LARMER V THE COMMISSIONER OF INLAND REVENUE COA CA 61/2010

LARMER V THE COMMISSIONER OF INLAND REVENUE COA CA 61/2010 19 April 2011IN THE COURT OF APPEAL OF NEW ZEALANDCA 61/2010[2011] NZCA 157BETWEEN JILLIAN CLAIRE LARMERAppellantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 5 April 2011Court: Harrison, Stevens and Wild JJCounsel: R P Harley for AppellantH W Ebersohn and K I S Naik-Leong for RespondentJudgment: 19 April 2011 at 11:00 AMJUDGMENT OF THE COURTA The appeal is dismissed.B If the appellant is not legally aided for the appeal, she is to pay therespondent's costs as for a standard appeal on a band A basis, with usual disbursements.REASONS OF THE COURT(Given by Wild J)Introduction[1] Was the way in which the respondent (the Commissioner) applied s 177 of the Tax Administration Act 1994 (TAA) in declining the appellant's (Ms Larmer's)application for financial relief for hardship open to him? That is the narrow statutory interpretation issue raised by this appeal against a judgment of MacKenzie J givenon 11 December 2009.1 The Judge answered the issue ―Yes. For the reasons we will give, we agree.[2] Ms Larmer's counsel, Mrs Harley, sought to take, on appeal, the further point that the Commissioner had not taken into account the most recent information available to him in applying s 177. For reasons we will explain2, we dismiss that ground as not one open to Ms Larmer.Background[3] From the tax year ended 31 March 2000 Ms Larmer did not pay her proper goods and services (GST) and income taxes. On 8 July 2008, after the Commissioner had sued her for a total of $175,641.68 tax arrears, penalties and interest for the 2000 to 2007 tax years, Ms Larmer applied for financial relief under s 177(1)(a) of the TAA.3[4] The Commissioner declined Ms Larmer's application. She responded by applying to the High Court for judicial review. Her application was resolved at a judicial settlement conference on 23 October 2008 on the basis that theCommissioner would withdraw his decision and ―remake it after giving Ms Larmer an opportunity to provide further information.[5] That information was provided to the Commissioner under cover of a letter dated 10 December 2008. Given the terms of s 177(5) of the TAA, the Commissioner treated that letter as a new request for financial relief. Pursuant to notices he issued under s 17 of the TAA, the Commissioner obtained further information about Ms Larmer's finances from her two banks.[6] With admirable thoroughness, Mr Amor, an officer of the Inland Revenue Department, worked through all the information he had. He then prepared a detailed submission recommending that the Commissioner, pursuant to s 177C(1) of the TAA, write off arrears of GST and income tax for the four tax years ended 31 March1 Larmer v Commissioner of Inland Revenue HC Wellington CIV-2009-485-582, 11 December2009.2 At [24]-[27].3 Set out below at [14].2000 to 31 March 2003 only. Mr Amor explained this in a comprehensive affidavit filed in the High Court (we have deleted the actual figures given the secrecy provisions in the TAA):20. The reason for the partial write-off was that I felt that the tax that arose in the years ended 31 March 2000 to 31 March 2003 was incurred during a period when Ms Larmer may have been in serious hardship. From 1 April 2003 the figures of returned income showedthat Ms Larmer was not in serious financial hardship. Ms Larmer'sstatement of financial position of 11 August 2008 recorded weekly income of $X. At $Y (X x 52) per annum this was considerably in excess of minimum community standards. The figures in respect ofMs Larmer's income over each year is included on page 3 of mysubmission.21. This approach allowed financial relief to be provided for that portion of the debt that could have been the result of an inability to meet minimum community standards as opposed to that debt which was merely the result of Ms Larmer not paying previous taxes. In this regard the submission took into account that under s 177A(1)(b)(i) &(ii) ―significant financial difficulties in the serious hardshipdefinition does not arise because the taxpayer is obligated to pay tax or may become bankrupt.[7] Mr Amor's recommendation was accepted by the Commissioner and its effect conveyed to Ms Larmer by letter on 18 February 2009.[8] Correspondence between Mrs Harley and Mr Amor ensued. Relevant to the interpretation issue, in a 25 February 2009 letter, Mrs Harley asserted:(c) by s 177(3): the Commissioner has four statutory options. None of them permits a partial acceptance/partial rejection. For obvious reasons, s 177(3) requires a global response to an overall review of prior years, by reference to the current position of the applicant.―Recovery is obviously a step taken currently, by reference toarrears from earlier periods. The section does not permit a ―salami slice year-by-year approach. The focus can only be a decisionmade in the 2008 year. Across those five years, Ms Larmer's position on the facts does not meet the Commissioner's ownstandards. She is in serious hardship by those standards.On the information point Mrs Harley sought to take, she asserted that theCommissioner had knowingly overstated Ms Larmer's 2008 taxable income by$4,222.26.[9] Responding on 5 March 2009, Mr Amor said he had no information suggesting Ms Larmer's 2008 taxable income had been overstated – he had adopted the figure returned by her. As to the interpretation issue he wrote:Section 177A of the Tax Administration Act clearly excludes taxpayers who have failed to pay tax and have accumulated back taxes. We have taken into account previous periods where hardship existed and accordingly written off tax in those years.The fact that partial relief has been granted should be treated as a counter offer. If your client does not want to accept relief from payment for the 2000 to 2003 tax years please let us know.Mr Amor enclosed a copy of his detailed submission and recommendation, to which we referred above.4[10] Mrs Harley replied on 25 March 2009 asserting that the $4,222.26 adjustment to Ms Larmer's 2008 income tax return was ―discussed in mediation. Her responseon the interpretation issue was:As to s 177A of the Tax Administration Act, it is plainly incorrect that the section clearly excludes taxpayers who have failed to pay tax and have accumulated back taxes. Section 177A says nothing of the sort.[11] Because Ms Larmer commenced her (second) application for judicial review the day after Mrs Harley wrote on 25 March 2009, that letter was substantively responded to by Crown counsel. On the information point, Crown counsel countered: you claim certain adjustments to Ms Larmer's income tax return werediscussed at mediation. If by mediation you are referring to the judicial settlement conference, neither my client nor I can recall such discussions. In any event, your client was given the opportunity of providing further information after the judicial settlement conference for the decision to be remade. My client was entitled to accept that information as complete.[12] Crown counsel's response on the interpretation issue was: the hardship provisions are not concerned with taxpayers who have a history of non-compliance and are not in serious hardship but who have failed to pay their income tax in previous years. This is expressed in4 At [6].s 177A(1)(b) where the definition of significant financial difficulties excludes difficulties because a taxpayer is obligated to pay tax or difficulties caused by a taxpayer becoming bankrupt. The payment of tax, which is not linked to the low level of income of a taxpayer, is not a sufficient basis for a serious hardship application. Rather than debating the law on this issue, I suggest this is left for the High Court to decide.[13] In his affidavit, Mr Amor conveyed an offer by the Commissioner to write off the $2,150.48 of 2008 tax which would not be payable if, in fact, Ms Larmer's 2008 taxable income was overstated by $4,222.26.The legislation[14] The relevant provisions of the TAA are:177 Taxpayer may apply for financial relief(1) A taxpayer, or a person on a taxpayer's behalf, applies for financialrelief by either –(a) Making a claim stating why recovery of outstanding tax would place the taxpayer in serious hardship;...(3) Upon receiving a request, the Commissioner may—(a) accept the taxpayer's request; or(b) seek further information from the taxpayer; or(c) make a counter offer; or(d) decline the taxpayer's request....177A Definition of serious hardship(1) In this section and sections 176, 177, 177B and 177C, serious hardship, in relation to a taxpayer, being a natural person,—(a) includes significant financial difficulties that arise because of—(i) the taxpayer's inability to meet minimum living expenses according to normal community standards;(b) does not include significant financial difficulties that arise because—(i) the taxpayer is obligated to pay tax;[15] There is also s 176(2) of the TAA, which prevents the Commissioner recovering outstanding tax to the extent that recovery would place a taxpayer, who is a natural person, in serious hardship.The judgment under appeal[16] MacKenzie J dealt with the interpretation issue in this paragraph of his succinct judgment:[14] I consider that the Commissioner's approach to this question hasbeen correct. That approach is a practical way of reconciling the rather difficult interrelationship between paragraphs (a) and (b) of s 177A(1). If the matter had to be approached globally, as counsel for the taxpayer submits, then it would be necessary to consider the position at the time when the application was made. If, at that point, the taxpayer is assessed as being able to meet minimum living expenses according to normal community standards, then relief must be refused. In assessing whether, at that point, the taxpayer was able to meet minimum living expenses or not, no regard could be had to the obligation to pay tax which had arisen from earlier tax periods. A global approach might therefore disadvantage a taxpayer who had earlier failed to pay outstanding tax because of significant financial difficulties who, if application had been made at the time, might have obtained relief, but whose financial position subsequently improved to a point where the financial difficulties no longer existed. Conversely, a global approach might advantage a taxpayer who had failed to pay tax when financially able to do so, but was, by the time enforcement action was taken, in significant financial difficulties. I do not consider that either of these outcomes is consistent with the scheme and purpose of the Act. It seems more consistent with the purpose which the financial hardship regime is intended to achieve that the focus be on the ability of the taxpayer to pay the tax without significant financial difficulties at the time when the tax became payable. The exclusion from consideration, as possible grounds for serious hardship, of difficulties arising because of the obligation to pay tax, indicates a clear legislative intention that defaulting taxpayers may be pursued to a point which may result in serious hardship. That suggests that the appropriate focus is on the ability to pay the tax when the obligation arose, rather than at the point when enforcement proceedings are taken.Argument upon appeal on the interpretation issue and our decision on it[17] Mrs Harley submitted MacKenzie J's analysis was wrong. These were herpropositions:(a) The TAA required the Commissioner to assess Ms Larmer's requests for financial relief at the date they were made, and in respect of―recovery of outstanding tax. That meant all outstanding tax as a global sum.(b) In other words, Ms Larmer's requests for financial relief cannot be assessed on an annual basis.(c) The effect of the scheme of the TAA is that the Commissioner is not entitled to accept Ms Larmer's requests for relief in respect of some income years and decline them in respect of other income years.(d) Having accepted Ms Larmer's requests for relief made in 2008, the Commissioner cannot decline those requests for relief in respect of the income years ended 31 March 2004 to 31 March 2008.[18] We do not agree. For four main reasons, we uphold MacKenzie J's analysis.First, the Judge's interpretation is the purposive interpretation produced by the approach required by s 5(1) of the Interpretation Act 1999. The purpose of s 177 is to enable the Commissioner to give financial relief to a taxpayer who would otherwise be placed in serious hardship, as that term is defined in s 177A(1). As MacKenzie J pointed out, the approach contended for by Mrs Harley could result in a taxpayer being denied relief. We cannot view ―relief as the all or nothing concept(all, that is, of the relief exactly as requested, or none of it) contended for by Mrs Harley. Some relief is still relief.[19] Secondly, but closely related to our first point, the Judge's interpretation ofs 177 accords with ss 6 and 6A of the TAA. We refer particularly to s 6(2)(b) and (f)– the right of taxpayers to have their liability determined fairly, impartially, andaccording to law; and the reciprocal responsibility of the Commissioner and the Inland Revenue Department to administer the TAA in that manner.[20] Thirdly, as MacKenzie J explained, the Commissioner's year-by-year approach represented a practical way of granting relief where s 177A(1)(a) applied, while denying it where s 177A(1)(b)(i) applied. In her oral submissions to us, Mrs Harley accepted that the Commissioner's approach was a ―practical one.Indeed, she submitted that that was why it was wrong. Mrs Harley was unable to resist the corollary that her own opposing approach was impractical, and she did not suggest any other way in which the two provisions could be reconciled. The key to interpreting s 177A and applying it to Ms Larmer is causation: what caused Ms Larmer's financial difficulties? MacKenzie J's answer to that question was thatin some years the cause was Ms Larmer's low income, but in others it was her taxliabilities. This was essentially an application of s 177A to the facts before him. Mrs Harley could not explain how any error of law resulted.[21] Fourthly, we reject Mrs Harley's submissions that the Commissioner'sapproach was proscribed by s 177(3). Purposively construed – so as to facilitate financial relief where it could properly be granted – we read s 177(3) as permitting a year-by-year approach. In other words, the Commissioner could accept thetaxpayer's request for one tax year, and decline it for another year. Even if that interpretation is not open, the Commissioner's approach can readily be viewed as a counter offer made under s 177(3)(c). We accept that the Commissioner's18 February 2009 letter was not described by him at the time as a counter offer. But, if Ms Larmer's application was for ―global relief (ie for all eight tax years), then the Commissioner's allowance of relief for four only of those tax years was a counter offer. It is not the way in which the Commissioner labelled – or did not label – his 18 February 2009 letter that matters, but the substance of that letter.[22] The year-by-year approach taken by the Commissioner in considering Ms Larmer's application for financial relief will not be appropriate in every case.For example, it will not be appropriate where the taxpayer's difficulties do not spanmore than one tax year. But, where it is appropriate and results in partial relief for the taxpayer, it is open for the Commissioner to adopt it.[23] Mrs Harley relied on the judgment of MacKenzie J in W v Commissioner of Inland Revenue.5 She obviously relied on that case before MacKenzie J as well, because he distinguished the present case as ―quite different from W.6 Indeed it is. The taxpayer in W had been seriously ill. As a direct result he failed to file tax returns and to pay his tax. As a consequence, the Commissioner imposed penalties and charged interest, which placed the taxpayer in financial difficulty. MacKenzie J held that, in that circumstance, the financial difficulty had arisen because of serious illness, and could be taken into account under s 177A(1)(a)(iii), and was not excluded from consideration by s 177A(1)(b)(i). That is not reasoning that has any application here.The information point[24] We turn to the information point Mrs Harley sought to pursue. To reiterate, she contended the Commissioner had erred in not taking into account the most recent financial information Ms Larmer provided to him. Mrs Harley is referring to the information she had sent under cover of her 10 December 2008 letter. We dismiss this point for three reasons. First, this point was not pleaded. The only relevant pleading in Ms Larmer's application for review filed on 26 March 2009 was anallegation in paragraph 7(a) that ―the Commissioner has taken into account incorrect and irrelevant information.[25] Secondly, and as a consequence of the lack of pleading, the point Mrs Harley now seeks to take was not considered by MacKenzie J. The only part of the judgment under appeal that deals with information is this:[19] Mrs Harley also submits that the Commissioner has erred in his assessment of the information available to him as to the taxpayer's incomefor the relevant period. That, too, is an issue which goes to the merits, such as might be relevant on an appeal. I do not consider that any error of law or principle, within the purview of judicial review, has been demonstrated by the applicant.[26] Thirdly, even if the point was open to argument on appeal, there is no evidence substantiating it. The evidence that was before MacKenzie J is to the5 W v Commissioner of Inland Revenue (2005) 22 NZTC 19,602.6 At [15].opposite effect. That was the evidence of Mr Amor who had considered Ms Larmer's application for financial relief, and who swore the affidavit we have referred to. He exhibited the submission and recommendation he prepared for the Commissioner, to which we referred above.7 In the conclusions section of that submission Mr Amor states:The Taxpayer's recent application for financial relief was received 10/12/2008. It was completed as at the Taxpayer's financial position of31/03/2008 in line with her Income Tax return of that date. ...[27] To summarise, because the information point was not pleaded, it was not dealt with by MacKenzie J and is not open on appeal. Even if it were, the evidence does not support the point. Rather, it exposes it as without substance.Result[28] The appeal is dismissed.[29] As to costs, we are not sure if Ms Larmer was legally aided for the appeal. Ifnot, she is to pay the Commissioner's costs as for a standard appeal on a band A basis, with usual disbursements.Solicitors:Harkness & Peterson, Wellington for AppellantCrown Law Office, Wellington for Respondent7 At [6].