Court of Appeal allows appeal of the Commissioner’s decision to decline request under s 113 of the Tax Administration Act 1994

Summary

This was an appeal by Charter Holdings Limited (“CHL”) against the High Court’s dismissal of CHL’s application for judicial review of the Commissioner of Inland Revenue’s (“the Commissioner”) decision refusing to amend her assessments under s 113 of the Tax Administration Act 1994 (“TAA”). The Court of Appeal allowed the appeal, ordering that the matter be referred back to the Commissioner for further consideration.

Impact

This case is significant in the context of the scheme of the Revenue acts, particularly the interaction between s 113, s 109 of the TAA, the statutory disputes and challenge process (“SDCP”) (provided for in parts 4A and 8A of the TAA) and the role of judicial review in a taxation context post Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153 (“Tannadyce”).

Primarily, this case indicates that, whether the SDCP could be entered into at the time of a taxpayer making a s 113 request is an important consideration that may persuade the Court that relief should not be granted, but it is not a substantive rule preventing judicial review of a decision declining the request in the first place.

Facts

CHL appealed against the dismissal by the High Court of an application for judicial review of a decision by the Commissioner refusing to amend her assessments of CHL’s tax liability in the 2006 to 2012 tax years under s 113 of the TAA. The subject matter of this decision concerned CHL attempting to secure amended assessments reducing its tax liability for the 2006 to 2012 tax years by bringing into account losses incurred in the 2000 to 2005 tax years.

The High Court considered that application for review on the basis that CHL:

1. had been in a position to invoke the SDCP under Parts 4A and 8A of the TAA in respect of the assessments in question;
2. had failed to do so; and
3. could not, therefore, use the judicial review process to dispute the quantification of its tax liability for the relevant income tax years.

The High Court, in applying s 109 of the TAA and Tannadyce, stated that judicial review of a decision under s 113 ought not to be used as a means to consider the merits of assessments by circumventing the SDCP. As a result of this approach the High Court did not consider the merits of CHL’s application for review, including alleged mistakes of fact in her decision making process.

Decision

Section 109 and Tannadyce

The Court of Appeal was satisfied that the High Court erred when it held that the judicial review of a decision under s 113 must be refused except when the SDCP could never be invoked. The Court of Appeal considered that s 113 is intended to stand outside of and be supplementary to the SDCP and that based its clear exclusion from right of challenge under s 138E (1)(e)(iv) of the TAA. While the decision whether to amend or not under s 113 cannot be subject to the SDCP, an amendment under s 113 can.

The Court of Appeal considered that the Commissioner’s power under s 113 is remedial in nature and its utilisation to ensure correctness of assessments is in accordance to s 6(2) of the TAA, in terms of protecting the integrity of the tax system.

The Court of Appeal was not persuaded that s 109 of the TAA has any impact on s 113, considering that s 109 is to ensure the SDCP is used in the case of disputable decisions. The Court of Appeal discussed Tannadyce, holding that the Supreme Court’s decision does not require any restriction on the general right to apply for judicial review of the exercise of the Commissioner’s powers under s 113, stating that a decision under s 113 is not a disputable decision and therefore s 109 has no direct application.

The Court of Appeal held that it did not matter that CHL’s ultimate objective was for its assessments to be amended so as to utilise losses referable to the 2000 to 2005 years. Furthermore it held that while the ability to access the SDCP will be an important consideration that may persuade the Court that relief should not be granted, it should not be elevated to a substantive rule. This would have the result of ousting the High Court’s jurisdiction to consider applications for review in the absence of a statutory direction to that effect.

The merits of the application for review

The Court held that the Commissioner had erred by finding that:

1. Mr Padfield, sole director of CHL (who completed CHL’s income tax returns, failing to carry forward losses), had demonstrated knowledge of the process for carrying forward losses in his personal tax returns, leading the Commissioner to reject his claim that he had made a genuine error in not carrying forward CHL’s losses;
2. the sale of the assets of CHL had not been a true sale, without any factual foundation for doing so; and
3. trading income should have been recorded in the tax return for the 2005 year, while CHL was in receivership, having sold its business and assets in 2003.

The Court of Appeal considered that the factual errors made were such that they must have caused the Commissioner to doubt the genuineness of Mr Padfield’s claim on behalf of CHL.

The Court of Appeal allowed the appeal of the Commissioner’s decision to decline CHL’s request under s 113 of the TAA, ordering that the matter be referred back to the Commissioner for further consideration.