Time of assessment by Commissioner not seen as justification to uphold judicial review

Summary

The time of assessment is established by the facts of the case. In order for judicial review to apply, the taxpayer will need to establish exceptional circumstances and provide evidence of the effect on them.

Impact of decision

The decision confirms the findings in Golden Bay Cement, Miller and Abbattis Properties Limited relating to when an assessment is made. It also confirms the criteria for judicial review after assessment.

Facts

This is a judicial review by Amaltal Fishing Company (AFC) in respect of assessments made by the Commissioner in April 2006. The assessments related to income earned in the 1994 and 1995 years. 

In 1994 and 1995 AFC was a wholly owned subsidiary of Amaltal Corporation Limited (ACL). In June 1996, AFC and ACL together with a third company in the Amaltal group filed tax returns for the 1994 and 1995 years. Each company was a separate entity. A request was made to have the three returns transferred as a group assessment in the name of ACL. A technical error was made when entering the AFC returns into the first system in June 1996. The error resulted in the returns going into a suspense-type account pending resolution of the error. In September 1996 the group assessment was made. However in order to resolve the error a "reassessment to nil" was entered into the first system against AFC. As a result nil notices of assessment were issued to AFC for the 1994 and 1995 years. 

In November 1997 an investigation was commenced into ACL and AFC. The investigation focus was on the 1994 and 1995 tax years. It was concluded that an adjustment was required to AFC's taxable income. The issue was disputed and in March 2001 an amended assessment was issued to ACL for the 1994 year. An amended assessment was issued to ACL for the 1995 year in May 2001. The assessments incorporated AFC's income and tax. In May 2001, ACL lodged a notice of claim in relation to the amended 1994 assessment with the Taxation Review Authority (TRA). One of the grounds was that the Commissioner did not have the power to jointly assess AFC and ACL. The 1995 amended assessment was opposed on the additional ground that it was time- barred. The Commissioner accepted that the amended assessment for ACL for 1995 was time-barred. However the Commissioner then issued a Notice of Proposed Adjustment (NOPA) dated 3 September 2001 to AFC indicating an intention to increase AFC's 1995 tax. AFC issued a Notice of Response (NOR) on 6 November 2001. 

On 7 August 2002, the TRA declared the 1994 amended joint assessment (under ACL) to be invalid and re-assessed ACL's tax for the 1994 year. This left the adjustments to be made to AFC for 1994, to be dealt with separately. A NOPA was issued to AFC for the 1994 year on 20 October 2004. The proposal was to increase AFC's tax. AFC's NOR was issued on 25 November 2004. On 27 April 2006 the Commissioner issued new assessments to AFC in relation to the 1994 and 1995 tax years. AFC failed to challenge the assessments within the prescribed time period. The TRA ruled that there were no "exceptional circumstances" under section 183D of the TAA 1994 (Case Y7, (2007) 23 NZTC 13,066) as did the High Court (Amaltal Fishing Co Ltd v CIR (2007) 23NZTC 21,639). In June 2007 AFC filed for an application in the High Court for a judicial review.

Decision

Justice Mallon initially considered section 109 of the Tax Administration Act 1994 (TAA) which deems disputable decisions correct except in proceedings. She concluded that after cases such as Golden Bay Cement Co Ltd v CIR [1996] 2 NZLR 665(CA; Miller v CIR [2001] 3 NZLR 316 (PC); and CIR v Abattis Properties Ltd (2002) 20NZTC 17,805 (CA) the established rules were:

1. The correctness of an assessment that has been made can only be challenged in proceedings on objection.
2. The legitimacy of the process adopted by the Commissioner and the validity of the outcome may be challenged in judicial review proceedings.
3. If a judicial review challenge is available the court has a discretion whether to grant relief by way of judicial review.
4. When an objection procedure is available it will only be in an exceptional case that the court will exercise its discretion to grant relief by way of judicial review.

Justice Mallon considered the submission by AFC that judicial review was available whenever there had been a "fatal flaw that affects the vires of a decision". That is, because the TRA and High Court found no exceptional circumstances existed ACL could not get a hearing and therefore there was no other remedial action for what it considered to be the unlawful actions of the Commissioner. At paragraph [28] of the decision she said:

• [28] I do not accept AFC's submission that its unsuccessful application to pursue its objections to the assessment through the statutory procedure point in favour of exercising my discretion to grant judicial review relief. It may be a relevant factor in some cases combined with other factors but it is not a decisive factor in itself. The timeframe for exercising challenge rights under the statutory procedure would be too easily thwarted if that were the case...

Nor did she agree with the Commissioner's submission that exceptional circumstances in relation to the judicial review could not be established because the TRA and High Court had already said in relation to section138D(2) of the TAA that exceptional circumstances (for allowing appeal outside time period) did not exist. Continuing on in paragraph [28] she said:

• [28] To bring a challenge under the statutory procedure outside the required timeframe an applicant must establish "exceptional circumstances" defined as being an event or circumstances beyond the control of the applicant that provides the applicant with a reasonable justification for not commencing the challenge in the required timeframe (section138D(2) Tax Administration Act 1994). The test is narrower than matters that are potentially relevant to my discretion to grant relief on judicial review.

Justice Mallon then visited the individual grounds upon which AFC based its application for the judicial review.

Ground one - time bar

Justice Mallon found that this was an issue which could have been decided had ACL challenged the assessment within the appropriate time period. She also found that there were no additional circumstances to justify her making a ruling that exceptional circumstances for a judicial review existed. However for completeness she went on to decide on the issue of whether or not the 2006 assessments were time barred. The legislation involved at the time was section 21D of the Inland Revenue Department Act 1974 (effective from 17 December 1992) which read:

21D Assessments and Determinations Made by Electronic Means

Any assessment or determination made for the purpose of any of the Inland Revenue Acts that is made automatically by a computer or any other electronic means in response to or as a result of information entered or held in the computer or other electronic medium shall be treated as an assessment or determination made by or under the properly delegated authority of the Commissioner.

Section 25 of the Income Tax Act 1974 dictates the time period for altering an assessment. It reads

25 Limitation of time for amendment of assessment

(1)  When any person has made returns and has been assessed for income tax for any year, it shall not be lawful for the Commissioner to alter the assessment so as to increase the amount thereof after the expiration of 4 years from the end of the year in which the notice of original assessment was issued.

In paragraph [44] Justice Mallon noted that:

• [44] An assessment is "the process by which the Commissioner carries out his statutory obligation to ascertain the amount on which tax is payable and the amount of tax": Lloyds Bank Export Finance Limited v Commissioner of Inland Revenue [1992] 2 NZLR 1 at [20].

Her Honour confirmed that amendments to the legislation were only made to clarify that time ran from the notice, and not from when the assessment was made. Her Honour could not see any distinction between the facts in AFC and Paul Finance and GoldenBay.

Mallon J then considered the evidence of the person responsible for the entry into the first system and determined that it was never her intention to make an assessment. Her honour was of the view that the four-year time period in section 25(1) of the Income Tax Act did not commence from 3 September 1996 and that notices issued on that day were issued in error.

Ground two - conditional assessment

This ground related to the failure of the Commissioner to include a deduction for depreciation in the 1995 year after he reassessed revenue expenditure as capital expenditure in the 1994 year. The contention being that the assessment for the 1995 year could not have been what the Commissioner honestly believed was correct. While he believed depreciation was available, he also believed he could not allow depreciation until the disputed issue of whether or not the 1994 assessment was correct (capital/ revenue distinction) was decided. Despite agreeing with Miller and stating that the issue should have been dealt with in disputes proceedings, Mallon J at paragraph [60] found 29 Tax Information Bulletin Vol 21 No 2 that the Commissioner was in error in issuing an assessment which created a liability when the Commissioner's view was that if his opinion was upheld in relation to the 1994 assessment, he would then need to amend his 1995 assessment. Despite ruling that the issue should have been addressed in disputes proceedings Her Honour adjourned this aspect of the proceedings to allow the Commissioner 14 days to amend the assessments to reflect a depreciation allowance.

The Commissioner has since complied with the directions of the Court.

Ground three - section 27(1) of the Bill of Rights Act 1990

Section 27(1) of the Bill of Rights Act 1990 (BOR) concerns the observance of the principals of natural justice. AFC submitted that assessments were Ultra Vires because they were not made within a reasonable time. The Commissioner submitted that the BOR did not apply and also that there was no unreasonable delay resulting in AFC suffering any prejudice as a result of the delay.

Justice Mallon referred to Combined Beneficiaries Union Incorporated v Auckland City COGS Committee [2008] NZCA 423 which held that section 27(1) did not require that the determination be adjudicative in nature. The determination applied to decisions "to which natural justice ordinarily applies". Justice Mallon again recognised that there was a procedure which a taxpayer could apply in order to challenge an assessment but also recognised that section 27(1) may still apply. She then proceeded on the basis that section 27(1) may apply. The question then to be answered was "whether the principles of natural justice required that an assessment under the Income Tax Act be made without delay?" AFC relied on Unitec Institute of Technology v Attorney-General [2006] 1 NZLR 65 to argue that natural justice required that a decision be made within a reasonable time. The Commissioner submitted that on the facts in this case there was no evidence of unreasonable delay.

Justice Mallon then found that "there is doubt as to whether the right to natural justice in this context included the right to a determination (the assessments) without unreasonable delay." At paragraph [73] she concluded:

• [73] Turning to general principal, in broad terms natural justice requires that a person affected by a determination receives a fair hearing. What that entails in any particular case depends on the circumstances and the nature of the determination assessed in light of any relevant statutory provision.

Her Honour then followed the sequence of events and determined that in this case the delay did not cause any breach in natural justice. In isolation the 10-year period for assessment looked like a long time; however, both parties thought that the joint assessments applied in the beginning could be made. This mistake counted for a period of five years. Periods of delay after the five years were seen as undesirable but not particularly lengthy when taken in context. Justice Mallon also found that there was no financial prejudice to AFC because penalties and interest applied to the core tax and could be offset against the depreciation which would now be allowed.

Ground four - arbitrary and unreasonable adjustment

This ground relates to a decision of the investigator to assess a portion of an insurance payout to AFC as recovered expenditure rather than as capital profit. The ground raised by AFC was that the Commissioner took irrelevant considerations into account when re-assessing. The claim also alleged an error of law although the error itself was not identified. Justice Mallon found that the grounds for the review "clearly challenge the correctness of the decision". The issue of the correctness of the decision should have been dealt with under traditional statutory review grounds. The only exceptional circumstance which could justify a review was the fact that AFC was time barred, but that alone was not enough to convince her that exceptional circumstances did exist.

Justice Mallon also noted that while AFC may have convinced a hearing authority that the Commissioner was wrong she was not convinced that the Commissioner acted in an unlawful or irrational manner.