[2007] Tonga LR 273

IN THE SUPREME COURT OF TONGA

Commissioner of Inland Revenue

v

Loto'aniu

Supreme Court, Nuku'alofa
Andrew J
AM 12/2003

18 October 2007; 12 November 2007 

Taxation – when taxpayer incurred liability – when Commissioner issued assessment 

The appellant appealed pursuant to Part VII of the Magistrate Court Act (Cap 11) against a summary dismissal of a claim for unpaid income tax. The issue was the point in time when a taxpayer properly incurred liability to pay tax. The learned magistrate found that liability arose from the end of the tax year in question. The appellant contended that the tax liability was incurred from the date of the demand to pay tax and that was the date on which the Inland Revenue Department made its assessment. The respondent was assessed for arrears of tax in the sum of $350 for the tax year 1996 to 1997. The assessment was made on 3 April 1998 to be paid on or before 6 May 1998. The summons to the respondent was not issued until 22 November 2002. The taxpayer asserted that the claim for arrears was time barred as it was made outside the five-year limitation period provided for under section 16 (2) of the Supreme Court Act (Cap 10). Section 16 (2) of the Supreme Court Act provided: "No action to recover from any person any tax or duty due and payable to the Crown shall be brought in any court but within five years next after the liability to pay such tax or duty was incurred." 

Held: 

1. Tax is incurred when the assessment is raised and the amount owing is determined. Time does not start running from the financial year in which income may have been earned or derived because nothing will have been incurred until the assessment is raised. 

2. Income raised or earned in any particular financial year may create an obligation to pay tax but that obligation is no more than pending, threatened or expected, no matter how certain it is to occur in the future. The debt is the tax assessed, not the obligation to pay tax -- see Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd [1984] 2 FCR 483 and Federal Commissioner of Taxation [1938] 61 CLR 179. 

3. The provisions of sections 3, 3(3), 41(1) and 43 of the Income Tax Act support the scheme of the Tax Act that a tax liability is only "incurred" when the Commissioner issues an assessment. 

4. The appeal was allowed and the matter was remitted to the magistrate's court for rehearing before another magistrate. 

Cases considered: 
Federal Commissioner of Taxation [1938] 61 CLR 179 
Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd [1984] 2 FCR 483 

Statutes considered: 
Income Tax Act 1976 
Magistrates Court Act (Cap 11) 
Supreme Court Act (Cap 10) 

Counsel for appellant: Mr Little 
Counsel for respondent: Mr Afeaki 

Judgment

[1] This is an appeal pursuant to Part VII of the Magistrates Court Act (Cap 11) against what was in effect a summary dismissal of a claim for unpaid income-tax. 

[2] The issue raised in the appeal is that of when a taxpayer properly incurs liability to pay tax. Does liability arise from the end of the tax year in question [as found by the learned Magistrate] or is the tax liability incurred from the date of the demand to pay tax, that is the date on which the Inland Revenue Department makes the assessment [as the department contends]? 

[3] The facts disclose that the taxpayer [the respondent in this matter] was assessed for arrears of tax in the sum of $350 for the tax year 1996 to 1997. The assessment was made on the 3rd of April 1998 to be paid on or before the sixth of May 1998. A summons to the taxpayer was not issued until 22nd of November 2002. The taxpayer asserted that the claim for arrears was time barred as the claim was issued on the 22nd of November 2002 which was more than five years outside the tax year of 1996/1997 and hence was barred by the limitation period of five years in section 16 of the Supreme Court Act (Cap 10). The commissioner asserted that the period of five years commenced on the 3rd of April 1998 when the liability to pay tax was incurred and the proceedings for recovery were commenced on the 22nd of November 2002 which was within the five-year period of limitation. 

[4] Section 16(2) of the Supreme Court Act (Cap 10) provides: 

" 16[2] no action to recover from any person any tax or duty due and payable to the Crown shall be brought in any court but within five years next after the liability to pay such tax or duty was incurred." 

The learned Magistrate found as follows and I quote: 

"the plaintiffs application is denied on the grounds that the statutory period for making such application has expired according to section 16 of the Supreme Court act, to which the plaintiff's representative [MAKISI FINAU] submitted that the five years, would commence from the date of assessment because that is at the date upon which the defendant is liable to pay that tax arrear, which is the meaning of incurred. My reading of subsection 16(1) and S.16(2) did not expressly state the time in which the five year is to commence, but subsection (2) expressly points out that no action shall be brought before a claim for tax or duty after five years. Therefore, I order that the plaintiff's claim against the defendant is declined" 

[5] The real issue raised in this appeal is at what time is the liability to pay tax incurred. It follows from section 16(2) of the Supreme Court Act (Cap 10) that the 5 year period of limitation commences when tax is "incurred".

[6] In my judgement it is quite clear that tax is incurred when the assessment is raised and the amount owing is determined. 

Time does not start running from the financial year in which income may have been earned or derived because nothing has been incurred until the assessment is raised. 

• Income raised or earned in any particular financial year may create an obligation to pay tax but that obligation is no more than pending, threatened or expected, no matter how certain it is to occur in the future. By section 84 of the Income Tax Act 1976 it is all taxes, interest and costs assessed, which are recoverable as a debt due to the crown from the person on whom it is assessed. The debt is the tax assessed, not the obligation to pay tax. See generally: Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd [1984] 2 FCR 483 and Federal Commissioner of Taxation [1938] 61 CLR 179. No "liability " to pay tax exists until it is incurred, that is when an assessment made by the Commissioner is issued to the relevant taxpayer. Any limitation period could only run from that time. No debt exists until the assessment is made.

• By Section 3 of the Income Tax Act the fiscal year commences on the first day of July and tax is payable on all income derived by the taxpayer in that year. By section 3(3) of the act, the income must be assessed. All persons liable to pay tax are required to lodge a return of their assessable income and upon receipt of those returns the commissioner is required to make an assessment. Section 41(1) clearly states that an amount of tax only becomes payable when an assessment is issued to a taxpayer. The commissioner may also make an assessment where no returns are lodged or where the commissioner is not satisfied by the taxpayers return or the information supplied by him. Section 43 of the act provides that a person who makes a false return or fails to make a return continues to remain liable to pay tax but that liability is only "incurred" by a taxpayer when the commissioner makes an assessment. The point of all of this is that these provisions support the scheme of the tax act that a tax liability is only "incurred" when the commissioner issues an assessment.

• I see no conflict between section 43 of the Income-Tax Act, creating a continuing liability to pay tax and section 16 of the Supreme Court Act, for the time period of five years for recovery of unpaid tax will only commence when the assessment is made and the debt incurred, however far that may be in the future. 

• The finding in this matter that, effectively, liability to pay tax expires after five years from the end of the tax year in which income is earned or derived is contrary to the scheme of the Income Tax Act. That interpretation might mean that those who had managed to avoid tax for example by not filing a tax return for over five years would forever be immune from paying tax. 

• In other jurisdictions with tax regimes which are not dissimilar to Tonga's, it is established that liability to pay tax is incurred when the assessment is raised. Two examples are Australia and New Zealand. 

• I repeat that tax is incurred when the assessment is raised and the debt owing is determined. The five-year period of limitation for the recovery of tax commences from the time of assessment by the commissioner and when it is issued to the taxpayer. 

• For all of these reasons I uphold the appeal in this matter and quash the decision of the Magistrates Court. 

Order 

Appeal allowed. The matter is remitted to the Magistrates Court for re-hearing before another magistrate.