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Commissioner of Inland Revenue v Fuji Xerox NZ Limited CA154/01 [2001] NZCA 401; (2002) 20 NZTC 17,470; [2002] BCL 130 (13 December 2001)

Last Updated: 18 January 2019

IN THE COURT OF APPEAL OF NEW ZEALAND
CA 154/01



BETWEEN
COMMISSIONER OF INLAND REVENUE


Appellant


AND
FUJI XEROX NZ LIMITED


Respondent



Hearing:
5 December 2001


Coram:
Blanchard J
Anderson J
Hammond J


Appearances:
A C Beck and R Vickery for Appellant
I M Gault and W P Sussman for Respondent


Judgment:
13 December 2001



JUDGMENT OF THE COURT DELIVERED BY ANDERSON J
[1] The respondent wishes to challenge a number of assessments for goods and services tax made against it by the Commissioner of Inland Revenue. In order to challenge it was required by s138B(1)(c) of the Tax Administration Act 1994 (“The Act”) to file proceedings in the Taxation Review Authority or the High Court within a response period of two months of the date of issue of the relevant notices of assessment. For reasons which will be examined in the course of this judgment, it did not file within the response period, so it sought to rely on s138D of the Act which provides as follows:

138D Challenge may in exceptional circumstances be commenced after response period

(1) If a hearing authority considers that exceptional circumstances apply, the hearing authority may, on application by a disputant, allow the disputant to commence a challenge to a notice of a disputable decision after the response period.

(2) For the purposes of subsection (1), an exceptional circumstance is an event or circumstance beyond the control of a disputant that provides the disputant with a reasonable justification for not commencing a challenge to a disputable decision within the response period; but an act or omission of an agent of a disputant is not an exceptional circumstance unless the act or omission was caused by an event or circumstance beyond the control of the agent—

(a) That could not have been anticipated; and

(b) The effect of which could not have been avoided by compliance with accepted standards of business organisation and professional conduct.

[2] The relevant assessments were dated 6 December 2000 and 18 December 2000 so that, making allowance for the incidence of Waitangi Day on 6 February and the fact that 18 February was a Sunday, the respondent should have filed its dispute proceedings not later than 7 February and 19 February 2001. On 23 March 2001 the respondent filed an application under s138D for an order allowing it to commence a challenge to the assessments. That application was resisted by the Commissioner. On 13 June 2001 after a defended hearing of the application the High Court made an order granting leave to the respondent. The Commissioner now appeals against that order.
[3] The proceeding is seen by the Commissioner as a test case for the resolution of possibly different approaches by the High Court to s138D. Of particular relevance are Treasury Technology Holdings Ltd v Commissioner of Inland Revenue (1998) 18 NZTC 13,752, a decision of Paterson J delivered on 25 May 1998, and Milburn New Zealand Ltd v Commissioner of Inland Revenue (1998) 18 NZTC 14,005, a decision of Gendall J delivered on 28 October 1998. To the extent that the approach taken by Gendall J may seem somewhat stricter than that taken by Paterson J it is favoured by the Commissioner.

Facts of the present case

[4] The respondent is registered for GST in New Zealand and the address it notified to the Commissioner for that purpose is its usual business address. During 1998 the Commissioner was carrying out an audit of its affairs including GST returns since June 1996. When the investigation began the respondent nominated the accountancy firm KPMG as its “tax agent” as that term is defined in s3 of the Tax Administration Act. There followed in 1999 and 2000 a number of dealings between KPMG and the Inland Revenue Department including notices relevant to the disputes procedures contained in Part IVA of the Tax Administration Act. They include a letter from KPMG dated 22 June 2000 covering the enclosure of seven waiver of time bar notices. Each notice contains the following statement:

I, Tom Duffy, authorised agent of the abovenamed taxpayer, hereby agree to waive the time bar, pursuant to section 108B of the Tax Administration Act 1994, for a period of 6 months.

The time bar now expires on the 30 day of December 2000.

Dated at Auckland this 15 day of June 2000

“T Duffy”

Taxpayer (or authorised agent).

[5] By a letter dated 23 November 2000 the Inland Revenue Department informed KPMG:

As discussed, due to the operation of the statute bar, we propose to issue an assessment for various GST periods by the end of December...

[6] On 5 December 2000 the Department again wrote to KPMG in the following terms:

I refer to our recent discussions.

Attached is a Statement of Amendment for various GST returns for the period June 1996 to December 1997. The adjustment relates to intra-group supplies between Fuji Xerox New Zealand Limited and Fuji Xerox Finance Limited. Notices will be issued in due course.

As you are aware, to protect your client’s objection rights, certain actions must be taken by you within 2 months of the Notice. Full details are contained on the back of the Notice.

[7] That letter was copied to Mr Duffy and is so endorsed on its face.
[8] On 6 December 2000 the Commissioner issued to the respondent at its business address several notices of assessment for goods and services tax. As previously mentioned a further batch of notices was sent on 18 December. Fuji Xerox paid the amounts assessed in accordance with a policy to pay all amounts due to the Inland Revenue on time in order to avoid interest or penalties which are greater than the costs of its own private arrangements relating to interest. KPMG, which was not sent copies of the notices by either the Inland Revenue Department or its client, and for some time remained unaware that such notices had actually been issued, took no steps to challenge the assessments. Nor did the respondent’s own employees.
[9] Mr T P Duffy, the respondent’s financial controller and himself a chartered accountant, deposed in one of his affidavits in the proceeding as follows:
  1. Around 5 December 2000 I received a copy of a letter from Inland Revenue to Dinesh Naik. [of KPMG] The letter stated that notices of assessment relating to GST issues arising from Inland Revenue’s investigation would be issued in due course.
  2. In December 2000, I was informed by a member of FXNZ’s accounts staff that notices of assessment had been received by FXNZ. Annexed hereto and marked with the letter “A” are copies of the notices. As I had no reason to expect FXNZ to receive any correspondence from Inland Revenue concerning the investigation that would require a response from FXNZ, I did not discuss the nature of the notices with the accounts staff member.
  3. Payment of the assessments was arranged by FXNZ’s accounts staff. This payment was made in line with FXNZ’s policy to pay all amounts due to Inland Revenue on time and so avoid any interest or penalties. FXNZ’s financial arrangements mean it has access to interest rates more favourable than Inland Revenue’s use of money interest rate.
  4. As a result of the course of dealing directly between Inland Revenue and KPMG, including the disclosure notice of 31 October 2000 and Inland Revenue’s correspondence, I expected that Inland Revenue would address all correspondence relating to its investigation and in particular send the relevant assessments to KPMG, who would deal with this as required, especially where a response would be necessary.

[10] On 7 February 2001 Mr Naik, a senior manager, taxation consultant and chartered accountant with KPMG, telephoned the Inland Revenue because he was concerned about the risk of assessments having been issued but not received. He was told that the assessments should have been issued and this led him to telephone Mr Duffy to ask whether he had received any notices. Mr Duffy told Mr Naik that he was not aware of Fuji Xerox having received them and that he expected that they would be sent to KPMG. On 27 February 2001 Mr Duffy was asked by Fuji Xerox’s solicitors whether notices of assessment had been received because the Inland Revenue had advised that such assessments had been issued. This caused Mr Duffy personally to check all recent correspondence from the Inland Revenue. He discovered that the notices received in December in fact related to the investigation; hence the application under s138D.

Observations about s138D

[11] For the purposes of s138D the term “exceptional circumstance” has a specific statutory meaning. By virtue of s3(1) of the Act the term “Is defined in s138D(2) for the purposes of that section”. As indicated in s138D(2), an exceptional circumstance is:

But an act or omission of an agent of a disputant will not be an exceptional circumstance unless certain conditions are satisfied. These are that:

[12] Where a hearing authority has to consider an application under s138D it is logically required by the included and excluded features of the statutory definition of exceptional circumstance to approach the issue in stages involving identification, evaluation and discretion.
[13] In short, s138D requires identification of events or circumstances with the qualifying characteristics, evaluation of those in terms of justification; and exercise of a residual discretion. We turn now to the Judge’s reasoning in the case under appeal.

The Judge’s reasons

[14] Having identified the nature of the application, referred to s138D of the Act and set out the facts, O’Regan J discussed the application of that section. He referred to the Treasury Technology Holdings Ltd and Milburn New Zealand Ltd cases previously referred to in this judgment. Both Paterson J and Gendall J had commented on the meaning of “exceptional” in dictionaries and other cases, leading them to the view that “exceptional” means “unusual” or “out of the ordinary”. In the Milburn case Gendall J characterised the test in terms which included “an event or circumstance which is unusual or out of the ordinary (but not so rare as to be categorised as extraordinary), which operates alone or together with other circumstances (unusual or not)”.
[15] In the case under appeal O’Regan J expressly adopted the test as articulated by Gendall J and then proceeded to examine whether there was an “Unusual Event or Circumstance”. He found that the sending of the assessments to the taxpayer’s address when all other correspondence had been conducted with KPMG “was sufficient to make this situation one which was out of the ordinary”. Next he found that this circumstance was one beyond the control of the taxpayer on the basis that it was not unreasonable for KPMG and the taxpayer to expect that the notices of assessment would be sent to KPMG in view of the dealings between that firm and the Commissioner in respect of the audit. He found that the taxpayer could have written to Inland Revenue and changed its address for the issuing of GST assessments, but did not believe it could be said that KPMG or the taxpayer ought to have predicted that the assessments would be sent to the taxpayer’s address, given the course of conduct adopted throughout the tax audit. In his view,

it was reasonable for both the taxpayer and KPMG to expect that the Notices of Assessment would be sent to KPMG in these circumstances.

[16] Turning then to the question of reasonable justification, O’Regan J found that there was no doubt that there were many things which the taxpayer itself could have done to avoid the failure to meet the statutory time limit but concluded, without indicating his reasons, that on balance the exceptional circumstances provided a reasonable justification for the taxpayer. There is a suggestion that he may have been influenced by a perception that the Commissioner’s conduct contributed to the situation.
[17] The Judge then considered whether action on the part of a tax agent could have been avoided by compliance with accepted standards of business organisation and professional conduct. His conclusion was that the question did not arise in the case because the assessments were sent directly to the taxpayer and any failings were to be laid at the door of the taxpayer rather than its tax agent KPMG. O’Regan J appears to have interpreted “agent” in s138D(2) as “tax agent” as defined in s3 of the Act. This is an error. In s138D(2) “agent” has its general meaning which would of course include Mr Duffy and other employees of the respondent.
[18] The Judge then concluded:

Accordingly I find that the taxpayer has made out a case under s138D that exceptional circumstances apply in this case and I therefore grant leave...

[19] The Judge does not appear to have exercised a discretion or, if he did, the reasons for exercising a discretion in favour of the taxpayer have not been stated.

Appellant’s submissions

[20] In support of the appeal Mr Beck submitted that O’Regan J erred in holding that the sending of the assessments to the taxpayer, where previous correspondence had been addressed to KPMG, was an exceptional circumstance. There is no dispute that the notices of assessment were received and that Mr Duffy knew that they were legal documents which required action. Section 14(1)(b) of the Act permitted the Commissioner to send the notices of assessment by post to the taxpayer’s business address and indeed that address had been indicated by the taxpayer for GST purposes. In counsel’s submission this is simply a case of the taxpayer mistakenly failing to take action.
[21] As O’Regan J held, it was within the taxpayer’s power to direct the Commissioner to send assessments to KPMG but it did not. It was within the taxpayer’s power to control what happened after receiving the notices but it took no steps.
[22] As to justification, O’Regan J was, in counsel’s submission, wrong to find any justification in what the Commissioner had done in sending the assessments to the indicated address.
[23] Counsel urged the Court not to be tempted into a sympathetic amelioration of strict statutory principles as, in his view, Paterson J had been in the Treasury Technology case. We do not, however, accept that Paterson J did approach the matter in that way. He did say (at 13,761) that:

...this is a case where the overall justice suggests that leave should be given. The Commissioner’s conduct has, in part, contributed to the situation which has arisen. There is a significant amount of money involved.

But it is plain that those were matters mentioned by the Judge as having informed the exercise of his residual discretion.

[24] Counsel for the Commissioner endorsed the approach indicated by the following dictum of Gendall J in Milburn (at p14,008):

Whilst the Court may be tempted to take a lenient or charitable view of errors or mistakes on the part of taxpayers during the early stages of this new legislation, nevertheless the statutory language of s138D cannot be ignored.

Arguments for the respondent

[25] Mr Gault identified the relevant event or circumstances as:

The sending of the assessment to the taxpayer itself against a background of dealings between the Commissioner and KPMG on behalf of the taxpayer.

[26] He accepted that there were things the taxpayer could have done but submitted that the background dealings mentioned above raised a reasonable expectation on the part of Mr Duffy that impending assessments would be sent to KPMG. That expectation was reinforced by the terms of the letter of 5 December 2000, which had been copied to Mr Duffy, and which stated that “...certain actions must be taken by you within two months of the notice”.
[27] Mr Gault submitted that the event or circumstances relied on by a taxpayer need not be the sole cause of a failure to commence a challenge within time. A taxpayer need only demonstrate that there are relevant events or circumstances which justify the default.

Judgment

[28] We think that a correct analysis of the case was impeded by an unwarranted attention to the question whether there were events or circumstances which would be considered “unusual or out of the ordinary (but not so rare as to be characterised as extraordinary)”. As we have indicated, the term “exceptional circumstance” has its own specific statutory meaning.
[29] The analysis then erroneously confused the taxpayer’s reasonable expectations, a matter which may have been relevant to the justification issue, with the question whether a relevant event or circumstance was beyond the control of the disputant.
[30] In relation to justification the Judge found a lack of prudence on the taxpayer’s behalf but, by implication, also found that the default was reasonably justified by the Commissioner sending the notices of assessment to the GST address. No specific reasons are given for finding justification. As will appear in the course of this judgment, we think there is no justification.
[31] We accept that the relevant event or circumstances may be identified as the sending of the notices of assessment, by the Commissioner, to the respondent’s usual business address against a background of relevant dealings between the Commissioner and the respondent’s tax agent KPMG. Our focus is therefore on the justification element of s138D. Such consideration must have regard to the circumstances which were within the respondent’s control after the notices were received. They came to the attention of the accounts staff who mentioned their receipt to Mr Duffy, a chartered accountant who only a day or so before had received a letter indicating that assessments were imminent. Each notice comprised a single page with relevant assessment information printed on the front and general advice to the taxpayer appearing as instructions on the obverse. Each notice states on its face information such as “Amended as per investigation” and “Tax to pay as assessed”. Columns relating to financial entries distinguish between “As returned” and “As assessed”. We were informed from the Bar, and as appears by a consideration of certain exhibits, the total amount of tax involved is well into six figures. Significant sums of money were involved and we think it extraordinary that such payments were made without Mr Duffy or his staff showing any apparent interest in the nature and terms of the assessments; all the more so when Mr Duffy knew that disputed assessments were imminent. We assume from his qualification as a chartered accountant that Mr Duffy must have known that there were time constraints for challenging assessments and certainly his affidavits do not assert ignorance in that respect. Even on 7 February 2001, when challenges would still have been within time, Mr Duffy did not associate the assessments which had been brought to his notice in December with the object of Mr Naik’s inquiry.
[32] In our view there is no basis whatever for criticising the Commissioner for sending the notices of assessment to the relevant address for GST purposes. That act was not in any real sense causative of the respondent’s default. The real and effective cause of that default lay in the systemic and human failures of the respondent itself. There is no reasonable basis for a finding that the respondent’s failures were reasonably justified by the relevant event or circumstances. Having reached that view we are not required to consider the discretionary aspect of s138D.
[33] Nor do we consider it necessary to analyse perceived differences of approach in the other High Court judgments which we have mentioned. Apart from an unnecessary additional gloss in respect of the identification of an exceptional circumstance, neither of the judgments appears to have erroneously applied s138D to the facts of its particular case.
[34] With respect to O’Regan J, we take the view that his approach was erroneous and the respondent should not have been allowed to commence a challenge. The appeal must therefore be allowed.
[35] The appeal is accordingly allowed with costs to the appellant in the sum of $3,000, together with the usual costs and expenses to be fixed if necessary by the Registrar.

Solicitors
Crown Law Office, Wellington for Appellant
Bell Gully, Auckland for Respondent

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