Commissioner's decision not to allow financial relief upheld
2005 case note - judicial review of the CIR's decision not to allow financial relief - serious hardship, maximise revenue.
Two taxpayers sought judicial review of the Commissioner's decision not to allow financial relief. They had accumulated very large debts to the Commissioner made up of outstanding tax, penalties and interest. The Court reviewed the correspondence, offers and counter-offers and held that the Commissioner had exercised his statutory discretions correctly and had not breached any statutory duty.
Messrs Clarke and Money each applied to the Commissioner under ss 176 and 177 of the Tax Administration Act 1994 ("the TAA") for relief from huge tax debts which they said they could not pay. Both had invested in the Digi-Tech and Salisbury Investment schemes and after reassessment and the imposition of penalties (which were neither disputed nor challenged), by 2004 they owed taxes of $581,000 and $865,000 respectively.
There was a prolonged course of correspondence, information requests, offer and counter-offer but Mr Clarke's final position was that he offered a single lump-sum payment of $10,000 in full and final settlement of his tax debts. Mr Money's final offer was $25,000 in full and final settlement. The Commissioner declined these offers and invited the taxpayers to come up with a proposal to address the full quantum of tax, penalties and interest due.
The plaintiffs commenced judicial review proceedings alleging that the Commissioner had breached his duty to accept only what the debtor taxpayers can pay. The Commissioner defended the action saying that his overarching duty is to maximise the revenue.
Priestly J summarised the correspondence and negotiations between the parties and cited large extracts from the IRD area managers' letters which declined the final offer from each plaintiff. He noted that formal relief had been sought under section 177 TAA but that section 176 obliged the Commissioner to "maximise" the recovery of tax unless "serious hardship" would result. His Honour also noted the prohibition in section 177C(3) against writing off any outstanding tax where a shortfall penalty for an abusive tax position or evasion had been applied.
His Honour summarised the factors which the Commissioner must consider:
"The various statutory duties and discretions imposed and conferred on the defendant by the above provisions are, in my judgment consistent with and probably derived from the obligation contained in section 6 of the Act to protect the integrity of the tax system. Highly relevant too is the Commissioner's duty contained in section 6A(3) which provides:
(3) In collecting the taxes committed to the Commissioner's charge, and notwithstanding 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 taxpayers with the Inland Revenue Acts; and
(c) The compliance costs incurred by taxpayers."
In that light, his Honour noted the limits the Courts had placed on judicial review in tax matters:
"From both jurisdictional and constitutional standpoints the plaintiffs' claim is a startling one. There is no evidence of the defendant having acted in an irrational or unreasonable manner. The powerful remedy of judicial review cannot be used, in a taxation context, as a quasi-appeal. It is trite to observe that the remedy is a check on unlawfulness and jurisdictional error."
Priestly J supported that proposition with extensive quotes from Duncan v Commissioner of Inland Revenue (2004) 21 NZTC 18,735 and Raynel v Commissioner of Inland Revenue (2004) 21 NZTC 18, 583.
"As did Baragwanath J in Duncan v Commissioner of Inland Revenue (op cit) the last paragraph in Randerson J's judgment stresses the proper function of judicial review. I emphasise again that there is no evidence suggesting the defendant has failed to consider his relevant statutory obligations. Nor is there evidence that, by declining to accept the sums offered by the plaintiffs and writing off the balance of their respective debts, he was acting irrationally or unreasonably."
Counsel for the plaintiffs submitted that the Commissioner's investigations had not been extensive and had on occasions been premised on erroneous assumptions. He submitted in essence that the onus was on the Commissioner to prove that the plaintiffs could in fact pay more. The Commissioner submitted on the other hand, and his Honour agreed, that the Commissioner merely had to be satisfied that "serious hardship" did not apply and hardship occasioned by an obligation to pay tax didn't count.
His Honour clearly stated that the Commissioner's discretion under section 177(3) (to give financial relief or not) "must be exercised by him and him alone. It is impermissible for the Court to usurp the defendant's functions in that area."
"Finally, there are the cogent policy considerations contained in Raynel v Commissioner of Inland Revenue (op cit). The stance of the defendant, both before and after the issue of these proceedings, as is evidenced in the two letters to the plaintiffs' counsel, does not display irrationality. In the circumstances of these two taxpayers I detect nothing unreasonable. In the exercise of his discretion under section 177 the defendant is fully entitled to consider a whole range of factors including the circumstances which led to the plaintiffs' taxation debts; the nature and extent of the plaintiffs' co-operation and negotiating stance; the speed with which they have provided requested information and the extent of that information; his obligations under section 6 and section 6A(3); and matters of consistency in administration."
Most importantly, his Honour stated that there was no breach of any statutory duty where the Commissioner seeks to recover sums which may not in fact be recoverable. Neither is forcing a taxpayer into bankruptcy inconsistent with the obligation to maximise the recovery of tax.
"Nor in my judgment is there any breach of the broader and paramount obligation of the Commissioner to uphold the integrity of the tax system required by section 6, nor of his duty under section 6A(3). Particularly in a case such as this, unpalatable outcomes for some taxpayers may be important in promoting voluntary compliance, which is a section 6A(3)(b) consideration."
Tax Administration Act 1994