McGuire v Commissioner of Inland Revenue

[2024] NZHC 883

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2023-485-377

[2024] NZHC 883

UNDER

Judicial Review Procedure Act 2016 and Part 30 of the High Court Rules 2016

IN THE MATTER OF

An application for review of a judgment of the Palmerston North District Court

BETWEEN

JEREMY JAMES MCGUIRE

Applicant

AND

THE COMMISSIONER OF INLAND REVENUE

First Respondent

AND

PALMERSTON NORTH DISTRICT COURT

Second Respondent

Hearing:

16 February 2024

Appearances:

G J Woollaston for plaintiff/respondent

K I S Naik-Leong and C L Russell for first respondent/applicant No appearance for second respondent (abiding on issues of substance)

Judgment:

22 April 2024

JUDGMENT OF JOHNSTONE J

This judgment was delivered by me on 22 April 2024 at 1.05 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Crown Law, Wellington

MCGUIRE v THE COMMISSIONER OF INLAND REVENUE [2024] NZHC 883 [22 April 2024]

[1]                 On 16 July 2022, Judge S B Edwards sitting in the Palmerston North District Court struck out Jeremy McGuire’s defence to the Commissioner of Inland Revenue’s claim for $39,763.48 in unpaid tax, entered judgment in that amount, and awarded costs.1

[2]                 On 1 March 2023, the Commissioner initiated bankruptcy proceedings against Mr McGuire by serving him with a bankruptcy notice. Mr McGuire initially responded by:

(a)filing a claim in the Wellington District Court seeking variation or rectification of a settlement deed dated 9 December 2020, the terms of which informed Judge Edwards’ judgment; and

(b)applying to the Palmerston North District Court for orders staying enforcement of Judge Edwards’ judgment.

[3]                 Judge Collins declined the Palmerston North stay application on 3 April 2023. Judge Kelly granted the Commissioner’s application to strike out Mr McGuire’s claim in the Wellington District Court on 29 June 2023.

[4]                 In the meantime, Mr McGuire had applied to this Court for an order setting the bankruptcy notice aside. But on 29 May 2023, his setting aside application was dismissed.2 By application dated 13 June 2023, the Commissioner proceeded to apply for an order adjudicating Mr McGuire bankrupt.

[5]                 Mr McGuire next responded by filing this proceeding seeking judicial review of Judge Edwards’ judgment. By application dated 28 August 2023, the Commissioner applies to strike out Mr McGuire’s amended statement of claim dated 17 August 2023 (Mr McGuire’s Claim) and for costs, and alternatively, for orders for security for costs.

[6]                 This judgment deals  with  the  Commissioner’s  strike-out  application  of  28 August 2023.

1      Commissioner of Inland Revenue v McGuire [2022] NZDC 12179.

2      The Commissioner of Inland Revenue v McGuire [2023] NZHC 1314.

Strike-out applications in general

[7]                 Where a pleading discloses no reasonably arguable cause of action, defence or case appropriate to the nature of the pleading, or is likely to cause prejudice or delay, or is otherwise an abuse of the process of the Court, the Court may strike out all or part of that pleading.3 If the Court strikes out a statement of claim under r 15.1(1) of the High Court Rules 2016, it may by the same or a subsequent order dismiss the proceeding.4

[8]                 A strike-out application proceeds on the assumption that the facts pleaded in the statement of claim are true, whether or not admitted,5 but that does not extend to allegations that are pleaded where there is plain evidence that they are unsupportable

— that is, entirely speculative and without foundation.6

[9]                 In particular circumstances the Court may be entitled, where there are apparent conflicts in the affidavit evidence, to look beyond bare statements in affidavits to determine whether particular assertions are capable of belief. A high threshold is required before the Court will be entitled to reject affidavit evidence and strike out a proceeding.7

[10]             Before the Court can strike out proceedings, the causes of action must be so clearly untenable that they cannot possibly succeed.8 The jurisdiction must be exercised sparingly, and only in a case where the Court is satisfied it has the requisite material.9

[11]             The principles applicable to an application to strike out a judicial review are the same as for other civil proceedings.10 In the tax context, William Young P (as he

3      High Court Rules 2016, r 15.1(1)(a), (b) and (d).

4      Rule 15.1(2).

5      Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267.

6      Commissioner of Inland Revenue v Michael Hill Finance (NZ) Ltd [2016] NZCA 276, [2016] 3 NZLR 303 at [4].

7      Pharmacy Care Systems Ltd v Attorney-General (2001) 15 PRNZ 465 (CA) at [30], cited more recently in Burchell v Official Assignee [2017] NZHC 1508 at [17].

8      Attorney-General v Prince, above n 5, at 267.

9      At 267.

10     Southern Ocean Trawlers Ltd v Director-General of Agriculture and Fisheries [1993] 2 NZLR 53 (CA) at 63.

then was) in Westpac Banking Corporation v Commissioner of Inland Revenue observed that when abuse of process is in issue, the courts will engage with the facts more freely than in the case of a “simple” strike-out application.11

Judge Edwards’ judgment of 16 July 2022

[12]             On 2 March 2021, the Commissioner initiated proceedings  in  the  Palmerston North District Court seeking judgment in respect of unpaid income tax and PAYE, including penalties and interest, relating to a range of tax years and PAYE periods. The Commissioner’s statement of claim, and the amounts claimed, were amended from time to time in the manner explained in an affidavit filed the day before Mr McGuire’s  application to strike out the claim was heard by Judge Edwards on   14 December 2021. As the Judge noted,12 the Commissioner’s initial claim for

$65,814.38 had by 13 December 2021 reduced to $39,763.48, including by removing late payment penalties and use of money interest that had been accrued incorrectly, and applying a payment by Mr McGuire to outstanding tax amounts in accordance with s 120F of the Tax Administration Act 1994 (the TAA).

[13]             Delivering her reserved judgment on 16 July 2022, Judge Edwards observed that Mr McGuire “denie(d) he owe(d) the Commissioner any tax and oppose(d) the strike out application on the grounds that the claims for tax arrears are disputed, are time-barred and have been settled”.13 And that, in maintaining he did not owe any tax arrears, Mr McGuire claimed a set-off.14

[14]The Judge proceeded to find that:

(a)Section 109(a) of the TAA operates to deprive the District Court of jurisdiction to hear and determine disputes over the correctness of assessments of tax or the amounts imposed for penalties and interest

11     Westpac Banking Corporation v Commissioner of Inland Revenue [2009] NZCA 24, [2009] 2 NZLR 99 at [10].

12     Commissioner of Inland Revenue v McGuire, above n 1, at [8]–[12].

13 At [13].

14 At [14].

such   as   those   which   underpinned the Commissioner’s claim.

Mr McGuire therefore had no reasonably arguable defence.15

(b)In any event, dealing with Mr McGuire’s arguments substantively:

(i)Section 109(b) of the TAA deemed the income tax assessments upon which the Commissioner was relying to be correct.16

(ii)Rule 5.63(1) of the  District  Court  Rules  2014  prevented  Mr McGuire from raising his set-off defence.17

(iii)Section 163 of the TAA overrode any statutory limitation period in respect of the recovery of tax. And the four-year limitation upon amending tax assessments arising under s 108 of the TAA did not apply to establish a  time-bar  in  this  case,  because Mr McGuire did not file the income tax returns the subject of the Commissioner’s reassessment until February 2017, and the reassessments occurred well within the four-year period after that.18

(iv)Properly interpreted, the settlement agreement entered between the Commissioner and Mr McGuire on 9 December 2020 did not extend to the claims the subject of the Commissioner’s proceeding.

[15]Judge Edwards granted judgment and costs accordingly.

15 At [35].

16     At [37], citing Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153, at [52]–[55].

17 At [39].

18     At [40]–[49].

Mr McGuire’s claim in this Court

[16]             Mr McGuire’s amended statement of claim dated 17 August 2023 (Claim) asserts four grounds for relief. In essence, Mr McGuire pleads that Judge Edwards’ judgment:

(a)involved a miscarriage because of various mistakes of fact;

(b)was unreasonable;

(c)was ultra vires; and

(d)is undermined by breaches of natural justice on the part of the Commissioner.

[17]             For Mr McGuire, Mr Woollaston sought to support these pleadings in the respects outlined below. He also sought to add to the natural justice claim by referring to Mr McGuire’s legitimate expectations.

The Commissioner’s case for strike-out

[18]               The Commissioner argues that Mr McGuire’s amended statement of claim discloses no reasonably arguable cause of action, that Mr McGuire’s legitimate expectations were met, and that Mr McGuire’s claim amounts to an abuse of process.

Mistake of fact

[19]             Mr McGuire’s Claim asserts a range of mistakes of fact that may be summarised as follows:

(a)On 14 December 2021, the date of the hearing before Judge Edwards, the matters in dispute between Mr McGuire and the Commissioner had not finally been determined under Parts 8 and 8A of the TAA.

(b)The Commissioner had not made the necessary adjustments for penalties and interest, or use of money interest. And the

Commissioner’s pleaded claim was inconsistent with both the Commissioner’s notice of proposed adjustment and statement of position, and the evidence.

(c)In particular, the Commissioner’s claim did not account for the settlement of amounts owed in respect of the 2015 tax year.

[20]None of Mr McGuire’s alleged mistakes of fact can be substantiated.

[21]             By the time the Commissioner’s claim was pursued before Judge Edwards, it was limited to income tax-related debts arising from the 2012, 2013, 2015 and 2016 tax years, and to a $50 late filing penalty for Goods and Services Tax (GST). Of these amounts, I can address the 2012, 2013, and 2016 income tax-related debts briefly, as follows:

(a)The amounts relating to the 2012 and 2013 tax years arose as a matter of self-assessment upon the filing of Mr McGuire’s tax returns. These self-assessments had not been amended by the Commissioner, nor disputed by Mr McGuire, within applicable time limitations. Section 109(b) applied, deeming them to be accurate.

(b)While Mr McGuire had filed a tax return for the 2016 tax year which claimed “look-through company” losses, he has since accepted he was unable to do so. The Commissioner amended his 2016 self-assessment accordingly, leaving no other part in dispute. Again, in the absence of challenge by Mr McGuire under Part 8A of the TAA to the Commissioner’s amended assessment, s 109(b) deemed it to be accurate.

[22]             Mr McGuire did not challenge the late filing penalty for GST. This leaves the 2015 income-tax related debt.

2015 income-tax related debt

[23]Here, a little more background is required.

[24]             A dispute between the Commissioner and Mr McGuire relating to the 2015 tax year (and others) was the subject of administrative review by Inland Revenue’s Disputes Review Unit (DRU), resulting in its “Adjudication Report” dated 9 March 2020. Following this report, the Commissioner issued separate notices of assessment for the 2014 and 2015 income tax years, each dated 17 March 2020. Mr McGuire then filed a notice of claim in the Taxation Review Authority. On 9 December 2020, the Commissioner and Mr McGuire entered a deed of settlement, and the proceeding in the Taxation Review Authority was discontinued shortly thereafter.

[25]For Mr McGuire, Mr Woollaston submitted that:

(a)All tax issues for the 2015 tax year were fully and finally settled after Mr McGuire paid the Commissioner $1,000 in accordance with the deed of settlement.

(b)This is because Mr McGuire’s proceeding in the Taxation Review Authority challenged the DRU’s report. The agreement to settle the proceeding in the Authority therefore settled Mr McGuire’s tax liabilities, confining them to the amounts outlined in the report.

[26]             I do not accept those submissions. They are inconsistent with the clear wording of the deed of settlement. In its recitals section, the deed records:

(a)at recital A, that:

[Mr McGuire] commenced Proceedings against the Commissioner in the TRA in respect of income tax and the imposition of shortfall penalties. The Proceeding relates to assessments made by the Commissioner for the income tax periods ending 31 March 2014 and 31 March 2015.

(b)the nature of those assessments in respect of the 2014 and 2015 tax years, described as assessments made “on 17 March 2020”;

(c)Mr McGuire’s prior concessions before the DRU about components of the adjustments the Commissioner had previously proposed; and

(d)that:

Accordingly, the only adjustments being challenged by the Taxpayer in the Proceeding is the disallowance of legal expenditure of

$13,011.74 and the imposition of the shortfall penalty of $608.75 for the period ended 31 March 2014 and the imposition of the shortfall penalty of $599.78 for the period ended 31 March 2015.

[27]The deed then proceeds to describe the settlement:

(a)At cl 5.1, Mr McGuire agreed to pay $1,000 within one week.

(b)At cls 5.3 and 5.4, provision was made for the filing of the discontinuance in the Authority.

(c)Clause 5.6 provided:

As soon as practicable after the Proceedings have been discontinued by [Mr McGuire], the Commissioner will confirm  in  writing  to [Mr McGuire] that:

5.6.1.   No amount of tax is owed by the Taxpayer in the income tax period ended 31 March 2014.

5.6.2.  For the income tax period ended 31 March 2015 the Taxpayer will have an amount of tax payable (and UOMI) but this will not include the not taking reasonable care shortfall penalty that was previously assessed under s 141A of the TAA for incorrectly claiming LTC losses.

(d)Clause 5.7 provided:

The Taxpayer acknowledges the final nature of the agreement in this Deed and covenants not to take challenge proceedings in respect of the tax position agreed upon in this Deed for the income tax periods ended 31 March 2014 and 31 March 2015.

[28]             At cl 7, the deed described the parties’ agreement as to confidentiality. Confidentiality and non-disclosure were to be maintained, except to the extent certain circumstances applied, including if it is necessary for the deed’s enforcement. I note that I regard the disclosure of the deed to this Court as having been necessary for its enforcement. While counsel for the Commissioner invited consideration of an order for non-publication in respect of the deed’s contents, I consider their discussion to the extent set out in this judgment to be part and parcel of my reasoning. This aspect of

the judgment is accordingly published without suppression. I will make an order in respect of access to the Court’s file at the end of the judgment.

[29]Clause 8 provided:

The settlement recorded in this Deed is in full and final settlement of the Proceeding.

[30]Clause 18 provided:

This Deed represents the entire agreement of the Parties in relation to its subject matter. This Deed may only be amended by an instrument in writing signed by all Parties.

[31]             As I consider quite apparent, Mr McGuire thus agreed that, by paying $1,000, he would receive what amounted to complete success in respect of his challenges to the Commissioner’s assessment of outstanding tax related to the 2014 year, and partial success limited to the shortfall penalty of $599.78 described in the 17 March 2020 assessment related to the 2015 year. This appears to explain why, at cl 5.2, the deed invited Mr McGuire to select the period ending “31 Mar 2014” when paying the

$1,000 sum by direct credit into Inland Revenue’s bank account.

[32]             More specifically, in respect of the 2015 tax year, the agreement operated to override the shortfall penalty stated in the 17 March 2020 assessment, leaving the balance of Mr McGuire’s income tax liabilities for that tax year, as described in that assessment (along with such further interest and penalties as might arise), to be paid. Not, as Mr Woollaston contends, the balance of the liabilities quantified in the DRU’s audit.

Other matters of calculation

[33]             As I understood Mr Woollaston to concede, all other matters of calculation of tax, as at the date of the hearing before Judge Edwards on 14 December 2021, were addressed by way of an affidavit dated 13 December 2021.

Unreasonable/ultra vires

[34]               Mr McGuire’s Claim alleges unreasonableness and ultra vires decision-making on the part of Judge Edwards on the same basis it alleges mistakes of fact. For the same reasons as outlined above, these pleadings cannot be substantiated.

Breaches of natural justice/legitimate expectation

[35]                 Mr McGuire’s Claim alleges breaches of natural justice in the following respects:

(a)Mr McGuire was not provided with a legible, colour-printed version of the affidavit of 13 December 2021, setting out the Commissioner’s up to date calculations of amounts owed.

(b)When initiating the administrative review by the DRU of its notices of proposed assessment outlined above, the Commissioner’s employees or agents failed to observe an obligation to consult with Mr McGuire about the content of their referral to DRU.

[36]             In connection with the latter allegation, Mr Woollaston referred in his submissions to the Commissioner’s “Standard Practice Statement SPS16/05”, which at the time of the DRU referral and proceeding in the Taxation Review Authority, described “the Commissioner’s rights and responsibilities with a taxpayer in respect of an adjustment to an assessment when the Commissioner commences the disputes resolution process.” Mr Woollaston submitted that the Commissioner did not apply and follow the policies and practices of the SPS in dealing with Mr McGuire, in breach of his legitimate expectation.

[37]             These allegations have no prospect of justifying the relief that is claimed: a setting aside of Judge Edwards’ judgment.

[38]             For the Commissioner, Ms Naik-Leong pointed out that Mr McGuire’s concern as to the affidavit’s legibility related to figures appearing in annexures which were

fully explained in the body of the affidavit. But to my mind, the fundamental difficulty for Mr McGuire on this aspect is that his claim for judicial review does not identify the response he might have offered had he received a legible, colour-printed affidavit. He was present at  the  hearing  at  which  the  affidavit  was  discussed  before  Judge Edwards. He has not since identified any respect in which the affidavit might have been contradicted, or that Judge Edwards may have been misled.

[39]             Similarly, the Commissioner contests Mr McGuire’s allegation that the procedure adopted in the course of the DRU referral was not fair. Mr McGuire took part in a meeting akin to formal hearing of the referral, which resulted in the DRU’s report, and at which he could have presented any concern with the referral’s content. But more significantly, the DRU’s report resulted in the subsequent 17 March 2020 assessment which was the subject of proceedings before the Authority. There is now no prospect of Mr McGuire unravelling the outcome of the latter assessment procedures, particularly in light of s 109 of the TAA. If there were any breach of natural justice, Mr McGuire has had his remedy.

[40]             Finally, I consider Mr Woollaston’s submission that the Commissioner did not follow the SPS to be meritless. He did not seek to support his submission by identifying any particular respect in which the SPS was not followed. It served only to waste the Court’s time.

Abuse of process

[41]             Given the above findings, I do not consider it necessary to determine the question of abuse of process. The plain evidence comprised in the business documents put before this Court by way of affidavit, including the deed of settlement, serves to undermine Mr McGuire’s pleadings suggesting that the various assessments of tax upon which Judge Edwards founded her judgment remain in dispute. As discussed, Mr McGuire’s Claim discloses no reasonably arguable cause of action. They are so clearly untenable that they cannot possibly succeed.

[42]             Be that as it may, I do not overlook that Mr McGuire did not pursue an appeal against Judge Edwards’ judgment of 16 July 2022. It was only once he was served with a bankruptcy notice on 1 March 2023 that he sought to contest that judgment,

including by way of this proceeding. This feature of the case is relevant to the issue of costs.

Costs

[43]             The Commissioner’s strike-out application sought indemnity or, alternatively, increased costs. For the Commissioner, Ms Naik-Leong submitted that Mr McGuire’s Claim was “hopeless”. She submitted that two of the criteria for awarding indemnity costs had been met: the Court’s process having been abused for the purpose of causing further unjustified delay in the bankruptcy action; and Mr McGuire having proceeded in wilful disregard of known facts or clearly established law, such as in respect of s 109 of the Tax Administration Act.

[44]             Mr Wollaston submitted, in opposition to an indemnity or increased costs order, that he did not share Ms Naik-Leong’s view of Mr McGuire’s claim, and that there are “various legal issues with the disputes resolution process that preceded” the Commissioner’s debt proceeding in the Palmerston North District Court.

[45]             Indemnity costs are exceptional and require exceptionally bad behaviour. To be justified, the misconduct must be flagrant.19

[46]             Circumstances warranting the exercise of the discretion to award indemnity costs include those where: the proceedings were commenced in wilful disregard of known facts or clearly established law; allegations were made which ought never to have been; or a case is prolonged by groundless contentions or more broadly is seen to be hopeless.20

[47]             I find that Mr McGuire’s Claim is properly described as “hopeless”. The only argument that Mr Woollaston could advance with any conviction during the hearing related to the deed of settlement. Essentially the same argument was put before

19   Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [28], citing Prebble v Awatere Huata (No 2) [2005] 2 NZLR 467 (SC) at [6].

20 Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233, adopted in Hedley v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [11], endorsed in Bradbury v Westpac Banking Corp, above n 19, at [29], and citing J-Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 at 303.

Judge Edwards, and promptly rejected, upon simple recitation of the deed’s terms and a refusal to look behind their plain meaning.21 That the other aspects of Mr McGuire’s Claim relating to natural justice and legitimate expectation were makeweights was demonstrated by Mr Woollaston’s inability to identify any disadvantageous consequence that might have arisen in the event of breach.

[48]             On this basis, I consider it appropriate to award indemnity costs. The method by which such costs are to be quantified is outlined below.

[49]             I am supported in my conclusion that indemnity costs are appropriate by the fact mentioned above, that Judge Edwards’ judgment was not appealed, action being taken only upon service of a bankruptcy notice. It is unlikely Mr McGuire commenced this proceeding anticipating any real prospect of success, beyond achieving simple delay.

Result

[50]The Commissioner’s application dated 28 August 2023 is granted, as follows:

(a)Mr McGuire’s amended statement of claim dated 17 August 2023 is struck out.

(b)The proceeding is dismissed, except that Mr McGuire is to pay the Commissioner’s reasonable costs.

(c)The calculation of the Commissioner’s reasonable costs is to be described fully in a memorandum of the Commissioner’s counsel, filed and served by 5 pm on Friday, 3 May 2024. If Mr McGuire takes issue with the amount of costs claimed, the basis for doing so is to be set out in a memorandum of his counsel, to be filed and served by

21     Commissioner of Inland Revenue v McGuire, above n 1, at [52].

5 pm on 17 May 2024.    I would determine that issue of quantum thereafter on the papers.

[51]             I direct that the Court’s file be marked so that, if access is sought under the Senior Courts (Access to Court Documents) Rules 2017, the decision-maker’s attention is drawn to paragraph [28] above.

Johnstone J