Commissioner of Inland Revenue not able to add new ground to appeal
2005 case note – Court found the CIR unable to raise an issue on appeal that had not been argued in the Taxation Review Authority.
Justice Keane found in favour of the taxpayer, holding that the Commissioner was unable to raise an issue on appeal that had not been argued in the TRA.
This is a decision on a threshold issue raised in the appeal.
The matter concerns the affairs of a company, Zentrum Holdings Ltd ("Zentrum"), and Mr John Brown, who is involved as director and principal shareholder. Another of Mr Brown's companies, Marketing Management Holdings Ltd ("MMHL"), is also involved in the arrangements in question. At the relevant time, MMHL had approximately $1 million in losses, and owed further money to Mr Brown.
Mr Brown made significant monetary contributions to Zentrum, which were held on capital account in a shareholder's current account. In 1997, it was agreed between Mr Brown and Zentrum's other director/shareholder that part of Mr Brown's current account ($1.2m) would be replaced with an interest-bearing loan to Zentrum from Mr Brown.
Mr Brown assigned his loan to Zentrum to MMHL. Zentrum agreed to pay interest to MMHL at the rate of 25%. MMHL paid $1.2m to Mr Brown as consideration, which Mr Brown immediately re-advanced to MMHL. This was done on terms whereby, although interest was to be paid to Mr Brown, it was not required unless it was requested. There was no record that interest was ever requested.
MMHL set off the interest received from Zentrum against its accumulated losses, and made repayments of capital to Mr Brown. The Commissioner assessed this transaction as tax avoidance.
The matter was heard in the TRA. Zentrum was successful in vindicating the returns of income it had made, and the Commissioner's assessments were set aside.
The Commissioner appealed, and included in his grounds for appeal the contention that the transactions in which the disputed assessments were founded amounted to a sham. This issue had not been argued in the TRA, and arose out of evidence given by the taxpayer during the course of the TRA hearing, and documents discovered afterwards.
The taxpayer challenged the Commissioner's ability to include this issue, arguing that the Commissioner is confined to the grounds on which he made the assessments.
The Commissioner submitted that whether or not he should be entitled to advance the sham argument should be determined according to the usual principles governing any new point taken on a civil appeal, and without reference Commissioner of Inland Revenue v V H Farnsworth  1NZLR 428 (CA). The Commissioner relied on Perkowski v Wellington City Corporation - while a new ground will not usually be permitted if further findings of fact are required, it can be entertained if open on the record of the Court below.
The Commissioner argued that Zentrum was aware of the Commissioner's concerns about the authenticity of the transactions, as they were set out in the Commissioner's first NOPA, as well as responded to in Zentrum's NOR. The Commissioner contended also that Zentrum's second NOR (in response to a further NOPA) went wider and "identified questions, which could only go to whether the transactions were genuine or fictional." These issues were the subject of evidence and submission in the TRA, and central to the Authority's decision.
Finally, the Commissioner contended that Zentrum did not disclose, either prior to the assessment or during the TRA hearing, "documents recording yet a further instance of circularity, demonstrating the transactions to have been no more than a device to deceive the revenue."
The starting point for Justice Keane's decision was Farnsworth, and to what extent the principles it stands for continue to apply.
His Honour then noted that:
"If this issue fell to be decided on ordinary principles, I would find the Commissioner's arguments highly persuasive. But the Farnsworth principles on which Zentrum relies, those decided in that case, and those deriving from it, are central to this case; and, if they apply, are fatal to the Commissioner."
After briefly summarising the Farnsworth principles, Justice Keane went on to consider the principles of accuracy and fairness, concluding that "[t]he ultimate expression of these principles ... is to be found in Duvall." In that case, Richardson P said that the Commissioner was "necessarily confined to the stance he had taken and which had been held by the TRA". Furthermore, the Court lacked the jurisdiction to entertain any other basis for the assessment.
His Honour continued:
"To be complete and intelligible, then, any assessment must be expressed definitively at some point not just as a sum payable but as an expression of statutory liability; and, I consider, where as here the Commissioner does not issue a statement of position under section 89M, he is bound instead by the ground of assessment which he has given in the notice of proposed adjustment the taxpayer has rejected by the notice of response triggering the right of challenge."
NOPAs and NORs, Justice Keane held, do not serve only to exchange information; they go to issues of fact as well as law, and in order to challenge an assessment, the taxpayer must have rejected the proposed adjustment. While NOPAs and NORs can be overtaken by SOPs, SOPs are not mandatory and in the instant case, none was issued. Accordingly, "the boundaries of the case before the Authority, or this Court, are to be found in the last NOPA and NOR exchange between the Commissioner and the taxpayer".
Although not central to the decision, His Honour added that if he was wrong about this, then the section 108(1) time bar might not necessarily preclude the Commissioner advancing his proposed alternative ground, as no increase in Zentrum's liability is involved. Section 108(1) "speaks in terms of amount rather than liability", and has previously been given its literal meaning in Dandelion.
However, His Honour held that the Commissioner is confined in his appeal to the ground on which he assessed Zentrum, and which the Authority disallowed. The Commissioner would not be permitted to run a "sham" argument.
Tax Administration Act 1994