Chapter 9 - Test cases

9.1 Occasionally, a number of taxpayers will have disputes with Inland Revenue that revolve around similar arrangements or transactions.

9.2 If the circumstances of the individual taxpayers are materially identical, it makes sense to have one case (referred to in this chapter as the “test case”) that is taken through the disputes process, with the outcome of that dispute being determinative for other taxpayers in the same situation (referred to in this chapter as the “affected cases”).

9.3 By having one case determine the outcome of others, all parties will have swifter resolution of the dispute. In addition, costs may be lower – as all affected cases can (in theory) contribute to the costs of the test case and the Commissioner will need to prepare just one case. The burden on the courts associated with hearing near-identical cases will be similarly relieved. However, current legislation and administrative practices fall short of fully achieving these objectives.

Reasons for a test-case procedure

9.4 Before discussing solutions to these problems, we note that there are two main reasons justifying the existence of a formal test-case procedure:

• the benefit and cost savings of having a number of disputes decided more quickly than would be the case if each dispute were to run its own individual course; and
• test cases are arguably a good way of clarifying any uncertainty in the existing legislation (for example, it might be important to take a dispute that features a particular pattern of facts through the court system so that Inland Revenue and a particular industry group get a clear understanding of how the legislation applies).

9.5 The first reason is undeniable. Access to more timely and cost-effective justice is universally recognised as a desirable outcome of any judicial process. The objectives are of equal importance to each other, since there seems little point in having swift justice if it is prohibitively expensive – while a low cost solution that results in lengthy delay appears equally unattractive.

9.6 The idea that test cases provide legal clarity appears to be at least partially based on the notions that the law is static and the relationship between the disputing parties is effectively equal. The reality of the New Zealand parliamentary system is that, if the Government of the day believes that a decision of the courts does not reflect good policy (or the policy intent behind the provisions in question), it has the capacity to sponsor a legislative amendment so that the law reflects the position it is seeking to determine. The clarification of a legislative provision by the courts will therefore provide certainty in respect of law in force at the time relevant for the particular dispute, but will not always provide the parties with lasting clarity on legal implications of the arrangement in question. We therefore consider that the first objective is the more relevant one in considering possible changes to the test-case process.

Current test-case rules

9.7 Section 138Q gives the Commissioner the power to designate a challenge as a test case if he “considers that determination of the challenge is likely to be determinative of all or a substantial number of the issues involved in one or more other challenges”. Designated test cases are always heard in the High Court.

9.8 Once a case has been designated as a test case, the Commissioner may stay proceedings for other cases that are considered to be subject to the outcome of the test case. This stay can only be issued if the other case has not itself been determined by a hearing authority (that is, it is in a pre-court phase of the disputes process). [40] A disputant has the right to challenge this stay. [41] Factors that the courts will consider relevant in considering the taxpayer’s challenge are: [42]

• A taxpayer should not lightly have access to the courts denied, even for a time.
• The closer the similarity in facts between the test case and the subject case, the more likely it is that the stay will be granted.
• The more cases riding on the test case, the more likely it is that the stay will be granted.
• The more tax involved, the less likely it is that the stay will be granted.
• The longer the period between the events leading to the tax dispute and the likely resolution of that dispute if the case is “parked”, the less likely it is that the stay will be granted.
• The more devastating the consequences of the unwanted stay on the taxpayer, the less likely it is that the stay will be granted.

9.9 However, when there is agreement that the test case will cover all of the material issues at stake, there must be very strong reasons for the Commissioner’s stay to be set aside. [43] When a stay applies, relevant statutory time limits are frozen. [44]

9.10 Section 89O provides that a taxpayer and the Commissioner may agree to suspend proceedings subject to the resolution of a test case. This agreement is different from the stay issued unilaterally by the Commissioner under section 138R (see preceding paragraphs), in that this agreement can occur at any stage during the disputes process, whereas the stay generally only applies to cases when an amended assessment has already been issued. When a suspension of proceedings is agreed under section 89O, it applies until either the test case is resolved or the particular taxpayer’s dispute is otherwise resolved. [45] The Commissioner may issue an amended assessment to the “suspended” taxpayer that is consistent with the outcome of the test case. [46]

9.11 Neither the Commissioner nor an affected taxpayer (either suspended or stayed) are bound by the outcome of the test case, meaning that any amended assessment issued by the Commissioner in accordance with the outcome of the test case can itself be challenged.

Perceived problems with the test-case procedure

9.12 The existing test-case procedure appears to be causing some difficulties for both taxpayers and the Commissioner.

Taxpayers

9.13 The NZICA-NZ Law Society submission raises the following concerns with the operation of the current test-case legislation:

• The test-case designation is entirely in the hands of the Commissioner.
• The Commissioner can take too long to determine whether a case should be treated as a test case.
• The procedure is seldom used and there is little guidance on how it would be used.
• Some cases that are of potential precedential value do not appear before the courts because of “burn-off”.

The Commissioner

9.14 From the Commissioner’s perspective, the following difficulties arise:

• Taxpayers are often reluctant to have their case designated as a test case and will judicially review their selection.
• Taxpayers are not bound by the test-case decision, thereby reducing the effectiveness of the procedure (in terms of time and cost savings to both parties).
• If a designated test case is settled, further delay is caused while the remaining parties have to go through the test-case process again under a new designated case. Alternatively, delay will simply arise by reason of the time taken to settle.

Possible solutions

Test-case panel

9.15 In Australia there is a test-case litigation program[me] that applies to tax cases. To quote from the ATO website:

Under the test case litigation program[me], the ATO provides financial assistance to taxpayers whose litigation is likely to be important to the administration of Australia’s revenue and superannuation systems. The aim of the program[me] is to develop legal precedent – that is, legal decisions that provide guiding principles on how specific provisions we administer should be applied more broadly.

We are guided in the decision to fund such cases by the criteria contained in this guide and by a test case litigation panel. The panel includes members of the accounting and legal professions, to ensure that we fund issues of importance to the community.

9.16 Their criteria for funding are:

• there is uncertainty or contention about how the law operates;
• the issue is of significance to a substantial section of the public or a particular industry; and
• it is in the public interest for the case to be litigated.

9.17 Taxpayers or an industry group generally apply for funding through a formal application process.

9.18 The programme is available to taxpayers:

• that have a case that has commenced or is about to commence;
• that have a potential case that is not yet fully developed; or
• where there is a potential issue, but no live case at present. These cases are generally identified by associations that represent industry groups. The ATO, sometimes with the assistance of the relevant association, will attempt to identify a suitable case to test the issue and that taxpayer will then apply for test case funding.

9.19 For these taxpayer-initiated cases, the programme generally also covers appeals (by either party) to the Full Federal Court (but not the High Court). The ATO can also initiate test cases when it has identified an issue it feels needs clarification. ATO-initiated cases receive public funding without the need for the taxpayer to submit an application.

9.20 Public funding may also be available to taxpayers when the ATO loses in the original hearing authority and appeals against that decision. This funding may be available irrespective of whether the original hearing was part of the programme and is available for ATO appeals up to the High Court level.

9.21 The test case panel is an advisory body only. The chair of the panel is the ATO’s Chief Tax Counsel, who makes the final decision on whether funding is offered. The current panel comprises six people, four of whom are external. The panel meets four or five times a year where applications are generally considered.

9.22 Funding of test cases is generally formalised through the taxpayer and the ATO entering into a test case funding deed. This deed can cover funding for solicitors’ fees, counsels’ fees and disbursements up to a level that allows the taxpayer to match, but not exceed, the number and seniority of the counsel instructed by the ATO.

Should the Australian approach apply in New Zealand?

9.23 There are a number of reasons for favouring the introduction of a similar programme in New Zealand:

• It would promote clarity of law in complex areas. The early recognition of complex issues would allow both taxpayers and Inland Revenue some certainty on how the law applies – even in law that is relatively recently enacted.
• Taxpayer funding is more likely to result in taxpayers volunteering to either be the test case or be bound by the outcome.
• Provided the Commissioner invariably followed the recommendation of a test case panel, the process would arguably be more transparent and acceptable to taxpayers. [47]

9.24 Countered against these arguments are the following major disadvantages:

• If the purpose of a test-case process is to aid cost reduction and timeliness rather than development of the law, there is more limited justification for funding some taxpayers and not others.
• New Zealand is a small jurisdiction with a limited pool of independent persons qualified to sit on a panel. This is especially problematic for cases that involve a large number of prominent taxpayers.
• There would be a fiscal cost associated with taxpayer funding of all or a substantial part of the costs of both parties to a protracted piece of litigation. There are policy concerns around the circumstances in which government funds should be diverted to assisting tax disputes.
• There appear to be no major advantages over a court making the decisions, which may have substantial experience in test-case designation (discussed below). To introduce a separate body would appear to be an unnecessary duplication of resources.
• The panel would need to be established through legislation. As a statutory body, its decisions would be subject to judicial review. Although we consider that the judicial review of the decisions of an independent panel would be rarer than the review of decisions by the Commissioner, this is by no means guaranteed. Therefore, in practical terms, the situation may not be materially advanced from the current position of these decisions being made by the Commissioner.

9.25 On balance, we consider that the disadvantages for having a taxpayer-funded test-case programme outweigh the advantages.

Test-case matters decided by the courts

9.26 One of the major stumbling blocks of the current system appears to be that the test-case designation is made unilaterally by the Commissioner. Another possible way of tackling the issue of test-case designation and application may therefore be to replace the Commissioner’s power and instead have the matter determined directly by the courts.

9.27 Any such system should first allow the parties to reach decisions of their own accord. As a result, the affected taxpayers and the Commissioner should be afforded the opportunity to agree to a particular taxpayer dispute being a test case for a wider set of affected cases (irrespective of what stage in the disputes process these various taxpayers were currently in). To be consistent with the policy of expeditious resolution of disputes, there would need to be timeframes that governed the reaching of this agreement.

9.28 Failure to reach an agreement by the set deadline would enable an application to be made to the Court for test-case designation. As test cases are required to be heard by the High Court (and it seems sensible that this should continue), that Court would be the most appropriate forum for the application.

9.29 To avoid the parties filing simultaneous applications at the earliest possible opportunity, the Commissioner could be given a certain timeframe within which to file the relevant application. If the Commissioner failed to file within the allotted timeframe, the filing right would pass to the taxpayers concerned.

9.30 The original application (regardless of who it was ultimately filed by) would cover:

• the taxpayer or taxpayers to be designated as the test case; and
• the identity of the affected taxpayers.

9.31 The responding party could object to the application by one or both of the following methods:

• arguing that the cases are inappropriate for test-case designation at all (this would need to be based on a notion that no one case, or set of cases, would be determinative of any other of the cases contained in the original application); and/or
• arguing that the wrong taxpayer had been nominated as the test case and/or the list of affected taxpayers was incorrect (in that it named too many or too few taxpayers).

9.32 The High Court would then determine all matters under contention (that is, would designate a test case and the specific affected cases). Given that any such proceedings would not be determinative of the substantive proceedings, there may be a strong argument that the parties’ costs for the High Court and any subsequent appeals should lie where they fall.

9.33 Under this approach, the affected cases would be suspended and determined by the outcome of the test case.

9.34 The advantages of such an approach would be that:

• The parties have the ability to discuss test-case designation to see if a mutually agreeable position can be found.
• If there is disagreement, both parties have the opportunity to articulate their views on how, or if, the test scenario should apply to the circumstances.
• The decision on test-case designation is made by an independent party.
• High Court judges have experience in this type of process. Rule 10.12 of the High Court Rules 2008 allows a judge to consolidate proceedings if there are various cases that share common characteristics. Also, Rule 4.24 allows for representative action proceedings. [48] In practice, the effect of either of these provisions may be largely identical to test-case designation. If the rules for test-case designation were to effectively mirror one or both of these rules, the process should be familiar to the Court and therefore adopted with a minimum of disruption.

9.35 The disadvantages of such a system are:

• There will invariably be disputes when there is disagreement on test-case designation and the scope of the affected cases. In such instances, there will be another delay to the substantive proceedings while the test-case designation is decided by the courts. Countered against this is the fact that current test-case designations made unilaterally by the Commissioner are frequently subject to judicial review in any event.
• The system requires that all relevant taxpayers agree amongst themselves who the test-case taxpayer/s should be and who will be bound by the decision.
• Such a system potentially places an additional burden on the court system, and there will be delays in every case while a hearing time before the High Court is obtained and then the Judge’s decision is released.
• Decisions of the High Court on test-case designation would themselves be subject to appeal and hence further delay. Although it is possible to make a decision of the Court on this issue final, there are always access to justice concerns with such an approach.

Remove the test-case provisions

9.36 As mentioned previously, the High Court (High Court Rule 10.12 and 4.24) and the corresponding rules in the District Court (Rule 3.72.1 and 3.33.5), of which the TRA forms a part, have the ability to either consolidate two or more proceedings if the Court sees that there is a suitable number of similarities between them or allow one or more persons to sue or be sued on behalf of all persons with the same interest in the subject matter (known as “representative action”).

9.37 The courts have these powers and there is some established judicial guidance on when it is appropriate to use them. [49] Also, either party can apply for an order under either of these rules by way of interlocutory application. [50]

9.38 One possibility is therefore to dispense with a separate statutory test-case procedure and leave it to the appropriate court to determine the circumstances in which consolidation of proceedings, representative action or the hearing of multiple cases simultaneously, would be appropriate.

9.39 Leaving matters entirely to the courts would appear to have the following advantages:

• There would be no “additional” dispute between the parties; the substantive case for each taxpayer would appear before the court.
• The TRA already has the ability to refer cases to the High Court, if appropriate. [51] Similarly, the Commissioner has the right to apply to the High Court to have any challenge proceedings transferred to the High Court if he thinks that Court is a more appropriate forum for the dispute. [52] The net result (of proceedings going straight to the High Court and then being either consolidated by the Court or heard as a representative action) would be the same test-case designation but without the need for the introduction of new rules.
• The parties to a consolidated hearing or a representative action are bound by the substantive decision of the hearing authority.

9.40 The major disadvantage of this system would appear to be that a dispute must have reached the court hearing stage of the process before it can be consolidated. In practice, disputes with numerous taxpayers do not follow neat time-lines. The complexity of some cases compared with others, the ability to file documents at any time during a statutory time period, resource constraints and information imbalance all contribute to some disputes progressing through the disputes resolution process faster than others. It is therefore not uncommon for some taxpayers who are potentially test cases or affected cases to be at vastly different stages of the process. Having no way of grouping these taxpayers before they all reach the point where proceedings are before a hearing authority may result in undue delay in getting the substantive issues resolved.

9.41 Countered against this is the fact that the Commissioner has a wide discretion in relation to opting out of the disputes process (as discussed in earlier chapters). If the parties were in general agreement that either consolidation or representative action was appropriate, the Commissioner could agree to fast-track the relevant disputes to the challenge stage so the relevant hearing could begin at the earliest possible time. However, this scenario depends on two factors:

• that all parties agree to be part of the consolidated or representative action proceedings. If there were no such agreement, the relevant party would not agree to opt out of the disputes process, effectively forcing the Commissioner to either take the case (or cases) that had already reached the hearing authority on its own, or apply for a court order under section 89N(3) to truncate the disputes process in respect of the “later” taxpayer/s; and
• that the courts will be willing to adjourn the “first” challenge to allow the remaining disputes time to “catch up”. Again, this may also depend in some measure on the cooperation of the individual taxpayer.

9.42 Because of the uncertainty in leaving test-case decisions to the existing court rules, our initial preference would be to have a formal test-case procedure that would pre-empt all of the disputes reaching the filing stage. Although this could be achieved by administrative guidelines, we believe this is an instance where clear statutory language is preferable.

Status quo

9.43 One option is to maintain the status quo. Given that test cases do not arise frequently, there may be an argument for simply maintaining the current system, despite its perceived flaws. This would be particularly attractive if significant improvements could be identified through remedial changes to the current rules. Although retaining the current system (or a variant of it) remains an option, the current review provides an ideal time to focus on this issue and, if possible, introduce a system that is more agreeable to both Inland Revenue and taxpayers.

40 Sections 138R(1) – (2).

41 Section 138R(3).

42 See Bage Investments Ltd v CIR (1999) 19 NZTC 15,531; CIR v T 11/6/03, Williams J, HC Auckland, CIV 2003-404-3355; and B v CIR; CIR v Multiple taxpayers [2004] 2 NZLR 86 (para 36).

43 CIR v Erris Promotions; Wilson & Black Associates Ltd v CIR; CIR v West Coast Developments Ltd [2003] 1 NZLR 506, para 30.

44 Section 138R(7).

45 Section 89O(3).

46 Section 89O(4).

47 In this respect it is worth noting that the ATO has, on occasion, declined to follow a funding recommendation by its Panel, see Review of Tax Office Management of Part IVC litigation, The Inspector General of Taxation, 28 April 2006, para 6.103.

48 McGechan on Procedure, Rule 2.24 synopsis.

49 See for example Medlab Hamilton Ltd v Waikato District Health Board (2007) 18 PRNZ 517, Callplus Ltd v Telecom New Zealand Ltd (2000) 15 PRNZ 14 in respect of consolidation and Houghton v Saunders [2009] NZCCLR 13; (2008) 19 PRNZ 173 in respect of representative action.

50 McGechan on Procedure, High Court Rules, paragraph 10.12.02.

51 Section 24, Taxation Review Authority Act 1994.

52 Section 138N(2).