Judicial review in tax disputes

14 Feb 2012

Supreme Court redefines limits by a 3:2 majority

From the official judgment text - minority:

“The better guide to [the] meaning and effect [of ss 109 and 114 of the Tax Administration Act 1994] is that given by the Court of Appeal and Privy Council … [That guide], reflecting principles applied generally in New Zealand for over 25 years, was developed by interpreting the legislation in a way which did not impair the courts’ ability to hold public officials to account … The judgment of Blanchard, Tipping and Gault JJ confines judicial review ... without analysis of the prior case law …”

Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158 per Elias CJ and McGrath J (minority judgment)

From the official judgment text - majority:

“[We] have not overlooked the previous case law …” per Blanchard, Tipping and Gault JJ (majority judgment)

No more judicial review proceedings

Taxpayers engaged in tax disputes with the Commissioner of Inland Revenue are no longer permitted to issue judicial review proceedings, the Supreme Court ruled (by a majority of 3:2) in a decision issued just before Christmas last year. Judicial review is available only when the statutory dispute and challenge procedures cannot be invoked, or when the issues cannot be dealt with through those procedures.

Background - default assessment & global return

Essentially, the facts are as follows. The taxpayer in the case, Tannadyce Investments Ltd, was issued with default assessments by the Commissioner of Inland Revenue in relation to some tax years for which the taxpayer had not filed tax returns. In response to those assessments, the taxpayer filed a ‘global’ return, claiming losses for those tax years in question. The reason a ‘global’ return was filed was, according to the taxpayer, because the documents it needed to have to enable it to file tax returns for those tax years were held and withheld (although later released) by Inland Revenue.

Why the Tax Administration Act 1994 was not used

Communications between the parties failed to resolve matters. Instead of initiating the dispute and challenge procedures provided for in the Tax Administration Act 1994, the taxpayer issued judicial review proceedings. The taxpayer claimed that it was not practically possible for it to issue challenge proceedings under the Tax Administration Act 1994 because the documents it needed to have to enable it to file the tax returns before initiating the dispute and challenge procedures were withheld by Inland Revenue.

To initiate the dispute procedures (Part 4A of the Tax Administration Act 1994), the taxpayer in the present case needed to file tax returns for the tax years in question. Section 89D(2) of the Tax Administration Act 1994 sets out the requirement that a taxpayer who has not filed a required tax return needs to meet to dispute an assessment issued by the Commissioner:

“A taxpayer who has not furnished a return of income for an assessment period may dispute the assessment made by the Commissioner only by furnishing a return of income for the assessment period.”

The Supreme Court

The Supreme Court upheld the decision of the Court of Appeal to strike out the taxpayer’s judicial review proceedings. [Tannadyce Investments Ltd v Commissioner of Inland Revenue [2010] NZCA 233, (2010) 24 NZTC 24,341] However, the Court was split on the availability of judicial review in tax disputes.

The minority judgment

The Chief Justice, Dame Sian Elias, and Justice John McGrath were both of the view that judicial review continues to be available in tax disputes between taxpayers and the Commissioner of Inland Revenue. In their judgment, they highlighted first the importance of judicial review inNew Zealand’s constitutional arrangements. Their Honours stated:

“Judicial review is the common law means by which the courts hold [public] officials to account [for the exercise of the powers conferred on them by Parliament]. … Statutes [such as the Tax Administration Act 1994] limiting recourse to judicial review to challenge statutory decisions … raise issues of constitutional concern. This concern is reflected in the presumption of the courts, when interpreting such legislation, that it was not Parliament’s purpose to allow decision-makers power conclusively to determine any question of law. … [In] the present context, tax legislation will not readily be read as enabling imposition of a liability for tax without also allowing the opportunity of access to a judicial process …”

Their Honours then considered the court cases [Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd [1994] 2 NZLR 681 (CA); Golden Bay Cement Co Ltd v Commissioner of Inland Revenue [1996] 2 NZLR 665 (CA); New Zealand Wool Board v Commissioner of Inland Revenue (1997) 18 NZTC 13,113 (CA); Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC)] that have dealt with the provisions in the Income Tax Act 1976 preceding the provisions in the Tax Administration Act 1994 that are in issue in the present case. Section 26 of the Income Tax Act 1976, which equivalent is found in s 114 of the Tax Administration Act 1994, protected the validity of an assessment even when that assessment has not complied with the provisions of the Income Tax Act 1976. Section 27 of the Income Tax Act 1976, the predecessor of s 109 of the Tax Administration Act 1994, deemed an assessment to be correct except where challenged in statutory objection proceedings.

Their Honours stated that those court cases (from the Court of Appeal and the Privy Council) provide a helpful explanation of the type of cases in which exceptional circumstances giving rise to judicial review were seen as arising under the Income Tax Act 1976. For example, in the New Zealand Wool Board case, the Court of Appeal stated that judicial review may be appropriate:

Where, because of its tentative or provisional character, a decision is arguably not an “assessment” for the purposes of the Income Tax Act 1976;
Where crucial natural justice issues impinge on the validity of the process and can conveniently be considered separately from the tax challenge proceedings;
Where the taxpayer would be unduly prejudiced by consolidating the judicial review proceedings with the tax challenge proceedings.

The minority judgment cont.

In Miller, the Privy Council opined that judicial review is available:

If proper grounds are made out relating to the legitimacy of the process adopted by the Commissioner and the validity of the outcome;
Where the making of an assessment amounts to an abuse of power;
Where the alleged error of law is fatal to the exercise of statutory power;
Where it would be wasteful to require to the tax objection procedure.

The Chief Justice, Dame Sian Elias, and Justice John McGrath then observed that there is no material change between s 27 of the Income Tax Act 1976 and s 109 of the Tax Administration Act 1994, and between s 26 of the Income Tax Act 1976 and s 114 of the Tax Administration Act 1994. As there is no material change between the past and the current provisions, courts considering the current provisions – ss 109 and 114 – should not ignore (as had the Court of Appeal in Westpac Banking Corp v Commissioner of Inland Revenue [2009] NZCA 24, [2009] 2 NZLR 99.) the earlier court cases. The Chief Justice and Justice John McGrath said that those earlier court cases provide a good guide to the meaning and effect of ss 109 and 114 of the Tax Administration Act 1994. That guide, “reflecting principles applied generally in New Zealand for over 25 years, was developed by interpreting the legislation in a way which did not impair the courts’ ability to hold public officials to account, particularly where there were allegations going to the legitimacy of the process …” [Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158 at [30] (emphasis added)].

Their Honours then stated that the majority judgment (by Blanchard, Tipping and Gault JJ) in the present case, confining judicial review to cases in which a taxpayer is unable to bring the grievance within the statutory process, does not take account of “the prior case law that provides a basis for ascertaining within a framework of interpretation of the relevant provisions whether judicial review or the statutory scheme best serves the ends of justice.” [Ibid, at [39]]

The approach of the Chief Justice, Dame Sian Elias, and Justice John McGrath means that judicial review was available to the taxpayer, Tannadyce Investment Ltd. They stated:[Ibid, at [42]]

“If the Inland Revenue Department were to act in bad faith, by withholding documents in its possession which it knew a taxpayer required, judicial review might be the most appropriate and effective process for holding officials to account for such an abuse of power.”

However, because the taxpayer failed to provide sufficient information to support its allegations against the Commissioner, the taxpayer could not establish that the assessments it was issued with were outside of the application of ss 109 and 114 of the Tax Administration Act 1994 thus giving rise to judicial review.

The majority judgment

The majority judgment, by Justices Peter Blanchard, Andrew Tipping and Thomas Gault, confined judicial review in tax disputes to the following circumstances:

When it is not practically possible for a taxpayer to challenge an assessment through the challenge procedures in Part 8A of the Tax Administration Act 1994;[Ibid, at [58]]
When the issue concerns an alleged flaw in the statutory process that needs to be addressed outside the statutory regime, because the remedy is not provided [Ibid, at [55]] for within the regime. For example, an alleged bias on the part of a Taxation Review Authority, in which case the issue is the legality of the process by which the challenge to the disputable decision (which includes an assessment) is to be determined under Part 8A. [Ibid, at [59]]

In confining judicial review to the above circumstances, the majority further limited the availability of judicial review in tax disputes. The majority stated that they “have not overlooked the previous case law.” In the view of Justices Blanchard, Tipping and Gault, the earlier case law “both under the [Income Tax Act 1976] and the current [Tax Administration Act 1994], does not take sufficient account of the fact that hearing authorities (whether a Taxation Review Authority or the High Court) both had and have the same powers as the High Court on an application for judicial review.” [Ibid, at [71]] Rule 7.9 of the High Court Rules (or, in the case of a Taxation Review Authority, reg 29(f) of the Taxation Review Authorities Regulations 1998) gives the court the power to give directions to secure the just, speedy and inexpensive determination of a proceeding. The earlier case also “seems not to have recognised sufficiently that objection and challenge proceedings, which contain the ability to elect to have the matter dealt with by the High Court, give the taxpayer exactly the same forum, and indeed broader rights and remedies than would be available on judicial review; but with the crucial advantage that all matters at issue can be dealt with at the same time.”[ Ibid.] The statutory objection and challenge procedures are framed so as to give hearing authorities power to consider a challenge made to an assessment on any ground whatsoever and to cancel, vary or confirm the assessment as may be appropriate. The words “on any ground whatsoever”, in s 109(a) of the Tax Administration Act 1994, must have been designed to emphasise the comprehensive nature of the embargo on bringing proceedings outside the statutory framework. Conversely, by the use of those words Parliament must have contemplated that disputable decisions (which include assessments) could and should be contested and challenged under the statutory objection and challenge procedures on any ground whatsoever, including the ground that what the Commissioner claimed to be a decision or assessment is not a decision or assessment at all. [Ibid, at [54]]

Justices Blanchard, Tipping and Gault stated:[Ibid, at [55] (emphasis added)]

“The advantage Parliament saw in this approach must have been that, whatever the claimed ground of error, illegality or invalidity, a hearing authority, which will be the High Court if the taxpayer so elects, is empowered to adjudicate upon it. Furthermore, the hearing authority can go on in the same proceeding, as far as necessary or appropriate, to determine whether the Commissioner’s assessment is correct and, if not, what the correct assessment ought to be. There is thereby no potential for separation of matters of legality from matters of correctness.”

Their Honours then stated: [Ibid, at [67], [72] and [73]]

“By insisting that the statutory disputes and challenge processes be followed, as s 109 does, Parliament has not deprived taxpayers of the ability to have all their concerns about tax assessments determined by the High Court. The legislative policy evident in s 109 is not at odds with the right of citizens to have matters of legality determined by the High Court. …

“Allowing for an unwritten ‘exceptional circumstances’ or ‘proper grounds’ escape from s 109 would not be consistent with the purpose which Parliament was trying to achieve in what it enacted. …

“… the best construction of s 109 in its particular statutory context is that it precludes judicial review, save where the statutory procedures could never be invoked.”

For the taxpayer, Tannadyce Investments Ltd, the further limitation placed by Justices Peter Blanchard, Andrew Tipping and Thomas Gault on the availability of judicial review in tax disputes means that judicial review was not available unless it could show that it was not practically possible for it to challenge the Commissioner’s assessments under Part 8A of the Tax Administration Act 1994. If the taxpayer could show that, then s 109 would not be engaged because the premise upon which s 109 was framed – the ability of hearing authorities to consider any challenge – was not present, and judicial review would be available. As the taxpayer failed to show that, their appeal was dismissed.

Lessons for taxpayers and advisers

By a simple majority, the Supreme Court has redefined the availability of judicial review in tax disputes, by confining judicial review to circumstances in which the statutory dispute and challenge procedures (in Parts 4A and 8A of the Tax Administration Act 1994) could not be invoked; and to when the issues could not be dealt with through those procedures.

Issues that previously were dealt with in judicial review proceedings, such as abuse of power or those concerning the validity of the assessment process, are now to be dealt with through the statutory dispute and challenge procedures in the Tax Administration Act 1994. Taxpayers are no longer permitted to issue judicial review proceedings to deal with these issues.

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