Striking out judicial review application
Decision date: 08 November 2005
Case: The Commissioner of Inland Revenue v Ch'elle Properties (NZ) Ltd
Act(s): Judicature Amendment Act 1972
Keywords: Judicial Review, Strike Out, GST transactions, Illegality, Negligence, Statutory Duty, Bill of Rights.
Summary
The defendant claimed GST input credits on 114 property transactions which the Commissioner disallowed on the basis the arrangement was tax avoidance. The Taxation Review Authority and High Court agreed with the Commissioner. The defendant applied for a judicial review of the Commissioner's actions on the basis he acted illegally in initially withholding the refunds and in retrieving the refunds accidentally paid. In addition, the defendant also claimed the Commissioner acted negligently, breached a statutory duty and had not complied with the Bill of Rights Act.
Facts
Application
This was an application by the Commissioner to strike out a judicial review claim and action for damages by Ch'elle Properties Limited ("Ch'elle"), alleging illegality, negligence, breach of duty and acting contrary to the NZ Bill of Rights Act 1992.
Background
In November 1998 114 companies ("the A Companies") entered into conditional contracts with W Developments Ltd to purchase 114 lots of land in a subdivision. The A Companies were all incorporated by Mr Nigel Ashby ("Mr Ashby") who was the sole director of each company.
Each agreement provided for a purchase price of $70,000, with an initial deposit of $10 on execution and a further subsequent payment of $29,990. The remainder of the purchase price was payable on settlement.
In May 1999, Ch'elle entered into conditional agreements with the A Companies to purchase from each company a section of land in the subdivision for a total price in excess of $80 million.
As Ch'elle was registered for GST on an invoice basis, it could claim an input tax deduction immediately, but the A Group of companies, being on a cash basis, did not have to account for GST until settlement.
Ch'elle had applied for a Private Binding Ruling ("PBR") in August 1998 in relation to a similar property transaction it had entered into that same month. Ch'elle entered two more property transactions in September and November 1998. These initial property transactions were known as "the 3 North Shore Properties".
The PBR issued in June 1999 approved the payment of the GST refund for the August 1998 transaction on the basis it was a credit contract. The input credit based on the present day value of the property was paid to Ch'elle in September 1999.
For the period ended 31 May 1999, Ch'elle claimed input tax credits based on the present day value of the properties for the purchase of 13 properties, made up of the 3 North Shore Properties and 10 of the 114 property transactions. For the period ended 31 July 1999, Ch'elle claimed input tax credits on the remaining 104 properties based on the future value of the properties, resulting in a claim of nearly $9 million.
The Commissioner investigated the claims and subsequently disallowed them. The dispute went to the Adjudication Unit which found for the Commissioner on the basis that the transactions (except for the 3 North Shore Properties) formed part of a tax avoidance arrangement.
In January 2000 the refund for the May 1999 period was accidentally released to Ch'elle. In February 2000 the Commissioner withdrew the money from Ch'elle's bank account under section 43 of the GST Act.
On 12 September 2000 all 114 contracts between the A Companies and W Developments Ltd were cancelled for failure to settle. Vendors of two of the 3 North Shore Properties were subsequently placed in liquidation and the properties on-sold to third parties by the liquidators.
Taxation Review Authority
The Taxation Review Authority ("TRA") found the GST refunds claimed by Ch'elle were central to the scheme, and that the mismatch of the parties' GST registration was central to the whole series of transactions. The entire arrangement had been put together to take advantage of this mismatch.
High Court
Ch'elle was unsuccessful in their appeal of the TRA decision. Justice Hansen agreed that the contracts were central to an arrangement that offended the underlying intention of the legislation.
Judicial Review Application
Ch'elle filed this claim in June 2004 seeking declaratory relief by way of judicial review and damages under the six causes of action set out below:
- The Commissioner was illegally withholding $9 million of input tax credits as he had not invoked section 46 of the GST Act;
- The Commissioner acted illegally when he recouped money paid accidentally to Ch'elle pursuant to section 43 of the GST Act;
- The Commissioner acted illegally in making his assessment and during the disputes process and adjudication. Therefore the decisions of the TRA and High Court were invalid;
- The Commissioner was negligent in that he breached a statutory duty of care and caused foreseeable loss;
- The Commissioner breached a statutory duty;
- The Commissioner had not complied with the New Zealand Bill of Rights Act in that he breached Ch'elle's right to natural justice.
The Commissioner contended the claim amounted to an abuse of process, was untenable and/or futile.
Decision
Although Justice Keane agreed that the Commissioner had failed to comply with section 46, the failure could not justify a declaration he was illegally withholding the money. Although the Court of Appeal in Sea Hunter found the Commissioner had a duty to pay out credits if section 46 was not complied with, he could still assess disallowing the claim. A taxpayer would then have to repay the money with interest. The decisions of the TRA and the High Court confirmed that Ch'elle was never entitled to the money and until those decisions were set aside, they stood. Ch'elle should have sought any declaratory relief before the challenge hearing.
Justice Keane considered a declaration that the Commissioner acted illegally in withdrawing the funds paid under section 43 could not serve any useful purpose. Although Justice Keane accepted section 43 was misused, nothing could be done now to remedy that misuse. In addition, Ch'elle was never entitled to the money.
Justice Keane considered the third cause of action - that the Commissioner breached his duty to act fairly, impartially and according to the law in making his assessment during the disputes process and adjudication of the claims - had been resolved or overtaken by the TRA and/or High Court decisionsJustice Keane found Ch'elle could not sustain a claim in negligence for breach of statutory duty as there was no such cause of action. Ch'elle could re-express this cause of action if the statutory context had a duty of care arising at common law. This would then require issues of proximity, forseeability and policy to be considered. Justice Keane considered everything pointed contrary to the Commissioner owing such a duty of care to Ch'elle. The relationship between the Commissioner and a taxpayer is one of creditor and debtor, and it is the Commissioner's job as the Crown's agent to collect revenue (taxes) for public purposes. He is charged with the care and management of taxes under section 6 of the Tax Administration Act and indispensable to the discharge of these duties is the accurate assessment of tax liability. To allow a taxpayer the ability to challenge or counteract an assessment through common law negligence would only subvert the creditor-debtor relationship and the balance achieved by the statutory scheme.
Justice Keane also considered that the Commissioner's ability to give a PBR in advance of a transaction did not change this conclusion. A PBR was simply a means to obtain an assessment in advance. In addition, the context within which a PBR could be given is carefully circumscribed (section 91E) and its effect was finite. In any event, Ch'elle could not have relied on the PBR as a safe foundation for all the transactions. It obtained what it was entitled to pursuant to that PBR - the credit relating to the specific transaction.
The conclusions as to negligence extended to the fifth cause of action, breach of statutory duty. The revenue statutes contained no clear indication that Parliament intended to create a private law duty on revenue officials.
He considered Ch'elle's sixth cause of action contending breach of the New Zealand Bill of Rights was misconceived. Although section 27(1) secures the right to "natural justice" it has never meant "substantive justice". The consistent authority is that 27(1) does not extend beyond procedural fairness. In any event, any breach of natural justice by the Commissioner would have been cured on the challenge before the TRA or appeal to the High Court.
All causes of action which Ch'elle relied on were either untenable, an abuse of process or futile. There was no basis on which Ch'elle could resurrect its claim by amended pleadings. The action as a whole was struck out.
Date published: 10 Oct 2006
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