13 October 2016

Tax: Charter Holdings v. Inland Revenue

Inland Revenue can be asked to review a tax assessment despite failures to challenge tax assessments within time said the Court of Appeal when ordering Inland Revenue reconsider a taxpayer’s claim that $1.4 million in tax losses be set off against subsequent income.    
Tax law allows taxpayers four months to file any objection to a tax assessment.  Inland Revenue argued any delay drew a line under the assessment, it could not be challenged in court later.  The Court of Appeal ruled section 113 of the Tax Administration Act empowers Inland Revenue to correct any assessment even where no objection is filed in time.
At issue was tax returns for six consecutive tax years filed by Mr Adrian Padfield on behalf of Charter Holdings Ltd.  He left blank tax return questions asking whether there was any claim for tax losses brought forward presuming, incorrectly, that Inland Revenue kept a running total for each taxpayer of any accumulating tax losses.  Presented in July 2014 with a tax demand that Charter Holdings pay $850,523 for tax arrears of some $306,400 plus penalties and interest Mr Padfield was surprised to learn Charter Holdings could not utilise accumulated tax losses of some $1.4 million.  Charter had not completed its tax returns correctly in the first place.  Inland Revenue said section 113 reviews can not be used to correct tax assessments outside the statutory disputes process.  The Court of Appeal said it is illogical to argue courts have no right to review Inland Revenue administrative processes because the statutory objection procedure has not been followed.  It goes to the integrity of the tax system that taxpayers have a right to ensure their tax returns are determined “fairly, impartially, and according to the law”, the Court said.
Inland Revenue had refused to reconsider Charter Holdings entitlement to past tax losses because a senior staffmember doubted Mr Padfield’s credibility in failing to properly complete the disputed tax returns.  The Court said this staffmember had made several mistakes of fact: she assumed Mr Padfield had correctly noted losses carried forward in his own tax returns while not doing the same when filing returns for Charter Holdings (in fact he was inconsistent claiming losses carried forward in only one year of his personal returns); she suspected trading income for Charter Holdings had been suppressed (without fully investigating the position).  Charter Holdings’ claimed tax losses must be reconsidered by a different Inland Revenue staffmember, the Court ruled.
Section 113 reviews are intended to ensure a tax assessment is correct, said the Court of Appeal.  The onus is on taxpayers to provide sufficient information when asking an assessment be corrected.  
Charter Holdings v. Inland Revenue – Court of Appeal (13.10.16)

16.144