Amaltal Fishing Company Limited v Commissioner of Inland Revenue HC Wellington CIV 2007-485-643

[2007] NZHC 2078

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV 2007-485-643

UNDER  the Tax Administration Act 1994 and the

Taxation Review Authorities Act 1994

BETWEEN  AMALTAL FISHING COMPANY LIMITED

Appellant

ANDCOMMISSIONER OF INLAND REVENUE

Respondent

Hearing:         30 August 2007

Counsel:         G Malone for the Appellant

J Norris for the Respondent

Judgment:      31 August 2007

JUDGMENT OF SIMON FRANCE J

[1]      The  taxpayer  appeals  the  decision  of  the  Taxation  Review  Authority  to decline leave to file a challenge out of time.   The original application was made under s138D of the Taxation Administration Act 1994.  The appeal is presumably brought under s26A of the Taxation Review Authorities Act 1994.    The Commissioner did not dispute that the issue fell within the terms of s26A, so other than noting it was not a point considered, I proceed to determine the appeal.

Facts

[2]      The appellant and the Commissioner were in discussion from early 2000 over the appellant’s tax liability for tax years 1994 and 1995.   A “process” was agreed

which was no more than the statutory scheme, but which involved discussion of the

AMALTAL FISHING CO LTD V IRD HC WN CIV 2007-485-643  31 August 2007

issues and settlement offers.  It was agreed that at a certain point, if agreement was not reached, the Commissioner would issue a Notice of Proposed Adjustment (NOPA), which in turn would be met with a Notice of Response (NOR).

[3]      On 10 December 2004, a NOPA having previously been issued a NOR was sent to the Commissioner.  There was then filed an amended NOR on 13 December

2004.  The Commissioner responded to the amended NOR by saying it involved new grounds which the Commissioner needed to consider.  Accordingly the anticipated Notices of Assessment would need to await that reconsideration.

[4]      In terms of correspondence the next  letter  was  April  2005  in  which  the Commissioner said it was still being considered.  There was then a significant lull of just over 12 months before the Commissioner wrote on 20 April 2006.  That letter apologised for the delay and said it had been decided to “now continue with the agreed process”.

“The next agreed step is for the Commissioner to:

1.        issue assessments for AFC for each of the 1994 and 1995 years;

2.        update the account of ACL …

3.        issue an assessment for ACL for the 1995 year.

This action will be completed shortly.  The notices will be sent to Amaltal’s PO Box number, being the address recorded in the Departments system for income tax purposes …

Once the above actions have been completed, AFC is entitled to commence challenge proceedings.  In this respect I refer you to seciton 138B(1) of the Tax Administration Act 1994, which requires the filing of proceedings for each challenge to be with the response period following the issue of the relevant notice of assessment. This response period is two months.”

[5]      The letter was addressed to the taxpayer’s lawyer who had been acting on its behalf.   It was copied to the taxpayer’s external accountant, and to the taxpayer’s internal accountant   This followed the pattern of preceding correspondence which had gone to all three persons and generally had been addressed to the lawyer.

[6]      The  Notices  of  Assessment  were  sent  a  week  later,  to  the  PO  Box  as indicated in the letter.  The internal accountant, Mr Holyoake, received them.   He

says he looked at them, noted what he read as a four-month objection time and put them to one side.

[7]      About 8-10 days later Mr Holyoake was in conversation with the external accountant,  and  mentioned  he  had  received  the  assessments.     The  external accountant asked for copies.  Mr Holyoake failed to send them.  A month or so later the external accountant again asked for copies.   Mr Holyoake sent them about 10 days later on what, seemingly by chance, was the last day for filing a challenge. Throughout this period it seems as if the taxpayer’s lawyer was unaware of the issuing of the Notices, and was not told by either accountant.  He also found out on the last day.

[8]      A challenge was not filed in time, and leave to extend the filing period is required.

The law

[9]      Section 139D of the Tax Administration Act 1994 provides:

138D       Challenge may in exceptional circumstances be commenced after response period

(1)     If a hearing authority considers that exceptional circumstances apply, the hearing authority may, on application by a disputant, allow the disputant to commence a challenge to a notice of a disputable decision after the response period.

(2)     For the purposes of subsection (1), an exceptional circumstance is an event or circumstance beyond the control of a disputant that provides the disputant with a reasonable justification for not commencing a challenge to a disputable decision within the response period; but an act or omission of an agent of a disputant is not an exceptional circumstance unless the act or omission was caused by an event or circumstance beyond the control of the agent—

(a)  That could not have been anticipated; and

(b)  The effect of which could not have been avoided by compliance with accepted standards of business organisation and professional conduct.

[10]     The section was considered by the Court of Appeal in CIR v Fuji Xerox NZ Ltd (2002) 20 NZTC 17, 470.  At paragraph 12 and 13 the Court observed:

12Where  a  hearing  authority  has  to  consider  an  application  under s138D it is logically required by the included and excluded features of the statutory definition of exceptional circumstance to approach the issue in stages involving identification, evaluation and discretion.

(a)      Identify the circumstances which the disputant relied on as being the "exceptional circumstances" and ascertain whether they were beyond the control of the disputant (including those actions or omissions of agents which met the conditions relating to agents in s 138D(2);

(b)    And having identified those circumstances, the hearing authority then needed to evaluate whether they provided reasonable justification for the disputant not having commenced the challenge within the response period; and

(c)    If the circumstances reasonably justifying the failure to file within time existed, the hearing authority needed to decide  whether  it  should  exercise  the  discretion  to  grant leave. The Court of Appeal considered that it was implicit in the use of the word "may" in s 138D(1) that the hearing authority had a residual discretion to grant or not grant leave.

13In Short, s138D requires identification of events or circumstances with the qualifying characteristics, evaluation of those in terms of justification;  and exercise of a residual discretion.  We turn now to the Judge’s reasoning in the case under appeal.

[11]     Counsel  are  agreed  this  is  the  applicable  authority.    In  Fuji  Xerox  the taxpayer had nominated KPMG as its tax agent to handle an audit being conducted by IRD.  All discussions occurred between those parties, and dispute notices were sent by the Commissioner to KPMG.

[12]     The letter sent to KPMG immediately preceding the issuing of  the final Notices of Assessment had said “Notices will be issued in due course.”  They were issued a day later, and sent to the taxpayer’s business address rather than KPMG. Another batch was sent on 18 December.  All received assessments were paid in full by Fuji Xerox.  KPMG was unaware of this.  No challenges were issued by KPMG or the company through its employees.

[13]     The internal employee responsible for these matters, and who had received the Notices, deposed that he expected that all investigation correspondence would go

to KPMG, so had not in effect linked the particular assessments he had received to the investigation disputes.

[14]     The Court of Appeal ruled:

.1the relevant event or circumstance was the sending of the Notices of Assessment to the taxpayers address, when all previous dealings had gone direct to KPMG.   That was an event outside the taxpayer’s control,  and  the  focus  therefore  became  the  justification  limb  of s138D.

.2the sending to the taxpayer’s address was not causative of the default of not challenging in time.  The taxpayer had received them and they were in the hands of its financial officer who was an accountant.  It was assumed he knew there were time limits on challenging.

.3        the real cause was the “systemic and human failures” of the taxpayer.

There was no reasonable basis to find the failures were reasonably justified.

The decision under appeal

[15]     The Authority identified four factors that were submitted to individually or collectively amount to exceptional circumstances beyond the taxpayers control and justifying a failure to file a challenge in time:

a)       a history of long delays between a process being agreed to and the issuing of the assessments;

b)communications by IRD which suggested a step was imminent, and then not occurring;

c)       a history of correspondence with, or copying of correspondence to, the taxpayer’s solicitors, which did not occur with the Notices;

d)an  understandable  misreading  by  the  in-house  accountant  of  the timeframes applicable to the filling of challenges.

[16]     Each point was addressed in turn by the Authority.

[17]     Concerning the issue of delays in the process, it is noted that Mr Holyoake had testified he did not consider the IRD notification letter of 20 April closely.  This letter had warned of assessments being issued shortly, which in fact occurred seven days later.  The Authority considered any earlier delays in the process, prior to this letter of 20 April, were not the:

“cause of the executive’s failure to properly consider correspondence copied to him re-familiarise himself with the  agreed  process,  and  to follow up matters within two months”.

[18]     It was noted the executive officer was an accountant in charge of the matter for the taxpayer.  He should have read the letter more closely, and was obliged to keep track of the process.

[19]     The Authority next held the evidence did not establish that the Commissioner would say he was going to do something and not do it.  Concerning the failure of IRD  to  copy  the  assessments  to  the  solicitors,  the  Authority,  like  Fuji  Xerox, focussed on the failure of the taxpayer to do anything with the assessments once received.

[20]     Overall Judge Barber held there was an ability to control, and the history of the process did not justify the taxpayer’s default.   Two points of distinction from Fuji Xerox were noted:

.1there was no history of formal notices going to the solicitor.   The occasion when it had occurred was at the specific request of the solicitor;

.2        the terms of the warning letter of 20 April 2006 were clear.   The Authority,   contrary   to   the   approach   of   counsel,   regarded Mr Holyoake as an employee rather than an agent.

[21]     Finally the reference on the back of the Notice of Assessment to a four-month challenge period was discussed.  It was noted that a close reading of the document

shows it applies only to the issuing of a NOPA, and is not applicable to the process of disputing an assessment by challenges.  Judge Barber noted that while he could understand a reader being misled, in the circumstances of this case given the history and the letter of 20 April 2006 it could not provide a justification.

[22]     Overall Judge Barber held there were no circumstances beyond the control of the disputant or the executive officer if the latter was viewed as an agent.   There being no exceptional circumstances, there was no jurisdiction to grant leave.

Appeal

[23]     The appellant essentially advances the same propositions that were rejected by the Authority.  No particular error of principle is identified other than that the bar was set too high.

[24]     The essence of the appellant’s case is this:

Mr Holyoake received the assessments and made two errors.  He did not send them to his solicitor, who was handling the process on behalf of the taxpayer, and he wrongly thought the challenge period was four months not two.  Each of these errors was attributable to matters outside his control, and provided reasonable justification for not filling a challenge in time.

Concerning the failure to copy the Notices to his solicitor, the history of events between the parties was that all correspondence had been addressed to, or  copied  to,  the  solicitor  and  it  was  reasonable  to  expect  this  to  have occurred on this occasion.  The failure of IRD to copy it to the solicitor was beyond  his  control.     Concerning  the  error  as  to  the  time  period  for challenging, the wording of the IRD Notices is misleading, and the matter beyond Mr Holyoake’s control.

Finally, in response to the challenge that a week before receiving the Notices of Assessment the parties had received an IRD letter explaining what would

happen and what the time periods were, it is said it was reasonable for Mr

Holyoake to ignore that given the history of the proceedings.

[25]     The focus of this submission owes much, I consider, to a mis-reading of the Court of Appeal judgment in Fuji Xerox.  There the Court was confronted with an argument that the relevant circumstance was that the Notices were not sent to the tax agent, KPMG, who had been dealing with the dispute.  Whilst the Court appears to accept that in isolation that fact was beyond the taxpayer’s control, it also quickly dismissed the proposition that such a fact provided a reasonable justification.  It was not a relevant circumstance because the correct focus was on what happened once the taxpayer had the Notices.

[26]     The appellant’s submissions seem to proceed on the premise that the Fuji Xerox case provides a useful base for an application, if one or two factors can then be added.  I read it quite differently, and see the Court as affirming that the relevance of the circumstance relied upon needs to be considered.   There is nothing in Fuji Xerox to suggest the Court thought the facts were in any way supportive of an argument that exceptional grounds existed.

[27]     In the present case there are two circumstances relied upon and I will briefly consider them.  First, however, one needs to stand back and look at what actually happened:

•   IRD wrote on 20 April to the solicitor, to the company officer dealing with the matter, and to the external accountant dealing with the matter. That letter told each of those people the Notices of Assessment would shortly be issued, that they would be sent to the taxpayer’s postal address, and there was two months to challenge;

•    None of these three people told IRD to send the Assessments elsewhere;

•   Seven days later IRD send the Assessments to the address they had said they would.  They were received by the relevant company officer.  He did

nothing with  them,  but  by chance told  the  external  accountant  about seven days later that he had them;

•   The external accountant asked for a copy, did not receive one and did not follow it up.  The company officer was asked to send them to the external accountant but did not do so;

•   Five weeks later the same exchange happens between these same two people, but it is another 10 days before they are sent;

•   No-one through this period contacted the solicitor, who is the person they expect to initiate the challenge.   The solicitor, after receipt of the IRD letter on 20 April, took no steps nor made any inquiries;

•   The IRD letter of 20 April was accurate and what it said would happen did happen.

[28]     Given these facts, it is, with respect, an impossible proposition to suggest that the statutory test of exceptional circumstance is met.  There is nothing in Fuji Xerox to offer comfort to such an argument.  The facts speak for themselves;  errors were made but nothing was beyond the tax disputant’s control.

[29]     The first of the two proffered relevant events is said to be the failure of IRD to copy the letter to the solicitor.  In my view it is incorrect to say this was out of the taxpayer’s control.   Obviously it is the IRD that mailed the letter, but the three relevant persons for the taxpayer, a week before the Notice of Assessments were issued, were told exactly where the Assessments were going.  None asked the IRD to act otherwise, nor did they arrange for the intended recipient to send copies to the solicitor.  There is no evidence from the solicitor as to why he did not act on the 20

April 2006 indication of where the Assessments were going.   Further, as Judge Barber noted, there was no history of formal notices going to the solicitor as there had been in Fuji Xerox, where KPMG had received them.

[30]     For reasons that are with respect obvious, the Court of Appeal in Fuji Xerox held the omission to copy the Assessments to the solicitor was not causative of the failure to file in time.   It was  the omissions  of  the taxpayer who  received  the Assessments that were the causative factor.   The same analysis applies here, and would be decisive;  however, on the facts of this case I reject the proposition that the failure of the solicitor to receive the Assessments was beyond the control of the taxpayer and/or its agents.

[31]     The second of the proffered reasons is Mr Holyoake’s belief that he had four months to file a challenge.   This belief was sourced in one aspect of the wording on the back of the Notices.  The four months is in fact the period applicable to a first challenge, by NOPA, to an amended assessment.  It is not the period applicable once the NOPA disputes process has already been completed.

[32]     The appellant’s reliance on this point must fail for several reasons.  First, it was not reasonable for a person of Mr Holyoake’s experience to make that assumption when he was aware of the process that had led up to the issuing of the Notices, and had received the 20 April 2006 letter from IRD a week earlier which told him that the period was two months.

[33]     Mr  Malone  sought  to  overcome  this  by  relying  on  the  history  of  the transactions between the parties to establish it was reasonable for Mr Holyoake to skim the 20 April letter but not absorb it.   At a policy level I would be loathe to accept that as reasonable justification;   it may be understandable and something many have done before Mr Holyoake did it, but this is different from saying it can found a reasonable justification for ignoring the timeframes identified therein.

[34]     Next, the Authority did not accept that the factual allegations which are said to underpin Mr Holyoake’s lack of interest in the 20 April 2006 letter.  I see no basis at all to disagree with those assessments.  For sure the process had been extremely prolonged, but as Judge Barber held, there was no history of the Department saying something would happen and then it did not.  The history might reasonably have led the parties to think the Notices of Assessment would take longer to come than they did,  but  that  belief  necessarily  became  irrelevant  once  Mr  Holyoake  actually

received the Notices.  It was not reasonable, nor beyond his control, for him to then look again at the recent 20 April letter.

[35]     Finally, on the evidence as it appears, Mr Holyoake’s mistaken belief was not relevant.  It seems that at this stage it was the solicitor who was conducting things, and Mr Holyoake says he was waiting for the solicitor to initiate a meeting.  The real problem was not the mistake as to the timeframes, but the failure to advise the solicitor the Assessments had been issued.  I have already addressed that issue.

Conclusion

[36]     For the reasons given I do not consider the failure to file in time was due to events beyond the control of the disputant, nor did anything occur that in terms of the  statutory  test  made  the  failure  to  challenge  in  time  reasonably  justified. Essentially for the reasons given by Judge Barber, the appeal is dismissed.

[37]   The respondent is entitled to 2B scale costs, together with reasonable disbursements to be fixed by the Registrar if necessary.

Simon France J

In accordance with r540(4) I direct the Registrar to endorse this judgment with the delivery time of 4.00pm on the 31st day of August

2007.

Solicitors:

Solutions Law Office, Richmond for the Appellant

Crown Law Office, Wellington for the Respondent