Judicial review application dismissed
2011 case note - judicial review proceedings, default assessments, provisional taxpayer, exercise of discretion, priority of applying funds.
The High Court dismissed the taxpayer's judicial review proceedings as the taxpayer failed to show that when making the default assessments the Commissioner could not have exercised a genuine and honest judgment, and that the Commissioner erred in considering the exercise of his discretionary powers to amend the assessments under section 113 of the Tax Administration Act 1994 ("TAA").
Impact of decision
No implications arise from this decision.
The taxpayer in this proceeding ("the taxpayer") and associates came to the attention of Inland Revenue following a police raid at an Auckland hotel in October 2005, in which a large sum of cash ($137,980), money bags, four Lexus vehicles, methamphetamine and drug paraphernalia were found.
The taxpayer claimed ownership of the money. However, he gave multiple explanations of how he obtained it, including from a money-lending business, buying and selling scrap metal and from the sale of his grandmother's property in Vietnam.
On 16 December 2005, default assessments for income tax and goods and services tax (GST) were issued to the taxpayer, for the periods 1 April 2004 to 31 March 2005. He was advised that a total sum of $153,518.57 was owed to Inland Revenue, and that this amount would be deducted from the money held by the police.
The taxpayer failed to issue a Notice of Proposed Adjustment and challenge the assessments pursuant to the applicable statutory procedures in the TAA.
Subsequently, bankruptcy proceedings were commenced in March 2010 on the basis of a default judgment in the District Court. The taxpayer sought to oppose the bankruptcy proceedings and requested the Commissioner correct the assessments under section 113 of the TAA.
Further information provided by the taxpayer to Inland Revenue was considered. However, it did not adequately show a clear and unambiguous error had been made in making the default assessments.
Mallon J dismissed the taxpayer's judicial review proceeding.
Issue 1: Whether errors in the default assessments are such that the Commissioner cannot have exercised a genuine and honest judgment when making those assessments
The Court stated that in order to challenge a default assessment the taxpayer is required to follow the statutory procedures, and the scope for judicial review is limited. A purported assessment may be challenged in judicial review proceedings if it "is not an assessment at all" or if exceptional circumstances exist bringing it outside sections 109 and 114 of the TAA (Westpac Banking Corporation v Commissioner of Inland Revenue  NZLR 99).
Also, an assessment is not an assessment at all if the assessment was "no more than an arbitrary conjecture or was demonstrably unfair". The Commissioner is required to "exercise judgment" and make the assessment "on an intelligible basis" and not act "arbitrarily in disregard of the law or facts as known to him" (Lowe v Commissioner of Inland Revenue  1 NZLR 326). However, there is not a "high threshold as to the material on which that judgment is based" (Commissioner of Inland Revenue v New Zealand Wool Board (1999) 119 NZTC 15,476). But there must be a genuine attempt to ascertain the income "even if carried out cursorily or perfunctorily".
The Court found that the taxpayer failed to show that in making the default assessments, the Commissioner could not have exercised a genuine and honest judgement or that any exceptional circumstances existed.
Mallon J also commented on several occasions that the taxpayer had the opportunity to dispute the default assessments under the statutory procedures but failed to do so.
Issue 2: Whether the Commissioner erred in considering the exercise of the discretionary power to amend the assessments under section 113 of the TAA
The Court stated that a decision not to amend an assessment under section 113(1) of the TAA is not a disputable decision for which there is a right to invoke the statutory dispute and challenge proceedings [section 138E(1)(e)(iv) and 138E(2) of the TAA]. Nor does section 113 confer a reviewable statutory duty or obligation to reassess on request by the taxpayer (Lawton v Commissioner of Inland Revenue (2003) 21 NZTC 18,042). However, section 113 does confer a discretionary statutory power which can be exercised on the Commissioner's own motion or on request, in accordance with statutory criteria and the purpose of the legislation (Commissioner of Inland Revenue v Wilson (1996) 1 NZTC 12,512). The Commissioner is not obliged to reinvestigate the taxpayer's liability where the taxpayer provides information and/or seeks to have the Commissioner exercise the power under section 113.
In this case, the Court identified two points that warranted possible further consideration. However, the Court was not prepared to direct the Commissioner to reconsider the default assessments on those two points, as the two requests by the taxpayer were non-specific and incomplete. Further, the Commissioner had shown a preparedness to reconsider matters and use section 113 of the TAA to amend assessments where genuine errors were made.
Issue 3: Whether the taxpayer was liable to pay interest in the income year ending 2005 for unpaid provisional tax
The Court found that the taxpayer fell within the definition of provisional taxpayer in section OB 1 of the Income Tax Act 1994, and was therefore, correctly charged interest.
Issue 4: Whether the Commissioner was correct to apply the taxpayer's money to his GST liability ahead of his income tax liability
The Court accepted the Commissioner's explanation that the application of funds is applied according to the priority protocol, which lists GST above income or provisional tax.
Judicature Amendment Act 1972