JAWAHAR BHASKAR MUSUKU v THE COMMISSIONER OF INLAND REVENUE [2015] NZHC 678

JAWAHAR BHASKAR MUSUKU v THE COMMISSIONER OF INLAND REVENUE [2015] NZHC 678 [13 April 2015]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2014-404-001903[2015] NZHC 678UNDER the Judicature Amendment Act 1972, Part30 of the High Court Rules and the TaxAdministration Act 1994IN THE MATTER of an application for judicial review of theCommissioner of Inland Revenueprocedural failures, breaching time-barperiod and abuse of processBETWEEN JAWAHAR BHASKAR MUSUKUApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 9 March 2015Appearances: G Thwaite for ApplicantM Deligiannis and P Ieong for RespondentJudgment: 13 April 2015JUDGMENT OF WOOLFORD JThis judgment was delivered by me on Monday, 13 April 2015 at 4.00 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:G J Thwaite, AucklandCrown Law, Wellington[1] The applicant, Jawahar Bhaskar Musuku, is in dispute with the respondent, the Commissioner of Inland Revenue. In his fourth amended statement claim dated 10 February 2015, Mr Musuku seeks judicial review of two decisions. The first decision disputed is the Commissioner's opinion, formed under s 108(2) of the Tax Administration Act 1994 (the Act), that Mr Musuku's income tax returns for thedisputed periods did not mention income which was of a particular nature or derived from a particular source or were fraudulent or wilfully misleading (Decision 1). Thesecond decision was the Commissioner's issuing of a Statement of Position (SOP) dated 23 August 2013 (Decision 2). The opinion by the Commissioner under s 108(2) of the Act is contained in the SOP itself.[2] The Commissioner now applies for an order striking out the fourth amended statement of claim in its entirety and dismissing the application for judicial review. She also seeks costs.Strike-out principles[3] The principles relating to strike-out applications are not in dispute. Rule 15.1(1) of the High Court Rules provides that a Court may strike out all or part of a pleading if it discloses no reasonably arguable cause of action; is likely to cause prejudice or delay; is frivolous or vexatious; or is otherwise an abuse of the process of the Court.[4] The principles to be applied in strike out applications are:(a) The jurisdiction to strike out is to be exercised sparingly, and the causes of action must be so clearly untenable that they cannot possibly succeed.1(b) The fact that an application to strike out raises difficult questions of law and requires extensive argument does not exclude jurisdiction.21 Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267.2 Ibid at p 267 line 27-29.However, care must be taken in areas where the law is confused or developing.3(c) A strike out application proceeds on the assumption that the facts pleaded in the statement of claim are true.4 This assumption, however, does not extend to pleaded allegations which are entirely speculative. The Court is not required to assume the correctness of factual allegations obviously put forward without any foundation.5(d) The same criteria are used in determining whether a judicial review claim should be struck out.Factual background[5] Mr Musuku is a pharmacist and derived income from his employment as a pharmacist, his position as a director and/or shareholder of a number of New Zealand companies, and from dividends and interest. He failed to file income tax returns within the required timeframes for the tax years ending 31 March 2001 –31 March 2005.[6] In his affidavit sworn on 17 October 2014, Mr Musuku states:My attempts in the early 2000's to comply with my requirements werefrustrated by the incompetence of accountants. Since the ability of those accountants to practise before the IRD was accepted by the IRD, I consider that I have no moral responsibility for the delay.[7] Because of Mr Musuku's failure to file income tax returns over a five year period, the Commissioner commenced an audit of Mr Musuku's financial affairs in August 2006, although a formal file relating to possible tax evasion was not opened until 13 October 2006.[8] On 27 February 2007, Mr Musuku filed income tax returns for the 2001-5 income tax years. In the returns, Mr Musuku claimed that his annual income over3 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].4 Attorney-General v Prince and Gardner, above n 1, at 267.5 Collier v Panckhurst CA136/97, 6 September 1999 at [19].that period ranged between $10,404.70 (in 2005) and $20,856.35 (in 2003). TheCommissioner's investigations continued.[9] Mr Musuku's returns have been consistently late. As at 13 May 2009, no income tax returns had been filed for any periods subsequent to 31 March 2005.[10] A case note by the investigator's supervisor dated 26 May 2009 recorded thatMr Musuku's case had been open for nearly three years. The note writer agreed with the investigator that the way forward was now to enter the disputes process. The note recorded that income tax returns for the years 2001-5 had been filed, but proffered the opinion that they bore little resemblance to the lifestyle/expenses/assets of Mr Musuku and his family. The note recorded that limited information had been provided, which had resulted in numerous spreadsheets being collated to analyse the bank statements (numerous accounts plus credit cards) to arrive at the final calculations. The note writer directed the preparation of a Notice of Proposed Adjustment (NOPA). Accordingly, on 16 March 2010, the Commissioner issued a NOPA in respect of Mr Musuku's income tax returns for the 2001-5 income tax years, which had been filed on 27 February 2007. The Commissioner proposed to adjust Mr Musuku's annual income for the purposes of liability for income tax overthat period to between $329,002.25 (in 2005) and $808,665.15 (in 2002).[11] On 14 May 2010, Mr Musuku issued a Notice of Response (NOR) in respectof the Commissioner's proposed adjustments to his 2001-5 returns. He submitted that the Commissioner should recognise that the proposed adjustments were totally unacceptable, inconsistent with factual information submitted and the approach taken by the investigator needed to be amended. He reiterated that his income tax returns for the 2001-5 income tax years were an honest reflection of his income.[12] In accordance with the Commissioner's standard practice statement relating to disputes resolution processes commenced by her, the Commissioner contacted Mr Musuku in May 2010 and invited him to attend facilitated conference meetings as part of the conference phase of the disputes process. Unfacilitated meetings between the investigator and Mr Musuku occurred on 1 October 2010 and 26 January 2011. Conferences facilitated by an independent departmental officeralso occurred on 24 September 2011 and 10 May 2011. On 10 May 2011, at the conclusion of the facilitated conference meeting, the Commissioner ended the conference phase of the disputes process.[13] However, on 16 May 2011, Mr Musuku contacted the Commissioner requesting that the conference phase be reopened. The Commissioner agreed to hold further facilitated meetings, which took place on 8 November 2011 and 8 May 2012. The conference phase was again ended by the Commissioner on 6 August 2012. Notwithstanding the involvement of a facilitator and the reopening of the conference phase of the disputes process, Mr Musuku and the Commissioner were unable to resolve the dispute.[14] Because Mr Musuku had filed income tax returns for the 2001-5 income tax years on 27 February 2007, the four year time bar set out in s 108(1) of the Act on the amendment of assessments by the Commissioner ran from 31 March 2007. The four year period was then due to expire on 31 March 2011 during the conference phase of the disputes process. As the conference phase of the disputes process was underway at that time, Mr Musuku and the Commissioner agreed to extend the date within which the Commissioner was able to amend an assessment under s 108(1) for a further year, to 31 March 2012. This time bar waiver was signed by Mr Musuku on 1 October 2010.[15] In any event, the conference phase of the disputes process was still underway when 31 March 2012 came and went. The Commissioner had initially ended the conference phase of the disputes process on 10 May 2011, but had specifically reopened it at the request of Mr Musuku. It was during this period when the conference phase had been reopened that the date of 31 March 2012 came and went.[16] Section 108(2) provides, however, that the time bar is not applicable if the Commissioner is of the opinion that a tax return does not mention income which is of a particular nature or was derived from a particular source or is fraudulent or wilfully misleading.[17] As noted, the conference phase of the disputes process was finally ended on 6 August 2012. In terms of the standard practice statement, the Commissioner then prepares a Statement of Position (SOP) and will normally refer the dispute to adjudication. Adjudication involves an independent review of the dispute by theDepartment's Disputes Review Unit, which was formed to provide an internal but impartial review of unresolved disputes. Adjudication is the final phase in thedisputes process before the taxpayer's assessment is amended (if it is to be amended)following the exchange of Statements of Position.[18] Accordingly, on 23 August 2013, the Commissioner issued a Statement of Position (SOP) in respect of the 2001-5 income tax years. In the SOP, the Commissioner advised Mr Musuku that she intended to adjust his taxable income over that period to between $254,267.69 (in 2004) and $558,131.74 (in 2002), which was an overall reduction of 30 per cent from the figures first proposed in the NOPA. On 27 May 2014, the High Court made orders by consent granting Mr Musuku a further six weeks to issue his Statement of Position (SOP) for the 2001-5 income tax years. On 28 July 2014, Mr Musuku issued his Statement of Position (SOP) for the 2001-5 income tax years. Mr Musuku again claimed that all his income tax returns were correct and accurately reflected his taxable income. Two days later, on 30 July 2014, Mr Musuku filed his statement of claim for judicial review and application for summary judgment.Statement of claim[19] The fourth amended statement of claim contains six causes of action as follows:(a) Decision 2 breached Mr Musuku's substantive legitimate expectationthat the Commissioner would not take any steps towards amending his assessment after the expiry of the (extended) time bar period on 31 March 2012.(b) Neither Decision 1 nor Decision 2 were made in accordance with s 108 of the Act nor are they consistent with the time bar waiversigned on 1 October 2010. Furthermore, neither decision was made in accordance with the principles in s 6 of the Act.(c) Each of Decision 1 and Decision 2 is invalid because they did not take into account 14 specified factors which are said to be of relevance, including the length of the investigation, the Commissioner's failureto request a further waiver beyond 31 March 2012, Mr Musuku'sdeteriorating health and the continuing expense to him.(d) Each of Decision 1 and Decision 2 failed to comport with procedural propriety in that each is inconsistent with the (extended) time bar period and on a proper construction, s 108(2) of the Act does not permit an extension of the period.(e) Each of Decision 1 and Decision 2 is unreasonable both in the context and in the light of the (extended) time bar period and because they impose an excessive burden on Mr Musuku in light of his deteriorating health and his professional expenses.(f) Decision 1 is illegal and invalid in that no proper factual or legal basisexisted for the Commissioner's opinion and/or it is inconsistent with the issuance of the NOPA on 16 March 2010.[20] The orders sought by Mr Musuku are:(a) A declaration that each of Decision 1 and Decision 2 is invalid.(b) An order quashing each of Decision 1 and Decision 2.(c) An order directing the Commissioner to terminate the proceeding under Part 4A of the Act (disputes procedures).(d) An order directing the Commissioner to proceed on the basis of theassessment of 27 February 2007 (Mr Musuku's self-assessment in his income tax returns filed on that date); and(e) Costs.Discussion[21] In essence, Mr Musuku wants to stop the investigation into his tax affairs and seeks a Court order that the Commissioner is to accept the validity of the income tax returns he filed in 2007. While I accept that Mr Musuku claims that the self- assessments in his returns are valid primarily because of the operation of the time bar in s 108(1) of the Act and only secondly as being valid in themselves, judicial review is not sufficiently broad to enable a Court to make the orders sought.[22] First, Decision 1 and Decision 2 are not in fact decisions. Decision 1 is an opinion: "It is the Commissioner's opinion that ". Decision 2 is a proposal:"Outlined below are the adjustments that the Commissioner proposes to make to your tax assessments and the legislation and arguments in support of theCommissioner's proposed adjustments".[23] Neither the Commissioner's opinion nor her proposal has, in substance, adversely affected Mr Musuku's position in the way that an assessment would.Decision 1 and Decision 2 are steps in a process. That is why the issue of a SOP by the Commissioner is, in my view, specifically excluded from the definition of a disputable decision in s 3 of the Act. It is not a decision which is normally amenable to judicial review. Nor is the formulation of an opinion under s 108(2).[24] Second, the Supreme Court decision in Tannadyce Investments Ltd v Commissioner of Inland Revenue6 has, in any event, severely limited the availability of judicial review even for disputable decisions such as assessments. The majority confirmed that disputable decisions can only be judicially reviewed when the taxpayer "cannot practically invoke the relevant statutory procedure"7 by challenging the decisions under Part 8A of the Act, which relates to the challenge of assessments.6 Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153.7 At [61].[25] The statutory procedure is given primacy by 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 Part8A,—(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.[26] Cases in which the relevant statutory procedures cannot practically be invoked or where some suggested flaw in the statutory process needs to be addressedoutside the statutory regime are likely to be "extremely rare".8[27] An assessment challenged on the basis that it is time barred can be challenged in the statutory process.[28] Leaving aside the question of the availability of judicial review, I am of the view that the time bar in s 108(1) does not, on its own wording, apply to the issue of Statements of Positions (SOPs). Section 108(1) only prevents the Commissioner from amending assessments after the time bar period. The Commissioner has not yet issued any assessment amending the self-assessments made by Mr Musuku when he filed his income tax returns in February 2007.[29] Furthermore, although the Commissioner has formed an opinion under s 108(2), she has not yet done what she is permitted to in s 108(2), namely, amend an assessment so as to increase its amount. The opinion is therefore a provisional one, which may not be upheld by the Disputes Review Unit. In the SOP dated 23 August 2013, the Commissioner sets out one of the issues which she considers will arise as"whether the taxpayer's tax returns for the disputed periods do not mention incomewhich is of a particular nature or was derived from a particular source; or, in the alternative, are fraudulent or wilfully misleading, allowing the Commissioner to re- open the time bar".98 Tannadyce Investments, above n 6, at [61].9 Commissioner's Statement of Position at [35].[30] If the Disputes Review Unit is of the view that s 108(2) does not apply then the Commissioner will not amend Mr Musuku's assessments so as to increase theiramount, as she will be barred from doing so by s 108(1).[31] Finally, I am of the view that it is contrary to the whole scheme of the Tax Administration Act to allow judicial review of steps in a process except in very exceptional circumstances. The Commissioner has bound herself to decisions of the Disputes Review Unit. Only if the Disputes Review Unit upholds theCommissioner's position will she amend Mr Musuku's assessments. Mr Musukucan then challenge those assessments under Part 8A of the Act. That challenge will be heard by either the Taxation Review Authority or the High Court on a de novo basis. Both the Authority and the High Court can deal with alleged deficiencies in both the validity and correctness of an assessment at the same time.[32] I agree with the comments of Lang J in Vinelight Nominees Ltd & Anor v Commissioner of Inland Revenue as to policy reasons for not allowing a collateral challenge to the issuance of an SOP.10[34] Any other conclusion may also lead to practical difficulties. In particular, it is likely to cause the parties to become embroiled in two separate challenge proceedings, each of which will necessarily have a significant degree of overlap with the other. That will lead to the parties incurring extra expense and delay in having all matters resolved. Findings of fact in one proceeding may also trammel or impinge upon the ability of the Court to properly resolve the issues raised in the other. Those outcomes are obviously undesirable if another means exists to have all outstanding issues resolved in a single challenge proceeding.[35] Moreover, it seems to me to be an illogical and potentially artificialexercise to allow the Commissioner's opinion to be the subject of achallenge proceeding prior to an amended assessment being issued. The Commissioner may ultimately elect not to amend the assessment afterreceiving and considering the matters raised in the taypayer's notice ofresponse. There is no time limit within which an amended assessment must be issued. As the present case demonstrates, there may be a considerable delay before the Commissioner finally decides whether or not to issue an amended assessment. In the event that no amended assessment is issued, thechallenge to the Commissioner's initial opinion will have been a barrenexercise.10 Vinelight Nominees Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,519 (HC) at [34]-[35].[33] In the context of my decision about the unavailability of judicial review, I need not deal with Mr Musuku's submission that the time bar is only restarted by s 108(2), in that the Commissioner is only able to amend an assessment within the four year period following the date when the Commissioner became aware of evidence indicating a failure to mention income in terms of s 108(2). Counsel for Mr Musuku submits that the four year time bar therefore expired, at the latest, on 16 March 2014.[34] I am of the view, however, that as a matter of strict statutory interpretation there is no time bar in cases where the Commissioner has formed such an opinion. Section 108(2) provides that the Commissioner may amend the assessment "at any time". No time bar is specified.[35] Furthermore, the date on which the time bar would restart is unclear. Counsel refer to either the Commissioner's suspicion of fraud following a recorded interview of Mr Musuku on 24 June 2008, or the issue of a NOPA on 16 March 2010. Neither date is definitive. When does the Commissioner become aware of evidence indicating fraud? Such a test is too uncertain.Conclusion[36] I am of the view that judicial review of steps in a process is unavailable. Mr Musuku's claim is premature. Although Mr Musuku and his counsel are well- intentioned in their desire to right perceived wrongs, the statement of claim is an abuse of process and likely to cause prejudice and/or delay, as it amounts to a collateral attack on the validity of tax assessments outside of the mandatory statutory disputes and challenge processes in Part 4A and 8A of the Act.[37] Mr Musuku will get his day in court in either the Taxation Review Authority or the High Court if the Commissioner issues an amended assessment. He does, however, have to wait until then to challenge both the process and the Commissioner's substantive position.[38] The fourth amended statement of claim is struck out. Costs are payable by Mr Musuku on a 2B basis..Woolford J