Chatfield & Company Ltd v the Commissioner of Inland Revenue

• Jurisdiction: New Zealand
• Judge: Wylie J
• Judgment Date: 22 December 2017
• Neutral Citation: [2017] NZHC 3289
• Docket Number: CIV-2015-404-001013
• Court: High Court
• Date: 22 December 2017

Under the Judicature Amendment Act 1972

In the Matter of a decision under the Tax Administration Act 1994

Between

Chatfield & Co Limited

First Applicant

Chatfield & Co

Second Applicant

and

The Commissioner of Inland Revenue

Respondent

[2017] NZHC 3289

CIV-2015-404-001013

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Judicial Review, Taxation — application to review a decision by the respondent to issue notices under s17 Tax Administration Act 1994 (“TAA” (information to be furnished on request of Commissioner) in October 2014 requiring them to furnish information about companies associated with a Korean national — whether the information was “necessary” under art 25 Double Taxation Relief (Republic of Korea) Order 1983

Appearances:

R A Rose and L M Zwi for Applicants

P H Courtney and M J Bryant for Respondent

JUDGMENT OF Wylie J

Introduction

1 The applicants, Chatfield & Co Limited and Chatfield & Co (jointly “Chatfield”), seek to review a decision made by the respondent, the Commissioner of Inland Revenue (the “Commissioner”), in October 2014 to issue 15 notices under s 17 of the Tax Administration Act 1994 (the “2014 notices”), requiring them to furnish information about 15 companies.

2 The information is sought by the Commissioner pursuant to a request made by the Korean National Tax Service (the “NTS”) under art 25 of the Double Taxation Relief (Republic of Korea) Order 1983 (the “DTA”). The NTS has requested the Commissioner to exchange the information once it is obtained in this country.

Background – the 2014 notices

3 The NTS made the request to the Commissioner under the DTA in May 2014. The information requested related to 21 New Zealand taxpayers. Some of the information sought was able to be obtained from the Commissioner's existing records. Some of it could be obtained from the Companies Office and Land Information New Zealand, as well as other publicly available sources. By these means, information requested by the NTS about five of the taxpayers was able to be provided and it was then exchanged. However, to fully respond, it was thought necessary to take further steps.

4 To this end, on 7 October 2014, the Commissioner exercised her discretion to issue the 2014 notices to Chatfield. They seek information about a company called KNC Construction Ltd and 14 affiliated companies. They were issued by Ms Forrest, an Investigation Team Leader, and they require Chatfield to produce various documents and records that it holds on behalf of the target companies. Some of the 2014 notices are relatively confined — for example, one seeks KNC Construction Ltd's 2013 financial statements. Others are more wide-ranging — for example one notice seeks the financial statements of KNC Construction and Engineering Ltd for the years 2003 – 2013, as well as copies of agreements for sale and purchase and settlement statements in relation to various properties. Documents sought from other target companies include share documents, bank remittance certificates for share and property sales, and reasons for changes in the ownership of various properties.

5 Each of the companies has its registered office in New Zealand. Chatfield is registered under s 34B of the Tax Administration Act as the tax agent for each of them.

6 The Commissioner's sole purpose in issuing the 2014 notices was to obtain information requested by the NTS for possible exchange under art 25 of the DTA. No New Zealand tax revenue is in issue.

7 The NTS has commenced a tax investigation in Korea into the affairs of Mr Jae Ho Huh. Mr Huh is the substantial owner of, and is associated with, the 15 companies the subject of the 2014 notices. He is a Korean national but he also has New Zealand residency. He has lived this country since approximately 2004.

Proceedings to date

8 Chatfield had concerns about the legality of the 2014 notices. It discussed these concerns with its advisors and with the Commissioner, but was unable to reach a satisfactory resolution.

9 As a result, in May 2015, Chatfield commenced these proceedings challenging the Commissioner's decision to issue the 2014 notices. The proceedings were issued on two broad grounds:

• (a) it was alleged that the Commissioner's decision to issue the notices breached Chatfield's legitimate expectations arising from an operational statement known as OS 13/02 1 dealing, inter alia, with the issuance of s 17 notices; and

• (b) it was further alleged that, in issuing the notices, the Commissioner failed to take into account three relevant considerations:

  • (i) OS 13/02;

  • (ii) the limited nature of information held by tax agents in New Zealand; and

  • (iii) the terms of the DTA.

10 Chatfield also sought an order under s 10(2) of the Judicature Amendment Act 1972 seeking that the Commissioner should disclose and produce all relevant documents that had not at that point been produced. In particular, it sought the request made under the DTA by the NTS to the Commissioner and any and all exchanges between the Commissioner and the NTS relating to the request.

11 The Commissioner refused to supply these documents. Rather, she sought an order under s 70 of the Evidence Act 2006 precluding disclosure on the ground that the documents relate to “matters of state”.

12 On 1 September 2015, Ellis J held that it is, in principle, possible to obtain disclosure of material exchanged between the Commissioner and the NTS, but that such disclosure is governed by s 81 of the Tax Administration Act. 2 She considered, however, that there was an evidential vacuum in the materials before her, and that the appropriate course was for the Commissioner to make enquiry of the NTS as to its views on disclosure of the documents sought. She indicated that if secrecy was sought to be maintained by the NTS, then the matter would need to be referred back to her. She directed the Commissioner to file and serve a memorandum advising the outcome of the enquiry to the NTS.

13 The Commissioner made the appropriate enquiry, and then filed both an open and a closed memorandum. The open memorandum asserted as follows:

I have not seen the closed memorandum.

• (a) NTS's request, and the information sought, was necessary for carrying out the provisions of the DTA and the domestic laws of Korea.

• (b) NTS's request was for information that is not obtainable in the normal course of tax administration in Korea.

• (c) Korean legislation gives a taxpayer the right to request information necessary for the exercise of his, her or its rights, but tax officials are not required to provide information where an investigation is in progress, a decision on the appropriate tax assessment has not been made, and disclosure of information might affect the tax investigation. When the tax investigation is completed, tax officials must notify the taxpayer of the result. However, material obtained during the investigation is still not disclosed, unless a request is made. The taxpayer has various options to dispute the outcome of the investigation.

• (d) The closed memorandum being filed contemporaneously was confidential to the Court. It had attached to it the response received from the NTS to the enquiry directed by the Court. The NTS was claiming confidentiality in respect of each document requested and it had given brief reasons for its claim to confidentiality.

14 After calling for submissions, in June 2016 Ellis J issued a further judgment as an addendum to her earlier judgment. She held that the Commissioner was not required to disclose the requested documents pursuant to s 81 of the Tax Administration Act. 3

15 In early July 2016, Chatfield both appealed Ellis J's decision and filed an amended statement of claim. The Commissioner promptly filed a strike-out application.

16 The strike-out application came before Lang J on 21 September 2016, and he issued his decision on 27 September 2016. 4 He struck out Chatfield's legitimate expectations claim, but held that Chatfield's allegation that the Commissioner had decided to issue the 2014 notices without taking into account the terms of art 25, and in particular the exceptions contained in art 25(2), was reasonably arguable. He held that this part of the cause of action could remain on foot.

17 Chatfield appealed both Ellis J's discovery decision and parts of Lang J's strike-out decision to the Court of Appeal. The Commissioner did not appeal either decision.

18 The Court of Appeal dismissed both of Chatfield's appeals following separate hearings. Relevantly, it:

• (a) held that the undisclosed documents were not relevant to Chatfield's amended statement of claim; 5

• (b) upheld Lang J's decision that OS 13/02 did not give rise to any legitimate expectation as contended for by Chatfield and that it was not reasonably arguable that, when exercising her s 17 power, the Commissioner was required to take OS 13/02 into account, or the limited relationship tax agents characteristically have with their clients. 6

19 Chatfield applied for leave to appeal both decisions to the Supreme Court. It also filed a second amended statement of claim on 8 June 2017 7 and the Commissioner filed an amended statement of defence in response on 22 June 2017.

20 The Supreme Court subsequently declined leave to appeal either decision made by the Court of Appeal. 8

21 In the course of the hearing before me, Mrs Courtney for the Commissioner sought to argue justiciability as an affirmative defence. That defence had not been pleaded and Ms Rose for Chatfield asserted that it was not open to the Court to consider the matter. After discussions in Court, Mrs Courtney sought leave to file an amended statement of defence. I granted her...