Allen v Commissioner of Inland Revenue Ca204/04
[2005] NZCA 234
•8 September 2005
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IN THE COURT OF APPEAL OF NEW ZEALAND
CA204/04
BETWEENDONALD EUGENE ALLEN
Appellant
ANDTHE COMMISSIONER OF INLAND REVENUE
Respondent
Hearing:17 August 2005
Court:William Young, O'Regan and Robertson JJ
Counsel:C T Gudsell for Appellant
R J Ellis and K Whitiskie for Respondent
Judgment:8 September 2005
JUDGMENT OF THE COURT
A The appeal is dismissed.
B The respondent is entitled to costs of $6,000 plus usual disbursements.
REASONS
(Given by O’Regan J)
Introduction
[1] This is an appeal from a decision of Wild J (now reported as Commissioner of Inland Revenue v Taxation Review Authority and another (2004) 21 NZTC 18,707). The Judge granted an application by the Commissioner for judicial review of a decision of the Taxation Review Authority (TRA) declining to strike out proceedings initiated by the appellant (to whom we will refer as the taxpayer) challenging default assessments made by the Commissioner for the 2000 and 2001 tax years. He set aside the decision of the TRA and struck out the taxpayer’s proceedings in the TRA.
[2] The decision of Wild J drew on the analysis he had undertaken in another case which had been heard by him at the same time as the case under appeal, Commissioner of Inland Revenue v Taxation Review Authority and another (2004) 21 NZTC 18,634. The taxpayer in that proceeding also appealed to this Court, but abandoned his appeal a few days prior to the intended hearing. It had been intended that the two appeals would be heard together.
Issue on appeal
[3] The issue on this appeal is a relatively narrow one, concerning the process which a taxpayer is required to follow if he or she wishes to challenge a default assessment made by the Commissioner under s 106 of the Tax Administration Act 1994 (TAA).
Facts
[4] The facts relevant to the present appeal can be summarised briefly. There was no dispute about them. The present litigation is, however, part of a broader dispute between the taxpayer and the Commissioner, and the factual context for that dispute is summarised in the decisions relating to earlier proceedings between these parties: Commissioner of Inland Revenue v Allen (2003) 21 NZTC 18,137 (HC) and Allen v Commissioner of Inland Revenue (2004) 21 NZTC 18,718 (CA).
[5] The facts relevant to the present proceeding are that on 8 April 2002, the Commissioner issued assessments for the taxpayer for the 2000 and 2001 income years. These were “default assessments”: the taxpayer had not filed any returns for the 2000 and 2001 years, and the assessments were made in the exercise of the power contained in s 106 of the TAA which entitles the Commissioner to make an assessment of the tax payable by a person in such circumstances. Assessments made in these circumstances are commonly known as “default assessments”, though that is not a defined term in the TAA.
[6] On 15 July 2002, the taxpayer filed a notice of claim in the TRA challenging the default assessments. He also filed an application under s 138D of the TAA to commence proceedings outside the response period for the bringing of proceedings under s 138B.
[7] On 31 July 2002, the taxpayer filed income tax returns for the 2000 and 2001 years, showing his income as nil. At the same time he filed a Notice of Proposed Adjustment (NOPA). The NOPA was consistent with the position taken in the tax returns. The tax returns were also accompanied by notes which explained that position. The NOPA was said to have been filed on a “without prejudice” basis. We were told that this was done because the taxpayer did not believe it was necessary to issue a NOPA consequent upon the issue of a default assessment in order to give the TAA jurisdiction to hear the challenge. The NOPA included a request by the taxpayer that the Commissioner consider certain circumstances under s 89K of the TAA (effectively requesting that the Commissioner accept the NOPA even though it was filed out of time).
[8] On 16 September 2002, the Commissioner filed a Notice of Defence to the Notice of Claim which had been filed by the taxpayer in the TRA. At the same time, the Commissioner filed an application to strike out the taxpayer’s Notice of Claim in the TRA.
[9] On 23 September 2002, the Commissioner declined the request made under s 89K to accept the taxpayer’s NOPA out of time.
[10] On 30 September 2002, the Commissioner issued a Notice of Response (NOR) on a conditional basis. In the NOR, the Commissioner rejected the NOPA as being out of time and invalid, and reiterated that the tax assessed in the assessment made on 8 April 2002 was owing.
[11] The Commissioner’s application to strike out the taxpayer’s Notice of Claim in the TRA was heard by the TRA in February and March 2003, and on 19 May 2003 the TRA issued a judgment declining the application: Case W19 (2003) 21 NZTC 11,182. The decision of the TRA is summarised in the High Court judgment at [15]-[22].
[12] The Commissioner then commenced the present judicial review proceedings in the High Court.
Statutory context
[13] Parts 4A and 8A of the TAA were introduced in October 1996 following the organisation review conducted by the Rt Hon Sir Ivor Richardson in 1993-94. In very broad terms, Part 4A sets out pre-litigation disputes procedures, while Part 8A provides for challenges, which is essentially a litigation procedure in either the TRA or the High Court. This replaced the earlier “objection” procedure in Part 8.
[14] The purpose of Part 4A is set out in s 89A(1) of the TAA which provides:
(1) The purpose of this Part is to establish procedures that will—
(a)Improve the accuracy of disputable decisions made by the Commissioner under certain of the Inland Revenue Acts; and
(b)Reduce the likelihood of disputes arising between the Commissioner and taxpayers by encouraging open and full communication—
(i)To the Commissioner, of all information necessary for making accurate disputable decisions; and
(ii)To the taxpayers, of the basis for disputable decisions to be made by the Commissioner; and
(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 concerning a disputable decision by requiring the issues and evidence to be considered by the Commissioner and a disputant before the disputant commences proceedings.
[15] The provisions of Part 4A seek to achieve the above purposes by requiring that there is full and frank communication between the Commissioner and the taxpayer in a structured manner with strict time limits. In broad terms, it is contemplated that, if the Commissioner wishes to dispute the position taken by a taxpayer in his or her tax return, the Commissioner issues a NOPA, and if the taxpayer wishes to dispute the position taken in the NOPA, he or she issues a NOR. Sometimes, however, the position is the other way round. The Commissioner says that this is such a case.
[16] That is because, in the present case, the Commissioner issued an assessment without having received a tax return from the taxpayer. In that situation s 89D applies. For present purposes the relevant provisions of that section are s 89D(1) and (2), which provide:
(1) If the Commissioner—
(a) Issues a notice of assessment to a taxpayer; and
(b)Has not previously issued a notice of proposed adjustment to the taxpayer in respect of the assessment, whether or not in breach of section 89C,—
the taxpayer may, subject to subsection (2), issue a notice of proposed adjustment in respect of the assessment.
(2)A taxpayer who has not furnished a return of income for an assessment period may dispute the assessment made by the Commissioner only by furnishing a return of income for the assessment period.
[17] The precise meaning of those two sub-sections is at the core of this appeal, and we will discuss them in greater detail later.
[18] Part 8A provides for challenges to “disputable decisions” made by the Commissioner. These can be commenced either in the TRA or the High Court. The intention of the reforms made following the Richardson Report is that the challenge process will take place only after the full and frank exchanges of information required by Part 4A have taken place, which will normally be through the NOPA/NOR mechanism. For present purposes, the key provision is s 138B. It was agreed that neither s 138B(1) nor s 138B(2) applied in the present case, so the applicable provision is s 138B(3), which provides:
(3)A disputant is entitled to challenge an assessment by commencing proceedings in a hearing authority if—
(a)the Commissioner rejects, within the applicable response period, an adjustment proposed by the disputant and does not subsequently issue an amended assessment; and
(b)the disputant files the proceedings, in accordance with the Taxation Review Authority Regulations 1994 (or any regulations made in substitution for those regulations) or High Court Rules, within the response period of the written disputable decision from the Commissioner that the proposed adjustment will not be adjusted; and
(c)for the purposes of paragraph (b), the written disputable decision from the Commissioner is not limited to the Commissioner's notice of response.
[19] A hearing authority means the TRA or the High Court. In this case, it was the TRA.
[20] If disputant does not commence proceedings within the applicable response period, there is provision for the hearing authority to allow proceedings to be commenced out of time in exceptional circumstances: s 138D. Section 138H provides:
The Commissioner may apply to a hearing authority to strike out a challenge commenced by a disputant if the Commissioner considers that the disputant has failed to comply with any of the requirements of section 89M or section 138B.
[21] This was the section under which the Commissioner applied to strike out the taxpayer’s Notice of Claim in the TRA in the present case. The Commissioner alleged that the taxpayer had not complied with the requirements of s 138B.
Three possible interpretations
[22] We received careful and comprehensive submissions from both counsel, and these were elaborated upon in oral argument. The statutory provisions in issue in this case are nowhere near as clear as they ought to be, and that lack of clarity has led to the present difficulties. But, looking at the issues in the round, we think that the competing contentions can be reduced to three possible interpretations.
First interpretation
[23] The first interpretation is that which is put forward by counsel for the taxpayer, Mr Gudsell. Its features are:
(a)As the Commissioner had issued an assessment under s 106 in this case, it was incumbent on the taxpayer to respond. Section 89(2) says that a taxpayer who has not furnished a tax return may dispute such an assessment “only by furnishing a return of income for the assessment period”. This means that the taxpayer has no option but to file a tax return and that this is the only response he or she can make. No time period is provided for doing this in s 89D(2).
(b)If the taxpayer does so, the position outlined in the tax return amounts to “an adjustment proposed by the disputant” to the Commissioner’s assessment, which has been rejected by the Commissioner (by the Commissioner pursuing High Court proceedings) and the Commissioner has not subsequently issued an amended assessment. So the requirements of s 138B(3)(a) are met. There is no doubt that the requirements of paras (b) and (c) of that sub-section are also met, so the TRA proceedings are properly before the TRA, the TRA has jurisdiction, and the proceeding should not be struck out.
Second interpretation
[24] The second interpretation is a variant on the first, and was also commended to us by Mr Gudsell. Its features are:
(a)Section 89D(2) says that a taxpayer who has not furnished a tax return may dispute an assessment made by the Commissioner “only by furnishing a return of income for the assessment period” (see [23](a) above).
(b)Where the taxpayer does file a tax return, that tax return displaces the Commissioner’s assessment and becomes the starting point for the Part 4A procedures. Thus, if the Commissioner does not accept the position outlined in the tax return, the Commissioner must issue a NOPA and if the taxpayer disputes the position set out in the NOPA, the taxpayer must issue a NOR. In the present case, that would mean that the tax return filed by the taxpayer on 15 July 2002 would be the starting point for the Part 4A procedures and the Commissioner should, if he does not accept the nil tax position outlined in the tax return, issue a NOPA. The Commissioner could still do so in the present case if that were the correct outcome.
(c)As the Commissioner would not yet have issued a NOPA in response to the taxpayer’s tax return, the Part 4A process would not yet have begun and there could not therefore be a challenge proceeding in the TRA. Although this position was put forward by Mr Gudsell in support of the taxpayer’s case against the striking out of the TRA proceedings, he accepted that, if we were to accept this interpretation there would be no basis on which the TRA proceedings could be continued and it would be appropriate to uphold the High Court decision striking them out, albeit on a different basis.
Third interpretation
[25] The third interpretation is that contended for by counsel for the Commissioner, Ms Ellis. Its features are as follows:
(a)A default assessment under s 106 is not to be treated differently from any other kind of assessment for the purposes of Part 4A and Part 8A. Accordingly, there is no basis to construe s 89D as displacing the normal requirement for a taxpayer who wishes to contest an assessment to do so by way of a NOPA and this must be done within the applicable response period: s 89D(5). That is a prerequisite to the entitlement to challenge an assessment by commencing proceedings in the TRA for the purposes of s 138B(3).
(b)The only difference in the process for challenging a default assessment from the process which applies to other assessments is the requirement in s 89D(2) that the taxpayer must furnish a tax return for the assessment period. However, that provision does not provide for the tax return to be the method of disputing the default assessment. Rather, it is a requirement which must be met before the taxpayer may issue a NOPA under s 89D(1). That is why s 89D(1) is expressed to be subject to s 89D(2).
(c)If a taxpayer wishing to challenge a default assessment has not issued a NOPA in respect of the default assessment under s 89D(1) within the applicable response period in accordance with s 89D(5), which the taxpayer cannot do until he or she has furnished a return of income for the assessment period under s 89D(2), then that taxpayer will not have met the requirements of s 138B(3) and will not therefore be entitled to challenge the default assessment by commencing proceedings in the TRA.
(d)If a taxpayer has commenced proceedings in the TRA without complying with s 138B(3), in the circumstances of the present case, the Commissioner may apply to have the challenge commenced by the taxpayer struck out under s 138H and the TRA should strike the proceedings out because of the failure to comply with s 138B.
Discussion of the options
[26] It was the third of these options which commended itself to the High Court Judge. He found that s 138B(3) applied where a taxpayer wished to challenge a default assessment, citing four reasons, namely:
(a)Section 138B is the only provision in the TAA conferring a right to challenge an assessment.
(b)An assessment includes a default assessment, that being clear from both the definition of “assessment” in s 3 of the TAA and from the wording of s 106.
(c)Section 106 expressly contemplates that an assessment made under that section may be the subject of challenge proceedings, and those proceedings can be brought only under s 138B, which in turn requires an exchange of a NOPA and a NOR prior to the commencement of proceedings;
(d)The alternative conclusion, that the s 138B prerequisites of a NOPA and NOR do not apply to a proceeding challenging a s 106 assessment would place a defaulting taxpayer at an advantage over taxpayers who filed a return. That was something which this Court had rejected in Lawton v Commissioner of Inland Revenue [2003] 2 NZLR 48 at [23].
[27] Wild J rejected the interpretation of s 89D(2) suggested by the taxpayer (and accepted by the TRA), to the effect that s 89D(2) expressly disentitles the taxpayer from issuing a NOPA in respect of a default assessment and requires instead the filing of a tax return. His reasons for this conclusion were:
(a)The TRA’s interpretation assumed that if a taxpayer filed a tax return under s 89D(2), the Commissioner would either amend the default assessment to accord with the return or issue a NOPA disputing it. But the Commissioner had no such obligation: he was entitled to issue a NOPA in response to a tax return under s 89B(1) but not required to do so: s 89C(h).
(b)Similarly the Commissioner had no obligation to assess tax liability on the receipt of a return from a defaulting taxpayer: s 92 requires the assessment of tax liability in respect of returns made under numerous other sections, but not s 89D(2).
(c)Section 106 places the onus on the taxpayer to demonstrate that the default assessment is excessive in challenge proceedings.
(d)The challenge proceedings must be brought within s 138B(3), and the entitlement to commence such challenge proceedings hinges on the taxpayer having filed a NOPA in respect of the default assessment. That NOPA must be filed within the applicable response period under s 89D(5) which was two months at the relevant time.
[28] Mr Gudsell submitted that the issuing of a NOPA by the taxpayer was not a prerequisite to the commencement of challenge proceeding under s 138B(3) where a default assessment was at issue. He said s 138B(3)(a) should be interpreted so that it does not import a requirement that the taxpayer has complied with ss 89C and 89D. He said the term “adjustment proposed” does not necessarily require that a NOPA be filed. He noted that “adjustment proposed” was not a defined term, unlike “proposed adjustment” which is defined in s 3 of the TAA. That defined term is, in turn, used in the definition of “notice of proposed adjustment” in the same section. Mr Gudsell argued all that is necessary for the purposes of s 138B(3) is that the taxpayer has proposed a different position from that outlined by the Commissioner, and the Commissioner has not subsequently issued an amended assessment. He said those conditions were fulfilled in this case.
[29] That interpretation requires the Court to interpret the term “adjustment proposed” as meaning something other than the issuing of a NOPA. In this case it is said that the tax return filed by the taxpayer constituted an adjustment proposed and it was therefore unnecessary for the taxpayer to issue a NOPA.
[30] However, as Ms Ellis pointed out, a tax return is not a proposal of adjustment, but rather a document which a taxpayer is required by law to file containing a definitive statement of the taxpayer’s assessment of his or her tax liability, and incorporating a signed declaration as to its correctness. She said that, given the context of Part 4A and Part 8A, the term “adjustment proposed” should be seen as referring to the proposal made in a NOPA. In that respect she noted that the references in the other sub-sections of s 138B to “the applicable response period”, when referring to an “adjustment proposed”, which makes sense only if read in light of the provisions in Part 4A which require that a NOPA be filed within the applicable response period. She also referred to s 89K(1)(b)(i)(A) which refers to “an adjustment proposed by the Commissioner in the notice of proposed adjustment” and similar provisions in s 89N(2) and 89G(1). She said that the adoption of the interpretation proposed by Mr Gudsell would introduce unnecessary uncertainty into the procedures in Part 4A which require that the dialogue between the Commissioner and the taxpayer follow strict requirements as to prescribed forms of NOPA and NOR and strict time limits.
[31] We accept Ms Ellis’ submission in that regard: it is clear when s 138B is considered in its context, that the term “adjustment proposed” in s 138B(3) refers to an adjustment proposed in a NOPA.
[32] Mr Gudsell suggested that even if s 138B(3)(a) imported the requirements for compliance with s 89D there had been such compliance in this case. In that respect he adopted the TRA’s interpretation of s 89D, and said that 89D(1) did not require a taxpayer to issue a NOPA after an assessment was issued, but merely provided that the taxpayer may do so. In our view, that interpretation cannot be sustained. It is true that s 89D(1) is expressed in permissive terms (“may”), but that is because there is no obligation on a taxpayer to challenge a default assessment. However, once the taxpayer decides to assert his or her entitlement to challenge the assessment, then he or she must do so in accordance with the process outlined in Part 4A. In the present case that is s 89D(1), and that section clearly requires that the method of challenge is by the issuing of a NOPA.
[33] Mr Gudsell said that the requirement to issue a NOPA or a NOR does not apply in a situation where an assessment has already been issued: but that can only be so if the term “adjustment proposed” in s 138B(3) is interpreted as meaning something other than an adjustment proposed in a NOPA. We have already rejected that interpretation.
[34] Mr Gudsell also suggested that the filing of a tax return under s 89B(2) could be seen as proposing an adjustment in a manner which satisfied the requirement to file a NOPA, even though the tax return was not expressed as being a NOPA He pointed out that, in the present case, the tax return filed by the taxpayer was accompanied by notes which explained the position taken in the tax return. He said the tax return in this case was therefore not a mere statement of a position, but a statement including an explanation which could be seen as being in the nature of a proposal. In other words, the position taken in the tax return (and the notes accompanying it) constituted an adjustment proposed in a NOPA for the purposes of s 138B(3).
[35] Mr Gudsell referred to the High Court decision in Singh v Commissioner of Inland Revenue (2002) 20 NZTC 17,811. In that case Baragwanath J considered whether a tax return could be treated as a NOPA for the purposes of s 138B(2) and commented at [20]:
In the present case it may or may not be legitimate to construe the alleged returns as NOPAs (I have found it unnecessary to consider the Commissioner’s contrary submission, although I see no reason in principle not to construe as a NOPA a document that conforms with the requirements of s 89F as to content, even if it is not expressly so described…).
[36] We note that Baragwanath J made no decision in that passage. In our view, s 89F makes it clear that a NOPA must be in the prescribed form (s 89F(1)(b)) and we do not believe that the requirements of s 89F(3) could be satisfied by the filing of a tax return. It is notable that the requirement for a NOPA to be in the prescribed form was introduced only in 1999, so that requirement may not have applied to the tax returns being considered in Singh. We accept the submission made by Ms Ellis that it is important that a NOPA is clearly identified as such, so that it is apparent to the party who must respond to it by a NOR that the applicable time periods have begun to run. If informal documents are treated as NOPAs, that could not occur.
[37] Having carefully considered Mr Gudsell’s submissions, we find ourselves in agreement with the analysis made by Wild J in this case, and we conclude that the third interpretation set out in [25] above is the proper interpretation, for essentially the same reasons as set out by Wild J.
[38] Mr Gudsell provided us with copies of a number of Inland Revenue Department publications which said that default assessments could be challenged only by filing a tax return under s 89D(2). There was no suggestion the taxpayer was misled by these publications but Mr Gudsell said their existence showed that his submission was, at the time the publications were written, supported by the Department itself. We agree. But if the Department’s publications were wrong, that does not assist his case. We think the publications were wrong and it is apparent that they have since been superseded by publications which are consistent with the High Court judgment in this case.
Other arguments
[39] That leaves alternative, subsidiary arguments which were pursued by Mr Gudsell, which we deal with briefly for completeness. The first was that a right of challenge exists outside of s 138B, by virtue of s 138E. In essence he said that the reference to proceedings challenging an assessment in s 106 created an independent right of challenge, recognised in s 138E(2). We think it is clear that s 106 does not create a right to challenge, but rather requires that a default assessment be met unless challenge proceedings are commenced, which in turn imports the requirements of Part 8A as to the commencement of challenge proceedings. The only way of doing that in the present situation is under s 138B(3). There is no alternative: s 138B is exhaustive in the present situation. In our view that interpretation is clear from the context of Part 8A which is predicated on a prior compliance with Part 4A, involving the issue of a NOPA and a NOR, before proceedings are commenced.
[40] Mr Gudsell argued that the TRA had been correct to hold that s 138B did not apply to default assessments. He said that a taxpayer is required to furnish a return under s 89D(2) and there is no time limit for doing so. He said if filing of a tax return is a prerequisite to the issuing of a NOPA, then that meant the tax return had to be filed within two months, which was too short a period for a taxpayer to gather all necessary information together. The two month period may impose some strictures on a taxpayer and cause some difficulties for him or her. But we do not think that is a justification for giving a strained interpretation to the requirements of the Act, and treating default assessments any differently from any other form of assessment when the Act makes no such distinction. In any event, there is provision for an extension of time in exceptional circumstances under s 89K which could be utilised in appropriate circumstances.
[41] Mr Gudsell then argued that the High Court Judge had been wrong to hold that the TRA in declining to strike out proceedings was thereby refusing to exercise a statutory power of decision. He said the power to strike out proceedings was not a statutory power of decision because all arguments raised at the time of the application for strike out could be argued at the substantive trial, and the rights of the Commissioner have not yet been finally decided. We reject that contention. As Wild J noted, the TRA should strike out a proceeding under s 138H if it does not have jurisdiction to hear it because of a failure to comply with s 138B. Its failure to do so is plainly the (wrongful) exercise of a statutory power of decision.
[42] Finally, Mr Gudsell suggested that the High Court Judge was wrong in holding that a taxpayer’s failure to comply with s 138B deprived the TRA of jurisdiction to hear the challenge proceeding. He said if s 138B was the only basis for commencing a challenge and it must be strictly complied with before a challenge is commenced, then non-compliance with s 138B was a failure of a required preliminary step under administrative law making all subsequent actions invalid. He said if there was no jurisdiction to hear the challenge because s 138B had not been complied with, then s 138H had no application because the exercise of the power under s 138H would be the exercise of a non-existent power. In our view that involves a misreading of s 138H, which provides a procedural mechanism for removing from the TRA proceedings which have been improperly commenced because of non-compliance with s 138B.
Result
[43] We dismiss the taxpayer’s appeal.
Costs
[44] We order the taxpayer to pay costs to the Commissioner of $6,000 plus usual disbursements.
Solicitors:
Fletcher Law, Hamilton for Appellant
Crown Law Office, Wellington for Respondent
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