VITASOVICH v COMMISSIONER OF INLAND REVENUE [2017] NZHC 1501

VITASOVICH v COMMISSIONER OF INLAND REVENUE [2017] NZHC 1501 [30 June 2017]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2016-485-185[2017] NZHC 1501UNDER Income Tax Act 2004BETWEEN DONNA VITASOVICHPlaintiffAND COMMISSIONER OF INLANDREVENUERespondentHearing: 5 August 2016Counsel: Plaintiff in PersonR M Park and C L Hollingsworth for RespondentJudgment: 30 June 2017JUDGMENT OF CLARK JIntroduction[1] Ms Vitasovich disputes her liability for income tax in the years ending 31 March 2004, 2005, and 2006. In this proceeding she seeks that her "alleged" debt be cleared and that the "exceptional circumstance" provision of s 89K of the Tax Administration Act 1994 (TAA) be applied to her circumstances. The respondent, the Commissioner of Inland Revenue, has applied to strike-out the proceeding.[2] This judgment determines the strike-out application.Background[3] In this judgment I refer to the "Commissioner" although of course thecommunications and correspondence with Ms Vitasovich were through departmental officers.[4] Following an audit of Ms Vitasovich's tax affairs for the income years 2004to 2006 the Commissioner initiated the disputes process under Part 4A of the TAA by issuing a notice of proposed adjustment (NOPA). The notice was issued on 16 October 2007.[5] The NOPA proposed to adjust Ms Vitasovich's income tax assessments byincluding additional income, imposing shortfall penalties but also disallowing losses incurred by Mapper Ltd, of which Ms Vitasovich was the sole director and whose losses she included in her personal income tax return as "other income".[6] Ms Vitasovich responded around 12 December 2007 with a notice ofresponse (NOR) rejecting the Commissioner's proposed adjustments.1 Then, on 12 December 2007, Ms Vitasovich left for Kuala Lumpur and did not return to New Zealand again until 12 December 2013.[7] Meanwhile, however, Ms Vitasovich and the Commissioner continued to communicate via her email address and an Auckland postal address apparently belonging to her mother.[8] In a letter dated 30 January 2008, sent to the Auckland address, theCommissioner rejected Ms Vitasovich's NOR. Ms Vitasovich replied by email on22 February 2008. She wished the dispute to proceed to the Taxation Review Authority (TRA).[9] On 5 March 2008 (again, by letter sent to the Auckland address) the Commissioner advised Ms Vitasovich that the next stage of the disputes process would be a conference to attempt to resolve the issues. After that the Commissioner would issue a statement of position (CSOP) and disclosure notice.[10] Ms Vitasovich replied on 12 June 2008. She said her previous correspondence had stated very clearly that no correspondence would be entered into about topics not relevant to the tax audit and that had been ignored by the Inland Revenue Department (the Department). Ms Vitasovich requested that her NOR1 The NOR also addressed issues in a dispute commenced by the Commissioner in relation to Mapper Ltd.therefore be sent direct to the TRA so she could be relieved of having to discuss what was stated in the NOR.[11] On 17 February 2009, the Commissioner issued a statement of position and a disclosure notice. Both documents were sent to the same Auckland address at which Ms Vitasovich received previous communications from the Commissioner. The disclosure notice:(a) required Ms Vitasovich to provide a statement of position by 17 April 2009;(b) warned Ms Vitasovich that if she failed to comply with the terms ofthe notice she would be deemed to have accepted the Commissioner'sposition, as set out in the statement of position; and(c) advised that the Commissioner had no power to accept a statement of position from Ms Vitasovich after 17 April 2009.[12] The Commissioner sent a reminder to the Auckland address on 2 April 2009. Then, on 20 May 2009, the Commissioner wrote advising Ms Vitasovich that the response period for rejecting the CSOP and disclosure notice issued on 17 February 2009 had expired. This meant:(a) Pursuant to s 89H of the TAA Ms Vitasovich was deemed to have accepted the adjustments to income tax and goods and services tax returns proposed by the Commissioner.(b) Ms Vitasovich was precluded by s 89I(I) of the TAA from challenging the adjustment proposed by the Commissioner.(c) The returns would be amended in accordance with theCommissioner's proposal, including shortfall penalties, and tax assessed would be payable immediately.[13] The 20 May 2009 letter concluded with a reminder that failure to ensure the correctness of future returns would result in the imposition of further shortfall penalties and advised that the investigation was closed.[14] Between May 2009 and March 2010 Ms Vitasovich and the Commissioner continued to correspond in relation to tax returns for later years.2[15] On 23 March 2010 the Commissioner wrote to Ms Vitasovich explaining once more that as she had not filed a statement of position within the relevant response period she was deemed to have accepted the Commissioner's proposedadjustments for the years in dispute. Only if exceptional circumstances prevented Ms Vitasovich from submitting her statement of position within the two-month period could there be an exception to the timeframe. The Commissioner invited Ms Vitasovich, if she believed exceptional circumstances applied in her case, to issue a statement of position together with an application for consideration of a late statement of position setting out the exceptional circumstances that Ms Vitasovich believed applied.[16] No such statement of position was filed nor was an application for consideration of exceptional circumstances made. As at the date of the hearing of the strike-out application that continued to be the case.[17] On 26 March 2015 Ms Vitasovich emailed the Commissioner advising that she wished to continue her dispute with the Department about the matters which she raised in 2006. The Commissioner responded by email on 13 April 2015 enclosing a copy of the letter dated 23 March 20103 clarifying the Commissioner's position inrelation to the dispute and advised that the matter was closed.[18] The Commissioner wrote on 28 April 2015, 13 May 2015, 5 June 2015 and 15 July 2015 advising Ms Vitasovich that she was deemed to have accepted theCommissioner's NOPA and that the disputes process was concluded.2 As stated at the outset this proceeding concerns disputed assessments for the three years 2004 to 2006.3 Referred to at [15] above.This proceeding[19] Ms Vitasovich filed this proceeding on 22 March 2016. She denies any debt to the Commissioner, claims the existence of extraordinary circumstances and seeksby way of relief to have her "alleged debt" cleared.[20] The Commissioner has not filed a statement of defence. The Commissioner applies to strike out the statement of claim as disclosing no reasonably arguable cause of action.Principles applicable to strike-out applications[21] The principles are well-established.4 Relevant to this claim they are:(a) The Court may only strike-out proceedings where the causes of action are so clearly untenable that they cannot succeed.(b) The jurisdiction is to be exercised sparingly and only in a clear case where the Court is satisfied it has the requisite material.First cause of action[22] I make a preliminary point. The statement of claim does not order causes of action as they are ordered and analysed in this judgment. (I say more about the statement of claim towards the end.) Rather, counsel for the Commissioner has structured the case in this way. The structure has lent coherence to the pleading andMs Vitasovich's submissions adopted that approach. I have followed suit.[23] In her first cause of action Ms Vitasovich denies liability for the amounts assessed in the years in dispute because, under s HK 11 of the Income Tax Act 2004, a director is only liable for an amount that does not exceed the greater of the market4 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267; and Couch v Attorney-General[2008] NZSC 45, [2008] 3 NZLR 725 at [33].value of the person's shareholding in the company at the time of entry into the arrangement and the value of any benefit derived from the arrangement.5[24] Ms Vitasovich pleads that at the time of the dispute the market value of the company shares was negligible.[25] The Commissioner submits that s HK 11 does not apply in this case.[26] Section HK 11 concerns the liability for tax payable by a company left with insufficient assets. The section applies where:6(a) any arrangement has been entered into in relation to a company;(b) an effect of that arrangement is that the company is unable to satisfy under the this Act a liability for income tax of the company, whether the tax liability exists at the time of entry into the arrangement or arises subsequently; and(c) it can reasonably be concluded that —(a) a director of the company at the time of entry into the arrangement who had made all reasonable inquiries into the affairs of the company would have anticipated at that time that the tax liability would be, or would be likely to be, required to be satisfied by the company under this Act; and(b) a purpose of the arrangement was to have the effect specified in paragraph (b).[27] Ms Vitasovich's proceedings relate to her personal tax liability. They do notconcern the liability of any company. Therefore, as Ms Park, counsel for the Commissioner, submitted, s HK 11 does not apply.[28] Accordingly, Ms Vitasovich cannot succeed on this cause of action.[29] In her affidavit, sworn 13 May 2016, Ms Vitasovich claims that the Department:5 The Income Tax Act 2004 was consequently repealed as from 1 April 2008 by the Income Tax Act 2007, but the 2004 Act is the relevant legislation for this claim.6 Income Tax Act 2004, s HK 11(1).chose to erroneously push company tax to my personal tax account and did not want to admit that I had volunteered that their staff made an error that I had followed.[30] Ms Vitasovich is incorrect. One of the proposed adjustments in the NOPA issued on 16 October 2007 was to:disallow the losses incurred by a related company, Mapper Ltd, treated as"other income" for the years ended 31 March 2005 and 31 March 2006.[31] In other words, the Commissioner proposed to disallow the losses incurred by Mapper Ltd which Ms Vitasovich erroneously included in her personal income tax returns. Furthermore, the NOPA explained how the law applied to the facts:(a) The income omitted from the returns was income under ordinary concepts and thus required to be included by Ms Vitasovich (the disputant) as gross income.(b) As Mapper was not a loss attributing qualifying company, the losses were not available for transfer to the shareholder.Second cause of action[32] The pleading of this cause of action is rather opaque. The Commissioner's understanding of it was set out in counsel's written submissions. As Ms Vitasovich's written submissions addressed the second cause of action, "as described by the respondent", the following description seems to be accurate:(a) Because Ms Vitasovich made a voluntary disclosure, the amount of the shortfall penalty assessed should be reduced.(b) As well, given Ms Vitasovich's personal circumstances, theCommissioner's discretion not to impose a shortfall penalty shouldhave been exercised.[33] Addressing this cause of action in her oral and written arguments Ms Vitasovich sought to highlight the series of abuses and neglect of procedure shesuffered after making her voluntary disclosure in a telephone call thereby satisfying the requirements of INV-251.[34] INV-251 is a Standard Practice Statement applying to voluntary disclosures under s 141G of the TAA.7 It establishes guidelines for making a voluntary disclosure, the timing of notification and what constitutes a voluntary disclosure.[35] Ms Vitasovich submitted that while the Commissioner had a discretion not to assess a shortfall penalty it was an abuse when the refusal to exercise the discretion was in ignorance of the law and procedures. Ms Vitasovich described theDepartment's failure to acknowledge her voluntary disclosures and its disclosure of her tax details to others as amounting to maladministration and gross abuse.[36] I am satisfied that this second cause of action is untenable.(a) A shortfall penalty payable by a taxpayer may be reduced if, in theCommissioner's opinion, the taxpayer makes a full voluntarydisclosure to the Commissioner of all the details of the tax shortfall either:8(a) before the taxpayer is first notified of a pending tax audit or investigation (pre-notification disclosure); or(b) after the taxpayer is notified of a pending tax audit or investigation, but before the Commissioner starts the audit or investigation (post-notification disclosure).(b) There is no evidence before the Court that any voluntary disclosure by Ms Vitasovich satisfied the requirement for full disclosure. Based as it is on voluntary compliance the New Zealand tax system relies on taxpayers meeting their obligations under the tax laws. The voluntary disclosure system provides an incentive to taxpayers to determine7 "Standard Practice Statement: IR-SPS INV-251 Voluntary Disclosures" (2002) 14(4) InlandRevenue Department Tax Information Bulletin 16 at 16.8 Tax Administration Act 1994, s 141G(1).their correct tax liability. A full and complete voluntary disclosure will be met by reduced levels in shortfall penalties. But the disclosure must be full and complete. Minimum details are set out in INV-251 and voluntary disclosure must include adequate information to enable an assessment to be made of the tax shortfall.9(c) The CSOP (17 February 2009) records that Ms Vitasovich proposed to include income that was omitted from 2005 and 2006 returns and was not previously disclosed. The CSOP records that shortly after returns were filed (which followed extensive contact with Inland Revenue) Ms Vitasovich attempted to have the returns adjusted to include negative shareholder salaries of undetermined amounts for both years (2005 and 2006). She was advised that the returns could not be amended until a shareholder salary had been paid. The CSOP then records that over the course of the next few months Ms Vitasovich had extensive contact with Inland Revenue but was reluctant to accept advice that was offered.(d) Ms Vitasovich was assessed under s 141A of the TAA as not havingtaken reasonable care. She had rejected any advice offered to her "out of hand" and was liable under s 141A to a shortfall penalty. TheCommissioner exercised her discretion to reduce the shortfall penalty by 50 per cent in recognition of the fact there had been no penalties for gross carelessness or lack of reasonable care within two years of the date the tax position was taken.[37] As no voluntary disclosure was made this cause of action has no prospect of success.Third cause of action[38] The third cause of action pleads that s 89K of the TAA should have beenapplied because "exceptional circumstances" arose for Ms Vitasovich. These9 Standard Practice Statement, above n 7, at 16.exceptional circumstances are said to have prevented Ms Vitasovich from issuing a statement of position pursuant to s 89K of the TAA.[39] The Commissioner may consider that an exceptional circumstance has prevented a disputant from taking actions otherwise required by the Act.10 In this case the action required by the Act was for the issue of Ms Vitasovich's statement of position. For the purposes of s 89K(1) an exceptional circumstance is an event or circumstance beyond the control of a disputant that provides the disputant with a reasonable justification for not (in this case) issuing a statement of position within the response period.11[40] Ms Vitasovich claims her exceptional circumstances arose because she was overseas and not in receipt of all mail. She submitted she had no control over:(a) wrong advice given to her by the service centre;(b) the Department's failure to acknowledge her voluntary disclosure;(c) the Department refusing to confer with her;(d) the fact they chose to use a 'snail mail address' despite having anemail address; and(e) the handing out of her details without permission to undesirable people and foreigners.[41] Ms Vitasovich submitted receipt of mail cannot be inferred just because she knew from her mother about the arrival of mail for her at the Auckland address. Receipt of mail did not mean that she knew of the contents.[42] The Commissioner's case is that the plaintiff's travel overseas, and theaddress she chose to have her mail sent to while overseas, did not constitute an exceptional circumstance because it was not an event or circumstance beyond10 Tax Administration Act, s 89K(1).11 Section 89K(3)(a)(i).Ms Vitasovich's control. It was entirely within her control. Ms Vitasovich directed the Commissioner to send mail to the Auckland address. She confirmed that her mail should be sent to this address. She also deposed in her affidavit that she made arrangements for her mother to forward mail from the Auckland address to her in Korea.[43] The issue is whether Ms Vitasovich's claim that she did not receive theCSOP, and other correspondence sent to her, amounts to an exceptional circumstance. If the Commissioner is satisfied that a taxpayer has been prevented by an exceptional circumstance from taking certain actions within the statutorytimeframe, and if other statutory criteria are met, the taxpayer's late actions will betreated as if they had been taken within the required timeframe. That is the effect of s 89K(1) of the TAA. For the purposes of subs (1):12(a) an exceptional circumstance arises if—(i) an event or circumstance beyond the control of a disputant provides the disputant with a reasonable justification for not rejecting a proposed adjustment, or for not issuing a notice of proposed adjustment or statement of position, within the response period for the notice:(ii) a disputant is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or more statutory holidays falling in the response period:(b) an act or omission of an agent of a disputant is not an exceptional circumstance unless—(i) it was caused by an event or circumstance beyond the control of the agent that could not have been anticipated, and its effect could not have been avoided by compliance with accepted standards of business organisation and professional conduct; or(ii) the agent is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or more statutory holidays falling in the response period.12 Tax Administration Act 1994, s 89K(3).[44] Whether an event or circumstance beyond the control of a disputant provides the disputant with a reasonable justification for not taking a step within the response period involves a staged analysis.13 Although the Court of Appeal in Commissioner of Inland Revenue v Fuji Xerox was considering exceptional circumstances in the context of s 138D(2) of the TAA, there is no material difference between the wording of that exceptional circumstance provision and the wording in s 89K(3) with which this appeal is concerned. What is required is that:14(a) The event or circumstances relied on by the disputant must be identified and then it must be ascertained whether they were beyond the control of the disputant. If they were not beyond the control of the disputant they cannot be relied on.(b) It is then necessary to decide whether the events or circumstances beyond the control of the disputant provided the disputant with a reasonable justification for not taking the step within the required time.(c) If the circumstances do provide a reasonable justification the residual discretion may be exercised.[45] In this case Ms Vitasovich says she was overseas and was not in receipt of all mail. In particular she was prevented from submitting her statement of position within the two-month period ending 17 April 2009.[46] The facts relating to Ms Vitasovich's address, as established by the evidence,are these:(a) Following her departure overseas in 2007 Ms Vitasovich continued to communicate with the Department and to receive mail at the Auckland address which she had provided to the Commissioner.(b) A letter dated 30 January 2008, addressed to Ms Vitasovich at her13 Commissioner of Inland Revenue v Fuji Xerox New Zealand Ltd (2002) 20 NZTC 17,470 at [12].14 At [12].Auckland address, advised that the Commissioner disagreed with the contentions contained in her NOR (issued 16 October 2007) and that the NOR was rejected.(c) Ms Vitasovich replied on 27 February 2008 to that letter. She referred to the contents of the letter. She plainly received the letter sent to the Auckland address. As well, Ms Vitasovich's email reply appears toinvite ongoing communications using the same methods.(d) On 6 May 2008, the Department emailed Ms Vitasovich advising that a letter had been posted to her at her Auckland address. The writer asked for confirmation that this was the correct address and if not where he should send the letter. Ms Vitasovich replied within a couple of hours confirming that the Auckland address was the correct address.(e) On 12 June 2008 Ms Vitasovich wrote to the same departmental officer. She referred to a letter sent by the Department having been forwarded to her from the Auckland address. Ms Vitasovich referred to the fact she was based offshore and required notifications withinthe correct timeframes. Her final sentence reads: "I trust that 60 006679 [the IRD number for this dispute] will be advised of the timeframe for the proceeding by snail mail."[47] This evidence shows that while she was overseas Ms Vitasovich communicated by email and received correspondence sent to her at the Auckland address which she originally gave and which she confirmed some time later continued to be the correct address. Ms Vitasovich also confirmed she wishedcorrespondence to be by "snail mail". Accordingly, the Commissioner has given notice by post to an address at which Ms Vitasovich has notified the Commissioner she accepts notices. There has been compliance with s 14(8)(c) of the TAA.15 By s 14(9) a notice given by post is treated as having been given at the time the notice15 Section 14 has subsequently been amended, as from 2 June 2016, by the Tax (Transformation: First Phase Simplification and Other Measures) Act 2016, s 79. However, this is the applicable law for this claim.would have been delivered in the ordinary post. Ms Vitasovich says she did notreceive the Commissioner's statement of position or notification of a dispute, yet later communications between Ms Vitasovich and the Department, transacted in an identical fashion, were successful.[48] The evidence does not establish that an exceptional circumstance has prevented Ms Vitasovich from filing her statement of position within the response period. Ms Vitasovich said she did not receive the Commissioner's notification, yet it was sent to the address at which she received other mail from the Department and to which she asked that mail should continue to be sent. The asserted non-receipt is not an event or circumstance beyond Ms Vitasovich's control. If she did not receivethe CSOP the cause of that failure lay in the arrangements which she had set up and maintained.[49] I conclude that not only was the alleged non-receipt not an event or circumstance beyond Ms Vitasovich's control but the event did not provide areasonable justification for not issuing a statement of position within the response period. The Commissioner is not called upon to consider exercising the discretion under s 89K of the TAA unless satisfied the circumstances are beyond the control of the disputant and they provide a reasonable justification for not taking the required step.[50] There is a further impediment to Ms Vitasovich relying on s 89K. A late action is deemed to occur within the response period if an exceptional circumstance applies, providing the disputant, as soon as reasonably practicable after becoming aware of his or her failure, sends the relevant document to the Commissioner.[51] In this case even if Ms Vitasovich was unaware of the tax dispute andresponse timeframe set out in the Commissioner's statement of position inFebruary 2009 there is no doubt that at least, as at March 2010, Ms Vitasovich was aware. The letter dated 23 March 2010 from the Department (to which I refer at para [15] above) set out the dates of its earlier letters and recorded that Ms Vitasovich was required to have filed a statement of position by 16 April 2009.[52] Ms Vitasovich has not issued a statement of position even after becoming aware, at the latest in March 2010, that she was in default. Nor has she issued one since her return to New Zealand in December 2013, nor since she indicated in 2015 that she wished to continue her dispute.[53] Section 89K is inapplicable in the circumstances and I am satisfied that this cause of action is untenable.[54] On the basis of the foregoing analysis I conclude that Ms Vitasovich'sproceeding is clearly untenable and should be struck out. I make two final observations.Section 138 Tax Administration Act[55] The Commissioner submits that the proceeding should be struck out on the basis also of s 138H of the TAA. Section 138H permits the Commissioner to apply to a hearing authority to strike out a challenge commenced by a disputant if the Commissioner considers that the disputant has failed to comply with any of the requirements of ss 89M or 138B.[56] I accept that that the Commissioner applies to strike out "a challenge" asdefined in the TAA. Under s 3, the interpretation section:Challenge means—(a) to commence proceedings under Part 8A challenging a disputable decision; or(ab) to commence proceedings under section 89K(6) challenging a refusal to issue a notice; or(b) the proceedings,—as the context requires.[57] Ms Vitasovich failed to comply with s 89M because she failed to issue a statement of position within the response period. Nor did she attempt to issue one at any time afterwards despite the default being repeatedly referred to in correspondence. Ms Vitasovich has consistently avoided the steps that needed to betaken to invoke the proper disputes process under the TAA. In a sense this proceeding maintains that improper approach.[58] The Commissioner has established the grounds for striking out the proceeding under s 138H of the TAA.Claim is likely to cause prejudice or delay[59] The Commissioner's position is that the claim is unintelligible and, as such,is likely to cause prejudice or delay.[60] The statement of claim is not lengthy. It occupies five and a half pages and 23 paragraphs. Two further paragraphs seek relief. The actual pleading of the cause of action appears in the final three complete paragraphs of the statement of claim. Beyond the final three paragraphs the statement of claim consists almost entirely of irrelevant material. Notwithstanding its brevity the statement of claim contains large tracts of personal narrative and factual material that, as in Commissioner of Inland Revenue v Chesterfields Preschools Ltd, does not "identify the main issues butobfuscate[s] them".16[61] I have considered, as an alternative to striking out the proceeding, whether it may be susceptible of amendment. But the defects in the pleading are such that it is not capable of cure. If the extraneous paragraphs were removed there would be no framework at all for the final three paragraphs in which a form of cause of action is pleaded. But the more elementary point is that even with wholesale amendment the fundamental defect is in the claim itself which I believe to be so clearly untenable it cannot succeed.16 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679 at [91].Result[62] The Commissioner's application is granted. The proceeding is struck out.[63] The Commissioner is entitled to costs which I award on a 2B basis._____________________________Karen Clark JSolicitors:Crown Law Office, Wellington for Respondent