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25 Jan 2008
Appeal Status
Not appealed

Commissioner entitled to use section 19 during the dispute resolution process

2008 case note - Section 19 enquiry convened for the proper purpose of assessing the taxpayers' tax liability - dispute resolution process, substantive unfairness.

Gerald Malcolm Foxley and Anor v The Commissioner of Inland Revenue

Section 19 of the Tax Administration Act 1994


The section 19 enquiry was convened for the proper purpose of assessing the taxpayers' tax liability. The Commissioner may use his section 19 power after the commencement of the dispute resolution process.


This case involved a judicial review of the exercise of the Commissioner's statutory power under section 19 of the Tax Administration Act 1994 ("TAA").

The taxpayers and the Commissioner are engaged in the dispute resolution process under Part IVA of the TAA 1994 concerning the taxpayers' liability for tax for the year ended 31 March 2002. Two sets of Notices of Proposed Adjustment ("NOPAs") and Notices of Response ("NORs") have been exchanged.

The Commissioner, at this stage, required the taxpayers to attend a section 19 interview. They alleged the Commissioner employed section 19 for the improper purpose of forcing them to settle. Further, they allege that section 19 is not available when the dispute resolution process is under way and that the Commissioner's use thereof was both procedurally and substantively unfair.

The Commissioner disagreed and alleged that section 19 was properly deployed to ascertain the taxpayer's correct tax liability.

On 25 May 2001, the taxpayers entered into a Deed of Transfer and Assignment of Interest of Forestry Rights with Fox and Fox Limited, a company of which they are the directors and shareholders. In terms of the deed the taxpayers assigned to Fox and Fox Limited, all rights and entitlements in and to the services and forestry rights in consideration for $488,000, of which $314,000 was to be paid for services and the balance for forestry rights.

Neither of the taxpayers returned any portion of the $488,000 in their returns for the period ending March 2002.

The Commissioner issued a NOPA on the basis that the payment was for forestry rights or services. The taxpayers' NOR denied the same but did not specify what was transferred.

The Commissioner issued a second NOPA alleging in the alternative that if forestry rights were not transferred and services not provided, the payment was a deemed dividend. The taxpayers' NOR alleged the payment was neither for cutting rights nor a dividend but was in fact for their interest in obtaining forestry rights that were under negotiation. They alleged that the cutting rights were obtained by Fox and Fox Ltd from the property owners concerned.

The Commissioner's solicitor decided that an inquiry based on section 19 should be made to fully understand the background facts to properly interpret the deed and issue a Statement of Position. The solicitor was also of the view that it might be possible to settle the dispute.

The taxpayers attacked the Commissioner's case alleging that the solicitors' memorandum and affidavits filed for the Commissioner reflected an improper purpose.


The Court found that the section 19 inquiry by the Commissioner was for the purpose of ascertaining the taxpayers' true tax position and not for the purpose of pressuring them to settle as alleged by the plaintiffs.

The Court held that there is nothing in section 19 itself or in Part IV that clearly precludes use of section 19 while a disputes process is under way. The availability of section 19 has not been the subject of any previous decision but it is well established that the Commissioner may use his powers under section 17 until the proceedings are on foot and potentially beyond, provided it is for the proper purpose. There is no reason why the section 19 power should be different.

The allegation of substantive unfairness on the part of the Commissioner failed as the Court found there was no abuse of power, as did the allegation of procedural unfairness based on the assertion that by its very nature the section 19 procedure will be unfair.

In the result, the judicial review was dismissed.