Dandelion Investments Ltd v Commissioner of Inland Revenue
[2000] NZCA 38
•6 March 2000
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA156/99 |
| BETWEEN | DANDELION INVESTMENTS LIMITED |
| Appellant |
| AND | THE COMMISSIONER OF INLAND REVENUE |
| Respondent |
| Hearing: | 22 February 2000 |
| Coram: | Blanchard J Tipping J Robertson J |
| Appearances: | B M Grierson for Appellant A C Beck and R J Wilcox for Respondent |
| Judgment: | 6 March 2000 |
| JUDGMENT OF THE COURT DELIVERED BY TIPPING J |
This appeal from Chambers J concerns several income tax assessments made by the respondent Commissioner, in relation to a return of income made by the appellant, Dandelion, for the year ended 31 March 1989. The Judge gave answers to four questions posed in an appeal by way of case stated from the Taxation Review Authority (Judge Willy). The Authority had resolved the issues in a way which was ultimately favourable to Dandelion. Chambers J took a different view and gave answers generally in terms of the Commissioner's approach. Dandelion has appealed, raising a number of points designed essentially to restore the Authority's conclusions.
Dandelion's return was filed in May 1990. On 12 June 1990 the Commissioner made his first assessment (assessment 1) fixing the amount of tax due at $311,270.40. On 17 March 1994 the Commissioner amended his first assessment, and made another assessment (assessment 2) in terms of which the tax due was assessed at $428,246.56. Certain interest deductions previously allowed were disallowed by the Commissioner in exercise of his power under s99 of the Income Tax Act 1976 (the Act).
On 31 August 1994 the Commissioner amended assessment 2 and in so doing issued assessment 3 increasing the tax due again, this time to $750,246.56. This increase resulted from a loss offset being disallowed. Dandelion's taxable income was thereby increased with the resultant increase in the tax due. On 16 September 1994 Dandelion gave notice that it required its objection to the interest disallowance aspect of assessment 2 to be heard and determined by the Taxation Review Authority. Reflecting the leisurely pace throughout, the Commissioner filed a case stated with the Authority on 17 March 1995. On 8 June 1995 prior to the hearing of the case stated by the Authority, the Commissioner made yet another amended assessment (assessment 4). The effect of this assessment was to revert to the amount fixed in assessment 2, namely $428,246.56.
The precise basis of this amendment is not before the Court, but as the amount fixed by assessment 4 is exactly the same to the last cent as that fixed by assessment 2, it seems probable that the Crown thought better of assessment 3 and decided the loss offset thereby disallowed was appropriate after all. On page 4 of his written submissions Mr Grierson indicated that assessment 4 made the same adjustment to assessment 1 as assessment 2 had done. It therefore seems clear that assessment 4 was simply a return to assessment 2. It should be mentioned at this point that assessments 3 and 4 were not notified to Dandelion. Mr Grierson attempted to build arguments on this point, but we do not regard it as material to the issues we have to decide.
The case stated based on the interest disallowance aspect of assessment 2 was heard by the Authority in December 1995. The Authority found that assessment 4 was out of time because the relevant four year period under s25 of the Act had expired on 31 March 1995, some 2 months prior to the date of assessment 4. The Commissioner's argument that assessment 4, while outside the four year period, was nevertheless valid because it was less than assessment 3, was rejected. Having found assessment 4 to be invalid, the Authority made the curious finding that there was no lawful assessment before it, and therefore nothing to determine pursuant to the case stated brought in respect of assessment 2. That was the Authority's formal conclusion. Lest that view be wrong the Authority said it would otherwise have disallowed the objection against assessment 2 because the Commissioner had correctly rejected the interest deduction under s99. The Commissioner appealed to the High Court by way of case stated from the Authority's decision that assessment 4 was out of time and thus invalid and against what the Authority saw as the consequence, namely that there was no valid extant assessment at all.
The Commissioner's appeal to the High Court posed four questions for the determination of the High Court. These will be examined in a moment. In short, Chambers J held that the Authority was wrong, both on the statute bar point, and on the consequences, and furthermore that the Authority had no business to be considering assessment 4 on a case stated directed solely to assessment 2. The Judge indicated that the Authority should have dealt with the objection to assessment 2 on its merits, rather than saying there was nothing formally before it. Against that rather complex background we turn to Dandelion's challenge to the specific answers which the Judge gave to the four questions in issue. It will be convenient to deal with the questions in sequence, identifying the terms of the question, the Judge's conclusions, the submissions in this Court, and then stating our own conclusions.
Question 1
This question asked:
Whether the Authority was correct in holding that the last assessment [Assessment 4] made on 8 June 1995 amounting to $427,246.56 was unlawful because it was for more than the first assessment dated 12 June 1990 [Assessment 1] amounting to $311,270.40 and was made more than 4 years after the original notice of assessment.
Chambers J gave a negative answer to this question. He did so for two reasons. First, he held that assessment 4 was irrelevant to the questions arising on the case stated directed to assessment 2; that assessment and the specific challenge to it being the only matter before the Authority. The Judge further held that in any event assessment 4 was not invalid because it was not caught by the time bar in s25(1) of the Act.
We will address the time bar point first. Section 25(1) is in these terms:
"When any person has made returns and has been assessed for income tax for any year, it shall not be lawful for the Commissioner to alter the assessment so as to increase the amount thereof after the expiration of 4 years from the end of the year in which the notice of original assessment was issued.
Mr Grierson's argument was that assessment 4 ($428,246.56) was time barred because it was for more than assessment 1 ($311,270.40). He argued that assessment 4 had to be compared with assessment 1 rather than with either assessment 2 or assessment 3. He provided no authority for his submission and indicated that as far as he could tell the point was a novel one. It is understandable that the point is novel because we do not imagine that anyone has previously considered it worth arguing. Mr Grierson's argument depended on the proposition that "the assessment" as referred to in the third line of s25(1) must inevitably and immutably mean the Commissioner's first assessment, irrespective of any subsequent amendments made pursuant to s23. The fallacy in the argument is that the concept of "the assessment" in terms of s25(1) must necessarily include all lawful amendments as may have been made to the original assessment. The assessment made by the Commissioner in relation to Dandelion's return, as at the expiry of four years, comprised assessment 1 as amended by assessment 2 and as further amended by assessment 3. That was "the assessment" as at the expiration of the four years.
To read the words "the assessment" in the section as necessarily meaning the first assessment, ignoring any amendments within time, does not represent the natural meaning of the words in their statutory context, nor can it possibly reflect the policy behind the section. Clearly Parliament intended that after four years the Commissioner could not issue any further assessments increasing the amount of tax beyond the amount of the last valid assessment made within the four years. The use of the words "original assessment" towards the end of the subsection makes the very distinction which is inherent in what we see as the correct approach. The original assessment is the first assessment. But "the assessment", which cannot be increased outside the four years, is a combination of the original assessment and any lawful amendments made to it during the four years. We agree with the conclusion to which Chambers J came and essentially for the same reasons. The Judge was correct to answer question 1 in the negative.
We now address the relevance of assessment 4 to a case stated directed to assessment 2. We agree with the Judge's approach to this issue also. Subject to the time bar, assessments are capable of continual amendment until the Commissioner is satisfied that the correct amount of tax has been assessed. If the subsequent amendment concedes the point or points the taxpayer is making there will be no remaining issue between the parties. If the subsequent amendment is on a different point rendering the taxpayer's objection to the earlier assessment still relevant, the Authority or the Court should proceed to determine the objection on its merits. The amended assessment still contains the point or points which were the subject of the taxpayer's objection. In some cases the assessments can only sensibly be read together and, preferably, dealt with at a conjoint hearing.
It would be ridiculous if the amendment had the effect of depriving the taxpayer of the right to continue the objection on the basis that a further objection in exactly the same terms was necessary to the amended assessment. As assessment 4 contained within it the same interest disallowance as had been the subject of Dandelion's objection to assessment 2, there was no basis whatever on which assessment 4 could have been regarded as depriving Dandelion of its right to object to assessment 2. There is no suggestion that in terms of assessment 4 the Commissioner was conceding the point raised by Dandelion in its objection to assessment 2. To the contrary it appears that the Commissioner was, in terms of assessment 4, maintaining exactly the same stance as he had taken in assessment 2 to the interest deduction point. Whether his reasoning had in any way changed is unknown but on the face of it, as indicated earlier, all the Commissioner was doing when he made assessment 4 was reverting to assessment 2.
We have considered the various arguments which Mr Grierson raised in support of the proposition that each individual assessment had the effect of superseding and cancelling the assessment which went before it. This in our view is to misunderstand the cumulative process involved when assessments are made and then amended. The amendment changes the earlier assessment in some respect or respects but it should not be regarded as necessarily completely replacing the earlier assessment. There may be cases in which in reality this is what occurs. But in the more conventional situation the original assessment and its amendment or amendments have to be understood in combination. For these reasons also we consider that Chambers J was entirely correct in differing from the approach of the Authority and providing, for his two reasons, a negative answer to question 1.
Question 2
This question asked:
Whether the Authority was correct in law to allow an objection to an assessment dated 17 March 1994 [Assessment 2] which had been superseded by a subsequent assessment dated 31 August 1994 [Assessment 3].
What we have already said is relevant to this question also. The first thing to note is the basis upon which the Authority is said to have allowed Dandelion's objection to assessment 2. We do not think it appropriate to say that the Authority allowed the objection. What the Authority held was that it did not have any power, jurisdiction or justification for giving an answer to the objection. This view was reached on the incorrect premise that assessment 4 was invalid. In any event, even if assessment 4 had been invalid, such invalidity could not by any process of logic or statutory construction have resulted in the invalidity of assessments 2 and 3; or, as the Authority appeared to see it, in the non existence of assessment 2. If assessment 4 had been invalid, the consequence would have been simply to ignore that assessment, or more accurately, the amendment to the existing composite assessment effected by assessment 4. Assessments 3, 2 and 1 read in combination would have remained valid. Thus Dandelion's objection to assessment 2 ought, as earlier indicated, to have been determined on its merits by the Authority. Nothing which Mr Grierson urged upon us can possibly lead us to the view that the invalidity of link 4 in the chain deprives links 1, 2 and 3 of any force.
The second aspect of this question is the inherent suggestion that when an assessment, here assessment 2, is amended by a later assessment, here assessment 3, the first of the two assessments is to be regarded as having been superseded by the second. This really was Mr Grierson's cancellation point in a different guise. We have already addressed that issue and reiterate that we can see no basis in terms of the statutory scheme, any specific statutory provision, or any case law, upon which we should hold that an amendment has the automatic and inevitable effect of removing altogether from contention the assessment which it is amending. As we have indicated, unless the Commissioner purports to start afresh, the normal and natural effect of an amendment is that the two or more assessments must be read together. We agree with Mr Beck's submissions that the making of assessment 3 did not alter Dandelion's rights to have its objection to assessment 2 determined by the Authority. The Authority considered that the Commissioner had been right to disallow the interest claimed by Dandelion and rather than saying it had no basis for examining Dandelion's objection to assessment 2, the Authority should have formally disallowed the objection and, if it took the view expressed in the latter part of its judgment, then, subject to a procedural argument with which this appeal is not concerned, should have upheld the Commissioner's assessment (assessment 2) which would then have taken effect subject to any subsequent lawful amendments. These conclusions mirror those to which Chambers J came, and essentially for the same reasons.
Question 3
This question asked:
Whether the Commissioner's assessment dated 8 June 1995 [Assessment 4] offends the BASF principle and the consequential effect of that on the previous assessment dated 31 August 1994 [Assessment 3].
Mr Grierson's argument was that assessment 4 did offend the BASF principle. His consequential argument does not have to be addressed unless his basic premise is sound, which it is not. In any event if assessment 4 were invalid for any reason, that invalidity in itself could not affect the validity of assessment 3 which would remain intact. The so-called BASF principle, as referred to in this question, derives from the decision of Thorp J in BASF New Zealand Ltd v Commissioner of Inland Revenue (1995) 17 NZTC 12, 136. In that case the Judge was required to answer the following question:
Is an assessment issued by the respondent to the applicant while a case stated in relation to a notice of assessment previously issued by the respondent to the applicant for the same income year has yet to be disposed of by the Court or conceded by the Commissioner valid?
He did so by saying:
The second assessment would be invalid if and in so far as it purported to reopen any issue requiring determination in the original case stated.
Thorp J's decision (which we will accept for present purposes as stating the law) was designed to avoid the injustice to taxpayers which could arise if, while a case stated was pending, on which the Commissioner was committed to a particular stance, the Commissioner attempted to circumvent that restriction by making another assessment in relation to the same issue, but on a different basis. The BASF decision does not give the taxpayer the kind of technical argument which Dandelion is attempting to mount in this case. If, while a case stated is pending, a further assessment is made which has no effect on the matters at issue on the case stated, the BASF principle cannot avail the taxpayer. The further assessment does not in such circumstances prejudice the taxpayer's position on the case stated at all. Thorp J was not saying that pending the resolution of a case stated there could be no amendment at all to the assessment underlying the case stated.
In the present case assessment 4 had two effects. First it abandoned the effect of assessment 3, and second it appears to have reverted to assessment 2. Thus the taxpayer's position on the case stated which was directed to the effect of assessment 2 was in no way prejudiced by assessment 4; nor for that matter was it prejudiced by assessment 3 which incorporated assessment 2 but added a further new and unrelated issue. It is difficult to resist the conclusion that the taxpayer's propositions throughout this litigation must have been motivated at least in part by a desire for delay and a wish to avoid getting to grips with the real issues. That conclusion may perhaps be seen as softened to some extent, but not much, by the fact that the Taxation Review Authority reached conclusions favourable to Dandelion. Quite rightly the High Court identified the erroneous nature of Dandelion's contentions.
The tortuous procedural steps which have come under consideration in this case demonstrate the need for a firm approach to this sort of tactical manoeuvring. Points which are valid in law must be recognised and adopted. But to the extent legally possible, litigation procedures in tax matters, as in others, should be simple and straightforward. The Commissioner added to the problems in this case by a series of amendments incorporating one apparent reversal of an earlier stance. If there has to be litigation the objective should be to have all issues relating to a return determined at the same time, either by the Authority or the Court.
Question 4
This question was in the following terms:
Whether in the light of the findings to Questions 1-3, the Authority was correct to allow the Respondent's objection and cancel any extant assessment.
Chambers J held that the Authority had acted incorrectly in what it had done. Mr Grierson acknowledged that if the Judge was correct in his answers to the previous 3 questions, he was obliged to give a negative answer to question 4. This must be right. Assessment 4 had the effect of abandoning assessment 3 and reverting to assessment 2. There was no basis for cancelling assessment 2. The objection to it should not have been dealt with on the procedural grounds advanced by Dandelion. The Authority should have formally determined the objection on its merits. This would have resulted in the Authority disallowing the objection on the basis which the Authority indicated would have been the result had it not thought the procedural challenge had merit. In his succinct and cogent judgment the Judge came to conclusions with which we entirely agree.
Dandelion's appeal is dismissed. We have not traversed in the course of this judgment Mr Grierson's very detailed arguments running to 26 pages. They have all been considered but found unpersuasive. The Commissioner is to have costs in this Court in the sum of $5,000.00 plus all reasonable disbursements to be fixed if necessary by the Registrar.
Solicitors
B M Grierson, Auckland, for Appellant
Crown Law Office, Wellington, for Respondent
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