The diminishing role of judicial review in New Zealand tax law

By Sehj Vather, Solicitor | Wednesday 29 July 2009

First published in Taxation Today, July 2009.

Introduction

In 2004, the Commissioner of Inland Revenue (CIR) issued amended assessments to Westpac invoking the general anti-avoidance provision in respect of 9 cross-border transactions commonly referred to as the "repo" or "conduit" transactions. Westpac challenged the amended assessments on two bases: first, an orthodox challenge of the substantive basis of the assessment; and second, a judicial review claim challenging the validity of the assessments.

The CIR successfully struck out the judicial review claim in the High Court. Westpac appealed the strike out order to the Court of Appeal. The Court of Appeal's decision on appeal in Westpac Banking Corporation v CIR (2009) 24 NZTC 23,340 is the subject of this article.

Background

In 1999, Westpac entered into 10 cross-border transactions which involved, in very simplified terms, a subsidiary of Westpac acquiring shares from a counterparty on the basis that the counterparty would buy back the shares after a specified period (usually 5 years). During that period, the Westpac subsidiaries would derive, from the shares, income that was either exempt from tax under the conduit rules or relieved from tax under the foreign tax credit rules. Westpac would also deduct: (1) the cost of its borrowing; (2) the net cost of the interest rate swap; and (3) guarantee procurement fees which it had paid to the counterparties' parent companies to guarantee performance of the buyback.

Each of the 10 repo transactions is referred to by the name of the relevant counterparty, such as Koch, First Data, GE, HSBC, Citibank and so forth; and all were structured along broadly similar lines.

Facts

Inland Revenue is organised around business units. The two units in issue in this case were the Rulings Unit (responsible for issuing binding rulings) and Corporates (which performs investigation and assessment functions in respect of large companies).

In 1999, Westpac sought a binding ruling in respect of its proposed tax treatment of one of the repo transactions, namely the First Data transaction. Specifically, Westpac sought a ruling that the general anti-avoidance provision (s BG 1) did not apply to the transaction. In 2001, Rulings issued a reasonably narrow ruling in Westpac's favour. The ruling was subject to a number of conditions and gave a very particular description of the transaction in question. Westpac did not seek rulings on the other 9 transactions.

Internal Inland Revenue documents show that Corporates had been unenthusiastic about the First Data ruling, but had not involved itself in the rulings process.

In 2003, two years after the First Data ruling had been issued, Corporates began to take an active interest in the repo transactions and formed the view that s BG 1 could apply to them. Realising the inconsistency between its view on the one hand and the First Data ruling on the other, Corporates referred the issue to "escalation", which is an Inland Revenue process that was performed (at the time) by the Technical Standards Unit. The escalation process is designed to resolve significant differences of opinion within Inland Revenue.

Technical Standards set out its conclusions in a determination dated December 2003. It found that the First Data transaction did not fall within the "generic description" of the 9 other repo transactions in which Corporates had taken an interest. Further, those other transactions did not meet the stringent conditions and factual assumptions laid down in the First Data ruling. On that basis, Technical Standards concluded that there was no real conflict of interpretation that warranted formal resolution through the escalation process or that precluded Corporates from pursuing an investigation into the 9 other transactions.

Consequently, in 2004, the CIR, through Corporates, issued Westpac with amended assessments which invoked s BG 1 in relation to the other 9 repo transactions.

Westpac's claims

The present case concerned an appeal by Westpac challenging the High Court's order to strike out its judicial review claim, which challenged the validity of the amended assessments on administrative law grounds. Although Westpac's judicial review claim involved multiple issues, at its core was the apparent inconsistency between the 9 amended assessments on the one hand and the First Data ruling on the other.

Availability of judicial review within the statutory framework

The Court of Appeal began by considering the availability of judicial review as a basis of challenge within the statutory framework of the Tax Administration Act 1994 (the TAA 1994).

Part 8A of the TAA 1994 provides a specific challenge process through which taxpayers may dispute an assessment either before the Taxation Review Authority or the High Court. Section 109 provides that, except in a challenge under Part 8A:

• No assessment may be disputed in a court on any ground whatsoever; and

• Every assessment and its particulars are deemed to be correct in all respects.

In other words, in relation to tax assessments, s 109 purports to limit taxpayers to only one avenue of challenge, namely a statutory challenge under Part 8A.

Section 114 further provides that an assessment made by the CIR remains valid even where the CIR has failed to comply with a provision of an Inland Revenue Act.

The Court of Appeal considered that ss 109 and 114 "provide what might be thought to be a particularly inauspicious statutory context for judicial review". The Court intimated that those sections provide something of a code for the resolution of tax disputes.

To some extent, this view accords with the approach of New Zealand Courts in the past. Most significantly, the Privy Council in Miller v CIR [2001] 3 NZLR 316 confirmed that the correctness of a tax assessment may only be challenged under the challenge proceedings process provided in the TAA 1994, and that challenge by way of judicial review is reserved only for exceptional cases. The Court of Appeal in the present case agreed with the proposition in Miller.

In reaching its view, the Court of Appeal looked to the UK and Australia for guidance as to the applicability of judicial review to tax assessments.

Approach in other jurisdictions

The United Kingdom

In the UK, the House of Lords in Re Preston [1985] 1 AC 835 gave support to the proposition that the Courts may intervene, by judicial review, to direct Inland Revenue authorities to abstain from exercising their powers on grounds of legitimate expectation.

However, in Westpac, the Court of Appeal questioned whether it was appropriate for New Zealand to follow the UK path and extend the judicial review doctrine of legitimate expectation to tax assessments. The Court of Appeal's key concern was that English legislation contains nothing in the nature of New Zealand's rulings regime, which allows taxpayers to apply for formal rulings from Inland Revenue. The lack of a rulings regime in the UK means that, in the interests of fairness and certainty, the relevant revenue authority is taken to be implicitly bound by views it may have expressed to taxpayers about the application of the law. In New Zealand, however, the Court of Appeal reasoned that we have a statutory process by which the CIR's views on a given matter may be formally ascertained. Rulings provided by the CIR are expressly binding on him. Given that taxpayers have the option of seeking such binding rulings, the Court of Appeal considered that there is little justification in principle to bind the CIR (by implication) to views he may have previously expressed on the application of the law.

Australia

In Australia, the Income Tax Assessment Act 1936 contains provisions similar to ss 109 and 114 TAA 1994. Australian Courts have also been reluctant to adopt the English position. Most recently, the High Court of Australia in Commissioner of Taxation v Futuris Corporation Ltd (2008) 247 ALR 605 observed that, as a consequence of the Australian equivalents to ss 109 and 114, taxpayers generally cannot challenge the validity of an assessment through judicial review, but instead are able to dispute it only through the challenge procedures provided by statute. However, the High Court qualified this statement by noting that the statutory preclusion of judicial review did not extend to situations of "conscious maladministration" on the part of the Revenue.

The Court of Appeal in Westpac accepted this position. It viewed conscious maladministration as one type of exceptional circumstance in which judicial review should be available. The Court of Appeal reconciled this view with ss 109 and 114 by stating that in cases of exceptional circumstances or conscious maladministration, the challenged assessment is not the sort of "assessment" which the legislature had in mind when enacting those sections.

Summary of the New Zealand position

The Court of Appeal expressed several clear reservations as to the role of judicial review in a tax context. These reservations can broadly be summarised as follows:

• Section 109, as mentioned, bars all disputes to tax assessments except through a challenge under Part 8A of the TAA 1994. It also deems an assessment to be "correct in all respects", which seemingly extends to the assessment's validity for the purposes of judicial review.

• Judicial review, as a doctrine, was developed to enable Courts to scrutinise the "exercise of a statutory power of decision". A tax assessment, however, is not so much the exercise of a statutory power as it is a reflection of the correct underlying tax position of a taxpayer. A taxpayer's liability to tax exists independently of an assessment. If an assessment is correct, complaints about process should not relieve the taxpayer from meeting its pre-existing tax liability. To allow a taxpayer to avoid its liability to tax on the basis of a procedural failure would amount to a judicial dispensation of that taxpayer's obligation to pay tax which it otherwise owes (independent of any assessment).

• Allowing collateral challenges to tax assessments through judicial review would provide scope for gaming and diversionary behaviour.

Notwithstanding its reservations, the Court of Appeal was prepared to accept that ss 109 and 114 had not, in the past, been applied in a "completely literal way" and that in "exceptional circumstances" judicial review is available.

It followed that although Westpac's judicial review claim was, on its face, inconsistent with ss 109 and 114, the ultimate question was whether Westpac could arguably maintain that the circumstances of its case were exceptional.

The approach taken by Court of Appeal was to determine, first, whether Westpac had an arguable basis for judicial review and, second, whether the relevant circumstances were exceptional.

The basis of Westpac's judicial review claim

Westpac's judicial review claim can be reduced to four key contentions:

1. The amended assessments in relation to the repo transactions were based on an interpretation and application of law that was inconsistent with that adopted by the CIR in the "substantially similar" First Data ruling;

2. Westpac had entered into the other repo transactions in the legitimate expectation that the law as interpreted in the First Data ruling would be applied;

3. The amended assessments were not an honest appraisal or a genuine exercise of judgment; and

4. The relevant staff of Inland Revenue's Corporates Unit were guilty of conscious maladministration.

The Court dealt with each of these contentions in turn.

Inconsistency between First Data Ruling and Corporates Unit's amended assessments

Westpac argued that the apparent inconsistency between the view of the Corporates Unit and Rulings was unfair and unreasonable, and breached the CIR's statutory duty to protect the integrity of the tax system.

The Court of Appeal found that Corporates genuinely believed that the repo transactions in question did not conform to the transaction description and conditions expressed in the First Data ruling. The factual basis upon which Corporates had issued the amended assessments was "appreciably different" from the factual assumptions built into the First Data ruling. For this reason, the amended assessments were not in themselves inconsistent with the First Data ruling.

The Court of Appeal also commented that, given the size of Inland Revenue, it is inevitable that inconsistencies would arise in interpretation and application of the law. An assessment is not invalid merely because of such inconsistency. The Court of Appeal went on to state that even if there had been a failure to comply with the TAA 1994 (including the CIR's duty of care and management), that too would not usually invalidate an assessment.

Legitimate expectations

Westpac asserted that it had entered into the other 9 repo transactions in the legitimate expectation that the CIR would apply an approach consistent with that of the private First Data ruling.

As mentioned above, the Court of Appeal held that legitimate expectation was not an appropriate basis for judicial review of tax assessments in New Zealand, given that taxpayers could seek a formal ruling on any given transaction. The Court of Appeal also noted in this case that it seemed clear that the various factual assumptions and conditions of the First Data ruling had not been met in the other repo transactions.

Finally, the Court of Appeal affirmed the general principle that the CIR cannot estop himself from enforcing the law, and held that to allow a legitimate expectation claim would contravene that principle.

Honest appraisal and genuine exercise of judgment

Westpac argued that the amended assessment was not an honest appraisal or a genuine exercise of judgment. In particular, Westpac contended that the CIR had not resolved its inconsistent view of the law and had therefore been unable to determine what the law was. As a consequence, the amended assessments had been issued in disregard of what the correct view of the law should be.

The Court of Appeal dispensed with this argument by focusing on the subjective notions inherent in the claim — that is, the "honesty" of the appraisal and "genuineness" of the exercise of judgment. Here, the amended assessments were issued by a Mr Goggin of Corporates (acting as the CIR's delegate). The Court considered that Mr Goggin, in issuing the assessments, had honestly and genuinely believed that they were correct in law and in fact. The Court of Appeal also found that he had believed that there was no inconsistency precluding him from issuing the assessment (given the outcome of the escalation process referred to above).

Conscious maladministration

Westpac claimed that Mr Goggin of Corporates had acted unfairly, for an improper purpose and in abuse of power, all amounting to conscious maladministration that rendered the amended assessments invalid.

Westpac argued that two different views of the law had been held by two different units in Inland Revenue. Corporates had instigated the escalation process not to resolve this alleged inconsistency, but rather for the improper purpose of obtaining approval to issue amended assessments that were inconsistent with the Rulings Unit's First Data ruling. Westpac further argued that Corporates had "deliberately subverted" the escalation process by telling Technical Standards that it had reviewed documentation relating to the 9 other repo transactions that had not been available to Rulings at the time of the First Data ruling. This in turn had induced Technical Standards to conclude, first, that the various repo transactions did not meet the conditions and factual assumptions of the First Data private ruling and, second, that there was therefore no inconsistency.

The Court of Appeal rejected Westpac's arguments. In dispensing with Westpac's conscious maladministration claim, the Court also stated that:

• There was no suggestion that Corporates or Technical Standards had acted dishonestly, and the escalation process itself had been transparent;

• The states of mind attributed to Corporates staff (in particular, the deliberate subversion motives) were not particularly plausible; and

• Mr Goggin, in issuing the amended assessments, had acted in good faith and in the belief that he was entitled to do so.

Exceptional circumstances

Even if, in the alternative, Westpac did have an arguable basis for judicial review, the Court of Appeal held that the circumstances in this case were not, in any event, sufficiently exceptional to override the operation of ss 109 and 114 1994.

First, in issuing the amended assessments, Mr Goggin of Corporates had acted in good faith and in the bona fide belief that the repo transactions could be challenged under the general anti-avoidance provision.

Second, even if the escalation process had been flawed, breaches of internal department procedures by Inland Revenue officers could hardly be described as exceptional (in the sense of being rare); and to allow procedural errors to invalidate subsequent assessments would leave very little scope for ss 109 and 114. Further, to allow taxpayer litigants to trawl through processes antecedent to the issue of an assessment, with a view to identifying and relying on departures from internal department protocol, would undermine the orderly and efficient resolution of tax disputes.

Third, the Court of Appeal noted that even where an Inland Revenue officer, in issuing an assessment, deliberately departed from internal department protocol, such a departure could hardly be considered exceptional if: (1) the officer believed the assessment to be well-founded in fact and in law; or (2) the procedural departure was entirely collateral to the accuracy of the assessment.

Comment

The outcome of this case and the reasoning therein, signals a decided reluctance on the part of the Court of Appeal to permit judicial review of tax assessments as a general avenue of challenge for taxpayers.

The Court of Appeal's analysis was in part founded upon the view that the availability of a formal rulings process in New Zealand justified a limitation on the availability of judicial review in tax disputes. Respectfully, the Court of Appeal's analysis in this respect perhaps overestimates the ease by which rulings can be obtained (particularly in relation to s BG 1) as well as the timeliness of the rulings process.

Overall, the Court of Appeal has set a high threshold in establishing the existence of the "exceptional circumstances" necessary for a judicial review claim to be available. This was most apparent in the Court of Appeal's remarks that even a deliberate departure from internal protocol would not be sufficiently exceptional to warrant judicial review, particularly where the procedural departure was collateral to the accuracy of the subsequent assessment.