Faloon v Commissioner of Inland Revenue HC Auckland M757-Sd/01

[2002] NZHC 162

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY M757-SD/01

UNDER THE TAX ADMINISTRATION ACT 1994

BETWEEN CLARENCE JOHN FALOON
Plaintiff

AND THE COMMISSIONER OF INLAND REVENUE
First Defendant

AND THE ATTORNEY-GENERAL SUED ON BEHALF OF THE MINISTER OF LANDS
Second Defendant

AND CENTRAL EQUIPMENT COMPANY LIMITED
Third Defendant

Hearing: 13 August 2001

Appearances: Plaintiff in Person (to oppose application by First and Second Defendants)
JAL Oliver and SD Barker for First and Second Defendants (in support of application for order striking out statement of claim)

Judgment: 4 March 2002

JUDGMENT OF ELIAS CJ

Solicitors for First and Second Defendants: Crown Law Office, Wellington

[1] The Commissioner of Inland Revenue and the Attorney-General (sued on behalf of the Minister of Lands) apply to strike out the plaintiff’s statement of claim dated 29 May 2001. The application, made under Rules 186 and 477 of the High Court Rules, is made upon the ground that the plaintiff’s statement of claim discloses no reasonable cause of action, is unnecessarily prolix, is likely to cause prejudice and embarrassment, is an abuse of the process of the court and is frivolous or vexatious. Such applications, I accept, are to be granted sparingly and only if an action cannot succeed.

[2] The background facts of the present proceedings have been considered by the High Court in approximately twelve cases. Aspects of the disputes have been considered by the Court of Appeal on at least two occasions. I do not propose to rehearse the grievances raised through-out this litigation by Mr Faloon and his interests. They are addressed in the decisions of the High Court in Bank of New Zealand v Faloon (M354/96, High Court Wellington, 18 October 1996, Goddard J); Faloon v District Land Registrar and Palmerston North Airport Limited (No 1) (M453/96, High Court Wellington, 6 March 1997, Ellis J); Traveller and Fatupaito as liquidators of Trade Lines Limited v Faloon (M137/97, High Court Wellington, 1 May 1997, Neazor J); Faloon and Piesse v District Land Registrar [1997] 3 NZLR 498; Trade Lines Limited (in liquidation) v Piesse (M181/97, High Court Wellington, 20 May 1997, Gendall J); Trade Lines Limited (in liquidation) v Faloon, Piesse and District Land Registrar (M195/97, High Court Wellington, 27 May 1997, McGechan J); Faloon and others v Attorney-General (CP310/99, High Court Wellington, 5 October 2000, Gendall J). The grievances sought to be aired in these proceedings by Mr Faloon and his family interests are summarised admirably in the last decision mentioned, that of Gendall J. I adopt the summary with gratitude and do not need to repeat it here. All claims by Mr Faloon in these cases have been found to be without merit.

[3] The decisions establish that land in respect of which Mr Faloon has lodged consecutive caveats is land in which he had no caveatable interest. It was owned by Trade Lines Limited, a company now in liquidation, and was sold by the liquidator of that company. While the third defendant in the present proceedings (a company in which Mr Faloon has an interest) was formerly the grantee of a drainage easement in gross in respect of the land, that easement was extinguished by court order in 1998 (Warnaco Investment Ltd v Central Equipment Company Limited (M124/98, High Court Wellington, 18 May 1998, Heron J; 2 July 1998, Neazor J).

[4] Appeals to the Court of Appeal against the judgments of Gendall J (CP310/99, 5 October 2000) and McGechan J (M195/97, 27 May 1997) have been dismissed as misconceived and an abuse of process because they attempted to re-litigate matters already decided against Mr Faloon (Faloon v Central Equipment Company and Attorney-General (CA255/00, CA280/00, 23 July 2001); Faloon v Trade Lines Limited (In Liquidation) and District Land Registrar (CA121/97, CA122/97, 13 December 2001)).

[5] The statement of claim, filed by the plaintiff in person on 29 May 2001, is discursive and difficult to understand. It claims no relief against the Second Defendant or the Third Defendant. Against the Commissioner of Inland Revenue it asks that:

“The Honourable Court will grant the application of the plaintiff and direct the Commissioner to alter the “disputable decisions” to the extent necessary to conform to the decisions of the Honourable Court, with the effect the Honourable Court specifies pursuant to and under section 138P(2)(b) of the Act.”

[6] The Act invoked in the intituling and in the prayer for relief is the Tax Administration Act 1994. Section 138P(2)(b), relied upon by the plaintiff, permits a hearing authority, on a challenge to a “disputable decision that is not an assessment” to

“direct the Commissioner to alter the disputable decision to the extent necessary to conform to the decision of the hearing authority with the effect the hearing authority specifies.”

[7] The statement of claim does not clearly identify the “disputable decision”. It refers to a “disclosure notice” given by the Commissioner to Central Equipment Company Limited on 22 September 2000 (later described in the statement of claim as the Commissioner’s “statement of position”), a 50 page “letter in reply” written by Mr Faloon on 18 October 2000 (later described in the statement of claim as a “statement of position” and eventually treated by the Commissioner as such) and a document dated 17 April 2001, referred to in the statement of claim as “E.4” (in apparent reference to the exhibit number it was given at an earlier interlocutory hearing), which is claimed to be a variation of the Commission’s “statement of position” and to misstate the dispute and the taxpayer’s “statement of position”.

[8] There is no claim that the plaintiff is the taxpayer subject to the “disputable decision”. It emerged during the course of the hearing that the taxpayer is the Third Defendant, Central Equipment Company Limited. In its December 1996 GST return, Central Equipment Company Limited claimed an input tax credit of $20,265.49 on account of rates levied by the territorial authority. The “disputable decision” alleged by the plaintiff is the Commissioner’s disallowance of that claim on the basis that Central Equipment Company Limited had never paid the rates in question. The rates had been paid by the liquidator of Trade Lines Limited, and had already been claimed for GST purposes by that company.

[9] Underlying the claim of wrongful assessment are allegations as to the ownership of and equitable interests in the land which was the subject of the previous litigation. These interests are said variously to arise out of the status of the plaintiff as co-surety, with his father, in a mortgage of the lands owned by Trade Lines Limited, by reason of Central Equipment’s interest in the easement in gross extinguished by court order in 1998, by breach of copyright, by virtue of patent rights (in respect of hay tedders which were the subject of litigation in 1987 and 1988 against the Comptroller of Customs and the Commissioner of Inland Revenue which was struck out), and under “special powers”. It is claimed that the Proclamation, by which some of the land was taken for airport purposes in 1993 “has no “substance” and should be revoked under section 55 of the Public Works Act 1981”. It is claimed that the Proclamation created an “Estate by wrong”, in “derogation of section 17 of the Property Law Act 1952”. A further claim is that the liquidator of Trade Lines Limited wrongfully compromised a rates claim (apparently because it was not the beneficial owner of the property rated) and in doing so was party to an illegal contract. Essentially, it appears to be the contention of the plaintiff that the rating liability was that of Central Equipment Company Limited, not Trade Lines Limited and that Central Equipment Company Limited is entitled to an input credit for GST purposes.

[10] It is not necessary to set out the recitals in the statement of claim in detail. They are confusing and in some measure contradictory. They include allegations against the Palmerston North [previously New Plymouth] City Council which are extraneous to the claims against the defendants named. They are prolix and largely unintelligible. The arguments put forward by Mr Faloon to oppose the applications by the first and second defendants to strike out the proceedings are similarly difficult to grasp. They included reference to the Partition Act 1540, the Grantees of Reversions Act 1540, the Distress Act 1689 and other legislation referred to in s 3(1) of the Imperial Laws Application Act 1988. The relevance of much of this material was impossible for me to discern.

The claim against the Commissioner of Inland Revenue

[11] The plaintiff claims that the Commissioner issued a “Disclosure Notice” to Central Equipment Company Limited on 22 September 2000. That was “challenged” by the plaintiff’s letter of 18 October 2000. The plaintiff claims that on 17 April 2001

“Without agreement required by section 89M(13) the Commissioner has varied his Statement of Position on 17 April 2001 by document numbered “E.4”, and sent that document to an adjudication unit on 24 April 2001.”

[12] The plaintiff claims that the “dispute” as referred by the Commissioner omits the dispute

“as to “Patent Rights” and the associated claim to a refund to “Taxation paid in Excess” of $117,067.38, and written application made for refund under section 409 of the Income Tax Act 1976 made 12 October 1984, as an issue to be considered by Adjudication unit, as a legitimate claim for a Tax position of the plaintiff and the third defendant pursuant to the Act, see page 19, Taxpayer’s statement of Position.”

[13] Further allegations are made that the Commissioner has withheld relevant documents and has, in document “E.4”, raised new issues to which it is necessary for “the disputant” to have an opportunity to respond.

[14] Counsel for the Commissioner in submissions gave some of the background to the statement of claim which appears uncontentious. In its December 1996 GST return, Central Equipment Company Limited claimed an input tax credit of $20,265.49 on account of rates in respect of the disputed land. The Commissioner did not allow the claim because the rates had been paid by Trade Lines Limited which had claimed the payments for the purposes of GST. (The plaintiff claims that the payment of rates by Trade Lines Limited was pursuant to a compromise which was an illegal contract because it failed to recognise the interest of Central Equipment Company Limited and Mr Faloon in the land).

[15] Part IVA of the Tax Administration Act sets out procedures to “[p]romote the prompt and efficient resolution of any dispute concerning a disputable decision by requiring the issues and evidence to be considered by the Commissioner and a disputant before the disputant commences proceedings” (s 89A(1)(d)). The procedure begins with the issue of a “notice of proposed adjustment” which can be either Commissioner or taxpayer initiated (ss 89B, 89C and 89D).

[16] The notice of proposed adjustment (effectively disallowing the input tax credit claimed by the company in its December 1996 tax return) was given by the Commissioner to Central Equipment Company Limited on 8 June 2000. Under s 89G of the Act, the recipient of the Commissioner’s notice then had two months to give a notice of response, setting out why it does not accept the proposed adjustment. A 161-page notice of response was provided by Central Equipment Company Limited on 2 August 2000.

[17] Under s 89M, the Commissioner, if disagreeing with the notice of response, then is empowered to issue a disclosure notice and a statement of position. After that, the taxpayer has two months to provide his own statement of position, failing which the Commissioner’s statement of position is deemed to be accepted (s 89M(5) and (7)).

[18] In the present case, the Commissioner’s statement of position was provided on 22 November 2000, with the notice of disclosure. The statement of position adhered to the earlier notice of proposed adjustment.

[19] On 18 October 2000 the plaintiff wrote a 50 page letter to the Commissioner requesting additional information and a “stay” of the Commissioner’s statement of position. He was advised by letter of 27 October that the statutory scheme did not give the Commissioner power to extend the time limit for the taxpayer’s statement of position which was to expire on 22 November.

[20] On 16 November Central Equipment Company Limited and Mr Piesse (Mr Faloon’s brother in law) applied to the High Court for extension of time under s 89M(11). Mr Faloon at the time was an undischarged bankrupt and was named as a respondent. On 11 December 2000, Master Thomson by consent granted an extension of time to 28 February 2001 to enable Central Equipment Company Limited to file a statement of position.

[21] On 25 February Mr Faloon wrote to the Department advising that Central Equipment Company Limited’s statement of position was the letter of 18 October 2000. With that indication, the Commissioner prepared an additional statement of position in response under s 89M(8) dated 17 April 2001 (Document “E.4”). The Commissioner contends that, contrary to the plaintiff’s submissions and the statement of claim, E.4 does not vary the Commissioner’s statement of position:

[22] With the completion of the statements of position, the matter should then have been referred to the Adjudication Unit under Part IVA of the Act, as the response of 17 April proposed. On 30 March however Central Equipment Company Limited and Mr Piesse applied to the High Court seeking recission of the order of the Master, earlier made by consent and on the application of Central Equipment Company Limited, which had granted the company an extension of time.

[23] The application for review was heard by Justice Wild. He dismissed the application and awarded costs to the Commissioner.

[24] The respective statements of position were then referred to the Adjudication Unit which found that Central Equipment Company Limited was not entitled to the GST claim. A reassessment of the December 1996 GST return disallowing the claim was made on 12 June 2001. The claim has been disallowed on the basis that there is no legal foundation for it. Central Equipment Company Limited was registered for GST on a “payments” basis and could only claim input credits for amounts actually paid. It has not been able to produce a valid invoice in order to claim the deduction for GST purposes (ss 20(2) and (3) of the Goods and Services Tax Act 1985).

[25] I comment that it does not seem to be seriously in issue that the rates were paid by Trade Lines Limited and that it claimed the deduction. The plaintiff contends, rather, that the rates were wrongly paid by Trade Lines Limited, and that Central Equipment Company Limited has the liability and is entitled to the deduction.

[26] The present claim does not comply with the provisions of the Tax Administration Act. The Act determines the procedures for hearing tax disputes. Part IVA provides the procedure for disputing proposed adjustments. When a disputable decision has been made following the procedures in Part IVA (as is the case here), a disputant can challenge the disputable decision only under Part VIIIA of the Act or in objection proceedings (not here applicable) (ss 109 and 138A). There are two types of challenges to a disputable decision under part VIIIA: a challenge to an assessment under s 138B and a challenge to a disputable decision that is not an assessment under s 138C. The specific powers granted to the hearing authority depend on whether the challenge relates to an assessment (s 138P(1)) or a dispuable decision that is not an assessment (s 138P(2)).

[27] An assessment is defined in s 3(1) of the Act as meaning “[a]n assessment of the amount on which tax is payable and the amount of that tax, a determination of net loss, or a determination of net loss carried forward. . . . . .” Mr Faloon seeks to challenge the Commissioner’s decision to disallow a claim made by Central Equipment Company Limited in its December 1996 GST return for a credit of $20,265.49 for rates liability. The decision of the commissioner that Central Equipment Company Limited could not claim a credit of $20,265.49 for the rates payment was an assessment of the amount on which tax is payable. As such, the decision was an “assessment” made by the Commissioner.

[28] Mr Faloon’s statement of claim requests the Court to exercise the powers granted to it under s 138P(2), which relate to a disputable decision that is not an assessment. It may be noted that the proceedings are misconceived in seeking to invoke s 138P(2). That provision applies to challenges to a disputable decision that is not an assessment.

[29] More importantly, the heairng authority may only exercise the powers in s 138P during a challenge. Mr Faloon’s statement of claim of 29 May 2001, in respect of which the strike out application is made, is not a challenge under Part VIIIA of the Act.

[30] When an assessment or reassessment has been made following the procedures in Part IVA (as is the case here), the disputant is only entitled to challenge the assessment on the basis of s 138B. Any challenge must be lodged within two months of the date of issue of the relevant notice of assessment (s 138B(1)(c), (2)(c) and (3)(b)). The Commissioner issued a reassessment for Central Equipment Company Limited’s December 1996 GST return on 12 June 2001. No challenge was brought, perhaps because of the present proceedings. Subject to s 138D (permitting the hearing authority, on application of the disputant, to allow a challenge to be commenced out of time in “exceptional circumstances”), there cannot now be a challenge to the assessment made by the Commissioner. No application under s 138D has been made.

[31] The plaintiff is also astray in seeking to invoke s 138G to permit additional information to be admitted. In a challenge to an assessment under Part VIIIA of the Act, the taxpayer is limited to the information contained in his and the Commissioner’s statements of position filed under Part IVA in accordance with the time limits prescribed in that Part of the Act (s 138G(1)). The hearing authority may permit additional information to be put forward in circumstances where it is satisfied that the information could not, with reasonable diligence, have been put forward earlier and that its admission is necessary to avoid “manifest injustice” (s 138G(2)). However, such an application to the hearing authority may only be made during a challenge properly brought within the response period prescribed by s 138B. For completeness it should be noted that the matters of additional information Mr Faloon seeks to include in his challenge seem to be matters which have been resolved adversely to him in the earlier Court proceedings.

[32] In addition to the procedural flaws in the present proceedings the challenge to the Commissioner by Mr Faloon is fatally flawed because, not being the taxpayer, he is not a disputant within the definition of the Act. S.3(1) defines a disputant as a person:

“(a) Who may issue a notice of proposed adjustment to the Commissioner; or

(b) To whom the Commissioner issues a notice of proposed adjustment or an assessment; or

(c) Who may challenge a disputable decision”.

[33] In the present case which relates to a GST assessment dispute, only the taxpayer, viz Central Equipment Company Limited, qualifies as a disputant (ss 3(1), 89D, 111, 138B). The statement of claim does not allege that the plaintiff is the taxpayer or recite any facts which might qualify him to challenge the assessment. In the light of the earlier determinations of the Court referred to above, it is clear that no such claim could properly be made. Mr Faloon has no standing to challenge the assessment.

The claim against the Minister of Lands

[34] No relief is sought against the Second Defendant. The complaint made against the Minister of Lands is difficult to understand. The allegations made in the statement of claim are that the Minister of Lands acted unlawfully in the matter of the Public Works Act taking by proclamation of land for the Palmerston North [previously New Plymouth] airport and in failing to protect the interests of the plaintiff in the land. The validity of the Public Works taking and the question of the ownership of the land has been determined against Mr Faloon and Central Equipment Company Limited in the litigation described in paragraphs [2], [3] and [4] above. In particular, the allegations made against the Minister of Lands were dealt with in a strike out application by Gendall J in the judgment of 5 October 2000 in CP310/99.

[35] No tenable cause of action against the Minister of Lands is disclosed. The Court has previously decided that neither Mr Faloon nor Central Equipment Company Limited had any interest in the land taken by proclamation. The taking has been held to be valid. I consider that there is no purpose in the proceedings and that they should be brought to an end.

Conclusion

[36] For the reasons given, the proceedings are struck out. The First and Second Defendants are entitled to costs on the application, which I fix in accordance with the Third Schedule to the High Court Rules as for a Category 2 proceeding, band B, including reasonable travelling expenses for two counsel, to be fixed if necessary by the Registrar.