Westpac Securities NZ Limited v Commissioner of Inland Revenue
[2014] NZHC 3377
•19 December 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2013-485-10792 [2014] NZHC 3377
UNDER
IN THE MATTER OF
the Judicature Amendment Act 1972
the Tax Administration Act 1994
BETWEEN
WESTPAC SECURITIES NZ LIMITED First plaintiff
WESTPAC HOLDINGS - NZ - LIMITED Second plaintiff
WESTPAC NEW ZEALAND LIMITED Third plaintiff
WESTPAC NEW ZEALAND GROUP LIMITED
Fourth plaintiff
WESTPAC CAPITAL - NZ - LIMITED Fifth plaintiff
WESTPAC NZ OPERATIONS LIMITED Sixth plaintiff
AND
THE COMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 28 August 2014
(further submissions 11 September 2014)
Appearances:
D J Goddard QC, A S Butler and B M Brown for plaintiffs
U R Jagose and D K Lemmon for defendantJudgment:
19 December 2014
JUDGMENT OF CLIFFORD J
WESTPAC SECURITIES NZ LTD v COMMISSIONER OF INLAND REVENUE [2014] NZHC 3377 [19
December 2014]
Introduction
[1] The plaintiffs are all members of the Westpac group of companies (Westpac).
[2] In returns for the income tax years 2008 – 2011 Westpac elected, mistakenly (it says) but as it was lawfully entitled, to offset losses from the second, fourth, fifth and sixth plaintiffs against the income of the first plaintiff Westpac Securities NZ Ltd (Westpac Securities) and of WestpacTrust Securities NZ Ltd (Westpac Trust). As a result, Westpac Securities and Westpac Trust were unable to use foreign tax credits that subsequently became available to them.
[3] Section 113 of the Tax Administration Act 1994 provides, as relevant, that 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”.
[4] Section IC5(4) of the Income Tax Act 2007 makes loss offset election irrevocable.
[5] Westpac says the Commissioner may, under s 113, consider correcting its mistake, and has asked the Commissioner to do so. The Commissioner says that is not the type of correction that s 113 allows. The Commissioner also says such a correction is precluded by s IC5(4). The Commissioner has declined Westpac’s request accordingly.
[6] This application for judicial review raises the general question of whether, where a taxpayer in error adopts a correct but disadvantageous tax position, the Commissioner has the power under s 113 to correct the taxpayer’s assessment so as to negate that disadvantage by adopting another correct tax position. It also raises the specific question of the effect of s IC5(4) on the Commissioner’s powers under s 113.
Facts
[7] Westpac’s New Zealand business is carried on through a number of companies. Individual tax returns are filed by Westpac for each company. As
provided by subpart IC of the Income Tax Act, the net loss of one company in Westpac’s group may be offset against the net income of another company in that group. That much is non-controversial.
[8] Westpac Securities and Westpac Trust had, at the relevant times, operations in the United Kingdom. They both paid United Kingdom tax on the profits of those operations. The Income Tax Act, together with the double tax agreement between New Zealand and the United Kingdom, allows for a credit against New Zealand tax for tax paid in the United Kingdom (an FTC), as the mechanism for relieving companies from double tax. FTCs can only be used to meet a New Zealand tax liability with respect to the income tax year in which the FTC is, itself, derived.
[9] Westpac is required to file its New Zealand income tax returns within six months of the end of its financial year. Final details of the United Kingdom tax paid by Westpac Securities and Westpac Trust were not available within this timeframe.
[10] In the 1999 income year, Westpac filed Westpac Trust’s income tax return without claiming a credit for United Kingdom tax paid, but also on a basis that showed its net income being fully offset by net losses of other group companies. That left Westpac Trust with no income tax liability, and therefore unable to receive a credit for United Kingdom tax paid. Westpac requested the Commissioner under s 113 to correct the returns involved by making amendments to reduce the loss offset to a level that would enable Westpac Trust to receive a credit for the United Kingdom tax paid, and to allocate the reduction in Westpac Trust’s loss offset to another company in the Westpac group. The Commissioner agreed to do so.
[11] In the 2000 to 2007 income years inclusive, Westpac filed the income tax returns of Westpac Trust and (in 2007 only) Westpac Securities without claiming a credit for United Kingdom tax paid. In those income years, Westpac did not elect to offset any net losses against the net income of Westpac Trust and Westpac Securities: instead, it offset those losses against the net income of other group companies. This ensured that the FTCs could be used as and when the necessary details became available. When those details became available Westpac requested (and the
Commissioner agreed to) amendments to recognise a credit for the United Kingdom tax paid.
[12] In the 2008 to 2011 income years (which are in issue in these proceedings) Westpac departed from the process it had followed in the 2000 to 2007 income years, and offset net losses from the other plaintiffs against the net income of Westpac Trust and Westpac Securities.
[13] Westpac’s letter of 20 June 2012 to the Commissioner, requesting the Commissioner to exercise her s 113 power to correct Westpac’s errors, explains the resulting position thus:
On review of the current year tax returns it has been determined that for the
2008 to 2011 financial years inclusive, that losses have been incorrectly offset to [Westpac Securities]. Similarly, loss offsets have been made for the
2008 to 2010 financial years inclusive for [Westpac Trust]. The effect of these loss offsets is, to the extent made, to remove the ability of [Westpac Securities] and [Westpac Trust] to claim the foreign tax credit once it has
been finalised.
The offsets are clearly an error and the original mistake made in making an offset for the 2008 year has simply been perpetuated year on year. Allowing the loss offset to stand would result in the inequitable position of [Westpac Securities] and [Westpac Trust] being exposed to double taxation due to what is, in effect, a staff processing error.
[14] In making that request, Westpac noted that the Commissioner had amended previous returns in the manner requested. That was a reference to the 1999 income year. Westpac accepts that that “precedent”, for want of a better word, does not bind the Commissioner.
[15] The Commissioner declined Westpac’s request. She did so for two reasons:
(a) Neither Westpac nor the Commissioner could, in her view, revoke the valid loss offset elections made in respect of Westpac Securities and Westpac Trust securities due to the irrevocable nature of such elections.
(b)She considered that the making of the loss offset elections was a legally valid option under the legislation and therefore not “a genuine
error” within the terms of her standard Practice Statement 07/03 (the Practice Statement)1 and did not fall within the power of amendment conferred on her by s 113 as the elections had not resulted in incorrect tax positions being taken.
[16] The reference to “genuine error” reflects the distinction the Commissioner draws in the s 113 context between a “genuine error” and a “regretted choice”. That distinction is explained in the Commissioner’s Practice Statement, which sets out her policy for considering requests to amend an assessment under s 113.
[17] The Practice Statement includes the following commentary:
9.Section 113 gives the Commissioner the discretion to amend assessments to ensure their correctness when they contain genuine errors, or following the application of the disputes resolution process in Part IVA.
…
22.When the Commissioner is not satisfied that assessments contain genuine errors, the Commissioner will not and cannot be compelled to amend the assessments. Please see Wood v CIR (1999) 19 NZTC
15,255.
…
28.In this SPS, the term “genuine errors” is used to mean incorrect tax positions taken in assessments resulting in a tax liability being either overstated or understated. However, if taxpayers choose to take particular tax positions under tax laws where legitimate alternatives are available and later regret that choice, no error has occurred (please see paragraphs 37 and 38). This is because the Commissioner does not consider it appropriate to devote resources to correcting optional positions if the preferred positions could have been taken when the taxpayers made the original self-assessments by filing the tax returns. Arguably, to do so would not promote the integrity of the tax system pursuant to section 6(1).
[18] Paragraphs 37 and 38 provide:
37.If taxpayers show that their tax returns simply incorrectly recorded their decisions under tax laws, the Commissioner would generally amend the assessments. For example, the taxpayer makes a transposition error in their 2006 income tax return after documenting a decision to allocate 40% of research and development (R & D)
1 “SPS 07/03 – Requests to amend assessments” (2007) Tax Information Bulletin 19(5).
expenditure to their 2006 income year pursuant to section EJ 21 of the ITA 2004. The final deduction claimed did not reflect the 40% intended to be claimed. Thus, the tax position taken was incorrect. The Commissioner would amend the assessment under section 113 to correct the transposition error if the taxpayer provides accounting or business records that substantiate the taxpayer’s intention to allocate 40% of the deduction to the 2006 tax year.
38.However, the Commissioner cannot exercise the discretion under section 113 if the amendment requests involve matters of regretted choice. For example, as in paragraph 37, a taxpayer seeks to deduct R & D expenditure incurred in the 2006 tax year pursuant to section DB 26 of the ITA 2004. The taxpayer has elected to allocate 40% of the allowable deduction in their 2006 income tax return pursuant to section EJ 21 of the ITA 2004. They have documented their decision and a notice of assessment has been issued reflecting that decision. The taxpayer later decides that they would like to allocate 60% of the allowable deduction to the 2006 tax year and requests that the assessment be amended pursuant to section 113. In this circumstance, the Commissioner cannot amend the taxpayer’s request because it involves a matter of regretted choice and is not a genuine error.
[19] The Commissioner used the following example to make the same point in a recent exposure draft intended to replace the Practice Statement:2
39.… For example, in terms of section DE 3 of the ITA 2007 a taxpayer may, subject to certain restrictions, use one of three options to calculate the proportion of business use of their motor vehicle; actual records, a logbook, or the mileage rate set from time to time by the Commissioner. A taxpayer is able to show that in a previous income year a decision was made to change the basis of calculation from the log book method to the Commissioner’s mileage rate method, but that inadvertently this change was not made in subsequent tax returns. The Commissioner would amend the affected assessments under section 113 to correct the error because the taxpayer is able to provide business or accounting records that substantiate the decision to change the calculation methodology. …
40.… For example, a taxpayer had always chosen to use the log book method (and this was a valid option for the taxpayer in all income years) but now, because the taxpayer realizes that using the Commissioner’s mileage rate method would have provided a larger deduction than previously claimed, the taxpayer wishes to use the alternative method and apply this change retrospectively. As the taxpayer had chosen a legitimate alternative in the previous years, the Commissioner cannot amend the taxpayer’s assessment as no genuine error has occurred. Note that, as in the above example, use of the Commissioner’s mileage rates is a legitimate alternative and this method may be used prospectively.
2 Inland Revenue Department ED0162: Draft Standard Practice Statement – Requests to amend assessments (2014).
Submissions
Westpac
[20] In its application for judicial review, Westpac seeks a declaration that, as a matter of law, the Commissioner is able to amend the relevant assessments, and an order requiring her to reconsider Westpac’s request in light of this decision.
[21] Westpac essentially argues that the Commissioner has placed an unnecessary gloss on the concept of correctness in s 113. Applying, as is appropriate, the orthodox principles of statutory interpretation, the starting point Westpac argues is with the ordinary meaning of the word “correct”. The ordinary meaning of correctness is to denote “freedom from error”. Put at its simplest, an assessment is not correct if it results in payment of an amount of tax that is different from the amount that the taxpayer was required to pay, based on a proper appreciation of the taxpayer’s circumstances and the relevant law. Westpac could have corrected the relevant assessments before filing them. After they have been filed, the Commissioner can correct them under s 113. The terms of s 113A, which provide for the correction of minor errors caused by clear mistakes, simple oversight, or mistaken understanding on a taxpayer’s part, addresses a subset of the errors previously covered by s 113. Thus it provides guidance for the interpretation of the correlative term “correctness” where it appears in s 113.
[22] Westpac does not argue that s 113 applies where a taxpayer makes a choice, and it subsequently transpires with the benefit of hindsight that another option would have been more advantageous. However, it says s 113 applies where a choice or election is made as a result of an error that would have been apparent at the time to a taxpayer with a proper appreciation of the relevant facts and law. Although there is no decision directly on point, Westpac argues that the decisions in Arai Korp Ltd and
Lawton support its approach.3 So more generally does the House of Lords decision
in Tower Hamlets, a situation where a local authority had declined to refund rates paid under a mistake of law.4 The local authority had a refund discretion which the
3 Arai Korp Ltd v Commissioner of Inland Revenue [2013] NZHC 958, (2013) 26 NZTC 21-014;
Lawton v Commissioner of Inland Revenue [2003] 2 NZLR 48 (CA).
4 R v Tower Hamlets London Borough Council [1988] AC 858 (HL).
House of Lords construed as a statutory remedy of restitution preventing the unjust enrichment of the rating authority at the expense of the taxpayer. Westpac argues that s 113 should be construed in a similar manner for reversing unjust enrichments of the Commissioner where a taxpayer has made an error or mistake. It should therefore be interpreted in a broad and high principled way. Factors that might point against the correction of an error in a particular case were better addressed in the course of applying the s 113 discretion, rather than reading that discretion as confined or restricted in some way that was not expressly provided for in legislation.
[23] Contrary to the Commissioner’s conclusion, loss offsets were not taken beyond the scope of the s 113 amendment power by s IC5(4). The scope of s IC5(4) was to restrict the taxpayer’s ability to revoke an election, not that of the Commissioner. Allowing revocation by the taxpayer alone would be impracticable, as it would affect not only that taxpayer, but also the other taxpayer or taxpayers whose losses had been offset. The section does not impinge on the Commissioner’s s 113 discretion. In fact, the s 113 power is all the more necessary if the taxpayer cannot itself amend loss offset elections. The Commissioner’s loss offset practice statement supports that conclusion. In the situation where a profit company is reassessed and as a consequence has reduced profits (below the level of the loss offset), the Commissioner accepts the original election remains valid up to the reduced amount of the profit. The “unused” offset loss remains to the credit of the loss company. Accordingly a fresh notice of election need not be filed. Westpac argues that if the amount of a loss offset election had previously been $100, and had been “reduced” or “adjusted” to $50, then the Commissioner had amended it. The only way the Commissioner could have done that was by exercising her power under s 113.
[24] The Commissioner’s concept of “regretted choice” was inconsistent with the Commissioner’s acceptance, in the Practice Statement, that disadvantageous correct tax positions taken by mistake could be corrected. That is exactly what Westpac had done here. Accordingly, it is within the Commissioner’s power to consider correcting the tax assessments involved.
The Commissioner
[25] Central to the position taken by the Commissioner is her understanding of the meaning of the term “correctness” in s 113. The plaintiffs say that, as between two correct tax positions, corrections can nevertheless be made if a different self- assessment would have been made if the taxpayer had correctly understood the relevant facts and principles. The Commissioner says correctness is an objective measure, focussed on correctness as a matter of law. Self-assessments made on the basis of one of a number of legally valid options are correct, and therefore cannot be corrected. To require the Commissioner to focus on the taxpayer’s subjective state of mind was not the Commissioner’s function, and would be unworkable. The Commissioner’s care and management responsibility dictate against that approach.
[26] The focus of the discretion is therefore on the correctness of the tax assessment, not on the errors which led to the assessment being incorrect. It was not necessary to identify who made the errors, or to conduct an inquiry into why the assessment was incorrect.5 If the Commissioner was not satisfied that the assessment was incorrect, she could not be compelled to amend the assessment. The discretion under s 113 had to be viewed in the context of the statutory disputes
procedure set out in Part 4A of the Tax Administration Act.
[27] There was no incorrectness here. The loss offset elections made, on the basis of which the relevant returns were filed, generated a correct tax position.
[28] The Commissioner acknowledged that the term “correctness” was not defined in the Tax Administration Act. The Commissioner’s submission was that it was co- extensive with the meaning of “correct tax position” as defined in s 3 of that Act. A correct tax position reflected the right amount of tax paid as against the taxpayer’s legal obligation.
[29] The nature of the self-assessment regime supported that approach. Taxpayers were free to adopt whatever tax position was permitted under the Income Tax Act.
Section 113 only provided for intervention where a return was incorrect, that is
5 See Arai Korp Ltd v Commissioner of Inland Revenue, above n 3, at [34].
representing an incorrect tax position. Hence s 113 should be given an accordingly narrow construction.
[30] The subjective approach suggested by the plaintiffs carried with it notable problems. In addition to its subjectivity, and the need for the type of inquiry that would generate, it also meant that a relevant error under s 113 could incorporate carelessness, but exclude diligence. In other words, the operation of the section in that way would undermine the integrity of the tax system, by relieving taxpayers of the proper responsibility they have to file accurate tax returns. Moreover, the applicant’s view of correctness was impossibly vague.
Analysis
[31] This application raises a classic question of judicial review: has the decision- maker correctly interpreted the statutory provision providing the power of decision making.
[32] The starting point is, as the Supreme Court emphasised in Commerce
Commission v Fonterra Co-operative Group Ltd, the text and purpose of s 113:6
[22] It is necessary to bear in mind that s 5 of the Interpretation Act 1999 makes text and purpose key drivers of statutory interpretation. The meaning of an enactment must be ascertained from its text and in the light of its purpose. Even if the meaning of the text may appear plain in isolation of purpose, that meaning should always be cross-checked against purpose in order to observe the dual requirements of s 5. In determining purpose the Court must obviously have regard to both the immediate and the general legislative context. Of relevance too may be the social, commercial or other objectives of the enactment.
[33] Taxation statutes are construed purposively in the same manner as any other statute.7
[34] Section 113 provides:
6 Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3 NZLR
767 (footnotes omitted). These principles apply to the interpretation of revenue statutes also: see Stiassny v Commissioner of Inland Revenue [2012] NZSC 106, [2013] 1 NZLR 453 at [23]; Terminals (NZ) Ltd v Comptroller of Customs [2013] NZSC 139, [2014] 1 NZLR 121 at [39].
7 Stiassny v Commissioner of Inland Revenue, above n 6, at [23]; Terminals (NZ) Ltd v
Comptroller of Customs, above n 6, at [39].
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.
[35] Section 113 contains no reference to error as a prerequisite for the exercise of the Commissioner’s discretion. Rather, the wording focuses on the result of the Commissioner’s amendment being a correct assessment.
[36] Context is everything. The concept of correctness is not necessarily, although (for example in arithmetic) it may be, a binary one. Volume 3 of the full version of the Oxford English Dictionary (second edition) contains this definition:
The quality or condition of being correct, conformity to an acknowledged rule or standard, to what is considered right, or to fact; freedom from error or fault; accuracy, exactness.
[37] The Shorter Oxford English Dictionary defines correct as “free from error; accurate; in accordance with fact, truth, or reason”. Similarly, the New Zealand Oxford Dictionary defines correct as “true, right, accurate”, the Collins English Dictionary “free from error; true; accurate” and the Oxford Online Dictionary includes in its definition, “meeting the requirements of or most appropriate for a particular situation or activity”. In an appropriate context multiple positions may be free from error, true, accurate, accord with fact, truth, or reason, or meet the requirements of a particular situation; though only one position may be “most appropriate for a particular situation”. On the plain wording of s 113, therefore, the Commissioner is not precluded from amending an assessment which is, on one understanding, correct, in order to ensure that it is nevertheless true, accurate, accords with fact, truth or reason, meets the requirements of a particular situation or is most appropriate for a particular situation.
[38] In my view, this preliminary analysis is confirmed when s 113 is viewed in the context of the role it plays in the Tax Administration Act and hence in the wider context of the Income Tax Act.
Statutory Scheme
[39] In 1996, new tax disputes procedures were enacted in New Zealand through the Tax Administration Amendment Act (No 2) 1996. The concept of a “correct tax position” was introduced,8 as was s 15B (the obligations on a taxpayer).9 Section 92 of the Tax Administration Act 1994 still provided in 1996 that it was the Commissioner who assessed tax,10 hence the Commissioner explained in a 1998
discussion document:11
3.8 The obligation to determine the correct amount of tax payable, while reflecting the practice of self-assessment, is not, strictly speaking, the same thing as requiring taxpayers to assess their own liability. An assessment is the process for establishing the debt owed by the taxpayer to the Crown.
[40] Section 92 was amended to provide for self-assessment by the Taxation
(Taxpayer Assessment and Miscellaneous Provisions) Act 2001 with effect from 1
April 2002. The Policy Advice Division of the Inland Revenue Department and the
Treasury explained in its official report on that bill that:12
The bill proposes changes to recognise that the tax system is administered on the basis that taxpayers make the initial assessment of their tax liabilities. It is now less appropriate to write legislation on the basis that the Commissioner of Inland Revenue performs all the functions of assessment. Assessments are in practice made by taxpayers, with Inland Revenue automatically processing their returns in the first instance. Although not involving significant policy change, the introduction of self-assessment will add to and enhance other improvements being made to simplify tax administration. As well as aligning the law with practice, the changes in this bill will facilitate the continuing development of policy and legislation in areas such as the review of compliance and penalties legislation, the review of the tax disputes procedures and the rewrite of the Income Tax Act.
The bill proposes to replace the Commissioner’s general power of assessment in section 92 of the Tax Administration Act 1994 (TAA) with a specific requirement that taxpayers assess their tax liability each year. Taxpayers will also, under an amended section 33 of the TAA, be required to furnish a notice of self-assessment with their return. The Commissioner will
8 Tax Administration Amendment Act (No 2) 1996, s 3(10).
9 Section 6.
10 It read: “…the Commissioner shall in and for every year, and from time to time and at any
subsequent time as may be necessary, assess the taxable income and income tax liability of the taxpayer and the tax payable by the taxpayer.”
11 Inland Revenue Department Legislating for self-assessment of tax liability: A Government
Discussion Document (August 1998).
12 Inland Revenue Department Taxation (Annual Rates, Taxpayer Assessment and Miscellaneous Provisions) Bill: Officials’ Report to the Finance and Expenditure Committee on submissions on the Bill (13 August 2001) at 95.
retain specific powers of assessment to amend a taxpayer’s assessment or
make an assessment if a taxpayer fails to self-assess.
[41] The self-assessment system thus requires certain taxpayers to file a return of income and make a self-assessment of their tax liability.13 Taxpayers are obliged to correctly determine the amount of tax payable by them,14 and self-assessments are deemed to be correct.15 This will often be the end of the process for quantifying the amount of tax due.
[42] In 1996 the term “correct tax position” was added to the Tax Administration
Act. That term is defined as:
correct tax position means the correct tax position established under 1 or more tax laws.
[43] Section 15B of the Tax Administration Act provides that taxpayers have the following obligations:
(aa) if required under a tax law, make an assessment:
(a) unless the taxpayer is a non-filing taxpayer, correctly determine the amount of tax payable by the taxpayer under the tax laws:
(b) deduct or withhold the correct amounts of tax from payments or receipts of the taxpayer when required to do so by the tax laws:
(c) pay tax on time:
(d) keep all necessary information (including books and records) and maintain all necessary accounts or balances required under the tax laws:
(e) disclose to the Commissioner in a timely and useful way all information (including books and records) that the tax laws require the taxpayer to disclose:
(f) to the extent required by the Inland Revenue Acts, co-operate with the Commissioner in a way that assists the exercise of the Commissioner's powers under the tax laws:
(g) comply with all the other obligations imposed on the taxpayer by the tax laws:
13 Tax Administration Act 1994, s 92. Where no return is filed, the Commissioner can issue a default assessment pursuant to s 106 of the Tax Administration Act.
14 Section 15B.
15 Section 109(b). Pursuant to the definitions of “disputable decision” and “assessment” in s 3 of
the Tax Administration Act, a self-assessment is a disputable decision.
(h) if a natural person to whom section 80C applies, inform the Commissioner that the person has not received an income statement for a tax year, if the income statement is not received by the date prescribed in section 80C(2) or (3):
(i) if the taxpayer is a natural person, correctly respond to any income statement issued to the taxpayer.
[44] Section 6A provides that the Commissioner is tasked with the “care and management” of taxes and with collecting over time the highest net revenue that is practicable within the law having regard to—
(a) the resources available to the Commissioner; and
(b) the importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and
(c) the compliance costs incurred by taxpayers.
[45] Section 6 provides that Ministers and officials have an obligation to “protect the integrity of the tax system” which includes protecting:
(a) taxpayer perceptions of that integrity; and
(b) the rights of taxpayers to have their liability determined fairly, impartially, and according to law; and
(c) the rights of taxpayers to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other taxpayers; and
(d) the responsibilities of taxpayers to comply with the law; and
(e) the responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and
(f) the responsibilities of those administering the law to do so fairly, impartially, and according to law.
[46] Where either the taxpayer or the Commissioner takes issue with a self- assessment, the disputes procedure contained within Part 4A of the Tax Administration Act and,16 thereafter, the challenge procedure contained within Part
8A of the Tax Administration Act will ordinarily be engaged.
16 Part 4A was introduced by the Tax Administration Amendment Act (No 2) 1996. The new disputes procedure applies to assessments issued on or after 1 October 1996 (subject to limited exceptions).
[47] The disputes procedure contained in Part 4A requires:
(a) The filing of a Notice of Proposed Adjustment (NOPA) either by the Commissioner if she does not accept the position as set out in the tax return,17 or by the taxpayer within four months if the taxpayer seeks to
adjust a position from that filed and assessed.18 The NOPA must set
out, in the prescribed form, the law and the facts supporting the tax position alleged.19
(b)If the NOPA is not accepted, a Notice in Response (NOR) must be filed within the notice period by the party who receives, but does not accept, the tax position, as set out in the NOPA.20 It must set out, in the prescribed form, the law and the facts supporting the tax position alleged.21 If a NOR is not filed within the response period the Commissioner or taxpayer, as relevant, is deemed to have accepted the proposed adjustment.22
(c) Where the strict time limits are not complied with, the taxpayer can request the Commissioner to accept a late NOPA on the basis that there were “exceptional circumstances”.23
(d)If, after the provision of the NOR the dispute has not been resolved, the Commissioner will issue a Statement of Positions (SOP) and disclosure notice.24 The disclosure notice requires the taxpayer to prepare a SOP. The Commissioner may amend her SOP, having received the disputant’s SOP. Each SOP must set out, in the prescribed
form, the law and facts supporting the tax position alleged by that
17 Tax Administration Act 1994 ss 89B-89C.
18 Sections 89D-89DA. A taxpayer might seek to adjust the position filed where she wishes to raise a potentially contentious matter with the Commissioner without the risk of incurring penalties and so lodges a tax return taking a conservative position then issues a NOPA proposing to adjust the position to the one she contends for.
19 Section 89F.
20 Section 89G(1).
21 Section 89G(2).
22 Section 89H.
23 Sections 89K and 89F.
24 Section 89M.
party. The effect of a disclosure notice is that each party is limited in any subsequent court hearing to the issues and propositions of law that are included in their SOP, unless the court permits otherwise.
(e) Where, at any time until and including exchange of SOPs, the dispute is resolved, the Commissioner can amend the assessment using s 113 to recognise that agreed resolution.
(f) If the dispute is not resolved the Commissioner can nevertheless amend the assessment using s 113, and the taxpayer can then challenge the amended assessment by commencing proceedings. Alternatively if the Commissioner does not amend the assessment the taxpayer can commence proceedings challenging the correctness of the original self-assessment.
[48] Such challenges may be brought before the Taxation Review Authority or the
High Court under Part 8A of the Tax Administration Act.25
[49] The Commissioner may also amend an assessment using the s 113 discretionary power in the following circumstances:
(a) At the request of a taxpayer, notwithstanding that a NOPA has not been issued, the time restraints have not been complied with, and the disputes procedure has not been engaged. 26
(b)When the Commissioner considers that an assessment contains an error, and there is no dispute.27
25 Tax Administration Act 1994, ss 109 and 138B, Allen v The Commissioner of Inland Revenue
[2006] NZSC 19, [2006] 3 NZLR 1 at [8]-[9].
26 Arai Korp Ltd v Commissioner of Inland Revenue, above n 3. Section 113B(2) provides specifically for the situation in which a taxpayers asks for an assessment to be amended under s
113 rather than through the issuing of a NOPA within the relevant response period in the context of research and development credits.
27 Arai Korp Ltd v Commissioner of Inland Revenue, above n 3, at [47].
[50] Section 113A separately provides for amendment where an error in a return was caused by a clear mistake, simple oversight, or mistaken understanding on the taxpayer’s part and the discrepancy caused by the error is $500 or less.
[51] There are, additionally, a limited number of situations in which the
Commissioner must amend a self-assessment, namely where:
(a) A person’s entitlement to a tax credit under s LK1 of the Income Tax Act 2007 cannot be determined before their income return must be filed and the person asks the Commissioner for an amended assessment within four years. 28
(b)A dividend is recovered or repaid,29 or a person receives attributed repatriated dividends from a controlled foreign company.30
[52] The Commissioner’s powers to amend assessments are in my view to be seen as Parliament’s recognition of the competing interests in a self-assessment tax system. Whilst taxpayers are obliged to correctly self-assess, the Commissioner’s powers to amend assessments recognise that nevertheless, in some circumstances, amendments at the taxpayer’s request may be necessary to ensure the integrity and perceptions of the integrity of the system are maintained in a system largely reliant
upon voluntary compliance.31 Consideration of these competing interests also assists
to define the scope of the Commissioner’s s 113 power, which is the broadest of the Commissioner’s powers to amend an assessment. As illustrated above, s 113 is the primary amendment power available following utilisation of the disputes process, and also plays a broader role in the self-assessment scheme enabling the Commissioner to correct undisputed errors, or make amendments at the Commissioner or taxpayer’s initiative outside of the narrow time period in which the
disputes resolution procedures are available.
28 Section 93C.
29 Section 113B,
30 Section 113C.
31 Tax Administration Act 1994, ss 15B, 6, 6A.
[53] This broad role of s 113 and, because of that, its broad scope has been emphasised by the Court of Appeal. In Wire Supplies Ltd v Commissioner of Inland Revenue the Court considered an argument, in that context from the taxpayer, that:32
[75] …. s 23 [now s 113], which relates to amendments of assessments, prohibited the Commissioner from amending an assessment if an earlier assessment made by him was “correct”, because s 23 allows an amendment only if the Commissioner considers the amendment is necessary to ensure the correctness of the assessment.
[54] The Court was critical of the argument, stating that:
[75] … This argument appears to be predicated on the basis that there is only one “correct” answer, and that once the Commissioner has decided what it is he is bound by it forever. We do not think that is the case where the assessment follows from an adjustment of income to counteract a tax advantage derived from tax avoidance under s 99(3). In that context a number of different assessments may be “correct”.
[76] What s 23 permits is an amendment of an assessment if the commissioner thinks it is necessary to ensure its correctness: the focus is on the commissioner’s view of correctness, not the Court’s. The Commissioner must be left with the flexibility to deal with changes, including changes in the understanding of the law, changes in his understanding of the arrangement which has led to the assessment and changes in the circumstances of the taxpayers involved. For example, the Commissioner will often need to amend an assessment in order to settle litigation with a taxpayer. On the argument made for the appellants in this case, that would not be possible unless the Commissioner acknowledged that the initial assessment was not in accordance with the legislation. But often settlements will be on a basis of a compromise which involves no such acknowledgment. There is no reason to read into the legislation the limitations which Mr Judd contended for. This analysis is consistent with the recent decision of this Court in Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 231 at para [20].
[55] In Accent Management Ltd v Commissioner of Inland Revenue the Court of
Appeal had held:33
[20] More importantly, the Commissioner is entitled to settle tax cases commercially; this is for the reasons and based on the authorities referred to in [12] –[15] above. We are likewise satisfied that such a settlement can be given effect to by an amended assessment under s 89C(d). Given these conclusions, we see no reason why the settlements and amended assessments need to reflect the Commissioner’s view of the correct tax position.
32 Wire Supplies Ltd v Commissioner of Inland Revenue [2007] NZCA 244, [2007] 3 NZLR 458.
33 Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 231, (2007)
23 NZTC 21,366.
[56] In Wire Supplies Ltd the Court was considering the predecessor to s 113, s 23 of the Income Tax Act 1976 which provided until introduction of s 113 that:
23 Amendment of assessments
(1) The Commissioner may from time to time and at any time make all such alterations in or additions to an assessment as he thinks necessary in order to ensure the correctness thereof, notwithstanding that tax already assessed may have been paid.
(2) If any such alteration or addition has the effect of imposing any fresh liability or increasing any existing liability, notice thereof shall be given by the Commissioner to the taxpayer affected.
[57] Section 23(1) was identical to its predecessor, s 22 of the Land and Income Tax Act 1954, which was identical to its predecessor, s 15 of the Land Income Tax Act 1923 which was identical to its predecessor, s 15 of the Land Income Tax Act
1916. Section 23(2) was also identical except that it had included in its previous manifestations that the taxpayer was entitled to object to the imposition of fresh liability or the increasing of existing liability in accordance with the relevant objection provisions.
[58] The Commissioner’s discretionary power to amend an assessment has therefore developed from a power to make all “alterations in or additions to” an assessment that he “thinks necessary in order to ensure the correctness” of the assessment to a power to “amend an assessment as the Commissioner thinks necessary in order to ensure its correctness”. The essence of the provision has however remained the same - the Commissioner is able to amend an assessment “to ensure its correctness” – and to that extent previous authority on the interpretation of
s 23 remains applicable.34
[59] Wire Supplies Ltd is authority for the proposition that the Commissioner is not precluded from using s 113 to amend an assessment where there are a number of
‘correct’ tax positions. Section 113 is the Commissioner’s primary power to amend assessments. That power is required to be used in a range of situations including, as the Court of Appeal discusses, to amend an assessment that already reflects a correct
a tax position and to amend an assessment to a position that does not reflect a correct
34 For a similar view see Arai Korp Ltd v Commissioner of Inland Revenue, above n 3, at [37].
tax position. The unfettered nature of this discretion was also considered by Wylie J
in Arai Korp Ltd v Commissioner of Inland Revenue:35
[34] Section 113 is clear in its terms. It confers a wide-ranging discretion on the Commissioner. The discretion may be exercised from time to time and at any time. It can be exercised by the Commissioner on her own motion. It can also be exercised at the request of a taxpayer. The discretion is available in order to ensure that an assessment is correct. It does not matter that the tax assessed may already have been paid. The discretion is not constrained in any way. It is not expressed to be subject to the prior exercise of the disputes procedure or the challenges procedure. It does not call for an inquiry into why any assessment is incorrect. It is not necessary to identify who has made the error that has resulted in an assessment being incorrect. It does not distinguish between consequential errors and genuine errors. The focus is on the correctness of an assessment, not on the errors which lead to an assessment being incorrect. The section can be considered to be a “backstop” provision.
[35] In exercising the discretion, the Commissioner must use her best endeavours to protect the integrity of the tax system.36 Inter alia, this requires the Commissioner to use her best endeavours to protect the rights of taxpayers to have their liability determined fairly, impartially and according to law.37
[60] These authorities do not require that a gloss be imposed on s 113 to only allow amendment where an incorrect tax position is taken. Nor, as analysed above does the wording of s 113, or its purpose. In my view, the integrity of the tax system would be undermined if the Commissioner was precluded from looking beyond the fact an assessment reflects a correct tax position to consider whether the self- assessment, nevertheless, for any number of meritorious reasons, needs correcting. Parliament has recognised that these interests may require amendments to be made in a number of particular situations and it is consistent with that recognition for the Commissioner not to be precluded from considering the merits of a request to
‘correct’ a correct tax position.
[61] An interpretation of s 113 that does not preclude the Commissioner from
amending a ‘correct’ assessment is consistent with the scheme of the Act. Section
109 of the Tax Administration Act deems self-assessments to be correct. Despite such assessments being deemed to be correct the above analysis of the statutory
scheme shows that s 113 is intended to be used to amend those ‘correct’ assessments.
35 Arai Korp Ltd v Commissioner of Inland Revenue, above n 3.
36 Tax Administration Act 1994, s 6(1).
37 Section 6(2)(b).
Moreover, this interpretation is consistent with Parliament having provided in ss 93C, 113B and 113C that the Commissioner must amend assessments in circumstances where the assessments reflect a correct tax position. This recognises that the integrity of the tax system can require, in some circumstances, that a
‘correct’ assessment be amended. Similarly, the introduction of s 113A illustrates recognition that despite the obligation on taxpayers to correctly assess their tax obligations they are liable to make clear mistakes, simple oversights and suffer from mistaken understandings which ought to be corrected.
[62] Moreover, it is difficult to see why amending an assessment in a manner which results in an outcome clearly available under applicable tax legislation is necessarily problematic simply because it is more favourable to a particular tax payer. Whilst the Commissioner is obliged to collect the highest net revenue that is practicable in accordance with the law, it may nevertheless be the case that allowing a taxpayer to amend their self-assessment is more consistent with the policy underpinnings of the legislation. Parliament has enacted some provisions, such as the ability to adopt an accelerated depreciation rate, with the desire of improving investment in a particular class of assets. If a taxpayer mistakenly fails to originally treat such an asset in a way that is optimal for it, amending that treatment not only benefits the particular taxpayer but ensures their tax position complies with a position that Parliament has not only allowed but encouraged due to its wider benefits.
[63] For these reasons I am of the view that the Commissioner’s s 113 power is not limited in the manner the Commissioner alleges.
[64] The Commissioner argues that finding the Commissioner’s s 113 power is not constrained by the objective, apparent ‘correctness’ of a tax position means that a subjective approach will need to be taken and that this is problematic as the Commissioner does not have the resources or ability to determine what a taxpayer was subjectively thinking. I do not think this is the case. The Commissioner’s current approach, where if a person can prove they made a genuine error (that is if they intended to allocate x but mistakenly allocated y) the Commissioner will amend an assessment, includes the assessment of a subjective mistake and involves the
correction of correct assessments. In submissions made after the hearing, the Commissioner in effect acknowledged that some aspects of the Practice Statement may be inconsistent with the position taken by her on this appeal. Nevertheless, in my view the examples provided in the Practice Statement support Westpac’s argument.
[65] On the basis that the Commissioner’s power under s 113 is not limited as she submitted, the focus of the inquiry as to whether the power was available would be centred on whether the amendment the taxpayer seeks to have made will ensure the assessment is correct when amended, even if it was also correct beforehand. The merit of a taxpayer’s reasons for seeking the amendment may need to be assessed in deciding whether the discretionary power should be exercised, but that has always been the case.
[66] I do not think, moreover, that it is necessary to draw the distinction, as a matter of law, that Westpac makes between a situation where a taxpayer makes a choice that with the benefit of hindsight is demonstrated to be less advantageous to an alternative position, and “an error that would have been apparent at the time to a taxpayer with a proper appreciation of the relevant facts and law”. Rather, that consideration is likely to be a factor relevant to the Commissioner’s decision whether or not to exercise her discretion in a particular case.
[67] The Commissioner retains the discretion to exercise or not exercise the s 113 power. There could be any number of valid reasons why the Commissioner may decline to exercise her discretion in situations of regretted correct tax positions including where the taxpayer appears to be gaming the system. In my view, the various concerns of the Commissioner, which have led to her current interpretation of the scope of her power under s 113, are more properly matters to be considered when she decides whether that discretion should be exercised or not. The fact that Westpac, a well resourced, sophisticated and well advised taxpayer says that it “erred” when the relevant offset elections were made may be a proposition that the Commissioner will need to consider carefully when deciding whether or not to exercise her discretion. But, the correct interpretation of the statutory power is, in my view, that the Commissioner is not precluded, in appropriate cases, from
exercising her discretion to “correct” what is already a “correct” decision. Relevant considerations will include that “s 113 is not intended to be used by taxpayers or indeed the Commissioner as a way of circumventing the statutory disputes process contained in Part 4 A of the Act”,38 the merits of the case, 39 and the resources available to the Commissioner.
Section IC 5(4)
[68] Given my conclusion that the role the Commissioner’s s 113 power is required to play in the Tax Administration Act necessitates that it not be unduly constrained, it follows that this power should not lightly be said to be constrained by the irrevocable nature of an election in the Income Tax Act.
[69] Section IC 5(4) provides:
If company A chooses to make the amount available to company B under subsection (2)(a), the decision is irrevocable.
[70] To a similar effect, s IG 2(2) of the Income Tax Act 2004 provided:
(2) Subject to the succeeding subsections of this section, where in respect of any income year (in this subsection referred to as the year of offset—
(a) A company (in this subsection referred to as the loss company)
has—
(i) incurred a loss (not being a loss which consists of a mining outgoing excess under section IH 5) in the year of offset); or
(ii) carried forward under sections IE 1 and IF 1 such a loss incurred by the loss company in a preceding income year (in this subsection referred to as the preceding loss year) to the year of offset; and
(b) The loss company either—
(i) elects by notice in accordance with subsection (3) that the whole or part of the loss be deducted from the assessable income derived in the year of offset by another company; or
38 Arai Korp Ltd v Commissioner of Inland Revenue, above n 3, at [61].
39 Lawton v Commissioner of Inland Revenue, above n 3.
(ii) receives a payment from another company under an agreement providing for the other company to bear or share in the loss (that other company being in this subsection referred to as the profit company);
…..
and any election made in accordance with this subsection shall be irrevocable.
[71] Section ZA 3(3) to (5) of the Income Tax Act makes it clear that these provisions are intended to have the same effect as one another.
[72] Westpac’s argument that irrevocable means irrevocable by the taxpayer is persuasive. Westpac submits that the purpose of s IC 5(4) and, previously s IG 2(2), is to clarify that although the form of an election is a unilateral choice by one taxpayer, it would be impractical if that taxpayer could unilaterally revoke its choice as the election and revocation in fact affects two taxpayers. If one taxpayer alone could revoke the election, the Commissioner would be left with the practical difficulties of pursuing the other taxpayer in order to make a consequential amendment to its assessment. The Commissioner could be left out of pocket if for example Company B’s assessment had become time-barred or the company had been liquidated. For these reasons, Parliament made the election irrevocable. However, these same considerations do not apply to preclude the Commissioner from amending an irrevocable election as the Commissioner can simply consider the presence or absence of such factors when determining whether or not to exercise her discretion.
[73] Moreover, there are a number of elections in the Income Tax Act that are said to be irrevocable. 40 It would in my view be impractical, given the extensive number of situations in which the Commissioner may need to exercise her s 113 power, including to resolve a dispute with a taxpayer, for the Commissioner to be precluded
in resolving that dispute from amending an election said to be irrevocable.
40 Income Tax Act 2007, ss EC 11(1), EI 5(4)(c), EJ 11(4)(c), EJ 12B(2), EJ 20E(2) EJ 20E(7), EM 4(4), EX 26(4), EZ 14(3), HR 8(6) and RD 59(5) .
Conclusion
[74] In my view, therefore, the Commissioner may, as Westpac has argued, consider whether to exercise her discretion under s 113 to correct the Westpac returns in the manner Westpac asks for. Whether the Commissioner considers that she should exercise her discretionary power in that way is a matter outside the scope of this judgment and is therefore a matter for her.
[75] Westpac asks for costs on a 2B basis. Westpac having prevailed, I see no reason why costs should not follow the event. If Westpac and the Commissioner are unable to reach agreement on the question of costs, brief submissions may be filed no later than 13 February 2015.
“Clifford J”
Solicitors:
Russell McVeagh, Wellington for plaintiffs. Crown Law, Wellington for defendant.
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