Financial Hardship Does Not Automatically Get Relief

Singh v Commissioner of Inland Revenue (2016) 27 NZTC 22,082.

The High Court has reminded us of the limited extent to which the Court will intrude on the discretion of IR to grant or withhold tax relief.

Mr and Mrs Singh (“the taxpayers”) sought judicial review of the Commissioner’s decisions to decline financial relief from paying outstanding taxation liabilities. They owed a substantial sum to the Commissioner for outstanding income tax and GST, which had been assessed following an investigation, which established that they had bought and sold 39 properties over a 16 month period. The Commissioner successfully obtained judgment against the taxpayers who claimed they had no means of meeting their tax debts. The Commissioner filed bankruptcy proceedings.

The taxpayers unsuccessfully sought financial relief from paying their tax debts on the grounds of serious hardship. This led them to file judicial review proceedings and, before the substantive hearing, the Commissioner agreed to reconsider her decision to deny relief.

Mr Philp, delegation holder, reconsidered the decision and declined the application for relief. The taxpayers continued with their judicial review.

The taxpayers’ grounds of review were that the reconsideration process was unfair, in breach of the principles of natural justice, failed to take into account relevant considerations and took into account irrelevant considerations.

The Court confirmed the decision in P v Commissioner of Inland Revenue [2015] NZHC 2293 that, following the introduction of section 177C (1BA) of the Tax Administration Act 1994, the Commissioner must undertake a two-step approach when considering an application for financial relief on the grounds of serious hardship. The first step is to decide whether the payment of tax would result in the taxpayer suffering hardship. The second step is to decide whether to write off the tax owed. At the second step (and only then) the Commissioner may have regard to the taxpayer’s compliance history.

Was there a breach of natural justice?

  • No bias in appointment of Mr Philp as decision maker: he had been involved in an earlier decision to deny relief, but that did not mean he might not be impartial)
  • No inconsistency in approach: Inland Revenue had previously accepted that the taxpayers would suffer serious hardship, but Mr Philp was entitled to reach a different conclusion on the basis of the information provided with the relief application.
  • Reconsideration was fresh: A thorough analysis of the material provided by the taxpayers was undertaken and Mr Philp made his own decision based on that material.
  • A proper opportunity to be heard was provided: an opportunity to explain was provided but the evidence (bank statements) did not support the explanation given (that the son was providing financial support). The Commissioner was not required to go back and point out that the explanation was not supported by the material provided.
  • No failure to give reasons: two page letter setting out reasons for declining the application was provided.
  • No abdication of authority: although recommendations were made to Mr Philp, the evidence established that he that made the actual decision.

Did the Commissioner fail to take into account relevant information?

  • No failure to take into account inability to make mortgage payments: issue was included in material provided to Mr Philp and so he must have taken it into account.
  • Allegation of suppression of income: absence of evidence of expenditure on living expenses lead to the logical conclusion that the taxpayers were meeting expense by an unknown means.

Did the Commissioner take into account information that was irrelevant?

  • History of non-compliance not taken into account when determining the issue of serious hardship: Mr Philp’s letter explained why he would not exercise the discretion in favour of the taxpayers even if they had established serious hardship. The Commissioner is entitled to take prior history into account when exercising the discretion whether to grant relief (ie at the second step).


Perhaps surprisingly, Justice Lang’s decision has been appealed to the Court of Appeal. The taxpayer’s argument will have to attack the notion that at the second step, compliance history can be taken into account to deny relief. It is unlikely to be attractive to the Court to say that, if financial hardship is established, the Commissioner must grant relief, but that may be where the taxpayer must go with its argument. Unless the two step test can be unseated, the merits of the case are likely to be against the taxpayers. They appear to have misled the Commissioner as to the number of property transactions they had undertaken and failed to fully disclose how they were meeting their living expenses while arguing that they could not meet their tax obligations. Inland Revenue’s paper trail records the detailed and through review process undertaken. The Court is likely to be reluctant to protect the taxpayers from bankruptcy in circumstances where there is no procedural impropriety on the part of the Commissioner, but where the taxpayers themselves have not acted in good faith in the past.

© G D Clews, 2017


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