Indemnity costs awarded to the Commissioner
2014 case note – CIR awarded indemnity costs on basis that taxpayers' claim was commenced for an ulterior purpose and fell within 'hopeless case' category – Trinity.
High Court Rules
The Commissioner of Inland Revenue ("the Commissioner") was awarded indemnity costs on the basis that the taxpayers' claim was commenced for an ulterior purpose and fell within the "hopeless case" category.
Impact of decision
The Court will award indemnity costs where a hopeless case is commenced by a plaintiff for the purpose of delaying collection of debt confirmed by a Supreme Court decision. This may have some application where taxpayers commence proceedings merely to delay the collection of tax.
This judgment is a costs judgment which relates to the previous Peters J decision dismissing the plaintiffs' application for review of a decision by the Commissioner, Peebles v Attorney-General  NZHC 2635, (2014) 26 NZTC 21-107 (October judgment).
The judicial review was premised on the argument that, notwithstanding the Supreme Court's determination of their tax challenge, the Commissioner should have recalculated the tax due under a different provision of the Income Tax Act 1994. The plaintiffs argued that the Commissioner has a duty to not seek to recover more tax than is properly payable and that the Commissioner failed to have regard to that duty and therefore made an error of law when she decided to commence/continue with collection proceedings against the plaintiffs. This argument was rejected by Peters J.
The Commissioner sought an award of indemnity costs, relying on High Court Rules, r 14.6(4)(a) of which states the court may order a party to pay indemnity costs if:
- a. the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding
The Commissioner's submission was that the plaintiffs' conduct was within r 14.6(4)(a) because they commenced this proceeding for an ulterior motive (namely to delay the collection process), misconducted themselves and the case was hopeless from inception.
The plaintiffs opposed the award of indemnity costs.
Peters J awarded indemnity costs. She found for the Commissioner on the grounds that:
- the plaintiffs commenced the judicial review for an ulterior purpose, was to delay the Commissioner in recovering the sum due from the plaintiffs; and
- the proceeding was hopeless from the outset.
Consequently, her Honour did not consider the Commissioner's third alternative ground that the plaintiffs' conduct amounted to misconduct, which wasted the time of the Court and of the Commissioner.
Her findings were that the plaintiffs' case was knowingly hopeless from inception and from this she inferred the proceeding was therefore brought for the ulterior purpose of delaying the Commissioner in recovering the sum due from the plaintiffs.
Peters J's basis for the decision was that the Supreme Court judgment Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue  NZSC 115,  2 NZLR 289 ("2008 Supreme Court Judgment") had the effect of fixing Mr Peebles' and Mr Bradbury's liabilities, being an obligation to each to pay the sum assessed, and this effect would have been known to the plaintiffs at the time of the commencement of the judicial review.
Peters J pointed out that this same point had been made as recently as September 2013 by Associate Judge Faire (as he was then) in declining an application to set aside a statutory demand the Commissioner had served. One of the issues that arose on that application was whether a debt was owed to the Commissioner in respect of sums assessed for the 1998 tax year. Associate Judge Faire confirmed that indebtedness by reference to the 2008 Supreme Court judgment (Bristol Forestry Venture Ltd v Commissioner of Inland Revenue  NZHC 2384, (2013) 26 NZTC 21-031) and provisions of the Tax Administration Act 1994 ("TAA").
It was further noted that the plaintiffs would also have been familiar with the TAA at the time they commenced this proceeding, given the extensive litigation between the plaintiffs and/or other participants in the Trinity scheme on the one hand and the Commissioner on the other.
Peters J concluded by finding at :
- The Commissioner has been required to commence the recovery proceedings only because Messrs Peebles and Bradbury have defaulted on their obligation to pay what was confirmed as owing in 2008. I consider it hopeless for a taxpayer in those circumstances to contend that, prior to taking steps to collect the tax assessed, the Commissioner has a duty to consider whether the amount assessed is due.
The Court was satisfied that the plaintiffs have acted vexatiously, frivolously, improperly or unnecessarily in commencing this proceeding and awarded indemnity costs.