Anyone following court decisions in taxation matters cannot help but to have noticed the fate of Mr Hardie patent attorney in his losing battle against Inland Revenue over his tax bill. The latest of the string of judgments concerning Mr Hardies tax debts was a decision by Justice Keane delivered on 23 December 2010. It is often said that if you can’t be a good example be a ghastly warning. Mr Hardie falls into the latter category with respect to the handling of his tax affairs.
For some considerable period of time Mr Hardie had not filed tax returns. The Commissioner of Inland Revenue issued default assessments for the periods 1992 to 2003 in relation to Income Tax and default GST assessments for the periods 2003 to 2006. With the accumulation of late payment penalties and interest Mr Hardies liability to the Commissioner totalled as at the last of his hearings $21,759,701.
The Commissioner issues default assessments when the taxpayer has failed to file the tax returns that they are obligated to file. He is usually extremely patient first writing to the taxpayer and reminding them of their obligation to file returns. In this instance his patient waiting with respect to the 1992 return some 7 or so years. In the face of extreme intransigency the Commissioner will issue default assessments. That is exactly what he did here.
Where the Commissioner issues a default assessments he is inviting the recipient to file the relevant returns. The invitation is communicated by the fact that default assessments are often considerably higher than the actual tax liability. In order to reduce the liability the taxpayer will be advised to file the outstanding returns and if the Commissioner does not reassess in line with the now filed returns the taxpayer can commence challenge proceedings.
Mr Hardie either ignored advice or failed to get any for he did not file the outstanding returns. Proceedings were initiated by the Commissioner in the Wiatakere District Court. One can speculate that even at that late stage it would have been possible to prepare the relevant accounts and file the correct returns but this never happened. Mr Hardie defended the proceedings in the District Court on multiple fronts. He raised various arguments before the District Court and filed judicial review proceedings in the High Court.
There was a general overlap in the arguments advanced. The first argument was that it was unfair and arbitrary for the Commissioner to assess without access to the full information. Related to this was an argument that the Commissioner was not being sufficiently accommodating given the difficulties that Mr Hardie said he was facing in getting his accounts done. Those difficulties appeared to be his lack of business systems, lack of accountancy knowledge and that he had family related issues.
These arguments are not of themselves unmeritorious but they were deployed in the wrong forum. Thus rather that having to engage with the substance of the arguments the District Court Judge was able to point out that:
- Section 106 of the Tax Administration Act 1994 (TAA) provides that the Commissioner may issue default assessments and that the amount assessed is payable unless the taxpayer succeeds in challenging the assessments or demonstrates that he or she is not chargeable with the tax.
- Once a default assessment is made under s 106 the taxpayer could only challenge the assessments by first filing the relevant returns and then by filing a dispute document within the relevant response period provided for in paragraph 89D of the TAA.
- If that route is not chosen then s 109 provides that no disputable decision (the default assessments are disputable decisions) can be challenged in a Court or in any proceedings.
- The Commissioner is entitled to then recover the taxes – s 156 of the TAA.
Had Mr Hardie filed tax returns as best as he could in the circumstances he would then have been able to challenge the default assessments and in the context of a challenge to an assessment an argument that the Commissioner has failed to take into account all relevant factors when raising his assessment is both permissible and powerful. The law would have swung in on his side. The Commissioner cannot disregard facts known to him. He must act reasonably. The information in the return and challenge documents are facts. Further the oral evidence of the taxpayer can be used to establish facts. Unless there were cogent reasons for disbelieving the taxpayer the Commissioner would be on the back foot.
If as the taxpayer said he had failed to keep the required records then he could have used other means of establishing his tax liability. For example he could have undertaken a kind of asset accretion calculation to establish his income. Again unless there were compelling reasons for disbelieving the tax payer the Commissioner would find it difficult. While the Commissioner can fall back on the burden and onus of proof he also has to be a model litigant and cannot act irrationally. Thus if there are no rational arguments that can be run to suggest that the taxpayer has miscalculated or is lying then it becomes very likely that the taxpayer will discharge the onus on them.
In this regard the Commissioner will often candidly admit that his default assessments are at best only informed estimates. This was admitted by the Commissioner before the District Court. It is the combination of the fact that default assessments are guesses, the Commissioner’s obligation to make a correct assessment (s 113) and the fact the taxpayers information as to what the correct assessment should be is often the only information that the Court has, which means that very often the challenge to the default assessment will succeed.
The lesson at this point is that it is vital to get advice on tax matters and that intransigence in the face of assessments is simply not an option. Mr Hardie had legal rights and a practical way of challenging the size of the Commissioner’s default assessments. Had he exercised those rights things may have turned out very differently.
The second argument that Mr Hardie deployed was that he was exempt from paying tax because he was of Maori decent. It appears that Mr Hardie neglected to provide any evidence of his whakapapa establishing his Maori decent. This provided an evidential difficulty irrespective of the legal obstacles that stood in Mr Hardie’s way.
With respect to the legal argument Mr Hardie did not advance any authority to support his proposition that people are exempt from paying tax if they are of Maori decent. The District Court found that it had never been accepted that Statutes passed by Parliament were not applicable to people of Maori decent. Tax legislation imposes obligations that apply to all New Zealanders irrespective of race. There is a long history of case law all rejecting the argument that some people are exempt from tax by virtue of race: Kaihau v IRD (1988) 10 NZTC 5,193, Rupe v CIR (2004) 21 NZTC 18,516, Boyton v CIR (2002) 20 NZTC 17,615, New Zealand Maori Council v AT  1 NZLR 641 (CA) and AG v Ngati Apa  NZLR 643 (CA).
The arguments about being exempt from tax if one was indigenous had there origin in the United States. They have never got any traction and nor do they deserve to.
The third argument that was advanced was that various provisions in the New Zealand Bill of Rights Act 1990 (BORA) had been transgressed. The alleged transgressions were of sections 9 and 27 of the BORA. Section 9 deals with the right not to be subject to torture or cruel treatment. That argument was dismissed as having no merit whatsoever.
Section 27 of the BORA provides for the right to receive natural justice and have ones rights and obligations determined by law. Self evidently none of the provisions of s 27 exempt a person from complying with their tax obligations. That argument was dismissed as well. As a general comment appeals to the BORA have proved a baron field for taxpayers.
The District Court judgment was appealed by Mr Hardie. In the High Court he ran the same arguments. They were all dismissed by Stevens J: see Hardie v CIR (2010) 24 NZTC 24,161.
Mr Hardie promptly made application for special leave to appeal to the Court of Appeal against the High Court decision. His application was dismissed: Hardie v CIR (2010) 24 NZTC 24,462.
Mr Hardie was not done, however. He also had judicial review proceedings which he was running parallel to his appeals against the entry of judgment. Two judicial review proceedings were lunched. The first judicial review proceeding was filed in June 2007, which was discontinued on July 2008. The Commissioner wanted orders that Mr Hardie not be permitted to file any further judicial review proceedings but the High Court declined to make the order because told the court that he did not intend to file another judicial review proceeding.
It would appear that despite that assurance a second judicial review proceeding because on 23 December 2010 Keane J struck out a judicial review proceeding filed by Mr Hardie relating to the default assessments. With admirable restrain the judge set out the law on judicial review and noted that Mr Hardies case was very similar to Tannadyce Investments Limited  NZCA 233 where the taxpayer had contended that the Commissioner had withheld documents obtained for default assessments and that this retention had prevented returns being filed as a foundation for a notice of proposed adjustment.
This saga stated with a judgment from the District Court in 2002 and now looks as if has finally ended in 2010. That is 8 years of fruitless litigation all doomed because of a take timely steps when faced with default assessments.