The High Court has held that the Commissioner was entitled to recover the costs contribution to expenses incurred on invoices raised by the Crown Law Office. The High Court noted the recent decisions relating to disqualification from recovery of any costs contribution to internal expenses incurred by the activity of in-house counsel but found that the Crown Law Office was a separate entity to the Commissioner.

The background

The taxpayer was a barrister and solicitor in sole practice. In his 2011 income tax return, he claimed deductions for loans he had written off as bad debts. The Commissioner considered the deductions did not fall within any of the exceptions allowing deductibility for bad debts provided for in s DB 31 of the Income Tax Act 2007. Amended assessments were issued for the 2011 income year resulting in a tax liability for the taxpayer. The taxpayer was also assessed for shortfall penalties pursuant to s 141A of the Tax Administration Act 1994 for not taking reasonable care.

The taxpayer’s challenge was dismissed by the Taxation Review Authority (TRA). The TRA found that the deductions claimed by the taxpayer for the loans he had written off as bad were non-deductible and that the shortfall penalties were properly imposed (reported as Case 3/2018 (2018) 28 NZTC ¶4-010).

The taxpayer’s appeal to the High Court was dismissed (reported as Hong v C of IR (2018) 28 NZTC ¶23-073, [2018] NZHC 2539).

The taxpayer resisted the Commissioner’s claim for costs and its quantification on multiple grounds. One of these grounds relied on C of IR v Pemberton (2018) 28 NZTC ¶23-064, [2018] NZHC 1245 and C of IR v New Orleans Hotel (2011) Ltd (2018) 28 NZTC ¶23-058, [2018] NZHC 971. These decisions related to disqualification from recovery of any costs contribution to the internal expenses incurred by the activity of in-house counsel. The High Court’s reasoning in those decisions paralleled Court of Appeal decisions on the disqualification from recovery of any costs contribution by unrepresented lawyer litigants (see Joint Action Funding Ltd v Eichelbaum [2017] NZCA 249, [2018] 2 NZLR 70 and McGuire v Secretary for Justice [2018] NZCA 37, [2018] 3 NZLR 71). The High Court considered that the Court of Appeal’s reasoning in Joint Action Funding Ltd and McGuire applied to exclude any litigant who conducted their litigation through in-house lawyers from a costs award, essentially because such a litigant had not “incurred” costs in the sense in which the High Court Rules used that term.

In the present case, the taxpayer maintained that the Commissioner was not entitled to recover any costs contribution to expenses incurred on invoices raised by the Crown Law Office, such being an attempt to circumvent the High Court decisions.

The High Court rejected the taxpayer’s objections and ordered him to pay the Commissioner’s costs. The High Court found that whether or not the earlier High Court decisions were correct, they had no application to costs sought by the Commissioner in this case. The High Court said that the Crown Law Office was a separate entity to the Commissioner and upheld the Commissioner’s claim for legal expenses, plus transport and accommodation disbursements.

Hong v C of IR HC Auckland [2018] NZHC 3077, 26 November 2018