Judicial Review Narrowed Further in Tax Matters
In the past taxpayers have sought to argue that a tax assessment is invalid because the Commissioner of Inland Revenue has not come to his decision in a procedurally correct way. However, judicial review as an avenue of challenge has been progressively narrowed by the tax legislation and case law, and now appears only to be available in exceptional circumstances such as conscious maladministration. What follows is an assessment of how judicial review can be used to question tax decision making following the recent decision Westpac Banking Corporation v C of IR  NZCA 24 in the Court of Appeal.
What is judicial review?
Judicial review is the process by which the Courts review the decision making process of a government or public body to determine whether a decision has been made in a lawful and fair manner. The emphasis of judicial review is on process, rather than outcome. However, if an application is successful the court may declare a decision to be unauthorised or otherwise unlawful and set aside all or part of it. The court may then direct the decision-maker to reconsider any aspect of his or her decision.
Judicial review and tax assessments
Historically, the courts have held that judicial review can be invoked against the Commissioner to address such things as procedural error, unlawfulness, bad faith, abuse of power, and errors of law going to the legitimacy of the decision-making process but not the correctness of the decision.
Section 109 of the Tax Administration Act 1994 (“TAA”) provides that an assessment made by the Commissioner cannot be disputed in any proceedings except through challenge proceedings provided for in the TAA. With the exception of those procedures, an assessment and all its particulars are conclusively deemed to be correct. The question arises whether taxpayers are effectively precluded from bringing judicial review proceedings to challenge the Commissioner's administration of the tax legislation leading to an assessment.
The recent Court of Appeal judgment in Westpac accepted that judicial review is available despite the enactment of sections 109 and 114 of the TAA, but reinforced that that is only so in exceptional circumstances, such as conscious maladministration.
Westpac Banking decision
Westpac Banking Corporation (“Westpac”) obtained a binding ruling from the Commissioner in January 2001 on the proposed tax treatment of one of its structured financing transactions and, in particular, as to the non-applicability of the anti-avoidance rule. However, in September 2004 the Commissioner issued amended assessments in which he invoked the rule in relation to nine other similar transactions. Westpac sought to challenge the validity of the amended assessments through judicial review proceedings; its key contention being that the inconsistency between the amended assessments and the approach taken by the Commissioner in the binding ruling was unacceptable.
In a review of recent case law, the Court of Appeal observed that judicial review proceedings in relation to tax assessments are available in exceptional circumstances where what purports to be an assessment is not an assessment. Otherwise such proceedings are an abuse of process. The Court observed that ‘it is perfectly clear that allowing collateral challenge to assessments can provide scope for gaming and diversionary behaviour’, and that collateral challenge involves not just delay but a diversion of effort and resources.
The Court defined ‘exceptional’ as a situation in which the assessment could be fairly seen as not being within the scope of sections 109 and 114 of the TAA. Thus, judicial review may still be available in cases of conscious maladministration.
Westpac’s arguments for judicial review included:
a) The assessment was not an honest appraisal or a genuine exercise of judgment;
b) The alleged inconsistency between the legal approach underpinning the amended assessment and the "existing law" invalidated the assessment;
c) The amended assessment breached Westpac's legitimate expectations; and
d) The IRD Corporates division was guilty of conscious maladministration.
The Court of Appeal noted the significance of the introduction into the law of the tax “care and management” provisions and the binding rulings regime in 1995. However, it held that Westpac’s argument that the amended assessment did not reflect an honest appraisal or a genuine exercise of judgment by the Commissioner did not provide a basis for judicial review on the facts of the case. It found that given the size of the IRD it was inevitable that there would be inconsistencies of interpretation and application. The Court of Appeal was also satisfied that breach of legitimate expectation did not provide a basis for judicial review in the context of this case. These observations signal that the Court is prepared to recognise significant latitude in what can be expected of the IRD and that it will not hold the IRD to what could be seen as impractical standards.
The court held that the decisive consideration in the case was that in issuing the amended assessment the IRD officer acted in good faith and with the belief that he was entitled to do so. There was thus no sustainable allegation of conscious maladministration which related directly to the issuing of the amended assessment or any deliberate subversion of the departmental process for the escalation of disputes.
The Court held that in a situation in which the IRD officer issuing an assessment believes it is well founded on the facts and law and that there is no legal impediment to it being issued, an inadvertent departure from procedure is not conscious maladministration and, in any case, is not an exceptional circumstance such as to exclude the operation of sections 109 and 114 of the TAA. This is so even if the officer is acting inconsistently with the actions of other members of the Department. This approach seems to be based in the view that having delegated authority to each and every officer, the decisions of any of them if honestly arrived at is that of the Commissioner and must be given effect.
In reaching its decision, the Court of Appeal had regard to the following policy considerations:
a) Most importantly, the statutory policy reflected in sections 109 and 114 of the TAA;
b) The general undesirability of allowing judicial review in tax litigation when a statutory process for disputing assessments exists; and
c) It was contrary to the need to treat taxpayers equally to permit a taxpayer to rely on a departure (advertent or otherwise) from IRD procedure to defeat an assessment.
Westpac sought leave to appeal the decision in the Supreme Court. However the Supreme Court declined leave on the basis that there was no arguable case against the Court of Appeal’s approach to the law, including its view of the effect of the policy of the legislation.
Other recent judicial review cases
CIR v Alam and Begum  NZCA 273
The high threshold for judicial review is further demonstrated in the recent Court of Appeal judgment CIR v Alam and Begum. In that case the Court did not agree with the High Court’s view that where the Commissioner considers that a Notice of Response (“NOR”) is invalid he should seek a declaration from the High Court to that effect. The court applied the Westpac decision and considered that to do so would cut across the dispute resolution procedures in the TAA, cause unnecessary delay and procedural complexity and be contrary to the principles underlying the statutory regime.
The Court of Appeal held that the correct procedure in the face of an assertion that a NOR is invalid for failure to comply with the content requirements under the TAA is to initiate a challenge in the normal way. If the IRD considers that a NOR is invalid, it will doubtless assess, alleging that the taxpayer is deemed to have accepted its proposed adjustments. The taxpayer would then commence challenge proceedings relying on section 138B of the TAA, claiming that it had validly rejected the adjustments reflected in the assessment. That question would be dealt with as a preliminary issue by the TRA or the trial Court. To go to a full case summary click here.
Berrytime Limited v CIR, (unreptd) High Court Tauranga, CIV 2009-470-000214/215
In another recent case, Berrytime Limited v CIR the need for exceptional circumstances to challenge a tax assessment by way of judicial review was again confirmed in the High Court.
Berrytime Limited’s tax agent sent a "voluntary disclosure" to the IRD requesting that incorrect GST assessments be amended. That could only occur through the exercise of the Commissioner's discretion under section 113 of the TAA because the company was time barred from using the formal disputes procedure. The IRD treated the letter as a request for the exercise of that discretion.
Following various meetings and requests for information, the IRD advised the tax agent and the companies that the section 113 request for amendments had been declined because insufficient evidence had been provided to confirm that the returns were incorrect. The companies then issued proceedings for judicial review of the Commissioner's decision to decline to amend the assessments, and applied for interim orders.
The Court applied the Westpac decision holding that, on the information available to the Court, Berrytime Limited’s case for establishing exceptional circumstances for judicial review proceedings was weak. That was because:
a) In the light of a taxpayer's obligations to make assessments, provide information to the IRD and co-operate with an investigation, it could not be accepted that the companies' efforts to have the GST assessments amended constituted "exceptional circumstances"; and
b) There was no strong case for an allegation of conscious maladministration, or an abuse of power by the Inland Revenue Department.
Accordingly, interim orders were not made.
It appears from recent case law that judicial review on matters relating to assessment should now only be sought in cases where exceptional circumstances exist. The Courts have defined ‘exceptional’ as a situation in which an assessment cannot be fairly seen as being within the scope of sections 109 and 114 of the TAA because it is not really a valid assessment at all. Most often, this will be in cases where conscious maladministration on the part of the IRD is suspected. Otherwise, it seems judicial review proceedings of tax assessments will be held to be an abuse of process by the Courts. Review remains an option where the Commissioner is exercising discretions or where the decision making power is not subject to rights of challenge.
© G D Clews 2009
This note is intended as general commentary and not as legal advice.