Taxman's powers get a trim

By BRIAN FALLOW economics editor

The Court of Appeal has rejected the proposition that the Inland Revenue can wind up a company that did not challenge, in the time allowed, a tax bill it did not receive.

Abattis Properties received a GST refund for the month of May 1995. Three years later the IRD decided the refund was a mistake and that it wanted the money back.

The tax dispute process then began and was still going at the end of May 1999, when the four-year time limit on the making of a tax assessment loomed.

The IRD says that on May 27, 1999, it sent the company, its accountant and its tax agent, notice of assessment for the original $111,000 GST and more than $200,000 in interest and penalties.

It told them that they had two months to challenge the assessment before the Taxation Review Authority or the court.

In October 1999 the IRD wrote again, noting that the tax assessment had not been challenged and demanding payment.

Abattis replied saying, in effect, that it did not receive the letters.

The IRD then began winding-up proceedings.

But Master Thomson in the High Court dismissed the winding-up application.

In that respect the Court of Appeal has upheld him.

But it also ruled that "strictly speaking" he erred in holding that the Commissioner of Inland Revenue had the onus of proving to the court that the assessment was served in time.

Master Thomson had said that, "Surely it cannot be right that an assessment, though prepared, can remain on the plaintiff's file, never served, and yet the taxpayer be liable therefore, including accruing penalties."

The IRD's litigation director, Mike Lennard, said, "We appealed because the master held the assessment was in some way deficient because it wasn't served within the four-year time limit for making it. That was clearly wrong and the [Appeal Court] has found that the master was wrong in that respect."

The IRD's point was that as the law stands the liability arises once the assessment is made, not when the taxpayer is notified of it.

"If you are assessed for tax and for some reason you don't get the notice of assessment, you may be out of the country or have moved to another address and be difficult to trace, it doesn't mean there is no tax liability.

"The Appeal Court said yes, the liability is there as soon as the assessment is made, but nevertheless you can't proceed to wind the company up on the basis of that liability until they have an effective chance to dispute it."

He said the IRD should have restarted its challenge of the assessment once it became clear it was uncertain that the company had received notice of the assessment. It had now done that.

That's all very well, says Abattis Properties' accountant and director Scott Anderson, but it is now five and three-quarter years after the original GST refund, when the time bar is supposed to be four years.

"They made their decision in 1995. The company relied on it. They changed their mind in mid-1998 and embarked on a process of negotiation.

"They ran out of time and arbitrarily decided to cut the process off, saying 'Here's the bill anyway.' But they didn't get the bill to the taxpayer."

He said the company had disposed of its business and repaid its creditors. "You just can't conduct business with two or three years of uncertainty about this amount of money. You could be breaching your duties as a director if you do."

Institute of Chartered Accountants tax director Jeff Owens said there were concerns about the way the IRD managed the disputes process.

The disputes regime is up for review this year.