Raynel & Anor v C of IR
The taxpayer, Mr Raynel owed substantial amounts of taxes to the Commissioner. He had set up different entities with the purpose of creating back-ups when the predecessors collapsed. Both he and his associated entities had a very poor record of compliance with their tax obligations, including GST, PAYE and income tax. His first entity was Whatawhata Forestry Contractors established in 1996 as a partnership between Mr Raynel and his son. This partnership ceased and new company Whatawhata Forestry Contractors Limited was incorporated in 2003. This company was placed in liquidation in 2003 owing $105151.48 for unpaid GST and PAYE and a new company was set up to carry out business. Mr Raynel had proposed some different payment arrangements for his tax debts. However, he kept on defaulting on payments resulting Commissioner decided to bankrupt him and wind up his company. He was also asked to supply an IR 590, but he failed to disclosure this information.
There are two clear issues that raised concerns in this case. The first issue relates to the application of the Taxation Administration Act 1994. To be more specific, the Judge looks at section 6, section 6A and section 176 and its implications on tax relief cases. The second issue is that whether the Commissioner is able to reject the instalment arrangement from the taxpayer
S 6: Responsibility on Ministers and officials to protect integrity of tax system. The integrity of the tax system is a very wide concepts, includes:
- taxpayer perceptions of that integrity; and
- the rights of taxpayers to have their liability determined fairly, impartially, and according to law; and
- 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
- the responsibilities of taxpayers to comply with the law; and
- the responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and
- the responsibilities of those administering the law to do so fairly, impartially, and according to law.
(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—
- the resources available to the Commissioner; and
- the importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and
- the compliance costs incurred by taxpayers.
S 176: Recovery of tax by Commissioner
(1)The Commissioner must maximise the recovery of outstanding tax from a taxpayer.
(2)Despite subsection (1), the Commissioner may not recover outstanding tax to the extent that—
(a)recovery is an inefficient use of the Commissioner’s resources; or
(b)recovery would place a taxpayer, being a natural person, in serious hardship.
(3)Despite subsection (2)(b), the Commissioner may take steps preparatory to, or necessary to, bankrupt the taxpayer, including debt proceedings in the District Court or the High Court.
S 177: Taxpayer may apply for financial relief
According to the taxpayer, he was willing to pay his overdue tax in instalments. However, the Commissioner did not accept his proposal and brought him and his company to bankruptcy. Thus, he submitted that “the Commissioner would have achieved a greater recovery under the offers made than would be possible in a bankruptcy and winding up”. The Commissioner had breached their duty to maximise the recovery of outstanding tax under section 176.
The Commissioner claimed that the fact that the taxpayer had missed several payment plans, the Commissioner was not confident that the taxpayer would keep up with his payments. Moreover, the taxpayer also failed to provide a full and realistic picture of his financial affairs. The Commissioner also explained the taxpayer’s claim about them breaching of section 176. There are other obligations under section 6 and section 6A(3) that the Commissioner needs to take into account when dealing with tax debt cases.
Relationship of s 176, 6 and 6A
Firstly, the most important statutory duty of the Commissioner is to protect the integrity of the tax system under section 6. This section defines the basic and most important responsibility of the Commissioner when dealing with the public. However, there are different meanings and interpretations for “the integrity of the tax system” phrase. Under section 6(2), the laws explain the meaning of the phrase “the integrity of the tax system” in a very broad way, which also includes the perception of the taxpayers and protection of the taxpayer’s rights.
Under this section, 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. It is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regards to the resources available, the importance of promoting compliance and the compliance costs incurred by taxpayers. By using the phrase “notwithstanding anything in the Inland Revenue Acts” in 6A(3), the Act explain the highest duty of the Commissioner as provided in this section. The Judge reflected on three important points after looking at those three sections:
• Section 6A(3) is to prevail over other provisions in the acts including section 176.
• The obligation to collect the highest net revenue is not absolute, as Commissioner needs to consider whether the steps to recover revenue are practicable and lawful.
• Commissioner is also required to have regard with section 6A(3) when recovering revenue.
Therefore, section 6 and 6A can override the obligation to maximise the recovery of outstanding tax in section 16. The Judge also commented on the Commissioner’s obligations:
“These qualifications to the Commissioner’s duty mean that the Commissioner is not obliged to take steps to collect revenue regardless of issues of practicality, available resources, and costs incurred. Rather, the Minister’s duty is to be approached on a pragmatic basis with proper regard to the likely benefits and the costs of achieving them”.
Thus, Commissioner needs to consider the integrity of the tax system before making decision whether granting relief or recovering the tax. Each case would have different approach and different outcomes, but the final result is to keep integrity in the tax system.
Comment on Commissioner’s decision
The Judge looked at the taxpayer’s application on both the law and the facts of the case. As explained above, the application failed on the law because the highest duty of the Commissioner is to protect the integrity of the tax system (Section 6) and collection the highest revenue regarding to other factors as set in section 6A. Thus, the obligation imposed on the Commissioner to maximise the outstanding tax is not absolute. Moreover, under section 176(2) there are other factors the Commissioner need to take into account when collecting the tax under section 176.
Mr Raynel’s application is also failed on the facts of the case. He continued to trade under different entities while his entities were continually failing to meet its tax obligations. He had proposed various payment plans, but he kept on failing to meet the arrangements. The Judge also considered the fact that he and his entities did not have sufficient resources to meet the debts or even a significant portion of it. He also did not provide IR590 and disclose the full picture of his financial information. Thus, the Court dismissed his application.