Court confirms two step approach for hardship applications
2016 case note – High Court confirms two step approach for hardship applications - Judicial review, hardship relief, non-compliance.
The Commissioner of Inland Revenue (“the Commissioner”) must now undertake a two-step approach when considering an application for financial relief on the grounds of serious hardship. Inland Revenue (“IR”) must determine, first, whether the payment of tax would result in the taxpayer suffering hardship and then, second, go on to make a decision on whether to write off the tax owed. It is only at the second step that the Commissioner may have regard to the taxpayer’s compliance history.
The Judgment’s impact:
- An IR officer is allowed to make a recommendation to the decision maker as long as the decision maker makes the actual decision whether to grant serious hardship relief.
- The Commissioner must outline to a taxpayer seeking relief the areas of concern and give the taxpayer a reasonable opportunity to provide explanations for those issues.
- The Court has confirmed the two step approach when considering applications for financial relief on the grounds of serious hardship: one, whether the payment of tax will result in the taxpayer suffering serious hardship: two, if serious hardship is established whether to write off the outstanding tax. The taxpayer’s history of compliance or non-compliance can only be taken into account in the second step.
Mr and Mrs Singh (“the Applicants”) were substantially indebted to the Commissioner for outstanding income tax and goods and services tax (“GST”) and claimed they had no means of meeting judgments the Commissioner has obtained against them in respect of their tax liabilities.
On several occasions between January 2014 and 2015, they unsuccessfully sought financial relief from paying their tax debts on the grounds of serious hardship. This led them to file judicial review proceedings and, before the substantive hearing, the Commissioner agreed to reconsider her decision.
Richard Philp, delegation holder, reconsidered the decision and declined the application. He advised them of this by letter dated 13 May 2016 and the Applicants continued with their judicial review.
The Applicants amended grounds of review were that the reconsideration process was unfair, in breach of the principles of natural justice, failed to take into account relevant considerations and took into account irrelevant considerations.
Before considering each issue, the Court turned to the relevant legislative provisions for granting hardship. The Court confirmed that s 6A (3) of the Tax Administration Act 1994 (“TAA”) prescribes the Commissioner’s general duty to collect taxes, noting the importance of compliance and voluntary compliance by taxpayers. The Court followed by detailing ss 176, 177, 177A and 177C of the TAA in how hardship provisions are to be applied.
Section 176 of the TAA deals with the Commissioner’s obligations to recover outstanding tax from individual taxpayers. A taxpayer may request financial relief against liability by making a request under s 177. Section 177A prescribes the manner in which the Commissioner is required to decide whether a taxpayer’s request for financial relief on the grounds of serious hardship should be granted. If the Commissioner concludes that relief should be granted, she may write off all or part of the tax owed by the taxpayer; s 177C.
The Court noted that s 177C (1BA) of the TAA took effect from 1 July 2014 and changed the law in relation to financial relief for serious hardship in one significant aspect. Under the previous legislation the Commissioner was obliged to grant relief where payment of the outstanding tax would result in serious hardship but under the new wording of s 177C (1BA), the Commissioner may use serious hardship as a basis upon which to grant relief but is not required to do so. The Court confirmed the decision in P v Commissioner of Inland Revenue  NZHC 2293 that the Commissioner must now undertake a two-step approach when considering an application for financial relief on the grounds of serious hardship. The Commissioner must determine, first, whether the payment of tax would result in the taxpayer suffering hardship and then, second, go on to make a decision on whether to write off the tax owed. It is only at the second step that the Commissioner may have regard to the taxpayer’s compliance history.
Did the Commissioner conduct the reconsideration process in a manner that breached the principles of natural justice?
Appointment of Mr Philp as delegated decision maker
Mr Weaver, counsel for the Applicants, argued that the Commissioner should not have appointed Mr Philp to make the ultimate decision as he understood that Ms Miranda Law would be making the decision and would have objected to Mr Philp. The submission was effectively an allegation of bias and the Court found there was no basis for any suggestion that Mr Philp was disqualified on the grounds of actual or apparent bias.
Inconsistency in approach
The Applicants’ submission was that the Commissioner was wrong to depart from earlier decisions in which delegated IR officials had accepted that the Applicants’ would suffer serious hardship if they were required to pay the outstanding tax. This submission, however, overlooked the fact that Mr Philp based his reconsideration on information supplied by the Applicants for the reconsideration and Mr Philp was entitled to reach a different conclusion.
No fresh reconsideration
The Applicants argued that Mr Philp did not make a fresh decision, and merely “rubber stamped” or endorsed the earlier decisions to deny relief. The Court dismissed this submission noting that Ms Law, Recovery and Enforcement Specialist, carried out a thorough analysis of the material provided by the Applicants and Mr Philp made his own decision based on that material.
Failure to provide Mr and Mrs Singh a proper opportunity to be heard
The Applicants argued that they should have had a greater opportunity to explain issues that were of concern. The Court accepted that the Commissioner was under an obligation to deal fairly with the Applicants which meant the Commissioner identifying areas of concern and giving the Applicants a reasonable opportunity to provide explanations for those issues.
The Court concluded that the Commissioner met her obligations when she wrote to Mr Weaver outlining issues and areas of concern regarding the hardship application. The principal issue was the absence of evidence relating to expenditure on living expenses and this issue was clearly put to the Applicants. They, via their accountant, provided an explanation that their son was providing the necessary funds to meet their living expenses and presented bank statements to support this. The bank statements did not support the explanation given and the Commissioner was not required to go back and point out that the explanation was not supported by the material provided.
Failure to give reasons
There was no basis for an allegation that Mr Philp failed to give reasons for the reconsideration decision. His letter to the Applicants dated 13 May 2016 comprised two pages setting out the reasons why he had declined the application.
Fettering discretion/abdication of authority
There was no basis for the submission that Mr Philp effectively abdicated his authority. Although Ms Law and others made recommendations to Mr Philp, the evidence clearly established that it was Mr Philp who made the actual decision regarding the application.
Did the Commissioner fail to take into account relevant information?
Failure to take into account inability to make mortgage payments
Mr Weaver submitted that the Commissioner failed to take into account the fact that the Applicants were unable to make mortgage repayments.
The Court did not consider that this submission was correct. Ms Law clearly took the issue into account in her recommendation to Mr Philp. Although Mr Philp did not refer to the issue expressly in his letter of 16 May, he obviously read Ms Law’s memorandum and must have taken the issue into account.
Justice Lang noted that the real issue was whether the Applicants had the ability to access sources of income that they had not disclosed as those sources of income may have been able to meet the mortgage arrears as well as their living expenses.
Alleged suppression of income
Mr Weaver submitted that both Ms Law and Mr Philp referred to the possibility that the Applicants had undisclosed income and that neither were qualified to make that decision. The Court disagreed.
The bank statements provided contained no expenditure that could be attributed to household living expenses and did not support the assertion their son was supporting them. The absence of evidence leads to the logical conclusion they were meeting those expenses by some means that is yet unknown.
Did the Commissioner take into account irrelevant information?
Mr Weaver submitted that Mr Philp took into account the Applicants’ history of non-compliance when determining the issue of serious hardship.
This allegation could not be sustained as the issue of the Applicants’ history of non-compliance was in the section of Mr Philp’s letter in which he explains why he would not exercise the discretion in favour of the Applicants even if they had established serious hardship. The Commissioner is entitled to take into account the prior history when exercising the discretion whether to grant relief (the second step).
Sections 6, 6A, 176, 177, 177A, 177C Tax Administration Act 1994