MCILRAITH V CIR HC HAM CIV 2003-419-208 M136/01

MCILRAITH V CIR HC HAM CIV 2003-419-208 M136/01 29 June 2007IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY CIV 2003-419-208 M136/01 CIV 2003-419-1060 TRA037/02 CIV 2003-419-439IN THE MATTER OF the Tax Administration Act 1994 and the Judicature Amendment Act 1972 BETWEEN DONALD HAMISH MCILRAITH Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 26, 27, 28 March and 2, 3 April 2007 (Heard at Hamilton) Appearances: DH McIlraith appearing in person H Ebersohn and C Curran-Teitjens for Defendant Judgment: 29 June 2007 at 4:00 pmJUDGMENT OF ASHER JThis judgment was delivered by me on 29 June 2007 at 4:00 pm pursuant to Rule 540(4) of the High Court Rules .. Registrar/Deputy Registrar .. DateSolicitors: DH McIlraith, PO Box 10056 Hamilton 3241 Crown Law Office, PO Box 2858 Wellington CentralTable of ContentsParagraph NumberIntroduction [1]The challenge proceedings [8]The issues [8]First issue: The assessment of private expenditure paid by SCL on Mr McIlraith's behalf of $2,791[10]Second issue: Should the assessment of $101,000 be over three years or one year, or be substituted by an assessment of the plaintiff with the net profit of SCL, or by the plaintiff's net drawings?[19]Third issue: Should there be any tax payable on the moneys Mr McIlraith received from SCL, as the claim is essentially double taxation?[28]Fourth issue: The $25,034, being the current account balance carried forward to the 1996 accounting year, was time barred and should not have been included[38]Fifth issue: Was the $42,133 treated by the Commissioner as dividends from JIL to Mr McIlraith double taxation?[41]Are the recent assessments of JIL and SCL correct? [44]Mr McIlraith's assertion that the Commissioner should have not proceeded on the basis that the moneys received by Mr McIlraith from SCR and JIL were dividends or remuneration, but should rather have assumed a tax avoidance scheme, and carried out a reconstruction[53]Judicial review [60]Are the judicial review claims moot? [63]Availability of judicial review to challenge assessment processes[66]First complaint: Claim that Mr Alan Smith should have stood down because of prior involvement with another taxpayer[75]Second complaint: Not providing Mr McIlraith with the right to be heard prior to the issue of the first NOPA and the notice to furnish information[81]Paragraph NumberThird complaint: Badgering [84]Fourth complaint: Bias – unreasonable failure to take into account ill health[86]Fifth complaint: Bias - Failure to exercise discretion to remit interest on GST[87]Sixth complaint: Providing separate assessments for 1996, 1997 and 1998 instead of a single assessment[90]General assessment of the Commissioner's position [91]Conclusion on bias [92]Result [93]Introduction[1] Donald McIlraith ("Mr McIlraith") challenges three income tax assessments issued by the Commissioner of Inland Revenue ("the Commissioner") for the income years ended 31 March 1996, 1997 and 1998. He also seeks relief from the Court by way of judicial review in respect of the decision-making relating to those three assessments. There are three separate proceedings, relating to the 1996, 1997 and 1998 years, all of which have been heard together. The judicial review claim is part of the 1996 proceedings, and relates to the assessment for the 1996 year. [2] Mr McIlraith was between 1996 and 1998 practising as a barrister and solicitor. He also had business interests in the bloodstock industry. He had earlier been an employee of the Hamilton office of the Inland Revenue Department. He then practised in the area of tax, and through the 1990s represented various high net worth individuals who had significant dealings with the Inland Revenue Department. [3] Mr McIlraith incorporated two companies, Solutions Corporate Limited ("SCL") and Jodan Investments Limited ("JIL"). In 1996 Mr McIlraith's annual financial statements recorded drawings of $40,584.00. However, his returned income for that year was $6,741.00. In the 1996 income year Mr McIlraith's drew $33,146.00. However, the income returned was $6,443.00. For the 1998 income year, he drew $37,157.00. The income tax returned was $3,823.00. For those three years Mr McIlraith paid certain sums to SCL and JIL, and received certain sums back from those companies. [4] The Commissioner commenced an investigation into Mr McIlraith's affairs in respect of these income years in January 2000. There was a degree of urgency about the investigation, because it initially related to income tax returns of Mr McIlraith for the years ended 31 March 1991 to 1998 inclusive. There were time limitations for the filing of proceedings.[5] The process of the Commissioner when carrying out such investigation is as follows: a) An initial investigation is carried out. b) Where the Commissioner proposes adjustments, he proposes adjustments in a document called a notice of proposed adjustment ("NOPA"). c) A formal notice is issued under s 17 of the Tax Administration Act 1994 ("the TAA") if the Commissioner requires any information or the inspection of any books or documents. d) If the taxpayer wishes to respond it must within two months provide a notice of response ("NOR"). If this is not done he or she is deemed to accept the adjustments proposed by the Commissioner. e) There is generally following the exchange of a NOPA and NOR, an attempt to settle the dispute. There may be a conference. No formal process is provided for in the legislation. f) The Commissioner will then issue its own assessment. If the taxpayer wishes to dispute the assessment, the formal objection procedure must be used by the taxpayer, that is set out in Part VIIIA of the TAA. [6] Mr Allan Smith ("Mr Smith") an investigator with the Inland Revenue Department, Investigations, in the Hamilton Service Centre, was appointed to investigate Mr McIlraith's affairs when the investigation commenced in January 2000. On 25 January 2000 he visited Mr McIlraith at home to discuss the investigation, and handed to him an initial investigation letter, a formal notice under s 17 of the TAA, and a NOPA relating to the years ending 31 March 1994 to 31 March 1998. This was the commencement of a prolonged interchangebetween Mr Smith and his colleagues in the Hamilton Service Centre, and Mr McIlraith. [7] The Commissioner issued three assessments as a consequence of its investigation, which are the subject of this proceeding. The dates of those assessments were: a) For the 1996 year, 27 March 2001; b) For the 1997 year, 26 March 2002; and c) For the 1998 year, 18 March 2003.The challenge proceedingsThe issues[8] The two statements of claim involve challenge proceedings, and seek amendments of the assessments made. A broad prayer for relief is included seeking to cancel the effects of the adjustments. It is not easy to discern the exact claims from those documents. [9] During the course of a one-day opening the exact issues being raised by Mr McIlraith became apparent. I circulated and obtained his approval of a minute which set out the issues. Mr McIlraith has confirmed that it is accurate. I will not set out all the terms of the minute, which is Minute No. 4 dated 28 March 2007, but I will, however, set out the stated issues relating to the challenge to the assessment: 1) The assessment of private expenditure paid by SCL on Mr McIlraith's behalf is no longer at issue, save for the payment of $2,791 which he says should be deducted as actual business rent. There should [have been] no such [assessments].2) The claim as to net drawings of the plaintiff from SCL gives rise to two issues: a) should the assessment of $101,000 have been over 3 years or 1 year, or be substituted by an assessment of the plaintiff with the net profit of SCL, or by the plaintiff's net drawings? b) should there be any moneys payable, as the claim is essentially double taxation? 3) The claim as to net drawings of the plaintiff from JIL gives rise to two issues: a) No net drawings at all are assessable, because JIL had no profit to sustain dividends, but if they are: i) is the 1995 figure of $25,034 time barred? ii) does the $42,133 amount to double taxation? b) Should the sum of $5,000 (identified as Ascot bloodstock) be assessed to the plaintiff? Mr McIlraith since opening has produced some further documents relating to this item. The Commissioner has considered them, and he has decided that Mr McIlraith's position on the $5,000 is correct. It is no longer at issue.First issue: The assessment of private expenditure paid by SCL on Mr McIlraith's behalf of $2,791[10] Throughout the relevant tax years Mr McIlraith carried out his legal practice from premises at 27 Richmond Street, Hamilton. The landlord was a Mr Chris Parker. Mr McIlraith also resided at that address personally from 3 May 1996 to 1 September 1997.[11] During the relevant 1996 to 1998 period, SCL and JIL paid all the rent on those premises. This issue relates specifically to SCL's notes to its annual general accounts for the period 1 April 1996 to 12 September 1997 (the date of SCL's liquidation). On page 2 of those notes it is recorded that rental is paid by SCL of $5,500. The notes also record that Mr McIlraith paid $2,708.32 towards the rental. GST was charged on this amount indicating that it was not rental from Mr McIlraith's private use of the premises, but rather a business use. [12] In his income tax return Mr McIlraith claimed the entire $2,708.32 together with GST as a deductible expenditure. The Commissioner concluded that the balance of the rental paid by SCL of $2,791.68 (being $5,500 - $2,708.32) was expenditure by SCL for the private benefit of Mr McIlraith. That $2,791.68 was assessed to Mr McIlraith. The Commissioner accepts that the whole $5,500 should not have been so assessed. [13] Mr McIlraith argues in the challenge proceedings that the Commissioner's assessment that the payment of $2,791.68 should be attributable as payable on his behalf, is wrong. He asserts that he paid rent to SCL for his five months of occupation, and has set out a complex calculation in support of that assertion. He has asked me to infer that he did in fact pay SCL personally for his accommodation. [14] However, he has not satisfied me that there is any evidence that he did pay SCL in this way. On discovery Mr McIlraith produced SCL's notes to the accounts for the 1998 year. They provided a background in respect of the rental. No amount is recorded as being received from Mr McIlraith by SCL for private rental expenditure. [15] The $5,500, of which the $2,791 was a payment, was paid to Chris Parker by SCL. Moreover, GST was charged on the amount paid by Mr McIlraith to SCL, indicating that it was not rental for Mr McIlraith's private use of the property, but rather for his business use.[16] During cross-examination of Mr Smith, Mr McIlraith sought to establish that taken together JIL and SCL had been paid a sufficient amount by him to cover any private use of the premises. However, he did not succeed in doing so, and no doubt was cast on the approach taken by Mr Smith. There is simply no evidence that satisfies me that Mr McIlraith has made any payment to SCL to reimburse it for his private residential accommodation. [17] There is no basis for saying, as Mr McIlraith sought to do, that even though no money was paid for private use, a $6,600 payment he made to JIL should be treated as an off-set. It is not possible to cross over tax obligations between corporate entities. Even if JIL was overpaid by Mr McIlraith, that does not affect the SCL position. [18] I am satisfied that the Commissioner was correct in assessing the $2,791 as a payment by SCL for the benefit of Mr McIlraith personally, and effectively a dividend, or monetary remuneration, or income under a tax avoidance arrangement. I decline to alter the assessment in that regard.Second issue: Should the assessment of $101,000 be over three years or one year, or be substituted by an assessment of the plaintiff with the net profit of SCL, or by the plaintiff's net drawings?[19] The Commissioner assessed $101,000 as taxable payments by SCL to Mr McIlraith during the 1996 income year. These amounts were $78,000 for the alleged sale of the business and $23,000 for the sale of the lease. The Commissioner, for reasons set out above, found that there was effectively no consideration for either sale. He treated the sums as dividends, or remuneration, or part of a tax avoidance scheme. [20] Mr McIlraith argued that it was artificial and unfair to assess $101,000 in the 1996 year. He made no attempt to justify the sales of the business and the lease, and his submissions appear to be premised on the basis that those sales were part of the tax avoidance scheme. He submitted, rather, that this being so, he should have been taxed for the profit of his legal business for the 1996, 1997, and1998 years, rather than the whole $101,000 being assessed with the 1996 year. The advantage to him, if that submission was successful, would be that he would pay less tax, because his practice income, spread over three years, would be lower. [21] Further, in cross-examination Mr McIlraith put it to Mr Smith that in making the assessment Mr Smith took account of the company's income as set out in the financial statements. To this Mr Smith firmly replied:No, what we did was say you received $101,000 purportedly for the sale of lease and administration business which we contend has zero value and hence is a deemed dividend and in the alternative if it was a deemed dividend it was monetary remuneration or alternatively was tax avoidance [22] It is necessary, in this context, to consider whether the $101,000 was properly assessed in the 1996 year. The assessments involved amounts received by Mr McIlraith from SCL and JIL in the 1996 income year. The amounts received were either: a) amounts paid directly to Mr McIlraith; or b) amounts paid on behalf of Mr McIlraith; or c) amounts paid for the personal benefit of Mr McIlraith. [23] These background matters have not been contested by Mr McIlraith. There is no doubt that he received $101,000. A taxpayer is taxed on income derived during the income year in which that income is received. Section BD 3(3) of the Income Tax Act 1994 states:OTHER GROSS INCOME (3) An amount of gross income that is not subject to a timing regime must be allocated to the income year in which the amount is derived.[24] "Derived" is not defined in the Act, but it has been held to apply to the year when the income is received. It was stated by Lord McNaughton in Tennant v Smith [1982] AC 150 at 164, quoted in New Zealand Income Tax Law and Practice (CCH Vol 1):[Income tax] is a tax on what "comes in" – the actual receipts.[25] I am satisfied that it was correct for the Commissioner to allocate the entire $101,000 for the 1996 year. That was when Mr McIlraith received the payment. It could not be spread by the Commissioner over the other years. If this results in Mr McIlraith paying more tax than he would have if he had declared the income from his legal practice in the usual way, then he has only himself to blame. He arranged for the payment of $101,000 to be made for the 1996 year, and must face the consequences of that. [26] While there was only a circular exchange of cheques, for the reasons that I will mention later, there was no double taxation. [27] Mr McIlraith's other suggestion, that the assessment should be substituted for an assessment of the net profit of SCL for each of the three income years, or spread by reassessing Mr McIlraith's net drawings in each income year, is not feasible. Such a measure would create its own fiction. I accept the Commissioner's submission that there is simply no principled basis for ignoring the payments that were actually made to Mr McIlraith, and assessing them in the usual way.Third issue: Should there be any tax payable on the moneys Mr McIlraith received from SCL, as the claim is essentially double taxation?[28] Mr McIlraith submitted that given that the Commissioner has assessed SCL with its income, to assess the plaintiff with the same income lead to double taxation. He challenged the Commissioner's conclusion that the $101,000 was part of a deemed dividend. He submitted that the $101,000 was not a dividend or a deemed dividend for the following reasons: a) A dividend requires the distribution of sums of money. He submitted that there was nothing more than an exchange of paper, and that if the cheques had not been drawn and deposited concurrently nothing could have happened;b) There was no deemed dividend because there was no property transferred as required by s CF 2(1)(d). That sub-section reads that dividends include: the value of any property that is acquired from any shareholder of the company to the extent that the consideration provided by the company for the property exceeds the market value of the property.Given that the sales of the lease and business have effectively been put to one side by the Commissioner, no property was acquired by the company from him. c) He also submitted that there was no dividend because payment by the company would be unlawful. He submitted that to consider the payment a dividend would be a breach of s 52 of the Companies Act 1993, which allows distributions only if the company satisfies a solvency test. d) He also submitted that there was no dividend because dividends can only come from profits, relying on the decision of Campbell v Commissioner of Inland Revenue [1968] NZLR 1. [29] A dividend for the purposes of the Income Tax Act 1994 does not necessarily have to correspond to a payment that is a dividend under the general law. Section CF 2(1) defines the term dividends, and there is nothing in that definition to indicate any requirement that dividends must be paid out of profits. The fact that the ordinary meaning of the concept of dividends can be modified by the Income Tax Act 1976 was expressly recognised in a decision of the Taxation Review Authority, M119 (1990) 12 NZTC2,760 at para [17]. Relying on this case it is stated in the "New Zealand Master Tax Guide" at p 686 that "the terms of a statute may classify a transaction as a dividend, even though the transaction may not be so regarded under the general law". [30] The focus for income tax purposes is not on whether the sum is capital revenue or reimbursement. Rather, it is whether the payment is in respect of or inrelation to employment: Shell New Zealand Ltd v CIR (1993) 15 NZTC 10,322, Grieg J. [31] I do not consider that the decision of Campbell v CIR relied on by Mr McIlraith takes the matter much further. In that case Justice McGregor relied on the Australian decision of FCT v Blakely (1951) 82 CLR 388 where the relevant Australian statutory provision expressly related to dividends paid by the company out of profits. There is no such provision in New Zealand relating to the present situation. [32] As to double taxation, the $101,000 paid by SCL to Mr McIlraith for the sale of the business and the sale of the lease was paid out of a circular flow of funds that took place on 29 March 1996. The $101,000 was funded first by a payment of $55,000 that was paid by Mr McIlraith to JIL, and then loaned by JIL to SCL. [33] When Mr McIlraith paid this amount to JIL there was a credit of $55,000 to his current account balance. This reduced his drawings to JIL. Mr McIlraith received the tax benefit when this amount was paid. Thus, when the amount was assessed as returned to Mr McIlraith, the tax benefit of the circular flow of funds was removed. [34] The $101,000 was also funded by a payment of $25,875 paid by Mr McIlraith to SCL for administration fees. Mr McIlraith deducted this amount from his income for tax purposes in the 1996 income year. He therefore obtained a tax benefit as a result of the circular flow of funds. [35] The $101,000 was lastly funded by a loan of $23,000 made by Mr McIlraith to SCL. The loan was repaid over a period of time by SCL. The repayments were not taxed. Therefore, the original circular flow of funds enabled Mr McIlraith to access a further $23,000, being the loan repayments without incurring tax. Mr Smith in assessing the $23,000 was merely removing the tax advantage created by the circular flow of funds.[36] The Commissioner has not sought to disallow the deductions that were claimed by Mr McIlraith. He has assessed the sales of the business and lease as income to Mr McIlraith. The levered assessment has merely removed the tax benefit obtained from the circular flow of funds. [37] If the $101,000 had not been so assessed, Mr McIlraith would have underpaid his tax, as he would have received unjustified tax benefits. I am satisfied that there was no double taxation.Fourth issue: The $25,034, being the current account balance carried forward to the 1996 accounting year, was time barred and should not have been included[38] $25,034 was the current account balance from 1995 that was carried forward into the 1996 accounting year. Mr McIlraith relies on s 108 of the Tax Administration Act 1994, which provides that an assessment may not be increased after four years. However, the relevant time bar relating to the 1995 income year is that contained in s 25 of the Income Tax Act 1976, which was in similar terms. It provided:(1) When any person has made returns and has been assessed for income tax for any year, it shall not be lawful for the Commissioner to alter the assessment so as to increase the amount thereof after the expiration of 4 years from the end of the year in which the [notice of original assessment was issued]. (2) Notwithstanding subsection (1) of this section, in any case where, in the opinion of the Commissioner, the returns so made are fraudulent or wilfully misleading or omit all mention of income which is of a particular nature or was derived from a particular source, and in respect of which a return is required to be made, it shall be lawful for the Commissioner to alter the assessment (being an assessment made on or after the 1st day of April 1958) at any time so as to increase the amount thereof.[39] I consider that Mr McIlraith's submission is based on a misunderstanding as to the nature of the 1996 assessment. The Commissioner was not seeking to increase the assessment for the 1995 income tax year. He was merely correctly inserting, as he had to, the current account balance to be carried forward. The Commissioner has not amended the assessment for the 1995 year. Obviously, a balance must always be carried forward. I do not consider that the inclusion of the current account balance of $25,034 was time barred.[40] Even if the Commission was seeking to alter an assessment for a time barred year, it would have been in part to do so in terms of s 25(2). Mr McIlraith had in fact shown no income from JIL for the 1995 income year. In terms of s 25(2) he had omitted to mention all income from that source. The Commissioner was in those circumstances entitled to assess income for that year under s 23(2), even if it was to increase the assessment outside of the four year period.Fifth issue: Was the $42,133 treated by the Commissioner as dividends from JIL to Mr McIlraith double taxation?[41] Mr McIlraith claims that the $42,133 was taxed both when income sourced from SCL was taxed, and then when JIL paid that amount to him. He says that the payments have been taxed twice in his hands, once in relation to SCL and once in relation to JIL. In his submissions he stated that the amounts in issue were for 1997, $69,212, and for 1998, $17,435, the total being $86,647. He submits that it is absurd to allege that $86,647 would be paid in remuneration to him, thereby creating a tax loss and insolvency. The submission is really part of a more general submission that no net drawings by him from JIL are assessable as dividends or remuneration, as JIL had no profit to sustain such payments. [42] However, Mr McIlraith was not assessed in respect of SCL's retained earnings. He was assessed in respect of particular amounts that were paid to him or paid for his benefit. In respect of both SCL and JIL he was assessed for specific amounts that were derived by him from those companies. He has not asserted that he did not receive those benefits. [43] Mr McIlraith attempted to prove the figure of $42,133 by using some yearly spreadsheet calculations of Mr Smith, that he had made during the course of his investigation. Those calculations were made off bank statements and other source documentation. They were a first attempt and had never been put forward by the Commissioner as accurate. At a later stage Mr Smith obtained the actual accounts of SCL, and no longer had to rely on the spreadsheet. He disavowed them in evidence, and I do not consider that Mr McIlraith can make anything of them. They are certainly not evidence as to the correct position. This is anattempt by him to create evidence advantageous to his cause, while not actually giving evidence himself.Are the recent assessments of JIL and SCL correct?[44] Mr McIlraith contends that the defendant must accept as correct in all respects the assessments of JIL and SCL that were made, following a submission of returns on behalf of those companies that Mr McIlraith made in 2006, after he had been subject to the disputed assessments. [45] SCL was liquidated on 12 September 1997 and removed from the Register of Companies. It was only recently restored to the Register of Companies and only filed its income tax returns for 1996 to 1998 on 18 August 2006, 31 August 2006, and 28 September 2006. [46] JIL never had an IRD number and never filed any returns. It was removed from the Companies Register in 1999 and only recently restored on 7 July 2005. JIL only filed its 1996 to 1998 income returns in August 2006. [47] All these returns were filed after the issuing of these proceedings and indeed after the allocation of a hearing date. I infer that their filing had a tactical purpose, related to these proceedings. [48] Mr McIlraith did not inform those involved in his personal assessments that he was filing these returns. The Commissioner issued assessments without being aware of the implications of the SCL and JIL position in relation to Mr McIlraith or the proceedings. So the assessments were merely a function of the officer involved and the computer system automatically producing a Notice of Assessment. Neither Crown Law nor the investigator, Mr Allan Smith, were advised of the filing of the returns. Mr McIlraith now seeks to rely on the assessments that were made as a consequence, and suggests that those later assessments of the companies have trumped the assessments made of his personal tax position.[49] However, any analysis of the accounts of JIL and SCL filed with those returns shows that they were materially incorrect. The accounts of JIL have been consolidated with its shareholder, W R Ranton. The JIL accounts exclude income from administration fees for both the 1995 and 1998 income years. The accounts exclude alleged interest charged by JIL to Mr McIlraith. JIL's accounts do not appear to mention Hamilton Stud Bloodstock. Mr McIlraith's drawings are not properly recorded in the JIL accounts, and the interest charged to SCL by JIL is not properly reflected. The JIL accounts exclude as income the amounts it received for administration fees and do not record entertainment expenses in the 1997 and 1998 income years. The SCL accounts do not include the $23,000 payment for the alleged assignment of lease, and show that the administration business was purchased for $55,000 (instead of the originally shown figure of $78,000). [50] I do not consider that Mr McIlraith can use these assessments as a strategy for casting doubt on the assessments made in respect of him personally. It was stated by the Court of Appeal in Dandelion Investments Ltd v CIR (2003) 21 NZTC 18,010 at para [86]:We do not agree with this analysis as there is no necessary inconsistency in disallowing the appellant's deduction of the interest while at the same time taxing it as income in the recipient's hands. But in any event the Commissioner was entitled in the exercise of the discretion under s 99(3) to disallow the appellant's claim for deduction, and as long as the Commissioner was of the opinion it was a proper adjustment to make under s 99(3) it cannot be attacked on the basis that the Commissioner has not simultaneously amended an inconsistent assessment of another taxpayer.[51] Moreover, it would be impractical and defeat the purposes of the legislation, to require the Commissioner when he makes an assessment of one taxpayer which is inconsistent with an earlier assessment of another taxpayer, to simultaneously amend the earlier assessment: Miller v CIR, Managed Fashion Ltd v CIR (1998) 18 NZTC 13, 961. The later assessments do not by any means constitute a waiver or estoppel, binding the Commissioner. They were effectively obtained by virtue of a false representation, namely the incorrect and misleading 2006 returns. The Commissioner's 2006 assessments of different entities cannotremotely be regarded as an unambiguous representation as to a state of events upon which Mr McIlraith relied. [52] For these reasons I do not regard the 2006 assessments of SCL and JIL as of any relevance to the matters at issue in these proceedings.Mr McIlraith's assertion that the Commissioner should have not proceeded on the basis that the moneys received by Mr McIlraith from SCR and JIL were dividends or remuneration, but should rather have assumed a tax avoidance scheme, and carried out a reconstruction[53] I have already refused to accept Mr McIlraith's submission that the Commissioner was wrong in assessing the moneys he received from SCR and JIL as dividends. In case in am wrong in that conclusion, I go on to consider the alternative approach taken by the Commissioner, that the moneys received by Mr McIlraith were in the alternative remuneration, and that in any event on reconstruction following disallowance for tax avoidance, the Commissioner's assessments were correct. [54] I have no doubt that the arrangements entered into by Mr McIlraith using SCL and JIL, detailed earlier in this judgment, constituted a tax avoidance arrangement under s OB1 of the Income Tax Act 1994. They had the intention and effect of reducing Mr McIlraith's income, as the Commissioner has submitted, in three respects: a) They allowed him to deduct administration fees while SCL and JIL did not return the administration fees as income. b) They provided companies through with Mr McIlraith's income could be diverted. c) The funds paid to SCL or JIL, either by Mr McIlraith for administration fees, or by third parties, were, by the devices created, channelled to him as capital as the sale of an administration business or the sale of a lease, or paid for his benefit or on his behalf.These were amounts that should have been returned as income, but were not as a consequence of the devices used. The transactions were part of an arrangement applied in a concerted way and for a predetermined end: Elmiger & Anor v CIR[1966] NZLR 683 at 694, AMP Life Ltd v CIR [2000] 19 NZTC 15,940. [55] I am satisfied that the arrangements put in place in the 1996, 1997 and 1998 years involving SCL and JIL constituted an arrangement that avoided tax, and directly or indirectly had tax avoidance as a purpose or effect. The purpose and effect was not merely incidental. I also accept that the following reconstruction could appropriately be made: a) The administration fees should be disallowed. b) The amounts paid to for the benefit of or on behalf of Mr McIlraith, should be considered to be income for Mr McIlraith (unless such amounts have already been held to be dividends or monetary remuneration). This will include the $78,000 paid for the purchase of the administration business and the $23,000 paid for the sale of the lease. I accept that Mr Smith has correctly avoided double taxation, by reducing the reconstruction in respect of the circular flow of funds. [56] The effect of the arrangement was to directly and indirectly alter the incidence of income tax, by altering it from Mr McIlraith to JIL and SCL. It had the effect of directly or indirectly relieving him from liability to pay income tax or reducing his liability for income tax in terms of s OB1 of the Act. I have no doubt that on the meagre income shown in his returns, he could not have supported himself, even on a modest lifestyle. The arrangement cannot be explained by any business purpose. It can only be explained by the tax benefits that were derived from it. I do not propose setting out the arrangement in further detail, as Mr McIlraith has not really contested such a conclusion.[57] Any reconstruction must focus on counteracting the tax advantages obtained under the arrangement. As Lord Hoffman said in O'Neill v CIR (2001) 20 NZTC 17,051 in delivering the judgment of the Privy Council at 17,059:The Commissioner's duty is to make an assessment with regard to what in his opinion was likely to have happened if there had been no scheme . The reconstruction is purely hypothetical and provides a yardstick for the assessment.As stated in GB1 of the Income Tax Act 1994, the Commissioner has a wide discretion in respect of reconstruction. The Commissioner may "counteract any tax advantage obtained by that person from or under the arrangement". [58] In relation to tax avoidance, Mr McIlraith wishes to rely on the recent assessments that he had induced for JIL and SCL. As I understand it he suggests that there should be a reconstruction, incorporating the consequences of those recent assessments. I have already dealt with this submission. He cannot rely on that assessment. Rather, the Commissioner's reassessment would apply in the alternative to Mr McIlraith's taxation affairs as follows: a) The $78,000 paid by SCL to Mr McIlraith is reconstructed as income of Mr McIlraith. b) The $23,000 paid by SCL to Mr McIlraith is reconstructed as income of Mr McIlraith. c) The various payments by SCL and JIL on behalf of or for the benefit of Mr McIlraith (including payments to Mr McIlraith) are reconstructed as income of Mr McIlraith. d) The administration fees by SCL and JIL to Mr McIlraith are disallowed. e) To avoid double taxation, where the administration fees have been disallowed, the remaining items of the reconstruction are reduced by the amount of the administration fees.[59] I conclude the Commissioner's alternative approach involving a reconstruction to have been accurate and correct.Judicial review[60] Mr McIlraith seeks judicial review of aspects of the procedures that led to the assessment. Under this head he no longer seeks any relief setting aside any particular decisions. Rather, he seeks declarations as to the impropriety of certain aspects of the investigation. Again, in the course of his opening he identified the particular complaints which he pursued, and I recorded these in a Minute in his presence. That portion of the Minute relating to judicial review is as follows:2.5 Claim of actual or apparent bias on the part of the Commissioner. Examples of this bias include: (a) The investigation being carried out by Mr Alan Smith (who should have been stood down because of his prior involvement with another taxpayer for whom Mr McIlraith acted); (b) Not providing Mr McIlraith with the right to be heard prior to the issue of the first NOPA and the notice to furnish information; (c) Badgering; (d) The unreasonable failure to take into account Mr McIlraith's illness at various times. 2.6 The giving of assessments at intervals over 1996, 1997 and 1998 leading to three separate challenge proceedings and delay. The assessments should have been done at the same time. 2.7 Failure on the Commissioner's part to exercise his discretion in favour of Mr McIlraith in relation to the decision not to remit interest on GST.[61] In the course of his closing submissions Mr McIlraith stated that the failure on the Commissioner's part to exercise his discretion in his favour in relation to the decision not to remit interest on GST, was really a particular of bias and should be seen as part of an allegation that there was a wrongful failure to give reasons.[62] In response the Commissioner made a number of general and particular submissions. It was pointed out that Mr McIlraith was no longer seeking by judicial review to question of validity of assessments, but merely seeking declarations as to the correctness of steps in the investigation and disputes procedure. The exercise therefore was meaningless and moot. Mr McIlraith could only obtain redress through the challenge proceedings, and they were the only proper subject of the Court proceeding.Are the judicial review claims moot?[63] It is clear that a Court will not entertain claims for relief where the relief will be moot: Gregory v The Rangatiki District Council [1995] 2 NZLR 208; seeSimpson v Whakatane District Court [2006] NZAR 247. This is consistent with our adversarial system and the assumption that the Courts will use their valuable resources on deciding live issues between parties, rather than providing opinions on academic questions where there will be no practical result. The Court does, however, retain a discretion to consider moot points where it is in the public interest to do so: Director of Proceedings v I (2004) 17 PRNZ 390 at [22]. This discretion is to be exercised cautiously, where it is, for example, likely to be of future value in a large number of similar cases and where detailed consideration of the facts is not required: R v Secretary of State for the Home Department, ex parte Salem [1999] 1 AC 450 at 456. [64] I am satisfied that the submission of the Commissioner that the claims are moot is correct. What Mr McIlraith effectively wants from the Court are expressions of opinion, condemning the actions of the Commissioner. He stated that obtaining the declarations he seeks would be "helpful for taxpayers". He seeks an indication as to taxpayers' rights. This may have an element of public interest. However, Mr McIlraith makes specific factual claims in respect of the Commissioner's conduct towards him. Any declarations granted require detailed consideration of the particular facts, and would not be of significant precedent value for other cases.[65] Mr McIlraith's judicial review proceedings fail on this initial point. He does not properly seek to invoke the judicial review jurisdiction. His judicial review claims are directed at specific allegation of bias against him. They are no longer directed at challenging the validity of the assessments. Rather, declarations of opinion as to the conduct of the Commissioner in respect of Mr McIlraith are sought. There does not appear to be a public interest component which would sway this Court to exercise its discretion to consider the matter in any event. As noted above, as the judicial review claims are based on specific allegations of bias in respect of conduct towards Mr McIlraith, there is no wider public interest value in considering these specific factual matters. Further, as I will outline below, the challenge proceedings have cured any breach of the rules of natural justice.Availability of judicial review to challenge assessment processes[66] Section 27 of the now repealed Income Tax Act 1976 provided:27 Assessments Deemed Correct Except In Proceedings On Objection (Repealed)Except in proceedings on objection to an assessment under Part 3 of this Act, no assessment made by the Commissioner shall be disputed in any Court or in any proceedings (including proceedings before a Taxation Review Authority) either on the ground that the person so assessed is not a taxpayer or on any other ground; and, except as aforesaid, every such assessment and all the particulars thereof shall be conclusively deemed and taken to be correct, and the liability of the person so assessed shall be determined accordingly.[67] There is a statutory objection procedure set out for challenges to assessments. The Courts have consistently held that any attack on the validity of an assessment, or on the process by which an assessment is reached, can and should be brought using those statutory challenge procedures and not by judicial review. Thus in Golden Bay Cement Co. Ltd v CIR [1996] 2 NZLR 665 (CA) McKay J said at p 671:Section 30 [of the Income Tax Act 1976] is intended to provide the primary means by which an assessment or apparent assessment can be challenged. If the taxpayer wishes to challenge it, whether as to its correctness or as to its validity, he is able to do so by the objection procedure.[68] In CIR v Titoki Cabarets (1989) Ltd [2001] 1 NZLR 147 the Court of Appeal struck out an application for judicial review on the grounds that the challenge procedure should have been followed. This approach was endorsed by the Privy Council in Miller v CIR [2001] 3 NZLR 316. Lord Hoffman stated at p 329:It will only be in exceptional cases that judicial review should be granted where the 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.[69] The Court of Appeal in Golden Bay Cement Co. Ltd at p 672 was of the view that in exceptional circumstances judicial review is available. Indeed, in that case it was persuaded to make an exception and to consider the issues by way of judicial review. The exceptional circumstances there were procedural; the matter had proceeded by way of judicial review without objection up to the Court of Appeal hearing, and it would have been wasteful of the resources of the Court to now require the matter to be reargued as challenged proceedings. Unlike the position in Golden Bay Cement, the challenge procedure has been invoked here and is underway. [70] Mr McIlraith submitted that a rejection of review would involve a Court turning its back on s 27(1) of the New Zealand Bill of Rights Act 1990, which gives every person the right to the observance of the principles of natural justice. However, such a submission overlooks the fact that Mr McIlraith has a full right to the application of the principles of natural justice in the challenge proceedings. Those challenge proceedings are heard either in the Taxation Review Authority or in the High Court. When they are heard, the taxpayer has a full opportunity of a hearing. Allegations of the type that are made in this case, such as bias, do not need to be determined, because in the course of the consideration of the challenge procedures, any bias in the processes that have led to the assessment and challenge, will generally become irrelevant and moot. The taxpayer has the full opportunity to be heard in accordance with the rules of natural justice by goingthrough the challenge procedure. I refer to Walker v Waiheke High School Board of Governors HC Auckland, A2550/88, 9 September 1994, Blanchard J, where in the context of a two-tier process (investigation and hearing), a full hearing on the merits at the second stage was said to be capable of curing defects of natural justice at the earlier stage. [71] Once before the Taxation Review Authority or the High Court the focus is on what is the correct assessment, not the procedure by which the assessment was made. The hearing of a challenge before the Court is a de novo hearing. Once before the Taxation Review Authority or the High Court, the Authority or Court has all the powers, duties, functions and discretions of the Commissioner: Russell v Taxation Review Authority (2000) 19 NZTC 15, 924 at para [12]. In Dandelion Investments Ltd v CIR [1997] 2 NZLR 96 it was stated at p 102 by Salmon J:A challenge to process is effected, therefore, not by attacking the method by which the Commissioner reached his decision, but by calling the evidence necessary to enable the Taxation Review Authority to make the correct decision.[72] In Miller v CIR, Managed Fashion Ltd v CIR (1998) 18 NZTC 13, 961at 13, 975 Blanchard J stated:The Judge was right to hold that to the extent that there may have been any justification for these complaints, any unfairness was cured at the TRA hearing. We agree with the Judge's factual conclusions on this point.Mr McIlraith has had a full opportunity to be heard in this proceeding. I therefore do not accept his submission that there has been a broad failure to observe the rules of natural justice in relation to the assessment processes. [73] In case I am wrong in these conclusions, and given Mr McIlraith's apparent deep sense of injustice as to the way in which he was dealt, I propose dealing with his particular judicial review submissions. [74] I now turn to his specific complaints.First complaint: Claim that Mr Alan Smith should have stood down because of prior involvement with another taxpayer[75] Mr Smith considered that the income tax returns for Mr McIlraith showing a return taxable income of $3,823 for a practising solicitor seemed very low. Mr McIlraith appears to assume that Mr Smith was prejudiced against Mr McIlraith because he had investigated other taxpayers and their companies for whom Mr McIlraith had acted. [76] The particular role of the Commissioner and those working for the Commissioner, in having to pursue taxpayers through lengthy processes on an investigatory basis, was recognised by the Court of Appeal in Russell v TRA(2001) 20 NZTC 17,418 at [9]:But, even if it is assumed that the Commissioner did have the dislike of Mr Russell which might have inclined him to look for an opportunity of assessing Mr Russell's clients, that would be of no continuing relevance if, in the end, the Commissioner made his assessments in due time and in accordance with the law and to the best of his judgment.[77] The statutory role of the defendant is a dual role of investigator on the one hand, and prosecutor and adjudicator on the other. This is envisaged by the various Inland Revenue Acts. The Commissioner is required in terms of those Acts to collect over time the highest net revenue (TAA s 6A(3)). The defendant is given both extensive investigatory powers at s 16-19 of the TAA, and then the power to adjudicate on the taxpayer's liability by amending the taxpayer's assessments (s 113 of the TAA). [78] There is a natural and inevitable tension between the two roles of prosecutor and investigator, which in a judicial context would be unacceptable but which in the context of the New Zealand Inland Revenue Acts, is specifically contemplated and permitted. As is stated in Administrative Law, 9 th ed (Wade & Forsythe 2004) at p 458, prior involvement does not disqualify where the nature of the role created would make it "impractical to disqualify". It was stated there:Company inspectors investigating a company have a policing function and cannot realistically be expected to be unbiased, since they are bound to be acting on suspicion; and it is therefore no objection that the sameinspectors have previously investigated a similar company under the same management.[79] Woolf J put it this way in R v Secretary of State for Trade & Ors, Ex parte Perestrello & Ors [1981] 1 QB 19 at 35:When one considers the functions of those offices, it really is wholly inappropriate to talk about them not being regarded as biased if they are performing their functions properly they are acting in a policing role. Their function is to see whether their suspicions are justified by what they find, and that being so, it is wholly inappropriate for the case to be approached in the same way as one would approach a person performing a normal judicial role or quasi-judicial role.[80] There is no hard evidence that Mr Smith indeed did have any dislike or hostility for Mr McIlraith. Mr Smith had not previously investigated Mr McIlraith. He had investigated some of his clients. He was cross-examined, and having heard his evidence I find that he was not hostile to Mr McIlraith, or pursuing any inappropriate agenda. He was just doing the job that he had been asked to do by the Commissioner, and in accordance with his role as an investigator. Given the dual role that he had in any event, I cannot remotely see any basis for an allegation of bias.Second complaint: Not providing Mr McIlraith with the right to be heard prior to the issue of the first NOPA and the notice to furnish information[81] Mr McIlraith alleges as an example of bias, that the Commissioner failed to give him the right to be heard prior to the issue of the first NOPA and the notice to furnish information. I accept the Commissioner's submission that this is a rather disingenuous proposition, considering Mr McIlraith's uncooperative, if not hostile, attitude to the investigation from the outset. Mr McIlraith provided formal notices of response (NORs), which was the minimum requirement if he wished to dispute the Commissioner's notices, but did nothing else to assist. He specifically refused to agree to a time bar waiver, to give the Commissioner, through Mr Smith, more opportunity to consider any representations made. He failed entirely to provide any information in response to the s 17 requests. Some of his actions can only be described as obstructive. For instance, when Mr Smith and another investigator called at his home on 14 December 2000 to collect documents sought under a s 17 notice, Mr McIlraith handed him a questionnaireasking for Mr Smith's address, passport number, driver's licence number, utility accounts and whether he would uphold international law and the Magna Carta, and other questions, which indicated a point-taking and uncooperative attitude to the investigation. [82] It is also to be observed that the NOPA is not the assessment itself. It is an initiating action, being a notice proposing an adjustment. Its purpose is "open and full communication" between taxpayers and the Commissioner (s 89(a) of the TAA). It is a basis for ensuring that the Commissioner does not issue an assessment until there has been some formal and structured dialogue with the taxpayer as to the basis upon which the Commissioner will issue any assessment or amended assessment. As Lang J observed in Vinelight Nominees Ltd v CIR(2005) 22 NZTC 19,519 at [29], the legislature set up this process as providing a means of resolving disputes without the need for formal referral to the Taxation Review Authority or a Court. [83] The formal response process to a NOPA envisaged by Part 4A of the TAA, is a notice of response (NOR) within the appropriate period. This is a formal document which provides the taxpayer's response to the proposed assessment. It must be provided within two months of the NOPA. Mr McIlraith did provide a NOR in relation to the 1995 assessment, and it is to be noted that in response to that NOR Mr Smith, after considering Mr McIlraith's response, decided not to issue any assessment in respect of that year. This does not indicate bias.Third complaint: Badgering[84] Mr McIlraith undoubtedly harbours a deep sense of injustice as to what he considers to have been the over-assiduous and pedantic communications he received from Mr Smith and others of the Commissioner's office. I do not propose going into the detail of this allegation. There is no doubt that the Commissioner's correspondence was assiduous and careful, to the point of being pedantic. It had to be. It faced in Mr McIlraith an educated taxpayer who had adopted a hostile and uncooperative position, and who was clearly going to takesuch advantage as he could of any error or carelessness on the part of the Commissioner. Mr Smith and his colleagues cannot be blamed for the extremely careful approach taken. They did after all face a taxpayer who had since 1990 been entering into arrangements aimed at paying outstanding tax, and who consistently had failed to make payments due under arrangements made, and who while paying off back-taxes had often defaulted on current taxes. He had required constant monitoring up to that point and already created large amounts of administration work for the Department. In relation to the investigation initiated in 2000, he had adopted a patently hostile and uncooperative position. [85] While Mr Smith may in Mr McIlraith's eyes, have been an exemplar of the fussy, relentless and unpopular stereo-type of a tax inspector, it is part of the nature of the Commissioner's job that nothing can be taken for granted, and indignant responses are one of the perils of office. If Mr McIlraith had been a cooperative taxpayer, some criticism might have been warranted, but even if that was the case, the Commissioner's actions would not have amounted to bias. Given Mr McIlraith's hostility, the very careful approach taken by the Commissioner was entirely warranted, and I am not critical of any of the steps taken.Fourth complaint: Bias – unreasonable failure to take into account ill health[86] As with badgering, it is difficult to see how a failure to take into account ill health could of itself amount to an indication of bias. In any event, I do not consider that this criticism, as with the badgering criticism, has any merit. Mr Smith became aware that Mr McIlraith had been to hospital early in the investigation, but he was not aware that he suffered from any general ill health. Mr McIlraith was, after all, adopting a policy of not communicating.Fifth complaint: Bias - Failure to exercise discretion to remit interest on GST[87] Despite Mr McIlraith's submissions I have not been able to find any evidence of an occasion when the defendant decided not to remit interest on GST. The Commissioner did decide not to remit any GST under s 183 of the TAA, butthat related to penalties and not interest, and was a response to a request by Mr McIlraith to remit those GST penalties. The decision in question was conveyed by means of a letter of 10 July 2001 sent to Mr McIlraith. The letters sets out the reasons for the decision. Mr McIlraith submitted that this letter set out only the reasons for not remitting penalties on GST "not under plaint", and failed to give reasons for not remitting penalties on GST "under plaint". There was a simple reason for this. In Mr McIlraith's letter requesting the remission, he was referring to GST again in his words "not under plaint". If Mr McIlraith was dissatisfied with the response, he could have sought further explanation. He did not do so. His only response was that he would pursue legal action, consistent with his confrontational approach to the investigation. Mr McIlraith did, however, seek from the Commissioner information as to the criteria for remission, which was provided within two days. [88] The Commissioner was not able to remit interest under s 183A(1a). That section relates to the remission of penalties but not interest. As with all dealings with Mr McIlraith, the Commissioner's communications must be seen in the context that it was aware that it was dealing with a person who had previously worked for the Inland Revenue Department, and was a practising lawyer. It must also be said that Mr McIlraith made no effort to remedy his failure to pay GST as soon as practicable, or provide any significant grounds for any remission or other indulgences. He never claimed that ill health prevented him from making payments in his correspondence on this matter. [89] It has been often said that the High Court will be slow to interfere with the Commissioner's proper exercise of the statutory duties imposed on that office in relation to the recovery of outstanding taxation revenues: McLean v CIR (2005) 22 NZTC 19,231 at [32], Rogerson v CIR (2005) 22 NZTC 19,260 at [63], Raynel v CIR (2004) 21 NZTC 18,583 at [73]. There is no basis for interference in this case.Sixth complaint: Providing separate assessments for 1996, 1997 and 1998 instead of a single assessment[90] I have already considered this issue at [[19]]-[[28]] of my judgment. For the reasons there given, those assessments were made separately for each income year as was appropriate and proper, and Mr McIlraith has no basis for claiming any error or injustice in relation to steps taken.General assessment of the Commissioner's position[91] It is my general assessment of the Commissioner's attitude to the investigation of Mr McIlraith, that it was clear and transparent. There were a number of indications that the Commissioner was open to any reasonable submissions made by Mr McIlraith. I have already mentioned how in response to Mr McIlraith's NOR, relating to the 1995 income year, Mr Smith decided not to issue any assessment. It is also to be recorded that the Commissioner agreed to write-off certain outstanding arrears owed by Mr McIlraith to the Commissioner, Mr Smith suggested to Mr McIlraith that he could grant a six-month extension of the time bar that would enable further consideration of records provided by Mr McIlraith, and Mr McIlraith refused that offer. In May 2001 the Commissioner agreed that Mr McIlraith could return GST on a six-monthly basis, after he complained about returning on a two-monthly basis. All these actions are inconsistent with the allegation that the Commissioner had a closed mind and was pursuing some sort of vendetta against Mr McIlraith.Conclusion on bias[92] I conclude that there is no evidence that the Commissioner was biased in relation to Mr McIlraith's assessments.Result[93] Mr McIlraith has not succeeded in any of his three statements of claim, and I enter judgment for the defendant in respect of all three proceedings.[94] I reserve the question of costs. If the Commissioner wishes to pursue costs, submissions should be filed within 14 days. Mr McIlraith has a further 14 days in which to file submissions in reply.. Asher J