Use of section 17 notices upheld
2005 case note – CIR entitled to issue section 17 notices despite the existence of court proceedings - litigation, discovery.
The Commissioner was entitled to issue section 17 Notices despite the existence of court proceedings.
On 30 March 2005, the Commissioner formed the opinion under section 108(2) of the Tax Administration Act ("the Act") that returns filed by the plaintiff for tax years ending in 1998 and 1999 were either fraudulent or wilfully misleading. The Commissioner was therefore entitled to issue a new assessment for those years.
On 25 May 2005 the plaintiff filed proceedings in the High Court challenging the Commissioner's decision under section 108(2). It was said the "re-opening" decision under section 108(2) is a disputable decision under the Act, and the plaintiff is entitled to challenge it, independent of any challenge to a consequent assessment.
Accompanying the primary proceedings, the plaintiff filed two other applications. The first application was seeking two questions of law to be determined prior to trial.
The second application (determined in this Judgment), sought the Court's direction that the Commissioner is not entitled to use his powers under section 17 of the Act.
This application sought orders:
- restraining the Commissioner from using or purporting to use his powers in section 17 to require the production of information relevant to the subject matter of this litigation and/or
- declaring that the defendant Commissioner has no power to issue notices under section 17 and/or
- requiring the defendant Commissioner to withdraw notices already issued since the commencement of this proceedings and relevant to its subject matter, and
Counsel for the Commissioner challenged the Court's jurisdiction to deal with the application.
His Honour first considered the Commissioner's challenge of the Court's jurisdiction to deal with the application. It was considered that there was a matter being raised by the plaintiff concerning the conduct of a party to proceedings before the Court, and that it was appropriate for the Court to hear it.
In relation to the primary issue, the plaintiff submitted that the Commissioner is not entitled to use his powers in relation to the subject matter of existing proceedings. He sought some form of declaration from the Court to this effect. The primary focus of his argument was that the Commissioner would be in contempt in issuing or enforcing the Notices.
The Commissioner submitted that the Act contains a scheme of information-gathering leading to an assessment. It then contains capacities to challenge that assessment. Section 17 Notices are part of that process. It would subvert the whole scheme if a taxpayer could, by means of issuing proceedings, stop the information gathering and prevent the issuing of proper processes.
It would also disadvantage the Commissioner if material that ought to be available under a section 17 Notice were only obtainable, if at all, under the rules of discovery with its restrictions on subsequent use. The Commissioner submitted that the existing authority is clear that the Commissioner can use his power in order to obtain evidence for upcoming Court proceedings, and this is so even if the new assessment has already been issued. A fortiori, he must be able to use them pre-assessment and this is unaffected by the taxpayer issuing proceedings.
His Honour considered the statutory scheme in his analysis. The present scheme was introduced in 1996 and is summarised in CIR v Delphi Fishing Co Limited (2004) 21 NZTC 18,525. The Commissioner stressed that one of the objectives of the new scheme was that communication between the taxpayer and Inland Revenue is to be direct and open to ensure that all information relevant to the dispute is available as soon as possible.
The Commissioner submitted that this scheme contemplates an information-gathering process that allows the Commissioner to confirm or amend his earlier opinion as to fraud. The use of a section 17 Notice is a part of the information-gathering process and ensures that the assessment is taken on the basis of all the relevant information. In his submission it is not correct to seek to circumvent the process by restricting use of section 17 prior to assessment.
The plaintiff although accepting this analysis to a point, focused on a different aspect of the scheme. The plaintiff referred to the concept introduced in 1996 of a "disputable decision". This broadened the range of decisions that could be the subject of a challenge before a "hearing authority". Included in "disputable decision" was the re-opening decision. The plaintiff submitted that it can be challenged in its own right, and that the new process of reassessment contemplates that it may be many months before all required steps have been taken. The plaintiff's pivotal proposition is provided in section 138F. Section 138F provides that a disputant may challenge an assessment made by the Commissioner that takes account of or relies on a disputable decision.
His Honour was referred to decisions CIR v McDougall's Holdings Limited (1983) 6 NZTC 61,505 and Green v Housden (1993) 15 NZTC 10,053 in support of the Commissioner's right to continue to use section 17. These confirmed the ability to use section 17 after assessment and expressly for the purpose of obtaining information for upcoming Court proceedings.
The plaintiff submitted that the Commissioner's position failed to take into account the statutory change that allows a taxpayer to institute proceedings, and at an earlier stage. The cases relied on by the Commissioner dealt with notices issued prior to Court proceedings commencing, and in circumstances where control of the proceedings lay with the Commissioner.
The plaintiff's strongest authority was Bramble Holdings Ltd. This was a decision of Franki J of the Federal Court of Australia. Notices were served upon the defendants, which is broadly comparable to section 17 of the Act. The Court ruled that the statutory power to issue the Notices did not extend to situations where proceedings had been commenced.
In conclusion His Honour stated it would not be correct to say that section 17 must generally be read down so that the power is not available when the intended subject matter of the Notices is also the subject of concurrent proceedings. His Honour looked at the motivation for the Notices and was satisfied that the purpose is not to gain an advantage as a litigant, but rather to assist the making of a revised assessment. The Department's evidence is that the Notices are in respect to the plaintiff advising them of the variation on 30 May 2005 and His Honour received no evidence from the plaintiff to the contrary.
His Honour also found the timing of the Notices to be relevant. The Notices were issued in response to a Notice of Response filed by the taxpayer after issue of the proceedings.
His Honour accepted it cannot be enough for the Department to simply point to an alternative or second purpose. There must be an enquiry as to the dominant reason for the notices.
Other facts that were taken into consideration were whether the present primary proceedings are available at this stage of the process, and whether based on the facts there is a real issue. His Honour also acknowledged the potential for proceedings to be used to thwart the statutory dispute process. The possible advantage that might accrue to the Commissioner as litigant as a by-product of the Notices was also taken into consideration.
His Honour after weighing up all the factors declined to make the declaration sought by the plaintiff.
Tax Administration Act 1994