CHESTERFIELD PRESCHOOLS LTD AND ORS V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV-2008-409-000722

CHESTERFIELD PRESCHOOLS LTD AND ORS V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV-2008-409-000722 25 November 2008IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2008-409-000722BETWEEN CHESTERFIELD PRESCHOOLS LTD First Plaintiff AND DAVID JOHN HAMPTON Second Plaintiff AND CHESTERFIELDS PARTNERSHIP Third Plaintiff AND CHESTERFIELDS PRESCHOOLS PARTNERSHIP Fourth Plaintiff AND ANOLBE ENTERPRISES LIMITED Fifth Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 21 and 22 October 2008 Counsel: M Andrews and J Peterson for Plaintiffs R Wallace for Defendant Judgment: 25 November 2008JUDGMENT OF FOGARTY J Summary of Result• Application for Judicial Review succeeds• Mr Budhia's decision set aside• Commissioner is directed to act on December judgment• Plaintiffs entitled to costsINDEXParagraph No.Introduction [1]Context of the caseInformal management of the taxpayer accounts [4]Automatic generation of 'additional tax' [6]Statutory powers to remit or exclude imposition of additional tax [7]Total 'debt' – relationship of additional tax to core debt [10]IRD failure to process GST input claims [12]Arrangements, expectations, IRD obligations [13]The December judgment [15]Issues [17]Issue No. 1 – The legitimacy of the Anolbe GST returnsThe scope of the Anolbe issues [18]Is Anolbe the owner of 8 Kahu Road, 55 and 63 Augusta Street? Did Mr Budhia apply the law on sham? [19]Was there a breach of procedural fairness when Mr Budhia addressed the Anolbe ownership issue? [32]The consequences of Mr Budhia's findings that Anolbe was not the owner [34]Issue 2: Was direction [159]4 applied consistently with the reasons of the judgment? [36]The IRD interpretation of [159]4 – Mr Brighty's conception of the Commissioner's discretion, post the judgment [37]How direction [159]4 should have been applied [51]Is the Commissioner obliged to follow the judgment's reasoning on proportionality? [60]Conclusion: Breach of direction [159]4 [64]Issue 3: Was relief under s 183A available? [66]Issue 4: Was Mr Budhia correct to refuse to exercise his general powers under s 6A of the TAA? [80]Remedies [90]The Anolbe sham issues [97]Non-disclosure of the Aronsen Notes as a relevant factor [102]Costs [111]Summary [118]Introduction[1] This is the second application for judicial review by the plaintiffs against the Commissioner of Inland Revenue. The plaintiffs were largely successful in the first application in a judgment delivered on 15 December 2006, (the December judgment). That judgment directed the Commissioner to reconsider various matters. That task was undertaken by officers of the Inland Revenue and resulted in a decision of Mr R K Budhia on 5 June 2007. This second application for review challenges the legality and fairness of that decision. It follows upon a judgment of this Court of 31 October 2007, (the October judgment), which scoped the issues. [2] In the October judgment the Court considered applications by the plaintiffs to set aside Mareva and other pre-judgment charging orders. This was in a context where also before the Court were three sets of summary judgment applications by the Commissioner of Inland Revenue. The outcome of that decision was to vary the pre-charging orders with the intended effect that it free up funds to enable the plaintiffs to obtain legal representation to challenge the Budhia decision. That decision found that there was a serious argument to be made that the reasoning of Mr Budhia, his recommendations and the decisions adopted did not give effect to the judgment of this Court in December 2006. The judgment also found that in the meantime it is premature on the part of the IRD to seek summary judgments. [3] Mr D Hampton and to an extent his former wife, Ms Sisson, have a number of business ventures which have or are being carried on via corporate entities (the first plaintiff and the fifth plaintiff), and partnerships (the third plaintiff and the fourth plaintiff). These proceedings examine their affairs during the 1990s.Context of the caseInformal management of the taxpayer accounts[4] In broad terms between 1993-1997 IRD officers were prepared to set off debits due by one entity against credits obtained by other entities, from time to time.This was an informal way of collecting tax, specifically recognised and endorsed by Parliament later in 2002: see paragraphs [27]-[29] of the December judgment. [5] This informal method depended upon communication between the different tax paying entities and relevant staff of the Commissioner: paragraphs [30] and [31] of the December judgment record:[30] At the heart of the plaintiffs' grievances in this case are several contentions that the Commissioner has not kept arrangements or should have accommodated the plaintiffs more effectively with earlier recognition of refunds of GST. As part of recognition of the refunds, penalties should be remitted on the accounts which were to benefit from the refunds. [31] For the most part the current indebtedness of the taxpayers in these proceedings reflects the automatic consequence of returns not being made on time and tax paid on due date. At various times officers of the Commissioner have discussed with the taxpayers bringing refunds likely to be due under the GSTA to bear and/or remitting penalties. The statement of claim in these proceedings is directed to these considerations.Automatic generation of 'additional tax'[6] The December judgment explains in some detail how interest and penalties are automatically generated by statutory provisions: see December judgment:The statutory provisions relied upon to accumulate penalties and interest, in the above balances[6] As will become clear it is necessary to distinguish between the law pre April 1997 and post.Pre 1 April 1997[7] During this time a penalty accrued on unpaid tax being a 10% penalty compounding every six months. Up to 31 March 1995 the penalty provision was s 398(2) of the Income Tax Act 1976 (ITA 1976) (as amended in 1986). [8] For the income years ended 31 March 1996 and 1997 the same type of penalty regime was brought over to the Tax Administration Act 1994 (TAA), to be found in former s 139(1). GST – Penalties prior to 1 April 1987[11] So far I have been referring to the income tax provisions. When the Goods and Services Tax (GST) came into force on 1 October 1986 the penalty provisions were contained in s 41(1) of the GST Act 1985 (GSTA).[12] Under the original s 41 of the GSTA the penalty on unpaid GST was known as additional tax and was initially imposed at the rate of 10% on the unpaid GST for the first month and then monthly at 2% (on a compounding basis). This penalty regime was even more harsh than the regime for income tax (10% compounding six monthly).Statutory powers to remit or exclude imposition of additional tax[7] Qualifying these automatic impositions of interest in penalty are statutory powers given to the Commissioner to postpone the due dates for payment and thus the commencement of the imposition of interest and penalties (then called "additional tax") and to remit the same (additional tax pre 1 April 1977) where the Commissioner is satisfied that the taxpayer has not been guilty of neglect or default or where the Commissioner thinks it is equitable to do so. That was the position pre April 1977 and is set out in the December judgment in paragraphs [9] and [10]:[9] In both cases the Commissioner had the ability to effectively remit or postpone the additional tax of 10% by fixing a new date for payment of the tax. This discretion was subject to certain conditions being satisfied. It is sufficiently set out in s 139(4) of the TAA which provided: (4) In any case in which an assessment is not made until after the due date of the tax, or is increased after the due date of the tax, and the Commissioner is satisfied that the taxpayer has not been guilty of neglect or default in making due and complete returns for the purposes of that tax, the Commissioner shall in the Commissioner's notice to the taxpayer of the assessment or amended assessment, or in any subsequent notice, fix a new date for the payment of the tax or of the increase, and the date so fixed shall be deemed to be the due date of that tax (There was a similar provision in s 398(5) of the ITA.) [10] In addition to that limited discretion there was a more general power of relief available under s 413 of the ITA 1976 now in TAA 1994 s 182 which provides:182 Relief from additional tax incurred due to default in payment of tax(1) Subject to this section, on application for relief made in writing by or on behalf of any taxpayer who has become liable for the payment of any additional tax under section 139(1)(a), or any incremental tax, the Commissioner, if, having regard to the circumstances of the case, the Commissioner thinks it equitable to do so, may, subject to this section, grant relief to the taxpayer—(a) By the remission of the whole or part of the additional tax, or the incremental tax; or (b) Where the additional tax, or the incremental tax, has been paid, in whole or in part, by the refund to the taxpayer of the whole or any part of that additional tax or that incremental tax that has been paid, with or without the remission of any part of that additional tax or that incremental tax that has not been paid. (4) In any case where subsection (1) or subsection (2) applies, no amount of tax in excess of $5,000 in any case shall be remitted or refunded under this section except with the approval of the Minister given either specifically with respect to that case, or generally with respect to any class or classes of cases. (5) In this section, 'incremental tax' means the additional tax which is, and is deemed to be, added to unpaid tax in accordance with section 139(1)(b) or section 139(1)(c) or section 139(1)(d).[8] A new regime came in post 1 April 1997 but the equitable discretion under s 182 continued where requests for remission predate 23 September 1997: see December judgment:The equitable discretion to remit penalties continues – where requests for remission predate 23 September 1997[14] Subsequently the TAA was amended so that all applications made on or after 1 April 1997 for remission of penalties would now be considered under Part 11 of the TAA. However, this amendment left in place the wide power to remit tax, with the consent of the Minister, where it is equitable to do so, in respect of requests made before that date. See Taxation (Remedial Provisions) Act 1997, s 103:103 Relief from additional tax incurred due to default in payment of tax(1) Section 182, as repealed by section 60 of the Tax Administration Amendment Act (No. 2) 1996, is deemed to have been repealed on 1 April 1997. (2) Notwithstanding subsection (1), a remission may be made under section 182 if the Commissioner considers that the request for the remission is received before the date on which this Act receives the Royal assent. (Emphasis added) Royal assent was received on 23 September 1997.[9] Post 1 April 1997 there was a new regime, set out in the December judgment:Remissions post 1 April 1997[19] For new applications as from 1 April 1997 the discretion to remit additional taxes, or now called late filing penalties or late payment penalty or an imputation penalty tax was contained in TAA s 183A. The Commissioner had to be satisfied that the late filing or late payment was caused by an event or circumstance beyond the control of the taxpayer that provided the taxpayer with a reasonable justification or excuse for not providing the tax return or paying the tax on time. The taxpayer also had to file the required tax return or pay the unpaid tax as soon as practicable. [20] This section was amended again in 2005. The relevant provisions are now:183A Remission for reasonable cause... (1A) The Commissioner may remit the penalty if the Commissioner is satisfied that— (a) A penalty to which this section applies arises as a result of an event or circumstance beyond the control of a taxpayer; and (b) As a consequence of that event or circumstance the taxpayer has a reasonable justification or excuse for not furnishing the tax return or an employer monthly schedule, or not furnishing an employer monthly schedule in a prescribed electronic format, or not paying the tax on time; and (c) The taxpayer corrected the failure to comply as soon as practicable. (2) Without limiting the Commissioner's discretion under subsection (1), an event or circumstance may include— (a) An accident or a disaster; or (b) Illness or emotional or mental distress. Total 'debt' – relationship of additional tax to core debt[10] Come May 2006 the total balances of the taxpayer accounts of the plaintiffs in these proceedings totalled $3,393,822.55 rising in November to about $4 million.But staying with the May accounts, at that time the interest and penalties totalled $2,620,142.90 (see December judgment [4]). [11] One particular "taxpayer" account was extreme. The account of Chesterfields Partnership had a core tax liability in June 1990 of $33,333.34 and late payment penalties of $1,180,537.29. As it happens the handling of that taxpayer account is at the start of the narrative of this litigation. In broad terms Mr Hampton discussed with Mrs Thornley, an IRD officer, at a meeting on 16 August 1993, paying the core liability by taking advantage of a GST tax credit which he said was due imminently.IRD failure to process GST input claims[12] The IRD officers were sceptical of a number of GST input credit claims. They were sent off to audit for vetting, where they languished for years. Had the IRD accepted the GST inputs and then booked them to account at an appropriate and much earlier date from the date of acceptance then there would have been a very large reduction in the interest and penalties. The total indebtedness of the plaintiffs would be much reduced from the amount the Commissioner is now claiming and upon which he is seeking judgment.Arrangements, expectations, IRD obligations[13] In the first judicial review pleadings the plaintiffs alleged certain "arrangements". These were disputed by the Commissioner. The term "arrangement" had no statutory basis at the time but was a term commonly used both by the Department officers and tax practitioners to refer to an agreement reached between IRD officers and taxpayers or their advisers. The first judgment is lengthy and most of its length is due to a careful examination of the discussions held between various IRD officers and Mr D Hampton and to examine to what extent understandings were reached and/or commitments made.[14] In broad terms while the plaintiffs did not establish the "arrangements" that Mr Hampton was contending for, the Court found that he had received sufficient assurances/commitments by Inland Revenue officers, which for all practical purposes had the same effect as arrangements.The December Judgment[15] That analysis led to the December judgment's conclusions and directions to the Commissioner which were as follows:Conclusion[155] The Commissioner of Inland Revenue has to accept some responsibility for the state of these taxpayer accounts, in particular the accrual of penalties. On any view of it the level is disproportionate to the seriousness of the breach. 4 In particular the Commissioner has to accept that his officers have from time to time countenanced recognising input tax refunds under the GST Act and the application of those refunds to debits arising under the same and related accounts. Furthermore, his officers have taken the opportunity to refer the input tax claims for examination thus avoiding the obligation to pay them within 15 days, but the Audit Department has not made decisions. Finally, the Commissioner's officers had an opportunity to respond constructively to the request on 23 March 2000 for the re-registration of Anolbe and to process the associated input claims. Taken together, these past events create a positive duty now on the Commissioner to exercise his discretionary powers, including the power to remit penalties on equitable grounds, so as to achieve an outcome where the penalties in fact sought to be collected are proportionate. That duty may also be overlaid by the recent deterioration in the value of the business and call for a judgment under s 6 and 6A of the TAA as to what in fact can be collected. [156] I am satisfied that these neglects by the officers amount to a failure to exercise the powers given to the Commissioner to collect tax. Those powers have to be exercised for their proper purpose. The various neglects or failures cumulatively justify intervention by this Court by way of judicial review directing the Commissioner to complete processing input claims, and to consider associated reduction of penalties and interest payments. [157] There is one difficulty in the way of such reconsideration, the problem of time bar. However, the Judicature Amendment Act 1972, s 4 (5B) provides:4 Application for review4 s 139(c) TAA, see above paragraph [28] (sic [26]) [of December judgment](5B) Where any matter is referred back to any person under subsection (5) of this section, that person shall have jurisdiction to reconsider and determine the matter in accordance with the Court's direction notwithstanding anything in any other enactment. [158] It is just that the plaintiffs [sic – see [159]2] do not obtain advantage of the time bar provisions. The fair outcome is for the Commissioner to acknowledge the payment on input tax by the plaintiffs, where that has happened. To this end the plaintiffs should not obtain the benefit of what may be invalid claims.Relief[159] In respect of Anolbe the Commissioner's decision of December 2004 is set aside. The Commissioner is directed to: 1. Reconsider the application for re-registration of Anolbe, treating the application as having been made on 27 March 2000 (on the basis it would have been completed formally had there been an appropriate reaction from the Commissioner's staff on receipt of the letter). 2. Consider the legitimacy of all the Anolbe GST returns, including those filed on 27 March 2000 and any other unresolved refund claims by other plaintiffs. The time ban provisions shall not apply. 3. Apply such refunds as are upheld to best fiscal advantage to the plaintiffs. 4. Make a decision under s 182 of the TAA, as preserved by Taxation (Remedial Provisions) Act 1997, s 103, treating the historic correspondence and meetings from and with Mr Hampton as substantive requests for remission, in respect of all the plaintiffs, received before 23 September 1997, and in so doing recognise that Mr Hampton was led to believe that the GST input claims he was lodging would be considered and decisions made upon them and refunds lodged to the best advantage of the plaintiffs. 5. Make a decision under s 183A, as to remission in respect of the period that has elapsed while this litigation has been proceeding. 6. The Commissioner may, in the usual way, continue to exercise his general powers under s 6 and 6A of the TAA, without derogating from the benefits that would accrue to the taxpayers by reason of the reconsideration of the foregoing matters. 7. Leave is reserved for further directions. 8. The debt collection proceedings continue to be adjourned, pending the outcome of the above directions. 9. Costs are reserved.[16] The decision of Mr Budhia, purporting to implement these directions, did reduce the total indebtedness of the plaintiffs, but not significantly from the point of view of the plaintiffs, considering their means. As at 11 September 2008 the total liability of the taxpayer accounts according to the IRD is as follows: Chesterfields Partnership 251,436.36 Anolbe Enterprises 571,514.16 David John Hampton (Excluding Mr Hampton's GST debt which he has disputed) 934,807.29 Chesterfields Preschool Partnership 373,077.00 Chesterfields Preschools Limited 1,508,354.46 ___________ TOTAL $3,639,189.20 ========== The May 2006 total was $3,393,822.55 (see [10] above). Of course this would have grown significantly by September 2008. However, I do not know by how much.Issues[17] The issues raised by this second application for review can be listed as follows: 1. (a) Was Mr Budhia applying the correct finding when rejecting a number of Anolbe GST returns on the basis that Anolbe was not a beneficial owner of the property rather than Mr David Hampton is. (b) Whether he should have given Mr Hampton a hearing before making that finding? These were findings arising out of the Commissioner discharging direction [159]2. (c) There is a further complaint by the plaintiffs that even if Mr Hampton was both the legal and beneficial owner of the properties, Mr Budhia then failed to consider whetherMr Hampton would be entitled to obtain a GST input tax credit for the purchase of those properties. 2. Did Mr Budhia and Mr Brighty apply direction [159]4 consistently with the reasons of the December judgment? 3. Was Mr Budhia correct to decide against relief under s 183A because the taxpayers had not corrected the failure to comply as soon as practicable (s 183A(1A)(c))? See paragraph [20] of the December judgment set out above. 4. Did Mr Budhia take into account all relevant factors when deciding that the Commissioner would not exercise the general powers under s 6 and 6A of the TAA? 5. RemediesForum(a) Should Mr Budhia reconsider the matter, or should the issues go to the adjudication section of the IRD or should they now go directly to the High Court for formal adjudication?Degree of correction(b) In addition to making findings as to error by Mr Budhia to what degree should there be more specific direction to the Commissioner as to relevant factors to be taken into account, on the fixing of due dates, and on other matters including whether the late disclosure of the Aronsen file notes in 2004 is a relevant factor and more precise instructions as to how any refunds be applied to best fiscal advantage?Issue No. 1 – The legitimacy of the Anolbe GST returnsThe scope of the Anolbe issues[18] The Commissioner's decision of December 2004, which was set aside, was a decision not to backdate the re-registration of Anolbe. Anolbe (short for Anolbe Enterprises Limited) was removed from the New Zealand Register of Companies by the registrar for non-payment of fees on 8 March 1996. As a result the Commissioner cancelled the GST registration of Anolbe on 1 April 1997 with effect from 8 March 1996. As is discussed in the December judgment, in March 2000 Mr Hampton had the company re-registered and asked the IRD to reinvoke the registration at the date of cancellation (ie 8 March 1996) and included a number of GST returns for periods post 1996, in 1999 and 2000: see judgment [99], [101]. The GST returns which are the subject of this second review are those set out in the December judgment at the end of paragraph [101] which are as follows:(a) $17,777.78 for the period ended September 1999, arising from the purchase of a property at 67 Augusta Street (b) $46,666.67 for the period ended March 2000, which related to the purchase of a property at 8 Kahu Street, Christchurch (c) $27,777.77 for the period ended September 2000, which related to the purchase of a property at 63 Augusta Street, ChristchurchThis is a summary. There were 28 GST returns in all. Some of the periods predated the GST deregistration.Is Anolbe the owner of 8 Kahu Road, 55 and 63 Augusta Street? Did Mr Budhia apply the law on sham?[19] The properties were at all times registered under the Land Transfer Act 1952 in Mr David Hampton's name. By the Land Transfer Act beneficiaries of trusts are not registered on the title. Mr David Hampton's position was that at all material times he held the properties as trustee for Anolbe Enterprises Limited. Essentially, Mr Budhia did not believe Mr Hampton. He first made a finding that AnolbeEnterprises Limited did not own the properties in question and then made a series of findings that Mr Hampton owned each property. [20] These findings went behind and contradicted a declaration of trust that Mr Hampton made, witnessed by his solicitor, on 18 May 2004 and a letter from his solicitors to the Commissioner on 7 March 2002, and a general implicit contention made by reason of the GST returns by Mr Hampton as controller of Anolbe Enterprises Limited that that company was the beneficial owner of the properties. [21] It also went behind the fact that in respect of 67 Augusta Street the first agreement for sale and purchase of the property was executed on 20 August 1994, was executed by Mr D J Hampton for and on behalf of "Anolbe". That agreement was superseded by two other agreements which had the purchasers as D J and T A Hampton and did not make a reference to on behalf of Anolbe. [22] In respect of 8 Kahu Road, 55 and 63 Augusta Street, the agreements for sale and purchase provided for a consideration to be largely purchased by an issue of shares from Anolbe Enterprises Limited and for that company to assume liability for the first mortgage. [23] When Mr Budhia rejected the Anolbe returns he had to be finding that the relevant documents were either shams or ineffectual. Given that we are dealing with documents created with reference to the law of trusts the ineffectual argument is unlikely to succeed, as the law favours recognising a trust where there is an attempt to create one. That was not the basis of Mr Budhia's reasoning. At no stage in Mr Budhia's reasoning did he refer to the sham test. Rather, his reasoning proceeds on the basis of an enquiry into the credibility of Mr Hampton. [24] Mr Budhia reached his decision with the benefit of a series of reports made by other officers. In the case of these Anolbe issues he had the benefit of reports by Mr R Kettley. Mr Kettley wrote a series of reports on this subject starting with an "Introductory" report of 54 pages, not counting the attachments.[25] In his Introductory report Mr Kettley reported that the Commissioner has in the past had considerable difficulty trying to establish the beneficial ownership of the properties owned by the plaintiffs – generally but in particular in respect of the GST input claims by Anolbe. In an interlocutory judgment I have earlier acknowledged reason for the IRD officers to be sceptical of the transactions. There was a basis for the IRD officers considering shams. [26] Messrs Andrews and Peterson essentially argued that while Mr Kettley raised difficulties, indicating that the issue of ownership was not straight forward, he did not come to such simple conclusions as Mr Budhia. He appears to have been of the view that Anolbe Enterprises Limited did have a beneficial interest in 8 Kahu Road, 53 and 63 Augusta Street, by reason of the share issues of Anolbe providing the consideration. The disagreement he had was as to the quantum that should be allowed for the GST refunds. [27] Messrs Andrews and Peterson argued that Mr Budhia had fallen into error of law by not applying the sham test in Snook v London and West Riding Investments Ltd [1967] 1 All ER 518. As I have had occasion to discuss in Harrison v HarrisonHigh Court, Auckland, CIV 2008-404-001270 18 September 2008, this sham test is simply an application of the common law of fraud. As the Court of Appeal has recently said in Official Assignee v Wilson [2008] 3 NZLR 45 at [26]:A sham exists where there is an intention to conceal the true nature of a transaction (Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (CA), per Lord Diplock [28] Mr Budhia never mentions the sham test. He does not remind himself that he must find positively that Mr Hampton was creating documents (such as the declaration of trust) knowing that they were false, and intending them to conceal the true nature of a transaction. [29] As I have had occasion to note in the R v Connolly and Ors (2006) 22 NZTC 19,844 at 19,850 [31] this is a counter-intuitive proposition. For persons who organise their affairs to minimise the impact of taxation (and Mr D Hampton is a quintessential example) the current interpretation of the avoidance provisions allowsconsiderable scope for the self-generation of structures which mitigate tax, so there is usually no need to erect sham structures. [30] In the written submissions the issue here was framed initially on the basis that Mr Budhia should have accepted Mr Kettley's recommendation rather than exercising his own power of decision. I agree with Mr Wallace that Mr Budhia was entitled to make up his own mind, and, as part of that to take into account the cautious character of Mr Kettley's analysis. [31] However, in the oral argument the issue really focussed on whether or not Mr Budhia had been consciously applying the sham test, with the stringency embedded in it. It is difficult for the Commissioner to prove that structures are shams, because of the need essentially to prove dishonesty. Mr Budhia's analysis seemed to proceed on the basis that it was a question simply of Mr Hampton's credibility. Witnesses can be found to be not credible without finding that witnesses were or are dishonest. When the decision-maker appreciates that a sham finding can only be made after a finding of dishonesty the line of enquiry can often be different, and in my view would be in this case. I am left with a clear view that Mr Budhia's decision-making is in error of law because he has not applied the sham test.Was there a breach of procedural fairness when Mr Budhia addressed the Anolbe ownership issue?[32] A more difficult issue is whether or not Mr Budhia should have heard the plaintiffs before making his decision. The common law regards any findings of dishonesty against an individual as a serious matter. In general principle there is a right to have notice of the contention, the content of the contention and an opportunity to reply, if not to be heard orally. [33] However, in this case it needs to be kept in mind that the process was ad hoc without any particular directions from the High Court and in place of the more sophisticated statutory regime for resolution of tax disputes. This point is also thrown into relief by the remedy sought. Mr Andrews argued that the remedy should be that Mr Budhia reconsiders the matter after reading affidavit material andsubmissions from the plaintiffs, write a preliminary decision and receive further submissions. He did not seek an oral hearing. In the end I do not need to make a decision on the natural justice/unfairness ground. It is sufficient that Mr Budhia did not expressly nor implicitly apply the sham test.The consequences of Mr Budhia's findings that Anolbe was not the owner[34] This is a significant error of law of very material consequence to the total indebtedness of the plaintiffs. In respect of the earlier Anolbe credits that he allowed, Mr Budhia provided that they be transferred against Chesterfields Partnership GST period ending 30 June 1990, this being to the plaintiffs' best fiscal advantage: see [159]5. However, a consequential effect of that decision is that new debts arose for Anolbe Enterprises in the GST periods ending 31 March 1994 and for some 17 other periods between 1 April 1993 and 31 March 1996. The effect of this decision has been to shift the penalties and interest from one entity, CP to Anolbe. Anolbe has acquired $419,526.52 in terms of overall debt. [35] Secondly, Mr Budhia's finding that Anolbe was not the owner did not mean that the transactions did not take place. The purchases of these three properties were from a third party. They were not transactions between parties in the group. It followed that there would be GST input credits derived by Mr D Hampton, who Mr Budhia said was the owner. However, Mr Budhia did not go on to consider recognising those credits.Issue 2: Was direction [159]4 applied consistently with the reasons of the judgment?[36] Mr Budhia went on to consider there was no case for any further remission of penalty for Chesterfields Partnership, Chesterfields Preschools Limited, Anolbe Enterprises Limited and Mr Hampton. He made a number of critical comments as to the tax compliance of these entities. Mr Budhia relied heavily on a report by Mr A Brighty.The IRD interpretation of [159]4 – Mr Brighty's conception of the Commissioner's discretion, post the judgment[37] Mr Brighty wrote a report examining the implications of paragraph [159]4. He began by saying:Firstly, that Justice Fogarty is not understood to be saying that deferral of recovery action automatically equates to remission or that deferral of action by the Commissioner equates to a "repayment arrangement" as that concept is understood in the Act.That is a comment which is inconsistent with most of the reasoning of the December judgment and certainly with the conclusion [155], as I will explain when examining Mr Brighty's reiteration of this proposition. [38] Mr Brighty then followed upon this error by approaching the position of the plaintiffs unsympathetically. For example:In all cases except AEL, the core debt is not disputed. While the escalation of penalties might be unpalatable the reality is that it is not a position of the Commissioner's choosing. Penalties are imposed by operation of law, against amounts which are themselves settled (and, with the exception of one group of periods, are not in dispute), and where a taxpayer by choice chooses not to make payments consequences follow. The history of litigation and recovery action initiated by the Department illustrates that the plaintiff had ample opportunities to settle matters. Accordingly where the Commissioner proposes that penalties be remitted it is understood that this is on the understanding that the reduced and outstanding debt is paid immediately before the remission is actioned. (Paragraph 6)[39] Mr Brighty then went on to recommend the method subsequently followed by Mr Budhia:This paper argues that we should accomplish the reduction in the FIRST system by way of remitting the penalties and CP's GST period ended 30 June 1990. However if the "adjustments" were actioned correctly we would reverse the transfers to the future periods and make new transfers to CP's GST period ended 30 June 1990. This would have the effect of dramatically reducing the penalties in CP's account but would create new debt and penalties in the other periods and entities to which the transfers had previously been made. The difference between the dramatic reduction and the new debt would effectively be the amount of the "remission of penalties" that is being recommended.This method reduced CP's debt by some $681,193.56 but increased AEL's debt by $419,526.52. [40] To support this approach Mr Brighty went through the judgment starting with paragraph [159] and then going into the detail of the judgment. Mr Brighty does refer in that context to paragraphs[149] and [155] highlighting passages from them as follows:24. Eventually the Judge gave his view of the penalties situation in paragraph 149 where he says: [149] In my view the correct perspective that the Commissioner should take in this case is that Parliament has provided for late payment penalties as incentives on taxpayers to pay the core tax liability. See now TAA s 139 set out above. The fact that these late payment penalties get characterised as "additional tax" does not mean that they are core tax liabilities. Second, the Commissioner needs to appreciate that rightly or wrongly for long periods of time, particularly between 1993 and 1998, the various officers were treating the debts as uncollectable because of the pending audit assessments of the GST inputs. The Audit Department did not make its decisions promptly and in some, if not most, cases, did not make decisions at all in respect of the disputed GST refunds. Mr Hampton was given comfort in that respect, and became naively confident his claims would prevail, and that the mounting penalties would be remitted.(Emphasis added by Mr Brighty)25. Finally in paragraph [155] Justice Fogarty gives us his views on the penalties accrued where he says: [155] The Commissioner of Inland Revenue has to accept some responsibility for the state of these taxpayer accounts, in particular the accrual of penalties. On any view of it the level is disproportionate to the seriousness of the breach. In particular the Commissioner has to accept that his officers have from time to time countenanced recognising input tax refunds under the GST Act and the application of those refunds to debits arising under the same and related accounts. Furthermore, his officers have taken the opportunity to refer the input tax claims for examination thus avoiding the obligation to pay them within 15 days, but the Audit Department has not made decisions. Finally, the Commissioner's officers had an opportunity to respond constructively to the request on 23 March 2000 for the re- registration of Anolbe and to process the associated input claims. Taken together, these past events create apositive duty now on the Commissioner to exercise his discretionary powers, including the power to remit penalties on equitable grounds, so as to achieve an outcome where the penalties in fact sought to be collected are proportionate. That duty may also be overlaid by the recent deterioration in the value of the business and call for a judgment under s 6 and 6A of the TAA as to what in fact can be collected. (Emphasis added by Mr Brighty) 26. These comments are actually preceded early in the judgment by other comments on the purpose of penalties, see paragraph [25] which is followed by reference to the new section 139 of the Tax Administration Act 1994. The other comments are just as pertinent to the old penalty regime as the new one. [25] The current claim balances set out above are the consequence of these penalties and interest. But no-one would suggest that Parliament ever intended taxpayers to sit back and let these penalties compound. The penalties are extremely severe and are plainly intended to galvanise the taxpayer in default to paying the tax. The purpose of the penalties is fundamentally to incentivise the taxpayer to paying tax on due date.[41] Then Mr Brighty gives his conclusions:27. From reading the above it is considered that the Judge is in reality directing us to look at a remission of penalties accrued under the legislation in force prior to 1 April 1997 (when the new compliance and penalties regime came into effect). That is in relation to periods that ended on or before 31 March 1997. 28. However Justice Fogarty is not understood to be saying that deferral of recovery action automatically equates to remission or that deferral of action by the Commissioner equates to a "repayment arrangement" as that concept is understood for the purposes of the Act.29. Essentially Justice Fogarty appears to be saying that to the extent the Commissioner's failure to decide on the GST input tax credits entitlements (which were subsequently found to be refundable) on a timely basis contributed to the escalation in debt then remission should be considered. Two important concepts arise in this context and have been adopted in this paper. 29.1 Firstly, in regard to the GST input tax credit claims allowed in December 2006, the funds arising from these have been reallocated. The reallocation is consistent with the then Departmental practice that the taxpayer receive the "benefit" of the claim as at the earliest possible opportunity and that it be applied against the oldest debt of any of the plaintiffs. In practice this means that any refund will be applied against any outstanding debt as if the plaintiff had paid anamount on account of the debt on the date after the end of the return period in respect of which the refund claim was made. From a penalties point of view this immediately eliminates any penalties which would have accrued on that amount set off from the effective date of "payment". Penalties would accrue on the amount of the debt before "payment" up to the effective date of "payment", and would also continue to accrue on any unpaid portion of the debt. 29.2 Secondly, where no other payments have been made by the plaintiffs or the set off amount wasn't enough to clear the outstanding debt,the plaintiffs alone are responsible for the continuing escalation of debt. It is for this same reason that the plaintiffs can not contend that deferral equates to permission to not meet continuing statutory obligations such as filing returns on time and making timely payment. If, on the other hand, 'set off" produced a credit which the Commissioner carried forward to future debt of that particular plaintiff instead of transferring it against the debt of one of the other plaintiffs who were in debt, then remission would be considered. (My emphasis added)[42] The passages highlighted in bold in Mr Brighty's paragraphs 27-29 are a narrow and erroneous reading of the December judgment. [43] In respect of the passage highlighted in paragraph 27 in Mr Brighty's reasoning it misstates the December judgment. The relevant paragraph is [152]:[152] The Commissioner, with the consent of the Minister, has a discretion today to remit penalties accruing on tax due prior to 1 April 1997, on equitable grounds. See paragraph [14] above.That discretion can include penalties accruing in periods after 31 March 1997 if it is in respect to tax due prior to 1 April 1997. [44] With reference to paragraph 28 of Mr Brighty's report, this paragraph is erroneous inasmuch as it blindsided the Commissioner from the passage in paragraph [155], which Mr Brighty did highlight, and reads: Taken together, these past events create a positive duty now on the Commissioner to exercise his discretionary powers, including the power to remit penalties on equitable grounds, so as to achieve an outcome where the penalties in fact sought to be collected are proportionate. That duty may also be overlaid by the recent deterioration in the value of the business and call for a judgment under s 6 and 6A of the TAA as to what in fact can be collected.The purpose of Mr Brighty's paragraph 28 appears to be to allay any concern that the Commissioner is under any duty. The Commissioner is under a duty to give effect to the December judgment and that includes the positive duty defined in paragraph [155] of the December judgment set out above. [45] Similarly, the passage highlighted in paragraph 29, that remission should be considered, understates and blindsides the Commissioner to the positive obligation imposed in paragraph [155]. The passage set out in bold in paragraph 29.2 of Mr Brighty's report is erroneous because it sets up as a criterion for decision making the proposition that the plaintiffs cannot contend that the deferral equates to permission not to meet continuing statutory obligations such as " making timely payment". To the contrary, the December judgment prevents the Commissioner from relying on this proposition. [46] The reasoning in paragraph 29.2 is an important part of the explanation for what happened in this case and was pressed in the hearing by Mr Wallace. It is an argument that the plaintiffs should have used their own resources to clear the outstanding debts during the period of time that they were awaiting resolution of the numerous GST input claims. [47] That argument was considered in the December judgment. It is the paragraph preceding paragraph [149] which Mr Brighty correctly identified as a key paragraph. Paragraph [148] says:[148] All that said, there is obviously some substance in the Department's view that Mr Hampton could have used his access to cash or credit to settle his tax arrears, rather than wait upon the resolution of the numerous GST input claims. Mr Hampton's wish is clearly to pay as little tax as possible. He has had a naïve confidence that he can rely upon the benefit of his letters requesting GST refunds to be applied against arrears. He was confident that the GST refunds would sooner or later be approved and then applied as at the date they were raised against core tax liabilities of other entities in the family "group" as at that date. Thus applied they would be rather like the axe at the trunk of a tree of interest and penalties.[48] However, [148] needs to be read with what follows particularly paragraphs [149] and paragraphs [153] and [154] which say:[153] Broadly, between 1993 down to at least 1998 the officers responsible for debt collection did not feel it was ethical to attempt debt collection while audit was examining the merit of the input claims. If these input claims were recognised they would carry interest calculated from the date they would have been paid but for the investigation. Further, they would have been credited against debits in various of the associated taxpayer accounts. Further, there was an undoubted readiness on the part of the officers to wipe penalties pertaining to those debit accounts, the payment of which would have been significantly resolved had the GST refunds been acknowledged. [154] It was never the intention of Parliament that the Commissioner could place GST refund claims under investigation, indefinitely. Mr Aronsen used the words unethical, but in legal parlance it was conduct contrary to the purpose of giving the Commissioner power to investigate refund input claims with a view to rejecting them.[49] The inescapable conclusion is that the Commissioner's officers did not accept this reasoning. It may explain why the judgment is sometimes described by the officers as merely the Judge's perspective or view: see above paragraph [24] from Mr Brighty which opens with the words:Eventually the Judge gave his view of the situation The same language is repeated in the first line of Mr Brighty's paragraph 25:Finally in paragraph [155] Justice Fogarty gives us his views.[50] It is a constitutional error of law to treat a judgment of the High Court as simply the "views" of one person. It is a judgment of the Court, which binds the parties. The Commissioner is obliged to accept and adopt the reasoning of the Court when discharging his obligations to reconsider matters as directed by the Court in the remedies.How direction [159]4 should have been applied[51] Mr Budhia filed an affidavit in response to the October 2007 decision where he said that he had interpreted [159]4 in the light of [155] and pointed to the last two bullet points of his para 140:• The last thirty four months worth of penalties accrued on Chesterfields Partnership's GST period ended 30 June 1990 be "remitted" on account of transfers that took place which were not to the plaintiffs' overall best fiscal advantage, that is they went to periods in the future while penaltiescontinued to accrue on Chesterfields Partnership's GST period ended 30 June 1990. This adjustment can not take place until final payment. (NB this will not actually be a remission – rather than a cancellation.)• The consequential effect of the above decisions is that new debt will arise for Anolbe Enterprises Ltd's GST periods ended 31 March 1994 and some 17 other periods between 1 April 1993 and 31 March 1996 inclusive because of having altered the previous transfers to now being made for the plaintiffs' best fiscal advantage.[52] This affidavit reflects Mr Budhia's conception of direction 4 that it is confined to remissions arising in respect of the Anolbe returns, and the position taken by Mr Aronsen. Second, Mr Budhia is not disturbed by the fact that his decision making did not significantly reduce the total indebtedness. He was just following a recommendation of Mr Brighty set out in paragraph [39] above. The consequence of what he did is set out in paragraph [34] above. [53] Mr Budhia did not see his responsibilities any wider because in my view he was blindsided by the narrow and erroneous reading of the judgment by Mr Brighty. [54] The consequential effect of the above decisions is that new debt will arise for Anolbe Enterprises Ltd's GST periods ended 31 march 1994 and some 17 other periods between 1 April 1993 and 31 March 1996 inclusive because of having altered the previous transfers to now being made for the plaintiffs' best fiscal advantage. [55] Paragraph [159]4 deals with all correspondence and meetings that Mr Hampton had in respect of all of the plaintiffs with all of the departmental officers he dealt with, as discussed in that judgment. Mr Aronsen was only one. He was at the end the most significant because he was the last in the chain. Mr Wallace argued that direction 4 should be confined to entities that Mr Aronsen was dealing with and to exclude future tax periods. This has ramifications in respect of the rejected Anolbe credits. The 8 Kahu Road and 3 Augusta Street agreements were all entered into after September 1997. Mr Budhia did not take any of those credits into account because he rejected them completely as part of his findings that Anolbe was not the beneficial owner.[56] In any event, as I understand Mr Wallace's argument, they would have been rejected as not falling within consideration under direction 4. Mr Wallace's argued that direction 4 should be read as applying only to returns that had been received by the Commissioner before 23 September 1997. [57] Direction 4 is intended to give effect to the findings in paragraph [155]. Essentially Mr Aronsen was of the view that it was entirely inappropriate for the Commissioner to take debt collection action against any of the plaintiffs until Audit decided on what action it would take on Anolbe's GST returns: see December judgment [94]-[98]. Mr Budhia has credited the Anolbe GST returns that were in existence at the time of Mr Aronsen's handling of the matters. These were in respect of Manchester Street and Bishop Street. [58] I agree with Mr Wallace that the question of remission as a consequence of the failure of consider the applications in 2000 for GST credits in respect of Kahu Road and the Augusta Street properties do not fall for consideration under direction [159]4. I note though that credits arising subsequent to 1 April 1997 can of course be used to offset indebtedness arising earlier. [59] More broadly, Mr Budhia has failed to consider under s 182 the consequences of the broad position taken by Mr Aronsen that no debt collection was possible until these GST claims were resolved. The reasoning of Mr Brighty adopted by Mr Budhia seems to have been of the effect that the taxpayers should have in the meantime paid their accounts. As already discussed, that is contrary to the findings of this Court in paragraphs [148]-[150], [153] and [154], and not least [155] of the December judgment.Is the Commissioner obliged to follow the judgment's reasoning on proportionality?[60] In this second review Mr Wallace went so far as to argue that the December judgment was in error of law inasmuch as paragraph [155] adopted the principle that the level of penalties should be proportionate to the seriousness of the breach. The Commissioner did not appeal the December 2007 decision. He has not applied to recall it. He is bound by it. I am functus officio.[61] I am, however, entitled, and in this case obliged, to interpret paragraph [155]. This does contain a finding of a positive duty on the Commissioner to exercise his discretionary powers so as to achieve an outcome where the penalties in fact sought to be collected are proportionate to the breaches. That duty has to be read with paragraph [149] of the judgment. That duty is now binding on the Commissioner in this case. [62] As explained above, it is inconsistent with the judgment and its directions for the Commissioner to take the view that Mr Hampton could have used other resources to pay outstanding taxes pending the consideration of the GST claimed inputs which the Commissioner had not processed but rather placed under scrutiny. [63] Mr Wallace argued that I was taking s 139(c) of the TAA out of context. While I did rely in part on s 139, it was my judgment that the correct interpretation of the taxation statutes, at all periods covered by this litigation, is that penalties and interest are to incentivise taxpayers to pay their taxation debts. Where taxpayers have been encouraged by IRD officers to believe that there would be adjustments to their accounts by subsequent recognition of credits to their best advantage once claims for credits were processed then the Commissioner (and his officers) have to take responsibility for that. Overall the function of interest and penalties is not to raise additional tax (though that is the name given to it in the earlier legislation) but rather to encourage voluntary compliance and, in the case of interest, to recover the lost benefit of the use of the money due to delayed payments. So that overall it is appropriate for the Commissioner to exercise discretionary powers so as to achieve an outcome where the penalties in fact sought to be collected are proportionate to the core tax liability. In this case there is a positive duty.Conclusion: Breach of direction [159]4[64] Sections 4(5) and in particular (6) of the Judicature Amendment Act 1972 provide:4 Application for review(5) Without limiting the generality of the foregoing provisions of this section, on an application for review in relation to the exercise, refusal to exercise, or purported exercise of a statutory power of decision the Court [if it is satisfied that the applicant is entitled to relief under subsection (1) of this section, may, in addition to or instead of granting any other relief under the foregoing provisions of this section,] direct any person whose act or omission is the subject-matter of the application to reconsider and determine, either generally or in respect of any specified matters, the whole or any part of any matter to which the application relates. In giving any such direction the Court shall— (a) Advise the person of its reasons for so doing; and (b) Give to him such directions as it thinks just as to the reconsideration or otherwise of the whole or any part of the matter that is referred back for reconsideration. (6) In reconsidering any matter referred back to him under subsection (5) of this section the person to whom it is so referred shall have regard to the Court's reasons for giving the direction and to the Court's directions.(Emphasis added)[65] Mr Budhia has fallen into error in not having regard to the Court's reasons. Mr Brighty did have more regard to the Court's reasons but misinterpreted them. That error continued over into Mr Budhia's analysis whose point of departure was not to replicate the earlier work. However, the root cause of the approach of these two officers to the December judgment is that they simply did not agree with the proposition in [155] that the end outcome should be that the additional interest in tax should be assessed against a proportionate test relative to the core tax.Issue 3: Was relief under s 183A available?[66] Section 183A is set out above. Direction 5 provides:5. Make a decision under s 183A, as to remission in respect of the period that has elapsed while this litigation has been proceeding.[67] The December judgment judicially reviews an earlier refusal by the Commissioner to remit remedies under s 183A. Paragraph [130] provides:[130] There is no reviewable error in respect of this application. With the benefit of hindsight it foundered on the strict limits on powers for remission in s 183A.[68] The application for review had been made on 20 May 2004 by Buddle Findlay against a long running set of negotiations to settle the indebtedness since 2000. The application for relief focussed on Mr D Hampton's daughter's tragic and ongoing illness as a justification for non-compliance as a result of an event or circumstance beyond the control of a taxpayer. It did not rely on the assurances received from the departmental officers, and in particular from Mr Aronsen. Mr Aronsen's notes were not disclosed. Finally, it foundered on a failure of the taxpayer to correct the failure to comply as soon as practicable. [69] Mr Budhia began by reviewing the refusal decision of 9 June 2004. The December judgment did not ask the Commissioner to do that. [70] In respect of the period subsequent to that, and in particular this litigation, he said:Turning to the period that Justice Fogarty has asked the Inland Revenue to consider, I have read the report from the Staff dealing with the Hampton / Sisson plaintiffs and find there is nothing that would suggest that we would now take a different view to the application of s 183A.[71] Mr Budhia gave no consideration at all to the fact that the judicial review proceedings had largely been successful, against the position of the Commissioner. That was the context of the language in direction 5: as to remission in respect of the period that has elapsed while this litigation has been preceding. (Emphasis added)The first judicial review resulting in the December judgment was largely successful in the plaintiffs' favour. The accumulation of interest and penalties occasioned by that litigation can hardly be laid at the feet of the plaintiffs. Since the December judgment another two years have elapsed.[72] Instead of addressing these circumstances, as direction 5 required of him, Mr Budhia went back to the view favoured by the Department officers that taxpayers should have cleared the debts from their own resources much earlier. He took into account a report dated 28 May 2007 by two solicitors, Mr S Weston and Ms S Glass which relied on paragraph [145] of the December judgment:[145] It is also clear that whether he is right or not, Mr Hampton has had firmly fixed in his mind for years a view that Chesterfields Partnership has satisfied what he sees as the August arrangement, and does not owe any tax. He has been remarkably sanguine about the mounting penalties and interest, based on a personal confidence in his view of the world.[73] The report also reiterated the same argument that we have seen from Mr Brighty that the taxpayers here could have paid their accounts earlier. This was both in regards to sub-paragraphs (a) and (b). Mr Budhia's reasoning under this head makes no reference at all to paragraph [155]. [74] Direction 5 has to be read in the context that the December decision upheld the earlier application under s 183A. It did not invite a reconsideration of the merits of the grounds advanced and rejected in that application. [75] Rather, it was intended to complement decision making under s 183A taking into account the delays engendered by this dispute and reflected in a largely successful outcome in favour of the applicant's position. Again, in essence, Mr Budhia gave no weight to the fact that the December judgment, as summed up in paragraph [155], positively required the Commissioner to accept some responsibility for the state of the accounts, in particular the accrual of penalties and to achieve an outcome whereby the penalties in fact were proportionate to the seriousness of the breach. [76] In doing so Mr Budhia should have taken into account that one of the problems in this case was, whereas the scheme of the Act imposes an obligation on the Commissioner to pay input credit claims within 15 days, with the power to defer payment while the claims were examined, claims were deferred, sent to the Audit Department, which never made a decision. The Department kept these claims foryears. The December judgment records efforts by Mr Aronsen to get the Audit Department to make a decision: see for example [98]. [77] In the oral hearing before me Mr Wallace, perhaps recognising these obvious deficiencies, focussed on the third requirement in subs (1)(a) that the taxpayer corrected the failure to comply as soon as practicable. He argued that s 183A only applied after the taxpayer had paid all the tax including the penalties. [78] That is not a correct interpretation of sub-paragraph (c) in these circumstances. As the judgment records, Mr Hampton took a naïve and confident view that the GST refunds would be recognised. As a result he did not pay the total core debt including the interest and payments. But in the context of his discussions with Mr Aronsen, Mr Barry and with Mrs Thornley, and the assurances and views they expressed to him, his conduct cannot be now characterised by the Commissioner as a failure to comply. [79] Plainly, Mr Budhia's analysis of direction 5 was contrary to the reasoning of the December judgment. If Mr Budhia had any doubts about that matter there was a leave to apply for further directions which was not taken up.Issue 4: Was Mr Budhia correct to refuse to exercise his general powers under s 6A of the TAA?[80] Mr Budhia's consideration of this direction was brief:Issue 6 – Consideration of Sections 6 and 6A[159]6. The Commissioner may, in the usual way, continue to exercise his general powers under s 6 and 6A of the TAA, without derogating from the benefits that would accrue to the taxpayers by reason of the reconsideration of the foregoing matters. 77. In terms of the issues that Justice Fogarty has directed Inland Revenue to consider, the plaintiffs are getting the benefits / advantages, as noted above. However, in terms of further relief under sections 6 and 6A, I consider that this would be counter to the aims of these sections. As noted earlier, it would compromise the Commissioner's obligations and responsibilities in relation to the integrity of the tax system.78. I do not consider that there are any grounds made out for relief under sections 6 and 6A of the Tax Administration Act 1994. Accordingly, I do not make any recommendation under these statutory provisions.[81] Neither counsel were either to find any cross-reference to a compromise of the Commissioner's obligations and responsibilities in relation to the integrity of the tax system. [82] However, it is reasonably clear from the preceding paragraphs of his report (which have been summarised in this judgment) that he had no sympathy for Mr Hampton. Mr Budhia plainly did not take into account the last sentence of paragraph [155] of the judgment which reads: That duty may also be overlaid by the recent deterioration in the value of the business and call for a judgment under s 6 and 6A of the TAA as to what in fact can be collected.[83] Section 6 and 6A provide:6 Responsibility on Ministers and officials to protect integrity of tax system(1) Every Minister and every officer of any government agency having responsibilities under this Act or any other Act in relation to the collection of taxes and other functions under the Inland Revenue Acts are at all times to use their best endeavours to protect the integrity of the tax system. (2) Without limiting its meaning, the integrity of the tax systemincludes— (a) Taxpayer perceptions of that integrity; and (b) The rights of taxpayers to have their liability determined fairly, impartially, and according to law; and (c) The rights of taxpayers to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other taxpayers; and (d) The responsibilities of taxpayers to comply with the law; and (e) The responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and (f) The responsibilities of those administering the law to do so fairly, impartially, and according to law.6A Commissioner of Inland Revenue(1) The person appointed as chief executive of the Department under the State Sector Act 1988 is designated the Commissioner of Inland Revenue. (2) The Commissioner is charged with the care and management of the taxes covered by the Inland Revenue Acts and with such other functions as may be conferred on the Commissioner. (3) In collecting the taxes committed to the Commissioner's charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to— (a) The resources available to the Commissioner; and (b) The importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and (c) The compliance costs incurred by taxpayers.[84] Section 6(1) requires the Commissioner and his officers to use their best endeavours to protect the integrity of the tax system and this is a mandatory consideration. But the section does not stop there. Subsection (2) includes within the concept of integrity, a value of fairness in dealings: see subs 2(b) and (f). [85] The context of this case is that officers of the IRD had, during the 1990s, pursued an informal basis of collecting tax as discussed in the December judgment and reiterated in this judgment. [86] It is and has always been part of the integrity of the tax system that officers of the IRD will work with taxpayers to achieve practical outcomes to resolve tax disputes in order to maximise the revenue. [87] In this case that direction 6 was the final reconsideration. Where, as here, for essentially technical reasons, Mr Budhia had found limits on his discretion in s 182 and in 183A, an appropriate reading of all the directions together, with [155], should have focussed the mind of the Commissioner's officer on delivering the obligations recognised in paragraph [155] via these two sections, ss 6 and 6A. That would in no way compromise the integrity of the tax system, for the Commissioner was bound as a matter of law to follow the reasoning of the December judgment. It is because ofpast conduct by his officers that the Commissioner has the obligations collected in [155]. Discharging these will protect the integrity of the tax system. [88] The Commissioner's officers did not see it that way. They fell back on standard office policy guiding the exercise of ss 6 and 6A decisions. It would appear from the materials that were canvassed in oral argument that while the Commissioner is prepared to compromise tax disputes where the outcome is doubtful if it goes to Court, the Commissioner will not compromise debt collection. In this regard the Commissioner's usual approach to debt collection is that once the statute raises debits for interest and penalties they are tax to be collected. That interpretation of the taxation legislation was rejected in the December judgment, in the context of these facts. So it is an error of law to apply the usual policy in disregard of the directions and reasons of the December judgment. [89] It became apparent to me in the course of oral argument that the officers of the Inland Revenue Department simply found the December judgment to be wholly inconsistent with the Commissioner's policies in the administration of the Act, and were not ready or able to adapt. As a result the Commissioner did not comply with s 4(6) of the Judicature Amendment Act.Remedies[90] The Commissioner's officers were in breach of s 4(6) of the JAA by not having regard to the Court's reasons for giving the directions, and erroneously construing those directions. Non-compliance pervaded the analysis and decision making that went to the Commissioner's purported compliance with the directions. [91] The reasons bringing me to this conclusion are set out above. However, it should be noted that the examples are selected from a huge volume of materials. It would be wrong to construe this judgment as confined to those examples. Rather, the reasons are expressing my view that the IRD officers took a "wrong headed" approach, narrowly construing the directions and not giving effect to the reasons.[92] In respect of the December judgment paragraph [155] is intended to encapsulate the consequence of a large number of earlier findings but is not itself to be read as capturing all the reasons. To the extent that the IRD officers did use the reasoning in the December judgment, it was selective. [93] Accordingly, the appropriate relief in this case is to redirect the Commissioner back to the December judgment. That judgment has not been qualified in any way by this judgment. This judgment is to be understood as identifying errors of the Commissioner purporting to carry out the directions of that judgment, and, as part of that exercise, it does contain further elaboration/interpretation of the December judgment. Accordingly, the reasons of this judgment also bind the Commissioner and must be taken into account in giving effect to the directions. The Commissioner is directed to begin again the task of discharging the duties imposed on him by the December judgment. [94] Before examining the question of further directions it is useful to briefly state the position of the High Court on review of exercise of statutory discretions. They are powers given by Parliament to Government agencies or persons. They are not powers given to the Court. Discretionary powers must always be exercised in good faith for the proper purpose of the statute. Considerations made mandatory by Parliament have to be taken into account. Other considerations may be relevant in the context of the scheme provisions and purpose of the relevant statute. In some cases, the factual circumstances will drive a decision maker to an inevitable conclusion. In other cases there will be room for reasonable decision makers to disagree. In this situation the exercise of the discretion will raise what lawyers call a "question of degree". [95] The text of paragraph [155] of the December judgment presumes that the final decisions as to penalty will be the result of a resolution of a question of degree. There will be no right answer. It does not follow that there cannot be wrong answers. An exercise of discretion under a taxing provision will be a wrong answer and so identified by the Court, if upon analysis it is unreasonably wrong. It will be unreasonably wrong if the outcome can be shown to be affected by irrelevantconsiderations, or the failure to take into account relevant considerations or demonstrably be one which Parliament could not have intended. [96] Until this Court is satisfied that the Commissioner has properly reached an outcome within the question of degree it will not allow the Commissioner to obtain or enforce judgment debts against the plaintiffs. To do so would be to enforce the tax statutes beyond the intention of Parliament. That is the context of the stay order which is part of the December judgment:8. The debt collection proceedings continue to be adjourned, pending the outcome of the above directions.The Anolbe sham issues[97] Embedded in the issues for reconsideration is an issue as to whether the later Anolbe transactions are shams. These cannot be resolved by an exercise of discretion. Whether the transactions are shams is not a question of degree. [98] In the course of oral argument I suggested that the Anolbe sham issues be sent to the Taxation Review Authority. Mr Wallace reminded me that all existing disputes before the Taxation Review had been transferred to the High Court. [99] I have already canvassed Mr Andrews' preferences for the matter to go back to Mr Budhia. Mr Wallace preferred the reconsideration to be undertaken by the Adjudication Unit. My concern about sending it to the Adjudication Unit is that under the principles of independence by which it operates it is not possible to set a timetable. This case has dragged on for years. The parties have been in dispute over these matters since 2000 when the Department started setting about trying to collect the debts. [100] It is in the interest of the parties that the sham question be resolved as soon as possible, and it seems to me the most reliably efficient way is to set the matter down for trial in the High Court.[101] Accordingly, all the reasoning, the directions, and the stay of the December judgment remain in place, with the proviso that the sham issues, if not settled within one month, be set down for hearing in the High Court.Non-disclosure of the Aronsen Notes as a relevant factor[102] Mr Andrews sought additional directions on this subject. The plaintiffs' written submission in this case totalled 107 pages. Pages 52 to 91 deal in one way or the other with the Aronsen matters including non-disclosure. There was an application made by the Crown to strike out relevant parts of the pleadings dealing with these matters and not to hear these submissions. Before and during the hearing I did not read the affidavits filed in support of this material including particularly an affidavit of Mr Palmer, the solicitor at the time for Mr Hampton. [103] The hearing proceeded on the basis of the principle that the Court will not give parties a second chance to litigate matters which were relevant in the earlier hearing. This is sometimes called the doctrine of merger of cause of action in judgment. [104] The fact that Mr Aronsen's file notes had not initially been discovered by the Crown was a grievance aired in the first judicial review. Then the point was made that Mr Hampton's position would have been much stronger in his negotiations with the officers of the IRD, post Mr Aronsen's handling of the file, were he, Mr Hampton, able to have access to Mr Aronsen's notes which corroborated his arguments that he had been given accommodation over time. [105] In the second hearing, without reading the material, I understood that counsel for the plaintiffs were seeking to amplify that argument and to further contend that had there been an earlier disclosure of the Aronsen notes there would likely have been an earlier resolution of the dispute and so a much lower indebtedness. [106] In the end I acceded to Mr Andrews' submission that this matter could be relevant as a factor to be taken into account in the exercise of discretions, that there was not a specific direction on this matter, and that there may now be a need for one.[107] However, I advised counsel that I would not read the Palmer affidavit without first hearing from Mr Wallace who was objecting to the same. [108] It is quite apparent from the December 2006 judgment that the disclosure of the Aronsen notes, ultimately by the Commissioner, had a very significant outcome in favour of the plaintiffs. [109] I do not think it is justiciable for this Court to opine as to what might have happened on earlier disclosure of the Aronsen notes. This is particularly difficult when Mr Hampton's behaviour has to a degree proved to be erratic over time and also because of the stress he was under at materials times in respect of his daughter. [110] The late discovery of the Aronsen notes is a relevant factor to be taken into account. I make this conclusion without reading the aforesaid pages of the written submissions. Leave is reserved to apply to open this matter up to argument and for me to read affidavits if this direction is considered by either party to be inadequate.Costs[111] The plaintiffs have succeeded in this application for judicial review. They are entitled to costs. I classify these proceedings as category 2. [112] The volume of materials in this case has been enormous. Indicatively I would expect that most of the steps in this litigation warrant a classification of Band C. The Commissioner will have to persuade the Court why Band C would not apply to a particular step. I am also of the view that this is a case where r 48C applies. This is because these proceedings have vindicated the plaintiffs' complaint that the Commissioner has not followed the directions of this Court in the earlier December judgment. I am of the view that at the minimum the Court should make an increased costs order as contemplated by r 48C(1)(a), applying r 48C(3)(d). [113] However, I will hear submissions as to whether or not the Court should order the Commissioner to pay the plaintiffs' indemnity costs on the grounds that theCommissioner has ignored the directions of this Court in the December judgment, being an application of r 48C(4)(b) which provides:48C Increased costs and indemnity costs (4) The Court may order a party to pay indemnity costs if— (b) The party has ignored or disobeyed an order or direction of the Court or breached an undertaking given to the Court or another party to the proceeding; or [114] I am satisfied that the Commissioner has not deliberately disobeyed any order or direction of the Court. But I consider arguable that the Commissioner has "ignored" the directions of the Court. I would need submissions as to whether the findings in this case mean that standard applies. [115] When costs have been quantified the sum will be payable by the Commissioner without any right of set off by the Commissioner, except against any cost orders the Commissioner might obtain. For some time prior to the proceedings I have been endeavouring to accommodate the Commissioner's concern to have security over assets in the event that it finally obtains judgments against the right of the plaintiffs to the benefit of competent counsel to argue the case against the Commissioner. It is not necessary to refer in detail to the history of this matter. But it is important in my view that where possible, consistent with the law of insolvency or liquidation, the plaintiffs recover a significant proportion, if not the whole, of their costs. [116] If the parties cannot agree the costs within ten working days of release of this judgment they are to file submissions, limited to seven pages for each counsel, within 13 working days of this judgment, together with an application for an oral hearing, if either or both counsel seek the same. These submissions should be exchanged in draft by the 12th working day so that there is no need for submissions in reply.[117] The parties can also apply for costs as reserved in the December judgment, and where appropriate in respect of the other interlocutory judgments. If so, the application and submissions in reply are to be treated as separate but on the same terms as to length and timing.Summary[118] The application for judicial review succeeds: 1. The determination of Mr Budhia is set aside, as are any consequential decisions. 2. The Commissioner is redirected to act upon the December judgment and to reconsider the matters in accordance with the Court's directions in that judgment, being bound to the reasons of that and this judgment. 3. The stay [159]8 remains in place. 4. There is one qualification to the above, namely, that if the Anolbe sham issues are not settled within one calendar month of this judgment, that they be set down for hearing in the High Court. 5. The late discovery of the Aronsen notes is a relevant factor to be taken into account in the reconsideration. Leave is reserved to apply to open this matter up to further argument and for this Court to read the affidavits. 6. The plaintiffs are entitled to costs. 7. Leave is reserved to file submissions on the timetable set out in this judgment for the purpose of resolving costs issues if costs are not agreed in the light of the indications given in the reasoning above.8. As a precaution, leave is reserved to the parties and in particular to the Commissioner to seek further directions from this Court in the event that either the Commissioner or the plaintiffs are left in any doubt as to the obligations on the Commissioner.Solicitors: Minter Ellison Rudd Watts, Wellington, for Plaintiff Raymond Donnelly & Co, Christchurch, for Defendant