King v Commissioner of Inland Revenue

[2022] NZHC 2432

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE

CRI 2022-441-11

[2022] NZHC 2432

BETWEEN

SHANE JOHN KING

Appellant

AND

COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:	18 August 2022
Counsel:	D J O’Connor for Appellant C R Walker for Respondent
Judgment:	22 September 2022

JUDGMENT OF MALLON J

Introduction

[1]    The appellant, Shane King, faces 10 charges of evading or attempting to evade the assessments or payment of tax by him or another person.1 They relate to the failure of Mr King’s company, Forest Export Management Limited (FEM), to account for GST. Mr King was an undischarged bankrupt for part of the period covered by the charges. He applied to the District Court to have these charges dismissed on the basis that a bankrupt cannot file returns.2 The District Court declined to dismiss the charges.3

1      Tax Administration Act 1994, s 143B(2).

2      He also applied to have them dismissed on other grounds that were unsuccessful and not pursued on appeal. He was originally charged with aiding and abetting FEM to knowingly not provide information (pay as you earn (PAYE) returns and employer monthly schedules and deduction forms) between April 2016 and April 2017. These charges were withdrawn and dismissed.

3      Commissioner of Inland Revenue v King [2022] NZDC 8682 (per Judge B M Mackintosh) at [51].

KING v COMMISSIONER OF INLAND REVENUE [2022] NZHC 2432 [22 September 2022]

[2]    The appellant seeks leave to appeal the District Court’s decision on a question of law.4 He poses two questions of law:

(a)Whether a bankrupt can be liable for an omission to act (failing to file GST returns on behalf of a company) when he had a legal duty not to act and it was a criminal offence under s 149 of the Insolvency Act 2006 to do so without leave from the Official Assignee or a court order.

(b)Whether a bankrupt can be an agent for a company and liable to pay GST for the company when a bankrupt is an incapacitated person under s 58 of the Goods and Services Tax Act 1985.

[3]    I grant leave to appeal the District Court decision. I accept that the appellant has raised legal questions that are potentially relevant to whether the 10 charges can proceed. It is desirable to have the legal questions determined before Mr King is tried on these charges. I note that the questions of law stated by the appellant may be amended or restated by this Court if it is necessary or desirable to do so.5

Background

Summary of facts

[4]    FEM was incorporated on 3 March 2010. Mr King was the sole director of FEM from 1 June 2013.

[5]    FEM held contracts with forest owners to fell and remove pine trees for export. It was registered for GST on a two-monthly basis from 3 March 2010 and had a taxable activity from that date. FEM accounted for GST on an invoice basis from 28 August 2014 and was required to file GST returns by the relevant due dates. From 2012 until July 2015, FEM engaged an accountant to comply with its GST obligations.

[6]    From September 2015, FEM continued to trade. GST invoices were issued under FEM’s name and its GST number. However, customers receiving these invoices

4      Criminal Procedure Act 2011, s 296(2) and (3)(b).

5      Section 299.

were required to make payment into Mr King’s personal account instead of FEM’s bank account.

[7]    Mr King was adjudicated bankrupt on 26 May 2016. Mr King did not obtain the Official Assignee’s permission to manage or control FEM following his bankruptcy. He continued to issue invoices to customers under FEM’s name, charging GST and using FEM’s GST number. He received payments from customers. He retained the GST component of the invoice and did not file GST returns for them.

[8]    For the GST periods ending between 30 September 2015 and 31 March 2017, 10 GST returns were due: on 28 October 2015, 15 January 2016, 28 February 2016, 7 May 2016, 28 June 2016, 28 August 2016, 28 October 2016, 15 January 2017,     28 February 2017 and 7 May 2017. Although Mr King continued to issue GST invoices under FEM’s name and using FEM’s GST number, he did not file GST returns for these 10 GST periods. Inland Revenue has determined that GST of at least

$38,932.33 ought to have been paid over these GST periods.

[9]On 3 October 2019 Mr King was automatically discharged from bankruptcy.

[10]   On 7 September 2020 Inland Revenue administratively ceased FEM’s GST registration and backdated this to 31 March 2016.

2018 conviction

[11]   On 23 July 2018 the Official Assignee brought three charges against Mr King. These charges were for: concealing the contents of two bank accounts; wilfully misleading the Official Assignee; and failing without reasonable excuse to comply with s 149 of the Insolvency Act 2006 by taking part in the management or control of a business without the consent of the Official Assignee or the Court. He pleaded guilty to the charges and on 5 December 2018 he was sentenced to 150 hours’ community work.

GST charges

[12]   On 18 November 2020 Inland Revenue charged Mr King with several offences. Some of the charges were subsequently withdrawn or dismissed by the District Court.6 The remaining charges relate to GST.

[13]There are two charging documents. As currently framed they each allege:

5 x offences against s 143B(2) of the Tax Administration Act 1994 in that he evaded or attempted to evade the assessments or payments of tax by the person or another person under a tax law to the sum of … for the Goods and Services Tax periods set out in the attached schedule.

[14]   The first of these (for alleged offending between 29 October 2015 and 30 June 2016) was for a sum of $17,901.11. The second of these (for alleged offending between 29 August 2016 and 9 May 2017) was for the sum of $21,742.22. The Schedules to each of them set out the details of the five offences covered by the charging document with dates for the relevant GST periods, the date the alleged offence was committed and the amount of tax evaded for each period. The earliest charged offending was for the period ended 30 September 2015, with a date the offence was committed of 29 October 2015 and GST evaded for that period of $770.09. The latest was for the period ended 31 March 2017, with a date the offence was committed of 8 May 2017 and GST evaded for that period of $3,996.

District Court

[15]   Mr King sought to have these charges dismissed on several grounds. The relevant ground to this appeal was that he could not be liable for evading GST because, pursuant to s 149 of the Insolvency Act, it was a criminal offence for him, as a bankrupt, to file returns.

[16]   The Judge regarded this as an argument that it would be an abuse of process to allow the charges to proceed.7 She considered that, as Mr King was running FEM and invoicing for GST on behalf of FEM, he was liable to pay GST as FEM’s agent.8 The

6      Commissioner of Inland Revenue v King, above n 3, at [31]–[33] and [50].

7 At [11].

8 At [15].

charges were therefore fairly open and Inland Revenue was not acting with an improper motive even though filing the returns would create liability under the Insolvency Act.9 It would also be contrary to the interests of justice if a bankrupt who controlled or managed a company to some degree, and who did not file tax returns, could not be charged for evading tax.10

[17]   The Judge also considered that there was a prima facie intention to evade tax in relation to the four charges pertaining to the period before Mr King was adjudicated bankrupt. These charges related to GST returns due on 29 October 2015, 16 January 2016, 29 February 2016 and 8 May 2016. As the charges were not filed until 2020, the returns had been outstanding for over five years. This was prima facie evidence of an intention to evade tax in the Judge’s view.11

Appeal

[18]   On appeal, Mr King submits that the actus reus of the charges is the failure to file GST returns. This is because the charge refers to evading or attempting to evade tax “under a tax law” and the Schedules specify the dates that GST returns were due but were not filed. Mr King submits that the Judge’s focus on whether the charges were an abuse of process meant that she failed to consider whether Inland Revenue could prove the actus reus.

[19]   Mr King says that Inland Revenue cannot prove the actus reus because he had no duty to file the GST returns. Rather, he had a duty not to file them as it would be a criminal offence to do so without the Official Assignee’s consent or a court order. He says the Official Assignee and Inland Revenue knew that no returns had been filed. The Official Assignee was in control of the company when Mr King was bankrupt and did not give consent to Mr King to file returns on behalf of FEM. Further, the Official Assignee and Inland Revenue could have, but did not, apply for a court order allowing him to file the returns.

9 At [16].

10 At [17].

11     At [44]–[49].

[20]   I do not accept this submission. The charges are brought under s 143B(2) of the Tax Administration Act 1994. This provides that “[a] person who evades or attempts to evade the assessment or payment of tax by the person or another person under a tax law commits an offence”. The charged offences are of Mr King evading or attempting to evade the assessment or payment of tax (GST), by a person (Mr King) or another person (FEM), under a tax law (the Goods and Services Tax Act) for the periods set out in the Schedules. The Schedules set out the GST periods over which GST was liable for assessment and the dates the GST returns were due but not filed.

[21]   The offence is therefore proven if Mr King intentionally evaded or attempted to evade the assessment or payment of GST by FEM under the Good and Services Tax Act.12 Inland Revenue alleges that Mr King issued GST invoices to FEM’s customers using FEM’s name and GST number; received payments from those customers, including a GST component, that were paid into the bank account directed on those invoices which was Mr King’s personal bank account; used the funds received, including the GST component, for his or FEM’s purposes; FEM was liable to account to Inland Revenue for the GST and to file returns whether FEM was registered for GST or not; and neither FEM nor Mr King accounted for GST or filed returns.

[22]   If Inland Revenue proves these facts for the relevant periods, then the actus reus is proven. I therefore do not accept the submission that the actus reus of the offence cannot be proven. The charges will be proven if the mens rea of intentionally avoiding the payment of tax is also proven.

[23]   Mr King further submits that the Judge found that Mr King was liable to pay FEM’s GST returns himself. He says the Judge’s reasoning was that, because FEM’s GST deregistration had been backdated to 31 March 2016, Mr King became liable to pay the GST himself as FEM’s agent. He submits that the Goods and Services Tax Act does not create retrospective criminal liability for a bankrupt if a company is deregistered for GST and that deregistration is backdated by Inland Revenue. He repeats that, as a bankrupt, he was incapacitated from, and therefore not liable for, paying the GST returns.13

12     See Goods and Services Tax Act 1985, s 2 (definition of “person”) which includes a company.

13     Mr King relies on Goods and Services Tax Act, s 58.

[24]Section 51B of the Goods and Services Tax Act provides:

51B     Persons treated as registered

(1)For the purposes of Parts 3 and 6, and of Part 9 of the Tax Administration Act 1994, the following are treated as registered persons making supplies in the course or furtherance of a taxable activity:

(a)a person who is not otherwise a registered person but who supplies goods or services, representing that tax is charged on the supply:

…

(2)If a person referred to in subsection (1) represents that tax is being charged on a supply that they make in a taxable period, the person is liable to pay the amount of tax.

…

[25]   The effect of s 51B is that, if FEM was making supplies in the furtherance of a taxable activity and representing that GST was charged on the supply, then FEM is treated as being registered for GST and is liable to pay the amount of GST being charged. As Mr King was the person operating FEM when it was making supplies and representing that GST was charged on those supplies, he can be liable for evading or attempting to evade the payment of GST on those supplies under s 143B(2) of the Tax Administration Act.

[26]   I therefore reject Mr King’s submissions that the fact of his bankruptcy means that he cannot be liable for the charges brought against him. The charges concern evading or attempting to evade tax. The fact that Mr King was allegedly operating FEM when he was prohibited from doing so is not relevant to whether he was evading or attempting to evade the payment of GST. A GST liability arose because invoices for supplies were issued in FEM’s name; those invoices included a GST component; and payment of that charged GST was received (into Mr King’s personal bank account).

[27]   The questions of law posed by the appellant are not the appropriate ones for the charges that have been brought. The relevant question of law is whether a bankrupt can be charged for evading or attempting to evade the payment of GST when that

bankrupt has operated a company that has charged and received GST on taxable supplies. The answer to that question is “yes”.

Result

[28]   Leave to appeal on a question of law is granted. The relevant question is “whether a bankrupt can be charged for evading or attempting to evade the payment of GST when that bankrupt has operated a company that has charged and received GST on taxable supplies”. The answer to that question is “yes”.

Mallon J