High Court upholds determinations of Taxation Review Authority in appeal by way of case stated
2015 case note - High Court upholds determinations of TRA in appeal by way of case stated - extension of time, s 99, s 165(2).
The High Court granted the appellant's interlocutory application but went on to find for the Commissioner of Inland Revenue ("the Commissioner") on the 13 questions included in the appeal by way of case stated.
The appellant taxpayers were participants in the "Russell template" tax avoidance scheme.
This appeal follows a series of determinations by the Taxation Review Authority ("TRA") disallowing the appellants' objections to the Commissioner's reassessment of their tax liabilities.
The appellants asked the TRA to state a case for the High Court under s 26 of the Taxation Review Authorities Act 1994.
The TRA posed 13 discrete questions to the High Court.
A preliminary issue, which the Court needed to address, was whether to allow Mr Russell to make submissions and to speak on questions that Mr Judd (the appellants' barrister) had advised he would not be submitting on.
The Court noted that a company may only be represented in Court by a lay person in exceptional circumstances (Re GJ Mannix Ltd  1 NZLR 309, (1984) 2 NZCLC 99,095 (CA)). The Court held firstly it was inappropriate, in a case-stated appeal, to see the questions raised that Mr Judd did not wish to address as abandoned. Secondly, due to Mr Russell's "considerable experience as an advocate" and familiarity with the history, facts and evidence of the decided cases, Mr Russell was allowed a circumscribed right of audience, even if in reality he would be speaking for all appellants, both natural persons and companies.
The 13 questions posed to the High Court by the TRA were as follows.
(1) Should the objections of the Webster group of objectors be allowed because the Commissioner should not have been granted an extension of time to file the cases in the Taxation Review Authority?
No. The Commissioner did not need an extension of time in Case U35 ((2000) 19 NZTC 9,330 (TRA)) and the objections should not therefore have been allowed on that ground.
(2) Were any of the interlocutory rulings made by the TRA wrong and, if so, what were the consequences of those incorrect rulings?
The appellants argued that the conduct of the hearing of the case denied them a complete and fair hearing because the TRA was biased and they were prevented from adducing relevant documentary and oral evidence.
The Court held that the interlocutory rulings are irrelevant unless it can be shown that they would have affected in some way the substantive outcome of the objections.
The Court held that given the history of the Russell litigation there was no conceivable basis upon which further evidence or discovery might be able to demonstrate that the template was not a tax avoidance arrangement.
Further, the Court stated that all process errors advanced by Mr Russell in his submissions had already been comprehensively dealt with and determined against him in other cases.
(3) Should the affidavit of J G Russell sworn 23 July 1999 have been admitted as evidence and taken into account in determining the issues in these proceedings?
No. The Court found there was nothing in Dandelion Investments Ltd v CIR ( 1 NZLR 600, (2003) 21 NZTC 18,010 (CA)) to suggest that the TRA is required to accept whatever material a taxpayer wishes to proffer to it.
(4) Were the requirements of s 25(2) of the ITA76 met in respect of each objector to allow the Commissioner to lift the time bar for each objector?
Yes. The Court found that appellants were unable to show why the opinion that the trading company profits were omitted from the shareholders' returns and that omission entitled the Commissioner to reopen otherwise statute-barred returns was not reasonably held.
(5) Is the effect of the decision of the Privy Council in Peterson v Commissioner of Inland Revenue that there is an onus of proof on the Commissioner in these cases and, if so, what is the extent of the onus and has the Commissioner discharged the onus?
No. The Court noted that the Court of Appeal in Wire Supplies Ltd v Commissioner of Inland Revenue ( 2 NZLR 384, (2005) 22 NZTC 19,357 (HC), at ), had held that Peterson does not have the effect of imposing this onus on the Commissioner.
(6) Have different taxpayers been assessed with the same income contrary to the prohibition in s 99(4) and, if so, how does s 99(4) affect the s 99(3) assessments made against the objectors in this case?
No. Ellis J, agreeing with the TRA, held "that a taxpayer can be assessed under s 99(3) and that another taxpayer can be assessed under s 99(3) with the same income, provided that no objection or challenge proceedings have been filed for the first taxpayer in relation to the earlier assessment. In the event that an objection or challenge proceeding has been commenced prior to the issuing of an amended assessment, the latter assessment of the same income is open to objection or challenge on the grounds that s 99(4) deems the income to be the income of the first taxpayer."
(7) In forming his opinion under s 99(2) in respect of each objector, did the Commissioner meet his statutory obligations to consider all of the relevant facts and particular circumstances in relation to each objector?
The appellants contended that the Commissioner did not follow his own Policy Statement on s 99. The Court cited the finding in Miller that the Commissioner's Policy Statement on s 99 was not binding and did not lay down rules and conditions (Miller v Commissioner of Inland Revenue  UKPC 17,  3 NZLR 316 at ). Nothing Mr Russell might have been able to elicit from witnesses would have changed that the Commissioner and his officers thought carefully about whether s 99 applied.
Thus, as the Commissioner's reassessments have been confirmed to be correct, any defects in the assessment process that might exist have been cured by the TRA decision and (7) do not matter.
(8) Should a portion of the administration fee be treated as a deductible funding charge and so be allowed as a deduction against the income assessed to the objectors?
The Court, citing with approval Lord Hoffman in Miller, held "the Commissioner is not, on reconstruction, required to rewrite history so as to give a tax avoiding objector the benefit of something that never happened and which would, in all likelihood, not have happened had the tax avoidance arrangement not been entered into".
Citing Ben Nevis Forestry Ventures v Commissioner of Inland Revenue in support, the Court affirmed that the onus is on a taxpayer "to prove on the balance of probabilities that the amount of the assessment is excessive by a specific amount" and it is "trite that [the] burden is both strict and critical".
The Court held that there was insufficient evidence of a funding charge.
(9) How and to what extent does s 165(2) of the ITA76 apply to the income assessed to each objector?
The appellants contended that the portion of the consulting fee that is not deductible under s 104 is deductible under s 165(2) in relation to the work done by Mr Russell in determining their taxable positions.
The Commissioner submitted, and the TRA accepted, that there was no jurisdiction to determine this issue because it was never a ground for objection.
Ellis J found that s 165(2) has no application in the present cases, either because it was not a ground for objection or there was no evidence to discharge the taxpayers' onus.
(10) Have conflicting and inconsistent assessments been made in respect of Fuel Haulers objectors and, if so, how should these assessments be reconciled?
Mr Judd submitted that because a Track A case has been stated in relation to the company and technically remains pending in the TRA, the Track B assessments issued to the manager and to Fuel Haulers (1990) Ltd cannot stand.
However, the Court was not satisfied that a case had ever been stated in relation to the Track A assessments and there is no difficulty in confirming the Track B assessments.
Additionally Ellis J stated, given that two of the companies remain struck off the Companies Register and there is no prospect of the Commissioner seeking to enforce the Track A assessments against those two companies, there is no vitiating inconsistency.
(11) Have the Consultant Applications Ltd objectors been mistakenly assessed?
The Court held that there was insufficient evidence to determine this and the burden is on the taxpayer.
(12) Are additional taxes chargeable in respect of any of the objections?
Ellis J noted this was a non-issue and the answer is "only if the Commissioner has nominated a due date".
(13) Should the Authority have considered and determined the objections of those company objectors that were struck off the Companies Register?
No. The Court cited the "ample authority" for the proposition that a company struck off the register cannot bring or continue a legal proceeding.
Tax Administration Act 1994, Taxation Review Authorities Act 1994, Income Tax Act 1976