Clark, Mclean, Rogerson and W
JUDICIAL REVIEW OF THE COMMISSIONER’S ACTION IN THE RECOVERY OF TAX DEBTS
This section considers five High Court cases where taxpayers have sought judicial review of the Commissioner’s decisions relating to the recovery of tax debts. The taxpayers were unsuccessful in all but one of the cases. In those majority cases the Court held that it was unable to look behind the Commissioner’s use of his statutory discretion as it relates to the care and management of taxes. In the most recent case the Court granted the taxpayer’s application on the ground that the relevant provision required the Commissioner to consider specific matters and that he had failed to adequately do so.
Clark v CIR; Money v CIR (2005) 22 NZTC 19,615
This case involves the separate application by Mr Clarke and Mr Money for judicial review of the Commissioner’s decision not to accept their offers of payment of outstanding tax. The facts relating to each taxpayer are similar. They had invested in what the Commissioner determined were tax avoidance schemes. He disallowed the losses that each had claimed under the schemes. He then assessed each for income tax on the income they had derived during the relevant periods and for shortfall penalties for taking an abusive tax position. They did not challenge the assessments and were unable to make payment of the amounts assessed. Each had sought to reach a compromise with the Commissioner that involved the Commissioner writing off a substantial amount of the debt. The Commissioner was not prepared to do so and invited them to put forward a proposal that included payment of the entire debt.
It is important to set out the grounds upon which Mr Clark and Mr Money applied for judicial review:
1. They sought to settle the Commissioner’s claims in accordance with their means and had provided the Commissioner with all relevant information.
2. They argued the Commissioner was under a duty to recover what can reasonably be recovered in the circumstances, taking into account the taxpayers circumstances and means to pay.
3. They said the Commissioner had breached his duty by not taking these matters into account (or failing to give them sufficient weight) and in particular their inability to pay more than the sums offered.
They sought orders that they pay the sum they were able to, such sum to be determined by the Court.
Central to Mr Clarke and Mr Money’s argument was that the Commissioner had an obligation to maximize the recovery of tax and that the amount offered by them was the best deal that the Commissioner could make with them. He ought, therefore, to grant relief by writing tax off under section 177(3) (as was) of the Tax Administration Act.
The Court endorsed the judgment of Randerson J in Raynel v CIR (2004) 21 NZTC 18,583. The matters concluded in that case were:
1. The duty imposed by section 6A of the Act prevails over all other provisions of the Revenue Acts including in the context of applications for relief under section 176 of the Act.
2. The obligation to collect the highest net revenue is not absolute. The Commissioner is only required to take recovery steps that are practical and lawful.
3. The Commissioner is required to have regard to the resources available to him, the importance of promoting compliance (especially voluntary compliance) by all taxpayers and compliance costs incurred by taxpayers.
4. Where the public interest is best served by a compromise agreement such a compromise is regarded as being within his managerial function.
5. Sections 6 and 6A emphasize the broader public interest in the integrity of the tax system. There may be instances where in order to protect the integrity of the tax system the Commissioner is justified in refusing an offer of settlement.
6. It is a matter for the Commissioner to carry out his duty having regards to the relevant considerations.
The Court found itself unable to interfere with the Commissioner’s discretion under section 177(3) holding it was one which the Commissioner must consider alone. The Court did note that before a taxpayer was eligible for relief for serious hardship they had to establish that significant financial difficulties would be caused for reasons other than their obligation to pay tax. There was no information before the Court on this point.
McLean v CIR (2005) 22 NZTC 19,231
Mr McLean was also an investor in the same schemes who had been assessed for income tax and penalties arising out of his participation in these schemes. He had sought to settle his tax obligations and wanted relief on the grounds of serious hardship and financial difficulties. The Commissioner had declined to accept his offers of settlement primarily on the basis that he had alienated assets to trusts while on notice of this tax liability. The Commissioner subsequently obtained judgment against Mr McLean in the amount of his tax debt.
Mr McLean’s application for judicial review sought orders striking down the Commissioner’s decision and directing the Commissioner to reconsider his offers and if necessary to direct the Commissioner to engage in satisfactory negotiations or enter into mediation.
The High Court dismissed Mr McLean’s application for judicial review essentially on the same grounds as in Clarke and found on the facts that the Commissioner was entitled to reject his application for relief and his offers.
Rogerson v CIR (2005) 22 NZTC 19,260
Mr Rogerson had a long standing history of non compliance with his tax obligations especially in respect to the payment of PAYE. The Commissioner had on two earlier occasions written off over $660,000 which was owed by a company under Mr Rogerson’s directorship and had unsuccessfully prosecuted him for PAYE fraud. It was accepted that Mr Rogerson’s defence in that matter had been successful due in no small part to a mental condition. This condition was referred to again in payment proposals put to the Commissioner and in the review proceedings as a reason why the Commissioner should accept Mr Rogerson’s proposal for payment.
The High Court declined Mr Rogerson’s judicial review application finding that the Commissioner had not breached his statutory duties to collect the highest net revenue overtime or maximize the recovery of outstanding tax in refusing to accept Mr Rogerson’s settlement proposals. The High Court endorsed the earlier judgments of Raynel and Clarke. It held the Commissioner’s obligation to collect the highest net revenue over time has never been expressed in absolute terms in the various provisions. The care and management duties imposed on the Commissioner by sections 6 and 6A overlay all other provisions in the Act. They emphasize that there is a broader public interest in protecting the integrity of the tax system and the importance of promoting taxpayer compliance, particularly voluntary compliance.
The High Court considered that the Commissioner was entitled and indeed obliged to take into account that acceptance of Mr Rogerson’s offers would not protect the integrity of the tax system nor collect the highest revenue given his tax non compliance history.
Mr Rogerson also sought to have the Commissioner write off shortfall penalties imposed on the non payment of PAYE, however, the Court found that before the matter could become one of the Commissioner’s discretion Mr Rogerson had significant hurdles to jump. As he had not accounted for the core tax he could not be afforded the relief contained in section 141E(2) of the Act which provides relief from a shortfall penalty where the deduction has been accounted for and where the person’s failure to account was caused by illness. This left the Commissioner with no discretion to write off the outstanding tax as section 177C(2) precludes him exercising this discretion where the taxpayer is liable to pay a shortfall penalty.
W v CIR (2005) 22 NZTC 19,602
W is a barrister who suffered a severe psychotic episode that was severely debilitating for a number of years and affected all areas of his life. W had as a result of his failure to file returns incurred significant interest and penalty liabilities. The Commissioner was made aware of what was termed “a catastrophic emotional breakdown” in the various applications for relief tendered by his counsel, however, the Commissioner provided no response to this issue, at least up until these proceedings were filed.
In granting in part W’s application for judicial review the High Court found that the Commissioner had failed to properly consider whether recovery of the outstanding tax would place W in serious hardship, or, whether W was in significant financial difficulty as a result of a serious illness.
Upon a careful consideration of the previous judicial review cases the Court concluded that cases such as Raynel concerned the recovery of tax owed by a taxpayer and thus involved the Commissioner making a decision under the care and management provisions of the Act. They required him to exercise his discretion in a way that protects the integrity of the tax system. A decision of that sort is different from deciding whether a taxpayer has experienced serious hardship as defined. Whether serious hardship is established involves the application of the statutory test contained in section 177A of the Act to each individual taxpayer.
The Court could find no specific reference to the statutory definition “serious hardship” in the correspondence from the Commissioner that would suggest that he had considered whether recovery would place W in serious hardship or whether recovery of more than the amount offered by W would cause serious hardship. Instead reference was consistently made to the test under the care and management provisions.
The Court found that the Commissioner had failed to properly consider a second way that an illness could cause serious hardship. This was that W’s financial difficulty was a direct result of the obligation to pay interest and penalties, but those imposts arose as a direct result of a failure to comply with the statutory obligations to file returns and make payments. That failure was caused by a serious illness.
Upon receipt of any application for relief under sections 176 to 177C based on illness, the Commissioner must direct himself to a more than cursory enquiry into the personal circumstances of each taxpayer in order to determine whether the direct cause of the taxpayer’s financial difficulties is serious illness.
W is the first case to distinguish between those elements of the tax recovery regime that are almost exclusively for the Commissioner to determine and those where the Court is more likely to intervene. The distinction is that the latter require the Commissioner to apply statutory tests and definitions rather than to exercise an overarching judgement under his care and management powers. Even then the Court is unlikely to substitute its own judgment for the Commissioner’s but, applying an orthodox judicial review approach, will refer the matter back for the Commissioner’s decision applying correct principles.
The case also amplifies the reluctance of the Courts to be drawn into matters that have been left by Parliament to the discretion of the Commissioner. These matters are outside the scope of standard tax challenges and the Court is reluctant to allow judicial review to become a “back door” challenge procedure unless there is a statutory basis by which the Commissioner is bound to make his decision. In this case the Commissioner’s effective dismissal of illness having led to financial difficulties was far short of the inquiry required by the law.
The decision in W arose out of an application to the Commissioner for relief on the grounds of serious hardship. That is also what the taxpayers in Clarke and Money also sought. In their case, however, there appears to have been no evidence of hardship apart from that arising from the payment of the taxes, whereas W was able to raise the issue of illness as a cause of hardship albeit arising out of tax non-compliance. In Rogerson illness was a present factor but it does not seem to have been advanced as a reason the taxpayer would experience hardship, only as a mitigating factor on the question of penalty.
When Parliament enacted the tax recovery provisions of the TAA, it was suggested that they would herald a “kinder” approach to debt recovery than had been exhibited by the IRD in prior years. There was an expectation abroad that if the IRD had a choice between receiving some tax and bankrupting a taxpayer and receiving less, it would choose the former. This expectation has been balanced by an emphasis on the paramounting of the care and management provisions that may not have been appreciated, even by the Parliamentarians who enacted them. The result is that the Courts have now left it almost entirely to the Commissioner to manage his debt recovery process and the prospect of judicial intervention is very limited. There still remain the (also limited) orthodox opportunities for a debtor to seek relief from being bankrupted or liquidated but the prospect of being able to establish any procedural flaw that would support an application for judicial review is slim.
© G D Clews, 2005