Section 157 catches agent
2008 case note – Application for judicial review - Deduction notice, agent, fraudulent use of corporate entity, s 157 Tax Administration Act.
The plaintiff company sought judicial review of the Commissioner's advice and receipt of funds under a statutory deduction notice which did not name the plaintiff company. The Court considered that the plaintiff company on the evidence before the Court was simply a front obviously carried on by Mr Smith, who was the subject of the section 157 notice, for the purpose of evading the tax implications. The Court considered the Commissioner's actions were justified and dismissed the application for judicial review.
Note that this was a case where, on the facts, the debtor owed money to the defaulting taxpayers; however, the latter chose (unsuccessfully) to hide the true position by using a front.
Impact of decision
This decision illustrates in the revenue context an application of the traditional position that the Courts will not allow the corporate form to be used for purposes of fraud or as a device to evade legal obligations where advantages of incorporation are used and intended to deprive others of their rights.
This was an application for judicial review which also included civil causes of action (alleging conversion, breach of fiduciary duty, and an action for money had and received).
The outcome of all causes turned on the lawfulness of a statutory deduction notice issued under section 157 of the Tax Administration Act 1994 ("the TAA") to a debtor to a kindling business. Subsequent to the notice being issued, the plaintiff allegedly took over the business and sought to recover monies which the debtor had remitted to the Commissioner under the notice.
Mr and Mrs Smith owned and operated a business of providing kindling and trellis fencing. The business initially operated as a partnership trading as "Trellis and Fencing Warehouse", then subsequently transferred to a company, Trellis and Fencing Warehouse Limited (TFW Ltd). In 2004, the Commissioner assessed the partnership for income tax and GST in excess of $450,000, and for PAYE (in respect of deductions not made for employees) of over $110,000. TFW Ltd had also failed to file tax returns and was issued with default assessments.
On 2 October 2007, the Commissioner issued a deduction notice under section 157 of the TAA to one of their debtors. The defaulters listed in the notice were both the taxpayers in the partnership and TFW Ltd. Deduction notices were also issued to other debtors of the defaulting taxpayers.
On the same day as the deduction notice was issued by the Commissioner, TFW Ltd (acting through Mr Smith) purported to sell the business to Ms P, for $25,000.
On 8 October, the Commissioner received payment from the debtor for the amounts in invoices rendered on 2 and 3 October 2007.
On 17 October, the plaintiff company, Enterprises Lakeview Limited was incorporated.
On 18 October, the debtor received a further invoice said to be from "Lakeview Enterprises", and raised the matter with the Commissioner. Following an investigation and interview with Ms P, the IRD advised the debtor on 19 October 2007 that the Department was of the opinion that Lakeview Enterprises was merely an agent for either Mr and Mrs Smith or TFW Ltd, and that funds should be paid to the Department in accordance with the section 157 notices. A total of $22,682.70 was received and applied to outstanding PAYE arrears.
The plaintiffs filed these proceedings on 17 November, the same day the liquidation of TFW Ltd was advertised. The affidavit in support of the application also revealed that Ms P had cancelled her purchase of the business on 22 October 2007.
Throughout this time Mr and Mrs Smith were being investigated for large amounts of suppressed income and PAYE unaccounted for over a lengthy period. Charges were laid on 27 July 2006 and they were found guilty after trail by jury on 20 February 2008.
Gendall J dismissed the application for judicial review based on the issue of the section 157 TAA notices, holding that the application was misguided.
Gendall J held that the section 157 deduction notice was lawfully issued to the debtor. Turning to the advice the Commissioner had subsequently given to the debtor, his Honour considered that the lawfulness of the Commissioner's actions would depend on factual matters and whether the Commissioner acted ultra vires, or unreasonably, or took into account irrelevant considerations.
After noting that even in judicial review proceedings factual issues may need to be decided by the Court, his Honour determined that the purported transfer of the business never came into operation: at  "However Mr Smith describes it, the sale did not happen".
Further the registration of the company on line was simply to cloak what Mr Smith was doing, and that Mr Smith was continuing to trade under various guises.
His Honour at  observed that where a corporate entity was a sham or façade designed to conceal a shareholder or another's involvement in a particular matter, then it had long been recognised that this was a fraudulent use of corporate entity, and would not be countenanced. The evidence had established that the plaintiff company was acting as agent for Mr Smith and in fact doing his business not its own at all and that it was a front obviously carried on by Mr Smith for the purpose of evading the tax implications.
At  his Honour agreed that it was entirely open for the Commissioner to assert that the funds were in fact aimed to go to the defaulting taxpayers.
His Honour concluded that on the facts of this matter the Commissioner's advice to the debtor on 19 October 2007 was fully justified, reasonable, and not in excess of the Commissioner's jurisdiction.
His Honour also found that the decision in CIR v ANZ Banking Group (NZ) Ltd (1998) 18 NZTC 13,643 (where a bank was held not to be required to pay the Commissioner monies held in a joint husband and wife account without the wife's consent) was distinguishable, because in the present case, the debtor did not resist the payment of monies owed to the defaulting taxpayers. The plaintiff's argument that it was entitled to receive payment from the debtor, because the taxpayer was not named in the section 157 notice and was not the defaulting taxpayer, was also unsustainable as a matter of fact.
His Honour also held that the further causes of action raised by the taxpayer could only proceed in a normal civil action, following usual civil procedure, and could not simply be merged into the judicial review application. The causes of action as pleaded under "Civil Claims" were adjourned; however, his Honour observed that the findings as to the lawfulness of the actions of the Commissioner "may provide certain difficulties to the plaintiff's claim".
Tax Administration Act, section 257, Goods and Services Tax Act, section 43