NOTICE TO PROVIDE INFORMATION AND RIGHT OF
CHALLENGE TO THE FORMING OF THE COMMISSIONER’S OPINION
Vinelight Nominees Ltd v CIR (2005) 22 NZTC 19,298
The High Court declined Vinelight’s application for directions limiting the Commissioner’s powers under section 17 of the Tax Administration Act 1994 and also Vinelight’s challenge to the opinion formed by the Commissioner that the Vinelight’s returns were fraudulent or willfully misleading, so as to allow him to reopen a period that was otherwise statute barred.
In the first proceedings Vinelight argued that the Commissioner was bound by the ordinary rules of litigation and could not use his statutory powers of information gathering to improve his position once litigation proceedings had been commenced. On the facts the Court found the motivation for the notice was not to gain an advantage as a litigant but to assist in making a revised assessment incorporating the periods for which the opinion had been formed that they could be reopened. The timing of the Commissioner’s notice was relevant as it followed receipt of the taxpayer’s explanation given to the IRD after the proceedings commenced.
The challenge proceedings failed also. The Court held that the forming of the opinion by the Commissioner that the returns were fraudulent or willfully misleading was not in itself a disputable decision but was a necessary step in the decision making process leading to assessment. and was therefore not subject to the right of challenge.
The relevant facts are as follows. Vinelight was informed by letter that the Commissioner had formed the opinion that tax returns filed by it were fraudulent or willfully misleading. Before the Commissioner could issue new assessments Vinelight issued proceedings in the High Court challenging the Commissioner’s decision to reopen the assessments. Vinelight thereafter provided an explanation to the Commissioner of matters related to the periods in question. Shortly after that the Commissioner issued two section 17 notices requiring Vinelight to provide information and documentation in support of the matters raised in its explanation. Proceedings were then issued seeking the Court’s direction that the Commissioner was not entitled to exercise his powers to requisition information sought insofar as it relates to the tax years in dispute.
The application for directions
A preliminary issue was raised as to whether the High Court had jurisdiction to hear the application on the basis that it was not possible for the Court to grant a number of the orders sought because to do so was contrary to statute in that a Court could not grant an injunction against the Crown. The Court held that to the extent that the issue for determination related to a person’s right to justice and to the conduct of a party in Court proceedings, the Court could exercise its inherent jurisdiction to determine the matter.
The Court held that section 17 is broad in its wording but its use after proceedings were issued must be consistent with a person’s right to justice under section 27(3) of the New Zealand Bill of Rights Act 1990 and found that it was reasonably clear that notices could not be issued for the sole purpose of extracting information for Court proceedings. In effect that would be a contempt of Court.
The Court ultimately found that the notices were issued in response to the explanation given after the proceedings were issued and was satisfied that their purpose was to enable the Commissioner to render fresh assessments. The timing of the notices reinforced the Commissioner’s position. This finding was against Vinelight’s submission that the explanation had been given on an earlier occasion because that was not supported by evidence.
The challenge proceedings
The Court held that the opinion formed by the Commissioner about the quality of Vinelight’s returns is but one of the steps taken prior to the Commissioner issuing an assessment. Without the assessment the opinion has no effect. The Court considered the scheme of the legislation and determined that section 108(2) provided the Commissioner with a single power of decision to issue an amended assessment increasing a taxpayer’s liability. Allied to this power are the dispute resolution provisions which set out the procedures the Commissioner must undertake before he can issue an assessment. Included in these provisions is the requirement that the Commissioner issue a notice of proposed adjustment (“NOPA”) before he issues an amended assessment.
The Court considered that it would be illogical and artificial to allow the Commissioner’s mere opinion to be subject to challenge proceedings because his opinion had no tangible effect until an amended assessment was issued. The opinion might change and might, indeed, never become the basis of an assessment. Until the opinion was crystallized, Vinelight’s substantive legal rights had not been affected. It had not lost the protection of the time bar and was not required to pay additional taxes or do anything else until the amended assessment was issued.
It was then academic that the remaining grounds of challenge would fail against the taxpayer. The Court found that Commissioner’s decision under section 108(2) is not his final decision. His final decision is the amended assessment which follows the information gathering processes outlined in the disputes procedures.
On the matter of who bears the burden of proof in a challenge under section 108(2) the Court considered it was clear on the wording of the provision. The Commissioner bears the burden in civil proceedings relating to evasion or a similar act under section 141E, and with regards to obstruction. In every other matter the burden rests with the taxpayer.
This decision is one of the first to deal with the definition of “disputable decision”. A challenge lies against such a decision which the Tax Administration Act makes clear can be an assessment or any decision by the Commissioner under a tax law which is not itself an assessment. Parliament seems to have intended that decisions by the Commissioner short of an assessment should be capable of being challenged. The effect of Vinelight is to suggest that this will only be the case if the decision affects the substantive rights of the taxpayer in the sense of affecting the taxpayer’s liability. Where that must be assessed, it suggests that any number of preliminary decisions or conclusions may be reached by the Commissioner but if they must lead to an assessment before they affect the taxpayer, only the assessment will be a challengeable disputable decision.
The decision in Vinelight can be compared with that of Paterson J in Spencer v CIR (2004) 21 NZTC 18,818. In that case the Court held that a decision that directors of a company were personally liable for the company’s debts was a disputable decision. The Judge in that case went so far as to suggest the notice may have amounted to an assessment. Even if it did not, the distinction between Spencer and Vinelight very probably lies in the fact that in Spencer the Commissioner had to do no more than notify his decision for section HK11 of the Income Tax Act to have been invoked. The position of the directors was immediately affected by his decision.
© G D Clews, 2005