NORTHBRIDGE HOLDINGS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC AK CIV 2010-404-2191

NORTHBRIDGE HOLDINGS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC AK CIV 2010-404-2191 23 March 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2010-404-2191BETWEEN NORTHBRIDGE HOLDINGS LIMITEDApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 3 February 2011Appearances: J D Turner for applicantC M Mitchell for respondentJudgment: 23 March 2011JUDGMENT OF ALLAN JSolicitors:McVeagh Fleming, Albany Jturner@mcveaghfleming.co.nzInland Revenue Department, Takapuna, Catherine.mitchell@ird.govt.nz[1] This is an application to set aside a statutory demand for payment of a debt. The applicant contends that there is a substantial dispute as to whether the debt claimed is owing,1 and that the demand ought to be set aside on other grounds.2Background[2] The applicant is a holding company which owns certain forestry assets through Pine farms, a joint venture. On 24 March 2010, the respondent (the CIR) issued a statutory demand to the applicant requiring payment of $611,905.83. The amount claimed in the statutory demand related to self-assessments by the applicant for the periods ending 31 March 2002 and 31 March 2003, processed by the CIR on 21 December 2009. The statutory period for initiating objection procedures havingexpired, the CIR seeks an order for the applicant's liquidation.[3] The background is a little unusual. Since 2001 the applicant has engaged the services of Hart & Co as its accountants. They were responsible for the collection of financial information from the applicant, the applicant's bank, the IRD and otherthird parties. They were also responsible for the filing of income tax returns from time to time. The applicant relied upon the advice and expertise of Hart & Co in the management of its tax affairs.[4] In September 2009, the applicant first became aware that there might be a problem with the service it was receiving from Hart & Co. It then discovered that that firm had not filed accounts for Northbridge Properties Ltd (an associated firm) with the IRD on time. It seems that there may have been staff problems within Hart & Co, leading to inefficiencies and delays.[5] In November 2009, the CIR notified the applicant that tax returns for the years 2002 and onward were still outstanding. Up to that point, the applicant was unaware that there had been any default in the filing of those returns. It took the1 Companies Act 1993, s 290(4)(a).2 Companies Act 1993, s 290(4)(c).matter up with Hart & Co, which on 21 December 2009 filed self-assessments on behalf of the applicant without reference to its client. It is these self-assessments which have given rise to the statutory demand now in issue.[6] Correspondence with the CIR followed. It seems that one or more letters sent by the CIR to Hart & Co were not immediately passed on to the applicant, and so further unfortunate delays ensued.[7] Mr Craig Green, a director of the applicant, says that he was first made aware of the precise tax situation confronting the applicant when the CIR sent a letter to the applicant on 24 March 2010, advising that a notice of statutory demand would shortly be served. Mr Green says that Hart & Co had failed to keep the applicant advised of communications passing, and tentative arrangements made, between Hart & Co and the CIR during the early part of 2010. He maintains that, if he had known about these events, he would have dealt with the tax situation as a matter of urgency.[8] When he discovered the true position, Mr Green consulted his solicitors and, through them, instructed new accountants, Ross Melville PKF. By that time Mr Green had ascertained that Hart & Co had not prepared taxation summaries for the applicant for the years ending 2002, 2003, 2006, 2007, 2008 and 2009, until November 2009.[9] Ross Melville uplifted files from Hart & Co, but there have since that date been on-going difficulties about recovering everything which the applicant believes ought to have been made available. Since March 2010, Ross Melville has beenendeavouring to ascertain the applicant's true tax position, and has been incorrespondence with the CIR. But that firm has been considerably hampered by an apparent absence of certain records relating to earlier tax years. It appears that Hart & Co has been unwilling or unable to identify and hand over the documents sought. However, the evidence is silent as to whether any formal steps have been taken against Hart & Co to obtain compliance by that firm with their undoubted obligations to make documents available to the applicant and its new accountants.[10] In the meantime the statutory demand was served, and this proceeding to set aside the demand was commenced in April 2010. An earlier fixture for the application to set aside was vacated because the applicant evinced a desire to engage in settlement negotiations with the CIR. It appears that those discussions eventually came to nothing and the application was brought back before the Court for determination, largely on the insistence of the CIR.Legal principles[11] An applicant for an order under s 290(4) must show a genuine and substantial dispute as to the existence of the debt.3 The test has also been variously described asrequiring an applicant to demonstrate a ―bona fide arguable case,4 or a ―clearly arguable case,5 or a ―truly disputed debt.6 There is little practical difference between the various articulations of the test.[12] It is common ground that the Court's determination must be made on theevidence provided to it,7 and that it is for the applicant to lay a proper evidential foundation for the Court.8The applicant's argument[13] Where a dispute is sufficiently demonstrated by an applicant in accordance with the foregoing tests, then the statutory presumption of insolvency arising by reason of the non-payment of the sum claimed is rebutted. Mr Turner argues that there is a sufficiently arguable case here, in that there is a dispute regarding the quantum of the income tax assessed by Hart & Co on behalf of the applicant. In the alternative, he invokes s 290(4)(c) and submits that the statutory demand ought to be set aside on other grounds, namely that on a net assets basis the applicant is solvent.93 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 at 299.4 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389 at [2].5 Tannadyce Investments Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2008-409-759, 13 October 2008 at [25].6 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [48].7 AMC (fn 4).8 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA).9 See Companies Act 1993, s 4(1).Discussion[14] The statutory demand rests upon a self-assessment prepared and filed on behalf of the applicant by its tax agent. That of itself constitutes an unpromising foundation for the present application.[15] Section 109 of the Tax Administration Act 1994 (the Act) provides that:109 Disputable decisions deemed correct except in proceedingsExcept in objection proceedings under Part 8 or a challenge under Part 8A,—(a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.[16] A ―disputable decision includes an assessment. Accordingly, the self- assessment is not disputable, except in objection proceedings under Part 8 (inapplicable here) or a challenge under Part 8A of the Act. The applicant is therefore unable to challenge the correctness of the self-assessment otherwise than by way of challenge proceedings.[17] The applicant had a period of four months from the date of the self- assessment to dispute its own assessments by filing a Notice of Proposed Adjustment (NOPA) under s 89D of the Act. That has not occurred.[18] However, Mr Turner submits that it remains open to the applicant to:(a) invoke the exceptional circumstances provision to be found in s 89K of the Act;(b) argue that any further order of the Court ought to await the conclusionof the CIR's internal audit in respect of the applicant's tax affairs;(c) invoke s 113 of the Act by asking the CIR to amend the assessment.[19] I deal with the audit point first. Ms Mitchell confirms that the CIR did for atime conduct an internal audit with respect to the applicant's tax affairs, but the Court is told that the audit is now complete, as is confirmed in an affidavit filed on behalf of the CIR. Following the completion of the audit, there is no intention ofdisturbing the applicant's self-assessment.[20] Mr Turner argues that the Court ought not to consider giving judgment adverse to the applicant until there is sworn evidence that the audit has actually been completed, as distinct from the evidence currently before the Court, which simply indicates that the audit process is not to be taken further. There is nothing in that distinction; nor is there anything in Mr Turner's argument. The CIR's internal auditprocesses, aimed at properly discharging his investigative functions, are not the concern of this Court in the circumstances of this case.[21] I turn therefore to the proposed invocation of s 89K.[22] The starting point must be the statutory framework governing disputes between taxpayer and Commissioner. Process requirements, including time limits for issuing challenges, are set out in Part 8A of the Act. In Commissioner of Inland Revenue v Wilson,10 Richardson P said in the context of an earlier version of the legislation:The imposition of time limits is a central feature of tax administration inNew Zealand It is part of the scheme and policy of the legislation. Without time constraints, administrative chaos and uncertainty would ensue. The Commissioner could not close the books. Taxpayers would not know where they stood. The setting of time limits and other constraints throughout the legislation recognises that the correctness and the quantification of tax liability is not an absolute value. It is crucial in the making of an assessment. Once the assessment is made, in the absence of a timely objection the assessment is determinative of liability. The focus then shifts. If a late objection application is made the Commissioner has to weigh and balance the relevant public policy considerations applicable at that time in the particular circumstances of the case.10 Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA) at 12,520.[23] The challenge provisions of the Act were recently the subject of an extensive review by the Court of Appeal in Westpac Banking Corporation v Commissioner of Inland Revenue.11 There, the Court said:[43] The Tax Administration Act provides for a disputes procedure which enables taxpayers to challenge assessments. Under Part 4A, the procedure begins prior to assessment, with the Commissioner usually serving a notice of proposed adjustment (NOPA) (s 89B). The taxpayer may reject the NOPA by filing a response notice within a fixed period (s 89G). Rejecting the NOPA initiates further dispute resolution steps.[44] Part 8A of the Tax Administration Act provides for a challenge process under which the taxpayer may challenge an assessment, either before the Taxation Review Authority or the High Court.[45] Sitting outside these Parts are ss 109 and 114. Section 109 provides:Except in . . . a challenge under Part 8A –(a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.[46] As well, s 114 provides:114. Validity of assessments — An assessment made by the Commissioner is not invalidated –(a) through a failure to comply with a provision of this Act or another Inland Revenue Act; or(b) because the assessment is made wholly or partially in compliance with –(i) a direction or recommendation made by an authorised officer on matters relating to the assessment:(ii) a current policy or practice approved by the Commissioner that is applicable to matters relating to the assessment.[47] These provisions have been described as a code for the resolution oftaxation disputes (Ohms, ―Dispute Resolution in Harris et al, Income Tax in New Zealand (2004), p 1134) and provide what might be thought to be a particularly inauspicious statutory context for judicial review (that is, outside of the challenge process provided for by the Tax Administration Act).11 Westpac Banking Corporation v Commissioner of Inland Revenue [2009] 2 NZLR 99 (CA).[24] There is provision under s 89K for the Commissioner to accept a late NOPA where the Commissioner considers that an exceptional circumstance has prevented a taxpayer from issuing a NOPA within the response period. In order to invoke that provision, a taxpayer must send to the Commissioner a NOPA specifying the matters required by s 89F.[25] The expression ―exceptional circumstance is defined in s 89K(3) whichprovides:89K Late actions deemed to occur within response period(3) For the purposes of subsection (1),—(a) an exceptional circumstance arises if—(i) an event or circumstance beyond the control of a disputant provides the disputant with a reasonable justification for not rejecting a proposed adjustment, or for not issuing a notice of proposed adjustment or statement of position, within the response period for the notice:(ii) a disputant is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or more statutory holidays falling in the response period:(b) an act or omission of an agent of a disputant is not an exceptional circumstance unless—(i) it was caused by an event or circumstance beyond the control of the agent that could not have been anticipated, and its effect could not have been avoided by compliance with accepted standards of business organisation and professional conduct; or(ii) the agent is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or more statutory holidays falling in the response period.[26] It is to be noted that a higher standard is set for tax agents. Where, as here, a tax agent has been appointed for a taxpayer, then an act or omission of an agent is not an exceptional circumstance unless it was caused by an event or circumstance beyond the control of the agent that could not have been anticipated, and its effect could not have been avoided by compliance with accepted standards of business organisation and professional conduct. Where there is no appointed agent, an exceptional circumstance is an event or circumstance beyond the control of thetaxpayer, providing the taxpayer with a reasonable justification for not rejecting a proposed adjustment or for not issuing a notice of proposed adjustment or statement of position within the response period of the notice.[27] The scheme of the Act is highly prescriptive. It imposes upon taxpayers, in effect, the responsibility of supervising their tax agents. A taxpayer cannot simply shelter behind a tax agent and claim that the shortcomings of the agent ought not to be laid at the door of the taxpayer. In balancing the rights of taxpayers against the need for efficiency, the IRD has plainly determined that the appropriate course is to require each taxpayer to be responsible for his or her own tax affairs. That has been made plain in several cases. An example is Hollis v CIR,12 where at [14] Ronald Young J said: I pointed out to her that generally the actions of her tax agent did not excuse her failure (see s89K(3)(b)). I acknowledge immediately that this is a difficult situation for Mrs Hollis because it is clear to me that the reason why she failed to file her NOPA in time with regard to the years 2000 to 2003 was because of the late advice by her accountants of the various assessments undertaken by the Commissioner. However, s89K makes it clear that such failures are not exceptional circumstances. Mrs Hollis could not point, therefore, to any relevant procedural error committed by the Commissioner here.[28] That approach was reflected also in the then current Inland Revenue'sStandard Practice Statement on s 89K,13 which explained that the case law was to the effect that:An agent's failure to advise their client that they have received a notice ofassessment or other relevant document that causes the taxpayer to respond outside the applicable response period will not generally be considered to be an exceptional circumstance under s 89K(3)(b).14[29] A further example of a case in which the Court held special circumstances not to exist is CIR v Fuji Xerox NZ Ltd.15 There, Fuji Xerox had commenced dispute procedures with respect to a GST matter. The CIR dealt with Fuji's tax agent KPMG12 Hollis v Commissioner of Inland Revenue (2005) 22 NZTC 19,570 (HC).13 SPS 08/01 at [199].14 In the standard practice statement [at 203] the Commissioner advises that he will take the following factors into account when deciding whether an exceptional circumstance has occurred: the date on which the notice is issued, the date on which the notice should have been issued, the event,circumstance or reason why the taxpayer failed to issue the notice within time, and the taxpayer'scompliance history in relation to the tax types under consideration.15 Commissioner of Inland Revenue v Fuji Xerox NZ Ltd (2002) NZTC 17, 470 (CA).at all stages of the dispute process, including the issue of the disclosure notice. However, the CIR issued the assessments directly to Fuji because that was themailing address on the CIR's computer systems. When the assessments arrived at Fuji, nothing was done about responding to them, because Fuji assumed that copies of the assessment would also have been sent to KPMG. Instead, the accounts staff at Fuji paid the amounts assessed in full. By the time the mistake was identified the response period had passed. The Court of Appeal held that these circumstances werenot ―exceptional because they were entirely within the taxpayer's control and provided no justification for the taxpayer's failure to respond.[30] The position is not dissimilar here. Mr Green identified a difficulty with Hart & Co late in 2009. When the true position became clear and new accountants were instructed, there remained time for the challenge procedure to be invoked, yet nothing was done at that time.[31] In my opinion it is extremely unlikely that the applicant would be able to bring itself within s 89K. The fact it has made no attempt to date to do so is itself telling in that respect.[32] That leaves the s 113 procedure. The section provides:113 Commissioner may at any time amend assessments(1) Subject to sections 89N and 113D, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.[33] A request by a taxpayer to re-open an assessment under s 113, is treated in the same manner as an application for the Commissioner to accept a late objection.16 Inboth instances the exercise of the Commissioner's discretion is open to judicial review. The courts have refrained from laying down absolute rules as to what factors will be relevant to the determination of a late objection request. Everything will depend upon the circumstances.1716 Tax Administration Act 1994, s 126(2).17 Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA).[34] It is reasonably obvious, however, that the merits of the objection must be relevant, in that no assessment will be amended unless good grounds can be demonstrated for adopting that course. The difficulty here is that the applicant has been unable to demonstrate any basis for amendment. Ross Melville appears to havemade some attempt to recover the applicant's records, both from Hart & Co and fromthe CIR. The latter has made available to Ross Melville such documents as he holds. But there is no evidence of formal steps having been taken to recover from Hart & Co the documents and records which would be relevant to a re-assessment of the tax self-assessed by the applicant through that firm.[35] Reading between the lines, it seems that the applicant has tended to sit on its hands in recent months, whilst awaiting the outcome of the internal audit and in the hope that Ross Melville may be able to persuade the CIR that there ought to be a reduction in the tax earlier assessed.[36] On 6 August 2010, Ross Melville wrote to the CIR. In a detailed letter the firm endeavoured to set out the results of such inquiries as it had been able to make in the absence of complete financial records. It considered that it had identified certain losses not taken into account in respect of the financial years ended 31 March 2002 and 31 March 2003. But the losses concerned were of the order of only $16,000 or so, giving rise to a tax variance of about $5,000. There is no evidence of any further communication between Ross Melville and the CIR since August of last year. The applicants and their advisers seem really to have awaited developments atthe CIR's end.[37] I infer that Hart & Co considered that it had sufficient information in December 2009 to prepare the self-assessments which formed the basis for the present statutory demand. If that is so, then Ross Melville would also, I infer, have access to those documents and will be in a position to check the accuracy of the calculations. It is unsatisfactory for the Court to be asked to assume that the applicant may at some point recover sufficient of its records to enable it to mount a challenge to its own earlier assessment. That is not the way in which the self- assessment regime is structured.[38] In my opinion the applicant has not made out a case sufficient to show that it has a viable prospect of persuading the CIR to amend the assessment under s 113.[39] This case is quite different from Sunrise Auto Ltd v CIR,18 to which Mr Turner referred. There, Master Kennedy-Grant made an order setting aside a statutory demand, but there was a plainly arguable case as to the invalidity of the assessment itself. Moreover, the applicant had already lodged an objection to the assessment and had applied by way of case stated to the Taxation Review Authority.[40] For the foregoing reasons, I am not satisfied that the applicant has demonstrated that this is a disputed debt. Nor am I satisfied that there is an available procedural avenue for the resolution of any dispute.[41] The remaining issues require only brief discussion. Mr Turner refers to the apparent solvency of the applicant on a net assets basis, but for present purposes the Court must have regard to the cash flow insolvency test.19[42] The financial statements of the applicant for the year ended 31 March 2009 disclose a trading deficit of $9,748. That suggests that the applicant is unable to pay its debts as they fall due. Indeed, there is evidence that it is not trading, and there is no evidence of any significant income. Even on an assets basis, the evidence suggests that the applicant is unable to pay its debt to the CIR within a reasonable period. Although it owns certain forestry assets, it would not be economic to realise them at this time. There is also evidence that debts owed to the applicant by certain family trusts do not become repayable for some years yet.[43] The applicant having failed to establish that the present debt is disputed, I am not satisfied either that other grounds exist that would justify an order setting aside the statutory demand. The applicant is perhaps entitled to look sideways at its former accountants, but that is not a relevant circumstance for present purposes.18 Sunrise Auto Ltd v Commissioner of Inland Revenue (1998) 18 NZTC 13,600 (HC).19 Re Tweeds Garages Ltd [1962] Ch 406 at 410; Waterhouse v Acrylocks Ltd HC Auckland CIV- 2004-404-6700, 23 June 2005 at [48].[44] In a nutshell, the position is that the applicant has been unable to show that there is a genuine dispute as to at least $600,000 of the sum claimed in the statutory demand. Nor, having regard to the statutory regime, has it shown that, at a procedural level, it has any right to pursue the matter with the CIR.Result[45] For the foregoing reasons the application fails and is dismissed.[46] Pursuant to s 291(1)(a) I direct the applicant to pay the debt to the CIR on or before Friday 29 April 2011. In default of payment, the CIR may make an application to the Court to put the applicant into liquidation.Costs[47] The respondent is entitled to costs. Counsel may file memoranda if they are unable to agree.C J Allan J