In Larmer v Commissioner of Inland Revenue (2010) 24 NZTC 24,016 the High Court considered the Commissioner of Inland Revenue’s (“CIR”) application of the serious hardship provisions in the Tax Administration Act 1994 (“TAA”). Notably, the High Court held that the focus of those provisions should be on the ability of a taxpayer to pay tax arrears without significant financial difficulties at the time when the tax became payable, rather than at the time an application for relief is made.
The taxpayer in this case had arrears of income tax and GST which amounted to $175,641.68 as at 7 July 2008 and were the subject of debt recovery proceedings. The taxpayer applied to the Inland Revenue Department for financial relief under the serious hardship provisions in the TAA. Following a settlement conference, the CIR determined that the taxpayer met the criteria for serious hardship for the income years ended 31 March 2000 to 31 March 2003 inclusive but did not meet the criteria during the tax years subsequent to 2003. The taxpayer subsequently brought judicial review proceedings in the High Court seeking judicial review of the decision dismissing the application for relief in those years.
MacKenzie J held first that the case was amenable to judicial review, though he said that this did not mean that it was an appeal on the merits. Instead it was necessary for the taxpayer to establish that the CIR had failed to properly apply the relevant administrative law principles in reaching his decision before the application for judicial review could succeed. The relevant issue that the CIR was required to consider was whether the taxpayer had significant financial difficulties arising because of her inability to meet minimum living expenses according to normal community standards.
It was clearly found that the taxpayer was not in a position of serious hardship at the time the application for financial relief was made. The taxpayer’s application for financial relief was received by the CIR on 10 December 2008, and was completed on the basis of the taxpayer’s financial position as at 31/03/2008 in accordance with her Income Tax return of that date. In the 2008 tax year the taxpayer had a taxable income of $30,987.87 and, allowing for income tax, was left with $25,050.58 for her living expenses. This amount was more than the $22,978.80 per year that the CIR considered to be the minimum living expenses according to normal community standards for a person in the taxpayer’s situation. Accordingly, the taxpayer was found not to be in a position of serious hardship on 31/03/2008. Further, it was found that in the 2009 income tax year the taxpayer’s self employed income would be approximately $52,000, so the taxpayer would not be in a position of serious hardship in that tax year either.
However, the CIR had considered whether the taxpayer was in a position of serious hardship in any of the other income years in which the obligation to pay tax arose. The IRD’s report considered the 2001, 2002, and 2003 tax years, by comparing the taxpayer’s income in those years to the 2005 household expenditure guide (which was the earliest the CIR had) and reached the conclusion that the Taxpayer was in a position of serious hardship for those years. Therefore, the CIR had written off tax in the 2001 to 2003 years, but rejected the application for serious hardship in the later periods.
The taxpayer’s submissions in the judicial review proceeding included the following:
The High Court held that the outcomes that arose when a global approach was adopted were not consistent with the scheme and purpose of the Act. It held that it was more consistent with the purpose which the financial hardship regime was intended to achieve to focus on the ability of the taxpayer to pay the tax without significant financial difficulties at the time when the tax became payable. Further, the court held that nothing in W v CIR (2005) 22 NZTC 19,602was inconsistent with the adoption of a year by year approach.
The Court held that it was clear from the report on which the CIR’s decision was based, read as a whole, that the CIR had correctly focused on the appropriate statutory test. Therefore, the taxpayer’s application for judicial review was unsuccessful.
This decision raises real concerns about the effectiveness of the hardship relief provisions of the TAA. It seems to go against the broad understanding of the provisions held by tax advisers. By focusing on hardship in the year a tax liability is incurred the Court has excluded any consideration of changed circumstances and hardship at the time of recovery of the debt.
The Judge rationalized this approach by saying that it was not fair that a person who could not pay tax when it was incurred because of financial hardship should be required to do so if their circumstances improved and they later acquired the resources to pay their tax debt. He said that if they could have qualified for relief at the time they were obliged to pay tax they should not be denied that relief because they had struck better times later. Conversely he said the person who could have paid tax but did not should not be able to obtain relief because at the point of being pursued for payment they could show financial hardship.
The propositions advanced by the Judge are questionable to say the least. The suggestion that a tax debtor should not be required to pay, despite having won Lotto in the meantime, should be rejected and would be unacceptable to the broad body of taxpayers. The fact that an application for relief might have been made before the Lotto win occurred, but was not, should be neither here nor there. The focus should be on the effects on the taxpayer of the recovery of tax, not the imposition of the liability. Just as positive changes of circumstance should be taken into account, so should negative changes. There are legion examples in recent years of taxpayers who have been assessed to tax on transactions which occurred in the “good times”, only to find themselves unable to meet the liability because they have subsequently fallen on bad times. Against the background of a major economic recession it is remarkable that a Court should have effectively ruled against the CIR being able to take into account the fact that, after a tax debt has arisen, a taxpayer’s financial circumstances may alter adversely to such an extent that recovery is not possible without causing financial hardship. Very often a tax liability is assessed well after the year in question and circumstances may have charged even in that time.
The hardship relief provisions were enacted in large part as a reaction by Parliament to instances of personal tragedy which were occasioned by heavy-handed IRD recovery action. One of the complaints of the time was that IRD took no account of the fact that a taxpayer’s situation might have changed through no personal fault, so that recovery was not practicable. The decision in Larmer seems to perpetuate that problem rather than recognize that the relief provision was intended to ameliorate problems at the point of recovery.
The decision can therefore be criticized, though it is impossible to avoid the thought that it was a reaction to the proposition being run by the taxpayer in judicial review. The taxpayer confronted an evidential problem in that she was clearly not in hardship at the time of the application for relief. The Taxpayer’s only option was to argue for relief for certain years and then to maintain that, having allowed some years, the CIR was committed to granting relief on the others.
Had the Judge dealt with the case on the basis of a consideration of matters at the time of the application for relief, he may well have been constrained to find that the relief already allowed by the CIR should not have been given. His decision therefore preserved the limited relief granted to the taxpayer but has led to a result that is, with respect, inconsistent with the scheme and intent of the relief provision.
There will be instances where, despite that, the case can be used to advantage. It appears to mean that, even if you are not currently in financial hardship, you may still be entitled to financial relief if you can show that you were in hardship at the time the tax arrears arose.
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