Commissioner of Inland Revenue v Erris Promotions
[2002] NZCA 265
•7 November 2002
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA175/02 |
| BETWEEN | COMMISSIONER OF INLAND REVENUE |
| Appellant |
| AND | ERRIS PROMOTIONS AND ORS |
| Respondent |
| CA229/02 |
| BETWEEN | WILSON AND BLACK ASSOCIATES LIMITED |
| Appellant and in representative capacity for 112 investors |
| AND | COMMISSIONER OF INLAND REVENUE |
| Respondent |
| M162/02 |
| BETWEEN | COMMISSIONER OF INLAND REVENUE |
| Appellant |
| AND | WEST COAST DEVELOPMENTS LIMITED |
| Respondent |
| Hearing: | 30 October 2002 |
| Coram: | Keith J McGrath J Glazebrook J |
| Appearances: | J A Farmer QC and J H Coleman for Appellants in CA175/02 and M162/02 and for Respondent in CA229/02 J R Eichelbaum for Respondents in CA175/02 and M162/02 and for Appellant and the 112 investors listed in CA229/02 |
| Judgment: | 7 November 2002 |
| JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J |
Introduction
The substantive proceedings concern over 400 investors in the ACTONZ joint venture. The dispute between the investors and the Commissioner relates to the taxation (and in particular depreciation) treatment of certain computer software. The Commissioner takes the view that the various statutory criteria for claiming depreciation have not been satisfied, that the documents under which the software purchases were made were shams and that the anti-avoidance provisions of the Income Tax Act 1994 apply. The investors take the contrary view. Penalties of 100% were also imposed. The investors say that the imposition of penalties is totally unjustified. The matters before the Court at this stage are, however, procedural.
After completion of the disputes resolution procedures under the Tax Administration Act 1994 Erris Promotions and 5 other investors filed challenges in the Taxation Review Authority (TRA). We note that it had been agreed at the Adjudication stage that the situation of those 6 taxpayers was representative of all other investors in the joint venture (and it is still accepted that this is the case). The cases have been set down for hearing in the TRA on 25 November 2002.
The Commissioner applied to the High Court under s138N(2)(a)(ii) of the Tax Administration Act (TAA) to have the Erris Promotions cases transferred from the TRA to the High Court, but his application was refused by Hammond J on 15 August 2002 (High Court, Wellington, CP136/02). The Commissioner appeals against that decision. Hammond J also refused the Commissioner’s application for consolidation of the Erris Promotions cases with a GST case relating to the joint venture. The consolidation application is no longer pursued.
Since Hammond J’s decision there have been a number of developments. The first of these was the filing in the High Court of proceedings by another group of 123 (now 112) investors - the Wilson Black proceedings (filed on 23 August 2002). The Commissioner then, on 23 September 2002, designated the Erris Promotions cases as test cases under s138Q of the TAA and issued a notice of stay to the taxpayers in the Wilson Black proceedings. The investors submit that the test case designation was invalid because leave was not sought from the TRA and leave was required under the District Court Rules, they argue, as the cases had been set down for hearing. If the test case designation for Erris Promotions is upheld by this Court then, under s138Q(2) of the TAA, the cases must be heard in the High Court (and the Commissioner has made a formal application for transfer).
A further case (West Coast Developments) was filed in the TRA about two weeks ago and it appears a notice of stay was issued by the Commissioner. West Coast Developments issued a notice under s138R(3) requiring that there be no stay, and the Commissioner therefore applied to the High Court under s138R(4) for the challenge to be stayed. That application has been removed by consent to this Court.
Wilson Black has also applied to the High Court for transfer of its proceedings to the TRA. An application to remove that application to this Court was rejected by Master Gendall on 29 October 2002 and this was upheld in the afternoon by Ronald Young J on the same day. Wilson Black appeals against that decision.
There are therefore the following issues before this Court –
(a) Is the test case designation for the Erris Promotions cases valid?
(b) Should the Commissioner’s appeal against Hammond J’s decision not to transfer the Erris Promotions cases to the High Court be allowed?
(c) Should the Commissioner’s application under s138R(4) of the TAA for stay of the West Coast Developments challenge be granted?
(d) Should the appeal against the decision of Ronald Young J be allowed?
Is the test case designation valid?
Under s138Q(1) of the TAA the Commissioner may designate a challenge as a test case if he considers that determination of the challenge is likely to be determinative of all or a substantial number of the issues involved in one or more other challenges. As indicated above, it is agreed that the determination of the Erris Promotions cases would be determinative of all the issues involved for all the investors in the joint venture. It is therefore agreed that the statutory criteria for designation as a test case are met.
The challenge to the test case designation is rather that the designation was made too late. Erris Promotions’ argument is that r431 of the District Court Rules (which under reg 4 of the Taxation Review Authority Regulations 1998 apply to the extent that they are not inconsistent with the provisions of the 1998 Regulations, the Taxation Review Authorities Act 1994 or the Tax Administration Act 1994) provides that, after a case is set down for hearing, no step can be taken in the proceeding without the leave of the Court.
The Commissioner points out (and we accept) that the test case designation could not have been made before the filing of the Wilson Black challenge. This is because s138Q of the TAA envisages the designation being made only where there is at least one other challenge filed. We also accept the Commissioner’s submission that requiring leave of the TRA before making a test case designation would be inconsistent with s138Q as that section does not require the Commissioner to seek the leave of the court. In addition, we agree with the Commissioner’s submission that the designation is not a step in the proceeding. It was the exercise of a statutory power and not a step governed by the rules or recognised practice of the court (see McGechan J’s comments in Mountain Rock Productions Ltd v Wellington Newspapers Ltd [1997] 3 NZLR 31 at 37).
There may of course be circumstances where the exercise of the statutory power to designate a case a test case could be challenged by judicial review – for example any purported designation in the course of a TRA hearing could raise questions of abuse of power - but there was no such challenge before the Court.
We conclude, therefore, that the designation of the Erris Promotions cases as test cases was valid. Section 138Q(2) provides that test cases are to be heard in the High Court. The designation thus requires a transfer to the High Court and it is possible that a formal application for transfer is not needed. In case it is necessary that there be a formal order, however, we order that the Erris Promotions cases be transferred to the High Court.
Should the Commissioner’s application for transfer have been granted?
As the Erris Promotions cases have now been designated as test cases and are required to be heard in the High Court it is not strictly necessary for us to deal with the appeal against Hammond J’s decision denying transfer to the High Court. Mr Eichelbaum indicated, however, that the investors have concerns about the designation as test cases and consider they may have grounds for judicial review. The appeal could therefore still be of relevance to the parties. In addition, the issues raised in the appeal may also have relevance for some of the other applications before this Court or the High Court. We thus consider it appropriate to make some observations on the appeal.
The Legislation
Under the TAA a taxpayer may file challenge proceedings in either the High Court or the TRA. Where proceedings are filed in the TRA the Commissioner may apply to the High Court under s138N(2)(a)(ii) to transfer the challenge to the High Court. The Commissioner is also able, under s138N(1)(a), to apply to the High Court to have any challenge filed in that Court transferred to the TRA. The High Court can also transfer proceedings to the TRA on its own motion. No statutory guidance is given as to the factors that should guide the exercise of the power of transfer.
Hammond J’s decision
Hammond J approached the transfer application on the basis that the section confers a broad general discretion and that the onus of satisfying the Court of the appropriateness of a transfer must be on the proponent of that proposition. In analysing the relevant factors he acknowledged that the sums at issue in this case are considerable - the total income tax at stake is said to be $226,000,000, although the investment of each individual investor was on average only about $80,000. He considered, however, that the sums in issue were not of real moment as the sum of money in issue in a proceeding is in and of itself a poor measure of the difficulties likely to attend a case.
He went on to say that the statute was structured so that the choice of forum by a taxpayer should be respected unless there is a demonstrable case to the contrary. He had earlier set out in detail the reasons for the taxpayer choice of forum in this case – essentially the specialist nature of the TRA, the differential in costs and anonymity. He said that taxpayers are surely entitled to say: “I want the less formal, less expensive, and private TRA, at least in the first instance”. Hammond J later in his judgment refers to the specialist nature of the TRA as making it the appropriate forum to deal with the case (and he appears to have considered that the main issue in the case was one of whether or not there was tax avoidance). He said
I intend no disrespect to my colleagues in saying that the everyday knowledge and abilities of the TRA in matters of this kind is precisely why those specialist Judges occupy that office.
Hammond J went on to consider and dismiss the application for consolidation of the Erris Promotions case with the joint venture GST case (which was proceeding in the High Court). He was obviously of the view that, had consolidation with the GST case been appropriate, then this may have provided a demonstrable reason to override the taxpayers’ choice of forum.
He concluded by saying that transfer was not appropriate (“essentially for practical reasons”) and that this was the case irrespective of whether the transfer application was approached on the footing of a proponent having to displace a statutory presumption or on the footing that a balancing of the interests of the respective parties is required.
Discussion
As indicated above, the transfer provision in s138N(2)(a)(ii) contains no statutory guidance as to when a transfer application should be granted. This is in contrast to the situation under the old disputes resolution regime as contained in s136(4) of the TAA. Where leave is required for an objection by way of case stated to be referred directly to the High Court, s136(4) requires the Court to be of the opinion that, by reason of the amount of the tax in dispute between the parties or of the general or public importance of the matter or of its extraordinary difficulty or for any other reason, it is desirable that the objection be heard and determined by the High Court instead of by a TRA.
It is also in contrast to s138O of the TAA where the Commissioner can apply to transfer a challenge from the small claims jurisdiction of the TRA to the general jurisdiction provided he considers that the factors set out in s138O(1)(a)-(d) are met. These factors are that the challenge involves or may involve significant legal issues of precedent, that the dispute is likely to arise again in future assessments, that the facts are not clear or are in dispute and (as a catch all) that for any reason the Authority acting in its small claims jurisdiction should not determine the challenge – see also s138O(2) for the TRA’s powers of transfer. We note, however, that the same powers appear to be contained in s138N(2)(a)(i) and (b) with no criteria set out.
The fact that there are no statutory criteria set out for transfer applications to the High Court under s138N(2)(a)(ii) does not in our view imply a legislative intent to change the role of the TRA and the High Court in taxation disputes. Nor does it exclude the consideration of the criteria set out in s136(4) or s138O if they are relevant in the circumstances of the particular case.
The scheme of the legislation for the resolution of taxation disputes is that there are two first instance courts – the TRA and the High Court. The TRA was designed to provide a more informal and less costly forum as evidenced by the anonymity provisions, and the fact that costs cannot be awarded in favour of any party. It is specialist in the sense that it only deals with taxation disputes, but there is no presumption in the legislation that taxation disputes should normally be dealt with at first instance in the TRA. This is understandable as taxation disputes so often (and this is no exception) involve issues of a general legal character. In our judicial system the High Court is the court of first instance jurisdiction for major litigation and in particular where the matters are complex and involve matters of major legal significance. This is no different for taxation litigation.
Hammond J, with respect, appears rather to have approached the matter on the basis that there is a presumption in favour of the TRA at first instance and certainly a presumption in favour of taxpayer choice. It is true that the taxpayer has the initial choice of forum and that the onus is therefore on the Commissioner in seeking a transfer to provide reasons why that transfer should take place. The court must, however, then consider the factors relied upon by the Commissioner and the reasons for the taxpayer’s choice of forum against the background of the scheme of the legislation and the role of the TRA and the High Court in taxation disputes as set out above.
In this case it is agreed between the parties that the resolution of the Erris Promotions cases should resolve the taxation position of all investors in the ACTONZ joint venture. Section 138Q(2) provides that test cases should be heard in the High Court. The parties thus always regarded the Erris Promotions challenges as test cases (even if the formal test case designation had to wait until other challenges were filed). This then would strongly suggest the High Court as the appropriate forum.
The cases, as representative cases, must also be seen as affecting the rights of all the investors in the joint venture and therefore as having a large amount of taxation revenue at issue. We agree with Hammond J that the amount of money involved does not necessarily equate with complexity. It does, however, make the cases financially significant both for the Commissioner and the investors as a group, and it therefore makes appeal (and more than one appeal) more likely. Starting at TRA level, while it may have the advantage of an earlier hearing date for the first instance hearing of these cases, would thus not necessarily mean less delay in final resolution as it would add a further possible level of appeal.
In addition, Hammond J appears to have considered the main issue in the Erris Promotions cases to be whether there is tax avoidance. In fact tax avoidance will be at issue only if the Commissioner is unsuccessful in his first two arguments – the depreciation argument and the sham argument. The depreciation argument involves issues of general commercial law. From the statement of claim of Erris Promotions (the others being in similar terms) the court will be required to consider inter alia questions of when the joint venture was formed, trust/constructive trust issues and whether software is tangible or intangible property. There will also be questions of the apportionment of the purchase price of the software and extensive specialist valuation evidence. The High Court regularly deals with such issues in its general jurisdiction.
The above factors point strongly to the transfer of the cases to the High Court (even without the test case designation) and in our view clearly outweigh the taxpayers’ reasons for choosing the TRA as the preferred forum. This is particularly so as the Commissioner has agreed to pay the hearing fees in the High Court and has agreed that costs will lie where they fall. He has also agreed to cooperate in seeking confidentiality orders in the High Court, although whether they are granted or not will be for the High Court to determine.
Should the Commissioner’s s138R(4) application be granted?
The Commissioner asks for a stay of the West Coast Developments challenge on the grounds that the Commissioner has already designated the Erris Promotions proceedings as test cases under s138Q and they ought to be heard first. He submits that the Erris Promotions cases will be determinative of all the issues in the West Coast Developments challenge and that therefore a stay is appropriate.
West Coast Developments opposes a stay on the grounds that the Erris Promotions cases will, if the test case designation is upheld, have to be heard in the High Court. In the normal course a fixture will not be available in the High Court in Wellington before June 2002 (although obviously no application for an urgent fixture has been made or considered). The fact that cases are outstanding, particularly in the light of the high penalty assessments, has been causing financial and emotional stress for the investors. In addition, the investors submit that the penalty assessments were imposed on a clearly wrong view of the law and in reliance on the minority view in CIR v BNZ Investments Ltd [2002] 1 NZLR 450 (a reliance which we acknowledge was somewhat surprising). The investors are therefore anxious to maintain the fixture in the TRA because this would allow their cases to be heard expeditiously – although, as we pointed out earlier, this course may result in delay in the final resolution of the cases due to the extra possible level of appeal.
We have already indicated that, even without the test case designation, the Erris Promotions cases should be heard at first instance in the High Court. It is therefore inappropriate that similar cases proceed in the TRA (unless they follow any decision in the Erris Promotions cases). In addition, the course proposed by West Coast Developments would serve to subvert the test case procedure under the TAA. The test case provisions have the purpose of saving resources by not duplicating litigation. They envisage that the test case will be heard first. Where, as here, it is agreed that the test case will cover all the issues that would be raised in the West Coast Developments case there would need to be very strong reasons for a stay not to be ordered, either related to the personal circumstances of the taxpayer or to the conduct of the test case. There are no such strong reasons put forward here (or at least no reasons that differentiate West Coast Developments from any of the other investors, including the Erris Promotions investors).
We therefore order that the West Coast Developments challenge be stayed pending determination of the Erris Promotions test cases or further order of the High Court.
Should the appeal against Young J’s decision be allowed?
Young J refused to transfer Wilson Black’s application for transfer to the TRA to this Court. The reason that the investors seek the transfer of the Wilson Black case to the TRA is so that (after the stay has been dealt with) 6 other cases that would be representative of all investors can proceed on 25 November of this year as planned. We have indicated above that the Erris Promotions test cases should be heard first and that any hearing in the TRA would subvert the test case procedure. We have also held that the High Court is the proper court of first instance in this case. We would therefore dismiss the appeal against Young J’s decision. The High Court can deal with the Wilson Black application and any related applications in the light of this judgment.
Result and Costs
(a) The test case designation is valid and the Erris Promotions cases should be heard in the High Court.
(b) Because of the decision in (a) we do not need to deal with the appeal against Hammond J’s decision of 15 August 2002 refusing to transfer the Erris Promotions cases to the High Court.
(c) The Commissioner’s application under s138R(4) for stay of the West Coast Developments challenge is granted.
(d) The appeal against Young J’s decision of 29 October 2002 is dismissed.
If any question of costs arises the parties have leave to file memoranda.
Solicitors:
Hughes Robertson, Wellington
Crown Law Office, Wellington
2
0
0