Care and Management
MIKE LENNARD, Tax Barrister
In this article, Mike Lennard looks at the central thesis of the “Care and Management” Interpretation Statement recently released by Inland Revenue.
In November last year the Department released[1] Interpretation Statement IS 10/07, “Care and Management of the Taxes covered by the Inland Revenue Acts” (“the Statement”), setting out the Department’s understanding of the application and effect of Section 6A(2) and (3) of the TAA 1994.
This article outlines the legislation and its origins, provides a brief description of the Statement and examines arguably its key aspect – its view that the provisions do not authorise the Commissioner to act inconsistently with the rest of the Inland Revenue Acts.
The legislation and its origins
Sections 6 and 6A provide:
“6 Responsibility on Ministers and officials to protect integrity of tax system
(1) Every Minister and every officer of any government agency having responsibilities under this Act or any other Act in relation to the collection of taxes and other functions under the Inland Revenue Acts are at all times to use their best endeavours to protect the integrity of the tax system.
(2) Without limiting its meaning, the integrity of the tax system includes—
(a) taxpayer perceptions of that integrity; and
(b) the rights of taxpayers to have their liability determined fairly, impartially, and according to law; and
(c) the rights of taxpayers to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other taxpayers; and
(d) the responsibilities of taxpayers to comply with the law; and
(e) the responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and
(f) the responsibilities of those administering the law to do so fairly, impartially, and according to law.
6A Commissioner of Inland Revenue
(1) The person appointed as chief executive of the Department under the State Sector Act 1988 is designated the Commissioner of Inland Revenue.
(2) The Commissioner is charged with the care and management of the taxes covered by the Inland Revenue Acts and with such other functions as may be conferred on the Commissioner.
(3) In collecting the taxes committed to the Commissioner’s charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to—
(a) the resources available to the Commissioner; and
(b) the importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and
(c) the compliance costs incurred by taxpayers.”
Two reports led to the enactment of section 6A and section 6:
• First Report of the Working Party on the Re-organisation of the Income Tax Act 1976, July 1993, Wellington (“the Valabh report”); and
• Organisational Review of the Inland Revenue Department, Report to the Minister of Revenue (and on tax policy, also to the Minister of Finance), April 1994, Wellington (“the ORC report”).
The Valabh Committee, following the dicta of Richardson J in Commissioner of Inland Revenue v Lemmington Holdings Ltd [1982] 1 NZLR 517 (CA), noted that the Income Tax Act imposed the obligation to pay income tax and the Commissioner’s statutory functions were directed to the quantification of that liability. It considered that in its “extreme form” the law obliged the Commissioner to “assess and recover all taxes which are due”[2]. The Committee considered this was an unrealistic obligation that did not match the practice of the Department. Moreover, any such obligation sat uncomfortably with the appropriation and financial accountability requirements of the State Sector Act 1988 and the Public Finance Act 1989. These required departments to focus on the “efficient, effective and economic production of their outputs, the funding for which is appropriated by Parliament”[3]. The Commissioner was required to act consistently with both enactments.
Consequently the Valabh Committee recommended that there should be “legislative recognition of managerial discretion to determine priorities and enter into sensible settlements”. It considered that the United Kingdom care and management provision provided “a useful model”.
The Organisational Review Committee agreed with the Valabh Committee’s recommendation that there should be legislative recognition of the Commissioner’s managerial discretion[4]:
“It is not possible for the Chief Executive of IRD, operating within limited resources, to ensure that every cent of due taxes is collected. Explicit recognition of the management of limited resources in the efficient and effective collection of taxes is required.”
The Committee considered that the Commissioner’s responsibility for the “management of limited resources in the efficient and effective collection of taxes” was encapsulated by the term “care and management”. It defined this term as[5]:
“Managerial discretion as to the use of independent statutory powers in a cost effective manner.”
Accordingly the Committee proposed draft legislation in almost identical terms to section 6 and 6A(2) and (3) of the TAA 1994.
The British Influence
Both the Valabh Committee and Organisational Review Committee referred to the United Kingdom “care and management” provision. At that time this provision was contained in section 1 of the Taxes Management Act 1970:
“1(1) Income tax, corporation tax and capital gains tax shall be under the care and management of the Commissioners of Inland Revenue (in this Act referred to as ‘the Board’), and the definition of ‘inland revenue’ in section 39 of the Inland Revenue Regulation Act 1890 shall have effect accordingly.”
The House of Lords considered that provision in Inland Revenue Commissioners v National Federation of Self-Employed and Small Businesses Ltd [1981] 2 All ER 93 (“Fleet Street Casuals case”). In this decision, casual workers in the printing industry had falsified their identities (“M Mouse Esq” was a common alias[6]) when collecting their pay, so that the Inland Revenue could not assess and collect tax due from them.
To end this revenue loss, the United Kingdom Revenue entered an arrangement with the casual workers, the Union and the employers where the casual workers would register with the Revenue in order for future tax to be deducted at source or otherwise assessed, and to co-operate with the Revenue in settling their taxes for the previous two year period, and the Revenue agreed not to investigate tax liability of these casual workers in years before the past two years.
The respondent, an association of business owners aggrieved at what seemed to be concessionary treatment of the casual workers, sought a writ of mandamus to compel the United Kingdom Revenue to act contrary to this arrangement by discharging their statutory duty to assess and collect all taxes owed by the casual workers. In considering the application, the House of Lords held in Fleet Street Casuals that the Revenue had a “wide managerial discretion” under section 1(1) of the Taxes Management Act 1970. Lord Diplock stated that this discretion was inherent in the phrase “care and management” (at page 101):
“… the Board are charged by statute with the care, management and collection on behalf of the Crown of income tax, corporation tax and capital gains tax. In the exercise of these functions the board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge the highest net return that is practicable having regard to the staff available to them and the cost of collection.”
Section 6A(3) is very similar to the duty Lord Diplock stated was imposed by section 1 of the Taxes Management Act 1970.
Their Lordships held that the arrangement was within the managerial discretion conferred that provision. Without the arrangement, attempting to collect the taxes from the casual workers would have been unlikely to produce any substantial sums of money and the arrangement was likely to lead to a greater collection of revenue, because it brought the casual workers into the taxation system and so enabled their future income to be taxed.
The Interpretation Statement’s Conclusions
The Interpretation Statement’s conclusions are largely negative, in that they are framed in terms of what the sections do not permit the CIR to do. At paragraph [65] the conclusion is expressed that section 6A(2) and (3) do not authorise the Commissioner to:
• disregard the requirements for the lawful exercise of powers and discretions conferred by other provisions;
• alter taxpayers’ obligations and entitlements;
• issue extra-statutory concessions;
• administratively remedy legislative errors and other deficiencies; or
• interpret provisions other than in accordance with statutory interpretation principles contained in the Interpretation Act 1999 and court decisions.
The Statement accepts that the provisions enable the Commissioner to adopt courses of action that have the effect of forgoing the collection of the highest net revenue:
• in the short term, if he considers that this will enable the collection of more net revenue in the longer term; and
• from particular taxpayers, if he considers that this will enable more net revenue to be collected from all taxpayers
As regards section 6A(3) specifically, the Statement says at para [131] to [135]:
“131. Section 6A(3) requires the Commissioner to identify the various options for dealing with administering the tax system or for dealing with particular taxpayers.
132. Section 6A(3) then requires the Commissioner to determine which option would result in the collecting “over time” of the “highest net revenue that is practicable” from all taxpayers. In making this determination, the Commissioner is required to ascertain the short and long term implications of the available options and to have regard to all three factors listed in section 6A(3). These factors are:
• the resources available to the Commissioner (section 6A(3)(a));
• the importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts (section 6A(3)(b)); and
• the compliance costs incurred by taxpayers (section 6A(3)(c)).
133. The practical effect of the words “over time” is that the Commissioner may adopt courses of action that have the effect of forgoing the collection of the highest net revenue:
• in the short term if he considers that this will enable the collection of more net revenue in the longer term; and
• from particular taxpayers if he considers that this will enable more net revenue to be collected from all taxpayers.
134. The words “notwithstanding anything in the Inland Revenue Acts” in section 6A(3) mean the Commissioner may carry out the course of action that he considers will “collect over time the highest net revenue that is practicable” even if it results in less tax being collecting tax than is imposed, or required to be collected, by another provision. The words “within the law” mean the Commissioner must act consistently with the rest of the Inland Revenue Acts in seeking to “collect over time the highest net revenue that is practicable”.
135. Section 6A(3) is not overridden by a later enacted provision unless Parliament specifically intended the later provision to do so.”
In summary the Statement’s central thesis seems to be that section 6A(2) and (3) allow the Commissioner to act inconsistently with other provisions only to the extent that they may otherwise be seen to require him to collect all taxes regardless of considerations such as costs and available resources. They do not authorise the Commissioner to act inconsistently with the rest of the Inland Revenue Acts to any greater extent.
The main reason why the Statement takes such a restrictive view of the provisions’ effect is that it concludes that the words “notwithstanding anything in the Inland Revenue Acts” in section 6A(3) do not have the effect that section 6A(2) and (3) override all other provisions. The Statement notes that several High Court decisions have come to an opposite view. The writer disagrees with the Statement’s conclusion on this point, for the reasons which follow.
Statutory interpretation of “notwithstanding” clauses
The leading New Zealand text on statutory interpretation, Burrows on Statute Law in New Zealand (12th ed) says at p 443:
“’Notwithstanding anything’ is another phrase used to resolve conflict between two or more provisions. If a provision applies “notwithstanding anything in s 5” or “notwithstanding anything in any other enactment” this gives the provision overriding authority”
In R v Pora [2001] 2 NZLR 37 the Court of Appeal considered that a general provision that provided it applied “notwithstanding anything in any other enactment” also over-rode specific provisions to the contrary in that same enactment – although that wide wording was considered only one of a number of factors[7] that had to be reviewed to reach that result. The existence of that phrase alone was not determinative and the context and purpose of the different provisions had to be considered.
In the Australian decision Perrett v Robinson (1988) 80 ALR 441 the High Court interpreted the words “notwithstanding anything in this Act” so as not to exclude every other provision but only where that other provision was either expressly overridden or must be implicitly excluded.
In Canada there are a number of cases on the meaning of “notwithstanding” but the founding decision is by the Ontario Supreme Court in Re Lyman Bros [1932] OR 419 at 423 which states that
“we cannot understand the phrase [notwithstanding any provisions of the Canadian Municipal Act] to mean that we are to disregard the entire Municipal Act because that would deprive the municipality of all power to tax. … The phrase in question must therefore be understood as though it read ‘notwithstanding any provisions of the Municipal Act to the contrary’. “
Following that case, the Canadian approach is that two provisions must be directly contrary before one will override the other. If they can both be read together in any way, then they will both apply (even if one is stated to be notwithstanding the other). See also the Supreme Court of Canada reaching a similar conclusion in Re Waters and Water-Powers [1929] SCR 20, at 217.
The oldest authority is that of the Privy Council in the Canadian case of Tennant v Union Bank [1894] AC 321 at 45 which made it clear the phrase ‘notwithstanding anything in this Act’ excluded other provisions “so long as it strictly relates to these matters”, but does not exclude matters that are not directly in conflict with the overriding provision.
More recently in Re Mitchell (1996) 25 BCLR 249, at [17] the British Columbia Supreme Court acknowledged “a provision beginning ‘notwithstanding X’ creates an exception to X” – and therefore interpreted it as permitting both implied as well as express override. However, even then the Court acknowledged that it will vary from statute to statute, and the context will be most important:
“Regard must be had to its contextual use within the provision itself and with respect to the statute to which it applies.”
In summary, it seems that a general principal is that if a section applies “notwithstanding” another particular specified provision then that other provision simply does not apply. However, if the section applies “notwithstanding any other provision” or “notwithstanding anything to the contrary” then it will only apply to override other provisions in the Act to the extent of any inconsistency.
Against that background, applying ordinary canons of construction, section 6A (3) would apply to override the other provisions in the Revenue Acts to the extent of any inconsistency. Therefore it would, contrary to the view expressed in the Statement, authorise the Department to depart from what would otherwise be its legal obligations where to do so would maximise net revenue recovery.
The Department’s Concern
Why does the Department have such a restrictive view of the sections’ effect? The key seems to be in the concern expressed at para [62], that the Commissioner would have an unfettered discretion to tax outside the limits of the legislation:
It might be noted that interpreting section 6A(2) and (3) as overriding all other provisions would seem to effectively alter the constitutional framework within which the tax system operates. Instead of administering the legislation as enacted by Parliament, the Commissioner would have an overarching discretion whether to give effect to it. Such an interpretation would seem to permit the Commissioner to maximise the net revenue collected by (for instance):
• disregarding legislative requirements or limitations imposed on him by Parliament (eg, by amending assessments to increase the assessed tax liability despite the four-year time limit having been exceeded); or
• altering the statutory assessment basis by advising taxpayers to assess themselves other than in accordance with the legislation.
But with respect, this concern ignores two points:
· First, the sections override to the extent only of any inconsistency.
· Second, and more importantly, the provisions are not taxing sections. They do not impose a tax, or give an ability to assess or collect tax. The imposition of tax and the Commissioner’s ability to assess and collect it are found in the Revenue Acts. So section 6A (3) does not give extra powers to impose or collect tax outside the limits of the remainder of the Revenue Acts. That is what the phrase “within the law” in section 6A (3) means.
In other words, the writer’s view is that section 6A (3) does not expand the Commissioner’s revenue assessing or collection powers (so, for example, the time limits continue to apply) because it is not a taxing provision. However, to the extent of inconsistency, it does require the Commissioner to depart from what would otherwise be his legal obligations.
Commissioner does depart from what would otherwise be his obligations
That this is, in fact and law, the way in which the provision works is shown by the situation relating to settlements. It is abundantly clear that the Commissioner can settle tax litigation on a compromise basis – see decisions of the Court of Appeal in Auckland Gas Co. Ltd v CIR [1999] 2 NZLR 409, Attorney-General v Steelfort Engineering Co. Ltd (1999) 1 NZCC 61,030, Accent Management Ltd v CIR (2007) 23 NZTC 21,366 and the Supreme Court refusal of leave to appeal against that last decision in Ben Nevis Forestry Ventures Ltd v CIR; Accent Management Ltd v CIR [2007] NZSC 82. However, in implementing such a settlement on a compromise basis (for example, at 70% of the disputed tax) the Commissioner will necessarily be raising a reassessment at a figure which is contrary to his own belief as to the “correct” amount and which, moreover, will often be absolutely wrong. What is meant by that last observation, is that in, say, a tax avoidance scenario where a company’s deduction for $1,000,000 has been denied, the correct tax reflex could be $300,000 additional tax (if the Commissioner is right) or nil additional tax (if the taxpayer is right). The tax cannot, however, be $210,000 being 70% of the disputed tax, because that does not reflect any tax rate which could possibly be applicable.
So in implementing a settlement the Commissioner is departing from what would otherwise be his legal obligations – to tax at the rate stipulated in the Income Tax Act and to amend an assessment only so as to “ensure its correctness” (section 113 TAA).
The Statement attempts to explain the inconsistency between its central thesis, and the well-sanctioned practice of entering into compromise settlements, by saying at para [153] that “the courts have made clear that the Commissioner is not exercising any power to alter taxpayers’ obligations in entering settlements”, citing as support for this proposition the Court of Appeal’s observation in Accent Management Ltd v CIR that settlements do not involve the Commissioner “assuming and exercising a power of dispensing with and suspending of laws, and the execution of laws, without consent of Parliament”. However, that passage, in context, simply means that section 6A (3) authorises compromise settlements, so any such settlement is under the law. It is clear that in entering and implementing settlements, the Commissioner is altering taxpayers’ obligations: in the example given above, the taxpayer was formerly obliged (subject to dispute) to pay disputed tax of $300,000 and on implementation of the settlement the taxpayer became obliged to pay a reduced sum.
Summary
In summary the Statement’s central thesis appears misguided. The view taken of the ambit of section 6A is unduly restricted as a consequence.
.
[1] TIB Volume Twenty Two, No. 10 November 2010
[2] Valabh report, page 6
[3] Valabh report, page 14
[4] ORC report, section 9.4.2
[5] ORC report, Glossary and Commonly Used Abbreviations, page 81
[6] R v Inland Revenue Commissioners [1980] 2 All ER 379 at 381
[7] Others included the fundamental importance of maintaining fundamental human rights – an aim which was supported by the interpretation which the Court preferred.