RON WEST MOTORS (OTAHUHU) LIMITED V COMMISSIONER OF INLAND REVENUE HC AK CIV 2005-404-787

RON WEST MOTORS (OTAHUHU) LIMITED V COMMISSIONER OF INLAND REVENUE HC AK CIV 2005-404-787 14 December 2005IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2005-404-787BETWEEN RON WEST MOTORS (OTAHUHU) LIMITED Plaintiff AND COMMISSIONER OF INLAND REVENUE Defendant Hearing: 2 December 2005 Appearances: G J Judd QC for Applicant M J Ruffin and R Wallace for Respondent Judgment: 14 December 2005 at 4:30 p.m.JUDGMENT OF SIMON FRANCE JSolicitors: Mr G J Judd QC, Barrister, PO Box 137 273, Auckland (E-mail: garyjudd@clear.net.nz ) Meredith Connell, Office of the Crown Solicitor, PO Box 2213, Downtown, Auckland (Fax: 336 7629)[1] On 22 September 2003, the plaintiff company requested the Commissioner to accept a late notice of objection to tax assessments for tax years 1982, 1983, and 1984. The Commissioner declined. The plaintiff filed judicial review proceedings some 17 months after the Commissioner's decision. The proceedings challenge the Commissioner's exercise of discretion essentially on the basis that it was unreasonable. The Commissioner has filed a strike out application, which is the subject of this decision.Background[2] The plaintiff is a company which was part of a so-called J G Russell template arrangement. Such arrangements have been disallowed by the Commissioner under tax avoidance provisions. When disallowance occurs, it is necessary for the Commissioner to reconstruct the affairs of the parties involved. Section 99(3) of the Income Tax Act 1976 provides:Where an arrangement is void in accordance with subsection (2) of this section, the assessable income of any person affected by that arrangement shall be adjusted in such manner as the Commissioner considers appropriate [3] Initially the Commissioner allocated the income in question to the company involved. Later he changed practice and began allocating it personally to the shareholders of the company. These alternatives have become known as Track A and Track B assessments. [4] The plaintiff was assessed according to the Track A assessment. That assessment was challenged unsuccessfully before the Taxation Review Authority, and the High Court. An appeal was filed in the Court of Appeal. It lapsed for want of progress and was deemed abandoned on 18 September 1998. [5] The plaintiff's notice of late objection, filed five years later, relates to the same assessment considered by the High Court. The plaintiff submits that events have occurred subsequent to the first objection process that mean that, as a matter of law, the plaintiff's assessment is now incorrect.[6] The new events that are said to have affected the validity of the plaintiff's assessment are tax actions taken by the Commissioner in relation to Mr Russell's companies, and Mr Russell personally. The plaintiff argues that these actions (described in the various judgments as Track C, D, and E assessments) engage s 99(4) of the Act, which provides:Where any income is included in the assessable income of any person pursuant to subsection (3) of this section, then, for the purposes of this Act, that income shall be deemed to have been derived by that person and shall be deemed not to have been derived by any other person.[7] Mr Judd QC submits that the effect of this section is that the more recent Track C, D, and E assessments deem the income to be that of the taxpayer C, D, and E. Further, because it is deemed to be say taxpayer C's, it is equally deemed to be not the income of taxpayer A, the company. Hence the need to adjust the company's assessment which is the purpose of the late objection notice. [8] The Commissioner declined to accept a late notice because in his opinion the Commissioner no longer has any discretion to amend the plaintiff's assessment. Mr Judd disputes this, but submits in the alternative that even if that is so, the Commissioner should accept a late application, and then decline the objection. This would allow the plaintiff to take the matter to the Taxation Review Authority. [9] At the hearing the Commissioner advanced his strike out on two complementary grounds: a) the Commissioner has no power to amend; and b) the ground of objection was available during the first objection process.Discussion[10] I propose to deal with the matter under the two heads advanced by the Commissioner, with a further section on whether the Commissioner's decision canbe seriously challenged on review given the conclusions I reach under the first two heads. a) Power to amend[11] The particular case is part of a protracted series of litigation between entities and persons associated with the Russell template, and the Commissioner. I do not therefore consider it necessary to embark upon a full analysis of either the template or litigation. I content myself with referring to the "Miller" trilogy of cases – (1997) 18 NZTC, 13,001 (HC), (1998) 18 NZTC 13,961 (CA), and O'Neill v C of IR (2001) NZTC 17,051 (PC). To these I add the most recent full discussion – Wire Supplies Ltd v C of IR (2005) 22 NZTC 19,357 (Courtney J, 1 September 2005). [12] A focus of this series of litigation has been the capacity of the Commissioner to issue assessments that at the same time attribute the same income to different taxpayers. For example, there have been times when there are existing Track A assessments in relation to the company and Track B assessments in relation to the shareholders. The objections to the Commissioner doing this were based on s 99(4) of the Act (para [6] above). [13] The consistent conclusion of the Courts has been that s 99(4) provides no impediment. Its purpose is to ensure that at the end of the day tax is only paid the once on the income. Concurrent assessments can exist as long as it remains open to the Commissioner to amend an assessment so as to avoid double taxation. The following passage from the O'Neill judgment captures the point (Lord Hoffman, para [33]):Their Lordships consider that an assessment which wrongly includes income deemed, by virtue of s 99(4), to be the income of someone else is not void, any more than an assessment which is wrong on some other ground. It is merely open to objection under s 30. It follows that the Commissioner or Taxation Review Authority may remedy the position by amending the inconsistent assessment at any time before the objection proceedings have run their course. It is only when the assessments are no longer open to amendment that an objection on grounds of inconsistency will be incapable of remedy.[14] In the present case there is a Track A assessment and a Track C assessment. The passage just cited makes it plain that this is permissible as long as the Commissioner can still amend. It also makes it plain a taxpayer cannot base an objection on inconsistency until the Commissioner can no longer amend. The plaintiff's intended objection is based of inconsistency, so in relation to which taxpayer is there an inability to amend? [15] In my view, there can be no sensible answer to this other than that it is the Track A assessment, confirmed as correct by the Taxation Review Authority and the High Court, that cannot be amended. If the subsequent Track C assessment is inconsistent, s 99(4) operates as a bar to that later Track C assessment. [16] The matter can be put another way. If there is still a power in the Commissioner to amend the Track A assessment, then it must be that the situation is no different from all the preceding cases that have held the Commissioner can have concurrent assessments in place. The objection then becomes an attempt to relitigate a matter definitely determined by the Privy Council. [17] I do not consider that the fact that the Track C assessment is now also within the control of the Taxation Review Authority changes this analysis. It would be very odd if lodging an objection to a Track C assessment on the basis of inconsistency altered the position in relation to the Track A assessment. It is the very fact that the Track A assessment cannot be amended that allows an inconsistency objection to be made. [18] In my view, therefore, the intended late objection is one that cannot succeed. Either the Commissioner can still amend the plaintiff's assessment in which case he is allowed to issue a concurrent Track C amendment, or he cannot, in which case the complaint of inconsistency must lie with the subsequent assessee. Either way the application fails. I add for completeness that I have no doubts the correct position is that the Commissioner cannot now amend the Track A assessment.b) The proposed basis for objection is not new[19] The plaintiff's intended objection is based on the effect that a subsequent Track C, D, or E assessment has on a prior Track A assessment. For reasons discussed in the preceding section, at a broad level I very much doubt that it is possible to advance the proposition that any such challenge is new. The Millertrilogy I refer to in para [4] of this judgment all address this issue, and I do not consider it matters whether the particular subsequent assessment is Track B, C, D, or E. The general principles set out in those cases remain applicable. [20] That aside, it is plain that it was open to the plaintiff in this case to raise the effect of a Track C assessment on its tax liability during the course of the original objection process. [21] The present plaintiff's appeal was heard before Baragwanath J on 30 June to 3 July 1997. Subsequent to the hearing, but before judgment, Baragawanath J heard a recall application by other template plaintiffs concerning judgments His Honour had given on the legitimacy of the template and the legitimacy of the reconstruction options adopted by the Commissioner. The basis for the recall application was that the applicants (who were represented by the same counsel as acted for present plaintiff on its appeal) had just become aware that the Commissioner was embarking upon Track C assessments. The applicants argued that this new tax action by the Commissioner affected the legitimacy on Baragwanath J's earlier rulings, and the prior Track A or Track B assessments. [22] Baragwanath J rejected the recall application 1 . Two matters of importance to the present proceedings emerge: a) the present plaintiff's appeal judgment was expressly delayed by His Honour until after he had ruled upon the recall application. This was because Baragwanath J wished to preserve the opportunity to assess the impact of Track C assessments on the plaintiff's objections had he taken a different view on the recall application;1 Miller and others v Commissioner of Inland Revenue Auckland, M103/93, 26 September 1997.b) second, Baragwanath J fixed Mr Russell, and the companies for whom he was tax agent (which include the plaintiff), with knowledge of the Track C assessments from 18 September 1996. That date is well prior to the High Court consideration of the plaintiff's appeal. [23] I accordingly conclude that the basis for the intended objection is not new. Mr Judd argued that "newness" is to be fixed by the date on which the grounds of objection are settled. Anything arising after that date cannot, he submitted, be considered on the original application. I do not consider that is a sustainable proposition given the discussion in Baragwanath J's recall judgment. [24] If the matter is not new but was known to the plaintiff prior to the High Court hearing, then Mr Judd would accept it is not open to base a new objection on it. c) Commissioner's discretion[25] The effect of the preceding two sections is to hold that: a) the authorities do not support the basis of objection which the late application would advance; b) the basis for objection that would be advanced was open to the plaintiff to raise during the previous objection process. [26] I consider that either basis would be a legitimate ground for the Commissioner to decline a late objection. Further, I do not consider it seriously arguable that the Commissioner should facilitate the recommencement of the objection process in relation to assessments that are 20 years old, and which have been the subject of full consideration before the Taxation Review Authority and the High Court.Conclusion[27] The judicial review proceedings cannot be seriously argued and the Commissioner's strike out application is granted. I note for completeness that theCommissioner did not base his application on the judgment of Courtney J in Wire Supplies Ltd. Accordingly, I have addressed the issues in the manner set out above. Reading that judgment it would appear, however, that Her Honour has reached the same conclusion. [28] The obvious costs order to be made is for costs to follow the event on a 2B basis. If, however, the parties wish to contend for a different costs outcome, leave to file memoranda in a timely way is granted. ____________________________________ Simon France J