JD and Ce Henson Partnership v Commissioner of Inland Revenue

[2009] NZCA 423

IN THE COURT OF APPEAL OF NEW ZEALAND

CA661/2008
[2009] NZCA 423

BETWEENJ D AND C E HENSON PARTNERSHIP

First Appellant

ANDJULIAN DOYLE HENSON

Second Appellant

ANDCAROLYN ELLEN HENSON

Third Appellant

ANDCOMMISSIONER OF INLAND REVENUE

Respondent

Hearing:15 September 2009

Court:Hammond, Harrison and Miller JJ

Counsel:D G Hayes for Appellants

M J Ruffin and M S Stapleton for Respondent

Judgment:22 September 2009 at 3 pm

JUDGMENT OF THE COURT

A        THE APPEAL IS DISMISSED.

B The appellants (jointly and severally) must pay the respondent costs for a standard appeal on a band B basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Miller J)

Introduction

[1]       The Taxation Review Authority (“TRA”) held that the Commissioner of Inland Revenue lawfully assessed the tax liabilities of the appellants for the 1992 to 1995 years, and confirmed the assessments.

[2]       It is not in dispute in this appeal that the Commissioner did assess the appellants for these periods, or that the assessments were correct.  Rather, the appellants challenge the decision of the TRA, and that of the High Court on appeal from it, on the ground that the challenge proceedings in which the decisions were issued rested on invalid notices of assessment.  The appellants say that the notices for 1992, 1993 and 1995 predated the actual assessments, and none of the notices assessed an amount of tax.  In the circumstances, they say, the TRA lacked jurisdiction to confirm the assessments.

The narrative

[3]       Mr and Mrs Henson were involved with a company that sold light fittings, and Mr Henson offered management advice.  They worked a small farmlet.  Their partnership, the first appellant, was set up to co-ordinate all of these activities. 

[4]       In May 1994 the Commissioner decided to audit the tax return of the first appellant for the year ended 31 March 1992, focusing on the deductibility of some large expenses claimed, such as interest payments for a home built on the farmlet and management services charged to the partnership.  He later decided to audit the appellants for the four years 1992-1995 inclusive, and exercised his powers under s 17 of the Tax Administration Act 1994 to require information from the appellants. 

[5]       On 26 September 1996 the Commissioner issued “Notices of Assessment” to the appellants.  They comprised amended statements of income and expenses for the four years concerned.  Partnership income was deemed to be split equally between the Hensons.  Also assessed were GST liabilities and employer ACC levies, with which we are not presently concerned.  The “Notices of Assessment” did not specify the amount of tax payable, although it might readily be calculated from the statements of income and expenses.

[6]       On 15 October 1996, statements of account and notices of adjustment were issued for each of the four years.  These documents had been prepared manually because the Commissioner’s electronic files for the appellants had been corrupted.  They recorded assessments and additional taxes for each of the Hensons for each year, specifying the amount of tax payable. 

[7]       Meetings followed between Mr Henson and Mr Gutry, an investigator with the Inland Revenue Department.  They led to adjustments to the Commissioner’s calculations.  On 20 February 1997 he issued amended “Notices of Assessment” for the four years.  The notice for Mr Henson for the year ended 31 March 2004 increased his income tax liability, but the others either reduced the Hensons’ liabilities or were the same as those issued in September 1996.  Again, they did not specify an amount of tax payable.  However, on 26 February 1997 the Commissioner issued statements of account and notices of adjustment, together with a document explaining the changes.

[8]       No challenge proceedings were commenced at that time.  Rather, the appellants sought judicial review in May 2002.  Those proceedings were settled under a deed dated 27 April 2005.  It recited that the parties agreed that they would treat the notices of assessment of 26 September 1996 as if they were issued after 1 October 1996, that being the date on which a new disputes procedure under the Tax Administration Act came into effect.

[9]       The deed further provided that the Commissioner would accept late notices of proposed adjustment (NOPAs) under s 89K of the Tax Administration Act.  The NOPAs would address the notices of assessment issued on 26 September 1996 and, in relation to Mr Henson, the notice of assessment issued on 20 February 1997. 

[10]     NOPAs were duly issued, leading to a challenge proceeding and the decisions below.  The challenge proceeding addressed both the validity of the notices of assessment and the correction of the assessments.

The Taxation Review Authority decision

[11]     In the TRA, Judge Barber held that the assessment process was probably not complete when the September notices of assessment were issued.  It was not completed until 15 October 1996.  The position was refined and confirmed in February 1997.  He found that: 

[81]     The overall evidence before me indicates that the IRD’s assessment process was probably not complete until 15 October1996 because there is no evidence of income tax having been calculated prior to that date.  The 26 September 1996 notices of assessment only set out assessed income;  and did not give the tax payable figure.  I realise it is not difficult to calculate the tax due from that, but the assessment process continued until 15 October1996 and also related both to 26 September 1996 figures.  Nothing turns on that except that the taxpayers were to be notified of the assessment outcome within a reasonable time.  In the light of the correspondence of 26 September 1996 this notification was sufficient by 15 October 1996 but, in any case, the notices of adjustment and statements of account with reassessment of February 1997 refined and advised the position and could be just regarded as prompt enough advice of assessment from September/October 2006.  Also, there had been full verbal advice of the assessment position to all disputants from Mr Gutry, particularly, at a three hour meeting requested by Mr H and taking place on 16 October 1996.  In any case, this authority has all the assessment powers of the defendant and, if necessary, would reassess to confirm the February 1997 re-assessments.

[12]     The Judge then reviewed and confirmed the assessments.

The High Court decision

[13]     In the High Court, the appellants argued that a notice of assessment must succeed the assessment and specify an amount of tax payable.  The only disputed assessments before the TRA were those of 23 September 1996 (for the 1992, 1993, and 1995 years) and 20 February 1997 (for the 1994 year).  These assessments commenced the disputes procedure, but did not stipulate the tax to be paid and merely evidence the fact there were no assessments in existence at the time.  In the circumstances, the TRA lacked jurisdiction, for the assessments before it were made at a later time.

[14]     Duffy J rejected these arguments.  She found that the Commissioner had made assessments for the years in question and held, relying on s 26 of the Income Tax Act 1976 and s 114 of the Tax Administration Act, that procedural irregularities do not invalidate an assessment.  She concluded:

[28]     There is no doubt that at the time the notices of assessment dated September 1996 and February 1997 were issued the assessment process was not completed.  The taxpayers’ assessable income was assessed but the amount of tax to be paid on it was not.  The result is that the notices of assessment were issued prematurely and did not for that reason express the amount of tax to be paid.  Whilst this may mean the notices were irregular and defective, it is hard to see how, in the face of statutory provisions protecting assessments from this type of challenge, their irregularity can affect the subject assessments.  All that has occurred is that the Commissioner has made assessments that were irregularly notified to the taxpayers.  Parliament has made express provision to immunise the validity of assessments from that occurrence.

[29]     The other aspect of the taxpayers’ jurisdictional argument is that the settlement agreement and consequential notices of proposed adjustment have caused a dispute over assessments made in September 1996 and February 1997 to be before the Authority when, in fact, as at those dates there were no complete assessments.  However, I do not think the settlement agreement can be read in this way.  The clear import of the settlement agreement and the notices of proposed adjustment that followed were that the dispute between the parties was over the Commissioner’s assessments for the 1992 to 1995 tax years.  There is no doubt that before and when the dispute was before the Authority, the parties were of the same mind as to the tax years in issue.  In Miller at 13,973 the Court of Appeal was alive to the need to avoid permitting “formalism to run riot”. I consider that to read the settlement agreement as tying the parties down to a dispute over assessments for the 1992 to 1995 tax years that were complete by the dates of the notices of assessments referred to in the deed would be overly formal, unrealistic and nonsensical. The deed was executed against a statutory background in which Parliament had made express provision to ensure that procedural irregularities could not invalidate an assessment. It follows that the parties will have understood that any reference to notices of assessments in their deed included defective irregular notices as well as properly issued notices. It follows that the taxpayers have failed on the jurisdictional grounds of appeal.

[15]     The Judge also dismissed challenges to the correctness of the assessments.

The appeal

[16]     The appellants argue, as they did before Duffy J, that no notice of assessment has been issued in respect of the real assessments, and the notices that were issued did not assess for an amount of tax.  Because the proceedings before the TRA were founded on the notices of 26 September 1996, which were issued when there had been no assessments, the TRA was without jurisdiction.  The notices were not notices of assessment at all; alternatively, they are incapable of founding a challenge proceeding.

[17]     The appellants do not dispute that assessments were in fact made for the relevant years.  It is plain that assessments had been made by 15 October, as the TRA found, and varied in February.  Mr Hayes focused rather on the notices of assessment of 26 September 1996 and 20 February 1997, arguing that the former predated the actual assessments and none of the notices qualified the tax liability.  The TRA has jurisdiction under s 138A of the Tax Administration Act only if a valid notice of assessment has been issued. 

[18]     The Commissioner maintains that assessments had been made as at 26 September 1996, and notified on 15 October, when the statements of account and notices of adjustment were issued together.  No further right of challenge arose in relation to the February assessments, except for the 1994 assessment in respect of Mr Henson, which was the only one to increase a tax liability: Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA). That is why the deed allowed the Hensons to issue NOPAs in relation to other years.

Assessments and notices of assessment

[19]     It is settled law that an assessment is a decision by the Commissioner quantifying the amount of tax payable by the taxpayer for the year in question:  Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd [1994] 2 NZLR 681 at 690 (CA). It must be definitive as to the taxpayer’s liability at the time it is made, and subject to challenge only through the objection process. It normally requires that the Commissioner should consider the facts, exercise judgment about the taxpayer’s taxable income, identify the tax payable, and intend that his determination be final: Golden Bay Cement Co Ltd v Commissioner of Inland Revenue [1995] 3 NZLR 475 at 483 (HC). It is the substance rather than the form of the decision that matters.

[20]     The legislation contemplates that the taxpayer must be given notice of the assessment as soon as is convenient after it has been made: s 111 Tax Administration Act.  Such notice is necessarily subsequent in time to the assessment itself: Hyslop v Commissioner of Inland Revenue [2001] 2 NZLR 329 at [22] (CA); and Wire Supplies Ltd v Commissioner of Inland Revenue [2007] 3 NZLR 458 at [43] (CA).

[21]     However, the validity of an assessment does not depend on the taxpayer receiving notice of it: Hyslop at [20]. It remains valid although the Commissioner omits to give notice: s 111(6) Tax Administration Act. Indeed, the assessment is generally unaffected by non-compliance with the provisions of the Inland Revenue Acts: s 114 Tax Administration Act. Notice of an assessment plainly may evidence an assessment, but it is a separate step, ancillary to the assessment itself.

[22]     Liability to pay the tax assessed arises when the assessment is made, but the notice has important procedural consequences.  The response period within which an assessment must be challenged does not begin until notice is issued: s 138(B)(1) Tax Administration Act.

The assessments in this case

[23]     Mr Hayes’ complaint about the notices of 26 September 1996 would have had some substance, if the assessment process had ended at that date.  It did not.  As the TRA found, the process continued until 15 October, at which point a final decision had been made regarding the amount of tax payable and the taxpayers were notified of the Commissioner’s decision.  The assessments were then amended as at February 1997, and again notified.

[24]     Mr Hayes argued that the statements of account issued in October and February could not amount to notice of assessments.  We do not agree. No particular form of notice is prescribed under s 111.  The documents set out for each taxpayer in each year the original assessment, adjustments to the assessment, and the total amount of tax due.  They are to be read with the “notices of assessment”, which set out the amount on which tax was payable. 

[25]     We further agree with Duffy J that the parties themselves treated the assessments in this way.  The deed referred to notices of assessment of 26 September 1997 and 20 February 1997, but those documents were merely part of the assessment process, and the deed was plainly intended to allow the Hensons to challenge the Commissioner’s assessments for the years in question.  They did so, and the TRA addressed the correctness of the assessments without objection from the appellants.

[26]     Section 138B of the Tax Administration Act supplies the TRA with jurisdiction to determine a challenge to an assessment.  Such a challenge is brought to the assessment, not the notice of assessment.  The notice determines the period within which the challenge proceeding must be brought.  If notice has not been given, time will not begin to run against the taxpayer but the assessment remains.  Because there were both assessments and notices of those assessments for the relevant years, there can be no doubt that the TRA had jurisdiction in this case. 

Decision

[27]     The appeal is dismissed.

[28]     The appellants (jointly and severally) must pay the respondent costs for a standard appeal on a band B basis and usual disbursements.

Solicitors:
Brook Law, Hamilton for Appellants
Inland Revenue, Wellington for Respondent