Great North Motor Company Limited (in receivership) v Commissioner of Inland Revenue
[2016] NZHC 2708
•11 November 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-001710 [2016] NZHC 2708
UNDER the Tax Administration Act 1994 IN THE MATTER
of the Income Tax Act 1994, the Income
Tax Act 2004, and the Income Tax Act
2007BETWEEN
GREAT NORTH MOTOR COMPANY LIMITED (IN RECEIVERSHIP) Plaintiff
AND
COMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 25 - 27 October 2016 Counsel:
M Lennard for Plaintiff
M Deligiannis and K Naik-Leong for DefendantJudgment:
11 November 2016
JUDGMENT OF DOWNS J
This judgment was delivered by me on Friday, 11 November 2016 at 3 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
M Lennard, Wellington.
Crown Law, Wellington.
M Deligiannis, Wellington.
GREAT NORTH MOTOR COMPANY LTD (IN RECEIVERSHIP) v COMMISSIONER OF INLAND REVENUE [2016] NZHC 2708 [11 November 2016]
Table of Contents
Para No
The case [1] The facts [4] Something about the evidence [25] The law in relation to tax avoidance [29] Did the arrangement constitute tax avoidance?
The first step [36]
The second step: the manner in which the arrangement was carried out [39] The roles of the relevant parties and their relationship to the taxpayer [44] The nature and extent of the financial consequences of the arrangement
for the taxpayer [47] Artificiality and contrivance [49] Mr Russell’s position on the issue [52] The ultimate question [55]
The time-bar: wilfully misleading returns?
The provision [58]
Fraudulent or wilfully misleading: the test [60] The Commissioner’s stance [63] Great North’s position [66] Analysis [68] Shortfall penalty [79] The time-bar: s 330(2) of the Companies Act [86] Conclusion [112]
The case
[1] The Commissioner disallowed tax deductions and losses of Great North Motor Company Ltd, or Great North, to the value of almost $22 million1 in relation to tax returns from 1996 to 2011.2 And, the Commissioner penalised Great North for adopting an abusive tax position on the basis tax avoidance was the dominant purpose or effect of the company’s arrangement. Great North contends the
Commissioner erred. It took its case to the Taxation Review Authority. On 14 July
1 The precise figure is $21,719,813.79, of which $19,934,737.67 represents deductions and
$1,785,076.12 losses brought forward from 1995.
2 The case encompasses three statutes given the returns’ time-span: the Income Tax Act 1994, which governs the 1996–2005 returns; the Income Tax Act 2004, which governs the 2006–2008 returns; and the Income Tax Act 2007, which governs the 2009–2011 returns. Because the material sections are the same throughout, this judgment refers only to the 2007 Act.
2015, Toogood J transferred it to this Court following an application by the
Commissioner.3
[2] In addition to the primary issue of whether Great North has engaged in tax avoidance, a procedural point arises of some significance. Most of the tax returns were re-assessed by the Commissioner more than four years after they were filed, and hence after a time-bar for re-assessment. But for much of that period, Great North did not exist in the sense it had been removed from the companies register. So, the Commissioner contends those returns were nullities and the time-bar does not apply, as it could not run during that time. However, s 330 of the Companies Act
1993 provides if a company is restored to the register—as Great North was twice— the company is deemed to have continued in existence as if never removed from the register, thereby implying the time-bar is engaged. Applicable case law is not obviously decisive.
[3] The Commissioner advances an alternative argument that because Great North’s tax returns were wilfully misleading, a statutory exception to the time-bar is engaged. Great North contends the returns were anything but.
The facts
[4] The facts are important, albeit few were contested. They are best understood after the relevant personnel have been introduced. First, the key corporates.
[5] Great North was incorporated on 21 October 1959 and until 7 February 1992, called Zupps Motors Ltd. It operated a used car yard. Great North’s ownership may be fairly described as circular. 99.99 percent of Great North’s shares are held by Glen Eden Holdings Ltd, or Glen Eden. Glen Eden is wholly owned by Commercial Management Ltd, or Commercial Management. Commercial Management is wholly owned by Commercial Administration Ltd, or Commercial Administration. And Commercial Administration is wholly owned by Glen Eden. The remaining
0.01 percent of Great North is owned by Downsview Nominees Ltd, or Downsview.
And Downsview is wholly owned by Commercial Administration:
3 Commissioner of Inland Revenue v Great North Motor Company Ltd (in rec) [2015] NZHC
1645, (2015) 27 NZTC 22-016.
Commercial
Administration Downsview
Commercial
Management
Great North
Glen Eden
[6] Next, the individuals. Mr John George Russell was the sole director of Glen Eden, Commercial Management and Commercial Administration. And, accountant and secretary to all three companies. Mr Russell could not recall in evidence whether he was a director of Great North before 2010 but nothing turns on this; he was its accountant since approximately 1989.
[7] Mr Russell is now a semi-retired accountant who remains active in tax affairs. Mr Russell has had a difficult, litigious and ultimately ruinous 30-year relationship with the Commissioner—ruinous because Mr Russell was bankrupted last year in consequence of a dispute about his own tax affairs. Unsurprisingly, these topics arose in evidence from time to time. So too did Mr Russell’s views about our tax laws, and the Commissioner’s interpretation and enforcement of them.
[8] On more than one occasion in testimony, Mr Russell referred to his contest with the Commissioner and by implication, tax more generally, as a “game”. I say more about this later. But before going further, I make explicit I have approached this case without reference to the long shadow cast by Mr Russell’s previous dealings with the Commissioner, and more particularly, Mr Russell’s reported propensity for tax avoidance. Great North is entitled to have its case determined by
reference to only the evidence in this case, of which propensity evidence formed no admissible part.4
[9] The other individual of significance, albeit he was not a witness, is Mr Anthony Radisich. Mr Radisich and his companies are longstanding clients of Mr Russell. And, Mr Radisich is a former shareholder of the plaintiff. He held
98.4 percent of the shares until September 1998. It was common ground all shares in
Great North are held on trust for Mr Radisich’s benefit.
[10] And now, the central arrangement and long aftermath. On 20 August 1993, Great North issued a debenture to Glen Eden in return for Glen Eden advancing
$380,277 to Great North. This sum was repayable “on demand”; meaning Great North was liable to repay the advance in full at any time. Interest was payable at any rate specified by Glen Eden, but only when Glen Eden actually demanded payment of interest. In the absence of Glen Eden stipulating an interest rate, the default rate was 28 percent per annum. Under the debenture, Great North was entitled to make repayments of principal at any time.
[11] Materially, Great North was then insolvent. It ceased trading on
10 December 1993, a little under four months after Glen Eden’s apparent injection of funding. I say apparent because while the funds were advanced, it is likely they were used to repay another creditor owed exactly the same amount by Great North, Ron West Ltd (Ron West). Mr Radisich owned 99.99 percent of Ron West; the remaining 0.01 percent was owned by Downsview. So, it is likely Glen Eden was
merely substituted for Ron West as a creditor.
4 Paragraph 101 of Ms Chapman’s brief of evidence for the Commissioner referred to propensity evidence of tax avoidance, but at a very high level of generality. The evidence lacked probative value for this reason and I declined to admit it; s 8 of the Evidence Act 2006. The paragraph also relied exclusively on hearsay evidence, in circumstances in which effective challenge might have been problematical. During closing, Mr Lennard submitted the tax arrangement in question was different from that engineered by Mr Russell in another case of established tax avoidance: Miller v Commissioner of Inland Revenue [2001] UKPC 17, [2001] 3 NZLR 316 (PC). At my invitation, Mr Lennard took instructions overnight and sought leave to withdraw the submission; by then, the hearing had concluded. I permitted him leave to do so, essentially to protect Great North’s entitlement to a fair trial. While carefully framed, Mr Lennard’s submission reduced to the proposition that upon this occasion, Mr Russell had not engaged in tax avoidance. That struck me as a potentially sharp dual-edged sword.
[12] On 14 July 1994, Mr Russell wrote to the Commissioner saying Great North had no assets or income, and thus no funds to pay PAYE tax deductions from
31 March 1991. Mr Russell engaged in not dissimilar correspondence on 21 March
1995. Great North was placed in liquidation in the intervening period, on
1 September 1994.
[13] On 20 April and 28 June 1995, Mr Russell filed income tax returns for Great
North for that year. The returns asserted Great North had made combined losses of
$1,785,076.12.
[14] Great North was removed from the companies register on 8 May 1996. But on 1 July 1997 it was restored to the register on application by Glen Eden and Mr Russell. It is likely the pair took this step to prosecute a dispute with the Commissioner in relation to the latter’s treatment of Great North’s tax returns for
1991 to 1995, in which the Commissioner had disallowed claimed deductions and losses on the basis the returns were unsupported by adequate documentation.
[15] On 23 December 1997 Mr Russell wrote two letters to the Commissioner outlining objections to the Commissioner’s 1991 to 1995 determinations. And then in April 1998, Great North instituted judicial review proceedings against the Commissioner in relation to these determinations. But Great North did not recommence business. Indeed, it has not sold a car since 1993 or perhaps earlier, or for that matter, done anything else since then to generate income.
[16] Great North was again placed in liquidation on 24 June 1998. Glen Eden abandoned its judicial review proceedings in September that year. Thereafter little happened until May 2005.
[17] On 25 May 2005 Kensington Developments Ltd, or KDL, acquired 14 debentures from Glen Eden, including that issued by Great North to Glen Eden in
1993. KDL was incorporated in 1979 but has been in receivership since 30 June
1994. Mr Russell has been its receiver from July 1994 and sole director from 1 April
2008. Notwithstanding Mr Russell’s evidence to the contrary, it is unlikely KDL
paid anything to acquire the debentures: it had no obvious means to do so,
Mr Russell’s reports as receiver imply nothing was paid, and there is no independent evidence to suggest anything was. By this time, Great North owed Glen Eden—and hence KDL by virtue of the transfer—$5.9 million under the debenture.
[18] On 26 May 2005, Mr Russell appointed himself receiver of Great North. And on 29 May 2005, it was struck off the companies register.
[19] In July 2005 Mr Russell filed tax returns on behalf of Great North even though the company had been removed from the register two months earlier. The returns were for the tax years ending 31 March 1996 to 31 March 2005 inclusive. They claimed as expenditure and associated losses the interest payable on Great North’s debenture since inception, which by 2005 had reached the sum of
$7,206,855.66. On 13 July 2006 Mr Russell filed Great North’s return for that year.
By then, Great North’s paper losses had swollen to $8,875,561.97.
[20] The Commissioner issued determinations the same year allowing the claimed expenditure and losses. However, these determinations were made automatically rather than in consequence of any deliberative process; indeed, they were computer generated.5 But they were determinations nonetheless. From 11 October 2005, the Commissioner issued re-assessments countermanding that earlier stance. However, it is almost certain Mr Russell had anticipated as much:
(a) On 27 August 2010 he and Glen Eden applied to reinstate Great North to the companies register, and it was reinstated from 8 October 2010.
(b) Then, on 5 January 2011 Mr Russell filed tax returns for 2007–2009.
(c) And on 10 January 2011 in response to a letter from the
Commissioner, Mr Russell informed the Commissioner re-assessment
5 Mr Russell gave evidence the Commissioner had a team of staff devoted to tax matters in which he was involved, and the assessments were made deliberatively. While it is likely a team existed at some point during Mr Russell’s dealings with the Commissioner over many years, I accept Ms Chapman’s evidence the returns were computed-generated with minimal human input (in part because they look computer-generated, and in part because Ms Chapman was authoritative on this point). But nothing turns on this because the determinations bound the Commissioner.
was time-barred because of the operation of s 330 of the Companies
Act 1993.
[21] Over 2011 and 2012 Mr Russell filed Great North’s tax returns for the 2010–
2011 years, the last of which are in issue. On 7 April 2011, the Commissioner commenced an investigation into Great North’s returns and sought information from Mr Russell. He and the Commissioner traded correspondence into 2012.
[22] On 4 September 2012, KDL transferred its interest or some thereof, in the Great North debenture to Timberton Investment Ltd, or Timberton. Timberton is wholly owned by Mr Radisich. Mr Russell signed the deed of assignment as receivers for both Great North and KDL. Whereas it is likely KDL had paid nothing for the Great North debenture (and others), Timberton paid KDL a total of $600,000. Great North agreed to pay contributory interest as necessary at a rate of 10 percent per annum. Timberton acquired Great North’s tax losses at a rate of 15 cents per dollar of loss.
[23] Events of 2013 need not detain us. In 2014, the Commissioner concluded Great North had engaged in tax avoidance and s 108(2) of the Tax Administration Act 1994 permitted re-assessment of allegedly misleading tax returns.
[24] To date, several companies in connection with Mr Radisich have applied
$6,571,066.72 of Great North’s putative losses to diminish their tax liability.
Something about the evidence
[25] There were only two witnesses: Mr Russell for Great North and Ms Keryn Chapman, a specialist investigator for the Commissioner. Ms Chapman’s evidence largely involved a reconstruction of the sequence set out above, based on documentation from a variety of sources, including Mr Russell. Little of her testimony was challenged.
[26] Mr Russell gave evidence for more than a day, all but 30–40 minutes being in cross-examination. In brief evidence-in-chief, Mr Russell disputed little of the sequence above. But he denied anything in connection with Great North was tax
avoidance, and strongly denied filing wilfully misleading returns. Material factual contests I deal with later in context of the respective issues, but first, some preliminary observations about Mr Russell’s evidence.
[27] Mr Russell was an avuncular and charismatic witness whose acuity remains undimmed by age.6 But his evidence was unpersuasive. Mr Russell’s testimony was marred by at least three difficulties:
(a) A tendency for the elliptical. Rather than answering the posed question, Mr Russell would often answer one of his choice, engage in argument or offer an explanation of peripheral relevance. On several occasions, I had to direct him to address the question.
(b)An apparently unwavering belief only he understood tax law, company law and accountancy. So, another person’s position on an issue—most frequently, but not always the Commissioner’s— Mr Russell would dismiss as “plainly wrong” or “simply wrong”. Mr Russell was similarly dismissive when confronted about the basis on which he appointed himself Great North’s receiver.
(c) His view, as alluded to above, that his dealings with the Commissioner and the tax system were a “game”. On several occasions when re-reading his combative correspondence with the Commissioner, Mr Russell laughed or smiled, demeanour captured only once by the record. The word “game” was his. It arose in this way:
Q So you are laughing, Mr Russell, why is that?
A Well at the time, what was happening was the, in the, the arguments the Commissioner was having with me at the time, he was denying his own records and so I said well if you, if you’re going to do that I want you to sign up here that, that your – in fact I asked you, you just recently in one such case I think but anyway I asked the, the
6 Mr Russell is in his eighties, a fact admitted by consent during the hearing; see s 9 of the
Evidence Act 2006.
Commissioner to sign a document which he was (inaudible
12:32:04) to sign and then I would supply the information. Well, it really was a bit of a game, you know, at that stage
and I thought well, he’s gonna deny his own records then
we’ll see how he goes on this one, so we asked that he sign up to actually perform what he said he would do if I gave him the information. I don’t know that I even had any information to give him or certainly not much, I would’ve thought.
THE COURT:
Q Who did you regard the game as being between, Mr Russell?
A The Inland Revenue Department, Your Honour.
CROSS-EXAMINATION CONTINUES: MS DELIGIANNIS Q And yourself?
A What’s that?
Q And yourself?
A Oh yes. It takes two to tango.
Q Well the last 30 years have been a bit of a game for you
haven’t they?
A Well. Not really. I mean it, it has been, become rather serious of recent times.
[28] Mr Lennard submitted Mr Russell’s apparently unwavering self-belief tended to confirm the veracity of his testimony. I disagree.
The law in relation to tax avoidance
[29] In Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue,7 and
Penny v Commissioner of Inland Revenue,8 the New Zealand Supreme Court authoritatively settled the correct approach to the hitherto somewhat amorphous
7 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009]
2 NZLR 289.
8 Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433.
concept of tax avoidance. In light of this, there was no dispute between the parties about the applicable principles. No exegesis is required.
[30] The cases call for a two-step inquiry.9 The first step examines whether the taxpayer has met the requirements of the specific taxation provision relied upon to permit the tax advantage; in this case, the ability of a company to deduct interest incurred by it as a business expense.10 If not, obviously the taxpayer is not entitled to the tax advantage for which he, she or it contends.
[31] If that step is met, the second step considers the use of the specific taxation provision in light of the arrangement as a whole to determine if an otherwise seemingly legitimate tax advantage engages tax avoidance:11
… If, when viewed in that light, it is apparent that the taxpayer has used the specific provisions, and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement.
[32] The general avoidance and specific taxation provisions are meant to work in unison. Each provides context for the interpretation and application of the other.12
Consequently, the policy underlying the general anti-avoidance provision must always be kept in mind.13
[33] In determining whether an arrangement gives rise to tax avoidance,14 the “general anti-avoidance provision does not confine the court as to the matters which may be taken into account” and the Courts may address “a number of relevant factors, the significance of which will depend on the particular facts”.15 These
include:16
9 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [107].
10 Income Tax Act 2007, s DB 7.
11 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [107]: see
Income Tax Act 2007, s BG 1.
12 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [103].
13 Penny v Commissioner of Inland Revenue, above n 8, at [47].
14 The term arrangement is defined extremely broadly; see Income Tax Act 2007, s YA 1.
15 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [108].
16 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [108].
(a) The manner in which the arrangement is carried out;
(b)The roles of the relevant parties and the relationship each has with the taxpayer;17
(c) The nature and extent of the financial consequences of the arrangement for the taxpayer; and
(d)Contrivance and artificiality, which are often hallmarks of tax avoidance.
[34] In Ben Nevis the majority observed:18
The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament’s purpose. … If the use of the specific provision is beyond parliamentary contemplation, its use in that way will result in the arrangement being a tax avoidance arrangement.
[35] As will be apparent, the inquiry is objective: tax avoidance does not require the taxpayer to have intended that outcome or effect. However, when a taxpayer is alleged to have filed a wilfully misleading return on the basis he, she or it knew the claimed deductions constituted tax avoidance, obviously knowledge or recklessness on their part must be established in relation to the return. Or more accurately given the burden of proof in these cases, not disproved by the taxpayer on the civil
standard.19 More about this later.
Did the arrangement constitute tax avoidance?
The first step
[36] There is no dispute Great North meets the first of the two steps identified by the Supreme Court: it was entitled to treat interest incurred in relation to the
debenture as a deductible expense.20 However, I accept the Commissioner’s
17 The Supreme Court saw the latter consideration as important because some tax avoidance arrangements are akin to joint ventures, so that ordinary commercial tensions are not engaged.
18 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [109].
19 Tax Administration Act 1994, s 149A(1).
20 Income Tax Act 2007, s DB 7(1).
submission that in providing for the deductibility of interest as a business-related expense, Parliament intended deductibility to align with the genuine cost of such expenditure.
[37] In Accent Management Ltd v Commissioner of Inland Revenue, the Court of
Appeal observed in relation to specific deductibility provisions:21
… When construing such specific rules and looking for their scheme and purpose, it is necessary to keep general anti-avoidance provisions steadily in mind. On this basis, it will usually be safe to infer that specific tax rules as to deductibility are premised on the assumption that they should only be invoked in relation to the incurring of real economic consequences of the type contemplated by the legislature when the rules were enacted. Further, it also seems reasonable to assume that deductibility rules are premised on a legislative assumption that they will only be invoked by those who engage in business activities for the purpose of making a profit. Further, schemes which come within the letter of specific tax deductibility rules by means of contrivance or pretence are candidates for avoidance.
[38] Similar observations appear in Ben Nevis in relation to the 50-year gap between when the expenditure was incurred and its payment.22 This does not change the outcome of the first step. But it does inform my assessment of the second, to which I now turn.
The second step: the manner in which the arrangement was carried out
[39] Great North was insolvent when it issued the debenture to Glen Eden. Glen Eden knew that because it was the majority shareholder; Mr Russell was the accountant for both companies; and as Mr Russell accepted in evidence, his office prepared Great North’s accounts. They are informative. As at 31 March 1993, Great North had:
(a) Incurred losses of $366,898.
(b) Negative shareholder funds of $511,558.
(c) Assets of $110,845 and liabilities of $622,403.
21 Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230, (2007) 23
NZTC 21,323 at [126].
22 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [127]–[130].
[40] By 10 December 1993 Great North had ceased trading. And by then, had incurred further losses of $137,014. As will be recalled, the debenture was issued on 20 August 1993. Great North had no means by which to service interest payments at 28 percent, let alone repay principal. And as observed, Glen Eden and Mr Russell knew that.
[41] As to the debenture, its terms tend to reinforce the artificiality of the situation:
(a) Principal was repayable on demand. So, in theory, Great North could be required to repay the entire sum at little notice.
(b)Interest was payable at any rate advised by Glen Eden, meaning at whim. It is unlikely a rational borrower would accept a term of this nature.
(c) The default interest rate was 28 percent per annum. Mr Russell said finance companies were then charging higher interest rates. However, Ms Chapman’s evidence was that Reserve Bank mortgage interest rates were just below 10 percent at that time. Of course, those interest rates presuppose security when the debenture was unsecured. However, it is unlikely marketplace interest rates for unsecured transactions were nearly three times higher.
(d)Interest was payable only on demand by Glen Eden. Lenders normally require regular periodic repayments of interest, as interest constitutes their income, which must be offset against their cost of lending money. But on this arrangement, Glen Eden received nothing unless it actually asked for interest—each and every time. Ms Chapman said she had never encountered a provision like this.
(e) The debenture placed Great North in the control of a Glen Eden- appointed receiver as soon as the advanced sum became payable, irrespective of whether Great North had defaulted.23
[42] Notwithstanding Mr Russell’s evidence to the contrary, it is unlikely KDL paid anything to acquire Glen Eden’s interests in the debenture. KDL could not. It was in receivership and owed $1,186,000 to its own debenture holder. And, Mr Russell’s reports as receiver for KDL in this period do not refer to any payment by it to Glen Eden. Moreover, there is no independent evidence KDL paid anything to acquire Glen Eden’s interest.
[43] To recapitulate:
(a) Great North issued the debenture to Glen Eden when it knew
Great North was insolvent.
(b)The debenture’s terms tend to reinforce the artificiality of the arrangement. Those terms were incongruent with the actions of rational business actors seeking to minimise cost and risk.
(c) The debenture was later transferred without consideration by
Glen Eden to KDL.24
The roles of the relevant parties and their relationship to the taxpayer
[44] Great North and Glen Eden are part of the same group of companies. Since
30 October 1992, Glen Eden has held 99.99 percent of the shares in Great North.
23 Providing the appointment was made in writing by the lender.
24 The Commissioner asked Mr Russell in correspondence why Glen Eden considered it advantageous to assign the debenture to KDL. Mr Russell responded in writing, saying: “it had
the effect of reducing the cost of receivership”. The more likely position is that the assignment was effected so Mr Russell complied with s 5(1) of the Receiverships Act 1993. That section provides a person is unable to be appointed to act as receiver if the person is or has been within the period of two years immediately preceding the commencement of the receivership, a director
of the grantor or a director of the mortgagee of the property in receivership. Under cross-
examination, Mr Russell appeared to accept that was real reason for the transfer; see notes of evidence, p 85. Mr Russell had previously been convicted for breaching the Receiverships Act: this evidence was introduced, but not as veracity evidence (s 37 of the Evidence Act 2006), and so no requirement of substantial helpfulness arose.
And as observed, Glen Eden’s ownership is circular: it is wholly owned by Commercial Management; Commercial Management is wholly owned by Commercial Administration; and Commercial Administration is wholly owned by Glen Eden. The remaining 0.01 percent of Great North’s shares are held by Downsview, in turn owned by Commercial Administration. Mr Russell was the director of Glen Eden, Commercial Management, Commercial Administration and Downsview.
[45] Mr Russell was KDL’s director and receiver. When Glen Eden assigned the debenture to KDL on 25 May 2005, Mr Russell signed the deed of assignment as director for Glen Eden and receiver for KDL. The next day, Mr Russell appointed himself receiver of Great North too.
[46] Mr Russell was asked in cross-examination if this gave rise to a conflict. He replied: “Well no. It wasn’t, because the interests of the parties were the same, was to get, the most out of the company for the benefit of the debenture holder”.25 But the parties’ interests could only align if they were closely inter-related. It is unlikely arms-length borrowers and lenders would agree to the same receiver acting for both. The point can be illustrated this way. Great North’s original indebtedness was
$380,277. Yet by the end of 2012 it was $20,738,717, a figure duly recorded by
Mr Russell in his report as receiver for KDL.
The nature and extent of the financial consequences of the arrangement for the taxpayer
[47] There is no nexus between the claimed deductions and genuine economic consequences for Great North. Great North has never paid a cent of interest. Nor will it. And, it is most unlikely it was intended to. There is no evidence Glen Eden ever demanded interest. Or KDL. Or for that matter, Timberton.
[48] There is no evidence Great North ever asked for a lower interest rate than
28 percent. Most rational actors wish to borrow money as cheaply as possible.
25 Notes of evidence, p 58.
Artificiality and contrivance
[49] Both indicia of tax avoidance are present.
[50] While it is correct funds were advanced by Glen Eden to Great North, Great North was known to be insolvent. As observed, there was never any likelihood it would be able to service the debt, let alone repay principal. The parties’ inter-relationships underscore the artificiality of the arrangement.
[51] Great North has been in receivership since 2005. And yet it has not sold a car since 1993, perhaps earlier. There is no reason—apart from this dispute—for Great North to remain on the companies register. Its continued existence is a contrivance.
Mr Russell’s position on the issue
[52] Mr Russell’s brief of evidence contained only one paragraph on the question of whether the arrangement was tax avoidance. Mr Russell said it was not because interest is deductible as a business expense, funds were advanced and there was no circularity or contrivance. In closing, Mr Lennard crisply made the same points.
[53] It is true interest is deductible as a business expense. But the Supreme Court has made clear that satisfaction of the first step is not determinative of the second. As discussed, circularity was present, at least in terms of the parties’ inter- relationships. So too contrivance. The use of actual funds in the first instance is offset by the fact Great North was known to be insolvent. One creditor was replaced for another, on my view, to alter the incidence of tax.
[54] In closing, Mr Lennard did not place any reliance on the fact Timberton paid KDL $600,000 for the partial assignment of KDL’s interests in the Great North debenture. That was understandable. Under cross-examination, Mr Russell accepted Timberton, a profitable company owned by Mr Radisich, paid the sum in order to use Great North’s tax losses. Or in Mr Russell’s own words: “So you can – you can
get money out of a debenture more ways than just having the customer pay you
back.”26
The ultimate question
[55] This leaves what the Supreme Court described as “the ultimate question”: whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament’s purpose.
[56] Great North has never suffered any genuine cost in connection with its borrowing from Glen Eden. Nor in all probability was it intended to. There is no alignment between the claimed deduction and expenditure on part of the taxpayer. Indeed, there was never any true expenditure on Great North’s part. Parliament would not have contemplated the deduction of interest as a business-related expense in this way.
[57] I am satisfied the Commissioner was correct to conclude the arrangement was tax avoidance, and a rather obvious example of its kind.27
The time-bar: wilfully misleading returns?
The provision
[58] Section 108(1) of the Tax Administration Act 1994 prohibits the Commissioner from increasing an income tax assessment after four years have passed from the end of the tax year in which the taxpayer provides the return. But the time-bar is subject to the exceptions identified in s 108(2):
(2) If the Commissioner is of the opinion that a tax return provided by a taxpayer—
(a) is fraudulent or wilfully misleading; or
26 Notes of evidence, p 89.
27 Tax avoidance merely incidental to an arrangement is not prohibited: see Income Tax Act 2007, s YA 1. At the hearing, Mr Lennard responsibly abandoned Great North’s original claim that any tax avoidance through the scheme was merely incidental.
(b) does not mention income which is of a particular nature or was derived from a particular source, and in respect of which a tax return is required to be provided,—
the Commissioner may amend the assessment at any time so as to increase its amount.
[59] These provisions represent a compromise between the accurate determination of taxation liability and finality,28 and acknowledge the Commissioner possesses only finite resources.29 Taxpayers who fail to comply with their obligations, or mislead the Commissioner, may not hide behind the four-year time-bar.30
Fraudulent or wilfully misleading: the test
[60] Although the phrase is disjunctive, the term fraudulent appears to have coloured the balance of the statutory language. So, in Babington v Commissioner of Inland Revenue (No 2) in 1958, Turner J concluded the phrase “wilfully misleading” required knowledge on the part of the taxpayer the return was materially inaccurate, and an associated intention to mislead: negligence or inattention was insufficient.31
However, the Judge accepted subjective recklessness would suffice, meaning when
the taxpayer “adverted to the probability or possibility that the returns were false and was at the time reckless in the sense of not caring whether they were correct or not”.32
[61] This approach has stood the test of time. In Case K48 Judge Keane, as he then was, considered:33
The objector must seek to evade liability, knowing that what he is doing is wrong, and intending it nevertheless. Or he must be recklessly careless as to whether or not he is wrong.
28 Sir Ian McKay and others Tax Compliance: Report to the Treasurer and Minister of Revenue by a Committee of Experts (Inland Revenue Department, December 1998, Wellington) at [10.2].
29 Vinelight Nominees Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,519 (HC) at
[24].
30 Vinelight Nominees Ltd v Commissioner of Inland Revenue, above n 29, at [24].
31 Babington v Commissioner of Inland Revenue (No 2) [1958] NZLR 152 (SC). This case considered s 16 of the Land and Income Tax Act 1923. Unlike s 108(2), s 16 at the relevant time permitted the assessments to be re-opened only if the returns were fraudulent or wilfully
misleading (an objective fact), rather than if the Commissioner held the opinion the returns were
fraudulent or wilfully misleading (a subjective fact). The change was not effected until 1955;
see Babington v Commissioner of Inland Revenue (No 2) at 154.
32 Babington v Commissioner of Inland Revenue (No 2), above n 31, at 157.
33 Case K48 (1988) 10 NZTC 397 (TRA) at 402. This case considered s 24 of the Land and Income
Tax Act 1954.
[62] In the recent case of Edwards v Commissioner of Inland Revenue,34
Williams J considered the phrase “fraudulent or wilfully misleading” to elide with the standard for the imposition of a shortfall penalty under s 141E of the Tax Administration Act,35 which applies to an evasive tax position. But that approach appears to have reflected the particular facts, including procedural wrangling on the part of both parties. Moreover, whether a return is “fraudulent or wilfully misleading” is a question antecedent to that of penalty, because there can be no re-
assessment—and hence no question of penalty—unless the return is first vitiated in this way. Consequently, I approach the issue by reference to the older authorities above.
The Commissioner’s stance
[63] Here, the Commissioner concluded the 1996–2006 returns were wilfully misleading. The essence of her reasoning was:
(a) Mr Russell filed the returns knowing the Commissioner had already disallowed similar deductions in relation to Great North’s 1991–1995 tax returns (also filed by Mr Russell). And, because Glen Eden’s judicial proceedings against the Commissioner were later abandoned, Mr Russell knew the Commissioner’s position vis-à-vis the earlier returns was unimpeachable.
(b) It was “arguable” Mr Russell knew the arrangement was tax
avoidance given its various features.
[64] So, when representing the returns reflected the true tax position of Great
North, Mr Russell had wilfully misled the Commissioner.
[65] Ms Deligiannis defended this reasoning, while inviting me to make my own determination if I concluded the Commissioner had erred.
34 Edwards v Commissioner of Inland Revenue [2016] NZHC 1795, (2016) 27 NZTC 22-064.
35 Edwards v Commissioner of Inland Revenue, above n 34, at [88] and [117].
Great North’s position
[66] Mr Lennard approached this issue in two ways. First, by reference to Mr Russell’s characteristics, and second, to alleged flaws in the Commissioner’s reasoning. As to Mr Russell, Mr Lennard noted this was the only occasion in 30 years’ litigation in which Mr Russell had been accused of dishonesty. And he reminded me Mr Russell had never been convicted of misleading a Court or an offence involving dishonesty. Mr Lennard accepted while Mr Russell had strong views about tax, those same views tended to support Mr Russell’s belief the returns were not misleading.
[67] Mr Lennard submitted the Commissioner’s reasoning was flawed in that the
1991–1995 returns were disallowed for reasons wholly unconnected with alleged tax avoidance. And, he noted the timidity of the Commissioner’s conclusion it was “arguable” Mr Russell knew the arrangement was tax avoidance, when cogent evidence is required before a Court or Tribunal may make a finding of fraud, dishonesty or some other species of morally reprehensible behaviour.36
Analysis
[68] I agree the first limb of the Commissioner’s case is largely a non sequitur. The earlier returns were disallowed for a reason unconnected with tax avoidance: the Commissioner had concluded there was insufficient source documentation to support the claimed deductions. Their rejection on this ground says little if anything about whether Mr Russell knew the later returns were misleading. It follows the Commissioner’s basis for her rejection of the earlier returns has only a tenuous rational connection to the issue of Mr Russell’s belief in relation to the later returns. So too the Commissioner’s submission Mr Russell was not authorised to file Great North’s 1995 tax return, as the company was then in liquidation and under the control of the Official Assignee. That may well be correct, but again, says little about whether Mr Russell knew the later returns were misleading.
[69] There is some divergence in the case law as to whether appellate deference
attaches to the Commissioner’s “opinion a return was fraudulent or wilfully
36 Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1.
misleading”,37 a subject explored by Williams J in Edwards v Commissioner of Inland Revenue.38 However, it is axiomatic the Commissioner may not re-assess a return merely because she considers it “arguable” the return is fraudulent or wilfully misleading. That would be to re-write the statute; the Commissioner must be of the
opinion the return was fraudulent or wilfully misleading. In fairness to Ms Deligiannis, she did not suggest otherwise. Having found the Commissioner’s first limb was in error and the second inadequate, I approach this question afresh: were the returns wilfully misleading?
[70] Having heard and re-examined the evidence, five things stand out.
[71] First, Mr Russell was an experienced accountant with particular expertise in relation to tax arrangements—and someone who understood the concept of tax avoidance.39
[72] Second, as Great North’s accountant and receiver; as Glen Eden’s, Commercial Administration’s and Commercial Management’s director, accountant and company secretary; and as director and receiver of KDL; Mr Russell knew all of the features of the arrangement discussed earlier that made it tax avoidance. So, for example, Mr Russell knew:
(a) Great North was insolvent when it issued the debenture to Glen Eden, and hence that it could not pay interest, let alone principal.
(b) Important features of the debenture lacked commercial reality.
(c) Of the inter-relationships between the companies, and of the corresponding absence of arms-length commerciality.
37 Maxwell v Commissioner of Inland Revenue [1962] NZLR 683 (CA); Commissioner of Inland Revenue v Legarth [1969] NZLR 137 (CA) and Wire Supplies Ltd v Commissioner of Inland Revenue [2007] NZCA 244, [2007] 3 NZLR 458 (CA).
38 Edwards v Commissioner of Inland Revenue, above n 34.
39 The important term here is understood. This is not to introduce propensity evidence or propensity reasoning about Mr Russell and tax avoidance.
(d)Of the absence of nexus between the claimed deductions and any economic cost borne by Great North.
(e) And that Great North’s continued existence was itself a contrivance.
[73] Third, Mr Russell completed and filed the returns, representing they reflected the true tax position of Great North. They did not.
[74] Fourth, Mr Russell’s actions provide support for the proposition he knew of
the returns’ misleading nature:
(a) As will be recalled, Mr Russell filed the returns for the 1996–2006 tax years in 2005 and 2006, and while Great North was struck off the companies register. Mr Russell then waited until August 2010 to apply for re-registration of the company, and when the Commissioner questioned the validity of the returns in early 2011, Mr Russell promptly responded saying s 330 of the Companies Act in conjunction
with the time-bar constituted an impediment to re-assessment.40
Mr Russell denied manipulating the time-bar. However, he offered no credible explanation for this sequence.41 In my view, this was a deliberate and cynical attempt by Mr Russell to frustrate the Commissioner’s ability to re-assess Great North’s true tax position.
(b)When filing the returns, Mr Russell did nothing to alert the Commissioner to the circumstances in connection with the claimed deductions. True, he was not obliged to. However, Mr Russell’s testimony is illuminating as to his state of mind. Under cross-examination on a related topic, he said, “If you don’t restrict the
objection procedure to what it is actually objected to it might end up
40 Mr Russell’s correspondence does not cite s 330 but the reference is unmistakable: “the Statute says that it is deemed to have continued in existence. For all legal purposes then the position is that the company has never been struck off”.
41 Notes of evidence, p 73.
giving the Commissioner ideas and we wouldn’t want that would we?”42
[75] Fifth, while Mr Russell denied filing misleading returns, on at least one occasion he came close to acknowledging the true purpose of the arrangement was tax avoidance. Ms Deligiannis put to Mr Russell he wrote to the Commissioner in (July) 1994 to explain Great North could not fund its PAYE obligations as it was insolvent:43
Q You were quite happy to write to the department and ask it to write off the debts, the PAYE debts and say it’s got no – company’s got no assets, ceased trading, please write them off as irrecoverable?
A Yeah well they were to them. Q Pardon?
A The debts were irrecoverable to them. Q But not to you?
A No.
[76] Mr Lennard submitted Mr Russell stood to gain nothing personally from filing misleading returns. But Timberton paid KDL $600,000 for Great North’s tax losses, and Mr Russell was KDL’s director and receiver. While these monies were paid several years after the returns were filed, the evidence suggests Mr Russell has an eye for the long game: Great North continues to exist for that reason. And in any event, the evidence is clear Mr Russell knew all of the characteristics of the arrangement that made it tax avoidance.
[77] Consequently, I am satisfied Mr Russell knew the returns he completed and filed were misleading on the basis, either, that he had actual knowledge the arrangement constituted tax avoidance, or that it was highly likely tax avoidance (subjective recklessness).
[78] In reaching this conclusion, I have considered but rejected as probative
Mr Russell’s previous good character. So too the argument which reduces to the
42 Notes of evidence, p 91.
43 Notes of evidence, p 14 (emphasis added).
proposition Mr Russell’s strong tax views blinded him to the obvious. Apart from being a somewhat unattractive submission, the evidence is against it—particularly given Mr Russell’s expertise in this area.
Shortfall penalty
[79] A shortfall penalty is imposed when there is a tax shortfall. Unsurprisingly, the shortfall is the difference between the position adopted by the taxpayer and the correct position.44 But the Commissioner may also impose substantial penalties. Here, the Commissioner concluded Great North had adopted an abusive tax position contrary to s 141D of the Tax Administration Act 1994. Subsection (3) of that section creates a penalty of 100 percent of the tax shortfall.
[80] In order for a tax position to be abusive, the position must have been unacceptable at the time at which the taxpayer adopted it; and the taxpayer must have entered an arrangement which, objectively, had the dominant purpose or effect of avoiding tax. An unacceptable tax position is one which, viewed objectively, falls short of being “about as likely as not to be correct”. In Ben Nevis, the Supreme Court considered a taxpayer did not need to demonstrate their position had at least a
50 percent chance of success, but instead point to “substantial” arguments in support of their tax position.45
[81] Ms Deligiannis submitted the Commissioner was correct to conclude Great North had adopted an abusive tax position given the features of the tax avoidance arrangement referred to earlier in this judgment.
[82] Mr Lennard submitted the Commissioner was wrong to conclude the tax position was unacceptable or abusive because “the loan was a real loan with real consequences incurring real interest”. And, he noted it was and is still legitimate for a company to engage in debt-parking.46
[83] This issue is essentially self-executing given my earlier findings:
44 Tax Administration Act 1994, s 3(1).
45 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 7, at [154].
46 Citing Fugle v Commissioner of Inland Revenue [2016] NZHC 1997, (2016) 27 NZTC 22,069.
(a) Great North’s arrangement constituted tax avoidance.
(b)Mr Russell knew that or was subjectively reckless as to that; on the basis he appreciated the arrangement was highly likely tax avoidance.
(c) This is a rather obvious example of such an arrangement.
[84] It necessarily follows Great North’s tax position was unacceptable and abusive. For completeness, it is correct as Mr Lennard submitted, the loan was real. But it is not correct the loan incurred real interest. In all probability, it was never meant to. Moreover, the debt-parking case identified by Mr Lennard was concerned with the somewhat Byzantine accruals regime under the Tax Administration Act
1994. More importantly, that case did not involve alleged tax avoidance either. Plainly, it is distinguishable.
[85] I am satisfied the Commissioner did not err in imposing shortfall penalties for an abusive tax position.
The time-bar: s 330(2) of the Companies Act
[86] This issue could be avoided given my findings. However, Toogood J saw it as a material reason for transferring the case here.47 And, an appeal is not unlikely. A higher court may be assisted by first-instance analysis, even if it later disagrees.
[87] The logical starting point is s 15 of the Companies Act 1993. It provides:
15 Separate legal personality
A company is a legal entity in its own right separate from its shareholders and continues in existence until it is removed from the New Zealand register.
[88] Consequently, a company removed from the companies register does not exist in law. But s 330 of the same Act provides:
47 Commissioner of Inland Revenue v Great North Motor Company Ltd (in rec), above n 3, at
[44]-[45].
330 Restoration to register
(1) A company is restored to the New Zealand register when a notice signed by the Registrar stating that the company is restored to the New Zealand register is registered under this Act.
(2) A company that is restored to the New Zealand register shall be deemed to have continued in existence as if it had not been removed from the register.
[89] The effect of the deeming provision was considered by the Court of Appeal in Natural Selection Clothing Ltd v Commissioner of Trade Marks.48 In that case an Australian company applied to the Commissioner of Trade Marks for an extension of time to oppose an application by a competitor to register a trade mark. At that time, the Australian company did not exist in that it had been removed from the register. The Commissioner granted the application. Natural Selection contended the
Australian equivalent to our s 330(2) did not permit the Commissioner to extend time even though the Australian company had subsequently been restored to the register.
[90] This submission was not accepted. The Court of Appeal approved the view that the re-animation of the company had retroactive effect, and said:49
Although we were invited by Mr Hodder to prefer the reasoning of Jenkins LJ, it was not argued that we should go so far as to adopt the conclusion that the relevant provision means only that upon the reinstatement of the company it resumes its corporate existence as if it had never been lost but does not revive acts done in the name of the company while it was deregistered. Mr Hodder accepted that the deemed existence of the company must be taken to extend back to the time of the application for extension of time to oppose the trade mark application and that application, from the time of the re-registration of the company, must be deemed to have been validly made by a “person”. … We have no doubt that it should extend to all matters the only defect in which stems from the non-existence of the company. To take the more restrictive view would be to create difficulties in such areas as company contracts and dealings by the company and its officers in the course of business. There is also an illogicality in treating the application as valid but the decisions as invalid when the only basis for their invalidity is the invalidity of the application.
[91] The next case of relevance is Spencer v Commissioner of Inland Revenue.50
There, the Commissioner issued goods and services tax assessments in the name of a company while it was removed from the register. The period for disputing the assessments expired while the company was off the register. The Commissioner later applied to restore the company. The Commissioner then sought to rely upon s 330(2). In particular, the Commissioner argued the assessments were valid and could not be disputed as the response period had expired. The High Court disagreed.
[92] Paterson J distinguished Natural Selection. The Judge noted that case involved action by or on behalf of the company when it was off the register, where as in his case, action was being taken against the company when it was off the register. The Judge noted there was English authority for the proposition a limitation period
does not run while the company is struck-off.51 The Judge concluded:52
…the deeming provision cannot validate an assessment which was issued against a non-existent company and in respect of which that nonexistent company was expected to take action before it was restored to the register. This is particularly so in a case where the assessment is now being used to claim a considerable sum from third parties. The defect stems not only from the nonexistence of the company, but also from the fact that it was not possible because of [its] non-existence … for the appropriate [Notice of Proposed Assessment] to be issued within the statutory period. They have no effect. In my view, the assessment was a nullity.
[93] To summarise, Paterson J considered it material the action was against the company, the company could not defend itself because it did not exist, and the rights of third parties were affected. Of these reasons, the second appears to have been especially important.
[94] The final case of significance is another decision of the Court of Appeal: Clark v Libra Developments Ltd.53 That case involved a dispute between a property developer and a building company about the latter’s entitlement to profit-share. At one stage, that company was removed from the register but restored several years later, and the impact of that was material to the dispute. Williams and Gendall JJ
reviewed the applicable common law and scheme of the Companies Act 1993. Their
Honours said:54
… [the Act’s] provisions support the view that it is appropriate to give s 330(2) its literal meaning. Removal from the register places the company and those operating it or dealing with it in legally a state of “suspended inanition”. As it is no longer registered and does not comply with the requirements of the Act, it is no longer a “company” as defined by s 2.
[95] And:55
But Parliament recognised that because the grounds for removal in s 318 are wide and removal may follow the company’s failure – sometimes minor failure – to comply with its statutory obligations, the Court or the Registrar should have the power of restoration to the register in appropriate cases and, should that occur, it is also appropriate that the company and all those dealing with it during the period of removal should not be disadvantaged by its and their actions during the period it was off the register. Accordingly neither it nor they can challenge the validity of actions taken, including during the period of its removal, and the Court is given power on restoration so to adjust the rights and obligations of the company and those involved with it as to place them as nearly as possible in the same position as if it had not been removed. As mentioned in Morris and Tymans, the Court or the Registrar has power by restoration to the register to ensure the company and all those who have dealt with it during the removal period are placed as far as is possible in an “as-you-were” position. Holding that s 330(2) is to be accorded a literal interpretation also accords with the decision of this Court in Natural Selection even though the point did not directly arise in that case, and also accords with the High Court decisions earlier reviewed. Spencer should, in our view, be seen as a decision on its own facts or confined to the operation of the Tax Acts. Further, as Mr Churchman submitted, had Mr Clark wished to dissolve Southern Developments during the period Libra was off the register, he could have issued dissolution proceedings in this Court under the Partnership Act 1908, s 38, and sought directions as to service.
[96] This is the first case since Clark v Libra in which the deeming provision’s effect has arisen in a taxation context. And whereas Spencer was a case in which the Commissioner was relying upon the deeming provision, here, the Commissioner contends that provision does not affect the outcome.
[97] Mr Lennard submitted Spencer was distinguishable for just this reason. He noted the breadth of s 330(2)’s language and the observation in Clark v Libra that the
section meant what it said. He also submitted the Commissioner would not be prejudiced in future cases by an adverse ruling on this issue because:
(a) Section 89C of the Tax Administration Act 1994 exempted the Commissioner from engaging the disputes resolution process when timely tax returns had not been filed.
(b)The Commissioner could seek to restore a company to the register via either ss 328 or 329 of the Companies Act (in order to pre-empt possible application of the time-bar if the company was later restored without reference to the Commissioner).
[98] Consequently, Mr Lennard submitted the returns filed by Mr Russell in 2005 and 2006 engaged the earlier discussed time-bar because s 330(2) meant Great North had never been removed from the register, and so time ran from 2005.
[99] Ms Deligiannis disagreed. She observed that in Clark v Libra, Williams and Gendall JJ treated Spencer as either “a decision on its own facts or confined to the operation of the Tax Acts”.56 Ms Deligiannis exhorted the latter characterisation. Ms Deligiannis also contended the Court in Clark v Libra saw s 330(2) as ensuring “the company and all those dealing with it during the period of removal should not be disadvantaged by its and their actions during the period if it was off the register”,57 which, if applied to the facts, led to the inverse result of the returns being nullities because:
(a) The company did not exist while it was off the register.
(b)There was no entity with which the Commissioner could deal in those circumstances.
[100] Ms Deligiannis submitted the Commissioner had neither time nor resources to restore companies to the register in order to comply with her statutory responsibilities.
[101] As will be apparent, the arguments advanced by the Commissioner and Great North offer a stark choice: either the returns were retrospectively validated and always in existence—or nullities. I consider the issue is more nuanced.
[102] Once removed from the register, a company does not exist in law. This is clear from s 15 of the Companies Act, which was cited earlier. It is also clear from s 2 of that Act, which defines a company as one registered under Part 2 of the Act or re-registered under the Companies Act in accordance with the Companies Re-registration Act 1993. However, case law demonstrates that, by dint of s 330, the actions of a deregistered company are not treated as nullities upon that company’s
restoration to the register.58 Consequently, s 330 appears to be capable of
retrospectively validating the filing of a tax return. So far so good.
[103] The question then becomes whether retrospective validation necessarily entails backdating a return to the time of its filing. I conclude not, for three reasons.
[104] First, until restoration, there is no taxpayer with whom the Commissioner can deal. So, a tax return filed during a corporate interregnum cannot affect the Commissioner unless the company is subsequently restored to the register. Until that point, no taxpayer exists. This was the view of Paterson J in Spencer: there was no company in existence at the relevant time. Consequently, the deregistered company could not defend itself (by complying with the applicable statutory time-period).
[105] Second, ss 328(6) and 329(4) of the Companies Act provide for the extension or suspension of limitation periods when necessary to put a company and third parties in the position they would have occupied if deregistration had not intervened.59 Both provisions seek to ensure neither the restored company nor any other person is unfairly affected by the company’s removal from the register.60 The
same concern was evident in Clark v Libra. The Court of Appeal said although
58 See, for example, Crisford v Bank of New Zealand [2012] NZHC 3290, (2012) 14 NZCPR 1 and
Commissioner of Inland Revenue v Registrar of Companies (2007) 23 NZTC 21,215, (2007) 4
NZCCLR 1.
59 Re Donald Kenyon Ltd [1956] 1 WLR 1397, [1956] 3 All ER 596 (ChD) and Tymans Ltd v
Craven [1952] 1 All ER 613.
60 Re West HC Napier M37/02, 15 May 2003.
removal from the register put the company in a state of “suspended inanition”,
Parliament had recognised via s 330 it was:61
… appropriate that the company and all those dealing with it during the period of removal should not be disadvantaged by its and their actions during the period it was off the register. Accordingly neither it [the company] nor they can challenge the validity of actions taken, including during the period of its removal, and the Court is given power on restoration so to adjust the rights and obligations of the company and those involved with it as to place them as nearly as possible in the same position as if it had not been removed.
[106] The Court referred specifically to the powers of the Court and Registrar on a company’s restoration to ameliorate any adverse effects of s 330. The literal meaning of s 330 was promoted, but only alongside the exercise of those powers.
[107] Third, s 108 must also be considered. It provides:
(1) Except as specified in this section or in section 108B, if—
(a) a taxpayer furnishes an income tax return and an assessment has been made; and
(b) 4 years have passed from the end of the tax year in which the taxpayer provides the tax return,—
the Commissioner may not amend the assessment so as to increase the amount assessed or decrease the amount of a net loss.
[108] Section 108’s primary purpose is to limit the circumstances in which the Commissioner can exercise the power to reassess tax.62 But in providing for a four- year time limit, a balance has obviously been struck between the finality of taxpayers’ affairs and effective maintenance of the tax base. Unbridled retrospective validation of a tax return pursuant to s 330 of the Companies Act could imperil s 108. And as observed, the Companies Act jurisprudence is alive to concerns of this nature, Clark v Libra included. So too ss 328(6) and 329(4) of that Act.
[109] So, had the issue been live, I would have concluded the s 108 time-bar commenced only when Great North was restored to the register on 8 October 2010.
Only then did the Commissioner have a “taxpayer” with whom to deal. As to that, a
61 Clark v Libra Developments Ltd, above n 53, at [203].
62 Catherine Bibbey Tax Acts and Commentary (online looseleaf edition, Thomson Reuters) at
[TAAC-108].
taxpayer is defined by the Tax Administration Act as a person who is liable to perform or to comply with a tax obligation, or who may take a tax position.63 On restoration to the register, a company becomes liable to file tax returns for the years in which it was off the register; on the basis it is deemed to have been “alive” during that period. Before then, no such obligation or liability exists, and more centrally, no company or taxpayer existed.
[110] Mr Lennard may be correct in submitting the Commissioner has other remedies if s 330(2) is applied literally. Specifically, if the Commissioner applied to reinstate the company to the register, she could take advantage of ss 328(6) or
329(4). However, doubt attaches to whether this is practicable. It is somewhat unrealistic to expect the Commissioner to have a company restored to the register in order to safeguard against the possibility the company might otherwise avail itself of the time-bar. And when, for whatever reason, the Commissioner does not take such pre-emptive action, it would be contrary to the intent of both ss 330 and 108 to allow this possibility to constitute an answer to the status of the relevant tax returns.
[111] For completeness, while Clark v Libra’s treatment of Spencer was admittedly guarded, Williams and Gendall JJ appear to have accepted Spencer represented a broader exception to s 330(2) in relation “to the operation of the Tax Acts”. It may also be their Honours, while doubtful of some of the reasoning, saw that the outcome reached by Paterson J as the only correct one in the circumstances. But whatever the true position, a party should not be governed by the retrospective application of a time-bar through quirk of a corporate interregnum.
Conclusion
[112] The Commissioner was correct to disallow the tax deductions and losses claimed by Great North. The arrangement was one of tax avoidance. A shortfall penalty for an abusive tax position was warranted. Great North’s case is dismissed.
[113] The Commissioner is entitled to costs on a 2B basis unless Great North is legally aided.
63 Tax Administration Act 1994, s 3.
[114] I thank counsel for the quality of their written and oral submissions.
……………………………..
Downs J
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