Commissioner entitled to discovery
2009 case note – Summary of the relationship between discovery and the Tax Administration Act – confirmation that CIR entitled to discovery in tax litigation.
The Commissioner sought general discovery against the plaintiffs and non-party discovery against two non-parties. The plaintiffs opposed general discovery on the grounds that general discovery is not appropriate in tax litigation, other than for exceptional cases.
Impact of decision
This judgment provides a clear and concise summary of the relationship between discovery and the provisions of the Tax Administration Act 1994 ("TAA"). It confirms that the Commissioner is entitled to discovery in tax litigation, notwithstanding his powers under the TAA and the evidence exclusion rule.
The plaintiffs, who are related companies and part of the CanWest group, issued optional convertible notes ("OCNs") as part of intra-group funding arrangements. The OCNs were issued to off-shore related companies. The Commissioner investigated the issue of the OCNs on the basis that he considered that it was part of a tax avoidance arrangement. During the course of his investigation, the Commissioner issued notices under section 17 of the TAA to the plaintiffs requesting documents and information.
When the Commissioner received the plaintiffs' Statements of Position ("SOP"), the SOPs raised a new issue, being whether the off-shore company to whom the OCNs were issued was in fact part of the CanWest group. The plaintiffs have since advised that they will not pursue the argument that the off-shore company was not a related company.
The plaintiffs applied for an order that general discovery was not appropriate. The Commissioner applied for non-party discovery against two non-parties, NZ Guardian Trust Company Limited and the parent company of the plaintiff, Media Works NZ limited.
High Court Rule 8.17 provides that the Court must make an order for discovery in standard track proceedings if it is appropriate. There is no specific provision for seeking or opposing general discovery. In principle, the person seeking discovery has the onus of establishing that discovery is appropriate, but the threshold is low and there is an assumption that discovery will be appropriate in standard track proceedings. If the party opposing general discovery raises issues that suggest that discovery is not appropriate, the party seeking discovery must show that discovery is appropriate, notwithstanding the issues raised.
Limitation of discovery in tax cases
The plaintiffs argued that discovery was not appropriate in tax litigation, other than for exceptional cases. They gave two reasons: first, the Commissioner has powers under section 17 of the TAA to obtain all relevant documents from taxpayers; and secondly, section 138G of the TAA excludes discovery.
The Court held that the scheme of the TAA (sections 17 and 138G) does not preclude general discovery; and there is jurisdiction to order general discovery in tax cases. The jurisdiction is supplementary to the information exchange provisions of the disputes resolution process. The Commissioner can be expected to have used his section 17 powers during the investigation, but there is no certainty that he will obtain all the relevant information this way. Section 138G of the TAA does not preclude discovery because documents obtained from discovery may fall within the category of documents identified in the SOPs or it may fall within the exclusion to 138G or it may be a basis for cross-examination.
The Court held that the Commissioner had established that discovery was appropriate in this case.
The Court also held that the Commissioner had established that non-party discovery was relevant and necessary in this case as it may be relevant to the issue of whether the OCNs would have value to a third party. The Court held that section 17 was not a bar to non-party discovery. The Court also stated that there was a distinction between discovery and admissibility and that the Courts do not have to determine admissibility at the time of making an order for non-party discovery.
Tax Administration Act 1994