High Court finds no reviewable error made by Commissioner
2009 case note - High Court found CIR's decision was focused on the correct test -serious hardship, minimum living standards, judicial review.
The judicial review proceeding failed as the High Court found that the Commissioner's decision was focused on the correct and appropriate statutory test and no error of law was demonstrated.
Impact of decision
Further consideration is being given by Inland Revenue to its application of the serious hardship provisions. Current procedures should continue to be followed until further notice.
The household expenditure guide is a tool to assist the Commissioner but it is a value judgment for the Commissioner whether or not a particular taxpayer is able to meet the minimum living expenses according to normal community standards.
The taxpayer had arrears of income tax and goods and services tax ("GST") amounting to $175,641.68. Inland Revenue had commenced debt recovery proceedings in the District Court.
In July 2008, the taxpayer had applied for financial relief under the serious hardship provisions of the Tax Administration Act 1994 ("TAA") claiming that her serious hardship was the result of significant financial difficulty that arose from her inability to meet minimum living expenses according to normal community standards. The Commissioner declined her application for relief and the taxpayer judicially reviewed that decision. At a settlement conference it was agreed that the Commissioner would consider a new application for relief.
In December 2008, the taxpayer filed the new application for relief. The Commissioner determined that she met the criteria for serious hardship in respect of the income years ended 31 March 2000 to 31 March 2003 but not during tax years subsequent to 2003. The taxpayer applied for judicial review of this second decision declining relief for the years subsequent to 2003.
Global v Year by year
A taxpayer's claim, under section 177(1)(a) of the TAA, must state why recovery of outstanding tax would place the taxpayer in serious hardship. Serious hardship is defined in section 177A as including significant financial difficulties that arise because of the taxpayer's inability to meet minimum expenses according to normal community standards; section 177A(1)(a)(i).
This does not include significant financial difficulties that arise because the taxpayer is obligated to pay tax.
The Commissioner's approach was to consider whether, in the year the obligation to pay the tax arose, the taxpayer was able to meet minimum living expenses according to normal community standards and if not, to grant relief. Each tax year was considered individually, not all tax years together. The Court found that this approach was correct.
Such an approach is a practical way of reconciling the "rather difficult interrelationship" between paragraphs (a) and (b) of section 177A of the TAA. The global approach - considering the position at the time the application is made - would potentially:
- advantage a taxpayer who failed to pay tax in the year the obligation to pay the tax arose when financially able to do so but was financially unable when applying for relief; or
- disadvantage a taxpayer who failed to pay tax in the year the obligation to pay the tax arose when financially unable to do so but was financially able when applying for relief.
Such outcomes would be inconsistent with the scheme and purpose of the TAA. The financial hardship regime focuses on the ability of the taxpayer to pay the tax at the time when the tax became payable.
The Court found:
- The exclusion from consideration, as possible grounds of serious hardship, of difficulties arising because of the obligation to pay tax, indicates a clear legislative intention that defaulting taxpayers may be pursued to a point which may result in serious hardship. That suggests the appropriate focus is the ability to pay the tax when the obligation arose, rather than at the point when enforcement proceedings are taken. [paragraph 14]
Minimum living standards
The taxpayer questioned the way in which the Commissioner applied the household debt expenditure guide. The guide sets out figures for the weekly average expenditure on certain items for different categories of household; the relevant one here being a one-person household.
The Court found that the guide is a tool to assist the Commissioner in determining what the minimum living expenses according to normal community standards for the particular taxpayer are. It is, however, a value judgment for the Commissioner.
The Court confirmed that an application for judicial review is not an appeal against the Commissioner's decision. The onus is on the taxpayer to demonstrate the Commissioner has erred in law in adopting the approach that he has. Here, the taxpayer had fallen well short of demonstrating that the use of the household expenditure guide constituted a reviewable error.
The taxpayer's submission that the Commissioner erred in his assessment of the information available is one that goes to the merits that might be relevant to an appeal. However, there was no error of law or principle, within the purview of judicial review that had been demonstrated by the taxpayer.
Finally, there was no substance to the taxpayer's submission that there was no specific reference in the Commissioner's letters to the statutory definition of serious hardship or whether the test had been met. It is clear that the Commissioner's decision was correctly focused on the correct statutory test and no error of law had been demonstrated.
The Court found the application for judicial review failed.
Tax Administration Act 1994