Commissioner of Inland Revenue v Zentrum Holdings Ltd HC Auckland CIV 2004-485-2729
[2005] NZHC 490
•16 September 2005
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Commissioner of Inland Revenue v Zentrum Holdings Ltd 5
High Court Auckland CIV 2004-485-2729 10
31 May; 16 September 2005
Keane J
Revenue – Income tax – Grounds of Commissioner of Inland Revenue’s original assessment based on contention of tax avoidance – Whether commissioner 15 could change grounds of assessment on appeal and contend that transactions amounted to sham – Whether commissioner bound by terms of notice of proposed adjustment and taxpayer’s notice of response – Income Tax Act 1994,
s BG1 – Tax Administration Act 1994, ss 89A, 89B, 89C, 89D, 89E, 89F, 89G,
89H, 89I, 89J, 89K, 89L, 89M, 138A, 138B, 138C, 138D, 138E, 138F and 20
138G.
Zentrum Holdings Ltd had claimed deductions over a period of several income years for amounts of interest which were payable to a related company, liability for which arose out of a series of transactions made between the companies and
the major shareholder and recorded by a number of linked documents. 25
The Commissioner of Inland Revenue challenged the validity of the
documents purporting to give rise to the allowable deductions on the grounds that they served no commercial purpose, that they frustrated the group offset rules contained in ss IG1 and IG2 of the Income Tax Act 1994, and that the
transactions amounted to a tax avoidance arrangement contrary to s BG1. The 30 commissioner disallowed the deductions claimed and assessed Zentrum for tax.
In proceedings brought before the Taxation Review Authority the commissioner’s assessment was overturned. The authority found that there was a commercial purpose behind the transactions and that they did not amount to
avoidance. The commissioner appealed and raised the additional contention 35 that the transactions amounted to a sham and were simply a fictional device designed to secure tax advantages.
Held: The commissioner was confined to the ground upon which the taxpayer was assessed for tax as stated in the commissioner’s notice of proposed adjustment and dealt with in the taxpayer’s notice of response. To permit 40 otherwise would be contrary to the purposes of the Tax Administration Act
1994 and the taxpayer would be left vulnerable. The commissioner was not able to contend that the transactions entered into by the taxpayer amounted to a sham under the circumstances where the only basis for the assessments was that
they amounted to a tax avoidance arrangement (see paras [40], [41], [46], [47], 45 [53], [63]).
Commissioner of Inland Revenue v V H Farnsworth Ltd [1984] 1 NZLR
428 (CA) applied.
BASF New Zealand Ltd v Commissioner of Inland Revenue (1995)
17 NZTC 12,136 applied. 50
F B Duvall Ltd v Commissioner of Inland Revenue (2000)
19 NZTC 15,658 (CA) applied.
Batagol v Commissioner of Taxation of the Commonwealth of Australia
(1963) 109 CLR 243; [1964] ALR 480 considered.
Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd [1994]
2 NZLR 681 (CA) considered.
Ch’elle Properties (NZ) Ltd v Commissioner of Inland Revenue [2004] 3
NZLR 274 considered.
Result: Appeal dismissed.
Other cases mentioned in judgment
Dandelion Investments Ltd v Commissioner of Inland Revenue [2000]
2 NZLR 548 (CA).
Golden Bay Cement Co Ltd v Commissioner of Inland Revenue (No 1) (1995) NZTC 12,253.
Inland Revenue (Commissioner of) v Taxation Review Authority (2004)
21 NZTC 18,634.
Lloyds Bank Export Finance Ltd v Commissioner of Inland Revenue [1992]
2 NZLR 1; [1991] 2 AC 427 (PC).
Perkowski v Wellington City Corporation [1959] 1 NZLR 1; [1959] AC 53
(PC).
Simunovich Fisheries Ltd v Commissioner of Inland Revenue [2002]
2 NZLR 516 (CA).
Smith v Commissioner of Inland Revenue [1987] 1 NZLR 727 (CA).
Union Steamship Co of New Zealand Ltd v Commissioner of Inland Revenue
(1996) 17 NZTC 12,629 (CA).
Appeal
This was an appeal by the Commissioner of Inland Revenue from the decision of the Taxation Review Authority ruling that the commissioner’s assessment of the taxpayer Zentrum Holdings Ltd and Ngahemi Properties Ltd, trading as the
30 Zentrum Holdings Group, should be overturned on the grounds that the arrangements entered into by the taxpayer had a legitimate commercial purpose and did not amount to tax avoidance contrary to s BG1 of the Income Tax Act 1994.
R J Ellis and M D Deligiannis for the commissioner.
G D Clews for Zentrum.
Cur adv vult
KEANE J. [1] The threshold issue raised an this appeal from the Taxation Review Authority is whether the Commissioner of Inland Revenue can contend that the transactions on which disputed assessments were founded amounted to
a sham, when the only basis for the assessments was that the transactions constituted a tax avoidance arrangement; and that was the only issue argued before and resolved by the authority.
[2] Zentrum Holdings Ltd, which succeeded before the authority in vindicating the returns of income it had made for the 1997 – 1998 tax years,
and in having the commissioner’s contrary assessments set aside, contends that the commissioner is confined on this appeal to the statutory ground on which he
made those assessments; as indeed is this Court. Moreover, Zentrum contends, the commissioner became time-barred after 31 March 2003 from raising the new ground of assessment even as a submission.
The commissioner contends that whether the transactions were a tax
avoidance arrangement or a sham turns on the same essential considerations, 5 and is capable of being resolved on this appeal on the evidence before the authority. No increase would result, he says, in the tax payable under the existing assessments, and the fresh ground on which he relies to support them cannot therefore be time-barred. Finally, he contends, the authority’s decision
has been overtaken. Bank records since obtained from Zentrum, which were not 10 before the authority and should have been, support the possibility of a sham.
Since Commissioner of Inland Revenue v V H Farnsworth Ltd [1984]
1 NZLR 428 (CA), the commissioner has not been able, even in submissions, to rely on a new statutory ground to support his assessment. That decision was
given within the context of the Inland Revenue Department Act 1974, however, 15 and the present challenge lies under the Tax Administration Act 1994. The first
and, I consider, decisive question is to what extent the principles it stands for continue to apply.
Context
In the income years 1997 – 1998, Zentrum, of which John Brown is now 20 and was then the controlling director and shareholder, returned before-tax profits fixed after deducting $300,000 interest payable in each year to another
of Mr Brown’s companies, Marketing Management Holdings Ltd. Marketing lacked assets and was not then trading, but as at 1 April 1996 it did have losses
that it was able to offset of $1,094,610. 25
Zentrum’s liability to Marketing was created by four linked documents,
three on 1 April. Mr Brown assigned to Marketing by deed to which Zentrum was also a party, part of a debt owed to him by Zentrum, $1.2m, in consideration of an equal payment. As well, and independently, he gave notice
to Zentrum directing it to pay the debt to Marketing, to whom it had been 30 assigned. By reciprocal deed Zentrum acknowledged the debt and undertook to
pay interest at the rate of 25 per cent yearly. On 2 April, by a third deed, Marketing acknowledged Mr Brown’s loan to it. It was to be for seven years and was to be interest free unless Mr Brown decided otherwise.
In each of the years 1997 – 2000 Marketing charged Zentrum $300,000 35 interest. Zentrum credited Marketing with such interest payments by journal entry, and claimed a deduction for the interest payable. Marketing correspondingly reduced its available tax losses by the amount of the interest credited and thus paid no tax on what it notionally received. Mr Brown did not charge Marketing with interest on his loan to it, but loan repayments due to him 40 were credited to his current account by journal entry. These he treated as capital payments not liable to tax.
After June 1999, when the commissioner initiated his investigation, Zentrum’s liability to pay interest reduced. In 1999 it became 12 per cent, in
2000 13 per cent and in 2001 9.6 per cent. On 30 March 2001 Zentrum paid 45
Marketing $601,824, on the basis that this was the interest then due, and on the
same day Marketing repaid $600,000 to Mr Brown’s current account, effectively repaying part of its debt to him.
On 28 September 2001 Zentrum paid Marketing the principal sum due,
$1.2m, and interest from 1 April 2001, in all $1,375,329, discharging its debt 50 completely. On the same day Marketing paid all but a fraction to Mr Brown,
who advanced most of that to a third company in which he had a controlling interest, Traus Holdings Ltd, which in turn advanced to Zentrum $1.375m at an interest rate of 9.6 per cent, secured by debenture.
[10] The tax returns filed reflected these transactions, and after investigating
all involved, the commissioner, on 31 March 2003, issued a group assessment disallowing the interest deductions made in the 1997 – 1998 income tax years. On 31 July in a notice issued to Marketing (not as it happens a member of the Zentrum Group), the commissioner proposed to reinstate those losses Marketing had offset against the deductions disallowed, but has not yet issued
any such assessment.
[11] In the returns the commissioner varied by his assessments, Zentrum had relied on its ability to deduct for income tax purposes interest payable in the derivation of gross income (ss BD2 and DD1). In disallowing those deductions the commissioner relied on the general anti-avoidance provision, s BG1, and
the related definitions contained in s OB1.
[12] Before the authority the commissioner contended that the deeds entered into on 1 – 2 April 1996, and the related notice, were circular, contrived, artificial, lacked any commercial purpose and frustrated ss IG1 and IG2. The commissioner contended also that these purposes or effects were more than
merely incidental and that the arrangement as a whole was caught by s BG1.
Zentrum contended the contrary and succeeded.
[13] The authority, in its decision dated 16 November 2004, overturned the commissioner’s assessment. It found that the transactions had commercial purpose and effect. The purpose was, as Zentrum contended, to enable
Mr Brown to resolve an impasse with a minority shareholder in Zentrum as to his right to interest on his current account, then standing at $1,447,594. The effects of the transactions were tangible in fact as well as law, the authority held, and the interest rate adopted was not inflated to increase the deduction Zentrum was able to claim. It was within the range then payable on the
secondary finance market. The fact that Marketing was able to rely on its offsetting losses was, it held also, a neutral factor.
[14] In his notice of appeal, dated 13 December 2004, the commissioner contended that the authority erred in its conclusions under s BG1. But in his memorandum of points of appeal, dated 24 March 2005, the commissioner also
contended that the transactions on 1 April 1996 were a sham, as neither Zentrum nor Marketing, in reality Mr Brown, intended that Zentrum should ever pay any interest. Zentrum lacked the means. The transactions were no more than a fictional device to secure the tax advantages obtained. The payments made eventually were all prompted, according to the commissioner,
by the investigation which began in 1999.
[15] On 10 May, Zentrum applied for the present order sought limiting the commissioner in his argument on appeal to the ground for his assessment, and on 13 May Winkelmann J directed that this issue be heard before the appeal proper. If the commissioner were able to advance the possibility of a sham, she
considered, further evidence might be needed.
Commissioner’s position
[16] The commissioner submits that whether or not he should be entitled to advance the sham argument should be determined according to the usual principles governing any new point taken on a civil appeal; and without
reference to the Farnsworth principle.
In civil appeals, he contends, it is finally for the appeal Court in its discretion to decide whether any new ground relied on should be allowed; and while a new ground will not usually be permitted if the further findings of fact are required, it can be entertained if open on the record of the Court below
(Perkowski v Wellington City Corporation [1959] 1 NZLR 1 (PC)). 5
While, the commissioner contends, he disallowed the interest deductions
on the basis that a more than incidental purpose or effect of the transactions was tax avoidance, his attack on the transactions, particularly before the authority, was more radical. They were, he then said, circular, contrived, artificial and
without commercial purpose. Implicitly, if not explicitly, that meant that they 10 constituted a sham.
Thus, in his first notice of proposed adjustment (NOPA), dated
31 July 2001, disallowing the interest deductions, the commissioner points out he posed as issues of law whether the transactions were real or fictional:
“Was the loan between John Donald St Clair Brown and Marketing 15
Management Limited actually made? Was the loan between Marketing
Management Limited and Zentrum Holdings Limited actually made? Is there any commercial reality present in the circular flow of funding which was completed by journals only?
Whether there is any commercial reality in John Donald St Clair Brown 20 lending $1,200,000 to Marketing Management Limited at nil interest by journal transfer only.”
Zentrum, equally, the commissioner says, was alive to the centrality of these issues in its notice of response (NOR), dated 28 September 2001, when it
said: 25
“While interest was initially credited in account between ZHL and MMHL, all interest due to MMHL in respect of the years referred to in the NOPA have been physically paid by MMHL and MMHL has in turn repaid the debt due to it from Mr Brown.”
Again, the commissioner says, in its NOR, dated 27 May 2003, replying 30 to his second and final NOPA, dated 28 March 2003, in which he relied on tax avoidance as his sole ground for assessment, Zentrum went wider. Zentrum identified questions which could only go to whether the transactions were genuine or fictional.
The notices of claim and defence filed on the case stated, the 35 commissioner contends, incorporated the issues identified in that last exchange.
They were the subject of evidence and submission and central to the authority’s conclusion. On this appeal, therefore, as a matter of ordinary principle and without any unfairness to Zentrum, the commissioner argues, the Court could readily decide on the evidence, as it is not just that the transactions constituted 40 a tax avoidance arrangement, but were a sham.
Farnsworth, and derivative cases, the commissioner contends, no longer apply. They were expressions of the post-assessment challenge regime prescribed by the Inland Revenue Department Act. Under the Tax Administration Act, the commissioner contends, he is not tied in his argument 45 on appeal to his intimated ground of assessment in his ultimate NOPA, nor is
he barred from supporting his assessment by a fresh ground, which will involve no increase in the tax Zentrum has been assessed to pay.
[24] Finally, the commissioner contends, justice dictates that he ought to be able to introduce his new and alternative ground. Zentrum did not disclose before the assessment was made, or during the hearing before the authority, documents recording a yet further instance of circularity, demonstrating the
transactions to have been no more than a device to deceive the revenue.
Farnsworth principle
[25] If this issue fell to be decided on ordinary principles, I would find the commissioner’s arguments highly persuasive. But the Farnsworth principles on which Zentrum relies, those decided in that case, and those deriving from it, are
central to this case; and, if they apply, are fatal to the commissioner.
[26] In Farnsworth, when the commissioner abandoned in this Court on a
case stated the ground on which he had assessed the taxpayer, he was denied the ability to rely on another; and the Court of Appeal upheld that decision. To have allowed the commissioner that shift in stance, the Court held, would have
been to frustrate the taxpayer’s right of challenge, and the shift was also time-barred.
[27] The Court did accept that the commissioner could vary or supplement his reasons for his ground of assessment. Richardson J reserved for another day whether the commissioner might introduce a fresh ground for assessment, if
that had been anticipated in an objection more widely framed than the assessment.
[28] In cases since, consistent with these principles, the commissioner has been permitted in some to introduce new reasons to support an existing ground of assessment (Smith v Commissioner of Inland Revenue [1987] 1 NZLR 727;
Union Steamship Co of New Zealand Ltd v Commissioner of Inland Revenue (1996) 17 NZTC 12,629 at p 12,633). In others, where the commissioner has sought to rely on a new ground, he has not been allowed to.
[29] Thus, the commissioner has been held not to be able to assess on a new ground, once a challenge to an assessment is before a hearing authority
(BASF New Zealand Ltd v Commissioner of Inland Revenue (1995) 17 NZTC
12,136). In F B Duvall Ltd v Commissioner of Inland Revenue (2000) 19 NZTC
15,658, this Court, sitting on appeal, was held to be confined to whatever ground of assessment was before the authority.
[30] That last iteration of the Farnsworth principle, if it applies in this case,
denies this Court jurisdiction to consider whether the transactions impugned went beyond avoidance and constituted a sham; and two reasons persuade me that it does apply, the first of which is that Farnsworth expresses principles basic to any system of assessment that purports to be both accurate and fair.
Principles of accuracy and fairness
[31] The principles, indeed the values, that the Court of Appeal identified in Farnsworth were not simply incidents of the then statutory scheme. They went to what constituted an assessment and how it could be challenged and reviewed
– most usually before the authority, but there before this Court – and whether, once challenged, it could be varied or supplemented, formally or informally.
[32] The commissioner’s argument could not have been more fundamental.
He contended that the taxpayer’s liability was fixed by the taxing statute, and
that his role was simply to quantify what that liability was. This Court, he contended, had jurisdiction independently, unconstrained by his grounds for assessment, to make a fresh assessment on different grounds. It was those
propositions that the Court rejected.
The taxing statute, the Court accepted, was the source of the taxpayer’s liability, but that liability, the Court said, remained at large until fixed by the commissioner. Counterbalancing the commissioner’s duty to assess, the Court held, was the taxpayer’s right of challenge. The one was integrated with the other jurisdictionally and procedurally, the Court held, principally by the 5 case-stated process then prescribed by the Inland Revenue Department Act
1974. The taxpayer was accorded a right of objection, not a right of general appeal. The task of this Court was to review the assessment against the objection. It was not to make a general reassessment.
To have allowed the commissioner on the case stated to rely on the 10 alternative ground, which formed no part of the assessment objected to, the Court concluded, would have been to frustrate the taxpayer’s right of challenge.
The taxpayer, whose objection to the assessment triggered the case stated, was restricted to that objection. Richardson J said at p 434:
“Parliament can never have intended leaving a taxpayer so vulnerable and 15 it cannot reasonably be predicated that it may simply have overlooked the point. I consider it is implicit in the statutory scheme affecting objections
that the Commissioner cannot shift his ground and thereby short-circuit the objection process.”
Equally, Richardson J continued to say, the Court could not on a case 20 stated exercise its discretion to make a new assessment on a ground differing
from that under objection. At pp 435 – 436 he said:
“The framers of the legislation could not possibly have contemplated that the making of an objection would expose the taxpayer to the risk that perhaps years later at the hearing of an objection and outside the time limit 25 for amendment of assessments the Commissioner could seek a review of
the taxpayer’s liability for tax in respect of other matters. That limitation is inherent in the scheme of the objection procedures. For similar reasons the power to make assessments or to direct the making of assessments must in
the statutory context be confined to assessments which fairly reflect the 30 basis on which the assessment was made . . .”
The Court also held (Cooke J without seeing any need to go further) that the commissioner’s new ground was time-barred. The taxing statute itself (there s 25 of the Income Tax Act 1976) precluded the commissioner from enlarging
his assessment once four years had passed from the date of return. 35
Richardson J said at pp 434 – 435:
“The time limitation on the power to make assessments is one imposed by the Act itself and it is not to be expected that Parliament would have allowed that deliberate limitation to be defeated by the Commissioner by a
side wind under the objection procedures.” 40
The ultimate expression of these principles, for present purposes, though Farnsworth was not referred to, is to be found in Duvall. On an appeal to this Court, the commissioner, Richardson P said, delivering the judgment of the Court at para [26], was necessarily “confined to the stance he had taken and which had been held by the TRA”. Furthermore, Richardson P said, this Court 45 on the appeal lacked jurisdiction to entertain any other basis for the assessment. Speaking of that case, he said:
“. . . the High Court was not hearing and determining the objections to the assessments. Rather, it was hearing an appeal on questions of law or fact arising for its determination in terms of the case stated by the TRA.” 50
[38] That last conclusion still holds; an appeal to this Court lies only from “the determination of the Authority” (s 24(l) of the Taxation Review Authorities Act 1994). Both that stricture, and the Farnsworth principles, I consider, cohere completely with the purposes and elements of the Tax Administration Act.
Present challenge process
[39] The Inland Revenue Department Act, under which Farnsworth was
decided, only allowed the taxpayer, as the commissioner says, to challenge all assessment once it had been made.
[40] The Tax Administration Act, by contrast, to achieve the two central
purposes expressed in s 89A(1) – to ensure that the commissioner makes accurate decisions, and to reduce disputes requiring to be resolved judicially – inverts that order. Before any assessment is made the commissioner and the taxpayer must disclose their hands on all disputed issues of fact and law.
[41] A shift in the grounds of assessment once a challenge to an assessment
is already extant (particularly a shift on an appeal) has to be I consider, antithetical to the purposes I have just identified and I cannot agree with the commissioner when he contends that no such antithesis exists once the detail of the statutory scheme is considered.
Assessment
[42] The commissioner argues on this present application, in the context of the time bar but as relevantly here, that an assessment is just a statement of tax payable, expressed as an amount, and does not include the grounds on which that is justified; and that under the 1994 Act he is not tied to any ground unless and until he issues under s 89M a disclosure notice and statement of position.
[43] An “assessment” is certainly a statement of the taxpayer’s liability, expressed as an amount, as the definition in s 3 confirms, but that is not all it is. The definition concludes by stating that this expression of liability is “made by the Commissioner under a tax law”; and that theme, unsurprisingly, is central to the definition of “tax”.
[44] An assessment in its complete sense is indeed, as Kitto J said in
Batagol v Commissioner of Taxation of the Commonwealth of Australia (1963)
109 CLR 243 at pp 251 – 252:
“. . . the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case
with the consequence that a specified amount of money will become due and payable as the proper tax in that case.”
[45] In Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd [1994] 2 NZLR 681 at p 690, Richardson J, delivering the judgment of the Court, adopted that definition as the Court’s own. Other instances of
“assessment” understood as a deliberative act are Lloyds Bank Export Finance Ltd v Commissioner of Inland Revenue [1991] 2 NZLR 1 (PC); Golden Bay Cement Co Ltd v Commissioner of Inland Revenue (No 1) (1995) NZTC 12,253.
[46] To be complete and intelligible, then, any assessment must be expressed
definitively at some point not just as a sum payable but as an expression of statutory liability; and, I consider, where as here the commissioner does not issue a statement of position under s 89M, he is bound instead by the ground of assessment which he has given in the notice of proposed adjustment the taxpayer has rejected by the notice of response triggering the right of challenge.
Notice of proposed adjustment
NOPAS and HORS do not, as the commissioner argues, serve only to exchange information. Nor is an NOPA analogous to an adjudication report from which the commissioner is free to depart, even though neither is subject
to s 138G, which ties the maker to any later statement of position given under 5 s 89M (Ch’elle Properties (NZ) Ltd v Commissioner of Inland Revenue [2004]
3 NZLR 274 per Rodney Hansen J).
Internal adjudication is the commissioner’s own review; it is administrative and without statutory status. The exchange between the commissioner and taxpayer by NOPA and NOR, by contrast, is a mandatory 10 condition precedent to a taxpayer’s challenge to an assessment (Commissioner
of Inland Revenue v Taxation Review Authority (2004) 21 NZTC 18,634 per
Wild J).
To challenge an assessment the taxpayer must first have rejected the assessment, when the commissioner gives notice proposing it. 15
Section 138B(1)(a), which confers the general right to challenge, is explicit:
138B. When disputant entitled to challenge assessment – (1) A disputant is entitled to challenge an assessment by commencing proceedings in a hearing authority if –
(a) the assessment includes an adjustment proposed by the 20
Commissioner which the disputant has rejected within the
applicable response period; . . .
This requirement springs from s 89G(1), under which the taxpayer must respond by notice rejecting the adjustment proposed in order to challenge any subsequent assessment; and reaches back to s 89B(1), under which the 25 commissioner must, before issuing an assessment containing an adjustment, in
all but exceptional cases give the taxpayer notice of the adjustment proposed. [51] As importantly, the notices exchanged cannot be abstract. They must go to the issues of fact as well as law. Section 89F(2), which prescribes the
commissioner’s notice, and which has its counterpart in s 89G(2), which 30 prescribes what the taxpayer’s response must be, makes this clear:
(2) A notice of proposed adjustment issued by the Commissioner must –
(a) identify the adjustment or adjustments proposed to be made to the assessment; and 35
(b) provide a concise statement of the key facts and the law in
sufficient detail to inform the disputant of the grounds for the
Commissioner’s proposed adjustment or adjustments; and
(c) state how the law applies to the facts.
These notices may be overtaken by even more explicit disclosure notices 40 and statements of position under s 89M, but these are not invariably mandatory,
and none was issued here. In such a case as this the boundaries of the case before the authority, or this Court, are to be found in the last NOPA and NOR exchange between the commissioner and the taxpayer.
The taxpayer’s NOR, which s 138B(1)(a) makes a condition precedent to 45 the challenge, serves therefore the same purpose that an objection served under
the 1974 Act. It defines the taxpayer’s challenge, and identifies what it is that
the hearing authority has to resolve. On the Farnsworth principle, the converse has to hold. The commissioner must be tied to the terms of the NOPA to which the taxpayer’s NOR responds. Otherwise the taxpayer would be left intolerably vulnerable.
Time bar
[54] In case I am wrong in this, I should add that in my view the s 108(1) time
bar might not necessarily preclude the commissioner advancing his proposed alternative ground. No increase in Zentrum’s liability is involved; and s 108(1) only prohibits the commissioner from amending an assessment four years after
the year of return, if the effect of the amendment is “to increase the amount assessed”.
[55] Zentrum argues that, even if the sum assessed does not change, each fresh ground introduces a fresh liability and discretely, though not cumulatively, increases the amount assessed.
[56] This does not square easily with s 108(1), which speaks in terms of amount rather than liability, and in Dandelion Investments Ltd v Commissioner of Inland Revenue [2000] 2 NZLR 548 (CA), Tipping J, delivering the judgment of the Court, did not hesitate to ascribe to s 108(1) its literal meaning at para [9]:
“Clearly Parliament intended that after four years the Commissioner could not issue any further assessments increasing the amount of tax beyond the amount of the last valid assessment made within the four years.”
[57] If the effect of Farnsworth were as Zentrum contends for, moreover, that would surely have been spelt out. Instead the Court appears to have assumed
that the actual effect of the new ground would be to increase the taxpayer’s liability.
[58] Cooke J certainly appears to have assumed that to be so, when concluding that the time bar did apply, and was fatal to the commissioner’s wish to shift stance; and, as he said, at pp 429 – 430, on a concession by the
commissioner’s counsel:
“In this Court it was conceded for the Commissioner, after consideration and the taking of instructions, that at the time when the Commissioner sought to rely on s 91(1D) for the first time in the High Court, the four years limit laid down in s 25 (except in the cases of fraud and the like) for
increasing an assessment (after a return) had expired. We are not called upon to examine the basis of the concession.”
[59] Somers J too, at p 439, may have been equally influenced; and Richardson J also appears to have considered that the commissioner wished to increase the taxpayer’s assessment, by including as assessable income what, at
p 434, he described as the “forestry sums”.
[60] The commissioner now says, his counsel having spoken after the hearing
of this application to counsel in Farnsworth, that in this Court on the case stated the commissioner abandoned his original ground for assessment, and thus the assessment itself. The taxpayer’s liability then reverted to that returned
and not disputed, unless this Court reassessed the taxpayer on the commissioner’s fresh ground and returned liability to the disputed level. The time bar perforce applied.
That may conceivably be so. What is clear is that Farnsworth has not since been understood as Zentrum argues it must be. In Simunovich Fisheries Ltd v Commissioner of Inland Revenue [2002] 2 NZLR 516 (CA), a case concerned with a goods and services tax amended assessment, but turning
just as centrally on the process of challenge, Richardson J, a member of the 5
Farnsworth Court, treated this present issue as one still to be resolved.
On this application the time bar point is secondary to that which I have decided against the commissioner. I do not need to decide it. It is better left for a case in which it more squarely arises.
Conclusion 10 [63] On the hearing of this appeal the commissioner will be confined to the ground on which he assessed Zentrum, and which the authority disallowed. He
will not be permitted to argue that the transactions or Zentrum’s agreement to pay interest are shams.
Zentrum is entitled to costs, as I should have thought at scale 2B. If the 15 commissioner wishes to be heard on that issue he is to file a memorandum within ten days of the issue of this decision and Zentrum is to reply within the succeeding seven days.
Appeal dismissed.
Solicitors for the commissioner: Crown Law Offıce (Wellington). 20
Solicitors for Zentrum: Hunt Edward (Orewa).
Reported by: Christopher Spells, Barrister
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