High Court dismisses judicial review application
2005 case note - CIR's refusal to accept settlement offers were not unreasonable and did not breach statutory duties – Judicial review, highest net revenue.
The Commissioner's refusals to accept the taxpayer's settlement offers were not unreasonable and did not breach any statutory duties under section 176 TAA: Raynel & Anor v Commissioner of Inland Revenue (2004) 21 NZTC 18,583 and Clarke v Commissioner of Inland Revenue; Money v Commissioner of Inland Revenue (unreported HC Auckland CIV 2003-404-5631 and CIV 2003-404-2148 applied). The Commissioner was entitled, indeed obliged, to take into account that acceptance of the amounts variously offered, which did not nearly equate with the taxpayer's tax debt, would not protect the integrity of the tax system, nor ultimately collect the highest tax revenue, given the taxpayer's compliance history. The Commissioner was precluded by sections 141E(2) and 177C TAA from accepting the settlement offers.
The taxpayer, Mr Rogerson, had a long history of non-compliance with tax reporting requirements and non-payment of tax assessed in relation to various related entities, resulting in significant tax arrears.
On 30 May 2000 the Commissioner met with the taxpayer to discuss the arrears. The taxpayer said he had no funds. Subsequently the Commissioner issued NOPAs to the taxpayer and the related entities. The assessments included shortfall penalties. On 18 March 2003 the Commissioner obtained judgment against the taxpayer for $18,658.55.
During 2003, Mr Rogerson made several offers of settlement, which the Commissioner rejected. The Commissioner contended the offers could not be accepted because: (1) section 177C(3) TAA precluded the Commissioner from writing off any amount of outstanding tax if the taxpayer was liable to pay a shortfall penalty for evasion or similar act in respect of that tax; and (2) such a write-off would not promote the principles of voluntary compliance, protection of the integrity of the tax system or ultimately collect the highest net revenue.
The Commissioner applied to have the taxpayer adjudged bankrupt. The taxpayer sought to have the bankruptcy application set aside on the grounds that the Commissioner's refusal of the settlement offers was in breach of the statutory duties under sections 6A and 176 TAA, as there was no evidence that bankruptcy would recover the most revenue over time. The taxpayer also argued that he was suffering from a mental condition that led him to ignore the letters from the Commissioner demanding payment.
Subsequently the Commissioner prosecuted Mr Rogerson and a related entity under section 143A(1)(d) TAA for nine counts of knowingly applying or permitting the application of amounts deducted from employees' wages for a purpose other than payment to the Commissioner. The jury found on the balance of probabilities that the failures to account were due to a cause beyond the taxpayer's control (being his mental disorder of which evidence was given at the trial), and that the amounts due had been accounted for.
Following the trial the Commissioner declined to accept a further settlement offer from the taxpayer because of his continued non-compliance with his tax obligations and his continued failure to pay the outstanding tax.
The taxpayer applied for judicial review of the Commissioner's decisions to refuse to accept the settlement offers. He argued that the decisions:
(1) breached a statutory duty to collect the highest revenue over time; and (2) were unreasonable. He also sought a declaration setting aside the bankruptcy application and the shortfall penalties.
Potter J, finding for the Commissioner, dismissed the application for judicial review.
Potter J held that the Commissioner had not breached a statutory duty to collect the highest revenue over time in refusing to accept the settlement offers. The duty imposed by section 6A(3) TAA applied notwithstanding anything in the Inland Revenue Acts, and therefore section 6A(3) TAA prevailed over section 176 TAA. The obligation to collect the highest net revenue was not absolute. The Commissioner was only required to take steps to recover revenue which were practicable and lawful. The Commissioner was required to have regard to the resources available, the importance of promoting compliance (especially voluntary compliance) by all taxpayers, and the compliance costs incurred by taxpayers. The cornerstone of the taxation system was the concept of voluntary compliance. Taxpayers who complied with the requirements of the Inland Revenue Acts were entitled to expect that appropriate and (where necessary) firm action would be taken against taxpayers who shirked their obligations. The Commissioner was entitled, indeed obliged, to take into account that acceptance of the amounts variously offered, which did not nearly equate with the taxpayer's tax debt, would not protect the integrity of the tax system, nor ultimately collect the highest tax revenue, given the taxpayer's compliance history.
On the second issue, Potter J held that the Commissioner's decision to decline to accept the settlement offers was not unreasonable. Section 141E(2) TAA which provided for situations when a shortfall penalty for tax evasion under section 141E(1)(b) TAA should not be chargeable, expressly required as a condition of the exercise by the Commissioner of a discretion in the matter, that the taxpayer had honoured the taxpayer's obligations to the Commissioner and to the taxation system as a whole, by accounting for the deduction for which the taxpayer was liable. Unless the Commissioner could be satisfied that the taxpayer had met those obligations, the Commissioner was precluded from exercising a discretion under section 141E(2) TAA. Similarly under section 177C, outstanding tax including shortfall penalties could not be written off if the taxpayer was liable for shortfall penalties for evasion. The taxpayer had not accounted for the amount of the deductions in terms of s 141E(2) TAA and there was no jurisdiction under section 177C TAA to write off tax because the taxpayer remained liable for shortfall penalties. For the Commissioner to exercise the discretion under section 141E(2) the Commissioner had to be satisfied that the failure to account for the relevant deductions within the prescribed time was due to illness, accident or some other cause beyond the taxpayer's control. The Commissioner was concerned with a much longer period than the period to which the nine charges related, and with a wider spectrum of non-compliance. The discretion under section 141E(2) TAA (if it arose) had to be exercised solely by the Commissioner. There was nothing irrational or unreasonable about the Commissioner's decision, or the matters taken into account in reaching it.
Tax Administration Act 1994 (TAA), sections 6, 6A, 176, 141E and 177C