Commissioner of Police v Cheng
[2024] NZHC 3242
•4 November 2024
IN THE HIGH COURT OF NEW ZEALAND GISBORNE REGISTRY
I TE KŌTI MATUA O AOTEAROA TŪRANGANUI-A-KIWA ROHE
CIV-2016-416-12 CIV-2016-416-46 CIV-2019-416-4
[2024] NZHC 3242
UNDER the Criminal Proceeds (Recovery) Act 2009 BETWEEN
COMMISSIONER, NEW ZEALAND POLICE
Applicant
AND
THOMAS CHENG
First Respondent
MASONIC LIMITED
Second RespondentREDOUBT HOUSE LIMITED
Third RespondentACTION INVESTMENTS LIMITED
Fourth RespondentACTION INVESTMENT LLP
Fifth RespondentHARVEST PROPERTY LLP
Sixth Respondentcontinued …
Hearing: 1 October 2024 Counsel:
H W Ebersohn and H C J Salisbury for Second Interested Party M F Nelson for Respondents
Judgment:
4 November 2024
JUDGMENT OF RADICH J
COMMISSIONER OF POLICE v CHENG [2024] NZHC 3242 [4 November 2024]
… continued
MORTGAGE INTERNATIONAL LLP
Seventh Respondent
EXPRESSS FACTORING LLP
Eighth Respondent
WORLDWIDE MODELS LIMITED
Ninth Respondent
CML BUILDING LIMITED
Tenth Respondent
STARDUST BUILDING LIMITED
Eleventh Respondent
BAYWIDE CREDIT LIMITED
Twelfth Respondent
ANDERSONS BUILDING LIMITED
Thirteenth Respondent
UNITEC INVESTMENT LIMITED
Fourteenth Respondent
KFC LIMITED
Fifteenth Respondent
WILLIAM CHENG LIMITED
Sixteenth Respondent
QUEENS HOTEL LIMITED
Seventeenth Respondent
WILLIAM CHENG
Eighteenth Respondent
NYIOH CHEW HONG
Nineteenth Respondent
EMILY CHENG aka JOANNE McKAY
Twentieth Respondent
WINSTON GEORGE MAURICE RAYMOND FRANKLIN
Twenty-first Respondent
continued …
… continued
UNITEC INVESTMENTS LLP
Twenty-second RespondentHARVEST FACTORING LLP
Twenty-third Respondent
AND WARREN JAMES BORRIE
First Interested Party
COMMISSIONER OF INLAND REVENUE
Second Interested Party
[1] Restraining orders have been made in this proceeding, under the Criminal Proceeds (Recovery) Act 2009 (the Act), over funds in the bank accounts of the ninth respondent, Worldwide Models Ltd, and the 18th respondent, William Cheng.
[2] The funds in the accounts are rental payments made to 11 of the other respondents by tenants of buildings owned by those respondents.1
[3] The Commissioner of Inland Revenue (the Commissioner), the second interested party, has an interest in the restrained funds. His interest is based upon the tax liabilities of the 11 respondents. They have not paid tax on the rental payments they have received. Accordingly, the Commissioner has issued a deduction notice to the Official Assignee under s 157 of the Tax Administration Act 1994 and s 43 of the Goods and Services Tax Act 1985.
[4] The Commissioner seeks an order confirming that, in the event that forfeiture orders are not made and restraint over the restrained funds is lifted, the Official Assignee is to pay the restrained funds to the Commissioner in accordance with the deduction notice, to relieve the tax liabilities of the 11 respondents.
1 The 11 respondents are Redoubt House Ltd (the third respondent), Action Investment LLP (the fifth respondent), Harvest Property LLP (the sixth respondent), CML Building Ltd (the 10th respondent), Stardust Building Ltd (the 11th respondent), Baywide Credit Ltd (the 12th respondent), Andersons Building Ltd (the 13th respondent), Unitec Investment Ltd (the 14th respondent), KFC Ltd (the 15th respondent), William Cheng Ltd (the 16th respondent) and Queens Hotel Ltd (the 17th respondent).
[5]The respondents resist the order. They see it as being premature and unfair.
Factual background
The restrained funds
[6] This proceeding comes about as a result of the drug dealing offending of Thomas Cheng. He is presently serving a lengthy sentence for that offending. Thomas Cheng’s father, William Cheng, and his partner, Nyioh Hong, purchased a number of commercial buildings in New Zealand. Each of the buildings is registered in the name of one of the 11 respondents I have mentioned. The 11 respondents, as owners of the properties, derived rental income and incurred tax liability on the income. Neither they nor William Cheng nor Nyioh Hong have returned or paid tax on the rental income.
[7] None of the 11 respondents have challenged the Commissioner’s tax assessments, which quantify their tax debt, or the evasion shortfall penalties that have been imposed.
[8] The rental income on the properties owned by the 11 respondents was not paid into bank accounts in their names but, rather, into bank accounts in the names of Mr Cheng and Worldwide Models. Tax assessments made by the Commissioner were based on the rental payments that could be identified in the bank statements for those accounts.
[9] As at 15 December 2023, the relevant outstanding tax liabilities for each of the 11 respondents, based on the rental income paid for the property that each of them owned was as follows:
(a)Andersons Building Ltd – $209,292.60;
(b)Baywide Credit Ltd – $58,553.51;
(c)CML Building Ltd – $94,528.53;
(d) KFC Ltd – $204,108.36;
(e)Queens Hotel Ltd – $108,459.86;
(f)Redoubt House Ltd – $178,075.48;
(g)Stardust Building Ltd – $232,168.08;
(h)Unitec Investment Ltd – $344,203.91;
(i)William Cheng Ltd – $238,841.09;
(j)Action Investment LLP – $911,778.31; and
(k)Harvest Property LLP – $10,368,505.70.
[10] Nyioh Hong has said, in evidence filed in the proceeding in 2016, that money received into William Cheng’s bank account related to rental payments from tenants of buildings owned by respondents in the proceeding and was held on trust for them.2
[11] Moreover, William Cheng, in his current tax dispute with the Commissioner (referred to in further detail below) has said that all of the rent paid into his account is held on trust for and on behalf of the corporate entities that own the rental properties. He has said, in his notice of proposed adjustment, that there is no dispute as to where the deposits came from and that they are held on trust for those entities.
[12] The position is the same for funds in a bank account in the name of Worldwide Models Ltd, the ninth respondent. During the audit carried out by the Commissioner it was established that this account, in relation to which William Cheng is the authorised signatory, was used by tenants of properties – owned by certain of the 11 respondents – to pay rental funds into. Accordingly, William Cheng and Worldwide Models Ltd were merely collecting and holding the rental funds on trust on behalf of the 11 respondents.
2 Reference at the time was to the second to sixth respondents but not all property-owning entities, as now joined in the proceeding, had been identified at that time.
The tax liability
[13] The income tax and GST liabilities for each of the 11 respondent was assessed by the Commissioner on the basis of the rental payments received from the properties owned by each respondent. None of the respondents disputed the assessments of their tax liability based on the rental payments made into the bank accounts of William Cheng and Worldwide Models Ltd. The tax liability (before interest and penalties) amounts to $1,679,246.33.
[14] As the tax assessments were not challenged, they are deemed, under s 109 of the Tax Administration Act 1994, to be correct.
The Criminal Proceeds (Recovery) Act proceedings
[15] This proceeding began in 2016 with the Commissioner of Police making a without notice application for restraining orders. The orders were made in April 2016. The allegations upon which the orders were made encompassed the alleged methamphetamine dealing by Thomas Cheng but also alleged tax evasion and associated offending by William Cheng and Nyioh Hong. The restraining orders were extended, in time and in scope, from 2016 to 2023. Ultimately, the property restrained fell into three categories. The first is money in Thomas Cheng’s bank accounts and cash held by him at the time of restraint, totalling just over $40,000. The second is money in William Cheng’s bank accounts, amounting to approximately $10.4 million. The third is property that William Cheng and Nyioh Hong owned through respondent companies, said to be worth approximately $10.2 million at the time of restraint.
[16] On 24 March 2023, Cooke J heard the Commissioner of Police’s application for profit forfeiture orders under s 55 of the Act.3 The sum of $20,102,053.22 was sought to be enforced against the restrained property. The application, insofar as it related to William Cheng and Nyioh Hong was founded on allegations of tax evasion and money laundering. It was not alleged that they were involved with the significant drug dealing in which Thomas Cheng had been engaged.
3 Commissioner of Police v Cheng [2023] NZHC 606.
[17] The amount sought by the Commissioner of Police, through the forfeiture orders sought, was described by Cooke J in the following way:
[76] The application in relation to Thomas Cheng’s drug offending, and alleged money laundering sought profit forfeiture orders of $512,852 and
$98,520. The balance of the Commissioner’s contention for profit forfeiture orders, totalling over $20 million, relates to Mr William Cheng, Ms Nyioh Hong and the entities with which they are associated. This was broken down to comprise claims in relation to undeclared commercial rental income totalling $5,721,145.98, off-shore remittances into New Zealand totalling
$13,249,330.08 and interest earned on New Zealand facilities of $520,205.16.
[18] Cooke J accepted the profit forfeiture claim relating to Thomas Cheng’s drug dealing offending. The maximum amount recoverable for that offending under ss 53 and 56 of the Act was found to be $512,852.4
[19] The profit forfeiture claim against the other respondents was declined. While Cooke J accepted that the Commissioner of Police had proved that there was significant criminal activity through a failure on the part of the respondents to declare income tax and goods and services tax lawfully,5 the allegations of money laundering were not accepted.6
[20] Cooke J went on to assess the benefit received by the respondents from the tax offending. The evidence showed that the, then, current tax liability arising from the unpaid $1.6 million in tax had ballooned to $11,443,457.36. The ballooning was the consequence of the penalty and default interest provisions under the Tax Administration Act. As Cooke J said, those provisions “are well-known to have a swinging effect when tax is not paid when due, particularly if no steps are taken to address that liability, as appears to be the case”.7 However, the benefit of the tax evasion in the proceeding was assessed at $1.6 million on the basis that the interest and penalties were not a benefit derived from the offending itself. Rather, they were penalties faced by the respondents for their tax evasion.8
4 At [65] – observing that the dispute may turn out to be moot given that the value of Thomas Cheng’s property was just over $40,000.
5 At [87].
6 At [99] and [106].
7 At [115].
8 At [116].
[21]Having said that, however, Cooke J did not make a forfeiture order for the
$1.6 million. He observed that, while the Commissioner of Police sought forfeiture in that sum, the Commissioner of Inland Revenue sought over $11.4 million for the same tax evasion. In order to avoid double recovery, Cooke J concluded that the best course of action was for the Commissioner of Inland Revenue to use his extensive powers to effectively call for the payment of those monies in New Zealand bank accounts to recover what is due. It is the exercise of those powers to which this current application relates.
[22] Cooke J’s preference for the use of the Tax Administration Act process, rather than the Criminal Proceeds (Recovery) Act process, to recover the unpaid tax was explained in the following way:
[133] The alternative approach was advanced by counsel assisting. It has two relevant aspects. The first is that in cases where the Commissioner of Inland Revenue remains able to recover the unpaid tax, and clearly has the ability to do so in relation to New Zealand assets, as a matter of fact the respondent has not benefited from the tax evasion. Indeed, given the extensive powers the Commissioner of Inland Revenue, including the penalty provisions, such a respondent is in a “world of grief”.9 Secondly, the provisions of the Act allow the Commissioner of Inland Revenue to apply for relief against restraint, and relief against forfeiture, to allow for recovery of the tax due. That approach would be most appropriate in more borderline cases.
[134] Under s 157 of the Tax Administration Act the Commissioner of Inland Revenue has a power to issue a notice to require any person to deduct or extract a sum that is equal to the amount payable by the taxpayer from any funds, and pay the sum to the Commissioner. That means, for example, that the Commissioner can direct a bank to pay it money from an account of a defaulting taxpayer to meet the amount of tax due. That power could be exercised here in relation to the more than $10 million in Mr William Cheng’s bank accounts. The Commissioner has not yet exercised such powers. The joint memorandum explains that that has not occurred because of the restraint orders made by the Court under the Act. But even if the judgment is released dismissing the Commissioner’s application for a profit forfeiture order against Mr William Cheng, Ms Nyioh Hong and their entities, the Commissioner of Inland Revenue remains able to exercise such powers. The judgment dismissing the application will not dismiss the orders restraining those accounts. Under s 38 the restraining orders remain in place for seven working days from the date of the decision, and if an appeal is lodged the restraint remains in place until the withdrawal or determination of that appeal.
9 Commissioner of Police v Snook [2018] NZHC 2537 at [59].
[23] Accordingly, the application for profit forfeiture for the $1.6 million in unpaid tax was declined on the basis that the Commissioner of Inland Revenue should use the Tax Administration Act process to recover all of the unpaid tax, as well as penalties and interest in a way that eliminated any benefit from the offending.10
[24] The Commissioner of Police has brought an appeal from the decision. The appeal was heard in July 2024, but the decision is yet to be released. As Cooke J observed, under s 38 of the Criminal Proceeds (Recovery) Act, the restraining orders remain in place for seven working days from the date the Court of Appeal gives its decision.
[25] In any event, the appeal relates only to a restraint sought by the Commissioner of Police to a value of $1,679,246.33. The restrained fund itself exceeds $10 million. Even if the appeal is successful and $1.6 million is forfeited, the Official Assignee needs to know what should happen to the remaining funds.
The deduction notice
[26] Following Cooke J’s decision, the Commissioner of Inland Revenue, on 15 December 2023, issued a deduction notice to the Official Assignee under s 157 of the Tax Administration Act and s 43 of the Goods and Services Tax Act 1985. The deduction notices relate to the amounts, identified in [63](b)] below, that the Commissioner of Inland Revenue says belong to the 11 respondents and which relate to their existing tax liabilities, identified in [9] above.
[27] It requires the Official Assignee to deduct those funds, which are payable to those respondents, which will then be paid towards their tax debts.
Positions of the parties
[28] The Commissioner says that, should the restraint be lifted, the respondents’ restrained funds will be payable to them but should instead, under the deduction notices, be paid to the Commissioner and applied towards the payment of the respondents’ tax debts.
10 At [160].
[29]The respondents says that:
(a)the default assessments issued by the Commissioner are incorrect;
(b)William Cheng is in a current tax dispute with the Commissioner for the same alleged tax debt; and
(c)the Commissioner’s failure to collect tax for more than six years calls into question the integrity of the tax system in circumstances in which the Commissioner is claiming penalty interest for the period during which he failed to act.
Relevant statutory provisions
Criminal Proceeds (Recovery) Act
[30] Under the Act, the Court may, if it is satisfied it has reasonable grounds to believe that a respondent has unlawfully benefited from significant criminal activity, make a “restraining order” that specified property11 –
(a)is not to be disposed of or dealt with otherwise than is provided for in this restraining order; and
(b)is to be under the Official Assignee’s custody and control.
[31] A restraining order lasts for one year, unless extended, or until the date on which a forfeiture order over the same property is made or declined.12 However, if a Court declines a forfeiture order application, but an applicant lodges an appeal, the restraining order lasts until the withdrawal or determination of that appeal, or of any final appeal.13
[32] Under s 43 of the Act, the Commissioner of Police may apply for a civil forfeiture order. There are different types. The Court may make a profit forfeiture
11 Criminal Proceeds (Recovery) Act 2009, s 25.
12 Section 37.
13 Sections 37(2)(a) and 38(b).
order if it is satisfied on the balance of probabilities that the respondent unlawfully benefited from significant criminal activity and has interests in property. In making a profit forfeiture order:14
(a)the Commissioner must prove that significant criminal activity (as defined in s 6) took place in the specified period;
(b)the Commissioner must prove that the respondent unlawfully benefited, directly or indirectly, from that significant criminal activity;
(c)the value of the benefit must be determined in accordance with ss 52 and 53 of the Act;
(d)the Commissioner must prove that the respondent has interests in property to be disposed of under s 83 to satisfy the order.
Tax Administration Act
[33] The Tax Administration Act provides a process that the Commissioner and taxpayers must follow in assessing and disputing tax.
[34] Under s 106, if a person makes default in furnishing any return, the Commissioner may make an assessment of the amount on which “in the Commissioner’s judgment tax ought to be imposed”.15 The person is liable to pay the tax that has been assessed as payable, unless the person establishes, through an objection or in proceedings challenging the assessment, that the assessment is excessive.16
[35] Under s 89D, if the Commissioner issues a notice of assessment (and has not previously issued a notice of proposed adjustment to the taxpayer for the assessment), the taxpayer may issue a notice of proposed adjustment.17 A notice of proposed adjustment disputes the Commissioner’s notice of assessment. However, for a notice
14 Commissioner of Police v Cheng, above n 3, at [40].
15 Section 106(1).
16 Section 106(1).
17 Section 89D(1).
of proposed adjustment to have effect, it must be issued within “the applicable response period”.18
[36] If the statutory processes are not used to challenge a tax assessment, the assessment is deemed to be correct under s 109 of the Tax Administration Act, which is in the following terms:
109 Disputable decisions deemed correct except in proceedings
Except in objection proceedings under Part 8 or a challenge under Part 8A,—
(a)no disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and
(b)every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.
[37] The terms of the provision are clear. Tax assessments that have not been challenged in the relevant response period are deemed in law to be correct in all respects.19
[38] A final avenue remains, through s 113 of the Tax Administration Act, to query a tax assessment. That provision is in the following terms:
113 Commissioner may at any time amend assessments
(1)Subject to section 89N, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.
(2)If any such amendment has the effect of imposing any fresh liability or increasing any existing liability, notice of it shall be given by the Commissioner to the taxpayer affected.
[39] A taxpayer may request under s 113 a reassessment of the taxes for which they have been assessed. The provision provides a “wide-ranging discretion” that may be
18 Section 89D(5). The “relevant response periods” as prescribed in s 89AB.
19 Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158; [2012] 2 NZLR 153 at [53]–[55].
exercised by the Commissioner “from time to time and at any time”; a discretion that is not “constrained in any way”.20 It has been described as a “backstop provision”.21
[40] Judicial review proceedings have been brought in relation to decisions of the Commissioner to correct an assessment under s 113.22 However, there is no obligation on the Commissioner to reopen assessments where a taxpayer did not use the statutory dispute procedure in the first instance.23 In other words, an application under s 113 does not ‘stay’ the operation of s 109. It does not mean that tax liability may not be enforced under that section. The High Court has said that this must be so given the administrative chaos that would unfold if an applicant has not utilised the statutory dispute scheme but sought to make a s 113 request at the last moment.24 It is not intended to be used to circumvent the statutory dispute procedures.25
[41] Finally, for the purposes of this introduction to the statutory provisions, under s 157, in circumstances in which a taxpayer has defaulted in the payment of any income tax (or any interest accrued by the taxpayer), the Commissioner may require any person to deduct a sum from any amount that is, or becomes, payable in relation to the taxpayer. The amount deducted may include a daily amount of interest.26
The alleged erroneous default assessments
[42] The respondents say that the amount specified in the deduction notice, and sought to be deducted from the funds held by the Official Assignee, is incorrect. It is said that the bulk of the Commissioner’s claim is made against the sixth respondent – Harvest Property LLP – a limited partnership. Over $11 million is said to be claimed by the Commissioner against Harvest Property.
20 Arai Korp Ltd v Commissioner of Inland Revenue [2013] NZHC 958 at [34].
21 At [34].
22 See for example, Westpac Securities NZ Ltd v Commissioner of Inland Revenue [2014] NZHC 3377; Arai Korp Ltd, above n 20.
23 In Arai Korp Ltd, above n 20, the Court declined an application for judicial review of the CIR’s decision not to correct assessments under s 113 despite there being an obvious error. In that case, the applicant had poor compliance history, and failed to utilise the statutory disputes procedure.
24 Arai Korp Ltd, above n 20, at [64] citing Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA) at 12,520.
25 Arai Korp Ltd, above n 20, at [61].
26 Section 157(1A).
[43] Accountants, now engaged for the respondents, have identified errors in the default assessments for Harvest Property of the following types:
(a)The charging of GST output tax at 15 per cent from March 2007 to September 2010 when the GST rate at that time was 12.5 per cent.
(b)The failure to apply input tax on a property purchase price.
(c)The application of income tax to Harvest Property when it is said to be a limited partnership and not a taxable entity.
[44] It is said that the advice from the accountants is that a GST refund is due to Harvest Property of over $116,000 and that income tax is payable by each partner of approximately $172,000.
[45] Amendments are sought to the assessments under s 113 of the Tax Administration Act which, as observed in [39] above, allows the Commissioner to amend an assessment, even although it was otherwise deemed to be correct under s 109.
[46] However, as discussed in [40] above, a review process under s 113 does not affect the operation of s 109. The disputed decision is deemed to be correct in all respects. The respondents’ income tax, GST and evasion shortfall penalty assessments were not disputed. They have crystallised. The respondents do not dispute that. They cannot now seek to challenge the correctness of the assessments in this forum.27
[47] As the Commissioner says, Harvest Property’s recent application under s 113 for income tax and GST returns from between March 2007 and March 2017 to be reassessed will be considered in the usual way. If the application under s 113 is successful, then the Commissioner will issue new assessments. Any new assessments issued prior to the lifting of restraint would be incorporated in updated summaries of accounts to be provided to the Official Assignee. In the event that the Commissioner issued new assessments after the restraint was lifted and funds had been paid to the
27 Tannadyce Investments Ltd v Commissioner of Inland Revenue, above n 19, at [53]–[55].
Commissioner pursuant to the deduction notice, the Commissioner would then treat any excess tax paid in the usual way.
[48] It is important that the system operates in this way. The administrative chaos mentioned in [40] above that would otherwise unfold would be significant.28 Inland Revenue receives vast numbers of tax returns continuously. In each case, the Commissioner has no knowledge of a taxpayer’s affairs. The system would be unworkable if s 113 could be used to delay or avoid collection procedures where tax obligations have been ignored previously. The need for corrections could have been avoided if tax returns were filed on time or resolved through the statutory processes. Section 113 does provide a backstop means of protection but it cannot stop the operation of the time-sensitive mechanisms for the payment of tax in the first instance.
[49] Accordingly, this ground of challenge to the Commissioner’s application cannot succeed.
The dispute with William Cheng
[50] The respondents observe that the Commissioner issued default assessments to William Cheng personally for the same debt as has been assessed for the respondent companies. Mr Cheng issued a notice of proposed adjustment under s 89D of the Act for those assessments on 3 August 2023. The Commissioner has issued a notice of response and so the dispute has entered what is referred to as the conference phase of the dispute process.
[51] I agree with the Commissioner that the two sets of assessments are not necessarily inconsistent with each other. Any benefits received by the shareholder from a company can be regarded as being dividends in the circumstances and are taxable irrespective of whether the company has paid tax on the same income previously.29 Through the 11 respondents permitting rental payments to go into Mr Cheng’s bank account, a transfer of value from them to him occurs to the extent that he is beneficially entitled to those funds. In that case, the 11 respondents and
28 See also Arai Korp Ltd, above n 20, at [64] citing Commissioner of Inland Revenue v Wilson, above n 24.
29 Section CD1 of the Income Tax Act 2007.
Mr Cheng will have a tax liability. It may be that Mr Cheng is not beneficially entitled to the funds. If that is so, then there will have been no transfer of value to him that could be taxed as a dividend. However, if the restrained funds do not belong to the respondent companies, then the funds in Mr Cheng’s account represent a transfer of value to him and the assessments to him and the companies can both stand. The tax liability will be met when someone pays it.
[52] In any event, as the Privy Council has found, the Commissioner may at any time amend inconsistent assessments to alleviate an inconsistency before proceedings objecting to or challenging assessments have run their course.30
[53] As the Court of Appeal has said, it would be at odds with the purposes of the legislation to require the Commissioner, when making an assessment of one taxpayer, to amend simultaneously an apparently inconsistent assessment of another taxpayer. The Commissioner must be allowed some flexibility in the timing of adjustments to meet administrative demands and to enable him to await the outcome of objection or challenge proceedings.31
[54] The Court of Appeal has said also, in relation to an allegation that assessments made over a company cast doubt on assessments made for an individual taxpayer, that it would defeat the purposes of the legislation to make simultaneous amendments to assessments that are seemingly inconsistent. A later assessment does not constitute a waiver or estoppel, binding on the Commissioner.32
[55] For these reasons, the dispute over William Cheng’s assessment is not relevant to the orders sought and is not a basis for the Commissioner’s application to be declined.
30 O’Neil v Commissioner of Inland Revenue [2001] UKPC 16, [2001] 3 NZLR 316, (2001) 20 NZTC 17,051, [2001] WL 535706 (PC).
31 Miller v Commissioner of Inland Revenue; Managed Fashions Ltd v Commissioner of Inland Revenue (1998) 18 NZTC 13,961 (CA) at 13,972 and 13,973.
32 McIlraith v Commissioner of Inland Revenue (2007) 23 NZTC, 21,456, [2007] WL 2121918 (HC) at [51].
Alleged inordinate delay and the integrity of the tax system
[56] The Commissioner’s investigation began in 2015. Initial audit letters were issued in April 2016, at about the same time as the first restraining order was obtained. The argument advanced by Ms Nelson under this head is that the Commissioner needed to act promptly and that, through acquiescing in the capture of the restrained funds in these proceedings, the tax debt has increased exponentially which is unfair to the respondents.
[57] Reference is made by the respondents to the integrity of the tax system in s 6 of the Tax Administration Act, to the need to use best endeavours to protect it, and to what is alleged to be a duty on the part of the Commissioner to act within a reasonable period of time.33
[58] It is said that, for the Commissioner to take no action for six years and now to seek to recover penalty interest against the respondents is unduly burdensome and disproportionate.
[59] However, that cannot be so in circumstances in which the respondents have chosen not to meet, or to deal with, their tax liabilities until recently. The tax system is predicated on voluntary compliance by taxpayers.34 The respondents could have paid their tax debt at any time, either through unrestrained funds or filing an application to the court to have the restraint varied to enable their tax obligations to be met.35 It is apparent that it is only since the Commissioner has issued deduction notices and become actively involved in these proceedings that the respondents have taken steps relating to their tax obligations. But they have not complied with their filing obligations since April 2017.
33 Reference is made also to a speech made by Lord Bingham, extrajudicially, on the rule of law in which it is said that public officials must exercise powers conferred on them in good faith, fairly and for the purposes for which they were conferred and that means must be provided for resolving bona fide civil disputes without prohibitive costs or inordinate delay. Lord Bingham of Cornhill, “Speech on the rule of law” (Sixth Sir David Williams Lecture, 16 November 2006).
34 Tax Administration Act 1994, s 15B.
35 William Cheng was aware of the ability to apply for the Court for exclusions from the restraining orders or for variations to enable living and business expenses to be met as he opposed aspects of the restraining order sought on this basis in May 2016.
[60] In these circumstances, there is no basis for points raised by the respondents under this head to form a basis to resist the Commissioner’s application.
[61] Accordingly, none of the points advanced for the respondents would in my view prevent the orders the Commissioner has sought from being made. I accept the Commissioner’s point that, once the appeal referred to in [24] has been determined, the restraining order will be lifted and there will need to be certainty on to whom the restrained funds should be paid.
Conclusion
[62] I am satisfied that the order should be made. For the reasons I have given, a direction may be given by the Court to the Official Assignee to ensure that a portion of the restrained funds are paid to the Commissioner when the restraint is lifted.
[63]I make the following orders:
(a)In the event that forfeiture orders are not made and restraint over the restrained funds is lifted, and upon receipt of updated summaries of account referred to below, the Official Assignee is to pay the Commissioner of Inland Revenue, in accordance with paras (b) and (c) below, the restrained funds to reduce the tax liability of the following respondents:
(i)Andersons Building Limited – thirteenth respondent;
(ii)Baywide Credit Limited – twelfth respondent;
(iii)CML Building Limited – tenth respondent;
(iv)KFC Limited – fifteenth respondent;
(v)Queens Hotel Limited – seventeenth respondent;
(vi)Redoubt House Limited – third respondent;
(vii)Stardust Building Limited – eleventh respondent;
(viii)Unitec Investment Limited – fourteenth respondent;
(ix)Williams Chen Limited – sixteenth respondent;
(x)Action Investment LLP – fifth respondent; and
(xi) Harvest Property LLP – sixth respondent. (the taxpayer respondents)
(b)When paying the restrained funds, the Official Assignee must pay the Commissioner of Inland Revenue the lesser of (1) the amounts held on behalf of the taxpayer respondents as specified below or (2) the outstanding tax liability of the taxpayer respondents as at the date restraint is lifted:
(i)Anderson Building Limited – $177,158.33;
(ii)Baywide Credit Limited –$126,184.89;
(iii)CML Building Limited – $148,972.38;
(iv)KFC Limited – $150,361.55;
(v)Queens Hotel Limited – $71,721.70;
(vi)Redoubt House Limited – $237,643.79;
(vii)Stardust Building Limited – $238,958.36;
(viii)Unitec Investment Limited – $225,067.44;
(ix)William Cheng Limited – $107,879.74;
(x)Action Investment LLP – $872,663.18; and
(xi)Harvest Property LLP – $4,402,001.03.
(c)To the extent that a taxpayer respondent’s outstanding tax liability exceeds the amount set out at para (b) above, the Official Assignee is directed to pay interest that has accrued on that sum to the Commissioner of Inland Revenue to reduce the taxpayer respondent’s outstanding tax liability.
(d)The Commissioner of Inland Revenue is to provide the Official Assignee an updated summary of account for each taxpayer respondent as at the date restraint is to be lifted, so that the Official Assignee can calculate the amounts to be paid to the Commissioner of Inland Revenue pursuant to paras (b) and (c) above.
[64] The Commissioner is entitled to the payment of costs on a 2B basis. If costs cannot be agreed between the parties, then the Commissioner is to file a memorandum within 15 working days of the date of this decision and the respondents are to file a memorandum within a further five working days. Memoranda (including any schedules) are not to exceed five pages in length.
Radich J
Solicitors:
Crown Law Office, Wellington for Second Interested Party Crawford Nelson, Auckland for Respondents
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