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21 Jun 2016
Appeal Status
Not appealed

Michael Hill’s inconsistency challenge struck out on appeal

2016 case note - Michael Hill's inconsistency challenge struck out on appeal - duty of consistency, s 6, s 6A, correctness, fairness, impartiality.

Commissioner of Inland Revenue v Michael Hill Finance (NZ) Limited [2016] NZCA 276

Income Tax Act 2007, Tax Administration Act 1994


The Commissioner of Inland Revenue ("the Commissioner") successfully appealed the High Court's decision to refuse to strike out Michael Hill's inconsistency cause of action. The Court of Appeal was not satisfied that there existed a standalone duty of consistency under ss 6 and 6A of the Tax Administration Act 1994 ("TAA") or common law, and found that even if there was such a duty, it would be owed to the public at large not an individual taxpayer. The assessment of any transaction should reflect the correct tax position and complaints about process deficiencies should not relieve the taxpayer of that liability.


Michael Hill's Inconsistency Challenge has been struck out, however their cause of action challenging the correctness of the assessments continues.

The judgment is authority for the proposition that ss 6 and 6A of the TAA do not create a separate duty of consistency, which can be brought as a separate cause of action against the Commissioner distinct from an orthodox correctness challenge.


In December 2008, the Michael Hill group of companies entered into a transaction in which it transferred its intellectual property and franchising operations within the group from New Zealand to Australia. An Australian Limited Partnership ("ALP") was used as part of the finance structure. Michael Hill owns 99.5% of the ALP. The ALP was used to create asymmetric tax treatment in the relevant years. The effect of this was that in both New Zealand and Australia there were deductions, and that the Australian deduction was not assessable income in New Zealand.

Michael Hill applied for a binding ruling from the Commissioner on the application of the Income Tax Act 2007 ("ITA"), including s BG 1, to the transaction. A binding ruling was provided in relation to the "black letter" tax treatment of the structure, but the Commissioner formed the view that s BG 1 applied; that is, that the transfer of the intellectual property and/or financing of its acquisition was a tax avoidance arrangement.

Michael Hill amended its application for a binding ruling to exclude consideration of s BG 1, and then self-assessed the tax liability on the basis that s BG 1 did apply. Subsequently, Michael Hill proposed an adjustment to its self-assessment. The Commissioner rejected Michael Hill's proposed adjustment by issuing a notice of response ("NOR").

Michael Hill has filed a challenge in the High Court to the Commissioner's consequential assessments of its liability to tax (The judgment refers to "consequential assessments" by the Commissioner. The Commissioner has not, however, made any assessments; Michael Hill self-assessed and then issued a notice of proposed adjustment ("NOPA") to its self-assessment. The Commissioner issued a NOR and Michael Hill have challenged the decision to issue a NOR.). Michael Hill relies on the orthodox ground that the Commissioner's "ruling" is incorrect in law.

Michael Hill separately challenges the Commissioner's "ruling" on the ground of its inconsistency with her earlier assessment that materially similar transactions entered into by another taxpayer are not liable to tax. Michael Hill claims the Commissioner has breached a duty owed to it of consistency of taxation treatment of comparable transactions ("the Inconsistency Challenge"). The Commissioner applied to strike this cause of action out.


Legislative Scheme

The Court was not satisfied that ss 6 and 6A of the TAA arguably recognise a standalone duty of consistency owed by the Commissioner to a taxpayer when exercising her statutory powers in assessing its liability to tax by reference to her assessment of materially similar transactions undertaken by another taxpayer.

The Court found that it was telling that s 6(2) omits any reference to a fourth standalone duty of consistency and could not see any warrant for reading that requirement separately into the meaning of the "integrity of the tax system".

Michael Hill's submission that the pleaded duty must be imported into the statutory framework to ensure the Commissioner's conduct is subject to public scrutiny was also rejected. The Court held other channels are expressly designed to promote the Commissioner's accountability.

Moreover, the Commissioner's responsibility under s 6(1) to protect the integrity of the tax system is not of an absolute nature. The Commissioner is required instead to use her "best endeavours". The aspirational nature of this standard reflects Parliament's recognition of the limitations imposed upon the Commissioner by various factors, and those limitations may well result in a degree of inconsistency among taxpayers, viewed at any point in time.

Michael Hill sought support from the Supreme Court's decision in Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153 ("Tannadyce") for their argument that other provisions in the TAA suggest a consistency duty. Toogood J found that support for the existence of a consistency duty was available from the minority's judgment.

The Court of Appeal held that, contrary to Toogood J's conclusion, the majority expressly rejected the minority's statement in question, and that the minority's statement was in a limited context.

Michael Hill also submitted that the majority's acceptance in Tannadyce, that process or invalidity claims can be brought within the pt 8A statutory challenge procedure "on any ground whatsoever", arguably supports the existence of an underlying duty of consistency.

The Court of Appeal disagreed. Instead, the Court of Appeal considered that the majority's discussion in Tannadyce of "any ground whatsoever" for disputing an assessment was on the obvious premise that the ground crossed the threshold of arguability – it did not open the door to any ground, regardless of its tenability.

The Court noted that of more importance is the recognition in Tannadyce that challenges should be separated only in rare cases. That is because a challenge is in law an appeal by way of hearing de novo of the facts and law. The hearing authority is free to form its own views on the merits, which will of itself normally cure any process defects by the Commissioner. The Supreme Court said nothing to suggest that a failure to act consistently can amount to such a defect.

Administrative law principles

The Court then addressed Michael Hill's argument that the Commissioner as a decision-maker is subject to a standalone duty imposed by administrative law principles to act with both procedural and substantive consistency.

Michael Hill submitted that the Commissioner's duty is to treat similarly placed taxpayers alike relying on Reckitt and Coleman (New Zealand) Ltd v Taxation Board of Review [1966] 2 NZLR 1032 (CA) ("Reckitt and Coleman").

In the Court's judgment, Turner J in Reckitt and Coleman in a different factual and legal setting does not provide a tenable foundation for asserting the existence of a common law duty owed by the Commissioner to Michael Hill to assess its liability to tax on the transaction consistently with her assessment of a materially-similar transaction entered into by another taxpayer.

Alternatively, Michael Hill sought support for its case from three English authorities (HTV Ltd v Price Commission [1976] ICR 170 (CA) ("HTV"), R v Inland Revenue Commissioners, ex part Preston [1985] 1 AC 835 (HL), and R v Inland Revenue Commissioners, ex part MFK Underwriting Agents Ltd [1990] 1 WLR 1545 (QB)). The Court found that there were vastly different issues raised by all three English decisions and Michael Hill's claim. In each English case the complaint was that the levying authority had gone back on its word upon which the taxpayer had earlier relied to its detriment.

The Court went on to add three further points. First, New Zealand courts have refused to countenance a public law doctrine of estoppel against the operation of a statute imposing a duty of a positive kind. Second, the ratios of the judgments of Scarman and Goff LJJ in HTV were firmly founded on an orthodox error of law.

Third, an imposition of a duty of consistency of treatment as between taxpayers would raise problems of policy and principle.


The Court rejected Michael Hill's submission of irrationality for two reasons. First, the Commissioner's conscious knowledge of her earlier assessment of the other taxpayer's materially similar transactions does not disqualify her from assessing Michael Hill's transaction differently. Second, a duty of consistency of taxation treatment or interpretation, if it exists, is owed to the public at large. An individual taxpayer does not acquire a correlative right of action for breach.


The Court held the extent to which Michael Hill's consistency claim runs contrary to the TAA is exposed by the remedies sought. Liability is imposed by statute, not the Commissioner and there is no discretion to be exercised when assessing the amount of liability. In performing her duty to collect revenue, the Commissioner must determine a taxpayer's liability fairly, impartially, and according to the law. The hearing authority must be bound to the same statutory obligation on appeal [challenge].

There was no suggestion that a hearing authority is exercising a supervisory power on a Part 8A appeal [challenge], where the inquiry is primarily into correctness, lawfulness or validity. A hearing authority may invoke its power to cancel an assessment in extreme examples where the assessment was not an assessment at all or the Commissioner acted outside of or abused her powers in making the assessment. Michael Hill does not assert that the Commissioner's assessment fell into that rare or extreme category.


Michael Hill raised a complex reconstruction argument, namely that the Commissioner's opposition to the existence of a duty on the ground that she has no discretion when assessing a transaction to tax could not apply where the Commissioner exercises a statutory power importing a degree of discretion. The Court found this argument did not advance their claim. Michael Hill's new argument was no more than a variation on its existing theme. The defining inconsistency for Michael Hill's purposes is the Commissioner's failure to reinstate Michael Hill's tax advantages to the same extent as those enjoyed by the other taxpayer. But this presupposes an underlying duty of substantive consistency which the Court had rejected.