Was Delay Exceptional Enough?
Two recent decisions have considered whether the circumstances surrounding taxpayer failure to meet a statutory time limit associated with the disputes process were “exceptional” such that they warranted extensions of time.
Vitasovich v Commissioner of Inland Revenue (2017) 28 NZTC 23,028 considered whether exceptional circumstances prevented a taxpayer from issuing a statement of position. Case 6/2017 (2017) 28 NZTC 4,005 concerned late-filed challenge proceedings.
The Tax Administration Act 1994 (“TAA 1994”) affords the court a discretion to allow the disputes process or challenge proceedings to continue after the expiry of what might otherwise be a “sudden-death” time limit. The disputant must satisfy the court that exceptional circumstances apply. An exceptional circumstance in this context means one that is beyond the control of the disputant and that provides them with a reasonable justification for not responding or commencing a challenge (as the case may be) within time.
Whether an event or circumstance beyond the control of a disputant provides the disputant with a reasonable justification for not taking a step within the response period involves a staged analysis. According to the decision of the Court of Appeal in Commissioner of Inland Revenue v Fuji Xerox (2002) 20 NZTC 17,470, what is required is that:
Following an audit of the taxpayer’s tax affairs, the Commissioner initiated the disputes process by issuing a notice of proposed adjustment (“NOPA”) on 16 October 2007. The NOPA proposed adjusting the taxpayer’s income tax assessments by including additional income, imposing shortfall penalties but also disallowing losses incurred by Mapper Ltd, of which the taxpayer was the sole director and whose losses she included in her personal income tax return as “other income”.
The taxpayer responded around 12 December 2007 with a notice of response (“NOR”) rejecting the Commissioner’s proposed adjustments. On 12 December 2007, the taxpayer left for Kuala Lumpur and did not return to New Zealand until 12 December 2013. The taxpayer and the Commissioner continued to communicate by email and via an Auckland postal address. The Commissioner rejected the taxpayer’s NOR on 30 January 2008. The taxpayer advised that she wished the dispute to proceed to the Taxation Review Authority (“TRA”).
The Commissioner issued a statement of position (“SOP”) and a disclosure notice on 17 February 2009. Both documents were sent to the taxpayer’s Auckland address. The Commissioner sent a reminder to this address on 2 April 2009. On 20 May 2009, the Commissioner wrote to the taxpayer advising her that the two-month response period for rejecting the SOP and disclosure notice had expired. Between May 2009 and March 2010, the taxpayer and the Commissioner continued to correspond in relation to tax returns for later years. On 23 March 2010, the Commissioner wrote to the taxpayer explaining that as she had not filed a SOP within the relevant response period she was deemed to have accepted the Commissioner’s proposed adjustments for the years in dispute. The Commissioner invited the taxpayer, if she believed exceptional circumstances applied in her case, to issue a SOP together with an application for consideration of a late SOP setting out the exceptional circumstances that she believed applied. The taxpayer failed to file a SOP or an application for consideration of exceptional circumstances. Further correspondence took place between the Commissioner and the taxpayer.
On 22 March 2016, the taxpayer filed proceedings with the High Court claiming exceptional circumstances.
The High Court was satisfied that while she was overseas, the taxpayer communicated by email and received correspondence sent to her at the Auckland address which she originally gave and which she confirmed some time later continued to be the correct address. She also confirmed that she wished correspondence to be by “snail mail”. Accordingly, the Commissioner gave notice by post to an address at which the taxpayer had notified the Commissioner she accepted notices.
The High Court concluded that the asserted non-receipt was not an event or circumstance beyond the taxpayer’s control. If she did not receive the SOP the cause of that failure lay in the arrangements which she had set up and maintained. It considered that the alleged non-receipt was not an event or circumstance beyond the taxpayer’s control. In addition, (applying the two-stage test set out in Fuji Xerox) the event did not provide a reasonable justification for not issuing a SOP within the response period.
It further considered that even if the taxpayer was unaware of the tax dispute and response timeframe set out in the Commissioner’s SOP in February 2009, there was no doubt that as at March 2010, the taxpayer was aware. The Commissioner’s letter of 23 March 2010 set out the dates of the earlier letters and recorded that the taxpayer was required to have filed a SOP by 16 April 2009. Therefore, the taxpayer had failed to issue a SOP even after becoming aware, at the latest in March 2010, that she was in default. Neither had she issued one since her return to New Zealand in December 2013, nor since she indicated in 2015 that she wished to continue her dispute.
The disputant filed a notice of claim which was received by the TRA on 22 May 2017. The time limit for filing that notice of claim was 8 May 2017. The disputant also filed an application for an extension of time to file the notice of claim. In the notice of claim, the disputant challenged the decision of the Commissioner not to allow input deductions claimed by the disputant in a number of GST periods.
When the disputant did not file any affidavit in support of its application for an extension of time, the TRA issued a minute directing it to file and serve an affidavit explaining the event or circumstance beyond its control which it contended provided a reasonable justification for not commencing its challenge within the response period.
An affidavit sworn by the director of the disputant company was subsequently filed. The affidavit dealt with events late in the process and did not explain what had been done by the disputant during the two month response period. The TRA directed that a further affidavit be filed specifically addressing this period together with any submissions that the company wished to file. The disputant filed a further affidavit.
In his first affidavit the director observed that the company’s notice of claim was unique in that it involved a large number of documents which had to be attached to the notice as “evidential data”. His request to Inland Revenue for the Commissioner’s cooperation to electronically transmit three copies of the invoices to the TRA had been declined, exacerbating the delay. He argued that that the delay in filing the notice of claim which followed was occasioned by the time taken to have the invoices photocopied.
The TRA said that it was unclear why the director considered that it was necessary to file copies of the invoices together with the notice of claim. It is not a requirement that such evidence be provided on the filing of the claim. It noted that in a proceeding before the TRA (as in other court proceedings), relevant documents are listed in a party’s affidavit of documents as part of the discovery and inspection process. It appeared that the director had simply misunderstood what had to be filed.
The TRA stated that the circumstances under which it may allow a disputant to commence proceedings after the expiry of the response period are limited. It was satisfied that the events which occurred were clearly not beyond the disputant’s control and did not amount to exceptional circumstances. Rather, it was evident to the TRA that the failure to issue the challenge proceeding within the requisite response period occurred because those responsible for filing the notice of claim did not follow the correct procedure.
The staged test from Fuji Xerox applied in both cases, but neither disputant overcame the threshold requirement that the circumstances be beyond their control.
The lessons to be drawn from the two cases are that:
Although in Case 6/2017, the delay was just 14 days, the fact that the disputant could not provide any explanation for why the issue of the (albeit unnecessary) copying of the invoices was not dealt with prior to the conclusion of the response period was fatal to its case.
The court will also look at how quickly any delay is remedied. In Vitasovich the High Court considered it relevant that remedial action could have been taken significantly earlier, even if the disputant had not originally been aware of the response period.
Taxpayers and their advisers live with the constant risk that dispute rights will be lost because a sudden death deadline falls. The exceptional circumstances provisions allow some relief but only where a stringent standard can be satisfied. This is the balance that Parliament has struck between requiring timely action by taxpayers who wish to dispute liability but allowing some way back for the taxpayer who is genuinely not able to comply with a time limit. It is sometimes leads to outcomes that some would say are unfair but it emphasises the premium the system places on certainty of outcome, in fairness to the broader body of taxpayers.
© G D Clews 2017