Alam and Begum v CIR

Commissioner may not unilaterally treat notice as invalid

Alam and Begum v Commissioner of Inland Revenue (2008) 23 NZTC 22,006

In this case the High Court considered whether the Commissioner of Inland Revenue has the power to determine the validity of a taxpayer’s Notice of Response (“NOR”). The required content of a NOR is prescribed by section 89G of the Tax Administration Act 1994 (“TAA”). The Commissioner decided the taxpayer’s NOR did not comply with this section and took the position that a NOR had not been received at all, leading to ‘deemed acceptance’ of the proposed adjustment under section 89H(1). The taxpayers sought judicial review of this decision.

The first question was whether the Commissioner has the power to assess the validity of a NOR and reject it. Woodhouse J held that the Commissioner does not have this power conferred on him by any section in the TAA, and stated that if the Commissioner wished to challenge the notice of response the appropriate course would have been for him to apply to the Court for a declaration as to its validity.

The next question was whether the taxpayer’s NOR did in fact comply with section 89G(2). Despite commenting that the taxpayer’s notice of response was sparse, Woodhouse J held that it complied with the TAA because it met the express requirements of section 89G and set out sufficient detail to reasonably inform the Commissioner of the various matters.

His Honour further stated that it is not necessary that an arguable case or detailed response be set out in a NOR. The NOPA and NOR stage of the dispute resolution process are designed to facilitate resolution of a dispute by consensus. It is in the next stage when the taxpayer and the IRD draft Statement’s of Position that the commencement of litigation is contemplated.

This legislative shift and an assessment of the purpose of the disputes resolution procedures, as set out by section 89A of the TAA, lent support to the conclusion that section 89G is not be applied in an overly stringent manner.
It appears from this judgment that where a NOR sets out an adequate response to the Commissioner’s NOPA it will comply with section 89G. A NOR is not required to be long, detailed in scope or to present an arguable case.

Accordingly, this judgment is positive for taxpayers because it acknowledges the original intention of the dispute resolution process and will help ensure this process continues to operate as it was originally intended to. This reduces the cost to taxpayers of using the disputes resolution process and makes the process more ‘user friendly’ and accessible.

This case also appears to confirm that the IRD should get judicial confirmation when determining the validity of documents in the disputes resolution process. The court was of the view that to have the IRD determining the validity of documents and then imposing the consequences of documents failing to meet specific requirements is not desirable.

However, after the date of the Alam judgment Inland Revenue published a standard practice statement on the disputes procedure which applies from 10 June 2008. It states that the IRD may inform a taxpayer that their NOR is invalid. To this extent, the standard practice statement is inconsistent with the High Court’s judgment which held that the IRD should seek a declaration from the Court. (Refer SPS 08/01 - Disputes resolution process commenced by the Commissioner of Inland Revenue.)

Thsi decision has been overturned on appeal as to the procedural point. To read the note on the Court of Appeal decision, click here.