HARDIE V THE COMMISSIONER OF INLAND REVENUE COA CA68/2011

HARDIE V THE COMMISSIONER OF INLAND REVENUE COA CA68/2011 28 September 2011IN THE COURT OF APPEAL OF NEW ZEALANDCA68/2011[2011] NZCA 492BETWEEN JOHN DAVID HARDIEAppellantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 20 September 2011Court: Wild, Ronald Young and Miller JJCounsel: A J Forbes QC and P A Robertson for AppellantP H Courtney and TKS Gillbanks for RespondentJudgment: 28 September 2011 at 2:30 PMJUDGMENT OF THE COURTA The appeal is allowed.B The High Court order striking out the application for judicial review is set aside.C The respondent is to pay the appellant's costs as for a standard appealon a band A basis with usual disbursements. Allowance for one counsel only.D The respondent is also to pay the appellant's costs in the High Court of the Commissioner's strike out application, on a 2B basis with disbursements fixed by the Registrar failing agreement.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)Introduction[1] Mr Hardie appeals against a High Court judgment in which was struck out his application for judicial review of the Commissioner's default assessments of income tax and goods and services tax (GST).1[2] The single substantive question is whether the default assessments were genuine assessments, as this Court put it in Westpac Banking Corporation v CIR.2 If they were not, judicial review is available and the High Court might, in the exercise of that jurisdiction, excuse Mr Hardie his failure to follow the statutory disputes procedure which taxpayers must ordinarily employ in such cases.3The narrative[3] Mr Hardie's tax affairs are a mess, and they have been so for many years. He has failed despite repeated encouragement and enforcement action to remedy matters by filing returns. We were given a detailed chronology but the parties sensibly included in the record few of the documents relevant to it, relying primarily on the statement of claim and two brief affidavits. For our purposes a brief summary will suffice.[4] Mr Hardie is a patent attorney who has practised in Auckland since 1969. He is liable to account for both income tax and GST, but he says he has had difficulties with GST ever since that tax was introduced. He deposes to difficulties with accountants and software, and he claims he has suffered stress and various other difficulties. None of this can possibly excuse the fact that Mr Hardie filed his last (presumably monthly) GST return for the period ended 31 January 2001, or his failure at any material time to file an income tax return. It appears that his last income tax return was filed as long ago as 1991.1 Hardie v CIR HC Auckland CIV-2010-202-145, 23 December 2010.2 Westpac Banking Corporation v CIR [2009] NZCA 24, [2009] 2 NZLR 99 at [59].3 Tax Administration Act 1994, part 4A.[5] Mr Hardie did file GST returns for the years ended 31 March 1998, 1999 and 2000, and for the period to 31 January 2001. Apart from those GST returns, the Commissioner has had available to him since 2000 only Mr Hardie's PAYE recordswhich showed how much had been paid as wages to his staff. On the pleading, the Commissioner is said to have had the latter records for the years ended 31 March 1998 to 31 March 2003 inclusive.[6] The Commissioner issued a default GST assessment on 10 July 2001 for the month ended 30 April 2001. Thereafter default assessments were issued on a monthly basis. The last of these default assessments appears to have been made for the monthly period ended 30 April 2006.[7] The Commissioner also issued default income tax assessments for the years ended 31 March 1991 to 31 March 2003.[8] From time to time Mr Hardie has made relatively modest payments, which the Commissioner has credited to his GST liabilities. The total said to be payable as at 10 May 2010 was $21,766,037.41, of which $19,387,081.68 comprised income tax, $2,372,619.73 GST, and the balance costs associated with obtaining judgment against Mr Hardie. Those sums include penalties and interest.[9] Remarkably, Mr Hardie still has made no attempt to establish his actual tax liability although he complains that the Commissioner's assessments are grosslyexcessive. He asserts that his failure to file returns is excusable because until relatively recently he did not know on what basis the assessments had been made, and he complains implausibly that he was unaware until 2006 that he must employ the statutory disputes procedure for challenging assessments, believing that he could file returns when he eventually got his affairs in order. We observe that he had been convicted in 1998 and 2000 of failing to file income tax returns, and he had also failed to file returns when directed to do so under s 17A of the Tax Administration Act 1994.[10] Relying on the default assessments, the Commissioner in 2006 sued Mr Hardie in debt, eventually obtaining judgment after trial in the District Court atWaitakere on 4 March 2009. In the course of his judgment, Judge Recordon held that the Commissioner was entitled to rely on default assessments, Mr Hardie having failed to file returns or use the disputes procedure, but noted that the District Court lacks jurisdiction to review the Commissioner's exercise of his powers ofassessment.4[11] Mr Hardie then took steps to have the Commissioner's assessments judicially reviewed, claiming that he had not previously appreciated he might do so. An application for review was filed on 11 June 2007. The Commissioner moved to strike it out. Mr Hardie discontinued the proceeding on the day before the scheduled hearing.[12] Mr Hardie next appealed the District Court judgment to the High Court. On 19 March 2010 Stevens J substantially dismissed the appeal, and subsequently dismissed an application for leave to appeal to this Court, which in turn dismissed, on 23 August 2010, an application for special leave to appeal.5 It is not suggested that the appellate judgments dealt squarely with the issue that concerns us here. On the contrary, the principal question appears to have been whether Mr Hardie was liable, as tangata whenua, to pay tax at all. Both Stevens J and this Court noted that a second application for judicial review had by then been filed, and this Court noted that the new application for review alleged errors in the Commissioner's tax calculations which had not been raised before Stevens J.6[13] Mr Hardie had filed the second application for review on 11 March 2010. The Commissioner moved to strike it out as both disclosing no reasonable cause of action and an abuse of process. On 23 December 2010 Keane J granted the strikeout application in the judgment presently under appeal.[14] Bankruptcy proceedings await the disposition of this appeal.4 CIR v Hardie DC Waitakere CIV-2006-090-1540, 4 March 2009.5 Hardie v CIR [2010] NZCA 389, (2010) 24 NZTC 24,452.6 At [17].How did the Commissioner come to his assessments?[15] We must begin by establishing on what basis the Commissioner is said to have issued the default assessments.GST[16] The evidence before us about the Commissioner's decision-making is sparse, the Commissioner having decided that for strikeout purposes only the barest summary was needed. The evidence takes the form of an affidavit by Kathleen Gavin, a Return and Debt Collection Officer with the Commissioner's NationalCollections Enforcement Department. She deposes that the default assessments were"based on financial information contained in the plaintiff's previous months GSTreturn, with 10 per cent added." She attaches a schedule of the dates on which the default assessments were issued.[17] Although the record is of very little assistance on this point, it was common ground between counsel that the first default assessment is likely to have been basedon Mr Hardie's last filed GST return, which was for the period ended 31 January 2001, and that the Commissioner appears to have made that assessment without allowing anything for input credits or zero-rated transactions. The previous returns filed by Mr Hardie showed that there had been substantial input credits and zero- rated supplies. These had resulted in him receiving GST refunds totalling some $50,000 for the return periods ended 31 March 1997, 1998, 1999 and 2000. However, the Commissioner appears to have ignored that history when issuing the default assessments, all of which resulted in GST being payable.[18] It is also common ground that for each subsequent monthly default assessment the Commissioner simply added 10 per cent to the last assessment. Surprisingly, Ms Gavin does not explain in her affidavit why that was done, but Mr Hardie pleads in his second amended statement of claim, and for our purposes it is not disputed, that in evidence in the District Court Ms Gavin stated that 10 per cent was added to each monthly default assessment to encourage taxpayers to file their returns.Income tax[19] Ms Gavin's evidence about the income tax assessments is that the default assessments were "based on details taken from GST returns filed by the plaintiff for that particular year, with an allowance of 20 per cent for any expenses. The resulting income was then divided by 33 to give an outstanding tax liability." (The reference to dividing by 33 appears to be an error; Ms Gavin presumably meant to say that a tax rate of 33 per cent was applied to the resulting net income.)[20] It is common ground that Mr Hardie had not filed GST returns in any of the relevant years. Contrary to Ms Gavin's evidence the "GST returns filed by the plaintiff" were actually the Commissioner's default GST assessments, which as noted were prepared by adding 10 per cent to the previous month's defaultassessment to encourage Mr Hardie to file returns.[21] The Commissioner cannot be faulted for adopting an estimate of deductible expenditure, but there is no explanation why 20 per cent was thought appropriate. Ms Gavin might have said, by way of illustration only, that that figure is typical of small businesses such as Mr Hardie's. Mr Forbes sought to persuade us, byreference to the GST returns that Mr Hardie did file until 2000, and his PAYE records, that 20 per cent was not a reasonable estimate, but we are in no position to choose among alternatives on reasonableness grounds even if that were the Court'stask on judicial review. All that can properly be said is that there is no evidence that the Commissioner considered Mr Hardie's actual deductible expenses, to the extent that they could be ascertained from the historic GST returns and PAYE records.Judicial review of tax assessments[22] Under the Tax Administration Act 19947 the Commissioner "may make an assessment of the amount on which in the Commissioner's judgment tax ought to be imposed and of the amount of that tax ... ." Judgment having been exercised, the taxpayer must pay the tax so assessed save so far as the taxpayer establishes on7 Tax Administration Act 1994, ss 106(1) and 106(1D); Goods and Services Tax Act, s 27(1).objection or in challenge proceedings that the assessment is excessive or the taxpayer is not chargeable with tax. The objection and challenge procedures referred to are those available under the Tax Administration Act itself.[23] The Act further provides that no disputable decision, which includes an assessment, may be disputed in a court or in any proceedings on any ground whatsoever, except in such objection or challenge proceedings, and an assessment is not invalidated through a failure to comply with a provision of the Tax Administration Act or another Inland Revenue Act.8 This Court held in Westpac v CIR that these provisions establish what might be considered "a particularlyinauspicious statutory context for judicial review".9[24] But an assessment may be set aside in judicial review, notwithstanding that it might have been challenged under the Tax Administration Act, where it is not an assessment of the sort which the legislature had in mind. As Richardson J held inCommissioner of Inland Revenue v Canterbury Frozen Meat Co Limited, theCommissioner must exercise judgment when making an assessment. He "is notentitled to act arbitrarily or in disregard of the law or facts known to theCommissioner", and there must be "a genuine attempt to ascertain the taxableincome of a taxpayer even if carried out cursorily or perfunctorily"... .10 In the same case McKay J held that the Commissioner is to determine as best he can on the information available the amount on which tax is payable and the amount of the tax. He may properly make an assessment which he believes is not necessarily correct, so long as he thinks it the best he can do on the information available to him. But he may not issue an assessment "which does not represent his own honest opinion."11This Court confirmed in Westpac v CIR that judicial review is available, exceptionally, when there has been no genuine assessment.128 Tax Administration Act 1994, ss 109 and 114.9 Westpac Banking Corporation v CIR [2009] NZCA 24, [2009] 2 NZLR 99 at [47].10 CIR v Canterbury Frozen Meat Co Limited [1994] 2 NZLR 681 at 690–691 (CA).11 At 693.12 At [53].Were the default assessments genuine exercises of judgment?[25] The Commissioner was faced, because of Mr Hardie's defaults, with thenecessity of estimating his GST and income tax liability using limited and, as time went on, increasingly dated information. Mr Hardie cannot be heard to complain that the resulting assessments were perfunctory or wrong, so long as they were genuine estimates of his tax liability based on the very limited information known to the Commissioner. Any challenge to the correctness of the assessments must be mounted using the objection or challenge procedures in the Tax Administration Act.[26] But on the evidence available to us, we think it clearly arguable that these assessments were not genuine exercises of judgment by the Commissioner, for several reasons.[27] First, Ms Courtney did not dispute that when assessing taxable income and the amount of tax payable, the Commissioner ought to take into account information known to him about expenses for which a taxpayer might claim a tax credit or deduction, as the case may be. As noted, for our purposes both counsel were prepared to accept, on the record before us, that the Commissioner likely did not credit Mr Hardie with input credits or zero-rated transactions when making the first default GST assessment. Ms Courtney's explanation was that to do so might have resulted in Mr Hardie receiving an overall GST refund, which she characterised as an unreasonable result. But we see no reason why in those circumstances the Commissioner must issue a default assessment at all.[28] Second and centrally for present purposes, it appears that the Commissioner added 10 per cent to each succeeding monthly default assessment not as a genuineestimate of Mr Hardie's liability but to encourage him to file his returns. That practice would act as an incentive only if, as time went on and the increases swiftly compounded, the assessments were likely to exceed his actual liability. Ms Courtney pointed to no justification for it in the legislation, which contains other mechanisms designed to encourage compliance.[29] Third, it appears that the default income tax assessments relied upon the monthly compounding increase in GST assessments, so that those too arguably didnot represent the Commissioner's genuine judgment as to Mr Hardie's actual income tax liability.[30] Fourth, it is arguable that the allowance of 20 per cent made for expenses when assessing income tax did not take into account the evidence, albeit limited, that the Commissioner had about Mr Hardie's expenses. Alternatively, there is no evidence that it is the product of some attempt to estimate his expenses.[31] In reaching these conclusions, we respectfully part company with Keane J, who reasoned that only in challenge proceedings could Mr Hardie advance the argument that the assessments were so arbitrary that the Commissioner could not honestly have believed them accurate.13 He appears to have reached that conclusion because he thought that, in the circumstances of this case, it would involve testingthe Commissioner's processes antecedent to an assessment, contrary to what was said in Westpac v CIR.14 We agree that the Court will not embark on that exercise, but we do not think the judicial review application requires it in this case. TheJudge's contrary conclusion appears to have been based in part on Mr Hardie's claimthat not until discovery has been had can the default assessments be tested. He was right to reject that claim. Judicial review of tax assessments is circumscribed, and in this case the issue is whether the Commissioner's admitted methodology involved agenuine assessment of Mr Hardie's liability. It is difficult to see how discovery is necessary to decide that issue.Mr Hardie's explanation for not using the statutory disputes procedure[32] Mr Hardie seeks still to excuse his longstanding and serial defaults, saying that he could not issue a Notice of Proposed Adjustment under the Tax Administration Act until he knew on what basis the default assessments had been issued, and that, as counsel put it, his accounting records "have not been able to be13 At [36].14 At [94].kept accurately or properly and he was unable to file returns that were, or were likelyto be, accurate".[33] Mr Forbes could point us to no authority that the Commissioner must deliver reasons for an assessment. We are not surprised.15 Nor are reasons a pre-requisite to use of the statutory disputes procedures. Liability to tax is imposed by the statutes, under which the taxpayer must file income tax and GST returns establishing the amount of tax payable for the relevant tax period.16 Mr Hardie might, without knowing how the Commissioner had made his default assessments, put forward a Notice of Proposed Adjustment in which he made his best assessment of his own liability. He has made no attempt to do so in any of the years which are the subject of this proceeding. Finally, it is axiomatic that Mr Hardie cannot excuse his non- compliance by pointing to his own failings, still less found an application for judicial review upon them.Abuse of process[34] We observe that in striking the application out, Keane J also concluded that it is an abuse of process.17 However, he rested that conclusion partly upon the prior history of litigation and partly upon his conclusion that this is not one of those cases in which there has plainly been no genuine assessment. We have differed from him on the latter point. So far as the history of litigation is concerned, the record before us is incomplete. We are not to be taken as precluding a finding that the application is an abuse of process, should the Commissioner elect to pursue that allegation. For example, earlier litigation may have finally determined some of Mr Hardie'sallegations. Ms Courtney also highlighted, in support of a submission that Mr Hardie is engaged in gaming and diversionary behaviour, the long and unsatisfactory procedural history of litigation, the extraordinary delays, and the continuing failure to file returns.15 Tax Administration Act 1994, s 111(1)(b).16 Goods and Services Tax Act 1985, s 16(1); Tax Administration Act 1994, ss 92(1) and 92B.17 At [37].Discretionary considerations generally[35] The considerations just mentioned might conceivably lead to relief being denied in whole or in part. It also seems plausible that new assessments, when coupled with penalties and interest charges, would be no less ruinous for Mr Hardie, practically speaking, than those he presently faces. We express no view about these matters, which are not relevant for our purposes. The question here is whether theJudge was right to strike out Mr Hardie's application for judicial review. For the reasons given, we are satisfied that the application ought to be heard. It will be for the High Court to decide whether the assessments are indeed susceptible to being set aside in judicial review, and if so, whether relief ought to be denied Mr Hardie in theexercise of that Court's remedial discretion.Decision[36] The appeal is allowed. The order striking out the application for judicial review is set aside.[37] The Commissioner is to pay Mr Hardie's costs in this Court as for a standard appeal on a band A basis, with usual disbursements. He is also to pay Mr Hardie's costs of the Commissioner's strike out application heard by Keane J, on a 2B basis with disbursements fixed by the Registrar failing agreement. In this Court, costs are for one counsel only.Solicitors:Mortlock McCormack Law, Christchurch for AppellantCrown Law Office, Wellington for Respondent