Appeal against partial strike-out dismissed
2017 case note – Court of Appeal dismissed appeal against partial strike-out – Chatfield - legitimate expectation, relevant considerations.
Chatfield & Co Ltd and Chatfield & Co (collectively Chatfield) applied to judicially review a decision of the Commissioner of Inland Revenue ("the Commissioner") to issue 15 Notices to Furnish Information under s 17 of the Tax Administration Act 1994 ("the TAA") ("the Notices"). In September 2016 the High Court struck out most of Chatfield's claims (Chatfield & Co Limited v Commissioner of Inland Revenue  NZHC 2289, (2016) 27 NZTC 22-072). Chatfield appealed. On 1 May 2017 the Court of Appeal ("the Court") dismissed the appeal.
The decision applies the standard principles governing strike-out. It also provides some useful comments on the exercise of s 17 of the TAA, operational statements and legitimate expectation.
The National Tax Service of the Republic of Korea ("the NTS") asked the Commissioner to obtain and provide certain information relating to a number of Companies ("the Companies"), pursuant to a double taxation agreement ("the DTA") between the Republic of Korea ("Korea") and New Zealand. The Commissioner implemented the NTS request by issuing the Notices to Chatfield, the tax agent for the Companies, under s 17 of the TAA.
In May 2015 Chatfield filed a judicial review proceeding alleging the Commissioner acted unlawfully in deciding to issue the Notices, by:
- breaching a legitimate expectation (based on Operational Statement 13/02 ("OS 13/02")) that she would not issue the Notices to Chatfield without first seeking the requisite information from the Companies themselves ("the first cause of action"); or
- by failing to take into account certain relevant considerations (being a legitimate expectation the Commissioner would follow OS 13/02; the existence of OS 13/02 and its terms; the limited nature of the tax agent/client relationship and the terms of the DTA) ("the second cause of action").
In September 2016 the High Court granted the Commissioner's application to strike out all except one part of Chatfield's claims, leaving only one part of the second cause of action to go to a substantive hearing. Chatfield appealed.
The Court agreed with the High Court that the claims in issue were not reasonably arguable and dismissed the appeal.
First cause of action: legitimate expectation
The Court referred to authority supporting the principle that parties seeking to invoke a legitimate expectation claim must satisfy a number of requirements, the first being an unambiguous commitment or promise by a public authority to follow a certain procedure. The interests of good administration requires the implementation of that unambiguous commitment provided that doing so does not interfere with that authority's statutory duty or powers and in the revenue context the Court has previously emphasised that the scope for invoking legitimate expectation is limited by the scheme and purpose of the income tax legislation (citing Comptroller of Customs v Terminals (New Zealand) Ltd  NZCA 598,  2 NZLR 137; Commissioner of Inland Revenue v New Zealand Wool Board (1999) 19 NZTC 14,476 (CA)).
The Court referred to previous case law where the Court rejected taxpayer claims of a legitimate expectation that they would not be assessed for income tax purposes on certain transactions based upon operational statements issued by the Commissioner relating to the power to strike down transactions for tax avoidance (Miller v Commissioner of Inland Revenue  3 NZLR 316 (PC); and Dandelion Investments Ltd v Commissioner of Inland Revenue  1 NZLR 600 (CA)). The Court held the rationale for that approach is beyond challenge – policy statements prepared for the guidance of taxpayers and the general public cannot be elevated to the character of constraints on the Commissioner's statutory duty as only Parliament has that authority (and the same rationale must apply to the exercise of the Commissioner's statutory powers).
The Court noted the power to demand information is necessarily broad given relevant information is normally within the taxpayer's sole possession and control. Section 17 contains the only limitation on that power – the Commissioner must be satisfied the information is necessary or relevant for any purpose relating to the enforcement of the Income Tax Act or any other statutory function (her satisfaction in that respect was not contested here).
The Court found OS 13/02 is simply a comprehensive and correct explanation of the nature and extent of the Commissioner's statutory power to demand information and the circumstances in which she proposes to exercise that power. Parliament vested the Commissioner with this operational discretion to decide what information she considers necessary or relevant and how it is to be obtained but did not vest the discretion for the particular purpose of limiting or impinging upon her otherwise broad statutory power.
The Court rejected Chatfield's attempt to distinguish between information sought under s 17 which is not required for a domestic purpose and information required to satisfy a foreign state's request. The Court did not agree with the submission that exceptions contained in Article 25(2)(a) and (b) of the DTA limit the Commissioner's s 17 power. The Court noted Article 25 has the force of a statutory provision in New Zealand, obliging the Commissioner to exchange such information as is necessary for carrying out the provisions of the DTA or Korea's domestic laws. While forming part of the legal framework within which the Commissioner exercises her powers and applies operational statements, the Court found nothing to suggest Article 25 exceptions limit the Commissioner's s 17 power by obliging her to seek the information from taxpayers before requiring Chatfield's compliance as tax agent.
The Court held that even if OS 13/02 was capable of constituting a binding representation limiting the circumstances in which the Commissioner would exercise her power, Chatfield's argument failed when applied to the plain words of OS 13/02. The Court rejected Chatfield's argument that the word "may" as used in paragraph 71 of OS 13/02 was synonymous with and must read "will only" seek information from tax agents where it relates to an inquiry for a different purpose than satisfying a request under the DTA.
The Court agreed that in paragraphs  -  of OS 13/02 the Commissioner is referring to a limited category of information relating to tax avoidance or evasion or offences likely to lead to prosecution. The Court was satisfied the word "may" as used here was no more than an expression of how the Commissioner intends to exercise her power in certain circumstances which did not apply in this case. The Court confirmed paragraph  of OS 13/02 is a correct legal recital of the Commissioner's power to seek information from multiple sources including those other than the affected tax payer, such as tax agents, whether before or after seeking information directly from that tax payer.
The Court rejected the argument that the claim should not have been struck out as further evidence regarding the meaning of OS 13/02 may be available at trial, holding that the proper construction of OS 13/02 was one of law (not fact as argued by Chatfield) to be determined according to settled principles of interpretation of the document itself.
The Court was satisfied OS 13/02 is not arguably capable of constituting a legitimate expectation by a taxpayer or its agent that the Commissioner will limit the circumstances in which she will exercise her discretionary power under s 17 to demand information, but recorded that even if wrong on that point, it was not satisfied that OS 13/02 could arguably be construed as imposing such a limitation.
Second cause of action: relevant considerations
The Court endorsed the High Court's answer to the allegation that OS 13/02 amounted to a voluntary representation to the world at large regarding the procedures the Commissioner will follow and considerations she will take into account when exercising her power, finding it followed logically from the primary conclusion on legitimate expectation. In finding OS 13/02 could not be construed as limiting the circumstances in which the Commissioner will exercise her s 17 power on receipt of a request under the DTA, it was therefore irrelevant as to whether the Commissioner did or did not take OS 13/02 into account and its consideration would have made no difference to the decision.
The Court held the Commissioner's knowledge of the role actually played by a tax agent in performing its contractual duties is not relevant to a request of an entirely different nature for documents required for the performance of a statutory obligation, the only relevant consideration being (once the Commissioner is satisfied that documents are necessary or relevant), whether in fact the agent is likely to hold them.
The Court also rejected a further proposition that the Commissioner should have taken into account possible reputational damage to Chatfield in complying with the notices.
The Court noted there was no cross-appeal of the decision not to strike out the final claim (that the Commissioner issued the Notices without taking into account the terms of Article 25 and its three exceptions). Assuming the High Court was correct that the Commissioner was required to take Article 25 into account, the Court noted the only evidence before it was that she did in fact do so. The Court however noted it did not have jurisdiction to intervene further.
Section 17 of the Tax Administration Act 1994; Double Taxation Relief (Republic of Korea) Order 1983; Section BH 1 of the Income Tax Act 2007