Dowden v Commissioner of Inland Revenue

[2019] NZHC 2729

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-2086

[2019] NZHC 2729

UNDER THE

Income Tax Acts 1994, 2004 and 2007; the Student Loan Scheme 1992; and the Tax Administration Act 1994

IN THE MATTER OF

an appeal against the decision of the Taxation Review Authority

BETWEEN

JOHN ALFRED DOWDEN

Appellant

AND

COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:

9 April 2019

Appearances:

B C Bhanabhai for Appellant

M J Bryant and C M Kern for Respondent

Judgment:

24 October 2019

JUDGMENT OF PETERS J

This judgment was delivered by Justice Peters on 24 October 2019 at 4 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date: ...................................

Solicitors:           Dyer Whitechurch, Auckland

Crown Law, Wellington

Copy for:           Inland Revenue — Litigation Management

DOWDEN v COMMISSIONER OF INLAND REVENUE [2019] NZHC 2729 [24 October 2019]

Introduction

[1]                  The appellant, Mr John Dowden, appeals against a decision of Judge A A Sinclair, sitting as the Taxation Review Authority (“TRA”).1

[2]                  The matter before the TRA was Mr Dowden’s challenge to assessments made by the Commissioner of Inland Revenue (“Commissioner”) of Mr Dowden’s liability for PAYE, student loan deductions, goods and services tax (“GST”) and income tax between January 2004 and May 2012 (“relevant period”).

[3]                  The assessments made concerned several business activities, including “Safeguard Security” (“Safeguard”) and a motor vehicle trading business. This appeal is only concerned with whether Mr Dowden is liable for the tax assessed and which derived from Safeguard.

[4]                  Mr Dowden had commenced trading as Safeguard in 1972 and continued, sometimes through a company structure, until, on his case, he transferred his interest in the business to his (former) partner, Ms Jackson, or her company Hibiscus Coast Security Limited (“Hibiscus”) in December 2003. Both Safeguard and Hibiscus were in the security industry. Mr Dowden’s case was that Ms Jackson was liable for the tax assessed insofar as it related to Safeguard between January 2004 and December 2011.

[5]                  In challenging the assessments, Mr Dowden had the burden of proving on the balance of probabilities that the assessments were wrong.2 The TRA was not persuaded that the assessments were wrong, as it did not accept Mr Dowden’s evidence that he had ceased to trade as Safeguard in the relevant period.

[6]                  This determination brought the TRA to the second issue, which only arose if Mr Dowden failed on the first issue. The second issue was whether the limitation periods in ss 108 and 108A Tax Administration Act 1994 (“TAA”) operated to prevent the Commissioner from assessing some of the income tax and GST in dispute. The TRA upheld the Commissioner’s submission that she was not bound by the limitation periods in the particular circumstances of this case.

1      Disputant Z v Commissioner of Inland Revenue [2018] NZTRA 7.

2      Tax Administration Act 1994, ss 149A(1).

[7]  On appeal, Mr Bhanabhai, counsel for Mr Dowden, submits that the TRA erred in its factual finding that Mr Dowden had carried on business as Safeguard in the relevant period. Mr Bhanabhai submits the TRA erred by failing to take into account statements that Ms Jackson had made in meetings with IRD personnel in March and May 2011.

[8]                  Mr Bhanabhai also submits that the TRA’s determinations under ss 108 and 108A were in error.3

Nature of appeal

[9]                  The appeal is brought pursuant to s 26A Taxation Review Authorities Act 1994. It is a general appeal, to be determined in accordance  with  the  principles  in  Austin, Nichols & Co Inc v Stichting Lodestar.4 Mr Dowden has the burden of establishing the TRA’s decision is wrong and that I should reach a different conclusion.

Investigation

[10]              The Commissioner commenced an investigation of Mr Dowden’s tax affairs in or about 2010, this investigation following an enquiry of the Inland Revenue Department (“IRD”) by a former employee regarding the payment of PAYE. At first the investigation concerned both Hibiscus and Safeguard but it was discontinued as regards Hibiscus.

[11]              Ms Jackson supplied some Safeguard and Hibiscus business records to the Commissioner for the 2010 and 2011 tax years and payroll data for both companies from 1 April 2001 to 31 March 2011. Neither Ms Jackson nor Mr Dowden supplied other records or documents to the Commissioner. Given that, the investigator obtained documents and information from others, including from trading banks and former employees.

3      Although other points were taken in Mr Dowden’s notice of appeal of 27 September 2018 and issues on appeal of 31 January 2019, the matters referred to in [7] and [8] above were the only ones pursued in submissions.

4      Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.

Assessments

[12]              In May 2012, the Commissioner notified Mr Dowden that she had assessed him for PAYE and student loan deductions of $749,210.52 and $601.50 respectively, in respect of the period from 1 January 2004 to 31 March 2011 inclusive.

[13]              Secondly, in October 2013, the Commissioner notified Mr Dowden that she had assessed him for:

(a)GST of $634,398.70 on the basis that Mr Dowden had conducted “taxable activities” between 30 September 2003 and 31 March 2012 inclusive;

(b)income tax of $175,127.52, derived but not returned between 1 April 2004 and 31 March 2011 inclusive; and

(c)additional PAYE of $78,249.46 in respect of the period 30 April 2011 to 31 May 2012 inclusive.

[14]              Some of the amounts assessed are no longer in dispute. Those that remain in issue are PAYE  of $798,404.52 in respect of the period from 31 January 2004 to     30 November 2011; GST of $490,791.55 in respect of the period from September 2003 to September 2011; and income tax  of  $124,171.33 in respect  of the  period from 31 March 2004 and 31 March 2011. These amounts exclude penalties and interest, if any.

TRA decision

[15]              The TRA heard the case in July 2018. Mr Dowden gave evidence and was cross-examined at length  — the transcript of his cross-examination runs to some  170 pages. The Commissioner called evidence from the investigator and a former employee of Safeguard. The investigator had filed a lengthy (70 page) brief of evidence setting out the course of the investigation, of whom enquiry had been made and the conclusions the investigator had drawn.

[16]              As I said above, Mr Dowden’s case before the TRA was that he had not carried on business as Safeguard in the relevant period, and that Ms Jackson had taken over the running of the business and was responsible for all aspects of it, including its obligations to the IRD. To the extent Mr Dowden continued to be involved, his evidence was that he did so as an employee.   Leaving aside the limitation point,    Mr Dowden’s liability for the tax assessed would depend on whether the TRA accepted he had ceased to trade as Safeguard.

[17]              Having heard the evidence, the TRA was not satisfied that Mr Dowden had ceased to trade as Safeguard in the relevant period.

[18]              For reasons the TRA gave, it did not find Mr Dowden a reliable or credible witness and considered his explanations of the operation of the Safeguard business implausible. Rather, the TRA considered it clear from the contemporaneous evidence that Mr Dowden had continued to trade as Safeguard after January 2004. This evidence included the following.

[19]              First, at all material times the security industry was regulated. Throughout, Mr Dowden held a security guard licence in his name, trading as Safeguard. In addition, Mr Dowden, as licensee, had applied for and renewed as required “certificates of approval” of  individuals  described  as  employees  of  Safeguard.  Mr Dowden had made these applications in his capacity as employer of the employee concerned.

[20]              Secondly, Safeguard employees’ wages had been paid from bank accounts which the TRA found were in Mr Dowden’s  name  and/or  under  his  control  (“bank accounts”). Invoices issued to Safeguard’s customers identified one of these bank accounts as that into which the sum due should be paid and were issued under Mr Dowden’s GST number, or that of another employee from March 2011.

[21]              Thirdly, the TRA was satisfied that Mr Dowden had continued to hold himself out to third parties as the owner/operator of Safeguard after January 2004. Staff members understood that Mr Dowden owned and controlled Safeguard. Also, in an unrelated proceeding, the Employment Relations Authority (“ERA”) had found that

Mr Dowden, trading as Safeguard, and Hibiscus were joint employers of an employee claimant.

[22]              Fourthly, Mr Dowden had sold Safeguard and Hibiscus after Ms Jackson’s departure. Mr Dowden was shown in the agreement for sale and purchase as the vendor of the two businesses, and as the employer of their employees.

[23]For these reasons, the TRA was:5

... satisfied that [Mr Dowden] continued to carry on business in his personal capacity under the trading name of [Safeguard] in the tax periods in dispute.

Liability for PAYE, income tax and GST

[24]              Having reached that conclusion, the TRA addressed the legislative provisions governing liability for PAYE, student loan deductions, income tax and GST. As to PAYE, the TRA determined that Mr Dowden was the “employer” of Safeguard’s employees in the relevant period, within the meaning of the PAYE provisions in the income tax legislation. He was liable to return the PAYE and account for the student loan deductions assessed accordingly.

[25]              Mr Dowden’s liability for the income tax depended on whether he had derived income from Safeguard. The TRA was satisfied that Mr Dowden had derived “income from a business”, the income being the payments Safeguard’s customers had paid into the bank accounts, alternatively that the amounts paid had “come in” to Mr Dowden and were his income “under ordinary concepts”.6

[26]              Mr Dowden’s liability for the GST assessed depended on whether, as a person registered for GST, he had carried out taxable activities. The TRA was satisfied that Mr Dowden had carried out taxable activities through the services supplied by Safeguard.

5      Disputant Z v Commissioner of Inland Revenue, above n 1, at [38].

6      Income Tax Act 2007, ss CB 1; CA 1(1); and CA 1(2).

Challenges to TRA’s determination

[27]              I turn now to Mr Dowden’s appeal against the TRA’s factual finding as to his continued trading as Safeguard, reproduced in [23] above.

[28]              Mr Dowden, through Mr Bhanabhai, makes two principal challenges to this finding.

[29]              First, Mr Bhanabhai attributes many of the matters referred to in [19] to [22] above as evidencing no more than an inattentiveness to detail on Mr Dowden’s part. For instance, as regards the sale of the Safeguard and Hibiscus businesses, referred to in [22], Mr Bhanabhai submits that Mr Dowden left “all the details” to the lawyers and accountants and his only interest was “where he needed to sign”, and “moving the business on”. As to why employees believed Mr Dowden owned the Safeguard business, the explanation given was that few people were told the true position. To the extent Mr Dowden had made inaccurate or inconsistent statements to third parties, it was because he adopted a “pragmatic” approach, which proved easier for him day- to-day.

[30]              Counsel for the Commissioner objected to these submissions on the ground that they may not be supported by the evidence.

[31]              Mr Dowden’s second challenge concerned the TRA’s failure to accept, or place any weight on, statements Ms Jackson had made to the IRD.

[32]              The relevant part of the TRA’s decision follows. References to “Ms Black”, “HCW Ltd” and “XYZ” are references to Ms Jackson, Hibiscus and Safeguard respectively:

[32]      The disputant did not produce any contemporaneous documentation or call any witnesses.   Instead, he relied largely on statements made by     Ms Black to Inland Revenue  officers at interviews on 31 March 2011 and  20 May 2011. In summary, at the first meeting, Ms Black told the officers that the GST and P AYE returns for XYZ should have been filed by HCW Ltd and were not filed because she had difficulties managing the businesses. Ms Black stated that invoices issued by XYZ were under the disputant's GST number because an employee did not update the computer system at the time. She also said that the PAYE deducted from employees’ salaries had been used to pay salaries for the next month or for day to day expenditure. At the second

meeting, Ms Black told the officers that she had authorised all the transactions in relation to the Westpac and ANZ accounts.

[33]      The disputant also  relied  upon  a  signed  brief  of  evidence  dated 6 August 2010, made by Ms Black in another ERA claim in which she said:

[2]In 2004 [HCW Ltd] took over the business [XYZ] which had previously been owned by a company owned and operated by [the disputant]. The company had been placed in liquidation and [HCW Ltd] acquired the business of [XYZ]. From 2004 [HCW Ltd] owned and operated its existing business together with the newly acquired [XYZ] business.

[3]The reason it acquired the business of [XYZ] was because the company [which the disputant] had operated, had been placed in liquidation and [the disputant] was then listed as a banned director by the Ministry of Economic Development. ...

[34]      Under cross examination, the disputant acknowledged that these statements did not correctly reflect what had occurred. Firstly,  he had operated XYZ in his own name after his previous company had gone into liquidation, and secondly, he had not transferred the business of XYZ for the reason given by Ms Black. In addition, these statements conflict with what Ms Black said in a brief of evidence provided in the earlier ERA Proceedings in which she stated that the business of XYZ had been leased to Mr Brown. Ms Black was not available to be cross examined. In view of the conflicting nature of the statements made by Ms Black, I do not place particular weight on any of them.

(Footnote omitted)

[33]   There is no dispute that the TRA’s summary in [32] and [33] of its decision above of Ms Jackson’s statements to the IRD and in her briefs of evidence to the ERA is accurate. However, Mr Bhanabhai submits, first, that the TRA should have attributed considerable weight to Ms Jackson’s statements because they constituted admissions that she or Hibiscus had taken over the Safeguard business and were responsible for the omissions giving rise to the assessments. Mr Bhanabhai also submits that the TRA was wrong to take into account the apparently conflicting statements in Ms Jackson’s briefs of evidence to the ERA, being an entirely different forum.

[34]   Counsel for the Commissioner submits that the TRA was entitled to place little weight on Ms Jackson’s statements and there is no basis on which to revisit the TRA’s decision.

[35]   I do not accept either of the challenges to the TRA’s determination. First, in deciding what weight to give Ms Jackson’s statements, the TRA was entitled to take into account that she had not given evidence and was not available for cross-examination. These matters inevitably affect the weight a judicial officer gives a statement made by a person not called to give evidence. Nor do I accept the TRA was required to disregard entirely the conflicting statements in Ms Jackson’s briefs of evidence. In determining reliability, a Judge is entitled to take into account all information relevant to the assessment.

[36]   It follows that I do not accept the TRA erred in placing little or no weight on Ms Jackson’s statements.

[37]   As to Mr Bhanabhai’s first submission, referred to in [29] above, the conclusion the TRA reached, ie that Mr Dowden was operating Safeguard, was plainly open on the evidence. The contemporaneous documents, many containing representations Mr Dowden himself made as to his ownership of the business, lead to the conclusion the TRA reached. I also take into account the TRA’s advantage in hearing all the evidence.7 Accordingly, I am not persuaded the TRA’s determination on this issue was made in error.

[38]This determination brings me to ss 108 and 108A TAA.

Sections 108 and 108A Tax Administration Act 1994

[39]   It is then necessary to consider ss 108 and 108A TAA as, in the absence of disentitling conduct on the part of the taxpayer, these provisions preclude the Commissioner increasing an assessment of income tax or GST respectively after four years has elapsed from the end of the relevant year or GST period. Accordingly, it was possible that some of the assessments the Commissioner had made were time barred, unless Mr Dowden’s conduct brought him within the exceptions referred to in the provisions.

7      See Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 at [26]–[34].

[40]   Before I address the provisions, I record the TRA identified the assessments potentially affected by ss 108 and 108A as those for income tax to 31 March 2004, and for the GST periods from September 2003 to March 2005 and September 2008 to March 2009. It is not clear to me that is or remains the position.8 However, the detail of the assessments potentially affected does not much matter. The issue before the TRA was whether, in the circumstances, the Commissioner was bound by the provisions. The TRA determined that the Commissioner was not bound.

[41]   On appeal, Mr Bhanabhai accepted that Mr Dowden’s appeal largely turned on whether or not I accepted the TRA had erred in concluding that Mr Dowden had continued to operate Safeguard in the relevant period. This statement is not entirely correct, at least as regards s 108A, as that requires a deliberate (using the word loosely) omission by the taxpayer of material facts. Accordingly, it is appropriate that I set out the TRA’s findings and why I consider they are not open to challenge in the circumstances of this case.

[42]Section 108 TAA provides:

108     Time bar for amendment of income tax assessment

(1)Except as specified in this section or in section 108B, if—

(a)a taxpayer furnishes an income tax return and an assessment has been made; and

(b)4 years have passed from the end of the tax year in which the taxpayer provides the tax return,—

the Commissioner may not amend the assessment so as to increase the amount assessed or decrease the amount of a net loss.

[...]

(2)If the Commissioner is of the opinion that a tax return provided by a taxpayer—

(a)is fraudulent or wilfully misleading; or

(b)does not mention income which is of a particular nature or was derived from a particular source, and in respect of which a tax return is required to be provided,—

8      Respondent’s Submissions dated 26 March 2019 at [100] and [110].

the Commissioner may amend the assessment at any time so as to increase its amount.

[...]

[43]   For the purposes of s 108(2)(a), “fraudulent” means to act deliberately and with knowledge that the act concerned is in breach of a legal obligation.9 “Wilfully misleading” requires the taxpayer to know and intend what he or she is doing.10

[44]   Section 108(2)(b) requires that the taxpayer omit all mention of a gain subsequently found to be assessable income.11

[45]   As it was required to do, the TRA arrived at its own view of whether the Commissioner was entitled to increase the income tax assessment(s) as she did.12 The TRA said it had “no difficulty in finding” that  Mr Dowden’s  income tax return to  31 March 2004 “did not reflect [Mr Dowden’s] true tax position and was misleading”, and deliberately so. The TRA referred expressly to Mr Dowden as “an experienced business man who was well aware of his tax obligations”.13

[46]   The TRA was also satisfied that the return omitted income earned from the operation of Safeguard (and the motor vehicle trading business which is no longer in dispute).

[47]   The consequence of these findings was that the Commissioner was not bound by s 108(1) and was entitled to increase the amount assessed as she had done.

[48]Section 108A TAA provides:

108A   Time bar for amending GST assessment

(1)Subject to this section and section 108B, if a taxpayer provides a GST tax return for a GST return period and an assessment has been made,

9      R v Coombridge [1976] 2 NZLR 381 (CA) at 387.

10 Babington v Commissioner of Inland Revenue (No 2) [1958] NZLR 152 (SC) at 156–157; and Great North Motor Company Ltd (in rec) v Commissioner of Inland Revenue [2017] NZCA 328 at [36].

11 Babington v Commissioner of Inland Revenue [1957] NZLR 861 (SC) at 866–867; and Cross & Goulding v Commissioner of Inland Revenue [1987] 1 NZLR 498, (1987) 9 NZTC 6,101 (CA) at 6,111.

12   Great  North Motor Company Ltd  (in  rec)  v  Commissioner of Inland Revenue ,  above n  10 at [27]–[34].

13 Disputant Z v Commissioner of Inland Revenue, above n 1, at [81].

the Commissioner may not amend the assessment to increase the amount assessed if 4 years have passed from the end of the GST return period in which the tax return was provided.

[...]

(3)The Commissioner may, at any time, amend an assessment to increase the amount of the assessment if the Commissioner considers that the person assessed has knowingly or fraudulently failed to disclose to the Commissioner all of the material facts that are necessary for determining the amount of GST payable for a GST return period.

[...]

[49]   “Knowingly”, as referred to in s 108A(3), requires knowledge of the existence of a fact or facts, and not of the lawfulness or otherwise of the act.14

[50]   The TRA was satisfied that Mr Dowden had failed to disclose to the Commissioner all material facts relating to the operation of Safeguard (and, again, the motor vehicle trading business) and that he had done so knowingly or fraudulently. The TRA referred to the fact that Mr Dowden “had been registered for GST since 1986 and was well aware of his GST obligations”.15

[51]   The consequence of this finding was that the Commissioner was not bound by s 108A(1) and was entitled to increase the amount assessed as she had done.

[52]   As I have said, there was no substantial challenge to these determinations on appeal. For the sake of completeness, however, I record that the conclusions the TRA reached were open, particularly having regard to the matters to which the TRA referred, mentioned in [45] and [50] above.

[53]   It follows that I accept the Commissioner was entitled to increase the assessments as she did and that the TRA made no error on this issue.

Result

[54]I dismiss this appeal.

14     District Commissioner of Inland Revenue v Gordon [1989] 11 NZTC 6,082 (HC) at 6,084.

15     Disputant Z v Commissioner of Inland Revenue, above n 1, at [86].

[55]   The parties may make submissions on costs and disbursements in the event they are unable to agree.

Peters J