Validity of Commissioner's assessments
2015 case note - preliminary hearing dealing with the disputant's challenge as to the validity of the CIR's assessments – partnership, s 138P and validity.
This is a preliminary hearing dealing with the disputant's challenge as to the validity of the Commissioner of Inland Revenue's ("the Commissioner") assessments.
This case will be a useful precedent, in particular as it relates to the powers of a hearing authority under s 138P(1)(a) of the Tax Administration Act 1994 ("TAA") and the Commissioner's power/obligation to amend under s 113 of the TAA.
Following an investigation, the Commissioner took the view that there was a three-person partnership comprising the disputant, AB and XZ that was engaged in the business of breeding, agistment and selling of horses.
During the 2007-2011 income tax years, amounts totalling over $5 million were transferred from overseas to the alleged partnership by or on behalf of the disputant. The Commissioner formed the view the transfers were income of the alleged partnership's activities and default assessed the disputant for a one-third share of the partnership's income.
The disputant filed returns and issued a Notice of Proposed Adjustment ("NOPA") contending the overseas transfers were derived from non-taxable activities (namely gambling) undertaken by him personally.
The dispute proceeded to the Disputes Review Unit ("DRU") with the Commissioner adding the further ground that the business of the alleged partnership included the gambling activities of the disputant and XZ.
The DRU concluded that the only partnership was that between the disputant and AB in relation to the horse related activities, and that the gambling was a business activity carried on by the disputant on his own behalf.
However, the DRU found that the disputant had not satisfied the onus of proving that the default assessments were wrong and by how much they were wrong. In particular, the disputant had not shown that his gambling was not a business activity, nor had he shown that the amounts default assessed did not reflect the net income from his combined income-earning activities.
The Commissioner issued a challenge notice, and the disputant challenged the assessments on grounds which included the validity of the assessments in light of the DRU's decision.
The Taxation Review Authority ("the Authority") ordered that the validity question be dealt with by way of preliminary hearing.
Adjudication report - amended assessment envisaged?
The disputant argued that the DRU report suggested the Commissioner should have amended the default assessments on the basis they were wrong both as to liability and quantum. Furthermore, as tax returns had been filed, new default assessments could not be issued, and therefore the Commissioner is required to recast her view of the disputant's liability in a NOPA in anticipation of then seeking an amendment to the assessment pursuant to s 113 of the TAA.
The Authority did not agree that the DRU envisaged or intended the Commissioner to issue amended assessments - there was no statement or direction of that nature. The Authority also noted that while a matter of good practice, the Commissioner is not bound as a matter of law to the determination or reasoning of the DRU (Ch'elle Properties (NZ) Limited v Commissioner of Inland Revenue  3 NZLR 274; (2004) 21 NZTC 18,618 (HC), at  to ).
Importantly, there was no obligation on the Commissioner to amend the assessments under s 113 of the TAA. Even when she has formed the view that the assessment is incorrect, she will not exercise the power unless or until she can be satisfied that the amendment will ensure correctness (as best this can be achieved). In this case, the disputant provided only limited information during the dispute process, and the Commissioner is not in a better position to make a correct assessment. Prima facie, the assessments remain correct until the disputant can show they are incorrect and, if so, by how much.
Validity of assessments - fresh liability?
The disputant argued that the Commissioner was seeking in this challenge proceeding to increase the quantum of the disputant's liability by the Authority imposing a fresh liability (using the hearing authority's powers under s 138P of TAA), and that this was inappropriate without having engaged in the disputes process as required by ss 89C and 89N(2) of the TAA.
The Authority agreed with the Commissioner that she was simply proceeding on the existing default assessment. The Authority noted that the disputant's liability to pay tax and the quantum (if any) will be matters for determination by the Authority on the eventual hearing of the challenge.
The Authority agreed that a hearing authority has the power under s 138P(1)(a) of the TAA on considering a challenge to confirm or cancel or vary an assessment, or reduce the amount of an assessment, or increase the amount of an assessment, to the extent to which the Commissioner was able to make an assessment of an increased amount at the time the Commissioner made the assessment to which the challenge relates. These powers are reinforced by those contained in s 16(2) of the Taxation Review Authorities Act 1994.
The disputant contended that s 138P powers are to be applied in the context of, and for the purposes of, addressing the correctness of an assessment that is properly advanced by the Commissioner and is under challenge. It does not envisage the assessment process being handed over to the Authority so that a liability greater than that originally assessed by the Commissioner can be argued for on grounds not maintained by the Commissioner.
The Authority disagreed, stating the Commissioner is not somehow abrogating or abandoning the assessment process in favour of the Authority. The Authority's powers are wide under s 138P and the focus of the hearing will be on determining the correct position in relation to the disputant's tax liability on the evidence before it.
The Authority also rejected the disputant's contention that an inference can be drawn from the Supreme Court's judgment in Tannadyce Investments Limited v Commissioner of Inland Revenue (2011) 25 NZTC 20,103 (SC) that challenge proceedings may not always be the most appropriate forum for resolution of a dispute where there is an issue as to procedural fairness. The Authority was of the view that, had there been any issue of unfairness or invalidity (which was not accepted), the de novo hearing before the Authority would cure that defect. Accordingly, it is not necessary or appropriate for the matter to proceed again through the Part 4A disputes process.
The Authority did not accept there was any prejudice to the disputant if the challenge remains before the Authority. The issues in dispute were live during the disputes process and are well known to the disputant. The disputant has the opportunity in discovery to ensure that all relevant documents are before the Authority.
The Authority noted that the disputant may make an application under s 138G(2) of the TAA if there are any additional issues or propositions of law which have not been sufficiently referred to by the parties in their respective Statements of Position.
The Authority did not consider it had the power under reg 12 of the Taxation Review Authorities Regulation 1998, or r 7.37 of the District Court Rules 2014, to direct the Commissioner to withdraw the default assessment and that the proceedings be abandoned. Nor could the Authority direct the matter back to the disputes process. It did not follow that if the matter was referred back, the Commissioner would necessarily issue a NOPA if she was not satisfied that there was sufficient information to propose an amendment under s 113 of the TAA.
The Authority did not accept the disputant's alternative submission that it ought to decline jurisdiction on the basis the assessments were no longer a valid expression of the Commissioner's opinion as to the disputant's liability to tax because the assessments were incorrect. In the Authority's view, the assessments continue to be a genuine attempt by the Commissioner to arrive at the amount of the disputant's taxable income on the information available.
Tax Administration Act 1994, Taxation Review Authorities Act 1994