Commissioner of Inland Revenue v Bioletti

[2013] NZHC 2131

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-509 [2013] NZHC 2131

IN THE MATTER OF

the Insolvency Act 2006

IN THE MATTER OF

The bankruptcy of Jeremy Newland
Bioletti

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

AND

JEREMY NEWLAND BIOLETTI Judgment Debtor

Hearing:	21 August 2013
Appearances:	B Chin for judgment debtor P F Chambers for judgment creditor
Judgment:	21 August 2013

(ORAL) JUDGMENT OF LANG J

[on creditor's application for order of adjudication]

THE COMMISSIONER OF INLAND REVENUE v JEREMY NEWLAND BIOLETTI [2013] NZHC 2131 [21

August 2013]

[1]      Mr Bioletti is a barrister and solicitor.  He specialises in defending clients in criminal cases involving allegations of complex commercial fraud.

[2]      Mr Bioletti has now amassed arrears of tax amounting to approximately

$550,000.  The Commissioner of Inland Revenue seeks an order adjudicating Mr Bioletti bankrupt on the basis that he is insolvent and unable to pay his debts as they fall due.  Mr Bioletti resists the Commissioner’s application.  He asks the Court to exercise its discretion under s 37(c) of the Insolvency Act 2006 not to adjudicate him bankrupt.  He says that it would not be just and equitable for the Court to make an order of adjudication in his case.

The technical requirements

[3]      There is no dispute that the technical requirements that give rise to the jurisdiction to make an order of adjudication have been met.  On 30 April 2010, the Commissioner obtained judgment against Mr Bioletti in the sum of $303,290.37. The judgment sum comprised arrears of goods and services tax owing in respect of the tax periods from 31 March 2005 to 30 September 2009.  It also comprised outstanding income tax in respect of the years ending 31 March 2005 to 31 March

2009.

[4]      On 25 February 2013, the Commissioner arranged for a bankruptcy notice to be served on Mr Bioletti.  This required him to pay the sum of $303,290.37 within ten working days.  Mr Bioletti failed to comply with the bankruptcy notice, and thereby committed an act of bankruptcy.  This provides the Court with the necessary jurisdiction to make an order of adjudication.1

[5]      On 22 April 2013, the Commissioner filed a creditor’s application seeking an order adjudicating Mr Bioletti bankrupt.  The application recorded that Mr Bioletti owed the Commissioner the sum of $509,955.39 as at that date.   It is common ground that Mr Bioletti now has two further tax liabilities that are not contained within the amount referred to in the creditor’s application.  These are a debt of approximately $10,000 for goods and services tax payable in respect of the period

ended 31 March 2013, and a debt of approximately $45,000 for income tax that Mr

Bioletti is liable to pay in respect of the tax year ending 31 March 2013.

The argument

[6]      Mr Bioletti contends that it would not be just and equitable for the Court to make an order of adjudication because he has the ability to make an immediate lump sum payment in reduction of the debt presently outstanding.   He also has the necessary means to make payments by instalments to enable the entire debt to be repaid in full over time.

[7]      In particular, Mr Bioletti contends that the Commissioner was wrong to reject a proposal that he provided to the Commissioner on 19 June 2013.2    This provided for Mr Bioletti to make an immediate lump sum payment of approximately $180,000 in satisfaction of core debt.  Mr Bioletti proposed to obtain this sum from his elderly mother.   Mr Bioletti then offered to pay the balance of the debt owing to the Commissioner over a period of four years at the rate of $37,000 per annum. Alternatively, he proposed paying the sum of $15,000 per year by way of interest on the sum of approximately $150,000 for a period of three years, with the arrangement

to be reviewed at the end of that period.

[8]      Mr Bioletti’s proposal is obviously flawed to the extent that it fails to take into  account  Mr  Bioletti’s  current  total  tax  liability.    As  recorded  earlier,  this currently stands at approximately $550,000.  If this sum was to be repaid over a four year period, Mr Bioletti would be required to make payments of more than $75,000 per annum after taking into account the lump sum payment.  Interest would also continue to accrue on the core debt.

[9]      Mr  Bioletti  criticises  the  basis  on  which  the  Commissioner  rejected  his proposal.  The Commissioner rejected the proposal on 27 June 2013, when she advised Mr Bioletti as follows:

We’ve considered your request for financial relief received via facsimile on

19 June 2013.

We haven’t granted your request for financial relief because you have a poor compliance history and have not shown the ability to voluntarily comply.

This is evidenced by:

Income Tax for the year ended 31 March 2012 not being paid when due

No instalment payments made for Provisional Tax for the year ended 31

March 2013

GST return for the period ended 30 September 2012 not filed on time and only part payment made

GST return for the period ended 31 March 2013 not being filed and paid. Also not all information, requested on 22 March 2013, has been forthcoming

such as a cash flow forecast, the last three months bank statements, specific

details of changes made to reduce business and domestic expenditure and evidence of current contracts held.

This means that you are required to pay $536,684.54 by 03 July 2013.

…

[10]     This  rejection  followed  the  rejection  by  the  Commissioner  of  an  earlier proposal that Mr Bioletti had made in March 2013.   On that occasion, the Commissioner rejected the debt for the following reasons:

We’ve considered your request for financial relief.

We haven’t granted your request for financial relief because pursuant to S176 of the Tax Administration Act 1994 the Commissioner has a statutory duty to maximise recovery of outstanding tax.   In exercising this duty the Commissioner is entitled and in fact compelled to consider the overarching obligations specified in S6 and 6A of the Act. These obligations relate to the care and protection of the venue, the duty to protect the integrity of the tax system, to have regard to the resources available and to promote compliance.

…

[11]     Counsel for Mr Bioletti points out that the Commissioner has an obligation under s 6A(3) of the Tax Administration Act 1994 (“the Act”) to maximise recovery of the highest net revenue that is practicable within the law.   He contends the Commissioner failed to meet this obligation, because she rejected a proposal that would immediately have resulted in the receipt of $180,000.  That sum will not be available in the event that Mr Bioletti is adjudicated bankrupt.

Decision

[12]   The obligation to maximise revenue is, however, but one part of the Commissioner’s obligations under ss 6 and 6A of the Act.  The Commissioner also has concurrent obligations to protect the integrity of the tax system3 and to promote compliance with the tax regime.4   These concepts, and their relationship with the compromise procedure under s 177 of the Act, were explained by Randerson J in Raynel v Commissioner of Inland Revenue5 as follows:

[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 In re Marra ex parte C of IR (2004) 21 NZTC 18,494 at p 18,497. In para [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

3      Tax Administration Act 1994, s 6(1).

4      Ibid, s 6A(3)(b).

5      Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18,583.

Commissioner will act firmly and resolutely with those who do not meet their obligations and have no reasonable excuse for doing so.

[13]     I  have  no  doubt  that  these  considerations  underlay  the  Commissioner’s rejection of Mr Bioletti’s proposal.  She would also justifiably be concerned that the tax debt has now reached a very considerable level.  Importantly, too, Mr Bioletti’s failure to meet his tax obligations stretches back as far as 2005.  He has also failed to keep his tax affairs current during the period in which he was negotiating with the Commissioner.  This is reflected in the fact that he has failed to meet his GST obligations in respect of the period ended 31 March 2013, and he also failed to pay any income tax in respect of the tax year ending 31 March 2013.  I consider the Commissioner  was  entitled  to  take  these  factors  into  account  in  rejecting  Mr Bioletti’s proposal.

[14]     More importantly, viewed in light of the facts as they are now known, Mr Bioletti’s proposal appears to be hopelessly optimistic.  He confirms that his net business income during the year ended 31 March 2013 was $130,000.  Once tax is deducted from that amount, there is a balance of approximately $85,000.   Of this sum, Mr Bioletti and his family require approximately $52,000 in order to meet their living costs.  This means that the sum of no more than $30,000 would be available in any given year to apply towards Mr Bioletti’s indebtedness to the Commissioner.

[15]     More importantly, Mr Bioletti’s proposal is based on an assumption that he will be able to derive sufficient revenue from his practice as a barrister to support the instalment payments he will be required to make to the Commissioner.   His latest cash  flow  forecast  indicates  that  his  business  will  produce  sufficient  income to enable him to set aside the sum of $13,000 in each month other than December and January.  Through his counsel today, however, he confirms that actual billings have been much less than the cash flow forecast indicated would be the case.  As a result, he was not able to set aside any money for tax between 1 April and 31 July 2013.  He also accepts that it is unrealistic to expect that any significant change will occur before next year.

[16]     When I take those factors into account, I am satisfied that there is no realistic prospect of Mr Bioletti repaying the debt to the Commissioner in the foreseeable future.

[17]     Mr Bioletti points out that he is not entirely to blame for the situation that has arisen.  Part of the problem between 2005 and 2009 was apparently driven by the fact that legal aid rates were lowered, and he also had difficulty with clients paying their bills.  There was then a seachange in or about 2009 regarding the manner in which legal aid was made available to clients.   This prevented clients from being able to engage the barrister of their choice.  As a result, Mr Bioletti was forced to relinquish several briefs that he had anticipated taking to trial.

[18]     These factors go some way towards explaining the fact that Mr Bioletti has become indebted to the Commissioner.  They do not, however, explain why he has made no attempt, in recent years at least, to make any payments towards either current or past tax indebtedness.  Rather, he has continued to have the benefit of the whole of the income derived from his business activities.

[19]   The need to maintain commercial morality indicates that an order of adjudication should be made.  A person who fails in such a manifest manner to meet his tax obligations can scarcely complain when the Commissioner takes steps to enforce the resulting debt through bankruptcy proceedings.   Indeed, any other approach by the Commissioner, or by the Court, would entail the very real risk of Mr Bioletti continuing to accrue further tax obligations with little prospect of meeting them in full or in part.

[20]     I therefore take the view that it would be inappropriate for the Court to exercise its discretion in favour of Mr Bioletti.  There is no option but for an order of adjudication to be made, notwithstanding the fact that the effect of such an order will be to prevent Mr Bioletti continuing to practise as a barrister and solicitor on his own account.

Result

[21]     There will therefore be an order of adjudication.  The order of adjudication is timed at 12.03 pm on 21 August 2013.

Lang J

Solicitors:

Inland Revenue Department, Auckland

Jeremy Bioletti, Auckland
Counsel:

P F Chambers, Auckland