Lawton v Commissioner of Inland Revenue

IN THE COURT OF APPEAL OF NEW ZEALAND

CA26/02

BETWEEN	RONALD GEORGE LAWTON
Appellant

AND	COMMISSIONER OF INLAND REVENUE
Respondent

Hearing:	29 October 2002
Coram:	Keith J McGrath J Glazebrook J
Appearances:	M S Hinde for Appellant R J Ellis and K Parkash for Respondent
Judgment:	19 December 2002

JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J

Introduction

Mr Lawton is a builder. In 1986 he began what turned out to be a disastrous foray into the share market, sustaining over the period up to the end of the 1992 income year losses of $566,183.33 and interest costs of $281,020.00. It was only in the income tax years ended 31 March 1987 and 1989 that he made any profits (of $34,272.74 and $41,378.68, but not counting the interest expense in those years of $23,085.00 and $9,646.00 respectively).
Mr Lawton’s evidence is that until 1993 he took the view that any profits or losses from the sale of shares and all associated interest costs were on capital account and therefore did not include any of the profits or losses or interest expense in his income tax returns over the period. He did include all dividend income received.
Mr Marley, Mr Lawton’s accountant, prepared both his personal and business income tax returns. As Mr Lawton took the view that his share transactions were on capital account he did not disclose his losses to Mr Marley. It is now agreed that Mr Lawton’s activities in the share market over those years were on such a scale that he was trading in shares and it may be assumed that Mr Marley would have advised him accordingly if he had disclosed his activities earlier.
As a result of the publicity in 1993 regarding this Court’s decisions in CIR v Inglis [1993] 2 NZLR 29 and CIR v Stockwell [1993] 2 NZLR 40 Mr Lawton finally consulted Mr Marley who advised him that his share transactions were on revenue account. Mr Marley prepared a schedule of Mr Lawton’s transactions and a schedule showing the consequent income tax adjustments for each income year. He sent these to the Commissioner on 26 August 1993, asking the Commissioner to make the necessary adjustments and to issue reassessments.
The Commissioner, through Mr Appleton, a senior technical officer, wrote on 12 November 1993 advising that the Commissioner declined to exercise his discretion and that the original assessments would stand, Mr Marley’s letter having been treated as a late objection under s30(2) of the Income Tax Act 1976 (“the Act”). Correspondence, meetings and reviews ensued, continuing until early 1998, but to no avail. The Commissioner maintained his stance in relation to the income years up to the 1992 income year. Mr Lawton’s losses for the year ended 31 March 1993 have, however, been allowed.
In June 2001 Mr Lawton filed proceedings seeking judicial review of the Commissioner’s decision not to reassess. We note that, while the correctness of the assessment cannot be challenged outside the statutory objection procedures, the legitimacy of the process employed in making the decision not to reassess and not to accept a late objection is justiciable on traditional administrative law grounds; see CIR v Wilson (1996) 17 NZTC, 12,512 at 12,520.
It is agreed that the relevant decision under review is that conveyed in the letter of 12 November 1993, although the Commissioner maintains that, if there were any deficiencies in that decision, they were remedied by the subsequent reviews.
Mr Lawton’s application for judicial review was dismissed by Randerson J on 19 December 2001, now reported at (2002) 20 NZTC 17,531. It is Randerson J’s decision that is now under appeal.
Mr Lawton argues that the Commissioner has a statutory duty to assess omitted income under s19 of the Act. In the alternative he submits that refusal to assess the omitted income was not a proper exercise of the Commissioner’s discretion under either s23 or s30(2) of the Act. The Commissioner disputes both these assertions and argues in addition that, even if Mr Lawton were successful, relief should be denied because of the unacceptable delay in filing proceedings.
The issues for the Court therefore are:
(a)Does the Commissioner have a statutory duty to assess omitted income?
(b)Was the decision of 12 November 1993 a valid exercise of the Commissioner’s discretion?
(c)If not, were any errors rectified in the subsequent reviews?
(d)If there are grounds for review should the delay in the filing of the proceedings lead to the denial of relief?

Statutory background

Mr Lawton’s case falls to be considered under the provisions of the Income Tax Act. For ease of reference the relevant parts of the provisions (as they were for most of the period in question) are set out below:

9     Annual returns by taxpayers
Subject to this Act or any regulations under this Act, every taxpayer shall for the purposes of the assessment and levy of income tax furnish to the Commissioner in each year a return or returns in the prescribed form or forms setting forth a complete statement of all the assessable income derived by him during the preceding year, together with such other particulars as may be prescribed.
19     Commissioner to make assessments, determinations of loss, and other determinations
(1)     From the returns made as aforesaid and from any other information in his possession the Commissioner shall in and for every year, and from time to time and at any time thereafter as may be necessary, make assessments in respect of every taxpayer of the amount on which tax is payable and of the amount of that tax.
23     Amendment of assessments
(1)     The Commissioner may from time to time and at any time make all such alterations in or additions to an assessment as he thinks necessary in order to ensure the correctness thereof, notwithstanding that tax already assessed may have been paid.
(2)     If any such alteration or addition has the effect of imposing any fresh liability or increasing any existing liability, notice thereof shall be given by the Commissioner to the taxpayer affected.
25     Limitation of time for amendment of assessment
(1)     When any person has made returns and has been assessed for income tax for any year, it shall not be lawful for the Commissioner to alter the assessment so as to increase the amount thereof after the expiration of 4 years from the end of the year in which the assessment was made.
(2)     Notwithstanding subsection (1) of this section, in any case where, in the opinion of the Commissioner, the returns so made are fraudulent or wilfully misleading or omit all mention of income which is of a particular nature or was derived from a particular source, and in respect of which a return is required to be made, it shall be lawful for the Commissioner to alter the assessment (being an assessment made on or after the 1st day of April 1958) at any time so as to increase the amount thereof.
27     Assessments deemed correct except in proceedings on objection
Except in proceedings on objection to an assessment under Part 3 of this Act, no assessment made by the Commissioner shall be disputed in any Court or in any proceedings (including proceedings before a Taxation Review Authority) either on the ground that the person so assessed is not a taxpayer or on any other ground; and, except as aforesaid, every such assessment and all the particulars thereof shall be conclusively deemed and taken to be correct, and the liability of the person so assessed shall be determined accordingly.
30     How objections to assessments originated
(1)     Any person who has been assessed for income tax may object to that assessment by delivering or posting to the Commissioner a written notice of objection stating shortly the grounds of his objection, within such time as may be specified in that behalf in the notice of assessment, not being less than 14 days after the date on which that notice of assessment is given.
Provided that, where the assessment is an amended assessment, the person so assessed shall have no further right of objection than he would have had if the amendment had not been made, except to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased.
(2)     No notice of objection given after the time specified in the notice of assessment shall be of any force or effect unless the Commissioner in his discretion accepts the same and gives notice to the objector accordingly.
31     Commissioner may amend assessment, or objections may be submitted to Taxation Review Authority
(1)     The Commissioner shall consider all such objections, and may alter the assessment pursuant thereto.
35     Determination of objection not to affect other income
The determination of an objection under this Part of this Act shall relate solely to the income which is the subject of the assessment objected to, and shall not affect the right of the Commissioner to assess any other income of the objector, or to amend the assessment objected to in any manner rendered necessary by the assessment of such other income.
38     Income tax imposed
(1)     Subject to this Act, there shall be levied and paid for the use of the Crown for the year commencing on the 1st day of April in each year, a tax herein referred to as income tax.
(2)     Subject to this Act, income tax shall be payable by every person on all income derived by him during the year for which the tax is payable.
(3)     The year in which income is so derived is in this Act referred to as the income year, and the year for which income tax is payable is in this Act referred to as the year of assessment.
409     Refund of excess tax
(1)     Subject to sections 394M, 394ZO, 394ZZX, and 394ZZZJ of this Act, in any case where the Commissioner is satisfied that tax has been paid in excess of the amount properly payable, he shall refund the amount paid in excess:
Provided that, … no refund shall be made under this section after the expiration of the period of 8 years immediately after the end of the year in which the assessment was made or, in any case where the original assessment has been altered (whether once or more than once), after the end of the year in which the original assessment was made, unless written application for the refund is made by or on behalf of the taxpayer before the expiration of that period.

Does the Commissioner have a statutory duty to assess omitted income?

Mrs Hinde, for Mr Lawton, bases her argument on this head on the scheme of the Act. She starts with s38 which imposes income tax on all income derived by a taxpayer in an income year and points out that the scheme of the Act is that the charge to tax is independent of any assessment; see Hawkes Bay Hide Processors of Hastings v CIR [1990] 3 NZLR 313 at 318. She then turns to s9, which requires annual returns of income by taxpayers, and says that returns must be made even if there is no net income but rather a loss; see CIR v Grover [1987] 2 NZLR 736 . Mr Lawton therefore was obliged to include in his returns the income (and associated expenditure) from his share trading activities, income wholly omitted in his filed returns.
Mrs Hinde then turns to s19 and the assessment process, pointing out that the Commissioner’s role is one of quantification and collection of income tax and that it is his statutory duty to see that income is assessed and collected; see New Zealand Stock Exchange v CIR [1992] 3 NZLR 1, 3 and Brierley Investments Ltd v Bouzaid [1993] 3 NZLR 655, 659. Once income has been returned (or otherwise identified by the Commissioner) and assessed she submits that the Commissioner’s fundamental obligation to assess that income is satisfied. He then has a discretionary power to amend the assessment of that known income under s23. The taxpayer also has a right of objection under s30 where there is a dispute over the amount assessed. Here she points out there is no dispute. The Commissioner agrees that Mr Lawton was a share trader and therefore it was not open to the Commissioner to treat Mr Marley’s letter as an objection. This is in contrast to what she characterises as a true late objection case where the Commissioner does not accept the taxpayer’s position.
Mrs Hinde points out too that there are time limits with regard to this process. Under s25 an assessment cannot be amended after four years where full and honest returns have been made. There is no time limit for the Commissioner decreasing an assessment or increasing it if returns were fraudulent, wilfully misleading or omitted all mention of income which was of a particular nature or was derived from a particular source. Where income has not been subjected to assessment (as in Mr Lawton’s case given that the Commissioner did not know of the income until receipt of Mr Marley’s letter), the Commissioner therefore has not fulfilled his statutory duty and is obliged to assess that income when its existence becomes known. Mrs Hinde points out, however, that there is a time limit of 8 years on any refunds of tax under s409.
Mrs Hinde draws further support for her contention that there is a distinction between the power to amend returns under s23 and the duty to assess omitted income under s19 from the terms of s35, which provides that the determination of an objection relates solely to the income which is the subject of the assessment objected to “and shall not affect the right of the Commissioner to assess any other income of the objector”.
Randerson J at para [59] rejected the contention that there was a statutory duty to assess omitted income under s19. The obligation was to make an assessment from the returns and other information in and for every year. The reference to further assessments from time to time and at any time thereafter is to a discretionary power and does not impose an obligation on the Commissioner. He held that it is for the Commissioner to decide whether subsequent assessments “may be necessary” and that the discretionary language of ss23, 25(2), 31(1) and 35 supports this construction.
He further held, at para [57], that the Commissioner was entitled to treat Mr Marley’s letter of 26 August 1993 as an application for consideration of a late objection in terms of s30(2) and that the fact that the details of the share trading had been wholly omitted from the returns filed did not affect that conclusion. Randerson J had earlier in his judgment at para 47 rejected the contention (although Mrs Hinde says that was never her argument under this head) that there was a statutory duty to reassess under s23. In giving the reasons for that conclusion he stressed the discretionary wording in both s23 and s30 and held that the power available under those provisions cannot be elevated to the point of a statutory duty. He referred in this regard to this Court’s decision in CIR v Wilson (supra).
Mrs Hinde’s analysis relies on drawing a distinction between the situation where income has been returned but there is a dispute over the assessment (which she says is subject to ss23 and 30 of the Act) and where income has been wholly omitted (which she says is not subject to ss 23 and 30 but instead triggers the Commissioner’s statutory duty to assess under s19).
We see no warrant, either in the legislation or in policy terms, for such a distinction to be made. We acknowledge that one interpretation of s19 may be that an assessment is made for each income year and that further assessments are made as necessary. The section therefore can be read as contemplating multiple assessments for any particular income year.
Despite the possible reference in s19 to multiple assessments, we consider that the scheme of the legislation is rather that the Commissioner makes an assessment for an income year based on the returns and other information he has at the time and is obliged to make that assessment. Later he may make such alterations or additions to the assessment as he thinks necessary to ensure the correctness thereof – see s23(1) – subject of course to the time limits in s25.
As indicated above, Mrs Hinde submits that a further and separate assessment must be made when the Commissioner is alerted to income which has not been returned and which would come within the categories of income in s25(2). That the Commissioner is in such circumstances rather altering or amending an existing assessment is supported by the very provision Mrs Hinde is relying on to support her argument. Section 25(2) provides that, where a return omits all mention of income which is of a particular nature or was derived from a particular source, “it shall be lawful for the Commission to alter the assessment … at any time so as to increase the amount thereof” (emphasis added).
Neither does s35, when read in full, support her contention. That section speaks not only of the right of the Commissioner to assess any other income but also of the right “to amend the assessment objected to in any manner rendered necessary by the assessment of any such other income” (emphasis added).
In addition, the distinction Mrs Hinde seeks to draw would seem to favour taxpayers who have not fulfilled their statutory obligations to file a complete return as against those who did fill a complete return. This cannot be in accordance with the policy behind the legislation.
This means that s19 has no application. Sections 23 and 30 are the relevant sections. Mrs Hinde accepts (as she must in the light of this Court’s decision in CIR v Wilson) that the Commissioner is not under a statutory duty to reassess under s23. While (subject to the time limits in s25) he can reassess under s23, either on his own motion or if a taxpayer so requests, there is no obligation for him to do so. We agree with Randerson J that the Commissioner is entitled in a case such as the present to treat any request to reassess as a late objection.
Mrs Hinde’s argument on this head fails.

Was the decision of 12 November 1993 a valid exercise of the Commissioner’s discretion?

Mr Appleton was the Inland Revenue Department officer responsible for replying to Mr Marley’s letter of 26 August 1993 asking the Commissioner to issue amended assessments to take into account the share losses. In his affidavit of 23 August 2001 he states that he began his decision making process by checking on the Department’s computer system the dates on which the Commissioner had issued assessments to Mr Lawton for the years 1987 to 1992. He therefore ascertained and noted on the computer records that the objections for all those years were late.
He then deposes that he considered the High Court decision of Gisborne Mills Ltd v CIR (1989) 11 NZTC 6,194. He noted on the system that the taxpayer had not previously sought to claim that his share losses were deductible but was merely seeking to take advantage of recent court cases. He wrote also that he was of the opinion that there were insufficient grounds to accept the late objection and stated that a letter was issued advising that the late objection had not been accepted. The letter of 12 November 1993 sent to Mr Marley merely advised that the Commissioner had considered whether to treat Mr Marley’s letter of 26 August 1993 as a late objection but that the Commissioner had declined to exercise his discretion.
It is clear from the above that Mr Appleton, in coming to his decision, considered only the lateness of the objections and the comments in Gisborne Mills as to taking advantage of a court decision. He did not consider the merits of Mr Lawton’s position. Indeed, if he had done so, it would have been obvious from the material provided by Mr Marley that Mr Lawton’s position was very different from the taxpayer’s in CIR v Inglis (or indeed in CIR v Stockwell [1993] 2 NZLR 40). It is agreed that Mr Lawton was a share trader and that his share trading activities had been on revenue account for the whole of the period. Therefore, while Mr Lawton may have been prompted to ask Mr Marley’s advice because of publicity about recent court cases, he was not “taking advantage” of those decisions. His losses would have been on revenue account even if those decisions had gone against the taxpayers.

This Court in CIR v Wilson held that the merits of a proposed objection must be considered unless the explanation for the lateness of the objection is so inadequate that this is unnecessary. As this Court pointed out in CIR v Wilson (at 12,521) it is important in a system which relies on voluntary compliance for the Commissioner to be seen to be operating fairly, and this will in many circumstances mean that the merits of a taxpayer’s position will be a material factor to be weighed.
We do not consider this to be a case where examination of the merits was not required. The explanation for lateness in this case was that Mr Lawton had not realised that the transactions were on revenue account. In such a case, unless this explanation was palpably untrue or quite unjustified, it would be rare for the explanation to be deemed so inadequate that the merits need not be examined. It would be difficult in any event to assess whether that explanation was adequate or reasonable without considering the merits at all. In this case Mr Appleton did not even consider whether he should examine the merits. We thus conclude that the decision, as set out in the letter of 12 November 1993, was not a valid exercise of the Commissioner’s discretion.

Was this error rectified in the subsequent reviews?

We conclude that the failure to consider and properly weigh the merits was not rectified in the subsequent reviews. The next communication with Mr Lawton was a letter of 20 January 1994 from Mr Appleton. As is set out below there had been no consideration of the merits at that stage. The next communication with the taxpayer was a further letter from Mr Appleton dated 3 August 1994. That letter provided no elaboration on the reasons for the decision not to accept the late objection. When one examines the internal Departmental documents, however, Mr Appleton still does not appear to have examined the merits before sending the letter. As indicated in more detail below, a Departmental solicitor, Ms Langston, did set out the merits but failed to give any weight to these at all as she was rigidly following Departmental policy that she interpreted as requiring refusal of Mr Lawton’s late objection request. She thus also failed properly to consider and weigh the merits.
It is also clear that the ultimate decision maker, the Regional Controller, did not consider the merits before the 3 August 1994 letter was sent. This is evident from a minute she wrote in September of that year expressing some disquiet at a continuing refusal to accept the late objection if the merits of Mr Lawton’s position were clear. In the end, however, she was persuaded to adhere to Departmental policy. She thus clearly did not properly consider and weigh the merits. There was some further communication with Mr Lawton in 1995 and subsequently but no evidence that the merits were at any time considered and properly weighed. We now set out the subsequent dealings with the Commissioner in more detail.
Mr Marley responded to the letter of 12 November 1993 on 20 December of that year. He expressed his surprise that the Commissioner had not reassessed on the basis of the amended figures and asked for an opportunity to discuss the matter with the Department in the New Year.
Mr Appleton, after consulting with Ms Langston, on 20 January 1994 sent the letter referred to above to Mr Marley. In that letter Mr Appleton advised that, after careful consideration, it had been decided not to accept the late objection. He noted that no attempt had been made to notify the Commissioner of the possibility of claiming a deduction for share losses before August 1993. He then referred to a pamphlet entitled “Taxation of Profits from Selling Shares”. He stated that the policy was well publicised at the time and that the comments in that pamphlet relating to deductibility of losses where shares were acquired for the purpose of sale were consistent with the recent Court decisions. He went on to say that, given the volume of transactions and the amount of money involved, it is unlikely that the matter would have been overlooked when the original returns were furnished and finished by referring to the comments of Robertson J in Gisborne Mills about a taxpayer “who, having never contemplated seeking a benefit under the taxing legislation, endeavours to take advantage of a matter when they become aware of a decision affecting another taxpayer” (at 6,202). He noted at the end of the letter that he had discussed the matter with a solicitor from the Regional office and that she would be available for a meeting if required.
A meeting duly took place in early May 1994 and Mr Appleton then prepared a report dated 27 May 1994 for the Regional Controller of the Inland Revenue Department’s (“IRD”) Northern Region. Mr Appleton’s report referred to s23 and indicated that the Commissioner would generally take a liberal view to re-opening assessments where there was a clear entitlement to the claim but it had been inadvertently overlooked when the return was prepared. He concluded that the application of s23 would not be appropriate as the large sums involved “would hardly be likely to have slipped the mind of the taxpayer”.
He went on to discuss the discretion to accept late objections. He said that the grounds under which late objections will be given favourable consideration are not applicable as they essentially relate to circumstances where the Commissioner has made adjustments to an assessment and the taxpayer has not objected within the time limits due to their particular circumstances. Finally he again considered the application of Gisborne Mills. He concluded that Mr Lawton appeared to be within the category of persons seeking to take advantage of a matter when becoming aware of a decision affecting another taxpayer. He recommended that the decision not to accept the late objection be reconfirmed.
Randerson J concluded (at paras [24] and [25] of his judgment) that up to this point there is nothing in the written material to suggest that Mr Appleton or anyone else in the IRD had considered the merits of Mr Lawton’s position. He noted that Mr Appleton did say in his affidavit in reply of 23 August 2001, para 19, that he had considered the merits of the objection when addressing the IRD’s pamphlet on the taxation of share transactions referred to in his letter of 20 January 1994. Randerson J held that, in the absence of any specific documentary evidence to support that conclusion, he found Mr Appleton’s statement difficult to accept. We agree. We note in any event that Mr Appleton’s reference in his letter of 20 January 1994 to the position where shares had been bought for the purpose of sale rather than to that part of the pamphlet dealing with share traders would support the proposition that he had not examined the merits, it being agreed that Mr Lawton’s activities amounted to share trading.
As well as Mr Appleton’s report of 27 May 1994, a legal opinion from Ms Langston dated 20 June 1994 appears to have been provided to the Regional Controller. Randerson J (at para 63) said that, were it not for this opinion which considered the merits and had clearly had an input into the Regional Controller’s decision, he would have decided that the Commissioner should reconsider the original decision for failure to address the issue of the merits of the amended assessment sought. We thus now examine Ms Langston’s opinion to see if it did rectify the earlier failure to examine the merits. We note here that Ms Langston had had input into the earlier decision and thus we would need to be satisfied that she did consider the matter afresh in a proper manner.
It is true that Ms Langston’s opinion of 20 June 1994 did set out the merits of Mr Lawton’s position and reached the conclusion that Mr Lawton was a share trader and therefore entitled to a deduction for losses incurred. She said that, although the claim for a deduction was made following publicity given to share trading cases, “its acceptance would not amount to a retrospective application of the law as the taxpayer would have been entitled to a deduction under s104(b) if he had made a claim”. She thus appears to conclude that the comments of Robertson J in Gisborne Mills relied on by Mr Appleton had no application in Mr Lawton’s case.
She went on to refer to the internal IRD Tax Rulings which stated that a more liberal view may be taken to a request to re-open an assessment where a taxpayer has inadvertently overlooked making a claim for a deduction, rebate or other benefit, but that that approach was limited to cases where a clear entitlement to the claim existed. By reference to the dictionary and case law (almost as if she considered the ruling to have legislative force) she concluded that “ignorance of the law, indeliberate [sic] actions or negligence may fall within inadvertence”. Thus she concluded that, if a taxpayer decided not to return share profits or claim losses because he was not aware of his obligation or entitlement, then he inadvertently overlooked to make a claim.
She went on to apply this to Mr Lawton’s case. She concluded that it was difficult to comprehend that neither Mr Lawton nor his advisers realised that the scale, volume and frequency of share transactions could constitute a share dealing business, particularly because Mr Lawton was a businessman involved in farming and other business activities as well as his construction business. She suggested that Mr Lawton had decided not to treat his share dealing activities as a business because he had made considerable profits in the first year of trading and then again in the 1989 year and hoped that this trend would continue. She then went on to say that Mr Lawton had access to professional advice, which he had sought for almost all his business activities but had decided not to seek in respect of his share dealing activities. She also said that, in the light of the considerable dividend income, a professional advisor should have inquired of his client as to the extent of his shareholdings. She concluded that Mr Lawton knew or ought to have known the tax implications but was influenced by other considerations not to make a claim at the relevant time and recommended that the late objection be declined.
We agree with Randerson J that Ms Langston did set out the merits in her opinion of 20 June 1994. She appears, however, to have given no weight to those merits because she was rigidly following the IRD policy that late objections should not be accepted unless a taxpayer had inadvertently overlooked making a claim. She had concluded that Mr Lawton did not fall within this category of taxpayers.
Ms Langston had set out in her opinion that the case British Oxygen Company Ltd v Board of Trade [1971] AC 610 was authority for the proposition that the Commissioner, while entitled to follow a policy, is required in law always to be willing to depart from that policy in an appropriate case. She does not, however, appear to have considered (as she should have done) whether it was appropriate to depart from the IRD policy, given the strength of the substantive merits. We note that Ms Langston commented in her opinion that “if the case goes to judicial review proceeding (sic), the taxpayer is most likely to receive sympathetic consideration from the Court”. This rather suggests that Ms Langston was concerned that by strictly adhering to its policy, the IRD might not be properly exercising its discretion.
Ms Langston’s opinion contained speculation as to Mr Lawton’s and Mr Marley’s motives and actions, drawing conclusions adverse to both. While it was quite in order for Ms Langston to consider whether Mr Lawton ought to have known about the taxation status of his share transactions, we consider it was also necessary for her (or the ultimate decision maker) to consider whether he did in fact know and whether her conclusions that he ought to have known were based on fact.
We note in passing that some of the evidence now before the Court can be seen as throwing some doubt on her conclusions (and that some of this would have been available at the time of the decision). Ms Langston appears to have considered that Mr Lawton knew or should have known about the taxation consequences of his share trading because he was a businessman with access to professional advice. Both Mr Lawton and Mr Marley have deposed that Mr Lawton did not take advice on this matter. Mr Lawton has also deposed that he is a hands-on builder who left school at 13 rather than a businessman in the sense the term was used by Ms Langston. While he had been involved in a number of special partnerships these had been passive investments not requiring him to have any involvement other than to pay when required. We do note too that, although it is clear in hindsight that Mr Lawton’s transactions were all on revenue account, this may not have been so clear at the beginning.
Ms Langston also considered that Mr Marley should have inquired about Mr Lawton’s shareholdings because of the dividend income declared. As Mr Marley has explained the dividends returned in 1989 to 1992 were from shares in public companies widely held by the New Zealand public and there was minimal change in the composition of those companies over those years. Mr Marley deposed that there was nothing to alert him to the share trading conducted by Mr Lawton either in the dividends, the names of the companies, or otherwise.
We note too that Mr Lawton did not claim any portion of the interest expense related to his share trading activities. Even if his share activity had been on capital account as he thought, the interest expense would have been deductible to the extent it was related to the dividends received or to be received from the shares. This may have been a further indication that Mr Lawton was ignorant of his taxation position in relation to his activities in the share market.
The reports of both Mr Appleton and Ms Langston were provided to the Regional Controller and she recorded approval of Ms Langston’s recommendation that the refusal to accept Mr Lawton’s late objection be confirmed. Mr Appleton also deposed that she had accepted his recommendation to similar effect. No evidence was adduced from the Regional Controller as to the reasons for her decision. She must then be taken to have committed the errors contained in the Appleton and Langston reports submitted to her, being the failure on Mr Appleton’s part to consider the merits at all and on Ms Langston’s part the rigid adherence to Departmental policy and the failure to weigh the merits.
Mr Appleton conveyed the Regional Controller’s decision to Mr Marley by letter of 3 August 1994. The letter provided no elaboration on the reasons for that decision. As indicated above Ms Langston’s opinion was in large part concerned with whether Mr Lawton had inadvertently overlooked the losses. Mr Appleton had mentioned this in his letter of 20 January 1994 but seems to have been using the term in the sense of forgetting to return them. Mr Lawton never suggested that he had overlooked his losses in this sense. Indeed, given their magnitude, one imagines they were seldom far from his thoughts. Mr Lawton says rather that he did not know the losses were on revenue account. Ms Langston was using the term “inadvertently overlooked” in a wider sense than that used by Mr Appleton and this was not mentioned in Mr Appleton’s 3 August letter. Mr Lawton, therefore, was never given the opportunity to address that wider meaning in his dealings with the Commissioner.
There appears to have been further consideration of Mr Lawton’s position by the Regional Controller in September 1994 after a meeting with Mr Lawton’s then solicitor. In a typewritten memorandum of 27 September 1994 it is recorded that Mr Lawton would be filing an amended return for 1993 which would be treated as a valid objection. The Regional Controller noted that, if Mr Lawton is considered by the Commissioner to be a share trader, she did not think they could refuse to reopen the earlier assessments. This seems to suggest she had not in fact considered the merits when she confirmed her acceptance of Ms Langston’s recommendation in June.
She noted that she had agreed to think again and to consult the author of the Department’s policy statement on late objections. It is uncertain which policy statement she is referring to but we do note the existence of a Policy Statement of December 1992 on the Commissioner’s policy in relation to late objections claiming losses on share sales and Gisborne Mills is specifically referred to in that policy statement. A handwritten note then records that the matter had been so discussed and that the author of the policy statement had advised that the policy not to accept a late objection in these circumstances should be adhered to.
While it appears that the Regional Controller may have been prepared to consider the merits of Mr Lawton’s position in September she decided, after consultation, that she would not do so but would rather follow Departmental policy. This means not only that there is no evidence that the merits were examined, but also that there is no evidence that proper consideration was given to departing from the policy.
The next contact between the parties was instigated by a letter from Mr Lawton’s then solicitors, Russell McVeagh McKenzie Bartleet & Co, of 28 February 1995. This was a request to reconsider the decision in the light of the High Court decision in the light of the High Court decision in CIR v Wilson.
Mr Appleton, in a report to the Regional Controller of 9 March 1995, recommended that the decision not to accept the late objection be reconfirmed, a recommendation that was accepted. He considered that Mr Lawton’s situation was very different from the situation of the taxpayer in CIR v Wilson, largely because Mr Lawton had, unlike the taxpayer in CIR v Wilson, never asserted his right to a deduction before asking the Commissioner to reassess. He stated explicitly that the merits of Mr Lawton’s case had been given very little weight in reaching the decision not to accept the late objection. In fact, as can be seen from the above discussion, the only examination of the merits was undertaken by Ms Langston and no weight was given to it. There is no suggestion in Mr Appleton’s 1995 report that he had reconsidered the merits at that point.
As an aside we note a somewhat strange comment in his affidavit of 23 August 2001. He says that he stated in his report of 9 March 1995 that the merits of the position had been given little weight because he considered Mr Lawton was entitled to the deduction he sought. While weight to be given to the merits is a matter for the Commissioner, this shows a misunderstanding of the reasons for the requirement to examine the merits. One would normally expect that the greater the merits the greater the weight to be accorded, rather than the merits being given little weight because they are clearly in the taxpayer’s favour.
The next contact with the Commissioner was by way of a letter from Russell McVeagh of 13 May 1997. This letter was considered by another in-house solicitor, Mr Yan. Mr Yan considered it appropriate to seek further explanation from Mr Lawton as to the reasons for the delay in lodging the objection. This appears to have been with a view to considering whether the explanation for lateness was so inadequate that it was unnecessary to consider the merits of the taxpayer’s position. No substantive reply was received. Finally Mr Yan wrote a memorandum to Mr Appleton setting out what had transpired and noting that Mr Lawton’s objection for the 1993 income year had been allowed by another part of the Department unaware of the late objection issue for earlier years. It is clear that Mr Yan did not consider the merits as he quite properly considered he needed further information on the reasons for lateness of the objection before doing so.

As we said earlier we therefore conclude (in contrast to the finding of Randerson J) that the failure to examine the merits was not cured in the course of any of the subsequent reviews.
There is one further point. There is no doubt that the main reason Mr Appleton recommended that the late objection not be accepted was his reliance on Robertson J’s comments in Gisborne Mills about taxpayers seeking to take advantage of court decisions relating to other taxpayers. Despite Ms Langston’s conclusion on the merits in her opinion of 20 June 1994, this appears to have permeated most of the subsequent dealings with Mr Lawton.
In our view the Commissioner misunderstood and misapplied those comments. The first problem with Mr Appleton’s reasoning in this regard is, as we have indicated, that Mr Lawton was not relying on recent court decisions – his activities would have been seen as being on revenue account without those decisions.
The next problem is more fundamental. In Tax Information Bulletin Vol 4, No. 5 (on which Mr Appleton was relying) the Commissioner stated that, in considering whether to reopen an assessment in the particular circumstances of each case, the Commissioner will take into account inter alia “whether the objector has consistently asserted that s/he was entitled to a deduction (in contrast to a taxpayer who never sought a deduction in the past, but who becomes aware of a decision affecting another taxpayer and tries to take advantage of it” – essentially quoting Robertson J’s comments in Gisborne Mills.
In our view, consistently claiming a right to a deduction without actually objecting may in some cases tell against the acceptance of a late objection. One could legitimately ask for an explanation as to why a taxpayer did not get on and object in such circumstances. In CIR v Wilson, for example, the answer appears to have been that the taxpayer may well have objected in proper form or at least earlier than he did had it not been for systems failures in the IRD. In Gisborne Mills the court decision in question related to another member of a consortium to which the taxpayer belonged, and the taxpayer had been informally involved in that case. It was in that context that Robertson J’s remarks were made.
Robertson J is not to be understood as stating that a late objection should never be accepted where a reassessment is only asked for when a taxpayer becomes aware of a decision affecting another taxpayer. Indeed this would be against the actual ratio of Gisborne Mills – that the Commissioner is required to weigh the particular circumstances which exist in any individual case rather than adhering to policy. That a reassessment was asked for only when a taxpayer became aware of a court decision is a factor that may of course be taken into account and may weigh against acceptance. It is not, however, decisive and the reasons in the individual case for that situation should be considered. The fact a taxpayer may have been acting on advice (from either the Commissioner or a professional adviser) that a deduction was not available may be relevant as a balancing consideration. The fact that a taxpayer was genuinely unaware of the right to the deduction may also be relevant. While Mr Appleton purported to examine Mr Lawton’s individual circumstances, in our view he treated the factor identified in Gisborne Mills as decisive and thus erred.

Should relief be denied because of delay?

Mr Lawton filed judicial review proceedings in June 2001, some five years after the last substantive contact with the Commissioner. He explains his delay (including his failure to respond to Mr Yan’s queries) by pointing to business problems and family health problems - both his own and his wife’s, but more importantly the serious health problems of his son, which necessitated trips overseas to seek treatment.
Taking account of these explanations and the fact that, despite multiple reconsiderations, the Commissioner failed to examine the merits of Mr Lawton’s case in a proper fashion, we do not consider that delay should disentitle Mr Lawton to relief. The Commissioner is in as good a position properly to assess and properly weigh the merits of Mr Lawton’s position as he was earlier and has therefore not been prejudiced by the delay.

Decision

The appeal against Randerson J’s decision is allowed for the reasons set out above.
We accept the Commissioner’s submission, however, that the relief sought by Mr Lawton (being that the Commissioner issue reassessments for the relevant years) is not appropriate. Rather we order that the Commissioner reconsider the application for acceptance of a late objection made by Mr Lawton in accordance with the terms of this Court’s decision.
Costs of $5,000 are awarded to Mr Lawton together with reasonable disbursements (including any travel and accommodation costs of counsel) to be fixed by the Registrar if not able to be agreed by counsel. The costs award in the HighCourt is set aside. If the parties cannot agree on costs in the High Court costs can be dealt with by that Court in the light of this decision.

Solicitors:

P E Newfield, Auckland for Appellant
Crown Law Office, Wellington

[2002] NZCA 337

19 December 2002