DONALD HAMISH MCILRAITH V THE COMMISSIONER OF INLAND REVENUE CA CA371/2007

DONALD HAMISH MCILRAITH V THE COMMISSIONER OF INLAND REVENUE CA CA371/2007 2 March 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA371/2007 [2009] NZCA 45BETWEEN DONALD HAMISH MCILRAITH Appellant AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 18 February 2009 Court: William Young P, Robertson and Baragwanath JJ Counsel: Appellant in person H W Ebersohn and L L du Claire for Respondent Judgment: 2 March 2009 at 2.30 pmJUDGMENT OF THE COURT A The appeals are 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 Robertson J)Introduction[1] This appeal is from a reserved judgment of Asher J (HC HAM CIV 2003- 419-208 M136/01 29 June 2007) in which Mr McIlraith unsuccessfully challenged income tax assessments issued by the Commissioner of Inland Revenue ("CIR") for the financial years 1996, 1997 and 1998. [2] In the same proceeding, Asher J dismissed an application by Mr McIlraith for judicial review of the CIR's decision-making which related to the assessment for the 1996 financial year. [3] Mr McIlraith (who had once been an employee of the Inland Revenue Department) practised during the 1990s as a barrister and solicitor in the area of tax law. He incorporated two companies – Solutions Corporate Limited ("SCL") and Jodan Investments Limited ("JIL"). Various transactions took place between Mr McIlraith and these companies between 1996 and 1998. Those transactions involved payments to or on behalf of Mr McIlraith by SCL and JIL. The benefits were not reflected in his annual financial statements and tax returns for those years. [4] As a result of investigations, the CIR issued three income tax assessments. The assessment for the 1996 year was issued on 27 March 2001, for the 1997 year on 26 March 2002, and for the 1998 year on 18 March 2003. The assessments took account of payments made to Mr McIlraith, and payments which were characterised as having been for his personal benefit.The challenge to the assessments[5] Asher J concluded that the material transactions between Mr McIlraith and SCL and JIL had generated income additional to that which Mr McIlraith had accounted for in his tax returns. The Judge found that sums arising from those transactions should have been returned by Mr McIlraith in his 1996, 1997 and 1998 tax returns and that those sums were properly included within the CIR's assessments.[6] In reply, the respondent in written submissions identified eight discrete points raised by Mr McIlraith in his appeal as filed. However, as the appeal proceeded before us, its ambit became markedly reduced. Mr McIlraith advised that his only challenge now was to Asher J's determination that the additional income was properly classified either as dividends, monetary remuneration or a tax-avoidance arrangement. [7] Mr McIlraith contended that the Judge was not entitled to decide the case against him on the basis of alternatives, but was required to identify what classification attached to each relevant payment, because the characterisation could have downstream consequences for Mr McIlraith as a taxpayer, particularly if the income was treated as dividends. [8] As Mr McIlraith's written submissions had covered a much wider ambit, we were at pains to obtain his confirmation that on appeal this challenge to the Judge's findings in the alternative was the issue he wished to pursue. We were assured that was the case. [9] Mr McIlraith accepted that the $101,000 received by him when he sold purported capital assets to SCL was properly treated as dividends under CF 2(1)(d) of the Income Tax Act 1994. Similarly he accepted that under CF 2(1)(j) expenditure by JIL and SCL for his benefit could also be characterised as dividends, and under CF 2(1) other payments made directly to him as a shareholder could be treated as dividends. [10] Mr McIlraith did not actively dispute that, under CH 3 of the Income Tax Act, all the benefits at issue could be viewed as monetary remuneration although he primarily argued for all being treated as dividends. [11] Asher J found that if the material payments were neither dividends nor monetary remuneration, then the CIR was able to consider that the arrangement was tax-avoidance. Mr McIlraith led no evidence to the contrary, so that was the inevitable finding in the case.[12] The crux of Mr McIlraith's argument before us was that the Court (or at least the CIR) should indicate which of the three alternatives is contended to apply in his assessment. [13] In support, Mr McIlraith sought assistance from the decision of this Court inCommissioner of Inland Revenue v Canterbury Frozen Meat [1994] 2 NZLR 681. He argued that what the CIR and Asher J had done in respect of his case was to provide a decision that was tentative, provisional, conditional or subject to adjustment and not final or conclusive. [14] We accept that the exercise under scrutiny is the "assessment" of the tax- payer's liability, or to use the Australian phrase, its "ascertainment". In Batagol v Commissioner of Taxation for the Commonwealth of Australia (1963) 109 CLR 243 at 251-252, Kitto J indicated this was:The completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case.[15] In this case, that is precisely what has occurred in respect of Mr McIlraith. There is no question about his total income and the tax liability flowing from it. The precise characterisation of the income makes no difference to those crucial variables. The CIR was clear and unequivocal as to what constituted additional income and the taxation consequences. In matters of tax liability assessment, which hinges on the application of complex statutory provisions, where the meaning of the statutory language is clear, effect should given to that meaning (see Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230). [16] It was open to the High Court Judge to find that the assessments were properly made on the basis of any of the three alternatives that the Judge found could describe the income at issue. There is nothing in the law which prevents either the CIR or a court when faced with a challenge from making such a determination. There is not a requirement for certainty. What the consequences thereafter might be are not issues which are before the Court in these proceedings.[17] Nor do we accept the argument that what occurred is arbitrary or demonstratively unfair in terms of the decision of this Court in Lowe v Commissioner of Inland Revenue (1981) 5 NZTC 61,006. There is no basis to find that the CIR, in exercising his judgment to determine the assessable income, acted in disregard of the law or of facts known to him, or that the assessment was not made on an intelligible basis. The assessment determines what income should properly be included. Those payments or benefits could be included under a number of heads but, for the purposes of the assessment, which of those heads applies is immaterial. [18] We specifically refrain from any comment upon the arguments floated by Mr McIlraith as to possible downstream consequences of precise classification of the income, particularly his contention as to what might flow from the items being treated as dividends. The issue is not before us and we remain silent on the possibility of Income Tax Act 2007 CD 40 having any application. [19] It follows that the appeal against the challenge proceedings must be dismissed.Judicial review[20] This aspect of the appeal was also radically curtailed in the course of oral argument. [21] Before us, Mr McIlraith said that there were two issues upon which he maintained his complaint at the High Court having refused judicial review. In the High Court there was a multitude of aspects of the procedure which were challenged, but prior to the hearing Mr McIlraith indicated to Asher J that he sought to question the impropriety of some aspects of the investigation only. [22] Three aspects were identified in a Minute issued by the Judge but only two are now in contention before us, namely: (a) The giving of assessments at intervals over 1996, 1997 and 1998, leading to three separate challenge proceedings and delay. Theassessments should, Mr McIlraith contends, have been done at the same time; (b) Failure on the CIR's part to exercise his discretion in favour of Mr McIlraith in relation to his decision not to remit interest on GST. [23] Mr Ebersohn submitted that any complaints about the steps in the investigation and disputes procedure had in any event been overtaken by the assessments. The disputes procedure provided for in Part IVA of the Tax Administration Act 1994 ("TAA") is complete. Counsel submits that this is a classic example of a situation where a court should not entertain applications for judicial review over issues which are moot. [24] The words of s 109 of the TAA are clear and unequivocal. The Supreme Court in Geoffrey Martin Smith v R [2008] NZSC 110 said at [4]:There is no justification for giving the words of s 109 [of the Tax Administration Act 1994] other than their plain meaning.[25] This approach is not novel. Lord Hoffman said in Miller v CIR [2001] 3 NZLR 316 (PC) at [18]:It will only be in exceptional circumstances that judicial review should be granted where challenges can be addressed in the statutory objection procedure. Such exceptional circumstances may arise most typically where there is abuse of power: Harley Developments Inc v Commissioner of Inland Revenue at p 736. But they have also been held to arise where the error of law claimed is fatal to the exercise of statutory power and where it would be wasteful to require recourse to the objection procedure: Golden Bay Cement Co Ltd v Commissioner of Inland Revenue at p 671.[26] This Court in Westpac Banking Corporation v Commissioner of Inland Revenue [2009] NZCA 24 has recently stated that the commencement of judicial review in other than exceptional circumstances is an abuse of process and that judicial review is not a valid alternative vehicle for collaterally challenging tax assessments. [27] The issues raised by Mr McIlraith could not come within this "exceptional circumstance" category. Therefore we agree with the respondent that the judicialreview application is, in reality, a collateral attack on the assessment which cannot succeed. [28] For completeness, however, we briefly note the two issues about which Mr McIlraith still complains. [29] As noted in [4], the assessments were issued on an annual basis shortly prior to the four year period within which the CIR was obliged to issue any amended assessments that increased Mr McIlraith's tax liability to avoid the time-bar. [30] This is the CIR's statutory obligation. Throughout the investigation, Mr McIlraith had been less than forthcoming with information requested. The CIR took the view that it was entitled (and prudent) to wait until the last opportunity for issuing assessments in each year in case Mr McIlraith might decide to provide further information. In the absence of that information, however, the CIR's duty was to make the best assessment he could on the information available. [31] If the Court might otherwise have considered this point, like Asher J we would have concluded that there was nothing unfair, improper or unlawful in the exercise which was undertaken. It was a proper response in the circumstances. [32] The other specific ground raised relates to non-remittance of interest on unpaid GST. [33] Over a number of years, there were various applications by Mr McIlraith to have tax interest and penalties remitted. There was, from time to time, a degree of confusion as to exactly which matters were being referred to. The CIR now argues that Mr McIlraith is endeavouring to seek relief in this Court in respect of matters which were not properly before the High Court. [34] Be that as it may, Mr McIlraith is adamant that the issue he is now raising is in respect of GST. Asher J concluded, at [87] of his judgment that there was no occasion on which there was a decision not to remit interest on GST. He noted there was an occasion when, under s 183 of the TAA, the CIR declined to remit GST, butthat related to penalties, not interest, and was in response to a request about penalties. [35] In his written submissions, Mr McIlraith also argued that there had been a failure by the CIR to provide reasons as to why he had decided not to remit interest on GST and that this was contrary to s 62B of the TAA and s 27 of the New Zealand Bill of Rights Act. [36] Mr Ebersohn submits that the particular issue upon which Mr McIlraith is now focussing is a matter which was not considered in the High Court. In the course of the hearing before Asher J, Mr McIlraith was specifically asked which administrative decisions he was complaining about. We are advised he told the Court he was seeking to review the decision under s 138A, referred to in a letter from Lyndsay Noble of 10 July 2001. In his submissions before us, Mr McIlraith says he has never questioned that decision. Be that as it may, Mr McIlraith is now questioning a decision under s 177 of the TAA made on 5 March 2001. [37] That matter is certainly not raised by the pleadings and is not the matter which was drawn to the attention of Asher J. However, s 177, as it applied prior to 1 April 2001, allowed the CIR to provide relief to taxpayers in respect of income tax and fringe-benefit tax. It did not provide for relief in respect of GST, or in respect of interest of any sort. There was no basis upon which Mr McIlraith could have obtained relief, even if it had been a matter at issue. [38] There is an additional point as to whether there has been a request by Mr McIlraith that all matters under s 177 should have been deferred pending the determination of the litigation. We are satisfied there is no occasion on which there has been a refusal to remit interest on GST which could be subject to judicial review. [39] In addition, Mr Ebersohn notes that there are limited powers with regard to GST interest under s 183D of the TAA. Mr McIlraith was aware of this section because on 16 July 2001 he asked for advice as to the criteria for the section's application. He has, however, never applied for relief under it.[40] We are aware that, following this judgment, the CIR is going to review the decision made in respect of the remittance of the GST interest. [41] It follows that the appeal against Asher J's refusal to grant judicial review in these two limited areas is necessarily unsustainable on a variety of bases.Result[42] The appeals are dismissed in their entirety. The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.Solicitors: Crown Law Office, Wellington