MUSUKU v THE COMMISSIONER OF INLAND REVENUE [2015] NZHC 2656

MUSUKU v THE COMMISSIONER OF INLAND REVENUE [2015] NZHC 2656 [28 October 2015]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2014-404-1947[2015] NZHC 2656UNDER Section 26A of the Taxation ReviewAuthorities Act 1994IN THE MATTER OF an appeal from a decision of the TaxationReview Authority dated 27 July 2015BETWEEN JAWAHAR BHASKAR MUSUKUAppellantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 28 October 2015Appearances: G J Thwaite for the PlaintiffL A Herbert for the DefendantJudgment: 28 October 2015ORAL JUDGMENT OF MUIR J(Application for waiver or postponement of Security for Costs)Solicitors:G J Thwaite, Solicitor, AucklandL A Herbert, Inland Revenue Department Litigation Management Unit, WellingtonIntroduction[1] Mr Musuku (the appellant) appeals from a reserved decision of the Taxation Appeal Authority (the "Authority") (Judge A A Sinclair) dated 27 July 20151 inwhich she dismissed his challenge to the Commissioner's assessment of income for the 2006 tax year. On 5 October 2015 Katz J made orders by consent in relation to disposition of that appeal.[2] In terms of the relevant consent memorandum, the parties agreed that the appellant would pay security for costs on appeal in the amount of $6,600 or that an application for exemption would be made not later than 10 working days after the scheduled date of the relevant case management conference.[3] On 5 October the appellant filed an interlocutory application for an order dispensing with or postponing payment of security for costs relying on High Court Rule 20.13.[4] The application was supported by an affidavit by the appellant's brother MrArun Musuku in which he deposed, among other things, that his brother was"presently out of New Zealand" with "no scheduled date for his return". There iscurrently an outstanding warrant for the arrest of the appellant on what I understand to be tax evasion charges.[5] The grounds for the application are in terms:2.1 Appellant is presently in a poor financial position, has been burdened with different pieces of litigation by respondent, has been in poor physical health and has a good basis for the appeal.Security for costs on appeal[6] Rule 20.13 of the High Court Rules provides:20.13 Security for appeal(1) This rule applies to an appeal other than an appeal for which the appellant has been granted legal aid under the Legal Services Act 2000.1 Musuku v The Commissioner of Inland Revenue [2015] NZTRA 12.(2) The Judge must fix security for costs at the case management conference relating to the appeal, unless the Judge considers that in the interests of justice no security is required.(3) The amount of security must be fixed in accordance with the following formula, unless the Judge otherwise directs:a/2xbwhere—a is the daily recovery rate for the proceeding as classified by the Judge under rule 14.4; andb is the number of half days estimated by the Judge as the time required for the hearing.(4) Security must be paid to the Registrar at the registry of the court no later than 10 working days after the case management conference, unless the Judge otherwise directs.(5) Except in the case of an appeal under the District Courts Act 1947 (where non-compliance with the security order results in a deemed abandonment of the appeal under section 74), if the security is not paid within the time specified under subclause (4), the respondent may apply for an order dismissing the appeal.(6) The Judge must defer the fixing of security until the application for legal aid has been determined if—(a) an appellant has applied for legal aid under the Legal Services Act 2000; and(b) at the time of the case management conference, the application has not been determined.[7] The leading authority in relation to security for costs on appeal is that of the Supreme Court in Reekie v Attorney-General.2 In that case the Supreme Courtelaborated on its earlier endorsement of the Court of Appeal's decision in RIG v Chief Executive of the Ministry for Social Development.3[8] Although Reekie concerned application of rr 35-37 of the Court of Appeal (Civil) Rules 2005, both Katz J in Jones v Waitemata District Health Board,4 and, more recently, Williams J in Skagen v Wellington Standards Committee of the New2 Reekie v Attorney-General [2014] NZSC 63, [2014] 1 NZLR 737.3 RIG v Chief Executive of the Ministry for Social Development [2010] NZCA 370, (2010) 20 PRNZ 703.4 Jones v Waitemata District Health Board [2014] NZHC 3370.Zealand Law Society,5 have confirmed application of the principles enunciated inReekie to matters governed by r 20.13. I summarise therefore the principles emerging from Reekie, for which summary I am indebted to the submissions of the Commissioner.[9] While acknowledging that the jurisdiction to require security "posessomething of a conundrum for Courts"6 the Supreme Court stated that impecuniosity does not, in itself, warrant an order dispensing with security.7 It acknowledged that the more impecunious the appellant, the greater the risk for the respondent as to costs.[10] Accordingly, the Supreme Court held that security for costs should only be dispensed with if it is right to require the respondent to defend the judgment under challenge without the usual protection as to costs provided by security.8[11] As to whether it is right to require security for costs to be dispensed with, the Supreme Court stated that discretion should be exercised so as to:9(a) preserve access to the Court by an impecunious appellant in thecase of an appeal which a solvent appellant would reasonably wish to prosecute; and(b) prevent the use of impecuniosity to secure the advantage of being able to prosecute an appeal which would not be sensibly pursued by a solvent litigant.[12] The Supreme Court noted that the costs regime, including the usual requirement for appellants to provide security for costs, imposed a discipline on litigants.10 Specifically, reference was made to the appellant who will not be able to meet a subsequent order for costs and, who is, absent security, free from the constraints that affect other litigants. It was noted that such freedom carries with it a potential for injustice to respondents.115 Skagen v Wellington Standards Committee of the New Zealand Law Society [2015] NZHC 675.6 Reekie v Attorney-General, above n 2, at [2].7 At [20].8 At [21].9 At [35].10 At [33].11 At [33].[13] It stated that legal aid provides a substitute for the discipline usually provided by the costs regime because it is subject to an independent merits analysis and that it can be withdrawn if the legally aided person acts unreasonably.12[14] Where an impecunious appellant has secured representation from non-legal aid counsel, the Supreme Court stated that any dispensation from security for costs will be based on whether the case is of the kind which would be appropriate for a grant of legal aid.13[15] It said further that protecting respondents from vexatious appeals is a legitimate purpose of the security for costs regime,14 and, in reliance on Australian authorities, that an appeal or its conduct may be considered vexatious for such purposes even though it does raise some points which are arguable. Vexatiousness, said the Court, might be manifested by the unreasonable and tendentious conduct of litigation, extreme claims made against other people involved in the case or perhaps a history of unsuccessful proceedings and unmet costs orders.[16] Finally, the Court noted that cost and benefit are not to be assessed in purely financial terms.15 An appeal may raise issues of public interest which are not measurable in economic terms. As well, considerations which are personal to an appellant (for instance, considerations affecting reputation) may legitimately fall to be considered as part of the cost/benefit assessment.[17] In terms of establishing impecuniosity, the Supreme Court stated that an appellant without liquid assets may be required to borrow money to provide security,16 or that it may be appropriate to investigate whether another party (for example a relative or family trust) might provide the necessary funding. It said, in an observation apposite to this case, that proof security cannot be provided may12 At [34].13 At [37].14 At [39].15 At [41].16 At [43] in reliance upon Hills v Public Trust [2010] NZCA 401, (2010) 20 PRNZ 707.require full disclosure of financial circumstances and the sources of funding relied on by the appellant to support his or her general lifestyle.17[18] In Skagen Williams J confirmed that a question of whether the appeal was one which solvent appellants would reasonably wish to prosecute is a matter which requires some examination of the merits of the appeal.The applicant's submissions[19] The appellant submits that he should be exempted from paying security for costs because of his personal situation, because he has a good basis for the appeal and because it is suggested that the respondent has acted unreasonably in pursuit of claims for the 2001 to 2005 financial years despite what is said to have been an agreement on the respondent's part to a limitation period which would preclude such claims.[20] In his submissions Mr Thwaite states that the appellant is suffering from ill- health; that the dispute about the tax years has been split into three cases thereby stretching the personal financial resources of the appellant; that a substantial award of costs was made against him, albeit with recognition that he and his counsel were well intentioned in their desire to right perceived wrongs; that the key issue is whether payments between a company and its director that refer to an arm's-length commercial dealing for the supply of product can constitute income because the director also happens to be a shareholder; and the fact that the appellant has spent some $70,000 with accountants to prepare tax returns which have had no effect on the outcome of the hearing before the Authority.[21] The only evidential basis for the allegation of ill-health is a brief statement inMr Arun Musuku's affidavit in which he says:One of the reasons for my brother to leave New Zealand was the need for medical treatment, arising from the stress of the investigation in New Zealand.17 At 43. In this case a similar inquiry may be relevant in terms of the source of funding for the various legal challenges which have been made.[22] There is no indication of why adequate medical treatment for stress related disorders could not have been obtained in New Zealand and in my view the inference must be available that a compelling reason for Mr Musuku absenting himself from the jurisdiction was his various legal difficulties culminating in a warrant for his arrest.[23] Significantly in my view, there is no direct evidence of his financial position or alleged impecuniosity.Analysis[24] I regard the absence of direct evidence of impecuniosity as decisive in terms of the application. I accept the respondent's submission that security for costsshould only be dispensed with to preserve access to the Court by an impecunious appellant in the case of an appeal which a solvent appellant would reasonably wish to take and that, where impecuniosity is not adequately established, the Court need not look further at the merits of the appellant's appeal.[25] Moreover, if impecuniosity had been demonstrated it does not, as the Supreme Court determined in Reekie,18 of itself warrant an order dispensing with security. It is clear from that case that the Court was concerned to prevent the use of impecuniosity to secure the advantage of being able to prosecute an appeal which would not be sensibly pursued by a solvent litigant.[26] In addition, the Supreme Court considered that protecting respondents from vexatious appeals was a legitimate purpose of a security for costs regime and that such purpose might be invoked even if an appeal raises some issues which are arguable.[27] I have considered the decision of the Taxation Review Authority and theappellant's grounds and points on appeal. Although any assessment must necessarily be on a preliminary basis only, I consider, on the information currently available, that the prospects of success on appeal are not encouraging.18 Reekie v Attorney-General above n 2, at [20].[28] The first ground of the appellant's appeal is that the Commissioner'sassessment did not represent an honest appraisal and a genuine exercise of judgment as required by the law. Judge Sinclair found that there was no merit in that argument relying substantially on the decision in Dandelion Investments Limited v Commissioner of Inland Revenue19 which held that because a hearing before the Authority was a hearing de novo, the focus is not on attacking the process, as the nature of the hearing cures any breaches of natural justice, fairness or other procedural defects. In the Dandelion decision Salmon J observed that although the Authority had jurisdiction to consider such issues:20However, I have concluded that it is not necessary and in most cases will not be desirable for the Taxation Review Authority to adjudicate on such matters.[29] The second ground of the appellant's appeal is that the Commissioner'sassessment was incorrect because:(a) the status and effect of the payments between the appellant and any company were not properly assessed;(b) the status of rental income was not properly assessed; and(c) unjustified assumptions were made as to the household resources.[30] In the appellant's points on appeal that position is expanded to include anargument that payments between the appellant and any company were deemed to be income even though:(a) they were part of a debtor/creditor relationship or part of a current account; and(b) they did not arise from the appellant's capacity as a shareholder; and(c) they were intermittent and did not relate to work; or19 Dandelion Investments Limited v Commissioner of Inland Revenue [1997] 2 NZLR 96 (HC).20 At 102.(d) they were drawings.[31] These expanded arguments are ultimately founded on ss CD3, 4 and 5 of the Income Tax Act 2004. Judge Sinclair found these arguments to be "completely without merit" because among other things, "there was no evidence to support any ofthese propositions". Significantly, her Honour also found that the amounts for business related expenditure had already been allowed by the Inland Revenue Department investigator and were not included in the amended assessment. That finding was based on methodology explained in [16] of her judgment where she sets out that the investigator calculated the default assessment by aggregating all bankaccounts to identify monies used for the appellant's benefit. It was on that basis, primarily, that the assessment reduced from the originally identified $591,080.74 to $201,740.90.[32] Mr Thwaite's argument in that respect is a subtle one. He says that allpayments made to the appellant may be taken as payments to him in his capacity as a creditor. And to the extent that there were overpayments, they are not to beconsidered payments derived from "the shareholding of the relevant shareholder"pursuant to CD5(1)(b), but rather are to be regarded as overpayments on account of possible future purchases by the appellant on the company's behalf and/or are properly categorised as loans. That seems to me a difficult argument on the facts as found by Judge Sinclair and having regard to the absence of evidence supporting the proposition.[33] Accordingly, albeit on a provisional basis, there appears to me to be merit inthe Commissioner's position that any contractual arrangement around the purchaseor payment of company product is not relevant.[34] The third ground of the appellant's appeal is that sufficient evidence wasavailable as to the amount by which the Commissioner's assessment was incorrect:(a) in the appellant's return; and(b) on the totality of the evidence, after the status and effect of the payments between the appellant and any company had been properly assessed.[35] Her Honour noted that none of the witnesses called for the appellant had anyfirst hand involvement in the preparation of the appellant's notice of proposedadjustment and 2006 income tax return, and accordingly, were unable to state where the information relied upon had come from. Her judgment records multiple changes of taxation agent on the part of the appellant throughout the relevant period. In thatcontext her Honour found little benefit from the evidence adduced on the appellant'sbehalf and again, on a provisional basis, my view is that this Court is likely to come to a similar conclusion.[36] Had it been necessary, I would also have regarded as relevant to the exercise of my judgment under r 20.13 the fact that the appellant has an apparent history of pursuing unsuccessful litigation and of failing to meet the costs awards imposed in consequence. In an affidavit filed on behalf of the Commissioner, Mr Cook deposes to:(a) The appellant's defence of a summary judgment claim by theCommissioner relating to assessments of income tax for the appellant's 2007 and 2008 tax years. This matter was the subject of adecision of Judge G M Harrison dated 28 November 2014 in which his Honour found for the Commissioner and held that there was no defence to the appellant's claim.21(b) An appeal of the decision of Judge Harrison to this Court where Thomas J again found for the Commissioner holding that "There is nodefence to the claim and summary judgment was properly granted".2221 Commissioner of Inland Revenue v Musuku DC Auckland CIV-2013-004-002049, 28 November 201422 Musuku v Commissioner of Inland Revenue [2015] NZHC 1454, (2015) 27 NZTC 22-012 at [65].(c) An application for judicial review by the appellant in respect of decisions made by the Commissioner in relation to the 2001-2005 tax years which was heard in this Court before Woolford J and in which his Honour found that the application for judicial review represented a collateral attack on the validity of the tax assessments outside the mandatory statutory disputes and challenge processes outside Parts 4A and 8A of the Act.23[37] Costs and disbursements awards against the appellant arising out of these various unsuccessful claims and totalling $33,410.97 have not been met.[38] In the circumstances I am satisfied that the appeal should not proceed without appropriate security. It would expose the Commissioner to an appeal in respect of which, in my preliminary view, there are only slight prospects of success and with little prospect of the Commissioner otherwise recovering costs incurred in relation to that appeal.[39] Nor do I consider there to be any proper basis for deferring security. The appeal has been set down for 3 and 4 February 2016. It is important that before the Commissioner is committed to the costs of preparation for the hearing that her position be secure. Nor in my view is the fact that there is other litigation before the Authority in respect of previous tax years and in which a discrete limitation issue (irrelevant to the 2006 tax year) arises, a proper basis for deferral of the security requirement or for adjournment of the 3 and 4 February 2016 fixture.Result[40] I decline the application.[41] Costs are awarded to the respondent on a 2B basis. In the unlikely event counsel are unable to settle the quantum of costs, memoranda are to be filed. They are to be exchanged between counsel beforehand so as to limit any areas of difference.23 Musuku v Commissioner of Inland Revenue [2015] NZHC 678, (2015) 27 NZTC 22-005.[42] I make further orders in terms that, unless security for costs in the amount of $6,600 is paid to the Registrar of the High Court at Auckland or otherwise secured tohis satisfaction within 15 working days of today's date, the Notice of Appeal in the matter of J B Musuku v Commissioner of Inland Revenue CIV-2015-404-1947 be deemed to be abandoned.[43] The timetable orders of Katz J are confirmed with the exception that one further week is allowed for filing of the case on appeal.__________________________Muir J