ALI V COMMISSIONER OF INLAND REVENUE HC AK CIV-2011-404-7302

ALI V COMMISSIONER OF INLAND REVENUE HC AK CIV-2011-404-7302 [16 April 2012]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-7302[2012] NZHC 691UNDER the Judicature Amendment Act 1972BETWEEN HAMSAT ALIPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantCIV-2011-404-7303[2012] NZHC 691AND UNDER the Judicature Amendment Act 1972BETWEEN FA'ASOLO FA'AGUTUPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 2 April 2012Counsel: A Kashyap for PlaintiffM Deligiannis and NS Delamore for DefendantJudgment: 16 April 2012JUDGMENT OF TOOGOOD JThis judgment was delivered by me on 16 April 2012 at 3:30 pmPursuant to Rule 11.5 High Court RulesRegistrar/Deputy RegistrarIntroduction[1] These related proceedings, which were heard together, concern the application of the Tax Administration Act 1994 ("the Act") and steps taken by the Commissioner of Inland Revenue ("the Commissioner") to assess and recover tax.1[2] The plaintiffs, Mr Hamsat Ali and Ms Fa'asolo Fa'agutu, seek judicial reviewof decisions by the Commissioner which led to judgment being entered against each of them in the District Court for tax arrears, penalties and interest. Following default in payment by the plaintiffs, the Commissioner has issued bankruptcy proceedings which the plaintiffs seek to defeat by appropriate orders made in these proceedings.Background facts[3] On 28 June 2007, the Commissioner issued default assessments for income tax payable by each of the plaintiffs, principally arising from a finding that they had been engaged in a joint venture business of buying and selling properties. The years to which the default assessments related were the income tax periods ending 31 March 2003 to 31 March 2006.[4] On 27 September 2007, the plaintiffs disputed the assessments by issuing a Notice of Proposed Adjustment ("NOPA") under s 89D of the Act. Following consideration of the matters raised, the Commissioner, exercising the discretionary power available to him under the Act,2 issued amended assessments for Ms Fa'agutufor the years ended 2004 and 2006. Although the plaintiffs continued to make representations to the Commissioner through their accounting and legal representatives over the next three years, they did not take any formal steps to challenge the assessments.1 In the judgment, the term "the Commissioner" is used to refer both to the person occupying theoffice of Commissioner of Inland Revenue from time to time, and to individual officials in theDepartment of Inland Revenue to whom the Commissioner's powers have been delegated in thematters at issue.2 Tax Administration Act 1994, s 113, which entitles the Commissioner, "from time to time, and atany time [to] amend an assessment as the Commissioner thinks necessary in order to ensure itscorrectness...".[5] On 9 March 2010, the Commissioner filed notices of claim in the District Court for the debts claimed to be owed by each plaintiff. The claim against Mr Ali was for tax arrears and penalties totalling $36,819.67 together with interest of $18,672.33 up to 2 December 2009. The Commissioner sought additional interest accruing at the rate of 8.91 percent per annum to the date of judgment, and costs of $175. The claim against Ms Fa'agutu was for tax arrears and penalties totalling$96,104.07 together with interest to 2 December 2009 of $27,630.77, with additional interest being claimed to the date of judgment at the rate of 8.91 percent per annum. A claim, totalling $87,064.15 plus additional interest and costs, was also made against the plaintiffs in respect of their joint venture, which had been registered for GST by the Commissioner.[6] Following service of the District Court proceedings, the plaintiffs made representations to the Commissioner concerning the debts. The plaintiffs took no steps to defend the District Court claims, however, and judgment was entered against each of them on 20 October 2010 for the full amounts claimed and costs.[7] By that time, the legal avenues open to the plaintiffs to dispute the assessments and the debt had long been closed. Nevertheless, the Commissioner agreed to consider further representations by the plaintiffs' solicitor, Mr Kashyap, onthe basis of the serious hardship provisions of the Act.3[8] Discussions were held between the plaintiffs, Mr Kashyap, and enforcement officers on 25 November 2010 and 1 December 2010. On 25 February 2011, Mr Kashyap provided information concerning Mr Ali's alleged inability to meet thejudgment debt. A payment of $50,000 in full and final settlement was offered. The statement of financial position submitted to the Commissioner revealed that the plaintiffs held an equity of $700,000 in their residential property. In the circumstances, the Commissioner rejected the proposal under the hardship provisions of the Act, but made a final counter-proposal to settle the matter which was open for acceptance for 20 days.3 Tax Administration Act 1994, ss 177 and 177A.[9] The plaintiffs rejected the Commissioner's proposals and on 1 August 2011 the District Court judgment against Mr Ali was sealed. The judgment against Ms Fa'agutu was sealed on 15 September 2011. Bankruptcy notices were filed in the High Court, in respect of Ms Fa'agutu and Mr Ali on 25 October 2011 and 28 October 2011 respectively.[10] On 11 November 2011, these proceedings were issued by the plaintiffs who, at the same time, filed applications to set aside the bankruptcy notices.[11] The bankruptcy proceedings are being held in abeyance pending the judgment of the Court in these proceedings.The pleadings[12] The statements of claim filed allege a breach of natural justice by the Commissioner. The plaintiffs claim that, by filing proceedings in the District Court, the Commissioner denied them the right "to fully exhaust all the options and procedures provided under Parts VIII and VIIIA of [the Act]." They say that theywere deprived of the opportunity to further challenge the assessment of tax owing by filing an application before the Taxation Review Authority or the High Court under s 138D of the Act. Further, they say that, at the time the District Court proceedings were issued, they believed that negotiations to resolve the dispute were ongoing. It is also alleged that the issue of hardship was never in fact submitted to the Commissioner for determination.The relief sought[13] The plaintiffs, by their statements of claim, sought:(a) A declaration that the matter be "remitted back to the TaxationReview Authority for assessment and review"; and(b) An interim order staying the bankruptcy proceedings before the HighCourt "pending the determination of the Taxation Review Authority."[14] Mr Kashyap conceded during oral argument, however, that an order for stay of the bankruptcy proceedings could not be made in these proceedings, notwithstanding the seemingly inevitable staying or striking out of the bankruptcy proceedings if the plaintiffs were granted the primary relief sought. Mr Kashyap did not address the question of this Court's jurisdiction to set aside the judgments of the District Court in these proceedings.The grounds advanced by the plaintiffs[15] In presenting his written and oral submissions, Mr Kashyap advanced theplaintiffs' case on a different basis from the allegations set out in the statements of claim. Rather than challenging the decision of the Commissioner to issue proceedings and obtain judgment against them in the District Court, the plaintiffs attacked the fairness of the procedure adopted by the Commissioner in making the default assessments, and the genuineness of his decisions.Tax Administration Act 1994, s 109[16] In bringing the proceedings on these grounds, the plaintiffs face the hurdle of s 109 of the Act, which provides:109 Disputable decisions deemed correct except in proceedingsExcept in objection proceedings under Part 8 or a challenge under Part 8A,—(a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.[17] It is common ground that each of the assessments currently in issue is a disputable decision in terms of the section.[18] In arguing the substantive case for the Commissioner, Ms Deligiannis took me through the judgment of the Supreme Court in Tannadyce Investments Limited vCommissioner of Inland Revenue.4 In that case, it was made clear by the majority of the Court that s 109 of the Act was a complete bar to judicial review proceedings seeking to overturn a tax assessment by the Commissioner, unless the claim could be considered to come within the category of rare cases where it is not practically possible for a taxpayer to attack an assessment under the Part 8 and Part 8A dispute and challenge procedures. The Supreme Court held that judicial review is available where the issue is not the legality, correctness or validity of the assessment but some suggested flaw in the statutory process that requires to be addressed outside the statutory regime because it is not provided for within it.5 Bias on the part of the Taxation Review Authority may be an example.[19] But, as the Court pointed out, that is different from challenging the legality of the process which led to the making of the disputable decision. The disputable decision is put in issue by a challenge to the process, and such challenges to the decision or its antecedents must follow the statutory procedure. The Court held that disputable decisions (including assessments) may not be challenged by way of judicial review unless the taxpayer cannot practically invoke the relevant statutory procedure. The Court observed that cases of that kind are likely to be extremely rare.6[20] The Supreme Court concluded that:7...the best construction of s 109 in its particular statutory context is that it precludes judicial review, save where the statutory procedures could never be invoked.[21] In considering the implications of s 109, therefore, it is necessary to considerthe grounds for the plaintiffs' assertions that judicial review is available to them and that the Court should exercise its discretion to grant the relief sought.[22] Mr Kashyap argued that the review proceedings were not an attack on themerits of the Commissioner's assessments, but on the legitimacy of the process and4 Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158.5 At [59].6 At [58].7 At [73].the integrity of his decision-making. He submitted that these matters could be reviewed judicially on administrative law grounds, provided there was sufficient evidential foundation.Legitimacy of process[23] As to the legitimacy of the process, Mr Kashyap submitted that, given the weight and seriousness of an investigation being carried out by the Commissioner (in that an investigation may result in stiff penalties, including imprisonment), thetaxpayer is entitled to "the very basic rights afforded by natural justice". Theseinclude, he argued, the right to be heard and adequately represented in order topresent the taxpayer's case without any impediment.[24] Mr Kashyap stressed that the plaintiffs were humble lay-persons and that the transactions with which the Commissioner was particularly concerned were straightforward property transactions involving the sale and purchase of residential properties. He contrasted this with the more sophisticated commercial arrangements which gave rise to some of the leading cases in which the Courts had explained the relevant principles. He also emphasised Mr Ali's "serious poor health", claimingthat he was not in a position to participate adequately in the investigation process.[25] Counsel noted that each of the plaintiffs had been interviewed only once before the Commissioner made his initial default assessments. Particular criticism was made of the Commissioner for not disclosing, prior to interviewing the plaintiffs, that he had obtained a significant amount of information about property transactions in which the plaintiffs had been engaged. Mr Kashyap submitted that it was grossly unfair of the Commissioner to ask the open-ended question, "Have youowned any other properties other than your residential home in the last four years?",knowing at the time that the answer to the question was "Yes". It was only after Mr Ali had answered that question, "No", that he was shown a number of documents establishing the contrary.[26] Mr Kashyap was unable to refer me to any statutory or other authority supporting the proposition that the Commissioner is obliged to disclose to thoseunder investigation all of the information he has obtained prior to conducting an initial interview as part of a tax audit or investigation. That is unsurprising, because there is no merit in the point.[27] In tax investigations, as in investigations conducted by the Police and other regulatory authorities, the honesty, integrity and credibility of the subject of the investigation is frequently in issue. It would be wholly unrealistic in such circumstances to expect an investigator to make a reasoned assessment of credibility on crucial matters if the investigator was obliged to disclose everything he or she knows or suspects about the matters at issue before asking the person under investigation any questions.[28] The Commissioner did not withhold information from the plaintiffs, and it is not suggested that he deceived them. Rather, Mr Kashyap's complaint was about thetiming of the disclosure; he argued, in effect, that Mr Ali had been ambushed by the Commissioner. I can see no reason to criticise the investigator for informing Mr Ali of what was known or believed by the investigators in the course of the first interview rather than prior to it. Mr Ali had been well informed, in a letter dated 9 August 2006, of the nature of the audit, and he had been asked to have available, among other things, sale agreements and other documentation.[29] Mr Ali was also informed in that letter that it was not too late for him to make a voluntary disclosure of his financial affairs; he was invited to advise theCommissioner of any errors, either at the initial interview or at the "inspection of records" stage. As an incentive to follow this course, a 40 percent reduction in any related penalties charged was offered.[30] Most importantly, however, the written record of the investigation meeting conducted on 5 September 2006 informed Mr Ali that the interview was voluntary; that he was entitled to refuse to answer any questions; that he could leave at any time; and that he was entitled to have his professional adviser with him, including a lawyer. He was also told that any information obtained during the interview may later be used in evidence.[31] Mr Ali was accompanied at that meeting by a Mr Derhamy, a professional tax agent. I provisionally received into evidence an affidavit sworn by Mr Derhamy in which he deposed to having known Mr Ali for over 20 years and to having been his accountant since April 1997, some nine-and-a-half years prior to the investigation. I am satisfied that it was well within Mr Derhamy's ability and power to ensure that the investigations officer was not provided with any inaccurate information during the meeting, or that any inaccurate statements were corrected.[32] Furthermore, once the records previously obtained by the Department were shown to Mr Ali, he provided explanations as to the nature and purpose of the transactions disclosed. At the meeting, Mr Derhamy proffered the view that dealing in property and the giving of property advice discussed at the meeting was Mr Ali's "hobby". Nevertheless, the investigation officers confirmed their view at the end ofthe meeting that, in accordance with the statutory regime, if the real estate had been acquired with the intention of disposal then the amount derived from the sales was income.8 They were satisfied that a partnership existed between Mr Ali and Ms Fa'agutu for the purpose of carrying out of a property dealing business.[33] A week after the meeting, on 12 September 2006, the Commissioner sent Mr Derhamy a letter recording that Mr Derhamy had offered to provide additional information of the kind requested in the letter of 9 August 2006 including, specifically:(a) a list of all property transactions during the period under audit;(b) copies of settlement statements for each property purchased and sold; and(c) copies of Mr Ali's solicitor's trust account records showing all of the transactions with which Mr Ali was associated.The investigators' interview notes were provided with the letter and Mr Derhamy was asked to confirm receipt.8 Income Tax Act 2004, s CB 5 (the section in force at the relevant time)[34] Ms Fa'agutu was then invited to attend a meeting to discuss her involvement in a number of specified property transactions in which her name had appeared on the certificates of title. The interview with her, on 14 November 2006, was conducted in a similar manner to that in respect of Mr Ali, although by that time theinvestigator's inquiries were more specifically focussed on particular transactions. Again, however, Ms Fa'agutu was told that the interview was voluntary; that she could refuse to answer questions; that she could leave at any time; and that she was entitled to have a professional adviser, including a lawyer, with her.[35] The default assessments subsequently issued by the Commissioner were based upon the information obtained by the investigators during their inquiries, including the interviews with the plaintiffs; documents subsequently supplied; and information obtained from third parties. In writing to Mr Derhamy in respect of each of the plaintiffs, the investigator did not disclose the identity of any third parties from whom information had been obtained, nor the nature of the information. Again, I do not consider he was obliged to do so.[36] The Act provides taxpayers with a comprehensive structure for challenging both the process and the result of an investigation leading to an assessment by the Commissioner. I agree with Ms Deligiannis that the time at which the Commissioner is required to make full disclosure of all information upon which he intends to rely in any dispute over an assessment is when the Commissioner provides a statement of position under s 89M of the Act.[37] As the law stood at the time, the effect of a s 89M statement of position was that the Commissioner was not entitled to rely, in any subsequent challenge to a disputable decision, on facts or evidence, issues and propositions of law not disclosed in the statement of position.99 See: Tax Administration Act 1994, s 138G(1) as it read. prior to its amendment by s 179(2) of theTaxation (Tax Administration and Remedial Matters) Act 2011, (which came into force on29 August 2011: s 2).Timeline of steps taken by the Commissioner[38] The steps taken by the Commissioner following the interviews of Mr Ali and Ms Fa'agutu were not disputed:(a) 19 April 2007: wrote to the plaintiffs setting out his findings and informing them that default assessments would be issued.(b) 5 June 2007: formally informed the plaintiffs of the default assessments and the due dates for payment.(c) 7 September 2007: issued reminder letters to the plaintiffs referring to the prescribed dates for disputing the assessments by filing a NOPA, together with tax returns.(d) 28 September 2007: received a NOPA on behalf of both plaintiffs.(e) 9 November 2007: received further information concerning Mr Ali's health and financial circumstances from the plaintiffs' solicitor,Mr Kashyap.(f) 28 November 2007: agreed to meet the plaintiffs' advisers to review the plaintiffs' financial position, but requested statements of financialposition and bank statements by 7 December 2007.(g) 30 November 2007: advised the plaintiffs that their NOPA did not comply with the legislative requirements. The Commissioner noted that, as tax returns had not been filed, the NOPA dispute procedure could not be used.10 He advised the plaintiffs, however, that such matters may be relevant under s 113 of the Act.10 Tax Administration Act 1994, s 89D(2).(h) 24 April 2008: having elected to consider the information supplied in the NOPA under s 113, advised Mr Derhamy and the plaintiffs that amended assessments had been made for Ms Fa'agutu for the 2004and 2006 years, but that the assessments made for Mr Ali and the joint venture remained unchanged.(i) 14 May 2008: interviewed Mr Ali (with Mr Derhamy and Mr Kashyap present) and received information that a settlement proposal would be made.(j) 1 July 2008: wrote to the plaintiffs declining their 18 June 2008 offer to pay $20,000 in full and final settlement of the dispute.(k) 15 August 2008: wrote to Mr Kashyap declining, with reference to ss 177B(2)A and B of the Act, his requests to reconsider the assessments and the offer previously made by the plaintiffs. The Commissioner notified the plaintiffs that legal action would proceed at any time.(l) 19 October 2009: informed the plaintiffs (14 months after the notification to Mr Kashyap of 15 August 2008) that, while sufficient time had been given to them to pay the debts, enforcement officers were prepared to have a meeting to discuss options for settling the debts.(m) 9 March 2010: four-and-a-half months after inviting the plaintiffs to meet to discuss options for settling their debts, and in the absence of any response from the plaintiffs or their representatives, filed Notices of Claim in the District Court.(n) 29 October 2010: obtained judgment in the District Court despite a meeting with the plaintiffs and Mr Kashyap on 27 October 2007 at which Mr Kashyap sought an adjournment pending the availability of particular officers of the Department.[39] It is significant that, in the NOPA dated 27 September 2007, the plaintiffs agreed that they had been in business, but disputed the assessments as to the business start date and disallowed expenses.[40] It is clear from the mere recitation of the undisputed facts that the Commissioner was more than patient with the plaintiffs, and that they had every opportunity to avail themselves of the procedures specified in the Act for disputing or challenging the Commissioner's assessments.Mr Derhamy's affidavits of 28 February 2012 and 30 March 2012[41] The plaintiffs' claims in these proceedings that Mr Ali was unwell, elderly and unsophisticated are not an answer to that latter point. In support of their claims, the plaintiffs sought to adduce evidence by way of an affidavit from Mr Derhamy dated 28 February 2012, to which the Commissioner objected on several grounds of admissibility. The body of the affidavit reads as follows:1. I have known Mr Hamsat Ali for over 20 years and have been his accountant since April 1997.2. In the time that I have known Mr Ali I can truthfully say that he is an honest, law-abiding, hard-working man of traditional values. He has always endeavoured to provide assistance to those around him, especially his immediate family members.3. In considering Mr Ali's health at the time we conceded that Mr Ali were [sic] in business strictly in hope that he would be able to resolved [sic] the matter with IRD promptly and amicably.4. I can honestly say that the properties questioned by the IRD were not bought [sic] by Mr Ali with a behaviour indicating that he would benefit from them on a short-term basis.5. The reason I had conceded that Mr Ali was in business in respect ofthe 'Notice of Proposed Adjustment' was on the basis that we would bring an early closure to the case and reduce the harm it may cause to Mr Ali's health.[42] I heard argument regarding admissibility of the affidavit at the outset of the hearing. In the course of his submissions, Mr Kashyap acknowledged realistically that paragraphs 2 and 4 were irrelevant. He agreed that Mr Derhamy's views as toMr Ali's character and motives could not be of any assistance to the Court in determining the matters at issue in the proceedings.[43] Although I expressed doubts as to the admissibility of paragraphs 3 and 5, because they lacked specificity and were essentially matters of opinion not admissible under the relevant provisions of the Evidence Act 2006, I read those paragraphs and paragraph 1 into the record on a provisional basis.[44] I also accepted on a provisional basis the contents of paragraph 10 of an earlier affidavit sworn by Mr Derhamy on 30 March 2012, which reads:10. The plaintiffs were never in the business of purchasing and selling properties in my opinion. Accordingly, we went into the interview being prepared for the Dream Translators Limited and not the individuals, but to be sprung with questions concerning the sale and purchase of properties, of which the plaintiffs were unprepared for and without legal advice.[45] The provisionally-admitted evidence indicates that the plaintiffs and their advisers made a decision that the plaintiffs would not formally dispute or challenge the assessments, as was their right. They elected instead to make informal approaches intended to persuade the Commissioner to reach views favourable to the taxpayers. That was their choice. They cannot now be heard to criticise the Commissioner for having rejected their overtures. The Commissioner did not take any step which prevented them from exercising their rights at law.Arbitrary conjecture[46] The second ground on which the plaintiffs now seek relief is that theCommissioner's assessments were not assessments at all, because they were theresult of "no more than an arbitrary conjecture" or were demonstrably unfair. It wassaid, relying on Lowe v Commissioner of Inland Revenue11 that the Commissioner had acted arbitrarily in disregard of the law and the facts as known to him. The plaintiffs argued that the Commissioner had not genuinely attempted to ascertain their income on an intelligible basis and that they had not been given an opportunity11 Lowe v Commissioner of Inland Revenue [1981] 1 NZLR 326.to explain their position. It was said that the Commissioner had predetermined the matter on the basis of the information obtained prior to the interview with Mr Ali on 5 September 2006, and that the Commissioner thereafter had a closed mind.[47] Mr Kashyap's submissions summarised the plaintiffs' explanations for thevarious purchases and subsequent sales of the properties in issue. He argued that, after receiving information supporting the plaintiffs' position, it was incumbent upon the Commissioner to make further inquiries to verify whether the plaintiffs'explanation satisfactorily explained that they were not in the property dealing business.[48] Consideration of the summary of events at [38] above demonstrates that there is no factual basis for this proposition. The Commissioner went to considerable lengths to provide the plaintiffs with opportunities to satisfy him that the nature and scale of their property dealings could not properly be regarded as producing income. When the plaintiffs conceded they were in business (in the NOPA filed on 27 September 2007), their efforts were directed towards persuading the Commissioner to vary the date of the commencement of the business and to allowing additional expenses. Latterly, their submissions focused on Mr Ali's poor health and the plaintiffs' financial circumstances. These latter representations could have availed the plaintiffs only in the context of the serious hardship provisions of the Act.12[49] The detailed explanations of the Commissioner's decisions; the number of occasions on which officers of the Department engaged with the plaintiffs and their advisers; and the tolerance shown by the Commissioner over approximately four years of investigation and discussion, make it wholly unrealistic to suggest that no real decision was made. The Commissioner's willingness to consider the plaintiff'srepresentations under s 113 of the Act, despite the failure of the plaintiffs to file tax returns, and his preparedness to amend the initial assessments for Ms Fa'agutu,demonstrates that he gave careful consideration to the evidence submitted.12 Tax Administration Act 1994, ss 177 and 177A.Conclusion as to effect of s 109 of the Act[50] It will be obvious from the foregoing discussion that the plaintiffs couldnever have hoped realistically to bring this claim within the category of "extremely rare" cases envisaged by the majority of the Supreme Court in Tannadyce Investments Limited.13 It follows that s 109 is a complete bar to these proceedings.[51] Even if I were wrong in coming to that conclusion, I have reached the clearview on the substantive merits of the plaintiffs' arguments that there is no proper basis for setting aside the assessments or any judgment of the District Court upon which they were based.[52] In these circumstances, it is unnecessary for me to address the form of relief sought by the plaintiffs.Decision[53] For the reasons given, the plaintiffs' applications are dismissed.[54] The Commissioner is entitled to costs; if he wishes to apply for costs, he may do so by filing and serving a memorandum on or before 18 May 2012. If the plaintiffs wish to respond, they may do so by filing and serving memoranda or a joint memorandum on or before 15 June 2012. Unless either party requests a hearing, I shall deal with any costs issue on the papers. Any request for a hearing will be considered and may be the subject of a telephone conference................................................. Toogood J13 Discussed at [18]-[20] above.