Decision date: 13 November 2013
Case: Inbound Tour Services Limited v Commissioner of Inland Revenue
Act(s): Goods and Services Tax Act 1985, Limitation Act 1950, Tax Administration Act 1994
Keywords: Statutory debt owing under section 46 of the GST Act 1985, Limitation Act defence, Judicial Review
The taxpayer was unsuccessful in its claim for a statutory debt owing as the Court held the Commissioner of Inland Revenue ("the Commissioner") had not breached her obligations under section 46 of the Goods and Services Tax Act 1985 ("GST Act"). The grounds for Judicial Review were rejected.
The complicated and somewhat unusual facts in this case limit the implication of the decision on section 46 of the GST Act.
In 2000 Ernst and Young ("EY") approached a number of inbound tour operators ("ITOs"), including Inbound Tour Services South Pacific Limited ("ITS"). EY advised ITS that it had formed a view that a proposed legislative amendment to the GST Act (the proposed introduction of section 11 (2A) of the GST Act 1985, introduced by section 80 of the Taxation (Remedial Matters) Act with application on or after 20 May 1999 and later renumbered to section 11A(2)) meant that members of the ITO industry should have been zero-rating travel packages sold to overseas clients.
Consequently, ITS claimed a goods and services tax ("GST") refund of $545,255.48 for GST accounted for between 1993 and 20 May 1999.
A section 46 letter was sent to the taxpayer's agent on the 15th working day but was not received until some days later. As this occurred prior to Commissioner of Inland Revenue v Sea Hunter Fishing Ltd (2002) 20 NZTC 17,478 (CA)("Sea Hunter"), all parties were of the view that section 46 of the GST Act had been complied with. However, the taxpayer's agent was told verbally by Inland Revenue staff that there would be an investigation into the GST return within the 15-day period.
A number of similar GST claims were made by other members of the ITO industry and a fiscal risk of $150–$200 million was identified. An ITO project was commenced by Inland Revenue and advice sought from the Solicitor General. Following consultation, a decision was made by Parliament that, to avoid doubt, the amendment to the GST Act would be made retrospective. The retrospective legislation contained a "savings provision" (section 241(6) of the Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001). The effect of the retrospective legislation was that the GST refunds claimed by members of the ITO industry (including ITS) would not be payable as claimed. However, a decision was made that the ITO industry's profit margin (known as the "facilitation fee") could be zero rated.
Accordingly, the Commissioner entered into two "agreed adjustments" with ITS, one to record that the original GST claim of $545,255.48 would not be paid and the second agreement recorded an agreement for a partial GST refund of $119,000 for ITS's facilitation fee.
ITS filed proceedings against the Commissioner in 2012 for a statutory debt owing due to a breach of section 46 of the GST Act and for Judicial Review.
The Commissioner filed an amended Statement of Defence and sought leave to raise a defence based on the application of the Limitation Act 1950 to ITS's claim after the close of pleadings.
Ronald Young J allowed the Commissioner to raise the Limitation Act defence but held section 163 acted to "effectively disengage" (paragraph 70 of the judgment) the Limitation Act. His Honour rejected the Commissioner's argument that section 163 of the Tax Administration Act 1994 ("TAA") only applied to the Commissioner's power to recover tax and did not apply to the current case (being a claim for a statutory debt). His Honour found that the plain wording of section 163 did not suggest its application was limited to the Commissioner, and that the other provisions in Part 10 of the TAA suggested section 163 applied to taxpayers and the Commissioner alike. His Honour also agreed with ITS's counsel that section 45 of the GST Act acted as a limitation period, so that section 33 of the Limitation Act 1950 (which states that the Limitation Act will not apply where an enactment prescribes its own limitation period) applied.
Breach of section 46 GST Act
Section 46 of the GST Act requires that once the Commissioner receives a GST refund, she must either pay the GST refund claimed or notify the taxpayer that an investigation will be conducted or request further information from the taxpayer within 15 working days (under section 46 of the GST Act). At the time ITS's refund was claimed, the Commissioner believed the requirements of section 46 were complied with if the Commissioner sent the required notification to the taxpayer by the 15th day. The later decision in SeaHunter held that this was incorrect and Inland Revenue has since changed its practice. ITS claimed that because they had not received notification of a further investigation of the GST return within 15 working days of filing their return, the Commissioner had breached section 46 and was required to pay the GST refund to ITS.
His Honour referred to the fact that notification given under section 46(5) of the GST Act did not have to be in writing in 2001 (paragraph 114 of the judgment). His Honour held that notification had been given within the timeframe so the Commissioner had complied with section 46(5) of the GST Act. His Honour referred to the policy behind section 46 of the GST Act (at paragraphs 96-97) as outlined in Contract Pacific v CIR  NZSC 136 and to the evidence of the correspondence between the Commissioner and EY. This showed that EY had known a refund was unlikely to be paid within 15 days from the outset and had expected the Commissioner to make a comprehensive review of the GST claim.
Section 11A(2) of the GST Act, as retrospectively enacted, confirmed that GST would be payable where the performance of service would be received in New Zealand. The Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001 ("TAMP Act") also contained a "savings provision".
His Honour found the purpose of the savings provision must have been to ensure that taxpayers who had received a refund would be entitled to keep the refund and that the savings provision applied to claims "affirmatively approved by the Commissioner", and not refunds which were generated by the Commissioner's legislative obligation under section 46. His Honour stated that even if ITS had received the refund after 15 working days, they would have known that (pending investigation) they may not retain the refund. His Honour held that while the Commissioner processed the GST return she did not assess whether ITS was entitled to it on the merits before the enactment of the TAMP Act, and so the savings provision does not apply (paragraphs 156 - 158 of the judgment).
ITS applied for Judicial Review on a number of grounds. The Commissioner argued that Judicial Review was not available to ITS, as following the decision in Tannadyce Investments Ltd v Commissioner of Inland Revenue  NZSC 158;  2 NZLR 153 ("Tannadyce"), Judicial Review in tax disputes is only available in "exceptionally rare cases".
His Honour agreed that the effect of Tannadyce is that Judicial Review will only be available in "exceptionally rare cases" but held that by entering into the Agreed Adjustments, the disputes resolution process was no longer available to ITS, therefore Judicial Review was available to it. His Honour then went on to consider each of the grounds of Judicial Review as alleged.
(a) Natural justice and procedural fairness
ITS claimed the Commissioner failed to disclose that the savings provision could apply to ITS and that the Commissioner did not consider ITS fell within the provision, and that ITS could receive the partial refund without forfeiting the right to the full amount.
His Honour found the Commissioner had always maintained that the savings provision did not apply to ITS, and there was nothing to suggest the Commissioner had ever thought the savings provision could apply to ITS. The Commissioner considered the agreed adjustments reflected the law, and ITS had received independent legal advice.
ITS also claimed that the Commissioner breached natural justice by saying if the refund was paid, it would be before March 2001 (when the TAMP Act was enacted).
His Honour found that there was no reviewable error. The comment allegedly made was an unreviewable comment, and not an undertaking (paragraphs 187 - 188 of the judgment).
ITS claimed the Commissioner deliberately deferred payment of the refund to prevent the savings provision applying to ITS, because while the Commissioner had all the information to make the decision by February 2001, the Commissioner did not make a decision until May of the same year.
His Honour found that the Commissioner had complied with section 46 of the GST Act and so could not have acted with maladministration. He also found the Commissioner's decision to freeze all GST claims that were under investigation was innocuous (paragraphs 196-197 of the judgment).