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28 Apr 2010
Appeal Status
Not appealed

Commissioner to reconsider whether to accept late objection

2010 case note - investors in partnerships that financed production of film 'Utu' - refund, objection, late objection.

Dunphy and others v Commissioner of Inland Revenue


The applicants argued that being on the Second Ernst & Young (EY) "in" List in 1996 was a request for a refund and should have been considered by the Commissioner as an application to accept a late objection, the grounds of the objection being the Rudd Watt & Stone letter in 1986. The Commissioner was directed to reconsider whether to accept the late objections.

Impact of decision

This judgment turns on its specific facts; particularly the EY "in" List. The taxpayers were investors in the same film investment (Utu) which the Privy Council held in Peterson v CIR to not be tax avoidance and the dispute procedure is per the old objection process.


The three applicants (originally there were eight) were investors in partnerships that financed production of the film Utu. The business affairs of the partnerships were managed by a management committee that operated through Ernst & Young (EY).

The Commissioner audited the partnerships and took the view that certain deductions could not be claimed; broadly because of sham and tax avoidance. Each partner received a letter to that effect.

The management committee instructed Mr Geoff Harley of Rudd Watt & Stone (RWS) who wrote to the Commissioner on 22 December 1986 that he had been instructed to object to the assessments of the partnerships and the partners respectively. This letter is referred to as the "RWS Objection".

The Commissioner responded that the RWS Objection could not be accepted as an objection and a written notice of objection would be required. No individual assessments had been made at the time.

It was informally agreed that the Hay group (other investors in the partnerships that financed production of the film Utu) would have their objections determined first, effectively as a test case.

As time passed and individual partners engaged directly with the Commissioner, the Commissioner questioned the authority of Mr Harley to act for the partners. Mr Harley prepared a list on 23 September 1992 in which the applicants, with others, were identified as having "continuing objections". This is known as the "First EY 'in' List".

In 1996 following an inquiry from Mr Jenkin QC, lead counsel for the Commissioner, an updated list, which included the applicants, was sent to the Commissioner on 20 March 1996 - the "Second EY 'in' List".

Following the discontinuance of the Hay proceedings, Mr Richard Peterson independently stated a case for the Taxation Review Authority and continued appealing to the Privy Council which, by majority, found that the arrangement was not tax avoidance; Peterson v CIR [2006] 3 NZLR 433.

During the progression of the Peterson case through the Courts, there was no communication between the applicants and the Commissioner. However, following the Privy Council's decision, the three applicants and others approached the Commissioner seeking refunds, either inquiring whether they had live objections or claiming that they did.

Following correspondence and discussions, the Commissioner by his delegate wrote to Mr Harley on 29 September 2008. It was this which was judicially reviewed by the applicants.

Subsequent to the proceedings, a senior tax counsel (STC) in the Department considered whether the Commissioner should accept late objections under section 30(2) of the Income Tax Act 1976 (ITA76) for the three applicants and two other applicants. The STC concluded a late objection would not be accepted from any of the three applicants but, subject to some qualifications, concluded a late objection should be accepted from the two other applicants, who subsequently withdrew from the hearing. Several other applicants had previously withdrawn from the proceeding.


The Court granted leave for the applicants to amend their pleadings after the hearing bar on one allegation; the Commissioner was also granted leave to file an amended defence. Essentially, the applicants were granted leave to amend their pleadings from one of having extant objections and/or the Commissioner being on notice to one of having late objections considered under section 30(2) of the ITA76.

The Court found that the effect of the Commissioner's decision on 29 September 2008 was to decline a request for a refund and, at least by implication, ignore the possibility that there might be a late objection capable of acceptance under section 30(2). These gave rise to a "statutory power of decision" within section 3 of the Judicature Amendment Act 1972 and the decision was justiciable.

The Court went on to consider the applicability of the Privy Council's decision of Peterson to these applicants; they not being parties to that proceeding. The Commissioner noted that the Privy Council's decision was decided on concessions made by the Commissioner, including the concession that the full costs deducted were economic costs. For different taxpayers, the Commissioner said that he may take a different position in relation to investments in Utu. The Court noted it had considerable difficulty with this:

  1. The applicants were members in the same Utu partnerships as Mr Peterson and the ratio of the Privy Council's decision was that the "arrangement" was not tax avoidance.
  2. If a matter concerning the partnerships came before the Court, it would be bound by the Privy Council's decision.
  3. Any concessions made by the Commissioner to the Privy Council were made during the final phase of the Peterson litigation and it is difficult to believe that the Commissioner's concessions would have been other than fully informed.
  4. The Commissioner has applied Peterson to other partners (because the Commissioner agreed they had extant objections) and it would grossly unfair to exclude these applicants from the benefits of the Privy Council's decision.
  5. Even though the non-recourse loan gave rise to a secret profit at the investors' expense, they nevertheless incurred a contractual liability to repay the loan out of profits generated by the film.
  6. Ben Nevis, Glenharrow and Accent Management [sic] involved different facts. Accordingly, the Court was satisfied in the context of late objections that the Commissioner should have proceeded on the basis that the Privy Council's decision applied to the applicants.

It was common ground that the Commissioner did not consider whether he should allow late objections under section 30(2) of the ITA76. The Court found that the issue of refunds was clearly before the Commissioner. There could be no refund in terms of section 409 in the absence of a timely objection (section 30(1)) or a late objection (section 30(2)). Although a late objection was not expressly mentioned in any of the correspondence to the Commissioner, it was inherent in the case the applicants were putting to the Commissioner. The failure of the applicants to directly raise the issue of late objections did not destroy their argument.

The Court found the Commissioner misdirected himself by failing to consider whether a late objection should be accepted. The Court went on to find that there was an objection capable of qualifying as a late objection.

The applicants' case was that being on the Second EY "in" List (20 March 1996) coupled with the RWS Objection (22 December 1986) constituted their objection.

The Court found that:

  • [79] The only sensible interpretation is that the investors referred to in the list [the Second EY 'in' List] of "Continuing objections" were confirming their objections. ... They were now restating their objection in writing at a time where the objection was capable of responding to their assessments. The only problem was that they were outside the one month timeframe.

The RWS Objection (in 1986) provided the grounds for the objection in 1996 (the Second EY "in" List) and if Inland Revenue officials involved at the time had "properly turned their minds to the matter" this should have been understood by them.

Thus, the Court found there was written notice of objection stating the grounds of objection, albeit it was out of time.

The Court accepted that the Second EY "in" List constituted a written application for a refund under section 409 of the ITA76. Accordingly, it was within the eight year timeframe.

The Court further commented that the apparent merits of the objections are strong (ie the Privy Council's decision binds) and despite the evidence from the Commissioner that he is unable to calculate the correct assessments and interest now due to the lack of information, the Court preferred the evidence of the applicants that this was overstated.

The Court concluded that this was one of those "rare cases ... where acceptance of the applicants' claims was the only reasoned response that the Commissioner could have properly made".

The Court further considered that the STC's consideration of whether to accept late objections did not cure the defects in the Commissioner's decision to not accept the late objections and directed the Commissioner to reconsider the applicants' positions in terms of the amended statement of claim.

Income Tax Act 1976