Practical Civil Services Limited v Commissioner of Inland Revenue
[2016] NZHC 593
•4 April 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-3037 [2016] NZHC 593
UNDER the Companies Act 1993 IN THE MATTER OF
an application under s 290 of the Companies Act 1993 to set aside a statutory demand
BETWEEN
PRACTICAL CIVIL SERVICES LIMTED
Applicant
AND
COMMISSIONER OF INLAND REVENUE
Respondent
Hearing: 4 April 2016 Appearances:
M Keating and P F Chambers for the Applicant
C van der Merwe for the RespondentJudgment:
4 April 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Henley-Smith Law (Mark Keating), Glen Eden, Auckland, for Applicant
Inland Revenue Department (C van der Merwe), Manukau, for Respondent
Counsel:
P F Chambers, Barrister, Auckland, for Applicant
PRACTICAL CIVIL SERVICES LIMTED v COMMISSIONER OF INLAND REVENUE [2016] NZHC 593 [4 April 2016]
[1] Practical Civil Services Ltd applies under s 290 of the Companies Act 1993 to set aside a statutory demand which the Commissioner served on it in December
2015. The demand required Practical Civil Services Ltd to pay $418,674.62 alleged to be due for income tax for the year ending 31 March 2006. That sum comprises a core income tax of some $94,000 plus accrued interest and penalties.
[2] Practical Civil Services Ltd has pleaded all three limbs of s 290 of the Companies Act. The purpose of a statutory demand is to create a presumption of insolvency if the company served with the demand does not comply with it. Under s 290 a statutory demand may be set aside so that it may not be relied upon to create the presumption. The overall purpose of s 290(4) is to prevent the presumption of insolvency arising when it would be unjust. The ground under s 290(4)(a) is when there is a substantial dispute as to the debt alleged to be due. That is the essential ground on which Practical Civil Services Ltd relies. I regard the other grounds as no more than cautious pleading. They do not add anything to the case.
[3] On an application under s 290(4)(a) the onus is on the applicant to show a substantial dispute. Mere assertion of a dispute is not enough. The applicant has to show a fairly arguable basis for the dispute. The court does not resolve disputed questions of fact on affidavits. And it does not decide the substantive merits of the dispute. If a genuine dispute is found, it is more properly decided in other proceedings.
[4] In short, the applicant’s case is that the Commissioner of Inland Revenue broke an agreement that she would recognise loss offsets available within the group of companies to which Practical Civil Services Ltd belongs. The Commissioner assessed income tax in 2010. In response, a notice of proposed adjustment was filed. That was withdrawn on the basis that the parties would enter into a process which, if successful, would lead to the Commissioner amending the assessment under s 113 of the Tax Administration Act 1994 by reason of loss offsets available from other companies so as to clear away the liability for the 2006 income tax.
[5] The Commissioner’s position is that the tax assessment of March 2010 stands. While she was willing to consider amending the assessment under s 113, there were no relevant elections by the loss companies under the applicable legislation, even after she had fixed time for elections to be made.
[6] A recurring element in this case is delays by the taxpayer. It is unusual that the taxpayer should allege that it is entitled to continue disputing its income tax liability more than 10 years after the income year for which the tax was assessed. There is little evidence in this case to explain the delays by the company in filing returns, in providing information to the Commissioner and in making elections under the group offset provisions of the Income Tax Act.
[7] The applicable legislation is the Tax Administration Act 1994 and the Income Tax Act 2004. The parties in part referred to the Income Tax Act 2007 but the relevant parts of that act did not come into force until 1 April 2008.1 As we are dealing with a tax that was assessed for the year ending 31 March 2006, the 2004 Act applies.
[8] Timetabling directions were given in January for this hearing. Those directions required any reply affidavit by the applicant to be filed and served by
12 February 2016. A reply affidavit was filed in time. On 1 April 2016, the applicant filed a further affidavit. Additional submissions were also filed. The Commissioner objected to the new affidavit coming in. Alternatively, if the affidavit were to come in, the Commissioner sought time for counsel to take instructions and, if need be, file an affidavit in reply.
[9] I ruled that I would not accept the affidavit of 1 April 2016. It was filed well after the time for filing reply affidavits. I am satisfied that it would have caused some embarrassment to the Commissioner. It could have required an adjournment, although counsel for the applicant made it clear that it wanted the case heard today.
[10] The main purpose of filing the affidavit was to exhibit a document said to be an attachment to a letter sent by the Commissioner on 19 May 2014. Other parts of
1 Income Tax Act 2007, s A 2.
the letter have been put in evidence. I have noted the reference to the attachment in that letter. I doubt whether there is significant injustice to the applicant in my reading the letter of 19 May 2014 without having that attachment before me.
[11] Practical Civil Services Ltd was incorporated in January 2006. It is one of the Ellery Group of companies. Its shareholder is 1411 Holdings Ltd. There are a number of other companies within the group, including Surrey Developments Ltd and Claverdon Developments Ltd. I understand that the Ellery companies were property developers. So far as group offset losses are concerned, there is no contest that there was the required common ownership between Practical Civil Services Ltd and the other companies relied on as loss companies.
[12] The Commissioner of Inland Revenue made a default assessment of income tax for Practical Civil Services Ltd for the year ending 31 March 2006. The date of assessment is 1 March 2010. The assessment showed a net surplus before tax of
$286,642.00. Income tax at 33 per cent was calculated at $94,591.86. That is the core debt relied on by the Commissioner in the statutory demand. There is no contest as to the Commissioner’s powers under the Tax Administration Act 1994 to make default assessments in the absence of returns by the taxpayer.2 The Commissioner made the default assessment based on draft financial statements of the company provided by the company’s accountant in July 2009. The company does not contend that the surplus before taxation was not correctly assessed and does not contest the tax of $94,591.86, save for the point that it was entitled to rely on losses
from other companies in the group to offset against the profit made by Practical Civil
Services Ltd. That is the only tax assessment issue in this case.
[13] The Commissioner wrote to the company on 25 February 2010 explaining the steps she was taking. Amongst other things, she said:
The amount of the Default Assessment is collectable by Inland Revenue. This means that once the payment due date has passed, if the company has not paid the assessment amounts, Inland Revenue may begin collection proceedings to collect the debt. Even if the company pays the Default Assessment amounts, it is still required to file the tax returns.
2 See Tax Administration Act 1994, s 106.
If the company does not file the tax returns, we may consider further action including prosecution for failure to furnish the return. If the company wishes to dispute the Default Assessment it must file a Notice of Proposed Adjustment along with the tax returns within four months of the Default Assessment issue date shown on the notice of assessment.
[14] On 30 June 2010 Practical Civil Services Ltd gave a notice of proposed adjustment disputing the Commissioner’s assessment. It is common ground that it gave that notice within time. The effect of that notice was to trigger the disputes resolution procedure under Part 4A of the Tax Administration Act. If the differences between the parties were not resolved under Part 4A, the matter could ultimately lead to the dispute being adjudicated upon in either the Taxation Review Authority or this court.
[15] The evidence refers to a letter of the Commissioner of 19 August 2010. Parts of it are referred to in other correspondence but the letter itself is not in evidence. In a letter of 19 May 2014 that will become important the Commissioner cited part of the 2010 letter. The 19 May 2014 letter says in part:
In this regard, as per IR’s letter date 19 August 2010, it is noted that IR has
agreed (at point 6) to consider:
6. Offsets of profits and losses between entities ultimately owned by the Glenfield Trust … in accordance with the statutory provisions and the discretionary powers held by the Commissioner”
[16] Counsel for a number of companies in the Ellery Group, including Practical Civil Services Ltd, wrote to the Commissioner on 1 November 2010. Under that letter the companies withdrew notices of proposed adjustment. The letter said, in part:
Further to those discussions and on the basis that the CIR has (through Mr Cotton) withdrawn his letter of 18 October 2010, I formally advise (on behalf of the above companies) that, in recognition of the CIR’s intention, in a fair and reasonable manner, to consider acceptance of future returns filed for the above companies under section 113 TAA, in order to attempt to settle outstanding tax matters with those companies in accordance with Mr Guise’s reconciliation report ( already provided), the abovenamed companies have agreed to withdraw their respective Notices of Proposed Adjustment (“NOPA’s”) earlier filed and that those NOPA’s are, by way of this letter, formally withdrawn.
[17] On 25 June 2013 the Inland Revenue wrote to the accountants for Practical Civil Services Ltd after an audit had been completed. The letter recorded that no income tax returns had been filed. It recorded the making of the default assessment for the year ending 31 March 2006, the lodging and later withdrawal of the notice of proposed adjustment, advised that the Commissioner had not reviewed the assessment under s 113 of the Tax Administration Act as she considered that there was no difference of opinion as to the method of assessment or the result of the assessment. The letter noted, however, that the Commissioner was willing to consider group offset. It recorded that there was agreement as to common ownership for 1141 Holdings Ltd, and went on to say:
Once the associated companies’ profit assessments are finalised and the loss assessments for the relevant companies are filed by the companies themselves, IR will consider the statutory provisions in respect of group loss/profit setoff and its discretion in respect of same (s IG2(3)) of the ITA
2004) in accordance with the IR’s facsimile of 19 August 2010.
Later, the letter said:
IR will advise its intentions in respect of this issue once all returns for PCSL and other associated companies have been filed and any appropriate set-off of the various companies’ profits and losses has been completed.
[18] The Commissioner’s letter of 19 May 2004 was addressed to the accountants and is headed “The Ellery Group of Companies”. It deals with the tax position of the Ellery Group generally, and the loss offset question in parts.
[19] Under the heading: “The agreement detailed in letters dated 19 August 2010 and 1 November 2010” it says:
I refer to the agreement (of late 2010) between the Commissioner and the Ellery Group in respect of the Ellery Group’s withdrawal of its Notices of Proposed Adjustment (NOPA) and the consequential review of the Commissioner’s default assessments.
[20] It recorded that other companies, including Practical Civil Services Ltd, had tax positions that coincided with the Commissioner’s default assessments, given that those default assessments were based on financial statements provided by the accountants. The Commissioner therefore considered there was no need to review that aspect of the tax assessments, but recorded that it was understood that the only
remaining point of difference was the potential offset of losses and profits within the extended Ellery Group. There followed the part I have quoted above, referring to the extract from the letter of 19 August 2010.3
[21] Later in the letter, at p 6, there is a heading “Consideration of late offset of Ellery Group profits and losses”. This section of the letter deals with the question of offsetting losses of one company in the group and applying it against the profits of another company. That section of the letter refers to a schedule which is said to have listed eight income tax returns filed and the finalised assessments of the companies within the Ellery Group. I infer from that that there are companies in the group that made profits in relevant years and others that made losses.
[22] The letter refers to the question of part-year accounts and states:
Where the Ellery Group wishes to apply losses between companies that were incorporated part way through a financial year then part-year accounts need to be prepared that verify that any loss to be offset was incurred during the same period of common ownership and is to be applied against profit incurred during the same period of common ownership.
[23] A number of companies are listed, to which that requirement applies. One of them was Practical Civil Services Ltd as that was incorporated on 10 January 2006.
[24] It is necessary also to quote a large part of the letter from pp 8-9:
Consideration of late offset of Ellery Group profits and losses
…
Consequences of loss elections
Please note that where an election is made it is irrevocable. A loss election can only be charged if the Commissioner determines that the core loss is incorrect.
Consequently, care should be taken when determining loss offset particularly
when not all of the Ellery Group’s tax returns are filed.
3 At [15] above.
In the circumstances, where loss offsets are requested and allowed, any residual within group companies will be liable for shortfall penalty consideration and standard collection action.
Valid election must be made in writing
At this time, while a desire to offset losses and profits has been communicated by the Ellery Group, a valid election has not been made.
Where the Ellery Group wishes to make an election (or elections) for loss offset such an election (or elections) must be made in writing. The details to be provided are outlined immediately below.
Election Requirements
The Ellery Group needs to consider its various positions and make determinations as follows:
1 If a valid written election is to be made; and if so;
2 What loss companies are to make elections; and
3 The quantum of the losses to be used for offset; and
4Which profit companies are to utilise the losses (and in what amounts); and
5The quantum of losses allocated to each profit company (which, where applicable, will include the provision of part-year financial statements).
Agreement of late 2010 and timeframe
In late 2010, the Commissioner undertook to consider a late loss offset election. Advice has now been obtained from LTS and the result of this advice is the request for records, information and elections as detailed within this letter.
Subject to receiving the legislatively prescribed records and information, it is likely that any late offset election(s) desired by the Ellery Group will be accepted so long as they are consistent with the information detailed in this letter.
However, in the circumstances where the Ellery Group determines that it wishes to make an election (or election) to offset losses and profits, the above records and information (including written elections and part year accounts where required) should be provided within six weeks (on or before Monday 30 June 2014).
As noted above, any election made is irrevocable and any residual profit positions will be subject to shortfall penalty consideration.
Please note: Where an election is not provided within this timeframe or the supporting records and information is incomplete or inadequate then the Commissioner will commence shortfall penalty consideration in respect of
the profit companies’ profits immediately and commence collection action
forthwith.
[25] There is no evidence of any response to that letter by the Ellery Group generally, its accountants or Practical Civil Services Ltd.
[26] The next event after that was a letter by the Commissioner to Practical Civil Services dated 16 January 2015, in which the Commissioner, under the heading “Debt outstanding $371,544.55” noted that that amount was outstanding and required payment. Attached to that letter was a summary of account as at 16 January
2015. It relies only on income tax payable for the year ending 31 March 2006 and sets out the core debt of $94,591.86 with associated charges for late payment, interest and the like.
[27] The company’s accountants replied on 20 February 2015. In short, the letter
refuted liability. Relevantly, the letter said this:
Inland Revenue correspondence 25 June 2013 notes this Company is part of a group in which there are losses available for offset.
Given there is the likelihood that the debt is not owing.
Financial statements for the ensuing years have also been made available. In light of [that] we request that you withdraw your claim.
[28] Later in July Guise Accountants filed a tax return on behalf of Practical Civil Services Ltd. That showed income of $286,642 and claimed a deduction for offset loss for the same amount. The return does not show the source of the offset. I was advised that that would not be possible by reason of the electronic filing of returns but the accounts would show the sources of the offsets. No such accounts have been put in evidence.
[29] The next step was the Commissioner’s statutory demand served on
2 December 2015.
[30] In large part, the Commissioner’s case relies on familiar statutory provisions directed at preventing taxpayers disputing their liability for tax once assessments have been made. The first is s 109 of the Tax Administration Act:
109 Disputable decisions deemed correct except in proceedings
Except in objection proceedings under Part 8 or a challenge under Part 8A,—
(a) no disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and
(b) every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.
[31] A tax assessment is a disputable decision under the Tax Administration Act. A taxpayer is entitled to contest liability by using the dispute resolution provisions of the Tax Administration Act, in particular by lodging a notice of proposed adjustment under Part 4A which may lead to an independent determination of liability under a challenge under part 8A. The company’s notice of proposed adjustment was effective to start the process.
[32] As to the effect of the withdrawal of the notice of proposed adjustment: on the face of it, s 109 would apply unless, of course, the Commissioner were to exercise her discretion to amend the assessment under s 113 of the Tax Administration Act:
113 Commissioner may at any time amend assessments
(1) Subject to sections 89N and 113D, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.
(2) If any such amendment has the effect of imposing any fresh liability or increasing any existing liability, notice of it shall be given by the Commissioner to the taxpayer affected.
That would seem to leave the taxpayer at the mercy of the Commissioner.
[33] Here the taxpayer has an argument to refute that. The argument is that the withdrawal of the notice of proposed adjustment was accompanied by an agreement to deal with the question of offsets. In its submission the terms of agreement were:
(a) The company would withdraw its dispute against the correctness of the default assessments and, in return:
(b) The Commissioner would accept the company’s tax position for the
2006, 2007 and 2008 income years as correct. This confirmed the default assessment for 2006, which assessed the company for a
taxable profit of $286,642; but
(c) The Commissioner agreed to allow the company to offset that taxable profit against losses properly incurred by other members of the corporate group in accordance with Parts 1C and 1T of the Income Tax Act 2007. In doing so, the Commissioner agreed to exercise all necessary discretions in favour of the applicant, to give effect to those offsets.
[34] To put this into context, the parties had begun steps towards dealing with the dispute under Part 4A of the Taxation Administration Act. They agreed not to follow that process, but to follow another process to resolve one outstanding issue in respect of Practical Civil Services Ltd. That issue was the group offset of losses. If that arrangement were carried out to a successful conclusion, that would, it was hoped, lead to the Commissioner amending her assessment under s 113 of the Taxation Administration Act.
[35] There is a plausible foundation on the evidence for an agreement along the lines alleged. That is found in particular in the fax of August 2010, recited in the letter of the Commissioner of 19 May 2014, the lawyer’s letter of 1 November 2010 and the recognition of the agreement in the Commissioner’s letter of 19 May 2014.
[36] At the same time, it is clear that the Commissioner was to operate within the statutory homework. That is recognised by references in the correspondence to the Commissioner extending time for elections to be made under the group offset legislation.
[37] The correspondence is silent as to how long this process should take. When contractual arrangements do not make any provision for something to be carried out within a specified time, the law implies a term that steps must be carried out within a reasonable time.
[38] It is also reasonable to imply a term that both sides would take such steps as were required to bring the agreement to an appropriate conclusion.4 That co- operation would require on the one hand the taxpayer to provide information to assist the Commissioner to make appropriate determinations in accordance with the statutory provisions, and on the other the Commissioner to give due consideration to all information placed before her by the taxpayer. In short, this is very much a
process agreement.
[39] I proceed on the basis that the company has an arguable case for an agreement of the sort alleged, even if not in the exact terms of the submission. Such an agreement is consistent with the Commissioner’s statutory powers under the Taxation Administration Act. I accept the submission for the taxpayer that it is competent for the Commissioner to enter into binding arrangements with taxpayers which may involve compromises of tax positions in the interests of overall efficiency in tax recovery.
[40] In Ultra Developments Ltd v Ultra Projects Ltd,5 Associate Judge Smith described in general terms how tax loss offsets between companies in the same group apply. He described the law under the Income Tax Act 2007. The parties agree that for present purposes the 2004 Act and the 2007 Act are substantively the same. Associate Judge Smith said:
Legal principles – tax offsets and subvention payments
[41] Tax loss offsets between companies in the same group are governed by Part IC of the Income Tax Act 2007. A “tax loss offset” can be made by election: the company within the group with the available tax loss (company A) simply notifies the Commissioner under s IC 9 that it makes the tax loss available to company B. The other means by which one company within a group may pass the benefit of an available tax loss to another company within the group, is by making a subvention payment. A subvention payment is a payment made by one company within the group (the profit-making company) to a loss-making company within the group. Under s 1C 5(2)(b), the subvention payment must be made pursuant to an agreement between the two companies.
[42] If a company within a group made no taxable profit within a relevant year, it cannot make either a subvention payment or obtain the benefit of a
4 Mackay v Dick (1881) 6 App Cas 251 (HL) at 263; Devonport Borough Council v
Robbins[1979] 1 NZLR 1 (CA) at 23.
5 Ultra Developments Ltd v Ultra Projects Ltd [2014] NZHC 1998.
tax loss offset. Any payment could not be greater than the paying company’s profit in the relevant year. Any subvention payment made by the profit- making company within the group, cannot be greater than the amount of the tax losses (including tax losses carried forward from earlier years) of the loss-making company. The amount of the subvention payment is deducted from the taxable income of the profit-making company, and deducted from the tax losses account (including accumulated losses) of the loss-making company.
[41] The key provision here is s IG 2 of the Income Tax Act 2004, in particular s IG 2(2)(b). Section IG 2(3) says:
(3) Every notice under subsection (2) must be given to the Commissioner not later than the 31 March that, in relation to the loss company and the year of offset, is the latest date to which the time for the furnishing of the return of its income for the year of offset may be extended under section 37(5) of the Tax Administration Act
1994 or within such further time as the Commissioner may allow.
[42] The evidence is sparse on what happened between the agreement in 2010 and the Commissioner’s letter of June 2013 other than that some audit was carried out at the behest of the Commissioner who was concerned to identify appropriate profits and losses within the Ellery Group. In that letter, the Commissioner kept alive the possibility that the company would still be able to apply group loss offsets.
[43] There is no explanation as to what happened between June 2013 and the Commissioner’s letter of 19 May 2014. By May 2014 more than eight years had passed since the year in which the profits for which tax was assessed had been earned and some four years had passed since the Commissioner’s assessment of
1 March 2010. Nearly a year had passed since the Commissioner’s letter of June
2013, in which the Commissioner had raised the question of offsets and that action should be taken to deal with the matter.
[44] That lapse of time with little action being taken on the part of the taxpayer provides the context for the Commissioner’s letter of 19 May 2014. The contract had not fixed any time for the process to be completed. With no time fixed, the parties were required to carry out steps within a reasonable time. Of course, it can be notoriously difficult to agree on what might be a reasonable time. Therefore the law says that if one party wishes to cancel on the basis that a reasonable time has passed,
it does so by giving notice to the other side. Tipping J gave a convenient outline of the law in Mt Pleasant Estates Co Ltd v Withell:6
The fundamental starting point is that no time was stipulated for the performance by Mt Pleasant of the condition in relation to procuring and registering the deed. That being so it is trite law that this requirement of the contract had to be performed within a reasonable time. What is a reasonable time must be determined upon all the circumstances of the case. Repudiation is not to be lightly inferred from inaction. In order for there to be repudiation from delay, the delay must generally be so substantial that it can reasonably be inferred from the delay alone that the party concerned does not intend to perform its contractual obligations.
The position is similar when it comes to breach of a contractual stipulation. If it is delay alone which is said to amount to a breach in a case where no time for performance has been agreed, it is generally necessary to show that the delay is clearly longer than could reasonably have been contemplated. In many cases the delay is concerned with performance as a whole. In some cases, such as the present, the delay concerns performance or fulfilment of a condition prior to overall settlement.
If time is not originally essential, ie of the essence, it is necessary to make it so by appropriate notice. Of course in many cases the contract itself may make express provision for the steps to be taken when one party contends the other is in default but it is common ground that in the present case the contract made no provision relevant to the issue which arose. Where no time has been fixed for the fulfilment of a condition the law, as I have said, will imply an obligation to perform or fulfil that condition within a reasonable time. In such cases time is not initially of the essence either generally or for the purposes of s 7(4). [Contractual Remedies Act 1979)].
A party faced with delay on the other side cannot normally hold the other party in repudiation or claim that a stipulation has been broken unless and until an appropriate notice has been given making time of the essence and requiring performance by a stated date. Provided the notice is valid (ie not premature) and allows a sufficient period for fulfilment, non-performance by the stipulated date can then be regarded as repudiation or, as appropriate, breach of a stipulation. There is little doubt that an appropriate notice is necessary if the issue is performance of the contract as a whole.
Tipping J re-stated that in his judgment in Steele v Serepisos.7
[45] In May 2014 enough time had passed that it is now unarguable for Practical Civil Services Ltd to say that a reasonable period of time had not passed. I regard the letter of the Commissioner of 19 May 2014 as effective notice within the approach taken by Tipping J in Mt Pleasant Estate Company Ltd v Withell. The
notice was not premature. More than a reasonable time had passed. The notice gave
6 Mt Pleasant Estates Co Ltd v Withell [1996] 3 NZLR 324 (HC). at 329.
7 Steele v Seriposis [2006] NZSC 67, [2007] 1 NZLR 1 at [40].
six weeks to act. In the circumstances of this case, that was adequate. It said that elections were required within that time. The letter set out the consequences of not acting.
[46] In response, Practical Civil Services Ltd takes two points. First, the Commissioner should not have required the companies in the Ellery Group to make elections. The Commissioner should have made the elections herself. The Income Tax Act 2004 gives the power to make an election to the taxpayer, not to the Commissioner.8 It was submitted that the Commissioner has a wide-ranging power of amendment and that would give her the power to select companies within the Ellery Group and to adjust those companies in terms so that losses in those
companies were applied against the profits of Practical Civil Services Ltd. The submission was that the company did not need to do anything. It was all over to the Commissioner to make the agreement work.
[47] I do not accept that argument. The legislation is clear that the election must be made by the loss-making company.9 The Commissioner was not in breach of the agreement by requiring the Ellery Group of companies to make elections rather than the Commissioner imposing her solution instead. There are good reasons why the election should be for the loss-making companies and not for the Commissioner. A loss-making company may not wish to have its losses applied towards the profit of a related company. There may be tax planning reasons why it might wish to carry those losses forward – for example, in anticipation of profits to be made in later years. The Commissioner might cause unforeseen harm or detriment by imposing
her solution over the wishes of the loss-making companies. The Commissioner is correct, in my judgment, in leaving the matter for the companies to decide. She could not be required to make elections on their behalf.
[48] The second objection is that the Commissioner imposed additional requirements to supply information. The point objected to are the requirements to provide records, information and elections. That requirement was apparently
inserted after Mr Cotton of the Inland Revenue had taken advice from the legal and
8 Income Tax Act 2004, s IG 2(2) and (3).
9 See in particular Income Tax Act 2004, s IG 2(2).
technical section of the Inland Revenue Department. The apparent reason for seeking additional information was to ensure that there was appropriate commonality of timing between profits earned by Practical Civil Services Ltd and losses claimed by other companies.
[49] I do not regard that as departing from the agreement. The companies were required under the agreement to provide the Commissioner with appropriate information so that the Commissioner could be satisfied that loss offsets were appropriate under s IG 2 of the Income Tax Act 2004. Significant information had already been provided. Rather than leave the Commissioner to hunt through records provided by the company to see whether the test was met, the Commissioner was requiring the companies to provide the information in a way that could be easily understood so as to show her that the test under s IG 2 was satisfied. That is simply a matter of implementing the agreement, not imposing an additional burden. I do not regard that as invalidating the letter of 19 May 2014.
[50] That letter gave the company and other companies in the Ellery Group the opportunity to file elections under s IG 2(3). There is no evidence that the company did so. If the company had given notice of elections before 30 June 2014, it would have put that in evidence. The only evidence of Practical Civil Services Ltd claiming any loss offsets is the return made in July 2015. By that stage the Commissioner had sent the letter of 15 January 2015 calling up the debt. That was a clear cancellation of the agreement made in late 2010. That cancellation was effective because time had been made of the essence by the letter of 19 May 2014 and the company failed to have any loss offsets applied by that date. It had failed to take action within time. That was delay which justified cancellation of the contract.
[51] Accordingly I find that the agreement of late 2010 was effectively cancelled by the Commissioner calling up the debt in January 2015. The purported filing of a return after that date was effective because the agreement no longer applied. The Commissioner was no longer contractually bound to consider any loss offsets which the company might have wished to have taken into account. In short, from November 2010 until January 2015, Practical Civil Services Ltd had the opportunity to have group tax offsets applied in reduction of its tax liability. It had more than
enough time. It was given clear notice of its opportunity to take action and simply failed to do so. It cannot complain of the consequences of cancellation of the agreement when it had delayed without any explanation.
[52] Although the taxpayer did not rely on it, I briefly consider an alternative. Rather than applying a contractual approach as proposed by the company, another approach might be to consider whether judicial review would be available. That is in the context that the parties agreed on an alternative dispute resolution mechanism outside the statutory framework. It might be arguable that if the Commissioner acted capriciously or irrationally in not following the agreed arrangements for dispute resolution, then the decision to stand by the original assessment might be subject to judicial review. It might be one of the rare cases which Tipping J suggested in
Tannadyce Investments Ltd v Commissioner of Inland Revenue.10 I consider that
possibility simply to ensure that potential arguments are not passed over.
[53] While allowing for that theoretical possibility, there is no substance to any claim that the Commissioner may have committed any reviewable error in the way that she dealt with the process after the agreement of November 2010. The Commissioner allowed plenty of time for the Ellery Group of companies to put their affairs in order. She gave clear notice, first in June 2013 and second in the letter of May 2014, so that Practical Civil Services Ltd and its accountants could not be under any doubt as to the action which the Commissioner proposed in the absence of any action by the companies. I see nothing that smacks of unfairness in the approach taken by the Commissioner.
[54] In summary, I am satisfied that the company does not have an arguable case that the Commissioner was in breach of contract in not amending the assessment of
1 March 2010 under s 113 of the Tax Administration Act. In the absence of any claim for breach of contract by the Commissioner the original assessment of 1 March
2010 continues to stand. Practical Civil Services Ltd remains liable to pay the debt
arising under that assessment. There cannot be a genuine and substantial dispute as
10 Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153.
to its liability. Accordingly I dismiss the application to set aside the statutory demand.
[55] Under s 291 of the Companies Act I order Practical Civil Services Ltd to pay the Commissioner the sum of $418,674.62 by 18 April 2016. If the company does not pay that sum in full by that date the Commissioner may make an application for liquidation.
[56] I also order the company to pay costs on the application on a 2B basis, plus disbursements. If the parties cannot agree costs memoranda may be filed.
………………………......................
Associate Judge R M Bell
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