ASB Bank Ltd v Commissioner of Inland Revenue
[2014] NZHC 2184
•10 September 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-004038 [2014] NZHC 2184
IN THE MATTER of the Tax Administration Act 1994 BETWEEN
ASB BANK LTD Plaintiff
AND
COMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 27 August 2014 Counsel:
DJ Goddard QC and SE Fitzgerald for Plaintiff
HW Ebersohn and M Stapleton for DefendantJudgment:
10 September 2014
JUDGMENT OF ASHER J
This judgment was delivered by me on Wednesday, 10 September 2014 at 3 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
DJ Goddard QC, Wellington.
Russell McVeagh, Auckland. Crown Law, Wellington.
ASB BANK LTD v COMMISSIONER OF INLAND REVENUE [2014] NZHC 2184 [10 September 2014]
Introduction
[1] The ASB Bank Ltd (the ASB) seeks discovery from the Commissioner of Inland Revenue (the Commissioner) of all documents that express any view about the transaction at issue in this proceeding, relevant to whether the tax position taken by the ASB was “about likely as not to be correct”.
[2] The substantive question to be determined in the proceedings is the tax deductibility of foreign exchange losses arising in a transaction known as the “Yen Transaction”. The Yen Transaction involved the borrowing of funds and the investment of part of those funds in Japanese Government bonds. The key issue will be the purpose and effect of the hedging arrangements that formed part of the Yen Transaction.
[3] The Commissioner says that the Yen Transaction is part of a tax avoidance arrangement. She has issued assessments which have included the imposition of shortfall penalties on the ASB for taking unacceptable or abusive tax positions under ss 141B and 141D of the Tax Administration Act 1994 (the TAA).
[4] The ASB in this proceeding has challenged the Commissioner’s assessments under s 138B(1) of the TAA, asserting that the assessments are incorrect in fact and law and there is no tax avoidance. The ASB’s primary position will be there was no tax avoidance, but it will argue that, if there has indeed been tax avoidance, it should not be liable for penalties because it did not at the time take an unacceptable position. It will argue that it took a position which was in terms of s 141B “about likely as not to be correct”.
[5] Mr Goddard QC for the ASB submits that discovery of the documents will assist in the process of determining, should this be necessary, whether the tax position taken by the ASB was about likely as not to be correct. To put it another way, it was a position of substantial merit on which reasonable minds could differ. For that reason there should be no penalties. He submits that disclosure of documents from Inland Revenue, in which experienced tax experts expressed views at the relevant time as to the merits of the transaction, would assist the Court in determining this question.
Discovery
[6] There have been no orders for discovery at this point. This is a first time discovery application. The application should be treated therefore as an application for discovery under r 8.5 of the High Court Rules and not for particular discovery under r 8.19. It is not for standard discovery as it is for specific documents only, and I treat it as an application for tailored discovery under r 8.8. Rule 8.8 provides:
8.8 Tailored discovery
Tailored discovery must be ordered when the interests of justice require an order involving more or less discovery than standard discovery would involve.
[7] The starting point on contested applications for discovery is that the documents sought to be discovered must be relevant to an issue in the proceeding.1
The way in which this matter is approached in standard discovery under r 8.7 is to decide whether amongst other criteria the document adversely affects a party’s case. If the document cannot adversely affect a party’s case (or to reverse the concept, positively affect the other party’s case), it follows that it is not relevant, and no discovery order will be made. The effect on a party’s case is measured against the issues to be determined in the proceeding as defined in the pleadings.
[8] In tailored discovery (which is a discovery order that is more or less than standard discovery), the fact that a document is relevant does not mean that it follows that discovery will be ordered. Tailored discovery is ordered “…when the interests of justice require…”. Rule 8.9 sets out certain situations where the interests of justice will require tailored discovery, unless the Judge is satisfied to the contrary. It is not suggested that any of the factors referred to in r 8.9 apply, and in particular it is not claimed by the Commissioner that the costs of discovering the documents sought are disproportionately high.
Are the Commissioner’s documents relevant?
[9] The documents sought are defined in the application. It is not the communications from the Commissioner to the ASB, or public statements of the
1 InterCity Group (NZ) Ltd v Nakedbus NZ Ltd [2013] NZHC 1054 at [15].
Commissioner which are sought, but rather all the emails meeting notes and minutes of the staff in the relevant divisions relating to the consideration of the Yen Transaction, including those that led to the rulings and that related to the disputes processes. This would include the musings or debates of all staff, senior or junior. Privilege would still apply and could be claimed if the communication fell into a privileged class.
[10] Mr Goddard submits that the documents are relevant to the consideration of whether the ASB took an unacceptable or abusive tax position. They are documents which directly touch on that position. Mr Ebersohn for the Commissioner submits that they are not relevant. He argues that the test being objective, the subjective views of officers at the Inland Revenue cannot assist the Court.
[11] Relevance must be measured against the statutory test that applies to the assessment of penalties. Section 141B(1) of the TAA provides:
141B Unacceptable tax position
(1) A taxpayer takes an unacceptable tax position if, viewed objectively, the tax position fails to meet the standard of being about as likely as not to be correct.
(emphasis added)
Subsections (5) to (7) provide guidance as to how to decide whether a tax position is acceptable or unacceptable:
(5) For the purposes of this section, the question whether any tax position is acceptable or unacceptable shall be determined as at the time at which the taxpayer takes the taxpayer's tax position.
(6) The time at which a taxpayer takes a tax position for a return period is—
(a) the time at which the taxpayer provides the return containing the taxpayer's tax position, if the taxpayer provides a tax return for the return period:
(b) the due date for providing the tax return for the return period, if the taxpayer does not provide a tax return for the return period.
(7) The matters that must be considered in determining whether the taxpayer has taken an unacceptable tax position include—
(a) the actual or potential application to the tax position of all the tax laws that are relevant (including specific or general anti-avoidance provisions); and
(b) decisions of a court or a Taxation Review Authority on the interpretation of tax laws that are relevant (unless the decision was issued up to one month before the taxpayer takes the taxpayer's tax position).
[12] The test was considered by the Supreme Court in Ben Nevis Forestry
Ventures Ltd v Commissioner of Inland Revenue where it was stated by the majority:2
[184] On its terms this standard does not require that the appellants’ tax position had a 50 per cent prospect of success but, subject to that qualification, the merits of the arguments supporting the taxpayer’s interpretation must be substantial. The stipulation of an objective test means that the taxpayer’s belief that the position taken was correct, or not unacceptable, is irrelevant.
[185] There is a helpful observation of Hill J concerning the statutory standard made in the context of a similar provision in Australian legislation:3
The word ‘about’ indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer’s argument can objectively be said to be one that while wrong could be argued on rational grounds to be right.
Whether a taxpayer’s interpretation meets the standard in any case accordingly comes down to a judgment of the weight of the arguments that support the taxpayer’s position in the application of the law to the relevant facts.
(emphasis added)
[13] The test then is whether the arguments supporting the taxpayer’s position had substantial merit, assessed objectively. All tax laws including the general anti- avoidance provision and decisions of the Courts and Taxation Review Authority on the interpretation of the relevant tax laws must be considered.4 The subjective views of the officers at the Inland Revenue who were involved are irrelevant.
[14] Mr Goddard argues that the test of whether the taxpayer’s position had
substantial merit is open textured and involves an exercise of judgment in relation to
2 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2006] NZSC 115, [2009]
2 NZLR 289 at [184]–[185].
3 Walstern v Commissioner of Taxation (2003) 138 FCR 1 (FCA) at [108].
4 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 2, at [184], and the
Tax Administration Act 1994, s 141B(7).
the weight of the arguments that support the taxpayer’s position, and a consideration of whether reasonable minds might differ as the correctness of the tax payer’s position. He relies on two Australian cases, in particular Walstern v Commissioner of Taxation where in relation to the similar Australian test it was stated:5
… the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of “authority” a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer’s view is ultimately seen to be wrong it is nevertheless ‘about’ as likely to be correct as the correct view. A question of judgment is involved.
[15] In that case there was a question whether the opinions of eminent legal tax experts as to the interpretation of the relevant section, which had been considered by the taxpayer, could be considered. Hill J was inclined to think that the opinion of eminent counsel practicing in the field if directed to the particular facts of a case might well fall within the definition,6 but since they were not, and since they were not in evidence, he would put them to one side.
[16] In another Australian case, Prebble v Commissioner of Taxation, Cooper J considered relevant texts, and private rulings and advance opinions given by the Commissioner, even when the taxpayer was not a party to the private rulings.7 This showed that other reasonable minds could come to the same conclusion on the interpretation of the sections as the taxpayer.8 The section relied on by Cooper J contained express reference to the consideration of “relevant authorities”.9 This included public rulings.
[17] The question of the discoverability of authority and documents in relation to
the issue of whether a taxpayer’s position had substantial merit has not been directly
addressed in New Zealand. In Accent Management Ltd v Commissioner of Inland
5 Walstern v Commissioner of Taxation, above n 3, at [108].
6 At [112].
7 Prebble v Commissioner of Taxation [2002] FCA 1434 at [39].
8 At [50]–[51].
9 Income Tax Assessment Act 1936 (Cth), s 222C(2).
Revenue Venning J refused to take into account views within the Inland Revenue
Department that the position of the taxpayer was “as likely as not to be correct”.10
Internal memoranda and papers from the Commissioner’s office had been
discovered. He held:11
[360] I am unable to accept the submission that the fact officers within the Inland Revenue Department Policy Division considered the Trinity Scheme posed a risk to the tax base and even that there may have been a risk of litigation uncertainty supports a finding that the tax position taken by the plaintiffs was “as likely as not to be correct”. There is litigation risk in all cases that come before the Court. The litigation risk may be assessed as very low for example at 5% or 10%. Depending on the extent of what is at stake a party, in this case the Policy Division of the Inland Revenue and the Treasury, may be unwilling to leave the matter to be tested in Court despite even that relatively small litigation risk. An acknowledgement of litigation risk does not equate to the taxpayer’s position being “about as likely as not to be correct”.
...
[364] I conclude that the views of officers within the Policy Advice Division of the Department of Inland Revenue, and the steps taken by the division to pursue a law change, are not relevant or of assistance in determining whether the position taken by the taxpayer was “about as likely as not to be correct”.
[18] I have not been referred to any case which directly addresses the discoverability of this type of documents. The Australian cases referred to are some indication that a wide array of views of experts can be taken into account. Those cases do not suggest that informal views not intended to be communicated to third parties can be considered. The observation of Venning J in Accent Management Ltd v Commissioner of Inland Revenue indicates that there are limits to whether private opinions can be considered.
[19] In Commissioner of Inland Revenue v Redcliffe Forestry Ventures Ltd the Supreme Court reached its decision based on the weight of argument taking into account the legislation and case law applicable at the time, not on the basis of evidence from the parties.12 It is clear that all decisions of Courts and the Taxation
Review Authority must be considered. A Court may well be assisted also by
10 Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC).
11 At [360] and [364].
12 Commissioner of Inland Revenue v Redcliffe Forestry Ventures Ltd [2012] NZSC 94, [2013]
1 NZLR 804.
commentary on the primary laws and cases and other material of probative value in the public domain, such as articles by reputable experts, and rulings of the Commissioner. These may assist a Court in deciding on whether a taxpayer’s position on the tax effect of a transaction had substantial merit.
[20] However there must be a cut-off point, beyond which the views of others, even if expert, cannot assist. The test is stated in s 141B(1) to be objective. The main exercise to be carried out by the Judge in deciding whether the position had substantial merit will be to assess the relevant sections in the relevant statutes and the case law of the Courts and Authority on those sections. The Judge will be very familiar with these, having already reached a view on whether there was tax avoidance, and will be well able to form his or her own opinion on the strength or weakness of the different arguments. I do not accept a suggestion that a Judge may have difficulty in carrying out that exercise dispassionately, having already reached a view that there is tax avoidance. Judges regularly have to assess the merits of conclusions they have reached, and the arguments to the contrary, for instance in leave to appeal decisions.
[21] A Judge may get some limited assistance from the published views of other experts. Relevant articles are likely to have been considered in any event by the Judge in the course of considering the substantive issues. But it is only published and considered opinions that could help. Informal internal expressions of view of the type sought in this application can only be understood in context, and a Judge would be taking a risk in placing weight on a view not intended for publication and third party consideration. There may be a myriad of qualifying factors, for instance the presentation of a perspective as a devil’s advocate, or a lack of knowledge or misunderstanding of background facts, that could qualify any such informal thoughts. The matrix leading to an expressed opinion is critical to its evaluation. When experts statements are intended for the public this is not an issue. It is very much an issue for opinions not intended to be communicated to the public.
[22] A line must be drawn, and I respectfully consider that it was rightly drawn by Venning J in Accent Management Ltd v Commissioner of Inland Revenue. I accept that the documents Mr Goddard seeks would be produced to assist the Court to reach
an objective view. However, the documents fail the relevance test because their informal nature means they have no significant probative value.
[23] As indicated I do not dismiss the possibility that published articles, and rulings that have been sent to tax payers, could be seen as sufficiently considered and final to warrant consideration. This would be a matter for a trial Judge. These are in a different category from informal notes and communications that were never intended to be read by third parties.
[24] Mr Goddard in support of discovery drew the analogy of legal experts called in a solicitor’s negligence case to give a view on a legal position taken by a solicitor defendant that has later proved to be wrong. Their view as experts on the correct legal position at the time would be relevant. However there is a difference. A lawyer called as an expert to say what he or she would have thought and done in the same position as the defendant is giving a view of good legal practice, and what was thought in the profession, and not on whether a legal view was, when viewed objectively, substantially correct. Moreover, the view presented to the Court by such an expert in professional negligence cases is a considered view, not an informal comment or position taken. Under s 25 of the Evidence Act 2006 such an opinion will be likely to be of “substantial help” to the Court in understanding the evidence, or in ascertaining a fact of consequence in the proceeding. The informal expressions of view at issue in this application will not be substantially helpful in either of these senses.
[25] Mr Goddard also suggested that given that the question of relevance was not straightforward, the position was best reserved for the trial Judge to rule on when considering admissibility at trial, and not at this point. In Accent Management Ltd v Commissioner of Inland Revenue the issue was determined at trial. He referred by analogy to the caution Courts may show in ruling at a preliminary stage on a strike out application on the basis of an absence of a duty of care.
[26] However, this is a different situation. This decision is not like a complex duty of care evaluation, dependant as that will be on matters of fact and developing policy. Nor is it determinative of the claim. If there is sufficient information before
the Court for relevance to be assessed, the decision should be made at the discovery stage.
[27] Mr Goddard referred to the penal nature of the litigation and the high stakes as pointing to caution before a discovery application was denied. However, while that may be of assistance in assessing proportionality, the high stakes are not of assistance in determining this issue. The documents are either relevant or not.
[28] I conclude that the Inland Revenue’s internal documents sought which express a view on the transaction are not relevant and not discoverable.
[29] Mr Ebersohn at the hearing also argued that there are strong public interest considerations against disclosure of the documents sought by the ASB. He submitted that a fair and frank exchange of views between officers at Inland Revenue would be discouraged if there was the possibility of the material being discovered. Mr Goddard objected to the argument being raised, pointing out that it was not in the Commissioner’s notice of opposition, or adequately forecast. This submission may have merit, but I accept that it was not clearly forecast and I do not need to deal with it given the conclusion I have reached.
Result
[30] The application for discovery is dismissed. The defendant having been successful is entitled to costs, which I fix on a 2B basis for two counsel.
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Asher J
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