WESTERN JOINERY LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZHC 1293

WESTERN JOINERY LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZHC 1293 [16 June2017]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2017-404-000510[2017] NZHC 1293BETWEEN WESTERN JOINERY LIMITEDApplicantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 14 June 2017Appearances: J Macdonald for the ApplicantC Van Der Merwe for the RespondentJudgment: 16 June 2017JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSENThis judgment was delivered by me on16.06.17 at 11:30am, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateThe application[1] The applicant Western Joinery Limited (Western Joinery) applies to set asidethe respondent's (the Commissioner) statutory demand served on 15 March 2017 andclaiming the sum of $201,692.76 in respect of unpaid tax, penalties and interest.[2] There is no dispute that Western Joinery owed money for core tax to theCommissioner. Issues in dispute concern claims the tax remains unpaid and, if so, theamount payable.[3] Western Joinery says it has an arguable defence and there is a general disputeabout whether liability to the Commissioner exists.Western Joinery's case for setting aside[4] Western Joinery assigned monies due to the Commissioner by a relatedcompany, Western Property Holdings Limited (WPHL) in terms of an arrangemententered into in March 2016 and subject to a formal deed of assignment in May 2016.[5] Western Joinery is a joinery manufacturer. It was incorporated in January 1997and continues to trade. WPHL commenced its business activity in June 2015, andapplied for GST registration which was approved. Because the premises occupied byWestern Joinery were to be sold, WPHL agreed to purchase that property. The priceincluded GST of $191,598 and in March 2016 the companies agreed to the transfer ofthe GST refund to Western Joinery.[6] In April 2016 the Commissioner commenced liquidation proceedings againstWestern Joinery in respect of its tax liability. Correspondence and communicationbetween the parties followed including that on Western Joinery's behalf of itsaccountant. On 26 May WPHL completed an assignment of its GST refund to WesternJoinery and on 10 June 2016 the Commissioner accepted that assignment as acceptablepayment but conditional on the vendor being unregistered. When on 10 August theCommissioner asserted WPHL never carried on a taxable activity WPHL's accountants(also Western Joinery's accountants) in September 2016 then provided full details ofWPHL's taxable activities.[7] It was by letter dated 5 January 2017 that the Commissioner cancelled WPHL'sgoods and services tax registration on the grounds that WPHL was not carrying on ataxable activity.[8] On 16 February 2017 the Commissioner served its statutory demand.[9] Both Western Joinery and WPHL have served Notices of Proposed Adjustment(NOPA) thereby engaging the taxation statutory process for challenging decisions ofthe Commissioner.[10] By its application to set aside the statutory demand Western Joinery notes theCommissioner accepted in June 2016 that the assignment arrangement constituted anacceptable payment method, subject only to the availability of the GST tax credit byway of refund.[11] Counsel submits the debt collection exercise before this Court should defer tothe Commissioner's NOPA process which will extensively examine issues regardingthe taxable activities of WPHL as it will also consider the detailed submissions ofdocuments filed; that the Commissioner will have two months to file a notice of replyand the matter would then proceed to a conference and if unresolved then to theTaxation Authority.[12] The Commissioner's position is that it is not in dispute that an amount of$85,000 has always been owed by Western Joinery. Therefore, counsel submits thestatutory demand should not be set aside because there is no substantial disputewhether the debt is owing or due and nor is there any basis for a set off or crossdemand.[13] Western Joinery's evidence is that it has filed returns and paid its tax and is notinsolvent. To the extent there is any shortfall it has the support of its associatedcompany WPHL.The Commissioner's case[14] It is not enough for a debtor company to claim the debt is in dispute; rather itis incumbent on Western Joinery to provide prima facie evidence of the existence of adispute. Counsel for the Commissioner refers to Rule 5.61 of the High Court Ruleswhich provides that in a proceeding by the Crown for the recovery of taxes a defendantis not entitled to advance any set off or counterclaim nor to claim any set off arisingout of any tax payment due without leave of the Court.[15] Counsel submits:(a) Western Joinery's setting aside application is a proceeding that fallswithin these provisions and therefore, without the Court's leave, accessto argument of a counterclaim and set off is precluded.(b) Section 290(4)(c) of the Act does not provide other grounds to set asidethe statutory demand, noting that in Commissioner of Inland Revenue vChester Trustee Services Limited1 there would need to be a substantialdispute concerning the debt if the Court was to consider setting aside astatutory demand.(c) There is no sufficient evidence available of Western Joinery's solvency.[16] Regarding Western Joinery's recourse to the NOPA process counsel for theCommissioner submits that it was for WPHL's purposes that process was engaged.[17] It is the Commissioner's position that she should not have to await the outcomeof WPHL's NOPA process particularly where, as in this case, WPHL has withheld thefull amount of the GST from Western Joinery until WPHL's issues with theCommissioner's ruling are resolved. Instead counsel submits the amount of funds inquestion ought to have been paid to a stakeholder until those issues are resolved.1 (2003) 1 NZLR 393, [3].[18] This Court should not, counsel submits, be concerned with those issuesaffecting the related company; that any agreement by the Commissioner regarding thepayment based on an assignment of a GST refund was subject to the GST refund beingavailable and the GST refund is not available to be assigned.[19] In summary it is asserted that Western Joinery is not a party to the disputebetween the Commissioner and WPHL. The Commissioner says the NOPA filed byWestern Joinery was invalid because because it does not address that there is anydispute between Western Joinery and the Commissioner.ConsiderationsWestern Joinery's case[20] A debt of $85,000 has been acknowledged by Western Joinery as owing. TheCommissioner's claim of an amount of $201,692.76 cannot therefore be disputed inthis Court as s 109 of the Tax Administration Act 1994 states. WPHL has engaged theNOPA process. Western Joinery has also, and arguably within time because it saysWPHL's NOPA has merit, and if successful will endorse Western Joinery's claims thatits debt to the Commissioner will be paid. The taxes have remained unpaid only whilethe input tax claim of WPHL remains unresolved.[21] Western Joinery's claim of a good taxation history since 1992 is not challenged.The only issue affecting matters was that of an arrangement which the Commissionerconditionally agreed to but which is changed following the Commissioner's officeenquiry challenging WPHL's GST position.[22] There is no doubt about the good faith of Western Joinery's purpose inrequesting to have its tax liability reserved until WPHL's issues being pursued by aproper process. They have engaged accountants and lawyers and did so beforeembarking upon that process. The Court accepts Western Joinery's purpose was notan attempt to profit at the expense of the taxpayer. Indeed it seems that had WesternJoinery and not its related company undertaken the purchase then it would have beenentitled to the GST refund which is the focus of the background issues.[23] However, there is a debt that remains unpaid and which it is theCommissioner's duty to recover and this, the Commissioner is bound to do. Thematter subject to taxation review concerns a related company and indirectly only doesit concern Western Joinery. Western Joinery's obligations must meanwhile be met. Itseems likely that if WPHL is successful upon its review of the Commissioner'sdecision then the Commissioner will likely review the extent of penalties and interestthat have accumulated upon the core unpaid tax. Until then however Western Joinery'stax obligations must be met.Judgment[24] The setting aside application is dismissed.[25] The date for compliance with the statutory demand shall be extended until11:45am, 7 July 2017 when the matter will be called in the miscellaneous companieslist.[26] Western Joinery shall pay the Commissioner's costs on a 2B basis as approvedby the Registrar.Associate Judge Christiansen