Disputing default assessments

Summary

To dispute and then challenge a "default" assessment a taxpayer must file the outstanding return and a NOPA within the response time.

Facts

The taxpayer failed to furnish returns for income for the years 2000 and 2001. The Commissioner made assessments under section 106 and notified the taxpayer on 8 April 2002. On 15 July 2002 the taxpayer filed a notice of claim in the Taxation Review Authority (TRA) challenging the default assessments. On 31 July he furnished income tax returns for the two years showing his income as nil. On that same date he issued a notice of proposed adjustment (NOPA) in respect of each assessment.

The Commissioner applied to the TRA to strike out the notice of claim on the grounds the TRA had no jurisdiction to hear the claim. When the TRA declined to strike it out, the Commissioner brought proceedings in the High Court for judicial review of that decision under the Judicature Amendment Ac 1972.

The High Court found for the Commissioner, set aside a decision of the TRA and struck out the proceedings in that Tribunal. The taxpayer then appealed unsuccessfully to the Court of Appeal before appealing to the Supreme Court.

Decision

The method by which the purpose of Part 4A (disputes procedures) of the TAA is advanced involves the issuing of a NOPA which may be disputed, within an appropriate response period, by a Notice of Response (NOR). This process may lead to the Commissioner and the taxpayer accepting the other's position, either affirmatively or by omitting to respond within an applicable response period. If the dispute is not resolved by the Part 4A procedure, the challenge procedure under Part 8A may be invoked by a "disputant".

Unlike the disputes procedure, which is in the nature of a negotiation process, the challenge procedure envisages litigation before a hearing authority, which may be either the TRA or the High Court. The litigation is initiated by the filing of proceedings in accordance with the Taxation Review Authority Regulations 1994 (or regulations made in substitution for those regulations) or in accordance with the High Court Rules, within the response period following the issue of the relevant notice of disputable decision - sections 138B, 138C. The terms of those sections make it plain that there cannot be recourse to litigation unless the disputes procedure under Part 4A has been followed to the extent as set out in the applicable subsection.

At issue is whether the taxpayer complied with the requirements of section 138B(3) of the TAA.

In the present proceedings the taxpayer initially contended that, at least in the case of a taxpayer wishing to contest a default assessment, section 138B(3) does not require compliance with the disputes procedures. However, as the Court of Appeal held, that contention is untenable because the term "adjustment proposed" in section 138B(3) clearly refers to a NOPA. The NOPA is an element of the disputes procedures as set out in Part 4A of the Act. And the reference to the "applicable response period" in section 138B makes sense only if read in light of the provisions of Part 4A. Indeed, if section 138B(3) was not read in light of the provisions of Part 4A there would be no apparent time limits on the steps that must be taken by the Commissioner and the taxpayer respectively, nor would there be any prescribed form for the dialogue to take.

The taxpayer's primary submission before the Supreme Court was that he had complied with the disputes procedure. The taxpayer's argument is that since the defaulting taxpayer "may dispute the assessment made by the Commissioner only by furnishing a return of income for the assessment period", the taxpayer disputes the default assessment by virtue of filing a return (section 89D(2)). The Commissioner must then either accept the return as filed and issue an assessment or issue a NOPA. In either case the taxpayer may then issue a NOR and subsequently challenge before a Hearing Authority the assessment made by the Commissioner.

The taxpayer supported this argument by reference to the legislative history of section 89D. The Supreme Court found that Parliament could not have meant to give preferential treatment to a defaulting taxpayer. Indeed, quite the opposite is to be inferred, namely that a defaulter must both meet its obligations to furnish a return and be subject to the same time constraints as complying taxpayers. In such a case, of course, the taxpayer's NOPA to the default assessment would be associated with the tax position indicated by the furnished return.

The taxpayer also sought to place reliance on information given to taxpayers in pamphlets and similar publications by the Inland Revenue Department. The Supreme Court found, given the elucidation of the law in the course of this litigation, a taxpayer who relied on Departmental advice between 1996 and 2004, including the taxpayer in the present case, would have been misled by it. That is regrettable but the Court was not persuaded that the Departmental publications bear on the question of interpretation.

The Supreme Court also found that there was no general obligation on a taxpayer under section 89D to issue a NOPA because there is no general obligation to dispute an assessment. If however, a taxpayer wishes to dispute the assessment, the disputes procedure must be complied with and that involves the filing of returns and the issuing of a NOPA.