White v Commissioner of Inland Revenue
[2023] NZHC 2368
•29 August 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-1334
[2023] NZHC 2368
UNDER the Judicial Review Procedure Act 2016 IN THE MATTER
of an application for judicial review
BETWEEN
ANTHONY JAMES WHITE
Applicant
AND
THE COMMISSIONER OF INLAND REVENUE
Respondent
Hearing: 7 February 2023
Supplementary submissions received 24 February 2023
Appearances:
S M Kilian for Applicant
M Deligiannis and R Duncan for Respondent
Judgment:
29 August 2023
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 29 August 2023 at 3 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date: ...................................
Solicitors: Kilian & Associates, Auckland
Te Tari Ture o te Karauna | Crown Law, Wellington
WHITE v COMMISSIONER OF INLAND REVENUE [2023] NZHC 2368 [29 August 2023]
[1] The applicant, Mr White, seeks judicial review of a decision by the respondent, the Commissioner of Inland Revenue (“Commissioner”), declining his application to amend his income tax assessments for the years ended 31 March 2010 to 2018 inclusive (“application”).
[2]The applicant seeks review on grounds that:
(a)the Commissioner failed to consider relevant considerations and took into account irrelevant considerations;
(b)the decision was unreasonable; and
(c)the Commissioner predetermined the application.
[3] The applicant seeks a declaration that the decision was invalid; an order quashing the decision; an order directing the Commissioner to reconsider the matter; and such further relief as may be required.
[4] The Commissioner’s case is that none of the grounds of review is made out, that he applied the relevant law correctly, and that it was reasonably open to him to decline the application.
Section 113 Tax Administration Act 1994
[5] The applicant made his application under s 113 of the Tax Administration Act 1994 (“TAA”). Section 113 provides:
113 Commissioner may at any time amend assessments
(1)Subject to section 89N [a reference to Part 4A], 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.
[6] Thus the Commissioner has a discretion to amend an assessment as the Commissioner thinks necessary to ensure the correctness of that assessment. In the present case, the Commissioner declined to amend the assessments as he did not consider correct assessments would result under the Income Tax Act 2007 (“ITA”).
Background
[7] In October 2015, the applicant, by his then accountants, filed income tax returns for the years ended 31 March 2010 to 31 March 2015. The applicant also made a voluntary disclosure of matters pertaining to GST.
[8] The Commissioner assessed the applicant for income tax and GST on the basis of those returns, and imposed late filing and late payment penalties and interest charges. I have made a point of saying the assessments were the product of the applicant’s returns and reflected his calculation of the tax due, because the applicant’s affidavit and the submissions for the applicant suggest that the assessments were the Inland Revenue’s (“IR”) own work. They were not. The assessments derived from the applicant’s returns, and the tax assessed to be due was as identified in those returns.1
[9] The applicant did not pay the sum due from him and in September 2017 the Commissioner commenced proceedings against him in the District Court. In April 2018, the Commissioner obtained judgment by default against the applicant in the sum of $55,140.95.
[10] In October 2018, another firm of accountants filed returns for the applicant for the years ended 31 March 2016 to 31 March 2018. The Commissioner again assessed the applicant on the basis set out in those returns and, as before, imposed penalties and interest charges.
Proceedings for adjudication
[11] The applicant still not having paid the sum due from him, in May 2021 the Commissioner commenced bankruptcy proceedings and, in November 2021, applied
1 Tax Administration Act 1994, s 3(1).
for an order adjudicating the applicant bankrupt. By this time, the applicant’s arrears were approximately $77,000.
[12] The application to bankrupt the applicant is still on foot. The applicant is opposing the application on the basis the sum claimed is incorrect.
[13] In the course of the proceedings, the applicant indicated, not for the first time apparently, that he proposed to make an application for amendment under s 113. Associate Judge Sussock ordered the applicant to make any such application promptly, which he did by letter of 29 March 2022. The application, lodged by Kilian & Associates (“KAL”), was accompanied by 300 pages of documents and sought amendments for the years ended 31 March 2010, and 2014 to 2018 inclusive.2
Application pursuant to s 113 Tax Administration Act 1994
[14] To put the application under s 113 in context, the applicant’s income tax returns disclosed assessable income by way of salary and from Work and Income.
[15] The application sought to bring about a reduction in assessable income by claiming the benefit of deductions for expenses that the applicant had paid in the relevant years. Had the Commissioner granted the application in its entirety, the sum due from the applicant would have been substantially reduced, and KAL’s letter to IR indicated that the applicant would then pay the reduced sum.
[16] The applicant sought deductions for two forms of expense. The first was for expenses the applicant claimed to have incurred in deriving income in 2010 and 2018, for instance for motor vehicle and telecommunications expenses. The second was for expenses that the applicant had paid on behalf of companies or entities with which he was associated, being Newcastle 1954 Ltd, Audio Visual Communication Ltd, Hexham Holdings Ltd, and the Rowland Gill Trust (“Newcastle”, “AVCL”, “Hexham”, and “trust” respectively).3
2 The years ended 2011, 2012 and 2013 can be put to one side as nothing of consequence was sought in respect of those years.
3 By the time of the application, each of these companies had been removed from the register of companies — AVCL in 2016, Newcastle in 2018, and Hexham in 2021. Their removal has some relevance to what follows.
Receipt by Inland Revenue
[17] The application was assigned to Mr Ian Phillips of IR. Mr Phillips, an experienced IR employee of some 40 years’ standing, has delegated power to determine an application made pursuant to s 113 TAA and, in his affidavit in this proceeding, he sets out the course he took to determine the application. This included discussing the application with Mr McMurtrie, the IR Collections Officer responsible for dealing with the applicant’s arrears and bankruptcy proceedings, and reviewing IR’s files relating to the applicant and related companies.
[18] In his affidavit, Mr Phillips gives a summary of the applicant’s dealings with IR. It is fair to say the applicant’s history is one of consistent non-compliance. This includes the applicant and the entities referred to above being late to file returns, if they have filed them at all; the applicant being required to make a voluntary disclosure of GST-related matters; Newcastle, of which the applicant was the sole director and shareholder (and which features below), claiming and receiving a GST refund of approximately $65,000 to which it was not entitled; and a criminal prosecution of the applicant following an IR investigation of Newcastle.4
[19] As I have said above, one of the grounds on which the applicant is seeking review is that Mr Phillips predetermined the application. This submission is based largely on this part of Mr Phillips’ affidavit, in which he discusses the IR’s dealings with the applicant.
[20] I can deal with this submission now. In short, I am not satisfied there is any basis for concluding or inferring that Mr Phillips predetermined the application. It was necessary for him to review the files to put the application and the various entities in context. The process Mr Phillips undertook to determine the application can only be described as painstaking. It cannot be said he resolved from the outset to refuse it.
[21] Turning to the application itself, Mr Phillips’ evidence is that he identified the sources of income the applicant had disclosed in his returns, this being relevant to the
4 IR prosecuted the applicant for knowingly providing false information and for failing to provide information to the Commissioner when required to do so, intending to evade the payment of tax. The applicant pleaded guilty to the charges in late 2017 or thereabouts.
applicant’s entitlement to the deductions sought; reviewed the folder of documents that accompanied the application; and considered, and retained throughout, a hard copy of SPS 20/03.
Standard Practice Statement – SPS 20/03
[22] SPS 20/03 is IR’s standard practice statement regarding the exercise of the discretion conferred by s 113 TAA. It anticipates that a request under s 113 will be considered in four consecutive phases, terminable at any one of them.
[23] Phase one requires an initial examination of the request, this being intended to filter a “clearly correct” request from one which is “clearly incorrect”. Part of this phase also requires consideration of whether the taxpayer has provided all required information. Mr Phillips considered that insufficient information had been provided but that he would be able to determine the application as a matter of principle, so he moved to phase two. This requires a decision as to whether to devote the IR’s limited resources to further consideration of a request when it is unclear that granting the request will result in a correct assessment. Mr Phillips resolved that he would proceed to consider the request, given the adjudication proceedings and Associate Judge Sussock’s order.
[24] This brought Mr Phillips to phase three. Phase three requires consideration of “whether a correct assessment will result from the requested amendment”. The guidance at this phase, relevant to this case, is that the requested position must be consistent with the Commissioner’s view of the law on the facts available. If it is, phase four requires consideration of whether to exercise the discretion to amend. If not, or if the position is unclear, the request is to be declined.
[25] At phase three Mr Phillips conducted what he describes as a “full analysis of the merits of the proposed adjustments including a consideration of the requested position relative to the Commissioner’s view of the law”. Mr Phillips carried out a year-by-year analysis of what had been claimed against what was known of the applicant’s affairs. That year-by-year analysis is set out at length in Mr Phillips’ affidavit.
[26] Mr Phillips concluded the amendments sought would not result in correct assessments and that the application should be declined:
Conclusion reached
144.I reached the conclusion that the Application’s proposed adjustments should not be made. I did not consider that the proposed adjustments would result in correct assessments. The applicant himself acknowledges at para 13 of his affidavit that the proposed adjustments may not be correct as some of the proposed deductions may have already been taken into account.
145.The main issue I identified was that the underlying income was income of AVCL, Newcastle, the Rowland Gill Trust and the new Hexham Holdings Limited. While the Application proposed deductions for expenditure that may have otherwise been deductible expenditure, the Application did not address the fact that the underlying income was derived by other parties. It is those parties (if anyone) that would be entitled to claim the deductions. Those parties would have needed to either record advances made to the applicant, as he paid expenses on their behalf, or alternatively, the expenditure could have been reimbursed. The opportunity to generate an entitlement to a large number of the proposed deductions has been lost with the removal of AVCL, Newcastle and Hexham Holdings Limited from the Companies Office register.
146.Based on my year by year analysis of the claims, I could find no reason to allow any of the deductions. At this point I concluded my consideration under Phase Three of SPS 20/03. Having formed the view that the Application should be declined, consideration under Phase Four was not required.
Decision to decline the application
[27] Mr Phillips conveyed the decision declining to amend the assessments by letter of 17 May 2022. Mr Phillips advised that he had considered the application by reference to SPS 20/03, and that he was not satisfied that allowing the deductions claimed would result in a correct assessment of the applicant’s income tax liabilities for the years in question.
[28]The reasons Mr Phillips gave for this conclusion were as follows.
Deductions
[29] First, under the ITA, the applicant was not entitled to the benefit of the deductions that he sought.
[30] A deduction is available to a taxpayer if, first, the “general permission” in s DA 1 ITA is satisfied and, secondly, if none of the “general limitations” in s DA 2 deny the deduction.
[31] The general permission is satisfied if the expense is incurred in deriving assessable and/or excluded income:
DA 1 General permission
Nexus with income
(1)A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is—
(a)incurred by them in deriving—
(i)their assessable income; or
(ii)their excluded income; or
(iii)a combination of their assessable income and excluded income; or
...
General permission
(2)Subsection (1) is called the general permission.
...
[32] Mr Phillips advised the applicant was not entitled to a deduction in respect of expenses he had paid on behalf of Newcastle, AVCL, Hexham or the trust because he had not “incurred” these expenses. The expenses in question had been incurred by those companies or the trust and only they could deduct for them.
[33] Mr Phillips advised that the sums the applicant had paid on behalf of those entities represented advances by him to them, and he returned to this point at the conclusion of his letter, saying:
The Application relates to expenditure, some of which might have been deductible if your client had arranged his affairs differently. I refer to the expenses paid from his personal account for costs relating to the Merwood Lane property. While that property was owned by other related parties –
Newcastle and then the Trust, they were the only parties who could have claimed the deductions.
The standard procedure where a shareholder pays for company expenditure is for the company to reimburse the shareholder for that expenditure. The company can claim a deduction for the reimbursing payment. That payment is exempt income to the shareholder.
[34] As I said above, the applicant also sought the benefit of deductions in respect of expenses he personally had incurred in deriving income in the 2010 and 2018 income years. As to this type of expense, Mr Phillips advised that the employment limitation in s DA 2(4) ITA denied the deduction. There is a dispute about this which I address below, as the applicant submits that the deduction is permitted by s CW 17 ITA.
Double counting
[35] Secondly, Mr Phillips referred to the fact that the applicant had already claimed some expenses when calculating his taxable income in the 2015 to 2017 income years. Mr Phillips stated that the applicant had not provided sufficient information as to the expenses that had already been claimed and those now claimed, so as to avoid double counting.
[36] The applicant himself acknowledges the possibility of double counting in [13] of his affidavit in support of this application, in which he says:
I did appreciate that my calculation might not all be correct and that the Commissioner may have taken some of the expenses into account, but without having a clear idea as to what the Commissioner did and did not take into account for his assessments, I was and I am still unable to reconcile the accounts properly.
[37] I have already made the point that it was the applicant’s own returns which gave rise to the assessments. It was and is for him to say what he took into account when he filed his returns. However, as Mr Phillips sets out in his affidavit, it is clear that the applicant had deducted for some expenses when filing his returns. For instance, in one example Mr Phillips gives, in the year ended 31 March 2017 the applicant’s bank statements show he received $22,223 from one source, but only returned income from that same source of $5,267. That could only be correct if the applicant himself had made deductions in arriving at his assessable income. In the
application, however, the applicant sought further deductions for that same financial year of more than $53,000. This state of affairs is not explained in the application (nor in the applicant’s affidavit for that matter). In those circumstances, it is not surprising that Mr Phillips considered there was a risk of double counting.
Dividend
[38] Mr Phillips’ third reason for declining the application was that it failed to take account of what he considered to be an additional liability for income tax, over and above that already owed, of approximately $52,917. This liability was said to arise from a transaction in June 2015 between Newcastle and the applicant in respect of a residential property referred to as “Merwood”.
[39] Newcastle went into voluntary liquidation on 12 June 2015. At the time, Newcastle owed $65,878 in GST arrears. Two days prior to the appointment of liquidators, Newcastle sold Merwood to the applicant at an undervalue. Some six weeks after that, the applicant sold the property to the trustee of the trust, that trustee being the applicant.
[40]As to this, Mr Phillips said in his letter:
Your client transferred the Merwood Lane property from Newcastle to himself for $900,000 on 10 June 2015. The sale price was below market value at that time. An independent valuation of this property in May 2015 shows that the market value of the property was $1,225,000. The Commissioner considers that the difference between the two amounts, about $165,217, represents a transfer of value from Newcastle to your client as the sole shareholder. Your client derived a dividend under sections CD 4 to CD 6 of the ITA. The Application does not include this omitted dividend income, which would give rise to additional income tax liability of about $52,917. Therefore, the Commissioner will not exercise her discretion under section 113 of the TAA to accept the Application in relation to the expense claims for the 2014 to 2017 income years because your client has failed to comply with tax obligations in respect of the sale of the Merwood Lane property.
[41]This part of Mr Phillips’ letter is contentious for two reasons.
[42] One is that, on the applicant’s submission, the dividend to which Mr Phillips refers does not arise in fact, and that it constitutes an irrelevant consideration which he ought not to have taken into account. I address this submission below.
[43] The second arises from the sentence beginning “Therefore”. Counsel for the applicant, Mr Kilian, submits this sentence evidences that the sole reason behind the refusal to amend the assessments was the applicant’s (apparent) failure to declare this dividend income. Thus Mr Kilian submits that I should focus on that reason to the exclusion of the others referred to in the letter.
[44] Counsel for the Commissioner, Ms Deligiannis, does not accept this submission for the applicant. She acknowledges that the sentence is unfortunately worded, in that it may suggest the sole reason for the refusal was the failure to account for the additional income. However, Ms Deligiannis referred me back to Mr Phillips’ statement at the outset of the letter, in which he prefaced his remarks by saying:
... These are the reasons for [the decision to decline] ...
[45] Accordingly, Ms Deligiannis submits that it is necessary to have regard to all the reasons Mr Phillips gave for his decision to decline the application.
[46] It is not entirely clear to me what Mr Phillips intended by commencing that sentence “Therefore”, nor why he was singling out the 2014 to 2017 years. Regardless, reading the letter as a whole, I am satisfied that each matter identified in the letter caused Mr Phillips to conclude that the amendments proposed would not result in a correct assessment.
Availability of judicial review
[47] There is no dispute that judicial review is available in relation to a decision under s 113.5 The Court will, however, be slow to interfere in the proper exercise of the Commissioner’s statutory duties and discretions, or in decisions which involve the exercise of judgment in the statutory framework.6
5 Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153; and Charter Holdings v Commissioner of Inland Revenue [2016] NZCA 499, (2016) 27 NZTC 22-075 at [59].
6 Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18,583 (HC) at [73]-[74];
Submissions/discussion
Failure to consider material relevant considerations and taking into account material irrelevant considerations
[48] To succeed on this ground, the applicant must establish that Mr Phillips failed to consider a relevant consideration or had regard to one that was irrelevant, that omission or consideration being material to the decision reached.7
[49] The relevant considerations said to have been overlooked are s CW 17 ITA and ss 6 and 6A TAA.
Sections DA 2 and CW 17 Income Tax Act 2007
[50] I referred in [34] above to Mr Phillips’ statement that some of the deductions claimed were precluded by s DA 2(4), which provides:
DA 2 General limitations
Employment limitation
(4)A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation.
[51] However, Mr Kilian submits that s CW 17(2) ITA applies in the present case, and prevails over s DA 2(4), but that Mr Phillips did not consider it. Section CW 17(2) provides:
CW 17 Expenditure on account, and reimbursement, of employees
Exempt income: reimbursement
(2)An amount that an employer pays to an employee in connection with the employee’s employment or service is exempt income of the employee to the extent to which it reimburses the employee for expenditure for which the employee would be allowed a deduction if the employment limitation did not exist.
[52] As Ms Deligiannis submits, the application of s CW 17 in the present case is not self-evident. She submits that the critical test is whether the applicant would be
7 CREEDNZ Inc v Governor-General [1981] 1 NZLR 172 (CA) at 207.
allowed a deduction if the employment limitation did not apply, that is if there is a nexus between the income derived and the expenditure incurred. Ms Deligiannis submits that, although Mr Phillips did not refer specifically to s CW 17, it is apparent from his affidavit that he turned his mind to the required nexus.
[53] Ms Deligiannis also submits that s CW 17(2) requires evidence that the payment said to be exempt is reimbursement of such an expense, and there is no such evidence in the present case.
[54] I accept Mr Kilian’s point that Mr Phillips’ reference to s DA 2(4) appears simply to rule out the deduction claimed as a matter of principle. That is, in fact, the effect of s DA 2(4) in any event. Section CW 17(2) deals with a different matter, which is to categorise a reimbursing payment of the type described as “exempt” (from income tax). I am not persuaded that Mr Phillips overlooked that point of principle because he makes express reference to it at the end of his letter, in the paragraphs quoted in
[33] above.
[55] The simple answer to this point, however, is Ms Deligiannis’ second submission. There is no evidence that the applicant was reimbursed any expense so incurred. Nor was a claim to that effect made in the application. The applicant sought the benefit of deductions, not exempt income. If the applicant considered some of his receipts to be exempt pursuant to s CW 17(2), that ought to have been said and established in the application, and it was not.
[56] To conclude on this point, on the evidence before me, I am not persuaded s CW 17(2) was a relevant consideration.
Sections 6 and 6A Tax Administration Act 1994
[57] The applicant’s next submission is that Mr Phillips failed to give proper consideration to the “overarching” obligations in ss 6 and 6A TAA, often referred to as the “care and management” provisions, but instead focused on the provisions of the ITA to which I have referred, so as to deny the applicant the deductions claimed.
[58]Sections 6 and 6A TAA provide:
6Responsibility of Ministers and officials to protect integrity of tax system
Best endeavours to protect integrity of tax system
(1)Every ... officer of any government agency having responsibilities under this Act ... in relation to the collection of tax and for the other functions under the Inland Revenue Acts must at all times use their best endeavours to protect the integrity of the tax system.
Meaning of integrity of tax system
(2)Without limiting its meaning, the integrity of the tax system includes—
(a)the public perception of that integrity; and
(b)the rights of persons to have their liability determined fairly, impartially, and according to law; and
(c)the rights of persons to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other persons; and
(d)the responsibilities of persons to comply with the law; and
(e)the responsibilities of those administering the law to maintain the confidentiality of the affairs of persons; and
(f)the responsibilities of those administering the law to do so fairly, impartially, and according to law.
6A Commissioner’s duty of care and management
Care and management
(1)The Commissioner is charged with the care and management of the taxes covered by the Inland Revenue Acts and with such other functions as may be conferred on the Commissioner.
Highest net revenue practicable within the law
(2)In collecting the taxes committed to the Commissioner’s charge, and despite anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect 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 persons with the Inland Revenue Acts; and
(c)the compliance costs incurred by persons.
[59] The applicant submits that Mr Phillips misunderstood the obligations imposed by ss 6 and 6A and, in essence, that Mr Phillips ought to have recognised that he could look beyond the strict provisions of the ITA to correct the assessments as sought. The applicant submits that Mr Phillips would have known that the applicant will be able to put himself in a position to obtain the benefit of the exemptions or deductions by, in essence, “going the long way round”: restoration of the affected companies (Newcastle, AVCL and Hexham) to the register of companies; the companies making their own application pursuant to s 113 TAA to claim deductions for expenses incurred (Mr Kilian submits that it is inevitable the companies will be allowed the deductions); thereby reducing the salary or income allocated to the applicant, which in turn will reduce his income tax; and the applicant then making a further application to amend under s 113.
[60] The gist of Mr Kilian’s submission is that this could have been avoided had Mr Phillips appreciated the importance and significance of ss 6 and 6A. Also, the convoluted process referred to in the previous paragraph uses more resources than necessary, which s 6A eschews. Mr Kilian does not say so expressly, but it is implicit in his submission that it was open to Mr Phillips to disregard the provisions of the ITA given the reference in s 6A(2) to “despite anything in the Inland Revenue Acts”, and to proceed on the basis that, sooner or later, the applicant would have the benefit of the amendments now sought.
[61] Ms Deligiannis submits that there is no evidence that Mr Phillips overlooked ss 6 and 6A. On the contrary (and as both counsel submit) there is discussion of ss 6 and 6A in SPS 20/03. The provisions and what they require of the Commissioner in toto are summarised at the outset of SPS 20/03. They are then referred to again in greater detail in a later section of the document.
[62] I accept that ss 6 and 6A are relevant in principle to an application under s 113. However, I also accept Ms Deligiannis’ submission that there is no evidence that Mr Phillips overlooked these provisions. Rather the evidence is to the contrary. Mr Phillips expressly says in his affidavit that he evaluated the application under these sections in deciding that he would proceed to consider the application under phase three. In my view, there are no circumstances in which ss 6 and 6A could compel the
Commissioner to allow an application under s 113 which required him to overlook applicable provisions of the ITA.
[63] Accordingly, I am not persuaded that relevant considerations were overlooked in determining the application for amendment.
Irrelevant considerations
[64] The irrelevant considerations said to have been taken into account are, first, a reference by Mr Phillips in his letter to s 149A TAA and, secondly, the income tax consequences for the applicant of the transfer of Merwood at an undervalue.8
Section 149A Tax Administration Act 1994
[65] As to the first, at the outset of this letter, Mr Phillips states that the applicant had:
... failed to satisfy the onus of proof on the balance of probabilities under section 149A(1) of the TAA that allowing deductions for the expenses claimed in the Application would result in the correct income tax liabilities for the 2010, 2014 to 2018 income years ...
[66] Section 149A(1) TAA provides for the standard of proof in civil proceedings relating to the imposition of penalties. It has no application to a request under s 113. Mr Phillips acknowledges this error in his affidavit. I am not persuaded anything turns on it.
Transfer at undervalue
[67] The more significant point relates to the income tax liability that Mr Phillips considered arose as a result of Newcastle’s sale of the Merwood property to the applicant at an undervalue.
[68] In particular circumstances, including the present, a transfer of property by a company to a shareholder at an undervalue constitutes a “transfer of company value”
8 There is no dispute that the property was transferred at an undervalue.
under s CD 5 ITA and as such is a dividend by virtue of s CD 4 and income in the hands of the shareholder.
[69] On its face, Newcastle’s transfer of the property to the applicant was at an undervalue of $325,000.
[70] In his letter, Mr Phillips refers to a shortfall of $165,217. Unfortunately, Mr Phillips does not explain that amount in his letter. However, as I understand it, that sum reflects events subsequent to the transfer, as follows.
[71] By agreement of 16 July 2015, so about six weeks after the transfer, the applicant agreed with the liquidators that he would repay the amount of the undervalue in instalments.
[72] Mr Phillips acknowledges in his affidavit that at the time he declined the application under s 113 he was not aware of all of the payments that the applicant made to the liquidators by 31 March 2016. As I understand it, and it is fair to say that this is not well explained in Mr Phillips’ affidavit either, the applicant had paid more than Mr Phillips gave him credit for, meaning that Mr Phillips overstated the income tax liability that arose.
[73] As it turns out, the applicant defaulted on some of the instalments due from him under his agreement with the liquidators but ultimately the liquidators did recover all of the shortfall when Merwood was sold in June 2017.
[74] The issue which arose before me was whether the agreement to repay and/or the liquidators ultimate recovery affected the applicant’s liability for income tax on the amount of the dividend received in the year ended 31 March 2016.
[75] There was considerable dispute at the hearing before me as to this point. Matters were left on the basis counsel would seek to reach an agreed position but file further submissions if unable to do so, as proved to be the case.
Subsequent submissions
[76] Mr Kilian’s submission is that the effect of the agreement to repay, entered into as it was in the same financial year as the transfer, is that the applicant did not receive a dividend at all, and therefore no income tax liability arises. Alternatively, if a dividend was received, it was reversed by ss CD 41 and/or 42 ITA, in which case again no income tax liability arises. In either case, Mr Phillips was in error in this part of his letter.
[77] Ms Deligiannis submits the repayment is irrelevant; there was transfer of company value as defined in s CD 5(1); and that by s CD 4 this constituted a dividend.
[78] The first issue is whether a dividend accrued to the applicant on the sale and that depends on whether there was a transfer of “company value” to the applicant. Mr Kilian submits there was no transfer, because of the repayment.
[79]Section CD 5(1) ITA provides:
CD 5 What is a transfer of company value?
General test
(1)A transfer of company value from a company to a person occurs when—
(a)the company provides money or money’s worth to the person; and
(b)if the person provides any money or money’s worth to the company under the same arrangement, the market value of what the company provides is more than the market value of what the person provides.
[80] It is not apparent to me that a subsequent restoration of the value transferred or part thereof can affect whether a transfer has taken place in fact. The effect of s CD 5(1) is that the transfer of value occurs on provision of money or money’s worth to the shareholder. As Ms Deligiannis submits the transfer, and thus the dividend, arise by operation of law at the time of transfer.
[81] The next issue is the effect, if any, of the agreement to repay or repayment in fact under ss CD 41 and 42.
[82]Mr Kilian submits each applies to reverse the dividend.
[83]Section CD 41 applies in either of the instances below:
CD 41 Adjustment if amount repaid later
When released debt repaid
(1)If the release by a company of a shareholder’s obligation to pay money to the company has been treated as a dividend and the released amount is later repaid to the company, this section applies to the extent necessary to ensure that—
(a)the dividend is disregarded for the purposes of this Act; and
(b)the resulting refunds are made.
When close company expenditure repaid
(2)If any expenditure of a close company that shareholders in the company believed on reasonable grounds was only for the benefit of the company is nevertheless a dividend and the expenditure is later repaid to the company, this section applies to the extent necessary to ensure that—
(a)the dividend is disregarded for the purposes of this Act; and
(b)the resulting refunds are made.
[84] Mr Kilian does not say why s CD 41 applies in the present case. I accept Ms Deligiannis’ submission that what occurred in this case falls outside ss CD 41(1) and (2).
[85]Section CD 42 provides:
CD 42 Adjustment if additional consideration paid
Differences from market value
(1)If a dividend from a company arises because of a difference between the market value of property provided by or to the company and the consideration paid for it, the dividend is disregarded for the purposes of this Act if the conditions in subsections (2) to (4) are met.
Market value
(2)The consideration paid must have been an amount that the company considered was the market value, having taken reasonable steps at the time of the transaction to ascertain a market value.
Difference paid
(3)The recipient of the dividend must have later paid to the company—
(a)sufficient additional consideration to reflect the actual market value of the property at the time of the transaction; or
(b)a refund of any excess consideration paid by the company.
Accounts adjusted
(4)Any necessary adjustments must have been made to the accounts of the company and the recipient for the additional consideration or refund.
[86] The transaction in this case is within the ambit of s CD 42(1) but the dividend is only to be disregarded if the conditions in ss CD 42(2) to (4) are met. As Ms Deligiannis submits, they are not. On the evidence, Newcastle could not have considered it received market value at the time. A valuation obtained only a few weeks prior to the sale to the applicant valued the property at $1,225,000 (s CD 42(2)); the applicant paid the shortfall not to the company but to the liquidators, who applied the funds to pay unsecured creditors and liquidators’ costs (s CD 42(3)); and the necessary accounting adjustments have not been made, regardless of whose responsibilities those adjustments might be — Newcastle’s or the liquidators’ (s CD 42(4)).
[87] Drawing these points together, although Mr Phillips may have overstated in his letter the additional income tax liability resulting from the dividend, on the face of these provisions the liability to which he referred existed and thus he did not take into account an irrelevant consideration.
[88]Accordingly, this ground of review is also not established.
Predetermination/unreasonable decision
[89] I have already addressed the submission that Mr Phillips predetermined the application in [20] above.
[90] An unreasonable decision is one that is outside the bounds of reason.9 The applicant contends the decision is unreasonable for the same reasons advanced above.
9 Webster v Auckland Harbour Board [1987] 2 NZLR 129 (CA) at 131.
This submission has no prospect of success given the evidence before me and the provisions of the ITA.
Discretionary remedy
[91] Ms Deligiannis submits, even if a ground of review had been made out, there would be good grounds for declining relief in this particular case. This is because on her submission it would be pointless to remit the application under s 113 back to the Commissioner, as the same refusal could be expected.
[92] I do not propose to express a view on this given the conclusion I have reached. Relief or the refusal of it might depend in large part on the ground of review identified.
Result
[93] I dismiss this application for judicial review. The parties may make submissions on costs if they are unable to agree.
Peters J
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