Inland Revenue Department asked to compensate complainant following errors made on GST claim
IRD failed to provide reasons for decisions to refuse a GST refund claim—there was no evidence for the basis of the refusal but the claim was accepted when similar supporting evidence was provided from another source—IRD gave no explanation for the change of decision—claimant sought compensation for unnecessary expenditure he had incurred to support his claim—Ombudsman found against IRD for errors made and IRD agreed to make an ex gratia payment of $1500 to the complainant
The complainant made a GST refund claim to the Inland Revenue Department (IRD). IRD refused the claim without explanation. In the absence of any reasons for the decision or arguments in rebuttal of the submissions made in support of the claim, and after discussing the claim with the officer concerned, the complainant was left with the impression that the officer had adopted an intransigent position and that any ensuing dispute would likely become protracted. The company was experiencing some cash flow difficulties and required the GST refund urgently. Although the accountant was confident that the claim was valid, having regard to the cited judicial authorities, he decided, in the circumstances, to obtain a legal opinion from a specialist law firm. That advice, which supported the arguments advanced in the original submissions on the claim, was then supplied to the departmental officer. He reconsidered the claim, concluded that the services in question were zero rated and arranged for a refund of the GST which amounted to approximately $10,000.00. However, he gave no reasons why he had changed his mind.
Given that the legal opinion was an elaboration of the information he had already provided to the departmental officer, the complainant argued that the officer’s original decision to decline the claim had been unreasonable, unprofessional and negligent. The officer had given no reason or justification either for that decision or for his further decision to accept the claim. After requesting access to the relevant file under the Official Information Act, the complainant could find no evidence to show what the considerations were which had led the officer to make either decision. The complainant therefore sought compensation for the costs incurred in obtaining that opinion on the basis that the officer had been given sufficient information at the outset to enable him to accept the claim. The Department’s responses to the complainant’s representations failed to satisfy him that the issues he had raised had been addressed properly.
In respect to the officer’s failure to provide any reasons to support his original decision to decline the claim, the Department acknowledged that in the normal course of events, officers would be expected to provide reasons why a particular view was being adopted. In this case, it believed that the complainant would have been aware from discussions with the officer why the officer was not satisfied that the claim met the requirements of section 11(2)(e)(i) of the Goods and Services Act 1985. However, the Department was unable to produce any evidence to show whether the officer’s decision was based on issues of fact, or legal principles, or the interpretation of departmental policy, or indeed had any foundation whatsoever.
It is a long established principle of natural justice and administrative fairness that those who make administrative decisions which affect individuals should be ready to justify and explain the grounds for those decisions. In this case, there was nothing to show why the officer had originally decided to decline the claim and then, on the basis of essentially the same information, to accept it. The officer had left the Department and was not available to be examined personally on the matter. In the circumstances, the view was formed pursuant to section 22 of the Ombudsmen Act 1975, that the failure to supply reasons for the decision was ‘unreasonable’ and ‘wrong’.
In respect of the Department’s refusal to compensate the complainant for the cost of obtaining unnecessary legal advice, the issues for consideration were whether there was negligent, unreasonable, or wrong behaviour by the Department, and, if so, the extent to which that behaviour had contributed to the complainant’s decision to seek legal advice. A number of factors prompted the complainant’s decision to seek urgent legal advice rather than asking the officer to issue a Notice of Proposed Adjustment thereby setting the formal disputes resolution process in train at an earlier stage. Firstly, the officer’s attitude had led the complainant to believe that the Department’s disputes resolution process was likely to become protracted. Secondly, the company needed the GST refund urgently due to cash flow problems, and, finally, the complainant believed that if the formal disputes resolution process was followed, there was no guarantee of a quick resolution and no interest would be paid on the amount of the refund while the matter was being investigated.
The complainant pointed out that under section 46 of the Goods and Services Act, the Commissioner is required to made a tax refund within 15 working days otherwise interest is payable to the taxpayer, except where the Commissioner gives notice to the taxpayer that he is not satisfied with a return. In such a case, the Commissioner may either investigate the circumstances of the return or request further information from the taxpayer. Interest is not payable for the period while the return is under investigation. In an endeavour to have the claim considered expeditiously, the complainant had provided the officer with all the relevant material relating to the claim, including judicial references, together with details of the company’s financial position. However, the officer had failed to respond in an equally open manner. His failure to provide reasons for his decision to reject the claim lent some support to the complainant’s perception that the officer had adopted an intransigent stance. He had also advised the complainant that the return was being delayed in terms of section 46(1B) of the Goods and Services Act.
The Department acknowledged that the disputes resolution process can become protracted, although noted that in this case the dispute had, in fact, been resolved before the formal process began. It also acknowledged that the advice that the return was being delayed in terms of section 46(1B) was wrong. The Department concluded that interest should have been paid for the delay in refunding the GST claimed by the company because, contrary to the advice given by the departmental officer handling the claim, it had not been the subject of any further investigation nor had further information been sought from the taxpayer relating to the claim. It therefore arranged for the relevant payment to be made.
However, the Department continued to believe that the complainant’s decision to seek legal advice was not the direct result of any action or omission by the Department. It considered that the complainant had acted prematurely at a very early stage in the process before the formal disputes resolution process had begun and before the Department had any obligation to give reasons for its position. It also considered that the tax position was not so clear cut that the Commission was not entitled to consider it and seek additional information.
While the early stages of the disputes resolution process are not regulated by statute, one of the purposes of the process, as set out in section 89A(1)(b) of the Tax Administration Act 1994, is to:
Reduce the likelihood of disputes arising between the Commissioner and taxpayers by encouraging open and full communication: (i) To the Commissioner, of all information necessary for making accurate disputable decisions; and (ii) To the taxpayers, of the basis for disputable decisions to be made by the Commissioner…
If the purposes of the disputes process are to be achieved the behaviour of officers in dealing with potential disputes should be governed by those purposes. In this case, the officer failed to act in an “open” manner providing “full communication” to the taxpayer. As a consequence the taxpayer was left with two unsatisfactory alternatives.
The Department produced no information to support its view that the tax position was not clear cut, and there was no evidence to show that the officer handling the case had had difficulty considering any particular issues or required further information to support the claim.
In the circumstances, the Department’s view that the complainant’s decision to take legal advice, thereby incurring expenditure, was premature and unnecessary because the formal disputes process was available, was not accepted. The unreasonable and wrong actions of the departmental officer had effectively placed the complainant in a situation where he felt his only option was to seek legal advice. That advice did not contain any new information, but rather elaborated on the advice already given to the officer concerned. In the absence of reasons either for the original decision or for the revised decision which had both been based on effectively the same information, it was concluded that the Department’s refusal to compensate the complainant for the costs incurred in obtaining legal advice was unreasonable. In the circumstances, it was recommended that the Department make an ex gratia payment of $1,500.00 to the complainant and the Department accepted that recommendation.
This case note is published under the authority of the Ombudsmen Rules 1989. It sets out an Ombudsman’s view on the facts of a particular case. It should not be taken as establishing any legal precedent that would bind an Ombudsman in future.