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

No judgment structure available for this case.

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-4921 [2015] NZHC 1532

UNDER
Section 26 of the Taxation Review

Authorities Act

IN THE MATTER

of an appeal from a decision of the
Taxation Review Authority

BETWEEN

WEBSTER GROUP OF OBJECTORS FOSTER GROUP OF OBJECTORS CONSULTANT APPLICATION GROUP OF OBJECTORS

Appellants

AND

COMMISSIONER OF INLAND REVENUE

Respondent

Date: 10-14 and 17 November 2014

Appearances:

SRG Judd for the Appellants (J G Russell given limited permission to be heard).

M Deligiannis and M J Ruffin for the Respondent

Judgment:

03 July 2015

RESERVED JUDGMENT OF ELLIS J

This judgment was delivered by me on Friday 3 July 2015 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:………………………….

Counsel/Solicitors:
SRG Judd, Barrister, Auckland
J W Appleby, Ladbrook Law Limited, Auckland
M Deligiannis, Barrister, Wellington
M Ruffin, Barrister, Auckland
H Ebersohn, Crown Law, Wellington

WEBSTER GROUP OF OBJECTORS v COMMISSIONER OF INLAND REVENUE [2015] NZHC 1532 [03
July 2015]

[1] The appellants are all participants in what is known as the “Russell template” tax avoidance scheme. With the assistance of the architect of the scheme, Mr John Russell, they have been pursuing objections to the reassessment of their tax liabilities by the Commissioner of Inland Revenue for a very considerable time now.

[2] Following the final disallowance by the Taxation Review Authority (TRA) of the appellants’ objections in 2009, they asked the TRA to state a case for this Court under s 26 of the Taxation Review Authorities Act 1994 (the TRAA).1 The case was finalised by the Authority on 13 November 2013 and posed the 13 discrete questions to which this judgment is addressed.

[3] Before turning to consider those 13 questions, however, it is necessary to address certain matters of background and process.

BACKGROUND The template
[4] The essence of the Russell template was a device whereby the profits of trading companies were converted into capital receipts in the hands of the companies’ shareholders. I take the description of its basic operation from the Court of Appeal’s decision in Wire Supplies Ltd v Commissioner of Inland Revenue:2

[8] …The first step was for the shareholders to agree to sell their shares to a company controlled by Mr Russell. This company became the new parent of the trading company and held the shares on trust for another Russell-controlled company, which we will call the “loss company”. The purchase price was left outstanding and secured by a mortgage over the shares. The transaction was not intended to be a sale in any commercial sense. Under a management contract between the trading companies, the shareholders and the relevant Russell entities which gave effect to the Russell template, the shareholders retained unfettered control over the business, notwithstanding the sale. The management contract also conferred on the shareholders an option to repurchase the shares when the scheme had run its course.

[9] The sale had two purposes, both of which were entirely tax-related. The first was to make the trading company part of a group of companies controlled by Mr Russell, some of which had tax losses. This would enable

1 The TRA’s final confirmation of the Commissioner’s assessments can be found in Case Z7
(2009) 24 NZTC 14,088 (TRA).
2 Wire Supplies Ltd v Commissioner of Inland Revenue [2007] NZCA 244, [2007] 3 NZLR 458.

Mr Russell to take advantage of the group relief provisions in s 191. The second was to create a debt to the shareholders which could be satisfied out of the profits of their trading company.

[10] The next step was for the trading company to agree to pay its net profits, half-yearly, to the loss company controlled by Mr Russell. This was called an administration charge. It was income in the hands of the loss company, but group relief under s 191 was relied upon to avoid tax. In reality, the administration charge was partly a conduit for the money which was to be returned to the shareholders, and partly a fee payable to Mr Russell for the use of the scheme. The proportion was calculated by reference to the amount of tax saved. In addition, the company paid a consultancy fee representing five per cent of the administration charge to another Russell company.

[11] The third step was for the parent company to pay the shareholders their part of the administration charge. This was designated an instalment of the purchase price. The amount of the purchase price was calculated not by reference to the value of the trading company, but to enable the scheme to mop up a given number of years of expected net profit. When that had been accomplished, the shareholders could exercise their option to repurchase the company and carry on as if nothing had happened. Alternatively, the parent company could agree to buy a release of the option for a sum which would create a sufficient new capital debt to enable the scheme to start up again.

The assessments and the Commissioner’s reconstructions

[5] Over time, the Commissioner determined that the various iterations of the Russell template were tax avoidance arrangements that were void for tax purposes under s 99 of the Income Tax Act 1976 (the ITA76). Section 99 empowered the Commissioner to reconstruct such arrangements in order to counteract the tax advantage that had been obtained and, thus, to reassess the participants’ liability for
tax.3

[6] The Commissioner’s initial reconstruction approach (known as “Track A”) involved disallowing the deductions that the trading companies had claimed on administration charges and consultancy fees. But the difficulty with the Track A reassessments was that, by the time the Commissioner sought to enforce the judgments which had upheld his reassessments, the trading companies (which were
liable for the tax) had become insolvent.

3 The Income Tax Act 1976 was repealed by s YB3(1) of the Income Tax Act 1994.

[7] The Commissioner then adopted a different reconstruction approach (known as “Track B”) whereby the portion of the administration charge received by the former shareholders was reassessed as income.

[8] Subsequently, there were a further three reconstruction approaches (known as Tracks C, D and E respectively). These approaches treated some of the income differently again, including by attributing some of it to Mr Russell.

Litigation

[9] Various participants in the template have, following their reassessment, sought to test whether those reassessments were correct by utilising the disputes procedures in Part 8 of the Tax Administration Act 1994 (the TAA). Part 8 provides that objection proceedings may, in the first instance, be commenced in either the TRA or the High Court (an issue discussed in much greater depth in relation to the first question below). Further rights of appeal to the Court of Appeal and, in some cases, to the Privy Council have routinely been exercised.

[10] By virtue of these various decisions, the central substantive issue raised by the objections, namely whether the Russell template was, indeed, a tax avoidance arrangement, has long since been determined. As the Privy Council said some 14 years ago:4

9. Given the highly artificial nature of the scheme, their Lordships are not surprised that the Commissioner and every judge who has considered the matter have been of opinion that it amounted to an arrangement which had the purpose or effect of tax avoidance within the meaning of s 99(2). As this is such a plain case, their Lordships think it unnecessary to examine in any depth the criteria by which arrangements caught by s 99 may be distinguished from those which are not. …

[11] Accordingly, none of the 13 questions presently before me go directly to the

correctness of the Commissioner’s reassessments.

[12] As well as disputing the substantive reassessments by way of objection under
Part 8, however, some objectors have also sought collaterally to attack those reassessments by way of judicial review. Over time, these review proceedings

4 Miller v Commissioner of Inland Revenue [2001] UKPC 17, [2001] 3 NZLR 316.

focused on aspects of not only the assessment process but also the Part 8 disputes process and the conduct of the hearings in the TRA. The Miller judicial review proceeding was ultimately determined against the objectors by the Privy Council in
2001.5

[13] The proliferation of process issues that had historically been raised by other Russell template objectors necessarily raised questions about the impact of the litigation in which those issues had been addressed on the cases for the present appellants as they proceeded through the TRA. In particular, the relationship between the Miller judicial review litigation and the objections by the present
appellants was squarely confronted by the TRA in Case U24.6

[14] In that decision, the TRA held that there was sufficient privity between the present objectors’ proceedings and the objectors in Miller for some form of issue estoppel to apply. But the Authority said that even if an estoppel in strict, formal, terms could not be made out, the same issues should not, as a matter of good case management, be permitted to be argued again. More specifically, the Authority held that the following “process” issues had been determined by the Court of Appeal and
could not be relitigated:7

(a) Whether the Commissioner exceeded his powers in making the Track B assessments and whether those assessments were otherwise procedurally flawed and a nullity. (The Court of Appeal had confirmed the correctness of the Commissioner's approach and held that making Track B reconstructions was an option that was open to a reasonable Commissioner.)

(b)Whether the Track B assessments were unlawful because they were made for an improper purpose of simply “following the money” and

5      Obviously, the present objectors are different persons and corporate entities from the objectors in that case, who were Fiorucci Fashions Ltd and its previous owners, the Millers and the O'Neils, and Wire Supplies Ltd and Coil Specialists (1980) Ltd and their previous owners, the McDougalls.
6      Case U24 (1999) 19 NZTC 9,223 (TRA). It will be noted that Case U24 was decided after the Court of Appeal’s decision in Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA) but before the Privy Council’s. The Privy Council upheld the Court of Appeal’s decision.
7      At 9,227–9,238.

attributing taxable income to the former shareholders because the trading companies had no assets and the shareholders were better able to pay the tax. (The Court of Appeal had found that the Commissioner was not improperly motivated in issuing Track B assessments even if it should later transpire in the case stated proceedings that s 99 could not actually be used to reconstruct in the way contended for by the Commissioner.)

(c) Whether Inland Revenue officers acted beyond their powers in failing to observe the requirements of the Commissioner’s s 99 Practice Statement. (The Court of Appeal found that the process of inquiry and interview met the requirements of the Practice Statement.)

(d)Whether the Court of Appeal's decision in Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd could be invoked.8 (The Court of Appeal had found that that case did not assist the objectors and there was no basis for concluding that the Track B assessments were not genuine attempts to ascertain the taxable income of those against whom they were made.)

(e) Whether the Commissioner was entitled to assess the taxpayers on Track B without at the same time withdrawing his Track A assessments. (The Court of Appeal had found that the Commissioner was entitled to switch from Track A to Track B under s 23 of the ITA76 as he sees fit in order to ensure the correctness of an assessment.)

(f) Whether the imposition of additional tax constituted an “assessment” which replaced any prior assessment of the taxpayer. (The Court of Appeal had held that the imposition of additional tax is not an
assessment.)

8 Commissioner of Inland Revenue v Canterbury Frozen Meat Co Ltd (1994) 16 NZTC 11,150 (CA).

(g)Whether the statutory time bar contained in s 25 of the ITA76 operated to prevent Track B assessments being made against the taxpayers in respect of any income year following the expiry of four years from the year in which the Commissioner’s original assessments, based on the taxpayers’ returns, were issued. (The Court of Appeal had found that the Commissioner could reasonably have formed the opinion that there had been an omission to mention income and the time bar did not apply.)

(h)Whether the Commissioner had an unlawful purpose in issuing the Track B assessments, namely that he was intent on pursuing a vendetta against Mr Russell. (The Court of Appeal had found that the Commissioner was entitled to adopt an uncompromising approach and it was open to him to conclude that the template arrangement fell within s 99.)

(i)Whether the Commissioner failed to supply the objectors with information and accord them an opportunity to be heard. (The Court of Appeal had found that any unfairness was cured by the TRA hearing.)

(j)Whether the Track B assessments, which involved reconstruction of the administration fee charged, represented an appropriate application of the reconstructive powers given to the Commissioner by s 99. (The Court of Appeal had found that the Commissioner was not inhibited from looking at the matter broadly and making an assessment on the basis of the benefit directly or indirectly received by the taxpayers in question.)

(k)Whether the 5 per cent consulting fee paid to a Russell entity was deductible. (The Court of Appeal found that the consulting fees were partially paid for a non-deductible purpose and the TRA was entitled to make an apportionment.)

[15] Eight years later, the Court of Appeal was required to consider very similar estoppel issues in relation to the Wire Supplies objectors.9 The Court of Appeal agreed with the High Court that those amongst that group of objectors who had been either parties or privies to the Miller/O’Neill litigation (namely the McDougalls) were formally estopped from contesting the same issues in the Wire Supplies litigation.10 But as far as those Wire Supplies objectors who were neither party nor privy to the Miller/O’Neill litigation were concerned, the Court of Appeal said:11

[30] We accept Mr Judd's argument that Courtney J may have extended the test in Shiels v Blakeley further than it was intended to go, which led to a finding of res judicata/issue estoppel in the present case in circumstances where there was insufficient mutuality of interest to justify the finding. In the light of our concern in that regard, we will proceed on the basis that issue estoppel does not apply to the appellants other than the McDougalls …

[31] It was not argued before Courtney J or us that the repetition of arguments conclusively dealt with in the Miller litigation amounted to an abuse of process, and we do not express a view. However we signal to parties involved in Russell template litigation that in future cases courts are unlikely to be tolerant of the recycling of arguments which have been dealt with over and over again in successive cases involving transactions which are, in all material respects, identical.

[16] In Case Z7 the TRA revisited its earlier estoppel finding in light of these dicta from Wire Supplies.12 The Authority said:

[10] So the Court of Appeal noted that there was a repetition/recycling of arguments which had been dealt with over and over again in successive Russell cases. Mr Ruffin submits that such a repetition of arguments, which have been conclusively dealt with in the Miller litigation (O'Neil v C/R (2001) 20 NZTC 17,051 (PC), is an abuse of process. I agree. The submissions for the objectors do not set out how there is any impact on my said interim decision (Case Y20) in a particular case where there is a particular issue restricted to a particular objector, save to extent acknowledged below in respect of F H (1990) Ltd.

[11] I agree with Mr Ruffin that, otherwise, it is an abuse of process to endlessly attempt to repeat arguments involving transactions which are in all material respects identical, and which have been conclusively dealt with in the Miller litigation, and have also been subsequently dealt with in later cases before the Court of Appeal.

9      Wire Supplies Limited v Commissioner of Inland Revenue, above n 2.
10     At [23]–[24].
11 See also [136].
12     Case Z7, above n 1.

[12] Accordingly, I adhere to my view expressed in Y20 that there are no special circumstances for my not applying issue estoppel in the present cases.

[17] In any event, in Case U24 the Authority had reserved leave to the present objectors to file a memorandum identifying any material differences between their cases and the Miller Template arrangement and any remaining justiciable issues in their cases.13

[18] Mr Russell confirmed in the hearing before me that no such memorandum identifying material differences was ever filed by any of the present objectors, although certain issues said yet to be justiciable were raised.14 Neither did Mr Russell seek directly to contend that the TRA’s assessment of what it was that the Court of Appeal in Miller had determined was wrong. Nor (as I understood it) did he take direct legal issue with the TRA’s estoppel/abuse of process analysis.

[19] Rather, as I understood it, Mr Russell’s central point was a more fundamental one, namely that the Miller litigation had misfired at an early stage and could really be disregarded, insofar as it dealt with process issues.15 That submission is, of course, highly problematic. As Elias CJ said in R v Smith:16

Unless a judgment of a Court is set aside on further appeal or otherwise set aside or amended according to law, it is conclusive as to the legal consequences it decides. If it were not so, the principle of legality would be undermined. ...

[20] So it is important to record at the outset that the suggestion that the decisions in Miller were wrong or on some other basis invalid is unsustainable and must be rejected.

[21] In any event, the upshot of the TRA’s decision in Case U24 is that, from

Judge Barber’s perspective, the only questions that remained “live” in relation to the

present objectors related to:

13     Case U24, above n 6, at 9,239.
14     These questions were specifically put to Mr Russell by way of minute issued during the hearing of the present appeals to which I shall return later below.
15     Mr Russell did not go so far as suggesting, however, that he was able to revisit the substantive conclusion that the Russell Template was a tax avoidance arrangement.
16     R v Smith [2003] 3 NZLR 617 (CA) at [46].

(a) whether the arrangement entered into by a particular taxpayer within the group involved some material deviation from the Russell template that somehow rendered it more anodyne for tax purposes (as to which see [17] above);

(b)whether there had been any procedural errors that might have some material impact on the reassessments and/or the TRA decisions;

(c) any specific arithmetical and reconstruction issues; and

(d)whether, in any given case, deductions for those portions of the 5 per cent consulting fee that could be attributed to the receipt from Mr Russell of genuine business advice should be allowed.

[22] The Commissioner’s reassessments in relation to the present objectors were ultimately confirmed by way of a series of determinations by the TRA, culminating in an interim decision in 2007 reported as Case Y2017 which was later confirmed in a final decision in 2009 reported as Case Z7.18 Case Z7 confirmed not only the interim Case Y20 but all prior determinations and interlocutory rulings relating to the
appellants’ cases.

[23] The 13 questions that the Court is presently required to answer relates to those decisions.

The hearing of the present appeals

[24] There is a further preliminary issue that requires mentioning at the outset. It relates to the way in which the case was stated by the TRA and the effect that had on the way in which the hearing of the appeals was conducted and Mr Russell’s role in it. More specifically, I need to set out why it was that I permitted Mr Russell to make submissions on certain of the questions stated, notwithstanding that he had no
right of audience and the objectors had legal representation.

17 Case Y20 (2008) 23 NZTC 13,207 (TRA).
18 Case Z7, above n 1.

[25] Prior to the hearing of the appeals, Mr Judd advised the Court that he would not be making submissions in relation to questions 2 – 7 and 13 of the case that had been stated by the TRA. While, for reasons of privilege, he was unable to tell the Court exactly why that decision was made, it seems clear enough (when one considers the content of questions 2 – 7 and 13) that there was a concern that those questions involve traversal of matters previously canvassed in the higher courts in relation to other Russell objectors and are an abuse of process.

[26] While I agree that the TRA has held in relation to the present cases that the reventilation of issues that have been long-ago decided against other objectors is an abuse of process, in fairness to Mr Russell, it must be said that this is not yet an issue that has been determined at a higher level. As noted above, in Wire Supplies the Court of Appeal held that, in the absence of the necessary privity, no formal issue estoppel can arise and left open the abuse of process question. I record that I was not directly asked to determine the point in this case and heard no specific argument (as opposed to bald assertions) on it.

[27] In any event, Mr Judd also advised that Mr Russell had instructed him to apply for leave in order that he (Mr Russell) could make submissions on those questions that would not be addressed by Mr Judd. A formal application was made. This was opposed by the Commissioner. The spectre of Re GJ Mannix Ltd was
raised.19 It was agreed that I could determine the matter on the papers.

[28] As well as taking the orthodox Mannix point (discussed further below) the Commissioner submitted that questions 2 – 7 and 13 were, essentially an abuse of process. While the basis for that contention is obvious enough, the submissions did not address the quite difficult issues that arise in the particular circumstances of this case (and which were left open in Wire Supplies), namely where the present litigation involves neither parties nor privies to the earlier litigation.

[29] On 25 September 2014 I issued a ruling in which I said I would permit Mr
Russell to file written submissions of a limited length in relation to questions 2 – 7 and 13. I said I would determine at the hearing whether or not I would be assisted by

19 Re GJ Mannix Ltd [1984] 1 NZLR 309, (1984) 2 NZCLC 99,095 (CA).

hearing from him orally. Mr Russell subsequently filed written submissions in accordance with my direction.

[30] During the hearing counsel made further submissions about whether I should also hear orally from Mr Russell. I then issued a further minute dated 14 November
2014 which stated:

[1] The following questions relate only to the second question in the present case. I would not anticipate that they will take long to address orally. But in any event, no more than an hour will be permitted.

[2] All other aspects of questions 2 to 7 and 13 are adequately dealt with in the written submissions filed.

Questions

[3] In relation to Case U24 (and Case W35 to the extent it deals with the same “justiciability” issue in relation to another group of objectors), do the appellants say that:

(a) Judge Barber was wrong to conclude (at [6]) that there was
“sufficient privity between the present proceedings and Miller for
issue estoppel to apply”, and if so, why?

(b) one or more of the particular issues held by Judge Barber to be non- justiciable (on the basis that higher courts had already ruled on them) were in fact justiciable and, if so, why?

[4] Pursuant to the leave granted in paragraphs [7] and [68] of the U24
decision, were further memoranda ever filed on behalf of the appellants:

(a) setting out what the objectors said were material factual or legal differences between the cases that are the subject of the present case stated appeals and the template arrangement set out in Miller; and/or

(b) identifying any remaining justiciable issues in the present cases?

[5] If so, please provide the Court with a copy and explain how and when it was dealt with by the Authority.

[31] After I had issued that minute Ms Deligiannis quite fairly requested that I give reasons for my two decisions in due course. There is understandable concern on the Commissioner’s part about the precedent effect of permitting Mr Russell personally to file submissions and to speak in this Court. So these are my reasons.

[32] I do not intend to set out at any length the principles enunciated by the Court of Appeal in Mannix. Essentially the Court endorsed the “well settled” rule that a company may only be represented by a layperson in Court in exceptional circumstances.20

[33] More recently, in Commissioner of Inland Revenue v Chesterfields Preschools Ltd, Mr Hampton (who was the second respondent and also the sole director and shareholder of the first and fifth respondents) filed an application to represent all five respondents at the hearing of the appeal.21 He argued that, given:

(a) that he was already “in court”;

(b) his role in relation to the first and fifth respondents; and

(c) the commonality of interests between all five respondents;

the exception described in Mannix should be applied.

[34] Prior to the hearing proper, the Court of Appeal “very reluctantly” decided to grant the application.22 The Court said: “[t]o have declined it would have resulted in the fixture being adjourned.”23 But the Court also considered whether Mr Hampton should be permitted to continue to represent the two corporate respondents in relation to future Court processes and appearances. In that context the Court said it had “no doubt that the [Mannix] rule remains in operation to the extent described by [Cooke J at 310–311 in the judgment]”.24 The Court considered that the rule provides “an important mechanism by which judges may ensure that the bringing or carrying on of proceedings achieves justice and the appearance of justice for the parties”.25 After reviewing the position in England and Australia, the Court noted:

[33] In New Zealand, it is implicit rather than explicit in the [High Court
Rules] that a company must be represented by a solicitor at all stages of the

20 At 310.
21 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2
NZLR 679.
22 At [22].
23 At [22].
24 At [27].
25 At [27].

proceeding. We are satisfied that the rule in New Zealand is that a solicitor must act for a company in commencing and carrying on a proceeding, subject to the discretion of the court.

(footnote omitted)

[35] The Court then set out the “sound policy reasons” why a solicitor, rather than a lay person such as an officer of a company, should act for the company in commencing and continuing civil litigation:26

(a) A company is not a natural body and may have a number of officers, each with their own individual concerns and interests. A solicitor is ethically constrained to represent the company's interests, unlike an individual officer who seeks to represent it.

(b) If a solicitor is involved, the court can generally be satisfied that careful attention has been given to the validity of the proceedings, and that the company's interests will be adequately presented and protected.

(c) Similarly, solicitors recognise the duties and responsibilities that are owed to the court and to the defendant in the conduct of litigation, and are less likely to require indulgences in the rules of procedure or to use court processes for vexatious purposes.

(d) The court must also have a solicitor on the record as it cannot exercise its disciplinary powers over a company.

(e) If a director or shareholder is representing the company there is a heightened risk that the representative will lack the objectivity that an independent solicitor can bring to the case.

[36] The Court considered it was “no doubt for these reasons” that the current law is that the Mannix rule may be departed from “only in exceptional circumstances”.27
The Court concluded:

[35] We consider that the future conduct of this case requires us to apply the Mannix rule. We see no basis for exercising the discretion to allow an exception to the rule: there are no exceptional circumstances to support its application. The reverse is the case.

[36] As we have noted, this is a difficult and complex case. The legal and procedural rules governing the conduct of the case are such that an experienced solicitor, preferably senior counsel, should be engaged by the two corporate plaintiffs to assist those parties, as well as Mr Hampton personally and the two partnership plaintiffs. Mr Hampton has readily acknowledged that he is not capable of pleading and conducting a case of this nature, even in relation to his personal circumstances. He accepts that he

26 At [34] (footnotes omitted).
27 At [34].

needs legal help. In the case of the corporate and partnership plaintiffs we consider we should, in the interests of justice, require that they be represented by a solicitor and/or counsel. It is for that reason that we propose to give directions (which we describe below) concerning the future conduct of the case on behalf of these parties by a suitably qualified lawyer.

[37] In the present case I determined that “exceptional circumstances” existed that warranted Mr Russell being given a circumscribed right of audience (namely the right to file written submissions and to make brief oral submissions on specific questions I had identified).

[38] The starting point was that Mr Russell had the necessary relevant connection with at least some of the appellant objectors. While it was accepted that he could not advocate (for example) for those appellants who were natural persons, he was able (subject to meeting the exceptionality threshold) to advocate for those corporate entities of which he was a director or an owner.28

[39] In terms of the exceptional circumstances themselves, my principal concern was the position in which the Court would find itself if Mr Russell were not permitted to be heard on the questions that Mr Judd did not address. Although Ms Deligiannis for the Commissioner urged that I should simply then regard those questions as abandoned, I am not certain that that would be appropriate in a case stated appeal. As Barker J said in Commissioner of Inland Revenue v G, a case stated appeal is, strictly speaking, a form of consultation by a tribunal with the Court in order to obtain an answer on a point of law (and, in the objection context,
questions of fact).29

[40] So there is certainly an argument to be made that, once a case has been stated, it is not open to the Court simply to decline to answer it; if there are difficulties with the questions the proper course would be to refer the case back to the Authority
which, for obvious reasons, was an unattractive option here. But effectively refusing

28 Because of the nature and scope of the present case stated appeals it was not possible or desirable that nice distinctions be drawn between the different appellants. So while at a theoretical level Mr Russell could speak only for certain of the appellants, in reality he would be speaking for them all.
29 Commissioner of Inland Revenue v G (1995) 17 NZTC 12,226 (HC).

to answer the questions stated appeared to me potentially to engage, at least by analogy, the principles in Electoral Commission v Tate.30

[41] Secondly, it is undeniable that Mr Russell has considerable experience as an advocate and is more familiar with the complex history, facts and evidence and with the decided cases than anyone else (although no doubt Judge Barber and Mr Ruffin would come a close second and third).

[42] While I acknowledge the force of the five policy concerns identified by the Court of Appeal in Chesterfields and accept that they each have some part to play here, in my view they were adequately met by the presence of Mr Judd and the constraints that were placed on Mr Russell through the directions of the Court. I record that he complied with those directions and that I found his response to the questions posed in my minute of 14 November helpful.

[43] To the extent that my finding of exceptionality was a little tinged by pragmatism, however, it seems to me that there is appellate support for that approach both in Chesterfields (where the Court permitted Mr Hampton to make submissions rather than countenance an adjournment) and also in Wilfred v Gan.31 In that case Mr Wilfred was the director of two of the appellant companies. In a postscript to its judgment (which concerned an application for stay pending appeal), the Court of
Appeal said that Mr Wilfred had been permitted to make submissions on behalf of all the appellants “given the exigencies of the situation”.32

[44] I heard from Mr Russell accordingly.

THE QUESTIONS

[45] Against that background I now turn to address each of the 13 questions stated for the opinion of this Court. I indicate at the outset which of these was the subject of submissions by Mr Judd and which were addressed by Mr Russell. I note that
some of the questions relate only to certain appellants.

30 Electoral Commission v Tate [1999] 3 NZLR 174 (CA) at [31]–[34].
31 Wilfred v Gan [2013] NZCA 285.
32 At [36].

Question 1 (Mr Judd)

Should the objections of the Webster group of objectors be allowed because the Commissioner should not have been granted an extension of time to file the cases in the Taxation Review Authority?

[46] In Case U35 the TRA granted the Commissioner an extension of time for the filing of the cases stated in that forum.33 The TRA held that the extension was justified by “exceptional circumstances”.34 The appellants now seek to contend that Case U35 was wrongly decided and that, accordingly, the Commissioner should have been precluded from defending the objections.

[47] Similar arguments have previously been raised by the objectors. These arguments have been traversed by both the High Court and the Court of Appeal in a number of decisions. Unsurprisingly, when the hearing before me began the Commissioner’s starting position was that this question was res judicata. I am prepared to accept that there were good arguments that that was so, although the
position was not entirely straightforward.35

[48] As the hearing progressed, however, it appeared that the decisions which have previously dealt with the issue were given per in curiam. More particularly, it became clear that none of the judicial officers or Courts who have so far considered the issues had been referred to reg 4 of the Taxation Review Authority Regulations
1994 (the TRAR94) which, on the analysis below, seems central. Although (as will become evident) the position is still not straightforward, the existence of reg 4 does go some considerable way to filling the legislative “lacuna” that had previously been thought to exist by at least some of the judicial minds that have engaged with the issues. It certainly means that the TRA’s analysis in U35 was (with respect) wrong, and warrants revisiting.

[49] For these reasons I do not propose to address the res judicata point further and will deal with the issue on the merits. I will refer to the previous decisions on
the matter only where necessary for the narrative.

33     Case U35 (2000) 19 NZTC 9,330 (TRA).
34     At 9,346.
35     There is room for debate whether the various statements made in the Commissioner’s favour
were obiter.

[50] The relevant legislative, factual and juridical background is complex. It is nonetheless necessary to deal with it in some detail.

[51] The relevant primary legislation governing the administration and procedure of the tax system was, and remains, the TAA. All references to the provisions in that Act are to be taken as reference to the provisions as they were at the material times. As I have said, Part 8 of the TAA deals with tax disputes under the old objection procedure. Part 8A deals with the newer challenge process by which a taxpayer can dispute an assessment and other “disputable decisions”. It is Part 8 that is relevant here.

[52] Importantly, however (and this is arguably where earlier decisions appear to have gone astray) when it comes to the litigation end of tax disputes (as opposed to the processes which precede litigation) the TAA deals only with the procedure in the High Court. Litigation in the TRA is largely governed by the TRAA and regulations made under that Act. In the instant case the relevant statutory regulations were the TRAR94 and/or the Taxation Review Authorities Regulations 1998 (the TRAR98). It is accepted that for present purposes there is no material difference between the two sets of regulations and for the remainder of this judgment I propose merely to refer to the provisions of the TRAR94.

[53] The Part 8 objection procedure has long since been replaced as the means by which taxpayers can dispute the Commissioner’s assessment of their tax liability. But at the time that is relevant in these proceedings, the disputes process was commenced by a dissatisfied taxpayer notifying the Commissioner of his objection to a particular assessment. The Commissioner was then required to consider the objection and to decide whether or not to allow it either wholly or in part.

[54] If the Commissioner disallowed an objection either wholly or in part, the taxpayer could then seek to have his objection judicially determined. Depending on the circumstances of the case and the positions of the parties, the first instance hearing of the objection could take place in either the TRA or the High Court. Different statutory provisions applied, depending on which route was taken.

Objections in the TRA

[55] The starting point is s 134 of the TAA, which provides:

If an objection is not wholly allowed by the Commissioner, the objector may, within 2 months after the date on which notice of the disallowance is given to the objector by or on behalf of the Commissioner, by notice in writing to the Commissioner require that the objection be heard and determined by a Taxation Review Authority, and in that event the objection shall be heard and determined by an Authority, and the Taxation Review Authorities Act 1994 shall apply in respect of the institution, hearing, and determination of the proceedings on the objection.

[56] The TAA also provides that in certain circumstances the Commissioner or the objector may require or seek that an objection be heard and determined at first instance in the High Court. I shall return to those provisions shortly.

[57] But as far as objections in the TRA are concerned, the objection process is formally commenced by the taxpayer serving the Commissioner with his “points of objection notice”, which is commonly referred to as a PON or a POON.36

[58] Regulation 5 of the TRAR94 requires that a PON “state with sufficient particularity so as to fairly inform” the Commissioner and the Authority of:

(a) the facts relied on; and

(b) the propositions of law (if any) relied on; and

(c) the issues the objector considers are required to be determined.

[59] And reg 4(1) required that service of the PON on the Commissioner be effected within 3 months of:

(a) The date of the objector's giving notice requiring that the objection be heard and determined by the Authority; or

(b) Such other relevant date as is specified in subclause (3) of this regulation, where either of the parties has unsuccessfully sought to have the objection referred directly to the High Court …

36 I propose to adopt the former acronym in this judgment. The point is made expressly in reg 3 of the TRAR98 but is implicit in the TRAR94.

[60] For reasons that will become clear it is reg 4(3) that is critical in the present case. It provided that if either the Commissioner or the objector had unsuccessfully sought to have the objection referred directly to the High Court (ie if reg 4(1)(b) applies) then the relevant date for service of the PON is either:

(a) The date on which the objector gave notice in writing to the Commissioner desiring the stating of a case for the High Court, where the objector gave such notice; or

(b) Such date as may be agreed between the Commissioner and the objector, where it was the Commissioner who sought the direct referral of the objection to the High Court (being a date not earlier than that on which the Commissioner notified the objector of the Commissioner's intention to seek referral to the High Court); or

(c) Such other date as may be specified by the High Court when declining leave for the objection to be heard and determined by that Court.

[61] And reg 4(4) provides that:

If the objector fails to serve on the Commissioner the points of objection within the 3-month period referred to in subclause (1) of this regulation, or within such further period as may be allowed under regulation 8 of these regulations, the objection shall be deemed to be withdrawn and the Commissioner shall not be required to take any further steps in relation to the objection.

[62] Regulation 6(1) provided that once a PON is served then the Commissioner has three months, or such further period as may be allowed under reg 8, to state and sign a case. Regulation 6(4) said that if the Commissioner fails to file a case within time, the objector may apply to the Authority for an order directing the Commissioner to allow the objector's objection, and the Authority :

(a) Shall make such an order accordingly, unless it is satisfied that there are reasonable grounds for the failure to file the case:

(b) May, where it refuses to make such an order, make such other orders as in the circumstances it thinks fit, whether relating to the filing of the case, or otherwise.

[63] And reg 8 empowered the TRA to extend time for the filing of the case by the

Commissioner:

… until such time as the Authority thinks fit, whether the application is made before or after the expiry of the time limit.

[64] But reg 8(2) stipulated that:

Where application is made for an extension of time more than 2 months after the date for service of the points of objection or the date for filing the case, as the case may be, an order for extension of time shall be made only in exceptional circumstances.

[65] Case U35 dealt with both:

(a) an application by the objectors under reg 6 for an order directing the Commissioner to allow the objector's objection on the grounds that the Commissioner was late filing his case stated; and

(b)an application by the Commissioner for an extension of time for filing his case under reg 8.

Objections in the High Court

[66] The circumstances in which objections may be referred directly to the High

Court and the related procedural rules are dealt with in s 136 of the TAA. Section

136(2) provides that where an objection relates solely to a question of law:

(a) the objector can, within 2 months of being given notice of disallowance of his objection require the Commissioner to state a case to the High Court; or

(b)in a case where the objector has already nominated the TRA as the forum under s 134, the Commissioner can state a case for the High Court and notify the objector accordingly.

[67] There is, however, no right to have an objection referred directly to the High Court where (as in the present case) the objection relates to questions of fact, or mixed questions of fact and law. In those circumstances, s 136(3) provides that:

(a) The objector may, within 2 months after the date on which notice of the disallowance is given to the objector by or on behalf of the Commissioner, give notice in writing to the Commissioner that the objector desires the Commissioner to state a case for the opinion of the High Court,

specifying in the notice the registry of that Court in which the objector desires the case to be filed.

(b) The Commissioner may, in any case where the objector has under section 134 required the objection to be heard and determined by a Taxation Review Authority, notify the objector that the Commissioner desires the objection to be referred directly to the High Court.

[68] And where notice is given by the objector or the Commissioner under subsection (3), subs (4) states that the objection shall be referred directly to the High Court if both the Commissioner and the objector consent, or:

… with the leave of that Court granted on the application of the objector or the Commissioner upon the ground that in the opinion of the Court, by reason of the amount of the tax in dispute between the parties or of the general or public importance of the matter or of its extraordinary difficulty or for any other reason, it is desirable that the objection be heard and determined by the High Court instead of by a Taxation Review Authority.37

[69] As in the TRA, the objection procedure in the High Court is formally commenced by the objector serving the Commissioner with a PON, which is defined in terms that are materially identical to reg 5, in s 136(6) of the TAA. In these cases a PON must be served within 3 months of:

(a) the date upon which an objector has notified the Commissioner under s 136(2)(a) or (3)(a) of his wish to go direct to the High Court: s 136(5)(a); or

(b)the date upon which the objector gave notice under s 134, where it is the Commissioner who determines or desires to go to the High Court under s 136(2) or (3): s 136(5)(b).

[70] Section 136(9) stipulates that:

Where under this section an objection is to be referred directly to the High Court, the Commissioner shall, within 3 months after the date of service of the points of objection or within such further period as may be allowed under subsection (12), state and sign a case …

37 Section 136(20) gives a taxpayer one month in which to apply to the High Court under subs (3)(a) where the Commissioner refuses to consent to a direct referral. There is no equivalent time limit where it is the Commissioner who wishes to go to the High Court but the objector does not agree.

[71] Extensions of time for both serving a PON or for stating a case may be sought by the objector or the Commissioner under s 136(12), which is in materially identical terms to reg 8. An extension of time greater than two months after the relevant due dates may only be granted in “exceptional circumstances”.

[72] Where an objector has sought leave to go directly to the High Court but leave is refused, then s 136(20) deems the notice given under s 136(3)(a) to be s 134 notice. This avoids an objector who applies for leave to go to the High Court from being out of time for commencing objection proceedings in the TRA.

What happened in this case?

[73] It is against the above dual legislative schemes that the history of the objections by the Webster group of objectors falls to be considered. It seems clear that matters began to go awry at an early stage. The relevant chronology is as follows.

[74] On 13 December 1995 the Commissioner wrote to Mr Russell, disallowing J M Webster Ltd’s objection in full. The letter advised that if the objection was to be pursued further the taxpayers needed to advise the Commissioner whether they wished the TRA or the High Court to be seized of the matter. Accordingly, on 8
February 1996, Mr Russell gave notice to the Commissioner that the objectors wished to proceed in the TRA, pursuant to s 134. He asked the Commissioner to “state a case accordingly”. Given that no PON had yet been served, that request was premature.

[75] On 19 February 1996, the Commissioner advised Mr Russell that he intended to apply for leave to refer the objection directly to the High Court under s 136(4). The letter also advised:

You have now a period of three months from the date Inland Revenue received your request to file a Points of Objection Notice. This means you must file your Points of Objection Notice by 12 May 1996. If you do not file it by that date you will forfeit your right to have your client’s dispute heard.

[76] The “request to file a Points of Objection Notice” referred to here appears to

have been a rather oblique way of referring to Mr Russell’s 8 February s 134 notice.

The 12 May 1996 deadline was correct given the Commissioner’s intention to apply for leave, when s 14B of the TAA deems notice to be given, and the timeframe stipulated in s 136(5)(b).38

[77] On 10 May 1996, Mr Russell advised by letter that leave would be opposed. On 12 May 1996, Mr Russell served a PON on the Commissioner.

[78] On 15 May 1996 the Commissioner responded to Mr Russell’s 10 May letter and advised that he would be filing a case stated in the High Court. But he had not yet applied for leave.

[79] On 21 May 1996 Mr Russell repeated his request that a case stated be filed in the TRA before 12 August 1996 and advised that if it was not, J M Webster Ltd would apply to have the objection allowed under reg 6(4) of the TRAR94.

[80] On 12 August 1996 the Commissioner filed a case stated in the High Court. In my view this was a clear error because he had not obtained, or even applied for, leave to do so. The requirement to state a case under s 136(9) is activated only in circumstances where “an objection is to be referred directly to the High Court”. But other Judges have found that nothing turns on this error, and I tend to agree.

[81] An application for leave was eventually filed on 4 October 1996.

[82] Following the filing by Mr Russell of a notice of opposition and the filing of various affidavits by both sides, the Commissioner filed an amended case stated on
28 February 1997. Leave had still not been obtained.

[83] On 3 March 1997 the application for leave came before Salmon J for directions. Subsequently there was a series of hearings, minutes and a judgment of Baragwanath J dated 3 June 1997.39 In that judgment Baragwanath J expressed the
view that the matters would be better dealt with by the TRA if the TRA had

38 The same deadline would have applied under reg 4(1)(a) of the TRAR94 had the Commissioner been content to let the matter proceed in the TRA.
39 Tupurau v Commissioner of Inland Revenue HC Auckland M1453/96, 3 June 1997.

sufficient available time. The application was adjourned to allow the TRA time to consider whether it could conveniently deal with the objection.

[84] On 14 July 1997 the taxpayers filed an application with the TRA pursuant to reg 6(4) to have the objection allowed in consequence of the Commissioner’s failure to state and file a case with the TRA within the time limits.

[85] On 13 October 1997 Baragwanath J issued a minute in which he noted the advice from counsel for the Commissioner that the TRA was able to hear the objections in 1998 and that the Authority would have up to six months available in that year for that purpose. Then, his Honour said:

That being so, as a matter of common sense, there is no good reason for the matter not to be dealt with by the Authority rather than by this Court.

Mr Grierson has however drawn my attention to the fact that if the applications to this Court are dismissed there will be a situation of limbo, since the Authority is not yet seized of the appeals. For that to occur it would be necessary for the Authority to grant an extension of time pursuant to Regulation 8(2) of the Taxation Review Authorities Regulations 1994, which extension may be made “only in exceptional circumstances”.

It is a matter for the learned Authority and not for this Court to determine the applications for extension which Mr Wood has signalled are to be made to the Authority. I record however that Mr Grierson accepts the common sense of the matter that if this Court is not to deal with his clients’ appeals they must logically be dealt with in the Authority, which is what he has contended for all along. The learned Authority may very well consider that the present circumstances are “exceptional” within the meaning of the Regulations. It is now for the Authority to consider whether that is so and how its jurisdiction should be exercised.

I defer making an order dismissing the applications pending the determination by the Authority; but specifically invite the Authority to make his determination in advance of my intimated dismissal of the Commissioner’s applications. It would not be in the public interest for the cases to fall between the stools of the Authority and this Court and it was for that reason alone that I do not make the order now.

[86] The advice recorded there as having been given to the Court by Mr Russell’s then lawyer, Mr Grierson, seems to me to be wrong, as (respectfully) was the Court’s acceptance of it. No application for an extension of time was necessary; the circumstances that had arisen were expressly dealt with by reg 4(3), which effectively provided that if an application for leave was declined, a date for activating proceedings in the TRA (by the service or re-service of a PON) could

either be agreed between the parties or stipulated by the High Court when it declined leave. I note at this point that the position was even clearer under reg 5(1) of the Taxation Review Authorities Regulations 1974, which provided:

… where an application has been made under section 32(4) of the Land and Income Tax Act 1954 by the objector or by the Commissioner to the Supreme Court for the leave of the Court to refer the objection directly to that Court and the Court has refused to grant such leave, the Commissioner shall file the case with the Registrar of the Authority within a period of 6 months after the date upon which the decision of the Court refusing to grant such leave was given.

[87] In any event, it seems that none of the persons or judicial bodies involved in the Webster group objections back in 1997 (or, indeed, subsequently) were aware of reg 4 and so, on 6 November 1997, the Commissioner applied to the TRA for an extension of time for filing the case stated under reg 8.

[88] On 3 February 1998, Baragwanath J issued an oral judgment in the course of which he said:

I decline Mr Grierson’s application to dismiss that of the Commissioner [the
8 November 1996 application for leave to file a case stated in the High Court] which I adjourn until 29 June 1998 but with leave to either party to bring on seven days notice if the Authority earlier makes or declines an order extending time so as to accept jurisdiction.

[89] As far as I am aware, nothing happened on 29 June 1998 but over a period of eight days between 23 February and 4 March 1999 the TRA heard the various applications that had been made by the taxpayer and the Commissioner.

[90] And on 4 February 2000 the TRA issued a decision granting the

Commissioner’s reg 8(2) application extending the time for filing the case to 31

March 2000, and dismissed the taxpayers’ reg 6(4) application. That decision is

Case U35.

Discussion

[91] In my view the correct process in the present case would have been as follows:

(a) on receipt of Mr Russell’s notice under s 134 (in February 1996) the Commissioner should immediately have notified Mr Russell that he wished to have the objection referred directly to the High Court under s 136(3);

(b)as soon as the Commissioner was advised that the objector did not consent to a direct referral, he should have applied to the High Court for leave;

(c) the objector’s PON should have been served on the Commissioner within three months from the giving of notice under s 134 (ie February 1996). This in fact occurred;

(d)no case should have been stated in the High Court by the Commissioner because there was no requirement for him to do so prior to the grant of leave;

(e) the application for leave should have been dealt with by this Court decisively and promptly;

(f) in the decision declining leave the Court should have set a date pursuant to reg 4(3);

(g)the objectors should have re-served their PON by that date and time limits for the Commissioner stating a case in the TRA would then have been activated; and

(h) the Commissioner should have stated a case within time.

[92] No application for an extension of time would therefore be required.

[93] No date was, of course, set by this Court under reg 4(3) when leave was declined. Indeed it remains unclear to me whether leave was ever formally declined.

[94] The consequences of what has occurred are not entirely straightforward. But one thing that does seem tolerably clear is that the Commissioner was not out of time for stating a case in the TRA and there was no need for him to establish exceptional circumstances. (Were it necessary for me to do so, however, I would regard the highly unusual way in which the application for leave proceeded in this Court as constituting such circumstances.)

[95] As far as reg 6 is concerned, I acknowledge that, in August and September

1997, the objectors arguably had grounds for making an application in the TRA to have their objection upheld because at that time:

(a) the objectors had given notice under s 134 and served a timely PON;

(b)the Commissioner had not yet applied for leave to go directly to the High Court and it was therefore the TRA that was seized of the matter; and

(c) the Commissioner was out of time for stating a case in the TRA, were the matter proceeding there.

[96] The objectors did, of course, file just such an application. But I have no doubt that the Commissioner’s intention to apply for leave, which had clearly been stated right from the outset, would constitute “reasonable grounds” for the Commissioner’s failure to file in time, and thus would justify its refusal. It would make no sense at all to require the Commissioner to state a case in the TRA (or to penalise him for not doing so) when he is taking steps to state a case in another forum. Although important aspects of the TRA’s analysis on this issue are incorrect, I consider that the ultimate decision to decline the reg 6 application cannot be impugned.

[97] To the extent that Mr Judd then alternatively contended that the upshot of all the confusion is that the objection hearing in TRA misfired at the start, and the whole process is rendered a nullity, I am unable to accept that submission. Such a

submission necessarily asks the Court to engage in an exercise of arid formalism that wholly disregards the reality of the last 15 years. The essence of that reality is that:

(a) the Webster group of objectors served a PON; (b) the Commissioner stated a case for the TRA; (c) the TRA determined the objections.

[98] The essential aspects of the statutory process have all been met. Apart from perhaps the delay occasioned by the tortuous leave process in 1997 and 1998 there has been no prejudice at all to the objectors in what has occurred. That delay is frighteningly minor in terms of the wider history of this litigation.

[99] In terms of the question whether the Webster group’s objections should have been allowed because the Commissioner should not have been granted an extension of time to file the cases in the TRA, the answer is: “No. The Commissioner did not need an extension of time; the objections should not therefore have been allowed on that ground.”

Question 2 (Mr Russell)

Were any of the interlocutory rulings made by the Authority wrong and, if so, what were the consequences of those incorrect rulings?

[100] The objectors contend that the conduct of the hearing of the case denied the objectors a complete and fair hearing because the Authority was biased and the objectors were prevented from adducing relevant documentary and oral evidence. The specific interlocutory decisions identified by the Authority in the case stated are:

(a) Case U24 (ruling on justiciable issues, discussed above);40

(b) Case U25 (see question 3 below);41

40 Case U24, above n 6.
41 Case U25 (1999) 19 NZTC 9,239 (TRA).

(c) Case U35 (see question 1 above);42

(d)Case W24 (discovery and application to strike out because of an alleged vendetta against Mr Russell);43

(e) Case W35 (discovery);44

(f) Case W36 (admissibility of minutes);45

(g) Case W37 (application for discovery of minutes);46

(h) Case W38 (application for discovery of minutes);47

(i) Case W39 (application for discovery of meeting notes);48

(j) Case W41 (application for discovery);49

(k) Case W45 (application for recall of judgment);50 and

(l)Case W46 (application by objectors to call further evidence – see question 7 below).51

[101] But the question is also said to encompass “all other rulings made in course of hearing and recorded in the transcript”.

42     Case U35, above n 33.
43     Case W24 (2003) 21 NZTC 11,246 (TRA).
44     Case W35 (2004) 21 NZTC 11,340 (TRA).
45     Case W36 (2004) 21 NZTC 11,353 (TRA).
46     Case W37 (2004) 21 NZTC 11,360 (TRA).
47     Case W38 (2004) 21 NZTC 11,372 (TRA).
48     Case W39 (2004) 21 NZTC 11,375 (TRA).
49     Case W41 (2004) 21 NZTC 11,380 (TRA).
50     Case W45 (2004) 21 NZTC 11,419 (TRA).
51     Case W46 (2004) 21 NZTC 11,424 (TRA).

Discussion

[102] Those rulings that are the subject of separate questions (namely Cases U25, U35 and W46) are dealt with in the context of the discussion relating to those questions. The general points that follow nonetheless also apply.

[103] The signal point that, in my view, answers all Mr Russell’s submissions on question 2 is that the interlocutory rulings are irrelevant unless it can be shown that they would have affected in some way the substantive outcome of the objections. In other words, they are only relevant if Mr Russell can demonstrate either that:

(a) a different ruling would have caused the TRA to conclude that the

Russell template was not a tax avoidance arrangement at all; or

(b)that there was such a fundamental procedural error (either in the course of making the assessments or in the course of the TRA hearing) that the assessments, or the TRA’s confirmation of them, are invalid.

[104] Obviously, Mr Russell’s contention was that he could so demonstrate. But in

my view that is quite clearly not so.

[105] As far as the possibility in (a) is concerned, the history of the Russell litigation means that there is simply no conceivable basis upon which (for example) further evidence or discovery might be able to demonstrate that the template was not a tax avoidance arrangement. As I have mentioned earlier, Mr Russell did not seek to contend before the TRA or before me that there were material differences between the arrangements entered into by the present objectors and the arrangements that have previously been found to be void for tax purposes under s 99.

[106] As far as the possibility in (b) is concerned, the first difficulty is that the arguments advanced by Mr Russell are essentially collateral matters of the kind that are advanced in judicial review proceedings. And in that respect he faces the

formidable impediments of ss 109 and 114 of the TAA.52 As the Court of Appeal said in Westpac Banking Corporation v Commissioner of Inland Revenue:53

[59] … [w]e accept that judicial review is available in exceptional cases and thus may be available in cases of conscious maladministration (as was recognised in Futuris). We can reconcile this with ss 109 and 114 on the basis that in such cases (ie no genuine assessment or conscious maladministration) what is challenged is either not an assessment, or at the least, not the sort of assessment which the legislature had in mind in enacting those sections. On this basis we see the availability of judicial review as depending on the claimant establishing exceptional circumstances of a kind which results in the amended assessment falling outside the scope of ss 109 and 114 and thereby not engaging those sections.

[60] We see any broader approach to judicial review as inconsistent with the statutory scheme. Despite the repetition, we set out s 109 which provides:

Except in [objection proceedings under Part 8 or] a challenge under
Part VIIIA, -

(a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and

(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.

A taxpayer who seeks judicial review of an assessment might be thought to be disputing it and doing so in flat defiance of s 109(a). Section 109(b) deems an assessment to be “correct in all respects” which might be thought to necessarily extend to its validity. In the context of the present case, we have difficulty with reconciling the statutory requirement that the 1999 amended assessment be taken as “correct in all respects” with the proposition advanced by Westpac that it is nonetheless invalid and ineffective.

[61] We also consider that the broad approach contended for by Westpac places too much emphasis on the assessment as an exercise of a statutory power of decision. An assessment should reflect the correct tax position and a taxpayer’s liability to pay tax exists independently of the assessment. If the assessment is correct, it is hard to see why complaints about process should result in the taxpayer not paying tax on a correct basis. Where there are very large sums of tax at stake (as there are here), this raises fairness considerations in relation to other taxpayers who have met their liabilities for the tax year concerned. If the assessment is wrong, it can be corrected in later challenge proceedings. If it is correct, the tax should be paid. It is frankly difficult to see what is unfair in this approach.

52 Section 109 is set out in the quotation below. Section 114 provides that (inter alia) a failure to comply with the Act does not invalidate an assessment.
53 Westpac Banking Corporation v Commissioner of Inland Revenue [2009] 2 NZCA 24, [2009] 2
NZLR 99 (CA).

[62] Further, it is perfectly clear that allowing collateral challenge to assessments through judicial review can provide scope for gaming and diversionary behaviour.

[63] In the past taxpayers going down the judicial review route have often sought to delay the statutory processes (whether prior to, or after, assessment) until the judicial review proceedings are completed; this on the ostensibly sensible ground that until the judicial review claim is determined it is premature to proceed with the statutory process. The response of the courts has been to require the review claim to be brought in the same proceedings as the challenge. But this is not necessarily an answer to the potential for judicial review to lead to delay, as illustrated by an unsuccessful attempt by Westpac in this case to have its validity cause of actions heard first.

[64] Collateral challenge involves not just delay but also diversion of effort and resources. The challenge proceedings between Westpac and the Commissioner will be complex and will fully engage the attention and resources of the Commissioner and the Court. The validity cause of action involves an attempt by Westpac to turn the case back onto the Commissioner. If it goes to trial, considerable resources which might otherwise have been devoted to the primary issue between the parties will be diverted to an inquiry into the internal processes of the Inland Revenue Department. This inquiry will throw up questions which are on the one hand difficult and nuanced (as to the subtleties of the differences of approach adopted by Rulings and Corporates) but on the other entirely irrelevant to whether Westpac owes the tax it has been assessed to pay which in the end will turn on the Judge’s approach to s BG 1.54

[107] The difficulties are no less insurmountable when one considers the specifics of Mr Russell’s submissions. That is because all of the process errors advanced by him have already been comprehensively dealt with and determined against him in other cases. I do not intend to refer to them all; a single example in relation to each error suffices.

[108] First, the vendetta allegation was rejected by Baragwanath J in Miller v

Commissioner of Inland Revenue in the following terms:55

The plaintiffs have demonstrated that the Commissioner's staff have gone to considerable lengths to investigate and challenge the use of Mr Russell's business structure. There is evidence of the establishment of a team of inspectors whose task was to carry out what was described in one document as an “attack plan”. At one stage a minute was written containing the words - “[it] may not be entirely legal but may help stem the flow”.

The allusion is to attempt to deter accountants from involving their clients in the use of the business structure. Such an attitude within the system of

54 Section BG1 of the Income Tax Act 2007 has replaced s 99 of the ITA76.
55 Miller v Commissioner of Inland Revenue (1997) 18 NZTC 13,001 (HC) at 13,046–13,047.

administering the legislation is troublesome. The author has done a disservice to other officers who adhere to the spirit and letter of the law in performing their difficult task. The temptation to overreact against conduct seen as anti social must be curbed.

There is another piece of evidence on which the plaintiffs particularly rely - the observation by the Taxation Review Authority

“I have been sitting on these Russell cases for more than 10 years and I have to say that the Commissioner seems to have some sort of hang up as Mr Russell is concerned and does funny things that are quite unbalanced really.”

The evidence is hearsay. In view of its generality and the fact it is tendered in reply I am not prepared to treat it as admissible at common law in the light of R v Baker [1989] 1 NZLR 738 at p 741 and R v Bain [1996] 1 NZLR 129. It is admissible under s 3 of the Evidence Amendment Act (No 2) 1980 but for the reasons just mentioned is of limited weight. I do accept that from time to time during the long process of attack and counter-attack between the parties the Commissioner's staff have become deeply troubled by Mr Russell's conduct and have sometimes overreacted. I am, however, clearly of the view that there is no such evidence of misconduct in the preparation of the assessments under challenge to warrant the Court's setting them aside.

One can well understand why Mr Russell felt himself and the directors who adopted his business structure to be “targeted”. Mr Russell is firmly of the view that his meticulously crafted business structure entitles those availing themselves and their companies of it to pay no tax provided his Company C receives 5% of the net profits of the business and his Company B retains its share of what the Commissioner regards as 50% of the tax Company A would have paid. (See for example Russell pp 16, 17 “The intent of the Commissioner as far as my companies are concerned on either Track A or Track B is simply to deny my companies the use of the tax losses in the manner allowed by law and to make nugatory the provisions of s 188 and
191 as far as my companies are concerned.”) The military metaphors about
“attack plan” and “war”; the justified fear that the Commissioner's officers were out to “destroy his business”, coupled with the long years of assessments, objections and litigation have made polarisation inevitable.

I am however satisfied that the Department's purpose in seeking to “destroy” Mr Russell's business was to terminate what its members were entitled to see as flagrant tax avoidance, which it is their statutory function to deal with. Mr Russell's template has been in use since 1980. Many millions of dollars which, if the Commissioner is right, should have been paid by way of tax have been received tax free.

Mr Russell is a man of obvious intelligence and resource who in correspondence has given the Department as good as he gets. While there is a departmental note referring to the fact that “we have got plenty of resources” it is the case that Mr Russell has had receipt through his companies B and C of sums equivalent to more than half the tax that would have been paid by the businesses in question over the past 15 or so years.

The competing views are deeply entrenched. They have been the subject of extensive litigation before the Taxation Review Authority, this Court and the

Court of Appeal. It is unsurprising that the parties view each other with disfavour. Mr Russell asserts that knowingly false statements have been made by one of the Commissioner's officers concerning the topic of the Commissioner's entitlement to privilege (Russell pp 181, 182) and in a 15 page passage (Russell pp 177–192) makes various assertions culminating with the statement

“226. I believe the vendetta considerations have become an obsession with some of the Commissioner[er]’s staff to the extent that they have become unbalanced in their conduct towards me and my clients.”

The introduction of this material in an affidavit in reply means that there is no response from the Commissioner. I bear that in mind in considering the critical question whether the Commissioner had adopted a mindset inconsistent with the performance of his proper statutory role.

…

The Departmental files exposed by the Official Information Act and the course of discovery before the Taxation Review Authority contained lead me to find a belief, honestly held, that Mr Russell's business structure has led to large scale tax avoidance which is the duty of the Commissioner and his staff to stop. Such opinion is well open to them; I do not find material improper purpose established.

[109] The Court of Appeal later upheld Baragwanath J’s findings:56

In the written submissions of counsel for the appellants it was contended that the Commissioner had an unlawful purpose in issuing the Track B assessments because he was intent on pursuing a vendetta against Mr Russell. This argument failed on the evidence before Baragwanath J. There is no basis for saying that the Judge was wrong and no appearance of an improper purpose. The Commissioner was faced with large scale and well organised schemes having the apparent intention of avoiding tax, with the position of the appellants and others involved being vigorously defended. The Commissioner was entitled to adopt an uncompromising approach and, as already held, it was open to him to conclude that the arrangements fell within s 99.

[110] Secondly, allegations of bias on the part of Judge Barber against Mr Russell have been rejected by the Court of Appeal in Russell v Taxation Review Authority.57
There the Court held that even if apparent bias had affected Judge Barber’s decision in Mr Russell’s personal income tax case before the TRA and Cooper J had erred in
holding that Judge Barber was not required to recuse himself,58 the situation was

56     Miller v Commissioner of Inland Revenue, above n 6, at 296.
57     Russell v Taxation Review Authority [2011] NZCA 158, (2011) 25 NZTC 20,044.
58     Russell v Taxation Review Authority (2009) 24 NZTC 23,284 (HC).

cured by the judgment of the High Court on the substantive appeal.59 The Supreme Court denied Mr Russell’s leave to appeal the issue further and upheld the Court of Appeal’s decision agreeing that any “taint” would be overtaken by the substantive appeal.60

[111] While, in the case of the present objectors, there is no substantive appeal, that makes no difference. As I have said, in the absence of any material difference between the present schemes and those previously considered by the higher courts, there is, no prospect that they would not be regarded as tax avoidance arrangements. To suggest otherwise is akin to saying that a naked emperor has clothes.

[112] And thirdly, similar allegations about the prejudice arising from decisions about the calling of witnesses and discovery were dealt with and rejected by the Court of Appeal in Russell v Taxation Review Authority.61

[113] The answer to the second question is: “The ruling in Case U35 was wrong but its incorrectness is of no consequence because of the answer to question 1. The other rulings were all either correct or of no consequence for the reasons given.”

Question 3 (Mr Russell)

Should the affidavit of J G Russell sworn 23 July 1999 have been admitted as evidence and taken into account in determining the issues in these proceedings?

[114] On 23 July 1999 the objectors filed with the Authority an affidavit sworn by Mr Russell. The Commissioner objected to the affidavit and the Authority ruled in Case U25 that it be rejected and not read. The Authority gave reasons as follows:

9. … [t]he said affidavit of Mr Russell dated 23 July 1999 is a diatribe of a submission virtually from start to finish … and cannot be taken into account as evidence. …

10. I do not find that the material in the affidavit is generally irrelevant but its relevance is peripheral and it contains (some) matters for submission but very little of evidence. To a significant degree, the affidavit refers to other Russell Template cases rather than the present objections. However, of most concern to me are unfounded allegations in para 15 and elsewhere (eg

59     Russell v Commissioner of Inland Revenue (No 2) (2010) 24 NZTC 24,463 (HC).
60     Russell v Taxation Review Authority [2011] NZSC 96, (2011) 25 NZRC 20-077 at [5].
61     Russell v Taxation Review Authority (2003) 21 NZTC 18,255 (CA) at [31].

paras 17, 25, 26, 39, 41 and 42) about a counsel for the respondent. These allegations are injurious to the reputation of that counsel and are generally disgraceful statements for Mr Russell to make. …

11. Just as disgraceful is the content of para 17 of the affidavit which, in my view, defames not only that counsel but some senior officers of the IRD. The tone of a number of other paragraphs of the affidavit is intemperate and unacceptable in a judicial forum. Paragraph 22 of the affidavit is also scandalous in terms of its references to the said counsel and would also seem scandalous, at least by strong inference, in its reference to this Authority (ie to me). I cannot be expected to tolerate such innuendoes although I realise they come from a person who will not accept that his template is void against the Commissioner and enables reconstruction assessments pursuant to s 99(3) of the Income Tax Act 1976. …

the income to be the income of the first taxpayer.84

[144] That is, plainly, a correct statement of the law as I have summarised it above. [145] The answer to question 6 is: “No.”
Question 7 (Mr Russell)

In forming his opinion under s 99(2) in respect of each objector, did the Commissioner meet his statutory obligations to consider all of the relevant facts and particular circumstances in relation to each objector?

[146] The objectors contend that the Commissioner did not properly apply s 99(2) in that the Commissioner did not follow his own CPS and the Authority did not permit the calling of witnesses from Inland Revenue about this issue. Mr Russell says that no detailed and thorough analysis was ever done in relation to each objector in light of the relevant facts and particular circumstances pertaining to that objector.

[147] This contention has no merit for reasons already given. In short:

81 At [77].
82 At [80]–[84].
83 At [85].
84 Case Y20, above n 17, at [33].

(a) Mr Russell has not identified any particular facts in relation to any particular objector that are said to warrant the conclusion that the scheme in which that objector participated was not a tax avoidance arrangement;

(b)any defects in the Commissioner’s assessment process that might exist have been cured by the TRA’s decision; and

(c) the argument is a collateral attack on assessments that are deemed, and have been found to be, correct.

[148] The proposition that the reassessments are somehow invalidated because the Commissioner failed to follow the CPS during the reassessment process, it can be answered just as shortly. The Privy Council in Miller held that the CPS was not binding and did not lay down rules and conditions; it did no more than reassure the public that the Commissioner and his officers would think carefully about whether
s 99 applied to any particular case.85 Nothing that Mr Russell might have been able

to elicit from witnesses who were not called could change that.

[149] The answer to question 7 is that “the reassessments have been confirmed to be correct and so it does not matter”.

Question 8 (Mr Judd)

Should a portion of the administration fee be treated as a deductible funding charge and so be allowed as a deduction against the income assessed to the objectors?

[150] This issue was dealt with by Judge Barber in Case Y20 as follows:86

[74] As I understand it, the objectors submit that a portion of the administration fee is a deductible expense in the nature of a funding charge.

[75] Strictly, I do not have jurisdiction to consider this question because it has not been pleaded as a specific ground of objection. However, this question arises out of an observation I made in earlier cases where I refused to allow a funding charge on the ground that there was no agreement for it and that, in any event, the issue was not a ground of objection. In Wire

85 Miller v Commissioner of Inland Revenue, above n 4, at [29].
86 Case Y20, above n 17.

Supplies Ltd (High Court) Courtney J allowed the issue to be argued as being an expansion of the ground of objection that the administration charge was fully deductible but, in relation to this substantive issue, she stated at paras
153–159:

“157. I therefore go on to consider the TRA’s finding that no funding charge could be allowed because there was no agreement to that effect. I consider that, even in the absence of a specific agreement, if funding were provided by the parent company it should be entitled to charge for it. There is no reason that the subsidiary should benefit from interest-free funding at the expense of the parent simply because the transaction giving rise to the funding breached s 99. It must have been implied into the contractual arrangements between the companies that if the underlying template scheme was annihilated the subsidiary would nevertheless meet the cost of genuine services which had been provided.

158. However, the only evidence I was referred to that could have supported a finding as to the quantum of a funding charge was from Mr R who asserted in his evidence in relation to NBL that if the subsidiary company faced cash flow problems the profit company would be asked to provide financial assistance to tide it over which it always did. But he gave no details of such funding and no evidence in relation to the companies other than

159. In cross-examination of the Commissioner’s witnesses Mr R sought to elicit agreement that a funding charge of 18% would have been appropriate. But that evidence is far too speculative to support any finding as to the appropriate amount of any funding charge in relation to any particular company. As a result, although a finding could have been made that a funding charge was allowed, there was insufficient evidence on which to actually do so.”

[76] When the Court of Appeal dealt with her finding, it held there was insufficient evidence that funding by the parent company had been provided, or that a charge had been made for that funding to support a claim for a deduction for a funding charge.

[77] In the present cases, there is no evidence of an agreement that there should be a funding charge. The issue is not covered in the management contract insofar as it relates to the administration charge. I agree with Mr Ruffin that there is nothing in the template documentation which remotely suggests an agreement between the parties for a funding charge to cover any delayed payments of the administration charges, or any loans made to the subsidiary as may be necessary from time to time. As he adds, the loans made to any subsidiary as may have been necessary from time to time would have been quite independent of the contractual arrangements set out in the template; and each separate loan would need to be identified as to date, quantum, and term, and as to what arrangements were made in relation to it as to whether it should be interest free or not. If there was an arrangement as to paying interest in relation to such a loan, that would be a separate interest payment payable by the trading company to the parent company. I agree with

Mr Ruffin that all this does not justify a submission that such interest would be paid out of the administration charge.

[78] The management contract does not mention the concept of “financial services”. The repayment agreement within the template provides that the mortgagor (owner described in management contract) covenants that within “7 days of the receipt of any income or cash from the company whose shares are mortgaged as aforesaid the mortgagor will pay the mortgagee (original shareholders of the trading company described as the managers and the management contract) a sum of money not less than 77.5% of the amount so received in reduction of the advance as aforesaid”. In that context, if there is a delay in paying the administrative charge, there is a delay in making repayment of the original sum advanced. The clause in the management contract which always relates to the administration charge always commences “in consideration of the administration services now and to be provided by the owner …” and does not mention ever “financial services”.

[151] And in Case Z7, the Authority simply said:87

[33] I dealt with this fully at paras 74–78 of Case Y20. Also, it was not a ground of objection. There is no evidence of an agreement that there was or would be a funding charge built into the administration fee. The issue has been dealt with by the Court of Appeal in Wire Supplies Ltd v CIR (at p 21,
431 paras 153–163) where that ground of appeal failed. There was insufficient evidence to support the claim for a deduction for a funding
charge although the court made it clear that it was not accepting that there
could have been a deduction if there had been adequate evidence.

[34] This is an issue which has been dealt with in full by this Authority and appellate Courts and I decline to reopen it.

[152] The objectors nonetheless submit that there was sufficient evidence before the TRA to establish that a portion of the administration charge was deductible as a funding charge. They say that the relevant portion can be calculated on the basis of the parent company account balances in evidence in every case. They rely on the financial statements of the corporate objectors showing the balance of the parent company account in every year and the evidence given by Mr Russell that the parent company operated interest free credit accounts with each corporate objector. The objectors contend that it was necessary for the trading companies to borrow and so a deduction to reflect this expense is appropriate and that such an allowance would be consistent with the decision to allow a portion of the consulting fee as a deductible
expense.

87 Case Z7, above n 1.

[153] I reject this contention. In my view far more cogent evidence than this would be required. The reality is that a deductible “funding charge” is a post-reconstruction invention, as is demonstrated by the need to hypothesise about what the “reasonable” quantum of such a charge might be. As Lord Hoffmann said in Miller the Commissioner is not, on reconstruction, required to rewrite history so as to give a tax avoiding objector the benefit of something that never happened and which would, in all likelihood, not have happened had the tax avoidance arrangement not been entered into. The Commissioner is quite entitled to annihilate the artificially created tax advantage in its entirety.

[154] The view just expressed is further borne out by the burden that is on a taxpayer in any objection proceeding to prove on the balance of probabilities that the amount of an assessment is excessive by a specific amount. It is trite that this burden is both strict and critical. As the Supreme Court said in Ben Nevis Forestry Ventures
v Commissioner of Inland Revenue:88

[171] Furthermore, when taxpayers challenge an assessment based on a reconstruction adopted by the Commissioner, the onus is on them to demonstrate, not only that the reconstruction was wrong, but also by how much it was wrong. Unless the taxpayer can demonstrate with reasonable clarity what the correct reconstruction ought to be, the Commissioner’s assessment based on his reconstruction must stand. This is settled law. In this case we are of the view that the appellants have not shown that the Commissioner’s assessment based on his reconstruction was wrong. Even if they had shown that to be so, they have not shown on any reasonably clear basis to what extent it should be varied. The appellants did not submit any specific proposed reconstruction of their own, the validity of which the Court could then have evaluated. The Commissioner’s assessment must therefore stand.

[155] The objectors have not, and in my view cannot, meet that burden here.

[156] The answer to question 8 is: “No”.

88 Ben Nevis Forestry Ventures v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2
NZLR 289 per the plurality of Tipping, McGrath and Gault JJ.

Question 9 (Mr Judd)

How and to what extent does s 165(2) of the ITA76 apply to the income assessed to each objector?

[157] In Case R25 and in other template cases, the TRA found that consultancy services were in fact provided to the objector company by the Commercial Management Partnership (Mr Russell) in the form of “normal” commercial advice as well as advice as to the tax avoidance scheme.89 In Case R25 the TRA held that 15 hours per month of advice in total would have been provided by Mr Russell and that that part of the consultancy fee which represented payment for non-tax avoidance
advice was deductible. The TRA further deemed that half of the advice given (7½ hours per month) was for legitimate commercial purposes, and a deduction for the payments made (at a deemed reasonable hourly rate of $250 an hour) was permitted under s 104 of the ITA76. While the figures differ, similar findings have been made in other template cases, including the present.

[158] But the remainder of the deduction for the consulting fee continued to be disallowed. So, in the present case the corporate objectors now seek to contend that this remaining portion should be deductible under s 165(2) of the ITA76, which provides:

(2) Subject to this section, in calculating the assessable income derived by any taxpayer in any income year, the Commissioner shall allow a deduction in respect of any expenditure incurred by the taxpayer during that income year in connection with —

(a) The calculation or determination of the assessable income of the taxpayer for any income year:

(b) The calculation or determination of the goods and services tax payable by the taxpayer for any taxable period:

…

[159] Subsection (4) makes it clear that deductions are not permitted under the section for expenditure incurred in connection with (inter alia):

89 Case R25 (1994) 16 NZTC 6,120 (TRA).

(a) Any matter or assessment arising from a return (being a return of income or a return furnished under the provisions of the Goods and Services Tax Act 1985) that, in the opinion of the Commissioner, was fraudulent or wilfully misleading:

(b) Any offence under any of the Inland Revenue Acts: …

[160] The objectors contend that if this provision is properly applied then the portion of the consulting fee that is not deductible under s 104 is deductible under s 165(2) in relation to the work done by Mr Russell in determining their taxable positions. They say it does not matter that the Commissioner did not agree with the tax position as determined by Mr Russell; the cost of determining that tax position remains deductible. I accept that latter proposition; it is the former that is in issue.

[161] The Commissioner submits, and the TRA accepted, that there was no jurisdiction to determine this issue because it was never a ground of objection.90 The notices of objection refers only to the deductibility of the consulting fee under s 104 and expenditure of the kind referred to in s 165 is not deductible under s 104.91 Mr Judd, however, took me to parts of various PONs which, he said, were worded widely enough to include the s 165 point. There is no dispute, however, that s 165 was never expressly mentioned.

[162] Be all that as it may, however, this argument suffers from the same problems as question 8 above. No evidence was provided to show what part of the consulting fee was paid for the calculation or determination of either assessable income or GST; there is no prospect of making an evidentiary linkage between some part of the consultancy fee and any specific (s 165) work that was done. Indeed, Mr Russell said in his evidence that only bare time records were kept and even these records were not before the TRA. I reject any suggestion that the Court proceed on the basis that the relevant amount is simply the difference between the total fee less any deduction already allowed under s 104.

[163] In a sense, the absence of evidence merely bears out the jurisdictional point

which formed the basis of this part of the TRA’s decision. It seems quite clear that it

90 Case Y20, above n 17, at [75]. An objector is limited to his grounds stated in the objection by s 18 of the TRAA.
91 Relying on Smith’s Potato Estates Limited v Bolland (Inspector of Taxes) [1948] AC 508, (1948)
30 TC 267 (HL).

never occurred to the objectors to advance the s 165 contention when proceedings in the TRA commenced, let alone at the objection stage before the Commissioner. It is merely a convenient ex post facto argument.

[164] In any event, and as I have said above, the onus is on the taxpayers to show that the reassessments are wrong, and by how much. Neither the Commissioner, the TRA, nor this Court are required to assist them to reinvent the past. They have failed to discharge that onus here.

[165] Accordingly the answer to question 9 is: “Section 165(2) has no application in any of the present cases.”

Question 10 (Mr Judd)

Have conflicting and inconsistent assessments been made in respect of the Fuel
Haulers objectors and, if so, how should these assessments be reconciled?

[166] The “Fuel Haul” objectors are: Messrs Borrows, Stewart, Weinberg, Ihaka, Bradley and Efaraimo. Those individuals have, at various times, been the managers of a fuel haulage business conducted by Fuel Haulers Ltd (FHL). FHL changed its name in October 1992 to Fuel Haul Management Systems Ltd (FHML). FHML was struck off the register in early 1995.

[167] There is another company known as Fuel Haulers (1990) Ltd (FHL 1990) that is now owned by a company associated with Mr Russell.92 As I understood it, this company may have taken over the business of FHML upon winding up.

[168] From 1985 to 30 September 1988 Messrs Borrows, Stewart, Weinberg and Ihaka managed the business under a management contract. Mr Bradley replaced Mr Ihaka in January 1989. Mr Efaraimo replaced Mr Borrows in February 1990.

[169] FHL/FHML were issued with Track A assessments. Track B assessments
(reassessing the administration charge) were subsequently issued to the managers and to FHL 1990 for the consulting fee.

92 Mangere Bridge Hardware & Hire Ltd changed its name to Fuel Haulers (1990) Ltd on 1 March
1990.

[170] FHL/FHML objected to the Track A assessments issued to them. Mr Judd says that cases were stated in relation to those assessments in the TRA and that this case stated has never been determined and is extant. He submitted that because a Track A case has been stated in relation to the company and technically remains pending in the TRA, the Track B assessments issued to the managers and to FHL
1990 cannot stand.

[171] The authority cited for this proposition is the Court of Appeal’s decision in Wire Supplies (see above) where the Court confirmed that once a case is stated in the TRA (or in the High Court) in relation to a Track A assessment, a later, inconsistent (Track B) assessment cannot be made against a different taxpayer.93 Similarly, while it was possible for both Track A and Track B assessments to co-exist, once a Track A case was stated the Track B assessment would be open to objection on the ground
that it contravened s 99(4). Mr Judd says that is precisely the case here.

[172] In the present case, the TRA appears to have accepted that a Track A case had been stated at the behest of the Fuel Haulers corporate objectors. In Case Z7 the Authority said:

[42] It seems that an issue should be whether the Track B assessments of the managers are prevented by the F H Ltd Case Stated having been already filed for years before 1991 on a Track A basis. Mr Ruffin put it that any submission that Track B assessments to those managers were invalid and legal nullities, because it was too late to amend the Track A assessments, has not been clearly made but the issue was covered in evidence. However, Mr Russell has submitted that the wrong taxpayer has been assessed under the template and he seems to put it that the income in issue was assessed under Track A to F H Ltd and that cannot be changed so that the Track B assessments to these managers are invalid. Mr Ruffin also put that if there is some other specific focus on this F H issue which could be the subject of further submissions, my analysis of the issue might assist the High Court if the matter proceeds on appeal. Mr Ruffin says it seems desirable to permit further submissions from the objectors to clarify what this issue is. Mr Russell has declined to make further submissions other than his substantive submissions of 30 May 2008. If any party wishes to have me deal with this F H-issue, I grant leave to apply but there would need to be clarification of the issue and the relevant evidence.

[173] As I understand it, the leave so granted was not utilised by Mr Russell and I

have to say, that the issue and the “relevant evidence” remains a little unclear. But

93 The issue is discussed at length between [115] and [131] of the judgment.

the Commissioner says that the TRA was mistaken and disputes that a Track A case stated exists. I was referred to contemporaneous evidence that certainly appears to support that proposition.

[174] As it happens, however, there is further support for the Commissioner’s position to be found in Ellen France J’s judgment in Downsview Nominees Limited v Commissioner of Inland Revenue.94 In that case (discussed further under question 13 below) Mr Russell was seeking to have a number of companies restored to the Companies Register in order that their objection rights might be revivified. One of those companies was FHL. While the restoration application as it related to the
majority of the companies was opposed by the Commissioner, the Judge specifically noted at [32] of her judgment:

The Commissioner does not oppose the restoration of Douglas & Henwood Ltd or of Fuel Haulers Ltd. In relation to those two companies, no case stated has been filed. The Commissioner’s view is that there is therefore no litigation involving the Commissioner and no basis for the Commissioner to have an interest.

(emphasis added)

[175] There is nothing in that judgment to suggest that Mr Russell or his then counsel demurred. Of course in that context it was not in their interests to do so. But in any event orders were indeed then made by her Honour for the restoration of FHL, without opposition from the Commissioner on the basis recorded by the Judge, although it seems that Mr Russell has never taken steps to give effect to those orders.

[176] No contrary evidence was proffered to me on behalf of the managers. If a case was indeed stated on behalf of the FHL/FHML prior to it being struck off I would expect there to be some record of it, particularly given that, at one point, Mr Russell attempted to assign the objection rights of the various companies that had been struck off to an entity of his own. I therefore accept the Commissioner’s position that no case was, indeed, stated. In my view there is nothing in Wire Supplies Ltd that prevented the managers’ Track B assessments being confirmed by
the TRA.

94 Downsview Nominees Limited v Commissioner of Inland Revenue (2006) 22 NZTC 19,971 (HC).

[177] The answer to question 10 is: “Track B assessments have been issued to the Fuel Haulers individual objectors and Track A assessments have been issued to FHL/FHML. But because I am not satisfied that a case has even been stated in relation to the Track A assessments there is no difficulty in confirming the Track B assessments, as the TRA has done. Given that FHL/FHML remain struck off the Companies Register and there is no prospect of the Commissioner seeking to enforce
the Track A assessments against them there is no vitiating inconsistency.”95

Question 11 (Mr Judd)

Have the Consultant Applications Ltd objectors been mistakenly assessed?

[178] It is accepted that there is a difference between the Consultant Applications Ltd (CAL) objectors and the usual shareholder objectors because the CAL objectors did not own any shares in the relevant trading company at the commencement of the alleged arrangement. Rather, the objectors were employees who wished to buy the business. A structure was set up through Mr Russell to enable them to do this. In broad terms the template was then applied to (or inserted into) the arrangement.

[179] In Case Z7 the TRA dealt with the issue briefly:

[43] With regard to C Applications Ltd, Mr Russell has also submitted that this arrangement differed from other template situations because it involved the purchase of a business from an Australian owner. Nevertheless, the template was applied to the business which the proprietors of C Applications Ltd purchased. I decline the reopening of this issue because the purchase of the business from the Australian did not have any material effect on the outcome of the template application.

[180] I do not propose to go into more detail here. That is because although Mr Judd submitted that there were clear differences the significance or implications of these were not able to be articulated. Although portions of the transcript of evidence in relation to this scheme were able to be located (and were included in the bundles
before me) none of the exhibits referred to have been found.

95 I was advised that the tax said to be owing under the assessments by FHL/FHML has, in fact, been written off by the Commissioner.

[181] In the end, I accept Mr Ruffin’s submissions that the documentary deficiencies in relation to this question are overwhelming. No blame is or should be attributed for that. But the reality that remains, in light of where the onus lies, is that there is no basis upon which I can conclude that the CAL assessments are wrong.

[182] The answer to question 11 is: “No. There is insufficient evidence before the

Court to determine this issue and the burden is on the taxpayer.”

Question 12 (Mr Judd)

Are additional taxes chargeable in respect of any of the objectors?

[183] This turned out to be a non-issue. The TRA referred to it in Z7 as follows:

[38] The final issue raised by Mr Russell under the leave reserved provision is as follows:

Additional taxes

“68. The issues of additional taxes appears to have been overlooked as it is not mentioned in the decision. The earlier submissions of the objectors deal with this issues in paras 3.47 -
3.49. The objectors ask that the wording from the decision of
Justice Courtney and Wire Supplies be adopted by the
Authority in this case.”

[39] The Commissioner's position was clearly set out before Courtney J
and in the Wire Supplies Ltd v CIR decision of the Court of Appeal at page
21,421, paras 92-95:

[92] In the High Court, Courtney J upheld the decision of the TRA to the effect that there was no right of objection in respect of additional tax. The TRA had applied the law as stated in Miller (CA) at 294 in which it was held that additional tax imposed under s.398 of the Act did not attract a right of objection.

[93] However, Courtney J recorded at [155] the Commissioner's acknowledgement that the decision of Baragwanath J in Withey v Commissioner of Inland Revenue (No 2) (1998) 18 NZTC 13,732 applied. This meant that the Commissioner had to set prospective dates for payment of tax, and additional tax would not become payable until those dates had been set and communicated to the appellants.

[94] None of this was contested in this Court, but Mr Judd submitted that finalisation was required. He said that there was no evidence of prospective dates having been set or communicated to the appellants, and that the appellants were

therefore entitled to a decision that no additional tax was payable by them. The response of Mr Ruffin was a repetition of the Commissioner's acknowledgement that the decision in Withey applied to all template taxpayers.

[95] To the extent that any matter remains outstanding in relation to additional tax, it seems to us that the appropriate forum to resolve it is the High Court. The decision of Courtney J was an interim decision and she contemplated that the impact of the decision on individual taxpayers would be dealt with when the hearing was reconvened in the High Court. This issue can be dealt with in that context.

All parties accept that there is no right of objection in respect of additional tax. The decision of Baragwanath J in Withey v Commissioner (No. 2) (1998)
18 NZTC 13,732 is to be applied to all the Russell template objectors in
these proceedings.

[184] That continues to be the position. If the Commissioner has not yet nominated a due date, she will do so. Mr Ruffin advised, however, that because the Commissioner has on occasions communicated directly with the objectors concerned, Mr Russell may not be aware in some cases that a date has been set.

[185] But in any event, there is no dispute as to the relevant law.

[186] Accordingly, the answer to question 12 is: “Only if the Commissioner has

nominated a due date.”

Question 13 (Mr Russell)

Should the Authority have considered and determined the objections of those company objectors that were struck off the Companies Register?

[187] As at the time of the hearing before me, the below-named corporate appellants had been struck off the Register of Companies, and remain so:

(a) Koroneho & Tapurau Limited; (removed 12/09/2000) (b) Fuel Haulers (1990) Limited; (removed 24/08/2011) (c) Keegan & Keegan Limited; (removed 30/05/2000)
(d) Murray Mason Electrical Limited; (removed 26/08/2000)

(e)       Avenue Consultants Limited; (removed 27/06/2000) (f)           Highman Holdings Limited; (removed 12/08/1998)
(g)      Peter Godber Transport Limited; (removed 6/08/1996) (h)     Fosters Transport Limited; (removed 16/09/1997)
(i)       ASC Holdings Limited; (removed 18/10/1996) and

(j) Consultant Applications Limited; (removed 17/11/1999).

[188] In Downsview Nominees Limited v Commissioner of Inland Revenue96 orders were made restoring some of these companies to the Register.97 Ellen France J noted, however, that:

[56] The Commissioner submits that the effect of the authorities is that restoration without more will not revive the case stated litigation between the company and the Commissioner. Hence, if orders are made for restoration, additional orders are required to reactivate the case stated proceedings.

[57] There is support for this view in some of the United Kingdom authorities. As Mr Ruffin said, the distinction sometimes made in the authorities is between corporate existence and corporate activity. In other words, the restoration to the register restores the company to life but it can only commence activity from the point of restoration. Restoration does not, then, have the effect of reviving activity undertaken by the company in the intervening period.

(citations omitted)

[189] Her Honour then observed that the usual approach taken in other New Zealand restoration decisions was to make restoration conditional on the companies filing all outstanding documents required to be registered in the office of the
Registrar of Companies and paying all outstanding fees payable. She said:

96 Downsview Nominees Limited v Commissioner of Inland Revenue, above n 94.
97 Those companies were Keegan & Keegan Limited, Avenue Consultants Limited, Highman Holdings Limited, Peter Godber Transport Limited, Fosters Transport Limited and ASC Holdings: at [65]. For some reason formal orders do not seem to have been made in relation to Douglas & Henwood Ltd and Fuel Haulers Ltd, notwithstanding the absence of opposition. Her Honour expressly declined to make restoration orders in relation to Koroneho & Tapurau Limited and Murray Mason Electrical Limited: at [67].

[66] Sealed copies of these orders are to be served on the Registrar of
Companies.

…

[68] The parties are to file submissions as to what additional orders are required to deal with the interregnum period between striking off and restoration and as to costs. The Commissioner’s submissions and any submissions from the Registrar of Companies are to be filed by 31 July 2006 and the plaintiff’s submissions by 14 August 2006.

[190] It appears that the orders were never sealed and submissions about further orders never filed. In any event, the companies remain struck off and their objections have never been reactivated.

[191] Mr Russell nonetheless says that these companies were registered on the Register of Companies at the time the case stated was filed in 1996, and that the TRA is therefore obliged to determine their objections notwithstanding that they have since been struck off. He says that former counsel for the Commissioner had given an undertaking that one of them (CAL) would be permitted to have its objection heard and determined by the Authority despite the fact that it had been
struck off.98

[192] Mr Russell’s submission that there is no provision in the TRAA to the effect that an objection need not be heard if a company objector has been struck off the Companies Register is, of course, correct. But that is because there is no need for such a provision; there is ample authority for:

(a) the general proposition that a struck off company has no legal status or standing and cannot bring or continue a legal proceeding;99 and

(b)the specific proposition that the rights of a corporate objector under the objection procedure and in any subsequent proceeding end upon
the dissolution of the company.100

98     This allegation is strongly denied by the Commissioner and evidence was filed (with my leave)
in support of the position that no such undertaking was given.
99     Floorlines (NZ) Limited v Commissioner of Inland Revenue; Duncan v Commissioner of Inland
Revenue (2001) 20 NZTC 17,249 (HC) at 17,251.
100   Suzy Speed Holdings Limited v Commissioner of Inland Revenue; Lone Oak Farms Ltd v
Commissioner of Inland Revenue (1994) 16 NZTC 11,108 (TRA) at 11,110.

[193] There is also authority for the yet more specific proposition that a struck off corporate objector in proceedings involving the Russell template ceases to exist for all relevant legal purposes.101 And in Wire Supplies (No 2) v Commissioner of Inland Revenue, Courtney J held that a deed by which all Wire Supplies’ rights and interests in its litigation with the Commissioner (including objection rights) were purportedly assigned to Downsview Nominees Ltd was ineffective.102 She again confirmed that the effect of the removal of a company from the register is that it ceases to exist. But because the Commissioner had acquiesced in the hearing of Wire Supplies’ objection in the TRA and because the company could yet be restored to the Register her Honour made an order removing the company from the proceeding unless an order was made restoring it to the Register by a specified date.

[194] But Mr Russell’s response to this overwhelming weight of authority is to say that the notion that a company which has been struck off has no standing in legal proceedings is “judge made law” which should not be followed. His logic is that if the relevant objections were heard and allowed then the companies would then be reinstated to the Register and so the Court can, and should, determine them.

[195] There are, however, obvious constitutional and conceptual difficulties with this submission and I reject it. Even if I were prepared to accept that some form of contrary “undertaking” had been given (which I am not) such an undertaking could not by some magic create an entity that does not, either in law or in fact, exist.

[196] Moreover, the proposition that the Court can be asked to determine an old dispute in which a now defunct entity was engaged while still alive so that the entity could be revivified to take advantage of any success but, could be kept defunct if the litigation is lost (thereby avoiding liability for any costs award) simply cannot be correct. And, as it happens, there has been no success in which Mr Russell might wish the defunct entities to share in the present instance.

[197] The answer to question 13 is: “No”.

101 Douglas v Commissioner of Inland Revenue (No 2) (2005) 22 NZTC 19,439 (HC) at [27]–[30].
102 Wire Supplies (No 2) v Commissioner of Inland Revenue (2005) 22 NZTC 19,390 (HC) at [13].

Result

[198] For convenience and by way of summary I restate the 13 questions and their respective answers below.

Q1:Should the objections of the Webster group of objectors be allowed because the Commissioner should not have been granted an extension of time to file the cases in the Taxation Review Authority?

A1:No. The Commissioner did not need an extension of time; the objections should not therefore be allowed on that ground.

Q2:Were any of the interlocutory rulings made by the Authority wrong and, if so, what were the consequences of those incorrect rulings?

A2:The ruling in Case U35 was wrong but its incorrectness is of no consequence because of the answer to question 1. The other rulings were all either correct and/or of no consequence for the reasons given.

Q3:Should the affidavit of J G Russell sworn 23 July 1999 have been admitted as evidence and taken into account in determining the issues in these proceedings?

A3: No.

Q4:Were the requirements of s 25(2) of the ITA76 met in respect of each objector to allow the Commissioner to lift the time bar for each objector?

A4: Yes.

Q5:Is the effect of the decision of the Privy Council in Peterson v Commissioner of Inland Revenue that there is an onus of proof on the Commissioner in these cases and, if so, what is the extent of the onus and has the Commissioner discharged the onus?

A5: No.

Q6:Have different taxpayers been assessed with the same income contrary to the prohibition in s 99(4) and, if so, how does s 99(4) affect the s 99(3) assessments made against the objectors in this case?

A6: No.

Q7:In forming his opinion under s 99(2) in respect of each objector, did the Commissioner meet his statutory obligations to consider all of the relevant facts and particular circumstances in relation to each objector?

A7:The reassessments have been confirmed to be correct and so it does not matter.

Q8:Should a portion of the administration fee be treated as a deductible funding charge and so be allowed as a deduction against the income assessed to the objectors?

A8: No.

Q9:How and to what extent does s 165(2) of the Income Tax Act 1976 apply to the income assessed to each objector?

A9: Section 165(2) had no application in any of these cases.

Q10:Have conflicting and inconsistent assessments been made in respect of the Fuel Haulers objectors and, if so, how should these assessments be reconciled?

Q10:Track B assessments have been issued to the Fuel Haulers individual objectors and Track A assessments have been issued to FHL/FHML. But because I am not satisfied that a case has even been stated in relation to the Track A assessments there is no difficulty in confirming the Track B assessments, as the TRA has done. Given that FHL/FHML remain struck off the Companies Register and there is no prospect of the Commissioner seeking to enforce the Track A assessments against them there is no vitiating inconsistency.

Q11: Have the Consultant Applications Ltd objectors been mistakenly assessed?

A11: No. There is insufficient evidence before the Court to determine this issue and the burden is on the taxpayer.

Q12: Are additional taxes chargeable in respect of any of the objectors?

A12: Only if the Commissioner has nominated a due date.

Q13:Should the Authority have considered and determined the objections of those company objectors that were struck off the Companies Register?

A13: No.

Rebecca Ellis J

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Citations

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

Most Recent Citation

Webster Group of Appellants v Commissioner of Inland Revenue [2016] NZCA 31

Cases Citing This Decision

1

Webster Group of Appellants v Commissioner of Inland Revenue [2016] NZCA 31

Cases Cited

9

Statutory Material Cited

1

Wire Supplies Ltd v Commissioner of Inland Revenue [2007] NZCA 244

Wilfred v Gan [2013] NZCA 285

Miller v Commissioner of Police NSW [2005] NSWCA 103

UNDER	Section 26 of the Taxation Review Authorities Act
IN THE MATTER	of an appeal from a decision of the Taxation Review Authority
BETWEEN	WEBSTER GROUP OF OBJECTORS FOSTER GROUP OF OBJECTORS CONSULTANT APPLICATION GROUP OF OBJECTORS Appellants
AND	COMMISSIONER OF INLAND REVENUE Respondent