R R KORAKO V THE COMMISSIONER OF INLAND REVENUE HC WHA CIV 2009-488-204

R R KORAKO V THE COMMISSIONER OF INLAND REVENUE HC WHA CIV 2009-488-204 18 September 2009IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY CIV 2009-488-204UNDER Part 1 of the Judicature Amendment Act 1972 IN THE MATTER OF the Tax Administration Act 1994 BETWEEN RAURETI REGINALD RUKA KORAKO Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 22 July 2009 Appearances: R C Mark for plaintiff K Millard and M Burr for defendant Judgment: 18 September 2009JUDGMENT OF ALLAN JIn accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 10.30 am on Friday 18 September 2009Solicitors: R Mark, PO Box 172, Kerikeri Crown Law, PO Box 2858, Wellington[1] Mr Korako was the subject of an amending income tax assessment for the year ending 31 March 2003, and of default income tax assessments for the years ending 31 March 2004 and 31 March 2005. He did not challenge the assessments within the time prescribed by the Tax Administration Act 1994 (the Act). Subsequently the Commissioner issued proceedings against him in the District Court, and obtained judgment by default for $561,822.51. Thereafter, the plaintiff made two unsuccessful applications to set aside the judgment. The Commissioner has now commenced bankruptcy proceedings, the hearing of which is pending in this Court. [2] Against that background, the plaintiff commenced this proceeding for judicial review. He seeks: a) An order staying the bankruptcy proceedings, and b) An order that the Commissioner allow the plaintiff to dispute the tax assessments through the dispute process provided for in the Act. [3] He now applies for an interim order under s 8 of the Judicature Amendment Act 1972, staying the bankruptcy proceedings until the determination of the judicial review proceedings. [4] The Commissioner, for his part, seeks an order striking out the proceeding on the grounds that it amounts to an abuse of process, or alternatively that it is clearly untenable.Factual background[5] Mr Korako was formerly the chief executive officer of the Ruka Ruka Ki Ati Awa Trust, a charitable trust established for the purpose of advancing the claims of the Waitaha (Moriori) people in the Waitangi Tribunal. For that purpose itconducted a significant number of hui throughout New Zealand between 1997 and 2005. The trust was ultimately liquidated in August 2007. [6] The activities of the trust were funded, at least in part, by advances from a benefactor. These funds were applied, according to Mr Korako, in paying hui and administration expenses, as well as on work associated with the Waitangi Tribunal claim. [7] Mr Korako filed an income tax return for the year ending 31 March 2003, but his agent later advised the Commissioner that no returns were required in respect of the years ending 31 March 2004 and 31 March 2005 respectively. [8] Having investigated the plaintiff's tax affairs, the Commissioner issued an amending tax assessment for the year ending 31 March 2003 and made default assessments for the two succeeding years. The plaintiff was advised of these assessments by way of a letter dated 5 March 2007, sent to four postal addresses with which the defendant believed the plaintiff to have been associated. A copy was also sent to the plaintiff's tax agent. The letter informed the plaintiff that if he wished to dispute any of the tax assessments, he must file any Notice of Proposed Adjustment (NOPA) within four months from the date of the assessment. [9] A Mr Pearson was recorded as Mr Korako's registered tax agent in terms of s 34B of the Act until 27 March 2007; it is common ground that receipt by the agent of the letter of 5 March 2007 represented good service on the plaintiff of the letter and its enclosures. [10] On 4 June 2007 the defendant sent a reminder letter to Mr Korako, in which he was advised once more of his obligation to file NOPAs by 5 July 2007 if he wished to dispute the assessments. The letter of 4 June was sent to three postal addresses connected with Mr Korako; the first two of the addresses were used by Mrs Patricia Korako, then the plaintiff's wife. She was a "nominated person" for the plaintiff. As such she was specifically authorised by him to deal with the Inland Revenue Department on his behalf with respect to his tax affairs. The plaintiff didnot lodge NOPAs with the department by 5 July 2007, nor indeed has he done so at any time since. [11] In an affidavit sworn on behalf of the defendant, Mr P J Sheild, an officer of the Inland Revenue Department, deposes to the posting of the various letters to the plaintiff. In particular, he says that a copy of the 5 March letter and the Notices of Assessment were sent to Mr Pearson. [12] Curiously, the Notices of Assessment were not produced in evidence. A copy of the letter of 5 March 2007 was however produced. As Mr Mark points out, the letter refers to the intention of the department to issue Notices of Assessment, but does not on its face purport to enclose the Notices themselves. However, it seems clear that the assessments did reach Mrs Korako at least. According to the department's records, Mrs Korako wrote to the department on 1 July 2007. The letter, which was hand-delivered to the Whangarei office of the department on 16 July 2007, reads:I write on behalf of Raureti. IRD Number 47-957-680. Raureti does not agree with the amount, but is happy to make whatever procedure necessary. He would like an appointment with you for Wednesday 25 July 2007. Please confirm appointment to me on 0276 817 448 or to PO Box 5017 Whangarei.[13] Mr Sheild's evidence is that the department's records indicate that meetings between the plaintiff and the department were scheduled on 10 (or possibly 11) April 2007, and for 25, 26 and 27 July, and 3 and 22 August 2007, but that Mr Korako did not keep any of the appointments so arranged. [14] Subsequently the defendant obtained judgment by default in the District Court, and then commenced bankruptcy proceedings against the plaintiff. In his present application the plaintiff seeks an order staying those proceedings until determination of the substantive judicial review proceeding. [15] On 5 March 2009, Mr Cornish, the plaintiff's current tax agent, filed income tax returns for the years ending 31 March 2003, 31 March 2004 and 31 March 2005,together with returns for other income years not relevant to this proceeding. There was no supporting material. Although Mr Cornish subsequently rang Mr Sheild on 17 March 2009 to confirm receipt by the department of these returns, nothing further has occurred. In particular, Mr Korako has not filed any NOPA or other response notice in respect of the defendant's assessments for the 2003-05 income tax years. [16] The bankruptcy proceedings against the defendant stand adjourned pending the outcome of the present applications.Jurisdiction[17] The defendant applies to strike out the plaintiff's claim for judicial review in its entirety. Rule 15.1(1) of the High Court Rules authorises the Court to strike out all or part of a pleading if the proceeding: a) discloses no reasonably arguable cause of action or case appropriate to the nature of the pleading; b) is likely to cause prejudice or delay; c) is frivolous or vexatious; or d) is otherwise an abuse of process. [18] Ms Millard submits that the Court would be justified in striking out the plaintiff's claim on all of these grounds, although accepting that there may be little distinction in this case between the third and fourth grounds. [19] Where the Court has struck out a pleading, it may dismiss the whole of the proceeding under r 15.1(2). Ms Millard submits that this course is appropriate in the present instance. She also submits that the Court is justified in striking out the proceeding on the basis that the plaintiff's claim is clearly untenable.[20] Strike out principles are the same in the case of a claim for judicial review as in ordinary proceedings. Only in a clear case should a plaintiff be precluded from advancing a proceeding in the normal way, by employing available interlocutory procedures. However, in what is demonstrated to be a clearly hopeless case, the sooner it is brought to an end the better: Southern Ocean Trawlers Ltd v Director- General of Agriculture & Fisheries [1993] 2 NZLR 53 at 63. [21] Ms Millard also contends that the present proceeding amounts to an abuse of process, in that the proceeding is aimed at the obtaining of a collateral advantage, namely a delay in the bankruptcy proceedings which the defendant is legitimately entitled to pursue given the relevant provisions of the Act: Hanrahan v Ainsworth(1990) 22 NSWLR 73 at 112; Ullrich v Ullrich (1996) 10 PRNZ 253 at 255-56. [22] The plaintiff's cross-application is for an order for interim relief under s 8 of the Judicature Amendment Act. Mr Mark argues that a stay of the bankruptcy proceedings is necessary in order to preserve the position of the plaintiff pending resolution of the present proceeding. The proper approach to s 8 applications is now well established. The Court should exercise its discretion in the light of such factors as the strengths and weaknesses of the claim, the relevant statutory framework, questions of delay and abuse of process, the public interest where relevant and the overall justice of the case: see generally Carlton & United Breweries Ltd v Minister of Customs [1986] 1 NZLR 423 and Singh v Chief Executive of the Department of Labour (1997) 12 PRNZ 428.The strike out application[23] It is logical to deal first with the defendant's application to strike out the proceeding. [24] 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 CIR v Wilson (1996) 17 NZTC 12,512 at 12,520, 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 in New 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.[25] 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 [2009] 2 NZLR 99. 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 of taxation 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).[26] Later in the judgment, by way of summary, the Court said at [59]:[59] We think it appropriate to continue to apply the established principles as to judicial review in tax cases. We accept that judicial review is available where what purports to be an assessment is not an assessment. Associated with this, we accept that judicial review is available in exceptional cases and thus may be available in cases of conscious maladministration (as was recognised in Futuris). We can reconcile this with ss 109 and 114 on the basis that in such cases (that is, no genuine assessment or conscious maladministration) what is challenged is either not an assessment or, at the least, not the sort of assessment which the legislature had in mind in enacting those sections. On this basis we see the availability of judicial review as depending on the claimant establishing exceptional circumstances of a kind which results in the amending assessment falling outside the scope of ss 109 and 114 and thereby not engaging those sections.[27] The Court also observed at [58] that the commencement of judicial review proceedings in other than exceptional circumstances is an abuse of process:Commissioner of Inland Revenue v Abattis Properties Ltd [2003] NZAR 155 at [24]. [28] In the even more recent decision of French J in Tannadyce Investments Ltd v CIR (2009) 24 NZTC 23,499, the following useful summary of the effect of theWestpac decision appears at [39].[39] These sections and their effect on the availability of judicial review in tax cases has recently been considered by the Court of Appeal in Westpac Banking Corporation v The Commissioner of Inland Revenue (2009) 24 NZTC 23,340; [2009] NZCA 24. The court confirmed the following:— "1. The established principles in relation to applications for judicial review in tax cases should not be widened. 2. As a general rule, the correctness of a tax assessment can only be challenged in challenge proceedings under Part VIIIA of the Tax Administration Act. 3. To allow collateral challenge to assessments through judicial review can provide scope for gaming and diversionary conduct. It involves not just delay but diversion of effort and resources.4. A challenge by way of judicial review is reserved for exceptional circumstances. 5. A challenge by way of judicial review in other than exceptional circumstances is an abuse of process. 6. Circumstances are exceptional for this purpose if they produce a situation in which the assessment can be fairly seen as not within the scope of ss109 and 114 of the Tax Administration Act. 7. Judicial review is essentially confined to two circumstances namely assessments that were not truly assessments at all and where there has been conscious maladministration."[29] It is to be noted that the Supreme Court recently refused an application byWestpac for leave to appeal against the decision of the Court of Appeal. [30] Conscious maladministration is not pleaded here, and there is nothing before the Court to suggest that the plaintiff might be able to establish it. That leaves the "not an assessment at all" ground, which necessarily falls to be discussed in the context of the legislation itself. [31] Section 109 provides that no disputable decision can be disputed in a Court in any proceedings "on any ground whatsoever" except by way of objection or challenge proceedings under Part 8 or Part 8A of the Act. Further, every disputable decision and its particulars are deemed to be correct: s 109(b). An assessment is not invalidated through any failure to comply with the provisions of the Inland Revenue Act: s 114. It is therefore not surprising that the Court of Appeal has characterised the statutory regime as constituting an "inauspicious statutory context" for judicial review. [32] Because Mr Korako had filed his return of income for the year ending 31 March 2003, the Commissioner issued an amended assessment for that income year under s 113 of the Act. The plaintiff then had four months from the date of issue of the amended assessment within which to respond. Since the plaintiff had not filed tax returns at all for the years ending 31 March 2004 and 2005, the Commissioner issued default assessments. The plaintiff was obliged to respond to these within four months by filing both a tax return and a notice of proposed adjustment for the years concerned, if he wished to dispute the assessments.[33] In ss 89F and 89G, the Act prescribes the contents of a NOPA and of a response notice to a NOPA. These sections provide respectively:89F Content of notice of proposed adjustment(1) A notice of proposed adjustment must— (a) contain sufficient detail of the matters described in subsections (2) and (3) to identify the issues arising between the Commissioner and the disputant; and (b) be in the prescribed form. (2) A notice of proposed adjustment issued by the Commissioner must— (a) identify the adjustment or adjustments proposed to be made to the assessment; and (b) provide a concise statement of the key facts and the law in sufficient detail to inform the disputant of the grounds for the Commissioner's proposed adjustment or adjustments; and (c) state how the law applies to the facts. (3) A notice of proposed adjustment issued by a disputant must— (a) identify the adjustment or adjustments proposed to be made to the assessment; and (b) provide a statement of the facts and the law in sufficient detail to inform the Commissioner of the grounds for the disputant's proposed adjustment or adjustments; and (c) state how the law applies to the facts; and (d) include copies of the documents of which the disputant is aware at the time that the notice is issued that are significantly relevant to the issues arising between the Commissioner and the disputant.89G Issue of response notice(1) To reject a proposed adjustment, the recipient of the notice of proposed adjustment must, within the response period for the notice, notify the issuer that the adjustment is rejected by issuing a response notice. (2) A notice of response must state concisely— (a) the facts or legal arguments in the notice of proposed adjustment that the issuer of the notice of response considers are wrong; and(b) why the issuer of the notice of response considers those facts or legal arguments to be wrong; and (c) any facts and legal arguments relied on by the issuer of the notice of response; and (d) how the legal arguments apply to the facts; and (e) the quantitative adjustments to any figure referred to in the notice of proposed adjustment that result from the facts and legal arguments relied on by the issuer of the notice of response.[34] In the present case, the plaintiff took no step within the prescribed time to dispute the Commissioner's NOPA and default assessments. The plaintiff is therefore deemed by s 89H(1) to have accepted the Commissioner's adjustments, and is precluded by s 89I(1) from challenging those adjustments unless s 89K applies. [35] 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. [36] The expression "exceptional circumstance" is defined in s 89K(3) which provides: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 businessorganisation 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.[37] 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 the taxpayer, 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. [38] In the present case, the plaintiff's tax agent, Mr Pearson, was given notice of the assessments. Moreover, the plaintiff's wife, an authorised person for the purposes of the Act, also received the assessments, as is plain from her letter dated 1 July 2007 to the department. There she makes specific reference to the amount of the assessment not being acceptable to the plaintiff. [39] The plaintiff himself says he was not aware at the time that the assessment had been made (although his agents plainly were). His explanation is that:During the period when my tax returns were not filed I was going through a messy divorce from Trisha Korako. Until that divorce Trisha had handled all of my paperwork and administration. She had ensured that my tax returns and the Trust's tax returns were all filed on time. As a consequence of the divorce, I did not receive the tax assessments and I was therefore not aware that the Inland Revenue Department had assessed all of this Trust expenditure as my income.[40] On that evidence, it appears that the plaintiff's ignorance of the assessments stems simply from his decision to entrust the conduct of his business and tax affairs to others, and of his failure to pay proper attention to the conduct of his affairs at the time of his divorce. The mere failure of a taxpayer to comply with prescribed timeframes, and his consequent inability to challenge an assessment under Part 8A, will not of itself amount to an exceptional circumstance. That is plain from the language of s 89K: Amaltal Fishing Company Limited v CIR (2009) 24 NZTC 23,313 at [28]. [41] The plaintiff's evidence is surprisingly limited, given that he seeks an interim order under s 8 of the Judicature Amendment Act. There is nothing from Mr Pearson, nor from the plaintiff's former wife. Nor does the plaintiff explain, for example, why he failed to keep a number of successive appointments with the Department at a point when time was still running. It appears from the evidence that at least as late as July 2007 Mrs Korako had authority to make arrangements on the plaintiff's behalf, but the plaintiff has said nothing about the extent of his knowledge of the existence of the assessments at that time, save to deny that he actually received them himself. Rather, his affidavit evidence, and that of his supporting deponents, concentrates upon the substance of his argument with the Commissioner – the plaintiff arguing that the income for which he has been assessed was truly the income of the charitable trust – a matter which is largely irrelevant for present purposes. [42] Even now the plaintiff has not formally responded to the Commissioner's NOPA and so has not engaged with the dispute process. As Ms Millard points out, a response notice is a prerequisite to any challenge by a disputant under the Act. [43] The plaintiff pleads that the Commissioner's refusal to accept the tax returns filed earlier this year was: a) unreasonable; b) made after taking into account irrelevant considerations; c) made after failing to take into account relevant considerations; d) made in order to facilitate the continuation of the bankruptcy proceeding, which itself is an abuse of process; e) in breach of s 27(1) of the New Zealand Bill of Rights Act 1990.[44] Ms Millard accepts that the first three grounds upon which the plaintiff seeks judicial review raise orthodox judicial review issues, but notes that they are unsupported by particulars or by affidavit evidence. She points out that there is no allegation of conscious maladministration on the part of the defendant; nor is there an express pleading of exceptional circumstances for the purposes of s 89K. Neither does the plaintiff plead that the Commissioner's assessments are "not assessments at all". Accordingly, she argues, the first three grounds must be struck out on the basis that there is no tenable case and that the claim amounts to an abuse of process. [45] The fourth ground, she argues, seeks in effect to challenge the substantive basis for the assessment. Such challenges must be undertaken in the context of s 109 of the Act. Accordingly, she maintains, this ground must also be struck out. [46] As to the allegation of breach of s 27(1) of the New Zealand Bill of Rights Act, she argues that there can be no room for a claim that the Commissioner is in breach of natural justice, because the content of such natural justice requirements as are applicable in this case can be found in the statutory regime prescribed by the Act:Daganayasi v Minister of Immigration [1980] 2 NZLR 130 at 141. There is no suggestion, Ms Millard says, that the Commissioner has failed to comply with the statutory regime. Further, it cannot tenably be contended that the Commissioner is bound to accept the excessively late filing of self-assessments on behalf of the plaintiff early this year, having regard to the plaintiff's failure to comply with his other filing obligations. [47] I agree. Insofar as it is based on s 27(1) of the New Zealand Bill of Rights Act 1990, the plaintiff's pleading plainly cannot stand. [48] Neither is there any foundation for the pleading that the Commissioner's refusal to accept the recent tax returns amounted to an abuse of process. [49] The remaining causes of action are premature. The plaintiff seeks an order directing the defendant to engage in the dispute procedure prescribed by the Act, but he has not yet set that procedure in motion by complying with ss 89F and 89G. Themere filing of a self-assessment unaccompanied by any other information plainly does not qualify. Section 89K has not been triggered. [50] It remains open to the plaintiff to comply (if he can, which may be doubted) with the provisions of s 89K, and then, if the Commissioner's response is believed to be reviewable, to challenge that decision in this Court. It is common ground that such a decision would be a statutory power of decision for the purposes of the Judicature Amendment Act. But the plaintiff has not complied with s 89K. He is not entitled to maintain this proceeding when no cause of action presently exists. [51] In Couch v Attorney-General [2008] 3 NZLR 725 Elias CJ and Anderson J at [33] said that:It is inappropriate to strike out a claim summarily unless the Court can be certain that it cannot succeed. The case must be 'so certainly or clearly bad' that it should be precluded from going forward.[52] I think that this is such a case. There is nothing in the affidavits filed by the plaintiff to suggest that the claim is capable of being reformulated in a manner that might support a tenable argument; nor do Mr Mark's oral submissions take the matter any further.Result[53] The defendant's application to strike out succeeds and the proceeding is struck out accordingly. It is therefore unnecessary to consider the plaintiff's application for an interim order pursuant to s 8 of the Judicature Amendment Act 1972. [54] The defendant is entitled to costs. Counsel may file memoranda if they are unable to agree.C J Allan J