Commissioner of Inland Revenue v Slioc Enterprises Ltd HC Auckland Civ-2011-404-001181
[2011] NZHC 1618
•15 September 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-001181
UNDER the Companies Act 1993
BETWEEN THE COMMISSIONER OF INLAND REVENUE
Plaintiff
ANDSLIOC ENTERPRISES LIMITED Defendant
Hearing: 12 September 2011
Counsel: C K Wood for Plaintiff
S R Carey for Defendant
Judgment: 15 September 2011
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
This judgment was delivered by me at 11.00 am on 14 September 2011 pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, PO Box 2213, Auckland 1140, DX 24063 for Plaintiff
(Counsel - C K Wood – [email protected])
Douglas M A Burgess, PO Box 7114, Wellesley St 1141, DX CP19002 for Defendant(Counsel – S R Carey, PO Box 848, Auckland 1140)
THE COMMISSIONER OF INLAND REVENUE V SLIOC ENTERPRISES LIMITED HC AK CIV-2011-404-
001181 15 September 2011
[1] This is an application to put the defendant company into liquidation. The
Commissioner claims a debt for unpaid taxation, interest and penalties amounting to
$37,010.09. In January 2011 the defendant was served with a statutory demand under s 289 of the Companies Act 1993. No part of the debt claimed in the demand has been paid. Accordingly the defendant is presumed to be unable to pay its debts unless the contrary is proved: s 287(a) of the Companies Act 1993.
[2] The company did not apply to set aside the statutory demand. It did apply for an order under r.31.11 of the High Court Rules for an order restraining publication of an advertisement of the application, and staying further proceedings. That application was declined by the Court by a judgment delivered on 9 May 2011. Similar arguments to those presented to me were presented to the Court on that application.
[3] The debt is for income tax for the income year ending 31 March 1990. The original assessment was in the sum of $3,533.97. The amount of tax assessed was not paid when due and late payment penalties have been added, amounting to
$36,222.86 as at 25 January 2011. A credit of $2,746.75 has been applied in reduction of the debt leaving a balance of the sum now claimed under the statutory demand.
[4] There are no outstanding objections in relation to the assessment. All objections have been heard and determined by the Taxation Review Authority, the High Court and the Court of Appeal. The process started in August 1995 and ended in February 2009.
Argument for the Commissioner
[5] The Commissioner’s position can be summarised briefly:
(a) As a consequence of the objection and appeal process the Commissioner was ordered by the Taxation Review Authority, and subsequently the High Court, to allow a deduction of $22,500 per
annum against assessable income of the company for the years 1984-
1990 inclusive. These deductions have been incorporated into the assessment from which the current debt is derived.
(b)Section 109 of the Tax Administration Act 1994 applies. This requires the Court to treat the debts which have been established through the process I have summarised as being correct and indisputable. Section
109 provides:
Except in objection proceedings under Part 8 or challenge proceedings under Part 8A –
(a) No disputable decision may be disputed in a Court or in any proceedings on any ground whatsoever;
(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, or are to be taken as being, correct in all respects.
Section 3 of the Tax Administration Act 1994 defines “disputable decision” as including an assessment.
(c) There is no right to object to the imposition of interest: s 120I(1) of the
Act provides:
A taxpayer may not object to or challenge the imposition of interest payable under this Part.
(d)Section 138L(2) of the Act provides that late payment penalties may not be challenged. It provides:
Notwithstanding subsection (1), a taxpayer has no right to challenge –
(a) A civil penalty imposed for –
(i) The late provision of a tax return; or
(ii) The late payment of tax; or
(ab) A civil penalty imposed under section 215 of the KiwiSaver
Act 2006; or
(b) The percentage applicable to the civil penalty.
(e) Accordingly it is not open to this Court on this application to entertain the challenge to liability made by the defendant.
(f) The company is unable to pay its debt and should be wound up.
[6] The Commissioner drew my attention to Commissioner of Inland Revenue v
Wilson:[1]
[1] Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512; 12,520
The imposition of time limits is a central feature of tax administration in New Zealand, as in other jurisdictions. It is part of the scheme and policy of the legislation. Without time constraints, administrative chaos and uncertainty would ensue. The Commissioner could not close the books. Taxpayers could not know where they stood ... Once the assessment is made, in the absence of a timely objection the assessment is determinative of liability.
The defendant’s case, and the Commissioner’s response
[7] The defendant argued three points in support of its submission that an order for liquidation should not be made, either because the principal debt is not in fact owing (and consequently penalty and interest fall away) or that in any event the Court should exercise its discretion not to wind up the company. I will deal with these in turn.
[8] I have referred to the finding of the Taxation Review Authority and the High Court that the sum of $22,500 should be deducted from the defendant’s assessable income for each relevant year. The defendant accepts that this step was in fact taken after the decision of the Taxation Review Authority. However, when the matter was appealed to the High Court, the Court issued a judgment which contained the following passage:
[46] With the exception of deductions permitted to corporate taxpayers for the consultancy fee, the effect of my determination of the questions raised in the cases stated is to confirm the amended assessments that were the subject of the original cases stated to the TRA. I accordingly make the following orders:
(a) In respect of Slioc I direct that the Commissioner make an amended assessment reducing the assessable income for each relevant year by
$22,500 to reflect the consultancy fee.
[9] This order was made at the request of the Commissioner – see paragraph [40] of the judgment. In submissions Mr Wood candidly informed me that when he appeared at that hearing, he requested the Court to make the order because he had not been informed by the Commissioner that the credit for the consultancy fees in the years in question had in fact already been passed in accordance with the direction of the Taxation Review Authority.
[10] Mr Carey argued a deduction of $22,500 should now be allowed in accordance with the direction of the High Court. Its effect would be to remove altogether any liability for income tax and accordingly interest and penalties would fall away.
[11] I am not prepared to accept this submission, for the following reasons. First, on a reading of the introductory portion of paragraph [46], and sub-paragraph (a) which follows it, together, it is the clear intention of the High Court that the amended assessments which went to the TRA were confirmed subject only to the deduction of the sums of $22,500 for annual consultancy fees. That is precisely what had already occurred: deductions of $22,500 from the amended assessments which were the subject of the original cases stated to the TRA. In my view it is plain that it was not the intention of the judgment to order a further deduction of the same amount for the same reason from the assessments as they stood at the time the matter was argued in the High Court, those deductions having been made already, though unbeknown to counsel. To interpret the judgment in any other way would, in my opinion, not only strain the wording of the paragraph I have referred to but also amount to a nonsensical outcome. Secondly, the administrative framework which I have quoted (paragraph [5] (b) above) in any event prevents this Court on this application entertaining the dispute now raised.
[12] The defendant’s second argument relies on paragraph [46] (d) of the
judgment of the High Court dated 16 February 2009. It provides:
(d) Judgment made against any of the individual taxpayers may only be sealed upon the filing and service of an affidavit annexing the case stated to the TRA for that taxpayer.
Evidently a judgment was sealed by the Commissioner to give effect to the judgment of the Court, in contravention of this direction. As a result the defendants in that case, which include the present defendant, applied to the Court for an order that the judgment of February 2009 had been improperly sealed and could not be acted upon. The High Court declined to make the order sought. An appeal has been lodged in the Court of Appeal. It has not been heard. Mr Wood observed that an appeal may not in fact lie as of right and may require leave. Be that as it may, Mr Carey argued that until that appeal has been resolved the objection proceedings have not come to an end and accordingly the present liquidation application is premature.
[13] I do not accept that argument. The decision of the High Court remains the subject of a sealed judgment unless and until that judgment is set aside. As Mr Wood said, the decisions of Courtney J have brought into effect the provisions of ss 109,
120I and 138L(2) of the Tax Administration Act 1994, and the defendant and the
Court are required to treat the debt as being correct and indisputable.
[14] The third defence argued is based on s 99(4) of the Income Tax Act 1976. This provides:
Where any income is included in the assessable income of any person pursuant to subsection (3) of this section ... that income shall be deemed to have been derived by that person and shall be deemed not to have been derived by any other person.
[15] In his affidavit dated 6 April 2011 Mr J G Russell, a director of the defendant, deposed in paragraph 16:
In addition the Commissioner’s officers are yet to carry out adjustments required under section 99(4) of the Income Tax Act 1976 in respect of Slioc Enterprises Limited and a large number of other taxpayers involved in Russell Template arrangements that have been the subject of reconstructions by the Commissioner pursuant to section 99 of the Income Tax Act 1976. Officers of the Department and their legal representatives have previously said that the section 99(4) adjustments would be carried out but they have not in fact been carried out.
Mr Russell then deposed, and Mr Carey argued, that as income assessed to Slioc Enterprises Limited has been assessed to other taxpayers under s 99, once the s 99(4) adjustments are carried out the tax liability of Slioc Enterprises Limited will be reduced or eliminated.
[16] In response to that, Mr T I Strang of the Inland Revenue Department, who has been involved in the affairs of Mr Russell and companies under his direction for some time, deposed:
5.1 I am unaware of any adjustments that have to be made under section
99(4) for the defendant.
5.2In any event if another taxpayer has been assessed for the same income assessed under section 99 of the Income Tax Act 1976 it is that other taxpayer who has the right to dispute or challenge the assessment made in breach of section 99(4). The defendant’s case involving section 99 is at an end.
In paragraph 7.4 Mr Strang continued to say that he is unaware of any adjustments under s 99(4) which still have to be carried out in relation to the defendant.
[17] It was common ground between the parties that assessments made by the Commissioner against Mr Russell personally remain before the courts. Objection proceedings in relation to those assessments have been dealt with by the High Court and are subject to appeal to the Court of Appeal. The appeal has not yet been heard. Objections to the assessments have not been upheld, so at present the assessments stand.
[18] The evidence on whether or not the income which has been assessed to, and is now claimed from, the defendant has also been assessed against Mr Russell personally, is as I have set out. This issue was debated before Associate Judge Bell in the application for an order restraining publication of an advertisement of this application, to which I have referred earlier. His Honour was not persuaded by the
argument - paragraphs [28] to [30] inclusive of the judgment.[2]
[2] Associate Judge Bell, 5 May 2011
[19] Mr Carey invited me to use as the starting, and indeed finishing, point for my consideration of this issue the wording of s 99(4). He argued that given the fact that income which is the subject of this claim has now been included in the assessable
income of Mr Russell, that income is now deemed to have been derived by Mr Russell and is also deemed not to have been derived by the defendant. As I understood his argument Mr Carey sought to dispute the findings of the Court of Appeal in Wire Supplies Ltd v CIR.[3] In that case the Court of Appeal considered at length the application of s 99(4) to assessments of taxation, sequentially, against two taxpayers. The Court said:
[3] Wire Supplies Ltd v CIR (2007) 23 NZTC 21,404
[110] On the [defendant’s] contention, no Track A or B assessments can be resolved until the s 99(4) arguments relating to all later tracks are resolved, ie after the objection proceedings for those later tracks are finally concluded. And if there is an inconsistency, the [defendant] says the earlier track assessees get the benefit, to the detriment of the later track assessees. There is nothing in s 99(4) that indicates that that should necessarily be the case and there is a degree of opportunism in this argument being made on behalf of Track B assessees, when Track B assessees were the beneficiaries of the opposite conclusion in Miller.
(Emphasis added).
...
[112] The [defendant’s] approach appears to be predicated on the premise that there can be only one “correct” assessment of income after the Commissioner has made any adjustment under s 99(3). As noted at [75] above, that is not so. ... Where the Commissioner has assessed different parties in circumstances that trigger or may trigger s 99(4), the question that faces the court may well be which of two otherwise valid and “correct” assessments prevails.
[113] The essence of the argument for the appellants is that the operation of s 99(4) means that (assuming assessments under Track C deals with the same income assessed under Track B) Track C assessments must make the earlier Track B assessments incorrect or invalid. Accordingly, the Commissioner became bound when he issued assessments under Track C to cancel or amend downwards the Track B assessments to avoid any double taxation in breach of s 99(4). If the Commissioner did not do this, then it was incumbent on the TRA to do so. That meant that the TRA needed to hear Mr McDermott’s evidence in order to understand the extent to which the Track B assessments needed to be amended downwards.
[114] Although the TRA did not hear Mr McDermott’s evidence, it did consider the impact of Tracks C and D on the Track B assessments in Case U23. In the TRA’s view, Track C assessments could not affect assessments made under Tracks A or B which had been taken to the case stated stage, and so the advent of the Track C assessments could not alter the TRA’s decision on the objections to the Track B assessments: Case U23 at [29] – [30]. (Emphasis added).
...
[129] This means that where a Track C assessment is made in circumstances where a Track B assessment is already before the TRA, the party who may seek to invoke an inconsistency argument based on s 99(4) is the Track C assessee, but not the Track B assessee. This is consistent with the decisions of all courts in Miller, as well as reflecting the reality that the Track B assessee is limited in the grounds of its objection to those which appeared in the objection itself, which cannot have included the possibility of an inconsistent Track C assessment that did not exist at the time of the objection. ... (Emphasis added)
[20] Mr Carey submitted that the statements of the Court of Appeal are not borne out by the statute. I am not prepared to engage in that argument. In my opinion the following submission by Mr Wood, referring to the passages just quoted from the judgment in Wire Supplies Ltd v CIR is correct:
What this means is that the assessments made of the defendant are final. If it subsequently transpires that another taxpayer has been assessed for the same income that the defendant has been assessed for it is the subsequent taxpayer who has the right to object and to seek to have the later assessment adjusted or cancelled.
[21] In my opinion that accurately summarises the position. Thus, even if the facts do in fact show that the same income has been assessed to Mr Russell, which the Commissioner maintains is not the position in any event, this does not affect the validity of the assessment upon which the statutory demand is based.
[22] Mr Wood went on to point out that in any event the assessments against Mr Russell were not in fact made under s 99(3), and therefore the provisions of s 99(4) do not apply. Rather, the assessments were made on the basis that the transactions were a sham. Whether this is ultimately relevant to the outcome of the assessments against Mr Russell is not a matter on which I make any comment in this judgment.
[23] Finally, Mr Carey argued that in the circumstances of this case I should exercise my discretion against making an order placing the defendant into liquidation, given the comparatively small extent of the core debt, the lack of any other creditors, the fact that the defendant is not trading and therefore there is no element of public interest, and there remains a question over double assessment of income, as the defendant would have it.
[24] I am satisfied that if there is any question over double assessment of income tax, and I am far from satisfied that there is, that question squarely lies with the taxation affairs of Mr Russell and not with the concluded assessment, objection and appeal processes that have been undertaken in relation to the defendant. The defendant is unable to pay its debts, having not introduced any evidence on this point to rebut the presumption in s 287 of the Companies Act 1993. If the company is not placed into liquidation, the fact that at present it is not trading may rapidly become a matter of history. I see no reason to exercise my discretion against placing the company into liquidation.
Outcome
[25] The defendant is placed into liquidation. I appoint the Official Assignee as liquidator. The plaintiff is entitled to costs on a 2B basis plus disbursements to be
fixed by the Registrar. This order is timed at [11.00 am].
J G Matthews
Associate Judge
0