William Royce Developments Ltd v Commissioner of Inland Revenue

[2012] NZHC 364

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-6299 [2012] NZHC 364

IN THE MATTER OF     s 290 of the Companies Act 1993

BETWEEN  WILLIAM ROYCE DEVELOPMENTS LIMITED

Applicant

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:         6 March 2012

(Heard at Auckland)

Counsel:         P. Chambers - Counsel for Applicant

M.F. Nelson - Counsel for Respondent

Judgment:      2 April 2012

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment of Associate Judge Gendall is delivered at 4.00 pm on 2 April 2012 under r 11.5 of the High Court Rules.

Solicitors:           James D Thompson, Solicitor, PO Box 33 197, Auckland

Inland Revenue Department, PO Box 76 198, Manukau 2241

WILLIAM ROYCE DEVELOPMENTS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC AK CIV-2011-404-6299 [2 April 2012]

Introduction

[1]      This is an application by William Royce Developments Limited, the applicant company, to set-aside a statutory demand issued against it by the Commissioner of Inland  Revenue,  the  respondent.    The  statutory  demand  in  question  dated  19

September 2011 claims from the applicant $1,330,801.99 said to be due and owing for Income Tax, penalties and interest ($216,144.68) and Goods and Services Tax, penalties and interest ($1,114,657.31).

[2]      The statutory demand was served on 23 September 2011.    On 6 October

2011 the applicant filed its present application to set-aside the demand.

[3]      The grounds outlined in the present application are threefold being: (a)         The applicant claims it is not indebted to the respondent.

(b)The applicant claims there is a substantial and ongoing dispute about whether the alleged debt is owing and/or due.

(c)      The use of the statutory demand procedure is said to be an abuse of process   and/or   oppressive   behaviour   unfairly   discriminating   or unfairly prejudicial to the applicant such that “it will cause a substantial injustice”.

[4]      The applicant relies upon s 290(4) Companies Act 1993 in bringing this application.

[5]      The application is opposed by the respondent.

Background Facts

[6]      It seems clear from material before the Court that the applicant company is a property development company.

[7]      On 4 August 2004 the applicant filed a GST Return for the period ending 31

May 2004 claiming a GST refund of $16,285.78.

[8]      On 9 November 2006 the respondent commenced an investigation into the applicant’s return.  This investigation it seems related specifically to GST output tax implications for the sale of a property by the applicant at 379 Swanson Road, Ranui, Auckland (the property).

[9]      The property had been purchased by the respondent earlier at a price of

$675,000.00   (including   GST)   to   enable   a   substantial   residential   property development to be undertaken.  That development I understand involved the creation of something in excess of twenty-five residential units.   The development was substantially completed and a lease arrangement with the Housing Corporation entered into for the completed units.

[10]     Prior to final completion of all the units, however, and as I understand it before any of the completed units were occupied by state house tenants, the property was sold by the respondent to a third party at a sale price of $4,792,500.00.  That sale agreement it seems contended that no GST was payable on the sale as it was claimed to be an exempt supply.  In addition, the respondent argues now that in any event the sale was zero-rated as a going-concern for GST purposes.

[11]     Following the respondent’s investigation of this transaction, he determined that GST was chargeable on the sale of the property by the applicant at the standard rate of 12.5% and on 28 November 2008 a Notice of Proposed Adjustment (NOPA) was issued to the applicant.  This proposed to adjust the GST return to include output tax on the sale of the property at that 12.5% rate.

[12]     On 23 January 2009 the respondent received a Notice of Response (NOR) from the applicant.  This NOR advised again that the applicant had treated the sale of the property as zero rated for GST purposes and accordingly did not return the output tax in its appropriate return.  The applicant then went on to claim that in addition, it actually never carried out a taxable activity in relation to the property and therefore output tax was not charged.  (As an aside at this point, it would seem that this claim

is somewhat surprising, given that it appears the applicant had made substantial GST input claims for the purchase of the property and for its development costs throughout).

[13]     In considering the applicant’s NOR the respondent determined that he could not accept its contents and therefore it was appropriate to continue with the Disputes Resolution Process.

[14]     Statements  of  Position  were  then  issued  and  on  18  April  2011  the Adjudication Unit of the Office of the Chief Tax Counsel at the Inland Revenue Department considered  the matter and ruled in favour of the respondent in this dispute.  On the same day a Notice of Final Determination (NOFD) was issued to the applicant detailing the decision of the Adjudication Unit. Attached to the NOFD was detailed information regarding the required process for any challenges to the taxation assessments which the applicant might wish to make.  Specifically, the information provided stated that the applicant must file documents disputing any decision given to the Taxation Review Authority (TRA) or the High Court within two months of the date of issue of the decision.

[15]     On 26 April 2011 the respondent carried out reassessments to reflect the adjudication decision.  A Notice of Assessment was issued to the applicant on that day.

[16]     On 27 April 2011 a letter was issued by the respondent to the applicant advising that the return had been reassessed in accordance with the adjudication decision and that the applicant had 2 months to dispute that decision.

[17]     Nothing happened for over 2 months.  Then, on 7 July 2011 the respondent contacted the applicant’s agent saying that the 2 month period to challenge the adjudication decision had passed and advised that the case would now be finalised. This notification appeared to be accepted at the time without question.

[18]     On 14 July 2012 a final audit letter was issued by the respondent to the applicant confirming this.

[19]     This culminated in the issue of the present statutory demand on 19 September

2011 claiming at the time the total sum of $1,330,801.99.

Counsels’ Submissions and My Decision

[20]     The applicant brings the present application pursuant to s 290(4)(a) and (c) Companies Act 1993.  These provide that the Court may grant an application to set- aside a statutory demand if it is satisfied first, that there is a substantial dispute whether or not the debt in question is owing or is due or secondly, that the demand ought to be set aside on other grounds.

[21]     The principles relating to s 290(4) are well settled.  The authors of Brookers

Insolvency Law & Practice provide the following succinct summary at para CA

290.02:

The  general  principles applicable to  applications under  s  290(4)  are  now well established.  These principles, which can be discerned from cases such as United Homes (1988) Ltd v Workman [2001] 3 NZLR 447; (2001) 9 NZCLC 262,605 (Court of Appeal); Fletcher Homes Ltd v Willis 23/7/99, Master Faire, HC Auckland M471IM99; Forge Holdings Ltd v Kearney Finance (NZ) Ltd 20/6/95, Tipping J, HC Christchurch M149/95; Queen City Residential Ltd v Patterson Co-Partners Architects Ltd (No 2) (1995) 7 NZCLC 260,936; Rennie v Prospect Resources Ltd

3/11/95, Tipping J, HC Greymouth M14/95; Crown Transport Services Ltd v Waipa District Council 2/7/08, Associate Judge Faire, HC Hamilton CIV-2007-419-1711; and Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297; (1989) 1 PRNZ 390 (Court of Appeal), are as follows:

(a)       The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.   The task for the Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.  The mere assertion that there is a genuine substantial dispute is  not sufficient:   Queen City Residential Ltd v  Patterson Co- Partners Architects Ltd (No 2) (1995) 7 NZCLC 260,935 (HC).

(b)       The mere assertion that a dispute exists is not sufficient.  Material, short of proof, is required to support the claim that the debt is disputed.

(c)       If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.

(d)       An applicant must establish that any counterclaim or  cross demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim.   Such an obligation would amount to the dispute itself being tried on the application.

(e)        It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

[22]     A starting point in properly addressing the application before me must be a consideration of the Tax Administration Act 1994.   This acts as a code for the conduct  of  resolving  tax  disputes.    Section  109  Tax  Administration  Act  1994 provides that, except in objection or challenge proceedings provided for in Parts 8 and 8A respectively of the Tax Administration Act 1994, a “disputable decision” may not be disputed in any Court or any proceedings on any ground whatsoever.  Rather, every “disputable decision” is deemed to be correct in all respects.

[23]     Section 3 Tax Administration Act 1994 defines a “disputable decision” to mean “an assessment”.

[24]     In the present case the respondent assessed the applicant for GST, Income Tax, interest and penalties.  The disputes procedure for the conduct of resolving tax disputes is prescribed in Part 8 of the Tax Administration Act 1994.  Strict time limits as well as specific Tribunals and procedures for handling of tax disputes are detailed within this section of the Act.  It is acknowledged at this point that the applicant did not commence proceedings either within the time limits or with the proper Tribunals provided for in the Tax Administration Act 1994.   Clearly the applicant did not challenge the Notice of Final Determination issued by the respondent under the available procedures in the Tax Administration Act 1994.

[25]     Given the provisions of s 109 Tax Administration Act 1994 therefore, there is an argument that the Court does not have jurisdiction here to entertain the applicant’s suggestion that there is a substantial dispute over the assessments and the debt in question in terms of that section.

[26]     It  follows  therefore,  according  to  the  respondent,  that  the  applicant  is prohibited here from disputing the amount of tax assessed in this case and under s

109(b) Tax Administration Act 1994 that assessment of the tax owing is deemed to be correct.

[27]     Further, the respondent contends (and there can be little dispute about this here) that ample notice was given to the applicant with respect to the time limits imposed for the challenging of these assessments. These time limits were ignored.

[28]   In his submissions before me, Mr Chambers counsel for the applicant acknowledged that the applicant does not dispute the fact that, prior to the 18 April

2011  adjudication  report  of  the  Chief  Tax  Counsel  of  the  Inland  Revenue Department, beyond the filing of a statement of position by it on 16 August 2010, the applicant has not pursued its tax dispute further either through the Taxation Review Authority or judicial review or as the provisions of the Tax Administration Act 1996 allow.  Notwithstanding this, the applicant attempts to advance an argument here, as I understand it, broadly upon the following lines.  First, Mr Chambers acknowledges that the applicant accepts its financial circumstances prevent it from pursuing its dispute further here (either under the provisions of the Tax Administration Act 1994 or by way of judicial review) and he concedes that this does not of itself create a sufficient ground for the Court to set-aside the present statutory demand.  Secondly however, he goes on to submit that when this financial circumstance factor is considered in conjunction with what the applicant says are both serious factual and procedural concerns about the respondent’s assessment and proposed adjustment here and the respondent’s alleged failure to disclose supporting documentation, there is a prevailing air of unfairness in this whole disputes process.   According to the applicant, all this must suggest that the governing provisions of the Tax Administration Act 1994 and the respondent’s Code of Practice for Disputes have not been complied with by the respondent in this case such that the present demand should be set aside,

[29]     Mr Chambers also suggests that this alleged procedural unfairness pervades all the decisions which have been made here and it is suggested that the applicant may have proper grounds to review the decisions which have been taken.  On this aspect, as noted above Mr Chambers claims that the applicant has been precluded from preparing judicial review proceedings in this case due to what he says is the company’s “financial situation”.   This claim however on its face might seem somewhat surprising given that the applicant sometime prior to 31 May 2004 sold the property it had purchased in May 2002 for $675,000.00 (inclusive of GST) and

then developed for a sale price of $4,792,500.00.  Although no doubt development and other costs were incurred in the meantime, no explanation has been given as to where this over $4 million presumably received by the applicant has gone.

[30]     Leaving that aspect on one side, however, Mr Chambers for the applicant submitted that the decision of Tannadyce Investments Limited v Commissioner of Inland Revenue, HC, Christchurch, 13 October 2008, Christiansen AJ, CIV-2008-

409-759 supports its position here.   (In turning to consider that decision I must say that I fail to see here how that case assists the applicant here).  Tannadyce related to an application to set-aside a statutory demand on the basis of a Judicial Review Application by the taxpayer alleging unreasonableness upon the part of the Commissioner of Inland Revenue in requiring returns to be filed when the taxpayer did not have access to its records.

[31]     In  that  case  the Associate  Judge  concluded  that  the  taxpayer  Tannadyce Investments Limited “did not have an arguable case much less a good arguable case” to set-aside the statutory demand and found the submission that the Commissioner had deliberately withheld financial information from the taxpayer here as “nonsensical” – see [72] of the decision.

[32]     As best I can tell from his further submissions before me, Mr Chambers for the applicant seemed to focus largely on suggestions in the respondent’s statement of position and the final determination by the Chief Tax Counsel that, impliedly at least, there had been improper conduct by the directors of the applicant company here.  Mr Lindsay Royce Ellery in his affidavit dated 5 October 2011 in support of the present application noted that he is one of the directors of the applicant and denied that any improper conduct had occurred here.   He went on to note that the applicant is no longer a trading company, has no assets and no income from which it can fund the dispute with the Commissioner any further.

[33]     Other  than  this  simple  denial  of  any  wrong  doing  on  the  part  of  the

applicant’s directors, as I see the position Mr Ellery took the matter no further.

[34]     In addition despite the protestations made on behalf of the applicant and by Mr Chambers in his submissions before me, I failed to see evidence before the Court to support the suggestion that the respondent may have acted improperly here in issuing the assessments which are the subject of the statutory demand.

[35]     Returning for a moment to the critical importance of the required taxation disputes process here, in Anderson v Commissioner of Inland Revenue (2006) NZTC

19,995 [Tab 1, Respondents BA], his Honour Stevens J cited with approval the case of Allen v Commissioner of Inland Revenue [2006] 3 NZLR 1 stating at [21]”

... with reference to the importance of adhering to the disputes process, the observation of the Court of Appeal in Allen v Commissioner of Inland Revenue [2006] 3 NZLR 1 are pertinent. At [18], O’Regan J stated:

Part 8A provides for challenges to disputable decisions made by the Commissioner. These can be commenced either in the [Taxation Review Authority] or the High. The intention of the reforms made following the Richardson report is that the challenge process will take place only after the full and frank exchange of information required by Part4A have taken place, which will normally be through the NOPA NOR mechanism ...”

[36]     Stevens J then went on to cite the approach taken by the Supreme Court in the Allen case. At [22] he stated:

The importance of adherence to the dispute process when a  taxpayer wants  to challenge an assessment by the Commissioner was repeated in the Supreme Court in Allen. At [9] Anderson J stated:

There cannot be recourse to litigation unless the disputes procedure under Part 4A [of the Tax Administration Act 1994] has been followed to the extent as set out in the applicable subsection ....”

(emphasis added)

[37]     Consequently, in my view, the applicant here is prohibited from disputing the amount of tax assessed.   Under section 109(b) of the Tax Administration Act, the assessment of tax owing is deemed to be correct.

[38]     In addition, I am satisfied here that ample notice was given by the respondent to the applicant in respect of the time to challenge the assessment:

(a)      Information  was  sent  to  the applicant  regarding  challenges  to  tax assessments on 18 April 2011;

(b)On 27 April 2011 a letter was issued to the applicant advising the return had been reassessed in accordance with the adjudication decision and the applicant had two months to dispute the adjudication decision.

‘Associate Judge D.I. Gendall'