ALAM AND BEGUM V COMMISSIONER OF INLAND REVENUE HC TAU CIV 2007-470-267

ALAM AND BEGUM V COMMISSIONER OF INLAND REVENUE HC TAU CIV 2007-470-267 17 June 2008IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY CIV 2007-470-267BETWEEN ZAHIRUL ALAM AND PARUL BEGUM Plaintiffs AND COMMISSIONER OF INLAND REVENUE Defendant Hearing: 12 May 2008 Appearances: D Hayes for Applicants C Curran-Tietjens for Respondent Judgment: 17 June 2008 at 11:30 a.m.JUDGMENT OF WOODHOUSE JThis judgment was delivered by me on 17 June 2008 at 11:30 a.m. pursuant to r540(4) of the High Court Rules 1985. Registrar/Deputy Registrar Solicitors / Counsel: Mr D Hayes, Barrister, Hamilton Ms C Curran-Tietjens, Crown Law Office, Wellington Copy to: Mr M Hunwick, Brook Law, Solicitors, Hamilton[1] On 4 July 2001 the Commissioner issued a notice of proposed adjustment under s 89F of the Tax Administration Act 1994 ("the Act"). This related to GST returns from the plaintiffs. A response was required from the plaintiffs within two months, otherwise the plaintiffs would be deemed to have accepted the proposed adjustments. The plaintiffs, by their accountant, sent a response notice within the two month period. The content of a response notice is prescribed by s 89G of the Act. The responsible tax investigator, after consulting colleagues, decided that the notice did not comply with s 89G and purported to reject it. In consequence the Commissioner applied the deeming provision. [2] The plaintiffs seek judicial review of the purported decision of the Commissioner to reject the response notice.The issues[3] There are two live issues as identified by the parties. The first is whether the plaintiffs response notice complied with s 89G of the Act. The second is whether, if the notice complied, the Court's discretion to grant relief under the Judicature Amendment Act 1972 should be exercised in favour of the plaintiffs. [4] There is a third issue. This is whether the Commissioner had the power to determine whether or not the response notice complied with the Act and reject it on the grounds that it did not. The point was not raised by counsel but it needs to be addressed because it underpins the Commissioner's decision to reject the response notice. [5] The statement of claim and written submissions for the plaintiffs raised further matters for review. One was whether the Commissioner should have exercised his power under s 113 of the Act to amend the assessment following the adjustment. The other was whether the Commissioner was entitled to issue proceedings to recover the debt arising from the adjustment. Both of these matters were expressly withdrawn by Mr Hayes for the plaintiffs.[6] A further pleaded ground for judicial review was that the plaintiffs had a legitimate expectation that the response notice would be acceptable to the Commissioner. In discussions with Mr Hayes, he accepted that there was no admissible evidence for the plaintiffs which provided a factual foundation for this argument, whatever legal merit it might have. Although Mr Hayes did not expressly withdraw this ground for review, he did not press it. The written submission on legitimate expectation concerned other response notices said to have been issued by the plaintiffs' accountant and not rejected by the Commissioner. There was no admissible evidence in this regard. Mr Hayes did not seek leave to adduce further evidence on the point. I consequently hold that the application for review based on an argument of legitimate expectation fails. [7] For the Commissioner, Ms Curran-Tietjens submitted that there were no grounds for challenging the process by which the Commissioner came to the conclusion that the response notice did not comply with s 89G. I accept that submission, and there was no argument to the contrary. But process is not the point at issue. This is not a case concerning the propriety of a process leading to a statutory power of decision, but whether there was a statutory power of decision and, if so, whether the conclusion reached was correct as a matter of law.The facts and s 89G[8] The plaintiffs had a kiwifruit picking business. In GST returns for the period 1 April 2000 to 31 January 2001 they claimed tax credits for payments to a subcontractor totalling $130,000. This claim was rejected by the Commissioner in the notice of proposed adjustment issued on 4 July 2001. A further adjustment was proposed in that notice for GST received on income not recorded in the returns. The Commissioner also proposed to charge shortfall penalties at the rate of 150% for evasion. [9] There was no argument that the Commissioner's notice of proposed adjustment did not comply with the statutory requirements. It fully set out the matters prescribed in s 89F of the Act. It included contentions that: there was insufficient documentation in relation to the alleged payments to the subcontractor;no proof of payment had been supplied to the Department; the Department had information that the subcontractor was not in New Zealand at the time the alleged payments were made to him in cash; the plaintiffs had advised the Department that they had no contact phone number for the subcontractor; for the relevant period there was a discrepancy between income received (a sharp decrease) and expenses (a small decrease). The Commissioner's notice had an explanation for the proposed imposition of shortfall penalties of 150% and schedules setting out the relevant calculations. There was also a statement as to what the plaintiffs had to do if they did not accept the notice of proposed adjustment. This statement included the essential terms of s 89G of the Act. [10] The plaintiffs' response notice was issued by their accountant one day before the expiry of the two month period prescribed in the notice of proposed adjustment. The response was as follows:NOTICE OF RESPONSETaxpayer's Name: Zahirul Alam and Parul Begum IRD Number: 76-128-464 WE AGREE to your adjustments in regards to the Goods and Services Tax for the income not returned. YEAR ENDED 31 MARCH 2001 TOTAL INCOME OMMITTED $37,135.35 GST CONTENT THEREON $4,126.15 WE REJECT your Notice of Proposed Adjustments in regards to payments made to Rafi Rafi Achmed for the following reasons: 1 Achmed presented to Alam partnership his Certificate of Exemption which was issued by Inland Revenue Department. The Certificate was for the correct tax year; signed by Mr. Achmed and properly authorised by Inland Revenue and advised the tax rate to be deducted from the gross payments. 2 Particularly under the Privacy Act, our clients could not verify that Mr Achmed was the person named on this Certificate. 3 Payments have been made in cash as requested by Mr Achmed, and there is no legal restriction from doing so. 4. We believe that 150% of shortfall penalties are not appropriate as our clients did not use false documents to try to obtain a tax advantage and did not show an abusive tax position or similar offence.Yours faithfully,[11] At the date of the plaintiffs' response notice, s 89G was as follows:89G Issue of response notice 89G(1) To reject a proposed adjustment, the recipient of the notice of proposed adjustment must, within the response period for the notice, notify the issuer that the adjustment is rejected by issuing a response notice.89G(2) A response notice must, with sufficient detail to reasonably inform the recipient, — (a) Specify the items in the notice of proposed adjustment that the issuer of the response notice considers to be in error; and (b) Specify the tax laws on which the issuer of the response notice relies; and (c) Outline the facts contained in the notice of proposed adjustment that the issuer of the response notice considers to be in error; and (d) Outline any further facts on which the issuer of the response notice relies; and (e) Outline any additional legal issues that the issuer of the response notice considers arise in respect of the notice of proposed adjustment; and (f) State the propositions of law relied upon in respect of the response notice.[12] The tax investigator dealing with the plaintiffs' tax returns, and who had been responsible for the issue of the Commissioner's notice of proposed adjustment, considered that the plaintiffs' response notice did not contain the information required by s 89G(2) and "seriously doubted" that it was a valid notice. Following discussions with other officers of the Department the tax investigator, for the Commissioner, advised the plaintiffs that the response notice was rejected. In practical terms, the Commissioner took the position that a response notice had not been received at all, leading to "deemed acceptance" of the proposed adjustment under s 89H(1). At the relevant time, s 89H(1) provided:If a disputant does not, within the response period for a notice of proposed adjustment issued by the Commissioner, reject an adjustment contained in the notice, the disputant is deemed to accept the proposed adjustment and section 89I applies.Did the Commissioner have power to assess the validity of the response notice and reject it?[13] These are related threshold questions. For the Commissioner it was submitted that the tax investigator "exercised her delegated power to reject" the response notice. But no submissions were made as to the source of this power nor was there any challenge for the plaintiffs to the assumed power. [14] The answer to the question as to the Commissioner's power may be academic at this stage, because the substantive issue as to the validity of the response notice is now before the Court. It is nevertheless appropriate to deal with the point, albeit briefly. [15] Section 89G is in Part IVA of the Act. This Part sets out the disputes procedures. There is no provision in Part IVA which gives power to the Commissioner to determine whether a response notice complies with s 89G and, following such determination, to reject a notice on the basis that it does not comply. There is no other provision in the Tax Administration Act which gives such power to the Commissioner. [16] It would, perhaps, be unusual for such power to have been given to the Commissioner. Questions of statutory interpretation are for the Courts. More specifically, a power in the Commissioner to determine compliance would be a power for the Commissioner to adjudicate on a question arising in a process in which the Commissioner was one of the parties; that is, the Part IVA disputes procedures. Moreover, a conclusion by the Commissioner, as in this case, that the response notice did not comply, would lead to the automatic imposition of the tax adjustment which, to that point, had merely been what the Commissioner contended in the proposal should happen. The proposal and response come at the commencement of a disputes process designed to try to get resolution by agreement but with the Courts, in the usual way, deciding matters remaining in dispute. [17] For these reasons I consider that the Commissioner did not have power to reject the notice. In consequence, deemed acceptance under s 89H(1) did not occur.[18] Notwithstanding this conclusion, it is necessary to consider whether the response notice did comply with s 89G(2). It is necessary to do so in case the conclusion just stated is wrong. It is also appropriate to do so because, on the basis of the conclusion just stated, if the Commissioner wished to challenge the response notice, the appropriate course would have been to make application to the Court for a declaration as to the validity of the response notice. This would have given rise to the same issues now brought before the Court by the plaintiffs. The alternative courses of action were to move to the next step in the disputes procedure.Did the response notice comply with s 89G(2)?[19] Mr Hayes submitted that, although the response notice was "sparse", it sufficiently complied because the essential points required by s 89G(2) for these taxpayers were conveyed. Mr Hayes supported this argument by reference to the nature of subsequent steps in the disputes procedure under Part IVA of the Act, the terms of an amendment of s 89G which came into force in July 2005, and guidelines provided by the Commissioner in a tax information bulletin on the application of s 89G(2) as it then stood. It is appropriate to refer to the related provisions in Part IVA. But I do not consider material assistance is provided by reviewing a subsequent amendment or the Commissioner's information bulletin. [20] Ms Curran-Tietjens, like Mr Hayes, undertook an analysis of the response notice by reference to each of the paragraphs in s 89G(2) and submitted that, in each case, the response was inadequate. The underpinning for these submissions was the requirement at the commencement of s 89G(2) that the response notice have "sufficient detail to reasonably inform" the Commissioner of the various matters noted in the sub-paragraphs. That statutory obligation is clear. However, the thrust of the submission, as it was developed, was to elevate the statutory requirement for a response notice to a document setting out an adequate response to the Commissioner's contentions or, put another way, an arguable case. In my judgment this is not what is required by s 89G(2) when considered on its terms and by reference to other provisions of Part IVA, and the subsequent amendment of s 89G(2).[21] Looking firstly at the response notice in relation to the paragraphs in s 89G(2): a) Specify the items in the notice of proposed adjustment that the issuer of the response notice considers to be in error. The Commissioner proposed three adjustments. The plaintiffs clearly informed the Commissioner that the adjustment in respect of the payments made to the subcontractor and the shortfall penalties were disputed. And they expressly accepted the income adjustment. b) Specify the tax laws on which the issuer of the response notice relies. There is no reference to any specific provision of any tax act, but if the taxpayer is not relying on any specific tax laws there are none to be specified. The absence of reference to a tax law cannot render the notice invalid. c) Outline the facts contained in the notice of proposed adjustment that the issuer of the response notice considers to be in error. This aspect received closest attention in the submissions for the Commissioner. When compared with the outline of facts in the Commissioner's notice of proposed adjustment, containing 16 different items, the taxpayer's response is indeed sparse. But again, the paragraph in its terms does not require the taxpayer to respond to every assertion of fact made by the Commissioner, but only to the assertions of fact considered to be in error. The response notice clearly records that the taxpayers challenged the Commissioner's contention that they had not made payment to the subcontractor, Mr Achmed. The Commissioner would be entitled to assume other facts of consequence were not considered to be in error, at least at this early stage of the disputes procedure. But the failure to refer to the other facts of consequence cannot render the notice invalid. d) and e) These paragraphs seek an "outline" of "any further facts" or "any additional legal issues" relied on or which are considered toarise. If there are none, invalidity cannot arise by a failure to state expressly that there are no further facts or additional legal issues. The absence of reference would indicate that there are none. In this case the paragraphs numbered 1 to 4 in the response notice do provide some further facts and a reference to some other possible legal issues. The adequacy of these as a response is not the issue. f) State the propositions of law relied upon in respect of the response notice. There is a proposition of law in the response notice to the effect that "there is no legal restriction" on making payments in cash. [22] In my judgement, the terms of s 89G(2) are clear and the response notice complied when assessed by reference to the words used in the section. As noted earlier, a submission for the Commissioner amounted to a proposition that, unless the response notice advances at least the appearance of an arguable case against what the Commissioner is asserting, then the response notice is effectively a nullity. There are two points to be made in that regard. The first is that the taxpayer is entitled to challenge the Commissioner's proposed reassessment even if the taxpayer does not have much of a case, or any good case. If the taxpayer does not have a good case the subsequent procedures set out in Part IVA will deal with this. The second point is that a taxpayer might not have any more information, or any additional argument, to put forward in a response notice. But the taxpayer could still have a genuine position sought to be advanced through the disputes procedures statutorily prescribed for that very purpose. [23] If the argument for the Commissioner was correct, a simple solution for a devious taxpayer with no grounds for resisting the Commissioner's proposed adjustment would be to concoct a detailed response, rather like a statement of defence which denies everything or asserts the contrary irrespective of the underlying substance. This would be considerably less helpful than a simple rejection of the Commissioner's basic proposal.[24] For the Commissioner, some emphasis was placed on the purpose of the Part IVA disputes procedure. Section 89A sets out the purpose of Part IVA. The purpose is, amongst other things, to establish procedures that will:(b) reduce the likelihood of disputes between the Commissioner and taxpayers by encouraging open and full communication— (c) promote the early identification of the basis for any dispute concerning a disputable decision; and (d) promote the prompt and efficient resolution of any dispute by requiring the issues and evidence to be considered by the Commissioner and the disputant before the disputant commences proceedings.[25] The means of seeking to promote these objectives are the procedures that are then set out in the remainder of Part IVA. This commences with the notice of proposed adjustment and the notice of response. This stage of the process is aimed at resolving the dispute consensually. Either party may accept the notice issued by the other. Resolution is promoted by the requirements in s 89G for the disputant to provide information indicating the nature of the dispute. [26] As a matter of practice, following a taxpayer's response notice the Commissioner invites the taxpayer to a conference. This administrative procedure is designed to see whether agreement can be reached and, no doubt, might be used to seek to elicit further information from a taxpayer. [27] The next statutory step, if agreement is not reached, is an exchange of statements of position pursuant to s 89M. Because in this case the Commissioner had issued a notice of proposed adjustment, if the matter had proceeded following receipt of the plaintiffs' response notice, a statement of position would have been required from the Commissioner followed by a statement of position from the plaintiffs. What is required from the taxpayer is set out in s 89M(6) as follows:A disputant's statement of position in the prescribed form must, with sufficient detail to fairly inform the Commissioner— (a) give an outline of the facts on which the disputant intends to reply; and (b) give an outline of the evidence on which the disputant intends to rely; and(c) give an outline of the issues that the disputant considers will arise; and (d) specify the propositions of law on which the disputant intends to rely.This stage of the process is aimed at the formal Court resolution of the dispute. The requirements of s 89M(6) are substantially similar to those of s 89G, with an additional requirement that the taxpayer outline the evidence on which they intend to rely. The need to once again outline the factual and legal nature of the dispute allows the issues between the parties to be further narrowed and focussed. The addition of documentary evidence is consistent with a formal resolution process in which the outcome of the dispute is determined for the parties rather than agreed by consent. [28] While the dispute can be resolved by consent at any time, the legislative shift from encouraging consensual agreement to preparing for a formal resolution process lends support to the conclusion that s 89G is not to be interpreted in the manner advanced for the Commissioner. [29] There is one other contextual point; this is s 89F compared with s 89G. Section 89F prescribes the content of a notice of proposed adjustment. Although the notice of proposed adjustment in this case came from the Commissioner, there is provision for such a notice to be issued by a taxpayer or "others with standing". Section 89F requires that the notice of proposed adjustment be in a prescribed form. There was no prescribed form for the response notice.Ultimate discretion[30] For the Commissioner Ms Curran-Tietjens submitted that, if there was error in the Commissioner's rejection of the response notice, the Court should nevertheless decline relief to the plaintiffs. [31] The starting point for considering whether to exercise the discretion not to set aside an unlawful decision is that the onus is on the defendant and, in one judicial expression, there must be "extremely strong reasons to decline any relief": R vAttorney-General Ex parte Imperial Chemical Industries [1987] 1 CMLR 72 at 109, quoted with approval in Unison Networks Limited v Commerce Commission(19/12/06, CA 284/05, at para [98] per O'Regan J dissenting). In the Unison Networks case, the majority (Hammond and Ellen France JJ) came to a different conclusion on the exercise of the discretion but said, at [81]:There are strong cautions against exercising the discretion not to set aside an unlawful decision: see, for example, the authorities referred to in FordhamJudicial Review Handbook (4 ed 2004) at 24.3.4.[32] There were two grounds for declining relief advanced for the Commissioner. The first was, in essence, that there is no substantive merit in the plaintiffs' response to the notice of proposed adjustment. A lack of substantive merit might, in some cases, provide grounds for declining relief because such would be futile. I am not prepared to adopt that approach in this case. It would require me to make a judgment on the substantive merit without hearing from the parties and any supporting witnesses. And to do that would require me to ignore much of Part IV of the Act which is, in fact, the prescribed procedure for resolving disputes. [33] The second ground advanced for the Commissioner was delay. The Commissioner's actions that are now challenged occurred in September 2001. The plaintiffs' proceeding for judicial review was not filed until 2007. In oral submissions Ms Curran-Tietjens acknowledged that there has been no material prejudice to the Commissioner as a consequence of the delay. For this reason I would not exercise my discretion against the plaintiffs for delay. Moreover, had the Commissioner continued with the Part IV disputes resolution procedure, which in my judgment he should have, and if the plaintiffs' case lacks substantive merit, this matter would have been resolved long ago.Result[34] There is an order by way of declaration that the response notice of the plaintiffs to the defendant dated 3 September 2001 was and is a valid notice pursuant to s 89G of the Tax Administration Act 1994.[35] There were no submissions on costs. Subject to any submissions I would award costs to the plaintiffs on a 2B basis. If the parties are unable to agree on costs, and the plaintiffs seek an order, a memorandum for the plaintiffs is to be filed and served within four weeks and for the defendant two weeks after receipt of the plaintiffs' memorandum. _________________________________ Peter Woodhouse J