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Decision date: 28 September 2011
Case: John David Hardie v Commissioner of Inland Revenue
Act(s): Tax Administration Act 1994, Income Tax Act 1994, Goods and Services Tax Act 1985
Keywords: Appeal against strike-out, genuine assessments of the Commissioner, judicial review
The Court of Appeal allowed the appeal by Mr Hardie and the order striking out the application for judicial review by the High Court was set aside.
Impact of decision
The Court confirmed that a default assessment must not be arbitrary, disregard the law or known facts and must be a genuine attempt to ascertain the taxable income. The implications of the judgment to the Commissioner's guidelines for making default assessments are being considered.
Mr Hardie failed to file his income tax returns for the years ended 31 March 1999 to 2005 and goods and services tax (GST) returns for the monthly periods ended 31 March 2003 to 30 April 2006. The Commissioner made default assessments. Mr Hardie did not, and had not, filed returns or issued Notices of Proposed Adjustments. The Commissioner obtained a judgment by default in the District Court in respect of Mr Hardie's tax liability. Mr Hardie was not successful in his appeals of this judgment.
Mr Hardie filed a judicial review application claiming that the default assessments were grossly excessive. He asserted that his failure to file returns is excusable because until recently he did not know on what basis the assessments had been made.
The Commissioner was successful in having Mr Hardie's judicial review application struck out. Mr Hardie appealed against that decision.
GST default assessments
For the GST default assessments, the first default assessment was likely to have been based on Mr Hardie's last filed GST return. The previous returns filed by Mr Hardie showed that there were input credits and zero-rated supplies that resulted in him receiving GST refunds. The Court observed that the Commissioner appeared to have ignored those refunds when issuing the default assessments, all of which resulted in GST being payable.
With regard to the subsequent GST default assessments, 10% was added. There was no evidence in the strike-out application but it was pleaded by Mr Hardie that the evidence in the District Court was that 10% was added to each monthly default assessment to encourage taxpayers to file their returns.
Income tax default assessments
The evidence was that the income tax assessments were based on details taken from GST returns filed by Mr Hardie, with an allowance of 20% for any expenses. The resulting net income had a tax rate of 33% applied to it.
Mr Hardie sought to persuade the Court by reference to the GST returns he did file and his PAYE records that 20% was not a reasonable estimate. The Court found that "All that can properly be said is that there is no evidence that the Commissioner considered Mr Hardie's actual deductible expenses …".
Judicial review of tax assessments
The Court confirmed that "an assessment may be set aside in judicial review notwithstanding that it might have been challenged under the Tax Administration Act, where it is not an assessment of the sort the legislature had in mind". When the Commissioner exercises his judgment in making an assessment he is not entitled to act arbitrarily or in disregard of the law or facts known to the Commissioner. There must be a genuine attempt to ascertain the taxable income of a taxpayer.
The Court noted it had confirmed in Westpac v CIR  NZCA 24 that judicial review is available, exceptionally, when there has been no genuine assessment.
Were the default assessments genuine exercises of judgment?
Turning to the facts of this case, the Court said it is clearly arguable that these assessments were not genuine exercises of judgment of the Commissioner for four reasons:
- It is likely that the Commissioner did not credit Mr Hardie with input credits or zero-rated transactions when making the first assessments. The Commissioner put to the Court that it would be an unreasonable result if Mr Hardie received an overall GST refund in a default assessment. However, the Court said it saw no reason why in those circumstances the Commissioner must issue a default assessment at all.
- It appeared that the Commissioner added 10% to each succeeding monthly default assessment, not as a genuine estimate of Mr Hardie's liability but to encourage him to file his returns.
- It was arguable that relying on monthly compounding increases in the GST assessments was not the Commissioner's genuine judgement as to Mr Hardie's actual income tax liability.
- It was also arguable that the allowance of 20% for expenses did not take into account the evidence, albeit limited, that the Commissioner had about Mr Hardie's expenses.
Mr Hardie sought to excuse his "longstanding and serial defaults" by asserting that he could not issue a Notice of Proposed Adjustment because he did not know on what basis the default assessments had been issued. The Court responded that there was no authority that the Commissioner must deliver reasons for an assessment, nor are reasons a prerequisite to use of the statutory dispute process. It is axiomatic that Mr Hardie "cannot excuse his non-compliance by pointing to his own failings, still less found an application for judicial review upon them".
Finally, the Court observed that it is not to be taken as having precluded a finding that the Mr Hardie's application for judicial review is an abuse of process, should the Commissioner elect to pursue that allegation.
The appeal was allowed. The order striking out the application for judicial review was set aside.
As this was an appeal by Mr Hardie against the High Court striking out Mr Hardie's judicial review application, the Court did not express a view on whether relief would be granted. The Court of Appeal said it will be for the High Court to decide whether the assessments are indeed susceptible to being set aside, and if so whether relief should be granted or denied to Mr Hardie in the exercise of the Court's remedial discretion.