Estate of King v Commissioner of Inland Revenue

[2007] NZCA 474

IN THE COURT OF APPEAL OF NEW ZEALAND

CA278/05
CA279/05
CA94/06
CA100/06
CA155/06
[2007] NZCA 474

BETWEENESTATE OF FRANK HILLYER KING

BRENDA KING
ANN KING
Appellants

ANDCOMMISSIONER OF INLAND REVENUE

Respondent

Hearing:24 and 25 July 2007

Court:Glazebrook, O'Regan and Ellen France JJ

Counsel:M Hinde for Appellants

M Deligiannis and R J Wallace for Respondent

Judgment:31 October 2007 at 3 pm

JUDGMENT OF THE COURT

AThe appeal in CA100/06 is allowed and the orders made by the TRA in Case W44 (2004) 21 NZTC 11,405 are reinstated.

BThe appeals in CA94/06 and CA155/06 are dismissed.

CWe record that the appeals in CA278/05 and CA279/05 were formally dismissed.

D        The appellants will have costs of $10,000 in relation to CA100/06 together with usual disbursements. 

REASONS OF THE COURT

(Given by Ellen France J)

Table of Contents

Para No.

Introduction  [1]
Factual background   [3]
Objection appeal  [14]
Share dealing?  [18]
The TRA and High Court decisions  [19]
           Submissions  [22]
           Principles  [24]
           This case  [43]
“In business”?  [68]
The TRA and High Court decisions  [69]
           Submissions  [73]
           Principles  [75]
           Discussion  [78]
Acquisition for the purpose of sale?  [81]
The TRA and High Court decisions  [82]
           Discussion  [89]
Should the TRA have dealt with ownership issues?  [91]
Was AMCE a bare trustee for the Kings?  [97]
Conclusion: Objection appeal   [115]
Judicial review appeal  [116]
Recall appeal  [122]
Other matters  [127]
Result and costs  [129]

Introduction

[1]       In this judgment we deal with appeals from three decisions of John Hansen J.  All of the decisions dealt with aspects of the Commissioner’s assessment that the appellants were in the business of share trading and so incurred liability for income tax.  The three decisions under appeal are:

(a)Estate of King v Commissioner of Inland Revenue (2006) 22 NZTC 19,691 (HC), a decision on an appeal by way of case stated from the decision of the Taxation Review Authority (TRA) in Case W44 (2004) 21 NZTC 11,405.  This is appeal CA100/06 which we refer to as the objection appeal;

(b)Dowell v Commissioner of Inland Revenue (2006) 22 NZTC 19,681 (HC), a decision in a judicial review proceeding brought by Anthony James Dowell and others as Trustees of the Estate of Frank King.  We will refer to the appeal against this decision (CA94/06) as the judicial review appeal; and

(c)Estate of King v Commissioner of Inland Revenue (2006) 22 NZTC 20,040 (HC).  This is a minute issued on 4 July 2006 in which John Hansen J refused an application by the appellants to recall the judgment dealt with in the objection appeal.  We will refer to this appeal (CA155/06) as the recall appeal.

[2]       John Hansen J issued separate judgments for the objection and judicial review proceedings.  We have found it more convenient to deal with all the appeals in a single judgment given the commonality in the issues raised and the arguments made on behalf of the parties.

Factual background

[3]       Frank King and Brenda King were both born in England in 1912 and 1910 respectively.  They emigrated to New Zealand in the 1970s with their daughter, Ann.  Ann King worked in various professions but in 1996 she gave up employment to nurse her father and mother.  By the time the Kings came to New Zealand Mr King, a former RAF engineer, had retired.  Mr King decided to leave all of the family investments in England in the care of an English stockbroker, Graham Cloake.

[4]       Apart from the age pension, the family depended entirely on the income from their share portfolios for their living expenses.  The only instruction given to Mr Cloake by Mr King was that he should manage the investments in such a way that it produced an income of £600 per month for each of the three members of the King family.  The money came from dividends, interest on fixed securities or gains on the sale of the shares. 

[5]       A feature of the factual background is the very limited involvement by the Kings in their investment portfolio decisions.  There were occasional meetings between Mr King and Mr Cloake in the course of which they would have some discussion about the investments but Mr Cloake was given a “completely free hand”, as John Hansen J put it in the objection decision (at [120]).  Further, the TRA found, none of the Kings had any particular commercial or business aptitude or experience (at [10]). 

[6]       By 1984 the three Kings had built up a good-sized portfolio of shares in each of their names.  In that year they transferred their investments into a company registered in Jersey, called AMCE (Jersey) Limited.  It appears that AMCE was used to prevent exposure to death duties in the United Kingdom.  AMCE paid for the transfer through the issue of shares to the Kings and the opening of loan accounts for them with AMCE.  The loans were interest free, unsecured and on demand.  The Kings became the beneficial owners of the shares in AMCE.  The legal shareholders were Cacique Investments Limited, Damor Investments Limited and Paternoster Nominees Limited.  The actual investing continued to be conducted by Mr Cloake.

[7]       As will be seen, in terms of the holdings in AMCE, the portfolios of the three Kings were kept separate, that is, one portfolio for Frank, one for Brenda and one for Ann.  The Kings had exclusive power to direct how the funds were managed, administered and invested.  All fees, commissions, dividends or other monies payable to or by the Kings were paid or distributed from that person’s fund exclusively.

[8]       The investment funds were held in AMCE from November 1984 until November 1989. 

[9]       Before 1 April 1988 the Kings were not required to pay income tax in New Zealand on either capital or income gains from the sale of their overseas investments.  There was therefore no requirement that they report such transactions to the Commissioner in their annual returns.  That changed in 1988 with the enactment of the controlled foreign company (CFC) regime.  Under that regime, the Commissioner could attribute a CFC’s income to its New Zealand shareholders.

[10]     As the TRA said at [85] the Commissioner treated the gains on the sale and purchase  of investments in the 1989 and 1990 years as being either:

[i]        Ordinary business income (s 65(2)(a)); or

[ii]Income arising from the business of dealing in shares (s 65(2)(e) first [limb]);

[iii]Income derived from investments acquired for the purposes of resale (s 65(2)(e) second [limb]).

[11]     The amounts of the adjustments for attributed foreign income were set out by the Commissioner in a letter dated 27 March 1996 as:

Shareholder	1989	1990
Frank King (30 per cent)	$110,494.00	$48,803.00
Brenda King (30 per cent)	$110,494.00	$48,803.00
Ann King (40 per cent)	$147,326.00	$65,071.00

[12]     These figures were calculated on the basis of each shareholder’s controlled interests in the controlled foreign company (AMCE) ignoring the separate funds within AMCE.

[13]     The Kings objected to their assessments.  The Commissioner disallowed the objections by letter dated 15 December 2000 and in May 2001, the appellants filed judicial review proceedings.  The Commissioner provided a case stated dated 19 September 2002 for the TRA to determine the objections.  The TRA allowed the objections.  The Commissioner then successfully appealed to the High Court.  The High Court declined the application for judicial review.

Objection appeal

[14]     At the relevant time, s 65(2)(a) of the Income Tax Act 1976 provided that the assessable income of a person was deemed to include:

All profits or gains derived from any business (including any increase in the value of stock in hand at the time of the transfer or sale of the business, or on the reconstruction of a company):

[15]     In terms of s 65(2)(e) assessable income also included:

All profits or gains derived from the sale or other disposition of any personal property or any interest therein (not being property or any interest therein which consists of land within the meaning of section 67 of this Act), if the business of the taxpayer comprises dealing in such property, or if the property was acquired for the purpose of selling or otherwise disposing of it, and all profits or gains derived from the carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit:

[16]     The word “business” included any profession, trade, manufacture, or undertaking carried on for pecuniary profits (s 2).

[17]     There are three issues, namely:

(a)       Were the Kings “in business” in terms of s 65(2)(a)?

(b)Were the Kings “dealing” in shares as envisaged by the first limb of s 65(2)(e)? and

(c)Were the shares acquired for the purpose of sale in terms of the second limb of s 65(2)(e)?

Share dealing?

[18]     The primary focus of the argument before us was on the first limb of s 65(2)(e) and we deal with that first.

The TRA and High Court decisions

[19]     The TRA concluded that this limb of s 65(2)(e) was not met.  In reaching that view, the TRA said at [93] that Mr Cloake did “no more” than try to keep the capital of the funds at a level which produced the income required by his instructions.  The TRA found that if Mr Cloake had been instructed to manage the funds with a view to maximising profits “he would have handed over the management of the funds to one of his colleagues who specialised in active trading” (at [93]).

[20]     The TRA considered it was wrong to focus only on the number of trades, rather, the whole of the evidence had to be considered.  On that approach, the TRA found that Mr Cloake undertook throughout “merely a realisation or change of investment” necessary to maintain the capital base so as to keep to the instructions as to the required income figure (at [108]).

[21]     In the High Court, the Judge took a different view.  The Commissioner’s appeal was allowed.  John Hansen J emphasised both the extent of dealing and the factors referred to in the context of considering s 65(2)(a), that is:

[124]    All of the Kings’ investment monies were placed in shares in investments controlled by Mr Cloake who was vested with an absolute discretion.  He reported the transactions to the Kings and accepted if there had ever been an objection his firm would have accepted personal responsibility and ownership of the shares concerned.  Despite the reports, that never occurred.  The Kings were totally dependent on income from this fund for their day to day living expenses.  There were a high number of transactions in the relevant period with significant profitability.  Most of the shares were held for a very short time, less than six months, and the longest appears to have been 20 months.  Mr Cloake, as a professional stockbroker, had acted for the Kings since 1977 and monitored their investments daily.  To meet the £1,800 per month requirement of the Kings, given the significant expenses charged to AMCE, Mr Cloake was effectively required to deal profitably in shares.

Submissions

[22]     Before us, the appellants emphasised what Ms Hinde described as the absence of indicia of share dealing:

(a)       volumes too low;

(b)       brokerage too high;

(c)       period of holdings too long;

(d)      Mr Cloake was a stockbroker not a dealer; and

(e)the conservative nature of the risk profile and Mr Cloake’s careful explanation for the transactions in the three portfolios.

[23]     The respondent pointed to the evidence about matters such as the frequency of transactions, their profitability, the active management of the portfolio, and the need for some trading in order to generate the required income and meet AMCE’s expenses.

Principles

[24]     The classic exposition of the test as to whether or not there is share dealing is set out by the Lord Justice-Clerk (Sir JHA Macdonald) in Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes) (1904) 5 TC 159 at 165 – 166 in a passage cited by the Privy Council in Rangatira Ltd v Commissioner of Inland Revenue [1997] 1 NZLR 129 at 134 – 135:

It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Act of 1842 assessable to Income Tax.  But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.  The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits.  There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income Tax.

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being – Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

[25]     There is also a helpful discussion of the relevant factors in Bates v Commissioner of Inland Revenue (N.Z.) (1955) 11 ATD 96 at 102 (SC) where Henry J observed that “dealing” (in land, in that case) connoted buying and selling or exchanging land.  Henry J continued at 102:

To constitute a business of dealing where a person does not hold himself out as carrying on such business, generally speaking, the law requires a reasonable frequency of transactions or some continuity of effort in respect of the buying, selling or exchanging of land.  Even where there are a number of transactions concerning land, they may well have some other explanation.  The sales and purchases may be entirely for personal reasons.  They may constitute a form of investment or change of investment with the object of getting a return from the property in preference to other forms of investment of money.  It is a question of fact or inference from fact in each case.  Sometimes it is difficult to draw the dividing line, and other times it is clear that the case falls on one side or the other.  Each case must be decided on its own facts.

[26]     Bates concerned the sale and purchase of properties.  Over the period from 1939 to 1950, the appellant had purchased 12 properties and sold 19.  The appellant taxpayer said he had bought the properties as investments.  Henry J accepted that explanation having considered matters like the reasons for the transactions and the periods for which the properties were held.

[27]     In the context of the sale and purchase of shares, the High Court in National Distributors Limited v Commissioner of Inland Revenue (1987) 9 NZTC 6,135 concluded there was no business and no dealing.  That case involved an outlay of some $107,000 from which the taxpayer company derived $11,600 by way of dividends and net gains on the sale of $42,000.  There were four sales of share parcels in 1980 and another four in 1981.  The shares sold in the 1980 and 1981 years were held for periods of between eight months and three years and on average for just over 19 months before sale.

[28]     In deciding there was no business or share dealing, Quilliam J emphasised at 6,141 the absence of any regular or systematic review of the shareholdings, the fact there were particular explanations for some of the transactions (some sales were to obtain money for family members), the absence of any coherent pattern and so nothing to suggest a systematic policy of sales and purchases, the “somewhat haphazard manner” in which sales were managed, and the “no more than intermittent attention” to the need to avoid the shareholdings falling out of line with inflationary trends.

[29]     Quilliam J’s findings on s 65(2)(a) and on the first limb of s 65(2)(e) were not challenged on the appeal to this Court: Commissioner of Inland Revenue v National Distributors Ltd [1989] 3 NZLR 661.

[30]     In Commissioner of Inland Revenue v Stockwell [1993] 2 NZLR 40 (CA) Cooke P expressly agreed with Quilliam J’s focus on “continuity and extent” as primary considerations (at 42). In Stockwell at 43 Cooke P also specifically endorsed the suggestion of counsel for the Commissioner that where a person spends “a significant part” of each day pursuing share trading activities, “has some 10s of thousands of dollars at risk, and engages in, say, 10 transactions per month” that would comprise share dealing.

[31]     Cooke P accepted that a transaction on the other side of the line would be one involving some $10,000 in the shares of two or three companies without any “active” trading.  His Honour saw the position in Stockwell as in a “more difficult grey area” (at 43). That case involved the use of an inheritance of some $73,000. The taxpayer purchased shares through a sharebroker between July and October 1987. The shares were held for two to eight months. Three parcels of shares were sold before the sharemarket crash of October 1987 but more thereafter at an overall net loss of $30,410.

[32]     Cooke P said at 43 in this case he would “lean against” a finding of a business:

When a taxpayer has a full-time occupation and devotes some of his spare time to stock exchange speculation, one should be slow, I think, to find that he has gone as far as to embark on a business.  Usually it would be an artificial use of language.  The same applies to a retired or unemployed person who engages in a modest amount of buying and selling shares.  In such cases the presumption should be against a business.

[33]     Hardie Boys J made similar observations at 43 and 44.  His Honour doubted whether what occurred comprised dealing in shares and continued:

Whether a particular activity amounts to a business is a matter of fact and degree, but the continuity and extent of the activity must be important considerations, if not the dominant considerations.

…

The buying and selling of shares is typical of many activities that may or may not be a business according to the individual circumstances.  Carried on merely to supplement an adequate income from other sources or to provide interest or excitement, it is unlikely to be a business.  That the person may regard himself as a “trader” is of little assistance.  One would normally expect to find a considerable number of purchases and sales over an appreciable period of time before he could be regarded as dealing in shares and a substantial capital investment before one would take the next step of regarding him as in the business of dealing in shares.

[34]     McKay J took the view there was no dealing in shares.  McKay J said at 45 that the intention to make a profit may bring the transactions within the second limb of s 65(2)(e) but was not enough of itself to constitute the business of dealing in shares.  Apart from one sale, the parcels had been sold following the sharemarket crash.  McKay J concluded at 45 that the transactions appeared to be:

[A]t least as consistent with normal investments as with any intention of trading in shares as a business.  The same can be said of the respondent’s commitment of time and effort.

[35]     The Commissioner placed particular emphasis on Piers v Commissioner of Inland Revenue [1995] 3 NZLR 456 (HC) where Temm J concluded that, while not in business, the taxpayer was dealing in shares in terms of the first limb of s 65(2)(e).

[36]     Piers involved a superannuation fund for the employees of an insurance brokerage company.  Westpac Investment Management (NZ) Limited managed the fund which, at the end of September 1994, comprised capital of $8.5 million.

[37]     There were three sources of funds, namely, contributions from the employees and from the employers and returns on investments which the trustees had made from accumulated assets.  The investments included shares.

[38]     Westpac managed the fund in accordance with a fund management strategy which factored in considerations such as the proportions to be allocated to the different types of investments.

[39]     Over the three taxation years in issue, there were some 176 share dealings.  That figure was reached having eliminated rights and bonus issues and dividend reinvestments.  The profits and losses made by the fund as a result of those transactions are summarised as follows:

Year	Profit	Fund’s capital
1989	$9,542	$5,402,629
1990	$65,625.10	$4,930,605
1991	-$83,516.36	$6,038.935

[40]     Temm J concluded that the trustees were not in business in terms of s 65(2)(a).  They had no customers and their sole purpose was to discharge the statutory and fiduciary obligations to act prudently in managing the fund (at 463).  But, the Judge said, that did not mean that the trustees were not dealing in shares in terms of the first limb of s 65(2)(e).

[41]     In deciding whether there was dealing in shares, Temm J saw the frequency of the transactions as “often decisive” (at 466).  “The purpose or motive” he said “is of less relevance than the extent of it” (at 466). The fact that Westpac was an active rather than a passive money manager was also relevant (at 466).  Temm J took into account the fact that many of the sales were dictated by the need to comply with the weightings which formed part of the fund management strategy but the number of transactions led the Judge to conclude that the fund was dealing in shares.

[42]     The issue grappled with in these authorities is as to which side of the line a particular set of transactions falls.  The essence of the test is as set out in Californian Copper.  Where the line is to be drawn can be a difficult question and it is ultimately one of fact and degree.  The matter must be looked at in context and so, while the frequency of transactions and continuity of effort are primary considerations, those matters cannot be viewed in isolation.  Relevant contextual matters may include the taxpayer’s circumstances, for example, the extent of the taxpayer’s investment, the relativities between the size of the investment and the turnover, and the circumstances in which the transactions take place.  Any explanations as to particular transactions will also be pertinent and whether or not dealings involved rights and bonus issues or matters of that kind will be part of the assessment.

This case

[43]     Applying the principles to this case, the matter has to be considered against the background that the taxpayers were largely dependent on the income from the sale of the shares.  Further, the amounts invested were not insignificant in terms of both value and gains.  The value of the investments transferred to AMCE in 1984 was as follows:

(a)       Frank King                £159,791

(b)       Brenda King              £158,428

(c)       Ann King                  £155,318

[44]     When the portfolios were transferred from AMCE some five years later, Frank King received investments of £257,311, Brenda King received £280,292 and Ann King received £451,894.

[45]     As a matter of context, it is also important that some dealing in shares was necessary to produce the desired figure of £1,800 per month and pay AMCE’s expenses.  For example, for Fund A (Frank King), the net income in the 1989 year was £3,909 in relation to which the required drawings were £7,200, leaving a deficit requiring funding from sale gains of £3,291.  The position for Fund B (Brenda King) was similar. 

[46]     Turning then to the frequency and continuity of transactions, there was a reasonably high volume of transactions on a fairly continuous basis throughout the period.  The relevant periods are the 1989 and 1990 tax years although only to the end of November 1989 in the 1990 tax year.

[47]     The transactions within each of the portfolios are summarised in the three appendices, A, B and C, that are attached to this judgment.  Those appendices have been prepared from the evidence of Mr Cloake.  There was no dispute about the accuracy of his description of what occurred or when.  For each of the three portfolios, the relevant appendix sets out the shares that were purchased and sold within the relevant periods.  In a number of cases, the appendices also include information about purchases outside of the tax years.  Those are cases where stock has been held for a period and then a further purchase and/or sale is made within the relevant tax year.  It is helpful to include these earlier purchases as they give some context to the approach to the portfolios overall and as to the total holdings.

[48]     The “reasons for sale” column in each of the appendices sets out the reason Mr Cloake gave for selling a particular stock.  With the exception of two or three of the transactions such as those involving EuroTunnel warrants and the Charterhall shares there was no real challenge to Mr Cloake’s explanations.  We come back shortly to what was said about the EuroTunnel and Charterhall transactions.

[49]     On the basis of the figures in the appendices, the total number of transactions across the three portfolios over the relevant tax years was 238.Obviously, the fact that there are three taxpayers has to be kept in mind when considering the number of transactions.  The total can be broken down as follows:

Appendix A			Appendix B			Appendix C
Purchases	Sales	Total	Purchases	Sales	Total	Purchases	Sale	Total
1989	22	23	45	23	17	40	32	26	58
1990	16	10	26	12	13	25	25	19	44

[50]     The number of transactions reduces to 135 if the calculation excludes any shares purchased and/or sold in two or more of the portfolios at the same time.  This calculation produces the following result:

Appendix A			Appendix B			Appendix C
Purchases	Sales	Total	Purchases	Sales	Total	Purchases	Sale	Total
1989	22	23	45	8	7	15	10	8	18
1990	16	10	26	3	4	7	16	8	24

[51]     Finally, if only those transactions involving both a purchase (or purchases) followed by a sale (or sales) in relation to a particular share in the relevant financial years are calculated, the number of transactions reduces to 131.  The details are as follows:

Appendix A			Appendix B			Appendix C
Purchases	Sales	Total	Purchases	Sales	Total	Purchases	Sale	Total
1989	15	6	21	17	4	21	24	12	36
1990	6	10	16	4	12	16	7	14	21

[52]     We consider that a figure in the region of 131 is a proper reflection of the scale of trading, not 238 or the higher figure (281) that the Judge worked from. 

[53]     It is necessary to turn then to Mr Cloake’s explanation of his approach since he  took over responsibility for the Kings’ investments in April 1977.  The portfolio had prior to then been looked after by a senior partner in Mr Cloake’s firm who was about to retire.  Frank King was by that time in his mid-60s and retired.

[54]     Mr Cloake had a total of some 700 clients.  He explains that the Kings were part of a group of about 90 “discretionary” clients, nearly all of whom were individuals, for whom he was responsible.  “Discretionary” clients were those who gave the firm discretion to monitor their investments according to their wishes. The Kings’ portfolios were monitored on a daily basis and if action was needed it was taken without reference to the Kings.  The safeguard was that clients had a day to cancel the transaction although Mr Cloake accepted that was not a practical safeguard given the Kings’ distance. Mr Cloake says the Kings were charged a commission on buying and selling shares but did not pay any other charges.

[55]     Mr Cloake described the Kings as “not rich” but “merely comfortably off” and he said that their portfolios received an amount of time appropriate to their “modest” size.

[56]     Mr Cloake’s instructions were to ensure there was enough cash to pay the Kings £600 each a month.  If the Kings needed a capital sum, he would reorganise the portfolio to achieve that.  Mr Cloake explained that this requirement meant they needed good returns on their investments plus safety of their capital and some inflation protection, hence, he explained:

The purpose of movements in the portfolios … was to protect their capital while generating a reasonable return for them.  The income from the portfolios was always important, as the Kings had to live off that income, and the investments in the portfolios had to continue into the indefinite future to support their income requirements, as well as any capital requirements.

[57]     Mr Cloake acknowledged that there was one set of transactions across all of the portfolios which was a “speculative” investment.   By “speculative” he meant a share investment in “which you hope you might strike it lucky”.  The stock involved was Charterhall, an oil and gas exploration company.  Taking Frank King’s portfolio as illustrative of the dealings in Charterhall, the first block of shares were purchased in May 1989 and then on 7 July 1989 there was a bonus issue.  Mr Cloake sold Charterhall shares soon after on 21 July 1989 to buy shares in Southend.

[58]     When the transactions across the portfolios are examined in detail it is apparent that the reasons for sale and purchase vary.  For example, some sales and purchases are explicable by Mr Cloake’s wish to maintain a balance both in the portfolios overall and a balance in terms of a portfolio’s exposure in relation to particular sectors.  An illustration of transactions in this category is provided by some of the dealings with shares of companies in the financial sector. Mr Cloake explained that the purchases of shares in the financial services sector took place when “the whole” of that sector was being bought because it was cheap.  He said large institutions were buying such companies for the funds they managed.  The shares were cheap and looked attractive, and so it proved.  One of the parcels of shares in this category was Morgan Grenfell.  In terms of the transactions involving these shares, Mr Cloake said that after buying the shares there was a “rapid” rise in the price of the shares, “which made no sense on the fundamentals of the company”.  As the price, in Mr Cloake’s words,  had “got out of hand”  he decided to take the profit that had arisen while it was there to take, and sold the shares on 7 November 1999. 

[59]     In addition, some of the transactions are explicable as arising from rights or bonus issues.  A holding such as Mercury Asset came from a free distribution from S G Warburgs (called Mercury Securities at the time).  In Ann King’s portfolio, the transactions involving Ford Sellar Morrison and Kwik Save were rights issues, that is, they arose from an entitlement of an existing holding in the company.

[60]     Mr Cloake also explained that for some shares it was not possible to buy or sell all that he wanted at the one time, for example, those in Pifco A and Anglo Eastern.  That explains why, on some occasions, there are a number of transactions involving the one type of share.  If this factor was taken into account in our calculations, that could reduce the total number of purchases across the portfolios.

[61]     Finally, in other cases there was some change in the company profile, or matters of that nature, that led him to change the particular investment.  To illustrate, Mr Cloake said he sold Pifco shares on 18 August 1989 after the company’s results contained a “note of caution” about future profits.  Shares in Fund A in Steel Burrill Jones were sold to avoid the perceived risk of new management.   The rapid turnover in relation to the Mountleigh shares which the Commissioner relies on is also explicable in a similar way.  Mr Cloake explains that after a presentation on 7 November 1989, he bought Mountleigh shares before the end of the day but after business for that day had ceased.  The purchase was therefore treated as an early bargain for the following day.  The presentation had indicated that the shares were very undervalued and so worth buying but the next day the company announced what Mr Cloake described as a significant increase in earning and in the net asset value of its properties.  This was apparently interpreted as a move to protect itself from an unwanted bid.  Mr Cloake’s reasoning was that if there was no bid, the share price would fall and so he “took advantage” of the rise and sold the shares.

[62]     We need to consider then two other transactions on which the Commissioner placed particular emphasis.  The first of these was the purchase on 7 February 1989 across all three portfolios of EuroTunnel shares and their sale at a gain of £600 the very next day.  Mr Cloake’s initial explanation is that he “repented” and decided to sell a company he did not like and that he must have decided that it was an unsuitable investment for the portfolios.  Subsequently, however, in evidence in chief and in cross-examination he explained that he thought it more likely that he had sold this stock because he realised that the Kings had not authorised him to hold warrants like those in EuroTunnel.  He explained that a warrant gave a holder the right to buy the underlying shares.  Mr Cloake also said that there was a separate passage in the firm’s agreement that it had clients sign which dealt with warrants.  This part of the agreement required a specific signature.  That explanation puts the transactions in a different light.

[63]     Second, the Commissioner emphasised the circumstances surrounding the sale of Dowty shares.  Mr Cloake said he sold those to raise cash in the portfolio.  He said:  “I was going on holiday, and wanted to have cash available rather than being fully invested”.   The Commissioner says that indicates dealing in shares rather than a capital investment.  However, it appears from a reading of Mr Cloake’s evidence that what he did was to maintain a cash float which at times he may have had to “top up” to ensure there was sufficient cash in hand.  It does not necessarily follow from that approach that there was share dealing.

[64]     There was evidence that the numbers of transactions were not as high as if the Kings were trading.  To illustrate, Mr Cloake said that if the Kings were active traders he would have expected them to have been buying several times during the course of a week.  He considered that a trader might take four or five positions in a week and sometimes in a day.  Mr Williams, a stockbroker, gave evidence on behalf of the appellants before the TRA generally to the same effect although he did accept in cross-examination that if there were 125 transactions in Frank and Brenda Kings’ two portfolios, not including rights issues or matters of that nature, that was “quite [a] high” number.

[65]     John Hansen J also placed weight on the need to sell stock in order to meet the Kings’ instructions.  That is certainly a relevant factor.  But we do not consider that it was sufficient, when the evidence is viewed overall, on which to reach a different view of the facts than that taken in the TRA.  It is also possible that if Mr Cloake was not able to achieve the required return, he would have had to cut into the capital.  That course was not the preferred course of action but it was presumably a possibility.

[66]     Our conclusion is that this matter is very finely balanced.  On the one hand, there was a reasonably high frequency and continuity of effort.  Certainly, this was not a case of haphazard or unsystematic buying and selling.  Rather the portfolios were, in Mr Cloake’s words “actively managed”.  On the other hand, there are explanations, other than trading, for a considerable number of the transactions and for their timing.  Further, the overall approach was, as Ms Hinde suggested, a fairly conservative one with a focus on the preservation of capital. 

[67]     Given that the matter is finely balanced in these circumstances we consider that before taking a different view from that in the TRA, it was incumbent on the Judge to be satisfied that the TRA was wrong in its factual findings. We do not consider that this test was met.  John Hansen J was influenced by the volume of transactions but with the benefit of further analysis, the significance of that is, in our view, reduced.  For example, before the High Court the matter proceeded on the basis that there were some 281 transactions, so if, for example, Mr Cloake decided to sell Dowty in Funds A, B and C that was counted as three transactions.  By contrast, as we have said, we consider a figure in the region of 131 is the proper measure of the number of transactions.  Further, there were other explanations for what occurred in terms of some of the stock and those explanations were consistent with the TRA’s findings. 

“In business”?

[68]     We turn then to the question of whether the Kings were “in business”.

The TRA and High Court decisions

[69]     The TRA said at [104] that the question whether the Kings were “in business” was a question of “fact and degree and a matter of impression”.  The TRA made factual findings that the Kings were not in business and that there was no “undertaking” (at [92]).  In this respect there is considerable overlap in the TRA’s reasoning on the first limb of s 65(2)(e) and that on s 65(2)(a).

[70]     The TRA relied on the fact that the only instructions to Mr Cloake were limited to treating each portfolio so as to produce the stipulated monthly income (at [92]).  That is, as we have noted, the TRA saw this as an endeavour to keep the capital at a level yielding those sums.  The TRA said that Mr Cloake as agent could not be in business without express instructions and there were none.  The TRA emphasised that Mr Cloake himself was not trading and saw this matter as coming squarely within the California Copper test. 

[71]     John Hansen J treated Mr Cloake as the agent of the Kings.  The Judge disagreed with the TRA’s finding that without express instructions it was not legally possible for Mr Cloake as agent to be in business on their behalf.

[72]     The factors relevant to the share dealing limb were also seen by the Judge as supporting the conclusion that the Kings were in business.  John Hansen J relied in particular on the following matters:

(a)The Kings’ dependency on a return on their investments and the associated inability to provide the necessary return and to pay AMCE’s expenses without some share dealing;

(b)The large number (281) of transactions across the three portfolios over a short period of time;

(c)The value and the increase in value of the combined portfolios;

(d)Admitted instances of profit-taking with some shares held for only a matter of days and, on three occasions, only overnight;

(e)Significant profits over a short period;

(f)Attention was given to the portfolios on a daily basis; and

(g)Mr Cloake would have been aware of the need to meet AMCE’s expenses on top of the £600 per month requirement.

Submissions

[73]     The primary submission for the appellants is that the TRA correctly identified and applied the test as to whether they were “in business” and the High Court did not show that the TRA was wrong about that.  In this context, the appellants state that the activity was investment and the case clearly fell within the Californian Copper test.

[74]     The Commissioner’s argument is that Mr Cloake was the appellants’/AMCE’s agent and he was “in business”.  The Commissioner emphasises the following factors:  the high number and profitability of the transactions; the very short length of time for which some of the shares were retained; the fact that Mr Cloake was a professional stockbroker who had acted on the Kings’ behalf for a lengthy period; the daily effort spent on monitoring the investments; and the fact that in order to achieve the Kings’ goals, some dealing in shares was required. 

Principles

[75]     The parties agree that the test in terms of s 65(2)(a) is that set out in Grieve v Commissioner of Inland Revenue [1984] 1 NZLR 101 (CA). Richardson J in Grieve at 110 said there was a “two-fold inquiry” as to the nature of the activities and as to the taxpayer’s intention in carrying out those activities. His Honour observed that a taxpayer’s statements as to his or her intentions are relevant but that “actions will often speak louder than words” (at 110). Richardson J then described the relevant factors at 110 as follows:

[T]he nature of the activity, the period over which it is engaged in, the scale of operations and the volume of transactions, the commitment of time, money and effort, the pattern of activity, and the financial results.  It may be helpful to consider whether the operations involved are of the same kind and are carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was conducted.  However, in the end it is the character and circumstances of the particular venture which are crucial.  Businesses do not cease to be businesses because they are carried on idiosyncratically or inefficiently or unprofitably, or because the taxpayer derives personal satisfaction from the venture.

[76]     The question of what constitutes being “in business” was considered further by the Privy Council in Rangatira. Their Lordships at 132 rejected the proposition that the holding of investments did not constitute the carrying on of a business although accepted that for individuals or trustees the holding of investments would “very rarely” amount to the carrying on of a business.

[77]     Their Lordships at 133 – 134 found assistance in the following observation of Richardson J in Calkin v Commissioner of Inland Revenue [1984] 1 NZLR 440 at 446 (CA):

[T]hat underlying each of the words in the definition [of “business”] in s 2, and the term “business” itself when used in the context of a taxation statute, is the fundamental notion of the exercise of an activity in an organised and coherent way and one which is directed to an end result.

Discussion

[78]     Essentially for the reasons we have given in relation to the first limb of s 65(2)(e), we do not consider there was a basis for the High Court to take a different view from that in the TRA on this issue.  The nature of the activity was investment. The scale and nature of the activity across the portfolios was not such as to meet the test for a business when the transactions are analysed taking into account Mr Cloake’s explanation for them.  It cannot be said that the taxpayers’ intention was to conduct a business.

[79]     On this approach, the question of whether or not Mr Cloake was the appellants’ agent is not determinative.  Nor is the question of whether or not the TRA was correct that express instructions from the Kings to Mr Cloake were necessary to operate as a business.

[80]     The TRA was correct that the first limb of s 65(2)(e) was not applicable.

Acquisition for the purpose of sale?

[81]     We turn then to consider the second limb of s 65(2)(e), that is, whether the shares were acquired for the purposes of sale.

The TRA and High Court decisions

[82]     The TRA said that whether property was acquired for the purpose of sale was a subjective test requiring consideration of the state of mind of the buyer at the required time (at [112]).  The mind here was that of Mr Cloake.  In terms of the objectors’ subjective intent, the TRA said at [120] that this was “solely to ensure that their respective funds were managed in such a way as to produce the stipulated income of six hundred pounds each per month”.  The Kings acquiesced in Mr Cloake’s periodic review of their portfolios which the TRA found were “held primarily for their potential income yield” (at [120]).  The TRA found no evidence of any intention to speculate in shares or to make capital profits by purchasing for the purpose, or with the object, of resale (at [121]).  The TRA continued:

[122]    It is equally clear from the evidence from Mr Cloake that he understood and implemented his clients’ intention in the way he managed the funds.  His practice did not include “in and out merchants” or those who speculated for short term capital gain.  His specialty was in managing the investments of clients to preserve their capital with a view to yielding income.  Those considerations were certainly what actuated his management of the objectors’ funds.

[83]     The TRA then addressed the Commissioner’s submissions that those findings did not resolve the matter.  That was because, the Commissioner, said, the volume of transactions and the circumstances in which some of them were made, were sufficient for the Court to conclude that the shares were bought with the intention to resell them.

[84]     The TRA took the view that while it may be appropriate to view the portfolios as a whole for the purposes of s 65(2)(a) or the first limb of s 65(2)(e), it was not acceptable to treat the buying and selling globally for the purposes of the second limb.  The TRA said that this was for the “obvious” reason that “within the totality of the sales and purchases, some might be bought for the purposes of resale and some not.  It is only those in the former category which are subject to tax or give rise to deductible losses pursuant to the second limb” (at [127]).  As the Commissioner had not made any attempt to consider the individual sales and purchases of the shares, the TRA concluded that this would not do. 

[85]     The TRA’s conclusion is as follows:

[133]    Against that background and keeping in mind that the onus is upon the taxpayers to prove on the balance of probabilities that the assessments are wrong … there is no basis upon which the taxpayers can begin to discharge that onus.  To do so they would need to know which of the investments in the Commissioner’s view [were] subjectively bought with the object of resale.  They have never been told that and they cannot be expected to prove a negative.

[134]    In those circumstances the Court is left with the evidence of Mr Cloake … .   He has exhaustively analysed each transaction in the light of the prevailing sharemarket conditions.  He explains the reason which motivated each transaction and, with the possible exception of the Charter Hall purchase, nowhere does one find any evidence of acquisition for the purpose of resale at a profit.  Rather there are, as one would expect given the terms of his instructions, a wide number of disparate reasons for each transaction, all of which come under the general umbrella of prudent capital protection for the primary purpose of “potential income yield”. 

[86]     The Commissioner took the view that the TRA in this respect had reversed the onus.  The High Court accepted the Commissioner’s argument on that issue.  The Judge said at [143] that it was for the Kings to show that the Commissioner was wrong in contending that all or any of the shares were required for the purposes of resale.

[87]     Applying the subjective test set out in Commissioner of Inland Revenue v National Insurance Company of New Zealand Limited (1999) 19 NZTC 15,135 (CA), the Judge concluded from looking at the evidence overall that the extent and nature of the trading was such that the Court could infer that Mr Cloake’s intention was to apply the shares for the purposes of resale.  John Hansen J put it this way at [153]:

[W]ith such extensive trading to achieve the respective returns, it seems to me it is a necessary inference that his subjective and dominant intention was to acquire shares for the purpose of resale.  This is re-emphasised by the short length of time the bulk of the shares were held, the number of transactions, and the admission there were instances of buying and reselling for profit.

[88]     Accordingly, John Hansen J concluded that the Kings had not discharged the onus of proof.

Discussion

[89]     There is no dispute between the parties as to the relevant principles.  It is accepted that the test of purpose under this limb is a subjective one requiring consideration of the state of mind of the purchaser at the time of acquisition of the property: Commissioner of Inland Revenue v National Distributors Ltd at 666.  Richardson P and Henry J in National Insurance said at [18] that matters were to be considered in the “totality of the circumstances” which will include:

[18]   … [T]he nature of the asset, the vocation of the taxpayer, the circumstances of the purchase including any connection with an existing investment, the number of similar transactions, the length of time the property was held and the circumstances of the use and disposal of the asset.  …

[19]      The nature of the asset is always an important consideration.  Generally speaking, if the taxpayer is in pursuit of economic gain and is not acquiring an asset for private use or enjoyment or other extraneous reasons, the economic rewards, which are the recognised goals of most investments, are ordinarily obtained either through periodic receipts such as dividends or through the gains derived on sale or through a combination of the two.  And it will ordinarily be possible to conclude whether retention or resale is predominant at the time when purchase is made.

…

[21]      … [T]he mere fact that at time of purchase of the property the taxpayer did not expect to hold the property for ever and contemplated the possibility of sale, does not attract the application of the second limb.  Where the taxpayer establishes that there was not a dominant purpose of resale at the time of purchase, any profits on the ultimate sale of the shares are not within the second limb.

[90]     The only issue is whether the High Court was correct to treat the acquisitions globally.  The Commissioner accepts that if unsuccessful in relation to the application of s 65(2)(a) and the first limb of s 65(2)(e), it will be necessary to consider individual transactions.  That must be correct given the nature of the test.  There are, however, no findings on the individual transactions.  It would be unusual in the circumstances for this Court to be making primary findings of fact.  Ms Deligiannis took instructions on this matter and advised the Court that the Commissioner did not seek to have the matter remitted back to the TRA to determine whether specific shares were bought with the purpose of resale.  Against this background we conclude that this limb of s 65(2)(e) was not met.

Should the TRA have dealt with ownership issues?

[91]     This part of the appeal relates to the TRA’s finding, upheld by the High Court, that for the relevant period AMCE was a bare trustee for the Kings.

[92]     The appellants’ challenge to this finding is twofold.  First, they say that there was no jurisdiction to make the finding.  Second, they argue that the finding was inconsistent with the evidence.  We take each in turn.

[93]     On the jurisdiction point, the appellants submit that ownership of the three portfolios by AMCE was never in dispute between the parties and so not in the case stated.  On this basis, the appellants say the matter should not have been considered by the TRA.

[94]     The Commissioner says the argument based on jurisdiction is ill-founded.  That is essentially because the Kings put these matters in issue in the context of the TRA hearing.  We agree.

[95]     The TRA in addressing this issue proceeded from the starting point that the Kings were not personally in the business of share dealing.  The TRA saw the only issue as whether Mr Cloake’s actions rendered the Kings liable as principals.  The TRA said at [41] that to answer this question it was necessary to look at the “legal structures within which the shares were held and the equitable incidents attaching to those structures”.  The TRA continued by recording at [42] the submission for the objectors that “at all material times the investments were owned by … AMCE”.

[96]     That submission does put the matter in issue.  In any event, the TRA must be right that the legal structures are relevant on the facts of this case.

Was AMCE a bare trustee for the Kings?

[97]     There is no challenge to the description of a “bare trustee” used by both the TRA and the High Court.  Both decisions refer to the definition in Lord Mackay of Clashfern (ed) Halsbury’s Laws of England Vol 48:  Trusts (4ed 2000) at [650] (see now: Lord Mackay of Clashfern (ed) Halsbury’s Laws of England Vol 48: Trusts (4ed 2007) at [755]) of a “bare trustee” as:

[A] person who holds property in trust for the absolute benefit and at the absolute disposal of other persons … and who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey or transfer it to persons entitled to hold it, and he is bound to convey or transfer the property accordingly when required to do so.

[98]     The relevant facts are set out at [43] to [69] of the TRA’s decision and we adopt that description in the summary which follows.  AMCE was incorporated in Jersey in 1983.  As we said, the shares in AMCE were registered in the names of Cacique Investments, Damar Investments and Paternoster Nominees.  The capital of the company was £10,000, divided into 10,000 £1 shares.

[99]     The first directors’ meeting took place on 31 March 1983.  There were two people present and they elected two others to be directors.  The two directors present resigned leaving the newly appointed directors in office.  As the TRA said at [53]:

It was resolved that “further directors’ meetings within the Channel Islands or the United Kingdom …” and that any functions exercised “would be of a purely secretarial and administrative nature.”  On 28 March the company held its Annual General Meeting.  The only persons present were two gentlemen representing the three shareholder companies.

[100]   Later that year, in November, the directors met in Geneva for the purposes of authorising the “restructuring of the companies’ share capital by having three classes of share, A, B and C” (at [54]).  These shares would be owned beneficially by the Kings.

[101]   The legal title to the new shares was to be in Cacique (200 A shares), Damar (300 B shares) and Paternoster (400 shares).

[102]   The minutes also record that the company accepted from Frank King the transfer of stock market investments valued at £159,791.00.  The consideration was the issue of 200 £1 “A”  shares and the balance as to a loan account by which the company became indebted to the deceased for the full amount of the value of the shares.  The loan was to be the “A” loan, interest-free, unsecured and repayable on demand.  There were similar transactions recorded in the minutes for Brenda King and for Ann King.

[103]   Mr Cloake’s firm was appointed “stockbrokers to the company” (at [59]).

[104]   The Kings then, on 16 April 1985, entered into an agreement with the company which the TRA described in the following terms at [63]:

(i)The objectors were the beneficial owners of the respective classes of shares.

(ii)The “individual assets to be held by the company on their respective behalves shall be kept separate and apart and they have therefore agreed that the company shall be run on the terms of the agreement in order to achieve that object.”

(iii)All accretions to each of the funds to be the property of that fund, and all payments to be made by the company to a fund holder to be made to the beneficial owner of the particular fund.

(iv)On a liquidation of the company the assets comprising each fund to be paid to the fund holder.

(v)Transfers between funds is forbidden except with the consent of the fund holders concerned.

(vi)All expenses to be debited to the fund by which they are incurred but in the event of a shortfall they, the company, to have the right to debit one or other of the funds.  The owner of the defaulting fund to indemnify the others.

(vii)Liability for fees and expenses incurred generally by the company to be paid pro rata the value of the respective funds.

(viii)The company bound itself not to issue any more shares or undertake any borrowings without the consent of the fund holders.

(ix)In the event of any inconsistency between the Articles of Association and the Agreement, the Agreement to prevail.

(x)The Agreement to be governed by Jersey law.

[105]   There were company accounts for the relevant period.  These showed the position of the A, B and C Funds and recorded the payments of £600 per month to each of the Kings.  The accounts do not show any trading by the company.  There were no profit and loss account, balance sheet or depreciation schedules.  The only financial reporting relates to the individual funds.

[106]   The TRA records at [67] a resolution of the directors at a meeting on 30 November 1989 as follows:

(i)“To appoint the assets of the company by way of an in specie distribution to R & H Trust Company (Jersey) Limited as bear (sic) trustee and nominee for the beneficial owners.”

(ii)The effect of this appointment was that instead of AMCE holding the A B and C funds for their beneficial owners, they became held by the R & H Trust Company.

(iii)The minutes go on to record, “the registered holdings would remain unaltered and R & H Trust Company (Jersey) Limited would act as bare (sic) trustee and nominee of the securities held by National Westminster Bank Nominees (Jersey) Limited ….”

(iv)It was then resolved to “recommend to the members that … the company be dissolved.”

[107]   The directors, however, did meet again on 9 November 1990 and transacted company business including the presentation of the 1989 accounts that reported on the three funds in the same way as in the earlier accounts.

[108]   The company was wound up as at 30 November 1989.

[109]   Against this background, the TRA concluded that the company, AMCE, was a bare trustee for the three fund holders.  The TRA said the legal test as set out in Halsbury’s was met because the Kings each had the whole beneficial interest in their funds and were free to call for the legal estate at any time.  The company had no duties other than those agreed to by the Kings.  When the cost of keeping up the company structure became too high, the “fund holders simply required the company to appoint the ownership of the funds to themselves, and it did so” (at [75]).

[110]   On this basis, the TRA said at [76] that although the legal relationship involving the management of the share portfolios was between Mr Cloake and AMCE, the Kings were his principals.  Hence the TRA concluded:

[79]     It is therefore clear in my view that as the objector family chose to effect and manage their investment portfolios through the agency of Mr Cloake, his actions within the terms of his contract of agency become those of the principal on behalf of whom they are transacted.  It does not assist the objectors to say and prove, as they have, that they had no intention or ability to engage in share trading or to buy investments with a view to resale if that was, in fact, what Mr Cloake was doing within their instructions on their behalf.

[111]   John Hansen J agreed with the TRA.  The Judge said:

[159]    In this case it is clear that the Kings were the beneficial owners of the shares in AMCE.  It seems to me that because of the provisions of the shareholders’ agreement they were also the beneficial owners in equity of the three share portfolios.  They had an absolute right to call for the legal estate at any  time.  The shareholding agreement, entered into some five months after the purported sale of the share portfolios to AMCE, makes this clear.  AMCE had no duties to perform, other than those agreed to by the Kings.  It was not for directors to make independent decisions about the various transactions involving the three portfolios.  They had no right to, and nor did they.  This was obviously left completely to Mr Cloake, by Mr King, who simply initiated transactions and advised the directors of AMCE to execute the transactions which they had to do.

[160]    The agreement entered into in April 1985 required that the individual assets of the Kings be held separate and apart in the “A”, “B” and “C” funds.  Each fund consisted exclusively of the assets the Kings transferred to AMCE.  The Kings, under para 7, retained exclusive power to determine and direct how the funds were managed, administered and invested.  The agreement overrode the Articles of Association and para 11 was a prohibition on the creation of further shares or transfer of shares without agreement.  Paragraph 12 gave any of the Kings the right to terminate by written notice, and para 12(c)(iii) required the assets remaining in each of the respective funds to be distributed to the beneficial owners or their nominees, ie the funds returned in specie to the Kings.  It is only subject to such apportionments and reimbursements as may be required.

[161]    It is obvious from that agreement that notwithstanding the transfer of the portfolios to AMCE the Kings retained absolute rights as to management, administration and investment which they had delegated, through Mr King, to Mr Cloake.  He operated independently of the directors in carrying out transactions, simply advising them afterwards for their information and, where necessary, execution.

[112]   We see no reason to take a different view from the TRA or the High Court on this aspect.  The appellants rely on the documentary evidence as confirmed by Mr Richardson, a professional director and secretary of AMCE.  Ms Hinde emphasises in particular evidence that the company purchased the portfolios, incurring transfer costs and that there were loans from each of the Kings and monthly repayments which were treated as such.  Ms Hinde also notes that significant administrative costs were incurred in running the company.

[113]   However, the findings made were open on the evidence.  The company had no other reason for its existence, no life other than that in relation to the three funds.  Further, as the Commissioner said, the Court is not bound to accept the labels the parties chose when the true nature of the arrangements is different.  Here, for example, neither Mr King nor Mr Cloake perceived the loan repayments as such.  Rather, both saw them as the £600 per month for each of the appellants Mr King required their investments to realise.

[114]   This is not to say that the arrangements were a sham or that Mr Richardson’s evidence was not credible.  All it means is that the legal effect of the arrangements was different from what Mr Richardson envisaged.

Conclusion: Objection appeal

[115]   The objection appeal is allowed.  The orders made by the TRA are reinstated.

Judicial review appeal

[116]   In the judicial review proceedings, the appellants challenged reassessments that had been made on 26 March 1996 for the income years ended 31 March 1989 and 1990.  The basis of the judicial review proceedings was that the reassessments were nullities because they were made under the Income Tax Act 1994 and not under the Income Tax Act 1976.  Declaratory relief was sought.

[117]   It was common ground that the references in the reassessments to the Income Tax Act 1994 were in error because the tax years (1989 and 1990) were not governed by that Act.  Rather, the assessments should have been made by reference to the equivalent provisions of the Income Tax Act 1976.

[118]   John Hansen J in dismissing the appellants’ judicial review application rejected the appellants’ claim that their reassessments were nullities. The claim is based on the argument that the only way to activate the underlying charge for income tax for the 1989 and 1990 years was to assess under the Income Tax Act 1976.  The appellants also argue that this is not a case in which the Commissioner’s position is saved by the application of s YB 5(4) of the Income Tax Act 1994 because the Commissioner’s failure is substantial not procedural. 

[119]   At the relevant time s YB 5(4) relevantly provided that any reference in any enactment, instrument or document to any provision of the 1994 Act was to be construed as including in relation to the times, circumstances, or purposes in relation to which the corresponding provision has or had effect, that corresponding provision.

[120]   Given our decision on the objection appeal, it is not strictly necessary to decide this appeal.  We do however agree with John Hansen J that s YB 5(4) does apply and is the answer to this part of the case.  There is a corresponding provision as required by s YB 5(4) and so the appellants’ argument that the assessments were nullities has no merit.  We do not need to address the appellants’ other arguments.

[121]   Accordingly, we dismiss the judicial review appeal on the basis that s YB 5(4) operates to rectify the position.

Recall appeal

[122]   After John Hansen J delivered his decision in relation to the substantive tax appeal, the appellant sought a recall of the judgment.  The recall was sought on the basis that it was inconsistent with what the appellants described as an earlier “oral judgment”.  That “oral judgment” related to a discussion between the Judge and counsel for the Commissioner as to whether or not the Commissioner intended to pursue the estate for any tax outside the period in issue in the substantive tax proceedings. 

[123]   In his minute declining to recall the judgment, John Hansen J noted that because the Commissioner did not intend to pursue the estate for tax outside the period the subject of the hearing, counsel for the Commissioner had taken further instructions.  As a result, John Hansen J recorded, that without prejudice to any appeal rights, if relevant, “the Commissioner did not oppose the estate’s appeal being allowed in relation to whether [AMCE] was a bare trustee, the relationship of principal and agent existing between the stockbrokers and the objectors and whether the amounts paid were income distributions related to share capital”  (at [2]).

[124]   John Hansen J acknowledged that he had overlooked these oral discussions and had dealt with the bare trustee issue in his judgment anyway.  The Judge noted that the parties had tried to reach agreement as to the recall of the judgment and the excision of the relevant paragraphs but had been unable to reach agreement on that.  In those circumstances, the Judge did not consider that he could do any more to correct the error.  By that point, as he noted, the matter was subject to appeal. 

[125]   The Commissioner questioned our jurisdiction to hear an appeal from the recall decision.  Assuming, without deciding, that we have jurisdiction, the appeal on this point was misguided.  We doubt that there was an oral judgment.  More importantly, as John Hansen J made plain to the appellants, the way to deal with this issue was to appeal against the substantive judgment rather than bring a pointless appeal on the recall decision.  It was nonsensical to argue on the one hand that we should allow the appeal on the substance and on the other that we should allow the recall appeal and so direct the Judge to recall.

[126]   The recall appeal is accordingly dismissed.

Other matters

[127]   The appellants also filed the appeals in CA278/05 and CA279/05.  Those appeals were filed as a matter of caution following the initial release of the High Court’s decisions in relation to the judicial review and the objection decision.  However, it transpired that neither of those decisions was properly issued in terms of the High Court Rules.  The judicial review appeal (CA94/06) and the objection appeal (CA100/06) were accordingly filed in relation to judgments as finally issued.

[128]   As we discussed with counsel, it follows from this chronology that the Court has no jurisdiction in relation to the two earlier appeals, CA278/05 and CA279/05.  Those appeals were dismissed at the hearing for want of jurisdiction.

Result and costs

[129]   For these reasons, the objection appeal is allowed and the orders made by the TRA in Case W44 (2004) 21 NZTC 11,405 are reinstated.  The judicial review and recall appeals are dismissed. We formally record that the appeals in CA278/05 and CA279/05 were dismissed at the hearing.

[130]   Having succeeded in relation to CA100/06 (the objection appeal), the appellants are entitled to costs plus disbursements in this Court in the usual way.  We reduce the costs award slightly to reflect the fact the appellants were unsuccessful in relation to CA94/06 and CA155/06 (the judicial review and recall appeals) and our view that both of those appeals were misguided.

[131]   Costs in the High Court were to be dealt with on the receipt of memoranda from the parties.  We leave any question of costs in that Court to be resolved by the High Court in light of this judgment.

Solicitors:

Lovegroves, Auckland for Appellants
Crown Law Office, Wellington for Respondent

APPENDIX A

Portfolio for Frank King

Company	Date Purchased	Date Sold	Reasons for Sale
AAH	September 1988	To finance purchase of Anglo Eastern.
Forward Technology	November 1988	To purchase Pifco and because company no longer making profits.
SG Warburg (previously Mercury Securities)	November 1988	To raise funds to send to Frank King.
Legal and General	November 1988	To purchase Hanson.
Transport Development	March 1989	To finance purchase of Prudential (to have some shares in insurance sector).
Steel Burrill Jones	1983	October 1988	To avoid risk of new management.
BAT	Well-before 1986	January 1989	To improve cash holdings.
Smith & Nephew	Prior to 1986	January 1989	To increase cash in portfolio.
Barclays Bank	Before March 1986 May 1988 (rights issue)	July 1988	To finance purchase of Caradon and because of problems with bank shares following the 1987 sharemarket crash.
MPEC	1986	October 1988	To avoid possible downturn in rents and to finance purchase of Consolidated Goldfields and Dowty Group.
Cadbury Schweppes Australia	1986	October 1988	To purchase South Australia Breweries.
Mercury European income units (managed by Warburys)	1986	November 1988	To raise funds to send to Frank King.
Mallett	Late 1986	February 1989	Antique sector of the market had been hit hard by the 1987 stockmarket crash.
Mining and Allied	1986/1987	January 1989	Reduce exposure to engineering sector.
Company of Designers	1987	August 1988	Company lacked growth potential after the 1987 stockmarket crash.
Verson International	1987 (from takeover)	October 1988	To avoid problematic company and to finance purchase of Consolidated Goldfields and Dowty Group.

Company	Date Purchased	Date Sold	Reasons for Sale
Mercury Asset Management (subsidiary of Mercury Securities)	1987 (free distribution)	November 1988	To raise funds to send to Frank King.
British Fittings (Convertibles)	April 1988
Ford Sellar Morrison	April 1988 (rights issue)
South Australia Breweries	April 1988 (bonus) October 1988 March 1989 (bonus)
Caradon	July 1988	March 1989	To finance purchase of Prudential (to have some shares in insurance sector).
Anglo Eastern	August and September 1988	January 1989	To increase cash in portfolio and these (and Smith & Nephew) least likely to increase in earning or value.
Rank Hovis	September 1988	November 1988	To raise funds for Frank King at his request.
Consolidated Goldfields	October 1988	April 1989	To purchase Heywood Williams and fully valued in market at the time.
Dowty Group	October 1988	August 1989	To raise cash in portfolio – going on holiday and wanted cash available.
Hanson	24 and 29 November 1988	January 1989	To improve cash holding of portfolio.
Pifco A	November 1988 February 1989	August 1989	Company’s results cautioning about future profits.
Adwest	December 1988
Ibstock	January 1989
Euro Tunnel (Warrants)	7 February 1989	8 February 1989	Decided it was an unsuitable investment for this portfolio – no authorisation to hold warrants.
Marina Development	15 & 26 February 1989	July 1989	To purchase Southend Properties (new on market) and not as likely to do as well as new company.
Prudential	March 1989	September 1989	To reduce exposure to the financial sector.
Heywood Williams	April 1989
Evered	May 1989

Company	Date Purchased	Date Sold	Reasons for Sale
Gateway	May 1989	June 1989	Shares were about to become unsaleable in the market as the company was the subject of a management buy-out.  The management offer consisted of cash and unquoted shares and unquoted loan stock.  Felt that it was difficult to put a value on the unquoted shares and that they would be unsaleable.
Charterhall	May 1989 July 1989 (bonus issue) October 1989 (rights issue)	July 1989	To purchase shares in new company (Southend).
Plastiseal	June 1989	July 1989	As for Charterhall and Marina Development(s).
Brent Walker	June1989
Southend Properties	July 1989
Bayer	July 1989
Midland Bank	11, 14 and 21 September 1989
Tate & Lyle (convertibles)	September 1989	November 1988	To purchase Hanson.
Morgan Grenfell	3 November 1989	7 November 1989	Take the profit.
Mountleigh	7 November 1989 4 pm	8 November 1989	To avoid move to protect from unwanted bid.

APPENDIX B

Portfolio for Brenda King

Company	Date Purchased	Date Sold	Reasons for Sale
GT Global Unit Trust	June 1988	Takeover.
Steel Burrill Jones	July 1988	In anticipation of expected management change.
London & Manchester	September 1988	Takeover.
Verson International	October 1988	To avoid problematic company and to finance purchase of Dowty Group.
Mercury Asset (from free distribution from SG Warburgs)	October 1988	Selling before drop in price.
Rea Bros	October 1988	Struggling company.
Forward Technology	November 1988	To purchase Pifco and because company no longer making profits.
Mining and Allied	January 1989	As for Frank King – to reduce exposure to engineering sector.
Smith and Nephew	January 1989	To increase cash in portfolio.
BAT	January 1989	To improve cash holdings.
Mallett	February 1989	Antique sector of the market had been hit hard by the 1987 stockmarket crash.
Transport Development	June 1989	To purchase Brent Walker.
Hardy and Hanson	1987	October 1988	Bought for asset value but unable to increase holding so pointless to retain.
Sun Life	Prior to 1988	October 1988	Reduce exposure to financial sector.
British Fittings (Convertibles)	April 1988
Ford Sellar	April 1988 (rights issue)
SA Brewing	April 1988 (Bonus Issue) March 1989 (Bonus Issue)
Caradon	July 1988	September 1989	To purchase Midland Bank.
Charterhall	August 1988 October 1988 (rights) February 1989 (rights)	July 1989	As for Frank King – to purchase Southend.

Company	Date Purchased	Date Sold	Reasons for Sale
Rank Hovis	September 1988	November 1988	To purchase Hanson.
Tate and Lyle (Convertibles)	1986 and September 1988 (from proceeds of London and Manchester takeover)	November 1988 (not convertible preferential stock)	To purchase Hanson.
Consolidated Goldfields	October 1988	April 1989	To purchase Gateway.
Dowty Group	October 1988	August 1989	As for Frank King ie to obtain cash prior to holiday.
Standard Chartered Bank	November 1988 (rights)
Pifco A	1 November 1988 8 November 1988 10 February 1989	15 and 18 August 1989	As for Frank King – company’s results cautioning about future profits.
Hanson	24 and 29 November 1988	January 1989	To improve cash holding of portfolio.
Adwest	December 1988
Euro Tunnel (Warrants)	7 February 1989	8 February 1989	Decided it was an unsuitable investment for this portfolio – no authorisation to hold warrants.
Pifco	February 1989	August 1989
Marina Development	15 and 21 February 1989	July 1989	As for Frank King – to purchase Southend.
Heywood Williams	April 1989
Gateway	April 1989	June 1989	Shares were about to become unsaleable in the market as the company was the subject of a management buy-out.  The management offer consisted of cash and unquoted shares and unquoted loan stock.  Felt that it was difficult to put a value on the unquoted shares and that they would be unsaleable.
Prudential	April 1989	October 1989	As for Frank King – to reduce exposure to financial sector.
Evered	May 1989
Brent Walker	June 1989
Southend Properties	July 1989
Midland Bank	1, 21 and 24 September 1989
Ely’s of Wimbledon	September 1989
Morgan Grenfell	3 November 1989	7 November 1989	No reason given.
Mountleigh	8 November 1989	8 November 1989	No reason given.

APPENDIX C

Portfolio for Ann King

Company	Date Purchased	Date Sold	Reasons for Sale
GT Unit Trust	3 and 6 June 1988	As for Brenda King – takeover.
Next	July 1988	Did not want these shares.
Preedy	July 1988	No reason given.
Company of Designers	August 1988	As for Frank King - company lacked growth potential after the 1987 stockmarket crash.
AAH	September 1988	To finance purchase of Anglo Eastern.
Verson International	October 1988	As for Frank King – to avoid problematic company.
Steel Burrill Jones	October 1988	As for Frank King – to avoid risk of new management.
Ely’s of Wimbledon	October 1988	Reduce exposure to share with a limited market.
Forward Technology	November 1988	Looked unattractive.
Mining & Allied	January 1989	As for Frank and Brenda King – reduce exposure to engineering sector.
Smith & Nephew	January 1989	As for Frank King – to increase cash in portfolio.
BAT	January 1989	As for Frank King - to improve cash holdings.
Myson	April 1989	Probably to give cash in portfolio.
Local London	April 1989	Taken over for cash.
Transport Development	June 1989	As for Frank King - to finance purchase of Prudential (to have some shares in insurance sector).
Britannia Arrow	July 1989	Had become unattractive.
London Merchants	November 1989	To purchase Colonial.
ASDA	Prior to 1988	July 1988	Small supermarket facing competition.
British Fittings (Convertibles)	April 1988
Ford Sellar Morrison	April 1988 (rights issue)
Jos Webb	April 1988	August 1988	Company received takeover offer.
Barclays Bank	May 1988	July 1988	No reason given.
Pifco A	2 and 13 June 1988 November 1988	September 1988 August 1989	Expected price to slip and wanted to take the gain. Company’s result cautioned about future profits.
Kwik Save	July 1988 (rights issues)
Company	Date Purchased	Date Sold	Reasons for Sale
WA Holdings	July 1988
Caradon	July 1988	September 1989	To purchase Midland Bank.
Anglo Eastern	August 1988 September 1988	12 and 19 January 1989	As for Frank King – to increase cash in portfolio and these shares least likely to increase in earning or value.
Charterhall	August 1988 October 1988 (rights issue) February 1989	February 1989 (partial sale of holding)	To purchase Marina Development(s).
Rank Hovis	September 1988	November 1988	To purchase Hanson.
Tate & Lyle (convertibles)	September 1988	November 1988	As for Frank King – to purchase Hanson.
Consolidated Goldfields	October 1988	April 1989	None given.
Dowty Group	October 1988	August 1989	Unclear.
Fitch Lovell	November 1988 (rights issue)	April 1989	Price slipping.
Hanson	24 and 29 November 1988	January 1989	As for Frank King – to improve cash holding of portfolio.
Shell	December 1988
Adwest Group	December 1988 June 1989
Cable and Wireless	December 1988 January 1989 (call)	December 1988	Share price too high and likely to slip.
Mallett	Late 1988	February 1989	As for Frank and Brenda King – antique sector of the market had been hit hard by the 1987 stockmarket crash.
Ibstock	January 1989
Euro Tunnel (Warrants)	7 February 1989	8 February 1989	As for Frank King – unsuitable investment for portfolio/no authorisation to hold warrants.
Marina Development	15 and 21 February 1989	18 and 25 July 1989	Lost its way.
Prudential	March 1989	September 1989	As for Frank King – to balance financial sector holding.
Heywood Williams	April 1989
Company	Date Purchased	Date Sold	Reasons for Sale
Gateway Group	April 1989 June 1989	June 1989	Shares were about to become unsaleable in the market as the company was the subject of a management buy-out.  The management offer consisted of cash and unquoted shares and unquoted loan stock.  Felt that it was difficult to put a value on the unquoted shares and that they would be unsaleable.
Evered	June 1989
Brent Walker	June 1989
Bayer	June 1989 September 1989
Allianz	June 1989 July 1989
Deutsche	June 1989
Southend Properties	July 1989
Ely’s of London	July 1989 August 1989
RTZ	July 1989 (rights)
Abbey National	July 1989	November 1989	To finance purchase of Siemens and Continental.
Wensum	3 July 1989 (offered by Greenwell’s subsidiary)	3 July 1989 Once dealings in shares commenced.	Reconsidered fit.  Made a gain on the transaction.
Polar	21 July 1989 (issue from Greenwell’s subsidiary)	28 July 1989	To purchase Allianz.
Midland Bank	1, 14 and 21 September 1989
Siemens	October 1989
Colonial	November 1989
Morgan Grenfell	3 November 1989	7 November 1989	No reason given.
Mountleigh	7 November 1989	8 November 1989	No reason given.