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Charter Holdings Limited v Commissioner of Inland Revenue [2016] NZCA 499 (13 October 2016)

Last Updated: 21 October 2016

IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN
 Appellant
AND
 Respondent
Hearing:
5 May 2016
Court:
Wild, French and Cooper JJ
Counsel:
J L Land for Appellant P H Courtney and H S Hallett-Hook for Respondent
Judgment:


JUDGMENT OF THE COURT

  1. The appeal is allowed.
  2. The respondent’s decision of 19 June 2014 declining the appellant’s request under s 113 of the Tax Administration Act 1994 is set aside.
  1. The matter is referred back to the respondent for further consideration in accordance with the terms of this judgment by delegates other than those involved in the application to date.
  1. The respondent must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Cooper J)

Table of Contents

Para No
The facts [8]
The s 113 decision [25]
Section 109 and Tannadyce [31]
Tannadyce [32]
High Court judgment [38]
CHL’s argument [41]
Commissioner’s argument [45]
Decision [48]
The merits of the application for review [65]
Result [77]

[1] Charter Holdings Limited (CHL) appeals against the dismissal by the High Court of an application for judicial review of a decision by the Commissioner of Inland Revenue (the Commissioner) under s 113 of the Tax Administration Act 1994 (TAA).[1] As will be seen, the facts of this case are most unusual but they present important issues concerning the role of s 113 of the TAA, the obligations of the Commissioner under it and the extent to which her decisions may be subject to review by the High Court on an application under the Judicature Amendment Act 1972.
[2] Section 113 of the TAA provides:

113 Commissioner may at any time amend assessments

(1) Subject to sections 89N and 113D, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.

(2) If any such amendment has the effect of imposing any fresh liability or increasing any existing liability, notice of it shall be given by the Commissioner to the taxpayer affected.

There is nothing relevant for present purposes in ss 89N and 113D; the focus of this judgment is on the substantive provisions of the section.

[3] The subject matter of the dispute is CHL’s attempt to secure under s 113 amended assessments reducing its tax liability for the 2006–2012 tax years by bringing into account losses incurred in the 2000–2005 tax years. Moore J dismissed the application for review of the Commissioner’s refusal to amend CHL’s tax assessment under s 113 on the basis that CHL:
[4] This was said to be the result compelled by s 109 of the TAA as interpreted by the Supreme Court in Tannadyce Investments Ltd v Commissioner of Inland Revenue.[2] Section 109 reads:

109 Disputable decisions deemed correct except in proceedings

Except in objection proceedings under Part 8 or a challenge under Part 8A,—

(a) no disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and

(b) every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.

[5] CHL says the High Court’s approach was wrong and overlooked the fact that s 109 relates only to a “disputable decision”, a phrase defined so as to exclude decisions made under s 113.[3] The Commissioner says the High Court’s reasoning was correct.
[6] The Judge’s approach meant he did not reach the merits of CHL’s application for review. CHL had pleaded that the Commissioner failed to take account of relevant considerations, took into account irrelevant considerations, made material mistakes of fact, breached a legitimate expectation that the losses could be carried forward and made a decision that was substantively unfair. In this Court, while not abandoning its other grounds of challenge, CHL has emphasised the Commissioner’s decision was affected by material mistakes of fact.
[7] Those issues need only be addressed if we decide the High Court was wrong to conclude the combined effect of Tannadyce and s 109 in the circumstances of this case was that CHL could not pursue the issues raised on an application for review. Before turning to that question we set out the facts.

The facts

[8] The Judge dealt comprehensively with the background facts, including CHL’s formal dealings with the Inland Revenue Department (IRD). The account that follows is largely based on his analysis, which we understand is not in dispute.[4] Where appropriate for the purposes of this judgment we have supplemented the Judge’s account by reference to affidavits filed in the High Court.
[9] In the 1990s CHL was in the business of manufacturing, distributing and retailing swimming pool equipment. In 2001 its business slowed and it submitted a tax return for the 2000 tax year showing a loss of just under $13,000. The 2001 tax return, submitted in May 2002, showed a loss of $150,949. The tax return was made by the company’s sole director, Mr Adrian Padfield, but in filling out the standard form he did not respond to question 24 which asked “Can the company claim net losses brought forward?” In explanation Mr Padfield says he did not think to answer the question because the trading result for 2001 had itself been a loss and he saw no need to refer to past losses as no tax would be payable in any event.
[10] The Commissioner sent out assessments in respect of both the 2000 and 2001 years. These were automatically generated on the basis of the information CHL had supplied as part of the self-assessment system. The assessments were headed “Notice of Determination of Loss/Loss to Carry Forward”. In each case they recorded the claimed sums as losses to be carried forward to the following year.
[11] On 7 July 2003 CHL entered into an agreement to sell its business, but before the sale was completed the National Bank appointed principals of PricewaterhouseCoopers (PWC) as receivers. They completed the sale on 25 July 2003. CHL was released from receivership on 30 March 2005, the receivers noting in their final report that unsecured creditors were owed $460,258 for goods and services supplied and that there were no further assets to realise or funds available for distribution to them. In the meantime CHL had continued to operate as a management consultancy employing Mr Padfield. He was made bankrupt on 9 June 2004 but remained an employee while the business was managed by another person until his discharge from bankruptcy in 2007.
[12] CHL’s tax returns for the 2002 and 2003 years were not filed until 6 September 2006. In what was to become a repetitive pattern they were late having been due by 7 July 2002 and 2003 respectively.[5] Moore J apparently accepted that these had not been prepared earlier due to the receivership.[6] The forms recorded losses of $463,771 and $415,543 respectively. As with the 2000 and 2001 returns Mr Padfield filled in the forms without responding to question 24, but Mr Padfield claimed he thought he did not need to answer the question about claiming losses brought forward. The Judge recorded:[7]

He again said this was because he did not believe he needed to specify the loss as it had already been set out in the previous year’s return and had been accepted and confirmed by the Commissioner in her notices. He also said that each of the years from 2001 to 2003 showed losses for [CHL] and as such there was no tax due to set off against previous losses.

[13] Once again, on 14 September 2006, the Commissioner sent out a “Notice of Determination/Loss carried forward” for 2002 and a notice of “Loss carried forward” for 2003, which reflect the losses claimed by the company.
[14] The returns for the following years had not been provided when on 12 December 2012 the Commissioner sent CHL a “final notice” stating that the returns for each of the years ending 31 March 2005–2012 had not been received and were overdue. Legal action was threatened if the returns were not provided within seven days. Moore J noted that the letter made no mention of the return for the 2004 year.[8] This was also overdue but the notice had been sent to the receivers. The judgment did not record any explanation for the lengthy periods for which each of these returns was overdue, and Mr Padfield’s affidavits did not attempt to explain the delay other than by reference to the receivership and an assumption that the receiver would file the returns for the years in which CHL was in receivership for which the receivers had all the company’s relevant records.
[15] After a further letter dated 18 February 2013 stating a prosecution would be commenced on 4 March, Mr Padfield filed the returns for the 2005–2012 years on 5 March. The 2005 return reflected the content of the receivers’ final report and showed a net loss of $409,433. However, the returns for the subsequent years in each case disclosed income earned by CHL and on each return Mr Padfield responded to the form’s question about net losses (question 25 until 2009 and then question 27) by placing a tick beside the word “yes”. The form then provided for dollar amounts to be stated under headings “Amount brought forward” and “Amount claimed this year”. Mr Padfield, in the case of each form, left the first blank and wrote under the second an amount equivalent to the income declared for that year. The Judge found:[9]

Mr Padfield was apparently wrongly of the view that the Commissioner maintained a record of losses for past years. He did not realise the company was required to add all previous losses into a total figure and note this in the tax returns.

[16] On 17 March 2013 the Commissioner sent CHL a notice (similar to those issued in respect of previous years) recording the loss of $409,433 for the 2005 year. But between 17 March and 31 May 2013 the Commissioner issued Notices of Assessment treating the income earned in the 2006–2012 years as taxable, and applying penalties and interest. This prompted a letter dated 10 April 2013 signed by Mr Padfield for CHL which referred to the assessments, listed the tax losses previously recorded for 2000–2003 and 2005 and then said:

These do not appear to have been applied to subsequent profits, please apply and correct the Statement of Account.

We maintain that no tax liability exists for this Company.

This letter was addressed to the IRD at Takapuna and arrived at its Upper Hutt Processing Centre on 15 April.[10] It was marked for consideration as a Notice of Proposed Adjustment (NOPA) and referred to the Takapuna National Correspondence Unit on 6 May.[11] It was then transferred to the Whangarei office where Ms Wendy Hay was asked to respond to it on 19 July. She immediately read the letter and relevant IRD case files concerning both CHL and Mr Padfield, who, in addition to his dealings about CHL, had previously been involved in discussions concerning his personal tax affairs. She noted that the 2004 tax return had not been filed and made a file note to the effect that because that return had not been filed no losses could be carried forward to 2005.

[17] She also noted CHL’s 10 April letter did not meet the requirements of IRD’s Standard Practice Statement: Requests to amend assessments (SPS 07/03), which outlines the Department’s practice when exercising the discretion to amend assessments to ensure their correctness under s 113 of the TAA: she thought there was not enough information to substantiate the request for tax losses in the 2000‒2003 and 2005 income years.[12]
[18] She then telephoned Mr Padfield and “explained to him that there was a process to be followed when requesting the amendment of assessments”. In her affidavit she said:

I informed him that the most important point was that losses being carried forward cannot skip years; and that he would need to file [CHL’s] 2004 return before a re-assessment could be considered. Following this I informed him that he would need to make a proper request to have the assessments reconsidered. My standard practice (which I doubt I would have departed from on this occasion) was to refer to SPS 07/03. I told Mr Padfield that any such request would need to include an explanation (including evidence) of the errors he said had occurred, which meant the losses were not carried forward, and why those errors had occurred. Mr Padfield told me that the applicant had stopped trading from June 2003 to March 2004, but that he still had all company records.

[19] The Judge accepted that up until this time Mr Padfield had been unaware that the 2004 return had not been filed.[13] It appears he assumed this had been attended to by the receivers. It was not in fact filed until 3 February 2014. A loss of $63,663 was claimed. Once again Mr Padfield did not fully complete the form, omitting reference to the losses referable to the 2000–2003 years on the basis that was unnecessary since there was no profit to set off against past losses. On 18 February the Commissioner sent CHL another notice of “Loss carried forward” from 2004 to 2005 recording the loss incurred as $63,663.
[20] Mr Padfield’s dealings with the IRD were now with Ms Harpreet Kaur. She had in fact spoken to him on 15 January 2014 after being assigned the role of collections officer. She said she told him that the 2004 return must be filed before any losses could be carried forward. She added that because the losses were significant in amount they would need to be reviewed and there was no guarantee they could in fact be applied. Mr Padfield gave a different account, claiming that Ms Kaur had said the losses would be applied once the 2004 return was filed. We think that is unlikely, but the Judge did not attempt to resolve this conflict and it is not necessary for us to do so.
[21] On 24 March Ms Kaur again telephoned Mr Padfield and also wrote to him. In the telephone discussion she told him that CHL’s financial statements were required for the 2000–2005 income years, together with information as to how the losses had been calculated and a written explanation of the failure to ask for the losses to be carried forward. In the letter she thanked Mr Padfield for filing CHL’s 2004 return and then said:

At this time, your request to apply [CHL’s] losses from 31 March 2000 to 31 March 2005 to its tax liability for the income tax periods ending 31/03/2006, 31/03/2007, 31/03/2008, 31/03/2009, 31/03/2010, 31/03/2011 and 31/03/2012 has been declined under section 113 of the Tax Administration Act 1994 as no further information was provided to substantiate your claim.

Please provide all relevant information relating to the losses for the 2000 to 2005 tax years, such as financial statements, to allow the department to consider your request. The above information is required by the 7 April 2014. Legal actions may commence without further notice.

[22] In reply Mr Padfield wrote on 4 April asserting the requested financial statements had already been provided with the original tax returns but adding he would obtain copies from the files and forward them again. This he did on 30 April, confirming “[w]e wish to apply to have the tax losses from the period 31 March 2000 to 31 March 2005 applied to subsequent years’ trading.”
[23] The IRD’s internal procedures now meant that Ms Kaur had to complete what was called a “Critical Task Assurance Referral Checklist” (the Checklist). The Checklist was required because Ms Kaur considered she did not have delegated authority as the case officer to make the decision needed under s 113 of the TAA. The delegated authority reposed in another business unit within IRD, namely, Legal Technical Services (LTS). The purpose of the Checklist is to summarise the work of the case officer on the matter to that point. After the decision had been made by LTS, the file would be returned to her to inform CHL of the decision and to take any further steps required.
[24] Before completing the Checklist on 27 May, Ms Kaur again telephoned Mr Padfield and asked why he had not “elected” to carry losses forward. He told her “he thought Inland Revenue would automatically do that”. Ms Kaur recorded that statement in the Checklist. In it, she also referred to what she described as a “genuine error” noting that the “director has advised it was a mistake of his as he did not realise he had to carry the losses forward.” Rather, he “assumed the Commissioner will account for the losses and update the returns”. The losses for the relevant years had been calculated, “however balances of losses were not carried [forward] from 2000 onwards”. She noted that the total losses claimed, to be carried forward to 31 March 2006, were $1,516,813. She compared this to the outstanding core income tax from 31 March 2006 to 31 March 2012 of $306,460. In the result, the company would “still have $1,200,000 losses available”. Ms Kaur recorded that Mr Padfield had provided financial statements to substantiate the claim and how the losses had been calculated. She recommended that the application be accepted, giving these reasons:

Director has delayed filing the company income tax returns from 2006–2012 as these years have tax liability.

Financial statements have been provided to show the losses occurred from 2000–2005, customer has made losses from all of these years but has never carried the balance forward from 2000 onwards nor used this to reduce tax liability.

Financial statements provided shows [sic] all income and expenses and how losses were calculated for the years. Although the losses are of significant value the required information has been provided to substantiate the claim.

The s 113 decision

[25] The s 113 decision was made by Ms Lyndsay Stowers, a Team Leader in LTS. Before doing so, she referred the matter to Ms Sharon Hague, a solicitor in LTS, for comment. Ms Hague disagreed with Ms Kaur’s recommendation. She recorded Mr Padfield’s claims that he had made a genuine error by not carrying forward the losses incurred in the 2000–2005 years and that he assumed the Commissioner would account for the losses and update the returns. However, Ms Hague did not accept that was so, apparently relying on information provided by Ms Stowers that in relation to his own personal tax return for 2006, Mr Padfield had carried forward a loss of $1,000 from the 2005 tax year. Ms Hague recommended that CHL’s returns not be adjusted.
[26] Ms Stowers considered Ms Hague’s report, Ms Kaur’s Checklist and the information held on the IRD’s file. She did not agree with Ms Kaur’s conclusion that the financial statements provided had given the necessary information to substantiate CHL’s “claim for the losses”. She gave the following nine reasons for that conclusion:
  1. The Profit and Loss statement for the years ended the 31 March 2004 and 31 March 2005 have been prepared by Mr Padfield. They have not been audited or provided the working papers to substantiate the information.
  2. Based on information provided to Inland Revenue by the liquidators PWC the company and the business were sold as a going concern on the 25 July 2003 the same day that they were appointed. The sale should have been reflected in the 2004 tax returns not the 2005.
  3. Mr Padfield advised that the company ceased trading from June 2003 to March 2004 but no trading income has been returned in the 2005 tax return.
  4. Mr Padfield advised Inland Revenue in July 2006 that he was preparing the 2004 income tax return for filing. Why did he not file this return with the 2005 to 2012 returns on the 5 March 2013? It was not filed until the 3 February 2014 some eight years later.
  5. The validity of the returns has been based on the income tax returns that were filed by Mr Padfield for his 2005 and 2006 tax years.
  6. As advised by the Official Assignee Mr Padfield received $136,412 from Wizard Home Loans while he was a bankrupt. This income was not returned in the tax returns that Mr Padfield filed.
  7. Mr Padfield has advised that he did not realise that he had to carry losses forward. This statement is not supported by the fact that in his 2006 personal tax return he carried forward the loss of $1000 from the 2005 tax year.
  8. PWC advised Inland Revenue that the company and related assets were sold as a going concern on the 25 July 2003 for $704,120. We have no further information of this sale. Who did he sell it to? Did Poolcare FPI Services Ltd just sell it to itself under the name change of Charter Holdings Ltd.
  9. If the company was sold why was no change registered at the Companies Office? This indicates it was not a true sale.

[27] She then wrote:

Based on the above without a full investigation of the unaudited income tax returns filed by Mr Padfield, I consider that the returns filed are not correct, irrespective of his comments that the Commissioner had accepted the returns as filed.

[28] Consequently, she did not agree with Ms Kaur’s recommendation that the tax returns from the 2000–2005 years should be amended to carry forward losses to the 2006–2012 tax years. She considered the onus had been on CHL to provide all relevant information, but it would in fact be necessary to devote IRD resources to verify the correct tax position of the 2004 and 2005 tax returns. This was sufficient for her to decide to decline the request that CHL’s tax losses for the years 31 March 2000 to 31 March 2005 be carried forward.
[29] In conclusion, she wrote:

The Commissioner cannot be compelled to investigate the claims that the assessment of the previous tax returns are in error and the assessments should be amended. Under sec 138E(1)(e)(iv) of the Act the taxpayer cannot challenge the exercise of the Commissioner discretion under sec 113. The exercise of this discretion may be subject to judicial review.

[30] Mr Padfield was advised of the decision by a letter written by Ms Kaur dated 19 June 2014. The last date on which CHL could have initiated the statutory dispute procedures under the TAA was two days earlier, 17 June.

Section 109 and Tannadyce

[31] The first issue to be addressed is whether the High Court was correct to hold that s 109 of the TAA, as interpreted by the Supreme Court in Tannadyce, means that CHL could not challenge the Commissioner’s decision under s 113 of the TAA.

Tannadyce

[32] In Tannadyce the taxpayer contended it could not make various tax returns it was required to provide because the Commissioner was in possession of the financial records necessary to enable the returns to be filed and withheld them from the taxpayer. The taxpayer claimed its inability to file returns vitiated default assessments issued by the Commissioner. The majority of the Supreme Court held that “disputable decisions” as defined in s 3(1) of the TAA could not be challenged by way of judicial review unless the taxpayer could not practically invoke the relevant statutory procedure.[14]
[33] The majority observed:[15]

The definition of a disputable decision includes an assessment, so the effect of s 109 is that no assessment or other disputable decision, as defined, may be disputed in any court or in any proceedings on any ground whatsoever, except in proceedings taken under the Act. It is clear that by means of s 109 Parliament was concerned to ensure that disputes and challenges capable of being brought under the statutory procedures were brought in that way and were not made the subject of any other form of proceeding in a court or otherwise.

[34] The Court underlined the words “on any ground whatsoever” used in s 109(a), stating they must have been designed to “emphasise the comprehensive nature of the embargo on bringing proceedings outside the statutory framework”.[16] Conversely:[17]

... Parliament must have contemplated, by the use of those words, that disputable decisions could and should be contested and challenged under the statutory procedures on any ground whatsoever, including the ground that what the Commissioner claimed to be a decision or assessment was not a decision or assessment at all. If that could be established, the hearing authority’s power to cancel on any ground whatsoever would appropriately be invoked.

[35] Consequently, any alleged ground of error, illegality or invalidity could be the subject of adjudication in the statutory process, and the hearing authority (whether it be the Taxation Review Authority or the High Court) could correct an assessment by the Commissioner as far as that was necessary or appropriate in any proceeding in which an error was established.[18] The Court observed:[19]

There is thereby no potential for separation of matters of legality from matters of correctness. This leads to a much more efficient and satisfactory process overall, particularly when regard is had to the various time limits that apply throughout the tax administration processes.

[36] The Court was prepared to recognise the possibility that there might be rare cases when it was not practically possible for a taxpayer to challenge an assessment under pt 8A.[20] It also recognised that judicial review would be available when the issue sought to be raised related not to the legality, correctness or validity of an assessment but some suggested flaw in the statutory process needing to be addressed outside the statutory regime because it is not provided for within it.[21] The example given was of alleged bias on the part of the Taxation Review Authority, making it appropriate that the Authority should be restrained from considering a challenge.[22] The Court observed:[23]

In such a case it would not be the disputable decision that was being disputed in a court but rather the legality of the process by which the challenge to that decision is to be determined under Part 8A. This is a different matter from a challenge to the legality of the process which led up to the making of the disputable decision. That process and any challenge to it directly puts in issue the disputable decision. Hence the challenge to that decision or its antecedents must follow the statutory procedure.

[37] The argument advanced by the taxpayer that it was not practically possible for it to comply adequately with the statutory requirements failed on the facts. The majority thought it was particularly significant that the taxpayer had never stated with any clarity or specificity how it was inhibited by a lack of documents from complying with the statutory disputes and challenge procedures. Its allegations had simply been general in nature.[24] The taxpayer had sufficient information and records to enable it to file a global return, and it would not have been a difficult exercise, if necessary by way of reasonable estimation, to have apportioned amounts stated in the global return between the various tax years that were in issue.[25]

High Court judgment

[38] In the present case, influenced by the approach taken by Wylie J in Arai Korp Ltd v Commissioner of Inland Revenue, Moore J considered that s 113 ought not to be used as a “backdoor means” to consider the merits of assessments by circumventing the statutory disputes and challenge procedure.[26] He accepted the submission of counsel for the Commissioner that if CHL sought to correct assessments, that should be done by utilising the statutory procedure where that was available, rather than seeking to judicially review a decision under s 113 of the TAA to amend the assessments.[27]
[39] The Judge was satisfied that at all relevant times CHL could have taken steps to engage in the statutory processes, but did not do so because of its own defaults.[28] He noted that CHL began discussions with the Commissioner about utilising the losses from the 2000–2005 years on 10 April 2013.[29] Then, on 17 March 2013, the Commissioner issued assessments for the 2005, 2006 and 2009 years, and on the following day assessments for the 2010, 2011, 2012 and 2013 years. The Judge found it must have been obvious to CHL at that stage that the Commissioner had decided not to carry forward the losses. There was then ample time for Mr Padfield to issue NOPAs.[30]
[40] Applying Tannadyce, the Judge concluded that judicial review should be refused because the statutory processes could have been invoked but were not.[31] The essential reasoning was summarised in the concluding paragraphs of the judgment:

[82] It is also apparent that [CHL] is, in fact, attempting to use the judicial review avenue to dispute the quantification of its tax liability in the 2006 to 2012 income tax years. It seeks to reduce its assessable income by the amounts of the alleged tax losses claimed.

[83] That its principal focus is on the correctness of its liability in the relevant years is apparent from the relief it seeks. These include orders setting aside the 2006 to 2012 assessments and any consequential interest and penalties. It seeks a direction that the request to have tax losses for the 2000 to 2005 tax years applied to subsequent years’ assessment be allowed. It seeks orders directing the Commissioner to issue reassessments for the 2006 to 2012 years.

[84] These are all issues which go to the questions which the SDCP[[32]] regime was established to deal with under the TAA. They are matters which go to quantifying the amount of tax [CHL] is liable to pay under the income tax legislation. This Court on a judicial review has no jurisdiction to deal with or determine matters of tax liability or quantum. They are properly matters which should have been pursued through the SDCP.

[85] Section 109 precludes [CHL] from raising them and the Court from granting relief in terms of that sought in these proceedings.

CHL’s argument

[41] Mr Land informed us he had made it clear in the High Court that the relief sought in the statement of claim summarised at [83] of the High Court judgment was not in fact pursued. Instead CHL sought only an order for reconsideration of the decision under s 113 by a different officer. It may be that a misunderstanding about that has contributed to the decision that the claim was barred by s 109.
[42] In this Court Mr Land has reiterated that the attack is not directly on the assessments themselves but on the alleged mistakes made in exercise of the Commissioner’s discretion under s 113. Reconsideration under s 113 remains the goal. While ultimately the aim is to secure amendment of the assessments, CHL accepts that can only occur if the Commissioner decides to amend them under s 113.
[43] Mr Land’s key propositions are that s 109 relates only to disputable decisions, that a decision under s 113 is not a disputable decision as defined by s 3(1) and indeed is specifically excluded from the decisions that can be the subject of the statutory challenge process under pt 8A by s 138E(1)(e)(iv).
[44] He submitted the High Court judgment was internally inconsistent because it accepted a decision under s 113 could be reviewed, but then held that CHL could not seek review of the decision because to do so would be to mount a collateral challenge to tax assessments. Yet a decision under s 113 of necessity relates to the potential revision of an earlier assessment. Carried to its logical conclusion, that approach would mean a taxpayer could not challenge the Commissioner’s decision under s 113 no matter how unfair the process and no matter whether the Commissioner had failed to take into account relevant considerations or based her decision on incorrect facts. Having regard to s 138(1)(e)(iv) the Commissioner’s decision under s 113 would effectively be impervious to legal challenge. This would not only be wrong in principle but also contrary to SPS 07/03 setting out the practice in relation to the exercise of the discretion to amend under s 113.[33] Such an outcome could not be justified by Tannadyce.

Commissioner’s argument

[45] Ms Courtney argued to the contrary. She submitted the High Court correctly relied on Tannadyce to conclude that s 109 prevents challenges to the correctness of assessments by way of judicial review, which was CHL’s objective in this proceeding. She argued the only reason CHL sought reconsideration of the s 113 decision was because it wanted to be able to use the claimed losses; this was a matter going to the correctness of the assessments. She submitted s 109 was comprehensive and meant that the correctness of the assessments could only be raised in challenge proceedings under pt 8A of the TAA. She went so far as to claim that filing a judicial review proceeding in such circumstances was an abuse of the court’s processes.
[46] She rejected CHL’s contention that the effect of the High Court’s decision was to place the Commissioner above the law. The statutory disputes and challenge process provides the means by which a taxpayer may take steps to ensure the correct assessment of tax liability is made and the only expectation taxpayers could have is that assessments will reflect the statutorily imposed liability.
[47] Ms Courtney relied on the majority’s conclusion in Tannadyce that s 109 precludes judicial review, save where the statutory procedures could never be invoked. She noted that the Supreme Court’s reasoning was based on the discerned parliamentary intention of ensuring that disputes or challenges about the correctness of tax assessments should only be advanced in the statutory disputes and challenge procedures provided by the TAA.

Decision

[48] We are satisfied that the High Court’s approach on this issue was incorrect.
[49] We start with the wording of s 113 itself. Subsection (1) provides that the Commissioner may amend an assessment as she thinks necessary in order to ensure its correctness. The only subject matter addressed is, as Mr Land submitted, the correctness of assessments. And the legislature has made it clear the power is able to be exercised outside the time to which the statutory disputes and challenge procedures are subject: that is a necessary consequence of s 109.
[50] The provisions of s 113(2) relating to an amendment under subs (1) having the effect of imposing fresh liability or increasing an existing liability also imply that an amendment may have the effect of reducing a taxpayer’s liability. Any amendment under s 113 would be treated as an “assessment” since the definition of that term in s 3(1) of the TAA includes “an amendment by the Commissioner of an assessment”. If the liability is increased there must be a notice. In that case at least, the statutory challenge procedure under pt 8A would be available under s 138A(1)(a): there would have been notice of a disputable decision because “disputable decision” is defined to include an assessment.[34]
[51] Otherwise, it is clear that s 113 itself is intended to stand outside of and be supplementary to the disputes and challenge process provided for in the TAA. We consider that conclusion follows from the straightforward conferral of power on the Commissioner without any reference to restrictions derived from the other statutory processes, and the TAA’s clear exclusion of decisions under s 113 from the right of challenge under pt 8A by means of s 138E(1)(e)(iv). That exclusion takes decisions made under s 113 outside the definition of “disputable decision” in s 3(1) because a decision under s 113(1) is a decision that cannot be challenged under pt 8A of the TAA, or pt 8 for that matter.[35] In the result, the decision whether to amend or not under s 113 cannot be subject to the statutory disputes and challenge process, whereas an amendment under s 113 can be.
[52] Section 113 allows the Commissioner to amend an assessment at any stage when she thinks it necessary to ensure its correctness. The power given is remedial in nature and sits comfortably with the obligation conferred on functionaries under the TAA “at all times to use their best endeavours to protect the integrity of the tax system”.[36] Relevantly, s 6(2) of the TAA states that, without limiting its meaning, the expression “the integrity of the tax system” includes taxpayer perceptions of that integrity, and the rights of taxpayers to have their liability determined “fairly, impartially, and according to law”. Amendment of an assessment so as to ensure its correctness is therefore clearly in accordance with protecting the integrity of the tax system.
[53] We are not persuaded that s 109 should impact on the interpretation of s 113. Section 109 seeks to ensure that the statutory disputes and challenge procedures are used in the case of disputable decisions. Its role was recognised and fully explained in Tannadyce, in which the Supreme Court accepted the section involved a restriction of the right to apply for judicial review.
[54] Section 27(2) of the New Zealand Bill of Rights Act 1990 enacts that:

Every person whose rights, obligations, or interests protected or recognised by law have been affected by a determination of any tribunal or other public authority has the right to apply, in accordance with law, for judicial review of that determination.

The remedy of judicial review under the Judicature Amendment Act is the means by which that right is most frequently exercised.

[55] The importance of judicial review was recognised in Tannadyce. Elias CJ and McGrath J said:[37]

[3] Our constitutional arrangements recognise that the Parliament of New Zealand is the supreme law maker and has “full power to make laws”. The courts of higher jurisdiction, however, have constitutional responsibility for upholding the values which constitute the rule of law. A central aspect of that role is to ensure that when public officials exercise the powers conferred on them by Parliament, they act within them. Judicial review is the common law means by which the courts hold such officials to account. It provides the public with assurance that public officials are acting within the law in exercising their powers, and are accountable if they depart from doing so. Statutes limiting recourse to judicial review to challenge statutory decisions accordingly raise issues of constitutional concern. This concern is reflected in the presumption of the courts, when interpreting such legislation, that it was not Parliament’s purpose to allow decision makers power conclusively to determine any question of law. Furthermore, in the present context, tax legislation will not readily be read as enabling imposition of a liability for tax without also allowing the opportunity of access to a judicial process to show that, in law, the tax should not have been imposed or imposed in the amount assessed.

[4] Legislation which does not on its terms prohibit judicial review, but restricts its availability, can nevertheless interfere with full supervision by the courts of the conformity of activities of government with the rule of law. The courts are reluctant to read legislation in a manner that impairs their ability to hold public officials to account in this way.

[5] These constitutional concerns over access to justice and accountability are also served by the general statutory principle in relation to judicial review that the existence of a right of appeal does not exclude the courts’ jurisdiction in judicial review proceedings in relation to the same subject-matter.

While the Chief Justice and McGrath J were in the minority, that was not because of any fundamental disagreement about the significance of judicial review. To the contrary, Tipping J (writing for the majority) also underlined its importance and confirmed this Court’s statement in Bulk Gas Users Group v Attorney-General that:[38]

... judges should be slow to conclude that a statutory provision ousting or limiting access to the courts was intended to preclude applications to the High Court for judicial review alleging unlawfulness of any kind.

[56] It is clear from the terms of the majority judgment in Tannadyce that concerns that might otherwise have existed about the breadth of s 109 were assuaged by the fact that, under the TAA’s statutory disputes and challenge procedures, the taxpayer can elect to have the substantive issues determined by either the Taxation Review Authority or the High Court itself. As Tipping J observed:

[57] But in the present case, there is no need to strain to reconcile the terms of s 109 with the general availability of judicial review in the interests of preserving taxpayers’ access to the High Court when taxpayers need it. This is because the challenge procedure has a built-in right for the taxpayer to take the matter to the High Court, if that is thought necessary or desirable. There cannot therefore be any question of s 109 preventing access by taxpayers to the High Court. Giving effect to its terms does not have that consequence. It cannot matter whether the taxpayer seeks relief from the High Court pursuant to an application for judicial review or pursuant to a challenge under Part 8A. As we have seen, the statutory procedures are framed so as to give hearing authorities power to consider a challenge made to an assessment on any ground whatsoever and to cancel, vary or confirm the assessment as may be appropriate.

[57] We do not see the decision in Tannadyce as requiring any restriction on the general right to apply for judicial review of the exercise of the Commissioner’s powers under s 113. A decision under s 113 is not a disputable decision, for reasons already addressed. Therefore, s 109 has no direct application.
[58] In the present case, the application for review related not to the Commissioner’s assessments, but to her decision under s 113(1) declining to amend the assessments. It does not matter that CHL’s ultimate objective is for the assessments to be altered so as to bring into account the losses referable to the 2000‒2005 years. Administrative law challenges are, in most cases, advanced against the processes followed by a decision maker rather than the substance of the decision, but the decision is set aside in the case of error. It was perhaps unfortunate that CHL did not seek formally to amend its claim in the High Court so as to make it plain that CHL did not in fact seek substitution of a different substantive outcome by way of the application for review. However, the fact that the relief sought in the statement of claim was inappropriately broad should not deprive CHL of the ability to challenge the Commissioner’s s 113 decision on standard administrative law grounds. Furthermore, a case might arise where it could be shown that the Commissioner’s decision was clearly irrational, there was only one correct answer and relief substituting a different decision was appropriate. Such a case would obviously be extremely rare. In any event, as we have noted, CHL does not seek here the substitution of a different substantive decision.
[59] We agree with Mr Land that the High Court’s approach is inconsistent. Once it is accepted that an application for review of a decision under s 113 can be made, it is inappropriate to postulate a rule that relief cannot be granted because the statutory disputes and challenge procedures have not been followed. Often that fact will be an important consideration and may persuade the Court that relief should not be granted. But to reason as the High Court did is to elevate to a substantive rule a consideration that could only be relevant to the question whether relief should be granted in the court’s discretion. Such a rule would effectively oust the High Court’s jurisdiction to consider applications for review in the absence of a statutory direction to that effect. That would be wrong in principle.
[60] This conclusion is consistent with the approach in Arai Korp Ltd v Commissioner of Inland Revenue where Wylie J held that, in deciding whether or not to exercise the s 113 power, it was relevant for the Commissioner to take into account the fact that the taxpayer had sat on its hands and done nothing to involve the statutory disputes and challenge procedures.[39] But that is different from a rule to the effect that the s 113 power need not be exercised whenever the statutory procedures could have been invoked, but had not been.
[61] Similarly, in Westpac Securities NZ Ltd v Commissioner of Inland Revenue, Clifford J held that relevant considerations include the fact that s 113 was not intended to be used by taxpayers to circumvent the statutory disputes process, the resources available to the Commissioner and the merits of the case.[40] The last consideration may be important. As this Court observed in Lawton v Commissioner of Inland Revenue, albeit in a different context:[41]

[29] This Court in CIR v Wilson held that the merits of a proposed objection must be considered unless the explanation for the lateness of the objection is so inadequate that this is unnecessary. As this Court pointed out in CIR v Wilson at p 12,521 it is important in a system which relies on voluntary compliance for the Commissioner to be seen to be operating fairly, and this will in many circumstances mean that the merits of a taxpayer’s position will be a material factor to be weighed.

[62] The importance of considering the merits in deciding whether or not to exercise the s 113 power is, we think, inherent in the evident purpose of s 113: the section constitutes a conferral of power exercisable outside the statutory disputes and challenge procedures by which the Commissioner may make adjustments necessary to ensure the correctness of assessments. For those reasons, we are satisfied that the High Court erred when it held that judicial review of a decision under s 113 must be refused except when the statutory process could never be invoked, and reject Ms Courtney’s argument to the contrary.[42]
[63] In the end, we understood Ms Courtney to accept that the s 113 power could be exercised although the statutory disputes and challenge procedures had not been invoked and the time for doing so had passed. She added, however, the proviso that sufficient information must have been made available by the taxpayer to satisfy the Commissioner that amendment of an assessment was necessary in order to ensure its correctness. It is the taxpayer who has all the relevant information, and the Commissioner should not be under any duty to ascertain the correct position.
[64] We accept that is so. However, in the present case it is clear that the Commissioner, through Ms Kaur, engaged with Mr Padfield on the issue of whether the assessments could be amended under s 113. Having done so, she recommended that the amendments be made. She took the view that sufficient information was available to enable her to make the recommendation. During that process, if Mr Padfield had been told that the s 113 power could not be exercised in CHL’s favour and it would be necessary for him to invoke the statutory dispute procedures he could have done so until 17 June 2014. At no stage over the period of his dealings with Ms Kaur was Mr Padfield told that there was an insufficient basis upon

which the s 113 power could be exercised. It does not seem reasonable or fair,[43] in the circumstances that the Commissioner should be able to rely on lack of information, and consequentially assert that in the absence of the timely commencement by Mr Padfield of the statutory disputes and challenge procedures, s 109 should be applied to preclude relief on an application to the Court for review.

The merits of the application for review

[65] The High Court did not deal with the merits of the application for review for the reasons we have already discussed. Because we have come to a different conclusion, it is necessary for us to do so.
[66] Mr Land’s principal submission was that the Commissioner had based her decision on material mistakes of fact. He focused on three factual errors. The first was a mistaken finding that Mr Padfield had demonstrated knowledge of the process for carrying forward losses in his personal tax returns. This had led Ms Stowers to reject Mr Padfield’s claim that he had made a genuine error in not carrying forward CHL’s losses in the returns that he completed for the company. This issue is reflected in item 5 of the reasons expressed by Ms Stowers in her decision. A slightly fuller explanation relating to the same point was given in a letter written by Ms Kaur on 18 July 2014 in response to further correspondence sent by Mr Padfield following the making of the s 113 decision. It was expressed as follows:

You filed your own income tax returns for the year ended 2005 with a loss of $1,000 and for the 2006 year with a profit of $1,000. The profit was offset by the losses carried forward resulting in NIL income which demonstrates your knowledge of this process.

[67] Mr Padfield’s personal tax returns for the 2005 and 2006 years were put in evidence in the High Court. Those returns showed a loss in each year. They did not show a loss in one year with an offset in the next year against profit to result in nil tax to pay. There was no attempt in the 2006 personal tax return to carry forward past losses from 2005 for the purposes of calculating the 2006 tax. Question 28 in the 2006 tax return, which asked “Are you claiming net losses brought forward?” was simply answered “No”. We accept Mr Land’s submission that this was consistent with the way in which CHL’s tax returns were completed.
[68] The factual basis for Ms Stowers’ rejection of Mr Padfield’s claim of genuine error in filling in the form relevant to CHL’s tax position falls away. In fact, the Commissioner did not attempt to assert the contrary in the High Court. It seems that this was simply an error made by Ms Stowers and Ms Hague.
[69] It also seems clear from the factual narrative that Mr Padfield had been intending to claim the relevant tax losses but had simply filled out the relevant forms incorrectly. His consistent approach was to state there had been a loss but not respond to the question about losses brought forward. In the circumstances, we doubt that there is any rational explanation for the failure to respond appropriately to the question on the forms about bringing forward net losses other than genuine error. Ms Courtney submitted that Ms Stowers did not find that Mr Padfield had not made a genuine mistake, contending that she had simply not been sure whether the losses had been incurred and decided that it was not worth applying resources to find out if the losses had in fact been incurred. However, it is clear from the record that the issue influenced Ms Stowers’ decision.
[70] The second mistake of fact relied on by CHL focuses on items 8 and 9 of the reasons given by Ms Stowers for her decision. Mr Land submitted that the suggestion that the sale of the assets of the company had not been a true sale lacked any factual foundation. He pointed out that the receivers’ report of 1 October 2013 made it clear that there had been a sale of the company’s then business and business assets for $704,120. He also submitted it would have been easy for Ms Stowers to check the position by contacting the receivers or CHL, and obtaining a copy of the sale and purchase agreement.
[71] Ms Courtney accepted that Ms Stowers’ conclusion was incorrect, although she claimed that Ms Stowers had been entitled to make the decision under s 113 on the basis of the information she had. At one stage she characterised items 8 and 9 as simply a series of questions.
[72] We consider that, in context, items 8 and 9 are rather more than that. They are questions in form, but taken together they indicate non-acceptance of the genuineness of the sale of the company’s assets. If that was to be a reason for failing to exercise the s 113 power, it ought to have had a factual basis. It did not.
[73] The third factual error was based on item 3 of Ms Stowers’ decision where she wrote that no trading income had been returned in CHL’s 2005 tax return. However, the pool servicing and retail pool equipment business of CHL had been sold as a going concern on 25 July 2003. In addition, the company was in receivership until 30 March 2005. Mr Land complained that Ms Stowers had not explained why she thought the company was likely to have had sales income in the 2005 year when it had sold its business in 2003, why she thought the company was likely to have sales income in the 2005 year when it had been in receivership until 30 March 2005 and what steps she took to verify what was effectively an accusation of non-disclosure of income, or tax evasion by CHL.
[74] There was evidently no attempt by the Commissioner to assert a factual basis for the suggestion that trading income should have been recorded in the tax return for the 2005 year.
[75] Taken collectively, these factual errors were such that they must have caused Ms Stowers to doubt the genuineness of Mr Padfield’s claim on behalf of CHL for amendment of the relevant assessments to allow for the losses claimed to be carried forward. We accept, as Ms Courtney emphasised, that item 1 of Ms Stowers’ reasons focused on the fact that the accounting information provided emanated from Mr Padfield himself, the information had not been audited and the working paper to substantiate the information had not been provided. The other matters relied on by Ms Stowers concerned delay, matters concerning Mr Padfield’s personal tax affairs and the factual errors we have already discussed. We consider in the circumstances that the factual errors must have had an impact on the decision. Further, insofar as additional information was necessary in order to found a proper decision under s 113, we consider the Commissioner should have sought its provision. Despite the serious delays for which Mr Padfield had been responsible, there was nevertheless a substantial sum at stake and, having engaged with Mr Padfield in a process leading to consideration of the exercise of the s 113 power, the appropriate course for the Commissioner to follow was to seek provision of further information if the information currently available was lacking. That is especially so since Ms Kaur evidently considered that she had sufficient information for the purposes of her report.
[76] There is now clear authority that an error of fact may properly constitute a ground of review.[44] As is often the case, there are overlapping grounds on which review can be justified in the circumstances of this case. To be influenced in reaching a decision by an erroneous conclusion of fact is to take into account an irrelevant matter and the decision may also be impugned on this basis.

Result

[77] The appeal is allowed and the Commissioner’s decision of 19 June 2014 declining CHL’s request under s 113 of the Act is set aside.
[78] The parties were agreed that if we reached that point, the appropriate course to follow was to refer the matter back to the Commissioner for further consideration in accordance with the terms of this judgment. We make an order accordingly. Having regard to the fact that at least to some extent the decision to decline the application appears to have been based on findings that were adverse to Mr Padfield’s credibility, we direct that the reconsideration should be by delegates of the Commissioner other than those who have been involved in the matter to date.
[79] The respondent must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.







Solicitors:
Gaze Burt, Auckland for Appellant
Crown Law Office, Wellington for Respondent

[1] Charter Holdings Ltd v Commissioner of Inland Revenue [2015] NZHC 2041.

[2] Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153.

[3] See Tax Administration Act 1994, ss 3 and 138E(e)(iv).

[4] Charter Holdings, above n 1, at [4]–[40]. The Judge’s findings were based on the affidavits filed: he declined an application made by CHL to cross-examine the respondent’s witnesses.

[5] Tax Administration Act, s 37(1)(c).

[6] Charter Holdings, above n 1, at [13].

[7] At [14].

[8] At [16].

[9] At [20].

[10] The details in this paragraph are from the affidavit of Ms Wendy Hay, one of the respondent’s witnesses.

[11] Tax Administration Act, pt 4A. Ms Hay thought it likely the letter had been so marked because the person who processed it thought that a NOPA might be required to action the amendments requested.

[12] Graham Tubb Standard Practice Statement: Requests to amend assessments (Inland Revenue, SPS 07/03, 17 May 2007).

[13] Charter Holdings, above n 1, at [23].

[14] Tannadyce, above n 2, at [61].

[15] At [53] (footnote omitted).

[16] At [54].

[17] At [54] (footnote omitted).

[18] At [55].

[19] At [55].

[20] At [58].

[21] At [59].

[22] At [59].

[23] At [59].

[24] At [85].

[25] At [85].

[26] At [64]; and Arai Korp Ltd v Commissioner of Inland Revenue [2013] NZHC 958, (2013) 26 NZTC 21-104.

[27] Charter Holdings, above n 1, at [67] and [69].

[28] At [74].

[29] At [75].

[30] At [75]. The NOPAs would have set in train the statutory disputes and challenge process under the TAA.

[31] At [80]–[81].

[32] This was a reference to the statutory disputes and challenge procedures in the TAA (footnote added).

[33] Tubb, above n 12. This sets out “Inland Revenue’s practice for exercising the Commissioner’s discretion to amend assessments to ensure their correctness”: at [1]. See also Graham Tubb Standard Practice Statement: Requests to amend assessments (Inland Revenue, SPS 16/01, 1 April 2016).

[34] Tax Administration Act, s 3(1).

[35] Section 125(j)(iv).

[36] Section 6(1).

[37] Tannadyce, above n 2 (footnotes omitted).

[38] At [56], citing Bulk Gas Users Group v Attorney-General [1983] NZLR 129 (CA) at 133.

[39] Arai Korp Ltd v Commissioner of Inland Revenue, above n 26, at [69].

[40] Westpac Securities NZ Ltd v Commissioner of Inland Revenue [2014] NZHC 3377, (2014) 26 NZTC 21-118 at [67].

[41] Lawton v Commissioner of Inland Revenue [2002] NZCA 337; [2003] 2 NZLR 48 (CA).

[42] Charter Holdings, above n 1, at [80].

[43] Section 6(2)(f) of the TAA refers to the responsibilities of those administering the law to do so “fairly, impartially, and according to law.”

[44] Taylor v Chief Executive of Department of Corrections [2015] NZCA 477, [2015] NZAR 1648 at [94] and the authorities there referred to.

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