Concepts 124 Limited v Commissioner of Inland Revenue
[2014] NZHC 2140
•5 September 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-1171 [2014] NZHC 2140
BETWEEN CONCEPTS 124 LIMITED
Appellant
AND
COMMISSIONER OF INLAND REVENUE
Respondent
Hearing: 26 June 2014
Further submissions 11 and 30 July 2014
Appearances:
A Romanos for appellant
A Goosen for respondentJudgment:
5 September 2014
JUDGMENT OF CLIFFORD J
Introduction
[1] In July 2008 the appellant, Concepts 124 Ltd, purchased a block of land (the
Property) for development purposes from Ormiston Residential Ltd (Ormiston) for
$8,034,750. Ormiston had acquired that land for $847,000. Concepts 124 was to pay the purchase price of the Property to Ormiston in 18 instalments of $423,000, and a final instalment of $420,750.
[2] During the GST tax periods between July 2008 and October 2009, Concepts 124 paid 17 instalments of the purchase price ($7,191,000) by way of book entry. Concepts 124 claimed GST input deductions of one-ninth of that amount ($799,000) in respect of those instalment payments.
[3] Robert John Cummings (Mr Cummings) owns 100 per cent of each of
Concepts 124 and Ormiston via intermediate holding companies, Working Concepts
Ltd and Flatbush Holdings Ltd.
CONCEPTS 124 LTD v COMMISSIONER OF INLAND REVENUE [2014] NZHC 2140 [5 September 2014]
[4] The question raised by this appeal is whether the respondent, the
Commissioner of Inland Revenue (the Commissioner), is right to assess Concepts
124’s GST liabilities on the basis that it and Ormiston are associated persons by reason of Mr Cummings’ 100 per cent ownership of each of them through Working Concepts and Flatbush.
[5] If the Commissioner is correct, Concepts 124 would only be entitled to claim GST input credits arising from its purchase of the Property of $94,111.12, (one-ninth of the purchase price of $847,000 when Ormiston acquired the land) rather than the
$799,000 it has in fact claimed (one-ninth of the relevant purchase price instalments).
[6] The dispute between Concepts 124 and the Commissioner came before the Taxation Review Authority (the Authority). In a decision of 17 December 2013 the Authority (Judge A A Sinclair) upheld the Commissioner’s approach.1 Concepts 124 now appeals that decision as being wrong in law.
Facts
[7] The additional facts relevant to this appeal are not now in dispute and can be simply stated.
[8] Concepts 124 was registered for GST purposes. Ormiston was not. As Ormiston was not registered for GST purposes, its sale of the Property to Concepts 124 was not a taxable supply. This gives rise to the asymmetry that would appear to be of concern to the Commissioner. Ormiston was not liable to collect GST and account for it in its return, whilst Concepts 124 could claim GST input credits in its return.
[9] The ownership structures of Concepts 124 and Ormiston were, at all relevant times, as set out below:
1 Concepts 124 v The Commissioner of Inland Revenue [2013] NZTRA 11.
Mr Cummings 100%
Working Concepts
100%
Concepts 124
[10] In addition to his direct and indirect shareholdings in Working Concepts, Flatbush, Concepts 124 and Ormiston, Mr Cummings was also the sole director of each of those companies.
Mr Cummings
100%
Flatbush
100%
Ormiston
[11] Working Concepts held its shares in Concepts 124 on its own behalf as beneficial owner.
[12] Flatbush held its shares in Ormiston:
(a) as to 75 per cent thereof, as trustee for the Flatbush Holdings Trust
(the FBH Trust); and
(b) as to 25 per cent thereof, for Mr Cummings personally.
[13] The FBH Trust is a discretionary family trust. The FBH Trust was established under a deed dated 30 November 2005, under which:
(a) the primary beneficiaries of the trust are Ms Deborah Marie Shuttleworth, any children of Ms Shuttleworth, any other person determined by the trustee, any other trust for the benefit of those beneficiaries, and any person who is related to any of the beneficiaries (cl 1);
(b)the trustee, Flatbush, holds the power of appointment of secondary beneficiaries; and
(c) Mr Cummins, during his lifetime, holds the power of appointment and removal of trustees.
[14] Mr Cummings made further arrangements, involving an entity associated with him – the Manchester Securities Trading Trust, as regards “his” 25 per cent of the shares in Ormiston. Those arrangements are not relevant here.
Statutory context
[15] For GST purposes, it is accepted that the Property as sold by Ormiston to
Concepts 124 is properly classified as second hand goods.
[16] Where second-hand goods are supplied by way of a non-taxable supply to a registered person, and the supplier and recipient (who is a registered person) are associated persons, then under s 3A(3) of the Goods and Services Act 1985 (the GST Act) the amount of the input credit the recipient may claim is the lesser of:
(a) the tax included in the original cost of the goods to the supplier; (b) the tax fraction (1/9th) of the purchase price; and
(c) the tax fraction of the open market value of the supply.
[17] The lesser of those three amounts in the case of the supply of the Property by Ormiston to Concepts 124 is the tax included in the original cost of the Property to Ormiston of $94,111.12. That amount is, the Commissioner argues, the amount of input credit that Concepts 124 may, as an associated person of Ormiston, claim.
[18] Section 2A(1)(a) of the GST Act provides that two companies will be associated persons:
…if a group of persons
(i) has voting interests in each of those companies of 50% or more when added together; or
(ii) has market value interests in each of those companies of 50% or more when added together and a market value circumstance exists in respect of either company;2 or
(iii) has control of each of those companies by any other means whatsoever.
2 This test is not relevant to this appeal.
[19] Section 2A(2) of the GST Act provides:
For the purpose of subsection (1)(a), group of persons has the meaning set out in section YA 1 of the Income Tax Act 2007.
[20] Section YA 1 of the Income Tax Act 2007 provides:
group of persons includes 1 person.
Mr Cummings is, therefore, a group of persons. [21] Section 2A(3) of the GST Act provides:
For the purpose of subsection (1)(a) …
…
(c) voting interest has the meaning set out in paragraph (a) of the definition of voting interest in section YA 1 of the Income Tax Act 2007.
[22] Section YA 1 of the Income Tax Act, again as relevant, provides:
voting interest
(a) means, for a person and a company and a time, the percentage voting interest that the person is treated as holding in the company at the time under sections YC 2 to YC20 (which relate to the measurement of company ownership) …
[23] In terms of ss YC 2 to YC 20 of the Income Tax Act: (a) section YC 2(1) provides:
Percentage of shareholder decision-making rights
A person’s voting interest in a company equals the percentage of the total shareholder decision-making rights for the company carried by shares or options held by the person.3
(b) shareholder decision-making right is defined in s YA 1 as follows:
shareholder decision-making right means a right, carried by a share issued by a company or an option over a share issued by a company, to vote or participate in any decision-making concerning–
(a) a dividend or other distribution to be paid or made by the company, whether on a liquidation of the company
3 Emphasis added.
or otherwise, excluding decision-making undertaken by directors acting only in their capacity as directors; or
(b) the constitution of the company; or
(c) a variation in the capital of the company; or
(d) the appointment of a director of the company.
(c) section YC 4 provides:
When subsection (2) applies
(1) Subsection (2) applies if a company (the shareholder company) has or is treated as having, whether under subsection (2) or otherwise, a voting interest in another company (the issuing company).
Voting interest attributed to shareholders
(2) Each person (the shareholder) who has a voting interest in the shareholder company is treated as having (to be added to any other percentage voting interest in the issuing company which the shareholder has) their portion of the shareholder company’s voting interest in the issuing company and the shareholder company is treated as not having that portion.
[24] The Commissioner and Concepts 124 agree, applying those provisions, that for the purposes of the GST Act, Working Concepts and Flatbush each have a 100 per cent voting interest (or 100 per cent voting interests) in Concepts 124 and Ormiston respectively (s YC 2(1)), and that those voting interests are to be
attributed4 to Mr Cummings (s YC 4(2)). As I read the statutory provisions, that
would make Concepts 124 and Flatbush associated persons in terms of s 2A(1)(a)(i) of the GST Act: that is, Mr Cummings, a group of persons, has voting interests in each of them of 50 per cent or more.
[25] That, however, is not the basis on which the Commissioner assessed
Concepts 124 or on which this appeal was argued by the Commissioner.
The challenged decision
[26] For the relevant tax periods, Concepts 124 returned its income as though it was not an associated person of Ormiston. The Commissioner issued a proposed
4 Attributed in the sense that Mr Cummings is treated as having Working Concepts’ and Flatbush voting interests in Concepts 124 and Ormiston, and Working Concepts and Flatbush, are treated as not having them.
adjustment on the basis that it was. Having followed the normal dispute procedure, the matter went to adjudication before the Inland Revenue Department’s Adjudication Unit. That unit ruled that Mr Cummings did have control of each of Concepts 124 and Ormiston by “any other means whatsoever”. The Adjudication Unit reasoned:
The beneficial ownership of Ormiston shares has been separated from the legal ownership which alters the capacity in which Flatbush held the shares and made them trust property. The shares in Ormiston held by Flatbush were held by Flatbush on trust for the [FBH Trust] (as to 75%) and for Mr Cummings (as to 25%) and not as Flatbush’s “personal” asset. As a result, Mr Cummings did not have a voting interest in Ormiston of 50% or more.
The separation of legal and beneficial ownership is not a significant fact when considering the test of control by any other means whatsoever. This makes the test under s 2A(1)(a)(iii) different from the voting interest test at s 2A(1)(a)(i). This means any conclusion reached on voting interests is not conclusive when considering whether or not there is an association between persons by control by any other means whatsoever.
Mr Cummings had legal control of each of Concepts 124 and Ormiston by way of share ownership. For those purposes, beneficial interests were irrelevant.
In the alternative, Mr Cummings controlled the FBHT.
As such, Concepts 124 and Ormiston were associated persons for the purposes of s 2A(1)(a)(iii).
[27] Concepts 124 appealed that decision to the Authority. The Authority, for reasons identical to those of the Adjudication Unit, dismissed that appeal.
Case on appeal
[28] The Commissioner takes the view that because Flatbush hold its shares in Ormiston as a trustee the voting interests “test” in s 2A(1)(a)(i) of the GST Act is not met. That approach is reflected in the following extract from the Commissioner’s written summary of her submissions:
17. Thus, both parties also agree that Mr Cummings is deemed to have a
100% voting interest in [Concepts 124] and [Ormiston].
18.However, both parties also agree, that while Mr Cummings has 100% voting interest in both [Concepts 124] and [Ormiston], that is not sufficient for association under the voting interests test in s 2A(1)(a)(i) of the GST Act. The fact that the shares in [Ormiston] were held on
trust means the capacity in which those shares were held was different to the capacity the shares were held in the appellant. Mr Cummings voting interests in [Concepts 124] and [Ormiston] were therefore in a different capacity to each other. The respondent has accepted that s 2A(1)(a)(i) of the GST Act requires the voting interests in each company to be in the same capacity.
19. The parties both agree that the “market value interests” test in
s 2A(1)(a)(ii) of the GST Act is not applicable.
20The only issue is therefore whether Mr Cummings had control of [Concepts 124] and [Ormiston] by “any other means whatsoever” as allowed for under s 2A(1)(a)(iii) of the GST Act.
[29] In this appeal:
(a) Concepts 124 say that the “other means” that have been relied on here by the Commissioner under subs (1)(a)(iii) are the same means as those referred to in subs (1)(a)(i): that is, those means are the relevant voting interests, the shareholder decision-making rights, which Mr Cummings holds directly and indirectly in Flatbush Holdings and Ormiston.
(b)Concepts 124 says, in effect, that the Commissioner cannot have it both ways: if Concepts 124 and Ormiston are not associated by reason of the correct interpretation of the voting interest test, then neither can they be associated under the concept of control by “any other means whatsoever”. There are, Concepts 124 says very simply, no other means involved here.
(c) Furthermore, Mr Cummings does not control the FBH Trust so as to give him control over the shares it owns in Ormiston. However, even if he did, subs (1)(a)(iii) would not be satisfied as Mr Cummings would control Concepts 124 via the voting interest test, but control Ormiston by “any other means whatsoever”. For subs (1)(a)(iii) to apply, both relevant entities have to be controlled by “any other means whatsoever”.
Analysis
My problems with the Commissioner’s approach
[30] Section 2A(1)(a)(i) of the GST Act, referred to by the Commissioner as the “voting interests” test, makes no reference, directly or indirectly, to shares held on trust. The phrase “voting interest(s)”, defined for the purposes of the GST Act in ss YA 1 and YC 2(1) of the Income Tax Act, means – in respect of a person and a company – the percentage of the total shareholder decision-making rights for the company carried by the shares or options held by that person. So, the concept of “voting interests” is of decision making rights carried by shares or options held by that person.
[31] The concept of “held” is not qualified, in that definition, by reference to whether the shares in question are owned legally only (as when held on trust) or legally and beneficially (as when held personally).
[32] As a matter of basic company law a share is held by the person registered as its holder for the time being in the company’s share register. Company law requires companies to ignore trust interests.5 That is the basis upon which questions of control of companies have also been determined in the tax context. It is sufficient to point to the decisions referred to by the Commissioner to establish that proposition.6
[33] I therefore found it difficult to understand why the Commissioner agreed with
Concepts 124 that Ormiston were not associated persons pursuant to s 2A(1)(a)(i).
[34] I also saw the force in Concepts 124’s position. That is, I found it difficult to identify the “other means” the Commissioner argued gave Mr Cummings control over Ormiston. I discussed those difficulties with Mr Goosen, counsel for the
Commissioner, at the hearing of this appeal, and explored them further in two post-
5 Companies Act 1993, s 92: No notice of a trust, whether express, implied, or constructive, may be entered on the share register.
6 W P Keighery Pty Ltd v Federal Commissioner of Taxation (1957) 100 CLR 66, [1958] ALR 97 (HCA); British American Tobacco Co Ltd v Inland Revenue Commissioners [1943] AC 335 (HL); Inland Revenue Commissioners v J Bibby and Sons Ltd [1945] 1 All ER 667 (HL); S Berenson v Inland Revenue Commissioners [1957] 2 All ER 612 (CA).
hearing memoranda. Additional submissions in response were filed by the
Commissioner and Concepts 124 on 11 and 30 July 2014.
[35] As I now understand matters, the reasons the Commissioner considers s YC 4 (the attribution section) does not apply here is found in the legislative history of these provisions, and their overall purpose. In her supplementary submissions of 11
July 2014 the Commissioner explained:
The purpose of ss YC 2 to YC 20 is to provide the measurement of a person’s direct or indirect ownership in a company. The purpose of s YC 4(1)-(3) (the corporate look through rule) is to enable economic ownership of a company to be traced through interposed companies to the individuals who are ultimate owners of the company. It is not consistent with the purpose for which the statutory fiction was created under s YC 4(1)- (3) that the provision should be applied to trace ownership through a corporate trustee to its shareholders. The economic owners of trust property are the beneficiaries.
[36] Thus the Commissioner argued that the purpose of ss YC 2 and YC 4 was to measure economic interests in a company. To apply s YC 4 to deem the shareholders of a corporate trustee to be the economic owners of the company in which shares are held on trust would be inconsistent with that purpose. In that context, the Commissioner submitted that the associated persons test for two companies in s 2A(1)(a) of the GST Act could be seen as including two tests that were intended to only measure economic interests – the voting interests and market value interests tests. At the same time that provision also contained a control “by any other means test”. That test was not concerned with economic interests. In that way the associated persons test for two companies captures both control by economic interests and control by other means, including legal control.
[37] The Commissioner argued further that s YC 9, by analogy, supported that approach. Section YC 9 modifies certain aspects of the way voting interests are attributed, when (as is the case with Flatbush and Ormiston) one company holds shares in another company on trust. It does so to implement the policy that only the shareholders who originally bore an economic loss are entitled to the benefit of the future use of the resulting tax loss. In that context, voting interests attaching to shares held by one company in another on trust are not attributed to the shareholders in the first company.
[38] Having considered the overall scheme of the relevant statutory provisions, and their legislative history, I have reached the conclusion that the Commissioner’s approach is wrong. In my view, Concepts 124 and Ormiston are associated persons pursuant to s 2A(1)(a)(i) of the GST Act because Mr Cummings, a group of people, is to be treated as having, through Working Concepts and Flatbush respectively, 100 per cent of the voting interests in each of Concepts 124 and Ormiston. I now set out the basis upon which I have reached that conclusion.
The legislative history
[39] The provisions of ss YA 1 and YC of the Income Tax Act, which control the operation of the associated person test found in s 2A(1)(a) of the GST Act, have their origins in the Income Tax Amendment Bill (No 6) 1991 (the 1991 Amendment Bill).
[40] As part of a package of reforms the 1991 Amendment Bill proposed the introduction of new continuity and commonality of shareholding provisions to control the ability of companies to carry forward losses (loss carry forward) and to set off losses with other companies in the same group (loss offset).7 These were, along with a number of other changes, base-maintenance measures. The Tax Information Bulletin, commenting on the 1991 Amendment Bill as introduced in
1991, explained:8
The policy intention of the new loss carry-forward and grouping provisions is to ensure that, as far as practicable, only those individuals who have borne the initial economic burden of a company’s losses are able to ultimately gain the benefit of those losses for tax purposes. The intention of the new rules includes that of preventing the commercial trafficking of company tax losses to the detriment of the Revenue.
[41] That Tax Information Bulletin went on to explain:9
The Bill introduces the concept of a shareholder’s economic interest in a company. This concept is central to the continuity and grouping provisions. A common measure of a shareholder’s economic interest in a company will apply for the purposes of the loss and credit carry-forward provisions
7 New sections 187A – D; 188 and 190A – 191A.
8 Inland Revenue Department “Loss Carry-Forward and Grouping Rules” Tax Information Bulletin, Vol 3, No 2 (August 1991) at 12. Similar explanations were provided in the Government’s 30 July 1991 Business Policy Statement, and in speeches made in the House on the introduction of the 1991 Amendment Bill.
9 At 13.
(referred to in the Bill as the continuity provisions) and the grouping rules.
…
A shareholding individual’s economic interest in a company will generally be measured by reference to the percentage of voting power held by that person in a loss company. In certain circumstances where a shareholder’s economic interest in a loss company may not be accurately reflected by the voting power held by that person, an additional market value test must also be used to measure that shareholder’s economic interest.
…
Apart from measuring an interest by reference to market value, voting power is seen as the best proxy for a measure of a shareholder’s beneficial interest in the losses or credits of a company, and it will often be relatively simple to apply. …
Under the new rules, voting power will be defined as the percentage of power to vote in relation to decision-making concerning the:
(i) Distributions to be made by the company; (ii) Constitution of the company;
(iii) Variation in the capital of the company; and
(iv) Appointment or election of directors of the company.
[42] The 1991 Amendment Bill did not, in fact, explicitly introduce an “economic interests” concept. It did, however, do so implicitly: a new purpose clause for the “Continuity and the Carrying Forward of Losses” provisions, s 187A,10 would provide that losses could be carried forward to be set off against future income:
…only in circumstances where the tax benefit arising from such set off or utilisation is obtained or available to be obtained (directly or indirectly), at least to the extent of the continuity percentage, only by the same natural persons holding (directly or indirectly) rights in relation to the company who, by virtue of holding such rights (directly or indirectly), incurred the loss or the taxation giving rise to the account credit11 or participate in the event giving rise to the account credit.
[43] A similar expression of purpose was to be provided in the new s 190A, which dealt with the circumstances in which a company that has incurred a loss in an income year or that has incurred a loss able to be carried forward to that income year
could set off that loss within its group of companies.
10 Section 187A, to be introduced by cl 12 of the 1991 Amendment Bill.
11 Credits in any memoranda account (for example imputation credit account) and excess tax credits.
[44] Continuity would be measured by reference to voting interests. The voting interest provisions were proposed to be located within the new s 187C.
[45] The 1991 Amendment Bill eventually became the Income Tax Amendment
Act (No 2) 1992 (the ITA (No 2) 1992).
[46] The loss carry forward provision, s 188 provided:
188. (1) Subject always to the express provisions of this section, this section is intended–
(a) To permit taxpayers to carry forward losses incurred in one income year for set off against assessable income of the taxpayer in a later income year; but
(b) In the case of taxpayers who are companies, to limit the circumstances in which a loss can be so carried forward and set off to those where the tax benefit arising from the set off is obtained (directly or indirectly), at least to the extent of 49 percent, only by the same natural persons holding (directly or indirectly) rights in relation to the company who, by virtue of holding such rights, effectively bore the loss.
[47] The loss offset provision, s 191, contained a similar purpose statement.
[48] By reference to those purpose statements, therefore, the “economic interests” concept is that natural persons obtain the benefit of tax losses when, measured by the voting interests concept, they effectively bore the loss giving rise to that benefit.
[49] In a change from the 1991 Amendment Bill, the ITA (No 2) 1992 separately provided a new section headed “Measurement of Voting and Market Value Interests”, perhaps anticipating the wider use of those provisions. It was in those sections, ss 8A – 8F, that the provisions now found in s YA (definitions) and s YA C (Measurement of Company Control and Ownership), were first enacted. Section 8A provided a separate purpose clause for those provisions in the following terms:
Purpose of provisions governing measurement of voting and market value interests
Except where otherwise expressly provided, sections 8B to 8F of this Act are intended to provide for the measurement of a person’s direct or indirect ownership in a company by reference to the percentage of voting rights which that person may directly or indirectly exercise, except where certain specified circumstances exist in relation to a company, in which event a
person’s direct or indirect ownership in that company is also measured by reference to the percentage of the total market value of interests in that company which that person holds.
[50] Given the policy intent, the statutory scheme for loss carry forward and offset needed to address the issue of shares held in a company by non-natural persons (especially companies) and by trustees. It needed to do so to ensure that the correct natural persons obtained the benefit of losses carried forward and applied within the company itself or by loss offset.
[51] As introduced, the 1991 Amendment Bill had provided for the calculation of a (natural) person’s voting interests in a company by reference to what were termed their direct and indirect voting interests.12 The concept of direct voting interests is self-explanatory: those were voting interests attaching to shares held by the person. In a company law sense, shares registered in the name of the person. The concept of indirect voting interest is also – given the policy context – self-explanatory: those were voting interests attaching to shares held by a company in which the (natural) person holds shares. Those indirect voting interests needed to be attributed to the
(natural) person shareholder to ensure the policy intent was achieved. That can be a complicated exercise.
[52] Indirect voting interests were dealt with in the 1991 Amendment Bill 1991 as follows:
(a) Companies were deemed not to hold voting interests in other companies, except:
(i) for the purpose of calculating (natural) persons’ indirect voting
interests; and
(ii) in the case of shares held by and in listed companies.
(b)A (natural person) shareholder in a company (first tier company) that held shares in another company (underlying company) held an
12 Section 187C, to be introduced by cl 12 of the 1991 Amendment Bill.
indirect voting interests in the shares in the underlying company proportionate to that person’s direct voting interests in the shares in the first tier company.
[53] Shares held by a natural person as a nominee for another were deemed to be held by that other person.
[54] In the 1991 Amendment Bill trustees of a trust holding shares were to be treated as a single, natural (ie not a company) person subject to a very general anti- avoidance provision.13 In other words, a company holding shares in another company as a trustee of a trust was treated as a single natural person who held the relevant voting interests: those interests were not to be attributed to the (ultimate) natural persons shareholders of that trustee company. The voting interest provision,
s 187C(10), was to provide:
For the purposes of this section in relation to the application of the continuity provisions, all persons who are trustees of the same trust shall, in respect of that trust and any shares, options over shares, or other rights in relation to a company held by such trustees in respect of that trust, be treated as the same single person (other than a company) if and only if in no case does any change in the trustees of that trust have a purpose or effect of defeating the intent and application of any of the continuity provisions.
[55] At that point, the term “continuity provisions” meant only ss 188, 394E(1)(g),
394ZW(1)(f) and 394ZZP(3)(d). In other words, from the outset, attribution to natural shareholders of a company holding shares in another company on trust would not occur as regards those sections. Rather, those economic interests, ie the interests of the person who bore the economic loss which would in the future become a tax benefit, had actually been incurred not by the natural shareholders of the holding company but by the beneficiaries of the trust in question represented, for these purposes, by the corporate trustee.
[56] At that point, and for reasons which are not clear, the continuity provisions did not include the company grouping and loss offset provisions (ss 190A, 191,
191A).
13 Section 187C(10), to be introduced by cl 12 of the 1991 Amendment Bill.
[57] In the ITA (No 2) 1992, the concepts of direct and indirect voting interest were dropped. To the same overall effect – and very much as is the position today – companies were first accepted as having, or being deemed to have, voting interests in other companies but then those voting interests were deemed to be held proportionately by (attributed to) the (natural person) shareholders in those companies. Section 8C(3)(d) provided:
For the purposes of this section:
(d) Where at any time any company (in this subsection referred to as the shareholder company) has or is deemed to have, whether under this paragraph or otherwise, a voting interest in another company (in this subsection referred to as the issuing company),—
(i) Each person who has a voting interest in the shareholder company shall at that time be deemed to have (to be aggregated with any other percentage voting interest in the issuing company which the person has at that time); and
(ii) The shareholder company shall be deemed at that time not to have—
that part of the shareholder company’s voting interest in the issuing company which is calculated by multiplying the shareholder company’s voting interest in the issuing company by the person’s voting interest in the shareholder company.
[58] As before, the attribution rule was, again as regards the continuity provisions, modified – now by s 8E(5) – to include a provision which treated a company holding shares in another company on trust as a natural person holding the voting rights attached to those shares. Section 8E(5) provided:
(5) All persons who are trustees of a trust shall, in respect of that trust and any shares or options over shares in a company held by such trustees in respect of that trust, be treated as the same single person (other than a company, and separate and distinct from those persons who are trustees in their capacities other than as trustees of the trust) if, and only if, in no case does the establishment of the trust, the termination of the trust, or any change in the trustees of that trust have a purpose or effect of defeating the intent and application of any of the continuity provisions.
[59] By this time, the definition of the continuity provisions had been extended to include the loss offset provisions. In other words, at that point the continuity provisions were all the provisions of the Income Tax Act where use was made of the “Measurement of Voting and Market Value Interests” provisions.
[60] The “Measurement of Voting and Market Value Interests” provisions were put to further use when the Income Tax Act was amended following the company law reforms enacted by the Companies Act 1993. Amongst other things, those reforms abolished the concepts of nominal and paid up capital by reference to which the concepts of “control” of a company and the circumstances in which two or more
companies would be associated with each, had been defined.14
[61] A December 1993 discussion document “The Taxation Implications of
Company Law Reform” summarised the changes in the following terms:15
5.3 Measurement of Shareholder Interests
In addition to replacing such terms as nominal capital nominal value and par value, the measurement of shareholder interest rules in section 8A to 8D of the Income Tax Act can also be used to replace references to issued capital, paid-up capital (where this term is not used for distribution purposes) and shares generally where those terms are used as a measurement of company ownership. Those rules are not dependent on the existing terminology of the Companies Act and can therefore be applied more generally in the Income Tax Act.
The company control definition in section 7 of the Income Tax Act and the various associated persons definitions [in section 8] are the main areas where the voting and market value interest concepts will be applied.
[62] Those changes were enacted by the Income Tax Amendment Act 1994 (ITA
1994).
[63] Immediately prior to the passage of the ITA 1994, s 7(2) of the Income Tax
Act 1976 provided:
For the purposes of this Act, a company shall be deemed to be under the control of the persons—
(a) By whom more than 50 percent of the shares, or more than 50 percent of the nominal capital, or more than 50 percent of the paid-up capital, or more than 50 percent of the voting power is held; or
(b) Who have by any other means whatsoever control of the company; or
14 At one point in her supplementary submissions the Commissioner argued that the voting interest and market value provisions were first adopted because the terminology used in the previous rules was not compatible with the Companies Act 1993. Although I do not consider it of great moment, the statutory history does not support that argument. Rather, and as can be seen, the terms were first adopted in the context of the loss carried forward and loss offset rules: they were then applied in the different context of company control.
15 Inland Revenue The Taxation Implications of Company Law Reform (Discussion Document, December 1993) at 50.
(c) Who, by reason of the shareholding at the end of any income year, would be entitled to more than 50 percent of the profits for that year if those profits were distributed by way of dividend at the end of that year.
[64] Section 7 was amended to provide:
7. Defining when a company is under the control of any persons—
(1) For the purposes of this Act, a company shall be deemed to be under the control at any time of the persons—
(a) The aggregate of whose direct voting interests (as defined in section 8B of this Act) in the company at the time exceeds 50 percent; or
(b) In any case where at the time a market value circumstance exists in respect of the company, the aggregate of whose direct market value interests (as so defined) in the company at the time exceeds
50 percent; or
(c) Who have at the time control of the company by any other means whatsoever.
[65] Immediately prior to the passage of the ITA 1994 s 8 of the Act provided:
8. Defining when 2 persons are associated persons—
(1) For the purposes of this Act, unless the context otherwise requires, associated persons or persons associated with each other are—
(a) Any 2 companies which consist substantially of the same
shareholders or are under the control of the same persons; or …
[66] Section 8 was amended to provide:
8. Defining when 2 persons are associated persons—
(1) For the purposes of this Act, unless the context otherwise requires, at any time associated persons or persons associated with each other are—
(a) Two companies where at the time there is a group of persons—
(i) The aggregate of whose voting interests in each company is equal to or exceeds 50 percent; or
(ii) In any case where at the time a market value circumstance exists in respect of either company, the aggregate of whose market value interests in each company is equal to or exceeds 50 percent; or
(iii) Who have control over both companies by any other means
whatsoever; or …
[67] In Tax Information Bulletin Vol 6, No 6 these were described as “terminology changes”,16 rather than as representing new policy.
[68] Prior to the ITA 1994 each of ss 7(4) and 8(2) had contained limited attribution rules. Read together, they provided:
[Shares in]/[Paid-up capital of] one company held by another company shall be deemed to be held by the shareholders in the last mentioned company.
[69] The discussion document commented:
The corporate and nominee look-through rules in existing section 8(2) are inadequate as they only refer to paid-up capital and not nominal capital, even though the latter is also used in section 8(1)(b) as a measure for determining whether a company and any individual are associated persons. The use of voting interest/market value interest tests in the recast section 8 will address this shortcoming.
[70] The attribution rules found in subsection (4) of s 8C applied, automatically, to the use of the voting interests definition in ss 7 and 8. But because ss 7 and 8 were not part of the continuity provisions, the modifications in s 8E, including subsection (5), did not. The reason for that, in my view deliberate, approach is clear.
[71] In the context of the continuity provisions I agree it is not consistent with the purpose of what the Commissioner describes as the “statutory fiction” created under ss YC 4(1) – (3) to trace ownership through a corporate trustee to its shareholders. The continuity provisions have the policy intent of ensuring that the future benefit of tax losses is enjoyed by the economic owners of the company at the time the underlying economic losses were incurred. Section YC 9, which means attribution is not to be made to individual shareholders where there is an, interposed, company holding shares on trust, confirms that.
[72] But that policy consideration does not apply where those rules are used to determine control of a company. It is not that s YC 9, by analogy as the Commissioner argued, supports the view that s YC 4 does not contemplate that voting interests are to be traced through a corporate trustee to its shareholders.
Rather, s YC 9 means that such tracing does not occur where voting interests are
16 Inland Revenue Tax Information Bulletin Vol 6, No 6 (6 December 1994).
determined in the context of the continuity provisions. Where, however, control is being determined, there is no reason not to attribute control to the (personal) shareholders of a company that holds shares in another company on trust.
[73] In my view, the limitation of s YC 9 to the continuity provisions is an acknowledgement of the broader use that the measurement and control provisions would be put to in the post-Companies Act environments. This interpretation does not deem the shareholders of a corporate trustee to be the economic owners of the company: rather it deems them to be, through the shareholding interests held by the corporate trustee, the controllers of the company. That is a different concept. Put very simply, and by reference to the text of the statute, context and legislative history, the interpretation adopted by the Commissioner to the application of the voting interests “test” is, in my view, incorrect.
[74] I have considered whether, given the way this appeal was argued, I am precluded from dismissing Concepts 124’s appeal on that different basis. I have concluded I am not.
[75] Although the Commissioner might choose, as she has done here, to adhere to a statement of policy or adjudication, she is not strictly bound to do so (outside of the binding rulings regime).17 Likewise, it is axiomatic that a judge’s primary duty is to apply the law and a judge cannot be bound by the parties’ incorrect statement of that law. As the Law Commission has observed:18
… the judge is assisted by the legal submissions made by or on behalf of the parties. But this assistance does not bind the judge. If the parties or their lawyers fail to advert to the relevant law, or if they incorrectly state the law, the judge must ignore the submissions and apply the correct law to the facts. In practice, the judge will often point out to the parties any problem with the law as they present it, or if the issue arises after argument has concluded, require further submissions. In the final analysis the judge must endeavour to ensure the law is correctly applied to the case.
17 Ch’elle Properties (NZ) Ltd v Commissioner of Inland Revenue [2004] 3 NZLR 274 (HC) at
[30]-[32], Ch’elle Properties (NZ) Ltd v Commissioner of Inland Revenue (2005) 22 NZTC
19,622 (HC); Smith v Commissioner of Inland Revenue [1987] 1 NZLR 727 (CA) at 734.
18 Law Commission Evidence Law: Documentary Evidence and Judicial Notice (NZLC PP22,
1994) at [284].
[76] It follows that, in my view, control by any other means is, therefore, control by means other than through voting interests/shareholder voting rights. For example, a person, including a company, could obtain control of another company by a range of contractual mechanisms whereby voting interests/shareholder voting rights held by other persons were in fact controlled by that person.
[77] Concepts 124 referred me to the Commissioner’s published policy, in the GST context, of recognising that separate trustee and personal capacity are to be recognised, and that separate trustee capacities exist for trustees of multiple trusts. That is, as a matter of tax law, clearly the case. It does not, in my view, affect the conclusions I have reached here regarding the proper application of the statutory provision related to associated persons, and in that context the control of companies.
[78] Thus, if I had agreed with the approach taken by the Commissioner, I would also have agreed with Concepts 124 that, here, the control the Commissioner pointed to, based on share ownership, would not be a means of control “by any other means whatsoever”.
[79] I consider, finally, the Commissioner’s alternative argument that Mr Cummings had control of Ormiston through his ownership of 100 per cent of Flatbush given Flatbush’s position as the trustee of the FBH Trust, with the capacity to appoint secondary beneficiaries, and personally, during his lifetime, holding the power of appointment in removal of trustees. As the Commissioner submitted, in RWR v AJR the High Court concluded:19
In the present case the trust deed gave RWR, as settlor, the power to appoint a new trustee. The trustee appointed by him was a company of which he is the sole director and sole shareholder. The combined effect of those two factors is that RWR has control over the trust.
[80] I therefore find that, through that approach also, Mr Cummings controlled
Ormiston.
[81] On that basis, and in terms of s 2A(1)(a) of the GST Act, in my view
Mr Cummings had control of “each of those companies by any other means
19 RWR v AJR [2010] NZFLR 82 (HC) at [31].
whatsoever”. I do not think that the section requires the “any other means whatsoever” to be the same means for each of the two companies in question. By my assessment, that would be an overly strained interpretation of the provision, and one not required to give it efficacy. The “any other means whatsoever” by which Mr Cummings controlled each of Concepts 124 and Ormiston is, in this context, the combination of Mr Cummings’ voting interests in Concepts 124 and of his ownership and control of Flatbush, and his power of appointment and removal of trustees under the FBH Trust Deed.
[82] I therefore dismiss Concepts 124’s appeal and uphold the Authority’s decision that the GST input credits Concepts 124 is entitled to claim arising from the payment of the relevant instalments is $94,111.12.
[83] In these circumstances, I am minded to leave the costs of this appeal where they fall. If, however, the Commissioner, who has succeeded albeit principally on a different ground to that which she argued, disagrees, submissions may be filed by her within three weeks of this judgment, and by Concepts 124 in reply within one week thereof. Neither submissions are to exceed five pages.
“Clifford J”
Solicitors:
Langford Law, Wellington.
Crown Law, Wellington.
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