High Court held that the Commissioner's opinion in section 108(2) of the Tax Administration Act 1994 must be determined by the hearing Authority on a de novo basis

Summary

This is an appeal to the High Court against the Taxation Review Authority's ("TRA") finding that the Commissioner of Inland Revenue ("the Commissioner") was correct to hold the opinion that the appellants' tax returns were fraudulent or wilfully misleading pursuant to s 108(2) of the Tax Administration Act 1994 ("TAA"). The Commissioner cross-appealed the TRA's finding that the appellants had not committed evasion.

The High Court held that the TRA was wrong to restrict her reconsideration of the Commissioner's time bar ruling to whether the Commissioner's opinion was honestly held and reasonably available on the evidence. Williams J concluded that the TRA ought to have reviewed the ruling de novo.

Williams J dismissed the Commissioner's cross-appeal because Williams J considered that the TRA was right to come to the conclusion that the Commissioner had not proved Mr Edwards was dishonest as that conclusion was very much open to her on the evidence.

Impact

This decision confirms the approach taken in Commissioner of Inland Revenue v Legarth [1969] NZLR 137 (CA) ("Legarth"). The TRA stands in the Commissioner's shoes in all respects when considering a challenge in relation to the opinion formed under s 108(2) of the TAA and can come to its own opinion as if it is the Commissioner. 

Facts

In April and May 2014, the Commissioner reassessed the appellants' income tax for the tax years 2004-2008. She found they had made impermissible deductions from declared incomes in those years, which were for premiums paid by way of promissory notes to a "captive insurance company" they planned to establish. 

The Commissioner re-opened the time bar in accordance with s 108(2) of the TAA because the appellants' tax returns were either fraudulent or wilfully misleading.  The Commissioner also imposed on the appellants evasion shortfall penalties in accordance with s 141E of the TAA or, alternatively, gross carelessness shortfall penalties in accordance with s 141C of the TAA. 

The appellants challenged the Commissioner's decision to re-open the time bar, as well as the imposition of the shortfall penalties. On 8 June 2015 the TRA upheld the Commissioner's decision to re-open the time bar and to impose a gross carelessness penalty on the appellants (Case 9/2015 [2015] NZTRA 09, (2015) 27 NZTC 3-008). The TRA considered the Commissioner had not established evasion.  

The appellants appealed to the High Court against the TRA's finding on time bar. The Commissioner cross-appealed the TRA's finding on evasion. 

Decision

The standard for re-opening the time bar in s 108(2) of the TAA

On appeal, Mr Lennard submitted that the TRA was wrong to refuse to review the Commissioner's time bar ruling on a de novo merits basis. Mr Lennard submitted that the leading authority (plus binding on the High Court) for his proposition is Legarth where the Court of Appeal held that the Taxation Review Board ("the Board") was required to review substantively the opinion of the Commissioner even though s 24 of the Land and Income Tax Act 1954 (equivalent to s 108(2) of the TAA) was subjectively worded. 

The Commissioner submitted that the TRA had applied the correct review standard.  The taxpayer must show that the Commissioner's opinion was not honestly held, that she had applied a wrong legal test or that the opinion was simply not reasonably open to her on the evidence. The Commissioner submitted that Legarth no longer controlled the review standard in challenges to time bar decisions in light of changes to the legislation and subsequent Court of Appeal authorities such as Auckland Institute of Studies Ltd v Commissioner of Inland Revenue (2012) 20 NZTC 17,685 (HC) and Wire Supplies Ltd v Commissioner of Inland Revenue [2007] NZCA 244, [2007] 3 NZLR 458.  

Williams J considered that Legarth was clearly right in terms of the construction of s 24(2) and s 18(2), and that the intention of the legislature must have been that whatever decision-making authority vested in the Commissioner also vested in the Board when an objection was lodged. The combined effect of s 108(2) of the TAA and s 16(2) of the Taxation Review Authorities Act 1994 ("the TRAA") is accordingly the same as s 24(2) and s 18(2) in Legarth. 

The Commissioner also relied on the effect of s 138P of the TAA. Williams J considered that s 138P could not be said to impliedly repeal s 16(2) of the TRAA.  The wording of s 138P does not negate the effect of s 16(2), but simply adds a "procedural twist". The TRA could no longer be said to have the direct powers of the Commissioner, but it may direct the Commissioner as if it did have such powers and the Commissioner must comply. 

Williams J held that the TRA was therefore wrong to restrict her reconsideration of the Commissioner's time bar finding to whether the Commissioner's opinion was honestly held and reasonably available on the evidence. Instead the TRA ought to have reviewed the ruling de novo. 

Correct test for "evasion or similar act" in s 141E of the TAA

Williams J considered that the TRA was well aware of the correct test for subjective recklessness, as well as the inferences that the Commissioner invited the TRA to draw.

Mr Edwards and Ms Patterson's view that the deductions were claimable were not directly challenged by the Commissioner in cross-examination, which would have been good practise. However, Williams J was not prepared to find the Commissioner was under an obligation to do so in terms of s 92 of the Evidence Act 2006, but did consider that the failure to test this issue with either witness inevitably made the argument that the TRA's conclusion was irrational more difficult to sustain. 

Relying on Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 (HL) and Faryna v Chorny [1952] 2 DLR 354 (BCCA), the Commissioner argued that the preponderance of the evidence so irresistibly pointed to Mr Edwards' knowledge of the risk that the deductions were unlawful, that the failure to directly attack his honest belief through cross-examination ought not to prevent Williams J from rejecting the TRA's finding. The High Court disagreed.   

Williams J considered that the TRA was right to come to the conclusion that the Commissioner had not proved Mr Edwards was dishonest as that conclusion was very much open to her on the evidence. Without having had the same advantage, Williams J did not feel that he was in any better position to assess credibility than the TRA was. In light of this, Williams J was not prepared to overturn the TRA's findings so the Commissioner's cross-appeal was dismissed.