The Commissioner's discretion to amend assessments - s 113 of the Tax Administration Act 1994

Summary

Charter Holdings Limited ("Charter Holdings") applied to judicially review a decision of the Commissioner of Inland Revenue ("the Commissioner") not to amend her assessment of its tax liability in the 2006 to 2012 tax years ("the Decision") pursuant to s 113 of the Tax Administration Act 1994 ("TAA"). The Commissioner considered that Charter Holdings should have engaged the statutory disputes and challenge procedure, and that its judicial review was a collateral attack on the validity of her assessments and therefore must be refused.

Impact

The decision supports the Tannadyce Investments Ltd v Commissioner Inland Revenue, [2011] NZSC 158, [2012] 2 NZLR 153 ("Tannadyce") principle that tax assessments cannot be challenged by way of a judicial review unless the taxpayer's concerns could not practically be addressed via the relevant statutory procedure. Moore J held that "judicial review must be refused except when the statutory process could never be invoked".

Facts

On 12 December 2012, the Commissioner sent Charter Holdings a final notice advising that its income tax returns were overdue for the eight tax years between 2005 and 2012. Charter Holdings' 2004 return was also outstanding, but not requested.

On 5 March 2013, Mr Padfield, director of Charter Holdings, filed the requested returns recording a loss in 2005 and net profit in the 2006 to 2012 years. Charter Holdings had claimed losses in previous years' returns, none of which were carried forward because of the way Mr Padfield filled in its income tax returns.

Between 17 March 2013 and 31 May 2013, notices of assessment were automatically generated and issued for these returns. These notices showed that Charter Holdings had tax to pay on its profits recorded in its 2006 to 2012 income tax returns.

On 10 April 2013, Charter Holdings sent a letter to the Commissioner setting out that the losses reported in its earlier income tax returns had not been applied to its subsequent profits. Charter Holdings requested that the assessments for the 2006 to 2012 years be amended to take its losses into account.

On 19 July 2013, the Commissioner responded stating that the outstanding 2004 return would need to be filed before the requested amendments could be considered. Charter Holdings filed its 2004 return eight and a half months later but again did not carry forward any losses.

After receiving the 2004 return, the Commissioner asked Charter Holdings to provide further information to substantiate the validity of the losses it wished to carry forward. Mr Padfield provided Charter Holdings' financial statements for these years and requested that the losses be applied to trading in subsequent years.

The Commissioner reviewed Charter Holdings' request and the information provided in support. She was not satisfied as to the legitimacy of the losses and declined to exercise her discretion under s 113.

Decision

Moore J began by explaining the Statutory Disputes and Challenge Procedure ("SDCP"), as set out in parts 4A and 8A of the TAA. His Honour set out Charter Holdings' compliance history, and the dates by which it would need to have filed a Notice of Proposed Adjustment ("NOPA") to engage in the SDCP. His Honour noted that Charter Holdings had consistently failed to file its income tax returns within statutory timeframes.

Moore J considered that the present case involved the effectiveness of the Ouster Provisions. His Honour explained that the Ouster Provisions generally prevent the Commissioner's assessments from being questioned outside the SDCP.  

Moore J considered the Supreme Court's decision in Tannadyce where the majority held that assessments could not be challenged by way of a judicial review unless the taxpayer's concerns could not practically be addressed through the relevant statutory procedure. Moore J considered that "Tannadyce has established a settled practice that the Court must refuse judicial review except when the statutory process ‘could never be invoked'".

Moore J discussed Arai Korp Ltd v CIR [2013] NZHC 958, (2013) 26 NZTC 21,014 ("Arai Korp") as an example of an application of the practice set out in Tannadyce. In Arai Korp,Wylie Jrejected an application to judicially review a decision not to invoke s 113 of the TAA for default income tax assessments. Wylie J observed that the dispute procedure was clearly available to Arai Korp and its real challenge was to the correctness of the default assessments. The accuracy of the tax assessments should have been challenged through the disputes procedure, and if necessary the challenge procedure. Wylie J held that s 113 was not meant to be used as a mechanism to bypass these procedures.

In this proceeding the Commissioner relied on Arai Korp as emphasising the principle that before a taxpayer can engage in the SDCP, it needs to file a tax return and have issued a NOPA within the statutory timeframes. If Arai Korp sought to correct the assessments, it should have used the SDCP regime rather than seek to judicially review the decision under s 113 of the TAA not to amend the assessments. Here the Commissioner submitted that the SDCP was available to Charter Holdings and no proper explanation had been proffered as to why it was not engaged.

Charter Holdings submitted it had no opportunity to make use of the SDCP. Charter Holdings alleged that on 10 April 2013 it made the request to supply corrected new assessments but it was not until 19 July 2013 that the Commissioner responded by which time the NOPA periods for the 2005, 2006, 2009, 2010, 2011 and 2012 tax years had expired. However, although the Commissioner's response predated the expiry of the NOPA periods for the 2007 and 2008 tax years, she suggested Charter Holdings take a different course to filing a NOPA, namely to file the 2004 return and seek to have the losses carried forward. By the time the Commissioner responded, declining to re-assess under s 113, the SDCP was no longer available.

Prior to examining the availability of the statutory objection procedure, Moore J emphasised the central importance of complying with statutory time limits in tax administration, referring to Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA).

Moore J then found that Arai Korp had direct application, and that Charter Holdings had opportunity to engage in the SDCP. His Honour determined that Charter Holdings, through its own defaults, did not take the steps necessary to engage in the statutory process. Charter Holdings was obliged to put itself into a compliant position and engage in the SDCP to seek any necessary adjustments so that its tax position was correct.

Moore J considered that Charter Holdings had ample opportunity to issue NOPAs and that Mr Padfield would have known that a procedure existed for determining disputes over tax liability. Furthermore, the reverse side of every notice of assessment contains a general description of what a taxpayer needs to do to engage in the SDCP if it does not agree with the assessment.

Consequently, Moore J held that "applying the principles of Tannadyce, I am not satisfied that this is one of those rare cases where judicial review is not precluded where a hearing authority does not have the ability to consider any challenge on whatever grounds". Furthermore, His Honour set out that "judicial review must be refused except where the statutory process could never be invoked", and that "the statutory process could have been invoked by Charter Holdings". Moore J described Charter Holdings' judicial review application as "a collateral challenge to the Commissioner's assessments".

Moore J dismissed the application for judicial review on the basis that the Court had no jurisdiction to deal with or determine matters of tax liability or quantum. His Honour considered that these are properly matters which should have been pursued through the SDCP.