Hoeberechts v Commissioner of Inland Revenue [2022] NZHC 2200 (31 August 2022)

Last Updated: 24 July 2023

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV 2021-419-288 [2022] NZHC 2200

UNDER	The Income Tax Act 2007, the Tax Administration Act 1994 and clause 20.9 of the High Court Rules 2016
IN THE MATTER OF	An appeal against the decision of the Taxation Review Authority
BETWEEN	VERONICA ANNE HOEBERECHTS Appellant
AND	THE COMMISSIONER OF INLAND REVENUE Respondent

Hearing:	21 June 2022
Appearances:	The appellant in person K Naik-Leong and T Carr for the respondent
Judgment:	31 August 2022

JUDGMENT OF CAMPBELL J

This judgment was delivered by me on 31 August 2022 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

HOEBERECHTS v THE COMMISSIONER OF INLAND REVENUE [2022] NZHC 2200 [31 August 2022]

[1] The Taxation Review Authority (the Authority) dismissed a challenge by the appellant, Ms Hoeberechts, to an income tax assessment by the respondent, the Commissioner of Inland Revenue (the Commissioner).¹ Ms Hoeberechts filed an appeal against the Authority’s decision. Her appeal was filed late. She seeks leave to appeal out of time.

[2] The Commissioner opposes the grant of leave. She says the reasons given by Ms Hoeberechts do not excuse the delay in filing the appeal. Even if there is an excuse, she says leave to appeal should be declined because the proposed appeal cannot possibly succeed.

[3] The primary issue is whether I should exercise the Court’s discretion to extend the time for Ms Hoeberechts to file her appeal. If I do extend time, I then have to deal with two subsidiary applications by Ms Hoeberechts. First, Ms Hoeberechts asks the Court to dispense with the requirement that she pay security for costs. Secondly, she asks the Court to appoint an amicus curiae.

Background facts

[4] Ms Hoeberechts received a lump sum payment of $188,386.95 from the Accident Compensation Corporation (ACC) in November 2017. The payment was in respect of an injury that Ms Hoeberechts suffered in 2014. The payment resulted from a decision of the District Court in 2017, overturning ACC’s view of Ms Hoeberechts’ entitlement. The payment was therefore backdated compensation, being in respect of shortfalls in compensation ACC should have paid to Ms Hoeberechts over the period April 2014 to September 2017.

[5] ACC allocated the backdated payment in the following way:

(a) ACC paid $38,386.65 to the Ministry of Social Development in respect of taxable benefit payments that Ms Hoeberechts had received from that Ministry from April 2014 to September 2017.

¹ Case 2/2021 [2021] NZTRA 3, (2021) 30 NZTC 6-001.

(b) ACC treated the balance of the payment (roughly $150,000) as a PAYE payment, paying the tax due to Inland Revenue and the remainder to Ms Hoeberechts.

[6] Ms Hoeberechts’ proposed appeal is in respect of the tax treatment of the

$150,000 payment. The Commissioner assessed the $150,000 as taxable on a cash basis for the tax year ended 31 March 2018 — the tax year in which Ms Hoeberechts received the payment. This meant that Ms Hoeberechts had a very high taxable income in the year ended 31 March 2018, and much of that income was taxed at the highest marginal tax rate.

[7] Ms Hoeberechts challenged that assessment. Before the Authority, her primary argument was that, rather than taxing the $150,000 payment in the year of receipt, it should have been taxed on an accrual basis — that is, spread across the tax years ending 31 March 2015 to 2018. On that position, none of her income would have attracted the highest marginal tax rate.

[8] If she were wrong on her primary argument, Ms Hoeberechts argued that the Commissioner had a discretion to apply the lower tax rates that would have applied had the backdated payment been allocated to the tax years over which her entitlement to ACC compensation had accrued. Ms Hoeberechts also argued before the Authority that conduct by the Commissioner was reprehensible.

The Authority’s decision

[9] Ms Hoeberechts represented herself before the Authority. Her challenge was heard on 28 September 2021.

[10] In a decision dated 1 October 2021, the Authority held that taxing backdated weekly compensation payments in the year of receipt was long established and a deliberate policy setting in the Income Tax Act 2007, and that the Commissioner had no general discretionary power to exempt taxpayers from tax laws.² The Authority also rejected Ms Hoeberechts’ criticism of the Commissioner and her officials.³ The

² Case 2/2021 [2021] NZTRA 3, (2021) 30 NZTC 6-001 at [28]–[31].

³ At [32]–[36].

Authority therefore rejected Ms Hoeberechts’ challenge to the Commissioner’s assessment.

Ms Hoeberechts is late in filing an appeal

[11] On the day of the Authority’s decision, the case manager emailed the decision to the parties. The email advised that any appeal must be brought within 20 working days,⁴ with the procedure to be followed set out in Part 20 of the High Court Rules 2016.

[12] The final day for Ms Hoeberechts to file her appeal was therefore 1 November 2021. She did not file an appeal by that date. She says her delay was caused by difficulties arising from COVID-19 Alert Level restrictions that were then in place.

[13] At 5.40 pm on 1 November 2021, Ms Hoeberechts informed the Commissioner by email that she intended to appeal the Authority’s decision. Counsel for the Commissioner responded to Ms Hoeberechts the next day, telling her that she would have to apply for special leave to appeal out of time.

[14] Ms Hoeberechts’ notice of appeal and a letter seeking special leave to appeal out of time were accepted by the High Court for filing on 10 November 2021.⁵ On 11 November 2011, Ms Hoeberechts provided the Commissioner with a copy of her notice of appeal (but not of her letter seeking leave). Ms Hoeberechts served a complete set of her documents on the Commissioner on 25 November 2021. Ms Hoeberechts says COVID-19 restrictions caused a delay in her filing and serving these documents.

Principles governing applications for special leave to extend time to appeal

[15] Rule 20.4(3) of the High Court Rules provides that, by special leave, the Court “may extend the time prescribed for appealing”. The “may” means the Court has a discretion whether to extend time.

⁴ High Court Rules 2016, r 20.4(2)(b).

5. These documents were first filed by Ms Hoeberechts on 8 November 2021, but the documents were not accepted for filing at that time because Ms Hoeberechts had not paid the filing fee.

[16] The principles governing the exercise of a discretion to grant or deny an extension of time to appeal were authoritatively summarised by the Supreme Court in Almond v Read.⁶ The ultimate question is what the interests of justice require in the particular circumstances of the case. Relevant factors include the length of the delay, the reasons for the delay, the conduct of the parties (particularly of the applicant for leave), any prejudice to the respondent, the significance of the issues raised by the proposed appeal (both to the parties and more generally) and the merits of the proposed appeal.⁷

[17] The Supreme Court said that there were qualifications to the principle that the merits of the proposed appeal may be relevant to the exercise of the discretion. Consideration of the merits in the context of an application to extend time must necessarily be “relatively superficial”. Accordingly, a refusal of an extension of time based substantially on the lack of merit of a proposed appeal should be made only where the appeal is “clearly hopeless”. The Supreme Court said that one example of a clearly hopeless appeal would be where, on facts to which there is no challenge, the appeal “could not possibly succeed”.⁸

Should I extend the time for Ms Hoeberechts to file her appeal?

[18] Ms Hoeberechts’ delay in filing her appeal and her application for an extension of time was relatively short. I am satisfied that the delay was attributable in part to difficulties that Ms Hoeberechts experienced as a result of restrictions that were then in place to control COVID-19. Ms Hoeberechts told the Commissioner, very shortly after the time for filing her appeal had passed, that she intended to appeal.

[19] For the Commissioner, Ms Naik-Leong submitted that the Commissioner would suffer prejudice if time to appeal were extended, because the Commissioner would have to apply resources in order to defend settled and longstanding law. I regard such prejudice as irrelevant to whether time should be extended. The prejudice to which Ms Naik-Leong referred is prejudice from the appeal, rather than prejudice

⁶ Almond v Read [2017] NZSC 80, [2017] 1 NZLR 801.

⁷ At [38]–[39].

⁸ At [39(c)].

from Ms Hoeberechts’ delay in filing the appeal. It is the latter sort of prejudice that is relevant to whether time should be extended.⁹

[20] These factors all favour extending time to appeal. In these circumstances, I consider that the only basis on which I could refuse an extension would be that the proposed appeal is clearly hopeless, in the sense that, on facts to which there is no challenge, the appeal cannot possibly succeed. The Commissioner submitted that it was. Indeed, that was the principal basis upon which the Commissioner opposed leave and is the principal issue on this application. I now turn to consider it.

Is Ms Hoeberechts’ appeal one that cannot possibly succeed?

[21] Ms Hoeberechts wishes to advance two grounds for appealing the Authority’s dismissal of her challenge to the Commissioner’s assessment:

(a) The first ground is that the Authority erred in concluding that the Commissioner correctly taxed the $150,000 backdated weekly compensation payment on a cash basis for the tax year ended 31 March 2018 — the tax year in which Ms Hoeberechts received the payment. I will refer to this as the tax treatment ground.

(b) The second ground is that, even if the Authority were correct in its view of Commissioner’s tax treatment of the backdated payment, the Authority erred in holding that the Commissioner had no discretionary power to alter the usual application of tax laws. I will refer to this as the discretionary ground.

The tax treatment ground

[22] I will explain the Authority’s reasons for upholding the Commissioner’s tax treatment, and then address Ms Hoeberechts’ challenge to those reasons.

[23] In holding that the Commissioner had correctly taxed the backdated payment in the year of receipt, the Authority referred to s BD 3(2) of the Income Tax Act, which

⁹ Cato v Manaia Media Ltd [2021] NZCA 226 at [84].

provides that income is allocated to the tax period in which it is “derived”, unless the Act otherwise provides. The Authority then followed a decision of this Court, Hollis v Commissioner of Inland Revenue.¹⁰ The Authority said that in Hollis Randerson J decided it was settled law that a backdated weekly compensation payment is properly assessed in the year of receipt.¹¹ The Authority said there was no statutory basis for Ms Hoeberechts’ contention that the backdated payment could be allocated to income years prior to the year of receipt. The Authority also explained that, were Ms Hoeberechts correct that she “derived” the income during the years 2014 to 2017, she would have been obliged to include that income in her tax returns for those years and pay tax on the income as it accrued, even though the income was unpaid.

[24] Ms Hoeberechts says that the Authority was wrong. She says that s BD 3 concerns the allocation of income to a specific financial year on either an accrual or a cash basis. She says the appropriate basis of allocation “may be prescribed from case law and the meaning of derivation”. She does not accept that Hollis (or the other cases relied on by the Commissioner) represents settled law. She contends that the backdated payment should be allocated on an accrual basis. If so, she says, her entitlement to the compensation represented by the backdated payment accrued over the period April 2014 to November 2017. In support of her argument, Ms Hoeberechts notes that the Commissioner accepts that a portion of her weekly compensation entitlement — that represented by the benefit payments she received from the Ministry of Social Development — was derived from April 2014 to November 2017. Ms Hoeberechts poses the question: how could she have derived a portion of her weekly entitlement throughout those years but not derived the other portion of her weekly entitlement at the same time?

[25] In assessing this ground of appeal, I start with s BD 3(1) of the Income Tax Act. This subsection provides that “[e]very amount of income must be allocated to an income year under this section”. Section BD 3(2) then sets out the general rule for allocating income to a particular income year:

¹⁰ Hollis v Commissioner of Inland Revenue (2010) 24 NZTC 23,967 (HC) at [28].

¹¹ Case 2/2021 [2021] NZTRA 3, (2021) 30 NZTC 6-001 at [24(f)].

General rule

• (2) An amount of income is allocated to the income year in which the amount is derived, unless a provision in any of Parts C or E to I provides for allocation on another basis.

[26] The qualifying words at the end of s BD 3(2) can be put to one side. There is no suggestion that any provision of Parts C or E to I of the Act provides for allocation on another basis.

[27] Central to the general rule in s BD 3(2) is the concept of income being “derived” at a particular time. Section BD 3(3) then provides guidance for the interpretation of “derive”. It provides:

Interpretation of derive

• (3) When the time of derivation of an amount of income is being determined, regard must be had to case law, which—

(a) requires some people to recognise income on an accrual basis; and

(b) requires other people to recognise income on a cash basis; and

(c) more generally, defines the concept of derivation.

[28] Section BD 3(3) refers to two bases upon which to determine the time at which income is derived. One is the “accrual” basis, under which income is derived in the income year in which the right to receive the income arises (as it is sometimes put, when that income is “earned”). The other is the “cash” basis, under which income is derived in the income year in which it is actually received. Section BD 3(3) refers to case law recognising that some people are required to recognise income on an accrual basis, while other people are required to recognise income on a cash basis.

[29] Case law has drawn a distinction, in this respect, between taxpayers who are in trade and taxpayers who are not. Taxpayers who are in trade are required to recognise income on an accrual basis. Taxpayers who are not in trade are required to recognise income on a cash basis.

[30] This distinction can be seen as early as (if not earlier than) the 1938 decision of the High Court of Australia in Commissioner of Taxes (South Australia) v The

Executor Trustee and Agency Co of South Australia Ltd (Carden’s case).¹² This case concerned the appropriate tax treatment of a doctor in sole practice. The Commissioner of Taxes contended that, for a particular tax period, the doctor should have recognised income on an accrual basis. The High Court disagreed. Dixon J said that the accrual basis was appropriate for a taxpayer who was in trade but was not applicable to every pursuit by which income was earned.¹³ For professional income, the cash basis was appropriate.¹⁴

[31] In Carden’s case the High Court of Australia was not concerned with an ordinary individual earning a wage or salary. Nonetheless, if the Court was of the view that the cash basis was appropriate for a professional doctor, all the more so would the Court have thought that was the appropriate basis for an ordinary individual who was neither a professional nor a trader.

[32] The distinction was drawn also by the House of Lords in Whitworth Park Coal Co Ltd v Inland Revenue Commissioners.¹⁵ Viscount Simonds, delivering the leading speech, said that it was “quite settled” that a trader’s income should be determined on an accrual basis, but that “the position of an ordinary individual who has no trade or profession is quite different”.¹⁶ Ordinary individuals are not assessable and do not pay tax “until they get the money because until then it is not part of their income”.¹⁷

[33] The New Zealand Court of Appeal has, several times, regarded Viscount Simonds’ statement in Whitworth Park as authoritative as to how a trader’s income is to be recognised.¹⁸ In one of those cases, Commissioner of Inland Revenue v The National Bank of New Zealand,¹⁹ Cooke J (as he then was) undertook a thorough review of case law in New Zealand, the Commonwealth and the United States. That

12. Commissioner of Taxes (South Australia) v The Executor Trustee and Agency Co of South Australia Ltd [1938] HCA 69; (1938) 63 CLR 108.

¹³ At 156–157.

¹⁴ At 158.

¹⁵ Whitworth Park Coal Co Ltd v Inland Revenue Commissioners [1961] AC 31 (HL).

¹⁶ At 62.

¹⁷ At 63.

¹⁸ Fincon (Construction) Ltd v Commissioner of Inland Revenue [1970] NZLR 462 (CA) at 470; Commissioner of Inland Revenue v The National Bank of New Zealand (1976) 2 NZTC 61,150 (CA) at 61,153 and 61,165; Commissioner of Inland Revenue v Farmers’ Trading Co Ltd [1982] NZCA 47; (1982) 5 NZTC 61,200 (CA) at 61,209.

¹⁹ Commissioner of Inland Revenue v The National Bank of New Zealand (1976) 2 NZTC 61,150 (CA).

review was primarily directed at the position of a taxpayer who is in trade, but Cooke J prefaced the review by observing that the cases showed that the cash basis was appropriate for “many private individuals who do not pursue a profession or business occupation”.²⁰

[34] The cases to which I have just referred were relied on by Judge Bathgate, sitting as the Authority, in Case F156.²¹ The taxpayer had lent a sum of money in 1976. The borrower defaulted. Eventually, in 1982, interest on the loan was paid in one lump sum to the taxpayer. The taxpayer sought to apportion the interest over the several income tax years to 1982. The Commissioner disallowed that apportionment, including the whole of the interest in the taxpayer’s assessment of income for the 1982 tax year. Judge Bathgate upheld the Commissioner’s assessment. The Judge found, relying on cases such as Whitworth Park, that the cash basis was appropriate for the taxpayer, given that she was not in trade.

[35] The reasoning of Judge Bathgate has, in turn, been followed on many occasions by the Authority when dealing with the tax treatment of backdated payments of ACC entitlements. On each occasion the Authority has found that the taxpayer, as a non- trader, had to recognise income on a cash basis, and that the backdated payment was therefore “derived” in the income tax year in which it was received.²²

[36] I turn now to Hollis, on which the Authority in Ms Hoeberechts’ case relied. In Hollis, Randerson J quoted extensively from the decision under appeal, which in turn had referred to numerous decisions of the Authority holding that backdated ACC payments were derived in the year of receipt (because individuals are taxed on a cash basis) and could not be spread back to the years to which the backdated payments related.²³ Randerson J noted that those earlier decisions revolved around s 38(2) of the Income Tax Act 1976, which provided that income tax was payable on “all income derived by [the taxpayer] during the year for which the tax is payable”. His Honour

²⁰ At 61,160.

²¹ Case F156 (1984) 6 NZTC 60,343.

22. See, for example, the decisions referred to in Hollis v Commissioner of Inland Revenue (2010) 24 NZTC 23,967 (HC) at [26].

²³ Hollis v Commissioner of Inland Revenue (2010) 24 NZTC 23,967 (HC) at [26].

said that provision was not materially different from the provision with which he was dealing, s BB 1 of the Income Tax Act 1994, and that:²⁴

No sustainable basis has been put forward by Ms Hollis to depart from the statute and the long line of authorities referred to by the [Authority] to the effect that the payment of back-dated compensation is to be taxed as a payment received in the year of its receipt.

[37] In summary, a long line of appellate cases holds that taxpayers who are not in trade are appropriately taxed on a cash basis. It is this principle that underlies the decisions of the Authority, and of the High Court in Hollis, that backdated payments of ACC compensation (and other backdated payments) are derived in the year of receipt.

[38] Ms Hoeberechts submitted that, contrary to the view that the Authority took below, this principle was not “settled”. She said that the decisions of the Authority and of the High Court in Hollis dealt with different tax and accident compensation legislation and that they did not constitute an extensive body of case law. She also submitted that settled case law can become unsettled.

[39] I accept that the earlier decisions dealt with different legislation. But there is no material difference between that earlier legislation and the current Income Tax Act. For many decades, income tax legislation has left it to the courts to determine what is the appropriate basis (accrual or cash) for recognising when income is derived. The case law on that question continues to apply, so long as income tax legislation continues to use (as it does) general terms such as “income” and “derive”. This is stated expressly by s BD 3(3), which requires regard to be had to case law that requires some people to recognise income on an accrual basis and others on a cash basis.

[40] Ms Hoeberechts’ submission that there is not an extensive body of case law ignored the appellate authorities to which I have referred. I mean no criticism of her when I say that. Ms Hoeberechts represented herself, and the Authority was, understandably, content to refer only to Hollis and so did not refer to the underlying appellate authorities.

²⁴ At [28].

[41] I therefore conclude that on Ms Hoeberechts’ proposed appeal this Court (and any appellate court) would be bound to apply the principle that taxpayers who are not in trade are appropriately taxed on a cash basis.

[42] Ms Hoeberechts was not in trade at any relevant time. That appears to have been common ground below. Ms Hoeberechts did not suggest, either in the written material filed in support of her proposed appeal or in her principal oral submissions, that she had been in trade and that this was a reason for being taxed on an accrual basis.²⁵ In her oral reply submissions, Ms Hoeberechts submitted for the first time that she had been starting her own business as a self-employed contractor at the time of her injury in 2014 and that therefore a cash basis was inapt. No evidential basis was put forward in support of this contention. In any event, even if Ms Hoeberechts was contracting on that basis at that time, it would not have made her a trader.

[43] Ms Hoeberechts did put forward a different reason for submitting that she should be taxed on an accrual basis. This was that the Commissioner had accepted that Ms Hoeberechts had derived a portion of her weekly compensation entitlement

— that represented by the benefit payments she received from the Ministry of Social Development — from April 2014 to November 2017. This, with respect, does not assist Ms Hoeberechts. The conclusion that Ms Hoeberechts derived that portion of her entitlement from April 2014 to November 2017 is consistent with her being taxed on a cash basis, given that Ms Hoeberechts did actually receive that portion of her entitlement over those years (albeit, at the time, from the Ministry).

[44] For these reasons, I find that, on the unchallenged facts, Ms Hoeberechts cannot possibly succeed on the first ground of her proposed appeal.

The discretionary ground

[45] Ms Hoeberechts submitted that the Commissioner has discretionary powers to alter the usual application of tax law. She said that these powers should be exercised to ensure that ACC claimants receiving backdated payments are taxed at a rate that

²⁵ The only argument that Ms Hoeberechts made in support of being subject to an accrual basis was that a portion of her weekly compensation entitlement had undoubtedly been derived from 2014 to 2017.

provides a more accurate accounting of their income from the date of their incapacitating injuries.

[46] I regard this ground as untenable. The Court of Appeal has repeatedly held that liability under income tax legislation is imposed by statute, not by the Commissioner.²⁶ It follows that the Commissioner has no discretion to exercise when assessing the amount of a taxpayer’s liability²⁷ — and it is the assessment of Ms Hoeberechts’ tax liability that would be in issue in the proposed appeal.²⁸

[47] Accordingly, I conclude that Ms Hoeberechts cannot possibly succeed on the second ground of her proposed appeal.

Conclusion

[48] For the reasons set out above, I find that Ms Hoeberechts’ proposed appeal cannot possibly succeed. I therefore decline to extend time for Ms Hoeberechts to file her appeal. This also means it is unnecessary for me to address the two subsidiary questions as to security for costs and the appointment of an amicus curiae.

[49] I have considerable sympathy for the position in which Ms Hoeberechts has been placed by ACC’s late payment of her entitlements. She has been exposed to a higher rate of tax than she would have incurred had ACC paid her entitlements on time. Ms Hoeberechts put before me material that shows that there are a significant number of people that have been similarly affected by the tax treatment of backdated ACC payments. But I have no doubt that that treatment is in accordance with the Income Tax Act. Any change in that treatment is a matter for Parliament. Neither the Commissioner, the Authority nor this Court has power to effect any such change.

²⁶ Brierley Investments Ltd v Bouzaid [1993] 3 NZLR 655 (CA) at 669; Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd [1994] 2 NZLR 681 (CA) at 689; Commissioner of Inland Revenue v Michael Hill Finance (NZ) Ltd [2016] NZCA 276, [2016] 3 NZLR 303 (CA) at [80].

²⁷ Commissioner of Inland Revenue v Michael Hill Finance (NZ) Ltd [2016] NZCA 276, [2016] 3 NZLR 303 (CA) at [80].

²⁸ Not, for example, the question whether the Commissioner should exercise her discretion to write off tax under s 177C of the Tax Administration Act 1994.

Result

[50] I decline to extend time for Ms Hoeberechts to file her appeal.

[51] Costs should follow the event in the usual way. Ms Hoeberechts is to pay costs on a 2B basis to the Commissioner.

Campbell J