Hardie v Commissioner of Inland Revenue HC Auckland CIV 2010-404-1453

[2010] NZHC 2339

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-1453

BETWEEN  J D HARDIE Plaintiff

ANDCOMMISSIONER OF INLAND REVENUE

Respondent

Hearing:         8 September 2010

Appearances: A J Forbes QC for Plaintiff

P H Courtney & R L Roff for Defendant

Judgment:      23 December 2010

JUDGMENT OF KEANE J

This judgment was delivered by Justice Keane on 23 December 2010 at 2.30pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

Solicitors:

Mortlock McCormack Law, Christchurch for Plaintiff

Crown Law Office, Wellington for Defendant

J D HARDIE V CIR AK CIV 2010-404-1453  23 December 2010

[1]      John Hardie, a patent attorney practising on his own account, failed to make returns of income for the years ended 31 March 1991 - 2005, and GST returns for the monthly periods ended 31 March 2003 - 30 April 2006.

[2]      The Commissioner of Inland Revenue issued, between 2001 - 2005, default assessments of income tax for the income years ended 31 March 1992 - 2003 and imposed late filing penalties for the income years ended 31 March 2004 - 2005. The Commissioner also for the monthly periods in issue in 2003 - 2006 made contemporary  GST  default  assessments.  Mr  Hardie  became  liable  to  pay  tax, penalties and interest of $21,759.701.41.

[3]      Mr Hardie did not respond to these default assessments by filing returns and giving the Commissioner a notice of proposed adjustment; his right under the Tax Administration Act 1994. Instead he issued this application for review, a second such application, in which he alleges that, in making the default assessments, the Commissioner is culpable of 'conscious maladministration'.

[4]      The Commissioner and his delegates, Mr Hardie contends, did not comply with their duty to protect the integrity of the tax system and to assess his liability to tax fairly, impartially and according to law. The assessments made are irreconcilable with the returns he had actually made. They are patently incorrect and arbitrary . There is an exceptional basis for judicial review. He seeks discovery.

[5]      The  Commissioner  applies  to  strike  out  Mr  Hardie's  application  on  the ground that it discloses no reasonable cause of action; and, equally, on the ground that, because he has failed to file returns, or to invoke the statutory process for objection, which is primary, his application is vexatious and improper. Discovery cannot assist him.

Prior litigation

[6]      This application for review comes after already extensive litigation, which began on 16 June 1998 when Mr Hardie was convicted in the District Court of seven failures to file income tax returns for the years ended 31 March 1991 - 1997; and

then on 20 June 2000 of two further failures for the years ended 31 March 1998 -

1999.

[7]      In August 2002 the Commissioner obtained orders in the District Court under s 17A of the Tax Administration Act 1994 requiring Mr Hardie to file income tax returns for the years ended 31 March 1998 - 2001, and GST returns for the period February 2001 - April 2002, with which Mr Hardie failed to comply.

[8]      In September 2006 the Commissioner obtained judgment by default in the District Court in respect of Mr Hardie's tax liability, as it then was, $10,341,590.32. Mr Hardie applied to have that judgment set aside and eventually, in March 2009, the District Court confirmed the judgment, that judgment was almost wholly upheld by this Court in March 2010, and he has since been declined leave to appeal further.

[9]      In June 2007, in the midst of the debt proceedings, Mr Hardie acting for himself, brought his first application for judicial review. That too took a protracted course complicated by his serial failures to comply with directions. There too the Commissioner applied to strike out his application. In June 2008, the day before that application was to be heard, he discontinued. Now he seeks to begin again.

Strike out jurisdiction

[10]     The Commissioner applies to strike out Mr Hardie's application relying on High Court Rules, r 15.1(1), on the ground that it is vexatious and an abuse of process, relying on well established principles.

[11]     As to the usual primary ground, untenability, the facts pleaded are to be assumed  to  be  true  and  though  complex  legal  issues  are  not  inhibiting,  the jurisdiction is to be exercised sparingly; 'the causes of action must be so clearly untenable that they cannot possibly succeed'.[1] Where there may be a cause of action, which has been insufficiently or inaccurately pleaded, the proper course is amendment.[2]

[1] Attorney-General v Prince & Gardner [1998] 1 NZLR 262 at 267.

[2] Marshall Futures Ltd v Marshall [1992] 1 NZLR 316.

[12]     Abuse of process can raise issues that extend beyond the pleadings and arises typically in tax cases as a result of s 109 of the Tax Administration Act 1994, which states that a disputable decision made by the Commissioner cannot be challenged except by objection under Part 8 or by challenge under Part 8A.[3]  Also, and as materially, s 109(b) says '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.'

Section  114,  furthermore,  deems  assessments  made  to  be  valid,  even  where incorrect.

[3] Tax Administration Act 1994 s 109(a).

[13]   Self evidently, the statutory objection process has primacy and only exceptionally does judicial review have a place. Unfairness or an abuse of process has long been seen to be the only justifiable basis for review;[4] and also now, as it has been held more recently, 'a fatal foundational error of law'.[5]

[4] New Zealand Wool Board v Commissioner of Inland Revenue [1997] 2 NZLR 6 (CA), at [14].

[5] Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC).

[14]     The statutory objection procedure is not just primary. It is also curative. The Taxation Review Authority, or this Court, should it hear the challenge, has the same powers as the Commissioner and, if on an objection the Commissioner is found to have acted in error, or invalidly, that can be cured by the exercise of the power of re- assessment.[6]

[6] Tax Administration Act 1994, ss 135(1), 136(17).

[15]     The most recent and presently definitive decision of the Court of Appeal is Westpac Banking Corporation v Commissioner of Inland Revenue.[7] There Court held that judicial review of a tax assessment will only be justified where (i) what purports to be an assessment is not; or (ii) in exceptional cases, such as where there has been conscious  maladministration;  and  that,  as  the  Court  said,  is  'a  particularly inauspicious statutory context for judicial review'.[8]

[7] Westpac Banking Corporation v Commissioner of Inland Revenue [2009] NZCA 24, at [59].

[8] At [47].

[16]     To  decide  whether  the  challenge  made  lies  within  those  exceptional categories, the Court said,[9] it is necessary to 'engage with the facts more freely' than is usual on a strike out application. The pleadings are not to be taken uncritically to

be correct where contradicted by indisputable fact, especially where the good faith of the applicant may also be in issue.[10]

[9] At [10].

[10] Z v Dental Complaints Assessment Committee [2009] 1 NZLR 1 (SC) at [58], [62], [63], [127].

[17]     In the nature of things a wider inquiry is called for. What is in issue is whether, as it was put in the Wool Board case,[11] the assessments made qualify as 'an honest attempt by the Commissioner to arrive as best he can on the information available to him at the amount of the taxable income and the amount of the tax'.

[11] At 695.

[18]     In Westpac, furthermore, the Court did recognise that the Commissioner's wider duties and powers may make his assessments more susceptible to review;[12]

His 'care and management of the taxes covered by the Inland Revenue Acts'[13]  and

attendant discretions, including the power to give binding rulings. Also his qualified duty to use his 'best endeavours to protect the integrity of the tax system', including the  taxpayers'  perception  of  integrity,  and  the  right  of  taxpayers  'to  have  their liability determined fairly, impartially, and according to law'.[14]  Also his duty to ensure that the taxpayer does 'comply with the law'.[15]

[12] At [56].

[13] Section 6A(1).

[14] Section 6(2)(a), (b), (f).

[15] Raynel v Commissioner of Inland Revenue (2004) 24 NZTC 18,583.

[19]     As against that, as the Court said, the taxpayer's liability depends on the statute not on the assessment. Therefore:[16]

If the assessment is correct, it is hard to see why complaints about process should result in the taxpayer not paying tax on a correct basis. Where there are very large sums of tax at stake … this raises fairness considerations in relation to other taxpayers … If the assessment is wrong, it can be corrected in later challenge proceedings. If it is correct, the tax should be paid.

[16] At [61].

[20]     The Court also deprecated the scope collateral challenge by review allows for

'gaming and diversionary behaviour'; and any attempt 'to turn the case back on to the Commissioner'.[17] The policy underlying s 109 and 114, as the Court said, constrains any challenge founded on the Commissioner's internal processes:[18]

To allow taxpayer litigants to trawl through processes ... antecedent to the issuing of an assessment (and the pre-assessment disputes procedure) with a view to identifying and then relying on perceived departures from internal department  procedures  is  inconsistent  with  the  orderly  and  efficient resolution of tax disputes.

[17] At [62], [63], [64].

[18]  At [94]

[21]     Thus the Court saw the form of inquiry by discovery that Mr Hardie wishes to embark on here as one that could cut across the s 109 and 114 presumptions. And, more recently in Tannadyce Investments Limited v Commissioner of Inland Revenue,[19] the Court was even more emphatic.

[19] Tanadyce Investments Limited v Commissioner of Inland Revenue [2010] NZCA 233.

[22]     That case is close to this. It too involved default assessments, an application by the taxpayer for review and one by the Commissioner to strike out, and an issue of discovery. The taxpayer there contended that the Commissioner had withheld documents obtained for the default assessments and that had prevented returns being filed as a foundation for a notice of proposed adjustment. He wished to verify that claim by discovery.

[23]     The Court held, by contrast with this Court at first instance, that the discovery issue was not an impediment to the proceeding being struck out. The maladministration alleged, the Court said, was antecedent to the impugned assessments. It was not pleaded that the officer, who made the assessment, did not honestly believe in their validity and accuracy. Even if then there were conscious maladministration, the claim did not qualify for judicial review.

[24]     The Court emphasised, as it had in numerous earlier cases, that the taxpayer's challenge could readily have been resolved within the statutory challenge process. Where a taxpayer chooses not to engage in that process, the Court said, it cannot complain when 'the alternative but extremely limited process of judicial review' is

unavailable.[20] The taxpayer's wish for further discovery proved irrelevant.

Asserted grounds of invalidity

[20] At [41].

[25]     To assess Mr Hardie's income for the purpose of the default assessments of income tax for the years ending 31 March 1992 - 2003 the Commissioner relied on his contemporary GST returns, then reduced his resulting deemed income by 20 percent for expenses and divided the balance by 33 to give his tax liability.

[26]     This  assessment  was  arbitrary,  Mr  Hardie  contends,  for  two  reasons essentially, the first of which is that even if his deemed income were accepted, which it is not, a 33 rate of tax cannot be the actual rate that would apply. More fundamentally, he contends, his deemed income is at variance with the GST returns on which the Commissioner relied.

[27]     As a result of filing those returns, Mr Hardie contends, the consistent result was that he obtained refunds and that has to mean that his purchases and business expenses would have exceeded his sales, and expenses as a proportion of sales would therefore have been considerably in excess of 20 percent.

[28]     In his last GST return filed Mr Hardie returned $116,310.10 in zero-rated sales  and  $182,177.45  in  sales  subject  to  GST.  He  returned  input  credits  of

$246,096.37. Again the inference has to be, he contends, that as a proportion of sales his expenses would have been considerably in excess of the percentage allowed.

[29]     Then, in the 2003 - 2006 years, when the Commissioner issued default GST assessments  based  on  his  last  GST  return  and  added  ten  percent,  Mr  Hardie contends,  that  was  not  in  any  attempt  to  be  accurate,  but  was,  as  he  says  the assessing officer confirmed in the District Court debt proceedings, designed to encourage the filing of returns.

[30]     Here  too,  Mr  Hardie  contends,  the  Commissioner  has  been  manifestly arbitrary. The addition of ten percent to each monthly default assessment resulted in an exponential increase in the assessments made from $3,058 for the return period ended 31 August 2003 to $94,530.83 for the return period ended 31 October 2006.

[31]     Further, Mr Hardie contends, the Commissioner failed to take into account the fact that for the return periods ending 31 March 1997 to 31 January 2001 he made GST returns, each of which resulted in a GST refund. Here too, he contends, the Commissioner acted inconsistently with the returns made and accepted.

[32]     Mr Hardie also pleads that he has been precluded from resolving these issues under the statutory disputes and challenge procedures of the Tax Administration Act, because s 89D(2) required him to furnish returns before he could do so. He was unable to because his financial records were neither complete nor accurate.

[33]     Against those pleadings he claims that there are exceptional circumstances justifying his application for review. Also that, until he has the complete material on which the Commissioner relied in making the assessments, he cannot advance his application with any surety. Discovery is indispensable.

Conclusions

[34]     The issues Mr Hardie raises in his application for review go, I accept, not merely to the accuracy of the default assessments made by the Commissioner but to whether they are arbitrary. That is not enough, however, to warrant his application proceeding. Those issues could, had Mr Hardie elected, have been readily resolved within the statutory challenge process, which extends to issues of validity as well as correctness.

[35]     Mr Hardie's claim not to have been able to file the returns necessary to invoke that procedure, because his records were inaccurate and incomplete, merely confirms, I consider, that the Commissioner had necessarily to assess Mr Hardie by default on an assumed basis. I am also sceptical about Mr Hardie's claim that he was unable to invoke the statutory procedure because he was unable to file returns. The manner in which he has contested his tax liability in debt, and his first review application, suggests rather that he has been intent on deflecting any assessment and delaying any liability.

[36]    Ultimately Mr Hardie is obliged to say that the Commissioner's default assessments  are  so  arbitrary  that  the  officer,  who  made  them,  could  not  have honestly believed that they could begin to be accurate. That, however, is the very issue that would have been tested had Mr Hardie invoked the statutory challenge procedure. It is not capable of being assessed on an application for review.

[37]     I conclude, therefore, that on the face of the pleadings, and the prior history of litigation, this is not one of those exceptional cases where plainly there has either been no assessment, as there plainly has been, or there has been conscious maladministration tainting the assessment made. Mr Hardie's application for review must therefore constitute an abuse of process.

[38]     This conclusion holds, I consider, despite the fact that Mr Hardie has been denied discovery. Mr Hardie knows on what basis he has been assessed. He has attacked it in this review proceeding.

[39]     For these reasons I accede to the Commissioner's application. Mr Hardie's application for review will be wholly struck out. The Commissioner is entitled to costs at scale 2B, according to the calculation filed and disbursements as fixed by the

Registrar.

P.J. Keane J