Aokautere Land Holdings Limited v Commissioner of Inland Revenue
[2023] NZHC 1839
•13 July 2023
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2023-485-129
[2023] NZHC 1839
UNDER the Judicial Review Procedure Act 2016 IN THE MATTER OF
an application for judicial review
BETWEEN
AOKAUTERE LAND HOLDINGS LIMITED
Applicant
AND
THE COMMISSIONER OF INLAND REVENUE
Respondent
Hearing: 4 July 2023 Counsel:
J K Mahuta-Coyle for the Applicant
K I S Naik-Leong and C Walmsley for the Respondent
Judgment:
13 July 2023
JUDGMENT OF GWYN J
(Discovery)
Introduction
[1] This is an application for specific discovery in the context of a judicial review application. The substantive proceeding is set down for hearing on 31 August 2023.
[2] In the substantive proceeding Aokautere Land Holdings Ltd (ALHL) seeks judicial review of the decision of the Commissioner of Inland Revenue (Commissioner) to issue a deduction notice under s 157 of the Tax Administration Act 1994 (TAA) to the Liquidators of Vey Group Ltd (in liquidation and receivership) (Vey). The s 157 Notice required the Liquidators to pay amounts payable by Vey to ALHL to the Commissioner.
AOKAUTERE LAND HOLDINGS LIMITED v THE COMMISSIONER OF INLAND REVENUE [2023] NZHC 1839 [13 July 2023]
[3] ALHL’s application for specific discovery was originally filed on 26 May 2023, but was amended by a further application dated 30 June 2023. The documents sought in the amended application are set out at Appendix One to this judgment. An amendment to the first category of documents was proposed by counsel at the hearing. That amendment is discussed at [62] below.
[4] The applicant asserts that the documents sought are “limited to those documents that explain the specific reasoning process that the Commissioner engaged in in order to conclude to exercise its statutory powers to issue default assessments and subsequently the s 157 notice.”
[5] The Commissioner opposes the amended application and says that the documents sought are not relevant to the issues pleaded in the statement of claim and that the Commissioner has disclosed the evidence relevant to his exercise of s 157 of the TAA by initial disclosure and by providing affidavit evidence from Maire Brid Clancy and Miranda Jane Law.
[6] The plaintiff applicant has not filed any evidence in support of the application for discovery.
Background
ALHL
[7] ALHL was incorporated on 26 March 2015 and registered with Inland Revenue (IR) for income tax and goods and services tax (GST) on that date.
[8] ALHL has carried on a business of land development and subdivision since its incorporation.
[9] On 8 September 2020, no income tax having been filed for ALHL since its incorporation, IR issued a notification of audit letter to the then director of ALHL, Kane Davidson.
[10] No response was received to the notification of audit letter and no income tax returns were filed by ALHL, prior to 2 February 2021, when IR issued a “Default Assessment” (DA) cover letter to ALHL. The DA cover letter noted that ALHL was required to file returns and make payments on time and listed the overdue returns and when they were due.
[11] The DA cover letter also stated that because ALHL had not filed the specified returns it would receive notices of assessment, under s 106 of the TAA, based on information IR held about the company’s income from the sale of land in each of the 2016 to 2020 income years. The cover letter said if ALHL wanted to dispute the assessments it must file a notice of proposed adjustment (NOPA) together with its tax returns, within four months of the assessment issue date shown on the notices of assessment.
[12] The Commissioner then assessed ALHL with default assessments (DAs) under s 106 of the TAA, for the income tax years ended 31 March 2016 to 31 March 2020 (ALHL DAs).
[13]The total income tax amount owed by ALHL for the ALHL DAs was
$2,711,198.19. The notices of assessment were issued on 3 February 2021.
[14]On the last page of each of the notices of assessment it stated:
If you don’t agree with the assessment, you must formally dispute it within four months of the date of issue of this notice. You’ll need to send us a Notice of proposed adjustment IR770 form.
[15] ALHL’s tax agent electronically filed nil income tax returns on 13 April 2021, but these were not seen by the IR officer until 21 June 2021.
[16] ALHL did not dispute the ALHL DAs by issuing a NOPA with its nil returns, within the prescribed four-month timeframe.
[17] Accordingly, on 21 June 2021 IR issued a letter to ALHL notifying it that the ALHL DAs for the 2016 to 2020 income years were deemed to be accepted and this finalised the income audit of the 2016–2020 income tax periods.
[18] On 10 August 2021 ALHL’s tax agent re-filed nil returns for ALHL. No NOPA was filed by ALHL.
Vey liquidation
[19] On 18 March 2022 the Liquidators of Vey filed an originating application seeking orders as to sale of a property at Webb Street, Wellington (the property) and for directions in the liquidation of Vey. There were two mortgages registered against the property: the first in favour of Daryn Turvey (who had constructed the building on the property), the second in favour of ALHL.
[20] The Commissioner was served with a copy of the Liquidators’ originating application but did not participate in the application or seek to be joined as a party. As at 3 May 2022 the Commissioner was a creditor of Vey in the amount of $380,923.41.
[21] The High Court decision in the originating application (Sale Orders Decision) was delivered on 27 September 2022, reissued on 7 October 2022.1
The Sale Orders Decision included directions that:2
(a)the Liquidators were to sell the property; and
(b)apply the proceeds of sale and any funds to pay ALHL $60,445.10 and the amounts owed by Vey to ALHL pursuant to the loan agreement dated 9 December 2016.
[23] Mr Fugle and ALHL sought orders staying execution of the Sale Orders Decision pending determination of their appeal to the Court of Appeal. On 6 December 2022 the High Court dismissed the stay application.3 Subsequently, ALHL abandoned its appeal of the Sale Orders Decision.
1 Fisk v Turvey [2022] NZHC 2462.
2 At [140] and [145(b)].
3 Fugle v Fisk [2022] NZHC 3253.
[24] On 7 December 2022 the Liquidators accepted a tender offer from ALHL for the property, with a settlement date of 21 December 2022.
[25] On 22 December 2022 the Commissioner issued the s 157 Notice to the Liquidators, requiring them to pay the amounts payable to ALHL to the Commissioner.
[26] The s 157 Notice stated that the amount to deduct was the lesser of either a lump sum of $2,962,658.74 or the funds available.
[27] The Liquidators then sought further directions from the Court as to distribution of the sale proceeds. In the Liquidators’ memorandum they confirmed that the amount to pay to ALHL was $1,185,458.37 and sought a direction from the Court as to whether the amounts owing to ALHL pursuant to the Sale Orders Decision were to be paid to IR in accordance with the terms of the s 157 Notice, or to ALHL, in accordance with the Sale Orders Decision.
[28] On 30 January 2023 the Commissioner was joined to the Liquidators’ application as a first interested non-party, in order to provide comment to the Court on the s 157 Notice. Mr Mahuta-Coyle made submissions on the application, on behalf of ALHL.
[29] By judgment dated 27 February 2023 (the Implementation of Sale Orders judgment),4 I directed the Liquidators to comply with the s 157 Notice and pay the amount of $1,185,458.37, being the amount payable to ALHL, to the Commissioner to be credited against ALHL’s outstanding income tax liability.
[30] ALHL did not seek leave to appeal the Implementation of Sale Orders judgment.
[31] On 28 February 2023 the Liquidators paid the Commissioner $1,185,458.37 as required by the s 157 Notice.
4 Fisk v Turvey [2023] NZHC 308.
ALHL’s case
[32] ALHL’s statement of claim, dated 16 March 2023, pleads two causes of action. The first is legitimate expectation. ALHL claims that, by exercising his s 157 power, the Commissioner undermined ALHL’s legitimate expectation of compliance with the terms of the Commissioner’s policy, as set out in Commissioner’s Statement CS 20/04: The Disputes Resolution Process and Fair Trial Rights,5 which states that, generally, the Commissioner will not require a taxpayer to take steps to dispute a tax assessment where a related criminal prosecution has commenced or is contemplated.
[33] The legitimate expectation is said to be that ALHL was not required to dispute the Commissioner’s default assessments while the Commissioner was contemplating prosecuting, or was prosecuting, Mr Fugle and/or entities related to him (and then commence such prosecution). In addition, the legitimate expectation is said to be that ALHL would not be the subject of civil enforcement action by way of the s 157 Notice.
[34] The second, alternative, cause of action is that in the particular circumstances, the Commissioner’s use of the s 157 power after a judgment had been rendered in relation to monies payable to ALHL,6 is unreasonable.
[35] At the core of ALHL’s case is that a prosecution investigation commenced by IR on 27 October 2020, in relation to Mr Fugle and Woodgate Ltd (Woodgate), included ALHL as an entity associated with Mr Fugle. ALHL’s substantive case is that “its obligation to dispute the default income tax assessments issued by the Commissioner within specified statutory timeframes (and to be subjected to enforcement of those assessments) was suspended by dint of the Commissioner’s criminal investigation into Mr Fugle.”
[36] In support of that submission, Mr Mahuta-Coyle refers to the following correspondence between IR and Mr Fugle and his barrister in March 2021.
5 Commissioner’s Statement The Disputes Resolution Process and Fair Trial Rights (CS 20/04), 22 July 2020.
6 Fisk v Turvey, above n 1, the decision resulting from the liquidators of Vey seeking orders and directions relating to the liquidation and sale of a property located in Webb Street, Wellington which was owned by Vey.
[37] On 1 March 2021 Raymond Anderson for IR emailed Mr Fugle in response to Mr Fugle’s email of the same date. In that email, Mr Anderson said:
… As you know, the Commissioner is considering taking prosecution action against Woodgate and you in respect of the GST refund arrangement. Consequently, to protect your fair trial rights, that civil dispute is required to be put on hold. Further, the Commissioner’s prosecution action considerations do not relate solely to the Woodgate GST refund arrangement, they also include non-compliance by other entities you control. …
[38] By email of 2 March 2021, Ms Clancy for IR emailed David Weaver (Mr Fugle’s barrister) in response to a letter from Mr Weaver about the audit of Woodgate’s GST return. Ms Clancy said:
With regard to prosecution action, as you know, legal services recommended prosecution of Woodgate and Mr Fugle in respect of the Woodgate GST arrangement be considered. However, prosecution considerations do not only involve Mr Fugle and Woodgate. Other non-compliance with tax obligations by your client and his associates is also relevant. The investigation into this is ongoing and a decision about prosecution will not be made until that investigation is complete.
[39] The applicant says that ALHL was “an associate” and an entity “controlled” by Mr Fugle, as referred to in the 1 March and 2 March correspondence. IR was aware of that relationship. Because IR’s ongoing investigation potentially encompassed ALHL, ALHL also was entitled to protect its fair trial rights by not disputing the ALHL DAs issued by IR by filing a NOPA.
[40] The applicant says its legitimate expectation — consistent with the Commissioner’s own policy in CS20/04 — was that the Commissioner would not require ALHL to take steps to dispute the tax assessment while the related criminal investigation was still on foot. The applicant relies on R v Safi.7
The respondent’s case
[41] The Commissioner says that the documents sought in the amended discovery application are not relevant to the issues pleaded and/or have already been addressed in the documents and evidence filed for the Commissioner.
7 R v Safi [2018] NZDC 19698.
[42] The Commissioner says that ALHL was not within the scope of the Commissioner’s criminal investigation relating to the Woodgate GST default. That investigation was specific to Woodgate and Mr Fugle, in relation to Woodgate’s GST liability.
[43] That evidence is that at the time the ALHL DAs were issued the Commissioner was not contemplating prosecuting Mr Davidson or ALHL. Woodgate and Mr Fugle, in his capacity as director of Woodgate, were formally advised in writing by the Commissioner that “criminal proceedings [were] being contemplated against [them]”. The Commissioner’s evidence is also that the prosecution in contemplation was specific to the GST refund arrangement in the GST return filed by Woodgate in the GST return period ended 31 June 2018 (the GST Return). There was no open audit on Mr Fugle for his personal tax affairs at the time the ALHL DAs were issued.
[44] Nor did the Commissioner otherwise make a commitment to ALHL that he would not take debt collection action. For that reason, the policy in CS 20/04 does not apply, nor is there any other basis for the applicant’s alleged legitimate expectation.
[45] Ms Clancy’s affidavit sets out the “specific reasoning process” engaged in by the Commissioner in exercising the s 157 TAA power. Ms Clancy’s affidavit also deposes that issuing the ALHL DAs was the sole focus of the Commissioner with a view to the Commissioner being able to collect that income tax believed to be owed by ALHL.
[46] The Commissioner also says that, even if ALHL was within the scope of the Commissioner’s criminal investigation, the use of the Commissioner’s enforcement power (in this case, through the issue of a s 157 Notice) may be necessary if there is a significant risk of the dissipation of assets or non-payment after any dispute process is concluded.8
8 See Commissioner’s Statement, above n 5, at [15] which states (under the heading Outstanding tax): “However, where it is considered that a delay in collection will result in a significant risk that the tax will not be paid, the Commissioner may take steps that she considers necessary to ensure the payment of tax and/or prevent the dissipation of assets.”
Possible prejudice to ongoing investigation
[47] On 2 June 2023 the Commissioner notified Mr Fugle and Woodgate that he had decided not to pursue prosecution action against them in relation to the GST Return filed on behalf of Woodgate. The Commissioner advised Woodgate that he would be continuing the civil dispute including the proposal to impose a shortfall penalty for evasion.
[48] On 9 June 2023 the Commissioner issued notification of audit letters to Mr Fugle, ALHL and the KCMK and JW (No 2) Trust, of which Mr Fugle is a trustee.
[49] On 9 June 2023 the Commissioner notified Mr Fugle that he would be the subject of an audit in relation to the income tax periods of 1 April 2015 to 31 March 2022. Part of this audit would consider what income Mr Fugle may have derived from ALHL.
[50] The Commissioner says that if the Court considers the documents sought in the amended application are relevant to the substantive judicial review, he is concerned that disclosure to ALHL and Mr Fugle of those documents is likely to prejudice the Commissioner’s ongoing investigation into the tax affairs of ALHL and Mr Fugle, referred to above. While any document would need to be considered individually, if any document is likely to prejudice the Commissioner’s investigation, the Commissioner says he will not be required to comply with the discovery order, in accordance with s 18 of the TAA.
[51] Under s 18 the Commissioner has a duty to “keep confidential all sensitive revenue information and must not disclose the information unless the disclosure is a permitted disclosure that meets the requirements of sections 18D to 18J.”9
Relevant principles
[52] As this proceeding is an application for judicial review, s 14(2)(h) of the Judicial Review Procedure Act 2016 applies.
9 Tax Administration Act 1994, s 18(1).
[53] I accept the submission that, as in an ordinary proceeding, the test for discovery in a judicial review proceeding remains relevance and proportionality. However, those requirements are particularly important in judicial review.10
[54]Further, as Williams J explained in Ririnui v Landcorp Farming Ltd (No 1):11
Discovery is not usually granted in judicial review proceedings, for the most part because it is unnecessary. Public authorities usually disclose relevant documentation in affidavit evidence without the need for specific orders. And, as it is often said, judicial review is intended to be a short and simple means by which to test the legality of public sector decision-making affecting ordinary citizens. …
[55] ALHL’s amended application is brought under rr 8.8, 8.12 and 8.17 of the High Court Rules 2016. Rule 8.19, providing for application for particular discovery, is also relevant, by analogy. In Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd,12 the Court set out a four-step approach for considering an application for particular discovery:
(a)Relevance and importance.
(b)Grounds for believing the documents exist and are within the party’s control. This will often be a matter of inference.
(c)Proportionality: The Court is required to balance the likely time and cost of discovery against its potential value. Broader considerations, such as the amount at issue, the resources of the parties and delay are also relevant.
(d)Weighing and balancing the first three steps, is an order appropriate. The Court retains an overriding discretion.
10 Te Runanga o Ngati Awa v Attorney-General HC Wellington CIV 2006-485-1025, 28 March 2007 at [6].
11 Ririnui v Landcorp Farming Ltd (No 1) [2014] NZHC 732 at [5].
12 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR 600, at [8]–[14], cited and applied in Talley’s Group Ltd v Biomex Trustees Ltd [2023] NZHC 1732 at [12].
Assessment
[56] The applicant does not allege that the Commissioner advised ALHL that criminal proceedings had commenced or were contemplated against ALHL before ALHL was next required to issue a disputes document.13
[57] Nor is there a claim that ALHL advised the Commissioner it had elected not to file an outstanding disputes document until the question of prosecution was resolved.14 It appears that the first time ALHL communicated to the Commissioner that it did not issue a NOPA in order to protect its fair trial rights was in its written submissions of 17 February 2023 filed in the Liquidators’ application for further directions, which led to the Implementation of Sale Orders Decision.
[58] Nor is there a claim that the Commissioner, by way of CS 20/04,15 made some other commitment to ALHL that he would not take debt collection steps.
[59] The evidence already filed for the Commissioner directly addresses whether, at the relevant times, ALHL was within the scope of the Commissioner’s criminal investigation related to the Woodgate GST default and the “specific reasoning process” engaged in by the Commissioner in exercising the s 157 power.
[60] As I have noted, the applicant has not filed any evidence in support of the substantive judicial review application, or this discovery application. I understood from counsel that the applicant has no current intention to file any evidence.
[61] In those circumstances the applicant cannot assert that it has grounds for asserting that further documents exist, in terms of the second of the four steps relevant to a discovery for particular discovery.16
[62] At the hearing Mr Mahuta-Coyle advised that ALHL would be prepared to amend the first category of its application to provide:
13 Commissioner’s Statement, above n 5, at [5].
14 At [8] and [14].
15 At [14] and [15].
16 At [55].
Documents held as at the date of the Default Assessments (2 February 2021) that address whether or not the investigation being conducted by the Commissioner into Mr Leslie Fugle and any entities associated with him included Aokautere Land Holdings Limited.
[63] Mr Mahuta-Coyle says that the documents sought in subsequent categories of the amended application merely flesh out that first category.
[64] It seems to me that, even on the basis of a modified application, the applicant has the same difficulty: the Commissioner’s evidence already addresses the issue.
[65] It is difficult to characterise this discovery application as other than a fishing expedition, searching for a factual basis on which ALHL might retrospectively pin its “legitimate expectation”, in circumstances where the ALHL DAs were not opposed at the time, despite clear notification from the Commissioner of the appropriate statutory procedure for doing so. It will of course be for the Court hearing the substantive judicial review application to determine whether the concept of legitimate expectation has application in the particular circumstances of this case.17
[66] I conclude that the documents sought by the applicant, and not already provided by the Commissioner, are not relevant to the claim. Nor has the applicant provided any basis on which the Court could conclude that there are sufficient grounds for believing that further documents as sought in fact exist.
[67] Given that finding it is not necessary to address the Commissioner’s submission about the application of s 81 of the TAA.
Outcome
[68]The application for specific discovery is dismissed.
Gwyn J
Solicitors:
Dewhirst Law, Whanganui Crown Law, Wellington
17 See for example Lalli v Attorney-General [2009] NZAR 720 (HC).
Appendix One
In relation to Aokautere Holdings Limited:
(a)Documents held as at the date of the Default Assessments (2 February 2021) that address the category of investigation being conducted by the Commissioner into Mr Leslie Fugle and any entities associated with him;
(b)A copy of any prosecution memorandum/sufficiency of evidence memorandum in relation to/or related to/or associated with ALHL;
(c)Copy of the default assessment submission for ALHL; and
(d)All core task assurance submissions in respect of making the default assessments for ALHL.
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