"P" v COMMISSIONER OF INLAND REVENUE [2015] NZHC 2293

"P" v COMMISSIONER OF INLAND REVENUE [2015] NZHC 2293 [30 September 2015]PERMANENT ORDERS MADE: (A) THE COURT FILE ISNOT TO BESEARCHED, COPIED OR INSPECTED WITHOUT THE LEAVE OF AJUDGE. (B) THE NAMES OF THE PLAINTIFF AND HIS WIFE, AND ANYPARTICULARS IDENTIFYING THEM, SHALL NOT BE PUBLISHEDIN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2014-404-3336[2015] NZHC 2293BETWEEN "P"PlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 15 April 2015Appearances: Plaintiff in personH Ebersohn and MT Szymanik for the defendantJudgment: 30 September 2015JUDGMENT OF TOOGOOD J [Redacted for Publication]This judgment was delivered by me on 30 September 2015 at middayPursuant to Rule 11.5 High Court RulesRegistrar/Deputy RegistrarTable of Contents ParagraphNumberBackground [1]Factual background [3]Issues [16]The plaintiff's assertions [16]Remedies sought [17]The matters for decision [18]Did the Commissioner breach P's right to natural justice? [20]The pre-30 June 2014 hardship provisions [27]The current hardship provisions [41]Conclusion – the law changed on 30 June 2014 [49]Given that there was a change in the law, were P'snatural justice rights breached?[50]Discussion [54]Did the Commissioner create a legitimate expectation thatP's arrears would not be taken into account?[57]Did the Commissioner act unlawfully by failing to considermandatory relevant considerations and by taking intoaccount irrelevant considerations?[59]Did the Commissioner reach a decision that isunreasonable?[66]Should I exercise my discretion to decline relief to P? [77]Decision [79]Costs [82]Orders prohibiting file search and for non-publication [83]Background[1] The plaintiff, P, applies for judicial review of the Commissioner of InlandRevenue's decision to decline to write off all of P's tax debt of $470,577.90 on thegrounds of serious hardship under s 177 of the Tax Administration Act 1994 ("the Act" or "the TAA").[2] P argues that the Commissioner erred in law, and that she followed an unfair process, in making her decision. He asks the Court to set it aside and, in effect, to order the Commissioner to forgive his tax debt and refrain from taking any recovery action. Alternatively, P asks for an order directing the Commissioner to reconsider the application for relief.Factual background[3] P is a self-employed professional, aged 75 years. He has suffered a number of illnesses over the last few years including a serious heart condition; type 2 diabetes; gastric ulceration; skin cancer; a stroke; chronic kidney disease; detached retinas; hearing problems and sleep apnoea. He continues to be unwell. P's wifesuffers from bipolar disorder and is dependent upon him. Notwithstanding his poor health and his wife's condition, P has continued to work and to earn an income that well exceeds the average New Zealand income. But P's ill-health and poor physical state have resulted in a loss of time from work and a loss of energy to complete work. This, he argues, is what has caused him to fall behind paying his tax and has brought about significant financial difficulties.[4] P has been granted tax relief by the Commissioner on two previous occasions:(a) In May 2003, P applied for relief based on his ill health, which was not disputed. On 19 June 2003, P was granted relief by having $343,185.80 of his tax debt written off. The Commissioner agreed that the balance of his tax debt – $184,000 – could be paid off through an instalment arrangement.(b) In November 2008, the Commissioner wrote off $855,062 worth of GST, income tax and PAYE owing, again on account of P's ill health.This left P with an outstanding tax bill of $253,000, which was approximately the amount of tax that was then owed if interest and penalties were disregarded.[5] When the Commissioner granted P relief in 2008, she anticipated that P would endeavour to bring his tax affairs under control by selling one of the two properties that P owned with his wife: their home and a beach property in [REDACTED]. Such a course would have reduced P's borrowing and ought tohave enabled P to comply with his obligation to pay tax in future but P did not sell either of the properties. Instead, he increased his mortgage commitments by $253,000 in order to make the agreed tax payment to the Commissioner.[6] Soon after the 2008 relief was granted, P fell into arrears with his 2009 provisional tax payments. He has continued to accrue tax debts since then.[7] P made his third application for relief on hardship grounds in 2012. The Commissioner refused to grant him relief and P commenced proceedings for judicial review of that decision. The Commissioner subsequently reviewed her refusal on her own initiative and on 16 August 2013 a new decision was given. That decision also declined P's application, on the basis that he did not qualify for financial relief on the ground of serious hardship.[8] P launched a new set of judicial review proceedings. The matter was heard in February 2014 by Wylie J who found that the Commissioner had not properly applied the law as required by the Act.1 In particular, the Court found that the Commissioner had failed to consider P's financial circumstances as at the date of the application for relief. The Judge indicated that, despite the Commissioner recordingin the decision the view that P had equity in assets which could be used to pay hiscreditors, this might not have actually been the case at the date of the application.The application was remitted back to the Commissioner for reconsiderationaccording to the law.1 P v Commissioner of Inland Revenue (2014) 26 NZTC 27-067 (HC).[9] Following Wylie J's decision, Ms Law, one of the Commissioner's case managers, advised P on 29 May 2014 that she had been asked to deal with P'sapplication for financial relief.2 She asked P whether he would prefer to make a new application for relief or whether the Commissioner should simply reconsider her decision of 16 August 2013. P advised Ms Law that he would make a new application as his cancer was back and he was having further surgery and time off work and that this would put him into a difficult position financially. He thought that his circumstances had changed so much for the worse that a new application was appropriate. As he was going into hospital for some time, it was agreed that P would have until 14 July 2014 to make a new application. This was confirmed in writing and the Commissioner agreed that penalties would be suppressed while his application was being prepared and considered.[10] P's application was eventually received on 21 July 2014 after a request for further time to apply was allowed. As at the date of application, his total tax debt was $470,577.90.[11] Ms Law then met with P to discuss the application and the further information she required. She also asked P to come back with a proposal as to how he would ensure that his tax was paid in the future. Ms Law did not tell P that an amendment to s 177 of the TAA, which had been in progress through the House of Representatives the previous month, had received the Royal Assent on 30 June 2014 and come into force that day. P provided further information and wrote to confirm that he had opened a new bank account into which he intended to pay 30 per cent of all of his future fees received in order to pay his ongoing tax obligations.[12] Ms Law then prepared a recommendation for Mr Richard Philp who held the delegated authority to make the Commissioner's decision. Mr Philp received a memorandum from Ms Law in which she recommended that the Commissioner not grant relief. Mr Philp considered the memorandum and supporting documentation over a three day period; he then met to discuss the application with Ms Law. After that meeting he decided that he would not grant relief. Mr Philp's decision is set out2 In this judgment I use the term "the Commissioner" to mean both the Commissioner of Inland Revenue in person and the Department of Inland Revenue or individual officers acting on her behalf.in a letter from Mr Philp to P dated 23 October 2014. After having consideredinformation in relation to P's income and expenditure, property rates and health andinsurance costs, Mr Philp wrote:Our analysis shows that on the basis you only had your on-going income to pay for your business and personal expenditure (including your on-going tax obligations), if you were also required to make payments toward your outstanding tax, this would be likely to place you in serious hardship. However, you also have equity in your property that could be used to pay your outstanding tax.You provided a valuation for your property at [REDACTED], Auckland dated 5 March 2013, which you have agreed is still applicable for this current application for financial relief. That document valued the property at $800,000. You have advised that as at the application date you had debts of $530,876.14 that are secured by registered mortgages on your property. Allowing for real estate agency fees and solicitor conveyancing fees we have determined that there is equity of as much as $241,131 in the property. As the property is jointly owned with your wife, your share of the equity is as much as $121,565. Accordingly, this analysis shows that you are able to pay $121,565 toward your outstanding tax before you are placed in a position of serious hardship.As at the application date your total outstanding tax was $470,577.90. Therefore, it is clear that, as at the application date, to recover $349,012 of your outstanding tax would place you in serious hardship.[13] He then said:Section 176(2)(b) of the TAA provides that the Commissioner of Inland Revenue may not recover outstanding tax to the extent that it would place you in serious hardship. Therefore, I have considered what action should be taken in relation to the balance of your outstanding tax over and above the $121,565 that could be collected without placing you in serious hardship.[14] Mr Philp then set out his reasoning:Section 6 of the TAA provides that the Commissioner, among others, is at all times to use her best endeavours to protect the integrity of the tax system. Section 6A(3) of the TAA states that it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to (inter alia) the importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts.You have received substantial financial relief in the form of write-off of outstanding tax on two previous occasions. Despite receiving this relief your compliance has not improved and as at the application date you had outstanding tax of $470,577.90. This includes outstanding assessed Income Tax of $181,460.95 for the 2010 and 2014 Income Tax years, plus penalties and interest accrued, against which you have paid only $500 and had$7,592.99 in credits. Your tax arrears include $124,445.30 of assessed tax for PAYE and GST, which are preferential debts in a bankruptcy. Those debts would be paid before your other tax and personal debts, should you be adjudicated bankrupt.I fully appreciate that you have suffered ill health for an extended period of time and that this has reduced your income. However, this ill health has been ongoing for a number of years and your income has remained significantly higher than most taxpayers who pay their tax. Notwithstanding previous relief, you have failed to structure your affairs so that you can live within your means.Our analysis of your actual expenditure also shows that due to your high debt servicing costs you are actually insolvent, in that you would be unable to pay all of your debts as and when they fall due, when payment of on- going tax is taken into account. You [sic] offer to set aside 30% of your income does not ensure that on-going tax will be paid, as you are able to access the funds to pay other debts. Your bank would also be entitled to take these funds should you fall behind in your debt servicing obligations.Given your inability to pay all your debts, including on-going tax, as when they fall due, I believe that it is inevitable that further outstanding tax debts will accrue if the Commissioner was to provide the financial relief that you have requested. I believe that your current situation is unsustainable while you have such high debt servicing costs compared with your income.I have considered the extent to which write-off of your outstanding tax might undermine or support the integrity of the tax system. I have noted your history of poor compliance when considered with your failure to structure your affairs so you can live within your means notwithstanding being provided with relief on two previous occasions and your apparent insolvency. I do not believe that it would promote your voluntary compliance to yet again write off your outstanding tax. Nor would it promote the voluntary compliance of all other taxpayers if a non-compliant taxpayer was given relief on a third occasion.Section 177C(1BA) of the TAA states that the Commissioner may write off outstanding tax that may not be collected because it would place the taxpayer in serious hardship. However, the Commissioner is not compelled to do so.Section 176(3) of the TAA states that despite the prohibition on collecting tax to the extent that to do so would place a taxpayer in serious hardship, the Commissioner may take steps to bankrupt the taxpayer.In the circumstances I believe that in order to protect the integrity of the tax system and to promote compliance it is not appropriate to provide financial relief to you by write-off of outstanding tax on this third occasion. It is appropriate to issue bankruptcy proceedings under subsection 176(3) of the TAA and to that end a demand for payment of your outstanding tax will be issue in preparation for issuing debt proceedings in the District Court.[15] P says that, soon after receiving the decision, he realised that the amendments to s 177 and the related provisions of the TAA had been enacted and that theyaffected how the "serious hardship" provisions would be applied. P submits that the outcome would have been different under the old provisions of the Act. He asserts that if he had been aware that the change was about to be made, he would have ensured that his application was filed before 30 June and presented submissions founded on the former, arguably more favourable provisions for the exercise of theCommissioner's discretion in his favour. Alternatively, he argues that he shouldhave been an opportunity to re-cast his new application on the basis of his understanding of the changes which came into force on 30 June 2014.IssuesThe plaintiff's assertions[16] P alleges that the Commissioner erred in reaching her decision. In particular, he submits:(a) The Commissioner breached P's natural justice rights by failing todisclose to him that the TAA was going to be amended on 30 June 2014 and by failing to allow P to make new submissions in July 2014 on the basis of the amendments.(b) The Commissioner created a legitimate expectation that she was not concerned with the repayment of arrears.(c) The Commissioner took into account irrelevant considerations and failed to take into account relevant considerations.(d) The substantive decision the Commissioner reached is unreasonable.Remedies sought[17] P seeks:(a) an order setting aside the Commissioner's decision of 23 October2014 to decline P's application for financial hardship relief;(b) an order quashing the Commissioner's decisions to enforce recoveryof tax and issue bankruptcy proceedings; and, alternatively(c) an order directing the Commissioner to reconsider P's applications for relief under the Act fairly, reasonably and according to law.The matters for decision[18] Relief in applications to review the exercise of a statutory power of decision is discretionary.3 Whether the Court grants relief on an application for judicial review depends not only on whether an error is established but also on what the interests of justice require in all the circumstances.[19] I am required, therefore, to answer the following questions:(a) Did the Commissioner breach P's right to natural justice?(b) Did the Commissioner create a legitimate expectation that P's arrearswould not be taken into account?(c) Did the Commissioner act unlawfully by failing to consider mandatory relevant considerations and by taking into account irrelevant considerations?(d) Did the Commissioner reach a decision that is unreasonable?(e) What, if any, relief should be granted?Did the Commissioner breach P's right to natural justice?[20] Consistently with the general principle that public administrators who make decisions pursuant to the exercise of a statutory power must do so fairly, the TAA requires the Commissioner to give effect to fair hearing rights when making the type of decision at issue in this case. Section 6 provides, among other things, that when3 Judicature Amendment Act 1972, s 4(3).exercising her powers under the Act, the Commissioner must use her best endeavours to protect the integrity of the tax system, which includes the rights of taxpayers to have their liability determined fairly, impartially and according to law.[21] P argues that the Commissioner breached his fair hearing rights by failing to disclose to him that an amendment was being made to the Act on 30 June 2014. This failure resulted in P not being able to file his application under the legislation as it existed prior to that date. P submits also that, upon receiving his new application, the Commissioner should have realised that P had made the application in accordance with the old law and, in fairness to P, re-consulted him on the effects that the new law would have on his application.[22] It is P's submission that the Commissioner appears to have exercised herdiscretion against him on an "enough is enough" basis: that he had been grantedrelief in the past; that significant amounts of tax, penalties and interest had beenwritten off; and yet he had failed to re-arrange his indebtedness and modify hisspending. He argues, however, that the serious hardship he suffered and continues tosuffer is merely a continuation of the reasons which justified the writing off of tax onearlier occasions. So it is not a question of his having failed to take advantage ofseveral opportunities to adjust his affairs to meet his tax obligations but of hisinability to meet his obligations continuing.[23] The duty to disclose and the duty to re-consult are interlinked. A duty to disclose information of which an affected party is unaware traditionally arises where a decision-maker receives information that is relevant to the decision and which will be taken into account. In such a situation, the decision-maker is generally required to give to the parties the opportunity to comment on the information.4 Where the decision-maker has already consulted with the parties regarding that decision, a duty to re-consult with the parties arises only if, at the time the decision is made, the new information relied upon by the decision-maker has changed in a material way the information which existed at the time of consultation.54 See, for example, Phillpott v Chief Executive of the Department of Labour HC Wellington CIV- 2005-485-713, 21 October 2005 at [53].5 See, for example, Accountants First v Commissioner of Inland Revenue (No 2) (2014) 26 NZTC 21-105 at [57]; Air New Zealand Ltd v Nelson Airport Ltd HC Nelson CIV-2007-442-584,[24] Mr Ebersohn submits for the Commissioner that there was no duty of prior warning about the amendment, and that no obligation to re-consult arose in this case, because the amendment of the TAA on 30 June 2014 merely clarified the law as it had previously existed. In other words, there was no material change in the law andP's application was to be treated in the same way under the post-30 June 2014 amendment as it would have been under the old law.[25] Mr Ebersohn says the key question for the Court is whether the amendment materially changed the applicable law on 30 June 2014. If so, it is accepted that the Commissioner owed a duty to disclose the fact that the Act had been amended, and consequently the Commissioner should have given P an opportunity to make a new application, articulating grounds which related to the new legal framework.[26] It is convenient, therefore, to set out the law as it was before 30 June 2014 and look at its effect; undertake the same exercise for the current law; and then to ascertain whether there was a material change in the law when the amendment came into effect.The pre-30 June 2014 hardship provisions[27] Prior to 30 June 2014, s 176 of the Tax Administration Act 1994 provided:Recovery of tax by Commissioner(1) The Commissioner must maximise the recovery of outstanding tax from a taxpayer.(2) Despite subsection (1), the Commissioner may not recover outstanding tax to the extent that—(a) recovery is an inefficient use of the Commissioner'sresources; or(b) recovery would place a taxpayer, being a natural person, in serious hardship.27 November 2008 at [50].[28] Serious hardship was defined in s 177A(1). It provided:(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; or(ii) the cost of medical treatment for an illness or injuryof the taxpayer or the taxpayer's dependant; or(iii) a serious illness suffered by the taxpayer or thetaxpayer's dependant; or(iv) the cost of education for the taxpayer's dependant;and(b) does not include significant financial difficulties that arise because—(i) the taxpayer is obligated to pay tax; or(ii) the taxpayer may become bankrupt; or(iii) the taxpayer's, or the taxpayer's dependant's, socialactivities and entertainment may be limited; or(iv) the taxpayer is unable to afford goods or services that are expensive or of a high quality or standard according to normal community standards.[29] P argues, on the basis that bankruptcy was a recovery action under s 176, that under the old provisions it was not possible to bankrupt a person where serious hardship was made out. The Commissioner was prohibited, therefore, from pursuing bankruptcy at the point where bankruptcy, along with any other recovery action, would cause serious hardship. Accordingly, the Commissioner only had one choiceupon finding that a taxpayer would suffer "serious hardship"; namely, to write off the tax.[30] Mr Ebersohn says the Commissioner's view is that bankruptcy does not necessarily place or cause a taxpayer to be in serious hardship. When a person ismade bankrupt, the Official Assignee takes over the bankrupt's affairs and ensuresthat the person does not suffer serious hardship.[31] The starting point for interpreting the provision is that the Commissioner is required by s 6A(3) to collect the highest amount of tax that is practicable. This duty, however, is fettered by considerations to do with the integrity of the tax system. In particular, ss 6(2)(b) and (f) provide for the right of taxpayers to have their liability determined fairly, impartially, and according to law and Commissioner has a reciprocal responsibility to administer the TAA in that manner.6[32] The hardship provisions were enacted into law through the Taxation (Relief,Refunds and Miscellaneous Provisions) Bill 2001 ("the Bill"). Before the Bill'sintroduction, the Government released a discussion document entitled Taxpayer compliance, standards and penalties: a review. It stated the purpose of the reform of the serious hardship provisions:73.32 Inland Revenue will be prevented from recovering tax if the recovery places the taxpayer in serious hardship. Obviously, tax should not be paid if it results in the taxpayer being unable to afford food or accommodation. Conversely, taxpayers should not be released from a tax obligation if that obligation is simply viewed as burdensome – for example, when a tax debt requires the taxpayer to sell an expensive car and replace it with a vehicle of lesser value.3.33 Recovery of a debt will continue until the point where further recovery would place a taxpayer in serious hardship. This ensures that taxpayers are not seen as being rewarded, or unduly punished, for failure to make payment. Any debt that cannot be recovered will be written off.[33] Statements of a similar nature as the one above can be found in the Commentary on the Bill,8 and this policy continued through into the Act in its final form. In the November 2002 Tax Information Bulletin the IRD recorded the effect of the Act after it had been passed into law:9Inland Revenue is prevented from collecting outstanding tax if recovery places a taxpayer in serious hardship. Recovery of a debt continues until the point where further recovery places a taxpayer in serious hardship. (Note that in some cases no recovery may have taken place as any action to recover the outstanding tax would place the taxpayer in serious hardship.) Any debt that cannot be recovered is written off.6 Larmer v Commissioner of Inland Revenue [2011] NZCA 157, (2011) 25 NZTC 20-043 at [19].7 Taxpayer compliance, standards and penalties: a review (government discussion document, August 2001).8 Taxation (Relief, Refunds and Miscellaneous Provisions) Bill: Commentary on the Bill (2001) at 6.9 (2002) 14(1) Tax Information Bulletin at 29.[34] Mr Ebersohn directs me to a number of decisions in which the Court has held that the duty to collect the most tax practicable is the overriding principle in the Act.10 He argues that this should be the main consideration in interpreting the meaning of s 176 under the old Act. I have considered these decisions but I do not think they are on point. Those cases dealt with situations where the plaintiffs sought to challenge decisions of the Commissioner to bankrupt them rather than enter into instalment arrangements with them on the basis that the Commissioner had misconstrued the obligation under s 176(1) to maximise the recovery of tax. In those decisions, the Court allowed the Commissioner to take a firm stand against taxpayers in default on the basis that the integrity of the tax system justified a refusal of the Commissioner to enter into instalment arrangements. But the cases did not involve consideration of the hardship provisions. The hardship provisions raise a different set of concerns: namely, that the Commissioner should not be able to take a firm stand against those who are in default of their tax obligations due to legitimate reasons that are outside of their control.[35] I do not accept the Commissioner's argument that under the old provisions she had a discretion to choose between writing off the tax or taking recovery action against a taxpayer upon finding that the person suffers "serious hardship" whichcame within the definition in s 177A.[36] The interpretation the Commissioner asserts does not sit comfortably with thelanguage in s 176 that "the Commissioner may not recover outstanding tax to the extent that recovery would place a taxpayer, being a natural person, in serioushardship". In effect, the Commissioner's interpretation would deprive s 176 of its intended effect by allowing the Commissioner to take debt recovery proceedings even if there was a finding of qualifying serious hardship. This is not a meaning that accords with the clear Parliamentary intention that those who have difficulty paying their tax for legitimate reasons may not be pursued.10 Re Marra, ex parte Commissioner of Inland Revenue (2004) 21 NZTC 18,494 (HC); Raynel & Anor v Commissioner of Inland Revenue (2004) 21 NZTC 18,583 (HC); McLean v Commissioner of Inland Revenue (2005) 22 NZTC 19,231 (HC); Clarke v Commissioner of Inland Revenue (2005) 22 NZTC 19,165 (HC).[37] I also hesitate to accept the Commissioner's argument that a person who is bankrupted never suffers "serious hardship" as a result of the recovery action because the Official Assignee will ensure that the person has an allowance to cover their necessary costs. In the absence of clear language permitting her to do so, I do not consider it is appropriate for the Commissioner to justify abdicating from her clear statutory responsibility not to pursue tax debts from those placed in serious financial hardship for reasons beyond their control on the basis that the Official Assignee will be able to provide those people with an opportunity to earn a bare living.[38] Finally, the Commissioner's interpretation does not accord with the way in which s 177A has been applied judicially. In W v Commissioner of Inland RevenueMacKenzie J held that where a person has suffered a financial difficulty contained in s 177A(1)(a) that was a direct cause of a difficulty contained in s 177A(1)(b), then aperson would still meet the definition of "serious hardship".11[39] It follows that the former law required the Commissioner to consider whether, after the date of the application for relief, the recovery of outstanding tax would cause significant financial difficulties. If such financial difficulties would becaused by (a) the taxpayer's inability to meet minimum living expenses according tonormal community standards; or (b) the cost of medical treatment for an illness or injury of the taxpayer or the taxpayer's dependant; or (c) a serious illness suffered by the taxpayer or the taxpayer's dependant; or (d) the cost of education for the taxpayer's dependant, the Commissioner was prevented from recovering the outstanding tax.12[40] But under the old approach the Commissioner was able to recover the tax where the significant financial difficulty occurred because (a) the taxpayer wasobligated to pay tax; (b) the taxpayer may become bankrupt; or (c) the taxpayer's, or the taxpayer's dependant's, social activities and entertainment may be limited; or (d)11 W v Commissioner of Inland Revenue (2005) 22 NZTC 19,602 at [33].12 Tax Administration Act, ss 176 and 177A(1)(a); P v Commissioner of Inland Revenue, above n 1; W v Commissioner of Inland Revenue, above n 11; Larmer v Commissioner of Inland Revenue(2010) 24 NZTC 24,016 (HC); Larmer v Commissioner of Inland Revenue [2011] NZCA 157, (2011) 25 NZTC 25,346.the taxpayer was unable to afford goods or services that were expensive or of a high quality or standard according to normal community standards.13The current hardship provisions[41] Since 30 June 2014, the regime for allowing the Commissioner to provide tax relief for those who suffer serious hardship has been contained in ss 176 – 177C of the TAA. The starting point is s 176, which now provides:Recovery of tax by Commissioner(1) The Commissioner must maximise the recovery of outstanding tax from a taxpayer.(2) Despite subsection (1), the Commissioner may not recover outstanding tax to the extent that—(a) recovery is an inefficient use of the Commissioner'sresources; or(b) recovery would place a taxpayer, being a natural person, in serious hardship.(3) Despite subsection (2)(b), the Commissioner may take steps preparatory to, or necessary to, bankrupt the taxpayer, including debt proceedings in the District Court or the High Court.[Emphasis added][42] Subsection (3) did not exist prior to 30 June 2014. The Commissioner arguesthat it was inserted to "clarify" that, even though collection of tax would put a person in hardship, the Commissioner can still bring proceedings resulting in bankruptcy.[43] Section 177 provides that a taxpayer applies for financial relief by making aclaim stating why recovery of the taxpayer's outstanding tax would place the taxpayer, being a natural person, in serious hardship. For the purposes of the section, the Commissioner must consider the taxpayer's financial position at the date onwhich the application for financial relief is made.13 Tax Administration Act, ss 177A(1)(b).[44] The new text of s 177A, so far as it is relevant to this case, reads:177A How to apply serious hardship provisions(1) Subsections (2), (3), and (4) provide the rules for the Commissioner to decide (the decision) whether,—(a) for the purposes of section 176, recovery of outstanding tax would place a taxpayer, being a natural person, in serious hardship:(b) for the purposes of section 177, the Commissioner mayaccept the taxpayer's request for financial relief on the basis of a claim that recovery of the taxpayer's outstanding tax or a relief company's outstanding tax would place the taxpayer,being a natural person, in serious hardship:(c) (d) for the purposes of section 177C, recovery of the outstanding tax would place the taxpayer, being a natural person, in serious hardship.(2) The Commissioner makes a decision under this section by determining whether financial information, after allowing for payment of a relevant amount of outstanding tax, and subject to subsections (3) and (4), shows that the taxpayer would, after the application under section 177 (the application), likely have significant financial difficulties because, after the application,–(a) the taxpayer or their dependant has a serious illness:(b) the taxpayer would likely be unable to meet––(i) minimum living expenses estimated according to normal community standards of cost and quality:(ii) the cost of medical treatment for an illness or injury of the taxpayer, or of their dependant:(iii) the cost of education for their dependant:(c) other factors that the Commissioner thinks relevant would likely arise.(3) Compliance with, and non-compliance with, tax obligations must not be considered by the Commissioner when making a decision under this section.(4) The Commissioner must use only financial information that the Commissioner has at the date on which the decision is made.[45] The last relevant provision is s 177C(1BA), which deals with theCommissioner's power to write of tax in cases of serious hardship:The Commissioner may use, as a ground for deciding whether or not to write off the outstanding tax of a taxpayer , the basis that recovery of the outstanding tax would place the taxpayer, being a natural person, in a serious hardship. The Commissioner is not required to write off the outstanding tax if the ground exists.[46] The new hardship provisions, therefore, require the Commissioner to take a two-step approach when dealing with an application for relief on the ground of serious hardship:(a) Step one: The Commissioner considers whether information aboutthe taxpayer's financial position, after allowing for payment of arelevant amount of outstanding tax, would show that the taxpayer would be likely to have significant financial difficulties after the date of application for relief because: (a) the taxpayer or their dependent has a serious illness; or (b) the taxpayer is not able to meet minimum living expenses according to normal community standards, the cost of medical treatment to them or their dependent, or the cost of education for their dependent; or (c) other factors would likely arise that the Commissioner believes to be relevant.14 The Commissioner must not take into account compliance or non-compliance with tax obligations when in this step determining whether the taxpayer suffers serious hardship.15(b) Step two: If the Commissioner has decided that requiring the taxpayer to pay the outstanding tax would place the person in serious hardship, then the Commissioner considers how to best deal with the debt. The Commissioner has two options available to her: she may write off the outstanding debt16 or allow the debt to remain and take steps preparatory to, or necessary to, bankrupt the taxpayer, including debt proceedings in the District Court or the High Court.1714 Section 177A(2).15 Section 177A(3).16 Section 177C(1BA).17 Section 176(3).[47] There is some disagreement between the parties about whether the Commissioner is permitted to consider how the debt arose when making the decision under step two about writing off the debt or taking recovery action, including bankruptcy proceedings. P argues that s 177A(1)(d) stipulates that s 177A(3) is one of the provisions that provides the rules for the Commissioner to decide whether, for the purposes of s 177C, recovery of the outstanding tax would place the taxpayer in serious hardship. He argues that this means that the Commissioner cannot consider how the tax debt arose.[48] I reject that submission. Both sections clearly contemplate that the Commissioner must make two separate decisions. Section 177A(1)(d) speaks of the decision whether, for the purposes of s 177C, recovery of the outstanding tax would place the taxpayer in serious hardship. In making that decision the Commissioner is prohibited by s 177A(3) from considering compliance and non-compliance with tax obligations. Section 177C(1BA) then speaks of the second decision; that is, whether or not to write off the outstanding tax of a taxpayer. In making that decision, the Commissioner may have regard to the person's compliance with tax obligations asthat is clearly material to whether the Commissioner should write off the tax or enforce the debt, including by bankrupting the person.Conclusion – the law changed on 30 June 2014[49] Notwithstanding the Commissioner's assertions to the contrary, I am satisfied that the law changed on 30 June 2014. Previously, the Commissioner was not permitted to bankrupt a taxpayer who met the pre-amendment definition of a person who would be placed in serious hardship as a consequence. Since 30 June 2014, however, the Commissioner has been permitted to choose whether to bankrupt or write off the tax of a person whom the Commissioner could not bankrupt prior to the amendment.Given that there was a change in the law, were P's natural justice rights breached?[50] I now turn to consider whether, in the light of the change in the law, theCommissioner's acknowledged failure to consult P amounted to a breach of naturaljustice.[51] Mr Ebersohn presses the argument that, taking into account the information Mr Philp used to reach his conclusions, the Commissioner's decision would havebeen the same if it had been decided under the pre-30 June 2014 provisions of the Act. Counsel draws attention to the following passages of Mr Philp's affidavit inwhich he identified the key grounds upon which he decided not to grant relief to P:80. I found that the main reason for the applicant's outstanding tax debtis his failure to rearrange his arrears in recognition of his decreased earning capacity. Particularly as he has had on-going ill health for numerous years. Although the appellant has had decreased earning capacity, he has still being earning significantly more than the national average. His taxable income has been:90. I noted that the applicant had failed to comply with his tax obligations even when he had higher income that would have left a greater surplus after essential out-goings. Despite his on-going health issues, in the year to March 2011 the applicant had a better year financially. He had a taxable self-employed income of $331,986 and could have made up some of his arrears. However he made no payments towards his 2010 income tax and he has only ever paid $246.19 towards his 2011 tax.[52] Mr Ebersohn argues that the amendments, when applied to P's case, did not alter the inevitable outcome. He submits that the only difference is that the circumstances of how the debt arose are now taken into account not at the stage of determining whether there is serious hardship, but at the stage where the Commissioner considers whether relief should be afforded to the person. Under the pre-amendment provisions, he argues, P would not meet the definition of "serious hardship" because, having regard to his income levels, the cause of his significant financial difficulty is his obligation to pay tax, and his failure re-arrange his financial affairs to meet that obligation. In such circumstances, s 177A(1)(b)(i) of the pre-Year Taxable Income2005 $243,068.472006 $227,385.232007 $281,143.642008 $215,888.982009 $182,378.652010 $132,014.002011 $347,046.032012 $94,742.102013 $76,647.242014 $91,550.14amendment Act operated to nullify the prohibition in s 176(2)(b) on the recovery ofP's outstanding tax through debt recovery and, if necessary, bankruptcy proceedings.[53] Mr Ebersohn submits that, under the new provisions, P's circumstancessatisfy the definition of "serious hardship", but the Commissioner is entitled nevertheless, by ss 176(3) and 177C(1BA), to pursue bankruptcy proceedings against him. So as far as this case is concerned, therefore, there is no material change: either way, the Commissioner would be entitled to pursue recovery of the debt, even though the paths to establishing that right may differ.Discussion[54] There is considerable force in Mr Ebersohn's argument and I revisit it below in the context of considering the granting of relief. But on the present issue, theCommissioner's argument misconceives the significance of fair hearing rights. The right to a fair hearing is not focussed solely on the substantive justice of the final outcome. Although fair hearing rights help to attain an accurate decision on the merits of a case, there are also non-instrumental justifications for them. They enhance formal justice and the rule of law in that they guarantee objectivity and impartiality. They protect human dignity by ensuring that the individual is told why he or she is being treated unfavourably and by enabling the individual to take part in the decision-making.18[55] As Mr Ebersohn acknowledges, it is clear that P's application was directed tothe old legislative provisions and not to the new criteria upon which theCommissioner's decision about relief would be based. The evidence does not go so far as to establish that Ms Laws was aware, when discussing the implications ofWylie J's judgment with P in May 2014, that a significant law change was imminent.I do not accept that the Commissioner was under a duty to inform P in advance of the legislative change that he should lodge his new application for relief before 30 June 2014. P acknowledged in the course of argument in this Court that he had no expectation that the Commissioner would provide him with legal advice.18 Paul Craig Administrative Law (7th ed, Sweet & Maxwell, London, 2012) at 341.[56] Ms Law does not appear either to have appreciated the significance of the amendments when speaking to P in late July 2014 after the new application was filed. In view of my finding that the amendment changed the law, however, fairness to P required the Commissioner to provide him with an opportunity to make new submissions so that his application for relief addressed the legislative provisions under which the decision about relief would be made. The failure by the Commissioner to provide that opportunity was a reviewable error.Did the Commissioner create a legitimate expectation that P's arrears would notbe taken into account?[57] P also submits that the Commissioner created a legitimate expectation by indicating to P that the she was not concerned with repayment of the arrears by requiring submissions only on how current and future payments were to be met. This, P alleges, resulted in the Commissioner acting with procedural impropriety because the decision of Mr Philp drew upon P's inability to pay tax arrears.[58] I cannot accept this submission. Given that P's application was based on the law as it stood prior to 30 June, and that P knew that the inquiry into "serious hardship" was to be focused on the position at the time of the application, he cannot have misapprehended that the IRD would consider only his future ability to pay tax.Did the Commissioner act unlawfully by failing to consider mandatory relevant considerations and by taking into account irrelevant considerations?[59] P makes several allegations regarding the failure of the Commissioner to take into account what he submits are mandatory relevant considerations and taking into account irrelevant considerations. I do not find these allegations to have any merit and reject them for the brief reasons that follow.[60] A decision-maker must take into account express and implied mandatory considerations and must disregard irrelevant and extraneous considerations.19Whether a decision is reviewable on the basis of relevancy involves two-step analysis. First, I must look to whether a consideration is a relevant input into the19 CREEDNZ Inc v Governor-General [1981] 1 NZLR 172 (CA) at 207.decision. Second, I must then consider whether the influence of the factor on the decision was reasonable.20[61] Relying on s 177A(3) of the TAA, P submits that the Commissioner acted unlawfully in taking into account the fact that P had failed to comply with tax obligations in the past when deciding whether to exercise her discretion to write off the tax. For the reasons discussed at [47] to [48], I reject that submission.[62] P submits also that Mr Philp failed to consider the large volume of submissions and annexures he had provided. I am not satisfied that is so. Mr Philp'sreasons for reaching the decision indicate that he took that information into account, and he deposes in his affidavit that:60. Miranda Law, Recovery and Enforcement Specialist, prepared a draftmemorandum and emailed it to me on 10 October 201461. On 13 October 2014 I considered the applicant's application for relief. I considered the draft memorandum prepared by Miranda Law and the supporting documents. I also met with Miranda to discuss the recommendation. Later that day I made the decision to decline the application for relief.[Emphasis added][63] I am not in a position to reject those direct statements of fact.[64] P also submits that Mr Philp was required to consider the effect of the sale ofthe beach house on reducing P's liabilities. I am not persuaded that this was a mandatory relevant consideration or that the facts asserted by P show that he had reduced his liabilities materially. The Commissioner had understood the beach house was to be sold and plainly gave that prospective event weight when granting relief in 2008. The understanding was misplaced. Instead, P took out an additional mortgage on that house which increased his financial liability. The Commissioner was entitled to come to the view that the decision was not one which adequatelyaddressed the need for P to reduce his outgoings. The fact that P's bank, asmortgagee, required P to sell the property after Mr Philps's decision does not assistthe plaintiff.20 Above.[65] Finally, P alleges that the decision did not take into account the fact that he had offered to open a separate bank account into which he would set aside a proportion of his earnings, to protect it from seizure by his regular bank. At best, it would be a permissible relevant consideration. The proposal did not address the circumstances in which the tax debt arose and does not explain P's failure to pay anymore than $246.19 in income tax for the 2010 and 2011 years despite receiving a total income of $480,000. Mr Philps's affidavit establishes that he did take the separate accounts proposal into account:83. I note that in paragraphs 59 to 65 of his affidavit the applicant refers to the separate account he opened in BNZ to set aside funds to pay his tax. I am also aware that the applicant did offer to open an account in another bank so that BNZ would not have access to these funds if the applicant fell behind in his obligations to BNZ. I did not give this much weight. Ultimately, theapplicant's inability to meet all his obligations as they fell due meant that hiscreditors would not be paid and the applicant would continue to have on- going difficulties.Did the Commissioner reach a decision that is unreasonable?[66] The final allegation P makes against the Commissioner is that she acted unreasonably, in that she:(a) failed to find that qualifying serious hardship had been established;(b) erred in deciding that the main reason for the applicant's outstanding tax debt was his failure to rearrange his finances;(c) failed to write off the whole of the plaintiff's outstanding tax; and(d) determined to issue bankruptcy proceedings,the combined effect of which will require the plaintiff to sell his home.[67] New Zealand's approach to unreasonableness is unclear. The High Court hasembraced varying standards of unreasonableness, but the appellate courts have not yet endorsed these standards.21 The traditional Wednesbury test for unreasonableness21 See, for example, Progressive Enterprises Ltd v North Short District Council [2006] NZRMA 72is one of manifest unreasonableness. It provides that "if a decision on a competentmatter is so unreasonable that no reasonable authority could ever have come to it,then the courts can intervene".22 In other words, there must be an obvious defect. That test is stringent.23[68] I do not believe there is an obvious defect in the Commissioner's decision. The effect of the decision on P is harsh, in that he is likely to lose his home. On top of the manifold difficulties he has experienced through ill-health, and his wife'scondition, the loss of the family home would be a bitter blow. But it cannot be said that the Commissioner has been unsympathetic to P in the past, or in reaching the decision under review, and the decision is one that was open to her. P has not been able to point to an aspect of the decision-making process or outcome that appears to be manifestly defective.[69] But a lower standard of unreasonableness than that applied under theWednesbury test might be justified in these circumstances. In Waitakere City Council v Lovelock, Thomas J criticised the Wednesbury unreasonableness test for being semantic and tautologious.24 The Judge noted that "the standard of unreasonableness will vary depending on the subject-matter"25 and observed that the Court's role may be less restrained from subjecting an administrative decision to more rigorous examination according to the gravity of the issue, as in cases involving fundamental human, civil and political rights.26 Justice Thomas also said that the standard of unreasonableness may be adjusted if the body is a non-statutory body exercising public power.27[70] In Wolf v Minister of Immigration Wild J echoed Thomas J's views and held that the manifest unreasonableness test should not be the universal test of unreasonableness applied in New Zealand public law. He said:28(HC) at [70].22 Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 2 All ER 680 (EWCA) at 682-683.23 Wellington City Council v Woolworths New Zealand Ltd (No 2) [1996] 2 NZLR 537 (CA) at 545.24 Waitakere City Council v Lovelock [1997] 2 NZLR 385 at 419.25 At 403.26 Above.27 Above.28 Wolf v Minister of Immigration [2004] NZAR 414 (HC) at [47].Whether a reviewing Court considers a decision reasonable and therefore lawful, or unreasonable and therefore unlawful and invalid, depends on the nature of the decision: upon who made it; by what process; what the decision involves (i.e. its subject matter and the level of policy content in it) and the importance of the decision by those affected by it, in terms of its potential impact upon, or consequences for, them.[71] Two factors suggest that a lower standard of unreasonableness should not be adopted. First, there is some democratic accountability for the Commissioner's decisions in that the Commissioner heads the executive leadership team of the Inland Revenue Department, which is accountable to the Minister of Inland Revenue. Second, the Commissioner is appointed on the basis of her expertise in the area of taxation and has a deeper knowledge of tax matters than the courts. Nevertheless, it is strongly arguable that the Commissioner's decision in this instance can be subjected to a less stringent test of unreasonableness:(a) The decision does not involve a subject matter having a high policy content. Whether somebody meets the hardship requirements requires the application of a legal standard that is defined in the Act; like all statutory tests, it is susceptible to scrutiny and enforcement by the courts. Although the Commissioner may have more experience in applying the hardship test, this Court is also well placed to consider whether any application of the statutory test by the Commissioner is unreasonable in any case.(b) The importance of the decision favours a more stringent form of review. Although the Commissioner's decision in this case does notdirectly implicate New Zealand's compliance with internationalhuman rights treaties as the decision did in Wolf v Ministry of Immigration, the ramifications of the Commissioner's decision has serious consequences for a person. The consequences of bankruptcy can be severe: it makes it difficult to obtain credit in the future; bank accounts can be terminated; job security and a person's ability to be a business owner can be threatened; a person can lose assets including the family home; it can affect Kiwisaver funds and superannuation. Bankruptcy can also have a lasting impact on a person's family life.[72] Accordingly, I consider that it is appropriate to assess the Commissioner's decision in the light of the straightforward test proposed by Thomas J in Waitakere City Council v Lovelock; namely, whether "a reasonable authority acting with fidelity to its empowering statute could have arrived at the decision it did in the circumstances of that case."29 Applying that test, I consider such an authority could have properly and reasonably come the same view as the Commissioner.[73] The Commissioner came to the conclusion that, as at the date of the application, recovery of the full amount of the outstanding tax would place the plaintiff in serious hardship. The Commissioner then considered whether the recovery of any tax was possible. She took into account finding and paying for accommodation in the area where P lives and she considered his health costs, both in terms of cost of treatment and cost to his earning ability. The Commissioner concluded that P had enough equity in his home to be able to sell it and pay a part of what he owed while still being able to afford to cover his medical bills and rent in the same area without being in serious hardship. So the Commissioner wrote off $350,577.90 of his tax debt. That was a significant concession.[74] The Commissioner reached this conclusion in the light of the fact that P had already been granted extensive relief in both 2003 and 2008. A total of $1,198,247.80 of tax debt had been written off. Despite this, P continued to increase his bank debt to a level which he could not service and meet his tax obligations. The Commissioner was entitled to view this behaviour as especially concerning because P was granted relief in July 2008 on the understanding that he would need to adjust his on-going expenditure. In the final paragraph of the report containing the decision to write off P's tax debt in 2008, the decision-maker acknowledged that adjustment toP's expenditure would invariably result in the sale of one of the two properties his wife and he owned. The report writer said he had "anguished over this decision and [had] read the various reports of the specialists and consultants." He expressed the belief that for P to be in a position to meet his ongoing tax liabilities, and to reduce his expenditure to a level where his outgoings did not continually exceed his income, P needed to realise an asset. P did not take that well-advised step.29 Waitakere City Council v Lovelock, above n 24, at 403.[75] Furthermore, P failed to comply with his tax obligations even when he had a higher income that would have left a greater surplus after essential outgoings. For example, despite his ongoing health issues in the year to March 2011, P had a taxable income of $331,000 which is substantial; paying current tax and something towards the arrears was entirely affordable.[76] The Commissioner has a duty to protect the integrity of the tax system. A reasonable Commissioner acting with fidelity to this statutory duty could have reasonably made the decision the Commissioner made in this instance.Should I exercise my discretion to decline relief to P?[77] I have concluded that P's argument that the Commissioner erred in law should succeed on the ground that the Commissioner should have notified P of the law change and allowed him to make further submissions on the effect of that change on his application. Nevertheless, in a judicial review application, whether or not relief is granted is a matter for the discretion of the Court.30 The Court of Appeal inAir Nelson Ltd v Minister of Transport held that there must be extremely strong reasons to decline relief where a challenge to an administrative decision is upheld.31In principle, the starting point is that where a claimant demonstrates that a public decision-maker has erred in the exercise of its power, the claimant is entitled to relief.32 But the Court of Appeal acknowledged subsequently that the approach inAir Nelson is insufficiently nuanced and that the Court seemed to have in mind in that case situations where it could be shown that there was substantial prejudice to the claimant as a result of the defect.33 The Courts have refused remedies where they believe that the decision would not have been different had the decision-maker acted impeccably.34[78] In his submissions, Mr Ebersohn emphasised that this was a situation where, irrespective of which legislative regime was applied, P would not be entitled to relief30 Judicature Amendment Act 1972, s 4(3).31 Air Nelson Ltd v Minister of Transport [2008] NZAR 139 (CA) at [60].32 At [61].33 Rees v Firth [2011] NZCA 668, [2012] 1 NZLR 408 at [48]; Tauber v Commissioner of Inland Revenue [2012] NZCA 411, [2012] 3 NZLR 549 at [90]-[91].34 See, for example, Wislang v Disciplinary Committee [1974] 1 NZLR 29 (SC) at 45; Stininato v Auckland Boxing Association (Inc) [1978] 1 NZLR 1 (CA).from all of his tax obligations: in both circumstances the IRD would have been able to bankrupt him, even if P's understanding of the old law was applied. For the reasons advanced on behalf of the Commissioner, as discussed at [51] to [53], I agree. Recasting his application in light of the new statutory regime, there is nothing material that P could add to the information already available to the Commissioner; P does not identify any. I am satisfied that if the Court remitted this matter to the Commissioner for further consideration, with the benefit of P's submissions on the new provisions, the Commissioner would inevitably and properly come to the same decision. Accordingly, I decline to award relief in this instance.Decision[79] Notwithstanding the error of law in the Commissioner's decision-making, I decline P's application for orders setting aside the Commissioner's decision topursue recovery action for the amount of the outstanding tax obligation not writtenoff. While I accept that the Commissioner breached P's natural justice rights, noremedy the Court could grant would do other than cause further delay in reaching the inevitable conclusion that recovery should be pursued to the extent that, if necessary, bankruptcy proceedings should issue.[80] It gives the Court no satisfaction to make such a decision about a man who has contributed greatly to his profession and the community, who is held in the highest regard, and who has suffered far greater personal misfortune than many. I am wholly satisfied, however, that no other outcome would be proper in this case. Delivery of this judgment has been delayed on account of further ill health suffered by the plaintiff since the hearing, as notified by a memorandum of counsel dated 15 July 2015. Delay in delivery was not requested by counsel but I considered in the circumstances that it was appropriate. The Commissioner has been patient but she is now entitled to the benefit of the Court's decision without further delay.[81] This judgment is to be made available to the parties forthwith, but distribution of the judgment more widely shall be withheld until 30 September 2015.Costs[82] The Commissioner has succeeded in resisting P's claim for relief, but P hashad a measure of success and it cannot be said that the application for review lacked merit. On that basis, and also because pursuit of any award of costs in favour of the Commissioner may be futile in the circumstances, I am inclined to the view that costs should lie where they fall. If costs are sought nevertheless by either party, a memorandum shall be filed and served by 30 October 2015. Any memorandum in reply shall be filed and served by 27 November 2015. Costs shall then be determined on the papers unless the Court directs otherwise.Orders prohibiting file search and for non-publication[83] The Commissioner does not oppose an order making permanent the interim orders made by Ellis J on 10 February 2015, prohibiting any search of the Court file and for non-publication of the names and identities of the plaintiff and his wife. I make the following permanent orders accordingly:(a) The Court file is not to be searched, copied or inspected without the leave of a Judge.(b) The names of the plaintiff and his wife, and any particulars identifying them, shall not be published.Toogood J