Western Joinery Limited v Commissioner of Inland Revenue

[2017] NZHC 1293

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV 2017-404-000510

[2017] NZHC 1293

BETWEEN

WESTERN JOINERY LIMITED

Applicant

AND

COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:

14 June 2017

Appearances:

J Macdonald for the Applicant

C Van Der Merwe for the Respondent

Judgment:

16 June 2017

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

16.06.17 at 11:30am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date……………

WESTERN JOINERY LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZHC 1293 [16 June 2017]

The application

[1]                 The applicant Western Joinery Limited (Western Joinery) applies to set aside the respondent’s (the Commissioner) statutory demand served on 15 March 2017 and claiming the sum of $201,692.76 in respect of unpaid tax, penalties and interest.

[2]                 There is no dispute that Western Joinery owed money for core tax to the Commissioner. Issues in dispute concern claims the tax remains unpaid and, if so, the amount payable.

[3]                 Western Joinery says it has an arguable defence and there is a general dispute about whether liability to the Commissioner exists.

Western Joinery’s case for setting aside

[4]                 Western Joinery assigned monies due to the Commissioner by a related company, Western Property Holdings Limited (WPHL) in terms of an arrangement entered into in March 2016 and subject to a formal deed of assignment in May 2016.

[5]                 Western Joinery is a joinery manufacturer. It was incorporated in January 1997 and continues to trade. WPHL commenced its business activity in June 2015, and applied for GST registration which was approved. Because the premises occupied by Western Joinery were to be sold, WPHL agreed to purchase that property. The price included GST of $191,598 and in March 2016 the companies agreed to the transfer of the GST refund to Western Joinery.

[6]                 In April 2016 the Commissioner commenced liquidation proceedings against Western Joinery in respect of its tax liability. Correspondence and communication between the parties followed including that on Western Joinery’s behalf of its accountant. On 26 May WPHL completed an assignment of its GST refund to Western Joinery and on 10 June 2016 the Commissioner accepted that assignment as acceptable payment but conditional on the vendor being unregistered. When on 10 August the Commissioner asserted WPHL never carried on a taxable activity WPHL’s accountants

(also Western Joinery’s accountants) in September 2016 then provided full details of WPHL’s taxable activities.

[7]                 It was by letter dated 5 January 2017 that the Commissioner cancelled WPHL’s goods and services tax registration on the grounds that WPHL was not carrying on a taxable activity.

[8]On 16 February 2017 the Commissioner served its statutory demand.

[9]                 Both Western Joinery and WPHL have served Notices of Proposed Adjustment (NOPA) thereby engaging the taxation statutory process for challenging decisions of the Commissioner.

[10]              By its application to set aside the statutory demand Western Joinery notes the Commissioner accepted in June 2016 that the assignment arrangement constituted an acceptable payment method, subject only to the availability of the GST tax credit by way of refund.

[11]              Counsel submits the debt collection exercise before this Court should defer to the Commissioner’s NOPA process which will extensively examine issues regarding the taxable activities of WPHL as it will also consider the detailed submissions of documents filed; that the Commissioner will have two months to file a notice of reply and the matter would then proceed to a conference and if unresolved then to the Taxation Authority.

[12]The Commissioner’s position is that it is not in dispute that an amount of

$85,000 has always been owed by Western Joinery. Therefore, counsel submits the statutory demand should not be set aside because there is no substantial dispute whether the debt is owing or due and nor is there any basis for a set off or cross demand.

[13]              Western Joinery’s evidence is that it has filed returns and paid its tax and is not insolvent. To the extent there is any shortfall it has the support of its associated company WPHL.

The Commissioner’s case

[14]              It is not enough for a debtor company to claim the debt is in dispute; rather it is incumbent on Western Joinery to provide prima facie evidence of the existence of a dispute. Counsel for the Commissioner refers to Rule 5.61 of the High Court Rules which provides that in a proceeding by the Crown for the recovery of taxes a defendant is not entitled to advance any set off or counterclaim nor to claim any set off arising out of any tax payment due without leave of the Court.

[15]Counsel submits:

(a)Western Joinery’s setting aside application is a proceeding that falls within these provisions and therefore, without the Court’s leave, access to argument of a counterclaim and set off is precluded.

(b)Section 290(4)(c) of the Act does not provide other grounds to set aside the statutory demand, noting that in Commissioner of Inland Revenue v Chester Trustee Services Limited1 there would need to be a substantial dispute concerning the debt if the Court was to consider setting aside a statutory demand.

(c)There is no sufficient evidence available of Western Joinery’s solvency.

[16]              Regarding Western Joinery’s recourse to the NOPA process counsel for the Commissioner submits that it was for WPHL’s purposes that process was engaged.

[17]              It is the Commissioner’s position that she should not have to await the outcome of WPHL’s NOPA process particularly where, as in this case, WPHL has withheld the full amount of the GST from Western Joinery until WPHL’s issues with the Commissioner’s ruling are resolved. Instead counsel submits the amount of funds in question ought to have been paid to a stakeholder until those issues are resolved.

1 (2003) 1 NZLR 393, [3].

[18]              This Court should not, counsel submits, be concerned with those issues affecting the related company; that any agreement by the Commissioner regarding the payment based on an assignment of a GST refund was subject to the GST refund being available and the GST refund is not available to be assigned.

[19]              In summary it is asserted that Western Joinery is not a party to the dispute between the Commissioner and WPHL. The Commissioner says the NOPA filed by Western Joinery was invalid because because it does not address that there is any dispute between Western Joinery and the Commissioner.

Considerations

Western Joinery’s case

[20]              A debt of $85,000 has been acknowledged by Western Joinery as owing. The Commissioner’s claim of an amount of $201,692.76 cannot therefore be disputed in this Court as s 109 of the Tax Administration Act 1994 states. WPHL has engaged the NOPA process. Western Joinery has also, and arguably within time because it says WPHL’s NOPA has merit, and if successful will endorse Western Joinery’s claims that its debt to the Commissioner will be paid. The taxes have remained unpaid only while the input tax claim of WPHL remains unresolved.

[21]              Western Joinery’s claim of a good taxation history since 1992 is not challenged. The only issue affecting matters was that of an arrangement which the Commissioner conditionally agreed to but which is changed following the Commissioner’s office enquiry challenging WPHL’s GST position.

[22]              There is no doubt about the good faith of Western Joinery’s purpose in requesting to have its tax liability reserved until WPHL’s issues being pursued by a proper process. They have engaged accountants and lawyers and did so before embarking upon that process. The Court accepts Western Joinery’s purpose was not an attempt to profit at the expense of the taxpayer. Indeed it seems that had Western Joinery and not its related company undertaken the purchase then it would have been entitled to the GST refund which is the focus of the background issues.

[23]              However, there is a debt that remains unpaid and which it is the Commissioner’s duty to recover and this, the Commissioner is bound to do. The matter subject to taxation review concerns a related company and indirectly only does it concern Western Joinery. Western Joinery’s obligations must meanwhile be met. It seems likely that if WPHL is successful upon its review of the Commissioner’s decision then the Commissioner will likely review the extent of penalties and interest that have accumulated upon the core unpaid tax. Until then however Western Joinery’s tax obligations must be met.

Judgment

[24]The setting aside application is dismissed.

[25]              The date for compliance with the statutory demand shall be extended until 11:45am, 7 July 2017 when the matter will be called in the miscellaneous companies list.

[26]              Western Joinery shall pay the Commissioner’s costs on a 2B basis as approved by the Registrar.

Associate Judge Christiansen