2014 case note - application for judicial review of the CIR's decision declining an application for financial relief – serious hardship.
This case concerned an application for judicial review of the Commissioner of Inland Revenue's decision declining an application by Mr P for financial relief under section 177 of the Tax Administration Act 1994 ("TAA").
Impact of decision
The Court confirmed that with the introduction of subsection (1B) into section 177 of the TAA, the year-by-year analysis will no longer be open to the Commissioner of Inland Revenue ("the Commissioner"); a global approach is mandated. However, the subsection does not require the Commissioner to depart from the causation approach.
Taxpayers' late responses to the Commissioner's requests for further information must be treated as a new application for financial relief. Accordingly, it is necessary for the Commissioner to obtain updated information from taxpayers as to their financial position as at the date of the deemed application before making a decision whether or not to accept the taxpayer's application for relief under section 177 of the TAA.
The applicant is a self-employed professional who earned well in excess of $200,000 for each of the 2000-2007 tax years, with the exception of 2002, when he earned $190,000. He earned $215,000 in 2008, $182,000 in 2009, $132,000 in 2010, $347,000 in 2011 and $94,000 in 2012. Mr P has experienced significant health difficulties since the late 1980s. Mr P's wife also suffers from significant health issues.
Despite his not insignificant income, Mr P has frequently defaulted on his tax payments and has repeatedly fallen into arrears. He has claimed that his inability to meet his tax obligations is due to his health issues and on a number of occasions he has applied for financial relief under section 177 of the TAA.
Mr P again requested financial relief in July 2011 ("the July 2011 application"). This application was declined on 26 September 2011. Mr P then wrote to the Commissioner disputing the decision. The application was referred to one of the Commissioner's officers and then on 7 November 2011, it was again declined. In November 2011, the parties entered into an instalment arrangement. However, Mr P failed to pay any of the instalments agreed to.
In March 2012, Mr P in effect asked the Commissioner to reconsider his application for financial relief on the grounds of serious hardship ("the March 2012 application"). The Commissioner declined that application and it was recommended that debt recovery action be taken against Mr P. In July 2012, Mr P commenced judicial review proceedings against the Commissioner.
In September 2012, the Commissioner agreed to reconsider both the July 2011 application and the March 2012 application. On 30 May 2013 she requested further information from Mr P. The required information was mostly provided by Mr P on 1 July 2013, with a further tax return being provided on 3 July 2011.
Prior to a decision being made on the July 2011 and March 2012 applications, Mr P made a further application for relief based on the serious hardship provisions.
On 16 August 2013 the Commissioner wrote to Mr P declining his request for hardship.
Wylie J began his analysis of the issue by setting out the relevant statutory provisions of the TAA including section 177, which sets out the circumstances in which a taxpayer may apply for financial relief, and section 177A which defines "serious hardship".
In relation to section 177, his Honour's focus was on subsection (1B) (an amendment to section 177 that came into force in 2012) which requires the Commissioner to assess the taxpayer's financial position as at the date on which the application for financial relief is made.
Counsel for Mr P submitted that the introduction of subsection (1B) into section 177 changed the effect of the section. He argued that the introduction of subsection (1B) changed the previously applied "causation test" to a "prospective test" and that the focus is now on the taxpayer's ability to pay the tax assessed without financial difficulties at the time the application was made. In opposition, the Commissioner submitted that the "causation test" still applied.
Wylie J, in his analysis of subsection (1B), referred to the cases of W v Commissioner of Inland Revenue (2005) 22 NZTC 19,602 ("W") and Larmer v Commissioner of Inland Revenue (2010) 24 NZTC 24,016 (HC);  NZCA 157, (2011) 25 NZTC 20-043 ("Larmer"), which considered section 177 prior to the introduction of section 177 (1B) and which both held that in determining whether a person is in serious hardship, it was necessary to consider the causes of that hardship. In the present case, Wylie J concluded that subsection (1B) was introduced to do away with the year-by-year approach and mandate a global approach. His Honour found that in accordance with subsection (1B) the Commissioner is required to consider the taxpayer's financial position at the date on which the application for financial relief is made. Subsection (1B) does not, however, either expressly or by implication, require the Commissioner to depart from the causation approach discussed in W and in Larmer.
In relation to the Commissioner's decision letter, Wylie J emphasised the absence of any express reference to Mr P's financial position as at the date of the application. Wylie J also considered that the decision letter was not clear as to which application was being considered. His Honour observed that the Commissioner's memorandum, which served as the background information upon which the Commissioner's decision was made, did not include any analysis of Mr P's financial position as at the date of the application. Further, he considered the letter appeared to be based on out-of-date information. Accordingly, his Honour concluded that the Commissioner had not abided with the relevant statutory provisions and had not, in her decision of 16 August 2013, considered Mr P's financial position as at the date on which his application for financial relief was made.
Further, his Honour found that the March 2013 application had been overtaken by a later application. Section 177(5) of the TAA states that if additional information is received out of date, that this information is to be considered an additional request. As Mr P did not respond to the request for further information that the Commissioner made on 30 May 2013 within the timeframe required (within 20 working days), his Honour found that a new application for financial relief was deemed to be made on 3 July 2013. It was on this date that Mr P provided, and the Commissioner received, the requested information.
Wylie J found the provision of this late information to be relevant because it meant that the Commissioner did not possess up to date information as to the applicant's financial position at the date of this deemed date of application. This was important as the Commissioner did not have, and could not know, Mr P's financial position as at the deemed date of the application, being 3 July 2013. The significance of this was that in an earlier statement of financial position as at 1 June 2013, one of Mr and Mrs P's properties was for sale which potentially could have impacted on the plaintiff's financial position and substantially reduced his mortgage outgoings.
His Honour noted that the provisions in section 177(5) are in his view odd and may enable a defaulting taxpayer to potentially abuse the process by providing requested information late and thereby obtaining a fresh application date. However, he did not suggest that to be the position in the present case.
In conclusion, his Honour held that the Commissioner had not properly applied the law as required by sections 177(1B) and (5). Wylie J referred to section 6(1) as requiring the Commissioner to use her best endeavours to protect the integrity of the tax system, recognising the right of taxpayers to have their liability determined according to the law, and the responsibility of those administering the law to do so according to law. His Honour held that that had not occurred in this instance and as a result the Commissioner had failed to take into account a relevant consideration, namely Mr P's financial position as at the deemed date of his application. The Court allowed Mr P's judicial review and set aside the Commissioner's decision.
The Court also directed that the orders made by Venning J prohibiting publication of Mr and Mrs P's names and his identifying particulars were to continue on a permanent basis.
It was Wylie J's preliminary view that costs should lie where they fall. However, if this view was not accepted, then any application for costs by Mr P was to be made within 10 days of the release of the reserved judgment. The Commissioner was to respond and the application would be dealt with on the papers.
Judicature Amendment Act 1972, Tax Administration Act 1994