Commissioner of Inland Revenue v Pootinun
[2020] NZHC 2651
•8 October 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-1702
[2020] NZHC 2651
IN THE MATTER of the Insolvency Act 2006 AND
IN THE MATTER
of the Bankruptcy of SURASAK POOTINUN
BETWEEN
THE COMMISSIONER OF INLAND REVENUE
Judgment Creditor
AND
SURASAK POOTINUN
Judgment Debtor
Hearing: 1 October 2020 (by AVL) Appearances:
K F Lee for Judgment Creditor N S Tabb for Judgment Debtor
Judgment:
8 October 2020
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 8 October 2020 at 4.00pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 8 October 2020
THE COMMISSIONER OF INLAND REVENUE v POOTINUN [2020] NZHC 2651 [8 October 2020]
[1] This is an application by the judgment creditor to adjudicate the judgment debtor. The judgment debtor, Surasak Pootinun, accepts the preconditions in the Insolvency Act 2006 (the Act) for the judgment creditor to seek his adjudication are satisfied.1 However, he seeks to halt the bankruptcy process as he intends to pursue judicial review of a decision of the judgment creditor, the Commissioner of Inland Revenue (the Commissioner) not to reassess his liability.
History
[2] On 29 May 2018 and 31 May 2018, the Commissioner issued notices of assessment in respect of GST and PAYE/Withholding Tax2 to the judgment debtor. The judgment debtor had four months to challenge the notices of assessment. A little under two weeks before the expiry of those four months, the Commissioner reminded the judgment debtor by letter the time limit was about to expire. The judgment debtor took no steps to challenge the notices of assessment.
[3] The Commissioner then, in early 2019, issued proceedings against the judgment debtor. A judgment was entered against him on 22 May 2019, when he took no steps to defend the proceedings. In fact, the judgment debtor had instructed a solicitor and a statement of defence was filed the day after the default judgment was entered, but before the judgment debtor had been advised judgment had been entered.
[4] A bankruptcy notice was issued on 28 August 2019 and served on the judgment debtor on 24 September 2019. The judgment debtor applied to set aside the judgment the Commissioner obtained by default in the District Court.
[5] Relying on the fact that an application to set aside the District Court judgment had been filed, the judgment debtor applied to set aside the bankruptcy notice and that application was opposed.
1 Insolvency Act 2006, s 13.
2 While referred to alternatively as PAYE or Withholding Tax, the assessment related to withholding tax under subpt RD of the Income Tax Act 2007. The judgment debtor was required to deduct from payments he made to independent contractors who supplied labour to the business that provided workers to the horticultural sector.
[6] The application to set aside the bankruptcy notice came before Associate Judge Sargisson on 5 March 2020. Judge Sargisson dismissed the application as the judgment in the District Court had not been stayed. The challenge to the bankruptcy notice was in substance to obtain the adjournment of the bankruptcy proceedings to allow the application in the District Court to be determined. The application to set aside the bankruptcy notice was struck out. Accordingly, an act of bankruptcy occurred on 6 March 2020.
[7] The hearing to set aside the judgment was disrupted by the COVID-19 lockdowns and eventually heard on 17 July 2020. The application was dismissed, essentially because of the Court’s limited ability to revisit the notices of assessment in the absence of any challenge by the judgment debtor to the assessments within the statutory timeframes.3 The Commissioner issued her creditor’s application on 8 June 2020.
[8] On 4 August 2020, the judgment debtor, pursuant to s 113 of the Tax Administration Act 1994, sought that the Commissioner reassess the judgment debtor’s liability for GST and the Withholding Tax.
[9] On 5 August 2020, a notice of intention to oppose adjudication was filed by the judgment debtor raising similar grounds to those contained in the application to set aside the bankruptcy notice, but also relying on the application to the Commissioner under s 113 of the Tax Administration Act.
[10] The s 113 application was declined and the reasons, set out in a letter dated 1 September 2020, were sent to the judgment debtor’s solicitor. The author of the letter records that he was requested to independently consider the reassessment request and recorded he had no prior familiarity with the judgment debtor’s tax affairs. In the letter he records he familiarised himself with the relevant assessments arising from the Commissioner’s audit action which led to the notices of assessment I referred to earlier. The author of the letter records that he was guided by the Commissioner’s existing policies and that the principal guidance in relation to his approach was found
3 Tax Administration 1994, s 109.
in Standard Practice Statement SPS20/03 and a link to that Standard Practice Statement was provided in the letter.
[11] The letter concludes that the decision to reject the s 113 assessment “… is not itself subject to dispute under the Tax Administration Act and is final.”
[12]As at 14 September 2020, the total liability of the judgment debtor was
$2,415,560 including interest and penalties of which $527,119.51 was GST.
[13] In submissions filed for the hearing, counsel for the judgment debtor records that her client maintains his challenge to the underlying tax debt relied on in the bankruptcy notice. The judgment debtor also wishes to have the opportunity to challenge the underlying tax debt. Counsel for the judgment debtor maintains the judgment debtor is bona fide in challenging the underlying debt.
[14] The submissions filed record the judgment debtor has given instructions to his counsel to apply to the High Court for judicial review of the Commissioner’s decision under s 113 declining the request to correct/amend the earlier assessments.
Commissioner entitled to seek order
[15] As noted, the judgment debtor does not dispute that the Commissioner is entitled to seek the judgment debtor’s adjudication under s 36 of the Act; the Commissioner having established the requirements set out in s 13 of the Act.
Judgment debtor’s arguments
[16]The judgment debtor relies on ss 37, 38 and 43 of the Act which provide:
37Court may refuse adjudication
The court may, at its discretion, refuse to adjudicate the debtor bankrupt if—
(a)the applicant creditor has not established the requirements set out in section 13; or
(b)the debtor is able to pay his or her debts; or
(c)it is just and equitable that the court does not make an order of adjudication; or
(d)for any other reason an order of adjudication should not be made.
38Court may halt application
(1)The court may at any time halt the creditor’s application for adjudication.
(2)The court may halt the application on the terms and conditions (if any), and for the period, that the court thinks appropriate.
...
43 Court may halt application while underlying debt determined
(1)This section applies if the debtor appears in opposition to a creditor’s application and the debtor says either—
(a)that he or she does not owe a debt to the creditor; or
(b)that he or she does owe a debt to the creditor, but the debt is less than $1,000.
(2)The court may, instead of refusing the application, halt the application so that the question of whether the debt is owed, or how much of the debt is owed, can be resolved at a trial.
(3)As a condition of halting the application, the court may require the debtor to give security to the creditor for any debt that may be established as owing by the debtor to the creditor, and for the costs of establishing the debt.
[17] The essence of the judgment debtor’s argument is that it is just and equitable that he have the opportunity to seek judicial review of the decision to decline his s 113 request. His s 113 request, seeks re-assessment of the underlying tax debt on which this proceeding is based. It is submitted if the judgment debtor is successful then the underlying debt will fall away and the bankruptcy proceeding will come to an end. The judgment debtor submits there is no significant prejudice to the Commissioner if the application is halted while the judicial review proceedings continue.
[18] While the judgment debtor said he could not pay the debt sum owed to the judgment creditor, he did not claim he had no assets so as to make the bankruptcy pointless.
[19] The onus of satisfying the Court it is just and equitable not to make an order for adjudication or that for other sufficient cause no order should be made is on the judgment debtor.4
Discussion
[20] Judicial review is available of a determination under s 113 of the Tax Administration Act.5
[21] Associate Judge Andrews in Excel East Ltd v The Commissioner of Inland Revenue, having accepted a discretionary decision made pursuant to s 113 was amenable to judicial review said:6
[t]here is no real evidence to support the claim that the CIR has abused her powers in making the decision under s 113; on the contrary, the evidence suggests that due consideration was given to the applications made. Furthermore, the discretion under s 113 is a very broad one and it is likely that a court would be slow to interfere with a decision of that kind.
[22] This last comment by Associate Judge Andrews is equally applicable here. The judicial review proceedings have not been filed.
[23] In Beach Road Commercial Ltd v The Commissioner of Inland Revenue, Dunningham J considered whether the potential for an application for judicial review of the Commissioner’s decision to decline a s 113 review meant there was a substantial dispute in respect of a statutory demand issued by the Commissioner.7 In Beach Rd, as here, the judicial review proceedings had not been filed. Her Honour said:8
[47] The basis of a potential application for judicial review is not identified and it is well established that there is only limited scope to challenge such a decision on judicial review. The technical merits of the decision will not be considered. As was made clear in Tannadyce and Abbatis,9 and recently
4 McHardy v Wilkins & Davies Marina Ltd (in rec) CA 54/93, 7 April 1993 at 3.
5 Charter Holdings v Commissioner of Inland Revenue [2016] NZCA 499, (2016) 27 NZTC 22-075 at [1].
6 Excel East Ltd v The Commissioner of Inland Revenue [2018] NZHC 3374 at [52] (footnote omitted).
7 Beach Road Commercial Ltd v The Commissioner of Inland Revenue [2015] NZHC 2205, (2015) 27 NZTC 22-023.
8 At [47].
9 Commissioner of Inland Revenue v Abbatis Properties Ltd [2003] NZAR 155 (CA) and Westpac Banking Corporation v Commissioner of Inland Revenue [2009] NZCA 24.
confirmed in Charter Holdings Ltd v The Commissioner of Inland Revenue,10 the taxpayer must be able to point to exceptional circumstances justifying that course. In Tannadyce, the Court held the proper approach was for the company to obtain interim relief in its judicial review proceedings, rather than applying for the statutory demand to be set aside on the basis it might get relief in judicial review proceedings that it has not even commenced.11 Here the exceptional circumstances are not identified. The evidence goes no further than saying counsel has been instructed to explore whether such grounds exist.
[24] While these comments now need to be read against the Court of Appeal judgment in Charter Holdings v Commissioner of Inland Revenue, they remain relevant where no review proceedings have been filed.12 The assessments that make up the debt to the judgment creditor relate to GST and PAYE/Withholding Tax. Tax years 2015 and 2016 were subject to the assessment. It is common ground that the judgment debtor was only obliged to make withholding tax payments from amounts he paid to his contract workers if those workers were undertaking “cultivation contract work”.
[25]The definition of “cultivation contract work” is:13
[cultivation contract work –
(a)means work or services provided under a contract or arrangement on or in connection with land that is used for the cultivation of fruit crops, vegetables, orchards or vineyards:
(b)includes work or services provided –
(i)under a contract or arrangement for the supply of labour, or substantially for the supply of labour:
(ii)in relation to land that is intended to be used for the cultivation of fruit crops, vegetables, orchards, or vineyards:
(c)does not include work or services provided by –
(i)a post-harvest facility:
(ii)a management entity under a formal management agreement under which the entity is responsible for payment for the work or services provided]
10 Charter Holdings Ltd v The Commissioner of Inland Revenue [2015] NZHC 2041 (note this decision was overturned see above n 5).
11 Tannadyce Investments Ltd v Commissioner of Inland Revenue, [2010] NZCA 233 at [44].
12 Charter Holdings v Commissioner of Inland Revenue, above n 5.
13 Income Tax Act 2007, sch 4 pt C cl 2.
[26] The judgment debtor says that the; “…definition encompasses the land used to grow the end product crops of fruit vegetables, grapes and not land on which seedlings are propagated in trays or pots.” Thus, the judgment debtor says there is a reviewable error of law in relation to this definition.
[27]Of the total debt of approximately $2,415,000, the sum of approximately
$1,884,000 relates to amounts the Commissioner claims the judgment debtor should have withheld from payments to his contractors. The judgment debtor’s liability for GST as at 14 September 2020, was a little over $527,000.
[28] To understand the judgment debtor’s argument in relation to GST, it is necessary to understand how the judgment creditor calculated the amount of Withholding Tax it says the judgment debtor failed to collect. As part of the Commissioner’s audit, the judgment debtor produced invoices said to have been given to him by his contractors. Those invoices apparently included a GST component.14
[29] The Commissioner reached the view that those invoices were not genuine. Apparently the invoices were provided by individuals who were not in the country when the work covered by the invoices was said to have been carried out. I am told handwriting analysis suggests that they were prepared by the same person.15
[30] Because the Commissioner did not accept the veracity of the invoices, the Commissioner analysed the judgment debtor’s bank account to identify payments made to creditors or cash withdrawals made by the judgment debtor which were assumed to be made to contractors. The assessment of the amount of Withholding Tax that should have been retained was based on the amount paid to contractors calculated on that basis, not on the impeached invoices.
14 (Not produced to the Court).
15 This evidence was not in the affidavits. Given the judgment debtor filed an affidavit on 28 September 2020, which was meant to be filed on 4 September 2020, raising for the first time the prospect of a judicial review application, the Commissioner was afforded some latitude in dealing with this issue from the Bar (without objection from Ms Tabb). Ms Tabb accepted that she had been provided with scans of the invoices at the beginning of this year. She had not requested access to the originals for the purpose of analysis. The judgment debtor, in his affidavit of October 2019, in support of his application to set aside the District Court judgment, complained (in error) the original invoices had been lost by the Commissioner and as a result he had been deprived of the opportunity to have an expert carry out a handwriting analysis of the invoices to provide an opinion on their legitimacy.
[31] The judgment debtor has not appreciated this point. In his late affidavit, referring to the GST issue, he says:
The second part of the section 113 application and the commissioner’s response is simply absurd and unbelievable. The payments on which the commissioner has assessed withholding tax on schedular payments (on the basis of the work being cultivation contract work) have then been disallowed as GST expenses. Clearly the payments to workers are an expense of a labour hire business and it is incorrect for the commissioner to disallow them as expenses. The commissioner cannot have it both ways, if the commissioner accepts the payments were made to workers (as she has to assess withholding tax on the payments) then the commissioner must allow the payments as a business expense for calculation of GST.
[32]In the next paragraph, the judgment debtor says:
I deny that I have fabricated anything and I presume Inland Revenue staff now accept that the invoices are genuine because they have used them to (incorrectly) assess the withholding tax. However for them to disallow them for GST purposes is very strange.
[33] The Commissioner has not used the invoices for the purposes of calculating Withholding Tax. Ms Lee, counsel for the judgment creditor, said the judgment debtor was only entitled to claim a GST input credit if he received GST invoices from his workers that charged him GST. In other words, there needed to be a GST component in the amount the judgment debtor paid his contract workers before he could seek a GST credit in respect of those payments. Because the judgment creditor does not accept that the invoices produced by the judgment debtor are genuine, the judgment debtor has not produced any invoices demonstrating payments he made to his contractors had a GST element.
[34] Counsel for the judgment debtor did not explain what the ground of review would be in relation to his liability for GST. Other than his bare assertion that the impugned invoices are genuine, the judgment debtor has provided no further grounds to support this claim. He had the opportunity to have the original invoices examined and to produce affidavits from the parties claimed to have generated the invoices, but he has not produced anything further that would support a judicial review in relation to the s 113 decision on this inherently factual issue. The judgment debtor would have to demonstrate there was, at the very least, a tenable ground for judicial review in respect of the process adopted by the Commissioner in reaching her s 113 decision
about the status of the invoices.16 Nothing in that regard has been advanced by the judgment debtor.
[35] Accordingly, the argument most favourable to the judgment debtor, is in respect of the interpretation of “cultivation contract work”. He has no answer to in excess of $500,000 GST liability to the judgment creditor.
[36] A taxpayer seeking to challenge a statutory demand via judicial review of the Commissioner’s decision on which the demand is based, should obtain interim relief in the judicial review proceedings rather than apply to set aside the statutory demand.17 In my view, the same approach applies in the bankruptcy context.
[37] Had I considered the proposed judicial review was arguably capable of being a complete answer to the judgment debt, I would have adjourned this application to allow the judicial review to be filed and for interim relief to be sought in that context. That would allow the merits of the judicial review to be properly explored.
[38] However, no basis for challenging the dismissal of the s 113 review of the judgment debtor’s GST liability was identified by Ms Tabb. Ms Tabb said everything she could on the point . She stated it was unfair for the judgment debtor to be required to make good the Withholding Tax he did not retain from his contractors and not receive the benefit of the payments he made to his contractors as an input credit. The two issues are distinct. The judgment debtor is liable for the Withholding Tax as he did not deduct the same from his contractors – he has to make up that shortfall. The judgment debtor cannot claim the payments to his contractors as a GST input credit as he can not demonstrate the payments he made to them had a GST component. As I have said, the judgment debtor has not demonstrated he has a reasonable basis for seeking judicial review of the Commissioner’s decision in respect of that issue.
16 Charter Holdings Ltd v Commissioner of Inland Revenue, above n 5 at [58]. In respect of the GST issue, the s 113 review was sought on the basis that the judgment debtor had incurred the payment to his contractors, therefore he should be allowed that expense as a credit without referring for that expense to have a GST component before it can be claimed as an input credit.
17 Beach Road Commercial Ltd v The Commissioner of Inland, above n 7, at [47] and Excel East Ltd v The Commissioner of Inland Revenue, above n 6 at [46].
[39] There was no suggestion that if the judgment debtor’s liability was reduced to the level of the GST that he would be able to pay it. Even if the judicial review was successful, assuming there is a reasonably arguable point to be pursued, in respect of the withholding tax there would still be a substantial indebtedness to the judgment creditor that could not be met.
[40] I am not satisfied that the judgment debtor has shown that it is just and equitable not to make an order for adjudication.
[41] Accordingly, there is an order adjudicating the judgment debtor timed at 4.00pm on Thursday 8 October 2020
Associate Judge Lester
Solicitors:
Legal Services Auckland (for Judgment Creditor) Natalie Tabb, Auckland
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