SINGH v THE COMMISSIONER OF INLAND REVENUE [2017] NZCA 506

SINGH v THE COMMISSIONER OF INLAND REVENUE [2017] NZCA 506 [1 November 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA36/2017[2017] NZCA 506BETWEEN VEENA SINGHFirst AppellantYAGASHWAR SINGHSecond AppellantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 1 November 2017Court: Kós P, Miller and Gilbert JJCounsel: S M Kilian and F J Hawkins for AppellantsJ K Gorman and L A Herbert for RespondentJudgment: 1 November 2017 at 11.20 amReasons: 13 November 2017JUDGMENT OF THE COURTA The appeal is dismissed.B The appellants must pay the respondent costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Gilbert J)Introduction[1] Veena and Yagashwar Singh appeal against the dismissal of their applicationfor judicial review of a decision by the Commissioner of Inland Revenue decliningtheir request for financial relief in respect of their obligations to pay outstanding tax.1The notice of appeal raised four grounds but two of these were appropriatelyabandoned, one before the hearing2 and the other at the hearing3. We were satisfiedthat there was no merit in either of the remaining grounds — alleged apparent bias bythe decision-maker4 and alleged failure to take into account the appellants' inability tomeet their mortgage payments.5 We accordingly dismissed the appeal at theconclusion of the hearing and stated that our reasons would follow.6[2] Although our reasons for dismissing the appeal can be stated briefly, it ishelpful to summarise the lengthy history of the matter to set the context for the judicialreview proceedings and this appeal. The history shows that Mr and Mrs Singh notonly failed to meet their tax obligations, they also failed to take advantage of the manyopportunities afforded to them by the Commissioner over a five-year period to provideproper and complete disclosure to support their repeated applications for financialrelief. We are satisfied that their complaints against the Commissioner are completelyunjustified and were rightly rejected by the High Court.1 Singh v Commissioner of Inland Revenue [2016] NZHC 3001, (2016) 27 NZTC 22-082 [HighCourt judgment].2 Ground 2: the allegation that the Commissioner did not give the appellants a proper opportunityto be heard.3 Ground 4: the Commissioner allegedly failed to advise the appellants of the legal framework underwhich their application would be considered.4 Ground 1.5 Ground 3.6 Singh v Commissioner of Inland Revenue [2017] NZCA 497.Background[3] In January 2008 a compliance officer in the Inland Revenue Departmentadvised Mr Singh's accountant that Mr Singh appeared to have been involved inundisclosed property transactions over recent years. Mr Singh was invited to make avoluntary disclosure which could have the effect of significantly reducing any shortfallpenalties that might otherwise be imposed.[4] Mr and Mrs Singh made a voluntary disclosure in March 2008 that they hadpurchased and on-sold 16 properties in the period from October 2002 to March 2004.The Singhs claimed to have been unaware of the requirement to declare incomederived from such property dealing.[5] The Commissioner found on further investigation that Mr and Mrs Singh hadin fact purchased and on-sold a total of 40 properties, 39 of which related to the 2003–2007 tax years the subject of the audit. The aggregate value of these 39 transactionswas in excess of $8 million. The Singhs subsequently agreed to the consequent taxadjustments for these income years in October 2009. The final audit report, issued inNovember 2009, noted that Mr and Mrs Singh had provided very few of the recordsthe Department had requested and that it had been forced to obtain the relevantsolicitors' files and bank statements and produce the necessary income tax and GSTschedules.[6] In February 2010 the Singhs' accountant indicated that they might be able tooffer a lump sum payment of $150,000 but nothing further came of this.[7] In February 2011 the Commissioner obtained judgment against Mrs Singh for$619,730 and against Mr Singh for $574,106. These debts included unpaid incometax, unpaid GST, overpaid family assistance benefits, use of money interest andshortfall penalties for gross carelessness.77 A shortfall penalty of 40 per cent was imposed for gross carelessness but this was reduced by50 per cent for previous behaviour. Some shortfall penalties were reduced by 75 per cent for thevoluntary disclosure.[8] The Commissioner commenced bankruptcy proceedings in early 2012. Mr andMrs Singh filed a notice of intention to oppose the application claiming that it wouldbe unjust and inequitable to make an adjudication order because, given time, theywould be able to repay the outstanding debt. They asked the Court to approve aninstalment arrangement commencing with monthly payments of $5,000. Despite thisclaim having been made over five years ago, the Singhs have repaid almost nothing.8[9] The Commissioner withdrew the bankruptcy proceedings in November 2012to consider further documentation provided by the Singhs.[10] In January 2014 the accountant then acting for the Singhs made a formalrequest for financial relief under s 177 of the Tax Administration Act 1994 (the Act).Section 176 of the Act provides that the Commissioner may not recover outstandingtax to the extent that recovery would place a taxpayer, being a natural person, in serioushardship. Section 177 makes provision for a taxpayer to request financial relief eitherby requesting an instalment arrangement or by stating why recovery would place themin serious hardship. The Singhs claimed they were "in very serious financialhardship", recovery of the debt was "not possible" and, as a result, they were "entitledto a tax write off". Their accountant asserted that the entire debt "must be written off"under s 177 of the Act.[11] After considering the application, the Commissioner responded in May 2014that she would accept a payment of $649,482 and write off the balance of the combineddebt which then stood at approximately $1.75 million.[12] Mr and Mrs Singh made a second request for financial relief inSeptember 2014. They claimed that their financial position had deteriorated sincetheir last request was made. They said they were in "a very serious financial crisis"and were unable to meet minimum living expenses. They again claimed that they were"entitled to a tax write off". However, Mr Singh indicated that a third party wasprepared to advance him $30,000 which could be offered in full and final settlementof the combined debt.8 $1,200 has been paid towards Mr Singh's debt.[13] The Commissioner reviewed the financial information provided in support ofthis request and found important discrepancies. For example, the amount required toservice the mortgage on the property owned by Mr and Mrs Singh's family trust,disregarding all other living expenses, was more than their declared combined income.Despite this shortfall, their bank statements showed that they had nevertheless recentlypurchased a number of non-essential items. The Commissioner concluded that theinformation provided in support of the request for financial relief did not reflect thetrue position because it would be impossible for them to continue to live in their homeand make the purchases they had made on their declared income. The application wasaccordingly declined in December 2014.[14] Undeterred, Mr and Mrs Singh promptly made a third request for financialrelief in January 2015. This time, they presented two options. Option 1 was for theCommissioner to write off both debts entirely. Option 2 was for the Commissioner toaccept the $30,000 previously offered (funded by the third party), a lump sum of$26,000 from Mr and Mrs Singh, and further payments from them of $400 per monthfor 36 months. This would yield a combined payment of $70,400 after three years.They proposed that the balance of the debt be written off. The Commissioner declinedthis request on 25 February 2015 and advised that dates had been set for the hearingof bankruptcy proceedings in March 2015.[15] The Singhs' accountant responded immediately asking for a further review ofthe case and advised that the Singhs would "vigorously defend" the bankruptcyproceedings. The Department wrote to the Singhs' accountant on 4 March 2015pointing out that the information that had been supplied did not give "a full picture ofMr and Mrs Singh's financial situation". This was because the monthly mortgagepayments exceeded their combined declared income. Further, the information showedthat payments had been made towards a home loan held by a related family trust. Theaccountant did not offer any explanation for this in his response on 10 March 2015.Rather than addressing that issue, he simply restated his claim that Mr and Mrs Singhwere "entitled" to relief. In the absence of any new information, the Commissionerdeclined this fourth application for relief on 16 March 2015 and stated that sheintended to proceed with the bankruptcy.[16] On 31 March 2015 the accountant provided a statement of financial position.This did not assist because no supporting records were provided, nor was anyexplanation given for the shortfall between declared income and expenses identifiedearlier. The Commissioner advised on 10 April 2015 that the further information hadnot changed the position and that the bankruptcy application would proceed.Judicial review proceedings[17] In May 2015 Mr and Mrs Singh filed judicial review proceedings in theHigh Court challenging the Commissioner's decision to decline relief. They soughtan order requiring the Commissioner to reconsider her decision. On 1 October 2015,one week prior to the scheduled hearing, the Commissioner agreed to the Singhs'request that she reconsider the matter. The hearing of the judicial review proceedingswas accordingly vacated by consent.[18] The parties agreed that the reconsideration would occur in the context of a freshapplication for relief. The Singhs would have the opportunity to provide additionalinformation and this would be reviewed in the first instance by Miranda Law, arecovery and enforcement specialist working in the collections section at the InlandRevenue Department. It was not suggested that anyone who had been involved inconsidering the Singhs' earlier requests should be disqualified from participating inthe reconsideration process.[19] On 19 November 2015 David Weaver, the barrister who had been representingthe Singhs in the High Court proceedings, submitted the further relief application andsupporting documentation. This became the Singhs' fifth application for relief.[20] After reviewing the material provided, Ms Law queried why no expenditurewas shown in the bank or credit card statements for general living expenses such asfood or clothing. She also queried the source of various deposits shown in the bankstatements. In January 2016 Mr Weaver passed on Mr Singh's response and stated "itseems their son has been helping to pay living costs". He attached the bank statementshe had been given to support this claim. The contention that one of the Singhs' sonswas supporting the family was directly contrary to what the Singhs had stated in theirrecently submitted relief application: "[they] rely on their carpet business to earn aliving and provide food, clothing and accommodation for themselves and their twosons who are depend[e]nt on them".[21] On 12 February 2016 Mr Weaver sent Ms Law a final demand the Singhs hadreceived from their bank as mortgagee showing arrears on their trust's home loan of$12,900.[22] Ms Law completed her internal report and provided her recommendation on31 March 2016. She noted that the Singhs' combined declared net monthly income(including drawings) was $5,012. Monthly home loan payments totalled $4,859giving a surplus of $153 to cover all living costs. She observed that the Singhs hadstated in their relief application that they were supporting their two adult children butthis was clearly not possible given their declared income. Ms Law noted that she hadfound no evidence of living expenses in the bank statements that were provided andthat she had sought an explanation for this. She recorded that she was then told thatMr and Mrs Singh were being supported by one of their sons who works in the familybusiness. However, when she reviewed his bank statements, these showed the type ofspending that would be usual for a 23-year-old male — takeaways, clothing, videogames and electronics — but no spending at supermarkets or on other normal livingexpenses required to support a family of four adults. Ms Law noted the bank demandshowing mortgage arrears but concluded that there was insufficient information toenable her to determine Mr and Mrs Singhs' actual income and expenditure. She stated"We have requested information about how they are meeting their day to day livingexpenses, but we have not received a satisfactory answer".[23] Ms Law's report and recommendation were reviewed by her team leader,Kristal Pihama. Ms Pihama concurred with the recommendation to decline theapplication for relief.[24] The collections manager, Marilyn Foster, also reviewed the matter. She saidthat having considered the available information, she supported the recommendationto decline relief and proceed with the bankruptcy proceedings.[25] The matter was then referred to Richard Philp, the collections manager withdelegated authority to make the final decision. He also concurred with Ms Law'srecommendation.[26] Mr Philp wrote to Mr and Mrs Singh on 13 May 2016 advising them of hisdecision to decline the request for relief. Because it is this decision which then becamesubject to the current judicial review proceedings, it is appropriate to set out therelevant passages:The information you provided to support your application for financial reliefshowed that your combined declared income was sufficient to make themortgage payments for your home. However, the balance of your combinedincome once the mortgage payments are deducted left a very minimal amountto cover living expenses (less than $200.00 per month). As a consequence,further information was requested about how your living expenses were beingpaid, but the information received did not provide any clarification of this. Inrespect of your claim that your son assisted with paying your living costs, theinformation provided did not support this. Given the lack of evidence demonstrating how you are meeting your livingexpenses on your current disclosed income, I am unable to conclude that youwould likely have significant financial difficulties after allowing for paymentof an amount of outstanding tax. Rather, the information suggests that youmay be in receipt of undeclared income.Consideration was given to the fact your debt has arisen as a result of InlandRevenue establishing that you did not disclose all income you had receivedfrom property trading activities. This, together with your lack of cooperationduring the audit investigation, means that, notwithstanding your currentfinancial situation, it would be inappropriate to provide hardship relief,particularly when I don't believe that you have fully disclosed your truefinancial position when making application for relief. [27] The Singhs were dissatisfied with this outcome. They filed an amendedstatement of claim in late August 2016 challenging this most recent decision andbrought their judicial review proceedings back on for hearing on 7 December 2016.The proceedings were dismissed by Lang J in a judgment delivered on 12 December2016.99 High Court judgment, above n 1.First ground of appeal — apparent bias[28] The Singhs contend on appeal that Lang J was wrong to dismiss their complaintthat Mr Philp was disqualified from participating in the reconsideration processbecause of apparent bias. This contention is hopeless.[29] The only pleading relevant to this claim is the following paragraph in the firstamended statement of claim:118. The previous decision to decline relief was made by Mr Philp. Thesame person who reconsidered his previous decision.Clearly, the mere fact that Mr Philp had previous involvement falls far short offounding a claim of apparent bias. The allegation of apparent bias should not havebeen made on such a manifestly inadequate foundation.[30] Mr Philp has been employed by the Inland Revenue Department for over40 years. For the last seven years he has managed some 870 staff who are responsiblefor collecting unpaid debts. As collections manager with delegated decision-makingauthority, he personally considers approximately 10 submissions every week. Thereis no reason to suppose that Mr Philp would not bring an impartial and open mindwhen considering the Singhs' request.[31] The hearing of the judicial review proceedings was vacated to enable theSinghs' application to be reconsidered. The Singhs had obtained discovery and wereaware of the process that had been followed by the Department when assessing theirearlier requests for financial relief. They knew the names and positions of thosepersonnel who had been involved. As noted, they did not suggest at the time thatMr Philp should not be involved in the reconsideration process.[32] After carefully reviewing the fresh application and the supporting information,Mr Philp accepted Ms Law's recommendation which itself had been independentlyreviewed and supported by two other senior collections employees. There is nosuggestion that any of those three individuals were predisposed against Mr and MrsSingh and would not carry out their task in other than a professional manner.[33] We agree with Lang J that there is no basis on which a reasonable andfair-minded observer might reasonably apprehend that Mr Philp would not bring animpartial and open mind to his responsibility to determine the further reliefapplication.10Second ground of appeal — alleged failure to take account of the Singhs' inabilityto make mortgage payments[34] The pleaded basis for this claim is contained in the following paragraph of thefirst amended statement of claim:130. The respondent misunderstood both the evidence and the nature ofthe case and thereby failed to take into account relevantconsiderations, took into account irrelevant considerations and wasmistaken.[35] This pleading is also inadequate. It is no more than a bald conclusory assertionwith no facts or circumstances pleaded to support it.[36] The inadequacy of the pleading may be explained by the fact that the claim isbaseless. The fact that Mr and Mrs Singh had missed some mortgage payments andhad received a final demand for some $12,000 from their bank was referred to inMs Law's report:Mr & Mrs Singh have provided a copy of a letter dated 4 February 2016 fromANZ bank which is a final demand for payment. The letter states that there is$12,908.82 outstanding on the loan account for the property owned by theirfamily trust.[37] However, this did not overcome the overriding concern that the Singhs had notsatisfactorily explained how they were meeting their living expenses based on theirdeclared income. Further, none of the bank records provided evidenced the spendingon basic living expenses necessary for a family of four adults. Even taking intoaccount the mortgage arrears, the information provided suggested that the Singhs musthave been paying their other living expenses from undeclared income.10 High Court judgment, above n 1, at [38].[38] We agree with Lang J's analysis and conclusion on this issue.11Concluding observations[39] Mr and Mrs Singh have maintained throughout that they are entitled to havetheir tax debts written off under s 177 of the Act because they are in serious hardship.They claim that the Commissioner must write off the debt and may not pursuebankruptcy. This contention is based on a misunderstanding of the Act.[40] Section 176 of the Act requires the Commissioner to maximise the recovery ofoutstanding tax from a taxpayer subject to two important constraints. The first is thatthe Commissioner may not recover outstanding tax if this would be an inefficient useof her resources. The second is that the Commissioner may not recover outstandingtax where recovery would place the taxpayer in serious hardship. Nevertheless, theseconstraints do not affect the Commissioner's ability to take steps to bankrupt thetaxpayer. All of this is clear from s 176. It is useful to set it out in full:176 Recovery of tax by Commissioner(1) The Commissioner must maximise the recovery of outstanding taxfrom a taxpayer.(2) Despite subsection (1), the Commissioner may not recoveroutstanding tax to the extent that—(a) recovery is an inefficient use of the Commissioner'sresources; or(b) recovery would place a taxpayer, being a natural person, inserious hardship.(3) Despite subsection (2)(b), the Commissioner may take stepspreparatory to, or necessary to, bankrupt the taxpayer, including debtproceedings in the District Court or the High Court.[41] Section 177(3) of the Act empowers the Commissioner to take any one of foursteps in response to a taxpayer's request for financial relief. These are to accept therequest, seek further information from the taxpayer, make a counter offer, or declinethe request. However, under s 177B(1) the Commissioner must not enter an instalmentarrangement to the extent that this would place the taxpayer in serious hardship.11 At [50]–[52].[42] Section 177C(1) provides that the Commissioner may write off outstanding taxthat cannot be recovered. Section 177C(1BA), however, makes clear that there is noobligation to do so, even where recovery of the outstanding tax would place thetaxpayer in serious hardship.[43] The Singhs' request for financial relief, the subject of the judicial reviewproceedings, did not involve any proposal for payment. Faced with the options ofwriting the entire debt off and receiving nothing, or pursuing bankruptcy, theCommissioner was entitled to choose the latter course, as s 176(3) makes clear. Thiswould enable the Official Assignee to take control of and investigate the Singhs'financial affairs.[44] That is not to say that the Commissioner would not have been entitled to writeoff the Singhs' debt had she been satisfied that they were in serious hardship. TheCommissioner's duty to recover tax would not apply in those circumstances. This isbecause either no recovery is possible, or any recovery would involve an inefficientuse of resources or would place the taxpayer in serious hardship.[45] We do not consider that bankruptcy proceedings are properly characterised asdebt recovery proceedings.12 There is no obligation on the Commissioner to write offoutstanding tax and she may pursue bankruptcy proceedings if appropriate. Were itotherwise, the Commissioner would be unable to pursue bankruptcy proceedings, evenin respect of the most insolvent debtors. Plainly that was not the intention ofParliament, as is clear from s 176(3).[46] It will be for the High Court to determine whether it is just and equitable tomake an order for adjudication taking into account all relevant considerationsincluding the interests of creditors generally and the wider public interest. We expressno views about that question. However, we are satisfied that the challenge to theCommissioner's decision to decline the Singhs' request for financial relief was withoutfoundation and the judicial review proceedings were rightly dismissed.12 To the extent that a contrary view was expressed by the High Court in P v Commissioner of InlandRevenue [2015] NZHC 2293, (2015) 27 NZTC 22-081 at [30]–[49] we disagree.Result[47] The appeal is dismissed.[48] The appellants must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements.Solicitors:Kilian & Associates Ltd, Auckland for AppellantsCrown Law Office, Wellington for Respondent