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  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?
Did the Commissioner fail to take into account relevant information?
Did the Commissioner take into account information that was irrelevant?
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