Consideration of the "evidence exclusion" rule

Summary

The taxpayer sought to strike out certain pleadings in the Commissioner of Inland Revenue's ("the Commissioner") Statement of Defence. The Commissioner successfully opposed the strike-out application primarily relying on the "evidence exclusion" rule in section 138G of the Tax Administration Act 1994 ("TAA").

Impact of decision

The judgment considers the requirement of no arguable defence to succeed in a strike out application and provides some guidance on the application of section 138G of the TAA. It reinforces the legislative requirement for both parties to refer to all issues and propositions of law in a Statement of Position to be raised in a challenge. (This case was dealt with under the old evidence exclusion rule which was replaced by the Tax Administration and Remedial Matters Act 2011 effective 29 August 2011.)

Facts

The Te Akau Stallion Syndicate No 1 ("the Syndicate") was formed in 2008. It purchased a thoroughbred colt at the 2008 Karaka sale for $550,000.

In the tax years 2008 and 2009, each member of the syndicate claimed a deduction for their respective share of the syndicate loss which was made up of expenditure incurred in relation to the colt and a 75% diminishing value write down of the purchase price.

The Commissioner allowed deductions for expenses incurred in relation to the colt. However, deductions for the cost of the colt were denied on the basis the syndicate was not in the business of breeding bloodstock pursuant to section EC39(1) of the Income Tax Act 2007.

Five syndicate members (the plaintiffs) challenged the Commissioner's finding in relation to the deduction for the cost of the colt. Included in the plaintiffs' Statement of Claim was an allegation that the fourth plaintiff was in the business of breeding outside the syndicate and was therefore entitled to its share of the value of the colt.

The Commissioner considered section 138G of the TAA applied to prevent the plaintiffs raising those three allegations in the challenge that had been referred to in the plaintiffs' Statement of Position and therefore denied he was required to plead to them in his Statement of Defence.

Decision

Associate Judge Faire began by setting out the general principles of strike out as per Attorney General v Prince and Gardener [1998] 1 NZLR 262 (CA). The issue to be determined here was whether there was no reasonably arguable defence that the plaintiffs were estopped from pleading due to section 138G of the TAA.

He also set out the requirements of "due diligence" pursuant to section 138G(2)(a) and "manifest injustice" pursuant to section 138G(2)(b) of the TAA to succeed on the application for leave to raise the matters set out in paragraphs 35, 21, 22 and 25 of the Statement of Claim.

In terms of the allegations concerning the fourth plaintiff, the Judge considered the Commissioner's pleading advanced was a reasonably arguable defence to the allegation made in the Statement of Claim. In addition, there was evidence in support of the contention made in the defence.

It was clear the pleading in the Statement of Defence had foundation to it and there was no justification for striking out the paragraph.

In terms of section 138G of the TAA, the plaintiffs had provided no evidence that they could not have with due diligence discovered the facts and issues referred to. The Judge was not satisfied a case had been made out that would justify the granting of leave.

The Statement of Claim contained allegations in relation to the deductions allowed by Inland Revenue's Adjudication Unit for expenses incurred by the syndicate in relation to the colt. While it was apparent the factual matters referred to in those paragraphs were in the plaintiffs' Statement of Position, there was no reference to inconsistency of the treatment of the two types of deductions claimed.

In terms of the strike-out, the Judge considered there was a reasonably arguable defence of estoppel and therefore could not strike out the pleadings in the Statement of Defence.

In relation to the section 138G of the TAA application, the Judge agreed with the Commissioner that while section 138G(2)(a) of the TAA was satisfied for these paragraphs, there was no manifest injustice in not granting leave as the correctness of the assessment did not turn on the correction of another assessment.

The Statement of Claim contained allegations in relation to the GST dispute. The Commissioner submitted that section 138G of the TAA did not permit the plaintiffs to refer to the GST dispute, particularly in relation to the issue of inconsistency which had not been raised in the Statement of Position. In addition, the Commissioner submitted that an inconsistency argument was not a ground for challenging an assessment and referred to a number of sections in the TAA that allowed the Commissioner to change his assessment.

On the basis of these arguments, the Judge considered that it was not appropriate to strike out the pleadings in the Commissioner's Statement of Defence.

The Judge again agreed with the Commissioner that there would be no manifest injustice in not allowing leave pursuant to section 138G(2)(b) of the TAA as the inconsistency argument was irrelevant to the determination of the issues.