High Court not satisfied that power to issue section 17 notices was lawfully exercised
Tax Alert - February 2018
By Campbell Rose and Virag Singh
On 22 December 2017, the High Court delivered its judgment in Chatfield & Co Limited v CIR  NZHC 3289. The decision is significant in confirming that, although section 17 of the Tax Administration Act 1994 (TAA) confers a broad information-gathering power on the Commissioner of Inland Revenue (CIR), a “hard-edged” review applies to the CIR’s decision-making under section 17 – and the courts will not simply take an official’s word for it in examining whether the power has been lawfully exercised.
This was the most recent judgment in a series of cases involving the accounting firm Chatfield & Co Limited (Chatfield) in relation to a request for exchange of information under the New Zealand and South Korea Double Tax Agreement (DTA). Specifically, information had been requested by the Korean National Tax Service (KNTS) from the CIR under Article 25 of the DTA relating to 21 New Zealand taxpayers, for 15 of whom Chatfield was the tax agent. In order to comply with that request, the CIR issued 15 notices (Notices) under section 17 to Chatfield.
Chatfield commenced proceedings in the High Court challenging on various grounds the CIR’s decision to issue the Notices. Chatfield lost in the High Court, and in subsequent appeals to the Court of Appeal and Supreme Court. This most recent judgment arose from Chatfield having filed an amended statement of claim in the High Court. The primary issues for consideration were summarised by Wylie J as follows:
- Was the CIR’s decision to issue the Notices susceptible to judicial review;
- If judicial review is available, what is the appropriate standard/intensity of the review; and
- In respect of the request by the KNTS, did the competent authority (Mr John Nash) for New Zealand satisfy himself that:
- the request involved taxes covered by the DTA;
- the information sought under the request was “necessary” under the DTA; and
- the exceptions to the provision of the information under the DTA did not apply.
Judicial review and intensity of review
The CIR argued that the subject of the Notices involved relations between sovereign states, which were at the apex of “executive responsibility” and “inherently unsuitable for resolution by the Courts”. The CIR claimed that the proceedings brought by Chatfield “undermined New Zealand’s reputation internationally by delaying the provision of the requested information”, and that this was contrary to the provisions of the DTA.
Wylie J did not agree. His Honour held that the decision to issue the Notices were justiciable (subject to judicial review), and made an order quashing the Notices. In particular he noted that:
- The issue is the exercise of the power by the CIR to issue the Notices under domestic law (i.e. under the TAA).
- The DTA is part of New Zealand law, and the New Zealand courts are responsible for determining questions of domestic law.
- The matters in issue are not those of high policy or politically fraught. It is a simple case of assessing whether the statutory requirements under domestic law have been met.
- The issue of notices under section 17 of the TAA can be the subject of judicial review if, for example, the CIR exceeds or abuses her powers.
- Checks and balances in the DTA and the OECD’s peer review regime do not focus on and do not give remedies to individual taxpayers.
With respect to the intensity of the court’s review of the CIR’s decision to issue the Notices, Wylie J also dismissed the CIR’s argument that intervention by the courts should be limited to instances where the information sought could not possibly be necessary for an investigation in respect of one or more of the taxes which come within Article 2 of the DTA.
Wylie J said that the power to make administrative decisions, including those made by the CIR and her delegates under section 17, must be exercised “properly, and in accordance with the law”. He went on to find that the review of the CIR’s decision should be “hard-edged” and a “correctness standard” should apply. Based on the facts before him, Wylie J said that the court could not be satisfied that the competent authority had correctly interpreted or applied the DTA and the request made by KNTS under the DTA.
Actions of the competent authority – were they lawful
Wylie J held that he was not satisfied that appropriate inquiries were made by Mr Nash to ensure compliance with the requirements under the DTA for an exchange of information.
His Honour was particularly surprised by the approach of the CIR refusing to share (on a confidential basis) with both him and counsel for Chatfield relevant background documents, including the request from KNTS, file notes that Mr Nash might have and any other correspondence between Mr Nash and KNTS (but the CIR was prepared to share this with the judge only). Wylie J also noted that this was contrary to the rules of natural justice.
Wylie J made some key observations in finding for Chatfield:
- The processes followed by Mr Nash were vague and suggested that no hard inquiry had been undertaken into the necessity for the exchange of information.
- Wylie J queried Mr Nash’s assumption that, given the KNTS has trusted partner status and a good reputation, when a request is received under the DTA there is generally no reason to believe that the request has been made in an unorthodox manner. His Honour said there was no warrant for the “hands-off” approach taken by Mr Nash and that any request under any DTA should receive the same high level of scrutiny.
- There was nothing in the evidence before the Court, other than Mr Nash’s say-so, that the request made by the KNTS complied with the DTA. In this respect Wylie J stated that “the days when a Court will accept an official’s simple assertion that a power has been exercised lawfully are long over”.
- An applicant for judicial review bears the burden of proof, on the balance of probabilities, but the evidential burden is relatively low where the facts are within the knowledge of the other party - and particularly where the Court has to determine whether the relevant facts on which the exercise of the power in issue turns, did or did not exist.
A section 17 notice is a powerful tool through which the CIR’ can obtain information from a taxpayer (or, as in Chatfield, from a third party). Complying with a section 17 notice can entail material business disruption and compliance costs. Non-compliance can result in significant penalties and truncation of the tax disputes process.
It is therefore critical to perceptions of integrity of the tax system, that taxpayers can have confidence in the lawfulness of the CIR’s decision to issue such notices. It is heartening to see that, despite a number of unsuccessful steps along the way, the exercise of the CIR’s power in this case was ultimately subjected to rigorous and impartial scrutiny by the Court. Fundamental to the exercise of the power was the CIR being able to demonstrate that the requirements under the DTA were fully satisfied. The CIR failed to do so on the evidence in this case.
Given the frequency with which the section 17 power is exercised by the CIR, and its impact on taxpayers as noted above, the outcome in Chatfield is to be welcomed as it ensures that the CIR must properly exercise that power. It is hoped that this judgment will result in a re-examination of the CIR’s decision-making processes in issuing section 17 notices (and the equally intrusive related request for tax contextual information). This is particularly the case given that not many taxpayers have the resources or wherewithal to challenge the CIR’s decision-making by way of judicial review in the High Court – and also given the imminent extension of the CIR’s section 17 powers in a transfer pricing context under the BEPS-related reforms introduced into Parliament in December 2017.
New Zealand has an extensive tax treaty network and, with increased focus on transparency between jurisdictions on the affairs of taxpayers, it is expected that there will be increased requests for exchange of information (and therefore a potential increase in the number of section 17 notices being issued). Taxpayers and their agents will need to be vigilant and prepared to request that the CIR confirm the grounds on which there has been a proper exercise of her power to issue such notices.
Challenging the validity of a section 17 notice in a domestic context may still prove difficult for taxpayers. In the present case, the exercise of the power to issue section 17 notices was clearly referable to compliance with the relevant requirements under the DTA. In a domestic setting, as part of an investigation, review or audit, when the CIR issues a section 17 notice to a taxpayer, the taxpayer has a very limited ability to challenge that notice – it simply needs to be necessary or relevant for the purpose of administering or enforcing the relevant tax legislation; but the courts have previously held that the power must still be exercised for a proper purpose (Green v Housden (1993) 15 NZTC 10,053). The only additional guidance that a taxpayer may have regard to (but cannot rely upon) is the Commissioner’s own operational statement (OS13/02), which Inland Revenue investigators regularly do not comply with (the Court of Appeal confirmed in one of the Chatfield-related procedural decisions that the statement is not binding on the CIR).