Sea Hunter Fishing Ltd v Commissioner of Inland Revenue

[2004] NZCA 47

IN THE COURT OF APPEAL OF NEW ZEALAND

CA55/03

BETWEENSEA HUNTER FISHING LIMITED

Appellant

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:26 February 2004

Coram:McGrath  J
Glazebrook  J
William Young  J

Appearances:  G A Muir and M S Hinde for Appellant

R J Ellis and M Deligiannis for Respondent

Judgment:5 April 2004 

JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J

Introduction

[1]       This case concerns an offshore factory trawler, Sea Hunter I, bought by Sea Hunter Fishing Ltd (“Sea Hunter”) in September 1996 with the intention of fishing for orange roughy in the Atlantic. For a variety of reasons this venture was unsuccessful and it was decided to bring the vessel to New Zealand to fish for hoki in association with Vela Fishing Ltd. The vessel commenced fishing in New Zealand in May 1997.  In a GST return sent to the Commissioner in January 1998, Sea Hunter claimed an input tax credit for the tax fraction of the value of the vessel, namely $2,495,850, on the basis of the change of use of the vessel in May 1997.

[2]       The Goods and Services Tax Act 1985 (“GST Act”) was amended retrospectively on 10 October 2000 by, among other things, the addition of ss21E and 21F. The effect of those new sections is to limit the circumstances in which taxpayers are able to take an input tax deduction upon a change in use when goods and services acquired for the principal purpose other than that of making taxable supplies are applied for the purpose of making taxable supplies. A savings provision applies in certain circumstances where a claim had been made before 16 May 2000.

[3]       It is common ground that the new ss21E and 21F of the GST Act mean that Sea Hunter is not entitled to the input tax deduction it has claimed, unless it can bring itself within that savings provision. By judgment of 4 March 2003, now reported as Sea Hunter Fishing Ltd v Commissioner of Inland Revenue (2003) 21 NZTC 18,090 (HC), Randerson J held that the savings provision does not apply. Sea Hunter appeals against that decision.

[4]       Although the Commissioner contends that Sea Hunter is not in any event entitled to the deduction, the sole issue for this appeal is whether the savings provision applies. 

The legislation

[5]       The retrospective amendment of the GST Act referred to above was made by s100 of the Taxation (GST and Miscellaneous Provisions) Act 2000 (“the 2000 Act”). The savings provision is contained in s100(3) of that Act. It provides as follows:

(3)       New sections 21E and 21F(1) apply on and after 1 October 1986 unless a claim for a deduction under section 20(3) of the Goods and Services Tax Act 1985 has been made, whether in a return or by using the disputes procedures of Part 4A of the Tax Administration Act 1994, before 16 May 2000 and the Commissioner of Inland Revenue -

(a)   has not been notified of the claim, other than by way of inclusion in the registered person’s return, and on this basis has not queried the claim in writing before 16 May 2000; or

(b)   has not queried the claim in writing before 16 May 2000 but has agreed in writing to the claim before 16 May 2000; or

(c)   has queried or considered the claim in writing before 16 May 2000 but has agreed in writing to the claim before 16 May 2000.

[6]       As s29 of the GST Act is relied on by Sea Hunter, we also set that out here:

Except in proceedings under Part VIIIA of the Tax Administration Act 1994, no assessment made by the Commissioner shall be disputed in any Court or in any proceedings (including proceedings before a Taxation Review Authority) either on the ground that the person so assessed is not a registered person or on any other grounds; and, except as aforesaid, every such assessment and all the particulars thereof shall be conclusively deemed and taken to be correct, and the liability of the person so assessed shall be determined accordingly.

[7]       Section 46 of the Goods and Services Tax Act 1985 is also relevant and provides as follows:

(1)     Subject to this section, if the Commissioner is required to refund an amount to a registered person under section 19C(8) or section 20(5) of this Act, the Commissioner shall refund the amount—

(a)     Except when paragraph (b) applies, not later than 15 working days following the day on which the registered person's return was received by the Commissioner; or
(b)     The day after the working day on which the Commissioner—

(i)     Determines the amount is refundable, after first having—

(A) Investigated the circumstances of the return in accordance with subsection (2); or
(B)  Reviewed the information requested in accordance with subsection (2); and

(ii)     Is satisfied that the registered person has complied with the person's tax obligations.

(2)     If the Commissioner is not satisfied with a return made by a registered person, the Commissioner—

(a)   May investigate the circumstances of the return:
(b)  May request the registered person to provide further information concerning the return.

[8]       Section 105 of the Tax Administration Act 1994 was also referred to. We set out that section as it read at the relevant time:

Any assessment or determination made for the purposes of any of the Inland Revenue Acts that is made automatically by a computer or other electronic means in response to or as a result of information entered or held in the computer or other electronic medium shall be treated as an assessment or determination made by or under the properly delegated authority of the Commissioner.

Background facts

[9]       A full discussion of the acquisition of the vessel, its coming to New Zealand, the arrangements with Vela Fishing Ltd and the events after the vessel’s arrival in New Zealand are set out in Randerson J’s judgment at paras [12]-[52]. Here we set out the events after the filing of the GST return in January 1998. As background, we commence with a description of the way in which GST returns are processed by the Commissioner.

[10]     Until recently, all GST returns filed by taxpayers have been paper rather than electronic returns. When a paper return is received by the Commissioner a processing centre operator keys the information contained within the return into the Department’s computer system. The system automatically checks the taxpayer’s GST registration and for simple calculation errors. It then conducts further electronic checks, including whether any refund is above an approved refund level, such level being set for each GST registered taxpayer. If the data passes these further checks the notices of assessment and any refund cheques are issued electronically.

[11]     If the return fails the registration and calculation checks it is sent to an assessment review officer. If that officer is satisfied, the return moves to the next step in the system for the further electronic checks. If the return fails those further checks it passes into what is called “account review”. The return can then go no further in the process until an authorised Departmental officer either approves it (in which case it returns to the system for the issue of the notice of assessment and the cheque if applicable) or transfers it to audit for further review. When it is transferred to audit a halt can be placed on the account to prevent any refund claimed from being automatically issued by the computer.

[12]     In the case of the Sea Hunter return, a paper return was sent to the Commissioner on 19 January 1998 and keyed into the computer on 22 January. It passed the first registration and calculation checks but, the refund claimed being above the pre-authorised level, it failed the further checks. It then passed to account review and from there, on 3 February 1998, to audit. Audit staff put a halt on the computer to stop the notice of assessment and refund being activated for 15 days and wrote to Sea Hunter on 10 February 1998 asking for further information about the refund claimed. No further halt was put on the computer, however, and the cheque and notice of assessment were therefore issued electronically on 18 February 1998 at the end of the 15 day halt period. Sea Hunter in due course received the cheque and notice of assessment and banked the cheque on 27 February 1998. The Commissioner, however, stopped payment on the cheque and Sea Hunter’s account was debited on 5 March 1998 with the amount of the cheque by way of reversal.

[13]     On 8 September 2000 Sea Hunter issued proceedings claiming judgment for the amount of the cheque plus interest. By judgment now reported as Commissioner of Inland Revenue v Sea Hunter Fishing Limited (2002) 20 NZTC 17,478 (CA), this Court, on 13 December 2001, granted summary judgment to Sea Hunter. It held that, as there had been no request for further information given to Sea Hunter within the requisite 15 day period stipulated under s46 of the GST Act, the refund had to be made. This 15 day period had in fact expired on 10 February 1998 but the letter requesting further information had not been received by Sea Hunter’s accountant until some time after this.

[14]     The Court also, however, held that the requirement to make the refund did not prevent the Commissioner from continuing, as he had done, with his investigation and subsequently issuing a notice of proposed adjustment, (which we note occurred on 8 September 1998), bringing into play the disputes resolution procedures of the Act. Nor did it prevent the Commissioner from issuing a reassessment disallowing the input tax claim, which he did on 2 May 2001. The Court noted that, by virtue of that reassessment, Sea Hunter became liable to pay non-deferrable tax of half the tax in dispute (pursuant to s138I of the Tax Administration Act). Sea Hunter’s then counsel conceded that the Commissioner was entitled, as from 2 July 2001, to offset his liability on the cheque against the amount due for non-deferrable tax. Judgment was, therefore, given for the reduced amount.

Randerson J’s judgment

[15]     In this proceeding there were two arguments for the Commissioner in the High Court. The first was that ss21E and 21F of the GST Act, as added by s100 of the 2000 Act, apply retrospectively so that s21 of the GST Act, on which the appellant relied, could have no application. The second was that the agreements entered into with Vela Fishing Ltd constituted an “arrangement” to defeat the intent or the application of the Act under s76 of the GST Act. Randerson J dealt only with the first issue, on which he found in favour of the Commissioner.

[16]     The key issue was whether s100(3) of the 2000 Act excluded the retrospective operation of the amendments where, before 16 May 2000, the Commissioner had issued the refund cheque to Sea Hunter. The Judge held that, in the circumstances, where inquiries were ongoing and the cheque had been sent in error and stopped, that cheque did not constitute an agreement in writing. He said at para [59]:

Although I accept that the question whether the Commissioner has agreed in writing is to be determined objectively, it must be demonstrated that the Commissioner did something more than send a cheque in error. There must be circumstances which show that the Commissioner or his staff have signified a deliberate or conscious acceptance of the claim evidenced by some appropriate form of writing.

Submissions of the parties

[17]     On behalf of Sea Hunter, Mr Muir’s first submission was that, although s100(3) does not expressly refer to claims paid, it necessarily contemplates that, where a claim has resulted in payment, the Commissioner cannot use the retrospective application of ss21E and 21F to reopen an earlier assessment, even on the basis that payment had been made mistakenly and hence there was in reality no agreement. That this is the position is, in his submission, backed up by statements made on behalf of the Minister of Revenue at the second reading of the Bill on 3 October 2000 and by the Finance and Expenditure Select Committee in its report back on 12 September 2000 that refunds already made would not be affected. As the Minister said (Hon J Sutton (3 October 2000) 587 NZPD 5800):

The Bill does not seek to overturn refunds that have already been granted or agreed to; it merely seeks to prevent further refunds of tax that has never been paid.

[18]     Ms Ellis, for the Commissioner, submitted in answer to this first submission that the amendments were intended to and do allow the reassessment of claims on which money was paid out before 16 May 2000. This follows from the retrospective operation of the amendments, s46 of the GST Act (which contemplates refunds where entitlement has not been established), the absurdity of the result contended for by Sea Hunter where a minor failure by the Commissioner would make Sea Hunter some $2.5 million better off and the emphasis on agreement rather than payment in the legislation. She also submitted that the Minister’s statements in Parliament are consistent with this position as he refers to agreement, which in context mean a conscious act, rather than the automatic consequence of s46. To the extent that other aspects of the legislative history suggest otherwise, they were said to be inconsistent with the statutory text.

[19]     Mr Muir’s second submission was that there had been an assessment made by the Commissioner which reflected the input tax deduction claimed by Sea Hunter. That assessment must in his submission be taken to be correct in all respects under s29 of the GST Act. Further, the refund cheque sent to Sea Hunter was accompanied by a Notice of Assessment and a Statement of Account, both of which evidenced in writing the preceding assessment.

[20]     In reply to this submission, Ms Ellis submitted that s29 of the GST Act cannot prevent the application of ss21E and 21F because those sections operate by virtue of the legislation and not an act of the Commissioner or the Court. Ms Ellis submitted further that, as a matter of statutory interpretation, s100(3) applies to claims that have been previously “agreed in writing” by the Commissioner, not to “assessments” and the terms are not synonymous. Alternatively she submitted that the issue of a cheque and notice of assessment in error by the computer in February 1998 did not, in any event, constitute an assessment that could give rise to the operation of s29.

[21]     Mr Muir’s third and main submission was based on the fact that the instructions to the computer to pay out the cheque were not countermanded. This means, in his submission, that, tested objectively, the cheque and the Notices of Assessment and Account are, separately or cumulatively, evidence of an agreement to the claim. He submitted that the focus should be on the objective manifestation of agreement rather than private subjective reservations. This is particularly so in the case of retrospective legislation, especially where, in his submission, the limit on the ability to claim input tax has no obvious policy rationale.

[22]     The core of this argument was an analogy with the principal-agent relationship. Mr Muir submitted that the computer is analogous to an agent instructed by its principal to perform actions in certain circumstances. If those instructions are not countermanded and the agent follows them, this is sufficient to manifest agreement, whatever subjective reservations the principal may have had. Here the instructions to the computer were not countermanded and the computer paid out as instructed. The Commissioner as principal is bound.

[23]     Ms Ellis submitted on this point that the issue of the cheque and Notice of Assessment and Account by the computer in February 1998 neither constitutes nor evidences the Commissioner’s “agreement in writing” to Sea Hunter’s claim. In her submission, the wording of s100(3) requires both a subjective intention to agree and that the agreement be express not inferred. She submitted that neither of these requirements exists on the facts in this case. The evidence is rather that there was no intention on the Commissioner’s part to agree to the claim. With regard to the policy rationale of the amendments she submitted that the rationale for the amendments was to limit input tax credits to situations where there had been a prior payment of GST on those goods, either through actual payment or in the more general sense of what is commonly called the general price uplift that related to the introduction of GST. 

[24]     There was also a matter raised by Mr Muir in relation to the summary judgment. He submitted that there was no non-deferrable tax owing and thus that there should have been no set-off ordered by this Court against the amount owing on the cheque.  This is because the whole of the input tax was repaid when Sea Hunter’s account was debited after the Commissioner stopped the cheque. Sea Hunter subsequently successfully sued for the amount of the cheque but this was not input tax. It was, instead, payment on the cheque. 

[25]     Ms Ellis countered that the summary judgment proceeding did not involve a simple action on a cheque. The consideration for the issue of the cheque was the Commissioner’s obligation under s46 of the GST Act to pay the refund. Under that section, what is paid is expressly stated to be a refund of tax. When the summary judgment proceedings concluded, therefore, a refund was to be paid to Sea Hunter. Because of the re-assessment, however, non-deferrable tax was payable by Sea Hunter which would be recoverable as a debt due to the Crown. Therefore, in her submission, there was in effect a set-off.

Discussion

[26]     Before examining Mr Muir’s submissions in detail we make some general remarks. In our view s100(3) of the 2000 Act must be interpreted in the context of a tax assessment regime which relies on a system of self disclosure through the filing of returns. There is then a short window of 15 working days from the filing of a return for the Commissioner to raise queries with the taxpayer, failing which any refunds have to be made (see s46 of the GST Act). This does not, however, preclude further queries being raised and reassessments being issued, as indeed occurred in this case. 

[27]     With that background, we turn to the savings provision in s100(3). Para (a) of that subsection is concerned with claims for input tax that had been made in a taxpayer’s return and had not been queried in writing before 16 May 2000. This will arise where a return has gone through the computer system without failing any of the tests or, if it had failed at any stage, where this had not resulted in a query being raised.

[28]     Although it is not immediately obvious why para (b) has been included, it may have been intended to apply where the Commissioner had, before 16 May 2000, been given information other than that contained in the return or where there had been an audit of the taxpayer’s GST returns before 6 May 2000 and, in both cases, where no query had been raised as a result. We consider it arguable that in such cases any notice of assessment issued together with payment of any refund may constitute an agreement in writing for the purpose of that paragraph.   

[29]     Section 100(3)(c) applies where there had been consideration in writing of or the raising of a query in writing about the return in question before 16 May 2000. This situation could arise where the return had failed one of the computer checks or where it had been subsequently subjected to audit and, as a result, correspondence about the return had been sent to the taxpayer. Para (c) continues: “but has agreed in writing to the claim before 16 May 2000”.  We consider that the wording of para (c) (and in particular the use of the word “but”) clearly contemplates that the agreement in writing to the claim must specifically, or by necessary implication, relate back to the correspondence sent to the taxpayer. In our view, an agreement in writing to a claim in terms of para (c) can only arise where the Commissioner has applied his mind to the matters he has raised with the taxpayer in the course of scrutiny of the claim, has reached a considered opinion that the claim should be allowed and has conveyed that considered opinion to the taxpayer. This can only happen if the Commissioner has been satisfied as to any concerns raised in the correspondence with the taxpayer. 

[30]     In this case, the letter requiring further information sent on 10 February 1998 and the Notice of Proposed Adjustment issued on 9 September 2000 would both qualify as queries in writing. On the other hand, the Notice of Assessment and the cheque automatically issued by the computer cannot be said to have indicated in any way that the Commissioner had now been satisfied as to the query contained in the letter of 10 February, since, at that time, he had not received a reply to that query. To the extent that this is relevant Sea Hunter would have been aware that the Commissioner was still querying the claim at the time of receipt of those documents. Equally, the cheque and Notice of Assessment cannot be said to have related to the query raised by the Notice of Proposed Adjustment issued on 9 September 2000 as they preceded that query. 

[31]     This effectively disposes of Mr Muir’s three submissions. We make the following further comments on them. With regard to the first submission we consider that the wording of s100(3)(c) is clear. It refers to an agreement in writing and not to payment. Whatever was said in Parliament cannot change the meaning of plain words.

[32]     On Mr Muir’s second submission, we accept Ms Ellis’ submission that the question in relation to s100(3)(c) is whether there was an agreement in writing and not whether there was an assessment. In addition, ss21E and 21F apply retrospectively. If the savings provision did not apply the Commissioner would have been obliged to reassess (if within time to do so) and s29 could have had no application until that process had been concluded. As this is the case, we do not need to decide if the computer generated process that issued the cheque to Sea Hunter in fact constituted an assessment in these circumstances, although we note that s105 of the Tax Administration Act may be relevant in this regard.

[33]     Turning to the third submission, we have already indicated that the agreement under s100(3)(c) has to be related to the querying or consideration of the claim in writing, reflecting the imperative that the Commissioner has addressed the particular circumstances raised in this query or consideration. That did not happen here.

[34]     Finally, with regard to the request that this Court revisits the summary judgment which set off non-deferrable tax owed by Sea Hunter, it is not now possible to challenge that judgment other than by way of appeal. There would be no grounds, in our view, for recall of the judgment. In any event, we consider that the argument was a technical one. As submitted by Ms Ellis, the payment on the cheque was ordered because of the operation of s46 of the GST Act. In such circumstances the payment must be taken to have constituted a refund in accordance with that section.

Result and Costs

[35]     For the reasons given, Sea Hunter’s appeal is dismissed. Costs of $6000 plus reasonable disbursements are awarded in favour of the Commissioner.

Solicitors:

Bradbury Muir, Auckland for Appellant
Crown Law Office, Wellington for Respondent