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Court of Appeal of New Zealand |
Last Updated: 23 November 2017
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IN THE COURT OF APPEAL OF NEW ZEALAND
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BETWEEN
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First Appellant
YAGASHWAR SINGH
Second Appellant |
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AND
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Respondent |
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Hearing: |
1 November 2017 |
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Court: |
Kós P, Miller and Gilbert JJ |
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Counsel: |
S M Kilian and F J Hawkins for Appellants
J K Gorman and L A Herbert for Respondent |
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Judgment: |
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Reasons: |
13 November 2017 |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE
COURT
(Given by Gilbert J)
Introduction
[1] Veena and Yagashwar Singh appeal against the dismissal of their application for judicial review of a decision by the Commissioner of Inland Revenue declining their request for financial relief in respect of their obligations to pay outstanding tax.[1] The notice of appeal raised four grounds but two of these were appropriately abandoned, one before the hearing[2] and the other at the hearing[3]. We were satisfied that there was no merit in either of the remaining grounds — alleged apparent bias by the decisionmaker[4] and alleged failure to take into account the appellants’ inability to meet their mortgage payments.[5] We accordingly dismissed the appeal at the conclusion of the hearing and stated that our reasons would follow.[6]
[2] Although our reasons for dismissing the appeal can be stated briefly, it is helpful to summarise the lengthy history of the matter to set the context for the judicial review proceedings and this appeal. The history shows that Mr and Mrs Singh not only failed to meet their tax obligations, they also failed to take advantage of the many opportunities afforded to them by the Commissioner over a five-year period to provide proper and complete disclosure to support their repeated applications for financial relief. We are satisfied that their complaints against the Commissioner are completely unjustified and were rightly rejected by the High Court.
Background
[3] In January 2008 a compliance officer in the Inland Revenue Department advised Mr Singh’s accountant that Mr Singh appeared to have been involved in undisclosed property transactions over recent years. Mr Singh was invited to make a voluntary disclosure which could have the effect of significantly reducing any shortfall penalties that might otherwise be imposed.
[4] Mr and Mrs Singh made a voluntary disclosure in March 2008 that they had purchased and on-sold 16 properties in the period from October 2002 to March 2004. The Singhs claimed to have been unaware of the requirement to declare income derived from such property dealing.
[5] The Commissioner found on further investigation that Mr and Mrs Singh had in fact purchased and on-sold a total of 40 properties, 39 of which related to the 2003–2007 tax years the subject of the audit. The aggregate value of these 39 transactions was in excess of $8 million. The Singhs subsequently agreed to the consequent tax adjustments for these income years in October 2009. The final audit report, issued in November 2009, noted that Mr and Mrs Singh had provided very few of the records the Department had requested and that it had been forced to obtain the relevant solicitors’ files and bank statements and produce the necessary income tax and GST schedules.
[6] In February 2010 the Singhs’ accountant indicated that they might be able to offer a lump sum payment of $150,000 but nothing further came of this.
[7] In February 2011 the Commissioner obtained judgment against Mrs Singh for $619,730 and against Mr Singh for $574,106. These debts included unpaid income tax, unpaid GST, overpaid family assistance benefits, use of money interest and shortfall penalties for gross carelessness.[7]
[8] The Commissioner commenced bankruptcy proceedings in early 2012. Mr and Mrs Singh filed a notice of intention to oppose the application claiming that it would be unjust and inequitable to make an adjudication order because, given time, they would be able to repay the outstanding debt. They asked the Court to approve an instalment arrangement commencing with monthly payments of $5,000. Despite this claim having been made over five years ago, the Singhs have repaid almost nothing.[8]
[9] The Commissioner withdrew the bankruptcy proceedings in November 2012 to consider further documentation provided by the Singhs.
[10] In January 2014 the accountant then acting for the Singhs made a formal request for financial relief under s 177 of the Tax Administration Act 1994 (the Act). Section 176 of the Act provides that the Commissioner may not recover outstanding tax to the extent that recovery would place a taxpayer, being a natural person, in serious hardship. Section 177 makes provision for a taxpayer to request financial relief either by requesting an instalment arrangement or by stating why recovery would place them in serious hardship. The Singhs claimed they were “in very serious financial hardship”, recovery of the debt was “not possible” and, as a result, they were “entitled to a tax write off”. Their accountant asserted that the entire debt “must be written off” under s 177 of the Act.
[11] After considering the application, the Commissioner responded in May 2014 that she would accept a payment of $649,482 and write off the balance of the combined debt which then stood at approximately $1.75 million.
[12] Mr and Mrs Singh made a second request for financial relief in September 2014. They claimed that their financial position had deteriorated since their last request was made. They said they were in “a very serious financial crisis” and were unable to meet minimum living expenses. They again claimed that they were “entitled to a tax write off”. However, Mr Singh indicated that a third party was prepared to advance him $30,000 which could be offered in full and final settlement of the combined debt.
[13] The Commissioner reviewed the financial information provided in support of this request and found important discrepancies. For example, the amount required to service the mortgage on the property owned by Mr and Mrs Singh’s family trust, disregarding all other living expenses, was more than their declared combined income. Despite this shortfall, their bank statements showed that they had nevertheless recently purchased a number of non-essential items. The Commissioner concluded that the information provided in support of the request for financial relief did not reflect the true position because it would be impossible for them to continue to live in their home and make the purchases they had made on their declared income. The application was accordingly declined in December 2014.
[14] Undeterred, Mr and Mrs Singh promptly made a third request for financial relief in January 2015. This time, they presented two options. Option 1 was for the Commissioner to write off both debts entirely. Option 2 was for the Commissioner to accept the $30,000 previously offered (funded by the third party), a lump sum of $26,000 from Mr and Mrs Singh, and further payments from them of $400 per month for 36 months. This would yield a combined payment of $70,400 after three years. They proposed that the balance of the debt be written off. The Commissioner declined this request on 25 February 2015 and advised that dates had been set for the hearing of bankruptcy proceedings in March 2015.
[15] The Singhs’ accountant responded immediately asking for a further review of the case and advised that the Singhs would “vigorously defend” the bankruptcy proceedings. The Department wrote to the Singhs’ accountant on 4 March 2015 pointing out that the information that had been supplied did not give “a full picture of Mr and Mrs Singh’s financial situation”. This was because the monthly mortgage payments exceeded their combined declared income. Further, the information showed that payments had been made towards a home loan held by a related family trust. The accountant did not offer any explanation for this in his response on 10 March 2015. Rather than addressing that issue, he simply restated his claim that Mr and Mrs Singh were “entitled” to relief. In the absence of any new information, the Commissioner declined this fourth application for relief on 16 March 2015 and stated that she intended to proceed with the bankruptcy.
[16] On 31 March 2015 the accountant provided a statement of financial position. This did not assist because no supporting records were provided, nor was any explanation given for the shortfall between declared income and expenses identified earlier. The Commissioner advised on 10 April 2015 that the further information had not changed the position and that the bankruptcy application would proceed.
Judicial review proceedings
[17] In May 2015 Mr and Mrs Singh filed judicial review proceedings in the High Court challenging the Commissioner’s decision to decline relief. They sought an order requiring the Commissioner to reconsider her decision. On 1 October 2015, one week prior to the scheduled hearing, the Commissioner agreed to the Singhs’ request that she reconsider the matter. The hearing of the judicial review proceedings was accordingly vacated by consent.
[18] The parties agreed that the reconsideration would occur in the context of a fresh application for relief. The Singhs would have the opportunity to provide additional information and this would be reviewed in the first instance by Miranda Law, a recovery and enforcement specialist working in the collections section at the Inland Revenue Department. It was not suggested that anyone who had been involved in considering the Singhs’ earlier requests should be disqualified from participating in the reconsideration process.
[19] On 19 November 2015 David Weaver, the barrister who had been representing the Singhs in the High Court proceedings, submitted the further relief application and supporting documentation. This became the Singhs’ fifth application for relief.
[20] After reviewing the material provided, Ms Law queried why no expenditure was shown in the bank or credit card statements for general living expenses such as food or clothing. She also queried the source of various deposits shown in the bank statements. In January 2016 Mr Weaver passed on Mr Singh’s response and stated “it seems their son has been helping to pay living costs”. He attached the bank statements he had been given to support this claim. The contention that one of the Singhs’ sons was supporting the family was directly contrary to what the Singhs had stated in their recently submitted relief application: “[they] rely on their carpet business to earn a living and provide food, clothing and accommodation for themselves and their two sons who are depend[e]nt on them”.
[21] On 12 February 2016 Mr Weaver sent Ms Law a final demand the Singhs had received from their bank as mortgagee showing arrears on their trust’s home loan of $12,900.
[22] Ms Law completed her internal report and provided her recommendation on 31 March 2016. She noted that the Singhs’ combined declared net monthly income (including drawings) was $5,012. Monthly home loan payments totalled $4,859 giving a surplus of $153 to cover all living costs. She observed that the Singhs had stated in their relief application that they were supporting their two adult children but this was clearly not possible given their declared income. Ms Law noted that she had found no evidence of living expenses in the bank statements that were provided and that she had sought an explanation for this. She recorded that she was then told that Mr and Mrs Singh were being supported by one of their sons who works in the family business. However, when she reviewed his bank statements, these showed the type of spending that would be usual for a 23-year-old male — takeaways, clothing, video games and electronics — but no spending at supermarkets or on other normal living expenses required to support a family of four adults. Ms Law noted the bank demand showing mortgage arrears but concluded that there was insufficient information to enable her to determine Mr and Mrs Singhs’ actual income and expenditure. She stated “We have requested information about how they are meeting their day to day living expenses, but we have not received a satisfactory answer”.
[23] Ms Law’s report and recommendation were reviewed by her team leader, Kristal Pihama. Ms Pihama concurred with the recommendation to decline the application for relief.
[24] The collections manager, Marilyn Foster, also reviewed the matter. She said that having considered the available information, she supported the recommendation to decline relief and proceed with the bankruptcy proceedings.
[25] The matter was then referred to Richard Philp, the collections manager with delegated authority to make the final decision. He also concurred with Ms Law’s recommendation.
[26] Mr Philp wrote to Mr and Mrs Singh on 13 May 2016 advising them of his decision to decline the request for relief. Because it is this decision which then became subject to the current judicial review proceedings, it is appropriate to set out the relevant passages:
...
The information you provided to support your application for financial relief showed that your combined declared income was sufficient to make the mortgage payments for your home. However, the balance of your combined income once the mortgage payments are deducted left a very minimal amount to cover living expenses (less than $200.00 per month). As a consequence, further information was requested about how your living expenses were being paid, but the information received did not provide any clarification of this. In respect of your claim that your son assisted with paying your living costs, the information provided did not support this. ...
Given the lack of evidence demonstrating how you are meeting your living expenses on your current disclosed income, I am unable to conclude that you would likely have significant financial difficulties after allowing for payment of an amount of outstanding tax. Rather, the information suggests that you may be in receipt of undeclared income.
...
Consideration was given to the fact your debt has arisen as a result of Inland Revenue establishing that you did not disclose all income you had received from property trading activities. This, together with your lack of cooperation during the audit investigation, means that, notwithstanding your current financial situation, it would be inappropriate to provide hardship relief, particularly when I don’t believe that you have fully disclosed your true financial position when making application for relief. ...
[27] The Singhs were dissatisfied with this outcome. They filed an amended statement of claim in late August 2016 challenging this most recent decision and brought their judicial review proceedings back on for hearing on 7 December 2016. The proceedings were dismissed by Lang J in a judgment delivered on 12 December 2016.[9]
First ground of appeal — apparent bias
[28] The Singhs contend on appeal that Lang J was wrong to dismiss their complaint that Mr Philp was disqualified from participating in the reconsideration process because of apparent bias. This contention is hopeless.
[29] The only pleading relevant to this claim is the following paragraph in the first amended statement of claim:
118. The previous decision to decline relief was made by Mr Philp. The same person who reconsidered his previous decision.
Clearly, the mere fact that Mr Philp had previous involvement falls far short of founding a claim of apparent bias. The allegation of apparent bias should not have been made on such a manifestly inadequate foundation.
[30] Mr Philp has been employed by the Inland Revenue Department for over 40 years. For the last seven years he has managed some 870 staff who are responsible for collecting unpaid debts. As collections manager with delegated decision-making authority, he personally considers approximately 10 submissions every week. There is no reason to suppose that Mr Philp would not bring an impartial and open mind when considering the Singhs’ request.
[31] The hearing of the judicial review proceedings was vacated to enable the Singhs’ application to be reconsidered. The Singhs had obtained discovery and were aware of the process that had been followed by the Department when assessing their earlier requests for financial relief. They knew the names and positions of those personnel who had been involved. As noted, they did not suggest at the time that Mr Philp should not be involved in the reconsideration process.
[32] After carefully reviewing the fresh application and the supporting information, Mr Philp accepted Ms Law’s recommendation which itself had been independently reviewed and supported by two other senior collections employees. There is no suggestion that any of those three individuals were predisposed against Mr and Mrs Singh and would not carry out their task in other than a professional manner.
[33] We agree with Lang J that there is no basis on which a reasonable and fairminded observer might reasonably apprehend that Mr Philp would not bring an impartial and open mind to his responsibility to determine the further relief application.[10]
Second ground of appeal — alleged failure to take account of the Singhs’ inability to make mortgage payments
[34] The pleaded basis for this claim is contained in the following paragraph of the first amended statement of claim:
130. The respondent misunderstood both the evidence and the nature of the case and thereby failed to take into account relevant considerations, took into account irrelevant considerations and was mistaken.
[35] This pleading is also inadequate. It is no more than a bald conclusory assertion with no facts or circumstances pleaded to support it.
[36] The inadequacy of the pleading may be explained by the fact that the claim is baseless. The fact that Mr and Mrs Singh had missed some mortgage payments and had received a final demand for some $12,000 from their bank was referred to in Ms Law’s report:
Mr & Mrs Singh have provided a copy of a letter dated 4 February 2016 from ANZ bank which is a final demand for payment. The letter states that there is $12,908.82 outstanding on the loan account for the property owned by their family trust.
[37] However, this did not overcome the overriding concern that the Singhs had not satisfactorily explained how they were meeting their living expenses based on their declared income. Further, none of the bank records provided evidenced the spending on basic living expenses necessary for a family of four adults. Even taking into account the mortgage arrears, the information provided suggested that the Singhs must have been paying their other living expenses from undeclared income.
[38] We agree with Lang J’s analysis and conclusion on this issue.[11]
Concluding observations
[39] Mr and Mrs Singh have maintained throughout that they are entitled to have their tax debts written off under s 177 of the Act because they are in serious hardship. They claim that the Commissioner must write off the debt and may not pursue bankruptcy. This contention is based on a misunderstanding of the Act.
[40] Section 176 of the Act requires the Commissioner to maximise the recovery of outstanding tax from a taxpayer subject to two important constraints. The first is that the Commissioner may not recover outstanding tax if this would be an inefficient use of her resources. The second is that the Commissioner may not recover outstanding tax where recovery would place the taxpayer in serious hardship. Nevertheless, these constraints do not affect the Commissioner’s ability to take steps to bankrupt the taxpayer. All of this is clear from s 176. It is useful to set it out in full:
176 Recovery of tax by Commissioner
(1) The Commissioner must maximise the recovery of outstanding tax from a taxpayer.
(2) Despite subsection (1), the Commissioner may not recover outstanding tax to the extent that—
(a) recovery is an inefficient use of the Commissioner’s resources; or
(b) recovery would place a taxpayer, being a natural person, in serious hardship.
(3) Despite subsection (2)(b), the Commissioner may take steps preparatory to, or necessary to, bankrupt the taxpayer, including debt proceedings in the District Court or the High Court.
[41] Section 177(3) of the Act empowers the Commissioner to take any one of four steps in response to a taxpayer’s request for financial relief. These are to accept the request, seek further information from the taxpayer, make a counter offer, or decline the request. However, under s 177B(1) the Commissioner must not enter an instalment arrangement to the extent that this would place the taxpayer in serious hardship.
[42] Section 177C(1) provides that the Commissioner may write off outstanding tax that cannot be recovered. Section 177C(1BA), however, makes clear that there is no obligation to do so, even where recovery of the outstanding tax would place the taxpayer in serious hardship.
[43] The Singhs’ request for financial relief, the subject of the judicial review proceedings, did not involve any proposal for payment. Faced with the options of writing the entire debt off and receiving nothing, or pursuing bankruptcy, the Commissioner was entitled to choose the latter course, as s 176(3) makes clear. This would enable the Official Assignee to take control of and investigate the Singhs’ financial affairs.
[44] That is not to say that the Commissioner would not have been entitled to write off the Singhs’ debt had she been satisfied that they were in serious hardship. The Commissioner’s duty to recover tax would not apply in those circumstances. This is because either no recovery is possible, or any recovery would involve an inefficient use of resources or would place the taxpayer in serious hardship.
[45] We do not consider that bankruptcy proceedings are properly characterised as debt recovery proceedings.[12] There is no obligation on the Commissioner to write off outstanding tax and she may pursue bankruptcy proceedings if appropriate. Were it otherwise, the Commissioner would be unable to pursue bankruptcy proceedings, even in respect of the most insolvent debtors. Plainly that was not the intention of Parliament, as is clear from s 176(3).
[46] It will be for the High Court to determine whether it is just and equitable to make an order for adjudication taking into account all relevant considerations including the interests of creditors generally and the wider public interest. We express no views about that question. However, we are satisfied that the challenge to the Commissioner’s decision to decline the Singhs’ request for financial relief was without foundation and the judicial review proceedings were rightly dismissed.
Result
[47] The appeal is dismissed.
[48] The appellants must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Kilian & Associates Ltd,
Auckland for Appellants
Crown Law Office, Wellington for Respondent
[1] Singh v Commissioner of Inland Revenue [2016] NZHC 3001, (2016) 27 NZTC 22-082 [High Court judgment].
[2] Ground 2: the allegation that the Commissioner did not give the appellants a proper opportunity to be heard.
[3] Ground 4: the Commissioner allegedly failed to advise the appellants of the legal framework under which their application would be considered.
[4] Ground 1.
[5] Ground 3.
[6] Singh v Commissioner of Inland Revenue [2017] NZCA 497.
[7] A shortfall penalty of 40 per cent was imposed for gross carelessness but this was reduced by 50 per cent for previous behaviour. Some shortfall penalties were reduced by 75 per cent for the voluntary disclosure.
[8] $1,200 has been paid towards Mr Singh’s debt.
[9] High Court judgment, above n 1.
[10] High Court judgment, above n 1, at [38].
[11] At [50]–[52].
[12] To the extent that a contrary view was expressed by the High Court in P v Commissioner of Inland Revenue [2015] NZHC 2293, (2015) 27 NZTC 22-081 at [30]–[49] we disagree.
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