Balich v Commissioner of Inland Revenue HC Auckland CIV 2006-404-4113

[2007] NZHC 1644

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2006-404-4113

UNDER  the Judicature Amendment Act 1972

IN THE MATTER OF     The Tax Administration Act 1994

BETWEEN  DIANA BALICH Plaintiff

AND  THE COMMISSIONER OF INLAND REVENUE

Defendant

Hearing:         8 December 2006

Appearances: Ms Balich in person (assisted by Mr Israel aka Mr G Schuchardt, as

MacKenzie friend)

Mr Wellik & Mr Comber for defendant

Judgment:      21 February 2007 at 2.15 pm

JUDGMENT OF WINKELMANN J

This judgment was delivered by me on 21 February 2007 at, 2.15 pm pursuant to Rule540(4)

of the High Court Rules.

Registrar/ Deputy Registrar

Crown Law, Wellington

D Balich, 13 Porter Crescent, Helensville

BALICH V COMMISSIONER OF INLAND REVENUE HC AK CIV 2006-404-4113  21 February 2007

[1]      Ms Balich brings judicial review proceedings in respect of decisions and actions taken by the defendant, the Commissioner of Inland Revenue, in relation to the assessment and determination of her liability to income tax and to goods and services tax.  In particular she seeks to review the Commissioner’s refusal to amend his assessment of her liability and his decision not to extend the response time for Ms Balich to object to the assessment.   She also complains of particular actions taken by the Inland Revenue Department.

A.      Factual background

[2]      Ms Balich was bankrupted in 1991.  From 1993 until 2001 she failed to file income tax returns or goods and services tax (GST) returns, although she was for at least part of that time, working as a real estate agent.  Various real estate agencies that she worked for deducted withholding tax from commissions paid to her and also paid her amounts which were purportedly GST.

[3]      The Commissioner filed a chronology in this proceeding, the details of which were, in large part, not in dispute.   In 2001, the Inland Revenue Department (the Department) learned that Ms Balich had been using her pre-bankruptcy IRD number. On 20 August 2001 the Department required her to file tax and GST returns back to

1993.  On 21 August 2001 it issued default income tax assessments (issued in the absence  of returns  by  the  taxpayer)  for  the  period  between  1993-2000.    These assessments were based on information held by the Department, and in particular the amounts of “withholding tax” source deduction payments made by the real estate agencies for which Ms Balich had worked, on her behalf.

[4]      On 27 September 2001, Ms Balich registered for GST.  The registration was backdated to 1 August 2001 and the registration form was forwarded to the Department by her accountant’s office.  On 8 February 2002, Ms Balich claimed a GST refund for the two month taxable period ending 31 January 2002.   The Department did not make payment of the refund claimed, but rather opened an audit

into the claim.  The audit focused on goods and services tax, but also covered the outstanding income tax returns.

[5]      Ms Balich’s accountant filed income tax returns for the 1995-2001 income tax years.  No tax returns for the 1993 and 1994 income tax years were filed.  The Department therefore issued amended default assessments for those two income tax years.

[6]      Through  2001,  2002  and  2003  work  was  done  on  the  completion  of Ms Balich’s GST return.  An investigator at the Department, Mr Wrottesley, worked on completion of many of the returns using information he was able to collect from real estate agencies Ms Balich worked for and from Ms Balich and her accountant, Mr Adsett.  Ms Balich and her accountant then checked those returns.

[7]      Mr Wrottesley filed affidavits in these proceedings in which he deposes that he assessed Ms Balich as  liable  for  GST only  in circumstances where  she  had actually collected GST on commission.  He collected information from the agencies as to the amounts of GST they had paid Ms Balich.  On 28 August 2003 Ms Balich signed an Agreed Adjustment recording the level of outstanding GST, income tax and  total  shortfall  penalties.    The  Department’s  final  audit  letter  was  sent  to Mr Adsett on 11 September 2003.  By that time, all outstanding GST and tax returns had been completed.  Ms Balich was informed the audit was complete.

[8]     Throughout late 2003 through to April 2005, the Department collected information on Ms Balich’s financial circumstances.  On 29 April 2005, 18 months after the Department’s investigation was completed, the Department sent Ms Balich a final demand letter for her tax debt.  By that time her tax debt amounted to $442,

254.07, made up of $346, 017.75 GST and $96, 236.32 income tax.

[9]      On 5 May 2005, a notice of proceeding and statement of claim were filed by the Commissioner against Ms Balich in the District Court.  This proceeding sought judgment for a debt of $443, 254.07, interest having accumulated further by that time.   Ms Balich did not file a statement of defence, and on 24 August 2005, a default judgment was entered in favour of the Commissioner.

[10]   In September 2005, the Department received from Ms Balich proposed “amended” returns for both income tax and GST.  Mr Wrottesley, as a delegate of the Commissioner, declined to amend Ms Balich’s tax assessments, under s 113 of the Tax Administration Act 1994 (the Act).

[11]     On 13 October 2005, the Department received Ms Balich’s application that it receive a Notice of Proposed Adjustment (NOPA) outside the statutory response period, on the basis that exceptional circumstances applied.   This application was made pursuant to s 89K of the Act.  Ian Bentley, a delegate of the Commissioner, declined that application on 15 November 2005.

[12]     On   1   December   2005,   the   Commissioner   commenced    bankruptcy proceedings against Ms Balich.  On or about 27 March 2006, Ms Balich applied to have the Commissioner’s  judgment  against  her  set  aside.    That  application was opposed and ultimately unsuccessful.

[13]     At the same time as Ms Balich applied to have the default judgment set aside, she also provided the Department with amended notices of assessment, completed by her.   That happened on 8 February 2006.   On 10 April 2006 and 26 April 2006

Ms Balich provided the Department with a “voluntary disclosure”.

[14]     Richard  Phillip,  on behalf  of the  Commissioner,  advised  Ms  Balich  that voluntary disclosure did not apply to her circumstance.

[15]     These judicial review proceedings were issued in July 2006.

B.       This proceeding

[16]     Ms Balich is self-represented.   At the commencement  of the hearing she sought and was granted leave to file an amended statement of claim.   Ms Balich’s amended pleading does not clearly articulate the grounds of review relied upon, nor what  actions,  decision  or  thing  she  seeks  to  review.    It  is  in  narrative  form. However, during the presentation of her written and oral submissions before me the following emerged as the issues she seeks to raise in this proceeding:

(a)      Did the Commissioner err in declining to amend his assessment of Ms Balich’s income tax and GST liability in light of amended returns filed by Ms Balich?

(b)      Did the Commissioner err in declining to grant an extension of time for the filing of a NOPA under s 89K of the Act?

(c)      Was the Commissioner in error in failing to amend the assessments in light of the Ms Balich’s voluntary disclosure and notices of assessment?

(d)      Did the Commissioner  act  unlawfully  in  coercing  Ms  Balich  into registering for GST, filing various returns and signing the agreed adjustment?

[17]     The relief Ms Balich seeks is as follows:

(a)       the defendant to process all corrections furnished by the plaintiff on her voluntary disclosure;

(b)       the defendant to refund to the plaintiff all income tax withholding payments  made  on  the  plaintiff’s  behalf  by  third  parties  and  totalling

$215,622.00 plus all other amounts wrongfully paid by or seized from the

plaintiff since 1993;

(c)       the defendant to pay to the plaintiff interest on all refund amounts owing in accordance with section 120E of the TAA;

(d)       the defendant to compensate the plaintiff for damages in the sum of

$125,877.00 for defamation and breach of privacy with respect to the improperly issued section 157 notice;

(e)       the defendant to withdraw the present bankruptcy proceedings and compensate the plaintiff for damages in treble the amount for which they sought to wrongfully bankrupt her, being a total of $1,508,898.80;

(f)       the defendant to compensate the plaintiff for damages in treble the amount of refund they have wrongfully sought to deny her, being at least

$646,866.00;

(g)       the  defendant  to  compensate  the  plaintiff  for  loss  of  reward  in amounts of $120,000.00 per year for the past four years and eight months, for a total of $560,000.00.

Or in alternative, the plaintiff seeks orders for:

(h)       the defendant to acknowledge the plaintiff’s letter denying liability and accordingly to withdraw the present bankruptcy proceedings;

(i)        the defendant to refund to the plaintiff all income tax withholding payments  made  on  the  plaintiff’s  behalf  by  third  parties;  and  totalling

$215,622.00, plus all other amounts wrongfully paid by or seized from the plaintiff since 1993;

(j)        the defendant to pay to the plaintiff interest on all refund amounts owing in accordance with section 120E of the TAA;

(k)       the defendant to compensate the plaintiff for damages in the sum of

$125,877.00 for defamation and breach of privacy with respect to the improperly issued section 157 notice;

(l)        the  defendant  to  compensate  the  plaintiff  for  loss  of  reward  in amounts of $120,000.00 per year for the past four years and eight months, for a total of $560,000.00.

[18]     Several preliminary matters  arise  from the  pleadings  and  from argument presented by Ms Balich at hearing.   In relation to the claim for damages for defamation and breach of privacy, there is no allegation in the body of the pleading to which that relates and Ms Balich did not address submissions in relation to such a claim.   I do not propose to consider that issue further, but would observe that the issue of such notices is provided for by the Act.  It is difficult to see how the issue of a s 157 notice in the circumstances could amount to a defamatory statement.

[19]     Ms  Balich  claims  general  and  compensatory  damages  in  respect  of  the alleged failures on behalf of the defendant.   The defendant submitted to me that damages are not available in the context of these proceedings.

[20]     When this proceeding was originally filed it was brought as an application for relief in the nature of mandamus.  Section 6 of the Judicature Amendment Act 1972 provides that  such applications,  insofar as they relate to  the exercise,  refusal to exercise, or proposed or purported exercise of a statutory power, are to be treated and disposed of as if they were an application for review.  Section 4 of that Act, which governs the powers of the Court on review, does not provide for awards of damages. While  r  628(3)  of  the  High  Court  Rules,  which  governs  the  procedure  for applications for judicial review, does make reference to damages as a form of relief, this provision has been interpreted as being procedural only.  It does not confer any substantive  right:  see  for  example  the  comments  of  Randerson  J  in  Henry  v

Devereaux HC AK CP351/02   8 April 2003 at [15]: “it does not confer a right to bring damages for a failure to carry out a public duty where such a right would not otherwise exist … to recover damages, a recognised cause of action in private law must be pleaded”.   That is consistent with the basic position that the failure of a statutory body to act in accord with public law principles itself gives no common law entitlement to compensation: S A De Smith, Lord Woolf, and J Jowell, Judicial Review of Administrative Action (5th ed), London, Sweet & Maxwell, 1995, at pp

758, 762.  As Ms Balich did not substantiate any independent causes of action that could give rise to an award of damages, this relief is unavailable in the context of the present review proceeding.

[21]     Finally, Ms Balich presented an argument which I record but do not propose to consider further, it being entirely lacking in merit.  She argued that s 6A(3) of the Act authorises the Commissioner to disregard the provisions of the Inland Revenue Acts to maximise tax collected and says that if the Commissioner is not bound by the various Tax Acts, then neither is she.

[22]     Section 6A(3) of the Act provides:

(3)       In collecting the taxes committed to the Commissioner's charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to -

(a)       The resources available to the Commissioner; and

(b)       The   importance   of   promoting   compliance,   especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and

(c)       The compliance costs incurred by taxpayers.

[23]   There is nothing in that provision that supports an argument that the Commissioner is not bound by the various Acts regulating income tax and GST.  Nor does it support Ms Balich’s argument that she too is not bound by the legislation.

[24]     Accordingly, I do not propose to consider the claim for damages further.

C.      Consideration of grounds of review:

Did the Commissioner err in declining to amend his assessment of Ms Balich’s income tax and GST liability in light of amended returns filed by Ms Balich?

[25]     On 20 September 2005, Ms Balich filed 34 amended tax returns with the Department.   She said that her original returns were furnished to the Department under duress.  She said:

Further, at the time I was being coerced into completing these returns, letters from medical experts  were provided  which show that  I was  in no state mentally to sign binding documents or agreements.  Thus, the returns upon which you base your claim are erroneous, unenforceable and void.

I can confirm that the enclosed returns have been completed at a time when my debilitating depression has lifted.  Further, with the threats from Inland Revenue investigators well behind me, I have completed these returns under no duress whatsoever.  Instead, I have been able to take the time necessary to objectively self determine my liabilities and obligations under law and to consider just how the provisions of the tax code apply to the facts of my situation.  Therefore, please use the information from the enclosed returns to replace any and all information obtained from the earlier returns covering the same time periods.

[26]     In her covering letter, she confirmed that the sales figures agreed upon with Mr Wrottesley during his audit process were unchanged in the amended returns, and that the purpose of the returns was not to dispute the audit numbers.   Rather, an expense for “reward” had been added to  all income tax returns,  as the original returns failed to take this significant amount into consideration in any way.  As to the GST returns Ms Balich said:

The GST returns now accurately reflect the “total GST collected on sales”, whereas on the original returns I had been coerced into confessing that I collected GST, when in fact I never did.   Other than these two changes, I believe you will find that no other significant details have been altered.

[27]     Section 113 of the Act provides:

… the Commissioner may from time to time, and at any time, amend an assessment  as the Commissioner  thinks  necessary  in  order  to  ensure its correctness, notwithstanding that tax already assessed may have been paid.

[28]     Section 7 of the Act provides that the Commissioner may delegate to such officer or officers of the Department as the Commissioner thinks fit all or any of the powers of the Commissioner.   Mr Wrottesley provided affidavit evidence for the Commissioner in this proceeding.  He said that he had delegated authority to make

the decision under s 113 of the Act  in relation to Ms Balich’s amended returns. When considering Ms Balich’s letter, he noted that she did not dispute the audit numbers.   Rather she proposed that the GST returns now reflect the “total GST collected on sales”.   She also stated that she was “coerced into confessing that I collected GST, when in fact I never did”.

[29]     As to this, Mr Wrottesley said:

As a person is required to be registered under the GST Act if that person makes   taxable   supplies   over   the   statutory   threshold,   I   understood Ms Balich’s  comments  to  mean  that  she  was  claiming  that  all  her commission income be “zero rated”.   Ms Balich did not provide any documentation supporting the adjustments she proposed.  I note that as such income is not “zero rated” under the GST Act, I considered there to be no genuine errors in the existing GST assessment.

[30]     In relation to income tax, Ms Balich proposed that her taxation position take into account an expenditure referred to as “a reward”.  In the amended returns filed she showed expenditure in each income tax year equal to the amount of income earned.  In this way Ms Balich proposed that her income for all income tax years be nil.   A consequence of that would be that she would be claiming an income tax refund for all the withholding tax that had previously been deducted by the various real estate agencies.

[31]     As to that, Mr Wrottesley said:

Ms Balich did not provide any documentation or legal argument supporting the adjustment she proposed.  I did not consider there to be genuine errors in the existing income tax returns.

[32]     Acting as the Commissioner’s delegate, Mr Wrottesley therefore declined to amend the assessment.

[33]     Ms Balich submits that her amended assessments clearly showed an error and that the Commissioner acted unreasonably, or applied the wrong legal test, or failed to take into account a relevant consideration in determining there was no error and declining to exercise his discretion to amend.  In relation to her liability to income tax she submits that she is due a reward for her labours, and she was correct to claim

that reward as an expense that reduced her taxable income.  In her NOPA, Ms Balich summarised her argument as follows:

In closing, any claim by Inland Revenue employees that no money can be claimed  as  reward,  and  recovered  from  taxable  income  as  such,   is tantamount to dealing in slaves.  The ‘reward’ she is entitled to is $200,000 a year.

[34]     In relation to GST Ms Balich submitted in argument before me, that such tax is only payable where, the taxpayer  is carrying on a ‘taxable activity’.   This is defined in s 6 of the Goods and Services Tax Act 1985 (GST Act).   Section 6(3) provides:

Notwithstanding anything in subsections (1) and (2) of this section, for the purposes of this Act the term taxable activity shall not include, in relation to any person, -

(a)       Being a natural person, any activity carried on essentially as a private recreational pursuit or hobby; or

(aa)     Not being a natural person, any activity which, if it were carried on by a natural person, would be carried on essentially as a private recreational pursuit or hobby; or

(b)       Any  engagement,  occupation,  or  employment  under  any contract of service or as a director of a company:

Provided that where any person, in carrying on any taxable activity, accepts any office, any services supplied by that person as the holder of that office shall be deemed to be supplied in the course or furtherance of that taxable activity; or

(c)       Any engagement, occupation, or employment - (i)         Pursuant to the Civil List Act 1979:

(ii)      As   a   Judge,   Solicitor-General,   Controller   and

Auditor-General, or Ombudsman:

(iia)     Pursuant to an appointment made by the Governor- General or the Governor-General in Council and evidenced by a  warrant  or  by  an  Order  in  Council  or  by  a  notice published in the Gazette in accordance with section 2(2) of the Official Appointments and Documents Act 1919:

(iii)      As a Chairman or member of any local authority or any statutory board, council, committee, or other body; or

(d)       Any activity to the extent to which the activity involves the making of exempt supplies.

[35]     Ms Balich argues that she was under a contract of service when she worked at the real estate agencies, and was therefore not conducting a taxable activity.

Analysis

[36]     The  scope  of  judicial  review  and  the  discretion  to  grant  relief  is  to  be considered in light of the statutory dispute procedures within the Act.   That Act provides an extensive set of appeal and dispute rights, together with detailed procedural rules.   As Baragwanath J said  in Duncan  v  Commissioner of  Inland Revenue (2004) 21 NZTC 18, 735 (at [33]):

Judicial review is  the procedure that  gives  effect  to  the right  to  justice against those who exercise public functions that is guaranteed by s 27 of the New Zealand Bill of Rights Act 1990.  It engages the reserve power of the High Court to control the exercise of public authority in breach of the law.  It contains a large discretionary element, its exercise influenced by the Court's perception of the overall justice of the case.  In tax cases, where a statutory right of appeal is available, judicial review is confined to supervision of the lawfulness of the processes employed in making the assessments, which are unassailable save by appeal if the procedures are lawful: Ex parte Preston; R v IR Commrs [1985] BTC 208; [1985] AC 835, Miller v C of IR; Managed Fashions Ltd v C of IR (2002) 20 NZTC 17,826; [2001] 3 NZLR 316 at pp

328–9 para [18], Dandelion Investments Ltd v C of IR (2003) 21 NZTC

18,010; [2003] 1 NZLR 600 at NZTC p 18,031–2, NZLR p 624 para [90]–

[92] (Dandelion II).   It is to be borne constantly in  mind  that  both the validity of particular assessments as well as their correctness are matters for the statutory processes of return, assessment, objection and appeal.  Judicial review is reserved for the exceptional case where there is an allegation of abuse of such processes.   It does not provide a back door for the entry of issues that might have been raised by way of objection.

[37]     This ground of review undoubtedly seeks a full review of issues that should have been raised through the dispute procedures provided in the Act, and therefore goes beyond the allowable scope of review in this area.

[38]     It is clear  from Mr Wrottesley’s evidence that the Commissioner,  by his delegate Mr Wrottesley, considered the content of the amended returns, turned his mind to whether there were any errors in the assessment in the light of that material, and whether it was appropriate for the Commissioner to exercise his discretion under s 113.  He concluded that it was not.  Based on the material provided by Ms Balich that view was entirely reasonable.

[39]     Even if I were to undertake a review of the validity of the assessments, it is immediately apparent that there is no merit whatsoever in Ms Balich’s objection to the assessments in relation to her liabilities to income tax or GST.  As to the GST position,  s  51A(1)(b)  of  the  Real  Estate  Agents  Act  1976  provides  that  the relationship between a real estate agency and a real estate agent shall be one of employer and independent contractor if the parties expressly agree.  The Department only collected GST from Ms Balich in circumstances where she had been paid that tax by the real estate agency with which she was employed.  The fact that Ms Balich collected GST from the real estate agency employer is compelling evidence that the relationship is one of employer/independent contractor rather than employer/employee.

[40]     If a real estate agent  exceeds the statutory threshold,  she  is  liable to  be registered for GST (s 51 GST Act).

[41]     Further, s 27(6) of the GST Act provides:

(6) For the purposes of this Part and Parts 3, [and 6 of this Act, and Part 9 of the Tax Administration Act 1994], where -

“(a) A person, not being a registered person, supplies goods and services and represents that tax is charged on that supply; or

“(b) A person furnishes, or makes default in furnishing, a return required to be made by that person pursuant to section 17 of this Act in relation to a supply of goods referred to in section 5(2) of this Act; or

“(c) A person whose goods  are sold in the circumstances  referred to in section 5(2) of this Act supplies a statement under section (5)(2)(a) of this Act to the person selling the goods, and that statement is in the judgment of the Commissioner incorrect, -

“that  person  shall  be  deemed  to  be  a  registered  person  and  any  tax represented to be charged on the relevant supply by that person shall be tax payable by that person.

[42]     Although this provision was repealed on 21 December 2004, it would have been in force at the relevant times.  Even were Ms Balich correct that she was not carrying on a taxable activity by virtue of this provision, it is most likely that the money paid to her on account of GST is tax payable by her, the collection of GST amounting to a representation by her that tax was charged on the supply.

[43]     In relation to income tax, Ms Balich’s protest that the income she is required to pay tax on should be reduced by an amount on account of her ‘reward’ for work has no  foundation in the Income Tax Act  1994 or  elsewhere.    It  is completely without merit.

Did the Commissioner err in declining to grant an extension of time for the filing of a NOPA under s 89K of the Act?

[44]     In  his  letter  of  23  September  2005  declining  to  amend  the  assessment, Mr Wrottesley  advised  Ms  Balich  that  should  she  wish  to  dispute  the  original assessments, she was required to file a NOPA along with an explanation of the “exceptional circumstances” that prevented her from filing the NOPA within the statutory  response  period  (the  two  month  period  following  each  assessment). Ms Balich was out of time for all assessments.  In some cases she was out of time by several years.

[45]     Section 89K of the Act  provides  the  Commissioner  with  a  discretion  to accept a NOPA from a disputant outside of the applicable response period, if the Commissioner considers:

That an exceptional circumstance has prevented a disputant from issuing a notice of proposed adjustment … within the applicable response period.

[46]     Section 89K(3) defines an exceptional circumstance as follows:

(a)      an exceptional circumstance arises if -

(i)        an event or circumstance beyond the control of a disputant provides  the  disputant  with  a  reasonable  justification  for  not rejecting a proposed adjustment, or for not issuing a notice of proposed adjustment or statement of position, within the response period for the notice:

(ii)       a disputant is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or  more statutory holidays falling in the response period:

(b)      an act or omission of an agent of a disputant is not an exceptional circumstance unless -

(i)        it  was  caused  by  an  event  or  circumstance  beyond  the control of the agent that could not have been anticipated, and its effect could not have been avoided by compliance with accepted standards of business organisation and professional conduct; or

(ii)       the agent is late in issuing a notice of proposed adjustment, notice of response or statement of position but the Commissioner considers that the lateness is minimal, or results from 1 or  more statutory holidays falling in the response period.

[47]     The expression “exceptional circumstance” has been considered (although in the context of s 138D of the Act) in Commissioner of Inland Revenue v Fuji Xerox NZ Ltd (2002) 20 NZTC 17, 470. In that case the Court of Appeal described the task for the Commissioner in determining whether there was an exceptional circumstance as follows (at [12]):

•         First, it must identify the events or circumstances relied on by the disputant and then ascertain whether those events or circumstances, or any of them were beyond the control of the disputant. Any which were not beyond the control of the disputant cannot be relied on. Nor can any act or omission of an agent of the disputant be invoked unless it meets the conditions for such specified in s 138D(2).

•         If (following the exclusion of events or circumstances not beyond the control of the disputant and not falling within the constraints relating to acts or omissions of agents specified in s 138D(2)) there remain any events or circumstances for consideration, the hearing authority must then decide whether   such  events  or   circumstances  provide  the  disputant   with  a reasonable justification for not commencing a challenge within the response period.

•         If they do provide a reasonable justification the hearing authority must exercise the residual discretion indicated by the use of the word “may” in s 138D(1).

[48]     By letter dated 12 October 2005, Ms Balich sent a NOPA and set out the exceptional circumstances she asked the Commissioner to take into account in determining whether to receive the NOPA outside the applicable response period. She said:

Quite simply, the information contained in the enclosed notice of proposed adjustment was not available to me within the two month response period after the original assessments had been issued.  Specifically, I was unable to defend my position using terms of law and statutory citations which would have been understood and accepted by Inland Revenue and/or the Court. How and when necessary information came to me involved circumstances beyond  my control.    Lacking  this  information,  there is  no  way  I  could reasonably lay out lawful grounds for disputing those assessments.  Further,

as evidenced by letters in your possession, I was in no state mentally at the time to be able to mount an effective dispute.

[49]     Mr  Bentley  acted  as  the  Commissioner’s  delegate  in  making  the  s  89K decision.  In an affidavit filed in this proceeding, Mr Bentley said that he considered two reports from Mr Wrottesley and in house legal advice.   After considering that material he decided that exceptional circumstances were not present.  In particular he decided:

(a)      Lack of knowledge of legal arguments is not an exceptional circumstance.

(b)       He had no evidence as to Ms Balich’s mental state, at the time of the various response periods.   He said that Ms Balich did not provide any evidence to support her claim.

[50]    Ms Balich says that the Commissioner was wrong in his view that the information as to her mental state was not on the file.   She has filed an affidavit saying that she had forwarded two letters to the IRD.   One is from Ms Balich’s general practitioner dated 9 April 2003.  It records that she is suffering from major depression and severe anxiety symptoms.  The second letter is dated 14 April 2003, and is from Gail Ratcliffe, registered psychologist.  Ms Ratcliffe stated:

Her symptoms as she described them fulfil the criteria for a major depressive disorder.  She reported experiencing six of the nine symptoms indicative of depression.  The cut off point is five.  Her score of 41 on the CES-D scale placed her in the seriously depressed category.  Scores of 25 or over fall into this category.

[51]     Mr Wrottesley’s evidence was that he was not at any time in receipt of those letters.   They were not on the file and he is not aware of them ever having been provided.  He acknowledges that Mr Adsett told him that medical reports would be provided.   An interview was then arranged for 29 April 2003.   The interview of Ms Balich took place on 29 April 2003, with Mr Wrottesley, Mr Bentley, Ms Balich and Mr Adsett attending.  Mr Wrottesley says that during the interview Ms Balich said that she was suffering from the after effects of bankruptcy and depression.

[52]     Mr Adsett’s evidence is that he did forward the letters to the Department but he is not specific as to when.  Ms Balich submits that as a matter of logic, given the

date of the letters, and the date of the interview, they must have been handed over at the interview.

[53]     Even if letters were not provided to the Department, the Department was well aware that Ms Balich believed that they had letters substantiating her claim to mental illness.   In a letter dated 20 September 2005 (to Ms Madeline Bowen) Ms Balich referred to letters from medical experts which “were provided”.  Again, in the letter of 12 October 2005 (again to Ms Bowen) Ms Balich refers to her mental state as follows:

As evidence[d] by letters in your possession, I was in no state mentally at the time to be able to mount an effective dispute.

[54]     In circumstances where the Department knew that Ms Balich was under a misapprehension that the Department had the evidence on which she relied, it was not a course of action available to the Department to rely upon the absence of that documentary support for her claim to mental illness to reach a view that exceptional circumstances did not exist, without first providing Ms Balich with an opportunity to supply those reports.  A failure to provide Ms Balich with that opportunity amounted to procedural unfairness.

[55]     Accordingly, I am satisfied that there has been a reviewable error in relation to the exercise of the s 89K discretion by the Commissioner.  However, that is not the end of the matter as I then have to determine whether or not to exercise the discretion to grant relief.  I will return to that point later.

Was the Commissioner in error in failing to amend the assessments in light of

Ms Balich’s voluntary disclosure and notices of assessment?

[56]     On 10 April 2006 and 26 April 2006 Ms Balich provided the Department with  a  ‘voluntary disclosure’.    The  plaintiff  argues  that  the  Commissioner  was obliged to process all corrections furnished by her in her voluntary disclosure and seeks an order compelling the Commissioner to do so.  In her affidavit in support of the application for review, Ms Balich says that the voluntary disclosure contained all

the corrections that she had previously submitted by way of “amended returns” and her NOPA.  In the voluntary disclosure Ms Balich states her intention to be to:

Correct the information in a number of tax returns and then leave it to you

[the Department] to assess what tax is owed based on the corrected returns.

[57]     The returns showed taxable income in each year (except for 1997) being nil. The amount of taxable supply in each GST taxable period is also nil.

Statutory framework

[58]     The process of a taxpayer’s “voluntary disclosure” is provided for in s 141G

of the Act.  This section provides:

(1)       A shortfall penalty payable by a  taxpayer  under  any  of  sections

141A to 141EB  may be reduced  if,  in  the Commissioner's  opinion,  the taxpayer makes a full voluntary disclosure to the Commissioner of all the details of the tax shortfall, either -

(a)       before the taxpayer is first notified of a pending tax audit or investigation (referred to in this section as “pre-notification disclosure”); or

(b)      after the taxpayer is notified of a pending tax audit or investigation, but before the Commissioner starts the audit or investigation (referred to in this section as “post-notification disclosure”).

[59]     On the facts as disclosed in the affidavit  material, Ms Balich signed her agreed adjustment form on 28 August 2003 and the audit was finalised in September

2003.  In those circumstances the voluntary disclosure provisions in the Act did not apply  to  Ms  Balich’s  circumstances.     Those  provisions  are  only  available  to taxpayers before an audit commences, and then only in relation to shortfall penalties.

[60]     Ms Balich argues that all times are before first notification of a pending tax audit, because an audit can commence at any time.  That is an implausible reading of the legislation.  The audit referred to in s 141G must be the audit of the relevant tax period or periods to which the voluntary disclosure is relevant.  In this case the audit for the relevant  tax periods to  which the voluntary disclosure was relevant  had commenced and concluded.

[61]     In February 2006 Ms Balich also provided amended notices of assessment. Ms Balich does not allege that the Commissioner erred in failing to process them. Nor could she.   There is no procedure in the Act or any other legislation for a taxpayer  to  unilaterally amend  her  own  tax  assessments  following  filing  of tax returns under s 92(1).  Accordingly, the Commissioner was not obliged to take any steps in response to the plaintiff’s filing notices of assessment in February 2006.

Did the Commissioner act unlawfully in coercing Ms Balich into registering for

GST, filing various returns and signing the agreed adjustment?

[62]     Ms Balich alleges in her statement of claim and in her affidavits filed in this proceeding that the Department coerced her into signing her outstanding income tax and  GST   returns,   although  acknowledging  that  the  coercion  necessary  was “minimal” due to her vulnerability.   In her first affidavit filed in this proceeding Ms Balich says that the Department:

Used the above detailed:

a.        default assessment;

b.        audit;

c.        section 157 notice to employer;

d.        thinly veiled threat of prosecution without lawful authorisation, in its efforts to persuade me to co-operate with their intention of raising an impossibly large liability against [me].

[63]     The Commissioner admits that his Department told Ms Balich that it would consider prosecution if the required returns were not filed.  However, that does not amount to coercion or the application of illegitimate pressure on Ms Balich.  It was no more than informing Ms Balich of the legal ramifications of a continued failure by her to file returns.  It was quite proper of the Department to advise Ms Balich of the likely consequence of continued inaction on her part.  No doubt many tax payers would complain if they were not given that warning in similar circumstances.  The other matters Ms Balich relies upon consist of no more than the Department lawfully utilising the processes provided by the Act.  There was therefore nothing unlawful or improper in the Department’s actions in relation to this.

D.      Exercise of discretion

[64]     Having found that the Commissioner erred in the exercise of his discretion under s 89K because of his failure to call for the medical information referred to by Ms Balich, I must consider whether to exercise my discretion to grant relief.  In this case the appropriate relief would be to quash the decision declining an extension and directing reconsideration of whether an extension should be granted for the filing of NOPA’s by Ms Balich.

[65]     In exercising this discretion I consider that there are two relevant matters:

(a)       whether   the   Commissioner’s   decision  would   likely   have   been different if the medical reports were before him,

(b)       the delay.

[66]     In relation to the s 89K decision, even had the medical reports been available to the Commissioner it is most unlikely that Ms Balich would have been able to establish exceptional circumstances.  The report from Ms Radcliffe was dated April

2003.   The  relevant  response periods commenced  expiring  in January 2003  but continued to do so through to 17 January 2005.   Even if Ms Balich’s depression explains her inaction in the first half of 2003, there is no medical evidence to support a conclusion that she remained depressed through until September 2005.

[67]     It would also be relevant to the Commissioner’s consideration that Ms Balich was  assisted  in  her  dealings  with  the  Department  by  her  chartered  accountant, Mr Adsett, who actively put forward Ms Balich’s view, and ultimately assisted her in the preparation of returns and the decision to accept the agreed adjustment.

[68]     In  short,  Ms  Balich’s  depression  in  2003  does  not  provide  her  with  a reasonable justification for not commencing a challenge within the response periods, especially when she had engaged the services of a chartered accountant to assist her in her dealings with the Department.

[69]   Even if Ms Balich could make out “exceptional circumstances”, the Commissioner was entitled to take into account in exercising the residual discretion under s 89K that none of Ms Balich’s proposed challenges to the assessment had any real prospect of success, as outline above.  The main arguments are:

(a)       That  requiring  Ms  Balich  to  pay  income  tax  on  income  under

$200,000 per annum is akin to treating her like a slave.   That argument is completely devoid of substance or merit.

(b)       That she made no taxable supply.  For the reasons set out above, that too is lacking in merit.

[70]     Finally, there is the issue of delay.  Ms Balich took no steps to attempt to file a NOPA until default  judgment  had  been  entered  against  her.    Even  when  the application for extension was declined, she delayed a further eight months before commencing the present proceeding.  Requiring the Commissioner to reconsider his decision under s 89K will simply further delay Ms Balich fulfilling an obligation that she undoubtedly has, to pay the income tax and GST she has been assessed as owing.

[71]     Accordingly, the plaintiff’s application for judicial review is declined.

[72]     If the parties are unable to agree costs they may file and serve memoranda as follows –

(a)       Defendant – Friday 16 March 2007. (b)        Plaintiff – Wednesday 4 April 2007.

Winkelmann J