Strike-out application dismissed
2014 case note - decision confirmed the statutory process to challenge the correctness of assessments, and the statutory role of the TRA - stay, damages.
The Taxation Review Authority ("TRA") rejected the disputants' application to strike out or stay the Commissioner of Inland Revenue's ("the Commissioner") defence to their challenge.
Impact of decision
The TRA in this decision confirmed the statutory process to challenge the correctness of assessments is as set out in section 138B and Part 8A of the Tax Administration Act 1994 ("TAA") as well as confirming the statutory role of the TRA.
Mr C and his family controlled the disputant companies, which are in the business of producing and publishing DVDs. The disputants are part of a group of separate companies, the others being administration companies.
Each of the companies is registered for goods and services tax ("GST"). The disputants were involved in a dispute with the Commissioner concerning GST claims arising from a number of supplies made to the disputants by the administrative companies in the group. The disputants filed GST returns on a monthly invoice basis, while the administration companies filed on a six-monthly payment basis. The Commissioner considered the disputants were part of a tax avoidance arrangement under section 76 of the Goods and Services Tax Act 1985 ("GST Act") involving mismatched inputs and output tax. She also disputed the value and content of the supplies between the administration companies and the disputants.
The disputants, having filed a Notice of Claim in January 2012 in the TRA challenging the Commissioner's decision, subsequently filed an application seeking the following orders:
- strike out the proceedings; or
- stay the proceedings; and
- award costs/damages, or
- alternatively if the proceedings are not struck out or stayed, that an order for the Notice of Proposed Adjustment to be reissued after proper investigation "where the applicants sit down with the disputant or a Special Conference Facilitation be carried out with a DVD player available Before the matter comes back to the TRA".
Striking out the proceedings
The disputants argued that the Commissioner has disclosed no reasonable grounds or evidence to support any claim of tax avoidance under section 76 of the GST Act and accordingly, an order striking out the challenge proceedings should be made.
In making this argument, the disputants relied on rule 2.50 of the District Court Rules 2009 ("DCR") and submitted that this rule gives the widest discretion for a strike-out application. The disputants argued that although it was the disputants who had brought the claim, the disputant companies were in reality defending themselves against the Commissioner's assessments.
The Commissioner submitted that the strike-out application was misconceived as the effect of granting the application would be to strike out the disputants' own proceedings, which would leave the assessments as they stand with tax to be paid by the disputants.
The TRA referred to section 138B and Part 8A of the TAA, which outline the disputes process to be followed, noted that the process to challenge the correctness of the Commissioner's assessments had been followed by the disputants and that that procedure was set down by statute. Judge Sinclair held that the TRA could not possibly treat the disputants as the defendant and consider the application on that basis. Instead, Judge Sinclair found that the disputants were required to put their case to the TRA for determination at a substantive hearing.
The TRA considered whether the Commissioner's defence to the disputants' challenge could be struck out under rule 2.50.1 of the DCR. In that regard, Sinclair J referred to the case of Attorney-General v Prince and Gardiner  1 NZLR 262 (CA) (endorsed by the Supreme Court in Couch v Attorney-General  NZSC 45,  3 NZLR 725), which sets out the established criteria for strike-outs, and held that this was not a case where the Commissioner's defence was clearly untenable. Again, the TRA considered that whether or not the assessments were correct was a question for the substantive hearing and not for a strike-out application.
Stay of proceedings
Judge Sinclair outlined rule 2.50.3 of the DCR which allows the Court to stay a proceeding if the Notice of Claim does not disclose a reasonable cause of action, the proceeding is frivolous or vexatious, or is an abuse of the process of the court. Judge Sinclair went on to conclude that the grounds in rule 2.50.3 related to the disputants' claim and there was no allegation by the Commissioner that the Notice of Claim does not disclose a reasonable cause of action, that the proceeding is frivolous or vexatious or is an abuse of process. Accordingly, as the proceedings were brought by the disputants and not by the Commissioner, rule 2.50.3 did not apply in this case.
The TRA held that the disputants' claims for costs and damages for wasted time and expenditure, abuse of process, breach of natural justice and breach of contract/estoppel were not available in its jurisdiction.
The TRA stated that it could only award costs in limited circumstances where the Commissioner failed to appear for a hearing or where the objection/challenge was vexatious. The TRA concluded that neither of those circumstances applied in this case.
In terms of the damages claimed, the TRA referred to section 138P of the TAA which sets out its powers on hearing a challenge to an assessment. Judge Sinclair held that the TRA did not have power to award damages and even if it had jurisdiction, the causes of action would have to be fully pleaded and proceeded by way of a substantive hearing with witnesses giving evidence and the evidence being tested under cross-examination, as appropriate.
Reissue of the Notice of Proposed Adjustment
The TRA, in considering the disputants' argument, outlined its statutory role under the TAA and Taxation Review Authorities Act 1994 to hear and determine challenges to tax assessments. It held that its powers did not extend to directing the Commissioner to issue a Notice of Proposed Adjustment or recommence the dispute process. Judge Sinclair found this alternative application of the disputants also to be misconceived.
The TRA dismissed the disputants' application in its entirety.
Tax Administration Act 1994