Structured finance taxpayer's appeal dismissed
2009 case note - Taxpayer's appeal from High Court decision to strike out a cause of action dismissed - Judicial review, escalation regime.
Sections 109 and 114 of the Tax Administration Act 1994
Taxpayer's appeal from High Court decision to strike out a cause of action dismissed.
Impact of decision
A useful judgment discussing the role of judicial review in the tax context. The Court of Appeal favoured a narrow approach based upon the statutory provisions (considerable emphasis was placed upon sections 109 and 114 of the Tax Administration Act 1994 (TAA)) and the need for truly exceptional circumstances before any judicial review would be allowed to continue (emphasis was placed upon par [62-64] quoted in below).
This is part of the Structured Finance (SF) litigation.
It was an appeal from a decision of Harrison J (reported (2008) 23 NZTC 21,694).
The taxpayer entered into a number of international SF deals. The earliest of these deals ("First Data") was subject to a positive binding ruling and the taxpayer took the view that the subsequent deals conformed in all material senses with that ruling.
The Commissioner (primarily large Enterprises or Corporates as it then was) considered there were material factual differences and reassessed the subsequent deals relying upon section BG1. In reaching this decision the Commissioner's internal escalation process was not fully complied with.
The taxpayer sought to argue the validity of the assessments made, arguing the assessments were invalid for a number of reasons. The Commissioner sought to strike out the cause of action in the taxpayer's claim raising the validity issue arguing the claim could not succeed.
The Commissioner was successful at the High Court and the taxpayer appealed.
The Court of Appeal dismissed the taxpayer's appeal.
In giving the judgment of the Court, William Palmer P noted that the basis upon which the validity point was advanced had changed since Justice Harrison's decision [par 5].
In the course of reviewing the background [par 12-42] it was noted that the Corporates Unit and the Adjudication Unit had differing views of the facts between the First Data ruling and the facts in the subsequent deals entered into [par 27-30]. It was also noted that the internal escalation process in this particular case was not observed consistently with the escalation memorandum [par 31-38].
The Court, before reviewing the development of judicial review in England, Australia and New Zealand, emphasised the role of sections 190 and 114 of the TAA describing these as providing "a particularly inauspicious statutory context for judicial review (ie outside of the challenge process provided for by the TAA)." [at par 47].
In reviewing the New Zealand position the Court recorded:
 The New Zealand authorities support the proposition that it is open to a taxpayer to challenge what purports to be an assessment which in fact does not represent the genuine assessment of the Commissioner as to the tax position of the taxpayer, cf Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd  2 NZLR 681 (CA). Generally the Courts have accepted that the correctness of a tax assessment can only be challenged in challenge proceedings (see Commissioner of Inland Revenue v Lemmington Holdings Ltd  1 NZLR 517 (CA) and Miller v Commissioner of Inland Revenue  3 NZLR 664 (CA)) and that challenge by way of judicial review is reserved for exceptional cases, see Miller v Commissioner of Inland Revenue  3 NZLR 316 at  (PC). The cases are not particularly specific as to what circumstances are sufficiently exceptional as to warrant judicial review proceedings.
The Court also noted the existence of section 6A and the rulings regimes as being pointers in opposite directions with section 6A being "conducive" to a board approach to judicial review but the rulings regime being the opposite [par 56].
Thus the Court concluded that:
 We think it appropriate to continue to apply the established principles as to judicial review in tax cases. We accept that judicial review is available where what purports to be an assessment is not an assessment. Associated with this, we accept that judicial review is available in exceptional cases and thus may be available in cases of conscious maladministration (as was recognised in Futuris). We can reconcile this with sections 109 and 114 on the basis that in such cases (ie no genuine assessment or conscious maladministration) what is challenged is either not an assessment, or at the least, not the sort of assessment which the legislature had in mind in enacting those sections. On this basis we see the availability of judicial review as depending on the claimant establishing exceptional circumstances of a kind which results in the amended assessment falling outside the scope of sections 109 and 114 and thereby not engaging those sections.
The Court found that a board approach to judicial review was inconsistent with section 109 and said:
 We also consider that the broad approach contended for by Westpac places too much emphasis on the assessment as an exercise of a statutory power of decision. An assessment should reflect the correct tax position and a taxpayer's liability to pay tax exists independently of the assessment. If the assessment is correct, it is hard to see why complaints about process should result in the taxpayer not paying tax on a correct basis. Where there are very large sums of tax at stake (as there are here), this raises fairness considerations in relation to other taxpayers who have met their liabilities for the tax year concerned. If the assessment is wrong, it can be corrected in later challenge proceedings. If it is correct, the tax should be paid. It is frankly difficult to see what is unfair in this approach.
 Further, it is perfectly clear that allowing collateral challenge to assessments through judicial review can provide scope for gaming and diversionary behaviour.  In the past taxpayers going down the judicial review route have often sought to delay the statutory processes (whether prior to, or after, assessment) until the judicial review proceedings are completed; this on the ostensibly sensible ground that until the judicial review claim is determined it is premature to proceed with the statutory process. The response of the courts has been to require the review claim to be brought in the same proceedings as the challenge. But this is not necessarily an answer to the potential for judicial review to lead to delay, as illustrated by an unsuccessful attempt by Westpac in this case to have its validity cause of actions heard first.
 Collateral challenge involves not just delay but also diversion of effort and resources. The challenge proceedings between Westpac and the Commissioner will be complex and will fully engage the attention and resources of the Commissioner and the Court. The validity cause of action involves an attempt by Westpac to turn the case back onto the Commissioner. If it goes to trial, considerable resources which might otherwise have been devoted to the primary issue between the parties will be diverted to an inquiry into the internal processes of the Inland Revenue Department. This inquiry will throw up questions which are on the one hand difficult and nuanced (as to the subtleties of the differences of approach adopted by Rulings and Corporates) but on the other entirely irrelevant to whether Westpac owes the tax it has been assessed to pay which in the end will turn on the Judge's approach to section BG 1.
It was noted that the escalation regime is not statutory and that the Commissioner could depart from it depending upon the circumstances [par 71]. The Court then turned to the taxpayer's complaints and dismissed each in turn, applying the Court's view as articulated in the paragraphs quoted above and concluding there were no exceptional circumstances such as to justify judicial review (see for example [par 74]).
Returning to the escalation process and whether these gave raise to exceptional circumstances, it was said:
 Although the escalation process and its resolution were causally connected to the amended assessment, we take the view that it would be inconsistent with the policy underlying sections 109 and 114 to allow the associated complaints of Westpac to be relied on in support of a validity challenge. To allow taxpayer litigants to trawl through processes which were antecedent to the issuing of an assessment (and the pre-assessment disputes procedure) with a view to identifying and then relying on perceived departures from internal department procedures is inconsistent with the orderly and efficient resolution of tax disputes. Such breaches could hardly be regarded as exceptional (in the sense of being rare) and to allow them to invalidate later assessments would leave very little scope for sections 109 and 114. Common-sense suggests that Inland Revenue Department officers will sometimes take shortcuts, perhaps occasionally with the knowledge that in doing so they are not conforming to, or are departing from, what is provided for in the departmental manual. Advertent departures from departmental procedures can hardly be exceptional (again in the sense of being rare). And in a situation in which the officer issuing an assessment believes that it is well founded on the facts and law, and that there is no legal impediment to it being issued, we take the view that an advertent departure is not conscious maladministration and in any event is not an exceptional circumstance in the relevant sense of excluding the operation of sections 109 and 114. This is all the more so where, as here, the alleged departure from department procedures is entirely collateral to the accuracy or otherwise of the assessment.
 In reaching this view we have had regard to a number of overlapping policy considerations:
- First and foremost the statutory policy reflected in sections 109 and 114;
- Secondly, the general undesirability of allowing judicial review in tax litigation (see ,  and );
- Finally, we see it as contrary to the need to treat taxpayers equally to permit a taxpayer to rely on a departure (advertent or otherwise) from a department procedure to defeat an assessment where the departure is irrelevant to the accuracy of the assessment. If this were permitted, it would amount to a judicially conferred dispensation for that taxpayer from the requirement to pay taxes which are owed and thus necessarily unfair to those taxpayers who do meet their obligations.