Commissioner's application of the serious hardship provisions upheld by the Court of Appeal
2011 case note – CIR's application of the serious hardship provisions upheld by Court of Appeal - financial relief, minimum living standards, judicial review.
The appeal failed as the Court of Appeal found that the Commissioner correctly applied section 177 of the Tax Administration Act 1994 ("TAA") and contrary to the argument by the taxpayer, had considered the most recent information available to him in applying section 177.
Impact of decision
This decision confirms the following.
The purpose of section 177 of the TAA is to enable the Commissioner to give financial relief to a taxpayer who would otherwise be placed in serious hardship, as defined in section 177A(1) of the TAA.
Partial relief is still relief for the purposes of section 177.
While not expressly mentioned, it would appear that the Commissioner may continue with assessing applications for financial relief at the date the application is made and considering all outstanding tax owing by a taxpayer as a global sum. However, where it is appropriate and results in partial relief for a taxpayer, the year-by-year approach to applications for financial hardship is open to the Commissioner to adopt.
In interpreting section 177A(1) of the TAA, regard must be had to what caused a taxpayer's significant financial difficulties.
The year-by-year approach represents a practical way of granting relief and applying section 177 of the TAA, where the facts allow such an application.
Inland Revenue commenced debt recovery proceedings against the taxpayer in respect of income tax and goods and services tax amounting to $175,641.68.
On 8 July 2008 the taxpayer applied for financial relief under the serious hardship provisions of the TAA claiming that her serious hardship was the result of significant financial difficulty that arose from her inability to meet minimum living expenses accord to normal community standards. The Commissioner declined the taxpayer's application for relief and the taxpayer responded by applying to the High Court for judicial review. On 23 October 2008, a judicial settlement conference resolved the taxpayer's application on the basis that the Commissioner would reconsider his decision after giving the taxpayer an opportunity to provide further information.
On 10 December 2008, the taxpayer filed a new application for relief. The Commissioner determined that she met the criteria for serious hardship in respect of the tax 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.
In the High Court, McKenzie J found that there was no reviewable error by the Commissioner in considering whether in the year in which the obligation to pay the tax arose the taxpayer was in serious hardship and accordingly allowing the taxpayer relief in the 2000 to 2003 tax years and not the tax years subsequent to 2003. The taxpayer appealed the decision of McKenzie J.
The Court of Appeal found in favour of the Commissioner and dismissed the Appellant's appeal.
Was the year-by-year approach taken by the Commissioner available to him in applying s 177?
The taxpayer argued that McKenzie J's decision in the High Court on this aspect was wrong for the following reasons:
- The TAA required the Commissioner to asses the taxpayer's requests for financial relief at the date they were made, and in respect of "recovery of outstanding tax". That meant all outstanding tax as a global sum.
- Accordingly, the taxpayer's requests for financial relief cannot be assessed on a year-by-year approach.
- The effect of the scheme of the TAA is that the Commissioner is not entitled to accept the taxpayer's requests for relief in respect of some tax years and decline them in respect of other tax years.
- Having accepted the taxpayer's requests for relief made in 2008, the Commissioner cannot decline those requests for relief in respect of the tax years ended 31 march 2004 to 31 March 2008.
The Court did not agree and upheld McKenzie J's analysis in the High Court for four reasons:
- Firstly, McKenzie J's interpretation of section 177 of the TAA was purposive as required by section 5(1) of the Interpretation Act 1999. The purpose of section 177 is to enable the Commissioner to give financial relief to a taxpayer who would otherwise be placed in serious hardship, as defined in section 177A. A consequence of the taxpayer's argument that all outstanding tax as a global sum be assessed at the date a request for financial relief is made, could result in a taxpayer being denied relief. The Court could not view "relief" to be an all or nothing concept as argued by the taxpayer, rather the Court considered "some relief is still relief".
- Closely related to the first point, the Court considered that McKenzie J's interpretation of section 177 of the TAA accords with sections 6 and 6A of the TAA. The Court referred particularly to section 6(2)(b) and (f) - the right of taxpayers to have their liability determined fairly, impartially and according to the law; and the reciprocal responsibility of the Commissioner and Inland Revenue to administer the TAA in that manner.
- The Court in explaining their third reason, noted the explanation by McKenzie J that the Commissioners year-by-year approach represented a practical way of granting relief where section 177A(1)(a) applied, while denying it where section 177A(1)(b)(i) applied. The Court stated that the key to interpreting section 177A and applying it is causation, namely what caused the taxpayer's financial difficulties? The Court agreed with McKenzie J's finding that in some years the cause was the taxpayer's low income, but in others it was her tax liabilities. The Court noted that this was essentially an application of section 177A to the facts before McKenzie J.
- Lastly the Court rejected the taxpayer's argument that the Commissioner's approach is proscribed by section 177(3). The Court considered that construing section 177 purposively in order to facilitate financial relief where it could be properly granted, permitted a year-by-year approach. Accordingly, the Commissioner could accept the taxpayer's request for one tax year and decline if for another. Further, the Court stated that even if that interpretation is not open, the Commissioner's approach can be viewed as a counter offer made under section 177(3)(c) of the TAA.
The Court noted that the year-by-year approach, which was taken in considering the taxpayer's application for financial relief, will not be appropriate in every case. An example given by the Court of when the year-by-year approach will not be appropriate is where the taxpayer's difficulties do not span more than one tax year. Otherwise, where it is appropriate and results in partial relief for the taxpayer, the Court stated the year-by-year approach is open for the Commissioner to adopt.
Tax Administration Act 1994