Commissioner's decision to refuse a late NOPA review
2007 case note – High Court found CIR made reviewable error in not accepting late NOPA – no relief granted to taxpayer given futility of underlying arguments.
The High Court found the Commissioner had made a reviewable error in the process by which he reached his decision not to accept a late notice of proposed adjustment under section 89K. However, the High Court declined to grant relief to the taxpayer due to the futility of her underlying arguments.
Ms Balich registered for GST on 27 September 2001 and subsequently claimed a refund for the period ending 31 January 2002. The Commissioner commenced an audit of the return and ascertained that Ms Balich had previously been declared bankrupt in 1991, and that she had been using her pre-bankruptcy IRD number since then. The audit also established that Ms Balich had been receiving payments on account of GST in the course of her business as a real estate agent, but not returning GST to the Commissioner. In some cases real estate agencies had made withholding tax payments for Ms Balich, but she had not filed any income tax returns.
Throughout the audit Ms Balich was advised by a chartered accountant. She signed agreed adjustments for the 1995–2001 income years and GST periods, and default assessments were issued by the Commissioner for the 1993 and 1994 years. The audit was finalised in September 2003 and the file transferred to Return and Debt Collection, who took steps to try and obtain information on Ms Balich's financial position. As this information was not forthcoming, the Commissioner issued a final demand letter. Default judgment was obtained in the District Court, and Ms Balich's subsequent application to have the default judgment set aside was unsuccessful.
Ms Balich attempted to provide the Commissioner with a "voluntary disclosure" showing that her tax position was not as assessed, and also provided amended returns and a Notice of Assessment. A Notice of Proposed Adjustment (NOPA) was also provided arguing that income tax was illegal as it is a form of slavery, or that she was entitled to deduct "reward" from her income of $200,000 per year. The Commissioner did not accept the NOPA as it was received outside the statutory response period and exceptional circumstances had not been established as no evidence had been provided to show Ms Balich was so depressed as to not be able to provide a NOPA within the response period.
Winkelmann J first considered whether the Commissioner had erred in failing to amend the assessments in light of the amended returns. Referring to Duncan v The Commissioner of Inland Revenue (2004) 21 NZTC 18,735 (HC) she considered that the issues raised by Ms Balich on review should have been raised in the disputes process and that they were therefore beyond the scope of judicial review. In any event, the view that the Commissioner formed in refusing to amend the assessments was entirely reasonable and the underlying arguments of the taxpayer had no merit whatsoever.
Winkelmann J then considered whether the Commissioner had made an error in declining to accept the late NOPA because of exceptional circumstances. Her Honour found that an error had been made by the Department as it knew Ms Balich was under a misapprehension that letters from her doctor and psychologist to show she was chronically depressed had been provided to the Commissioner. The Commissioner had not received the letters, and relied upon the absence of the letters as a reason for declining to accept the late NOPA. In the circumstances it was found that this amounted to procedural unfairness.
As to Ms Balich's voluntary disclosure and notices of assessment, it was held the provision for voluntary disclosure in section 141G of the Tax Administration Act 1994 did not apply and no error was made. The Commissioner's audit was completed in September 2003, and the disclosure made in 2005. The argument that the disclosure was made prior to the audit, because an audit can begin at any time, was an implausible reading of the Act. In any event, voluntary disclosures only apply to shortfall penalties.
Ms Balich also argued that she had been unlawfully coerced into registering for GST, filing returns and signing the agreed adjustment while vulnerable due to her depression. Of particular concern to the taxpayer was that she had been told she may be prosecuted if she did not file the returns. In the circumstances, the Departmental officers adopted the appropriate course of action by advising prosecution was possible, as it was a likely consequence if she did not comply. It was found the other actions complained of consisted of no more than the Department lawfully utilising the processes set out in the Act.
As Winkelmann J found the Commissioner had made a reviewable error through procedural unfairness in respect of his decision under section 89K, she considered what relief was appropriate. Counsel for the Commissioner submitted that the Court should exercise its underlying discretion not to grant relief, and Her Honour agreed. The letters relied upon by Ms Balich did not establish that she was still unwell in September 2005 and it was also considered relevant that she was advised by a chartered accountant throughout the audit. As such, the circumstances pleaded did not provide a reasonable justification for her not issuing a NOPA within the response period.
Even if exceptional circumstances had been established the Commissioner still would have been able to exercise the residual discretion within section 89K not to accept the late NOPA. This was because none of the proposed challenges to the assessment had any real prospect of success.
Finally, as Ms Balich was also responsible for the delay in issuing the NOPA, it was inappropriate for the Court to direct the Commissioner to reconsider his decision under section 89K, as it would simply further delay Ms Balich fulfilling her obligation to meet her undoubted tax liability.
Sections 89K, 113 and 141G of the Tax Administration Act 1994.