COMMISSIONER OF INLAND REVENUE V ZAHIRUL ALAM AND PARUL BEGUM CA CA408/2008

COMMISSIONER OF INLAND REVENUE V ZAHIRUL ALAM AND PARUL BEGUM CA CA408/2008 26 June 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA408/2008 [2009] NZCA 273BETWEEN COMMISSIONER OF INLAND REVENUE Appellant AND ZAHIRUL ALAM AND PARUL BEGUM Respondents Hearing: 5 May 2009 Court: O'Regan, Arnold and Ellen France JJ Counsel: R J Ellis for Appellant D G Hayes for Respondent Judgment: 26 June 2009 at 2.30 pmJUDGMENT OF THE COURT A The appeal is allowed. B The respondents must pay the appellant costs for a standard appeal on a band A basis, plus usual disbursements. REASONS OF THE COURT(Given by Arnold J)Introduction[1] The issue in this case concerns the interpretation of the Tax Administration Act 1994 (TAA). The appellant, the Commissioner of Inland Revenue, issued a notice of proposed adjustment (NOPA) under s 89F of the TAA in relation to returns for goods and services tax (GST) filed by the respondent taxpayers. By virtue of s 89G(1) of the TAA, the taxpayers were required to notify the Commissioner that they rejected the proposed adjustments by issuing a notice of response (NOR) within two months. If they failed to do this, they would be deemed to have accepted the Commissioner's proposed adjustments : s 89H(1). [2] The taxpayers' accountant sent a document to the Commissioner headed "Notice of Response" within the two month time period. The Commissioner considered that the NOR did not meet the statutory requirements in s 89G(2) and purported to reject it. The Commissioner then applied the deeming provision (s 89H(1)) and issued assessments incorporating the proposed adjustments. [3] The taxpayers did not commence challenge proceedings in respect of those assessments. Rather, some years later they issued judicial review proceedings seeking various declarations. Not all were pursued at the hearing before Woodhouse J: (2008) 23 NZTC 22,006 at [5]. The Judge noted (at [3]) the two live issues identified by the parties as being: (a) Whether the respondents' NOR complied with s 89G of the TAA; and (b) If so, whether the Court should exercise its discretion to grant relief to the respondents. He went on to identify a third point, one not raised by counsel, namely whether the Commissioner had the power to determine whether a NOR complied with the TAA and to reject it if it did not: at [4]. [4] The Judge concluded that the Commissioner did not have the power to reject a NOR. As a consequence the "deemed acceptance" provided for in s 89H(1) did notoccur (at [17]). Rather, the Commissioner should have applied to the High Court for a declaration as to the validity of the NOR: at [18]. The Judge then went on to consider whether the NOR complied with the requirements in s 89G(2) and held that it did. The Judge rejected the Commissioner's argument that relief should be denied as a matter of discretion and made a declaration that the respondents' NOR was valid in terms of s 89G. [5] The Commissioner has appealed against that decision.Background[6] The respondents operated a partnership business which performed fruit picking contracts. In 2001 the Commissioner carried out an audit of their tax affairs. This revealed that the respondents had claimed GST input credits in connection with payments totalling $130,000, which they claimed to have made to a subcontractor. The respondents said that the payments had been made in cash to a person named Rafi Rafi Achmed. [7] On investigation, the Commissioner could find no evidence of the payments, other than tax invoices in the name of the subcontractor. For example, there was nothing in the respondents' bank statements which married up to the payments they said had been made. The Commissioner also ascertained that Mr Achmed had left New Zealand prior to the dates on which the payments were said to have been made to him, and had not returned. Further, the respondents were unable to provide contact details for him. [8] The Commissioner concluded that there was insufficient evidence to support the input tax credits that had been claimed. Accordingly he issued a NOPA to the respondents on 4 July 2001, which indicated that he proposed to disallow the claims. [9] On 3 September 2001 the Commissioner received a document headed "Notice of Response" from the respondents' taxation representative. We set out the relevant portion of it:WE REJECT your Notice of Proposed Adjustments in regards to payments made to Rafi Rafi Achmed for the following reasons: 1 Achmed presented to Alam partnership his Certificate of Exemption which was issued by Inland Revenue Department. The Certificate was for the correct tax year; signed by Mr Achmed and properly authorised by Inland Revenue and advised the tax rate to be deducted from the gross payments. 2 Particularly under the Privacy Act, our clients could not verify that Mr Achmed was the person named on this Certificate. 3 Payments have been made in cash as requested by Mr Achmed, and there is no legal restriction from doing so. 4 We believe that 150% of shortfall penalties are not appropriate as our clients did not use false documents to try to obtain a tax advantage and did not show an abusive tax position or similar offence.[10] The tax inspector dealing with the respondents' file considered that this notice did not meet the requirements of s 89G(2) of the TAA. She wrote to the respondents' representative indicating this. After some further communications, the tax inspector decided that she would issue notices of assessment incorporating the proposed adjustments, and did so. [11] There then followed a lengthy period of discussions and communications between the parties. They were unproductive, however, and around September 2005 the Commissioner filed debt recovery proceedings against the respondents on the basis of the assessments in the District Court. The respondents contested those proceedings and on 22 March 2007 filed judicial review proceedings in the High Court. [12] In the proceedings, the respondents sought the following declarations against the Commissioner:1. The rejection of the NOR was unreasonable or unlawful because it did comply with section 89M of the Tax Administration Act 1994. 2. The rejection of the NOR was in breach of a legitimate expectation that NOR in the form provided would be accepted. or 3. Notwithstanding the NOR was correctly rejected the Defendants statutory power to assess the correct amount of tax was incorrectly withheld.And/or 4. Legal proceedings attempting to collect the amount of the assessment are unlawful where the Commissioner is aware the correct amount of tax may not have been assessed.However, as we have noted, the issues actually addressed by counsel at the hearing were whether the respondents' NOR complied with s 89G and, if so, whether they should be granted relief: see [3]. The Judge also raised the point about whether the Commissioner had the power to reject a NOR because it did not comply with the statutory requirements: at [4]. [13] The Judge concluded that: (a) The Commissioner did not have the power to reject a NOR on the ground of non-compliance. The appropriate course was for the Commissioner to seek a declaration in the High Court. As a consequence the deemed acceptance provisions in s 89H did not apply: at [15] – [18]. (b) The respondents' NOR did comply with the requirements of s 89G(2). The Judge assessed the NOR against each of the requirements in s 89G(2) in reaching this view: at [19] – [29]. (c) The respondents should be granted relief. The Judge said that there had to be strong grounds for withholding relief in respect of an unlawful decision. Here the two grounds put forward by the Commissioner for denying relief, namely, the lack of merit in the respondents' substantive position and the long delay in the filing of the proceedings, were insufficient to justify the refusal of relief: [30] – [33].Issues on appeal[14] Ms Ellis for the Commissioner identified the following issues for determination:(a) What course should a taxpayer take when he or she considers that the Commissioner has wrongly rejected his or her NOR and applied the deemed acceptance provisions in s 89H(1)? (b) Was the High Court wrong to exercise its discretion to grant relief? (c) If not, what is the effect of the Judge's declaration on the assessments issued against the respondents on the basis of the Commissioner's adjustments? It follows from this, as Ms Ellis confirmed in oral argument, that the Commissioner no longer seeks to argue that the respondents' NOR did not meet the requirements of s 89G(2). [15] Mr Hayes for the respondents formulated the issues somewhat differently, but we prefer to deal with the case on the basis of the issues identified by Ms Ellis for reasons that will become apparent.Discussion[16] Ms Ellis submitted that the Judge had asked himself the wrong question and so had been diverted. That wrong question was whether the Commissioner had the power to reject a taxpayer's NOR on the ground that it did not meet the requirements of s 89G(2). (The first issue identified by Mr Hayes was a more generalised version of this.) Rather, Ms Ellis submitted, the real question was how, under the legislative scheme, a taxpayer could challenge the Commissioner's conclusion in a case such as this. The answer to that was, she submitted, through the usual challenge procedures in the TAA, relying in particular on Allen v Commissioner of Inland Revenue[2006] 3 NZLR 1 (CA & SC). Ms Ellis argued that the reassessments in the present case remained valid. The judicial review proceedings were a collateral attack on them and were not permitted. She invoked the recent decision of this Court inWestpac Banking Corporation v Commissioner of Inland Revenue [2009] 2 NZLR 99 (in respect of which the Supreme Court refused leave to appeal: [2009] NZSC 36).[17] We agree with those submissions. [18] Before we set out our reasons, we should mention that the current dispute resolution provisions in the TAA differ in some respects from those which were in force at the relevant time, namely in 2001. Our discussion relates to the 2001 situation, and the relevant provisions of Parts 4A and 8A of the TAA. In Allen this Court described the background to those parts as follows:[13] Parts 4A and 8A of the TAA were introduced in October 1996 following the organisation review conducted by the Rt Hon Sir Ivor Richardson in 1993 – 1994. In very broad terms, Part 4A sets out prelitigation disputes procedures, while Part 8A provides for challenges, which is essentially a litigation procedure in either the [Taxation Review Authority] or the High Court. This replaced the earlier "objection" procedure in Part 8.[19] The Court went on to outline the effect of Part 4A in more detail:[15] The provisions of Part 4A seek to achieve [the purposes in s 89A(1)] by requiring that there is full and frank communication between the commissioner and the taxpayer in a structured manner with strict time limits. In broad terms, it is contemplated that if the commissioner wishes to dispute the position taken by a taxpayer in his or her tax return, the commissioner issues a NOPA, and if the taxpayer wishes to dispute the position taken in the NOPA, he or she issues a NOR. Sometimes, however, the position is the other way around.[20] Two features of this procedure should be emphasised at this point: (a) It requires openness from both sides, in the sense that each side is required to advise the other of its position and of the reasons for it. (b) There are strict timeframes within which particular steps are to be taken, although there is provision for extensions in exceptional cases. [21] Turning to the relevant provisions, we begin with ss 89I in Part 4A and 138B(1) in Part 8A. Under s 89I(1)(b) a disputant may not challenge an adjustment proposed by the Commissioner if the disputant is deemed to accept the adjustment and s 89K does not apply. (Section 89K is irrelevant in the present case.) Section 89I(2) requires the Commissioner to "include or take account of each proposed adjustment that is accepted or deemed accepted by a disputant in a noticeof assessment issued to the disputant". Section 138B(1) has a similar effect to s 89I(1)(b). It provides:138B When disputant entitled to challenge assessment(1) A disputant is entitled to challenge an assessment by commencing proceedings in a hearing authority if – (a) The assessment includes an adjustment proposed by the Commissioner which the disputant has rejected within the applicable response period; and (b) Where the assessment is an amended assessment, an adjustment proposed by the Commissioner that is included in the assessment – (i) Imposes a fresh liability (being a liability that was not included in an earlier assessment) in respect of a particular; or (ii) Increases an existing liability (being a liability that was included in an earlier assessment but to a lesser extent) in respect of a particular; and (c) The disputant files the proceedings in accordance with the Taxation Review Authority Regulations 1994 (or any regulations made in substitution for those regulations) or the High Court Rules, within the response period following the issue of the relevant notice of assessment.[22] As can be seen, the effect of both s 89I(1)(b) and s 138B(1)(a) is that a taxpayer wishing to mount a challenge must have rejected the Commissioner's proposed adjustment within the applicable response period, in this case two months. Accordingly, once the Commissioner had issued the assessments incorporating the adjustments proposed in his NOPA in September 2001, following his rejection of the respondents' NOR, the respondents could have instituted the challenge process under s 138B(1)(a). Given his view that the respondents' NOR did not meet the requirements of s 89G, the Commissioner would presumably have applied to strike the challenge out under s 138H. That section provides that the Commissioner may apply to strike out a challenge commenced by a disputant where he considers that the disputant has failed to comply with the requirements of s 138B, one of which is, as just noted, that the respondents had issued a compliant NOR. By this means, the question of the validity of the respondents' NOR would have been determined without the need for judicial review proceedings. Even if the Commissioner did notapply to strike out, the respondents still had to meet the threshold in s 138B(1)(a), so that the question of the status of their NOR would have been at issue. [23] There are two consequences of this analysis. The first is that we agree with the Judge's view that the Commissioner does not have the statutory power to determine the validity of a NOR by rejecting it on the ground that it is non-compliant and applying the deemed acceptance provisions. The Commissioner may, of course, take a view on whether a taxpayer has issued a compliant NOR, and if he considers that a NOR is non-complaint, may issue a default assessment. But that step will not "determine" the validity of the NOR. That determination can only be made by the Taxation Review Authority or the High Court if the matter comes before it in the procedurally correct manner. In the absence of an appropriate challenge by the taxpayer, the default assessment will remain valid. So we agree that the Commissioner does not have the power to determine whether or not a particular NOR is compliant where that is disputed. [24] The second is that we do not agree with the Judge's view that, where the Commissioner considers that a NOR is non-compliant, he should issue judicial review proceedings seeking an order from the High Court to that effect. A requirement to utilise judicial review in circumstances such as the present would cut across the dispute resolution processes provided for in the TAA, in particular their timeframes. Those processes are, as we have said, adequate to deal with this type of case, and a requirement to institute proceedings in the High Court while those dispute resolution process are still underway would cause unnecessary delay, procedural complexity and expense, contrary to the principles underlying the statutory regime. [25] Judicial review is available in the taxation context only in limited circumstances, as this Court recently confirmed in Westpac. The Court emphasised the importance of ss 109 and 114 of the TAA. They provide:109 Disputable decisions deemed correct except in proceedingsExcept in objection proceedings under Part 8 or a challenge under Part 8A,-(a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and (b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.114 Validity of assessments not affected by failure to comply with ActThe validity of an assessment shall not be affected by reason that any of the provisions of this Act or any of the other Inland Revenue Acts have not been complied with.As the Court said, those sections "provide what might be thought to be a particularly inauspicious statutory context for judicial review": at [47]. [26] Having reviewed authorities from various jurisdictions dealing with judicial review in tax cases, the Court concluded:[59] We think it appropriate to continue to apply the established principles as to judicial review in tax cases. We accept that judicial review is available where what purports to be an assessment is not an assessment. Associated with this, we accept that judicial review is available in exceptional cases and thus may be available in cases of conscious maladministration (as was recognised in [Commissioner of Taxation v Futuris Corporation Ltd (2008) 247 ALR 605]). We can reconcile this with ss 109 and 114 on the basis that in such cases (that is, no genuine assessment or conscious maladministration) what is challenged is either not an assessment, or at the least, not the sort of assessment which the legislature had in mind in enacting those sections. On this basis we see the availability of judicial review as depending on the claimant establishing exceptional circumstances of a kind which results in the amended assessment falling outside the scope of ss 109 and 114 and thereby not engaging those sections.The Court went on to explain why a broader approach to the availability of judicial review in this context was inappropriate: at [60] – [64]. Among other things, the Court made the point that allowing collateral challenge to assessments through judicial review provides scope for gaming and diversionary behaviour, and diverts effort and resources. The present case illustrates the point. [27] It might be said that the judicial review proceedings in this case did not seek to challenge the Commissioner's assessment. As the case was eventually argued before Woodhouse J, that is certainly true. But as a consequence, the proceedings had little or no value, in the sense that the assessments remain valid despite thedeclaration made by the Judge. So the respondents' position was not substantially advanced as a result of the proceedings. [28] We acknowledge that, to some extent at least, the problem in this case arose as a result of the Commissioner's attempt to reject the NOR as non-compliant and to apply the deemed acceptance provisions. But the respondents did not respond to that in a timely way by challenging the assessments that followed, as they were entitled to do. Had they done so, the question of the validity of the NOR, and of their GST liability, would have long since been resolved.Decision[29] We answer the three issues posed at [14] above as follows: Issue (a): What course should a taxpayer take when he or she considers that the Commission has wrongly rejected his or her NOR and applied the deemed acceptance provisions in s 89H(1)? Answer: The taxpayer should issue challenge proceedings under the TAA within the appropriate time limit. Issue (b) Was the High Court wrong to exercise its discretion to grant relief? Answer: Yes, the High Court should have refused to make a declaration because of the respondents' improper use of judicial review. Issue (c) If not, what is the effect of the Judge's declaration on the assessments issued against the respondents on the basis of the Commissioner's adjustments? Answer: No answer required.[30] Accordingly, we allow the appeal and quash the declaration made by the Judge. The respondents must pay the appellant costs on a band A basis, plus usual disbursements.Solicitors: Crown Law Office, Wellington for Appellant Brook Law, Hamilton for Respondents