Commissioner of Inland Revenue v Yip

[2012] NZHC 1355

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

CIV-2011-454-656 [2012] NZHC 1355

IN THE MATTER OF     the Insolvency Act 2006

AND

IN THE MATTER OF      the bankruptcy of CHI W ERIC YIP

BETWEEN  THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

ANDCHI W ERIC YIP Judgment Debtor

Hearing:         14 June 2012

(Heard at Palmerston North)

Counsel:         A.J. York - Counsel for Respondent Judgment Creditor

R.B. Hucker - Counsel for Applicant Judgment Debtor

Judgment:      24 July 2012

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment of Associate Judge Gendall was delivered by the Registrar on 24 July

2012 at 3.30 pm under r 11.5 of the High Court Rules.

Solicitors:           Inland Revenue Department, PO Box 1462, Wellington

Hucker & Associates, Solicitors, PO Box 3843, Shortland Street, Auckland

THE COMMISSIONER OF INLAND REVENUE V CWE YIP HC PMN CIV-2011-454-656 [24 July 2012]

Introduction

[1]       The applicant judgment debtor Chi W Eric Yip (Mr Yip) has applied to set- aside a Bankruptcy Notice served on him by the respondent judgment debtor the Commissioner of Inland Revenue (the Commissioner).

[2]      The Bankruptcy Notice in question relates to a judgment obtained in the District  Court  at  Waitakere  against  Mr Yip  on  4  May  2009  for  $1,870,840.83 representing outstanding income tax, GST, interest and penalties claimed against him by the Commissioner.

[3]      The present application is opposed by the Commissioner.

Background Facts

[4]      As I have noted above, this application relates to a long-standing District Court judgment dated 4 May 2009 obtained against Mr Yip for what was said to be outstanding income tax, GST, interest and penalties due to the Commissioner for various taxation periods in the past.

[5]      Although, as I understand it, Mr Hucker had appeared as counsel for Mr Yip at an earlier time on those District Court proceedings, when judgment was given against Mr Yip, Mr Hucker had withdrawn that defence and effectively there was no appearance made on behalf of Mr Yip in that proceeding.

[6]      Subsequently, no appeal was brought against that 4 May 2009 decision.  Nor has any application been made to set aside the District Court judgment.

[7]      As I understand it, some discussions did take place after May 2009 between Mr Yip  and  officers  of  the  Inland  Revenue  Department  regarding  the  taxation judgment.  The judgment had been based upon default assessments of income tax for the years ended 31 March 2003, 31 March 2004, 31 March 2005 and 31 March 2006 and  of  GST  for  the  periods  ended  31  July  2005,  30  September  2005  and  30

November 2005. Those discussions, however, it appears came to nothing and finally, over two years later, the present Bankruptcy Notice was issued and served.

[8]      As to the issue of the default taxation assessments, the respondent contends that at the time it undertook an extensive investigation into the affairs of Mr Yip for those 2003, 2004, 2005 and 2006 taxation years as he had filed no income tax returns for these periods as required by s 33 Tax Administration Act 1994 (TAA).

[9]      Based  on  this  investigation,  the  Commissioner  issued  the  assessments, pursuant to s 106 of the TAA (commonly referred to as “default assessments’).

[10]     Similar default assessments for GST were issued pursuant to s 16 Goods and Services Tax Act 1985 as no GST returns had been filed by Mr Yip for the particular periods in question.

[11]     The income tax assessments were based on income considered to have been derived  by Mr Yip.   The majority of these income calculations  were  based  on amounts that had been deposited into Mr Yip’s bank account in the relevant years which he had confirmed to the bank in question did represent his income when applying for bank loans.  (Later, it seems that Mr Yip endeavoured to renege from this position – more on this aspect later).

[12]     There is no dispute that Mr Yip was advised on several occasions in person and  in  writing  that  he  was  required  to  issue  a  Notice  of  Proposed Adjustment (“NOPA”) and file the outstanding returns if he wished to dispute the assessments, pursuant to s 89D of the TAA.  Mr Yip it seems did endeavour to file certain income tax returns but did not file a NOPA as required, and so did not formally dispute the default assessments under the disputes procedures set out in the TAA.  Consequently, the default assessments remain in place and are payable pursuant to ss 89D, 106 and

109 of the TAA.  It is also useful to note here that Mr Yip is a chartered accountant, he  describes  himself  on  his  email  address  as  a  “tax  adviser”,  and  on  his  own evidence he controls and operates a significant number of companies.

[13]     One income tax return since filed for the year ended 31 March 2005 by Mr

Yip has been accepted by the Commissioner. The assessment amount (core tax being

$1,037.91) however still remains unpaid by Mr Yip.

[14]     Mr Yip in about December 2007 made an initial request pursuant to s 113 of the TAA, asking that the Commissioner amend the other assessments currently in place.

[15]     The request to consider an amendment under s 113 was rejected however, as the Commissioner says Mr Yip did not provide sufficient evidence to show the assessments issued were incorrect.

[16]     From the material before the Court, it is clear that the Commissioner did request further information on several occasions but this was not provided by Mr Yip, and, accordingly, the request to consider the application of s 113 could not be processed and was rejected.

[17]     From the evidence before me, it appears that Mr Yip was also invited to several meetings at the time to discuss the assessments, but these did not eventuate.

[18]     After 2007, no further request under s 113 was made for some 5 years until a current request was made (interestingly only some three days before the hearing of the present application) dated 11 June 2012.  As I understand the position, the same information previously provided to the Commissioner has again been provided. According to the Commissioner no new information has been given in support of Mr Yip’s latest request.  Leaving to one side obvious issues of delay here, this request, in a letter dated 11 June 2012 from Mr Hucker who is counsel for Mr Yip, is somewhat unclear but there seems to be a reasonable suggestion here that it appears to relate only to assessments for the income tax years ended 31 March 2004 and 31 March

2005.

[19]     Returning to the original May 2008 District Court proceeding, as I have noted above, initially this was defended by Mr Yip.  The matter was then called before His Honour Judge Taumaunu on 4 May 2009.  Mr Hucker appeared on behalf of Mr Yip and advised that he had not received any further instructions from Mr Yip and, therefore, was not in a position to oppose the entry of judgment.  At this hearing, the Commissioner confirmed with His Honour that no objection to the assessments had been  received  and,  accordingly,  the  Commissioner  sought  to  proceed  to  obtain

judgment.  Significantly as I see it, no defence was advanced for Mr Yip at the time (despite  the  fact  that  he  was  legally  represented  right  up  to  the  District  Court hearing) to suggest that his December 2007 request pursuant to s 113 of the TAA that the Commissioner amend the assessments in question, allegedly remained unanswered.

[20]     Again, as I have noted above, on 4 May 2009, judgment was entered and costs were awarded against Mr Yip in the District Court.   These amounted to the total judgment debt in question here of $1,870,840.83 (“the judgment debt”).

[21]     Over two years of detailed discussions and negotiations then ensued between Mr Yip and the Commissioner.  These were entirely unsuccessful.  No resolution was reached, nor was any payment made by Mr Yip towards the outstanding taxation. Finally, no doubt with some element of exasperation, the Commissioner looked to his  other  remedies  and,  on  15  November  2011,  he  served  Mr  Yip  with  the Bankruptcy Notice.

[22]     On 29 November 2011, Mr Yip filed his present application to set-aside the

Bankruptcy Notice on the stated grounds that:

(a)      Mr Yip has since issued dispute documents I understand for later years (not subject to the judgment debt and Bankruptcy Notice) under the TAA and instituted its adjudication processes which may affect the amounts claimed in the Bankruptcy Notice;

(b)the applicant has counterclaims and/or cross demands which were not available when judgment was obtained; and

(c)      it would be an abuse of process to rely on the Bankruptcy Notice and the Court ought to exercise its inherent jurisdiction to set-aside the Bankruptcy Notice (the application).

[23]     The affidavit that accompanied this application stated that a further affidavit in support was to be filed setting out further detail.  This was to be filed by 15 March

2012.  An affidavit however was filed only on 11 June 2012 (some three days before the allocated date for hearing of this application) along with the submissions from Mr Yip’s counsel, Mr Hucker.

[24]     Those  submissions,  received  by  the  Commissioner  on  11  June  2012, essentially seem only to seek an adjournment of the present application on the basis that Mr Yip has allegedly received no answer to his further request pursuant to s 113 of the TAA that the tax assessments be amended and the tax, interest and penalty impositions which total the amounts contained in the Bankruptcy Notice cancelled. That request under s 113 as I have noted above was also made only on 11 June 2012.

Counsels’ Submissions and My Decision

[25]     The  present  application  is  effectively  brought  pursuant  to  s  17  of  the Insolvency Act 2006. This provides that a debtor commits an act of bankruptcy if a creditor has obtained a final judgment or order against the debtor, the debtor has been served with a Bankruptcy Notice and the debtor has not, within the specified time limits, complied with the requirements of the Notice or satisfied the Court that he or she has a cross-claim against the creditor. Section 17(7) defines a cross claim as a counter-claim, set-off or cross-demand that is equal to, or greater than the judgment debt, and one which the debtor could not have used as a defence in the proceeding in which the judgment or order was obtained.

[26]     Here, there is no suggestion by Mr Yip that there are irregularities in the Bankruptcy Notice issued against him or that it may not have been served in compliance with the rules as to service in the High Court Rules.

[27]     Brookers Insolvency Law and Practice at para IN17.10 addresses the question of a s 17(1)(d)(ii) cross claim against the creditor and states:

IN17.10 “cross claim against the creditor” — s 17(1)(d)(ii)

The second option in s 17(1)(d) Insolvency Act 2006 is that the debtor, within the time limit specified, satisfies the Court that he or she has a cross claim against the creditor. Section 17(7) provides further guidance on the meaning of a cross claim. It requires that the cross claim must be “equal to, or greater than, the judgment debt” and it is one which “the debtor could not use as a defence in the action or proceedings in which the judgment or order … was obtained”.

These requirements are discussed further below, but in summary ss 17(1)(d) and

17(7) Insolvency Act 2006 requires the debtor to:

(i)        Demonstrate that he or she has a cross claim of true substance which he or she genuinely proposes to pursue (Sharma v ANZ Banking Group (1992) 6

PRNZ 386; [1992] 3 NZBORR 183 (CA), see further IN17.10(5) below);

(ii)       Establish that the cross claim is equal to or is greater than the judgment debt (see further IN17.10(6) below);

(iii) Establish that he or she could not, by law, use the cross claim as a defence in the action or proceeding on which the judgment or order providing the basis for the bankruptcy notice was entered (Clark v UDC Finance Ltd [1985] 2 NZLR 636, 639 see further IN17.10(3) below); and

(iv) If he or she relies on factual inability to set the cross claim, he or she must establish some cogent circumstances because the primary emphasis is on the legal nature of the impediment (Hardie v Booth [1992] 1 NZLR 356,

362, see further IN17.10(3) below).

[28]     As I have noted above, Mr Yip here simply seeks an adjournment of the present application he says to await the Commissioner’s decision on his recent s 133

TAA application for a reconsideration of the long-assessed taxation in question here.

[29] The Commissioner opposes the adjournment application, disputes the grounds advanced for Mr Yip as outlined at [22] above and submits that the Bankruptcy Notice should not be set aside essentially on the basis that:

(a)      The Commissioner obtained judgment against Mr Yip over 3 years ago on 4 May 2009 in the Waitakere District Court; and

(b)S. 109 of the TAA provides that, except in challenge proceedings, no disputable decision may be disputed in a Court or in any proceedings on any ground whatsoever;

(c)       No dispute documents in relation to the assessments in the District

Court judgment debt have been received;

(d)Notwithstanding s 109, the Commissioner may amend an assessment at any time to ensure its correctness, pursuant to s 113 of the TAA;

(e)       The exercise of s 113 however is discretionary on the part of the

Commissioner.

(f)       The Commissioner has previously considered (and rejected) several requests by Mr Yip under s 113 and has confirmed his decisions to Mr Yip that he has not exercised his discretion on the basis that Mr Yip did not provide adequate evidence showing the assessments were incorrect;

(g)The very recent request pursuant to s 113 made on 11 June 2012 does not offer any further evidence than that already considered by the Commissioner and, also perhaps significantly, that request was timed to be made only three days before the hearing of the present application.

(h)The judgment debt is substantial and remains outstanding, and accordingly, it is not an abuse of process to rely on the Bankruptcy Notice.

[30]     Before me,  counsel  for  the Commissioner noted that  New  Zealand’s  tax system is based on voluntary compliance by taxpayers.  Taxpayers are required to file returns declaring their income and expenses, and assessments issued can only be amended in limited circumstances, either through the disputes resolution processes or through the exercise of s 113 of the TAA.

[31]     Pursuant to s 149A(2) of the TAA, the onus of proof in civil proceedings rests with the taxpayer to prove an assessment is incorrect.

[32]     And  in  terms  of  s  109  of  the  TAA,  except  in  objection  or  challenge proceedings provided for in Parts 8 and 8A respectively of the TAA, a disputable decision may not be disputed in any Court or in any proceedings on any ground whatsoever.  Rather, every disputable decision is deemed to be correct in all respects.

[33]     Under  s  3  of  the TAA,  a  “disputable  decision”  is  defined  to  mean  “an assessment”.  And, where tax returns have not been filed as required by the revenue legislation, the Commissioner may issue assessments under s 106 of the TAA (“default assessments”).  If a taxpayer does not agree with these default assessments, she/he must file the relevant tax returns together with a Notice of Proposed Adjustment (“a NOPA”) within 4 months of the issue of the default assessments, under s 89D of the TAA (Allen v Commissioner of Inland Revenue (2006) 22 NZTC

19,827  (SCNZ)).     Failure  to  do  so  results  in  “deemed  acceptance”  of  the

respondent’s assessments, and s 109 noted above at [32] applies.

[34]     Notwithstanding this s 109 of the TAA however, the Commissioner can, at any time, amend an assessment to ensure its correctness, pursuant to s 113 of the TAA.

[35]     S. 113 gives the Commissioner the discretion to amend assessments to ensure their correctness when they contain genuine errors, or following the application of the disputes resolution process.  It is clear that this discretion under s 113 is only to be  exercised  when  assessments  are  clearly  wrong,  as  otherwise  the  disputes resolution process should be initiated.

[36]     The authorities as I see it support the clear position that the Commissioner cannot be compelled to either investigate claims that assessments are in error or subsequently to amend those assessments (Commonwealth Agricultural Services Engineers Limited (In Liquidation) v Commissioner of Inland Revenue (1926) 38

CLR 289 and Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512).

[37]     If the Commissioner is not satisfied that assessments contain genuine errors, he cannot be compelled to amend the assessments (Wood v Commissioner of Inland Revenue (1999) 19 NZTC 15,255).

[38]     The  exercise  of  discretion  under  s  113  of  the TAA is  not  a  “disputable decision” under s 3 of the TAA, and, accordingly, cannot be subject to the disputes resolution process.   The only avenue to review a decision made under s 113 is through the judicial review process.

[39]     That judicial review process is directed at determining whether the correct procedure was followed in reaching the Commissioner’s discretionary decision.  It is not  a  method  of  re-arguing  the  result  of  the  Commissioner’s  decision.     No application to judicially review the Commissioner’s earlier s 113 decisions has been brought by Mr Yip.

[40]     And finally, r 5.61 of the High Court Rules provides that, in a proceeding for recovery of taxes by the Crown, a defendant is not entitled to plead any set-off or counterclaim.

[41]     In the present case, Mr Yip did not issue a NOPA with the outstanding returns nor did he formally dispute the default assessments under the disputes procedures set out in the TAA.  Therefore, it must follow that the assessments in question, including all the particulars of those assessments, are deemed to be, and are to be taken as being, correct in all respects, pursuant to s 109 of the TAA.

[42]     Consequently, I am satisfied that Mr Yip cannot now apply to set aside the Bankruptcy Notice on the basis that there is an alleged dispute in respect of his tax assessments.

[43]     With  respect  to  s  113  of  the  TAA,  Mr  Yip  acknowledges  that  he  had previously in 2007 made requests to the Commissioner to amend the assessments that comprise the judgment the subject of the Bankruptcy Notice.   I am satisfied from all the evidence before the Court however that these requests to consider an amendment under s 113 were considered and rejected, as Mr Yip did not provide sufficient evidence to show that the assessments issued were incorrect.  And, it is clear from the material before the Court that Mr Yip was aware of this and, in subsequent  discussions,  no  further  information  was  provided  despite  repeated requests from the Commissioner to Mr Yip.

[44]   In the present case, after considering the comprehensive material the Commissioner has placed before the Court, I am satisfied that the Commissioner determined all aspects of the default assessments after a full investigation into Mr Yip’s tax affairs.  The supporting information which Mr Yip now attempts to provide I accept was properly reviewed previously and rejected by the Commissioner.

[45]     Mr Yip appeared to argue in his previous requests under s 113 that his income from China that was declared as such to the bank in question, was not his income and he had simply asked friends in China to “make up some stories”.

[46]     As I have noted above, under s 149A(2) of the TAA, in civil proceedings such as those at issue here, the onus of proof must rest with Mr Yip, the taxpayer. Mr Yip has certainly not been able to provide sufficient evidence to prove that the amounts in question in his bank accounts were not his income.  The Commissioner, as I see it, simply cannot be required to consider the default assessments to be clearly wrong in this instance based on Mr Yip’s belated evidence that he was providing false information to his bank.  Mr Yip’s credibility is clearly a substantial issue in this case, and the Commissioner cannot amend an assessment under s 113 unless he thinks it is clearly necessary to do so to ensure its correctness.

[47]     It needs also to be noted here that the current request under s 113 of the TAA, although somewhat confusing, might appear only to seek a re-consideration for the income tax years ended 31 March 2004 and 31 March 2005. As stated above at [13], the income tax return for the year ended 31 March 2005 filed by Mr Yip has already been accepted.  Accordingly, the present request could only relate to the year ended

31 March 2004.

[48]     In addition, it is clear Mr Yip has not even paid the tax re-assessed for the 31

March 2005 year.  It is also arguable that Mr Yip does not seem to have made any request  under  s  113  for  the  years  ended  31  March  2003  or  31  March  2006. Obviously,  no  payment  for  the  amounts  assessed  in  these  years,  which  total

$1,965,524.63 as at 12 June 2012, ($625,623.57 of this being core tax), has been made.

[49]     Mr Yip also appears to maintain here that there are further return years which are now  subject  to  the Commissioner’s  dispute resolution  processes  which  may allow him a possible set-off or counterclaim.  Even accepting however, that there are current disputes in respect of those periods, these disputes concern later income tax years and cannot affect the assessments in the earlier periods which were the subject of the District Court judgment here.   Accordingly, these matters as I see it are irrelevant for the current proceeding.

[50] Furthermore, and in any event, Mr Yip cannot advance an argument of set-off or counterclaim in the recovery of taxes by the Crown, pursuant to r 5.61 High Court Rules, as noted at [40] above.

Conclusion

[51]     For all the reasons outlined above both Mr Yip’s substantive application before the Court and his present request that this application be simply delayed by way of an adjournment, must fail.

[52]     An order is now made that the judgment debtor, Mr Yip, is to have until 31

July 2012 to comply with the Bankruptcy Notice served upon him, failing which the Commissioner as judgment creditor may bring appropriate proceedings against Mr Yip seeking his adjudication in bankruptcy.

[53]   As to costs, the Commissioner has succeeded in opposing the present application, and I see no reason why he should not be entitled to an order for costs in the usual way.

[54]     Costs are therefore awarded to the Commissioner as judgment creditor on this application on a Category 2B basis together with disbursements as fixed by the Registrar.

‘Associate Judge D.I. Gendall’