COMMISSIONER OF INLAND REVENUE v FUGLE [2017] NZCA 230

COMMISSIONER OF INLAND REVENUE v FUGLE [2017] NZCA 230 [1 June 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA489/2016[2017] NZCA 230BETWEEN COMMISSIONER OF INLANDREVENUEAppellantAND LESLIE WILLIAM FUGLERespondentHearing: 17 May 2017Court: Randerson, Winkelmann and Brown JJCounsel: H W Ebersohn and P H Higbee for AppellantM T Lennard for RespondentJudgment: 1 June 2017 at 3.30 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Brown J)Introduction[1] In consideration for a payment of $90,000, the Bank of New Zealand assigned to the respondent, Mr Fugle, a debt in the sum of $2,659,442.06 (plusaccruing interest) owed to BNZ by Bathos Properties Ltd.1 That transaction is a financial arrangement to which the financial arrangement rules (also referred to as the accrual rules) set out in subpt H of pt E of the Income Tax Act 1994 (the Act) apply.[2] Under s EH 4 of the Act, a base price adjustment is required when a financialarrangement "matures",2 an event defined in s EH 14 as being the "date on which the last payment contingent upon the financial arrangement is made".[3] Bathos' financial statements for the 2005 tax year recorded an opening balance in Mr Fugle's shareholder's current account of $2,659,441, which was, inessence, the amount of the indebtedness.3 Although Bathos did not have the full amount in its bank account during the 2005 tax year, Mr Fugle was able to draw down funds totalling $452,754. He drew down further amounts in the 2006 and 2007 tax years.[4] The primary issue on appeal is whether, as the appellant, the Commissioner of Inland Revenue (the Commissioner), contends, the last payment contingent upon the financial arrangement occurred at the time the sum of $2,659,441 was credited to Mr Fugle's current account. If this is correct, a base price adjustment would berequired, forming the basis for the Commissioner's taxation assessment of Mr Fuglefor the 2005 tax year.[5] There are two other subsidiary issues that arise on the appeal, although our consideration of these issues is impacted by our conclusion as to the primary issue. These are:(a) if a base price adjustment is not required, whether the Commissioner could raise an alternative argument as to the appropriate taxation method to be applied; and1 At the time named Chas Pilcher (1986) Limited. Mr Fugle was both a director and shareholder of Chas Pilcher at the relevant time.2 Or is remitted, sold or otherwise transferred in the income year.3 The accruing interest had since become unrecoverable because of the passage of time: Limitation Act 1950, s 20(4).(b) whether documents not previously discovered should have been permitted to be introduced in the hearing before the Taxation Review Authority (the Authority).BackgroundThe material facts[6] The material facts are succinctly recorded in the judgment of Cull J:4[6] Mr Fugle has been a director of Bathos since 6 October 1987 and has been the sole director since 23 February 1996. Since October 2003, Mr Fugle was the sole shareholder.[7] Bathos, originally called Chas Pilcher (1986) Limited (Chas Pilcher), was a road construction entity that secured the contract to dredge the Clutha River downstream from the Clyde Dam. The company sustained large losses and was put into receivership by BNZ in September 1989.[8] As at 30 April 1992, Chas Pilcher was indebted to BNZ in the sum of $2,659,442.06 together with accruing interest. Mr Fugle was a guarantor of that debt. Litigation commenced between Mr Fugle and the BNZ regarding Mr Fugle's guarantee.[9] On 31 December 1992, Mr Fugle settled the dispute with BNZ, by executing a Deed of Admission of Liability and Settlement (the Settlement Deed) between BNZ, the receivers, Bathos and Mr Fugle. The Settlement Deed provided that Mr Fugle would pay to BNZ $90,000 in return for anassignment of Bathos' debt to BNZ. The debt was $2,659,442.06 plusinterest of $1,433,015. On payment of $90,000 to the BNZ, the receivers would then retire.[10] The receivers retired in February 1993. Mr Fugle paid the last portion of the monies due under the Settlement Deed on 12 February 1996. The BNZ then entered into a Deed of Assignment (the Assignment Deed) with Mr Fugle, by which the debt was assigned to him. The Assignment Deed recorded that the amount owing to the BNZ as at 11 December 1995 was $5,567,745.91. Bathos did not trade again until the 2005 tax year, when it commenced a property development project. When it ceased trading, Bathos accumulated tax losses that were carried forward.[11] On 1 April 2004, during the 2005 tax year, Bathos credited the amount of $2,659,442 to the current account of Mr Fugle with Bathos. This was the amount of indebtedness, without interest.[12] As the Authority recorded, the financial statements for the 2005 year recorded an opening balance in Mr Fugle's current account for that year of4 Fugle v Commissioner of Inland Revenue [2016] NZHC 1997 [High Court judgment] (footnote omitted).$2,659,442. The financial statements for Bathos showed drawings by Mr Fugle in the following amounts:(a) in the 2005 tax year, Mr Fugle drew down $452,754;(b) in the 2006 tax year, Mr Fugle drew down $1,064,364; and(c) in the 2007 tax year, Mr Fugle drew down $751,475.[13] The net amount drawn down by Mr Fugle over the three year period from 2005 to 2007 was $2,238,592. Between 2001 and 2010, Mr Fugle returned no income and paid no income tax. The funds drawn down were used in part to support Mr Fugle and his family and he and his partner claimed a number of tax credits in the 2005 to 2007 income years. No financial statements were prepared for Bathos from the early 1990s to 2010. Specifically, no financial statements were prepared since the 31 December 1992 Settlement Deed.[14] Inland Revenue commenced an audit in July 2009. The financial statements for Bathos for the 2005, 2006 and 2007 years were finalised on 17 June 2010 and provided to the Commissioner. These were Bathos' firstfinancial statements since the assignment of the debt from BNZ to the appellant. In the financial statements, the assignment of debt was credited, as a net sum in Mr Fugle's current account.[7] As Cull J noted,5 Mr Fugle did not return any taxable income for the 2005 tax year. After pursuing the statutory procedures, the Commissioner made a disputable decision that Mr Fugle had an additional amount of income of $2,569,442 in the 2005 tax year, issuing a notice of assessment in that amount on 10 October 2014.[8] The basis of the Commissioner's assessment was that Mr Fugle had received taxable income of $2,569,442 in the 2005 financial year which had been derived as the result of a base price adjustment. That base price adjustment was required to be made at the maturity of the financial arrangement, said to have occurred in 2005 when the last payment contingent on the arrangement was made by way of a credit to Mr Fugle's shareholder account.Mr Fugle's challenge[9] Mr Fugle disputed the Commissioner's assessment. He challenged the noticeof assessment in the Authority on several grounds including, relevant for present purposes, that if a payment was made in the 2005 year it was not the final amount5 At [13].payable to Mr Fugle under the financial arrangement, and hence no base price adjustment was required.[10] After a careful review of the authorities discussed below,6 Judge Sinclair accepted the Commissioner's argument that the Bathos indebtedness was paid by the crediting of the full amount of the debt to Mr Fugle's shareholder current account because the funds were placed at Mr Fugle's disposal and he was able to draw downagainst payment of that debt as and when he required.7 The Judge rejected the proposition that in order for there to be a payment by crediting it was necessary for the full amount of the funds to have been immediately available to Mr Fugle.8 As the crediting of the entire amount of the debt was the last payment contingent upon the financial arrangement, the arrangement had matured and a base price adjustment was required.9[11] Mr Fugle appealed to the High Court. In allowing the appeal, Cull J disagreed with Judge Sinclair and held that the crediting of Mr Fugle's currentaccount in 2005 was not a payment. Consequently, there was no final payment under the financial arrangement and a base price adjustment had not yet been triggered. Materially, the Judge stated:10[66] I accept Mr Lennard's submission that a dividend or salary credit isan allocation of income or retained earnings to the shareholder, which then becomes payable to him or her and was not previously payable. It is the dividend or the salary that is the payment; the crediting to a current account is simply the means of effecting that payment. Further, the payment bycredit to a shareholders' current account will amount to payment if, and only if, the crediting is done with the shareholders' assent, as Mason J said inBrookton Co-operative Society Ltd.[67] In this case, an existing liability to Mr Fugle was recognised by anentry to his credit in his shareholder's account, 10 years after the debt was assigned. There was no payment or cash sums made available to Mr Fugle at that time. Nor was there a decision to make a payment from Bathos to Mr Fugle in the 2005 tax year. The entry in the current account of Mr Fugle in 2005 did not establish a payment to him. I am unable therefore to accept the submission from the Commissioner that there was a payment to Mr Fugle by the crediting of his current account in 2005.6 At [17]–[22].7 Fugle v Commissioner of Inland Revenue [2016] NZTRA 2 [Authority judgment] at [76].8 At [90].9 At [95].10 High Court judgment, above n 4 (footnote omitted).[12] Cull J then went on to say, when considering whether the financial arrangement had matured:[74] I am unable to accept the Commissioner's submission, and the casesreferred to, do not assist the Commissioner. A dividend was declared, with funds being made available to the directors in Case Z4, and in Garforth, money was placed unreservedly at the disposal of the directors. I have drawn a distinction between those cases and the facts in this case, because here, there was no sum of money to constitute a payment, but rather an assignment of debt. There has been no final payment under the financial arrangement and the base price adjustment has not yet been triggered and it is premature to tax the full credit sum for the 2005 tax year, as no taxable event occurred in the 2005 year.The accrual rules[13] The accrual rules bring to tax increases or decreases in value of financial arrangements.11 A financial arrangement is relevantly defined in s EH 14 and includes:(a) any debt or debt instrument; and(b) any arrangement (whether or not such arrangement includes an arrangement that is a debt or debt instrument, or an excepted financial arrangement) whereby a person obtains money in consideration for a promise by any person to provide money to any person at some future time or times, or upon the occurrence or non-occurrence of some future event or events (including the giving of, or failure to give, notice).[14] The Act sets out how the benefits received under a financial arrangement are to be taxed: either by way of a spreading method, which applies during the life of the arrangement,12 or a base price adjustment, which applies when the arrangement comes to an end. Relevant for present purposes, a base price adjustment is acalculation which must be undertaken when a financial arrangement "matures or is11 Subpart H contains two "divisions" in its provisions. Division 1, applying to financial arrangements entered into after 23 October 1986 but before 20 May 1999, is the relevant one in this case.12 With the various spreading methods being set out in s EH 1(2)–(7) of the Income Tax Act 1994.remitted, sold, or otherwise transferred" by a taxpayer in the relevant income year.13Where a base price adjustment results in a positive amount, that amount becomes assessable income.14[15] Section EH 14 defines "matures" and "maturity":"Maturity", in relation to a financial arrangement, means the date on which the last payment contingent upon the financial arrangement is made, and"matures" has a corresponding meaning [16] It was common ground on the appeal that:(a) the transaction, namely Mr Fugle's acquisition of an assignment of Bathos's debt to the BNZ in consideration for a payment of $90,000,was a financial arrangement and accordingly the accrual rules applied;(b) if the crediting to Mr Fugle's current account in Bathos in the 2005tax year was considered to be the last payment contingent on the financial arrangement, then a base price adjustment was required; and(c) if a base price adjustment was required, the adjustment made correctlycalculated Mr Fugle's income and the assessment was correct.Was the crediting to Mr Fugle's current account the last payment bringing thefinancial arrangement to maturity?[17] A crediting of money to a person's bank account or shareholder's currentaccount15 will constitute payment when that money is placed unreservedly at the disposal of the person.16 However, if for some reason the money is not placedunreservedly at the payee's disposal, in that the mode of payment or access to funds is not a matter entirely of choice for the payee, different considerations may arise.1713 Income Tax Act, s EH 4(1).14 Section EH 4(4).15 Described by Rowlatt J in The Commissioners of Inland Revenue v Doncaster (1924) 8 TC 623 (KB) at 631 as equivalent to a banking account.16 Garforth (Inspector of Taxes) v Newsmith Stainless Ltd [1979] 1 WLR 409 (Ch) at 414–415. However, that is not to be taken as constituting a necessary requirement in all cases: seeCommissioner of Inland Revenue v Albany Food Warehouse Limited (2009) 24 NZTC 23,532 (HC) at [42].17 Garforth (Inspector of Taxes) v Newsmith Stainless Ltd, above n 16, at 415.[18] Alliance Group Limited v Commissioner of Inland Revenue, which concerned the tax effect of redundancy payments to employees, was such a case.18 Doogue J explained:19However, that agreement did not result in a crediting to the accounts of the individual employees of sums upon which they could draw. I am accordingly not persuaded by the submissions for Alliance that payment was made by way of crediting to an account, for the simple reason that, whilst the crediting acknowledged the liability of Alliance to its employees, there wasno "payment" until the employees could draw upon their accounts. Thiscould not occur until the relevant dates were reached and in the limited number of cases of 61 employees certain other contingencies fulfilled.There was undoubtedly a crediting which acknowledged the liability and the ultimate indebtedness. There was not, however, a crediting which entitled the employees to payment without more. There is no suggestion the sums credited were lent back to Alliance or that the employees had the use of them. Whilst crediting can undoubtedly result in payment, on the facts here that was not the case.[19] The Commissioner contended that payment by crediting had occurred here because the funds in the amount of the indebtedness were made unreservedly available for Mr Fugle to access and draw down upon as he chose. In support of this, the Commissioner advanced two propositions: payment by crediting does not require the actual book entry in the current account to be made contemporaneously; and, the company does not need to have at any one point in time sufficient funds to cover the total liability before there is payment.[20] We accept the first proposition; payment by crediting does not require the actual book entry in the current account to be made at the same time the act of payment is said to occur.20 However, in the context of the accrual rules, we do not accept the second.[21] It was the Commissioner's contention that, even though Bathos did not havein its bank account at any time the full amount equivalent to the indebtedness of $2,659,442, nevertheless from the 2005 income year the funds of Bathos were fully available to Mr Fugle to use as he chose. The Commissioner emphasised the lack of18 Alliance Group Limited v Commissioner of Inland Revenue (1995) 17 NZTC 12,066 (HC).19 At 12,072.20 See Commissioner of Inland Revenue v Albany Food Warehouse Limited, above n 16, at [55]–[56].any effective division between Bathos and Mr Fugle,21 said to be demonstrated bythe fact that Mr Fugle did not have his own bank account and simply used Bathos'sbank account as his own.[22] Reliance was placed on the decision of Clifford J in Commissioner of Inland Revenue v Albany Food Warehouse where payment was effected by the crediting ofshareholders' current accounts notwithstanding the fact the shareholders had to waitfor a period as receipt by them of funds was subordinated to other creditors being paid.22 However that case concerned the imputation credit account regime providedby subpt E of pt M of the Act. Under s OB 1 of that Act the word "paid" is given anextended definition, applicable in that case, to include "distributed, credited, or dealt with". It was held that the dividend credited to the shareholders' current accounts by the directors' resolution was "paid" in terms of the extended definition.23 The extended definition does not apply in this case.[23] As Walton J observed in Garforth (Inspector of Taxes) v Newsmith Stainless Ltd, the word "payment" is one which has no settled meaning but takes its colourvery much from the context in which it is found.24 In the context of the accrual rules, which are concerned with cash flows,25 we consider that the description of payment by Megaw LJ in The Brimnes is apt:26Whatever mode or process is used, "payment" is not achieved until theprocess has reached the stage at which the creditor has received cash or that which he is prepared to treat as the equivalent of cash or has a credit available on which, in the normal course of business or banking practice, he can draw, if he wishes, in the form of cash.[24] Such a state of affairs did not pertain at the date when the full amount of thedebt was credited to Mr Fugle's current account. The full amount was not availableto be drawn down by Mr Fugle in the normal course of business. What transpired in fact is appropriately analysed in terms of orthodox contractual principles.21 Mr Fugle being, in 2005, both sole director and shareholder of Bathos.22 Commissioner of Inland Revenue v Albany Food Warehouse, above n 16.23 At [28]–[30].24 Garforth (Inspector of Taxes) v Newsmith Stainless Ltd, above n 16, at 412.25 Sovereign Assurance Company Limited v Commissioner of Inland Revenue [2013] NZCA 652, (2013) 26 NZTC 21-056 at [47]–[50].26 The Brimnes [1975] QB 929 (CA) at 963. This statement was approved by the House of Lords in The Chikuma [1981] 1 WLR 314 (HL) at 320.[25] The terms on which a shareholder's current account operates within acompany depends upon what is agreed between the company and the shareholder. Such an arrangement may be express or implied. In the present case there is no evidence of any express agreement but the terms may be readily inferred or impliedfrom the known facts. Mr Fugle's current account was credited with the full amountof the assigned debt but Bathos had no capacity to pay that amount. That fact is evidenced by the absence of sufficient cash or other resources to enable such a payment and by the fact that the amounts actually paid to Mr Fugle were in tranches over a period of three years when sufficient cash was generated for that purpose. The plain inference is that Bathos and Mr Fugle implicitly agreed that the assigned debt would be paid to him only as permitted by the available resources of the company from time to time.[26] An alternative analysis is that a crediting to an account where the date upon which it is possible to draw down on the funds is postponed for some reason is properly analysed as a crediting subject to a condition precedent. Writing in the context of payments through the banking system, the authors of Goode on Payment Obligations in Commercial and Financial Transactions explain:27Where DB, in transferring funds to CB, imposes conditions that must be satisfied before the funds are made available to C, payment is not effective as between D and C until those conditions have been fulfilled or waived. The typical case is where funds are remitted with a "pay date" (a date when they may be released to C) later than the "value date" (a date when they areplaced under the control of CB). In this case, the condition is a condition precedent.[27] We consider that in such a scenario payment is not made until the condition precedent is either fulfilled or waived. In the present case, payment in full was not made until the full amount was unconditionally available to be drawn down. That did not occur in the 2005 tax year.[28] Consequently the crediting to Mr Fugle's shareholder's account of an amountgreater than the funds then available to Bathos was not the last payment contingent27 C Proctor and V Dixon Goode on Payment Obligations in Commercial and Financial Transactions (3rd ed, Sweet & Maxwell, London, 2016) at [5–51].on the financial arrangement. Hence the arrangement had not matured and a base price adjustment was not triggered.Is the spreading argument available to the Commissioner?[29] Although the relevant documentation was not before us, it is apparent fromJudge Sinclair's decision that the matters for determination before the Authorityincluded an alternative argument for the Commissioner that, if no base price adjustment was required, Mr Fugle was still required to return accrual income pursuant to one of the spreading methods under the accrual rules.28 Mr Fuglechallenged the Commissioner's entitlement to advance that issue in view of s 138G of the Tax Administration Act 1994.[30] Section 138G of the Tax Administration Act states:138G Effect of disclosure notice(1) Unless subsection (2) applies, if the Commissioner issues a disclosure notice to a disputant, and the disputant challenges the disputable decision, the Commissioner and the disputant may raise in the challenge only the issues and the propositions of law that aredisclosed in the Commissioner's and disputant's statements ofposition.(2) A hearing authority may, on application by a party to a challenge to a disputable decision, allow the applicant to raise in the challenge new propositions of law, and new issues, if satisfied that—(a) the applicant could not, at the time of delivery of theapplicant's statement of position, have, with due diligence, discerned those propositions of law or issues; and(b) having regard to the provisions of section 89A and the conduct of the parties, the hearing authority considers that the raising of those propositions of law or issues is necessary to avoid manifest injustice to the Commissioner or the disputant.In view of her conclusion on the payment issue Judge Sinclair did not address theCommissioner's alternative argument.28 Authority judgment, above n 7, at [5].[31] However on Mr Fugle's appeal to the High Court the Commissioner filed amemorandum stating her intention to support the Authority's decision on thealternative ground that Mr Fugle was required to return accrual income pursuant to one of the spreading methods under the accrual rules but he failed to specify a method of calculation or quantify the amount by which the assessment was incorrect.[32] Cull J addressed this issue at the conclusion of her decision:29[94] Lastly, Mr Ebersohn invited the Court to adopt a "spreading method"if the Court decided that there was no payment by crediting and a base price adjustment was not triggered in the 2005 income year.[95] This matter has proceeded by way of appeal from the Authority'sfinding and Mr Fugle has been successful. I am not satisfied that the alternative spreading method in s EH1(2)–(7) is applicable here, where the payments to Mr Fugle have been three respective payments of principal. It is now open to the Commissioner to reassess Mr Fugle's income tax liability,in light of this Court's decision.[33] In this Court the Commissioner sought to challenge the conclusion that the spreading method was not applicable in this case and to advance the proposition that Mr Fugle had failed to meet his onus of proving that the assessment was incorrect and by how much.30 Mr Fugle's resistance to that course was reflected in the agreedlist of issues:2 Whether the appellant is precluded by s 138G of the Tax Administration Act 1994 from making an alternative argument in respect of the spreading method?2.1 The appellant says that the spreading methods are covered inthe parties' statements of position and the respondent isrequired to prove not only that his 2005 tax assessment is incorrect, but also by how much; which requires the spreading method to be applied.2.2 The respondent says that the appellant's spreading method argument is not raised as an issue in the parties' statement ofposition, that the authorities on which the appellant relies inrespect of the taxpayer's onus of proof relate to evidentialissues only, and that those authorities are not a judicial over- ride to the provisions of s 138G of the Tax Administration Act 1994.29 High Court judgment, above n 4.30 Citing s 149A of the Tax Administration Act 1994; Buckley & Young Ltd v Commissioner of Inland Revenue [1978] 2 NZLR 485 (CA) at 498; and Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [171].[34] The Commissioner's statement of position dated 17 April 2014 referred tospreading methodology in two places. First, under the heading "The propositions of law upon which the Commissioner intends to rely", [51]–[57] summarised the various spreading methods which are set out in s EH 1, noting specifically s EH 1(6) as well as Determination G 12.31[35] Then, under the heading "Submissions on how the law applies to the factsand evidence," the subject of spreading was addressed in this way:Spreading Income[101] On the evidence available to Inland Revenue, the arrangement did not give the Taxpayer a future right to receive interest as there have been no identified interest deductions being claimed by Bathos in respect of this financial arrangement and the Taxpayer has not returned any interest from this financial arrangement. Therefore there is no interest income to spread in terms of the financial arrangement from the date it was assigned to the Taxpayer therefore there is no requirement to spread any income over the term of the arrangement.[36] Mr Fugle's statement of position in response dated 11 June 2014 made noreference to the spreading proposition. Nor did the additional information provided by the Commissioner on 4 August 2014 to supplement her statement of position.[37] Mr Ebersohn for the Commissioner sought to rely on the fact that, in the context of a lengthy review of legal principles spanning [37]–[79], theCommissioner's statement of position referred to various aspects of s EH 1 andidentified a number of spreading methods. However the issue of spreading was notone of the six matters in the "Outline of issues that the Commissioner considers willarise", which preceded the discussion of propositions of law. The only discussion ofspreading income appeared in [101], which made clear that the Commissioner considered that there was no requirement for Mr Fugle to spread any income over the term of the arrangement.31 Which provides the method for calculating the income or expenditure incurred in respect of a financial arrangement where an alternative spreading method must be used per s EH 1(6) of the Income Tax Act and no determination has been issued by the Commissioner of Inland Revenue.[38] The Commissioner's approach is similar to the attempt in Vinelight Nominees Ltd v Commissioner of Inland Revenue32 to rely on one of numerous provisions of the tax laws listed in the statement of position. As this Court there observed, the objective of the disclosure provisions requires that any issue be identified with sufficient clarity to cause a reasonable party to recognise it as such.33[39] We agree with Mr Lennard's submission for Mr Fugle that this case is starkerthan Vinelight because the topic of spreading of income is not only not advanced in the statement of position but is positively disavowed. The only conclusion areasonable person could draw from reading the Commissioner's statement ofposition as a whole would be that the spreading of income was not being raised as an issue.[40] It follows that the Commissioner's statement of position did not raise an issueto the effect that there was an obligation on Mr Fugle to spread income over the term of the arrangement. Consequently the Commissioner is precluded by s 138G(1) of the Tax Administration Act from advancing the spreading argument. Although a hearing authority may, on application, allow an applicant to raise new propositions of law and new issues at a challenge to a disputable decision, this Court is not granted the same power.34[41] As a consequence we do not address the substance of the spreading contention which the Commissioner sought to advance. However we consider it appropriate to note that we are not to be taken as endorsing the view of Cull J thatthe spreading method had no application because the payments were "principal" andnot interest.35 It suffices to draw attention to this Court's decision in Sovereign Assurance Company Limited v Commissioner of Inland Revenue.3632 Vinelight Nominees Ltd v Commissioner of Inland Revenue [2013] NZCA 655, (2013) 26 NZTC 21-055.33 At [31].34 Tax Administration Act, ss 3, definition of "hearing authority", and 138G(2).35 Set out at [32] above.36 Sovereign Assurance Company Limited v Commissioner of Inland Revenue, above n 25.The admissibility of new documents before the Authority[42] Evidence was given before the Authority in support of the challenge first by Mr Fugle and then by his accountant, Mr Short. The day prior to the hearing Mr Short had discovered among some old records certain Bathos documents37 thatwere not referred to in Mr Fugle's statement of position or in either Mr Fugle's orMr Short's briefs of evidence. The Commissioner opposed the late production of the documents.[43] Relying on s 138G(2) of the Tax Administration Act, the Authority declined to admit the documents, ruling in essence that a new issue was raised, the documents could have been located earlier and there was no manifest injustice to Mr Fugle as a result of declining leave.38 Leave to admit the documents was also refused under r 8.31 of the District Court Rules 2014 because of the risk of prejudice to the Commissioner.39 On appeal, however, Cull J considered that the Authority was in error in refusing to admit the documents under s 138G(2) or alternatively in refusing to grant leave under r 8.31.40[44] In this Court, the Commissioner challenged the conclusion of Cull J andsought to have the Authority's ruling restored. Our conclusion on the primary issuerenders consideration of this matter academic and it is unnecessary for us to address it.Costs[45] Mr Lennard sought increased costs on appeal, submitting that the spreading method argument was obviously precluded under s 138G and was clearly wrong forthe reasons articulated in the Commissioner's own statement of position, and had37 Those documents included shareholder's current account records for Mr Fugle for the years ended 31 March 1993 and 31 March 1998 that showed a closing balance of $2,659,442 for both years.38 Authority judgment, above n 7, at [34]–[35].39 At [45].40 High Court judgment, above n 4, at [80]. Cull J considered the documents did not raise a newissue for Mr Fugle, that it would be wrong to disadvantage Mr Fugle for his accountant'soversight, and any risk of prejudice to the Commissioner could be alleviated by allowing an adjournment or extra submissions: at [81]–[89].resulted in increased complexity to what would otherwise have been quite a simple case. A 50 per cent uplift on scale costs was sought.[46] Rule 53E(2)(b)(ii) of Court of Appeal (Civil) Rules 2005 enables the Court to order a party to pay increased costs if that party has contributed unnecessarily to the time or expense of the appeal by taking or pursing an unnecessary step or an argument that lacks merit.[47] Although we have declined to consider the Commissioner's spreadingargument, we have not expressed the view that it lacks merit. Indeed we have noted the Sovereign Assurance Company decision in the context of the principal andinterest argument which was advanced in Mr Fugle's submissions.41[48] The s 138G(1) issue was raised both in the Authority and in the High Court but was not ruled upon in either instance. Consequently the Commissioner was entitled to press the point in this Court, albeit unsuccessfully. In our view this is not a case which attracts an obligation to pay increased costs by reference to the conduct specified in r 53E(2)(b)(ii).Result[49] The appeal is dismissed.[50] The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.Solicitors:Crown Law Office, Wellington for AppellantDewhirst Law, Whanganui for Respondent41 At [41] above.