Roma Properties Ltd v Commissioner of Inland Revenue

IN THE COURT OF APPEAL OF NEW ZEALAND

CA 275/01

BETWEEN	ROMA PROPERTIES LIMITED
Appellant

AND	THE COMMISSIONER OF INLAND REVENUE
Respondent

Hearing:	18 July 2002
Coram:	Anderson J Glazebrook J Williams J
Appearances:	R J Warburton for Appellant J H Coleman and R J Wallace for Respondent
Judgment:	10 September 2002

JUDGMENT OF THE COURT DELIVERED BY WILLIAMS J

Table of Contents

Paragraph No.

Issues  1
Facts  5
Miller v Commissioner of Inland Revenue  12
Judgment under appeal  15
Submissions  17
Discussion:

(i)The s99 point 21
(ii)The NOPA point 27

Abuse of process? 34
Summary and result 36

Issues

On 21 June 2001 the respondent Commissioner issued proceedings to wind-up the appellant, Roma Properties Ltd, on the ground that it owed $4,692,926.85 for fringe benefit tax (“FBT”), additional taxes and penalties, it having failed to meet a statutory demand for that sum.
Roma Properties applied to stay those proceedings and restrain advertising on the grounds that the Commissioner had not fulfilled what Roma Properties claimed was an obligation to make new assessments in respect of the tax owing arising out of the decision of the Privy Council in Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (also reported as O’Neil v Commissioner of Inland Revenue (2001) 20 NZTC 17,051).
Following a defended hearing where Master Kennedy-Grant ruled inadmissible a number of passages in the affidavit filed in support, on 19 November 2001 Morris J delivered a reserved decision dismissing Roma Properties’ application.
This judgment deals with Roma Properties’ appeal against that dismissal.

Facts

The dispute between Roma Properties and the Commissioner has a lengthy history. For present purposes no more than a summary is required. Much of it can be taken from previous decisions delivered as part of that dispute.
The background was described in the headnote to the first litigation between the parties, a case stated to the Taxation Review Authority reported as Case Q 48 (1993) 15 NZTC 5,241. The headnote accurately records the factual findings in the judgment and reads :
The taxpayer company was incorporated on 27 September 1972 and was engaged in the business of landlord of commercial property. On 1 April 1985 the three shareholders of the company sold their shares to CM Limited. Three declarations of trust recorded that each of the three shareholders who had disposed of their shares became trustees for those shares on behalf of CM Limited as beneficiary. Contemporaneously with the agreement for sale and purchase of the shares, the vendors and purchaser entered into a deed entitled “Mortgage of shares” with the mortgagor being recited as CM Limited. Two further declarations of trust were drawn up, the first being between CM Ltd, the purchaser of the shares, and another company, B Ltd. A further document entitled “management contract” established the three former shareholders of the taxpayer company as managers of that company. A management fee was returned for income tax purposes by one of the former shareholders in the income year ended 31 March 1988.
The Commissioner considered that the former shareholder-directors had received a fringe benefit by way of a loan represented from time to time by the debit balance in their current accounts. The basis for the Commissioner’s assessment was that the three persons concerned were, during the relevant periods in issue, employees of the taxpayer company as defined by sec 336N of the Income Tax Act 1976. The taxpayer objected to the assessment contending that the three persons concerned were not employees but “independent contractors” who contracted with the parent company to assist it in the management of its subsidiary.
It remains to add :
[a] That the taxpayer company in that citation was Roma Properties;
[b]CM Limited is Commercial Management Ltd, a company operated by a Mr J G Russell, Roma Properties’ taxation agent;
[c]The FBT claimed is for the 13 quarterly periods 1 October 1986-31 December 1989 amounting to $409,618.40. That sum, with penalties, grew to the total earlier mentioned by the date the Commissioner’s statutory demand was issued and had grown further to a sum exceeding $5,678,441.36 by the hearing in this Court.
The Taxation Review Authority’s decision delivered on 25 June 1993 was in favour of Roma Properties. The learned Authority held (at 5,253) that none of the shareholders and directors were in receipt of source deduction payments. They were therefore not within the definition of “employee” at any material time and could not be said to have received a fringe benefit as defined. Since an appeal against the judgment was allowed, it is unnecessary for present purposes to do more than adopt the Authority’s summary of the facts and note the Authority’s comments (at 5,245) that the status and effect of the declarations of trust was considered against the factual background and “the fact that the Commissioner has not sought to rely on s 99 or the anti-avoidance provisions of the fringe benefit tax regime”. However, when the Authority was discussing a document described as an assignment of debt, it held (at 5,249) :
The Commissioner regards this document as a sham entered into in his view expressly for the purposes of stripping the objector company of its assets. The asset referred to is the money owed by the former shareholders to the company on current account. In his final submissions Mr Wood for the Commissioner was minded to argue that the Court in those circumstances should invoke the provisions of sec 99 of the Income Tax Act. Mr Russell vehemently objected to such a proposition at that late stage of the case and in the face of that objection Mr Wood withdrew. The provisions of sec 99 are therefore not relevant to any determination I have to make.
The Commissioner successfully appealed (Commissioner of Inland Revenue v Roma Properties Ltd (1995) 17 NZTC 12,367). For present purposes it is only pertinent to note that Cartwright J held that the payments to directors were source deduction payments and rendered Roma Properties liable for FBT. For obvious reasons, s 99 was not mentioned.
Roma Properties unsuccessfully appealed to this Court (Roma Properties Ltd v Commissioner of Inland Revenue (1998) 18 NZTC 13,903). The Court commenced its reserved judgment delivered on 6 July 1998 with the following observation :
The primary question raised by this appeal is whether the three directors of the appellant, Roma Properties Limited, to whom the company advanced loans on current account, were within the definition of employee under s 366N(1) of the Income Tax Act 1976 in relation to the income quarters in question so as to render Roma liable to fringe benefit tax. The answer turns on whether the directors came within the expression “a person …who will be, is, or has at any time been entitled to receive a source deduction payment”.
Then, in setting out further points raised for the first time at the hearing, the judgment observed (at 13,908-9) :
The first was that the payments by Roma to the three directors were not “loans” but were derived from a distributable capital reserve following the settlement of the sale of a property on 31 August 1987. The second was that the directors had owing to them on the sale of their shares in Roma an amount in excess of any moneys shown subsequently as temporarily owing by them to Roma. The third was that the general anti-avoidance provision (s 99) applied to the agreement for sale of the shares and other relevant documents and all steps and transactions carried out pursuant to that arrangement with the result that each of the three directors remained a shareholder owing 10% or more of the ordinary shares in Roma and so falling within a statutory exclusion from the definition of fringe benefit in s 336N(1).
None of these points is properly arguable on appeal. They are not within the scope of the four questions which the parties themselves stated were to be answered by the High Court in the case on appeal from the authority. …
Turning … to s 99, it is sufficient to add that the authority was hearing and determining an objection against an assessment. As noted in the authority’s judgment (p 5,245) the Commissioner did not invoke s 99; the letter of objection (p 5,247) did not raise s 99; and the judgments of the authority and the High Court proceeded on the basis that the relevant documents and transactions were to be given their legal effect.

Miller v Commissioner of Inland Revenue

Because the decision of the Privy Council in Miller delivered on 10 April 2001 was a focus of the judgment from which this appeal was brought and was central to the submissions made to us, it is helpful to consider the terms of that judgment as they apply to this appeal before considering Morris J’s decision.
It is again sufficient to recount the facts and issues in Miller by reference to an amalgam of the headnotes in Miller and O’Neil which read :
(Ex O’Neil)
The four taxpayers were shareholders in two trading companies which had participated in the JG Russell template tax avoidance scheme. Under this scheme, an accountant named JG Russell (“JGR”) offered to take, year by year, the entire net profits of the shareholders companies and immediately make a return to them (less remuneration for his services) in the form of tax-free capital.
The first step in the scheme was for the taxpayers to agree to sell their shares to a company controlled by JGR, the price being left outstanding and secured by a mortgage over the shares. The taxpayers declared themselves trustees of the shares for JGR’s company but remained on the register and continued to run the company. They had an option to repurchase the shares when the scheme had run its course. Alternatively, JGR’s company could agree to buy a release of the option for a sum which would create a new capital debt sufficient to enable the scheme to start up again.
Under the scheme, the trading company’s net profits were paid to a JGR company every six months as an “administration charge”. The JGR company retained a proportion of each instalment and accounted for it to the tax loss company. The amount of the profits transferred as administration charges was claimed as an offset against the tax losses available to the tax loss company. In reality, the administration charge was partly a conduit for the money which was to be returned to the taxpayers and partly a fee payable to JGR for the use of the scheme. The proportion was calculated by reference to the amount of tax saved. The company also paid a six-monthly “business consultancy fee” to another JGR-owned entity, calculated at 5% of the administration charge, and claimed that amount as a tax deduction.
The JGR company paid the taxpayers their part of the administration charge. This was designated as an instalment of the purchase price. The purchase price was calculated, not by reference to the value of the company, but by way of enabling the scheme to mop up a given number of years of expected net profit.
(Ex Miller)
The Commissioner of Inland Revenue … took the view that the scheme amounted to an arrangement which had the purpose or effect of tax avoidance within the meaning of s 99(2) of the Income Tax Act 1976 (the Act). He undertook a reconstruction of what would have occurred had there been no scheme. Initially, the Commissioner made assessments against the trading companies on the basis that the administration fees would not have been allowable deductions. This form of assessment was known as “Track A”. It transpired that the trading companies had disposed of their assets and the assessments went unpaid. The Commissioner then adopted an alternative form of assessment, “Track B”, based on the supposition that the appellants would have paid themselves the net profits as directors’ remuneration, and he increased their assessable incomes accordingly.
The taxpayers objected to the assessments under s 30 of the Act. The objection by one taxpayer was rejected and this decision was upheld by the Court of Appeal, while the objection by the other taxpayer had not been finally determined. Parallel with the objection proceedings, the taxpayers brought proceedings for judicial review to quash the assessments. The applications for judicial review were dismissed by the High Court and by the Court of Appeal. The taxpayers appealed to the Privy Council against the decision of the Court of Appeal. They relied upon a number of arguments: the Track B assessments were out of time; the Commissioner failed to comply with his own policy statement in respect of s 99; the Commissioner’s decision to make the assessments was irrational; the assessments were an abuse of power; the Track A and Track B assessments were inconsistent; and the Track B assessments were tentative only.
With reference to s 99, their Lordships observed (at 329-330 paras 23, 24) :
23.It appears that the decision of the Privy Council in Challenge Corporation Ltd v C of IR [1987] AC 155 created some uncertainty in the minds of taxpayers about how the Commissioner might apply s 99. In February 1990 he therefore published a Policy Statement, which has in these proceedings been called the CPS, setting out in some detail what he regarded as the proper scope of the section. It is relevant to observe that the question of whether an arrangement is void against the Commissioner under s 99(2) is not a matter for his discretion or policy. The Act says that an arrangement falling within the terms of the section “shall be absolutely void”. Likewise, the Commissioner is under a statutory duty to reassess the taxpayer’s assessable income to counteract any tax advantage. Discretion enters into the matter only as to the method of calculation by which the Commissioner discharges that duty.
24.The CPS nevertheless reassured taxpayers that, before invoking s 99, the Commissioner would undertake a careful and thorough analysis of the meaning and purpose of the statute and the purpose or effect of the arrangement. He would consider whether it was a fair and reasonable inference that one purpose was tax avoidance. He would decide whether the scheme frustrated the underlying scheme and purpose of the legislation. …

and further, in considering whether the CPS laid down conditions, their Lordships observed (at 330 para 26) that the Commissioner’s “statutory duty is to reassess the taxpayer in any case in which s 99 applies and this duty cannot be made subject to internal conditions”. They also held in relation to persons obtaining tax advantages from an arrangement (at 331-332 para 31) that:

Section 99(3) says that the Commissioner shall adjust the assessable income of any person affected by the arrangement to counteract any tax advantage that person has obtained. There is no reason why an arrangement should not confer tax advantages upon more than one person … provided that [the Commissioner] was not using inconsistent hypotheses for his reconstructions, he was in their Lordships’ opinion entitled to assess any party who had obtained a tax advantage.

Judgment under appeal

Morris J first reviewed the grounds on which the stay and restraint applications were based. They included those already mentioned coupled with an assertion that the refusal to make new assessments breached the Commissioner’s obligations under the Tax Administration Act 1994 (TAA) s 6 and the New Zealand Bill of Rights Act 1990 (BORA) s 27 and the statutory demand proceedings were an abuse of power, abuse of legal process and savoured of unfairness or undue pressure. There was also said to be a genuine dispute as to the amount claimed.
Morris J first held (para 6 p 3) in reliance on Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512, 12,520 that because the effect of the decisions in the Roma Properties litigation in the High Court and in this Court were to uphold the Commissioner’s assessments, no objection or challenge rights remained. The Judge then held that Miller was distinguishable in that it centred round s 99 whereas the present case was focused on FBT and the Commissioner did not rely on that section. The Judge accordingly held the Commissioner entitled to make the assessments for FBT. He went on to hold that the allegations under s 6 of the TAA and s 27 of BORA were unproved and that Roma Properties had been treated fairly and according to law. The Judge then held that Roma Properties had not established a strong prima facie case for a genuine dispute of the debt on substantial grounds (Pink Pages Publications Ltd v Team Communications Ltd [1986] 2 NZLR 704, 707; Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379, 385) before concluding (para [20] p 7) :
I can find no abuse of process or abuse of power by the Commissioner. As stated above, the Commissioner was entitled to make the finding that fringe benefits had been given to the defendant’s employees and to make assessments of the fringe benefit tax payable. The Commissioner did not abuse his discretion in making the assessments in question as alleged by the defendant. There can be no genuine dispute relating to this debt.

Submissions

For Roma Properties, Mr Warburton consolidated the grounds of appeal to, first, a submission that the Commissioner was wrong in his assessment of FBT because he thought the operation of s 99 was optional contrary to what Miller has now held, and that if s 99 were applied to the facts no FBT would be payable. The second, and new, point was that on 3 December 1996 and 7 and 17 May 2001 Roma Properties filed Notices of Proposed Adjustment (NOPAs) asserting that all previous assessments should be set aside and claiming that because there had been no notice of response filed within the allowed period the NOPAs had become binding on the Commissioner and all assessments should be cancelled.
Amplifying the first of those assertions, Mr Warburton submitted that if the scheme entered into by Roma Properties and its shareholders was void against the Commissioner under s 99, the Commissioner should consider the taxation position of all of them as if the scheme had never been implemented and all former shareholders would accordingly be required to be treated as shareholders owning more than 10% of the ordinary shares in Roma and therefore Roma would not be liable for FBT on the low-interest loans. He submitted that s 6 required the Commissioner to undertake his statutory duties in order to ensure the integrity of the tax system and that taxpayers paid only their statutory due and s 27 should be construed as obliging the Commissioner to observe natural justice since he had power to make determinations in respect of persons’ rights and obligations. He submitted that where the Commissioner knew that taxation liability was incorrect because of the application of s 99, he should be restrained from winding-up the taxpayer company and that, even now, it would be open to the Commissioner to issue amended assessments.
As to the NOPA point, he submitted that Roma Properties only had to show that it had an arguable case that the point might be successful to lead to a conclusion that Roma Properties’ stay application should have been granted.
The Commissioner’s leading counsel, Mr Coleman, said that the FBT assessments had been upheld in the earlier litigation and could not now be further disputed and that Roma Properties misunderstood the Privy Council’s observations in Miller. Those observations did not compel a revisiting of the FBT assessments. He argued no breach had been proved of s 27 of the BORA or s 6 of the TAA. He went on to submit that all Roma’s NOPA’s were invalid as either dealing with matters on which objections had been lodged or in relation to tax affairs to which the Tax Administration Act 1994 did not apply or were not issued within the relevant response period. Hence no response from the Commissioner was required. He also submitted that taxpayer-generated NOPAs could not be used as collateral challenges to court decisions.

Discussion

(i) The s 99 point

Roma Properties’ liability to FBT has been definitively established in both the High Court and in this Court. No appeal was ever lodged against this Court’s decision confirming that liability. Roma Properties’ argument in this case amounts to a suggestion that the Commissioner is obliged now to reassess its FBT liability despite the fact that such liability has been finally concluded by this Court’s decision. It is not open to the Commissioner to take action to override a Court decision in this manner. In addition, were Roma Properties’ argument to be accepted, it would involve the Commissioner effectively overriding this Court’s decision on grounds that were not able to be raised throughout the statutory process leading to that decision. Again that is not open to the Commissioner. Section 99 has never been in issue in the Roma Properties litigation. As this Court noted, neither party had invoked s 99 before the dispute went to the Taxation Review Authority and in particular it was not included in Roma Properties’ notice of objection, thus precluding the Roma Properties from raising it in the litigation. We note too that Mr Russell was successful in opposing the Commissioner’s attempted reliance on s 99 when he sought to invoke it at the Authority hearing (albeit in a different manner from that contended for by Roma Properties).
In any event Miller does not have the effect contended for by Roma Properties. We have set out the factual backgrounds listed in the headnotes to the Miller litigation and to the Roma Properties litigation. Even though both involved Mr Russell, a comparison makes it immediately apparent that not only are the two cases factually entirely distinct but they also involve different taxes and different legal relationships giving rise to those different taxes. The FBT assessments in the Roma Properties litigation arose because of the decisions in the High Court and in this Court that the directors were employees as defined for FBT purposes being, in the factual situation applying to them, persons who had received or had been entitled to receive source deduction payments. This led to findings that Roma Properties was obliged to pay FBT in respect of the low-interest loans to those directors. The Miller litigation principally revolved round capital repayments taxed under the track B assessment as directors’ remuneration. By contrast, the loans in the Roma Properties’ case were unrelated to the capital repayments. The Authority held (at 5,248) that there was no basis for arguing that the loan monies could be offset against the amounts owing in relation to the share sale, especially as those latter amounts were not owed to the company. That finding was not challenged on appeal to the High Court (at 12,369), a matter which was noted in this Court with apparent approval (at 13,909).
The Privy Council decision in Miller therefore relates to the applicability of s 99 involving a different tax, different taxpayers and different periods. In addition, although their Lordships observe in the passages cited from Miller that considering whether an arrangement is void under s 99 amounts to a statutory duty to reassess income to counteract tax advantages and is not a matter for the Commissioner’s discretion or policy, their Lordships also made it clear that (para 31 p 17,061) the Commissioner was entitled to adjust the assessable income of any person affected by the arrangements to counteract any tax advantage that person has obtained, provided he uses consistent hypotheses for such reconstruction. This therefore would not have provided support for Roma Properties’ position in any event.
It is noteworthy too that, although Mr Russell in the admissible portions of his affidavit sworn in support of Roma Properties’ stay and restraint application, gives it as his view that the Commissioner is required to issue new assessments in respect of Roma Properties’ FBT as a result of Miller, he nowhere says that, if the Commissioner now sought to invoke s 99 in relation to Roma Properties’ taxation affairs, the company would abandon its long-held and stoutly defended opposition to that course and would concede that s 99 applied to the arrangements between Roma Properties and its directors and shareholders from 1985 onwards.
We therefore conclude, in agreement with the Judge, that Miller does not require the Commissioner to invoke s 99 as regards the FBT debt owing by Roma Properties and that no substantial dispute as to the debt has been demonstrated by the appellant in that regard.
We are also of the view that s 6 of the TAA does not avail Roma Properties it having come into force some years after the assessment for FBT which is at the heart of this claim. Similarly, s 27 of the BORA is of no assistance to Roma Properties – even if it applies to tax assessments and disputes – since we agree with the Judge that the Commissioner has not been shown to be acting in breach of his statutory rights and obligations and accordingly could not be held not to have observed such of the principles of natural justice as might apply to any determination of Roma Properties’ taxation affairs. When Roma Properties has fully availed itself of the statutory objection in litigation processes up to this level, it is very difficult to see that s 27 could possibly be breached in the manner for which it now contends. Even if s 27 might arguably have been breached, the rights conferred on taxpayers by the taxation statutes might amount to justified limitations under s 5 to the application of s 27, although we leave that aspect of the matter for decision in a case where it has been properly pleaded and is the subject of evidence.
(ii) The NOPA point
Though the NOPA point was not raised in the High Court, in our view, it is also of no assistance to Roma Properties.
NOPAs were creations of the Tax Administration Act 1994 Part IVA which set up disputes procedures in taxation matters. But s 89A(2) which came into force on 1 October 1996 excludes the operation of Part IVA in relation to any returns or assessments that are or become subject to objection proceedings. Roma Properties’ first NOPA dated 3 December 1996 relates to income tax assessments for the years 1984-88 inclusive. The second NOPA, that dated 7 May 2001, effectively covers the same ground. A comprehensive objection to all aspects of the assessments of Roma Properties’ taxation affairs was lodged by Mr Russell on 11 September 1996. The third NOPA, that dated 17 May 2001, seeks adjustment of FBT for the periods 31 December 1986 - 31 March 1989 and cancellation of the penalties. That is the period covered by this Court’s earlier decision in relation to Roma Properties and is not now open to challenge.
A further reason why this new point cannot avail Roma Properties is that the Tax Administration Act 1994 came into force on 1 April 1995. At the time of its enactment it only applied to the 1995 - 96 and subsequent tax years. It was only with effect from 20 May 1999 that the Taxation (Accrual Rules and Other Remedial Matters) Act s 73, added subs (3) to s 89A(2) which applied Part IVA to disputable decisions made by the Commissioner for the income years of and before 1994 - 95. But the assessments and the first NOPA in this case had been issued well before 20 May 1999 and accordingly at a time when the Tax Administration Act 1994 did not apply for periods prior to the 1995 - 96 tax year, and the second NOPA, that dated 7 May 2001, also applied to those earlier tax years.
Mr Coleman also submitted that the NOPAs were invalid as issued outside the two month response period allowed.
The first NOPA was issued on 3 December 1996 in respect of an assessment issued on 28 August that year (although Mr Russell had objected to the assessments on 11 September). The second NOPA issued on 7 May 2001, is claimed to be in response to a notice of assessment dated 19 April 2001 for the 1990 tax year, but it lists 14 suggested assessments which are in fact statements of account each adding penalty to the 1990 tax assessment which was issued on 28 August 1996. That such statements of account did not amount to assessments was decided in Miller and Managed Fashions (supra at 13,237) which relied on a finding to that effect by this Court in Paul Finance Limited v Commissioner of Inland Revenue (1995) 17 NZTC 12,379, 12,382.
For completeness, it should be added that, as noted, the final NOPA on which Roma Properties relied, that dated 17 May 2001, concerns the FBT assessment confirmed against the appellant by this Court’s decision. That NOPA was issued about 11 years after the FBT assessment and three years after the matter was dealt with by this Court. The NOPA therefore seeks to revisit a question definitively decided against Roma Properties in this Court and is invalid on that ground.
It follows that the NOPA point, even allowing it to be considered despite not being raised previously, does not avail the appellant.

Abuse of process?

Mr Warburton submitted that the actions of the Commissioner first, in restoring Roma Properties to the register when it was struck off a number of years ago and secondly, in pressing ahead with liquidation proceedings in the circumstances earlier described, arguably amounted to abuse of process sufficient to warrant the staying of this claim.
Whilst there is power for the Court to set aside statutory demands – not in issue here – and also to stay winding-up proceedings which it concludes amount to abuse of process (Apple Fields Limited v Trustees Executors and Agency Co of NZ Limited (1999) 8 NZCLC 262,008 and cases there cited) a similar submission was rejected by Morris J and we are unable to see any error in his approach. If liquidation of Roma Properties follows it will not have the usual consequence of removing a debtor company from the commercial community as the appellant has not traded for almost a decade. But, that notwithstanding, there is no basis for concluding that the Commissioner’s winding-up proceedings brought against Roma Properties as a debt collection exercise is an abuse of process. That object was held not to be improper in Apple Fields.

Summary and result

It follows that, for the reasons discussed, we are of the view that Roma Properties has not demonstrated error in Morris J’s approach or in the exercise of his discretion, nor that it has any other ground available to it on which the Commissioner’s winding-up proceedings against it should be stayed and advertising restrained.
The appeal is accordingly dismissed.
The appellant must pay the Commissioner’s costs of the appeal which we fix at $5,000 plus disbursements (including travel and accommodation costs) to be set by the Registrar if necessary.

Solicitors

Warburton & Co., Auckland
Crown Law, Wellington

[2002] NZCA 285

10 September 2002