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Rabbits from Hats - October 2008

The "Evidence Exclusion Rule" in s 138G Tax Administration Act 1994 (TAA 1994) is designed as a "key part" of the disputes resolution procedure[1],' and aims to ensure that neither the taxpayer nor the Commissioner (CIR) will be able to raise in litigation any evidence or legal arguments not disclosed following a disclosure notice under s 89M TAA 1994. This article explores ways in which this aim may be circumvented, allowing parties to continue to pull rabbits from hats in Court to their opponents' dismay, by:

             The latitude in the evidence exclusion legislation;

             Situations where a disclosure notice need not be issued at all; and

             The hearing authority's own power to explore issues and raise assessments.

Latitude in Evidence Exclusion Rule

Under s 89M(2) TAA 1994, the CIR must issue a Disclosure Notice that includes a reference to the evidence exclusion rule in s 138G TAA 1994. The effect of that rule is that only facts, evidence, issues, and propositions of law that are disclosed by the parties in their Statements of Position (SOPs) may be raised in the hearing of any subsequent challenge.

The disclosure requirements are to give "an outline" in "sufficient detail to fairly inform". Despite the common practice (especially within the Department) for SOPs to be large documents (several hundred pages!), in essence the statute requires a summary. It has recently been observed by the Taxation Review Authority (TRA) in Case Y14 (2008) 23 NZTC 13,137 that s 89M does not require each document to be listed separately and precisely, but only that there must be sufficient information in the SOP so that the opposing party is not taken by surprise. Further, it is sufficient for the purposes of an outline of the evidence that although not listed, the evidence could be inferred so as to put the other party on enquiry.

The latitude is demonstrated by the High Court decision in CIR v Delphi Fishing Co Ltd (2004) 21 NZTC 18,525. There the High Court held that during the litigation the parties could rely on information raised in either party's SOP, and that the CIR's Addendum SOP under s 89M(8) could respond to and raise new legal propositions as well as facts.

Consequently, there is scope for a party to augment a case by arguing that evidence is inferred or is outlined in the other side's SOP.

When Evidence Exclusion Does Not Apply

Until 2005, the majority of tax disputes that were not resolved between the parties resulted in an assessment being issued by the Department without a SOP being completed - and therefore without the case proceeding to Adjudication. This result usually arose because the dispute had not reached the SOP stage before the statutory time bar in ss 108 or 108A TAA 1994 applied.

In some cases the disputes procedure had barely begun before it was terminated, with the CIR raising an assessment immediately following the issue of a Notice of Proposed Adjustment (NOPA). This situation was not envisaged by the designers of the process,' [2]nor intended by the TAA 1994'[3] nor envisaged in Inland Revenue's own publications[4]. Nevertheless, the Courts consistently upheld the CIR's power to raise assessments without completing the disputes procedure[5].'

In response to the scheme and purpose of the disputes procedure being frustrated in this way, new legislation was enacted in the form of s 89N TAA 1994. This section, appropriately entitled "Completing the Disputes Process", applies to most disputes commenced after 1 April 2005 to prevent the CIR from short-cutting the full disputes process.

However, there are four situations where the CIR is still not obliged to complete the disputes process and a case can go to Court or the TRA without the exclusion rule applying:

1. A taxpayer is assessed without the CIR issuing a NOPA. Set out in s 89C TAA 1994 is a list of circumstances in which the CIR does not need to issue a NOPA before assessing. In addition, it is implicit from s 89D TAA 1994 that at least in some circumstances the CIR may validly assess even when none of the circumstances in s 89C apply, and this has received some confirmation from the Courts.[6] Section 89D enables a taxpayer to issue a NOPA where the CIR has issued a Notice of Assessment without having previously issued a NOPA (whether or not in breach of s 89C). In these circumstances, if the taxpayer receives a Notice of Response rejecting the NOPA, the opportunity then exists for a taxpayer to go straight to Court or the TRA, without SOPs having been exchanged.

2. The taxpayer has done one of a range of things which disentitle the taxpayer to due process. Most of these things (listed in ss 89N(1)(c)(i) to (vii)) involve some wrong-doing by the taxpayer or an associate, such as asset-stripping, committing offences or failing to comply with information requests. However, issuing judicial review proceedings challenging the legitimacy or reasonableness of the CIR's processes also disentitles a taxpayer from due process. The policy for this latter exception is hard to discern.

3. The taxpayer and the CIR agree that completion of the process can be dispensed with (ss 89N(1)(c)(viii) and (ix));

4. The CIR applies for and obtains an order from the High Court under s 89N(3). Interestingly, despite submissions to the contrary when the legislation was enacted, there are no criteria as to what circumstances the Court might take into account in allowing or declining such an application. Inland Revenue's commentary[7] was as follows:

"It is envisaged that the exception to apply to the High Court for an order to issue an assessment or to allow further time to complete the process will be used only in exceptional circumstances. It is intended that the section will cover broadly similar situations already listed in the proposed new section which provide a schematic constraint to its application.

"The High Court in Sweetline Distributors Ltd & Ors v CIR (2004) 21 NZTC 18,608, High Court Wellington, CIV 2001-485-712, CP 107/01 confirmed that an assessment issued without completing the disputes process is valid and necessary in order to discharge the Commissioner's duty to ensure that the highest net revenue is collected in the public interest. This decision provides some guidance for Inland Revenue and taxpayers as to when it will be appropriate for Inland Revenue to approach the High Court for an order."

While the second sentence is fairly unintelligible, it might mean that an application will be justified when similar, but not identical things have happened are the things which automatically waive the need for the CIR to comply with the full process). In the writer's view, the Sweetline case provides little guidance: it was about whether there was a requirement to complete the process under the old legislation (there clearly was not) although it does say that given concerns that companies were about to be struck off, assessments were justified.

The only other comment is in the IRD Standard Practice Statement 05/03: Disputes Resolution Process Commenced by the Commissioner of Inland Revenue:

"It is envisaged that the exception will be used only in exceptional circumstances. Certain considerations such as complex issues, issues that involve large amounts of revenue and delays caused by the taxpayer may be relevant."

Consequences of Evidence Exclusion Not Applying

In the past the CIR was unable to change his grounds of assessment once litigation had commenced. That was the position found by the Court of Appeal under the former objection procedure in CIR v VH Farnsworth Ltd [1984] 1 NZLR 428 and was followed for two decades. But that position appears to have changed under the current challenge regime in Part VIIIA of the TAA 1994. In CIR v Zentrum Holdings Ltd (2006) 22 NZTC 19,912 (CA) the CIR was allowed to introduce a new ground of assessment (sham) in the course of the litigation (indeed, on appeal after the case had been heard in the TRA).

This effectively means that, if there is no SOP, the parties are free to vary their evidence, arguments and indeed the whole basis of the dispute almost at will. Trial by ambush is still a very real possibility.

Court's Options

When determining a challenge the Court (or TRA) is not limited to either upholding the CIR's assessment or finding in the taxpayer's favour. It is not an "either/or" contest. Instead, s 138P TAA 1994 makes a range of powers available to the Courts, including confirming, cancelling or varying the CIR's assessment, or making any assessment of its own that the CIR could have made.

The range of remedies available under this section reflects the onus on the taxpayer to prove that the assessment is wrong and by how much,[8] and the fact that the Courts are (by and large) in the business of administering justice. Thus, even if the CIR used the wrong procedure when making the assessment, or the assessment itself is based on incorrect grounds, the just result might still be that the taxpayer is liable to pay the tax. The wide range of remedies available in s 138P enables the Courts (or TRA) to achieve this result.

The potential breadth of the section is illustrated by the outcome in CIR v Campbell Investments (2004) 21 NZTC 18,559 (HC) where Wild J made obiter findings, and apparently directed reassessments, in relation to GST periods that were not subject to the litigation.


In conclusion, despite the apparently restrictive nature of the evidence exclusion rule, it gives the parties some considerable leeway; it may not apply in any particular case; and the Courts themselves are not bound by it.

[1] Government Consultative Document, Resolving Tax Disputes: Proposed Procedures, December 1994.

[2] See Appendix E to 1994 report Organisational Review Of The Inland Revenue Department and the consultative document previously cited at n 1.

[3] See objectives at s 89A TAA 1994.

[4] See TIB Vol 8:3 (August 1996).

[5] Eg PLM Software Ltd v CIR (2001) 20 NZTC 17,336 (HC) and Sweetline Distributors Ltd v CIR (2004) 21 NZTC 18,608 (HC).

[6] Eg Spencer v CIR (2004) 21 NZTC 18,818 (HC).

[7] Officials ' Report to the Finance and Expenditure Committee on Submissions on the Taxation (Annual Rates, Venture Capital And Miscellaneous Provisions) Bill 2004, August 2004

[8] Lancaster v CIR [1969] NZLR 589 (SC) at 590.