DOWDEN v COMMISSIONER OF INLAND REVENUE [2019] NZHC 2729

DOWDEN v COMMISSIONER OF INLAND REVENUE [2019] NZHC 2729 [24 October 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-2086[2019] NZHC 2729UNDER THE Income Tax Acts 1994, 2004 and 2007; theStudent Loan Scheme 1992; and the TaxAdministration Act 1994IN THE MATTER OF an appeal against the decision of theTaxation Review AuthorityBETWEEN JOHN ALFRED DOWDENAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 9 April 2019Appearances: B C Bhanabhai for AppellantM J Bryant and C M Kern for RespondentJudgment: 24 October 2019JUDGMENT OF PETERS JThis judgment was delivered by Justice Peters on 24 October 2019 at 4 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate: ...................................Solicitors: Dyer Whitechurch, AucklandCrown Law, WellingtonCopy for: Inland Revenue — Litigation ManagementIntroduction[1] The appellant, Mr John Dowden, appeals against a decision of Judge A ASinclair, sitting as the Taxation Review Authority ("TRA").1[2] The matter before the TRA was Mr Dowden's challenge to assessments madeby the Commissioner of Inland Revenue ("Commissioner") of Mr Dowden's liabilityfor PAYE, student loan deductions, goods and services tax ("GST") and income taxbetween January 2004 and May 2012 ("relevant period").[3] The assessments made concerned several business activities, including"Safeguard Security" ("Safeguard") and a motor vehicle trading business. This appealis only concerned with whether Mr Dowden is liable for the tax assessed and whichderived from Safeguard.[4] Mr Dowden had commenced trading as Safeguard in 1972 and continued,sometimes through a company structure, until, on his case, he transferred his interestin the business to his (former) partner, Ms Jackson, or her company Hibiscus CoastSecurity Limited ("Hibiscus") in December 2003. Both Safeguard and Hibiscus werein the security industry. Mr Dowden's case was that Ms Jackson was liable for the taxassessed insofar as it related to Safeguard between January 2004 and December 2011.[5] In challenging the assessments, Mr Dowden had the burden of proving on thebalance of probabilities that the assessments were wrong.2 The TRA was notpersuaded that the assessments were wrong, as it did not accept Mr Dowden'sevidence that he had ceased to trade as Safeguard in the relevant period.[6] This determination brought the TRA to the second issue, which only arose ifMr Dowden failed on the first issue. The second issue was whether the limitationperiods in ss 108 and 108A Tax Administration Act 1994 ("TAA") operated to preventthe Commissioner from assessing some of the income tax and GST in dispute. TheTRA upheld the Commissioner's submission that she was not bound by the limitationperiods in the particular circumstances of this case.1 Disputant Z v Commissioner of Inland Revenue [2018] NZTRA 7.2 Tax Administration Act 1994, ss 149A(1).[7] On appeal, Mr Bhanabhai, counsel for Mr Dowden, submits that the TRAerred in its factual finding that Mr Dowden had carried on business as Safeguard inthe relevant period. Mr Bhanabhai submits the TRA erred by failing to take intoaccount statements that Ms Jackson had made in meetings with IRD personnel inMarch and May 2011.[8] Mr Bhanabhai also submits that the TRA's determinations under ss 108 and108A were in error.3Nature of appeal[9] The appeal is brought pursuant to s 26A Taxation Review Authorities Act 1994.It is a general appeal, to be determined in accordance with the principles inAustin, Nichols & Co Inc v Stichting Lodestar.4 Mr Dowden has the burden ofestablishing the TRA's decision is wrong and that I should reach a different conclusion.Investigation[10] The Commissioner commenced an investigation of Mr Dowden's tax affairs inor about 2010, this investigation following an enquiry of the Inland RevenueDepartment ("IRD") by a former employee regarding the payment of PAYE. At firstthe investigation concerned both Hibiscus and Safeguard but it was discontinued asregards Hibiscus.[11] Ms Jackson supplied some Safeguard and Hibiscus business records to theCommissioner for the 2010 and 2011 tax years and payroll data for both companiesfrom 1 April 2001 to 31 March 2011. Neither Ms Jackson nor Mr Dowden suppliedother records or documents to the Commissioner. Given that, the investigator obtaineddocuments and information from others, including from trading banks and formeremployees.3 Although other points were taken in Mr Dowden's notice of appeal of 27 September 2018 andissues on appeal of 31 January 2019, the matters referred to in [7] and [8] above were the onlyones pursued in submissions.4 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.Assessments[12] In May 2012, the Commissioner notified Mr Dowden that she had assessedhim for PAYE and student loan deductions of $749,210.52 and $601.50 respectively,in respect of the period from 1 January 2004 to 31 March 2011 inclusive.[13] Secondly, in October 2013, the Commissioner notified Mr Dowden that shehad assessed him for:(a) GST of $634,398.70 on the basis that Mr Dowden had conducted"taxable activities" between 30 September 2003 and 31 March 2012inclusive;(b) income tax of $175,127.52, derived but not returned between 1 April2004 and 31 March 2011 inclusive; and(c) additional PAYE of $78,249.46 in respect of the period 30 April 2011to 31 May 2012 inclusive.[14] Some of the amounts assessed are no longer in dispute. Those that remain inissue are PAYE of $798,404.52 in respect of the period from 31 January 2004 to30 November 2011; GST of $490,791.55 in respect of the period from September 2003to September 2011; and income tax of $124,171.33 in respect of the period from31 March 2004 and 31 March 2011. These amounts exclude penalties and interest, ifany.TRA decision[15] The TRA heard the case in July 2018. Mr Dowden gave evidence and wascross-examined at length — the transcript of his cross-examination runs to some170 pages. The Commissioner called evidence from the investigator and a formeremployee of Safeguard. The investigator had filed a lengthy (70 page) brief ofevidence setting out the course of the investigation, of whom enquiry had been madeand the conclusions the investigator had drawn.[16] As I said above, Mr Dowden's case before the TRA was that he had not carriedon business as Safeguard in the relevant period, and that Ms Jackson had taken overthe running of the business and was responsible for all aspects of it, including itsobligations to the IRD. To the extent Mr Dowden continued to be involved, hisevidence was that he did so as an employee. Leaving aside the limitation point,Mr Dowden's liability for the tax assessed would depend on whether the TRA acceptedhe had ceased to trade as Safeguard.[17] Having heard the evidence, the TRA was not satisfied that Mr Dowden hadceased to trade as Safeguard in the relevant period.[18] For reasons the TRA gave, it did not find Mr Dowden a reliable or crediblewitness and considered his explanations of the operation of the Safeguard businessimplausible. Rather, the TRA considered it clear from the contemporaneous evidencethat Mr Dowden had continued to trade as Safeguard after January 2004. Thisevidence included the following.[19] First, at all material times the security industry was regulated. Throughout,Mr Dowden held a security guard licence in his name, trading as Safeguard. Inaddition, Mr Dowden, as licensee, had applied for and renewed as required"certificates of approval" of individuals described as employees of Safeguard.Mr Dowden had made these applications in his capacity as employer of the employeeconcerned.[20] Secondly, Safeguard employees' wages had been paid from bank accountswhich the TRA found were in Mr Dowden's name and/or under his control("bank accounts"). Invoices issued to Safeguard's customers identified one of thesebank accounts as that into which the sum due should be paid and were issued underMr Dowden's GST number, or that of another employee from March 2011.[21] Thirdly, the TRA was satisfied that Mr Dowden had continued to hold himselfout to third parties as the owner/operator of Safeguard after January 2004. Staffmembers understood that Mr Dowden owned and controlled Safeguard. Also, in anunrelated proceeding, the Employment Relations Authority ("ERA") had found thatMr Dowden, trading as Safeguard, and Hibiscus were joint employers of an employeeclaimant.[22] Fourthly, Mr Dowden had sold Safeguard and Hibiscus after Ms Jackson'sdeparture. Mr Dowden was shown in the agreement for sale and purchase as thevendor of the two businesses, and as the employer of their employees.[23] For these reasons, the TRA was:5... satisfied that [Mr Dowden] continued to carry on business in his personalcapacity under the trading name of [Safeguard] in the tax periods in dispute.Liability for PAYE, income tax and GST[24] Having reached that conclusion, the TRA addressed the legislative provisionsgoverning liability for PAYE, student loan deductions, income tax and GST. As toPAYE, the TRA determined that Mr Dowden was the "employer" of Safeguard'semployees in the relevant period, within the meaning of the PAYE provisions in theincome tax legislation. He was liable to return the PAYE and account for the studentloan deductions assessed accordingly.[25] Mr Dowden's liability for the income tax depended on whether he had derivedincome from Safeguard. The TRA was satisfied that Mr Dowden had derived "incomefrom a business", the income being the payments Safeguard's customers had paid intothe bank accounts, alternatively that the amounts paid had "come in" to Mr Dowdenand were his income "under ordinary concepts".6[26] Mr Dowden's liability for the GST assessed depended on whether, as a personregistered for GST, he had carried out taxable activities. The TRA was satisfied thatMr Dowden had carried out taxable activities through the services supplied bySafeguard.5 Disputant Z v Commissioner of Inland Revenue, above n 1, at [38].6 Income Tax Act 2007, ss CB 1; CA 1(1); and CA 1(2).Challenges to TRA's determination[27] I turn now to Mr Dowden's appeal against the TRA's factual finding as to hiscontinued trading as Safeguard, reproduced in [23] above.[28] Mr Dowden, through Mr Bhanabhai, makes two principal challenges to thisfinding.[29] First, Mr Bhanabhai attributes many of the matters referred to in [19] to [22]above as evidencing no more than an inattentiveness to detail on Mr Dowden's part.For instance, as regards the sale of the Safeguard and Hibiscus businesses, referred toin [22], Mr Bhanabhai submits that Mr Dowden left "all the details" to the lawyersand accountants and his only interest was "where he needed to sign", and "moving thebusiness on". As to why employees believed Mr Dowden owned the Safeguardbusiness, the explanation given was that few people were told the true position. Tothe extent Mr Dowden had made inaccurate or inconsistent statements to third parties,it was because he adopted a "pragmatic" approach, which proved easier for him day-to-day.[30] Counsel for the Commissioner objected to these submissions on the groundthat they may not be supported by the evidence.[31] Mr Dowden's second challenge concerned the TRA's failure to accept, or placeany weight on, statements Ms Jackson had made to the IRD.[32] The relevant part of the TRA's decision follows. References to "Ms Black","HCW Ltd" and "XYZ" are references to Ms Jackson, Hibiscus and Safeguardrespectively:[32] The disputant did not produce any contemporaneous documentationor call any witnesses. Instead, he relied largely on statements made byMs Black to Inland Revenue officers at interviews on 31 March 2011 and20 May 2011. In summary, at the first meeting, Ms Black told the officers thatthe GST and P AYE returns for XYZ should have been filed by HCW Ltd andwere not filed because she had difficulties managing the businesses. Ms Blackstated that invoices issued by XYZ were under the disputant's GST numberbecause an employee did not update the computer system at the time. She alsosaid that the PAYE deducted from employees' salaries had been used to paysalaries for the next month or for day to day expenditure. At the secondmeeting, Ms Black told the officers that she had authorised all the transactionsin relation to the Westpac and ANZ accounts.[33] The disputant also relied upon a signed brief of evidence dated6 August 2010, made by Ms Black in another ERA claim in which she said:[2] In 2004 [HCW Ltd] took over the business [XYZ] which hadpreviously been owned by a company owned and operated by[the disputant]. The company had been placed in liquidation and[HCW Ltd] acquired the business of [XYZ]. From 2004 [HCWLtd] owned and operated its existing business together with thenewly acquired [XYZ] business.[3] The reason it acquired the business of [XYZ] was because thecompany [which the disputant] had operated, had been placed inliquidation and [the disputant] was then listed as a banneddirector by the Ministry of Economic Development. ...[34] Under cross examination, the disputant acknowledged that thesestatements did not correctly reflect what had occurred. Firstly, he hadoperated XYZ in his own name after his previous company had gone intoliquidation, and secondly, he had not transferred the business of XYZ for thereason given by Ms Black. In addition, these statements conflict with whatMs Black said in a brief of evidence provided in the earlier ERA Proceedingsin which she stated that the business of XYZ had been leased to Mr Brown.Ms Black was not available to be cross examined. In view of the conflictingnature of the statements made by Ms Black, I do not place particular weighton any of them.(Footnote omitted)[33] There is no dispute that the TRA's summary in [32] and [33] of its decisionabove of Ms Jackson's statements to the IRD and in her briefs of evidence to the ERAis accurate. However, Mr Bhanabhai submits, first, that the TRA should haveattributed considerable weight to Ms Jackson's statements because they constitutedadmissions that she or Hibiscus had taken over the Safeguard business and wereresponsible for the omissions giving rise to the assessments. Mr Bhanabhai alsosubmits that the TRA was wrong to take into account the apparently conflictingstatements in Ms Jackson's briefs of evidence to the ERA, being an entirely differentforum.[34] Counsel for the Commissioner submits that the TRA was entitled to place littleweight on Ms Jackson's statements and there is no basis on which to revisit the TRA'sdecision.[35] I do not accept either of the challenges to the TRA's determination. First, indeciding what weight to give Ms Jackson's statements, the TRA was entitled to takeinto account that she had not given evidence and was not available forcross-examination. These matters inevitably affect the weight a judicial officer givesa statement made by a person not called to give evidence. Nor do I accept the TRAwas required to disregard entirely the conflicting statements in Ms Jackson's briefs ofevidence. In determining reliability, a Judge is entitled to take into account allinformation relevant to the assessment.[36] It follows that I do not accept the TRA erred in placing little or no weight onMs Jackson's statements.[37] As to Mr Bhanabhai's first submission, referred to in [29] above, theconclusion the TRA reached, ie that Mr Dowden was operating Safeguard, was plainlyopen on the evidence. The contemporaneous documents, many containingrepresentations Mr Dowden himself made as to his ownership of the business, lead tothe conclusion the TRA reached. I also take into account the TRA's advantage inhearing all the evidence.7 Accordingly, I am not persuaded the TRA's determinationon this issue was made in error.[38] This determination brings me to ss 108 and 108A TAA.Sections 108 and 108A Tax Administration Act 1994[39] It is then necessary to consider ss 108 and 108A TAA as, in the absence ofdisentitling conduct on the part of the taxpayer, these provisions preclude theCommissioner increasing an assessment of income tax or GST respectively after fouryears has elapsed from the end of the relevant year or GST period. Accordingly, itwas possible that some of the assessments the Commissioner had made were timebarred, unless Mr Dowden's conduct brought him within the exceptions referred to inthe provisions.7 See Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 at [26]–[34].[40] Before I address the provisions, I record the TRA identified the assessmentspotentially affected by ss 108 and 108A as those for income tax to 31 March 2004, andfor the GST periods from September 2003 to March 2005 and September 2008 toMarch 2009. It is not clear to me that is or remains the position.8 However, the detailof the assessments potentially affected does not much matter. The issue before theTRA was whether, in the circumstances, the Commissioner was bound by theprovisions. The TRA determined that the Commissioner was not bound.[41] On appeal, Mr Bhanabhai accepted that Mr Dowden's appeal largely turned onwhether or not I accepted the TRA had erred in concluding that Mr Dowden hadcontinued to operate Safeguard in the relevant period. This statement is not entirelycorrect, at least as regards s 108A, as that requires a deliberate (using the word loosely)omission by the taxpayer of material facts. Accordingly, it is appropriate that I set outthe TRA's findings and why I consider they are not open to challenge in thecircumstances of this case.[42] Section 108 TAA provides:108 Time bar for amendment of income tax assessment(1) Except as specified in this section or in section 108B, if—(a) a taxpayer furnishes an income tax return and an assessmenthas been made; and(b) 4 years have passed from the end of the tax year in which thetaxpayer provides the tax return,—the Commissioner may not amend the assessment so as to increase theamount assessed or decrease the amount of a net loss.[...](2) If the Commissioner is of the opinion that a tax return provided by ataxpayer—(a) is fraudulent or wilfully misleading; or(b) does not mention income which is of a particular nature orwas derived from a particular source, and in respect of whicha tax return is required to be provided,—8 Respondent's Submissions dated 26 March 2019 at [100] and [110].the Commissioner may amend the assessment at any time so as toincrease its amount.[...][43] For the purposes of s 108(2)(a), "fraudulent" means to act deliberately and withknowledge that the act concerned is in breach of a legal obligation.9 "Wilfullymisleading" requires the taxpayer to know and intend what he or she is doing.10[44] Section 108(2)(b) requires that the taxpayer omit all mention of a gainsubsequently found to be assessable income.11[45] As it was required to do, the TRA arrived at its own view of whether theCommissioner was entitled to increase the income tax assessment(s) as she did.12 TheTRA said it had "no difficulty in finding" that Mr Dowden's income tax return to31 March 2004 "did not reflect [Mr Dowden's] true tax position and was misleading",and deliberately so. The TRA referred expressly to Mr Dowden as "an experiencedbusiness man who was well aware of his tax obligations".13[46] The TRA was also satisfied that the return omitted income earned from theoperation of Safeguard (and the motor vehicle trading business which is no longer indispute).[47] The consequence of these findings was that the Commissioner was not boundby s 108(1) and was entitled to increase the amount assessed as she had done.[48] Section 108A TAA provides:108A Time bar for amending GST assessment(1) Subject to this section and section 108B, if a taxpayer provides a GSTtax return for a GST return period and an assessment has been made,9 R v Coombridge [1976] 2 NZLR 381 (CA) at 387.10 Babington v Commissioner of Inland Revenue (No 2) [1958] NZLR 152 (SC) at 156–157; andGreat North Motor Company Ltd (in rec) v Commissioner of Inland Revenue [2017] NZCA 328at [36].11 Babington v Commissioner of Inland Revenue [1957] NZLR 861 (SC) at 866–867; and Cross &Goulding v Commissioner of Inland Revenue [1987] 1 NZLR 498, (1987) 9 NZTC 6,101 (CA) at6,111.12 Great North Motor Company Ltd (in rec) v Commissioner of Inland Revenue, above n 10at [27]–[34].13 Disputant Z v Commissioner of Inland Revenue, above n 1, at [81].the Commissioner may not amend the assessment to increase theamount assessed if 4 years have passed from the end of the GST returnperiod in which the tax return was provided.[...](3) The Commissioner may, at any time, amend an assessment to increasethe amount of the assessment if the Commissioner considers that theperson assessed has knowingly or fraudulently failed to disclose to theCommissioner all of the material facts that are necessary fordetermining the amount of GST payable for a GST return period.[...][49] "Knowingly", as referred to in s 108A(3), requires knowledge of the existenceof a fact or facts, and not of the lawfulness or otherwise of the act.14[50] The TRA was satisfied that Mr Dowden had failed to disclose to theCommissioner all material facts relating to the operation of Safeguard (and, again, themotor vehicle trading business) and that he had done so knowingly or fraudulently.The TRA referred to the fact that Mr Dowden "had been registered for GST since 1986and was well aware of his GST obligations".15[51] The consequence of this finding was that the Commissioner was not bound bys 108A(1) and was entitled to increase the amount assessed as she had done.[52] As I have said, there was no substantial challenge to these determinations onappeal. For the sake of completeness, however, I record that the conclusions the TRAreached were open, particularly having regard to the matters to which the TRAreferred, mentioned in [45] and [50] above.[53] It follows that I accept the Commissioner was entitled to increase theassessments as she did and that the TRA made no error on this issue.Result[54] I dismiss this appeal.14 District Commissioner of Inland Revenue v Gordon [1989] 11 NZTC 6,082 (HC) at 6,084.15 Disputant Z v Commissioner of Inland Revenue, above n 1, at [86].[55] The parties may make submissions on costs and disbursements in the eventthey are unable to agree.Peters J