Judicial review proceedings for assessment under section 113 of the Tax Administration Act is not a bypass mechanism for dispute and challenge procedures

Summary

Arai Korp Ltd sought to judicially review the Commissioner of Inland Revenue's ("the Commissioner") decision not to invoke section 113 of the Tax Administration Act 1994 ("TAA") in respect of the applicant's income tax assessments for the 2004 and 2005 income years. The original assessments, which were default assessments, were made by the Commissioner in 2006 and were not disputed nor challenged by Arai Korp Ltd ("Arai Korp") at that time. Arai Korp's application for judicial review was only filed in August 2011 against a background of liquidation proceedings brought by the Commissioner against Arai Korp. The Commissioner had already successfully prosecuted Arai Korp for failing to file income tax returns. The Court found that the Commissioner had not considered the merits of Arai Korp's application for reassessment but that was not fatal as the Commissioner's decision was not unreasonable based on the facts and because Arai Korp had been attempting to circumvent the disputes and challenge procedures.

Impact of Decision

This decision applied the Supreme Court's decision in Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153 "that disputable decisions (which include assessments) may not be challenged by way of judicial review unless the taxpayer cannot practically invoke the relevant statutory procedure. Cases of that kind are likely to be extremely rare".

This case confirms that taxpayers who attempt to circumnavigate the statutory disputes and challenge procedures by issuing judicial review proceedings will be unlikely, in most cases, to be successful with their application for review.

Facts

Default assessments were issued by the Commissioner to Arai Korp Limited for the 2004 and 2005 income tax years on 17 November 2006. These default assessments have never been disputed by Arai Korp through the disputes procedure in the TAA.

The default assessments concerned the proceeds of the sale of a subdivision property situated at 618 Maungatautari Road, Karapiro Cambridge ("the property").

The property was originally owned by Mr Murray Athol Osmond (who is the director of Arai Korp and the director of the sole shareholder, Aniwaniwa Trustee Limited).

On 27 March 1997, the property, save for Units J, K, L and F, were sold to Ran Kor Resources Limited. On or about 30 September 1999, this agreement was allegedly assigned by Ran Kor Resources Limited to Arai Korp.

On 30 September 1999, Arai Korp alleged that Mr Osmond agreed to sell units J, K and L to Arai Korp.

On 28 April 2000, Arai Korp allegedly borrowed funds from the National Bank to purchase Lot 1 and Lot 2 and complete the subdivision.

By 17 October 2003, the subdivision was completed and new titles were issued for Units A to L in the subdivision.

In the 2004 and 2005 income years, Arai Korp made various sales of these units. Notwithstanding this, no income tax returns were filed for Arai Korp. The Commissioner successfully prosecuted Arai Korp for failure to file its returns. The income tax returns for the 2004 and 2005 income years were due on 7 July 2004 and 7 July 2005 respectively.

On 13 November 2006, as a result of an investigation, the Commissioner default assessed Arai Korp for the 2004 and 2005 income years. These assessments were based on Arai Korp's Goods and Services Tax returns.

The Commissioner brought collection proceedings and, after being granted summary judgment, she brought liquidation proceedings. After the commencement of the liquidation proceedings, the applicant sent a letter dated 22 May 2011 to Inland Revenue seeking agreement to fresh tax returns being completed by Arai Korp or for consent to an appeal to the Taxation Review Authority out of time.

The Commissioner treated the letter of 22 May 2011 as being, in effect, a request under section 113 of the TAA to make an amended assessment and, having considered the request, declined it.

Arai Korp issued judicial review proceedings asserting that the Commissioner's decision not to invoke section 113 of the TAA breached the rules of natural justice, that it contained mistakes of fact, that the Commissioner failed to take into account relevant considerations, that she took into account irrelevant considerations and that it was manifestly unreasonable.

Decision

The sole question for the Court was whether the Commissioner's refusal to exercise the discretion vested in her by section 113 of the TAA was manifestly unreasonable.

Section 113 is clear in its terms, conferring a wide-ranging discretion on the Commissioner that can be exercised on her own motion or at the request of a taxpayer. The discretion is available in order to ensure that an assessment is correct. In exercising the discretion, the Commissioner must use her best endeavours to protect the integrity of the tax system, which includes protecting the rights of taxpayers to have their liability determined fairly and according to law. There is no duty to reassess and so, whilst the Commissioner can reassess, there is no obligation to do so.

In essence here, the reasons why the Commissioner, by her delegated officer, declined the request by Arai Korp were that:

• 1. there had been a full investigation and the Commissioner was confident that the default assessments were correct;
  2. Arai Korp was trying to reopen the dispute process and accommodating its request would be treating it more favourably than other taxpayers;
  3. additional resources would have to be devoted to verifying the income and deductions belatedly sought by Arai Korp;
  4. the request was not in regard to consequential or genuine errors;
  5. the facts of case did not meet the criteria detailed in the Commissioner's Standard Practice Statement 07/03.

The Court considered each of the reasons relied on by the Commissioner for her decision.

Correctness of Default Assessment

That there are strict statutory criteria for an extension of time in relation to the disputes or challenge procedures does not affect the broad discretion available under section 113 of the TAA. When faced with an application to exercise the discretion, the Commissioner has to consider whether the assessment is correct. If a convoluted argument is raised to show the assessment is incorrect, then it is to be expected that the Commissioner will be considerably more circumspect and will take into account whether or not the dispute or challenge procedures have been followed by the taxpayer.

Here, the Court found the Commissioner should have given consideration to the merits of Arai Korp's arguments and whether they were capable of affecting the correctness of the default assessments. If the Commissioner had concluded that the matters raised by Arai Korp could not affect the default assessments, that would have been the end of the matter. If she had concluded that Arai Korp might have a bona fide argument, then she should have either determined whether the default assessments were correct or, alternatively, considered whether there were other relevant factors which precluded the exercise of the discretion in any event.

However, although the correctness of the default assessments was a relevant factor, it was not a paramount consideration on the facts of this case and the Court was not persuaded that a failure to address the correctness of the assessment was fatal to the decision to not exercise the discretion in section 113 of the TAA.

Dispute process

There are strict timelines within which the dispute process is required to be initiated. These can only be extended in defined circumstances. Here there was no application for an extension of time by Arai Korp and it had not taken any steps required by section 89K of the TAA.

The Court agreed that section 113 of the TAA is not intended to be used by taxpayers, or indeed the Commissioner, as a way of circumventing the statutory disputes procedure. This is put beyond doubt by section 109 of the TAA. Parliament has put in place detailed provisions detailing how tax disputes are to be resolved, there are strict timelines and there must be finality. The provisions are designed to prevent "administrative chaos".

Arguments as to the substance of assessment can only be raised in challenge proceedings and cannot be raised by way of judicial review. The legitimacy of the process and the validity of the outcome may be challenged in judicial review proceedings on established administrative law grounds. This case is not one of the "extremely rare" cases mentioned by the Supreme Court in Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153 where an assessment may be challenged by judicial review. Except in extremely rare circumstances, judicial review cannot be used as a backdoor method for considering the merits of the assessments. Here, Arai Corp was challenging the correctness of the assessments and was doing no more than trying to bypass the dispute process. To allow Arai Korp to do so would be to undermine the statutory scheme and treat it more favourably than other taxpayers.

The Commissioner was entitled to take these matters into account and cannot be criticised for doing so.

Available Resources

The Commissioner took into account that the earlier investigation would have to be reopened and resources applied to investigate the request. The Court held this was a relevant factor to take into account in the exercise of the discretion in section 113 of the TAA and the Commissioner had not erred by doing so.

Consequential/Genuine Errors

The Court was not persuaded that section 113 of the TAA distinguishes consequential or genuine errors. However, here, this factor was not crucial to the decision to not invoke section 113 of the TAA.

Standard Practice Statement

The Court found it was not inappropriate for the Commissioner to refer to the Standard Practice Statement. She did not "slavishly follow its dictates" but, rather, applied her mind to the facts and exercised the discretion by reference to those facts.

The Court concluded that the Commissioner's decision to decline Arai Korp's request under section 113 of the TAA was not manifestly unreasonable, the section was not meant to be used to bypass the dispute procedure and this was what Arai Corp was attempting to do. The Court dismissed the application for review.