Douglas v Commissioner of Inland Revenue HC Auckland CIV 2003-404-6359

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Douglas v Commissioner of Inland Revenue

High Court Auckland CIV 2003-404-6359
28 February; 1, 2, 3, 4, 7 March; 1 September 2005
Courtney J

Practice and procedure – Defences – Issue estoppel and res judicata – Tax

avoidance scheme subject of much litigation – Whether appellants estopped from raising issues argued in previous litigation as res judicata – Whether issue estoppel – Whether suffıcient mutuality of interest between parties.

Revenue – Income tax – Company restructuring scheme known as “Russell template” – Tax avoidance scheme subject of much litigation – Whether

appellants estopped from raising issues argued in previous litigation as res judicata – Whether issue estoppel – Whether suffıcient mutuality of interest between parties – Whether individual assessments unintelligible – Income Tax Act 1976, ss 23, 25(2), 35, 99 and 191.

Revenue – Administration – Assessments – Whether individual assessments

unintelligible – Standard for judging intelligibility.

The taxpayers had participated in a company restructuring scheme conceived by a taxation consultant, Mr J G Russell, known as the “Russell template”. It had previously been held to be a tax avoidance scheme, and there were a number of cases considering it.

The Commissioner of Inland Revenue assessed the taxpayers on income affected by the scheme. They objected unsuccessfully and requested the commissioner to state a case to the Taxation Review Authority (the TRA). The TRA found substantially in favour of the commissioner. The taxpayers then required the TRA to state a case to the High Court.
Many of the issues raised in the case had been raised in previous cases, either in the same or a very similar way. The TRA treated the issues as res judicata. Because none of the taxpayers were parties to the earlier litigation this could only be the case if there was issue estoppel.

Held: 1 Whether there was sufficient relationship or mutuality of interest to

create issue estoppel was a question of fact; it did not depend on the state of knowledge of the alleged privy. Although there was no apparent relationship between the parties, all the users of the template were inextricably connected by their participation in the scheme. The totality of the connections disclosed such a nexus or community or mutuality of interest, or such an identity between
them, that it was just to estop the appellants from advancing the arguments that had already been determined in the previous cases (see paras [55], [63], [65]).
Carl Zeiss Stiftung v Rayner and Keeler (No 2) [1967] 1 AC 853; [1966]
2 All ER 536 adopted.

514

High Court

[2006]

Shiels v Blakeley [1986] 2 NZLR 262 (CA) applied.
Peterson v Commissioner of Inland Revenue [2005] UKPC 5 referred to.

2 The different nature of the earlier proceedings (judicial review) did not, in itself, preclude a final decision on a particular issue capable of giving rise to

an issue estoppel. The difference in the nature of the proceedings was a matter 5 for consideration in each case (see para [70]).

3 The taxpayers could argue, as a matter of fact, that individual assessments were unintelligible on their face where it was a question of what the individual assessments said. But the other aspects of alleged

unintelligibility were not open for argument, either because they had previously 10 been considered or because argument could have been advanced in the same

way in the earlier cases (see paras [76], [77], [78]).

4 The requirement that an assessment be intelligible was a substantive requirement intended to ensure that the taxpayer had been fairly informed of

the assessment and the general basis for it. Whether an assessment was 15 intelligible was to be judged objectively by considering whether an ordinary reasonable person receiving the assessments would have understood what they meant. It was not necessary that the recipient had prior knowledge of everything referred to. Viewed objectively, the various assessments were intelligible. It was of limited relevance that, some years after making the 20 assessments, some IRD witnesses displayed some confusion in explaining aspects of the assessments (see paras [79], [91]).

Result: Appeal dismissed.

Other cases mentioned in judgment

Arnold v National Westminster Bank plc [1991] 2 AC 93; [1991] 3 All ER 41. 25

Cummings (K J) Ltd v Commissioner of Inland Revenue (1998) 18 NZTC

13,537.

Henderson v Henderson (1843) 3 Hare 100; [1843-60] All ER 378.
Lowe v Commissioner of Inland Revenue [1981] 1 NZLR 326.

M & J Wetherill Co Ltd v Taxation Review Authority (2003) 21 NZTC 18,311. 30

Miller v Commissioner of Inland Revenue (No 1) (1997) 18 NZTC 13,001.

Miller v Commissioner of Inland Revenue (No 2) (1997) 18 NZTC 13,127.

Miller v Commissioner of Inland Revenue (1997) 18 NZTC 13,219 (HC), (1998) 18 NZTC 13,961 (CA).

Nippon Credit Australia Ltd v Girvan Corporation New Zealand Ltd (1991) 5 35

PRNZ 44.

O’Neil v Commissioner of Inland Revenue (2001) 20 NZTC 17,051 (PC).
R v Secretary for the Environment, ex p Hackney London Borough [1983] 1

WLR 524.

Talyancich v Index Developments Ltd [1992] 3 NZLR 28. 40

Appeal

This was an appeal by N T H Douglas and others by way of case stated from the decisions of the Taxation Review Authority in Cases T59 and V2. Judgment was given on the same day by Courtney J in Wire Supplies v Commissioner of

Inland Revenue (2005) 22 NZTC 19,357, which raised some of the same issues. 45

G J Judd QC and J McCartney for the taxpayers.
M Ruffın for the Commissioner of Inland Revenue.

Cur adv vult

COURTNEY J.

Table of contents

Para no

Introduction [1] Difficulties in the case stated and the hearing of the appeal [5] Effects of findings in this case [7]

History of the Russell template
Nature of the Russell template [8] Assessments by the commissioner [13] Facts in this case [17] Melbar [18]
Straits Fishing [21] T C Large [24] Douglas & Henwood [26] WBL/Tourelle/Sherlock [34] Res judicata issue estoppel [42]
Are the appellants privies of the parties in the Miller/O’Neil cases? [44]

Is it relevant that the appellants were unaware of the extent of the scheme?
Is it relevant that some of the Miller/O’Neil cases were judicial review proceedings?

[62]

[66]

Threshold issue – intelligibility [71] Assessments unintelligible on their face [79]
[Paragraphs [92] – [198] are omitted from this report.]

Introduction
[1] This is an appeal by way of case stated from the decisions of the

Taxation Review Authority (TRA) in Cases T59 and V2. It involves five separate cases heard together by the TRA.
[2] The appellants had participated in a company restructuring scheme known as “the Russell template”. The Russell template was conceived by taxation consultant, Mr J G Russell. It has previously been held to be a tax
avoidance scheme and there are a number of cases that consider it: Miller v Commissioner of Inland Revenue (No 1) (1997) 18 NZTC 13,001; Miller v Commissioner of Inland Revenue (No 2) (1997) 18 NZTC 13,127; Miller v Commissioner of Inland Revenue (1997) 18 NZTC 13,219; Miller v Commissioner of Inland Revenue; Managed Fashions v Commissioner of
Inland Revenue (1998) 18 NZTC 13,961 (CA); O’Neil v Commissioner of
Inland Revenue (2001) 20 NZTC 17,051 (PC).

The Commissioner of Inland Revenue assessed the appellants on income affected by the scheme. They objected unsuccessfully and requested the commissioner to state a case to the TRA. The TRA found substantially in favour of the commissioner. The appellants then required the TRA to state a case to this Court. 5 [4] Many of the issues raised in this case have been raised in previous cases, either in the same or a very similar way. The TRA treated these issues as

res judicata. Since none of the appellants were parties to the earlier litigation this could only be the case if there was an issue estoppel, the requirements for which I discuss in detail later. 10

Diffıculties in the case stated and the hearing of the appeal

There have been unsatisfactory aspects of this case, which have caused unnecessary complexity. First, many of the questions in the case stated pose more than one question, making a simple positive or negative answer

impossible. Secondly, many of the questions are loaded, again making a simple 15 answer impossible.

In addition, the appellants’ submissions, filed in advance in accordance with Potter J’s direction, were supplemented with two further sets of submissions (in addition to written submissions in reply) as well as adoption of

parts of the additional submissions filed in the Wire Supplies v Commissioner of 20

Inland Revenue (2005) 22 NZTC 19,357 appeal, which preceded the hearing of

this appeal. This has made the case unnecessarily complicated.

Effect of findings in this case

Counsel did not make submissions on the effect various findings in this

case would have on the individual assessments. As a result, this decision is 25 an interim one. I will hear submissions on the individual assessments at a

later date.

History of the Russell template

Nature of the Russell template

During the early 1980s, Mr Russell found himself in control of a group 30 of companies with substantial tax losses. The group was owned by Mr Russell’s clients, Mr and Mrs Manning. Mr Russell conceived a method of utilising the group’s tax losses under s 191 of the Income Tax Act 1976. He introduced the scheme to many companies. Ultimately, however, the commissioner invoked

s 99 of the Income Tax Act 1976 in respect of the template. The Privy Council 35 has confirmed that the template infringed s 99 (O’Neil v Commissioner of Inland Revenue). There have been years of litigation arising from the commissioner’s assessments of the various participants in the scheme.

At its simplest, the Russell template worked in the following way: a

non-trading loss company acquired the shares in a profitable trading company. 40

The identity of the ultimate purchaser was obscured by other companies

interposed between it and the trading company, which acted as the new parent company of the trading company and as trustees for the loss company. All such companies were controlled by Mr Russell.

The vendor shareholders lent the purchase price back to the purchaser. 45

Repayment was provided for as follows: the trading company was required to

pay to the parent company an administration charge equivalent to the company’s net surplus, less 5 per cent. The 5 per cent was payable as a consultancy fee to Commercial Management Company Ltd (CML), which was

controlled by Mr Russell. The balance was split as follows: 77.5 per cent was returned to the vendor shareholders in repayment of the vendor loan and
22.5 per cent retained by the loss company and set off against the tax losses available to the loss group.

[11] The effect was that the trading company’s entire net profits were soaked up through the administration charge and consultancy fee, leaving no taxable income. The administration charge did not attract tax in the hands of the loss company because it was used to repay the vendor loan and set off against the loss company’s tax losses. The repayments did not attract tax in the hands of the
vendors of a business because they were capital payments in their hands.
[12] The sale was never made public and the vendors simply executed a
declaration of trust, confirming that they held the shares/business in trust for the purchaser. However, they remained in control of the business through the management contract, which gave them complete and unfettered control over
the business of the new trading company with the right to buy the assets of the business on unusually favourable terms once the vendor loan had been repaid.

Assessments by the commissioner
[13] In the mid-1980s the commissioner began to investigate this scheme. He formed the view that it infringed s 99. Initially, he assessed the trading

companies, disallowing the deductions that they had claimed for the administration charges and consultancy fees and assessing them on that income. This approach has become known as the “track A” method of assessment. [14] The commissioner was successful in these early cases but found that the trading companies were insolvent shells by the time the IRD sought to enforce
the judgments. This was because the companies’ assets had been sold back to the original owners as provided for in the management contracts.
[15] The commissioner then changed his approach. He restored the deduction for the administration charge (but not the consulting fee) and then reconstructed the administration charge as income to the original vendor shareholders,
assessing them accordingly. This method of assessment has become known as
“track B”.
[16] Subsequently there have also been tracks C and D, which are assessments against the parent companies, Mr Russell personally and entities controlled by him in respect of the fees they received.

Facts in this case
[17] Having identified the nature of the typical Russell transaction, I now go
on to look at the particular transactions in this case. Three of the groups of appellants, namely, Melbar Engineering Ltd (Melbar), Straits Fishing Ltd (Straits Fishing) and T C Large Ltd (TCL), concede that their transactions were
typical template transactions. I briefly describe those cases first. I then go on to consider the cases of Douglas and Henwood and Waikato Brokers Ltd (WBL), which the appellants say were not standard Russell template transactions. Whether the various transactions were standard Russell template cases is relevant because, realistically, there will only be an issue estoppel if the
transactions are either standard template transactions or so similar that they should be treated as such.

Melbar

Mr and Mrs Hayes sold their shares in Melbar Engineering (Melbar) to a Russell-controlled company, Corporate Securities Ltd (CSL), which held them on trust for the loss company, Zinc and Brass Foundries Ltd (ZBL). Its

shareholders were other Russell-controlled companies, Commercial 5

Management Ltd (CML) and Downsview Nominees Ltd (Downsview).

The Hayes had a typical management contract. It required Melbar to pay

CSL an administration charge equal to its net surplus each six months,
5 per cent of which was then payable to CML as a consultancy fee. The Hayes

could buy Melbar’s assets at the expiration of five years or once CSL had 10 received an income of at least $1.004m (whichever came first) for the amount

of the company’s liabilities plus $11,500. They eventually invoked this clause. [20] Melbar was initially assessed under track A, but that assessment was amended when track B was introduced. There are now disputed assessments by Melbar for the years 1984, 1985, 1990 and 1991 and by Mr and Mrs Hayes for 15 the years 1984, 1985 and 1986.

Straits Fishing

In 1984 Messrs Linton and Pont sold their fishing business to a shell company, Straits Fishing Ltd (Straits Fishing), which they owned. This sale was

in preparation for entering into the template scheme. They then sold their shares 20 in Straits Fishing to CML. CML held the shares on trust for a loss company,

F B Duvall Ltd (Duvall). Duvall was beneficially owned by Mr and

Mrs Manning (their shares being held on trust by CML and Downsview).

The transaction had all the features of a template transaction including a

management contract with favourable buy-back rights. After five years or when 25

CML had received at least $572,900 in income (whichever came first),

Messrs Pont and Linton could purchase the assets of Straits Fishing for the amount of the company’s liabilities plus $1.

In 1992 the commissioner assessed Straits Fishing and Messrs Pont and

Linton for the years 1985 – 1988 inclusive. 30

T C Large

In 1984 Mr and Mrs Large sold their shares in T C Large Ltd (TCL) to CSL and lent back the purchase price. CSL had purchased the shares on behalf of Duvall. Under the management contract TCL paid over the company’s profit

as administration charge to CSL (for Duvall), less 5 per cent to CML for the 35 consulting fee. Mr and Mrs Large eventually repurchased the assets of the business, as they were entitled to under the management contract.

In 1992 the commissioner assessed TCL and Mr and Mrs Large for income said to have been derived from the scheme for the years 1984 – 1989.

Douglas & Henwood 40 [26] The appellants say that this transaction was not a standard template transaction. Mr and Mrs Douglas and Mr and Mrs Henwood ran a building services business in partnership with one another. They had planned to join the scheme in the same way as Messrs Pont and Linton, by first selling their business to a new company and then selling the shares in that company to a 45

Russell-controlled company. But this plan was stymied by the Registrar’s

refusal to allow their desired name. So in April 1983 they sold the business to
CEL, which was a Russell-controlled loss company.

[27] Douglas & Henwood advanced the purchase price to CEL through
Downsview, acting as their trustee. CEL agreed to repay the advance using
77.5 per cent of moneys received from the shares (clearly an error) and gave security for the advance (described as a mortgage of the business) to

Downsview. Douglas & Henwood held a management contract which required the net surplus from the business to be paid to CEL, less 5 per cent payable as a consultancy fee. The contract did not contain the usual buy-back provision. [28] However, this whole arrangement was clearly intended to be temporary. This is obvious from the fact that the management contract ran for only
11 months and provided that it would be replaced by another contract for a period of four years with “suitable incentives yet to be agreed”. In March 1984
CML wrote to Douglas & Henwood’s usual accountants, noting CEL’s intention to conduct the business through a limited liability company, being a subsidiary of CEL. That limited liability company was Evans Road
Construction Ltd, later called Douglas & Henwood Ltd (DHL).
[29] The assets of the business were transferred from CEL to DHL in April 1984, and the security was altered so that the new owner gave security. A new repayment contract was entered into between CEL and Downsview. It refers (presumably in error) to CEL as the mortgagee and Downsview as
mortgagor. It contained the usual provision requiring the mortgagor to repay the advance from the 77.5 per cent of any money received from DHL. However, it appears that the parties did actually act in accordance with the correct position, that is, CEL received the administration charge from DHL and used that money to pay Downsview (as trustee for Douglas & Henwood).
[30] The acquisition of the business by DHL brought with it a fresh management contract for Douglas & Henwood until April 1989. This management contract was of the type found in the standard template transactions and included the payment of the administration fee to DHL, payment of the consultancy fee to CML and the right to purchase the assets of
the company for an amount equal to its liabilities plus $14,000.
[31] Clearly, the initial sale to CEL was intended by all concerned to be a temporary holding position pending the incorporation of a suitable trading company. The short-term nature of the management contract and the letter from CML setting out CEL’s intention as to the way in which it intended to operate

the business makes it clear that the sale to CEL was not the permanent arrangement.
[32] In February 1988 (with the original debt created by the sale of the business about to be repaid) CML wrote to Douglas & Henwood offering to “continue the association” through the offer of a payment in consideration of
deleting the buy-back clause. This resulted in a variation to the contract in September 1988, deleting the buy-back option in consideration for $300,000 being added to the advance account of the managers.
[33] Ignoring the temporary arrangements, the substance of the transactions are those of a standard template transaction. The vendors’ business was
acquired by a new trading company, which was a subsidiary of the loss company, CEL. That company received an administration charge equal to the net surplus of the company, less 5 per cent for a consultancy fee payable to CML. CEL paid 77.5 per cent of that back to the vendors (via their trustee,

Downsview). The vendors held a typical management contract. I cannot see any justification for treating this transaction differently from any other Russell template case. The purpose and effect of the standard template was achieved in this case, in all respects.

WBL/Tourelle/Sherlock 5 [34] The appellants say that this transaction was not a standard template transaction either. It involved the sale of an insurance broking businesses by

Mr J Sherlock and Mr R Tourelle in April 1981. The purchaser was WBL. This company had originally been called J T Sherlock Ltd; even though the sale and purchase agreements refer to WBL, it was called J T Sherlock Ltd until 10

October 1981.

In both cases the purchase price almost entirely comprised goodwill. By the time the name change had occurred, the shareholders in WBL were Downsview (1 share) and Waikato Brokers Management Ltd (WBML)

(4999 shares). WBML, the new parent of WBL, was ostensibly owned by 15

Mr and Mrs Sherlock, Reg Tourelle & Associates Ltd (RTAL) and Downsview.

Both the sale and purchase agreements provided that until the purchase price had been paid or acceptable arrangements for payment made the vendors would continue to operate the businesses under their direct personal control in

their names, though the benefit of such operations would be the property of the 20 purchaser. Such arrangements were made in early 1982:

•    Declarations of trust were executed 15 March 1982 under which WBML held its shares in WBL on trust for CSL. Downsview held its share in WBL on trust for CSL. CSL held the shares in WBL on trust
for Duvall. Its only income was from the administration charges and   25 these were set off against losses held by other companies in its group.
•      RTAL and Mr Sherlock entered into loan agreements with CSL. Under the loan agreement WBL’s liability for the purchase price was transferred to CSL. The agreement recorded that CSL was the beneficiary of the earlier sale and purchase agreement. It covenanted   30 to apply 77.5 per cent of any cash received from the shareholding to repayment of the purchase price.
•      The net surplus arising from the business after all costs were to be paid to CSL as an administration charge.
•      Under a management contract WBL appointed WBML manager of   35
WBL’s business. As manager, WBML was to have full and unfettered
control over the operations of WBL except for secretarial and taxation matters. The management contract also appointed CML to provide consultancy services in return for a fee of 5 per cent of the
administration charge payable to CSL.  40

The ultimate effect of these arrangements was that WBL paid no tax on its net profit, since it was paid (ultimately to Duvall) as an administration charge. Of this charge, 77 per cent was used to repay the vendor loans. The original directors and shareholders in the businesses received the repayments

tax free as capital repayments. Duvall or its associated loss companies paid no 45 tax on the balance of the administration charge income because it was set off against tax losses in the group.

The standard template involved the sale of shares to a new trading company with loan repayments back to the original shareholders. In comparison, in the DHL transaction: 50

•      the vendors were partners in the Douglas & Henwood partnership;
•      the sale was of the business, not shares;
•      the initial purchaser was the loss company, CEL; and
•      the business was on-sold to the new trading company, DHL.

[39] In addition, unlike standard template transactions there were no buy-back rights or right of first refusal on the sale of the business. The commissioner asserted (without disagreement from the appellants) that this was because, as evidenced by the make-up of the purchase price, the business was largely personal to the insurance agent concerned; there was no need for
favourable buy-back terms because the agent could leave any time and start business again on his own account. I note, however, that there was no restraint of trade clause in the management contract, which would usually be found in agreements for the sale of a business where an individual commands the goodwill of the business. So the management contracts for Mr Sherlock and
Mr Tourelle were still unusually favourable.
[40] Otherwise, however, the essential aspects of the transaction are
sufficiently close to the standard template as to be properly treated as a template case. The fact that Messrs Sherlock and Tourelle were initially shareholders in WBML does not detract from the true arrangement, which was that the trading
company was really owned by CSL which, in turn, held its shares for the loss company, Duvall. The temporary ownership by Messrs Sherlock and Tourelle was simply a holding position pending agreement as to the final terms of the purchase; it was clearly the intention all along that the vendor’s business would ultimately be owned by a Russell-controlled trading company.
[41] In truth, the arrangement was the same as any standard template arrangement in that the business was sold to a Russell-controlled company which in turn held the shares on trust for the loss company and the profit from the business was substantially returned to the original owners in a tax-free form. I find that there is insufficient difference in either the DHL or WBL cases
to justify treating these objectors differently from any other standard template user.

Res judicata through issue estoppel
[42] The commissioner argues that there is such an identity of relationship or mutuality of interest between the parties in this case and those in the cases

referred to above (which I refer to as the Miller/O’Neil cases) as to render the appellants privies of the parties in those cases. He points to the fact that all were users of the template and that Mr Russell occupies a common position as taxation agent for all the objectors and has (with and without legal assistance) conducted all of the template cases before the TRA. In essence,
the commissioner contends that in any case where the template has been used the objectors should be regarded as privies of the objectors in the Miller/O’Neil cases.
[43] There will be issue estoppel where there is a final decision by a Court of competent jurisdiction deciding the same issue between the same parties or
their privies (Carl Zeiss Stiftung v Rayner and Keeler (No 2) [1967] 1 AC 853 at p 916). In respect of these requirements:
(a) There is a final decision where a New Zealand Court of competent jurisdiction has determined, as an essential and fundamental step in the logic of the earlier judgment without which it could not stand, some
issue which is necessary to establish (or demolish) the cause of action

set up in the later proceedings (Spencer Bower, Turner and Handley, Res Judicata (3rd ed, 1996), paras 182 – 183; Talyancich v Index Developments Ltd [1992] 3 NZLR 28 at p 37);
(b) The proceeding will involve the same issue if that issue could, with
reasonable diligence, have been raised in the first proceeding 5 (Henderson v Henderson (1843) 3 Hare 100 at pp 114 – 115; Arnold v National Westminster Bank plc [1991] 3 All ER 41 at p 47);
(c) Notwithstanding the above, the Court may refuse to recognise an issue estoppel if it would create a clear injustice, such as where new evidence has become available (Arnold v National Westminster Bank 10 plc; Nippon Credit Australia Ltd v Girvan Corporation New Zealand
Ltd (1991) 5 PRNZ 44 at p 60); and
(d) A person is a privy of the earlier litigant if there is such mutuality of interest or identity between parties that estoppel would produce a fair
and just result having regard to the purposes of the doctrine (Shiels v 15
Blakeley [1986] 2 NZLR 262 at p 268).

Are the appellants privies of the parties in the Miller/O’Neil cases?

In Shiels v Blakeley, the Court of Appeal considered what was required to render a party the privy of an earlier litigant. The case involved amendments

to a superannuation deed. Members of the superannuation fund brought 20 proceedings following the first amendment. That proceeding was determined

and no appeal was lodged. The plaintiff was also a member of the fund. Following a second identical amendment of the deed, he brought fresh proceedings. He sought to advance arguments identical to those raised in the earlier case. The Court held that he was a privy of the members who had 25 brought the earlier action. His interest was identical with that of the other plaintiffs. His obvious objective was to secure the right to advance the same arguments in the Privy Council, which the earlier litigants could not do because

they had not appealed the earlier decision.

The Court of Appeal expressed the requirements for privity as follows: 30
“We conclude that there must be shown such a union or nexus, such a community or mutuality of interest, such an identity between a party to the first proceeding and the person claimed to be estopped in the subsequent proceeding that to estop the latter will produce a fair and just result having
regard to the purposes of the doctrine of estoppel and its effect on the 35 party estopped.”

The purposes of the doctrine of estoppel are well known, namely, that, as a matter of public policy, there be an end to litigation and, secondly, that an individual should not be vexed twice in the same matter.
There is no direct relationship between the Miller/O’Neil objectors and 40 the appellants. I am conscious of the need to guard against unjustifiably precluding later litigants from advancing arguments for themselves. On the

other hand, there is an obvious and serious issue in relation to the public policy objective of the doctrine of res judicata; the resources of the state are being expended on case after case in which the same arguments are advanced. 45 [48] I consider that the proper approach to this issue is to look beyond the

fact that there is no apparent relationship between the parties and examine the scheme as a whole and Mr Russell’s role in it. As I have described, the object of the scheme was to create groups of companies comprising non-trading loss

companies and trading profit companies in order to set off the profit of the latter 50

against the tax losses of the former. Individuals who sold their shares or businesses were almost certainly unaware of the wider picture. From their perspective, the arrangement appeared to comprise only the trading company and its Russell-controlled parent; they simply sold their shares, enjoyed the tax

benefits and had the security of being able to buy the businesses back later on favourable terms.
[49] But the scheme did not comprise a series of unrelated transactions. Nor were they a straightforward sale of shares. As soon as vendors entered the scheme by selling their shares or businesses to the new parent company they
became enmeshed in a Russell-controlled group, though they would have been unaware of this fact.
[50] In these groups, the parent companies, the loss companies and the companies that acted as agents and trustees for the parent and loss companies were all controlled by Mr Russell. Some of these companies featured in more
than one transaction. CML, the Russell-controlled company that acted as trustee for the loss company Duvall in the Straits Fishing transaction, also acted as trustee for the loss companies in the Wire Supplies transaction, which I considered in Wire Supplies v Commissioner of Inland Revenue and in the Miller/O’Neil cases. Duvall was the loss company for the Straits Fishing Ltd,
TCL and Waikato Brokers Ltd transactions. CSL acted as trustee for the loss companies in the Coils 1980, Melbar and TCL transactions and was also the trustee for the loss company in K J Cummings Ltd v Commissioner of Inland Revenue (1998) 18 NZTC 13,537.
[51] Connections such as this existed throughout the scheme. While a portion
of the profit from each trading company was returned to the vendor shareholders, the balance ultimately formed part of the pool of income used by the groups of loss companies to set off against their tax losses. It is not possible to view any transaction in isolation. Each was simply part of the overall scheme.
[52] Contractually, the vendor shareholders became committed, not only to the sale of their shares, but also to the various other devices employed by Mr Russell to operate the scheme. These included the execution of declarations of trust intended to maintain the secrecy that was a hallmark of the scheme; those who dealt publicly with the trading company the shares of which had
been purchased (including the company’s bankers) were never told of the change of ownership.
[53] The form and contents of the documents giving effect to the various transactions were virtually identical. Inevitably, the factual inquiry in relation to any template transaction would yield the same result, as has been demonstrated
by the Privy Council’s confirmation in Miller/O’Neil that the template constituted a breach of s 99, which is now accepted by the appellants as binding on them.
[54] Nor would the picture be complete without reference to Mr Russell’s role. He has been an active participant in every aspect of the scheme. As I have

45noted, he controlled the loss companies, the parent companies, the trading companies and the various subsidiary companies, which were interposed as agents and trustees between the trading and loss companies. Through entities that he controls, Mr Russell has also benefited personally from the scheme; he and companies that he controls are currently the subject of assessments in

respect of the various transactions, including the transactions in this case.

I have reached the view that all the users of the template were inextricably connected by their participation in the scheme. In particular, I find that it is impossible to separate or ignore the connection between the vendors of the shares or business and the other participants in the scheme. I find that the

totality of the connections discloses such a nexus or community or mutuality of 5 interest, or such an identity between them, as described by the Court of Appeal

in Shiels v Blakeley, that it would be just to estop the appellants from advancing the arguments that have already been determined in the Miller/O’Neil cases. [56] I now mention a further aspect that, while not the basis for my

conclusion on privity, underscores the connection between the appellants and 10 the earlier litigants. When the IRD began to investigate the affairs of the

trading companies, Mr Russell assumed the role of taxation consultant. In that capacity, he has demonstrated a dogged determination to manage and control the entire objection process on behalf of the appellants. He undertook virtually

all communications with the department on behalf of both the trading 15 companies and the individual taxpayers. This correspondence was voluminous,

and it is clear from the reports of the earlier cases that his approach has been almost identical in every case. In particular, Mr Russell has relentlessly pursued every document and piece of information that could possibly be relevant to the various assessments and has embarked on a comprehensive 20 challenge of all aspects of the commissioner’s assessment process and the resultant assessments.

It is apparent that when the objection process reached the TRA in this case Mr Russell was in complete control of the appellants’ cases. He gave the primary evidence on behalf of the appellants and cross-examined IRD 25 witnesses at length. It is also apparent from the various decisions in both the

TRA and the High Court that nearly all the Russell template cases have been managed in the same way. With the odd exception (for example, the executrix of the deceased taxpayer in this case) the various appellants in all the cases

have effectively ceded control over their cases to Mr Russell and adopted the 30 common strategy employed by him. This is notwithstanding the fact that

Mr Russell is, himself, an assessee in respect of the very transactions under scrutiny and is therefore personally affected by the outcome of the arguments advanced in the previous cases and now advanced in this case.

All template users have the same interest in seeing the various 35 arguments against the commissioner succeed. The same arguments are advanced on behalf of each appellant, sometimes in a subtly altered form. The events in one case are used to shore up the position of objectors in other unrelated cases. For example, the appellants support one of their arguments

with a comment by the TRA during the hearing of the unrelated Fosters case 40 about the potential significance of an IRD witness’s evidence to support one of

their arguments. The evidence in the earlier cases cumulatively forms part of the evidence in later cases.

Only rarely is there any sign in the reported cases of separate representation for an objector. Remarkably, virtually none of the appellants 45 appear to have given evidence or taken any other active part in the objection process. It is clear from the interview notes of Mr Hayes (the original shareholder in Melbar) that total control of the entire objection process had

been relinquished to Mr Russell and that there was no or very little consultation between him and Mr Hayes. 50

[60] There is no sign whatsoever that the cases being run for the various objectors have deviated at all from the strategy conceived and managed by Mr Russell. Indeed, there is hardly any sign of independent contribution to the process by the various objectors. The objection process can only be regarded as

a common effort by the taxpayers acting in concert, through Mr Russell, to impugn the commissioner’s assessment process as well as the individual assessments.
[61] The manner in which the objection process has been handled by
Mr Russell on behalf of so many of the affected taxpayers is not the basis for

10 my conclusion that template users should be regarded as privies of the Miller/O’Neil litigants, but it is a striking illustration of the relationship between all these parties.

Is it relevant that the appellants did not realise the extent of the scheme?
[62] It is clear from Mr Russell’s evidence that the appellants did not know

the true extent or nature of the scheme and this was deliberate on his part.
Mr Russell has said that he ensured that the vendors of the profit companies and
businesses did not know the identity of the loss companies. They almost certainly did not realise, either, the extent of the direct interest that Mr Russell had in the scheme as a whole. But this does not alter my conclusion.
[63] In Peterson v Commissioner of Inland Revenue [2005] UKPC 5, the Privy Council held that a taxpayer could be affected by an arrangement which breached s 99 even if not a party to it nor privy to the details. The reason for this is that whether there is an arrangement for the purposes of s 99 is a question of fact. If such an arrangement exists and the taxpayer was affected by it and
obtained a tax advantage from it, then the commissioner is entitled to assess the income of the taxpayer. I consider that the current situation is analogous. Whether there exists a sufficient identity of relationship or mutuality of interest is a question of fact. It does not depend on the state of knowledge of the alleged privy.
[64] In this case, the identity of relationship arises from the characteristics of the overall scheme in which the appellants were, unwittingly, only part. Once they agreed to participate in the template scheme, their companies and businesses immediately became part of the groups of companies being created by Mr Russell. The repayments they received had first become profit for the
loss companies. The fact that they did not realise any of this did not alter the reality of how the scheme operated in its entirety.
[65] As a result, to the extent that any issue now raised is the same as that previously decided or could, with reasonable diligence, have been raised previously, the appellants are estopped from raising it. Of course, the appellants
must still be entitled to raise questions of fact peculiar to individual assessments.

Is it relevant that some of the Miller/O’Neil cases were judicial review proceedings?
[66] In the Wire Supplies appeal, the appellants submitted that the decisions

that arose from applications for judicial review could not produce an issue estoppel because the Judges could do no more than find that a particular course of conduct was open to the commissioner but not that the commissioner was actually correct in what he had done. This submission was not made in the

present case. But I deal with the issue anyway for the sake of completeness; the appellants adopted many of the submissions made in the Wire Supplies appeal and it seems appropriate to deal with this one in both cases as well.

In the Wire Supplies case I was not referred to authority for the

proposition that an issue estoppel could not arise from a judicial review 5 proceeding. However, the point was considered by O’Regan J in M & J Wetherill Co Ltd v Taxation Review Authority (2003) 21 NZTC 18,311 at

p 18,319, who held (in the context of a Russell template case) that the taxpayer appellants and the commissioner should be bound by the findings in an earlier judicial review proceeding to which they had been parties. He found that an 10 issue estoppel did arise in relation to particular issues that had been dealt with

by the High Court and Court of Appeal in the course of earlier judicial review proceedings.

This position is contrary to the decision in R v Secretary for the

Environment, ex p Hackney London Borough [1983] 1 WLR 524, in which the 15

Court of Appeal held that issue estoppel was not available in judicial review

proceedings brought under the Rules of the Supreme Court (UK). However, the Court referred to the fact that there were no formal pleading for judicial review, making it difficult, if not impossible to identify a particular issue that the earlier

application might have decided. Of course, this is different to the position that 20 exists in New Zealand.

This case has been criticised in Spencer Bower, Turner and Handley at para 357, where the learned authors say that:

“The objection that it may be impossible to identify the issues decided in judicial review proceedings is no reason for rejecting res judicata estoppels 25 where this can be done. In any event the issues decided are usually apparent from the court’s reasons and orders.”

I respectfully agree with this criticism. There does not seem to me to be any reason that the nature of the earlier proceedings should, in itself, preclude

a final decision on a particular issue capable of giving rise to an issue estoppel. 30

Provided that the recognised requirements for issue estoppel are met, the form

of the earlier proceedings should not be relevant. The difference in the nature of the proceedings may make it less likely that the question previously determined was identical but this is a matter for consideration in each case.

Threshold issue – intelligibility 35

The appellants submit that the commissioner failed to meet the threshold

onus on him, in that the assessments were unintelligible. This submission was made in reliance of Lowe v Commissioner of Inland Revenue [1981] 1 NZLR

326 at p 348:

“In rare cases a threshold question may arise. In making an assessment 40 the Commissioner is required to exercise judgment in determining the assessable income of the taxpayer. He is not entitled to act arbitrarily in disregard of the law or facts as known to him. If the assessment is not
made on an intelligible basis, it cannot stand. That matter was given some consideration in the judgments of Walker and Gresson P at p 357 expressed 45 the firm view that the method which the Commissioner had adopted in that
case was ‘too theoretical to be valid’.”

[72] Threshold issues were considered by Baragwanath J in Miller v Commissioner of Inland Revenue (1997) 18 NZTC 13,219 at p 13,225 and by the Court of Appeal ((1998) 18 NZTC 13,961 at pp 13,980, 13,971 and 13,972) and the Privy Council (O’Neil v Commissioner of Inland Revenue (2001) 20

NZTC 17,051 at pp 17,059 and 17,062).
[73] Baragwanath J described at p 13,225 the threshold issue he was considering as follows:

“The exercise of the s 99 function was otherwise defective for various reasons, including incompleteness of the assessment process in terms of

s 99(4), arbitrariness, capriciousness and other breaches of administrative principles.”

[74] Clearly the threshold issue considered by Baragwanath J did not include the concept of unintelligibility as a separate aspect. The threshold issues argued before him appear to have been only arbitrariness and unspecified breaches of

administrative law principles rather than unintelligibility in the sense that it is advanced now. However, the actual substance of the alleged unintelligibility was nevertheless considered in these earlier decisions, though not in the context of the threshold issues.
[75] The appellants say that the assessments are unintelligible because they:

(a) Were unintelligible on their face as lacking any sensible basis;
(b) Were not made following compliance with the commissioner’s policy
statement (CPS);
(c) Did not characterise the receipts and payments on which they were based, and, as a result, failed to identify the tax advantage said to have
been obtained;
(d) Were tentative or provisional by reason of the subsequent inconsistent
tracks; and
(e) Were arbitrary in that they were made on the basis of the solvency of the assessee.

[76] Whether an assessment is unintelligible on its face is clearly a factual question to be considered in each case. That ground cannot be the subject of an issue estoppel. But the other grounds have all been considered and finally determined. I deal with each as I come to it.
[77] Further, although unintelligibility was not argued as a specific ground it
is clearly a threshold issue identified in Lowe and could easily have been advanced along with the other grounds said to have been aspects of the threshold. For that reason also the appellants are estopped from raising it now.
[78] I therefore approach this issue on the basis that the appellants may argue that, as a matter of fact, individual assessments are unintelligible on their face,
because this is a question of what the individual assessments say. But the other aspects of alleged unintelligibility are no longer open for argument, either because they have been previously considered or because the argument as advanced now could have been advanced in the same way in the earlier cases.

Assessments unintelligible on their face

[79] Whether an assessment is intelligible is to be judged objectively, that is, would an ordinary reasonable person receiving the assessments have understood what they meant. For an assessment to be intelligible it is not necessary that the recipient have prior knowledge of everything referred to. I do

not view the threshold requirement of intelligibility as being a technical requirement. It is a substantive requirement to ensure that the taxpayer is fairly informed of the assessment and the general basis for it.

The appellants have identified a number of the aspects of the particular letters, which they say are unintelligible on their face. In the Douglas & 5

Henwood case the IRD wrote identical letters of assessment to Mr and

Mrs Douglas and Mr and Mrs Henwood on 18 March 1992. The appellants dissected the letters paragraph by paragraph in an effort to show that the wording was unintelligible. Among the criticisms are:

•      The fact that the letters referred to three separate arrangements without   10 suggesting that the two subsequent agreements forming part of the arrangement had been known to the taxpayers at the outset.
•      The letters (wrongly in the appellants’ submission) asserted that Mr and Mrs Douglas and Mr and Mrs Henwood had received a “substantial proportion of the profits of Douglas & Henwood Ltd so   15 distributed by CEL as repayments of the loan of the purchase price of
the shares in Douglas & Henwood Ltd”. But as the Douglases and the Henwoods were in partnership they sold their business not their shares, so the reference to the purchase price of shares was incorrect.
•      There is no explanation as to why the department concluded that the   20 arrangement was a tax avoidance arrangement and that without such explanation the assessment is unintelligible.
•      The phrase “received a substantial proportion of the profits from Douglas & Henwood Ltd” is inaccurate. The appellants received no payment from Douglas & Henwood Ltd, only payments from CEL.   25
They say there is no explanation as to why those loan repayments
should have been regarded as a substantial proportion of the profits of Douglas & Henwood Ltd. In particular, although the taxpayers now appreciate that the commissioner considered the payment of the administration charge to be an artificial means of removing the profit   30 from Douglas & Henwood Ltd, this explanation is not referred to in
the letters.
•      Several other aspects, mainly in the use of inaccurate phrases such as
“administration fee” rather than “administration charge”.

I do not consider that a minute dissection of the letters by reference to 35 the relevant documents is the appropriate way to assess intelligibility. These letters were the culmination of the IRD’s investigation, which had been under

way for more than 18 months. There had been extensive correspondence between the IRD and Mr Russell on behalf of Douglas & Henwood.

Mr Douglas and Mr Henwood had been interviewed by IRD staff. Indeed, the 40 possibility of the arrangement being in breach of s 99 and the fact that the administration charges might be reassessed to the managers of the company

was discussed at the interview in July 1990.

In these circumstances, the letters quite adequately conveyed to the Douglases and the Henwoods the fact that the various transactions comprising 45 the sale of their business to CEL and the subsequent transactions which flowed

from that were regarded by the IRD as an arrangement which breached s 99. It is perfectly clear that the basis for the assessment was the commissioner’s view that the administration charges paid would likely have been derived by the

former proprietors of the business had the arrangement not been entered into. I find that the submission of unintelligibility on the face of the letters of assessment to be overly technical and disingenuous.
[83] In the Straits Fishing case, the assessments were advised by way of

letters on 23 April 1991 to CML and Messrs Pont and Linton. The particular complaints are that:

•The steps identified as forming the arrangement are inconsistent in that they refer to payments made to Duvall when the payments were made to CML as trustee for Duvall. They say that to be comprehensible there

should have been no mention of Duvall. Instead the letter should have referred to CML as the legal owner of Straits Fishing and being obliged to repay the loan.
• The letters do not explain who has actually avoided the tax.
Mr Judd QC urged on me that because the former proprietors of this
business were unaware of the existence of Duvall the letters must have been unintelligible and incomprehensible to them.

[84] I do not accept these submissions. The letters do not purport to provide a comprehensive list of all the steps and transactions making up the arrangement. Paragraph 2 begins with the opening words “the arrangement in

question includes, the following steps and transaction . . .” (emphasis added).
Secondly, although Messrs Pont and Linton may not have been aware of the
existence or purpose of Duvall, the reference at para 2(3) of the letter to the declaration of trust between CML and Duvall was sufficient to alert the recipients of the letter to the fact that the administration charge and consultancy
and management fees were being received beneficially by someone other than CML. Thirdly, as I have already noted, the Privy Council has confirmed in Peterson that in an arrangement which infringes s 99 the taxpayer need not be a party to the arrangement nor indeed privy to its details. Plainly, the existence of Duvall, as beneficial owner of the trading companies was an essential part of
the template arrangement in this case. The fact that the individual shareholders were unaware of Duvall’s existence until advised by the IRD is irrelevant. Nor do I see any difficulty in the way the IRD has expressed itself in the rest of the letter.
[85] In the TCL case the assessment was by way of letters on 5 June 1992 to
Mr and Mrs Large. They set out the specific steps said by the commissioner to constitute the impugned arrangement and specifically identified the fact that the income being assessed was that purportedly derived by Duvall as administration charges. For the reasons discussed in relation to Straits Fishing, I consider that the letters were objectively intelligible and would have
adequately informed any reasonable person in Mr and Mrs Large’s position of the basis for the assessment.
[86] In the case of WBL, the IRD sent letters of assessment on 23 May 1991 to WBL and to Mr Tourelle and Mr Sherlock. In the case of WBL it referred to the company’s claim for a tax reduction on the relevant years in respect of
management fees and consultancy fees. It referred to the fact that the expenditure was purportedly incurred pursuant to certain steps and the relevant components of the arrangement are set out. These include the sale and purchase agreements and the declarations of trust between WBL and CEL, Downsview and CEL and CEL and Duvall. It includes a schedule of the amended income
being assessed.

The letters to Mr Tourelle and Mr Sherlock were in identical terms. They refer to income purportedly derived by Duvall as management fees and set out the various steps said to comprise the impugned arrangement. The appellants particularly take issue with the second paragraph on p 2 of each letter which

refers to tax avoidance as being a purpose and effect of the arrangement in that 5 it caused the purported deriving by Duvall of income which, in the absence of

the arrangement, might be expected to have and would in all likelihood have been derived by certain individuals, including the addressee.

I cannot see anything on the face of these letters which could justify

describing them as unintelligible. I consider that they convey adequate 10 information to explain the basis for the assessment. The recipients could be in

no doubt that the restructuring of the named business or company was being viewed as tax avoidance under s 99 and that they were being assessed on the amount that the trading companies had paid in management and consultancy

fees, and administration charges. 15

The appellants also say that the intelligibility of the assessments in this

case cannot be determined by reference to previous cases because, among other things, the evidence in Case T59 showed that IRD witnesses did not understand those assessments and that if they could not understand and explain them they

must be unintelligible. They point to the evidence of various witnesses, which 20 they say indicates a misapprehension or lack of comprehension as to the basis

for the assessments.

This evidence was referred to by the TRA at para 17:

“In their evidence those witnesses described a careful, objective and thorough approach whereby they looked at each case and carefully   25 analysed the law and the facts of each case before agreeing to the issuing
of an assessment under s 99. It was clear from the evidence that the respondents’ staff laboured long and hard and with great care to ensure that the assessments were properly made in each case against the objectors. The
evidence of the witnesses must, of course, be taken as a whole and in   30 context; and I agree with Mr Wood that it is unacceptable for Mr Russell
to endeavour to take out of context answers to a few questions. Also, these witnesses were called under subpoena to give evidence without being given an advance opportunity to refresh their memories in any depth and without knowing the type of questions that would be put to them. They had   35 not been given an opportunity to prepare briefs of evidence in advance as
has become normal in tax and civil cases. The fact that an IRD witness may now find it difficult to explain a process in court, or may seem confused, is relevant to the factual issue of intelligibility of an assessment
but is not necessarily indicative of unintelligibility.”   40

I agree entirely with the approach of the TRA on this issue. I consider that, viewed objectively in the circumstances that existed at the time of the assessment, the various assessments were intelligible. There must be limited relevance in the fact that several years after the assessments were made the IRD witnesses display some confusion in explaining aspects of the assessments. The 45

TRA heard from these witnesses over a considerable period of time and under

very lengthy cross-examination. I consider that he was quite entitled to view the evidence of the witnesses in its entirety and reach the conclusion that he did. [Paragraphs [92] – [198] are omitted from this report.]

Appeal dismissed. 50

Solicitors for the respondent: Meredith Connell (Auckland).

Reported by: Carolyn Heaton, Barrister

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Citations

Douglas v Commissioner of Inland Revenue HC Auckland CIV 2003-404-6359 [2005] NZHC 488

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Webster Group of Objectors v Commissioner of Inland Revenue [2015] NZHC 1532

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[2005] NZHC 488

1 September 2005