AA Taxation & Accounting Services Limited v Commissioner of Inland Revenue
[2019] NZHC 2301
•13 September 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-0209
[2019] NZHC 2301
UNDER the Companies Act 1993 BETWEEN
AA TAXATION & ACCOUNTING SERVICES LIMITED
Applicant
AND
THE COMMISSIONER OF INLAND REVENUE
Respondent
Hearing: 24 June 2019 Appearances:
S Kilian for the Applicant
J V Angelson for the Respondent
Judgment:
13 September 2019
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 13 September 2019 at 3.00 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Kilian & Associates Ltd, Auckland Inland Revenue, Auckland
AA TAXATION & ACCOUNTING SERVICES LTD v THE COMMISSIONER OF INLAND REVENUE [2019] NZHC 2301 [13 September 2019]
[1] The applicant (AA) has applied to set aside a statutory demand issued by the respondent (the Commissioner), in which the Commissioner demanded payment of
$227,882 for taxes, penalties and interest. The Commissioner opposes the application. She says that there is no dispute as to the amount of tax outstanding, particularly as AA and the Commissioner entered into an Agreement to Amend Assessment on 7 August 2018 (the Agreed Assessment), in which AA accepted an amended assessment of $211,894.59 for unpaid GST and income tax, shortfall penalties, and further interest payable under s 120D of the Tax Administration Act 1994 (the TAA). In the Agreed Assessment, AA agreed that it had no rights to challenge the assessed tax further in terms of s 89I of the TAA.
[2] AA does not dispute that it has been properly assessed for tax purposes in the amount set out in the statutory demand. Its argument is that the tax has already been paid by its director, Zhiwei Li (also known as Tom Lee), in the course of the settlement of a proceeding against Mr Li and his partner, Ms Cheng-Lan Wang, commenced by the Commissioner of Police (the Police) against Mr Li and Ms Wang under the Criminal Proceeds (Recovery) Act 2009 (the CPRA). The contention is that the "significant criminal activity" which was required to engage the CPRA was primarily evasion of the very same tax now demanded by the Commissioner from AA, and that assets of Mr Li and Ms Wang were forfeited to the Crown in the CPRA proceeding with the intention that the tax liability would be discharged.
The proceeding under the CPRA
[3] On 23 April 2015 Mr Li was convicted of one charge of obtaining by deception. He was sentenced to four months' home detention. The offending that gave rise to the conviction involved Mr Li selling a fake qualification to an undercover journalist. Mr Li charged $12,000 for the qualification, and he personally received
$3,000 of that sum. The qualification was paid for in cash by the undercover journalist.
An appeal by Mr Li against his conviction was dismissed in May 2016.1
[4] The Police commenced a proceeding under the CPRA, contending that the one count on which Mr Li was convicted was but one example of an ongoing scheme under
1 Li v R [2016] NZCA 237.
which Mr Li sold fraudulent qualifications to international students. Restraining orders under the CPRA were made on the application of the Police on 7 October 2015, in respect of the following property:
(i)A residential property situated at Totara Vale, North Shore (the home), owned by Mr Li and Ms Wang and occupied by them as their home. Their equity in the home was approximately $500,000.
(ii)Funds seized from personal bank accounts operated by Mr Li and or Ms Wang totalling approximately $260,194.
(iii)$135,000 in cash seized by the Police from the home on 10 September 2017 (this cash was seized following the unauthorised withdrawal of funds by Mr Li from a restrained bank account).
[5]In total, the value of the assets restrained came to about $885,000.
[6] The Police then proceeded with a CPRA claim to have "tainted" assets of Mr Li and/or Ms Wang, and any profits from the criminal offending, forfeited to the Crown. The Police contended that Mr Li (and Ms Wang as his spouse) had unlawfully benefited in the total sum of $1,855,136.64, consisting of the following deposits made into their bank accounts:
(i)$1,552,543.45 in cash deposits;
(ii)$84,459 in unidentified deposits; and
(iii)$218,134.19 in non-cash deposits from third parties.
[7] Mr Li accepted in the CPRA proceeding that the funds had been paid into the bank accounts, but he contended that they had been received by him in exchange for legitimate services, such as accounting services, barista courses, and English classes.
[8] The settlement eventually concluded by Mr Li and Ms Wang with the Police recorded the acknowledgement of Mr Li and Ms Wang that, regardless of the
legitimacy of the sources of the deposits, the money deposited had not been declared to the Inland Revenue Department for tax purposes. On that basis, the Police also relied on tax evasion as a "significant criminal activity" sufficient to justify the asset forfeiture orders sought. The Police contended that Mr Li's total tax liability was
$778,883.98; Mr Li accepted that he had a substantial unpaid tax liability, but contended that the total amount was $490,260.33.
[9] The Police and Mr Li and Ms Wang eventually settled the asset forfeiture claims, in the total sum of $575,000. The settlement required the approval of this Court under s 95 of the CPRA, and that approval was sought in a joint memorandum signed by counsel for the parties on 12 July 2017 (the Settlement Agreement). The Settlement Agreement was duly approved by order made by Woolford J on 12 July 2017.
[10]The principal parts of the settlement were:
(i)All remaining restrained funds in the proceeding (approximately
$385,000) were to be forfeited to the Crown; and
(ii)The balance (up to $575,000) was to be paid by Mr Li to the Official Assignee on behalf of the Crown within one month of the orders being made;
(iii)On payment of the $385,000 the restraining orders would be varied to permit Mr Li and Ms Wang to use the home as security to borrow sufficient funds to pay the balance of the settlement sum. On payment of the full $575,000 the restrained property would be released from the restraint;
(iv)The Police agreed not to pursue enforcement of certain costs orders made against Mr Li in the proceeding (total approximately $10,500), and also agreed not to pursue any profit forfeiture orders.
[11] Under s 95 of the CPRA, the Court had to be satisfied that the Settlement Agreement was in accordance with the overall interests of justice. The Settlement Agreement included the following joint submissions to the Court on that issue:
(i)The Police recognised certain litigation risks in the forfeiture proceeding. First, the only offending for which Mr Li had been convicted was one count of obtaining by deception, and he was sentenced on the basis that he received only $3,000 for supplying one false diploma. The case advanced by the Police relied largely on inferential reasoning — the much larger sum of $1,855,136.64 paid into bank accounts operated by Mr Li and or Ms Wang from unknown sources was likely the proceeds of further fraudulent offending. However, the Commissioner accepted that, beyond an inference from the one conviction and the sums received into the bank accounts, "there was little to support this contention".
(ii)The parties considered that any application for relief by Ms Wang on the grounds of undue hardship under s 67 of the CPRA was likely to be successful. She would probably be considered as an innocent party, ignorant of her husband's offending.
(iii)In settling upon a figure of $575,000, the Police were mindful of the fact that the pool of property available for settlement was limited to
$885,000, and that it appeared to be accepted that Mr Li owed outstanding tax (likely to be between $778,883.98 (the Police expert's figure) and $490,260.33 (Mr Li's figure)).
(iv)In agreeing to the settlement at $575,000, the Police were also mindful that a settlement at that sum would allow Mr Li and Ms Wang to retain the family home.
(v)Mr Li recognised that he also had certain litigation risks. In particular "$1,855,136.64 in income was received by bank accounts controlled by Mr Li, which he did not declare to Inland Revenue".
(vi)The proposed settlement would also bring finality for the parties, and save substantial ongoing costs. It would provide security and certainty for Ms Wang and her young child.
[12]Paragraph 2.10 of the Settlement Agreement provided:
2.10 In summary, [the Police rely] on both fraudulent offending and tax evasion as the significant criminal activity from which Mr Li has unlawfully benefited. Mr Li disputes these allegations, however for the purposes of settlement acknowledges that funds would be owed for the tax identified by the forensic accountant [an accountant retained by Mr Li] (but not for tax evasion) and for the benefit he received from the original offending, being $3,000. The [Police note] that [the Commissioner] is not, and has never been, a party to these proceedings. The parties' proposed settlement has no bearing on any action that may be taken by [the Commissioner] in the future, and how Inland Revenue may treat the present settlement, if approved, would ultimately be a matter for it.
Mr Li's accountant's report and the Voluntary Disclosure
[13] By letter from his solicitors dated 15 May 2017 (the Voluntary Disclosure), Mr Li and AA elected to make Voluntary Disclosure to the Commissioner in respect of the unpaid tax. The Voluntary Disclosure was made with the assistance of a forensic accountant, Ms Sara Weaver, who had reviewed materials supplied to her by AA and Mr Li and made certain calculations. Parts of a report by Ms Weaver were reproduced in the Voluntary Disclosure.
[14] The purpose of the Voluntary Disclosure appears to have been to avoid prosecution for tax evasion (under the Commissioner's policies relating to the circumstances in which criminal proceedings may be commenced), and to obtain a reduction in the shortfall penalties that would otherwise have been applied in respect of the unpaid tax.
[15] The Voluntary Disclosure advised that AA provides accounting and taxation services, together with skilled job training services (including accounting training, coffee training, English courses, tuition services, assistance with school enrolment, and various other services). Many of AA's clients were overseas immigrants, most being from India or China.
[16] The Voluntary Disclosure advised that AA and Mr Li operated various bank accounts which cash funds were deposited into and "transferred to and from". AA and Mr Li accepted that all of the businesses' income and expenses had not been recorded in financial statements, and had therefore not been included in tax returns.
[17] Ms Weaver noted that Mr Li "operated a business through [AA] providing [a range of services]". She said that Mr Li operated numerous bank accounts through which he conducted his business activities, and numerous deposits were made into the "private bank accounts" of Mr Li and his family members and also into AA's bank accounts. Those transactions that involved the use of AA's bank accounts were included in the income tax returns for AA, but deposits into the private bank accounts of Mr Li and his family do not appear to have been included in the income tax returns for either AA or Mr Li. From her analysis of the source documents, Ms Weaver concluded that it was highly likely that Mr Li generated substantial (undeclared) assessable income from business activities during the 2009 to 2015 years.
[18] Ms Weaver described Mr Li's accounting practices as disorganised at best. She noted that it was conceivable that the majority of the receipts were deposited or used for legitimate business expenditure, and that a portion of these funds may have been retained for personal use. However, she considered that those factors would be within the acceptable margin of error, and would not be material. She relied on the deposits into Mr Li's bank accounts as a reasonable representation of (taxable) cash received, concluding that $1,839,736.64 of the deposits should be considered as business income. That income was not included in either Mr Li's or AA's income tax returns.
[19] Ms Weaver then looked at the issue of allowable deductions, and concluded that a total of $526,231.37, being transactions in private bank accounts which related to business expenses incurred in the operation of Mr Li's business activities, were deductible. She noted that relevant withdrawals from private bank accounts had not been claimed in the financial statements or tax returns of AA, and on that basis she considered Mr Li had incurred deductible expenditure that had not been claimed.
[20] A complete copy of Ms Weaver's report was not provided, but it appears that the total unpaid tax identified by her for the years 2009 to 2015, for both Mr Li and
AA, would have been the $490,260.33 referred to as Mr Li's expert's figure in the Settlement Agreement.
[21] There is a dispute between the parties as to whether it has been sufficiently proved in this case that the Police had either Ms Weaver's report or the Voluntary Disclosure when the Settlement Agreement was made. Mr Kilian relied on a communication dated 28 June 2017 from counsel for the Police, received by him as counsel acting in the assets forfeiture proceeding, as support for an inference that the Police did have this information. The relevant email was expressed to be written on a without prejudice basis save as to costs. Mr Angelson objected to the production of the document on the grounds that the communication remained subject to the without prejudice privilege, and that privilege has not been waived by the Police or Ms Wang. I reserved the question of the admissibility of this document, to be dealt with in this judgment.
Events after the Court's approval of the Settlement Agreement
[22] The agreed settlement amount was paid to the Official Assignee on or about 21 August 2017, and on 3 October 2017 the Commissioner was advised that payment had been made in accordance with the approved asset forfeiture agreement. At that stage, the Commissioner had still not finalised the assessments for AA and Mr Li. The Commissioner did not complete her review of the Voluntary Disclosure until July 2018, and she then issued assessments for the full amount of tax owing as against AA. The amount was in fact lower than that contemplated in the Voluntary Disclosure, due to further information being provided to the Commissioner in the interim. The result was an agreement to amend the assessment of tax to $211,894.59, including penalties and interest.
[23] Assessments were also made by the Commissioner against Mr Li personally, and the Commissioner is attempting to recover the amount assessed from Mr Li. For his part, Mr Li has maintained that the agreed asset forfeiture provided in the Settlement Agreement and approved by the Court means that his personal tax liability was also then discharged.
AA's application to set aside the statutory demand
[24] AA contends that it has paid the amount of tax owing, and that there are no amounts due. It also contends that it has a good counterclaim against the Commissioner, on the basis that the Commissioner was aware of the negotiations between AA and the Police, and that the Police sought settlement for outstanding tax as well as for unrelated matters. It says that the Commissioner is seeking to obtain an unjust enrichment, to which she is not entitled.
The Commissioner's opposition
[25] The Commissioner relies on the Agreed Assessment as an acknowledgment by AA that the amended amounts for which it was assessed are due and payable by it. She says that under s 109 of the TAA the Agreed Assessment cannot now be challenged.
[26] The Commissioner also says that AA has no available counterclaim, and that there is no other basis on which the statutory demand could be set aside.
Counsel's submissions
AA
[27] Mr Kilian submitted that the debt owed to the Commissioner has been paid in full. Alternatively, Mr Li paid money to the Crown in lieu of the tax debt owed, and he requested that those funds be used to pay AA's tax debt. In either circumstance, the Crown is in possession of funds in excess of the debt that is due for tax.
[28] The payment made to the Crown under the Settlement Agreement was not a profit forfeiture, but payment of a determined tax liability (without an assessment having been concluded, despite the Voluntary Disclosure having been made). As the determination referred to by the Crown in the Settlement Agreement related to the Voluntary Disclosure made by both Mr Li and AA, the asset forfeiture should be regarded as having discharged the tax liabilities of both Mr Li and AA. The Police were aware that the funds seized represented the extent of any funds available to Mr Li, and taking the money for any other reason (ie apart from meeting the tax
liabilities) would have resulted in Mr Li and AA not having funds to pay their tax liabilities to the Commissioner.
[29] The Commissioner should not be allowed to differentiate between separate Crown entities for the purpose of her contention that AA's tax debt has not been paid. Whether the tax payment has been paid to the Official Assignee to be held on behalf of the Secretary for Justice, or whether it has been paid to the Commissioner, should not matter.
[30] The information provided by Ms Weaver was not questioned by the Commissioner, and the evidence supports an inference that the Voluntary Disclosure was made available to the Police.
[31] On the interpretation of the Settlement Agreement, Mr Kilian submitted that it is significant that, in July 2017 when the Settlement Agreement was signed, the Commissioner had not yet finalised her assessments for AA and Mr Li, despite having received the Voluntary Disclosure. It was for that reason that Crown counsel (on behalf of the Police) could not refer to assessments of tax in the Settlement Agreement
— no such assessments then existed. Nor could the Police purport to recover the tax debt or debts on behalf of the Commissioner. The only party empowered to collect GST or income tax is the Commissioner. It is that combination of circumstances that led to cl 2.10 being inserted in the Settlement Agreement.
[32] Mr Kilian also submitted that cl 2.10 must be read in conjunction with cl 5.1(d) and (g) of the Settlement Agreement. Clause 5.1(d) stated:
In settling upon a figure of $575,000, [the Police] were mindful that the pool of available property was limited to $885,000 and that it appeared to be accepted that Mr Li owed outstanding tax, albeit the sum of that was in dispute: $778,883.98 according to the [Police's expert] and $490,260.33 according to Mr Li's expert.
[33]Clause 5.1(h) stated:
the absence of a profit forfeiture order against Mr Li and Ms Wang will relieve them of a residual debt to the Crown in the future. This settlement will bring a degree of finality to the matter.
[34] Mr Kilian contended that AA has shown that there exists a substantial dispute over AA's liability for the amount demanded.
The Commissioner
[35] Mr Angelson accepted that the only issue is whether the tax claimed in the statutory demand has been paid. He pointed out first that neither the Commissioner nor AA were parties to the Settlement Agreement. And while the Settlement Agreement did involve the forfeiture of assets that were, in part, the subject of tax evasion, the only tax liability referred to in the Settlement Agreement was that of Mr Li
— AA's separate tax liability was not addressed. Nor were the assets forfeited to the Crown under the Settlement Agreement assets of AA; they were said to be assets of Mr Li and/or Ms Wang. AA made no claim to legal or beneficial ownership over any of the forfeited assets, notwithstanding that it had the opportunity to make such a claim and be heard on it.2
[36] The evidence shows that AA did have its own bank account, and financial statements were prepared for it. It did file income tax and GST returns, although they failed to properly report AA's income. AA's tax liability was separate from Mr Li's tax liability, and a distinct tax shortfall arose in relation to AA, for both GST and income tax. This separate tax liability of AA was not addressed in the Settlement Agreement.
[37] AA was not the only entity through which Mr Li traded. He also operated the company NZ Student Services Ltd, and there appears to have been no clear delineation between the business activities of the two companies, and Mr Li personally. The fact that Mr Li dealt almost exclusively in cash meant that Ms Weaver could only estimate the amount of legitimate business income and expenditure.
[38]Although Mr Li was only convicted on the basis he received one payment of
$3,000 for the offending, there is an available inference that he derived quite a lot more from the scheme. There would have been a number of steps necessary to put such a scheme in place, so it is unlikely that the entire fraudulent scheme would have been a
2 Referring to ss 23, 28(1)(c), and 49(d) of the Criminal Proceeds (Recovery) Act 2009.
"one-off". All of the cash and other deposits totalling $1,855,136.64 were tainted by Mr Li's fraud, and once that property became tainted, the entire amount became liable for forfeiture.
[39] Mr Angelson next submitted that, once assets are forfeited to the Crown under the CPRA, they come within the custody of the Official Assignee. Under s 81 of the CPRA, the Official Assignee does not assume any liabilities in respect of the forfeited property. Nor does the CPRA extinguish tax liabilities in respect of restrained property. Those liabilities remain with the owner of the restrained property (in this case, Mr Li and/or Ms Wang), and there is no mechanism within the tax legislation to recognise the simple forfeiture of criminal proceeds by itself as a credit towards, or in payment of, a tax liability. In those cases under the CPRA where a respondent's unpaid tax has been provided for, the taxes were either paid under the relevant settlement deed itself, or through express agreement with the Inland Revenue Department.
[40] Mr Angelson referred to s 28 of the CPRA, which provides a mechanism for certain liabilities to be paid out of restrained assets. One such liability is "any specified debt incurred by the respondent in good faith". Tax liabilities resulting from legitimate business activities would have come within that expression. The Commissioner does not know why no provision was made for the payment of taxes out of the restrained funds, using s 28 of the CPRA.
[41] As AA's debt to the Commissioner for the outstanding tax was not established until the tax assessments were finalised between AA and the Commissioner on or about 7 August 2018, the forfeiture of assets in August 2017 could not have satisfied a tax liability that did not crystallise until approximately a year later.
[42] Mr Angelson also referred to AA's ongoing liability for interest ($62,748.56 as at 31 July 2018, and $69,317 as at 1 March 2019).
[43] The Commissioner says that her position at all times in the course of the negotiations with Mr Li (on behalf of himself and AA) was that she was not a party to, or bound by the Settlement Agreement.
[44] Mr Angelson referred to a number of authorities under the CPRA where provision has been made for the discharge of the respondent's tax liabilities from the respondent's assets (including in cases where the significant criminal offending relied upon was or included tax evasion).3
[45] In answer to questions put by the Court at the hearing, Mr Angelson accepted that the difference between the situations that were in issue in Police v McCarthy, Police v Investments Ltd, and Police v Gong, and the present case, is that in the other cases there was specific reference or acknowledgment that the forfeited funds would be applied in part to pay a tax liability owed to the Commissioner. Mr Angelson submitted that in this case there was no such express reference; on the contrary, the Settlement Agreement was said to have no bearing on what the Commissioner might or might not do with regard to tax assessments. Mr Angelson submitted that the effect was to leave it to the Commissioner to decide whether some of the unpaid tax (reflected in the assets forfeited) would or would not be credited to Mr Li's or AA's unpaid tax liabilities when they were assessed.
DISCUSSION AND CONCLUSIONS
Applications to set aside statutory demands — general principles
[46] In my judgment in Eagle Flight Training Ltd v Aerospace Invest Pte Ltd I summarised the relevant principles as follows.4
[47] A statutory demand is a demand, made in accordance with s 289 of the Act, by a creditor in respect of a debt owing by a company to the creditor.5 The statutory demand must be in respect of a debt that is due and is not less than the prescribed amount (currently $1,000), and it must require the company to pay the debt, or enter into a compromise or otherwise compound with the creditor, or give a charge over its property to secured payment, to the reasonable satisfaction of the creditor, within 15 working days of the date of service of the demand.6 If a company fails to comply
3 Commissioner of Police v McCarthy [2013] NZHC 3257, Commissioner of Police v Investments Ltd [2017] NZHC 284, and Commissioner of Police v Gong [2018] NZHC 1859.
4 Eagle Flight Training Ltd v Aerospace Invest Pte Ltd [2018] NZHC 966.
5 Companies Act 1993, s 289(1).
6 Section 289(2).
with a statutory demand, that failure provides prima facie proof that the company is unable to pay its debts – a ground on which the creditor may apply to put the company into liquidation.7
[48]Section 290 of the Act materially provides:
290Court may set aside statutory demand
(1) The court may, on the application of the company, set aside a statutory demand.
…
(4)The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
…
(7) An order under this section may be made subject to conditions.
[49]Section 291 of the Act materially provides:
291Additional powers of court on application to set aside statutory demand
(1)If, on the hearing of an application under section 290, the court is satisfied that there is a debt due by the company to the creditor that is not the subject of a substantial dispute, or is not subject to a counterclaim, set-off, or cross-demand, the court may—
(a)order the company to pay the debt within a specified period and that, in default of payment, the creditor may make an application to put the company into liquidation; or
(b)dismiss the application and forthwith make an order under section 241(4) putting the company into liquidation,—
[on the ground that the company is unable to pay its debts.]
7 Sections 287(a) and 241(4)(a).
(2)For the purposes of the hearing of an application to put the company into liquidation pursuant to an order made under subsection (1)(a), the company is presumed to be unable to pay its debts if it failed to pay the debt within the specified period.
[50] Under s 290(4)(a), the onus is on the applicant for an order setting aside a statutory demand to show that there is a genuine and substantial dispute as to the existence of the debt. The dispute must be real and not fanciful or insubstantial; the applicant must show a fairly arguable basis upon which it is not liable for the amount claimed. The mere assertion that a dispute exists is not sufficient. Under s 290(4)(b), an applicant must establish that any counterclaim or cross-demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim; such an obligation would amount to the dispute itself being tried on the application.8
[51] Under s 290(4)(c), which is concerned with setting aside on "other" grounds, the Court will consider whether the creditor's prima facie entitlement to liquidate the company is outweighed by some other factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the debtor company must be sufficiently compelling to overcome the general policy of the Act (that insolvent companies should normally be put into liquidation).9 In Commissioner of Inland Revenue v Chester Trustee Services Ltd, Baragwanath J considered that s 290(4)(c) should only be used in cases which "clearly justify departure" from the fundamental principle that insolvency should bring the end of the company's existence.10
[52] If an application to set aside a statutory demand is made on the basis that the debt is disputed, proof of solvency is not determinative but will support the applicant’s case that the dispute is genuine.11
8 Linda Howes & Others Brookers Company and Securities Law (looseleaf ed, Brookers), at [CA 290.02], citing North Harbour Equine Hospital Ltd v Little HC Auckland CIV-2006-404-7585, 19 February 2007.
9 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [3] per Tipping J, referred to by the Court of Appeal in 21st Century Investments Ltd v ANZ National Bank Ltd [2011] NZCA 548 at [47].
10 Commissioner of Inland Revenue v Chester Trustee Services Ltd, above n 9, at [48].
11 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].
[53] The Court is entitled to allow statutory demands to stand in reduced amounts representing items not open to dispute.12
Relevant provisions of the CPRA
[54] Section 3 of the CPRA provides that the primary purpose of the CPRA is to establish a regime for the forfeiture of property —
(a)that has been derived directly or indirectly from significant criminal activities; or
(b)that represents the value of a person's unlawfully derived income.
[55] The purposes of the criminal proceeds and instruments forfeiture regime established by the CPRA include eliminating the chance for persons to profit from undertaking or being associated with significant criminal activity, deterring significant criminal activity, and reducing the ability of criminals and persons associated with crime or significant criminal activity to continue or expand criminal enterprise.13
[56] In general terms, the CPRA provides for the restraint and forfeiture of property derived as a result of significant criminal activity, without the need for a conviction.14 It is common ground that the definition of "significant criminal activity" in the CPRA catches tax evasion.15
[57] The CPRA generally provides for civil proceedings for restraining orders, and orders for the forfeiture of assets and/or profits. The person empowered to apply for such orders is the Police, and any application for a civil forfeiture order must be made in this Court.16
[58] Sections 22 and 28 of the CPRA are concerned with applications for restraining orders, and conditions on the making of a restraining order. Under s 23, the parties
12 United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [46]; 21st Century Investments Ltd v ANZ National Bank [2011] NZCA 548 at [39].
13 Criminal Proceeds (Recovery) Act 2009, s 3(2).
14 Section 4(1)(a).
15 Section 6.
16 Sections 43 and 44.
entitled to appear and adduce evidence at the hearing of an application for a restraining order are the applicant, the Official Assignee, and any person who holds an interest in the proposed restrained property (including, if applicable, the respondent).
[59] Section 28(1) of the CPRA materially provides that the Court may impose such conditions on the making of a restraining order as it thinks fit, including conditions that provide for the following to be met out of a respondent's restrained property:
…
(c)"the payment of any specified debt incurred by the respondent in good faith";
(d)any other expenses allowed by the Court.
[60] Under s 49 of the CPRA, an application by the Police for an assets forfeiture order must specify the particular property that the Police allege is "tainted property".17
[61] The Police must state in the application for an assets forfeiture order the grounds for belief that the property is "tainted property". The Police must also name any other persons who, to the knowledge of the Police, have an interest in the property to which the application relates.
[62] Section 50 of the CPRA provides that if, on an application for an assets forfeiture order, the Court is satisfied on the balance of probabilities that specific property is tainted property, the Court must make an assets forfeiture order in respect of that specific property. The forfeited property:
(a)vests in the Crown absolutely; and
(b)is in the custody and control of the Official Assignee.
17 "Tainted property" is defined in s 5 of the Criminal Proceeds (Recovery) Act as any property that has, wholly or in part, been —
(i)acquired as a result of significant criminal activity; or
(ii)directly or indirectly derived from significant criminal activity.
"Tainted property" will include any property that has been acquired as the result of, or directly or indirectly derived from, more than one activity if at least one of those activities is a significant criminal activity.
[63] Section 95 of the CPRA deals with Court approval of settlements. Section 95 provides:
95High Court must approve settlement between Commissioner and other party
(1)The Commissioner may enter into a settlement with any person as to the property or any sum of money to be forfeited to the Crown.
(2)A settlement does not bind the parties unless the High Court approves it.
(3)The High Court must approve the settlement if it is satisfied that it is consistent with—
(a)the purposes of this Act; and
(b)the overall interests of justice.
The application of the law in this case
[64] First, I do not think it is necessary to rule on the admissibility of the without prejudice letter dated 28 June 2017 sent by counsel for the Police to Mr Kilian. It is apparent from the Settlement Agreement that both the Police and Mr Li had retained experts to provide reports on the extent of the tax that had been evaded, and the Settlement Agreement states in a footnote that Ms Weaver provided an affidavit dated 5 May 2017 in the proceeding under the CPRA. It seems improbable that Ms Weaver's evidence in the CPRA proceeding, and the subsequent negotiations which must have taken place between the parties to the CPRA proceeding, would not have involved disclosure of essentially the same material that formed the basis of Ms Weaver's report for the Voluntary Disclosure. I therefore consider it more likely than not that, before the Settlement Agreement was signed, the Police were well aware that at least a substantial part of the deposits into the bank accounts totalling $1,855,136.64 reflected revenue derived substantially by AA.
[65] But I do not think the Police needed to be concerned with the issue of which party was the liable taxpayer (Mr Li or AA). The assets which were the subject of the application for a forfeiture order (the home and the cash) were in the possession of Mr Li and Ms Wang, and those assets would have been "tainted" for the purposes of the definition of "tainted property" in the CPRA if they were either directly or indirectly derived from significant criminal activity. The CPRA provides at s 5(2) that
a reference to a person "deriving" property includes property derived by another person "at the request or direction" of the first person. Any tax evasion by AA was presumably carried out at the request or direction of Mr Li, and for that reason it would not have mattered to the Police at the time the Settlement Agreement was entered into whether the assets in question were tainted because Mr Li was guilty of the tax evasion that constituted the "significant criminal activity", or whether the guilty party was AA acting at Mr Li's request or direction. Either way, the assets would be tainted, and they were owned by Mr Li and/or Ms Wang.
[66] I have not been provided with any of the evidence given in the CPRA proceeding, and it has not been explained to me how the home was, wholly or in part, acquired or derived directly or indirectly from one or both of the significant criminal activities relied upon by the Police (or from one or more of those activities combined with legitimate activities), and thus qualified as "tainted property". Nevertheless, restraining orders had been made by Keane J in respect of the home as well as the cash, and the Court would have been required to be satisfied that there were reasonable grounds to believe that the home was tainted property before any restraining order could be made in respect of it.18 And Woolford J would have satisfied himself, as required by s 95 of the CPRA, that the proposed settlement was consistent with both the purposes of the CPRA and the overall interests of justice. I will proceed on the basis that there was evidence that both the home and the remaining cash were tainted property under the CPRA.
[67] I accept that AA has shown that it has a genuine and substantial argument that the amounts paid under the Settlement Agreement reflected, and would have been sufficient to extinguish, the relevant tax liability of AA. The total amount paid under the Settlement Agreement was $575,000, and under the Agreed Assessment AA's tax liability was assessed, roughly a year after the Settlement Agreement, at only approximately $211,000. Mr Angelson pointed out that the parties' respective tax positions before the Settlement Agreement was made in the CPRA proceeding would not have taken account of shortfall penalties, but I did not understand him to argue that, if the $575,000 forfeited by Mr Li and Ms Wang to the Crown had been paid to
18 Criminal Proceeds (Recovery) Act 2009, s 24(1).
the Commissioner, that would not have been sufficient to extinguish AA's tax debt, together with shortfall penalties and interest, at the time of payment. Of course no assessment had been made at that point, and Mr Kilian submitted that that is the substantial reason why no provision was made in the Settlement Agreement for the (evaded) tax to be paid by the Official Assignee to the Commissioner.
[68] I also accept AA's submission that the agreed forfeiture payments were probably calculated almost entirely on the basis that the relevant "significant criminal activity" was tax evasion. The Settlement Agreement was reached not long before the forfeiture application was due to be heard at a three day hearing, and numerous affidavits had been filed. Subject to any cross-examination, all of the evidence was in. Against that background, the Police acknowledged in the Settlement Agreement that Mr Li was only sentenced on the basis of one count of obtaining by deception, and the amount proved to have been received by him was only $3,000. The Police submitted that there must have been further fraudulent offending, but they accepted that there was "little to support this contention".
[69] The eventual settlement figure of $575,000 appears to have reflected a compromise between the parties' competing positions on the amount of tax evaded ($778,883.98 according to the Police; $490,260.33 according to Mr Li), also taking account of the limited value of the assets available for forfeiture ($885,000) and what was perceived as a likelihood that any hardship application by Ms Wang would succeed.
[70] For present purposes, I conclude that it is arguable for AA that an amount equivalent to the tax it was later assessed to have failed to declare and pay, was included within the $575,000 paid by Mr Li and Ms Wang to the Official Assignee.
[71] However, that conclusion only takes AA part of the way. The first, and substantial, problem for AA is that it did not do what parties appear to have done in other cases where settlements have been reached in proceedings under the CPRA in which the significant criminal activity was tax evasion, namely ensure that their settlement agreements provided for the forfeited assets to be applied to pay the outstanding tax. It appears that the Commissioner was not involved in the CPRA
proceeding at all, notwithstanding that an application could have been made under s 45(3) of the CPRA for an order directing that the Commissioner (and, for that matter AA) be served with the forfeiture application. And the parties expressly recorded that the Settlement Agreement would have no bearing on any action the Commissioner might take in the future, or on how the Commissioner might treat the settlement, if approved.19 On the face of it, Mr Angelson appears to have been correct when he submitted that the effect of cl 2.10 was to leave it to the Commissioner to decide whether some of the unpaid tax (reflected in the assets forfeited) would or would not be credited to Mr Li's or AA's unpaid tax liabilities when they were assessed.
[72] It is not clear why the Commissioner elected to pursue the tax payable under the Agreed Assessment without apparent regard to the payments earlier made by Mr Li and Ms Wang pursuant to the Settlement Agreement. In a letter to AA's solicitors dated 9 October 2017 the IRD investigator had said that the Commissioner would "bear in mind the proceeds of crime recovery payment to [the Police] when considering treatment of amounts that may be owed by your clients following completion of all reassessments". The letter did go on to say that the Commissioner gave no undertaking of what the outcome of the "bearing in mind" might be, and pointed out that the Commissioner was not a party to the Settlement Agreement. Given that early indication of a possible willingness to consider a credit for the forfeiture payments, one might have expected the Commissioner to have provided some evidence of the process by which she apparently reached the view that the payments made under the Settlement Agreement should be disregarded. But no evidence of that sort was provided.20
[73] The Commissioner's view as expressed in counsel's submissions appears to have been that her reasons for declining to give AA any "credit" for the payments made under the Settlement Agreement are not relevant. Mr Angelson submitted that there is no mechanism in the tax legislation for the Commissioner to recognise the simple
19 Settlement Agreement, cl 2.10.
20 The communications between the Commissioner's staff and Mr Li or his agent Mr Lawson which were produced appear to show that those staff members were concerned solely with completing the assessments of tax and shortfall penalties. Once those assessments were made, the matter would be passed to "Collections", with a copy of the Settlement Agreement, for further decisions to be made. The evidence does not show why the Collections staff concluded that no credit should be given for the money recovered by the Crown under the Settlement Agreement.
forfeiture of criminal proceeds by itself as a credit towards, or in payment of, a tax liability. He also submitted that it is contrary to the scheme and purpose of the CPRA to regard the confiscation of criminal proceeds as satisfaction of a liability arising through legitimate business activities. Thirdly, he submitted that the statutory demand was premised on tax assessments made by agreement between AA and the Commissioner on or about 7 August 2018, when the Agreed Assessment was signed. The forfeiture of the criminal proceeds in 2017 could not have satisfied a tax liability that did not crystallise until August 2018. I return to those arguments below.
[74] The second problem for AA is the Agreed Assessment. The Agreed Assessment set out details of the total of $211,894.59 agreed for the outstanding income tax, GST, and shortfall penalties, and then provided:
Due date of amended taxes
The due date for payment will be 35 days for GST assessment(s) and two months for all non-GST tax types from the date of the amended assessment and will be detailed on Statement(s) of Account. If payment is not made by the new date, late payment penalties may apply.
[75] Mr Angelson submitted that in signing the Agreed Assessment for AA, Mr Li acknowledged the dates the taxes were due. There was no suggestion that the tax had already been paid.
[76] The part of the Agreed Assessment quoted at paragraph [74] above appears to have been part of a standard form of agreement, and in the communications which preceded it Mr Li and AA do appear to have maintained the position that the payments made under the Settlement Agreement had effectively already discharged the tax liability for which AA would be formally assessed for each of the relevant years. Also, the process adopted by the Commissioner's staff does appear to have contemplated deferment of consideration of the effect of the Settlement Agreement payments until after the assessments had been completed.21 In those circumstances I think it arguable
21 For example, a record of a contact with Mr Li on 25 July 2018 which the Commissioner produced states:
25/7/2018 Mr Li confirmed receipt of the email and AAF forms. He is reviewing them. He asked what he should do. I said that if he agrees with adjs and penalties he should sign and return them. He said what should he do about double payment ie payment to the court. Can he get the money from them. I said I do not know but he should approach the court. I said that my job was make the correct assessments
for AA that the effect of the Agreed Assessment was to settle the amounts of tax payable for each of the relevant periods, leaving open the question of whether that tax may have already been paid.
[77] If there is no mechanism in the tax legislation for the Commissioner to recognise the simple forfeiture of criminal proceeds by itself as a credit towards a tax liability, as Mr Angelson submitted, it is not at all clear how the Commissioner's investigator felt able to advise AA's solicitors that the Commissioner would "bear in mind" the payments made under the Settlement Agreement when assessing the tax. Nor is it obvious to me that it would have been outside the scope and purpose of the CPRA to regard the Court's "confiscation" of criminal proceeds as satisfaction of a liability arising through legitimate business activities, when the "criminal proceeds" in question (the unpaid tax) might correspond precisely to that very same liability. Settlements in other cases involving tax evasion have made provision for payment of the outstanding tax to the Commissioner.
[78] I do not think there is anything in Mr Angelson's submission that payments made in 2017 under the Settlement Agreement could not have satisfied a tax liability that did not crystallise until August 2018. The issue is not over the timing of the payments made under the Settlement Agreement, but whether the payments to the Crown (whenever made) were and are available to be applied towards AA's present or future tax liabilities.
[79] I accept Mr Angelson's submission that nothing in the CPRA would have required the Official Assignee to hold the money paid under the Settlement Agreement on trust for the Commissioner (notwithstanding that a principal reason the bulk of the money was "tainted" at all was presumably that the same money had been wrongfully withheld from the Commissioner). The Official Assignee was obliged, after meeting costs (and certain other payments if applicable) to pay the balance of the forfeited assets to the Crown.22 But Mr Kilian's argument, as I understood it, was that either
and apply the correct [shortfall penalties] if any. I would then pass case to Collections who will then consider repayment and how the court payment agreement affects IR. They can only do this when assessments raised and any applic penalties imposed. He said he will consider whether approaching Mr Kilian again.
22 Criminal Proceeds (Recovery) Act 2009, s 82(1)(d).
(i) payment to the Crown was sufficient to discharge the tax liability, or (ii) the Crown (not the Official Assignee) is holding the money equivalent to the tax liabilities on a trust or trusts for the Commissioner, and AA has directed the Crown to pay the amount of its tax liability to the Commissioner.
[80] It is doubtful that AA has met the standard of proof normally required to set aside a statutory demand (showing that there is a genuine and substantial dispute over the existence of the debt), but a concern remains that the Commissioner's position could involve AA being required to pay the outstanding tax, including shortfall penalties and interest, twice, and I doubt very much that was ever contemplated when the order was made approving the Settlement Agreement. Certainly cl 2.10 recorded that the Commissioner was not bound by the Settlement Agreement, but did the Police, Mr Li or Woolford J really contemplate that Mr Li and/or AA might later be compelled to pay up to $778,883.98 to the Commissioner? Such an outcome would arguably be inconsistent with the apparent intention of the Settlement Agreement to allow Mr Li and Ms Wang to retain the family home, and to "provide security and certainty for Ms Wang and her young child". It is also arguably inconsistent with the understanding expressed in the Settlement Agreement that the property pool available for settlement was $885,000. I accept that cl 2.10 left it to the Commissioner to decide how to treat the payments made under the Settlement Agreement, but that may have represented no more than an acknowledgment by the Police that only the Commissioner could finally settle the amount of tax payable. It must be doubted that anyone thought the Commissioner would disregard the $575,000 CPRA forfeiture altogether.
[81] Mr Angelson submitted that the Settlement Agreement was made with Mr Li, not AA, and that AA had separate and distinct tax liabilities. That may be so, but it appears that there was never a clear distinction between Mr Li and AA in the running of the business. And the Settlement Agreement did not need to address the distinction
— the starting point was that $1,855,136.14 had been received by Mr Li and Ms Wang and everyone appears to have accepted that, wherever the money came from, it represented taxable revenue that had not been declared. Whether that revenue was derived by AA or Mr Li did not matter under the CPRA; either way, Mr Li and Ms Wang were arguably in possession of tainted assets.
[82] No doubt there will be CPRA cases where the respondent has obtained money from someone by criminal fraud, and that fraud is the "significant criminal activity" on which an asset forfeiture order is made. The money obtained by the fraud in such a case will presumably be tainted and liable to forfeiture. The complainant in such a case might no longer have any "interest" in the money paid as a result of the fraud, and accordingly might not have participated in the CPRA proceeding. In those circumstances I do not think anyone would suggest that the complainant could not sue the fraudster for recovery of his or her money, and it would be no defence to such a claim for the fraudster to say that the money had been paid (forfeited) to the Crown under the CPRA. But what is different in this case is that the complainant (the Commissioner) is in substance a department of the Crown, and the Crown received sufficient money under the Settlement Agreement to cover the unpaid tax and penalties thereon.
[83] I accept that there are other difficulties facing AA, including the fact that the CPRA is concerned with broader matters, such as deterring criminal behaviour by others. It is not necessarily just concerned with the recovery of the proceeds of criminal activities. And subject to hardship considerations, all of a tainted asset will be forfeited, even if a substantial part of the cost of its acquisition or maintenance came from legitimate funds. But the elephant in the room remains, in the form of a likelihood that no-one involved with the Settlement Agreement expected that the Crown would receive the evaded tax twice, once via the Official Assignee and once via the Commissioner.
[84] There is authority under s 290(4)(c) of the Act 23 that the subsection may be invoked where the use of the statutory demand procedure amounts to the application of undue pressure by the creditor.24 I think that is the position here. People should not ordinarily have to pay their taxes to the government twice, and if there is a serious risk that that would occur, as I think there is in this case, the issue should not in my view be determined in a summary way on an application such as this. That in my view
23 I think the subsection is sufficiently invoked by the application, in particular by the contention that the Commissioner is seeking to obtain an unjust enrichment.
24 Stewart's Cycle City Ltd (now known as Trafalgar Traders Ltd) v Sheppard Industries Ltd [2013] NZHC 256 at [9]; Paramoor Eleven Ltd v Pramb Wong Enterprises Ltd HC Auckland M1434/94, 10 April 1995, at 14.
provides a "sufficiently compelling" circumstance that it would be unjust to allow the Commissioner to proceed with a liquidation claim based on failure to comply with the statutory demand.25
Result
[85] For all of those reasons, there will be an order setting aside the statutory demand under s 290(4)(c) of the Act, conditional on AA filing and serving an appropriate proceeding in this Court within 15 working days, seeking such declaratory or other relief as it may consider appropriate to vindicate its contention that the amount claimed in the statutory demand should be deemed to have been paid or sufficiently satisfied by AA (whether by the actual payments made pursuant to the Settlement Agreement, or by the subsequent direction given by AA to the Crown to pay the outstanding tax to the Commissioner).
[86] Although AA has been successful with its application, I am of the view that AA and Mr Li have largely brought the problems on themselves, and the interests of justice will be sufficiently met if costs are left to lie where they fall. I make no order for costs.
Associate Judge Smith
25 Commissioner of Inland Revenue v Chester Trustee Services Ltd, above n 9, at [3].
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