In this case the Court of Appeal upheld an appeal by the Commissioner from the High Court Judgment reported as Alam and Begum v Commissioner of Inland Revenue (2008) 23 NZTC 22,006.
The issue in this case was whether the Commissioner 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 decide the validity of a NOR and reject it.
In the High Court Woodhouse J held that the Commissioner does not have this power under any section in the TAA, and stated that if the Commissioner wished to challenge a NOR the appropriate course was 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 NOR 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 in issue.
His Honour rejected the Commissioner’s argument that relief should be denied as a matter of discretion and made a declaration that the Respondents’ NOR was valid.
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 stages 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 to 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.
Court of Appeal
The Court of Appeal agreed with Woodhouse J’s finding that the Commissioner does not have the statutory power to determine the validity of a NOR by rejecting it on the basis that it is non-compliant and apply the deemed acceptance provisions. That determination can only be made by the Taxation Review Authority or the High Court. The High Court’s observations regarding the requirements of section 89A of the TAA as to the content of a NOR were not appealed and so remain the law.
However, the Court of Appeal overturned the High Court’s approach to review. It did not agree that where the Commissioner considers a NOR is invalid he should issue judicial review proceedings, seeking a declaration to that effect. The Court considered that would cut across the dispute resolution procedures in the TAA, cause unnecessary delay and procedural complexity and is contrary to the principles underlying the statutory regime.
The Court confirmed that judicial review is available in the taxation context in limited circumstances. The Court applied Westpac Banking Corporation v CIR  NZCA 24, noting that allowing a collateral challenge to assessments provides scope for ‘gaming and diversionary behavior and diverts efforts and resources’.
The Court held instead that a taxpayers should issue challenge proceedings under the TAA within the appropriate time limit if they consider that a NOR has been wrongly rejected. The right to challenge an assessment is given by section 138B of the TAA. That section permits a challenge when a taxpayer has rejected an adjustment proposed by the Commissioner and has commenced proceedings within the required time frame. Rejection in this context is achieved by NOR, so whether that had been done or not could be dealt with as preliminary jurisdictional point in the challenge proceedings, rather than by way of review. Accordingly, the High Court should have refused to grant relief in this case.
The rationale for this is not altogether satisfactory, although the practical result of Woodhouse J’s decision on the required content of a NOR means that the issue may seldom arise. If there is a real contest over the validity or not of a NOR and the right to challenge, there is hardly an element of gaming or diversion by the taxpayer (who will be trying to protect its challenge rights) in having the validity issues dealt with by review. As it is, unless a preliminary issue on validity can be heard and determined before the challenge proper is dealt with, a taxpayer may face the problem of having to prepare for the entire case without being sure the TRA or Court will hear it.
© G D Clews 2009
This note is intended as general commentary and not legal advice