District Court declines to set aside debt judgment on basis of alleged unfairness

Summary

The defendant unsuccessfully applied to set aside a judgment of debt obtained by the Commissioner of Inland Revenue (“Commissioner”). The District Court declined to set aside the judgment on the basis that the defendant had no reasonable grounds of defence and could not establish that a miscarriage of justice had occurred.

Facts

The defendant applied to set aside a debt judgment given on 17 June 2015 (and later sealed) in favour of the Commissioner in the sum of $137,303.10.

The Commissioner’s claim was in respect of goods and services tax (“GST”), late payment penalties and interest. The proceedings in respect of the claim were filed on 2 December 2014 and were served on the defendant on 24 January 2015.

No statement of defence was filed by the defendant, and subsequently the Commissioner sought default judgment by way of formal proof pursuant to r 15.9 of the District Court Rules 2014 (“DCR”). The matter was listed for a formal proof hearing on 25 May 2015 and notice was sent to the defendant regarding the date of the hearing.

On 25 May 2015, the defendant appeared in person and asserted that he had not been served with the proceedings and disputed the amount claimed. The hearing was adjourned until 27 June 2015.

On 27 June 2015, the defendant conceded that the proceedings were properly served on him but sought a further adjournment to see whether settlement could be reached between the parties. This was declined and judgment was entered for the Commissioner.

On 15 June 2016, the defendant applied to set aside the judgment asserting that he had a substantial ground of defence that he could now prove.

Decision

The Court declined the defendant’s application to set aside on the grounds that he did not have a reasonable ground of defence.

The Court referred to DCR 15.10 which provides that a judgment by default may be set aside, or varied by the court if it appears that there has, or may have been, a miscarriage of justice. The Court cited Russell v Cox [1983] NZLR 654 and said that in determining the Court’s overriding consideration of the interests of justice, the Court will generally consider: whether the defendant’s failure to file a statement of defence was excusable; whether the defendant had a substantial ground of defence; and whether the plaintiff would suffer irreparable injury if the judgment was set aside.

The defendant’s tax liability arose out of a GST debt owed by a trust of which the defendant was a trustee; the defendant is liable as a trustee for the unpaid GST debt of the trust pursuant to s 57 of the Goods and Services Tax Act 1975 (sic). In 2003, the core amount of GST owed by the defendant was $17,693.65. This amount has remained unpaid since July 2003 and with the addition of penalties and interest, the liability increased over the 12 year period until judgment to a sum of $137,303.10.

Citing s 109 of the Tax Administration Act 1994 (“TAA”) which states that disputable decisions are deemed correct except in challenge proceedings, the Court held that the defendant had no defence to his claim in relation to the core tax liability.

In relation to the interest component of the defendant’s claim, the Court cited ss 120D and 120I of the TAA, which state that a taxpayer is liable to pay interest on unpaid tax in accordance with Part 7 of the TAA (s 120D) and a taxpayer may not object to or challenge the imposition of interest payable under Part 7 (TAA, s 120I).

The defendant accepted that he could not challenge the core tax liability or the interest liability. However the defendant referred to the Commissioner’s obligations under s 6 of the TAA and argued that it was not fair for the Commissioner to seek to recover the amount claimed (particularly in relation to the interest) because IRD “sat on its hands” for 6 years before seeking judgment. The Court noted that the Commissioner did not accept the allegation and asserted the Commissioner had been endeavouring to resolve the defendant’s tax issues during that time.

The Court found that in assessing the defendant’s liability the Commissioner was doing exactly what the law required. The defendant was attempting “by back door means” to judicially review an administrative action in the District Court; judicial review is outside the jurisdiction of the District Court and has very limited application in relation to tax. In any event, the Court considered the argument had no merit as “fairly” in the context of s 6 does not relate to a “taxpayer’s subjective concepts of fair play”. Rather the Commissioner is required to act lawfully and carry out her lawful duties fairly and impartially between taxpayers and “according to law”.

The Court cited TRA No 95/086 (1996) 17 NZTC 7,534 (TRA), where Judge Barber stated that “[t]he Commissioner’s role…is not to act fairly, it is to act lawfully by taking from each taxpayer no more and no less than is that person’s lawful obligation to pay.”