DRUMMOND V THE COMMISSIONER OF INLAND REVENUE HC HAM CIV-2012-419-185

DRUMMOND V THE COMMISSIONER OF INLAND REVENUE HC HAM CIV-2012-419-185 [13 August 2012]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYCIV-2012-419-185[2012] NZHC 2028IN THE MATTER OF the Income Tax Act 2004, the Income TaxAct 2007 and the Tax Administration Act1994BETWEEN PETER SCOTT DRUMMONDFirst PlaintiffAND PATRICK JOHN DYERSecond PlaintiffAND RONALD BOETThird PlaintiffAND KERRY NOTT PHARMACY LIMITEDFourth PlaintiffAND CHERYL LEANN RENOUFFifth PlaintiffAND THE COMMISSIONER OF INLANDREVENUEDefendantHearing: 7 August 2012Counsel: JH Coleman for plaintiffsHL Dempster and SJL Townsend for defendantJudgment: 13 August 2012JUDGMENT OF ASSOCIATE JUDGE FAIRE[on applications to strike out]Solicitors: North End Law, PO Box 20 555, HamiltonCrown Law, PO Box 2858, Wellington 6140The applications[1] The plaintiffs apply for orders:(a) Striking out certain paragraphs of the amended statement of defence; or, in the alternative(b) Granting leave in terms of s 138G(2) of the Tax Administration Act 1994 to raise matters in the corresponding provisions of the amended statement of claim to those which are sought to be struck out in the amended statement of defence.[2] Mr Dempster confirmed that there is no opposition to the first strike out order sought. That relates to paragraph 4 of the amended statement of defence. An order is made implementing that position at the conclusion of this judgment. Because of the effect of an order striking out paragraph 4 of the amended statement of defence leaving paragraph 4 of the amended statement of claim with no responding pleading, an order is made requiring the defendant to file a further amended statement of defence that responds specifically to paragraph 4 of the amended statement of claim.[3] Counsel were agreed that although the application seeks orders for costs, costs should be reserved and dealt with separately after the issue of this judgment. I proceed on that basis.Background[4] On 17 February 2012 the plaintiffs, who collectively hold a 40% share in the Te Akau Stallion Syndicate (No. 1), which I shall refer to as "the syndicate", filed this proceeding. It seeks a declaration that the defendant's assessment of "the syndicate's" income for its financial years ended 31 August 2008 and 31 August 2009 are incorrect, resulting in the need to make certain consequential orders.[5] The central issue in the proceeding is whether the defendant was correct in disallowing a write-down of the purchase price paid by "the syndicate" pursuant tos EC 39 of the Income Tax Act 2007 and its equivalent provision, s EC 39 in the Income Tax Act 2004. Section EC 39 of the Income Tax Act 2007 provides:EC 39 First income year in breeding businessBloodstock to which this section applies(1) This section applies to bloodstock that is 2 years of age or older at the end of the first income year in which a person—(a) uses the bloodstock for breeding in their breeding business; or(b) forms the intention of using the bloodstock for breeding in their breeding business; or(c) buys the bloodstock, with the intention of using it for breeding in their breeding business.[6] In determining the central issue there is a need to determine whether "the syndicate" was operating a breeding business in its financial years ending 31 August 2008 and 31 August 2009.[7] In January 2008 Mr DC Ellis purchased a thoroughbred colt by Zabeel out of Desert Lily, named Roman Gladiator, at the Karaka premier sale for $550,000 plus GST.[8] In March 2008 the plaintiffs, with others, collectively formed "the syndicate". They plead that their objective was to "acquire, train, race the colt and any other thoroughbred colts" acquired by "the syndicate" with a view to increasing their value as thoroughbred stallions and to carry on the business as owners of thoroughbred stallions.[9] The colt was two years of age or older, as at 31 August 2008, which was the end of the first income year in which the colt was acquired. In the period January 2009 to May 2010, the colt had nine race starts and five barrier trials. The defendantadmits "the syndicate" trained and raced the colt in the years ended 31 August 2008 and 31 August 2009 with the objective of putting the colt to stud if, and when, it provided its potential worth as a breeding stallion by it succeeding as a racehorse.[10] It is admitted that the colt was gelded on 5 October 2009. The plaintiffs plead, although it is not accepted by the defendant, that that was because of behavioural difficulties with the colt. On 19 September 2010 the colt was exported to Singapore and raced in five races there.[11] The strike out application is made in reliance on r 15.1 of the High Court Rules. Rule 15.1 provides:15.1 Dismissing or staying all or part of proceeding(1) The court may strike out all or part of a pleading if it—(a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or(b) is likely to cause prejudice or delay; or(c) is frivolous or vexatious; or(d) is otherwise an abuse of the process of the court.(2) If the court strikes out a statement of claim or a counterclaim under subclause (1), it may by the same or a subsequent order dismiss the proceeding or the counterclaim.(3) Instead of striking out all or part of a pleading under subclause (1), the court may stay all or part of the proceeding on such conditions as are considered just.(4) This rule does not affect the court's inherent jurisdiction.The Court's approach to a strike out application[12] The general principles to be applied in a strike out application are well known. They were confirmed in Attorney-General v Prince & Gardner where the Court of Appeal said:1A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed (R Lucas & Son (Nelson Mail) Ltd v O'Brien [1978] 2 NZLR 289 at pp 294-295; Takaro Properties Ltd (in receivership) v Rowling [1978] 2 NZLR 314 at pp 316-317); the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it1 Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA) at 267.has the requisite material (Gartside v Sheffield, Young & Ellis [1983] NZLR 37 at p 45; Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2 NZLR 641); but the fact that applications to strike out raise difficult questions of law, and require extensive argument does not exclude jurisdiction (Gartside v Sheffield, Young & Ellis).[13] The principles referred to above were endorsed by the Supreme Court inCouch v Attorney-General.2The effect of an order striking out a pleading[14] In Westpac Banking Corporation v MM Kembla New Zealand Ltd the Court of Appeal in discussing the relative positions of an application for summary judgment and an application to strike out drew specific attention to the different effects which flow from each application. The Court said:3The difference between an application to strike out the claim and summary judgment is that strike-out is usually determined on the pleadings alone whereas summary judgment requires evidence. Summary judgment is a judgment between the parties on the dispute which operates as issue estoppel, whereas if a pleading is struck out as untenable as a matter of law the plaintiff is not precluded from bringing a further properly constituted claim.Purpose of pleadings[15] It is necessary for the purpose of the strike out application to record that the primary purpose of pleadings is to define the issues and thereby to inform the parties in advance of the case they have to meet and to enable them to take steps to deal with it.4 The purpose of pleadings has been the subject of comment in a number of cases.52 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.3 Westpac Banking Corp v MM Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA) at [60].4 Farrell v Secretary of State for Defence [1980] 1 All ER 166.5 Price Waterhouse v Fortex Group Ltd CA179/98, 30 November 1998; Commerce Commission v Qantas Airways Ltd (No 2) (1992) 5 PRNZ 227 (HC).The paragraphs in the amended statement of defence which are sought to be struck out analysed[16] There are four paragraphs in the amended statement of defence which are sought to be struck out. I now deal with them in the order in which they appear in the application to strike out.Paragraph 35 of the amended statement of defence[17] Paragraph 35 of the amended statement of defence responds to paragraph 35 of the amended statement of claim. For completeness' sake I set out the paragraphs:Amended statement of claim – paragraph 35In the alternative the assessments are partly wrong in fact and law because the Te Akau syndicate is transparent for tax purposes under s HG 2 of the Income Tax Act 2007 (which codified the existing common law) and the fourth plaintiff is in the business of breeding horses independently of the Te Akau syndicate and is entitled to deduct its share of losses relating to the colt in any event.Amended statement of defence – paragraph 35He is not required to, and does not plead to paragraph 35, on the grounds that the plaintiffs are estopped from pleading such allegations by reason of s 138G(1) of the Tax Administration Act 1994 unless and until they have applied to the Court for leave to make those allegations, and to raise those propositions of law, and the Court, on hearing such application, has granted the leave sought.[18] The issue I must determine is whether there is no reasonably arguable defence that the plaintiffs are estopped from pleading that the fourth plaintiff is in the business of breeding horses independently of the Te Akau Syndicate and is entitled to deduct its share of the losses relating to the colt in any event.[19] The defendant, although not required to, pleads that the estoppels arises by virtue of s 138G(1) of the Tax Administration Act 1994.[20] Section 138G of the Tax Administration Act 1994 provides:138G Effect of disclosure notice(1) Unless subsection (2) applies, if the Commissioner issues adisclosure notice to a disputant, and the disputant challenges the disputable decision, the Commissioner and the disputant may raise in the challenge only the issues and the propositions of law that are disclosed in the Commissioner's and disputant's statements of position.[21] It is common ground that at the time the pleading was filed, no application had been made for leave pursuant to s 138G(2) of the Tax Administration Act 1994.[22] Mr Dempster submitted that paragraph 35 of the amended statement of claim pleads facts which give rise to two issues, namely:(a) Whether the fourth plaintiff is in the business of breeding horsesindependently of the business undertaken by "the syndicate"; and(b) Whether as a matter of statutory interpretation, the fourth plaintiff isentitled to deduct the cost of the colt raced by "the syndicate"regardless of the primary issue in this proceeding, that is whether the purchase of the colt with the intention of breeding from it if it raced successfully, is, in and of itself, the carrying on of a bloodstock breeding business for the purposes of s EC 39(1) of the Income Tax Act of either 2004 or 2007.[23] Mr Dempster submitted that neither the fourth plaintiff nor the Commissioner raised either issue in their respective statements of position. Accordingly, he submitted, the fourth plaintiff cannot lawfully raise these matters as an issue in thisproceeding unless the Court's leave pursuant to s 138G(2) of the Tax Administration Act 1994 is obtained.[24] Unfortunately, in my view, the strike out application is misconceived. It is misconceived because I am clearly not justified in striking out paragraph 35 of the amended statement of defence. The pleading advanced is a reasonably arguable defence to the allegation made in paragraph 35 of the amended statement of claim.[25] In addition, however, there is support in the evidence for the contention made in paragraph 35 of the amended statement of defence.[26] Mr Coleman sought to rely on paragraph 1.7 of the fourth plaintiff'sstatement of position dated 1 August 2011. Paragraph 1.7 provides:Concerning paragraph 13 of the Commissioner's SOP, other members of thesyndicate (ie taxpayers) own breeding horses in their own right.[27] Other members of "the syndicate" clearly are not the fourth plaintiff. Thisstatement simply does not support the proposition advanced by Mr Coleman.[28] Mr Coleman next referred to paragraph 19 of the fourth plaintiff's statementof position where, under the heading Issues, the following is provided:whether the taxpayer was in the business of breeding bloodstock in the 2008 and 2009 income years.That, again, would not seem to answer the estoppel argument that has been raised asit does not specifically raise the issue of the fourth plaintiff's involvement in thebreeding business. It certainly would not answer the argument to the extent that I could say that there is no reasonably arguable estoppel defence available.[29] Next is reference to a minute of the fourth plaintiff company. Mr Coleman, however, confirmed to me that that was not part of the statement of position.[30] Counsel referred to a number of decisions. With the exception ofRadioWorks Ltd v Commissioner of Inland Revenue none involved interlocutory applications.6 That case did not involve a strike out application.[31] I am required to apply r 15.1 and the approach which the courts follow in relation to strike out applications. When that is applied in the instant case it is clear that the pleading has a foundation for it. It is further clear that there is no reason why it should not be permitted to be raised as a proper issue at trial. Accordingly, I conclude that there is no justification for striking out paragraph 35 of the amended statement of defence.6 RadioWorks Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,691 (HC).Paragraphs 21 and 22 of the amended statement of defence[32] Paragraphs 21 and 22 of the amended statement of defence respond toparagraphs 21 and 22 of the amended statement of claim. For completeness' sake Iset out those paragraphs.Amended statement of claim – paragraphs 21 and 2221. In the tax year ended 31 August 2008 the Te Akau syndicate made a loss and each of the plaintiffs claimed a deduction for income tax purposes of their share of the losses. The particulars of the losses which were allocated are:21.1. Expenditure incurred in relation to the colt $20,04221.2. A 75% diminishing value write down in relation to the purchase price of the colt $412,50022. In the tax year ended 31 August 2009 the Te Akau syndicate made a loss and each of the plaintiffs claimed a deduction for income tax purposes of their share of the losses. The particulars of the losses which were allocated are:22.1. Expenditure incurred in relation to the colt $32,39922.2. A 75% diminishing value write down in relation to the purchase price of the colt $103,125Amended statement of defence – paragraphs 21 and 2221. Except to say that he is not required to, and does not plead to paragraph 21.1, on the grounds that the plaintiffs are estopped from pleading such allegations by reason of s 138G(1) of the Tax Administration Act 1994 unless and until they have applied to the Court for leave to make those allegations, and to raise those propositions of law, and the Court, on hearing such application, has granted the leave sought, and otherwise he denies the allegation in paragraph 21.22. Except to say that he is not required to, and does not plead to paragraph 22.1, on the grounds that the plaintiffs are estopped from pleading such allegations by reason of s 138G(1) of the Tax Administration Act 1994 unless and until they have applied to the Court for leave to make those allegations, and to raise those propositions of law, and the Court, on hearing such application, hasgranted the leave sought, and otherwise he denies the allegation in paragraph 22.[33] The analysis of the application in relation to these two provisions in the amended statement of defence again emphasises why the strike out application is misconceived.[34] Paragraphs 21 and 22 of the amended statement of claim plead facts. Thedefendant's position, as explained by Mr Dempster, is that the fact that "the syndicate" pleads it suffered a loss incurred in the form of expenditure in relation to the colt is not an issue that is raised by this particular proceeding. He therefore submits that as a matter of pleading, those facts should not be pleaded in the statement of claim. His concern is, however, that there is a hidden purpose behindthe plaintiffs' pleading in paragraphs 21 and 22 of the amended statement of claim.The hidden purpose is to refer to an adjudication report designed to show that there is an inconsistency in the position which has been adopted by the defendant inrelation to these taxpayers. He drew my attention to the footnote to counsel'ssubmissions, which is note 1 alongside paragraph 44.[35] It seems to me ultimately the argument is not one about pleadings but one about the admission of evidence.[36] What is apparent, however, is that the factual matters referred to in paragraphs 21 and 22 do appear in the statements of position that have been filed. What has not been referred to in the statements of position is any inconsistency in the treatment of losses. That, of course, is understandable because the AdjudicationUnit's report was not available at the time the statements of position were completed.[37] I am required, however, to treat this as an application to strike out paragraphs 21 and 22 of the amended statement of defence do provide a reasonably arguable defence of estoppel, certainly in relation to matters of evidence that it is anticipated may well flow from the pleaded facts in paragraphs 21 and 22 of the amended statement of claim. I therefore conclude that I am not justified in striking out those paragraphs in accordance with the application, despite the plaintiffs having a potentially tenable argument.Paragraph 25 of the amended statement of defence[38] Paragraph 25 of the amended statement of defence responds to paragraph 25 of the amended statement of claim. The specific complaint that the plaintiffs make about the pleading in paragraph 25 of the amended statement of defence is as to the allegation that the plaintiffs are estopped from making reference to the existence of the GST dispute. That position is repeated in paragraphs 26, 28, 29, 30 and 31, which are linked accordingly in the application to strike out.[39] The matter can be adequately considered, however, by considering the relevant paragraphs, being paragraphs 25 in both pleadings. They are as follows:Amended statement of claim – paragraph 25On 12 October 2010 the defendant issued 2 Notices of Proposed Adjustment("NOPAs") pursuant to s 89C of the TAA one against the Te Akau syndicate for GST purposes and the other against the members of the Te Akau syndicate for income tax purposes.Amended statement of defence – paragraph 25He is not required to, and does not, plead to any allegation relating to GST in paragraph 25, on the grounds that the plaintiffs are estopped from pleading such allegation by reason of s 138G(1) of the Tax Administration Act 1994 unless and until they have applied to the Court for leave to make those allegations, and to raise those propositions of law, and the Court, on hearing such application, has granted the leave sought. He says further, he admits the allegations in paragraph 25 in relation to income tax liability, but says he issued 5 NOPAs for income tax purposes, one to each plaintiff.[40] Mr Dempster submitted that the Commissioner's complaint, and therefore hisdefence, is based on the proposition that there has never previously been a case in which the courts ruled that s 138G(1) of the Tax Administration Act 1994 permits the raising in a challenge proceeding a matter of fact and legal issue arising in another dispute and recorded in a statement of position filed in that other dispute. He submitted that when one considers s 138G of the Tax Administration Act 1994 read in the light of its purpose in accordance with s 5 of the Interpretation Act 1999, the section does not permit either the taxpayer or the Commissioner to raise in thechallenge proceeding "facts and evidence and the issues arising from them, and thepropositions of law" that do not relate to the decision that is in dispute.[41] Mr Dempster drew attention to the fact that the reason for referring to theGST issue is recorded in the footnote to the plaintiffs' submissions at paragraph 58 where, again, the reason is to refer to the Adjudication Report for the GST issue andto "raise any legal or factual argument that arises from them including if necessary inconsistency".[42] The Commissioner's reason for the pleading of estoppel in relation to theGST issue is based on the proposition that, as a matter of law, inconsistency by reference to a past decision with the position adopted in the present decision is not a ground for challenging the present decision. In short, the Commissioner of Inland Revenue may change the assessment. As a proposition that was not challenged by Mr Coleman. Mr Dempster supported the submissions by reference to the following sections of the Tax Administration Act 1994, namely, ss 6, 6A(3), 15B, 89A(1)(a), (c), (d), and 109(b). He also drew attention to s 113 which provides:113 Commissioner may at any time amend assessments(1) Subject to sections 89N and 113D, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.[43] He noted that there is an exception to that general proposition that the prior assessment is not binding on the Commissioner having regard to the matters that are dealt with in Part 5A of the Tax Administration Act 1994 and dealing specifically with binding rulings.[44] He also drew attention to s 114, which deals with the validity of assessments, and s 149A.[45] He next referred to the powers given to the hearing authority, which are contained in s 138P of the Tax Administration Act 1994.[46] He submitted that the Commissioner's powers are limited by the respectivetax statutes. The Commissioner is not empowered to dispense with the requirements of the Act or to act inconsistently with the Acts. He referred me to a passage fromCommissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd where the Court said:7If he [the Commissioner] makes a mistake or otherwise reaches a wrong conclusion, that can only be challenged and put right through the objection procedure. The Commissioner is not empowered, however, to issue an assessment which does not represent his own honest opinion. He cannot say, for example, "on the information available to me I think the taxable income is $ X, but I will nevertheless issue an assessment for $10X". Such a purported assessment would not be a true assessment within the powers conferred by s 18. The Commissioner may properly make an assessment which he believes is not necessarily correct, or even probably wrong to some extent, so long as he believes it to be the best he can do until he obtains further information. What he is not empowered to do, however, is to make an assessment at a figure which is at variance with his own honest judgment as to what he thinks the correct figure should be on the information available to him.[47] Mr Dempster also referred to Westpac Banking Corporation v Commissioner of Inland Revenue where the Court said:8An assessment should reflect the correct tax position and a taxpayer'sliability to pay tax exists independently of the assessment. If the assessment is correct, it is hard to see why complaints about process should result in the taxpayer not paying tax on a correct basis. Where there are very large sums of tax at stake (as there are here), this raises fairness considerations in relation to other taxpayers who have met their liabilities for the tax year concerned. If the assessment is wrong, it can be corrected in later challenge proceedings. If it is correct, the tax should be paid. It is frankly difficult to see what is unfair in this approach.[48] Later:9Given the size of IRD, it is inevitable that there will be inconsistencies of interpretation and application. We do not see how it could be credibly argued that an assessment is invalid merely because some such inconsistency can be identified. In this case the complaint is that such an inconsistency was identified prior to the amended assessment, but then not resolvedappropriately. But for reasons already indicated, the "flaws" in the escalation process (if any) and any associated failure to comply with a provision of the Tax Administration Act (including s 6) would not usually invalidate an amended assessment.Comments to a similar effect appear at [94] and [95] of the decision.7 Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd [1994] 2 NZLR 681 (CA) at693.8 Westpac Banking Corporation v Commissioner of Inland Revenue [2009] NZCA 24, [2009]2 NZLR 99 at [61].9 Ibid, at [80].[49] In Miller v Commissioner of Inland Revenue the position was repeated where the Court recorded:10He [the Commissioner] was also entitled to change his mind. We agree withBaragwanath J as well that "it would not be the intention of Parliament torelieve one taxpayer of liability because error had been made in theassessment of another."[50] Mr Dempster submitted that the argument which is based on admission of evidence to show inconsistency simply has no foundation because inconsistency itself is not a foundation for setting aside an assessment. He drew attention to the comments of Priestley J in Clarke v Commissioner of Inland Revenue where his Honour said:11It is to be borne constantly in mind that both the validity of particular assessments as well as their correctness are matters for the statutory processes of return, assessment, objection and appeal. Judicial review is reserved for the exceptional case where there is an allegation of abuse of such processes. It does not provide a back door for the entry of issues that might have been raised by way of objection.[51] A similar position is contained in the judgment of McGrath J in Dandelion Investments Ltd v Commissioner of Inland Revenue:12The Commissioner was entitled in the exercise of the discretion under s 99(3) to disallow the appellant's claim for deduction and as long as theCommissioner was of the opinion it was a proper adjustment to make under s99(3) it cannot be attacked on the basis that the Commissioner has not simultaneously amended an inconsistent assessment of another taxpayer.[52] Mr Dempster submitted that the purpose of the pleading in paragraph 25 and the other paragraphs where the same matter is raised is to draw attention to the fact that a lack of consistency was not pleaded as an issue in the statements of position and that, in any event, for reasons which will become apparent when I consider s 138G(2), the lack of consistency, even if it exists, cannot manifest an injustice to a taxpayer and therefore ground a basis for the Court exercising its powers under s 138P of the Tax Administration Act 1994.10 Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA) at 296.11 Clarke v Commissioner of Inland Revenue (2005) 22 NZTC 19,165 (HC) at [40].12 Dandelion Investments Ltd v Commissioner of Inland Revenue (2003) 21 NZTC 18,010 (CA) at[86].[53] When I consider the above matters it is clear to me that this plainly is not an appropriate case to strike out the pleading. Certainly the issues raised by theCommissioner's pleading in relation to the paragraphs in the statement of defence that have been considered cannot be dismissed as not reasonably raising arguable defences to the allegations that are made in the corresponding provisions in the amended statement of claim.The application for leave[54] The plaintiffs seek alternative relief by way of orders pursuant to s 138G(2) of the Tax Administration Act 1994.[55] The orders sought are:(a) Leave to raise the matters pleaded in paragraph 35 of the amended statement of claim;(b) Leave to raise the matters pleaded in paragraphs 21 and 22 of the amended statement of claim and by inference the issues that those paragraphs raise; and(c) Leave to make reference to the existence of the GST dispute, referred to in paragraph 25 and repeated in paragraphs 26, 28, 29, 30 and 31 of the amended statement of claim.[56] Section 138G(2) of the Tax Administration Act 1994 provides:138G Effect of disclosure notice(2) A hearing authority may, on application by a party to a challenge to a disputable decision, allow the applicant to raise in the challengenew propositions of law, and new issues, if satisfied that—(a) The applicant could not, at the time of delivery of theapplicant's statement of position, have, with due diligence,discerned those propositions of law or issues; and(b) Having regard to the provisions of section 89A and theconduct of the parties, the hearing authority considers thatthe raising of those propositions of law or issues is necessaryto avoid manifest injustice to the Commissioner or the disputant.[57] In RadioWorks Ltd v Commissioner of Inland Revenue, Associate Judge Abbott reviewed the reasons behind the enactment of the Tax Administration Act 1994.13 He summarised the consequences which flowed from that enactment as follows:14The pre disputes procedures (Part IVA) and challenge procedures (Part VIIIA) were introduced into the TAA in 1996. It is clear from them and the review and consultative documents that preceded them that:a) The underlying legislative purpose of the disputes procedures is to encourage open and full communication of information to enable the Commissioner to make as accurate an assessment as possible.b) The Commissioner is expected to use his powers under s 17 towards that end.c) The exchange of statements of position is intended to inform the taxpayer as to the Commissioner's view of the dispute with anoutline of the facts and law on which he intends to rely, and for the taxpayer similarly to respond with its view of the dispute and the facts and law on which it relies in support of its view.d) The statements of position are only required to provide an outline of facts, evidence and issues, in sufficient detail to fairly inform (s 89M(4) and (6)).e) If the dispute is not resolved under the dispute procedures of Part IVA a taxpayer is entitled to challenge the Commissioner's decision.If that challenge is brought in the High Court, it proceeds as standard civil litigation to which the High Court Rules apply.f) The intention of the evidence exclusion rule is to ensure that the dispute remains confined to the facts and law raised and addressed in the pre-assessment stage, subject to the Court's discretion to admitnew facts, evidence, issues and law if satisfied that the criteria in s 138G(2) are met.13 Above, n 6.14 Ibid, at [40].[58] The extent of the facts and evidence, the issues arising from them and the propositions of law that may be raised in challenge proceedings are limited by the operation of s 138G(1) as Frater J observed:15[T]he plain meaning of s 138G(1) is that where a disclosure notice is issued and the taxpayer subsequently challenges the assessment, the matters in issue are limited to the legal and factual issues identified in these statements of position (as distinct from the NOPA and NOR), but that all of those issues are legitimate matters of dispute in the challenge proceedings.[59] The limited nature of the inquiry and challenge proceedings was endorsed by the Court of Appeal as follows:16The inquiry must be focused upon the terms of the dispute as raised andresponded to by the taxpayer. The statutory regime requires "a more preciselegal articulation of a party's case than is conventional with ordinary civil proceedings". In Ben Nevis, the taxpayer was prevented from introducing at a late stage an entirely separate and distinct basis for assessing the tax payable.[60] That position had previously been expressed by the Supreme Court where the Court said:17the disputes process is not a general inquiry into the taxpayer's liability topay tax and the amount of that liability. It is an inquiry focused on and by the terms upon which the dispute is raised and responded to. That approach has been reinforced by the terms of Part 4A.[61] I now consider the application for leave in respect of the three areas.Leave in relation to paragraph 35 matters[62] The criteria set out in s 138G(2)(a) and (b) are cumulative.[63] The first problem faced by the plaintiffs is that they have adduced no evidence that they could not, at the time of the delivery of their statement of position, have with due diligence discovered the facts and issues that I have referred to in [22]of this judgment. The matters which they seek to rely upon, namely the alleged15 Beckham v Commissioner of Inland Revenue (2007) 23 NZTC 21,499 (HC) at [69]..16 Commissioner of Inland Revenue v Penny [2010] NZCA 231, (2010) 24 NZTC 24,287 (CA) at[82].17 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009]2 NZLR 289 at [153].ownership of horses for breeding purposes, must have been known to them at the time. They were represented by a tax agent. There is nothing to suggest that the interpretation issue would not have been known at the time the statement of position was filed. I am therefore left with the position that the plaintiffs cannot satisfy the first requirement which is specified in s 138G(2)(a).[64] However, I consider the second requirement. That raises the question of whether or not it would manifest injustice to the plaintiffs to be not allowed to raise the facts and issues concerned. The matter, if relevant, should have been addressed by the plaintiffs' tax adviser. At the best, the matters sought to be raised are collateral to the main issue involved in this proceeding, namely whether "the syndicate" was carrying on a breeding business. Just because one member of "the syndicate" runs a breeding business independently, that does not mean "the syndicate" as a whole also carries on that business. I am therefore not satisfied that acase has been made out which would justify the granting of leave to raise the matters that are broadly set forth in in paragraph 35 of the amended statement of claim.Leave in relation to paragraph 21 and 22 matters[65] Mr Dempster limited the Commissioner's opposition to leave in this case tothe second requirement of s 138G(2)(b). In short, he submitted that the plaintiffs cannot show that the raising of the consistency issue is necessary to avoid manifest injustice to the plaintiffs. That, he submitted, is because whether the Court shoulduphold the challenge to the Commissioner's adjustment to the assessment brought bythe plaintiffs in this proceeding turns entirely upon the correctness of that assessment, not of any other assessment. I accept that submission and, indeed, conclude that there is no justification for the granting of leave in relation to the paragraph 21 and 22 matters set forth in the amended statement of claim.Leave in relation to paragraph 25 matters[66] The question here is whether the GST issue and the resolution of it before the Adjudication Unit should be able to be raised in these dispute proceedings.[67] As with the last matter, the Commissioner does not base her opposition to leave on the matters set out in s 138G(2)(a). Mr Dempster submitted that there can be no manifest injustice to the plaintiffs by refusing leave in this case because the purpose of the grant of the leave is to run a lack of consistency argument, and that argument is irrelevant to a determination of the issues involved in this proceeding. The reasons for that have been set out paragraphs [42] – [52].[68] Mr Coleman did not specifically address me on that outcome. I am satisfied, however, that there is in fact no manifest injustice by refusing leave in relation to theGST issue and the reference to the Adjudication Unit's report.Conclusions[69] For the reasons set out in this judgment, and with the exception of the first order sought, the orders sought by the plaintiffs in their application are refused. Having said that, I appreciate that the issue of content of the pleadings will nevertheless require further consideration to ensure that the issues are clearly identified prior to trial.[70] I took the advantage at the conclusion of the hearing of this case to discuss an appropriate agenda for matters to be discussed at the next case management conference with counsel. I incorporate those matters in the orders that are now made.Orders[71] I order that:(a) That part of paragraph 4 of the amended statement of defence that provides that Kerry Nott as opposed to Kerry Nott Pharmacy Ltd is the member of the Te Akau Stallion Syndicate (No 1) is struck out. An amended statement of defence which pleads to the entire parts of paragraph 4 of the amended statement of claim and having regard to the order made in this judgment shall be filed and served within 10 working days of the issue of this judgment;(b) Except as provided in order (a), the plaintiffs' application for ordersstriking out portions of the amended statement of defence and for leave pursuant to s 138G(2) of the Tax Administration Act 1994 is refused;(c) A telephone case management conference shall be held with counsel at 8:30am on 19 September 2012. The following matters will be discussed at that conference:(i) The pleadings;(ii) The issues requiring resolution at trial;(iii) The appropriate discovery order, if any, to be made (counsel must comply with r 8.11 on the basis that this conference is to be treated as the first case management conference for discovery purposes and for the purposes of r 8.11. Ideally, counsel, if agreement can be reached, should file and serve a joint memorandum that sets out the form of the discovery order sought. If agreement cannot be reached, memoranda setting out the form of the order sought by each party and the reasons for an order in those terms must be filed and served in accordance with the direction for the filing and service of memoranda which I now make);(iv) Trial duration, the fixing of the trial date and the making of any special trial directions that are required. In respect of these matters counsel should have available the number of witnesses to be called and the general scope of the evidence to be covered by them so that an accurate assessment can be made of trial duration. In addition, counsel should be in a position to indicate if any order should be made in relation to experts pursuant to r 9.44.Because the issues requiring resolution at trial will be considered at the conference, memoranda shall be filed on a sequential basis so that the defendant has the opportunity ofcommenting upon the plaintiffs' summary of the trial issues.To achieve this the plaintiffs' memorandum dealing with theabove matters shall be filed and served by 5 September 2012 and the defendant's memorandum dealing with the above matters and, in particular, commenting upon, conceding or adding to the list of issues shall be filed and served by 12 September 2012.(d) Costs in relation to this application are reserved and will be the subject of directions at the case management conference to be held on 19 September 2012._____________________JA FaireAssociate Judge