No exceptional circumstances to allow a challenge outside the response period
2009 case note – No exceptional circumstances for challenge proceedings - extension of time, accounting error, agent, event/circumstance beyond taxpayer's control.
The Taxation Review Authority ("TRA") could not allow the taxpayer to commence challenge proceedings after the statutory response period because the exceptional circumstances required by section 138D of the Tax Administration Act 1994 ("TAA") did not exist in this case. The alleged errors of the taxpayer's accountant were not beyond the control of the accountant as the taxpayer's agent, and could have been anticipated. Whether personnel are to be treated as employees or as contractors is a basic element of business, and the error could have been avoided by compliance with accepted standards of business organisation and professional conduct. The failure of the taxpayer's director to discover the errors in time was also not an event or circumstance beyond the taxpayer's control.
Impact of decision
The Authority held that a taxpayer may not challenge a decision by the Commissioner to not exercise his discretion in section 113 of the TAA to make an amended assessment; ie a taxpayer may not challenge a decision by the Commissioner to not amend an assessment under section 113 of the TAA. If the Commissioner does make a new assessment under section 113 of the TAA, then the new assessment is amenable to challenge in the usual way notwithstanding section 138(1)(e)(iv) of the TAA.
The decision also illustrates the implementation of the test in the Court of Appeal decision CIR v Fuji Xerox NZ Ltd (2002) 20 NZTC 17,470, on "exceptional circumstances" for allowing a challenge to be filed outside the response period.
The Disputant (a company), having filed its returns on the basis that its staff were employees, when faced with liquidation proceedings brought by the Commissioner, sought to amend its assessments to reduce the tax debt upon which the liquidation was based.
The Disputant asserted that its various returns between 1 April 2004 and 31 March 2007 were in error, and that the mistake was occasioned by its external accountants incorrectly treating its staff as employees, when they were allegedly contractors. The Commissioner declined to exercise his discretion under section 113 of the TAA to amend the assessments.
There were no "exceptional circumstances" within the meaning of section 138D(2) of the TAA, and as such the Authority did not have jurisdiction and/or discretion to grant the application to file a challenge after the response period (at  ).
The Disputant had not clarified the errors which were claimed to be "exceptional circumstances" that caused the challenge to not be filed within time. Hence, the Authority considered the relevant act or omission to be the two alternatives as stated by the Commissioner. The first was the accountant’s alleged ongoing error in treating the staff as employees when they were allegedly contractors. The second was the omission of the director of the Disputant to take timely independent advice despite, on his own evidence, the fact he was aware that there was a taxation problem "over the years from 2003 to 2007".
Applying the test in CIR v Fuji Xerox NZ Ltd, the Authority (at ) reached the view that in respect of the accountant’s error none of the elements of the conditions in section 138D(2) of the TAA were satisfied, when all three must be satisfied together for an agent’s conduct to be an "exceptional circumstance". The acts or omissions were not beyond the control of the accountant, could have been anticipated and the ongoing misunderstanding as to the proper accounting treatment of the staff for tax purposes could have been avoided by compliance with accepted stands of business organisation and professional conduct. The actions or omissions of the accountant (agent) were not beyond the control of the Disputant; the accountant acted at the direction of the Disputant.
In respect of the alternative (ie, that the relevant error was the omission of the director of the Disputant to take independent advice despite becoming aware that there was a taxation problem), that omission was a routine business decision and not an "exceptional circumstance" either (at ). The Authority further applied Milburn NZ Ltd v CIR (1998) 18 NZTC 14,005, reaching the view that it could not say that the omission by the director was "beyond the control" of the Disputant (at ).
The Authority considered that section 138E(1)(e)(iv) of the TAA means what it says, and that in this case, there was no right for the Disputant to challenge a decision of the Commissioner to not exercise his discretion in section 113 of the TAA in favour of the Disputant (at ).
The Authority specifically noted that, to be fair to the accountant, it may be that the accountant has at all times acted competently and properly but that the Disputant is retrospectively attempting to change the status of its employees.
Tax Administration Act 1994 sections 3, 113 and 138D