Clarke v Commissioner of Inland Revenue HC Auckland CIV2003-404-5631
[2005] NZHC 1661
•4 April 2005
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV2003-404-5631
BETWEEN MASON CLARKE
Plaintiff
ANDTHE COMMISSIONER OF INLAND REVENUE
Defendant
CIV2003-404-2148
AND BETWEEN CHRISTOPHER JOHN MONEY
Plaintiff
ANDTHE COMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 8 February 2005 Appearances: A A Weir for Plaintiffs
R J Willox for Defendant Judgment: 4 April 2005
RESERVED JUDGMENT OF PRIESTLEY J
Counsel:
Mr A A Weir, P O Box 281, Herne Bay Mr R J Willox, P O Box 2213, Auckland
CLARKE & MONEY V CIR HC AK CIV2003-404-5631 [4 April 2005]
The Issue
[1] Both plaintiffs, for reasons set out in this judgment, have been assessed by the defendant for income tax and penalties which they cannot pay. There is no challenge, at least so far as these proceedings are concerned, to the quantum of the plaintiffs’ taxation liability.
[2] Their respective liabilities exceed their assets by a considerable margin. They wish to negotiate a compromise with the defendant. They do not wish to become bankrupt. The defendant for his part is not prepared to write off the plaintiffs’ taxation liability to the extent the plaintiffs have suggested.
[3] The issue is whether the defendant, in these circumstances, has made decisions properly reviewable by way of judicial review.
Background
[4] In 1994, acting on professional advice and hoping to minimise their tax, the plaintiffs invested money in entities known as the Digi-Tech, Salisbury Investment schemes. Expecting these schemes to reduce their taxation liability the plaintiffs filed tax returns for taxation years from 1994 to 1999 inclusive. Substantial savings resulted to each of them.
[5] In due course the defendant disallowed tax losses claimed by the plaintiffs attributable to the scheme. The plaintiffs were two of many investors in this situation.
[6] So far as the plaintiff Mr Clarke is concerned the additional tax which he owes the defendants (as at August 2002), adjusted for interest owing and payments and other credits is $249,423.24. Further assessments of that plaintiff were made in five subsequent taxation years. Inclusive of short fall penalties, late payment penalties, and interest, the total debt owing by Mr Clarke to the defendant (as at 31 May 2004) is $581,461.49.
[7] Similarly with the plaintiff Mr Money. The sum owing by him for the tax years 1994 to 1997 inclusive is $496,088.17. Further assessments have been made for three subsequent taxation years. The total debt owing by Mr Money to the defendant as at 31 May 2004 was $865,118.23.
[8] The plaintiffs issued proceedings seeking judicial review of certain decisions made by the defendant. Those proceedings were launched in October 2003 and April 2004 respectively. There have been extensive negotiations between the parties attempting to settle the proceedings and, more importantly, the plaintiffs’ respective debts. It is common ground that neither plaintiff can hope to pay the defendant in full. Their assets are insufficient by a considerable margin.
Judicial Review proceeding
[9] Agreement has been reached, however, on the claim which this Court must determine. It is contained in the third cause of action in the plaintiffs’ amended statements of claim.
[10]Each plaintiff in essence claims:
· They have sought to settle the defendant’s claims in accordance with their means and have provided the defendant with all information requested.
· The defendant is under a duty to recover what can reasonably be recovered in the circumstances from the plaintiffs taking into account the plaintiffs’ circumstances and means to pay.
· The defendant has breached that duty by not taking the plaintiffs’ means into account and in particular the plaintiffs’ ability to pay more than sums offered.
The plaintiffs seek an order that they pay to the defendant “the sum [they] are able to, such sum being determined by the Court”.
[11] The defendant for his part disputes that he has any duty in the circumstances, other than his statutory duty to maximise the collection of outstanding tax. He further claims that the plaintiffs have not made offers which maximise the revenue and additionally have not made full and frank disclosure of their financial affairs.
Factual Matters
[12] A historical review of the dealings and negotiations between the parties will serve no useful purpose. The defendant commenced debt recovery proceedings against both plaintiffs in the District Court in September 2002. Mr Clarke for his part commenced a previous judicial review proceeding against the defendant in this Court in 2003 which was discontinued.
[13] To a certain extent since these proceedings began, events have moved on. Certainly the parties have had a dialogue which has been inconclusive.
[14] So far as Mr Clarke is concerned, on 23 June 2003 his accountants sought formal relief under s 177 of the Tax Administration Act 1994 and offered a lump sum of $10,000 in full and final settlement of all tax arrears. Over the following 15 months the defendant requested further information (including an updated IR 590) from Mr Clarke through his accountants and his counsel.
[15] This phase culminated in a lengthy letter from Graham Pomeroy, the area manager of the recovery and debt collection section of the defendant’s Takapuna service centre. The letter is dated 26 October 2004 and is exhibited to Mr Pomeroy’s affidavit of 2 November 2004. The letter, comprising 12 pages relevantly states:
Summary
The Revenue has now been dealing with Mr Clarke and his various representatives regarding his tax arrears since August 2001, a period in excess of three years. Over this period Mr Clarke has paid only $2,000 in reduction of the debt outstanding, while it appears that he has paid other creditors in preference to the Revenue.
Mr Clarke has the capacity and ability to commence businesses at very short notice. For example, in March 2000, he formed Origination Holdings Ltd immediately after Origination Group Ltd was put into receivership. The
number of employees that it had, and the size of its turnover would indicate that it had a not insignificant financial capital base (although the Revenue has no specific information about this).
Despite several requests, Mr Clarke has not provided details of his share of the $130,000 debt that he supposedly paid relating to Origination Group Ltd. Assuming that he paid anything, he was able to obtain funds to meet this obligation, yet has been unable to address his tax liability.
The Revenue considers that Mr Clarke has concealed from the Revenue his involvement with the residential properties by using his family trust. The trust’s tax returns show that it had other assets that have “disappeared” during 2000. Mr Clarke has not explained any of this to the Revenue.
The delays or inactions on behalf of Mr Clarke and his advisers over the last three years appear to have been unnecessary, as much of the information requested by the Revenue should have been readily available. When information was provided, it was incomplete which has hindered the Revenue from making an informed and accurate appraisal of his financial affairs in terms of evaluating his hardship application. As late as September 2002, Gosling Chapman stated that Mr Clarke was then in a position to make a formal application as he had just obtained secure employment, however nothing was received by the Revenue until June 2003 when it wrote to the Revenue again advising similar information. It was not until July 2003 that a formal IR590 was submitted which it appears was a response to the Revenue undertaking District Court Recovery action.
There has been insufficient information provided to enable the Revenue to make an informed decision as to the application for relief received on behalf of Mr Clarke in June 2003.
Decision
Despite numerous requests that information be supplied to the Revenue to enable an informed decision to be made, as at 26 October 2004, 17 months after information was first requested by the Revenue in response to an IR590 received, the information has not been forthcoming.
The Revenue has not formally declined Mr Clarke’s application in an effort to keep dialogue occurring over this matter in an attempt to reach a resolution. A review of the file indicates that a more than reasonable period of time has elapsed for the information requested to have been supplied.
It appears that there is no immediate intention to provide the required information to the Revenue. As a result this letter serves as formal notification that the applications for relief dated 2 September 2002 (although not technically “an application”) and the application for relief dated 23 June 2003 are declined pursuant to section 177B(2)(a) of the Tax Administration Act 1994 in that the Commissioner believes that the offer tendered does not “maximise the recovery of outstanding tax from the taxpayer”, and pursuant to section 177B(2)(c) of the Tax Administration Act 1994 in that the taxpayer in not forwarding the information requested by the Revenue Commissioner to make an informed decision, “is being frivolous or vexatious”. Furthermore the tax periods and corresponding interest and penalties subject to an abusive tax position are unable to be written off by
the Commissioner, and therefore the Commissioner has no discretion in relation to these tax periods which must be paid. The offer tendered to the Revenue does not address these specific tax periods, neither does it address the other tax debt outstanding.
We look forward to receiving from your client a proposal in the near future which addresses the full quantum of tax, penalties, and interest due.
[16] Mr Clarke, in an affidavit dated 7 February 2005 does not dispute Mr Pomeroy’s summary and decision in any substantive way. He relevantly deposes that he has “…not willingly or knowingly not disclosed matters which … were relevant”. He endeavours to correct possible confusion on Mr Pomeroy’s part relating to residential addresses and properties owned by trusts. He deposes that the defendant has correctly recorded his income for the 2004 year which is his only income and that “…I have no way of meeting the demand from the Commissioner on that income”.
[17] A similar letter in respect of the plaintiff Mr Money was sent to his counsel on 14 December 2004 by Richard Malcolm Philp, the service centre manager of the defendant’s Takapuna service centre. It is exhibited to Mr Philp’s affidavit of 26 January 2005.
[18]The letter comprises just over 11 pages and relevantly states:
Decision
Despite numerous requests that information be supplied to the Revenue to enable an informed decision to be made, as at November 2004, Mr Money’s willingness to provide the required information appears at best to have been delayed. The last contact the Revenue has had in receiving information from Mr Money was in January 2004.
In terms of the tax relief rules in place since December 2002, the Revenue has not formally declined Mr Money’s application in an effort to keep dialogue occurring over this matter in an attempt to reach a resolution. A review of the file indicates that a more than reasonable period of time has elapsed for the information requested to have been supplied.
It appears that there is no immediate intention to provide the required information to the Revenue. As a result, this letter serves as formal notification that the application for relief dated 12 July 2002 (although not technically “an application”) and the application for relief received on 12 January 2004 are declined pursuant to section 177B(2)(a) of the Tax Administration Act 1994 in that the Commissioner believes that the offer tendered does not “maximise the recovery of outstanding tax from the
taxpayer”, and pursuant to section 177B(2)(c) of the Tax Administration Act 1994 in that the taxpayer in not forwarding the information requested by the Revenue for the Commissioner to make an informed decision, “is being frivolous or vexatious”. Furthermore the tax periods and corresponding interest and penalties subject to an abusive tax position are unable to be written off by the Commissioner, and therefore the Commissioner has no discretion in relation to these tax periods which must be paid. The offer tendered to the Revenue does not address these specific tax periods, neither does it address the other tax debt outstanding.
We look forward to receiving from your client in the near future a proposal which addresses the full quantum of tax, penalties, and interest due.
That affidavit is unopposed.
[19] The references to s 177B(2)(a) and (c) of the Act along with the words used in that latter provision of “frivolous or vexatious” are confusing. Section 177D relates to the defendant’s power to enter into “an instalment arrangement”. As is apparent from the evidence, Mr Money in 2001 offered to pay a total of $19,800 by monthly instalments of $550 over a period of 3 years. That offer appears to have been replaced subsequently by an application for relief in July 2002 under s 177 offering a lump sum payment of $25,000 in full and final settlement. The plaintiff, Mr Clarke, similarly offered a $12,000 lump sum plus $100-$200 each week for a period of 3 years in 2001. That offer too was replaced by his $10,000 full and final settlement lump sum offer on 23 June 2003.
Discussion
[20] Section 176 of the Tax Administration Act 1994 obliges the defendant, in general terms, to “maximise” the recovery of tax debts. It provides:
176. Recovery of tax by Commissioner—
(1)The Commissioner must maximise the recovery of outstanding tax from a taxpayer.
(2)Despite subsection (1), the Commissioner may not recover outstanding tax to the extent that—
(a)recovery is an inefficient use of the Commissioner's resources; or
(b)recovery would place a taxpayer, being a natural person, in serious hardship.]
[21] Section 177 of the Tax Administration Act 1994 provides:
177 Taxpayer may apply for financial relief—
(1)A taxpayer, or a person on a taxpayer’s behalf, applies for financial relief by either—
(a)making a claim stating why recovery of outstanding tax would place the taxpayer in serious hardship; or
(b)requesting to enter into an instalment arrangement with the Commissioner by telephone or in writing.
(2)The Commissioner may require a taxpayer, or a person on a taxpayer's behalf, to apply for financial relief under subsection (1)(a) in writing.
(3)Upon receiving a request, the Commissioner may—
(a)accept the taxpayer's request; or
(b)seek further information from the taxpayer; or
(c)make a counter offer; or
(d)decline the taxpayer's request.
(4)A taxpayer has 20 working days, or a longer period allowed by the Commissioner, to provide the information sought or to respond to a counter offer.
[22] The two letters (supra) sent by the defendant to the plaintiffs suggest that, in terms of his power under s 177(3)(d) the defendant has declined each plaintiff’s request for financial relief. The last sentence of each letter arguably invokes s 177(4). Neither plaintiff responded within the stipulated 20 day period.
[23]For the purposes of s 176 and s 177, s 177A defines “serious hardship”:
177A Definition of serious hardship—
(1) In this section and sections 176, 177, 177B and 177C, ‘‘serious hardship’’, in relation to a taxpayer, being a natural person,—
(a)includes significant financial difficulties that arise because of—
(i)the taxpayer's inability to meet minimum living expenses according to normal community standards; or
(ii)the cost of medical treatment for an illness or injury of the taxpayer or the taxpayer’s dependant; or
(iii)a serious illness suffered by the taxpayer or the taxpayer’s dependant; or
(iv)the cost of education for the taxpayer’s dependant; and
(b)does not include significant financial difficulties that arise because—
(i)the taxpayer is obligated to pay tax; or
(ii)the taxpayer may become bankrupt; or
(iii)the taxpayer's, or the taxpayer's dependant's, social activities and entertainment may be limited; or
(iv)the taxpayer is unable to afford goods or services that are expensive or of a high quality or standard according to normal community standards.
[24] Section 177C empowers the defendant to write off outstanding tax that cannot be recovered.
177C Write-off of tax by Commissioner—
(1)The Commissioner may write off outstanding tax that cannot be recovered.
(2)The Commissioner must write off outstanding tax that cannot be recovered in the following situations:
(a)bankruptcy:
(b)liquidation:
(c)a taxpayer's estate has been distributed.
(3) Despite subsection (1), the Commissioner must not write off outstanding tax (inclusive of any shortfall penalties), if a taxpayer is liable to pay, in relation to the outstanding tax, a shortfall penalty for an abusive tax position or evasion or a similar act.
[25] Thus the request made by each plaintiff to the defendant to accept a relatively paltry figure when measured against the plaintiffs’ total tax debt, brings into play the s 177C discretion. That discretion, however, is fettered if a taxpayer is liable to pay a shortfall penalty for evasion or an abuse of tax position.
[26] Counsel for the defendant submits that the Digi-Tech, Salisbury investment scheme is caught by this provision. However, I was informed that other investors in the scheme were able to negotiate settlements which resulted in the Commissioner, as part of such settlements, issuing amended assessments which adjusted downwards penalties which might otherwise have been assessed and payable.
[27] In June 2004 the defendant apparently extended to Mr Clarke the benefit of a settlement offer relating to penalties which had been proposed to other investors in the scheme. Overtures of a similar nature were made in the same month to Mr Money. Nothing, however, was concluded.
[28] The various statutory duties and discretions imposed and conferred on the defendant by the above provisions are, in my judgment consistent with and probably derived from the obligation contained in s 6 of the Act to protect the integrity of the tax system. Highly relevant too is the Commissioner’s duty contained in s 6A(3) which 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.
[29] The plaintiffs’ judicial review proceedings seize on the defendant’s powers and discretions under s 177 and s177C. The plaintiffs claim that recovery of the assessed tax, interest, and penalties would cause them serious hardship. Despite the duties imposed on the defendant by s 176(1) and s 6A(3), the plaintiffs assert that the defendant should exercise his s 177C(1) discretion in their favour.
[30]Section 6A(3) of the Tax Administration Act 1994 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
[31] From both jurisdictional and constitutional standpoints the plaintiffs’ claim is a startling one. There is no evidence of the defendant having acted in an irrational or unreasonable manner. The powerful remedy of judicial review cannot be used, in a taxation context, as a quasi-appeal. It is trite to observe that the remedy is a check on unlawfulness and jurisdictional error.
[32]As Baragwanath J observed in Duncan v Commissioner of Inland Revenue
(M401/87 Auckland, 10 August 2004):
[33] Judicial review is the procedure that gives effect to the right to justice against those who exercise public functions that is guaranteed by s27 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: In Re Preston [1985] AC 835; Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316, 328-9 para [18]; Dandelion Investments Limited v Commissioner of Inland Revenue [2003] 1 NZLR 600, 624 paras [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. For example, the question whether Mr Duncan’s approach to the Department is to be characterised as a voluntary disclosure, which might affect the imposition of penal tax (T209, 241; Macdougall 2002 A46), is in issue on pending case stated appeals and is not a matter for resolution at this hearing. But the essential thrust of Mr Duncan's claim is that of abuse of power, and evidence and issues relating to that are properly the subject of judicial review.
…
[41] The law required of both taxpayer and Commissioner due exercise of their respective responsibilities. Viewed from the position of the taxpayer, the less the information provided by the Commissioner following
an assessment, the greater the taxpayer’s right to file an objection in broad terms, to seek further information and evidence, and to have time for objection extended. Contrariwise, the more unreasonable the position of the taxpayer in the maintaining and provision of records and other information, the greater must be the entitlement of the Commissioner to make assessments in broad and even rough terms (see Dandelion II para [35] “The decision could not be said to have been taken cursorily or perfunctorily, but even if it had that would not have invalidated it”), even though as the exercise of a public law function it must be performed both bona fide and proportionately to the occasion.
[33] It would require cogent evidence indeed to justify granting a remedy of judicial review against the factual background I have outlined. The plaintiffs’ relevant cause of action seeks an order that the plaintiffs:
…only pay to the defendant the sum that [they are] able to, that sum being determined by this [court].
[34] That is a bold remedy to seek against the backdrop of the statutory powers duties and discretions I have outlined. It is all the bolder against the bald allegation (supra para [10]) suggesting that the defendant is under a duty to recover some reasonable sum taking into account a taxpayer’s circumstances and his means to pay.
[35] Very similar arguments were run in Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18, 583. That was a case where the Commissioner wished to bankrupt and wind up the plaintiff and his company. The Commissioner had rejected various proposals. The taxpayer sought judicial review on the grounds that the Commissioner had breached his s 176 duty to maximise the recovery of outstanding tax. It was submitted that the offered sums would result in more money being recovered by the Commissioner than would bankruptcy and winding up.
[36] Randerson J dismissed the application for judicial review. He made the following observations in his judgment which I unhesitatingly endorse:
[49] Several points stand out. First, the duty imposed by the section applies notwithstanding anything in the Inland Revenue Acts. It is therefore clear that s 6A(3) is to prevail over other provisions in the Inland Revenue Acts including, in the present context, s 176 of the TAA. Secondly, the obligation to collect the highest net revenue is not absolute. The Commissioner is only required to take steps to recover revenue which are practicable and lawful. Thirdly, the Commissioner is required to have regard to the resources available to him, the importance of promoting compliance (especially
voluntary compliance) by all taxpayers, and the compliance costs incurred by taxpayers.
[50] These qualifications to the Commissioner’s duty mean that the Commissioner is not obliged to take steps to collect revenue regardless of issues of practicality, available resources, and costs incurred. Rather, the Minister’s duty is to be approached on a pragmatic basis with proper regard to the likely benefits and the costs of achieving them.
[51] The cases have emphasised that the Commissioner has a wide managerial discretion as to the best means of obtaining the highest net return in the field of tax recovery: see the discussion by the Court of Appeal in a judgment delivered for the court by Richardson P in Auckland Gas Company Ltd v Commissioner of Inland Revenue (1999) 19 NZTC 15,027, 15,032 referring to R v IR Commissioners : ex parte National Federation of Self Employed and Small Businesses Ltd [1982] AC 617, 636 per Lord Diplock and IR Commissioners v Nuttall [1990] 1 WLR 631 per Bingham LJ at 643. As Richardson P observed at 15,034:
The principles underlying ss 6 and 6A ... are designed to protect the integrity of the tax system in an environment where the Commissioner is required to operate within limited resources in the care and management of all the functions committed to the Commissioner’s charge.
[52] Where the public interest in collecting taxes would be better served by a compromise agreement with the taxpayer than by the exercise of the range of enforcement powers available to the Commissioner, such a compromise is regarded as being within the broad managerial discretion of the Commissioner. But the considerations relevant to the exercise of the Commissioner’s duty are not limited to issues of practicality, resources, and costs. Importantly, the Commissioner is also required by s 6A(3)(b) to have regard to the importance of promoting compliance (especially voluntary compliance) by all taxpayers with the Inland Revenue Acts.
[53] In that respect, I endorse the remarks made by Master Lang in Re Marra
: ex parte Commissioner of Inland Revenue (2004) 21 NZTC 18,495, 18,497. In paragraph [17] of the decision, the Master referred to the Commissioner’s responsibility for the care and management of our taxation system and stated:
The cornerstone of that system is the concept of voluntary compliance. Taxpayers comply with their obligations voluntarily and in the expectation that others will do likewise. If that expectation is allowed to erode, the very foundation of our present tax regime is at risk. In claiming losses that he is not entitled to Mr Marra has let down his fellow taxpayers. If the Commissioner was to simply accept Mr Marra’s "take it or leave it" offer of
$20,000 it would do nothing to promote the voluntary compliance system so far as other taxpayers are concerned. Other taxpayers expect and are entitled to see that the Commissioner takes a firm stand in dealing with those who fail to meet their taxation obligations.
[54] Sections 6 and 6A(3)(b) emphasise that there is a broader public interest in the integrity of the tax system and in ensuring that taxpayers meet their obligations. Taxpayers who comply with the requirements of the Inland Revenue Acts are entitled to expect that appropriate and (where necessary)
firm action is taken against taxpayers who shirk their obligations. If not, complying taxpayers will justifiably perceive there is a lack of integrity in the system and an unfair burden is cast on those who conscientiously comply with their obligations. As well, as Master Lang pointed out, the voluntary compliance scheme which is central to the proper functioning of the Inland Revenue Acts will be placed in jeopardy unless all taxpayers know that the Commissioner will act firmly and resolutely with those who do not meet their obligations and have no reasonable excuse for doing so.
[55] Ordinarily, where a higher net recovery will be achieved through a proposed compromise than by winding up or bankrupting a taxpayer and there are no countervailing considerations, the Commissioner’s duty will be to accept the compromise. But there may be circumstances where, in order to preserve the integrity of the tax system and promote compliance by other taxpayers, the Commissioner will be justified in refusing an offer and, instead, taking enforcement proceedings. Where, for example, there has been a flagrant and ongoing failure to comply with the taxpayer’s obligations and where recovery is dubious or is likely to result only in a relatively minor proportion of the overall debt being recovered, the Commissioner may be justified in initiating or continuing enforcement proceedings to secure the wider interests identified by the legislation.
[56] It is difficult and undesirable to give precise guidelines to the Commissioner other than the statutory considerations themselves. It will be a matter for the Commissioner to carry out his duty, having regard to the relevant considerations as they apply in individual cases and circumstances.
…
[63] The new s 176(1) is expressed in mandatory terms but is subject to ss (2). Under the latter, the Commissioner may not recover outstanding tax to the extent that recovery is an inefficient use of the Commissioner's resources or where it would result in serious hardship. This provision immediately qualifies the obligation under ss (1) and reflects similar considerations to those specified in ss 6A(3)(a) and (c). The Commissioner is not obliged to maximise the recovery of tax where to do so would amount to an inefficient use of resources. That involves a consideration of the time and cost involved in the recovery measured against the amount of any likely return.
[64] Importantly, s 176 is to be read along with s 6 of the Act and subject to s 6A(3). There is nothing in s 176 to suggest that it is intended to override other statutory obligations under the TAA. Indeed, s 6A(3) is specific in stating that the duty imposed by that provision applies notwithstanding anything in any of the Inland Revenue Acts including other provisions of the TAA.
[65] In enacting the new s 176, Parliament must be taken to have been aware of the then existing provisions in ss 6 and 6A. If Parliament had intended the new s 176 to override ss 6 and 6A, then it would have provided accordingly. Tax legislation is notoriously subject to frequent amendment but one might have hoped for greater attention to have been paid to the relationship between ss 6, 6A and 176. It is not immediately apparent why Parliament would seek to restate in s 176 the obligation to maximise recovery in a slightly different form from s 6A(3). But the courts must interpret and apply the legislation in the form in which it is expressed. In that respect, the
proviso to the former s 176(1) was also expressed in similar mandatory terms.
[66] For the reasons outlined, I conclude that s 176(1) in its current form does not place any greater obligation on the Commissioner than the duty imposed by s 6A which is to be treated as the overriding expression of the Commissioner’s duty to collect, over time, the highest net revenue that is practicable within the law having regard to the matters defined by s 6A(3)(a), (b) and (c). Section 176(2) emphasises that the Commissioner is not obliged to pursue recovery where it would be inefficient to do so and provides that recovery is not to be pursued to the extent where it would cause serious hardship (as defined) to a taxpayer who is a natural person.
[67] I also conclude that s 176 in its current form does not relieve the officers of the Inland Revenue Department from their duty under s 6(1) to use their best endeavours to protect the integrity of the tax system as defined. That obligation is to be read alongside the duties expressed in both ss 6A and 176.
…
[71] As well, the Commissioner was quite entitled and indeed obliged, to have regard to the integrity of the tax system and the importance of promoting compliance with the Inland Revenue Acts. This was a case where other taxpayers were entitled to expect that the Commissioner would take a firm line, both with the partnership and company debt. Effectively, Mr Raynel was continuing to trade under a variety of enterprises established by him while continually failing to meet his obligations to file returns in a timely manner, failing to make the appropriate deductions for PAYE purposes, and failing to pay the relevant taxes as they fell due.
[72] It was clearly in the wider public interest that stern enforcement measures be taken against him which would have the maximum coercive effect in terms of securing recovery of taxes or, in the absence of recovery or realistic repayment arrangements, would result in his personal bankruptcy and the winding up of IFTL. Failure to do so would have enabled Mr Raynel to have continued in business while he continued to ignore his obligations to the detriment of other taxpayers and creditors.
[73] Finally, I wish to say a word about the availability of judicial review in cases such as this. Given the broad managerial responsibilities given to the Commissioner and officials of the Inland Revenue Department, this court will be slow to interfere with the proper exercise of their statutory duties and discretions in relation to the recovery of outstanding taxation revenue. Decisions in this field essentially involve the exercise of judgment within the statutory framework and this court will not lightly interfere with decisions of that kind.
[74] It is important to emphasise the proper function of judicial review. It is to ensure, in a broad sense, that statutory powers and duties are exercised in accordance with law. In the present context, the grounds for review will generally be very limited. If the decisionmaker has called to attention all mandatory considerations and has not made any material errors of law, then this court will be unlikely to intervene unless the decision can be shown to be such that no reasonable decisionmaker could have made it. It must be
emphasised that this court does not, on judicial review, simply substitute its own view for that of the decisionmaker and proper weight will be given to the experience, knowledge, and judgment of the departmental officer or officers concerned.
[37] As did Baragwanath J in Duncan v Commissioner of Inland Revenue (op cit) the last paragraph in Randerson J’s judgment stresses the proper function of judicial review. I emphasise again that there is no evidence suggesting the defendant has failed to consider his relevant statutory obligations. Nor is there evidence that, by declining to accept the sums offered by the plaintiffs and writing off the balance of their respective debts, he was acting irrationally or unreasonably.
[38] Mr Weir for the plaintiffs submitted it was unreasonable for the defendant to force the plaintiffs into bankruptcy. He submitted that throughout the unhappy history of the Digi-Tech Salisbury investment schemes the plaintiffs had endeavoured to act legally. They had relied on the recommendations and advice of professional advisors. Importantly they wished to act honourably and declined at this stage to seize the shield and immediate relief which bankruptcy would provide.
[39] Fairbrother v Commissioner of Inland Revenue [2000] 2 NZLR 211 was cited by Mr Weir. It is a High Court authority for the proposition that the duty imposed on the Commissioner by s 6A(3) overrode all other obligations in revenue statutes and that there was no absolute obligation on the Commissioner to collect the right amount of tax in order to seek the recovery of money which was not in fact recoverable, or could only be recovered inconsistently with the obligation to obtain the highest net revenue practicable.
[40] Mr Weir’s submissions to some extent mirrored the submissions made by the unsuccessful taxpayers in Raynel v Commissioner of Inland Revenue (op cit). He additionally submitted that the defendant’s investigations over the past 15 months, summarised in the two letters dispatched by the defendant, (supra para [15] and [18]) had not been extensive and had on occasions been premised on erroneous assumptions.
[41] In counsel’s submission the defendant was obliged to carry out a full and accurate investigation. If, as a result of that investigation, it became apparent that
the plaintiffs could not possibly pay any more than the offered sum, then the defendant’s statutory obligations obliged him to accept that sum. He should not be permitted to pursue the plaintiffs into bankruptcy.
[42] Despite the wording of the two letters (supra) there was insufficient evidence to find that the plaintiffs had, for the purposes of s 177B(2)(c) been frivolous or vexatious.
[43] For the Commissioner Mr Willox, in addition to relying on Raynel v Commissioner of Inland Revenue (op cit) submitted correctly that the “serious hardship” imported by s 177A did not extend to financial difficulties flowing from a taxpayers obligation to pay tax. (See Raynel v Commissioner of Inland Revenue para 59; in re Marra; ex parte v Commissioner of Inland Revenue (2004) 21 NZTC 18, 494). So far as the plaintiff Mr Clarke was concerned, Mr Willox submitted that, in the absence of complete disclosure, the Commissioner properly doubted whether the plaintiff’s settlement offer was the best that could be achieved. Furthermore the Commissioner’s obligation to preserve the integrity of the tax system justified the defendant in taking a firm line in respect of the tax avoidance schemes in which the plaintiffs had participated.
[44] In counsel’s submission an objective observer would be “dismayed” if either plaintiff could avoid their core tax liabilities and walk away by paying small sums without any demonstrable detriment.
[45] Finally Mr Willox submitted that s 177C(3) prevented the defendant from permitting core tax and/or shortfall penalty tax arising from an abusive tax position
Decision
[46] The plaintiffs’ judicial review applications seek, quite nakedly, to compel the defendant to accept their offers in full and final settlement of their taxation obligations.
[47] The defendant’s two letters to the plaintiffs’ counsel dated 26 October 2004 and 14 December 2004 (supra) respectively contain “decisions” which fall well short of spelling out in precise terms whether a final decision under s 177(3) has been reached. First both letters contain references to s 177B which is an instalment focused provision. Although both plaintiffs initially made instalment offers those offers had been overtaken by subsequent lump sum offers of full and final settlement.
[48] Secondly the letters purport to leave the door ajar by inviting the plaintiffs’ counsel to formulate “….a proposal in the near future which addresses the full quantum of tax, penalties, and interest due”. Arguably that invitation might be soliciting a further offer. Certainly, given the assertions in the letters that inadequate information had been provided in some areas by the plaintiffs, the overture could constitute a request for further information in terms of s 177(3)b), in which case the response period stipulated in s 177(4) is running in an open ended fashion.
[49] Both of these letters were dispatched by the defendant after the filing of the operative statements of claim. At a narrow jurisdictional level, therefore, the claimed relief cannot possibly be sought without relevant re-pleading. That point would be ample justification to dismiss the judicial review application.
[50] The parties, however, have both run their cases on a broader basis. The plaintiffs, despite the defendant’s complaints that adequate information has not been provided in all areas, are contending that the defendant has statutory obligations which oblige him to accept the highest or most reasonable settlement offers the plaintiffs can make. They seek orders to the effect they are obliged only to pay such sums to the defendant as they are able, such sums to be determined by the Court. The defendant for his part says he is under no such obligation and that the plaintiffs, for a combination of reasons, are not eligible for financial relief under s 177.
[51] In my judgment, on this broader level, the plaintiffs’ applications must also fail. The discretion the Commissioner has under s 177(3) must be exercised by him and him alone. It is impermissible for the Court to usurp the defendant’s functions in that area.
[52] Before being eligible for relief under s 177 a taxpayer must make out grounds for serious hardship as defined by s 177A. Quite apart from the defendant’s perception that inadequate information has been provided in some areas, the plaintiffs would have to establish that s 177A(1)(a) “significant financial difficulties would be caused” for reasons other than their obligation to pay tax or their vulnerability to bankruptcy. There is no such evidence. Vague expressions of honour and a desire to pay some tax rather than none do not, in my judgment, overcome the policy thrust of s 177A(1)(b).
[53] Overarching the defendant’s discretion conferred by s 177 are powers and obligations under s 6 and s 6A(3). There is also the s 177C(3) consideration. There is neither evidence nor a submission which justify my finding that the defendant’s refusal to acquiesce in the plaintiffs’ proposals breach those provisions.
[54] Finally, there are the cogent policy considerations contained in Raynel v Commissioner of Inland Revenue (op cit). The stance of the defendant, both before and after the issue of these proceedings, as is evidenced in the two letters to the plaintiffs’ counsel, does not display irrationality. In the circumstances of these two taxpayers I detect nothing unreasonable. In the exercise of his discretion under s 177 the defendant is fully entitled to consider a whole range of factors including the circumstances which led to the plaintiffs’ taxation debts; the nature and extent of the plaintiffs’ co-operation and negotiating stance; the speed with which they have provided requested information and the extent of that information; his obligations under s 6 and s 6A(3); and matters of consistency in administration.
[55] The obvious proposition, contained in Fairbrother v Commissioner of Inland Revenue (op cit) to the effect that the defendant has no obligation to recover sums which might not in fact be recoverable is certainly not determinative of how the defendant should exercise his discretion. Nor is it the only factor the defendant must weigh. To some extent the proposition contained in Fairbrother goes no further than the balancing exercise the Commissioner must undertake between s 176(1) and 176(2).
[56] Raynel v Commissioner of Inland Revenue (op cit) and the various dicta of Randerson J which I have adopted (supra para [36]) in effect give the lie to the bald proposition that the defendant, in seeking to recover sums which might not in fact be recoverable, or in forcing a taxpayer into bankruptcy, is a breach of his obligations to maximise the recovery of tax. I see no such breach. Nor in my judgment is there any breach of the broader and paramount obligation of the Commissioner to uphold the integrity of the tax system required by s 6, nor of his duty under s 6A(3). Particularly in a case such as this, unpalatable outcomes for some taxpayers may be important in promoting voluntary compliance, which is a s 6A(3)(b) consideration.
[57] There being no discernible breaches of statutory duty the plaintiffs’ applications for judicial review are dismissed.
Costs
[58] Both proceedings have been heard together which obviously impacts on the quantum of costs awards.
[59] The defendant, having succeeded, is clearly entitled to costs. The scale and band may already have been fixed or agreed.
[60] I reserve costs solely for the reason that the issue is not argued by counsel. Costs will be determined by me on the basis of submissions in memoranda in the unlikely event of counsel being unable to resolve them.
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Priestley J
Delivered at pm on Monday 4 April 2005
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