A Renewed Effort to Read Down Section 113
Charter Holdings Limited v CIR  NZHC 2041
Section 113 of the Tax Administration Act 1994 (“TAA 1994”) allows the Commissioner of Inland Revenue to make changes to assessments, to ensure that they are correct. The discretion applies notwithstanding the usual time limits for amending or challenging assessments. It gives taxpayers an opportunity to “correct” their assessments, potentially enabling them to adopt more advantageous (or less disadvantageous) tax positions.
The theoretically broad provision has unfortunately generally been read down and applied by the Commissioner in significantly narrower circumstances than taxpayers have hoped. By and large the courts have endorsed this approach.
Something of a watershed occurred, however, in Westpac Securities NZ Limited v Commissioner of Inland Revenue (2014) 26 NZTC 21,118 where the High Court held not only that the Commissioner ought to reconsider her decision not to amend the assessments at issue in the manner requested by the taxpayer, but that her ability to exercise her discretion to amend assessments under section 113 is not limited to amendments made to correct an erroneous assessment. The High Court considered that section 113 also allowed the Commissioner to amend an assessment that, although correct, could be substituted with a more appropriate assessment.
Taxpayers could be forgiven for being buoyed by this decision and looking forward to a broader and more frequent utilisation of the discretion by the Commissioner. Unfortunately, however, in her most recent foray into litigation on this point the Commissioner appears to have renewed her effort to read down the scope of section 113 (in Charter Holdings).
The taxpayer in this case, having made a simple mistake in not disclosing losses brought forward in the “Amount brought forward” box in its IR4 return, asked the Commissioner to exercise her discretion to allow it to carry the losses forward. There was no dispute as to the authenticity of the losses. They were genuinely incurred in previous years and confirmed in notices issued by the Commissioner. The taxpayer was simply not aware that it had to disclose the losses brought forward from previous years in each tax return and wrongly assumed that the Commissioner maintained a tally herself.
Despite having confirmed the losses, the Commissioner refused to exercise her discretion to allow them to be offset against income earned in later years. Despite also initially advising the taxpayer that it could seek judicial review of her refusal, she argued before the High Court that the taxpayer should have disputed the assessments under the statutory disputes process and so judicial review was not available. The High Court agreed. It pointed out that the Court, on a judicial review, had no jurisdiction to deal with or determine matters of tax liability or quantum. These were matters which the Court considered should have been pursued through the statutory disputes process. Section 109 of the TAA 1994 precluded the taxpayer from raising such matters and the Court from granting relief in the terms that the taxpayer sought in the proceedings. Further, the Court noted that pursuant to Tannadyce Investments Limited v CIR (2011) NZTC 20,103 judicial review must be refused except where the statutory disputes process could never have been invoked.
In the Court’s view, the taxpayer had actions available to it which would have allowed it to engage in the statutory disputes process. It did not take the steps necessary to engage that process through its own omission.
The Court seems to be implying that wherever a taxpayer has had an opportunity to engage the disputes process, but does not do so, they will be precluded from judicial review.
Such an argument was not pursued by the Commissioner in Westpac Securities. In that case the taxpayer sought to reverse loss offsets mistakenly made so that it could instead utilise foreign tax credits that had subsequently become available. It is not apparent from the High Court’s decision whether details of the foreign tax credits became available in the period in which the statutory disputes process could have been commenced, but arguably the taxpayer would have been aware during that period that foreign tax credits were expected to be generated. With this information the taxpayer could have issued a Notice of Proposed Adjustment reversing the loss offsets, and subsequently requested amendments to recognise the use of foreign tax credits once then information became available as it had in previous years. It did not do so and asked the Commissioner to exercise her discretion pursuant to section 113 to amend the assessments. The Commissioner refused on the basis that the assessments were not incorrect. When judicial review of the Commissioner’s decision was sought no argument seems to have been made that judicial review was not available because the taxpayer ought to have invoked the statutory disputes process.
Westpac Securities is not referred to at all in the decision Charter Holdings and it is not clear if it was cited in support of the taxpayer’s argument.
What does this decision mean for taxpayers?
The proposition that taxpayers will be precluded from judicial review when an opportunity to engage the disputes process is not utilised presents difficulties in a section 113 context, for if a taxpayer has made an error, it is probable that they would at some point have had an opportunity to amend or challenge the assessment which contains that error. In fact, it is likely to be precisely because a taxpayer is out of time to amend or challenge the assessment that they are faced with the “back stop” option of asking the Commissioner to exercise her discretion to correct it pursuant to section 113. If the Court is correct in its conclusion that judicial review of a refusal to exercise the section 113 discretion would not be available in such circumstances, it is questionable whether there are any circumstances at all in which a review of the section 113 discretion could be validly sought.
It is unclear how the Commissioner will seek to apply this decision. The Commissioner’s current Standard Practice Statement on requests to amend assessments is currently under review but when it is finally released, it will be interesting to see how she reconciles the reasoning in Charter Holdings with the more liberal approach espoused in Westpac Securities. It may be that the Commissioner will simply seek to confine Westpac Securities to its facts.
In the meantime, taxpayers must be mindful of the need to not only be vigilant about checking the correctness of returns at the time of filing, but also of ensuring that any challenges are commenced within the requisite statutory response periods. Although the Court in Charter Holdings commented that even after the statutory response period for challenging the assessments had expired, the taxpayer could have requested an extension of time under s 89K of the Tax Administration Act, it would be a very naive to rely on the Commissioner agreeing to entertain a late Notice of Proposed Adjustment.
© G D Clews 2015