IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV 2011-419-001243 [2013] NZHC 958

UNDER	The Judicature Amendment Act 1972

IN THE MATTER OF	an application for judicial review of a decision made pursuant to s 113 of the Tax Administration Act 1994

BETWEEN	ARAI KORP LIMITED Applicant

AND	THE COMMISSIONER OF INLAND REVENUE
Respondent

Hearing:	26 March 2013

Counsel:	J Moroney for the Applicant
H Ebersohn and T Lamb for the Commissioner

Judgment:	3 May 2013

[RESERVED] JUDGMENT OF WYLIE J

This judgment was delivered by Justice Wylie
On 3 May 2013 at 11.00 am
Pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Distribution:
J Moroney:  john@thodeutting.com
E Ebersohn:	harry.ebersohn@crownlaw.govt.nz

ARAI KORP LIMITED V THE COMMISSIONER OF INLAND REVENUE HC HAM CIV 2011-419-001243 [3 May 2013]

Introduction

[1]       Arai Korp Limited (“Arai Korp”) is a property development company.   It

seeks judicial review of a decision made by the respondent Commissioner on 8 June

2011 not to invoke s 113 of the Tax Administration Act 1994 in respect of default income tax assessments issued for the 2004 and 2005 income years.

[2]       In its statement of claim, Arai Korp asserted that the decision breached the rules of natural justice, that it contained mistakes of fact, that it failed to take into account relevant considerations, that it took into account irrelevant considerations, and that it was manifestly unreasonable.

[3]       These various assertions were denied by the Commissioner.

[4]       In the event, only one argument was advanced before me — namely that the Commissioner’s  decision  not  to  invoke s  113  to  amend the  default  income tax assessments was manifestly unreasonable.

Background

[5]       It is common ground that default assessments were issued by the respondent against Arai Korp for the income tax years 2004 and 2005.  The default assessments were issued on 17 November 2006.  The income assessed had been generated by the sale    of    various    units    in    a    subdivision    of    a    property    situated    at
618 Maungatautari Road, Karapiro, Cambridge.

[6]       The property at Maungatautari Road was originally owned by a Mr Osmond. On 27 March 1997, Mr Osmond entered into an agreement for sale and purchase with  a  company  known  as  Ran Kor Resources  Limited.    He  agreed  to  sell  the property to Ran Kor, but excluded from the sale units J, K, L and F.   Unit F had already been sold to third parties.

[7]       Arai Korp says that on or about 30 September 1999, Ran Kor assigned the agreement to it.

[8]       It is common ground that on the same day, 30 September 1999, Mr Osmond entered into a further agreement for sale and purchase.  He agreed to sell units J, K and L in the proposed subdivision to Arai Korp.

[9]       Arai Korp  went  ahead  and  completed the subdivision  and  by 17 October

2003 the subdivision was completed.  New titles were issued for units A to L in the subdivision.

[10]     In the 2004 and 2005 financial years, Arai Korp sold several of the units.  The sale proceeds were $2,044,000.  Notwithstanding these sales, no income tax returns were filed by Arai Korp.  The tax returns for the 2004 and 2005 income years were due on 7 July 2004 and 7 July 2005 respectively.1

[11]     Arai Korp did not file income tax returns for any of the tax years 2002–2007. It was prosecuted in August 2005 for failing to file returns for the years 2002–2004. It pleaded guilty and it was fined $1,500.

[12]     In or about late 2005, the Commissioner commenced an investigation into Arai Korp’s GST affairs.   Mr Osmond was then a director of Arai Korp, and he provided   the   Commissioner   with   some   limited   information.      However,   on
15 February 2006, Mr Osmond was banned from acting as a company director for five years, following a conviction for fraud-related offending under the Crimes Act
1961.   He ceased to act as a director of Arai Korp, and a Mr MacDonald was appointed in his stead.  Mr MacDonald went on to provide further information to the Commissioner  in  relation  to  the  investigation  of Arai Korp’s  GST affairs.    The investigation started as a GST investigation, but it became an investigation into Arai Korp’s income tax liabilities as well.

[13]     On 13 November 2006, an investigator employed by the Commissioner wrote to Arai Korp.   The letter advised that because Arai Korp had not filed income tax returns for the years ended 31 March 2004 and 31 March 2005, the Commissioner had prepared default assessments pursuant to s 106 of the Tax Administration Act.
The letter also advised that the Commissioner considered that Arai Korp had taken

1	Tax Administration Act 1994, s 37(1)(c).

“a tax position” by not filing income tax returns, and that in so doing, it had evaded the assessment and payment of income tax.   It recorded that Arai Korp was to be assessed with a tax shortfall penalty.   The letter advised Arai Korp of its right to dispute the default assessments if it wished to do so.  It indicated that in that event, Arai Korp had to file a notice of proposed adjustment along with its tax returns within four months of the default assessments.

[14]     A calculation of income tax returns annexed to the letter advised that the Commissioner  had  assessed  Arai Korp’s  income,  based  on  its  GST  returns,  as follows:

(a)	Year ended 31 March 2004 — $1,032,725; (b)	Year ended 31 March 2005 — $264,912.50.
It also advised that the Commissioner had allowed various deductions, allocated on a pro rata basis, during each income year. The deductions were as follows:

(c)	 Year ended 31 March 2004 — $134,588.27; (d)	Year ended 31 March 2005 — $47,805.37.
[15]     On 17 November 2006, the respondent assessed Arai Korp’s income tax as

follows for the years ended 31 March 2004 and 31 March 2005:

(a)	31 March 2004 — $263,453.19 (plus shortfall penalties of 63,684.72); (b)	31 March 2005 — $63,624.72 (plus shortfall penalties of $47,763.57).
Notices of assessment were generated and they were sent to Arai Korp, care of its post office box address in Cambridge.

[16]     The  default  assessments  did  not  allow  any  deductions  for  the  costs  of purchasing the land which was ultimately subdivided, nor for interest payable on a loan which Arai Korp says it obtained from the National Bank.

[17]     Arai Korp  did  not  dispute  the  default  assessments  within  the  timeframes allowed by the Tax Administration Act.

[18]     As noted, the letter of 13 November 2006 and the notices of assessment were sent to a PO Box address in Cambridge.   At the time, Mr Osmond, who was no longer a director, was in prison.  He was not released from prison until 27 November
2006.  Mr MacDonald says that he had a discussion with an IRD officer and that he asked that correspondence should be addressed to him at a different PO Box.  There is however no internal IRD record that a change of address was requested.  In the event, this issue was not advanced before me.   It would have  faced significant difficulties:

(a)       According  to  a  Mr  Mitchell,  who  was  the  tax  investigator  who undertook the investigation, the original PO Box was recorded in the Department’s records as Arai Korp’s address.

(b)	There is a file note of a discussion between Mr MacDonald and an

IRD employee in April 2008 in which the tax debt was discussed.

(c)       Pre-printed GST returns were sent to the original PO Box.  They were completed and returned to the Commissioner.

(d)       Letters were sent by the Commissioner to the original PO Box and replies were received to those letters.

(e)       Allan  J,  in  a  decision  issued  on  18  February  2009,  rejected  an argument that the default assessments were not received.2

(f)       It  is  clear  from  a  notice  of  appeal  annexed  to  Mr  MacDonald’s affidavit that Arai Korp knew of the default assessments at the very latest by 17 March 2009.

I do not take this matter any further.

2	The Commissioner of Inland Revenue v Arai Korp Ltd HC Hamilton CIV 2008-419-1577, 18
February 2009 at [24].

[19]     On 18 February 2009, the High Court at Hamilton granted the Commissioner summary judgment against Arai Korp for the sum of $1,013,603.88 (plus $14,853.72 for further penalties, and $17, 521.19 for interest).   The judgment sum included outstanding income tax, shortfall penalties, and  interest arising from the default assessments.

[20]     On 12 November 2010, the Commissioner served a statutory demand on Arai Korp seeking payment of $2,185,733.13.  Of this sum, $1,372,701.25 related to income tax, shortfall penalties and interest imposed under the default assessments.

[21]     Arai Korp did not comply with the statutory demand within the required timeframe, and on 22 December 2010, the Commissioner filed proceedings against Arai Korp in the High Court at Hamilton seeking that it be placed into liquidation. The liquidation proceedings were served on 21 January 2011.   No statement of defence was filed.

[22]     On 1 March 2011, Mr MacDonald resigned as a director of Arai Korp, and

Mr Osmond was reappointed as a director of the company.

[23]     The  liquidation  proceedings  were  due  to  be  called  in  the  High Court  at Hamilton on 14 March 2011.  Mr Osmond filed an application for an extension of time for the filing of a statement of defence.  In a supporting affidavit, he asserted that he had prepared draft income and expenditure accounts for the years 2000–2010, and  that  he  had  requested  a  chartered  accountant  to  review  and  complete  the accounts.   He stated that it was clear that there would be very little, if any, profit given the clear losses which had to be brought forward, and that as a result, there was no tax payable by Arai Korp.

[24]     The Commissioner filed a notice of opposition  to  the application  for an extension of time.  In its notice of opposition, the Commissioner indicated that she would have been extremely unlikely to exercise her discretion under s 113 of the Tax Administration Act to amend the assessments, even if Arai Korp had made an application under that section.

[25]     On 22 May 2011, Arai Korp wrote to the Commissioner.  The letter requested the Commissioner to agree to fresh tax returns being completed by Arai Korp, and accepted in place of the default assessments, and requested the Commissioner’s consent to an appeal out of time to the Taxation Review Authority against the default assessments.

[26]     On 8 June 2011, the Commissioner wrote to Arai Korp’s solicitor, advising as

follows:

(a)       Arai Korp’s letter to the Commissioner of 22 May 2011 had been treated as  being,  in  effect,  a request  under s  113  of the Taxation Administration Act;

(b)      The Commissioner had considered the request, and exercised her discretion to decline it;

(c)       The figures upon which Arai Korp’s debt to the Commissioner was based, had been established as a result of a full investigation, and the Commissioner was confident that the assessments were correct;

(d)       The request was made not in regard to a consequential or genuine error, but rather, was an attempt to reopen the disputes process;

(e)       To allow the request would mean that the Commissioner would be treating Arai Korp more favourably than others.

The request was declined.  The Commissioner also stated that it was not within her power to allow a late challenge.

[27]     It is not disputed that the letter of 8 June 2011 constituted the exercise of a statutory  power  of  decision,  and  that  it  is  prima  facie  reviewable  under  the Judicature Amendment Act 1972.

Submissions

[28]     Mr Moroney for the applicant referred to the decision the subject of the review application.  He did not take issue with the fact that the Commissioner treated the letter as a request under s 113.   He noted that the Commissioner, in the letter detailing the decision, noted that the request was not in regard to a consequential or genuine error, but was rather an attempt to reopen the disputes process.  He referred to the standard practice statement, SPS 0703, issued by the Commissioner, which notes that s 113 gives the Commissioner a discretion to amend assessments to ensure their correctness when they contain genuine errors, or following the application of the disputes resolution process in Part 4A.  He argued that there was a genuine error in the default assessments, because the purchase price for the property that was subdivided  was not treated as a deduction.  He argued that had the purchase price been taken into account, along with interest costs, and other ancillary costs, no tax liability could have arisen.

[29]     Mr  Moroney also  submitted  that  the  Commissioner  has  an  obligation  to protect the integrity of the tax system, and that that obligation extends to applying the tax laws fairly, impartially, and according to law.  He argued that it is standard practice to take into account the purchase price of land in such circumstances, and to allow the developer to deduct the sum paid for the land.  He submitted that there was a genuine error, that the error was self evident, and that the Commissioner should have acceded to the request, and allowed the default assessments to be reopened.  He argued that had the discretion been exercised in Arai Korp’s favour, it would simply have put the tax payer in the position it should have been in, and that a reasonable and fair minded decision maker, concerned with the integrity of the tax system, would have exercised the discretion, and allowed tax to be assessed on the correct position.

[30]     Mr Ebersohn for the Commissioner argued that s 113 must be understood within the overall statutory framework.  He argued that the section is not meant to be a mechanism by which non compliant tax payers “can do a long run” around the statutory disputes procedure contained in Part 4A, or the challenge procedure contained in Part 8A of the Tax Administration Act.

[31]     Mr Ebersohn submitted that if a taxpayer wishes to dispute his or her tax liability, it is essential that the relevant provisions are followed.  He referred to s 109 of the Act, which provides that, except in defined circumstances (which do not apply in the present case), no assessment can be disputed in a Court or in any proceedings whatsoever, and the assessment is taken to be correct in all respects.  He submitted that before a taxpayer can challenge an assessment in a Court, the taxpayer must go through the disputes procedure, and referred me to s 138B of the Act in this regard. He argued that the disputes procedure, and the challenge procedure allowed for by the Act,  provide  for  an  “all  cards  on  the  table  approach”  and  allow  for  a  full investigation prior to Court proceedings.  He noted the time limits contained in the Act, and submitted that they apply to both taxpayers and the Commissioner, and that they must be complied with save in exceptional circumstances.  He argued that the statutory scheme recognises not only the time limits, but also the reality of the resourcing issues faced by the Commissioner.   He argued the Commissioner was entitled to take this reality into account when declining Arai Korp’s application.  He argued that there was no obligation upon the Commissioner to enter into a further investigation prior to making her decision not to apply s 113, and that there was no reason why the Commissioner should have placed the applicant in a better position than other taxpayers, who had followed the statutory disputes procedure.

Analysis

Section 113

[32]     The decision in issue was made under s 113 of the Tax Administration Act. The section provides as follows:

113	Commissioner may at any time amend assessments

(1)        Subject to sections 89N and 113D, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.

(2)        If any such amendment has the effect of imposing any fresh liability or increasing any existing liability, notice of it shall be given by the Commissioner to the taxpayer affected.

[33]     It is not suggested that ss 89N or 113D are relevant for present purposes.  The sole question for consideration is whether or not the Commissioner’s refusal to exercise the discretion vested in her by s 113 was manifestly unreasonable.

[34]     Section 113 is clear in its terms.  It confers a wide-ranging discretion on the Commissioner.  The discretion may be exercised from time to time and at any time. It  can  be  exercised  by  the  Commissioner  on  her  own  motion.    It  can  also  be exercised at the request of a taxpayer.  The discretion is available in order to ensure that an assessment is correct.  It does not matter that the tax assessed may already have been paid.  The discretion is not constrained in any way.  It is not expressed to be subject to the prior exercise of the disputes procedure or the challenges procedure. It does not call for an  inquiry into why any assessment is incorrect.   It is not necessary to identify who has made the error that has resulted in an assessment being incorrect.  It does not distinguish between consequential errors and genuine errors. The focus is on the correctness of an assessment, not on the errors which lead to an assessment  being incorrect.   The section  can  be considered  to  be  a “backstop” provision.

[35]     In exercising the discretion, the Commissioner must use her best endeavours to protect the integrity of the tax system.3   Inter alia, this requires the Commissioner to use her best endeavours to protect the rights of taxpayers to have their liability determined fairly, impartially and according to law.4

[36]     The predecessor to s 113 was s 23 of the Income Tax Act 1976.  The Court of Appeal held that the Commissioner was not under a statutory duty to reassess under s 23, and that while he or she could reassess, either on his or her own motion or if a taxpayer so requests, there is no obligation to do so.5

[37]     Section 113 is in substantially the same terms as s 23.  These observations remain applicable.

3	Section 6(1).
4	Section 6(2)(b).
5	Lawton v Commissioner of Inland Revenue [2003] 2 NZLR 48 (CA) at [24].

[38]     The decision of 8 June 2011 was made on the Commissioner’s behalf by a Mr Parkinson.   He is a technical advisor in the IRD’s Hamilton office and he had delegated authority authorising him to exercise the discretion conferred on the Commissioner by s 113.  Mr Parkinson prepared a memorandum at the time which recorded his reasons for declining the request from Arai Korp.  That memorandum amplified the reasons for declining the application which had been noted in the decision.  In essence, the reasons were as follows:

(a)       There had been a full investigation into Arai Korp’s affairs, which was concluded in 2009.  The Commissioner was confident that the default assessments were correct.

(b)       Arai Korp  was  trying  to  reopen  the  disputes  process.     If  the Commissioner  were  to  accommodate  its  request,  she  would  be treating Arai Korp more favourably than other taxpayers.

(c)       Additional  resources  would  have  to  be  devoted  to  verifying  the income and deductions recorded in the new returns which Arai Korp was belatedly seeking to substitute for the default assessments.

(d)	The request was not in regard to consequential or genuine errors.

(e)     The facts of the case did not meet the criteria detailed in the Commissioner’s standard practice statement, SPS 0703, and to reopen the 2004 and 2005 default assessments would not be in accord with the Commissioner’s policy set out in that statement.

[39]     Mr Parkinson’s memorandum setting out how he proposed to exercise the discretion  was  peer  reviewed  by  a  legal  and  technical  service  team  leader,  a Ms Strang.    Mr  Parkinson  sent  her  a  copy  of  his  decision  in  draft,  and  his memorandum on 7 June 2011.  She agreed with his views.

Correctness of the default assessment

[41]     In its letter of 22 May 2011, Arai Korp asserted, inter alia, that the default assessments failed to include the cost of the land when computing its profit, and that therefore the amounts on which tax was assessed were substantially over-stated.  It also asserted that the assessments failed to include its interest costs on borrowing, and that a full breakdown of costs had been completed.

[42]     In broad terms, Mr Moroney submitted that the merits were obvious, and the Commissioner,  acting  fairly  towards  Arai Korp,  should  have  acceded  to  the application, to ensure that the default assessments were correct.

[43]     Little  consideration  was  given  to  the  correctness  of  the  assessments  by Mr Parkinson.   He simply asserted that the Commissioner was confident that the assessments  were  correct,  because  there  had  been  a  full  investigation  into Arai Korp’s affairs which had concluded in 2009.

[44]     Notably, the Commissioner in her statement of defence accepted that the default assessments did not allow for the cost of the land or interest payable on a loan  Arai Korp  apparently  obtained  from  the  National  Bank.     This  is  not acknowledged by Mr Parkinson in his decision or in the supporting memorandum.

[45]     There is clear Court of Appeal authority that  a relevant consideration  in determining  whether  a  late  objection  should  be  accepted  could  be  the  issue  of whether or not the taxpayer’s claim had apparent merit.6

[46]     Following  the  Court  of Appeal  judgments,  Parliament  has  defined  more tightly the circumstances in which an extension of time can be allowed to invoke the disputes  procedure.    There  was  previously  a  general  discretion  available  under
s 30(2) of the Income Tax Act 1976.  That general discretion has now been replaced

6	Commissioner  of  Inland  Revenue  v  Wilson  (1996)  17  NZTC  12,512  (CA);  Lawton  v
Commissioner of Inland Revenue [2003] 2 NZLR 48 (CA).

by strict statutory criteria, which are contained in s 89K in relation to the disputes procedure, and in s 138D in relation to the challenge process.

[47]     Despite Mr Ebersohn’s arguments to the contrary, I am not persuaded that these   statutory   amendments   affect   the   broad   discretion   available   to   the Commissioner under s 113.  As I have noted, s 113 confers a discretion to amend an assessment in order to ensure its correctness.   When faced with an application to exercise the discretion, necessarily, the Commissioner has to consider whether the challenged assessment is correct.  For example, if an assessment contains a simple typographical error — say tax owing of $10,000 is erroneously recorded on an assessment as being $100,000, then it is open to the Commissioner to amend the assessment under s 113, notwithstanding that the disputes procedure has not been invoked in a timely fashion.  If a more convoluted argument is raised to try and show that an assessment is incorrect, then it can be expected that the Commissioner will be considerably more circumspect and that she will take into account whether or not the disputes procedure and/or the challenge procedure have been followed through by the disputant taxpayer.

[48]     Here, Mr Parkinson asserted that there had been a full investigation into Arai Korp’s  affairs,  and  that  the  Commissioner  was  confident  that  the  default assessments were correct.   He gave no consideration to the merits of Arai Korp’s arguments, or to whether or not they were capable of affecting the correctness of the default assessments.  In my judgment, Mr Parkinson should have done so.  This did not require him to undertake a full and detailed investigation.  Rather, it required him to consider whether there was a bona fide argument that the default assessments may have been incorrect.

[49]     If Mr Parkinson had concluded that the matters raised by Arai Korp could not affect the default assessments, then that would have been the end of the matter.  If he had concluded that Arai Korp might have a bona fide argument which could affect the correctness of the default assessments, then it was incumbent on him to either postpone any exercise of the s 113 discretion until he could determine whether or not the default assessments were correct, or alternatively, consider whether there were other relevant factors which precluded the exercise of the discretion in any event.

[50]     I am not, however, persuaded that Mr Parkinson’s failure to address these issues is fatal to his decision.  While the correctness of the default assessments was in my view a relevant factor, it was not the paramount consideration on the facts of this case.7

Disputes/challenges — the statutory regime

[51]     The Act contains comprehensive provisions allowing for challenges to tax assessments.  The starting point is the disputes procedure contained in Part 4A.  Its purpose is  to  establish  procedures  that  will  improve the  accuracy of  disputable decisions, and reduce the likelihood of disputes arising between the Commissioner and taxpayers, by encouraging open and full communication.8

[52]     Arai Korp had not filed tax returns when and as required by the Act.  Given Arai Korp’s  default,  the  Commissioner  had  issued  default  assessments  under s 106(1).  She was not required to issue a notice of proposed adjustment9 — indeed, until the default assessments were issued, there was nothing to adjust.

[53]     Section  106  not  only  authorised  the  Commissioner  to  make  default assessments of the amounts on which, in the Commissioner’s judgment, tax ought to be imposed, and of the tax on those amounts, but went on to provide that Arai Korp, as the entity that had defaulted in furnishing its tax returns was liable to pay the tax so assessed, save so far as it established on objection or on proceedings challenging the assessment that the assessment was excessive or that it was not chargeable with the tax assessment.

[54]     The disputes procedure was available to Arai Korp.  This had been explicitly pointed out to it in the letter dated 13 November 2006 which immediately preceded the default assessments.  The relevant provision was s 89D.  The Commissioner had issued notices of assessment to Arai Korp.   Arai Korp was entitled to dispute the assessments  by  issuing  notices  of  proposed  adjustment  in  respect  of  those
assessments.    It  had  not finished returns of income for the assessment periods.

7	Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA) at 12,520–12,521.
8	Section 89A(1)(a) & (b).
9	Section 89C(h).

Therefore, if it wished to dispute the assessments made by the Commissioner, it also had to furnish returns of income for the assessment periods.10

[55]     There were strict timelines within which the disputes process was required to be initiated.   The initiating notices were the notices of assessment.   They were disputable decisions,11  and they were issued by the Commissioner on 17 November
2006.  The relevant timeline was a two-month period, starting on the date of issue of the initiating notices.12

[56]     Arai Korp did not file either notices of proposed adjustment, or returns of income, within the statutory timeline.

[57]     The timeline can be extended, but only in defined circumstances.  Where the taxpayer is late, s 89K applies.   An extension of time can be allowed where the Commissioner  considers  that  an  exceptional  circumstance  has  prevented  the disputant  from  taking  the  appropriate  steps,  or  where  the  disputant  had  a demonstrable intention to enter into or continue the disputes process at the time that the disputant failed to take one or more of the necessary steps.  Further, the disputant must send to the Commissioner either a notice rejecting the Commissioner’s adjustment, or a notice of proposed adjustment as soon as is reasonably practicable after becoming aware of his, her, or its failure to reject the Commissioner’s proposed adjustment or to issue a notice within the applicable response period.  The Act sets out when an exceptional circumstance can exist.

[58]     Here, s 89K is not in issue.  There has been no application for an extension of time by Arai Korp.  It has not taken any of the steps required by the section.

[59]     After completion of the statutory disputes procedure, and if the parties have not reached agreement, the taxpayer can challenge the assessment before a hearing
authority, which may be either the Taxation Review Authority or this Court.  Again,

10	Section 89D(1) & (2); and see Allen v Commissioner of Inland Revenue [2006] NZSC 19, [2006]
3 NZLR 1.
11	Section 3(1).
12	Section 89AB(4)(a).

strict timelines apply.  Further, a disputant is only entitled to challenge an assessment if he or she has gone through the disputes procedure.13

[60]     Here, Arai Korp has not sought to invoke the challenge provisions contained in the legislation.   Nor could it do so given it had not been through the disputes process contained in Part 4A of the Act.

[61]     I agree with Mr Ebersohn that s 113 is not intended to be used by taxpayers, or indeed the Commissioner, as a way of circumventing the statutory disputes procedure.

[62]     The position is put beyond doubt by s 109.  It provides as follows:

109	Disputable decisions deemed correct except in proceedings

Except  in  objection  proceedings  under  Part  8  or  a  challenge  under
Part 8A,—

(a)	no  disputable  decision  may  be  disputed  in  a  court  or  in  any proceedings on any ground whatsoever; and

(b)	every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.

[63]     Part 8 does not apply in the present circumstances and Part 8A has not been, and cannot now be, invoked by Arai Korp.

[64]     Parliament has put in place detailed provisions detailing how tax disputes are to be resolved.   Those provisions ensure effective tax administration, and provide certainty to both the Commissioner and taxpayers. Tax for each income year must be determined.  There are strict timelines and there must be finality.  The provisions are designed to prevent “administrative chaos”.14

[65]     It is clear that s 109 precludes any assessment from being disputed except through the objection provisions in Part 8 of the Act, or the challenge provisions in
Part 8A.15    If the taxpayer’s arguments go to the substance of the assessments, and

13	Sections 138B and 138C.
14	Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA) at 12,520.
15	Golden Bay Cement Co Ltd v Commissioner of Inland Revenue [1996] 2 NZLR 665 (CA).

not to the procedure followed by the Commissioner, then they can be raised only in challenge proceedings under the Act, and not by way of judicial review.16   Although the  correctness  of  an  assessment  may  not  be  challenged  except  by  statutory objection,  the  legitimacy  of  the  process  adopted  by the  Commissioner,  and  the validity of the outcome may be challenged in judicial review proceedings on established administrative law grounds.17

[66]     The law is summarised in a judgment of the Supreme Court in Tannadyce Investments Limited v Commissioner of Inland Revenue.18    In that case, Blanchard, Tipping and Gault JJ, discussed the availability of judicial review in the following terms:

Judicial review, as provided for in the Judicature Amendment Act 1972, is a valuable  remedy  of  general  application  and  the  conventional  means  of testing the legality of decisions made by those subject to its reach.  Clearly the Commissioner’s statutory power to make assessments is, prima facie, within the reach of judicial review.  The question is whether, and if so how, the remedy of judicial review can stand with s 109.  As the Court of Appeal confirmed in Bulk Gas Users Group v Attorney-General, judges should be slow to conclude that a statutory provision ousting or limiting access to the courts was intended to preclude applications to the High Court for judicial review alleging unlawfulness of any kind.

But in the present case, there is no need to strain to reconcile the terms of s 109  with  the  general  availability  of  judicial  review  in  the  interests  of preserving taxpayers’ access to the High Court when taxpayers need it.  This is because the challenge procedure has a built-in right for the taxpayer to take the matter to the High Court, if that is thought necessary or desirable. There cannot therefore be any question of s 109 preventing access by taxpayers to the High Court.  Giving effect to its terms does not have that consequence.   It cannot matter whether the taxpayer seeks relief from the High Court pursuant to an application for judicial review or pursuant to a challenge under Part 8A.   As we have seen, the statutory 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.

But despite the comprehensive scope of the challenge procedure and the powers of hearing authorities, it is necessary to recognise the possibility that there may be rare cases in which it is not practically possible for a taxpayer to challenge an assessment under Part 8A.  Indeed Tannadyce claims that the present is such a case. If that is so, proceedings for judicial review cannot be

16	Commissioner of Inland Revenue v Ti Toki Cabarets (1989) Ltd [2001] 1 NZLR 147 (CA) at
[39]-[45].
17	Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC) at [14] .
18	Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2
NZLR 153 at [56]–[61].

regarded as precluded by s 109 because the premise on which that section is framed, namely the ability of hearing authorities to consider any challenge, on whatever ground, is not present.

We should add, for completeness, that judicial review will also be available when what is in issue is not the legality, correctness or validity of an assessment but some suggested flaw in the statutory process that needs to be addressed outside the statutory regime, because it is not provided for within it. An example might be the case of a well-founded concern that a particular Taxation Review Authority should, for whatever reason, be restrained from considering a challenge; for example because of alleged bias on the part of the Authority.  In such a case it would not be the disputable decision that was being disputed in a court but rather the legality of the process by which the challenge to that decision is to be determined under Part 8A.   This is a different matter from a challenge to the legality of the process which led up to the making of the disputable decision.  That process and any challenge to it directly puts in issue the disputable decision.  Hence the challenge to that decision or its antecedents must follow the statutory procedure.

It is important to be clear that the fact that judicial review is very largely excluded in favour of the statutory processes by s 109 does not in any way diminish the general importance and availability of judicial review for examining the legality of conduct and decisions that fall within its compass. The exclusion of judicial review is a product of the text and purpose of s 109 in its particular statutory setting.

In  summary  therefore  we  would  hold  that  disputable  decisions  (which include assessments) may not be challenged by way of judicial review unless the  taxpayer  cannot  practically  invoke  the  relevant  statutory  procedure. Cases of that kind are likely to be extremely rare. We will examine whether the present is one of those rare cases a little later in these reasons.

[67]     This is not one of the extremely rare cases mentioned by the Supreme Court. The disputes procedure was clearly available to Arai Korp.   Its challenge is to the correctness of the default assessments.  The accuracy of those assessments should have been challenged through the disputes procedure, and if necessary, the challenge procedure.   While a decision  by the Commissioner not  to  utilise the discretion available under s 113 can be subject to judicial review, except in extremely rare circumstances, judicial review cannot be used as a backdoor means for considering the merits of the assessments it is sought to correct.

[68]     I agree with Mr Ebersohn that Arai Korp is doing no more than trying to bypass the disputes process, and the challenge procedure, in circumstances where there is no proper explanation for its failure to avail itself of those processes in the first place.   If it were to be allowed to do so, this would undermine the statutory scheme.  Arai Korp would be being treated more favourably than other taxpayers.

Section  6(2)(c)  of  the Act  requires  the  Commissioner  to  protect  the  right  of  a taxpayer to have his or her tax affairs treated with no greater or lesser favour than the tax affairs of other taxpayers.  A taxpayer who has sat on his or her hands and done nothing, is not entitled to expect preferential treatment.

[69]     Mr Parkinson was entitled to take these matters into account and in my judgment, he cannot be criticised for doing so.

Available resources

[70]     Mr Parkinson took into account the fact that the earlier investigation would have to be reopened, were the discretion to be exercised under s 113.  He considered that this would impact on the resources available to the Commissioner.

[71]     I accept that this was a relevant factor, which Mr Parkinson was entitled to take into account in considering the exercise of the discretion.

[72]     Pursuant to s 6A(3) of the Act, in collecting taxes, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to, inter alia, the resources available to her.

[73]     Here, there had been an earlier investigation which had been concluded. That investigation  had  commenced  with  a  GST  audit,  and  had  gone  on  to  consider Arai Korp’s  income  tax  obligations.    The  Commissioner  had  tried  to  compel Arai Korp to file income tax returns.   Indeed, she had prosecuted Arai Korp for failing to do so.   The Commissioner sought information in the course of her investigation.  It was not provided in full.  Third parties were contacted in an effort to ascertain whether or not income had been suppressed.   It was only after determining that income had been suppressed, that default assessments were issued, on the basis of the best information then available.

[74]     The affidavit evidence, particularly from Mr Mitchell, establishes that the assessments  were  the  best  which  the  Commissioner  could  make  given  the information which she had available to her at the time.

[75]     In  the circumstances,  the Commissioner was entitled  to  treat  the belated assessments prepared by Arai Korp with considerable scepticism.   It is clear, even from Mr Osmond’s affidavit, that the transactions leading up to, and the subject of the default assessments, are murky and convoluted.  Before it could be said with any certainty that the default assessments were incorrect, further detailed investigations would have been necessary.   Resources would have been needed to conduct those investigations.

[76]     It cannot be asserted that the Commissioner was required by the statute to fully investigate afresh the default assessments to determine the correctness of the assessments, before she could decline a request under s 113.  The Commissioner was entitled to take into account the circumstances in which the request was made, and the background which led up to that request.  Mr Parkinson did not err in doing so.

Consequential/genuine errors

[77]     Mr Parkinson sought to distinguish between consequential errors and genuine errors.  As I have noted above, I am not persuaded that the section calls for such an analysis.  I do not however consider that this was an error which was crucial to the decision not to invoke the s 113 discretion.

Standard Practice Statement, SPS 0703.

[78]     Mr Parkinson referred to the Commissioner’s standard practice statement.  It was not inappropriate for him to do so.   He did not slavishly follow its dictates. Rather, he applied his mind to the facts with which he was faced and he exercised the discretion by reference to those facts.  He did refer to the standard practice statement, but he did not treat it as an inflexible mandate which had to be applied regardless of the circumstances.

Result

[79]     I do not consider that the Commissioner’s decision to decline Arai Korp’s

application under s 113 was manifestly unreasonable.  Section 113 was not meant to

be  used  as  a  mechanism  to  bypass  the  disputes  procedure,  or  the  challenge procedure.   In my judgment, that is what Arai Korp has attempted to do in the present case, against a background where it has, for an extended period of time, failed to comply with its statutory obligations, and where it continues to do so.

[80]     The application for review is dismissed.

Costs

[81]	The Commissioner is entitled to costs. [82]	In that regard, I direct as follows:
(a)       If   the   Commissioner   wishes   to   seek   costs,   she   is   to   file   a memorandum in that regard within 10 working days of the date of this judgment;

(b)       Arai Korp is to file a memorandum in response within a further 10 working-day period.

[83]	I will then deal with the issue of costs on the papers, unless I require the assistance of counsel.

Wylie J