claim: $6,281,767. After the Commissioner declined the request, proceedings were filed in the High Court.The High Court decision[17] In the High Court, Contract Pacific advanced two causes of action. The first was an action under s 27 of the Bills of Exchange Act 1908, under which a person can enforce payment of a cheque that has been dishonoured where consideration has been given for it. The relevant sections of the GST Act are ss 20(5) and 46, which impose obligations on the Commissioner that are capable of establishing a qualifying antecedent debt or liability (judgment of Duffy J at [99]). [18] Section 20(5) provides that where the total amount that may be deducted for a taxpayer's output tax is greater than the aggregate output tax for the relevant taxable period, the Commissioner shall refund the excess pursuant to s 46. [19] Section 46 of the GST Act provides (emphasis added):Commissioner's right to withhold payments(1) Subject to this section, if the Commissioner is required to refund an amount to a registered person under section 19C(8) or section 20(5) of this Act, the Commissioner shall refund the amount – (a) Except when paragraph (b) applies, not later than 15 working days following the day on which the registered person's return was received by the Commissioner: or (b) The day after the working day on which the Commissioner – (i) Determines the amount is refundable, after first having – A Investigated the circumstances of the return in accordance with subsection (2); or B Reviewed the information requested in accordance with subsection (2); and (ii) is satisfied that the registered person has complied with the person's tax obligations. (2) If the Commissioner is not satisfied with a return made by a registered person, the Commissioner – (a) May investigate the circumstances of the return;(b) May request the registered person to provide further information concerning the return.(3) If a registered person fails to provide a return for any taxable period as required by this Act, the Commissioner may withhold payment – (a) Of any tax otherwise refundable under this Act or the Tax Administration Act 1994; or (b) Of any interest payable under Part 7 of the Tax Administration Act 1994 – until the registered person complies with the requirement. (4) The Commissioner must give a request for information concerning a return under subsection (2) – (a) Within a period of 15 working days following the day on which the return is received by the Commissioner (in the case of an initial request for information); and (b) Within a period of 15 working days following the date of receipt of any information previously requested by the Commissioner (for subsequent requests for information). (5) The Commissioner must notify the registered person –(a) Of the Commissioner's intention to investigate the circumstances of the return under subsection (2); and (b) Of the Commissioner's intention to withhold payment under subsection (3) – Within 15 working days following the day on which the return is received by the Commissioner. . . . (16) If, but for this subsection, a registered person would be entitled to an amount as a refund under section 19C(8) or 20(5) or 45 or under the Tax Administration Act 1994, or as a payment of interest under Part 7 of the Tax Administration Act 1994, the Commissioner may apply the amount, in accordance with a request under section 173T of the Tax Administration Act 1994 or in the absence of a request in such an order or manner as the Commissioner may determine, in payment of – (a) tax that is payable by the person; (b) an amount that is payable by the person under another Inland Revenue Act.[20] Section 46(1) provides that where a refund is payable, it shall be paid by the Commissioner within 15 days of his receipt of the registered person's return, unless he is not satisfied with the return, in which case he can elect either to investigate the circumstances of the return (s 46(2)(a)) or request further information from theregistered person (s 46(2)(b)). Section 46(5) provides that the Commissioner must notify the registered person if he intends to investigate the return under s 46(2) or if he intends to withhold payment under s 46(3). Such notice must be given within 15 working days following the day on which the return is received by the Commissioner. Section 46(4) provides that requests for information under s 46(2) must be made within 15 days of either receipt of the return by the Commissioner (s 46(4)(a)), or following the receipt of any information previously requested (s 46(4)(b)). [21] The issue for the Judge, therefore, was what time limits constrained the Commissioner when both an investigation and a request for further information were made under s 46(2)(a) and (b). [22] Duffy J summarised the argument advanced by Contract Pacific as follows:[112] Contract Pacific contends that s 46 is a comprehensive code in relation to the withholding of disputed GST refunds. It submits that once the Commissioner commences an investigation into a GST return under s 46(2)(a), any request he might make for further information has to be treated as a request that falls within s 46(2)(b). It follows that his request(s) for information must comply with the s 46(4) time limits if he is to retain his authority to withhold the disputed refund pending the completion of his investigation. Since it is common ground that the Commissioner's requests for further information were made outside the prescribed time in s 46(4), on Contract Pacific's view of the law by 5 February 2001 when the refund cheque was issued he would have lost his authority to withhold the $7.3m refund. Thus, the refund cheque was properly payable and so there was no basis for stopping payment of it.[23] Duffy J accepted this submission, and held that the two limbs of s 46(2) operate together, and that in any investigation of a refund claim under s 46(2)(a), requests for further information from a registered person will engage s 46(2)(b). In such cases, requests made under s 46(2)(b) must comply with the time limits prescribed in s 46(4) (at [119]). [24] Turning to the facts before her, Duffy J held that the Commissioner's request for information from Contract Pacific in January 2001 was not made within the time limits provided for in s 46(4) and so was invalid (at [133]). The Judge held that the Commissioner's obligations under s 46 of the GST Act constituted consideration: (at [137]), and that there was no failure of valuable consideration to undermine theaction on the cheques: (at [138]). She also held that the cheque that was issued was to be treated as the equivalent of cash so that there was a debt still owing: (at [147]). Duffy J accordingly entered judgment for Contract Pacific.The appeal[25] It was common ground that, if the Commissioner were to succeed on the first issue, namely the time limits prescribed by s 46, there was no need to consider the second matter. In light of our conclusion, discussed below, that the Commissioner does succeed on the first issue, we allow the appeal on that basis and do not consider the second issue.The Commissioner's position[26] The Commissioner submitted he was within the time limits set by s 46 because he notified Contract Pacific of his intention to investigate the claim within the 15 working day time period. After that, requests for further information in conjunction with the investigation did not need to be made within any time limit. Accordingly, the Commissioner's request for information in January 2001 was valid and there was no need to provide a refund at that point.Contract Pacific's position[27] Contract Pacific's submission was that, in all cases where the Commissioner elects to investigate the circumstances of a registered person's return under s 46(2)(a), any further information sought from the registered person must be requested within the statutory time limit prescribed in s 46(4). Mr Harley argued that unless that restriction is read in, s 46(2)(b) becomes redundant. That is because, Mr Harley argued, the Commissioner would always choose to investigate under s 46(2)(a) and then request further information as part of the investigation, without being bound by any time limits. That, he submitted, cannot have been the Parliamentary intention (judgment of Duffy J's at [128]).Discussion[28] We consider that the Commissioner's position is correct. [29] Under ss 6 and 6A of the Tax Administration Act 1994 ("TAA"), there is a general responsibility to use best endeavours to protect the integrity of the tax system and a specific duty on the Commissioner to collect the highest revenue that is practical having regard to resources and the importance of obtaining compliance, especially voluntary compliance. [30] There are specific additional powers contained in Part 3 of the TAA in ss 16 to 20. The GST Act is covered by this provision. [31] The specific provisions in s 46 of the GST Act do not derogate from, or minimise, the force and impact of the provisions of the TAA except with regard to the time in which the initiation of activity must occur. [32] When a taxpayer seeks a refund of GST, the Commissioner is required to refund the amount unless the Commissioner takes action within 15 days, and when he is satisfied that the registered person has complied with their tax obligations after he has first investigated the circumstances of a return, or has reviewed information requested. [33] Contract Pacific's position is that, under s 46(2), there can either be an investigation of the circumstances of the return, or a request to provide further information. Mr Harley argues that if the Commissioner decides to investigate the circumstances, he cannot make any request for information from the registered person except in accordance with s 46(4). [34] We see no reason to read down the plain words of this statute and thereby the force and effect of the taxation regime in such a way. [35] The initiation of action within 15 days is essential (Sea Hunter Fishing Ltd v Commissioner of Inland Revenue (2002) 20 NZTC 17,478 (CA)), but we agree withMr Palmer that the proper interpretation of s 46(2) is that each of the avenues available under subs (2)(a) and (2)(b) respectively is alternative and distinct. [36] In cases where all that is required is additional information, the Commissioner will not investigate the circumstances of the return but will merely request information. [37] If, however, as in this case, within the 15 day period the Commissioner gives notice of an investigation, that investigation is not subject to any limitation, curtailment or restriction. If, in the course of the investigation, instead of or as well as seeking submissions, the Commissioner requires additional information, he can ask for it and such request will not engage s 46(2)(b). [38] It is artificial to consider that, if the investigation route under s 46(2)(a) is embarked upon, the registered person is immune from information requests except in the 15 day period or subsequent 15 day periods following the provision of information. That is not what the words say and such an interpretation would be most impractical. [39] We do not accept Mr Harley's submission, and the view taken by Duffy J, that this interpretation renders s 46(2)(b) redundant. There will be cases where the Commissioner only requires further information. In those cases, s 46(2)(b) will be engaged, s 46(2)(a) will not come into play, and the time limit prescribed by s 46(4) will apply. Section 46(2)(b) is not redundant simply because it does not exhaust all categories of information requests that the Commissioner may make. [40] There will be some investigations which will be complex and require a number of information requests whereas others will only involve the provision of additional information which has been overlooked. [41] It is not sensible for these two different kinds of inquiries to be governed by the same approach. The more expansive must necessarily include the narrower process.[42] Mr Palmer is correct that s 46 concerns notice of the Commissioner's intention, and that the section is not meant to control the Commissioner's investigation once such notice is given. [43] We note that the Judge's decision was predicated on the basis that the Commissioner could continue with an investigation under the general powers in the TAA, but in the meantime would have to pay the claimed refund. We do not see that inhibition or restriction being a necessary corollary of the statutory arrangement.Second issue[44] The parties were agreed that if we reached that conclusion then there was no refund which could have been paid in terms of s 242(6) of the 2001 Act and we need not comment further thereon.Conclusion[45] We are satisfied that the Commissioner, when investigating Contract Pacific's GST return satisfied the time limits contained in s 46(5) of the GST Act and therefore there was no obligation to make a refund. [46] The appeal is accordingly allowed. The orders for costs in the High Court in favour of Contract Pacific are quashed. The Commissioner is entitled to costs in the High Court to be fixed by that Court if agreement cannot be reached. [47] The respondent must also pay the appellant costs for a standard appeal on a band A basis and usual disbursements.Solicitors: Crown Law Office, Wellington, for Appellant Buddle Findlay, Auckland, for Respondent