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The Contract Pacific Decision – a blank cheque for the IRD?

Has the Court of Appeal decision in C of IR v Control Pacific Limited [2009] NZCA 568 given the Commissioner of Inland Revenue a blank cheque to…well…close the cheque book?

At stake was whether the Commissioner was bound to pay Contract Pacific Ltd a GST refund totalling $6,669,061.74 because he had not complied with section 46 of the Goods and Services Tax Act 1985 which sets out the circumstances in which the Commissioner may withhold a GST refund.

After Contract Pacific lodged its GST return including the claimed refund, the Commissioner advised the company within the specified time limit in section 46 (4)(a) of his intention to investigate the return and withhold the repayment until his investigation was complete.  However, when the Commissioner requested further information he did not do so as required by section 46(4)(b) “…within 15 working days following the date of receipt of any information previously requested by the Commissioner.”

In our experience IRD officers do not always meet the section 46 time limits when requesting further information during a GST audit so the question of the implications of a failure to do so is of great importance.   Hence the relief felt in many quarters when Duffy J in the High Court, (2009) 24 NZTC 23,092, held that because the Commissioner had not made requests for information within the required 15 working days then he “lost the authority to withhold the disputed refund from Contract Pacific”. Duffy J took the view that this interpretation “did not undermine Parliament’s intent to impose strict limits on the Commissioner’s authority to withhold a refund” [Para 133].

However, the Court of Appeal in a rather brief judgement overturned Duffy J’s decision.  The Court began by referring to sections 6 and 6A of the Tax Administration Act 1994 and the “specific duty on the Commissioner to collect the highest revenue that is practical having regard to resources and the importance of obtaining compliance, especially voluntary compliance.” The emphasis given to these provisions is concerning because the implication is that maximising the collection of taxes is of overriding importance rather than protecting the integrity of the tax system and “the responsibilities of those administering the law to do so, fairly, impartially and according to law” (section 6(2)(f)).

The Court of Appeal then introduced an artificial and frankly nonsensical distinction between requesting information as part of an investigation which would not be covered by section 46 (4)(b) and requests for information which would.   The Court considered that requiring the Commissioner to meet the time limits for information requests “would be most impractical” [Para 38].

With respect it is difficult to understand why the Commissioner should not be bound by time limits in the same way that taxpayers are, for example when filing qualifying company elections or loss offset claims.  A period of 15 working days should be sufficient for the Commissioner to identify what further information may be required and request that information.  Section 46 doesn’t require that all additional information required must be requested within the prescribed time limit just that any such requests are made within 15 working days.

Finally the Court formed the view that requiring the Commissioner to make a refund pending completion of an investigation was not “a necessary corollary of the statutory arrangement” [Para 42]. This rather stunning pronouncement ignores the fact that this is precisely how the Commissioner recovers underpaid tax in most investigations.

Overall this is a hugely disappointing decision.  No-one would dispute the duty of the Commissioner to investigate a GST return.   But given how the Commissioner is able to dictate the pace of an investigation without any prescribed time limits prior to the issue of a NOPA, the Court of Appeal’s decision deals a huge blow to the rights of taxpayers to expect any such investigation to be resolved promptly and further tips the scales in favour of the Commissioner.   Let us hope the Supreme Court takes a more robust view of the Commissioner’s responsibilities when it hears the appeal.

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