MANAGED HOTELS LTD v COMMISSIONER OF INLAND REVENUE HC AK CIV-2008-404-8432

MANAGED HOTELS LTD v COMMISSIONER OF INLAND REVENUE HC AK CIV-2008-404-8432 19 October 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2008-404-8432UNDER the Companies Act 1993BETWEEN MANAGED HOTELS LIMITEDApplicantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 30 August 2011Counsel: S R F Judd for the ApplicantC Wood for the RespondentJudgment: 19 October 2011RESERVED JUDGMENT OF ELLIS JThis judgment was delivered by me on 19 October 2011at 12 noon, pursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors: Crown Solicitors, PO Box 2213, Auckland 1140Ladbrooks Solicitors, PO Box 37633, AucklandCounsel: SRG Judd, PO Box 3320, Auckland 1140[1] The Commissioner of Inland Revenue has issued a statutory demand to Managed Hotels Limited (MHL) as a result of MHL's failure to pay a GST debt said to be owing to the Commissioner. MHL has applied to have the demand set aside and has also filed judicial review proceedings relating to the circumstances giving rise to the debt. MHL also now seeks interim orders declaring that the Commissioner should take no steps to enforce the demand pending resolution of those review proceedings.Background[2] MHL is one of the companies involved in litigation against the Commissioner of Inland Revenue arising from the template tax scheme devised by Mr J G Russell. The history of that litigation is both ancient and convoluted but insofar as it relates to the present matter it has recently been clearly and usefully summarised by Allan J inFB Duvall Ltd & Ors v Commissioner of Inland Revenue between [19] and [39].1Because of that summary I propose only to canvass the particularly salient aspects here. They are as follows.[3] MHL's GST debt arises as a result of assessments issued to that company by the Commissioner in the early 1990s. Those assessments reflected returns filed on behalf of MHL by Mr Russell and in particular its position at the time that (as a result of its involvement in the Russell template scheme) it had been paid fees by other companies for administration or management services it said it had provided to those companies. As I understand it MHL's returns, and the Commissioner'sconsequent assessments:(a) rendered MHL liable to pay output tax on the fees received; but(b) entitled it to claim input tax for any expenses incurred in the course of its taxable activity.[4] By virtue of s 109 of the Tax Administration Act 1994 (the TAA) those assessments are deemed correct and, other than in objection proceedings under Part 81 FB Duvall Ltd & Ors v CIR (2010) 24 NZTC 24,053 (HC). MHL is one of the "Ors".or a challenge under Part 8A of the TAA, may not be disputed in any court or in any proceedings on any ground whatsoever. The age of the assessments in question means that it is the Part 8 procedures that are relevant in this instance. There are, however, no Part 8 objection proceedings presently on foot.[5] It is evident from the documents that I have seen that Mr Russell has, over the last 15 years, asserted that the Commissioner is obliged to treat all the entities involved in his scheme "consistently" for tax purposes. It is that position that lies at the heart of the present matter.[6] At the risk of over-simplifying an indisputably tortuous saga, the current issues arise because of the objection proceedings initiated by F B Duvall Ltd (Duvall). Mr Russell says that Duvall is a company in a materially identical position to MHL. Whether the Commissioner agrees with that or, if he does not, the reasons for his difference of view, are not matters that are presently clear to me.[7] In any event, because the Commissioner's investigation into the Russellscheme was lengthy and ongoing in nature, his position in relation to Duvall's taxliability changed while that litigation was on foot. More particularly, the Commissioner initially assessed Duvall on the basis that it was liable to pay output tax on the administration fees it had received. Duvall objected but the Taxation Review Authority found for the Commissioner. Duvall appealed. Prior to the hearing of the appeal in the High Court, however, the Commissioner formed the view that no services had been provided by Duvall in return for the fee and that Duvall had no taxable activity. He therefore determined that he should concede the appeal.[8] In the High Court, Baragwanath J was of the view that this concession enabled or required the Court to look afresh at the assessments at issue and to takeinto account what he considered to be the logical corollary of the Commissioner'sconcession, namely that Duvall was not entitled to claim any input tax credits, either. That decision was, however, overturned by the Court of Appeal on the grounds that, although it was open to the Commissioner to concede the appeal, the reasons for his doing so could not be interrogated by the Court. More particularly, the Court ofAppeal held that in litigation involving an objection to an assessment the Commissioner was not entitled to depart from (reverse) the legal and/or factual position that underlay the assessment, which in this case was that Duvall Ltd wasengaged in a taxable activity. The Court said that all the Commissioner could do was issue fresh assessments which reflected his changed position, provided the statutory time bar did not prevent him from doing so.2[9] The net result of this as far as Duvall was concerned was that the Commissioner was, as a result of his concession of the appeal, obliged to refund the output tax paid for the GST periods at issue in the litigation. As I understand it he was unable to claw back the input tax refunded to Duvall.[10] Mr Russell's present position is that the Commissioner is obliged to take the same approach to the GST assessments issued to other Russell companies that are in the same position as Duvall, including MHL. If he did so then the output tax debt for which the statutory demand has been issued would necessarily be eradicated.[11] The time limits for objecting to assessments under Part 8 of the Act are short, and strict. By contrast, the relevant Duvall litigation spanned over six years. By thetime the Court of Appeal's decision was delivered in 2000, MHL was significantly out of time for raising an objection. From the correspondence I have read it seems that Mr Russell has, from 1993 onwards, raised consistency issues of the above sort with the Commissioner and asked that amended assessments be issued to MHL. Over this time the Commissioner's response has been consistently to decline to revisit his earlier assessments. On my reading of the evidence the only reasons he has given for this are:(a) the lateness of Mr Russell's requests (which he has treated as requests that the Commissioner accept a late objection under what was s 33(2) of the Goods and Services Tax Act 19853); and2 In very general terms the time bar contained in s 108A of the TAA prohibits the Commissioner fromissuing reassessments that increase a taxpayers' GST liability after the expiry of four years. There isan exception for fraud.3 Section 33 has since been repealed. It's equivalent can now be found in s 89K of the TAA.(b) the need to await the conclusion of the Duvall litigation. In particular in response to a letter from Mr Russell reiterating his desire to pursue an objection in December 1999, the Commissioner responded by saying:The Commissioner has not made any determination in respect of the amended GST returns to which you refer.I suspect that it may be possible to address the matter on completion of the FB Duvall Limited litigation.The Commissioner has not failed to observe statutory provisions as you claim.Your early attention to finalising the FB Duvall Limited litigation will ensure this matter does not drift on further.[12] I interpolate at this point that the mere fact of lateness by and of itself is not a ground for declining to accept a late objection: Commissioner of Inland Revenue v Wilson.4 I also interpolate that while the Commissioner accepts that the Duvalllitigation has now concluded it seems that this has prompted him simply to revert to his former position, that is, that the proposed objections are simply too late to be accepted.[13] As I have said it is also not apparent to me what the Commissioner's position is on the merits of Mr Russell's proposed objection. I note that in an affidavit dated 23 March 2009 Mr Strang suggests that the Commissioner "stands by" his original assessments (which were based on Mr Russell's returns). But in light of his position in the Duvall litigation it seems to me to be improbable that the Commissioner considers that MHL was providing services or engaging in a taxable activity. But that is a matter that will no doubt be clarified in due course. What appears to me to be a possible scenario, however, is that the Commissioner faces something of a conundrum, in that:(a) he does not consider that the present assessments (i.e. the assessments that form the basis of the statutory demand) are correct; but4 Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA).(b) he is unwilling or unable to reassess in the way sought by Mr Russell because either:(i) he is prevented by the time bar from issuing reassessments that also require repayment by MHL of the input tax refunds it has received; or(ii) (in the event that any input tax received by MHL is less than the output tax paid) he does not wish to pay a refund to MHL.[14] If I am wrong in those assumptions that can no doubt be rectified by the filing of further evidence.The history of the present applications[15] In any event, on 28 November 2008 the Commissioner issued a statutory demand under s 289 of the Companies Act 1993 for payment of the sum of $869,908.30, that being the amount of the GST now said to be owing by MHL.5[16] On 17 December 2008 MHL filed an originating application to set aside the statutory demand on a variety of grounds. The application, inter alia, relied on the ground that MHL had made it clear to the Commissioner that it disputed liability for the GST debt. The application to set aside the statutory demand was opposed by the Commissioner.[17] On 6 March 2009, F B Duvall Limited, MHL and a number of other Russell companies filed judicial review proceedings against the Commissioner. As a result of those proceedings, Mr Wood (for the Commissioner) and Mr Judd (for MHL) agreed that the hearing of the application to set aside the statutory demand (then set down for a hearing on 27 April 2009) should be adjourned pending the determination of those proceedings.5 The original GST debt was $37,329.05 with the difference comprising interest and penalties.[18] The Commissioner subsequently applied to strike out the judicial review application and that application was heard on 2 December 2009. Allan J delivered his decision on 25 February 2010 and virtually all the claims were struck out. The claim relating to the Commissioner's refusal to accept late objections, however, was permitted to remain. An appeal against Allan J's decision has since been abandoned.[19] In light of Allan J's judgment the Commissioner then determined that hewished to reactivate the statutory demand proceedings. He was of the view that that small portion of the judicial review proceedings which remained extant did not apply to MHL. But a second amended statement of claim was then filed which, on its face, put MHL back in the picture. Such a repleading had expressly been contemplated by Allan J.[20] The filing of the further amended claim and the Commissioner's desire to pursue the statutory demand necessarily engaged the recent dicta of the Court of Appeal about the relationship between debt recovery proceedings6 and judicial review proceedings that seek to impugn the basis upon which (or process by which) the relevant debt has been imposed:7[21] The upshot of these dicta is that where a debtor seeks to rely on judicial review proceedings to stave off pending debt recovery action then the appropriate course is for the debtor to make an application for interim orders under s 8 of the Judicature Amendment Act 1972 (JAA) declaring that the debt proceedings should not be pursued pending resolution of the review proceedings. If the interim orders are not granted then the existence of review proceedings would not be an impediment to debt recovery.8[22] These dicta and the need to apply for interim relief in such cases was subsequently stressed by Associate Judge Christiansen in a judgment relating to6 Self evidently the only debts with which the decisions are concerned are those imposed by statutoryor public bodies whose pricing or charging decisions are susceptible to judicial review.7 See Air New Zealand v Wellington International Airport Ltd [2009] 3 NZLR 713 (CA) at [82]-[87];Tannadyce Investments Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,341 (CA) at [44].8 The practical reason for this approach is the problem faced by Associate Judges who are asked totake into account the existence of an application for review in the context of debt recoveryproceedings in circumstances where they have no jurisdiction in judicial review matters.applications for stay and restraint of advertising made by another of the plaintiffs inthe judicial review proceedings, Motor Dealers Ltd (another Russell "parent"company that is said to be in the same position as Duvall and MHL): Commissioner of Inland Revenue v Motor Dealers Ltd.9[23] Consequently, Duvall, MHL, Motor Dealers Ltd and the other judicial review plaintiffs filed an application for interim orders on 19 August 2011. It was both that application and the application to set aside the statutory demand that came before me on 30 August. Necessarily the outcome of the application for interim orders is likely to be determinative of the statutory demand issue and it is therefore to that matter I turn first.Interim orders[24] It is trite that the threshold question in terms of s 8 of the JAA is whether theorders sought are necessary to preserve the applicant's position. An assessment of MHL's "position" is therefore critical.[25] I have not found that issue to be particularly straightforward.[26] On one analysis, MHL's "position" is simply that it has been issued with assessments that are deemed by s 109 to be correct for all purposes and in all proceedings (other than proceedings under Part 8 or Part 8A of the TAA).10 Here, there are no Part 8 or 8A proceedings on foot and MHL is, of course, significantly out of time in terms of filing an objection. Accordingly, and by contrast with an orthodox application to set aside a statutory demand, it is not, as a matter of law, open to MHL to say that there is a "substantial dispute" about whether the debt isowing and nor is it open to the Court to set aside the demand on that basis under s 290 of the Companies Act 1993.119 Commissioner of Inland Revenue v Motor Dealers Ltd (2011) 25 NZTC 20-063 (HC).10 The debt arising as a result of those assessments is recoverable by the Commissioner of InlandRevenue as a debt due to the Crown: TAA, s 156.11 It is of course for the same reason that judicial review proceedings (collaterally) challenging thecorrectness of an assessment will not usually be entertained.[27] If it is therefore concluded that MHL's only relevant "position" is that it owes an undisputable (or indisputable) debt to the Commissioner, the grant of the interim relief sought would arguably involve improving its position in a way that would not ordinarily be entertained.[28] The difficulty is, however, that the judicial review proceedings here arecentrally concerned with the very issue that gives rise to the above "position". Theproceedings (now) relate solely and directly to MHL's ability to object to theassessments under Part 8 and therefore to dispute the debt. In that respect it is relevant that Allan J has held that a refusal by the Commissioner to reassess/accept a late objection is prima facie reviewable, and I respectfully agree:12[29] If MHL's substantive application for review succeeds then the Commissionerwould be required to reconsider his refusal to accept MHL's late objection. In that event, there are three possible outcomes (depending, perhaps, on the terms of any judgment):(a) the Commissioner could reconsider but reach the same conclusion (which would mean that MHL's Part 8 rights were not engaged and itcould not dispute the assessments further);(b) the Commissioner could reconsider, accept the late objection and then allow the objection13 and reassess in the way sought by MHL (which would be an end to the matter);(c) the Commissioner could reconsider, accept the late objection but then decline to allow it (that is refuse to reassess) at which point MHL could pursue its Part 8 objection rights in the Taxation Review Authority and beyond.12 Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA) and Lawton vCommissioner of Inland Revenue [2003] 2 NZLR 48 (CA).13 There is an important distinction between "accepting" a late objection (ie agreeing to consider it)and "allowing" a late objection (ie agreeing to reassess). Although the correspondence issometimes confusing it appears that in the present case the Commissioner has declined to accept,rather than declined to allow, MHL's late objection.[30] It is the chance of either the second and third outcome, together with the ancillary possibility that MHL will be able to have the statutory demand set aside on the grounds that the debt underlying it has been cancelled or is disputed, that amounts to the position that the application for interim orders seeks to preserve.Necessarily, therefore, the relevant "position" constitutes, at best, an opportunity or acontingency. I note that the Courts have, on occasion, held that such an opportunity can constitute a relevant position for s 8 purposes, although the remoteness of theopportunity in question may have a bearing on the Court's ultimate exercise ofdiscretion.14[31] Unless MHL can be said to have a position that is capable of preservation by interim orders of the kind presently at issue it seems to me that the Court of Appeal'sdicta in Tannadyce would be empty in tax cases; s 109 of the TAA would operate to defeat an interim orders application in any case involving a tax debt. And bearing in mind that the ability judicially to review the Commissioner in an assessment context is already extremely limited, that seems an intuitively unattractive outcome.[32] For that reason, and armed with a modicum of authority, I am prepared to conclude that the orders sought here are necessary to preserve MHL's position, thatposition being the opportunity, if successful in the review proceedings, to dispute the debt that is the subject of the statutory demand or to have that debt cancelled.[33] Importantly, I record that I do not consider that any "floodgates" will beopened by this conclusion. That is because, in my view:(a) the existence of such a position to preserve is contingent on the relevant review proceedings being legally tenable on their face. That will rarely be the case where tax assessments are at issue; a point that can be seen by comparing the present case (where Allan J has held that only the late objection aspect of the original review application is arguable) and a case such as Tannadyce (where the Court of Appealstruck out Mr Henderson's judicial review claim in its entirety);14 Westhaven Shellfish Ltd v Chief Executive of Ministry of Fisheries CA52/03, 28 March 2003.(b) the existence of a position to preserve in circumstances involving a"late objection" is also contingent on there being a tenable factual basis for the review proceedings. Accordingly, unless a taxpayer has,prior to the initiation of any debt recovery action, asked the Commissioner to reopen the relevant assessment out of time then it is difficult to see that any relevant position will exist.15[34] Having reached the conclusion that, in the specific circumstances of this case, MHL has a position that can only be preserved by the grant of interim orders, I am also satisfied that I should exercise my discretion in favour of MHL and grant the orders sought, at least on limited terms. As my discussion above indicates, I am notprepared to conclude (on the basis of the material presently before me) that MHL's position is hopeless. And indeed to find otherwise would run contrary to Allan J'sdecision.[35] While I am acutely conscious that the J G Russell tax saga rivals in time and(public) money the story of Jarndyce v Jarndyce, the reality is that there is unlikelyto be any public interest or increased expedition in denying the orders sought.Indeed I suspect the opposite may be the case. That is because the substantivejudicial review proceedings are set down for 2 November 2011. If MHL falls at thathurdle then the interim orders will come to an end, unless MHL is able to obtain astay pending any appeal. And although the relatively remote and contingent natureof the position that MHL seeks to protect would ordinarily count against thefavourable exercise of the s 8 discretion, the closeness of the substantive hearingdate renders that consideration more neutral here. But if there is any delay in theresolution of the proceedings occasioned by MHL, reconsideration would, again, bewarranted.[36] Accordingly I make interim orders declaring that the Commissioner of Inland Revenue ought not pursue the statutory demand proceedings CIV 2008-404-8432 against MHL pending resolution of the judicial review proceedings CIV 2009-404- 1193 or further order of this Court. Leave is reserved to the Commissioner to bring15 Even though I have not considered the correspondence between Mr Russell and Inland Revenue indepth or detail I am prepared to accept that such a basis exists in MHL's case.the matter on again in the event of any delay or obstruction of the sort referred to in the previous paragraph.[37] Costs are reserved.______________________________Rebecca Ellis J