HUA & Ors V COMMISSIONER OF INLAND REVENUE HC AK CIV-2011-404-007442

HUA & Ors V COMMISSIONER OF INLAND REVENUE HC AK CIV-2011-404-007442 [22 May 2012]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-007442[2012] NZHC 1098UNDER the District Courts Act 1947 and theJudicature Act 1908IN THE MATTER OF an appeal against a decision of the DistrictCourt at Manukau striking out appellants'notice of claimBETWEEN JIAO HI HUA, HUAN HSUEH WU ANDSHOU-CHEN CHIAO AS TRUSTEES OFTHE HARSONO FAMILY TRUSTAppellantsAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 26 April 2012Appearances: Ms Jiao in person assisted by Mr Yoe Wei (Interpreter)R L Roff for RespondentJudgment: 22 May 2012JUDGMENT OF VENNING JThis judgment was delivered by me on 22 May 2012 at 3.00 pm, pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors: Crown Law, PO Box 2858, Wellington 6140Copy to: Harsono Family Trust, PO Box 64219, Botany Downs, Manukau 2142Introduction[1] The appellants have been involved in litigation concerning or arising out of a property at Anzac Avenue since 2003. This appeal is the latest episode in the longrunning saga. It follows the District Court at Manukau's decision to strike out the appellants' claim against the Commissioner for the return of $137,500. Judge Andrée Wiltens delivered the decision on 8 November 2011.1Background facts[2] Freeport Developments Ltd (F) acquired the Anzac Avenue property in January 2001. A mortgage to the BNZ was registered against the title to the property.[3] On 4 March 2002 Mr Barge (Mr B) entered an unconditional agreement with F to purchase the property for $1.1 million. Within a few days of the agreement between Mr B and F being signed, the appellants approached F and expressed an interest in buying the property at a higher price. On 19 June 2002 the appellants made an agreement with F to purchase the shares in F for $1.2 million. The agreement was not completed.[4] On 11 July 2002, one of the appellant trustees, acting as an authorised bank account signatory, withdrew funds from the bank account of a Mr Chiao (Mr C) to discharge the BNZ mortgage. Mr C is the brother of one of the appellants.[5] On 15 July 2002 the appellants purported to enter a sale and purchase agreement with Mr C (as mortgagee of the property) to purchase the property for $1.1 million plus GST (in total $1,237,500). An assignment of the BNZ mortgage to Mr C was registered against the title to the property on 19 July 2002.[6] On 2 August 2002 the appellants apparently made payments on account of the purchase price to Mr C as mortgagee. On 12 August 2002 the appellants and Mr1 Jiao v The Commissioner of Inland Revenue DC Manukau CIV-2010-092-979 8 November2011.C executed a transfer document for the property. The transfer document was never registered.[7] Between 2003 and 2005 Mr B disputed the legitimacy of the appellants' purchase of the property. Ultimately the High Court found in Mr B's favour.2 The Court made a declaration that the purported sale of the property to the appellantspursuant to Mr C's power of sale (as mortgagee) was invalid as the process Mr Cfollowed was fundamentally flawed. The Court also found that the appellants had wrongly induced and procured F to breach its sale contract with Mr B and that the appellants were involved in an unlawful means conspiracy causing loss to Mr B. The Court ordered specific performance of the sale and purchase agreement between F and Mr B.[8] On 19 July 2006 the Court of Appeal dismissed an appeal by the appellantsagainst the High Court's findings.3[9] The Supreme Court refused leave to appeal the Court of Appeal decision.4[10] In addition to paying the purchase price, and after the issue of the High Court proceedings, the appellants paid the GST output tax on the transaction of $137,500 to the Department of Inland Revenue on 31 October 2003. The appellants also returned the purchase price of the property as an input in its GST return for the period ended 30 September 2003 and claimed an input tax credit for $137,500.[11] The Commissioner paid the GST input tax credit to the appellants on 28 January 2004.[12] Following the completion of the litigation by the Supreme Court's refusal togrant leave, in March 2007 the Commissioner issued a GST assessment which reversed the GST input tax credit claimed by, and paid to, the appellants. The appellants unsuccessfully disputed the GST assessment. The appellants then issued challenge proceedings in the Taxation Review Authority.2 Barge v Freeport Development Limited HC Auckland CIV-2002-404-1771 27 October 2005.3 Jiao v Barge CA236/05, 19 July 2006.4 Jiao v Barge [2006] NZSC 82, (2006) PRNZ 396.[13] On 14 May 2009 the Taxation Review Authority confirmed the correctness ofthe Commissioner's assessment.5[14] The appellants then applied to have the 14 May 2009 decision of the Taxation Review Authority recalled.[15] On 5 August 2009 the Taxation Review Authority dismissed the application to recall.6[16] The appellants appealed the recall decision to the High Court, and on 15 September 2009 the High Court dismissed the recall appeal.7[17] On 15 March 2010 the appellants filed their civil claim in the District Court,which was met by the Commissioner's application to strike-out.The District Court decision[18] The claim in the District Court followed the revised notice of claim procedure. The heads of claim were:(a) unjust enrichment;(b) relief pursuant to s 94A Judicature Amendment Act 1908;(c) money had and received;(d) restitution.[19] The Commissioner applied to strike-out the proceedings on three grounds:(a) the appellants' notice of claim in the District Court disclosed noreasonable cause of action;5 Case Z16 (2009) 24 NZTC 14,179 (TRA).6 Case Z26 (2010) 24 NZTC 14,380 (TRA).7 Jiao v Commissioner of Inland Revenue HC Auckland CIV-2009-404-5397 15 September 2009.(b) the appellants' notice of claim was an abuse of process of the Court; and(c) the appellants had acted vexatiously and frivolously in commencing the proceeding.[20] In his reserved decision Judge Andrée Wiltens referred to the relevant principles to apply on a strike out application before considering and upholding all three grounds advanced by the Commissioner.8 The Judge accepted theCommissioner's argument the claim was, in essence, a tax claim. He held that s 109 of the Tax Administration Act 1994 precluded the Court from considering it. Next,he accepted the Commissioner's further argument that if the appellants had a claimin relation to the $137,500 they had paid it must be a claim against F, not the Commissioner. The Judge also held that the appellants could not claim relief for a mistaken payment under s 94A of the Judicature Amendment Act 1908 because the mistake must be judged at the time the payment was made, not subsequently. Finally, the Judge concluded that the claim was, in any event, an abuse of process because the claim was no more than an attempt to relitigate matters that had previously been determined by the Taxation Review Authority. He struck out theappellants' claim.The appellants' case[21] The appellants filed written submissions to support the appeal. Ms Jiao also addressed oral submissions to the Court (with the assistance of the interpreter). Theessence of the appellants' argument is that, as a consequence of the findings in theHigh Court and the Taxation Review Authority, the transaction between the appellants and Mr C as mortgagee had no legal effect. There could therefore be no taxable activity. It follows that the payment could not, in the circumstances, be payment of a GST output tax. The appellants were therefore entitled to repayment of the $137,500 paid on 31 October 2003 for GST in respect of the transaction.8 Attorney-General v Prince & Gardiner [1998] 1 NZLR 262 (CA).[22] The appellants next argue that for the same reasons ss 109 and 165 of the Tax Administration Act 1994 have no application.[23] Alternatively, the appellants argue that they paid the $137,500 by mistake and the money is recoverable pursuant to s 94A of the Judicature Act 1908, or in equity.[24] In summary, the appellants' case is that the effect of the Taxation ReviewAuthority's decision was to "strip" the payment of any tax implications so that theappellants' claim was effectively a fresh and distinct claim for money had andreceived.[25] The appellants also submit that, if necessary, rather than being struck out, their claim could be amended and leave should be granted to enable them to do so. During the course of the hearing the appellants proffered a proposed draft amended notice of claim. The draft amended claim recites some of the above facts but pleads further that:5. On 31 October 2003, on the request of the mortgagee and a Mr Vincent Tam from Messrs Prince & Partners, Chartered Accountants acting for the registered proprietor, the [appellants] paid the GST component of the purchase price to the Commissioner as advised by the mortgagee. The sum paid to the [Commissioner] was $137,500.6. The [appellants] had believed that the Goods and Services Tax Act 1985 made it liable to pay the amount of GST owed on the purchase, being the sum of $137,500.7. By judgment dated 27 October 2005, the High Court at Auckland annulled the sale and purchase agreement between the Trust and the mortgagee and reversed the sale. The property, the subject of the sale was subsequently conveyed to a third party by the High Court.8. By judgment dated 14 May 2009, the Taxation Review Authority (TRA) ruled that the sum of $137,500 the [appellants] had paid to the [Commissioner] was not GST tax, given the previous ruling of the High Court mentioned in paragraph 7 above.9. The [appellants] concluded, on the basis of the two judgments mentioned in paragraphs 7 and 8 above, that it had paid the sum of $137,500 to the [Commissioner] in reliance of a view of the GST legislation which was totally wrong.10. The [appellants] had paid the sum to the defendant by mistake of law and is entitled to seek relief pursuant to the Judicature Act 1908, s. 94A.11. The [appellants are] further entitled to relief at equity, given that the payment had no tax implication or relevance, the judgments of the High Court ... and of the Taxation Review Authority ... having held conclusively that there had been no purchase of asset and no GST tax payable by [appellants].12. The [appellants were] therefore entitled to judgment for the sum of $137,500 together with interest from the date of payment.[26] In addition to repeating a number of the above written submissions, Ms Jiao made the following further submissions orally:the appellants believe the District Court judgment raises a question whether, when the appellants paid the money to the IRD they were paying on behalf of the registered proprietor or somebody else;the claim raises an issue whether GST is payable by the vendor or purchaser.[27] In conclusion, Ms Jiao submitted generally that the District Court Judge did not correctly apply the law and the appellants believed their claim must be allowed to proceed.Decision[28] The appeal and the appellants' proceedings in the District Court aremisconceived and were properly struck out as an abuse of process.[29] At the heart of the appellants' claim in the District Court, and this appeal, isthe submission that, as a result of the decisions of the High Court and TaxationReview Authority, the appellants' claim in the District Court has nothing to do withtax issues. Rather, it is simply a claim for the recovery of money mistakenly paid by the appellants to the Commissioner.[30] Those issues have already been determined against the appellants. However the appellants may seek to categorise their claim, it is an attempt to relitigate matters that have already been disposed of. It is an abuse of process.[31] The Taxation Review Authority's decision of 14 May 2009 is the principalanswer to this appeal. In that decision Judge Barber identified the issues before him as follows:9[1] Did a purported 15 July 2002 sale and purchase agreement of a derelict city commercial property between the [appellants] as purchasers and a Mr C as vendor for $1.1 million (plus GST of $137,500) constitute a taxable supply for the purposes of the Goods and Services Tax Act 1985 (the GST Act)? ...[2] I am also asked that, if I find there was no taxable supply, whether the [appellants] are nevertheless entitled to recover from the [Commissioner]the output tax they paid to the [Commissioner], by mistake allegedly, onbehalf of the registered proprietor of the property (F).[3] Should I find that there has been a taxable supply to the [appellants], I am further asked whether that supply was cancelled or fundamentally altered as a result of certain High Court and Court of Appeal findings involving the [appellants] to which I refer below.[32] The review proceedings were taken by the appellants in response to theCommissioner's assessment requiring them to repay the GST input credit they hadbeen paid by the IRD. In the event the appellants failed on the review, the appellants sought a finding they were entitled to recover the output tax they had paid, effectively as a set-off against the Commissioner's claim. The review also sought adetermination as to whether the supply was cancelled or fundamentally altered.[33] The appellants' claim in the District Court is primarily an attempt to relitigate the second issue before Judge Barber. It was dealt with by the Judge in the course of his decision. After finding there was no supply of land to the appellants (as opposed to Mr B) and that the correct tax position therefore was that the input tax credit claimed by (and paid to) the appellants must be refunded to the Commissioner, the Judge went on to consider the second point, the set-off issue:[48] The [appellants] purport to have mistakenly paid (to the defendant Commissioner) output tax on behalf of F regarding the purported sale and purchase of the property to them by F through C.[49] Section 165 of the TAA provides that any person who pays tax for, or on behalf of, any other person shall be entitled to recover the amount against that other person as a debt. If the [appellants] did pay the output tax on behalf of F (and it seems that they did), then they have a claim for recovery of it against F and not against the defendant Commissioner. ...9 Case Z16 (2009) 24 NZTC 14,179 14 May 2009.The Judge also dealt with the issue of the claim the appellants had paid the $137,500 by mistake:[51] I agree with Counsel for the Commissioner that the case authorities provided for the [appellants] to support their claim in unjust enrichment are not relevant because the [appellants'] claim for a refund from theCommissioner cannot succeed due to s 165 of the TAA (set out above). That provides the [appellants] with a cause of action against F.[52] None of the cases referred to for the [appellants] deal with s.94A of the Judicature Amendment Act 1908 (re recovery of payments made under a mistake of law), and none of them deal with the present situation where one person has paid a liability or debt on behalf of another. According to s.94A(2) of the Judicature Act 1908, a mistake is to be judged at the time the payment was made, not subsequently. On the facts of this case, there was no mistake at the time the output tax was returned. It was only later, following the 2005 High Court judgment, that the output tax liability was known to be incorrect. ......[54] The [Commissioner] does not accept that the output tax should be refunded to the [appellants]. I agree. As noted above, F returned the output tax to the defendant Commissioner on the purported sale and purchase to the [appellants] (albeit, there is an argument that it should have been returned by the mortgagee (Mr C) as it was a purported mortgagee sale). The correct tax position must be to reverse the transaction. That would result in a potential refund of the output tax to F, not to the [appellants].[34] Res judicata applies to the appellants' claim to recover the $137,500 from theCommissioner. Res judicata is the rule that decrees a final judgment by a competent court is conclusive as to the rights of the parties, so that those parties are estopped from relitigating the same issues.10 In Joseph Lynch Land Co Ltd v Lynch Tipping J (for the Court) explained the concept of res judicata applied to both cause of action and issue estoppel:11The expression "res judicata" means the matter has been adjudicated. The concept of res judicata is often applied to both cause of action estoppel and issue estoppel. Traditionally its use was confined to the former. Cause of action estoppel is different from issue estoppel which can arise where a plea of res judicata in the strict sense is not open because the causes of action are not the same: see 16 Halsbury's Laws of England (4th ed, reissue) (Estoppel) at para 977. Cause of action estoppel is more precise than issue estoppel. For there to be cause of action estoppel the cause of action sought to be estopped must be precisely the same as that upon which there has been an earlier adjudication.10 Chief Executive of Ministry of Social Development v Batt HC Wellington CIV-2003-485-27 31October 2003.11 Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 (CA) at 40-41.Issue estoppel is concerned with the prior resolution of issues rather than causes of action. In the same paragraph of Halsbury as that referred to above, it is said that issue estoppel precludes a party from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him.[35] The policy reasons underlying the principle of res judicata are that it is in the interest of the State that there should be an end of litigation and also, that individual litigants should not be vexed twice in relation to the same cause or issue. As Richardson J explained in Bryant v Collector of Customs:12[M]isuse of the judicial process - of which the attempted relitigating of issues is just one example - is likely to produce unfairness and to undermine confidence in the administration of justice ... The public interest in the due administration of justice necessarily extends to ensuring that the processes of the Court are fairly used and that they do not lend themselves to oppression and injustice.[36] While cause of action estoppel may not apply in this case given the nature of the proceedings before the Taxation Review Authority, issue estoppel does apply. The issues which the appellants rely on to support the claim against the Commissioner were considered and determined against them by Judge Barber in the Taxation Review Authority.[37] Apart from the passages referred to above, in the course of his decision JudgeBarber further summarised the appellants' challenge as follows:13[1] [The appellants] honestly believed they had purchased the property and they are therefore entitled to a refund from the Commissioner equal to the amount of output tax they paid on behalf of F on the purported sale of the property, under s 94A of the Judicature Act 1908. ...[2] [The appellants] are entitled to a refund from the Commissioner inequity and, in particular, "in restitution for unjust enrichment"....[5] If the defendant Commissioner is correct that no supply had been made to the dispute to [the appellants] when they purchased the property, it is untenable that they could have paid and the [Commissioner] received output tax on a purported sale at 31 October 2003.12 Bryant v Collector of Customs [1984] 1 NZLR 280 (CA) at 282.13 At [22].[6] The High Court and Court of Appeal decisions in relation to the litigation were wrong and not binding on the Taxation Review Authority.[38] The appellants therefore put in issue before the Judge:(a) that they paid the GST component of the purchase $137,500 by mistake in reliance on the validity of their agreement to purchase the property;(b) that as the transaction had no taxation implication they were entitled, in equity, to recover the payment from the Commissioner on the basis of unjust enrichment.[39] The additional heads of claim for money had and received and restitution add nothing to the appellants' general claim for the return of the money, based as it is in equity. Neither the claim as formulated in the District Court nor the proposed amended claim presented during the course of argument on this appeal raise any issues that were not effectively dealt with before the Taxation Review Authority.[40] The decision in the Taxation Review Authority was a final decision from which a right of appeal existed but was not pursued.14 It was made in a competent Tribunal. The parties to the decision are the same. For the appellants to now seek to relitigate the same issues in the District Court is an abuse of process. Their proposed claim is frivolous and vexatious. The Judge was correct to strike out the proceedings on those grounds.[41] In light of the above findings it is strictly unnecessary to consider the otherground upon which the appellants' proceeding was dismissed, namely that itdisclosed no reasonable cause of action. However, for completeness I deal with that issue briefly.[42] I do not consider s 109 of the Tax Administration Act 1994 applies to the appellants' claim as it is now framed. Section 109 prevents challenges to disputabledecisions (which include an assessment of a refund due under the Goods and14 Taxation Review Authorities Act 1994, s 26A.Services Tax Act 1985 by the Commissioner) by means other than engaging the statutory disputes challenge process.15 In this case the disputable decision was the Commissioner's assessment that the appellants are required to repay the $137,5000 income tax credit paid to them. That assessment however is not the basis of the appellants' present claim. Their claim is to recover or achieve a set-off of the tax GST component of the sale of the Anzac Avenue property. To that extent I do not consider s 109 is of particular assistance to the Commissioner.[43] However, the Commissioner does not need to rely on that s 109. Section 165 applies to the transaction.[44] The appellants' case proceeds on the basis that there was effectively no taxation implication because the transaction that they were a party to was declared invalid. However, while the transaction the appellants were a party to was declared invalid, there was a legitimate sale of the property by F with tax implications, and with the obligation that GST be accounted for on that sale. As Judge Barber noted, the payment made by the appellants was applied to the vendor's obligation to payGST on that transaction. Further, the appellants, as purchasers under the agreement which was subsequently declared to be invalid, had no obligation to pay outward tax to the Commissioner of Inland Revenue, in any event. If they had paid the money to Mr C (or to F) and the money had then been applied by those parties to the Commissioner they would have no right to seek to recover the money. The fact they paid the money direct to the Commissioner on behalf of the vendor does not alter the position that a GST liability arose as a result of the sale and that the obligation to pay it rested with F, as the supplier.[45] In this respect, I do not consider there to be any merit in the fresh matters Ms Jiao sought to raise orally. GST is clearly payable as a tax on supply by a registered person.16 In the case of the sale or supply of land the obligation to account lies with the vendor as supplier, not with the purchaser of property. The contract between the vendor and purchaser may oblige the purchaser to pay a sum of money that15 Tax Administration Act 1994, s 3.16 Goods and Services Tax Act 1985, s 8.represents the GST component of the transaction but the obligation to account for GST to the Commissioner is an obligation on the person making the supply.[46] The Judge was correct to conclude that the appellants paid the output tax on behalf of either the registered proprietor or the mortgagee. The appellants remedy lies under s 165 of the Tax Administration Act. They may recover the money representing the GST from the person on whose behalf they paid it.[47] Finally, the money was paid to meet the GST obligation that was understood to exist at the time. The effect of s 94A(2) of the Judicature Act 1908 is that if, after the payment, the law is found not to have been as it was commonly understood at the time the payment was made, relief is not available. In the present case the appellants clearly believed GST was payable on their transaction at the time they made the payment. It was only subsequently that that understanding has been shown to have been wrong.Result[48] For the above reasons the appeal is dismissed.Costs[49] The Commissioner seeks indemnity costs. I note Ms Roff advises that costs of between $10,000 and $11,000 have been incurred to date.[50] The appellant did not address that issue in her submissions. The appellants are to provide written submissions on the issue of costs by Friday 1 June 2012. I will then make an order for costs on the basis of the memoranda exchanged.__________________________ Venning J