Wilson v Commissioner of Inland Revenue
[2016] NZHC 87
•22 April 2016
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV2015-463-000129 [2016] NZHC 87
BETWEEN RONALD MAXWELL WILSON
Applicant/Judgment Debtor
AND
THE COMMISSIONER OF INLAND REVENUE
Respondent/Judgment Creditor
Hearing: 4 February 2016 and 19 April 2016 Appearances:
K Badcock for the Judgment Debtor/Applicant
M L Brown for the Judgment Creditor/RespondentJudgment:
22 April 2016
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
22.04.16 at 4:30pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
R M WILSON v THE COMMISSIONER OF INLAND REVENUE [2016] NZHC 87 [22 April 2016]
Background
[1] The applicant (Mr Wilson) applies to set aside a bankruptcy notice dated 8
October 2015 and served on him on 5 November 2015. He also applies for an order approving his proposed terms of payment of the judgment debt.
[2] He claims:
(a) He is prejudicially affected by the Commissioner’s delay in obtaining judgment against him personally for the debts of the Il Mondo Trust (the Trust), of which he was a trustee; and
(b)The Commissioner has failed or refused to accept his reasonable terms for repayment of the full amount of the judgment debt; and
(c) The Commissioner’s bankruptcy application is an abuse of process;
and
(d) Interests of justice support his application.
[3] Mr Wilson is a trustee of the Trust which was unable to meet an historic GST
obligation. The Trust has no assets and is unable to pay the judgment debt.
The application
[4] Mr Wilson says he has offered to repay the judgment debt in full but the Commissioner’s refuses to accept his proposed terms of payment. He seeks the Court approval of his offered terms of payment of the judgment debt of $137,303.10.
[5] Mr Wilson does not dispute the assessments which form the basis of the judgment entered but his position is that the law entitles him to seek to have the bankruptcy notice set aside and for his payment proposal to be approved.
[6] It is not in dispute that the Court has an inherent jurisdiction to entertain such a payment proposal when considering an application to set aside a bankruptcy notice.
However, special circumstances must be demonstrated. Much depends upon the Court’s assessment of the interests of justice in the circumstances. In that regard it is this Court’s view that matters for consideration focus upon Mr Wilson’s offer of payment, but as well upon those events which have occurred meanwhile until that offer was made.
[7] Mr Badcock for Mr Wilson draws support from the judgment of Master
Kennedy-Grant in Re Wise1. In that case the learned Master noted:
[7] … The Court is exercising and independent power. The purpose of the power is to consider whether the bankruptcy notice would be deemed to have been complied with by the Court approving the terms of payment.
[8] In effect, if the Court approves the terms of payment or, in terms of s
29(1)(b)(3) the debtor has compromised on terms that satisfy the Court, then the debtor is treated as having complied and no active bankruptcy will arise.
If the debtor has made a payment which satisfies a creditor, even though it may not be a payment in full, that will be enough to stop an act of
bankruptcy arising.
[9] The position that confronts the Court is that the creditor does not approve. The Court is being asked to approve and, in effect, to override the decision of the creditor. It needs to be said at the outset that the Court does not necessarily exercise a commercial judgment in these matters. Usually the Court applies insolvency law, while leaving the parties themselves to make commercial judgments as to whether they should accept a part- payment in satisfaction of debts. A starting point is an initial reluctance of the Court to question the commercial judgment of a creditor or to override it. It may be that if the creditor was seen to be acting unconscionably or unreasonably or in a way that would not be consistent with any commercial judgment that the Court might step in to override the wishes of the creditor.
[8] In that case the learned Master noted that the debtor’s terms of payment offer were fairly loose i.e. to pay over five years without any program of repayment being provided or of any provisions as to what should happen if there is noncompliance.
[9] In that case the debtor’s offer was of six cents in the dollar. The learned
Master did not approve the terms of payment proposed.
[10] In this case the judgment against Mr Wilson related to a core GST debt of
$17,693.65 incurred by his Trust dating back to 2003. He deposes to having made
various attempts to resolve his Trust’s tax liabilities and his own personal tax
1 HC Auckland B227/95.
liabilities over the period 2004 to 2008. He says he did not get anywhere with the Commissioner despite he says having provided all of the information required of him.
[11] Mr Wilson says the Commissioner knew in 2008 that he had applied for hardship assistance and between July 2008 and October 2014 the Commissioner took no steps in resolving the debts of the Trust or Mr Wilson and only in October 2014 recommenced the pursuit of payment of those.
[12] Mr Wilson says between October 2014 and June 2015 he again attempted to resolve those tax liabilities but that the Commissioner would not accept his proposals.
[13] Mr Badcock submits that a prolonged period of inaction by the respondent now prejudicially affects Mr Wilson to an extent that the Court will be justified in intervening in the bankruptcy process.
[14] Mr Wilson deposes in his affidavit dated 17 November 2015:
…
13.It appears that the IRD have never in fact known what amount the Trust actually owed and we never got to the bottom of determining that.
14.Notwithstanding that, in June 2015 I conceded to the IRD’s claim. At that time I was tired, unwell, unable to afford a lawyer and just not able to carry on. I accept that the IRD was legally entitled to obtain judgment against the Trust, even 12 years after the core debt. I also accept that as a Trustee of the Trust that I am ultimately liable to the IRD for the Trust’s tax liabilities.
15.What I find difficult to accept is that for about 4 or 5 years I attempted to resolve the Trust and my own tax matters with little success, and not for the want of trying. The IRD then did nothing for about the next 6 years and then as my retirement is approaching they take steps to bankrupt me.
16.I turn 65 on 7 March 2016. In March 2016 I am entitled to start collecting my National Superannuation and can retire. The IRD know this because my date of birth is recorded on my tax records with them.
17.For the past 8 years I have been self-employed operating a small second-hand car sales yard. That yard employs three other people and returns me a living wage. The business does not make any profit.
18.Due to my ill health I am unable to work in any other paid employment because I have so much time off work.
…
[15] Mr Badcock submits this Court should “seriously consider” that it is in the interests of justice to stay the bankruptcy proceeding and to approve the repayment offer. Mr Badcock submits it is difficult to perceive any public interest element that would be served in making Mr Wilson bankrupt; that bankruptcy would be a purely punitive outcome and serve no practical or useful purpose given that Mr Wilson “proposed to repay the judgment debt, in full, over a relatively short period”.
[16] Mr Badcock submits that the repayment plan “will mean that the bankruptcy notice has been complied with so that no act of bankruptcy has arisen”. In such circumstances the Court has previously indicated that whilst not questioning the commercial judgment of a creditor the Court might however step in to override the
wishes of the creditor.2 In the FM Custodians case the Court did not approve the
payment proposal because only a minimal amount of the debt would be repaid. In this case Mr Badcock submits full repayment has been offered.
[17] Mr Wilson says he cannot pay the debt in a single lump sum. He asserts his
proposal provides “full payment over time”.
The Commissioner’s opposition
[18] The evidence provided by Mr Wilson in support of his application was responded to by Ms Hutchison a collections officer of the Inland Revenue Department. She deposes that the debt arose due to a failure by the Trust to pay GST for the periods ended 30 November 2001 to 31 July 2003. She said the Commissioner has had numerous contacts with Mr Wilson but the debt remained unpaid; that between August and October 2014 contact was made with Mr Wilson’s
accountant in order to address the Trust’s debt. On 7 November 2014 a letter
2 FM Custodians Ltd v McNally [2013] NZHC 34.
requesting payment in full was sent but in absence of a response the bankruptcy proceeding was initiated.
[19] When the proceeding was served no statement of defence was filed. The matter was scheduled for a formal proof hearing on 25 May 2015. Later the matter was called on 17 June 2015 when judgment was entered against Mr Wilson, after the Court heard counsel for the Commissioner and heard Mr Badcock on behalf of Mr Wilson.
[20] Later and after Mr Wilson had been served with the bankruptcy notice on 5
November the Commissioner on 12 November received a payment proposal from Mr Badcock on behalf of Mr Wilson. Ms Hutchison deposes that on 13 November 2015 she telephoned Mr Badcock and advised the Commissioner required further information including a disclosure of financial position, a complete disclosure of all assets, a copy of the trust deed for the Trust, and any mortgage information. She confirms at that time she was advised Mr Wilson would reach superannuation age the next year and would continue to work to be able to make the payments in accordance with the proposed arrangement and that the proposed lump sum payment would be funded through a loan.
[21] On 17 November 2015 Ms Hutchison received the disclosure of financial position, a statement of assets and liabilities and bank statements for Maxam Group Limited, a company Mr Wilson is the sole director of and through whom it was proposed a lump sum payment of $38,000 would be provided.
[22] Responding to claims that the Commissioner should have pursued judgment against Mr Wilson before 2014 Ms Hutchison stated that Inland Revenue records show that between 2004 and 2015 numerous attempts had been made by the Commissioner to deal with the Trust’s debt. In particular:
(a) Between 8 November 2004 and 21 December 2004 the Commissioner was in frequent contact with Mr Wilson and the Trust’s tax agent about the Trust’s debt and outstanding income tax and GST returns. A
final notice was issued to the Trust requiring all outstanding tax returns to be filed by 15 January 2005.
(b)Between 12 January 2005 and 28 February 2006 there was frequent contact about the outstanding tax returns of the Trust with Mr Wilson undertaking to provide the returns on several occasions. The returns were ultimately not provided until March 2006.
(c) On 3 March 2006 the Commissioner received a request for financial relief from Mr Wilson. At that time additional information was requested, including outstanding tax returns for the Trust.
(d)Between 22 May 2006 and 12 July 2006 Mr Wilson undertook to provide additional information.
(e) On 16 May 2008 Mr Wilson contacted the Commissioner and indicated that he wanted to reach an agreement to deal with the Trust’s debt. He was advised to file outstanding tax returns.
(f) On 14 July 2008 a further payment proposal was received from Mr Wilson. This proposal does not appear to have been considered by the Commissioner because there were still outstanding tax returns.
[23] It is the Commissioner’s position that during several periods of negotiation Mr Wilson failed to provide outstanding tax returns which were required to be provided in order to adequately consider any proposal going forward. Further and contrary to Mr Wilson’s assertions Ms Hutchison deposes to conversations being held with Mr Wilson’s legal advisor. Further that Mr Wilson’s claims need to be measured against the fact that pursuant to s 15B of the Tax Administration Act 1994
Mr Wilson must take some responsibility for the length of time that has passed since the debt was incurred.
[24] Regarding the payment proposal it is noted that on behalf of the Commissioner that payment is to be made over five years but does not address the interest which will accrue over the proposal payment period.
[25] Ms Brown submits the proposal is unsupported by corroborating evidence to show that the payments proposed are sustainable; that there is no evidence of loan documents between Mr Wilson and Maxam Group Limited. Also it is noted the monthly income of Mr Wilson and his wife is stated to be $2,513 and that the proposed monthly instalment of $1,928 will leave Mr Wilson and his wife with only
$585 per month to live on – which seems insufficient. Also it is submitted the bank statements of Maxam Group Limited which have been provided do not suggest that company has sufficient funds available to meet a loan of a lump sum of $38,000, as proposed; that no evidence has been provided to show the loan between the company and Mr Wilson and nor has any evidence been provided which suggests how the loan is to be repaid.
[26] Ms Brown submits there are relevant additional factors that ought to be taken into account in particular because of the Commissioner’s obligations to recover outstanding tax; to recover revenue which is practicable and lawful having regard to the resources available to the Commissioner and because of the importance of promoting compliance by all tax payers. The Commissioner has the broader public interest in the integrity of the tax system and in ensuring that tax payers meet their obligations; that taxpayers who do not comply should expect firm action to be taken; and that the voluntary compliance scheme which is central to the proper functioning of the Inland Revenue acts would be placed in jeopardy otherwise.
[27] Ms Brown submits therefore enforcement proceedings will be justified where there has been a flagrant and ongoing failure to comply with the taxpayer ’s obligations and where recovery is dubious or is likely to result only in a relatively minor proportion of the overall debt being recovered.3
[28] Therefore, the Commissioner is obliged to consider more than merely maximizing recovery of tax. In this case Ms Brown says Mr Wilson’s proposal
3 Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18, 583 [55].
seems to provide insufficient supporting evidence to suggest he is in a position to comply with the five year repayment arrangement.
Adjournment to obtain further information
[29] When this matter was initially called on 4 February 2016 it was clear from the Court’s discussion with counsel that Mr Wilson’s debt to the Commissioner was greater than that contained in the Commissioner’s judgment against him.
[30] In the course of discussion with counsel it became clear Mr Wilson bore responsibility for unpaid personal tax and also for his failure to pay child support obligations due.
[31] The hearing on 4 February 2016 was adjourned to enable Mr Wilson to provide information in connection with those responsibilities the debt for which required consideration on his repayment proposal. Hence the hearing was adjourned to enable the Commissioner to request further information and for Mr Wilson to provide further evidence in response to that request.
[32] On 11 February 2016 the Commissioner’s solicitor wrote to Mr Wilson’s
solicitor requesting, inter alia:
(a) Six months bank statements for all bank accounts (including credit cards) if any, held by Mrs Wilson.
(b) Business financials for Mr Wilson’s company Maxam Group Limited.
(c) Proof of Mr Wilson’s income.
(d)A letter from Oxford Finance confirming it had offered a line credit to Maxam Group Limited (to provide the $38,000 that Mr Wilson had offered to provide by way of an initial instalment for his payment proposal).
(e) Evidence of any loan application made to Oxford Finance.
(f) Details of any mortgage over the family home which was owned by the family trust.
(g)A list of all bank accounts in the name of Mr Wilson showing balances.
(h)Confirmation that Mr Wilson intends to address his entire personal tax debt (including penalties and interest) including concerning child support arrears.
(i)Confirmation that he will continue to pay interest that will accrue on the debt at the rate of 9.21 per cent.
[33] In response Mr Wilson has sworn an affidavit and to which he has attached all that information he believes sufficiently responds to the Commissioner’s request. It shows:
(a) $46,500 is due as at 31 March 2016 for personal tax owed by Mr
Wilson. The sum has remained virtually unchanged since 2011.
(b)That Ms Wilson is receiving income of $905 net per fortnight and as well regular contributions from payments from their house owing Fontana Trust.
(c) Mr Wilson’s business company, Maxam Group Limited operated at a
loss of about $30,000 for the 2015 financial year.
(d) Maxam’s financial accounts confirm asset equity of about $80,000.
(e) Current account details of income and/or drawings from Mr Wilson’s
business indicate annual sums ranging between $8,000 and up to
$18,000 and even $34,000 was available over the period 2010 to 2015 as salary or drawings to Mr Wilson.
(f) A letter from Oxford Finance confirming that Mr Wilson had indicated he may seek finance at $40,000 and when he does then the application would be given consideration and would be subject to Oxford’s normal lending criteria.
(g)ASB bank statements indicating an amount of $530.72 being paid each fortnight towards the mortgage over Mr and Mrs Wilson’s residential home. Those payments meet principal deductions as well as interest.
(h)ASB bank statements from July 2015 to-date from which mortgage and loan repayments, household insurance costs and as well the sum of $200.00 each fortnight to Mrs Wilson’s account which appear to be utilised for living expenses.
(i)A copy of the Maxam Group trading account from September 2015 to-date evidencing trade transactions and finance loan repayments.
(j)Mr Wilson’s ASB bank records from August 2015 to-date from which loan payments to Oxford Finance were made.
(k) Mr Wilson’s MasterCard and Visa credit card statements for the
period July 2015 to-date.
(l) Mr Wilson’s personal bank account statements from December 2015 –
February 2016.
(m) Inland Revenue statements of account for GST tax from December
2001 to December 2007 demonstrating how somewhat very modest GST assessments (save for one) can accumulate penalties and interest over but a few years.
(n)IRD statement dated 18 March 2015 advising their records disclose that income tax due on 7 February 2012 was not paid in full and that the outstanding amount including interest was $3,026.61.
The Commissioner’s assessment
[34] All the information was provided at the request of the Commissioner to enable an assessment be made regarding whether Mr Wilson’s repayment proposal was sustainable. Complaint is made however regarding Mr Wilson’s apparent unwillingness to address his entire personal tax debt including an acknowledgment that the child support arrears previously excluded from Mr Wilson’s repayment proposal be factored into his debt repayment offer. Also Mr Wilson is criticised for not confirming that interest would continue to accrue on the debt over the period of the repayment plan; the current interest rate being 9.21 per cent which by the Commissioner’s rough calculation would add a sum of $25,953.01 to the total amount to be paid to the Commissioner.
[35] In the submission of Ms Brown responses were due from Mr Wilson in relation to those matters; that without that commitment Ms Brown submits the proposal was somewhat futile. Otherwise, the Commissioner would be entitled to pursue judgments for an amount not subject to the proposal.
[36] Regarding the information received Ms Brown notes Ms Wilson earns a modest salary of $450 per week and, she submits, that sum is insufficient to contribute to repayment of Mr Wilson’s debt even if she wished to do so.
[37] Also it appears from Ms Wilson’s account that after regular fortnightly withdrawals for household and credit card payments Ms Wilson has only a surplus of approximately $30 per fortnight.
[38] It appears clear from the Maxam Group Limited records that it is operating at a loss and is unable to assist Mr Wilson in the repayment of his debts.
[39] Mr Wilson’s promise to pay a proposed lump sum payment of $38,000 is to be funded by a line of credit extended by Oxford Finance Limited to Maxam Group Limited. However Maxam is, counsel submits, operating at the loss and the additional commitment would only reduce Mr Wilson’s ability to draw living expenses from the trading operation account.
[40] Ms Brown notes that with Mr Wilson’s superannuation entitlement he now receives (he having turned 65 in March 2016) that it is calculated his monthly income will be in the vicinity of $2,390 from which he proposes to pay monthly amounts of $1,928. This means he would only have $462 per month with which to pay his share of the mortgage of his trusts as well as paying for household expenses and any discretionary spending.
[41] Regarding the availability of funding from Oxford Finance it is to be noted by that company’s letter that consideration only will be given in due course if an application is made. There is presently no certainty that funding will be provided at all.
[42] Regarding the present fortnightly mortgage instalment amounts of $530.72 it is noted that $200 of this sum is paid from Ms Wilson’s account leaving an additional $330.72 per fortnight for contribution but that this could not be forthcoming from Mr Wilson’s resources – at least as far as the records provided can demonstrate.
[43] Ms Brown notes that Mr Wilson’s credit card statements show the
MasterCard account appears to be overdrawn.
[44] Regarding Mr Wilson’s claim of an outstanding personal tax liability of
$3,026.61 only as at 18 March 2015 Ms Brown submits the Commissioner’s letter has been misinterpreted for it clearly states that amount for $3,026.61 pertains only to the income tax period ended 31 March 2011 and that Mr Wilson’s full personal tax arrears are set out in the Commissioner’s summary indicating $52,153.82 as at 11
February 2016.
[45] Regarding the increase of the debt of the II Mondo Trust between April 2008 and June 2015 Ms Brown comments this is due to the accrual of penalties and interest which occurs as a matter of statute. Section 120D of the Tax Administration Act 1994 (the TAA) establishes the liability to pay interest. Sections 139A and 139B provide the rates for imposition of late payment and non payment penalties which in this case have been added to the amount requiring payment from Mr Wilson.
[46] Regarding Mr Wilson’s claim that records indicate that the only child support arrears owing as at 27 May 2008 was $104 – which Mr Wilson claims to have paid. Ms Brown submits this assessment overlooks the fact that the debt of $104 was owed for payments missed between April 1993 and November 1993.
[47] The present position says Ms Brown is that $5,615.68 is owed as at 11
February 2016 for unpaid child support.
[48] Likewise for personal income tax unpaid there is due as at 11 February 2016
$46,538.14 – and not the sum of $3,026.61 as is asserted on behalf of Mr Wilson, for that latter sum is the amount overdue income tax for the year ended 31 March 2011.
Considerations
[49] Mr Badcock says Mr Wilson has relied upon material provided on behalf of the Commissioner from which he has assessed his responsibility overall. It is clear, however, that there has been some misunderstanding about the state of Mr Wilson’s current debt to the Commissioner, not only in respect of the Il Mondo Trust debt which Mr Wilson bears legal responsibility for but also in respect of which the Commissioner has the Court’s judgment including costs.
[50] For reasons identified already in this judgment it is clear, at least from the Commissioner’s point of view, that Mr Wilson’s personal debt inclusive of penalties and interests amounts to $46,538.14 as at 31 March 2016. Finally, there is due to the Commissioner from Mr Wilson the sum of $5,615.68 for unpaid child support. The total of those sums is about $200,000. It is an amount of around
$50,000 more than was contemplated by his application for approval of a payment arrangement. Also, there was no calculation by his application of an enduring/ongoing liability for interest which would accumulate over the repayment period of five years. Mr Wilson wants to settle in full his debt to the Commissioner.
[51] The Commissioner’s primary objective in obtaining the further information sought from Mr Wilson was due to the obligation created by s 177B(1) of the Act. It provides:
The Commission must not enter into an instalment arrangement with the taxpayer or a relief company to the extent that the arrangement would place the taxpayer, being a natural person, in serious hardship.
[52] Ms Brown’s submissions to the Court examined in detail Mr Wilson’s information provided by direction of this Court. It was Ms Brown’s conclusion that too little income appears available to fund a repayment programme over five years, indeed as it appeared also to the Court. However, there are two factors which give the Court encouragement to consider that a repayment programme may not be beyond Mr Wilson’s capabilities. The first is about the business he runs and has continued to do so for many years. In spite of this, he appears not to have any debts other than those disclosed, or any creditors chasing him for payment. The second aspect concerns the recent, albeit modest, income increase occasioned by his pension
now payable following his recent 65th birthday. Other matters also weigh in
Mr Wilson’s favour.
[53] By far the greater proportion of the debt due has accrued because of penalties and interest that has attached to the unpaid tax. Clearly Mr Wilson must share some responsibility for this. Section 15B of the Act obliges the taxpayer to make an assessment of any tax due and to correctly determine any tax that is payable; and to pay tax on time.
[54] In the particular circumstances of this case the Court considers s 6 of the Act is also very important, for it obliges every officer (of the Commissioner) having responsibilities under the Act to use their best endeavours to protect the integrity of the tax system.
[55] For nearly seven years from 2008 no action was taken on behalf of the Commissioner to recover the tax due. In that time a core debt of about $15,000 (by the Commissioner’s own assessment) became a debt of about $46,500 as penalties and interest accumulated.
[56] That said, undoubtedly the present situation is very much of Mr Wilson’s making. He has only acted now because of the inevitability of his bankruptcy had he not done so.
[57] Unusually, but to Mr Wilson’s credit, his proposal contained a promise to pay the whole of his debt (as it was perceived to be). Usually payment proposals focus on a very modest, sometimes very small, percentage of the total debt. If, as appears clear, that debt is now in the region of $200,000 then if Mr Wilson’s arrangement (to pay about $150,000) is kept he will have repaid about 75 percent of his total debt. If there is added to that the $25,000 of interest that would accumulate until the debt was paid in five years’ time, Mr Wilson’s offer still provides in the region of
66 percent of the debt owing.
Conclusions
[58] The situation in which Mr Wilson finds himself was in significant part of his own making. However, it was also the result of significant inactivity undertaken on behalf of the Commissioner to recover the debt due.
[59] Mr Wilson is a man without other pressing debt it seems. The offer of repayment is generous when compared to offers made by similar applications to this Court. In the Court’s view it is appropriate to provide him with the opportunity to fulfil his promise to pay a debt of $150,000 (as the Court calculates it should be) over a period of five years and subject to an initial instalment of $38,000 being made.
[60] So that it is clear, the payment of that debt, if made by regular and equal instalments, will also meet any obligation he has to pay of the Commissioner’s present debt in excess of that sum. Also, it means he will not be liable to meet any interest or penalties that will accrue within the five year period within which the Commissioner’s debt must be met. If however Mr Wilson fails, even by one month, to meet the regular payments due, then the Commissioner has leave to apply to cancel the repayment arrangement.
[61] Leave is reserved to counsel to file memoranda if further clarification of these orders is sought.
Result
[62] The Court approves Mr Wilson’s terms of payment in that amount identified by this judgment.
[63] In the circumstances, the Bankruptcy Notice served on Mr Wilson will be deemed to have been complied with by the terms of the Court’s approval of terms of payment.
[64] Costs are directed to lie where they fall.
Associate Judge Christiansen
2