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Court of Appeal of New Zealand |
Last Updated: 14 December 2011
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IN THE COURT OF APPEAL OF NEW ZEALAND
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CA 42/00
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BETWEEN
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IVAN ROBERT HYSLOP
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First Appellant
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AND
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PENELOPE MARY HYSLOP
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Second Appellant
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AND
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THE COMMISSIONER OF INLAND REVENUE
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Respondent
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Hearing:
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26 February 2001
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Coram:
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Richardson P
Tipping J McGrath J |
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Appearances:
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G A Muir for Appellants
M T Lennard and R J Scott for Respondent |
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Judgment:
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1 March 2001
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JUDGMENT OF THE COURT DELIVERED BY RICHARDSON P
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[1] This appeal by Mr and Mrs Hyslop is against the decision of Chambers J reported at (2000) 19 NZTC 15,560 which in turn allowed an appeal by the Commissioner of Inland Revenue from a decision of Judge Barber as Taxation Review Authority ("TRA") reported at (1998) 18 NZTC 8,335.
[2] The case concerns the 1985-1989 income years. An earlier case affecting the Hyslop family and Mr and Mrs Hyslop's pharmacy company concerning the 1982 to 1984 income years was decided in favour of the Commissioner by Judge Bathgate. It is Case M7 and is reported at (1989) 12 NZTC 2,046. In essence, Case M7 held that certain arrangements initiated by Mr and Mrs Hyslop designed to benefit the Hyslop children by providing them with capital and income were ineffective for tax purposes. Mr and Mrs Hyslop were advised by the department that principles established in Case M7 would be applied to their 1985 and 1986 income years and statements of amended assessments for those years were sent to them. A similar course was followed in respect of the 1987 to 1989 income years.
[3] Following disallowance by the Commissioner of the Hyslops' objections, the objections were referred to the TRA. The case stated by the TRA to the High Court in respect of the appeal by the Commissioner from the TRA decision records in para 3:
The Authority found that it did not need to decide the substantive issues as it found in favour of the objectors on a threshold submission. The Authority found that the Commissioner had failed to give adequate grounds for the assessments, thereby rendering those assessments invalid.
[4] The case sets out facts proved or admitted at the hearing before the TRA and states the question to be determined by the High Court in this way:
- The question to be determined by this Court is:
12.1 Whether the Authority erred in finding in favour of the objectors on the threshold submission that the assessments in question were not valid and therefore not deciding the substantive issue of whether the Commissioner acted incorrectly in making the assessments in question.
12.2 Following the principles in CIR v Morris [1998] 1 NZLR 344, the parties are in agreement that if the answer to 12.1 is yes, then the matter should be referred back to the Authority for consideration of the substantive issue.
The High Court decision
[5] The Commissioner advanced three grounds in support of the appeal, each of which was upheld by Chambers J. The first was that the TRA determined the case in the taxpayers' favour on a point which was not open to the taxpayers because the letter of objection did not specify invalidity as a ground of objection. The Judge noted that there was no reference in the Authority's decision as to which part of the Hyslops' objection provided justification for the "threshold" submission. He observed that there was uncertainty as to the extent to which that point was argued before the Authority. He took the view, however, that, whatever happened before the Authority, the point was squarely taken by the Commissioner before him and could not be ignored, especially since the restriction on what might be raised by an objector was statutorily prescribed. On his analysis of the objection Chambers J concluded that it was clearly not directed to an assertion of invalidity but rather was an objection to correctness of the amended assessments. Accordingly it was not open to the Authority to hold the assessments invalid on the threshold argument "that the Commissioner had failed to give adequate grounds for the assessments".
[6] The Judge went on to consider whether, had the Hyslops taken invalidity as a ground for their objections, failure to give reasons would have invalidated the assessments. He saw a crucial distinction between making an assessment and giving notice of an assessment which has been made. Section 29(1) of the Income Tax Act 1976 required notice of the assessment to be given "as soon as conveniently may be after an assessment is made". Section 26 of the Act states that the validity of an assessment is not affected by reason that any of the provisions of the Act have not been complied with. Section 29(6) of the Act specifically states that the omission by the Commissioner to give any of the notices referred to in s29 does not invalidate the assessment.
[7] Chambers J referred at some length to judicial discussions of the meaning of assessment in the statutory scheme, particularly in CIR v Canterbury Frozen Meat Co Ltd [1994] 2 NZLR 681, 690-691:
An assessment is the quantification by the Commissioner of the statutorily imposed liability of the particular taxpayer to tax for the year in question. The making of an assessment including an amended assessment requires the exercise of judgment on the part of the Commissioner in quantifying that liability on the information then in the Commissioner's possession. ...
The making of an assessment determines the indebtedness of the subject to the Crown. That liability is unqualified. Sanctions are provided for failure to pay. It follows that a decision which is tentative or provisional or subject to adjustment or conditional does not reflect the statutory scheme. In short, to constitute an assessment for income tax purposes the decision of the Commissioner must be definitive as to the liability of the taxpayer at the time it is made and final subject only to challenge through the objection process.
A second ground on which a decision affecting tax liability may be challenged is that the Commissioner did not follow a proper process in arriving at that decision. In making an assessment the Commissioner is required to exercise judgment. He or she is not entitled to act arbitrarily or in disregard of the law or facts known to the Commissioner (Lowe v Commissioner of Inland Revenue [1981] 1 NZLR 326, 348; Commissioner of Inland Revenue v Walker [1963] NZLR 339). There must be a genuine attempt to ascertain the taxable income of a taxpayer even if carried out cursorily or perfunctorily (Re Deputy Commissioner of Taxation (WA), ex parte Briggs (1986) ATC 4,748, 4,755).
[8] Turning to Judge Barber's judgment, Chambers J recorded the TRA's proposition that it was "a fundamental part of the assessment process ... to notify the objector, simultaneously with an assessment document, or perhaps prior to that, of the reasons for assessment or reassessment". Here, the Authority found "that did not happen" because a simple reference to "the principles of Case M7" did not adequately identify the reasons.
[9] The Judge concluded that the TRA had blurred the distinction between the assessment and the notice of the assessment. It was not, the Judge said, "a fundamental part of the assessment process ... to notify the objector ... of the reasons for assessment". The assessment process is complete before the obligation to give notice even arises.
[10] Chambers J went on to consider and rejected another invalidity argument which counsel for the Hyslops had sought to advance:
[31] Dr Muir also attempted to uphold the Authority's decision as to invalidity on another ground, namely that the Commissioner had not adequately turned his mind to making a proper assessment. A similar submission had been made to the Authority, but the Authority said that it did not need to decide that question: see judgment at p8,345. That submission could not be raised again before me because it was not part of the Authority's decision and certainly not part of the question posed in the case on appeal agreed by the parties and fixed by the Authority.
[11] The third ground advanced for the Commissioner in argument, and upheld by Chambers J, was that in any event there had been no failure in the Hyslops' case to give reasons for the reassessments made. The Judge expressed his reasoning in this way (para [35]):
When the Commissioner said that he was relying on the principles in Case M7 , he must be limited, of course, to what the reasonable objective reader of Case M7 would understand the principles to be. I stress this point because there was in the hearing before the Authority considerable evidence as to what the Commissioner's investigating officer understood the principles to be. This evidence is referred to at some length in the Authority's decision. With respect, while the investigating officer's opinion on the principles he deduced from Case M7 may have been relevant to other issues before the Authority which are not before me, his opinion was not relevant to the meaning to be ascribed to the expression used in the Commissioner's notice of assessment. That notice must be objectively interpreted on its face in light of the other material at that time available to the taxpayer.
And, he concluded:
The principles of Case M7 were and are reasonably clear and the Commissioner's application of them was well demonstrated in the working papers sent with the notices.
No objection taken on validity grounds
[12] We are satisfied that the Judge erred in law in upholding the Commissioner's first argument. It seems that his attention was not directed to the statutory scheme governing cases stated on appeal to the High Court and the confined jurisdiction of the High Court in relation to such appeals.
[13] Section 43(3) of the Inland Revenue Department Act 1974 provided for appeals to the High Court to be by way of case on appeal stated by the TRA. By s43(3) the appellant was required to "prepare a case setting forth the facts and the questions of law or fact arising for the determination of the High Court". Section 43(5) provided for the TRA to sign the case as submitted, either originally or with such amendment as directed by the TRA, and deliver it to the appellant for filing in the High Court. Section 43(7) empowered the High Court on the hearing of the appeal to cause a case so stated to be sent back to the Authority for amendment. No such step was taken in this case and in jurisdictional terms the High Court was confined to the issues raised in the case stated.
[14] F B Duvall Ltd v CIR (2000) 19 NZTC 15,658, decided subsequent to Chambers J's decision, is a recent decision of this court holding that in terms of the case stated, in that case on parallel GST legislation, the Commissioner was confined to the stance taken before the TRA and upheld by the TRA and the High Court lacked jurisdiction to hear and determine a further argument:
[26] Further, the High Court was not hearing and determining the objections to the assessments. Rather, it was hearing an appeal on questions of law or fact arising for its determination in terms of the case stated by the TRA. That case stated ultimately confined the High Court to determining whether the Commissioner was correct in determining that the administration charges were taxable supplies and therefore subject to GST (para [14]). The case was not sent back to the TRA for amendment. It must follow that in the High Court the Commissioner was not entitled to change that stance and that the High Court exceeded its jurisdiction in allowing the Commissioner to do so and in hearing and determining the appeal as it did.
[15] Clearly, in its context in the case on appeal the question posed for the High Court in para 12.1, "Whether the Authority erred in finding in favour of the objectors on the threshold submission that the assessments in question were not valid", must refer back to the same expression in para 3 where the Authority recorded that it found in favour of the objectors "on a threshold submission"; and that paragraph accurately records the actual decision of the TRA which makes it clear that that was the only threshold submission considered by the TRA. The question pursued before and decided by the Authority pre-supposes that the taxpayers were entitled to object to the assessments on invalidity grounds.
[16] Nevertheless, Mr Lennard for the Commissioner sought to argue that the TRA erred in law in coming to that conclusion on that identified threshold submission because the TRA had no authority to embark on the inquiry which led to that conclusion. The short answer is that the TRA is presumed to have been acting within jurisdiction and its decision is presumed valid in jurisdictional terms unless and until it is successfully challenged. The case on appeal does not raise it and there is nothing to put jurisdiction in issue.
Whether failure to give reasons invalidates assessment
[17] We turn to the issue properly raised by the case on appeal, namely whether failure to give the taxpayers notice or advice of the grounds of assessment invalidates the assessment.
[18] The relevant provisions are ss23, 26, 29(1) and (6) and 30(1) of the Income Tax Act 1976 and s36 of the Inland Revenue Department Act 1974:
Income Tax Act 1976
(2) If any such alteration or addition has the effect of imposing any fresh liability or increasing any existing liability, notice thereof shall be given by the Commissioner to the taxpayer affected.
Provided that where—
(a) The taxpayer has, in his return to which the assessment relates, calculated the amount on which tax is payable or the amount of the tax; or
(b) The assessment has been made on default by the taxpayer in furnishing any return for the year to which the assessment relates; or
(c) The Commissioner causes a separate statement in relation to the assessment to be given to the taxpayer setting forth the amount on which tax is payable and the amount of the tax,—
it shall not be necessary to set forth in the notice of the assessment any particulars other than particulars as to the amount of tax to be paid by the taxpayer or the amount of tax to be refunded, as the case may require.
...
(6) The omission to give any such notices shall not invalidate the assessment ... or in any manner affect the operation thereof.
[19] If the objection is not wholly allowed, the taxpayer may require that it be heard and determined by a TRA, and by s36 of the 1974 Act:
Inland Revenue Department Act 1974
[20] The statutory scheme thus draws a clear distinction between making an assessment and giving notice of an assessment after it has been made. It distinguishes between coming to a decision and communicating a decision. Where applicable, notice of assessment is to be given to the taxpayer "as soon as conveniently may be after an assessment is made" (s29(1)). But "the omission to give any such notices shall not invalidate the assessment" (s29(6)). That reinforces the anchor provision of s26 which states that the validity of an assessment is not affected by non-compliance with any provision of the statute.
[21] Mr Muir accepted that looked at in isolation assessments and notices are different and successive statutory steps. He submitted, however, that, when read with the objection provisions, the giving of notice of the grounds of assessment was to be characterised as part of the process of assessment in order to prevent prejudice to the taxpayer in the formulation of the notice of objection to which the taxpayer would be confined in the objection proceedings. The assessment process, he submitted, encompasses both steps - the assessment and the giving of notice - and failure to complete the assessment process by proper notification may render that process invalid. Mr Muir adopted the reasoning of the TRA that a fundamental part of the assessment process is to notify the taxpayer of the reasons for assessment or reassessment and that, essentially, the assessment procedure, with its right of objection, operates on the basis that grounds of assessment are to be given by the Commissioner and that, in general, the Commissioner is bound by those grounds just as, pursuant to s18 of the Taxation Review Authorities Act 1994 (previously s36 of the Inland Revenue Department Act 1974), the objector is bound by the terms of the objection. And, the Commissioner expressly accepted in CIR v V H Farnsworth Ltd [1984] 1 NZLR 428, 434, that " ... as the objector is so limited he is entitled to be provided with such details of the assessment process as are necessary to enable him properly to formulate his objection".
[22] In terms of the statutory scheme, however, the giving of notice of the assessment and providing the taxpayer with details of the assessment process to facilitate the framing of an objection are necessarily subsequent to the making of the assessment and ss26 and 29(6) proceed on the premise that the assessment process ends when the assessment is made.
[23] Because of the different statutory language and scheme under the Australian legislation, where the statute spoke of "any assessment issued", the High Court of Australia concluded that a notice of assessment was essential to the existence of an assessment (Batagol v Federal Commissioner of Taxes [1963] HCA 51; (1963) 109 CLR 243; F J Bloemen Pty Ltd v Federal Commissioner of Taxes (1981) 81 ACT 4,280). But there is nothing in our statutory provisions to justify departing from the clear and unambiguous language of ss26 and 29. In short, any challenge to the validity of the assessment must be directed to the making of the assessment.
[24] While it may be said that the taxpayer is disadvantaged under the statutory arrangements governing assessments, notices and challenges, there are remedies and safeguards available. The time for objection (and the response period within which the right to challenge must be exercised under the new regime - CIR v Abattis (CA 156/00, judgment 20 February 2001) does not start to run unless and until the notice of assessment is issued to the taxpayer. Under the new regime the underlying all cards on the table premise should ensure that the reasons for any assessment that follows adjudication are known to the taxpayer when the assessment issues. Where an assessment is made under the old regime or outside the adjudication process, as in Abattis, the Commissioner accepts that the objector is entitled to be provided with such details of the assessment process as are necessary to enable him properly to formulate its objection (para [21] above). If the notice to the taxpayer is expressed in wide terms, the grounds of objection may be correspondingly wide (Smith v CIR [1987] 1 NZLR 727, 734). The taxpayer may also request better particulars, may invoke the Official Information Act 1982, and in appropriate cases may seek an order in the nature of mandamus. Once the matter is before the TRA or the High Court the taxpayer may apply for particulars in the ordinary way. While validity issues may and should ordinarily be pursued along with correctness issues in objection proceedings, a taxpayer is entitled to invoke judicial review if circumstances warrant and those circumstances may include particular cases where the Commissioner disputes whether invalidity was sufficiently signalled in the objection - as the Commissioner sought to do in the High Court here. See also CIR v Canterbury Frozen Meat Co Ltd at 691-692.
Whether Commissioner failed to give sufficient reasons
[25] Chambers J concluded that the Commissioner had not failed to give sufficient reasons for the amended assessments. In the light of our conclusions on the second issue it is unnecessary to go into this third ground and Mr Muir freely accepts that the taxpayers now have ample notice of the Commissioner's case against them and will not be prejudiced by any deficiencies in the advice they were given initially of the reasons for the assessments.
Result
[26] For the reasons given the appeal is dismissed and in the result the matter is remitted to the TRA for determination. Whether or not the taxpayers may pursue the invalidity ground that the Commissioner did not adequately turn his mind to the making of what in law constitutes an assessment (see para [7]) will be a matter for the TRA.
[27] In the circumstances there will be no orders as to costs.
Solicitors
Bradbury & Muir, Auckland, for
appellants
Crown Law Office, Wellington, for respondent
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URL: http://www.nzlii.org/nz/cases/NZCA/2001/41.html