What price correctness of the assessment?
Arai Korp Limited v CIR (2013) 26 NZTC 21-014
The High Court has declined an application for judicial review of an Inland Revenue decision not to reopen default assessments under section 113 of the Tax Administration Act 1994 (“TAA”).
The taxpayer had taken no steps at all to dispute or challenge default assessments issued by the CIR for the 2004 and 2005 income years. Those assessments had been made in late 2006. Only in mid 2011, when the company was about to be wound up, did it request the CIR to accept new returns for the relevant years and allow a challenge out of time. The CIR treated this as a request for the assessments to be reconsidered under section 113 of the TAA, which permits the CIR to amend assessments at any time to ensure their correctness.
There was no dispute that the original default assessments contained manifest errors. Land sales had been brought to account as giving rise to income but no allowance had been made for the cost of acquiring the land or for interest on known borrowings.
Despite this an IRD official refused to exercise the section 113 discretion and did not consider the merits of the taxpayer’s assertion that clear errors had occurred.
The High Court held that the CIR was permitted in these circumstances to refuse to exercise the section 113 discretion. The decision is based essentially on the view that judicial review ought not to provide a back door avenue for the assessments in issue to be challenged when the strict time requirements of the disputes process had apparently been ignored. The Court also upheld the fact that the IRD official exercising the delegation to consider this matter was entitled to take into account the fact that an earlier investigation would have to be reopened and would require IRD resources to be committed and also to take account of the background leading up to the request.
The circumstances of the case certainly seem to have been extreme. No steps having been taken for so long meant that there was inevitably little sympathy for the taxpayer’s last minute attempt to reopen matters. Nevertheless it is remarkable that when it is clear that the default assessments could never have been correct, the CIR was relieved of any responsibility to correct them. The Court noted that the merits of the taxpayer’s case were not considered by the relevant officer yet that omission was not fatal to the decision to refuse to reopen matters. The other factors, principally the costs to the IRD and the background of the taxpayer having taken no steps trumped the fact that the merits had not been considered.
It is unsatisfactory to think that even the clearest instance of error in an assessment might be allowed to stand despite the discretion available under section 113. It is arguable that once seised of the fact that an error exists, especially a sizeable one, the CIR should assume a duty to correct it, even if the section is expressed as discretionary. The fatal element for the taxpayer was a combination of very unhelpful facts which, if not present in another case, could see the need to consider the merits of the taxpayer’s case given far greater prominence.
© G D Clews 2013