Question
24 proved important after making tax losses.
So did the four month time limit to dispute tax assessments. Losses of over $1.4 million claimed to be
carried forward from six prior tax years were dissallowed because a business
trading as a management consultancy failed to properly complete its tax
returns.
Auckland company Charter Holdings Ltd was
told by the High Court it could not get a judicial review of Inland Revenue’s
decision to ignore prior year tax losses claimed. Charter should have completed its tax returns
correctly in the first place and when a mistake was identified it should have
filed a Notice of Proposed Adjustment within four months of receiving a tax
assessment as required by the Tax Administration Act.
The High Court was told Mr Adrian
Padfield had an interest in Charter Holdings for the tax years in
question. At the turn of the century,
the company was dealing in swimming pools.
After going through a period of receivership, the company later
commenced trading as a management consultancy.
Its 2000 tax return declared a small loss of just under $13,000. The 2001 return declared a larger loss of
about $150,900. Question 24 of the 2001 tax
return asked: Can the company claim net losses brought forward? No answer was given. Mr Padfield said he left it blank. There was no profit, no tax to pay, so no
need to disclose claimed losses from a previous year as a set off, he presumed. This pattern continued in tax returns for
subsequent years. As company
profitability improved in later years, Mr Padfield did answer Yes to the tax
return question regarding previous tax losses.
But he inserted an amount for losses carried forward for that year equal
to the amount of total income for that year.
Justice Moore said Mr Padfield was apparently wrongly of the view that
Inland Revenue maintained a record of losses for past years. He did not realise the company, as the
taxpayer, was required to add together all previous losses carried forward into
a total figure and note this in each year’s tax return.
Matters reached a head in July 2014 when
Inland Revenue demanded $850,523 from Charter Holdings: $306,460 in tax
arrears; the rest being penalties and interest.
The undisclosed tax losses from previous years could not be carried
forward.
Justice Moore ruled Charter Holdings
could not use judicial review proceedings to circumvent its failure to properly
follow rules for filing returns and challenging tax assessments. Taxpayers have an obligation to correctly
self-assess their liability. They bear
the risk of failing to do so or failing to take the prescribed steps to correct
it. Taxpayers can apply for an extension
of time for filing corrected tax returns under section 89K of the Tax
Administration Act if there are “exceptional circumstances”.
Charter
Holdings Ltd v. Inland Revenue – High Court (27.08.15)
15.094