Wire Supplies Ltd v Commissioner of Inland Revenue HC Auckland CIV 2003-404-6401

[2005] NZHC 1213

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2003-404-6401

BETWEEN  WIRE SUPPLIES LIMITED & ORS Appellants

ANDCOMMISSIONER OF INLAND REVENUE

Respondent

Hearing:         9-11, 14-15, 22-25, 28 February 2005

Appearances: G J Judd QC and J McCartney for Appellants

M Ruffin for Respondent

Judgment:      1 September 2005

RESERVED JUDGMENT OF COURTNEY J

Solicitors:           Meredith Connell, P O Box 2213, Auckland

Fax: [phone]

Counsel:            G Judd QC, William Martin Chambers, 152 Anzac Ave, Auckland

Fax: [phone] – email: [email protected]
J McCartney, P O Box 47114, Auckland

Fax: [phone] – email: [email protected]

WIRE SUPPLIES LTD & ORS V COMMISSIONER OF INLAND REVENUE HC AK CIV-2003-404-6401 [1

September 2005]

Table of Contents

Introduction

Para No.

Nature of Proceeding  [1] Effect of Decision on Individual Assessments  [3] Difficulties in Case Stated and Hearing of Appeal  [4]

History of the Russell Template

Structure of Template  [6]

Assessments by IRD  [11] Transactions in this Case  [15] Wire Supplies Limited  [16]

Coils NZ/Slioc  [19]

Assessments Subject of Appeal  [36] Scope of Cases T52 and U23  [44] Res Judicata  [46] Appellants Privies of Earlier Litigants?  [52]

Is it Relevant that the Appellants Were Unaware of the

Extent of the Scheme?  [70]

Is it Relevant that Some of the Earlier Cases were Judicial

Review Proceedings?  [74] Threshold Issues  [79] Unintelligibility  [83] Arbitrary/Abuse of Power (Going where the Money Is)  [93]

Lack of any Sensible Basis  [108]

Quantum Not Calculated with Reference to Receipts/Payments or

Otherwise  [116]

Inconsistent Tracks – Track C Automatically Renders Track B

Incorrect  [121]

Consulting Fee  [131] Evidence of Paul McDermott Not Heard  [136] Exhaustion of Discretion  [145] Extent of Annihilation of Template Transaction  [149] Additional Tax  [153] Section 25 Time Bar  [156]

Introduction

Nature of Proceeding

[1]      This is an appeal by way of case stated from the decisions of the Taxation Review Authority (TRA) in Cases T52 and U23.  The appellants were participants in a company restructuring scheme known as the Russell template.  The scheme was conceived by taxation consultant, Mr J G Russell.  It has previously been held to be a tax avoidance scheme and a substantial body of case law has accumulated around it.

[2]      The Commissioner assessed the appellants on income affected by the scheme. They objected unsuccessfully and requested the Commissioner to state a case to the TRA.  The TRA found substantially in favour of the Commissioner.  The appellants required the TRA to state a case to this Court.

Effect of Decision on Individual Assessments

[3]      I was not addressed on the effect this decision would have on the individual assessments that are affected.  Mr Judd QC suggested that this decision be delivered as an interim decision, with further submissions made in relation to the effect of the decision on the individual assessments.  This is a sensible suggestion.  This decision is therefore an interim decision and I will hear parties again on the precise effect of it on the individuals concerned.

Difficulties in the Case Stated and Hearing of Appeal

[4]      I record my dissatisfaction with two aspects of this case.  First, many of the questions in the case stated are loaded and pose more than one question, making it difficult to give a simple positive or negative answer.   In those cases I have not attempted to do so and have elaborated where I consider appropriate.

[5]      Secondly, notwithstanding that counsel had (in accordance with Potter J’s direction) filed submissions in advance of the hearing, the appellants’ case developed piecemeal with four further sets of written submissions being tendered during the

course  of  the  hearing  and  consequential  supplementary  submissions  by  the

Commissioner.  This added to the complexity of the case.

History of the Russell Template

Structure of Template

[6]      During the early 1980s Mr Russell found himself in control of a group of companies with substantial tax  losses.    The  group  was  owned  by Mr Russell’s clients, Mr & Mrs Manning.  Later, other companies with tax loss also came under Mr Russell’s control.   Mr Russell conceived a method of utilising the group’s tax losses under s 191 Income Tax Act 1976.   He introduced the scheme to many companies.  Ultimately, however, the Commissioner of Inland Revenue invoked s 99

Income Tax Act 1976 in respect of the scheme.  The Privy Council has confirmed that it infringed s 99 Income Tax Act 1976 (O’Neill v C of IR (2001) 20 NZTC

17,051).   There have been years of litigation arising from the Commissioner’s assessments of participants in the scheme.

[7]      At its simplest, the Russell template worked in the following way: a non- trading  loss  company  acquired  the  shares  in  a  profitable  trading  company. Interposed between them were other companies, which acted as the new parent company of the trading company and as trustees for the loss company.   All such companies were controlled by Mr Russell.

[8]      The vendors of the trading company’s shares lent the purchase price back to the purchaser.   Repayment was provided for as follows: the trading company was required to pay the new parent company an administration charge equivalent to the company’s net profit.   Of that charge 5%  was payable as  a consultancy fee to Commercial Management Limited (CML), which was controlled by Mr Russell. The balance was split as follows: 77.5% was returned to the vendor shareholders in repayment of the vendor loan and 22.5% was retained by the loss company and set off against the tax losses of the loss companies.

[9]      The effect was that the trading company’s entire net profits were soaked up through the administration charge and consultancy fee, leaving no taxable income. The administration charge did not attract tax in the hands of the loss company because it was used to repay the vendor loan with the balance set off against the loss company’s tax losses.  The repayments did not attract tax in the hands of the vendors of the shares because they were capital repayments of the purchase price.

[10]     The  sale  was  never  made  public  and  the  vendors  simply  executed  a declaration of trust, confirming that they held the shares/business in trust for the purchaser.     However,  they  remained  in  control  of  the  business  through  a management contract granted by the new owner of the business.  Under it the vendor shareholders retained complete and unfettered control over the business of the new trading company.  In addition, they had the right to buy the assets of the business on unusually favourable terms once the vendor loan had been repaid.

Assessments by IRD

[11]     In the mid-1980s the Commissioner began to investigate this scheme.   He formed the view that it infringed s 99.  Initially he assessed the trading companies, disallowing the deductions that they had claimed for the administration charges and consultancy fees and assessing them on that income.   This approach has become known as the Track A method of assessment.

[12]     The Commissioner was successful in these early cases but found that the trading companies were insolvent shells by the time the IRD sought to enforce the judgments.  This was because the assets of the companies had been sold back to the original shareholders as provided for in the management contracts.

[13]     The Commissioner then changed his approach.  He restored the deduction for the administration charge (but not the consulting fee) and then reconstructed the administration charge as income to the original vendor shareholders, assessing them accordingly.  This method of assessment has become known as Track B.

[14]     Subsequently, there have also been Tracks C and D, which are assessments against the parent companies, Mr Russell personally and entities controlled by him in respect of the fees received by them.

Transactions in this Case

[15]   The appellants are brothers, John James McDougall and Lyndon Lee McDougall, their father John Upton McDougall and companies, Wire Supplies Limited (WSL) and Slioc Enterprises Limited (Slioc).  Slioc was previously called Coils Specialists NZ Limited.  I refer to it throughout as Coils NZ/Slioc.

Wire Supplies Limited

[16]     The shares in WSL were originally owned by the McDougall brothers and their father.  In June 1983 they granted Commercial Management Limited (CML) an option to purchase their shares in WSL.   In June 1985 the McDougalls sold their shares to CML pursuant to the option.   CML purchased the shares as trustee for Charity Construction Company Limited (Charity Construction).

[17]    The appellants acknowledge that this transaction was a standard Russell template transaction of the kind considered in other reported cases.  It had the usual features of the Russell template, notably:

•        The vendors lent back the purchase price to the purchaser.

•WSL became liable to pay its new parent company an administration charge which represented WSL’s entire net profit in any given year, less 5% of that figure which was payable to CML as a consulting fee. WSL did not become liable for tax because its net profit was absorbed through these payments.

•77.5% of the administration charge was used to repay the loan given in  respect  of  the  purchase  price  for  the  shares.     The  vendor shareholders did not pay tax on these payments because they were said to be capital receipts.

•        The remaining 22.5% was  retained  by CML (on  trust  for  Charity

Construction) and set off against Charity Construction’s tax losses.

•The vendors were granted a management contract entitling them to exercise full management control over the company.   This contract conferred favourable terms under which the vendors could, after a certain period, buy back the assets of the business and a right of first refusal on any future sale of the business.

[18]     The effect of this arrangement was that most of WSL’s income which would otherwise have been taxable found its way back into the McDougalls’ hands as a capital receipt, tax free.  They have been assessed on the basis of the administration charge and consulting fee paid by WSL.   They accept that they are bound by the Privy Council’s decision in O’Neil that the scheme infringes s 99.   However, they resist the assessments on other grounds.

Coils NZ/Slioc

[19]     The McDougall brothers (but not their father) were the shareholders and directors of a company called Coil Specialists (1980) Limited (Coils 1980).   In August 1982 they sold their shares in Coils 1980 to a Russell-controlled company Commercial  Securities   Limited  (CSL).     CSL  held  the  shares  on  trust   for Management and Distribution Services Limited (MDSL), a Russell-controlled loss company.  The appellants accept that this sale was a standard template transaction.

[20]     In March 1983 Mr Russell wrote to Coils 1980’s accountant, Mr Young, advising that he had a client interested in purchasing Coils 1980’s business.  In June

1983 Coils 1980 sold its business to a Russell-controlled loss company, Zinc and Brass Foundries Limited (ZBL). The ultimate owner of the business was to be a new subsidiary of ZBL, Coils NZ/Slioc.  But Coils NZ/Slioc was not incorporated until

23 September 1983, so the purchase was effected by ZBL as its agent.   The McDougall brothers were directors of Coils NZ/Slioc and were to be granted a management contract of the business by the new owner.

[21]     It is this sale of the Coils 1980 business (as opposed to its shares) that is the subject of the appeal.   The appellants say that this transaction was not a standard template transaction.   For reasons I discuss next, I consider that it is so close a variation that it can safely be treated as such.  If I am wrong about this, I consider that the transaction would, nevertheless, infringe s 99 if considered afresh.

[22]     The sale of the Coils 1980 business was effected as follows:

•        On the day of settlement a cheque for $500,000 was deposited into

Coils 1980’s bank account by CML.

•        Coils 1980 paid $250,000 to each McDougall brother.

•The McDougall brothers each endorsed his cheque of $250,000 to ZBL. The only record of this advance is a Declaration of Trust by Downsview Nominees Limited (Downsview), a Russell-controlled company, in favour of JJ and LL McDougall, referring to an advance of $500,000 made by them to Downsview on trust for ZBL.

•ZBL (through  Mr Russell)  endorsed  the  cheques  over  to  CML in payment for the business.

•ZBL  gave  a  mortgage  of  its  shares  in  Coils  NZ/Slioc  (not  yet incorporated) to Downsview to secure the advance of $500,000 by Downsview (as trustee for the McDougalls) to ZBL and entered into a repayment  agreement  under  which  it  would  apply  77.5%  of  any amount   received   from   the   shareholding   in   repayment   of   the Downsview advance.

•        Downsview  agreed  to  use  its  receipt  of  the  money  to  repay  the

McDougall brothers.

•        Settlement of the sale was to be 31 August 1983.  The McDougalls’

management agreement was extended to then.

•The  McDougall  brothers  were  granted  a  management  contract  by Coils NZ/Slioc which included the usual clauses conferring the right of first refusal in the event of the sale of the business and the right to purchase the assets of the business on favourable terms (liabilities plus

$1).   It also provided for payment of the six-monthly administration charge and consultancy fee.

[23]    The Commissioner submitted that the motivation for the Coils NZ/Slioc transaction was that by August 1983 the amount owing to the McDougalls as a result of the original sale of their shares in Coils 1980 would have been repaid.  Without any remaining debt there would be no justification for further tax-free payments to the McDougalls.   The McDougalls could have exited the scheme at that point by exercising  their  buy-back  rights  under  the  management  contract  and  resuming control of the business.  Given the profitability of the business and the favourable terms of these clauses this would have been the rational commercial course.

[24]     If they had purchased the business back, however, they would have resumed receiving the profit from the business by way of taxable salary, directors’ fees and dividends.  Continuing to enjoy the tax benefits of the scheme would require a new debt that could justify capital repayments funded from an administration charge. The debt could not be created through the sale of shares (since they had already been sold in the first transaction) so a different mechanism was used, namely the apparent advance by the McDougall brothers to ZBL for the purchase of the business of Coils

1980.

[25]     Looking at the totality of the situation after the Coils NZ/Slioc transaction:

•ZBL,  as  the  purchaser  of  the  Coils  1980  business,  owed  the McDougalls $500,000, being the ostensible debt created through the advance made via Downsview for the purchase of the business (but in reality funded by CML).

•The McDougall brothers had effective control over Coils NZ/Slioc’s operations by virtue of the management agreement.

•They were directors of Coils NZ/Slioc.  The remuneration conferred by the management agreement was unrealistically low compared to the  level  of  responsibility they  had  assumed  and  the  profit  being generated by the company.

•      They had the right of first refusal if the business was sold again.

•They had the right to purchase the assets on very favourable terms (liabilities  plus  $1).    On the  basis  of  the  1984  balance  sheet,  for example,  that  formula  would  have  entitled  the  McDougalls  to purchase $235,714 worth of assets for $191,602.

•They  were  receiving,  indirectly,  the  same  proportion  of  Coils NZ/Slioc’s income in a tax-free form as they had under the original template arrangement which followed the sale of their Coils 1980 shares.

[26]    The irresistible inference is that the dominant purpose and effect of the transaction was to ensure that the McDougalls continued to receive the income from the business in a tax effective form.  I consider that the Coils NZ/Slioc transaction was simply a device to create an ostensible new debt to the McDougall brothers to enable this to happen.

[27]     In February 1985 CML wrote to Mr Young advising that the balance of the debt outstanding to the McDougall brothers was now only $84,796.00 and proposed options for when that amount was paid off.  The letter continued:

If the McDougall brothers wish to continue with the arrangement, then the most practical proposition is to increase the size of the debt outstanding which would allow the process to continue.

The Parent Company is willing to pay the McDougall brothers a further

$500,000  in  consideration  for  the  deletion  of  cl  18  in  the  Management

Contract…You will note that cl 16 permits the Managers to have right of first  refusal  in  the  event  that  the  business  is  ever  sold.    For  practical

purposes, it still retained control of the business as before but they do lose

the automatic right to purchase the assets…

The end result of the transaction would be to obtain a tax shelter for a further

$677,419 of assessable income.

[28]     Following this letter Coils NZ/Slioc and ZBL entered into a variation of management contract with the McDougall brothers under which ZBL paid them

$950,000 in return for the deletion of cl 18 (the right to purchase the assets of the business).  There is no explanation in any correspondence as to why the proposal had changed from $500,000 to $950,000.

[29]     The Commissioner says that the variation of the management agreement was no more than a device and that this is evidenced by the unexplained increase in the consideration.  I accept this submission; there is a letter from Mr Russell referring to the better than expected performance of Coils 1980 as justifying the increased offer and  it  does  appear  from  the  increase  in  administration  charges  paid  over  the preceding year, that the company’s performance had improved.   But the balance sheet shows assets worth about $500,000 which the McDougalls could have purchased for about $150,000.  In addition the variation did not affect the right of first refusal to buy back the business; there was a further variation agreement in June

1987 in which that clause was also deleted, this time for fresh consideration of $1.95 million.  There was no commercial justification for paying such exorbitant sums for the deletion of these clauses.

[30]     The appellants submit that the TRA wrongly treated the sale of the Coils

1980 business to Coils NZ/Slioc as a standard template case, which breached s 99. They say that the transaction was an entirely different and separate transaction, which cannot be treated as a standard template case.   They say further that the transaction was not a tax avoidance arrangement and that the McDougalls did not obtain any tax advantage from it.

[31]     The learned Judge said:

I appreciate that SEL is a case where individuals were not vendors of shares to Russell entities because the latter were original shareholders in SEL.  In my view that factor makes little difference in terms of applying the criteria of s 99(3) in the manner I refer to and my Reasons for Decision herein, and as I indicate in paragraph [44] below… [18]

In  my  view  it  matters  not  whether  the  person  ending  up  with  adjusted income was a shareholder of a company in the group or not.  The point is whether that person might have been expected to have derived the relevant income or part of it, but for the void arrangement. [44]

[32]     The end result of the Coils NZ/Slioc transaction as documented was that the McDougalls were owed $500,000 by ZBL which was to be repaid from the profits of the Coils 1980 business (originally owned and still managed by the McDougall brothers).  The only difference between the Coils NZ/Slioc transaction and that of any other standard template transaction was the fact that the change in shareholding in Coils 1980 preceded the sale of its business.   But it is clear that  all parties intended that the profit from the business would continue to be dealt with in exactly the same way as it had under the initial template transaction i.e. 77.5% of the profit from the business was returned to the McDougalls, and 22.5% was retained by the parent.   It is perfectly plain that the purpose and effect of the transaction was to avoid tax.

[33]     As to the question whether it mattered that the McDougalls were neither shareholders nor the vendors of shares, I respectfully agree with the TRA that it does not.  Had the transaction not taken place the McDougalls would certainly have taken the business back and received the profits generated by it in a taxable form and the Commissioner was entitled to make the assessment on that basis.

[34]     I consider that, although not identical to the previous template transaction involving the sale of the Coils 1980 shares, the Coils NZ/Slioc transaction was simply a variation on the standard template and the TRA was entitled to treat it in the same way as other template cases.  Similarly, the 1985 and 1987 variations of the management contract were devices used to create a further debt, which could serve the same purpose.

[35]     Even if considered afresh, the arrangement clearly infringes s 99 as having the  effect  of  converting  income  from  the  Coils  1980  business  which,  in  all likelihood, would otherwise have been received by the McDougall brothers as income, into tax-free capital in their hands.

Assessments Subject of Appeal

[36]     The appellants were each assessed for income tax relating to the years during which they participated in the scheme. The cases stated before the TRA related to:

a)        Track A assessments for:

•         Slioc 1984-1990

•         WSL 1984-1988 b)       Track B assessments for:

•         WSL 1985-1990

•         John   Upton   McDougall   1984-1990   (in   respect   of   WSL

income)

•         Lyndon  Lee  McDougall  1984-1990  (in  respect  of  WSL

income)

•Lyndon  Lee  McDougall  1982-1990  (in  respect  of  Slioc income)

•         John  James  McDougall  19884-1990  (in  respect  of  WSL

income)

•         John James McDougall 1982-1990 (in respect of Slioc income) [37]  During the hearing of Case T52 Baragwanath J delivered his decision in

Miller v C of IR; McDougall v C of IR (1997) 18 NZTC 13,127 at 13,134 in which he held that any Track B assessment made after a case stated had been requested in respect of a Track A assessment was a nullity.  Later the Court of Appeal (Miller v C of IR; Managed Fashions v C of IR (1998) 18 NZTC 13,961 at 13,973) and Privy

Council (O’Neil v C of IR (2001) 20 NZTC 17,051 at 17,062) confirmed that an assessment could be amended up until the case stated had been signed.

[38]     At paragraph 22 of his decision in T52 the TRA referred to the fact that, consequent upon Baragwanath J’s decision;

•        Track B assessments for WSL for the years 1984-1988 were nullities

•Track  B  assessments  for  John  Upton  McDougall,  John  James McDougall and Lyndon Lee McDougall in respect of WSL income for the years 1984-1988 were nullities.

[39]     Mr Judd QC submitted that, as a result, the only assessments in relation to

WSL income which could be live in this appeal were:

•         Track A assessment of WSL for years 1984 – 1988

•         Track B assessments of WSL for years 1989 –1990

•         Track B assessments for John Upton McDougall for years 1989 –

1990

•         Track B assessments for Lyndon Lee McDougall for years 1989 –

1990.

•         Track B assessments for John James McDougall for years 1989 –

1990.

[40]     The  TRA  did  not  specifically refer  to  the  Track  A  assessment  of  Coils NZ/Slioc.  The appellants say that there was no case stated to the TRA in respect of Track A assessments and that there are no documents showing what happened to that assessment.  Clearly, however, the Track A assessment of Coils NZ/Slioc must have been overtaken by the Track B assessment issued against it; if there was no case stated in respect of the Track A assessment for Slioc, the assessment was open to amendment by a Track A assessment.

[41]     Therefore in relation to Coils NZ/Slioc income the assessments that were live for the purposes of this appeal were Track B assessments only for;

•        Coils NZ/Slioc 1984 – 1990

•        Lyndon Lee McDougall 1982 – 1990

•        John James McDougall 1982 – 1990

[42]     In Case U23 (paragraph 65) the TRA concluded that “Except to the relatively minor extent referred to herein, all the assessments are hereby confirmed”.   The “relatively  minor”  extent  referred  to  appears  to  have  been  the  issue  of  the consultancy fee which was held to be deductible by the trading companies.  Mr Judd QC submitted that, in confirming the assessments in this way, the TRA was, on the face of it, confirming both the Track A and B assessments in respect of WSL and the McDougalls.  I accept Mr Judd’s analysis (which was not challenged by Mr Ruffin). Clearly, the TRA  could  not  (and  I do  not  think  was  intending to)  confirm  the assessments which it had already identified at paragraph 22 of Case T52 as nullities. Therefore, I have proceeded on the assumption that this appeal relates only to the assessments referred to at [37] and [39] above.

[43]     Mr Judd QC submitted that the current appeal also concerns assessments of Coils Specialists (1980) Limited (later known as Peter Baker Transport Ltd and later again Petbak Holdings Ltd).  However, there is no indication that this is the case.  To the contrary, at paragraph 17 of Case T52 the TRA specifically notes that there was no case stated before him in relation to Coils Specialists (1980) Ltd.

Scope of Cases T52 and U23

[44]     In Case T52 the TRA referred to the fact that the objectors had elected to put their case solely on the basis of so-called threshold issues.  In the final decision U23 the TRA clarified that position, noting that it was the three individual objectors (Mr McDougall senior and the McDougall brothers) who had elected to limit their case to the threshold issues.  This left the corporate objectors free to raise other issues.

[45]     Judge  Barber  specifically  declined  to  permit  the  individual  objectors  to advance arguments beyond the threshold issues and I consider that this step was correct.  Therefore, other than the threshold issues, the various issues that I deal with arise solely in relation to the corporate objectors.

Res Judicata

[46]     Some of the issues that are raised in this appeal have been the subject of previous judicial consideration.   Baragwanath J heard judicial review applications and appeals by way of cases stated in Miller & Ors v C of IR; McDougall & Anor v C of IR (No 1) (1997) 18 NZTC 13,001; Miller & Ors v C of IR; McDougall & Anor v C of IR; Managed Fashions Ltd & Ors v C of IR (No 2) (1997) 18 NZTC 13,127; Miller & Ors v C of IR; McDougall & Anor v C of IR; Managed Fashions Ltd  v C of IR (1997) 18 NZTC 13,219.  Most of the taxpayers in these cases had been objectors in the TRA decision in Case R25, which also concerned a Russell template restructuring.  However, the McDougalls were parties in respect of the assessments they had received arising from the WSL and Coils NZ/Slioc transactions.

[47]     These cases were the subject of appeals to which the McDougalls were not party: Miller v Co of IR; Managed Fashions v C of IR (1998) 18 NZTC 13,961 (CA), Miller v C of IR [2001] 3 NZLR 316 (PC) and O’Neil & Ors v C of IR (2001) 20

NZTC 17,051 (PC).  I refer to all of these decisions generally as the Miller/O’Neil

cases.

[48]     The Commissioner maintains that the appellants are bound by these earlier cases, including the Court of Appeal and Privy Council decisions to which they were not party, and cannot re-argue issues that have been previously determined.

[49]     The appellants say that they should not be estopped from advancing these arguments now because:

a)        The corporate objectors (WSL and Coils NZ/Slioc) were not parties in any of the earlier cases and are not to be bound by those decisions;

b)Insofar as the earlier cases were judicial review proceedings, there can be no res judicata because the Courts in those cases could not and did not purport to find that any decision of the Commissioner was correct, merely that it was open to the Commissioner to reach it;

c)       The threshold issue of unintelligibility was not considered by the High Court or the Court of Appeal or Privy Council in the various appeals against Baragwanath J’s decisions;

d)The Commissioner’s reliance on the Miller/O’Neil cases is flawed because between the hearing of Case R25 and the present cases (T52 and U23) new evidence became available which the appellants are entitled to have taken into account, namely the minutes of a meeting of IRD staff 27 September 1990 and the cross-examination of an IRD witness, Mr Player.

[50]     Because the appellants were not parties to the earlier litigation the relevant form of res judicata is issue estoppel.  The prerequisites for issue estoppel are well established, namely a final decision by a court of competent jurisdiction deciding the same issue between the same parties or their privies: Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (No 2) [1996] 2 All ER 536. In relation to each of these aspects:

a)       There is a final decision deciding the same issue if a New Zealand court of competent jurisdiction has determined, as an essential and fundamental step in the logic of the judgment, without which it could not stand, an issue that is necessary to establish (or demolish) the cause of action set up in the later proceedings: Talyancich v Index Developments Ltd [1992] 3 NZLR 28,37; Spencer Bower & Turner Res Judicata (3ed 1996) paragraphs 182-183.

b)The proceeding will also involve the same issue if the issue could, with reasonable diligence, have been raised in the earlier case: Henderson v Henderson (1843) 3 Hare 100, 114-115; Arnold v National Westminster Bank plc [1991] 3 All ER 41, 47.

c)       The Court may nevertheless permit argument on an issue which has been previously determined or could have been raised where further material relevant to the correct determination of a point in the earlier proceedings has become available and could not, by reasonable diligence, have been adduced in the earlier proceedings: Arnold v National Westminster Bank plc.

d)A person is a privy of the earlier litigant if there is such mutuality of interest or identity between the parties that estoppel would produce a fair and just result having regard to the purposes of the doctrine: Shiels v Blakeley [1986] 2 NZLR 262 (CA).

[51]     The possibility of issue estoppel arises in relation to a number of questions in this case.  Therefore, whether a particular question has been the subject of a previous final determination or could have been argued in the earlier case are matters that I will consider as I come to each issue.  At this point I consider only whether WSL and Coils NZ/Slioc the appellants are privies of the litigants in the earlier cases and whether the fact that some of the earlier decisions were judicial review applications makes any difference.

Appellants Privies of Earlier Litigants?

[52]     There is an initial question, namely whether the individual and corporate objectors should be viewed separately.   This is relevant because the McDougalls were parties to the cases in the High Court decided by Baragwanath J whereas WSL and CoilsNZ/Slioc were not.

[53]     This issue was considered by Fisher J in Russell & Ors v Taxation Review Authority & Anor (2000) 19 NZTC 15,924 at 15,932 in relation to the Millers, O’Neils and Managed Fashions Limited.   The learned Judge held that, although companies should not necessarily be equated with their shareholders for the purposes of issue estoppel, it would be artificial in that case to suggest that, in substance, there was a conflict of interest between the original proprietors/managers on the one hand and the trading companies on the other.  The parties who ultimately stood to gain by

the scheme were the original proprietors, who would not have embarked upon the scheme if they had not thought that it would ultimately be for their benefit.

[54]     I respectfully agree with Fisher J and consider that the position is identical in the present case.  It is clear from the totality of the transactions involving WSL and Coils NZ/Slioc that the interests of the McDougalls were paramount and that both WSL and Coils NZ/Slioc served as vehicles to enable the McDougalls to extract funds from both companies in a non-taxable form which would otherwise have been taxable income in their hands.  WSL only entered into the scheme as a result of the decisions by the McDougalls and received the same form of benefit (tax relief) as they did.   The Coils NZ/Slioc transaction was effectively controlled by the McDougall brothers  and  had  the  same  effect  as  any  other  template transaction, namely the transfer of the majority of the profits from the business back to them in a tax-free form.

[55]     Even though the McDougall brothers had no equity interest in Coils NZ/Slioc they were directors and managers of the company and had the right to re-acquire the business by virtue of the management contract.  It is clear that they only parted from the business for tax purposes and it is apparent that the separation was intended by all concerned to be temporary.  I can see no distinction between the companies and the McDougalls that would preclude me from treating WSL and Coils NZ/Slioc as privies of the McDougalls.

[56]     This brings me to the wider question of whether the appellants should be bound by decisions in earlier cases in which none of them were parties.  They could only be so bound if they were privies of the earlier litigants.  The Court of Appeal has expressed the requirements for privity between litigants in different cases in Shiels v Blakeley:

We conclude that there must be shown such a union or nexus such a community or mutuality of interest, such an identity between a party to the first proceeding and the person claimed to be estopped in the subsequent proceeding that to estop the latter will produce a fair and just result having regard to the purposes of the doctrine of estoppel and its effect on the party estopped.

[57]     I start my consideration of this question by reiterating the purpose of the doctrine of res judicata namely that, as a matter of public policy, there should be an end to litigation and secondly, that an individual should not be vexed twice in the same matter.  In considering whether these appellants should be bound by the earlier cases in which they were not parties I am conscious of the need to guard against unjustifiably precluding later litigants from advancing the arguments as they wish to. On the other hand, there is an obvious issue that requires consideration; the TRA and the High Court are fielding case after case in which the same or very similar arguments are advanced, inevitably with the same result.

[58]     I consider that this issue can only be determined by looking at the scheme as a whole and Mr Russell’s role in it.  As I have already described, the object of the scheme was to create groups of companies comprising non-trading loss companies and profitable trading companies in order to set the profit of the latter off against the tax losses of the former.  Individuals such as the McDougalls, who sold the shares in their companies, were almost certainly unaware of this wider picture.   From their perspective they simply sold their shares and reaped the tax benefits of doing so with the security of knowing that they could re-purchase their business at a later date.

[59]     However, the scheme did not exist as a series of unrelated single transactions between individuals such as the McDougalls and the parent companies, as would have appeared to the vendor shareholders. Nor were they a straightforward sale of shares.   As soon as shareholders entered the scheme by selling their shares to the new parent company they became enmeshed in a Russell-controlled group, though they would have been unaware of this fact.

[60]     In these groups the loss companies and the companies that acted as agents and trustees for the parent and loss companies were all controlled by Mr Russell. Some of these companies featured in more than one transaction.  CML, the Russell- controlled company that acted as trustee for the loss companies in the Wire Supplies transaction, also acted as trustee for the loss company F B Duvall Limited in the Straits Fishing Limited transaction, which I considered in Douglas & Ors v C of IR (High Court Auckland, CIV-2003-404-006359, 1 September 2005, Courtney J) and also in the Miller/O’Neil cases.  F B Duvall Limited was the loss company for the

Straits Fishing Ltd, T C Large Ltd and Waikato Brokers Ltd transactions, which I

also considered in Douglas.

[61]     Connections such as this existed throughout the scheme.  While a portion of the trading companies’ profit was returned to the vendor shareholders, the balance ultimately formed part of the pool of income used by the groups of loss companies to set off against their tax losses.  It is not possible to view any transaction in isolation. Each was simply part of the overall scheme.

[62]     Contractually, the vendor shareholders became committed, not only to the sale of their shares, but also to the various other devices employed by Mr Russell to operate the scheme.  These included the execution of declarations of trust intended to maintain the secrecy that was a hallmark of the scheme; those who dealt publicly with the trading company, the shares of which had been purchased, (including the company’s bankers) were never told of the change of ownership.

[63]     The  form  and  contents  of  the  documents  giving  effect  to  the  various transactions were virtually identical.  Inevitably, the factual inquiry in relation to any template transaction would yield the same result, as has been demonstrated by the Privy Council’s confirmation in Miller/O’Neil that the template constituted a breach of s 99.

[64]     Nor would the picture be complete without reference to Mr Russell’s role. He has been an active participant in every aspect of the scheme.  As I have noted, he controlled the loss companies, the parent companies, the trading companies and the various subsidiary companies, which were interposed as agents and trustees between the trading  and  loss  companies.    Mr  Russell  personally  and  companies  that  he controls  are  currently  the  subject  of  assessments  in  respect  of  the  various transactions, including the transactions in this case.

[65]     I have reached the view that all the users of the template were inextricably connected by their participation in the scheme.   I find it impossible to separate or ignore the connection between the vendors of the shares or business and the other participants in the scheme.  I find that the totality of the connections discloses such a

nexus or community or mutuality of interest, or such an identity between them, as described by the Court of Appeal in Shiels v Blakeley that it would be just to estop the appellants from advancing the arguments that have already been determined in the Miller/O”Neil cases.

[66]     While I have concluded that all those who participated in the scheme through template transactions are to be regarded as privies of one another, I also mention a further aspect that underscores the connection between the majority of the appellants in this and the other reported cases involving Russell template transactions. Mr Russell has acted as taxation consultant from the outset of the IRD’s investigations, managing  the  objection  process  on  behalf  of  virtually  all  the  appellants  in  the reported Russell template cases with obvious control over the manner in which the cases have been presented.  He has given evidence on behalf of the appellants, cross- examined IRD witnesses and made submissions. This is notwithstanding the fact that he is, himself, an assessee in respect of the very transactions in question and is therefore  personally affected  by the  outcome of  the  arguments  advanced  in  the previous cases and now advanced in this case.

[67]     Only rarely is there any sign in the reported cases of separate representation for an objector. It is apparent from the various reported decisions that virtually all of the Russell template cases display a common strategy by the objectors. They have promoted their interests in a singular manner, ceding control over the objection process to Mr Russell who is both taxation agent and litigant in relation to the transactions under scrutiny.  There is no sign whatsoever that the cases being run for the various objectors have deviated at all from the strategy conceived and managed by Mr Russell.  Indeed, there is hardly any sign of independent contribution to the process by the various objectors.

[68]     The  objection  process  in  virtually  all  of  the  reported  cases  can  only  be regarded as a common effort by the taxpayers acting in concert, through Mr Russell, to impugn the Commissioner’s assessment process as well as the individual assessments.   All template users have the same interest in seeing the various arguments against the Commissioner succeed.  The same arguments are advanced on behalf of each appellant, sometimes in a subtly altered form.  The events in one case

are used to shore up the position of objectors in other unrelated cases.  For example, the appellants support one of their arguments with a comment by the TRA during the hearing of the unrelated Fosters case about the potential significance of an IRD witness’s evidence to support one of their arguments. The evidence in the earlier cases cumulatively forms part of the evidence in later cases.

[69]     The manner in which the objection process has been handled by Mr Russell on behalf of so many of the affected taxpayers is not the basis for my conclusion that template users should be regarded as privies of the Miller/O’Neil litigants but it is a striking illustration of the connection between all these parties.

Is it Relevant that the Appellants were Unaware of the Extent of the Scheme?

[70]     I accept Mr Russell’s evidence that the appellants did not know the true extent or nature of the scheme and that this was deliberate on his part.  Mr Russell has said that he ensured that the vendors of the profit companies and businesses did not know the identity of the loss companies.  They almost certainly did not realise either the extent of Mr Russell’s own interest in the scheme.  But this does not alter my conclusion.

[71]     In Peterson v C of IR [2005] UKPC 5 the Privy Council held that a taxpayer could be affected by an arrangement which breached s 99 even if not a party to it nor privy to the details because whether there is an arrangement for the purposes of s 99 is a question of fact; if such an arrangement exists and the taxpayer is affected by it and obtains a tax advantage from it then the Commissioner is entitled to assess the income of the taxpayer. I consider the current situation to be analogous. Whether there exists a sufficient identity of relationship or mutuality of interest is a question of fact. It does not depend on the state of knowledge of the alleged privy.

[72]     In this case the identity of relationship arises from the characteristics of the overall scheme in which the appellants were, unwittingly, only part.   Once they agreed to participate in the template scheme their companies and businesses immediately became part of the groups of companies being created by Mr Russell.

The fact that they did not realise any of this did not alter the reality of how the scheme operated.

[73]     As a result, to the extent that any issue now  raised  is  the same as  that previously decided or could with reasonable diligence have been raised previously, the appellants are estopped from arguing it.   Of course, such an estoppel cannot extend to questions of fact peculiar to individual assessments, a number of which have been raised.

Is it Relevant that Some of the Earlier Cases were Judicial Review Proceedings?

[74]     The appellants point out that certain of the issues previously considered arose in the context of judicial review proceedings.  They submit that determinations made in  such  proceedings  could  not  result  in  a  final  determination  creating  an  issue estoppel because the only finding that could properly be made was that it was open to the Commissioner to proceed in the way he had, not that the Commissioner was actually correct.

[75]     I was not referred to any authority for the proposition contended for by Mr Judd QC. I note, however, that in M  & J Wetherill Co Ltd v Taxation Review Authority (2003) 21 NZTC 18,311 at 18,319 O’Regan J considered (in the context of a Russell template case) whether the taxpayer  appellants and the Commissioner should be bound by the findings in an earlier judicial review proceeding to which they had  been  parties.  He  found  that  an  issue  estoppel  did  arise  in  relation  to particular issues which had been dealt with by the High Court and the Court of Appeal in the course of the earlier judicial review proceedings.

[76]     This position is contrary to the decision in R v Secretary of State for   the Environment, ex parte Hackney London Borough [1983] 1 WLR 524 in which the Court of Appeal held that issue estoppel was not available in judicial review proceedings brought under the Rules of the Supreme Court. The Court referred to the fact that there were no formal pleadings for judicial review, making it difficult, if not impossible to identify a particular issue that the earlier application might have decided. Of course, this is different to the position that exists in New Zealand.

[77]     This case has been criticised in Spencer Bower & Turner at paragraph 357, where the learned authors say that:

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

[78]     I respectfully agree with this criticism. There does not seem to me to be any reason that the nature of the earlier proceedings should, in itself, preclude a final decision on a particular issue capable of giving rise to an issue estoppel.  Provided that the recognised requirements for issue estoppel are met, the form of the earlier proceeding should not be relevant.  The difference in the nature of the proceedings may make it is less likely that the question previously determined was identical but this must be matter for consideration in each case.

Threshold Issues

[79]     The objectors raised what are referred to as threshold issues, in reliance on

Lowe v C of IR  [1981] 1 NZLR 326 at 348; (1981) 5 NZTC 61,006 at 13,052:

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

[80]     Judge  Barber  described  the  threshold  issues  raised  by  the  objectors  in

Case T52 as follows:

The objectors contend that the respondent’s assessments are two (sic) theoretical to be valid and/or are no more than arbitrary conjecture and/or the Commissioner, initially or at the threshold, cannot point to what is prima facie a proper assessment. (paragraph 26)

[81]     In this Court, however, the threshold issues were advanced as:

a)       Unintelligibility

b)       Abuse of power/arbitrariness c) Lack of any sensible basis

[82]     The  appellants  say that  they should  be able  to  advance  these  arguments because:

a)       The  threshold issue of unintelligibility was not considered by any of the High Court, Court of Appeal or Privy Council in the Miller/O’Neil/McDougall/Managed Fashions decisions.

b)In relation to unintelligibility and the other threshold issues, reliance on  the  earlier  decisions  would  be  flawed  in  any  event  because, between the hearing of Case R25 and the hearings of Cases T52 and U23, new evidence became available which the appellants are entitled to have taken into account, namely the minutes of a meeting of IRD staff  27  September  1990  and  the  cross-examination  of  an  IRD witness, Mr Player;

Unintelligibility

[83]     The threshold question considered by Baragwanath J in Miller v C of IR; McDougall v C of IR; Managed Fashions v C of IR was recorded  at 13,225 as being that:

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

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

[84]     The threshold issues argued before Baragwanath J appear to have been only arbitrariness and unspecified breaches of administrative law principles rather than unintelligibility in the sense that it is now advanced.  However, I consider that this submission must nevertheless fail because the actual substance of the alleged unintelligibility  has  been  considered  previously,  though  not  in  the  context  of threshold issues.

[85]     The appellants contend that the assessments were unintelligible because they were inconsistent.  The argument was advanced as follows:

•To be intelligible the assessments would need to have certain qualities, namely factual correctness, be precise in calculation and identify the proposed assessee, the income to be adjusted, the tax advantage obtained  and  the  basis  on  which  the  income  is  considered  to  be income which the proposed assessee would have had.

•When the assessments were made in 1991 there were still Track A assessments of the parent company in existence for 1984 – 1990 and the trading company for 1984 – 1988.  Under the Track A assessments the Commissioner had reconstructed the income to the trading companies.

•As a result of s 99(4) the income that was the subject of the Track A assessments was deemed not to be the income of any other party (i.e. the McDougalls).   So the Track B assessments, which reconstructed the same income to the original shareholders must have been unintelligible since any such assessment could not have met the prerequisites noted above.

[86]     Although advanced now as a threshold issue, this argument is really the same as the argument about inconsistency between the Track A and B assessments considered by the Court of Appeal in Miller v C of IR; Managed Fashions v C of IR and the Privy Council in O’Neil & Ors v C of IR.  The submission made on behalf of the McDougalls in the Privy Council in O’Neil was recorded at paragraph 32 of that decision as being:

“ …that the Track A and Track B assessments were in fact inconsistent. Track A treated the trading company as having made the profits it would have made without deductions for administration charges whereas Track B treated those profits as having been paid to the appellants. Section 99(4) says that income included in the assessable income of a taxpayer under s 99 shall be deemed to have been derived by him and not by another person. Consequently  the  Commissioner  could  not  validly  make  a  Track  B

assessment while a Track A assessment in respect of the relevant company was outstanding.

[87]     It seems to me that the question being determined in both the Miller/O’Neil cases and in the present case was whether Track A and Track B assessments were inconsistent.  The submissions in each case as to the effect of inconsistency differed; in the Miller/O’Neil cases inconsistency was said to render the later assessments void. In the present case it is contended that the inconsistency resulted in unintelligibility.  However, the decision as to whether the assessments were, in fact, inconsistent was an essential and fundamental question being argued in both the earlier cases and in the present case.

[88]     In the O’Neil case the question whether the assessments were inconsistent was resolved in the following way:

…an assessment which wrongly includes income deemed, by virtue of s

99(4) to be the income of someone else is not void, any more than an assessment which is wrong on some other ground, it is merely open to

objection under s 30.  It follows that the Commissioner or Taxation Review

Authority may remedy the position by amending the inconsistent assessment at any time before the objection proceedings have run their course.  It is only when the assessments are no longer open to amendment that an objection on grounds of inconsistency will be incapable of remedy.

(emphasis added)

[89]     The effect of the decision in O’Neil is that an assessment can be amended by a later assessment (provided there was no case stated).  As a result a later assessment is not inconsistent with the earlier one.

[90]     I consider that this issue has been the subject of a final determination.  This means that the appellants cannot now argue that a Track B assessment is inconsistent with a Track A assessment (unless there is a case stated on foot).  Since this question forms the basis for their submission on unintelligibility, it follows that it must fail.

[91]     Even if the question were not the same in both cases I would nevertheless consider that the argument that the assessments were unintelligible would fail.  It is clear from the Privy Council decision in O’Neil that an inconsistent assessment is merely incorrect rather than invalid.  In Miller v C of IR; McDougall v C of IR (No 1)

Baragwanath J described the threshold referred to in Lowe v C of IR as being very low.  An assessment that is merely incorrect (but remediable through amendment) could not, in my view, be regarded as falling short of the threshold.

[92]     Finally, it is quite obvious that the argument, as now expressed, could easily have been raised by the McDougalls in the earlier cases. Given that fact and my conclusion that the other appellants are privies of the earlier litigants, they are now estopped from raising the argument now.

Arbitrary/Abuse of Power (Going Where the Money is)

[93]     The appellants submit that the Commissioner made the decision to change to Track B because it had been discovered that the trading companies were insolvent and  he  thereby acted  arbitrarily and  in  abuse  of  his  power.    They rely on  the comments of the Court of Appeal in Miller v C of IR (1995) 17 NZTC 12,341 at

12,348 that:

The statutory power of adjustment of the assessable income of any person affected by the arrangement is exercisable “to counteract any tax advantage obtained by that person from or under that arrangement”.  It is outside that power and a misuse of authority for the Commissioner to make an amended assessment on the footing that the person selected may have a greater ability to pay than the trading company through which the individuals concerned derived their income…if the motivation for targeting the individual plaintiffs rather than [Fiorucci] was simply because [Fiorucci] was not solvent, that could not possibly be justified under s 99(3) and would have to be characterised as an abuse of power.

[94]     The appellants say that at a meeting on 27 September 1990 IRD staff decided to change the form of assessments to what is now known as Track B because the trading companies that had been pursued to date had proved to be insolvent.  They further say that at paragraph 37 of the decision in Case T52 the TRA effectively found that the departmental officers and the Commissioner changed tracks purely and simply because they recognised that the companies had no money.

[95]     I cannot see how paragraph 37 of the TRA’s decision can be read this way; it is clear that the TRA was reaching entirely the opposite conclusion:

It  was  perfectly reasonable  for the  Department  to be  concerned  that  its success before the Authority regarding Track A cases merely led to a former profit company which had no assets remaining.  I respectfully agree with the Court of Appeal that it would be an abuse of power for the Commissioner to issue assessments to a particular person merely because the proper assessee has no money.   However, where the person first thought of as the proper assessee is found, or is thought likely to have no money, it is quite proper for the departmental officers to reconsider whether that person really is the proper assessee.  This is one of the matters which took place at the meeting of 27 September 1990 and led to a change in direction from an application of Track A to Track B, although I understand that assessments were not issued under the Track B method until about March 1992.  In my view, the inability to collect income tax from the trading company is merely another sign that the trading company is not the most appropriate assessee pursuant to s 99(3).

[96]     It  seems  quite  plain  that  the  TRA  viewed  the  insolvency of  the  trading company as a matter which might properly (and did) lead to a reconsideration as to who the most appropriate assessee was.  This reconsideration could, in turn, lead to the decision to change tracks.  It is clear from the Court of Appeal’s decision just referred to that this would not constitute an abuse of power.

[97]      But, in any event, the question whether the Commissioner’s decision to change to Track B was arbitrary and an abuse of power was the subject of a final determination by the Court of Appeal in Miller v C of IR; Managed Fashions v C of IR (1998) NZTC 13,961 at 13, 970, which approved the decision of the High Court in Miller v C of IR; McDougall v C of IR (No 1) 13,001 at 13,039.

[98]     In Miller v C of IR; McDougall v C of IR (No 1) at p 13,039 Baragwanath J recognised that the Commissioner’s decision to change tracks had to be considered both as a matter of principle and within the context of the specific facts of the case. As a matter of principle, the Commissioner was entitled to elect between the trading company and the former shareholders as to which class should be assessed to counteract their respective tax advantage.   This was different from purporting to assess a person against whom no assessment could lawfully have been made because of a perceived capacity to pay, which could constitute an abuse of power and would certainly be ineffectual to produce an enforceable assessment.

[99]     Having  stated  the  general  position,  the  learned  Judge  then  went  on  to consider the evidence in the particular case at some length.  The learned Judge found that the Commissioner’s decision to shift from Track A to Track B was not simply

because the trading company was insolvent.  His Honour found that the true reason for the change was that both the trading company and its former shareholders were viewed as having obtained a tax advantage; the fact that the impecuniosity of the trading company was an intended element of the whole arrangement was simply the reason for the Commissioner reconsidering the appropriate assessee.

[100]   Those findings were approved by the Court of Appeal in relation to both the statement of principle and the factual findings:

Baragwanath J was amply justified, following an extensive review of the evidence,  in  concluding  that  there  was  nothing  in  the  material  adduced which could be said to establish that the Commissioner was distracted from his proper task by any improper purpose. Earlier the Judge said that there was no reason why, if two taxpayers are liable in the alternative, the Commissioner should not select the one more likely to be able to pay, “a fortiori if part of the arrangement was to strip the assets of the alternative targets”. We entirely agree.

[101]   Referring to the passage in its earlier decision in Miller v C of IR, relied on by the appellants, the Court then commented:

These remarks, especially given the final sentence, are being given an importance which is not warranted…the emphasis in the final sentence of the passage quoted from this Court’s judgment is on the word “simply”.   The Commissioner must, on a reasonably arguable basis, hold the opinion that the assessment is a proper one for him to make against the person assessed. He must believe that in terms of the taxing legislation that person is properly assessable, rather than being simply, for example, a relative or friend, not party to the impugned arrangement, to whom monies or other assets have been passed.

In the present case the Commissioner was quite entitled to consider that it was part of the arrangement that the monies representing the net profit were to be removed from the trading companies, leaving those entities in practical terms judgment proof, and put into the hands of the former shareholders; and that the former shareholders obtained a tax advantage in that way.  He was not therefore improperly motivated in issuing a track the assessments even if it should later transpire in the case stated proceeding that s 99 could not actually be used to reconstruct the situation as the Commissioner desired.

[102]   The appellants assert that there are special circumstances that mean that, even if the question has been finally determined they should nevertheless be permitted to argue the point, namely further evidence that became available in the hearing of T52

and which was not available in the earlier cases.  This was the cross-examination of the IRD witness, Mr Player, who had not given evidence in the earlier cases.

[103]   In his brief of evidence Mr Player said that the change of track was due to the eventual realisation during cases M104 and M109 by IRD staff that part of the overall scheme was that the original shareholders would purchase back the assets on favourable terms leaving an insolvent trading company when the scheme was terminated.  In cross-examination (NOE p239/1-15, and p287/1-25) Mr Player was asked what parts of the overall scheme had not been appreciated during the earlier Cases M104 and M109 but were appreciated during the hearing of Case T52.   He answered that it was that the equivalent persons to the McDougalls had received the income in a tax-free form at the end of the loop.  Later a document was put to him, which indicated that this aspect of the scheme had been known to the Commissioner during the earlier cases.  It was put to him that his answer had been false.  Mr Player said that the answer had been given from the best of his unrefreshed memory but that on reviewing the document he acknowledged that that aspect of the scheme had been known but “that for other reasons the full scheme was not appreciated”.  This aspect was not pursued further on cross-examination and nor was the original explanation given in evidence-in-chief attacked.

[104]   The appellants assert that the cross-examination showed that Mr Player’s explanation was false and that the sole reason for the change was the insolvency of the trading companies.   However, when viewed against the whole of Mr Player’s evidence, the cross-examination falls short of proving that the evidence was untrue. The evidence shows (as Judge Barber found) that the Commissioner was influenced in  his  assessment  of  the  shareholders  by where the income being assessed  had actually finished up.  But it would be overstating the effect of the evidence to suggest that it showed that the sole motivation was to find a solvent assessee, as opposed to a legitimate assessee.

[105]   Judge Barber’s decision in Case T52 referred to Mr Player's evidence at some length, though not the particular part of the cross-examination to which counsel has referred me.  Having reviewed Mr Player’s evidence and also the way the issue was dealt with by Baragwanath J in Miller v C of IR; McDougall v C of IR (No 1) and

Miller v C of IR; McDougall v C of IR; Managed Fashions v C of IR the learned

Judge said:

It seems to me that if the respondent has a number of legitimate potential assessees under the law then, so long as he acts in good faith and in an honest and reasonable manner, it must be legitimate to be influenced by where the money he wishes to relate assessments to has actually finished up…it seems a perfectly sensible and businesslike decision to me for the respondent to then decide that it is his duty to trace the escaped income and bring it back into the tax net and therefore implement Track B or Track C insofar as that is permissible under the law.  That attitude of the respondent seems to me to be perfectly permissible and I do not see it as in any way an abuse of power.

[106]   It is apparent from Judge Barber’s decision that he carefully considered the issue of the Commissioner’s motivation for changing tracks and reached the view that the decision to change tracks was not made in bad faith so as to amount to an abuse of power.  Although it is true that he did not refer specifically to the cross- examination on which counsel relies it seems clear from his judgment that he did consider Mr Player’s evidence generally.   This hearing ran for a very substantial period of time over nearly two years.  It is unrealistic to expect the learned Judge to refer to every piece of evidence in his decision.

[107]   I do  not  consider  that  the  evidence  relied  on  by  the  appellants  justifies allowing the question of whether the Commissioner was entitled to change tracks to be re-litigated.

Lack of any Sensible Basis

[108]   The third ground is that the assessments lacked any sensible basis and were quite unsupportable in that:

a)       In the assessments in respect of WSL income the letters advising the assessments  incorrectly  referred  to  CML  as  having  derived  the income;

b)In relation to the Coils NZ/Slioc income the letters advising the assessments incorrectly referred to the McDougall brothers having received a substantial proportion of the profits of Coils NZ/Slioc;

c)       The quantum of the assessments failed to identify the amount of the tax advantage obtained by each of them;

d)The TRA erred in failing to take account of the fact that, historically, the shareholders of WSL had never received all of the company’s profits.

[109]   The TRA held (paragraph 54) that whether assessments have been made on a basis that is intelligible, real and sensible, is an objective test.  The appellants accept that this is the appropriate test.   It is against that test that I turn to consider the specific complaints levelled against the assessments, made by way of letters 13

August 1992 to various of the appellants in this case.   The letters to the two McDougall brothers and Mr McDougall senior are all in identical terms and include schedules of the amounts to be assessed as income, which are also identical.

[110]   The first complaint is that paragraph 3 of each letter refers to income from WSL  being  derived  by  CML  as  a  result  of  the  impugned  arrangement.    The appellants say that CML never derived the income, which was by the nature of the arrangement, derived by the parent companies.  However, as is set out in the recital of the various transactions comprising the impugned arrangement, CML stood as trustee for the parent company, CCL.  It was CML that rendered the invoices for the administration charge and CML that received the funds.  The fact that it held those funds on trust does not preclude it from having derived them for the purposes of s 99.  I can see no substance in this complaint.

[111]   There is a similar complaint about the Coils NZ/Slioc arrangement and my view is the same.

[112]   The next complaint is that the letters of assessment refer in paragraph 2 to the assessee having received or derived the benefit of a “substantial proportion of profits

of Wire Supplies Limited….”.  The appellants submit that this statement is at odds with the actual assessment which reconstructed all of the template income to the assessee.  This complaint overlooks the fact that each assessee did derive the benefit of a substantial portion of the profits of WSL and, further, the actual assessment (which generally equated to one-third of the administration charge) reflected that fact.  The position of each assessee must be looked at individually and I see nothing misleading or confusing about the wording of paragraphs 2 and 3 of the letter 13

August 1992.

[113]   There are similar complaints about the assessments in respect of the Coils NZ/Slioc income.  However, the letters themselves dated 30 September 1991, do not seem  incoherent,  as  submitted  by the  appellants.    They  adequately  identify  the companies concerned and include a detailed schedule of the amounts being assessed as income for each of the relevant years.

[114]   The   third   ground   of   complaint   is   that   the   assessing   of   the   whole administration  charge  as  income  did  not  make  sense  because  prior  to  the arrangement being entered into the shareholders had never received or derived 100% of the trading companies income.  Some of the profits were retained and some used for salaries to the shareholders.   Allied to that point is the submission that the reconstruction  of  the  income  requires  the  Commissioner  to  ascertain  the  tax advantage derived by the proposed assessee so as to counteract that tax advantage. The appellants assert that the tax advantage must be limited to any director’s fee or shareholders’ remuneration which was not returned and that the Commissioner was obliged to identify the proportion of profits likely to be represented by such remuneration.  This could not be done by assessing the whole of the administration charge.

[115]   The TRA rejected this argument on the basis that the assessment represented the countering, pursuant to s  99(3),  of  a  tax  advantage  in  terms  of  appropriate entitlement or expectation in the honest view of the Commissioner.   I respectfully agree.  The McDougalls had been the only shareholders and directors of WSL and Coils 1980.   Realistically, if they had not entered into the arrangements with Mr Russell the profits from these businesses would eventually have come to them one

way or the other.  I do not think that it is necessary for the Commissioner to identify whether that would have been by way of dividend, director’s fees, salaries or an accumulating current account to be drawn at some later time.

Quantum Not Calculated with Reference to Receipts/Payments or Otherwise

[116]   The appellants contend that the Commissioner’s assessments must be limited to the actual and identifiable fees or shareholders’ remuneration which were not returned,  on  the  basis  that  the  Commissioner  is  required  to  ascertain  the  tax advantage derived by the proposed assessee so as to counteract that tax advantage. The appellants complain that assessing the whole of the administration charge as reconstructed income is not a proper reconstruction under s 99(3).

[117]   The appellants also complain about the TRA’s statement at paragraph 26:

I am not necessarily concerned with the fair allocation of the tax burden uncovered in terms of s 99 among those who actually received and kept the net profit that the trading company…

[118]   The  appellants  say  that  this  statement  disregards  the  TRA’s  statutory obligation to deal with administrative law issues such as fairness in respect of the assessment process.  They say it would be unfair and incorrect for the tax burden to be allocated in a manner contrary to s 99(3) and that it cannot be part of the statutory construction for objectors to be required to issue civil proceedings amongst themselves to correct deficiencies in the decision of the authority.

[119]   I do not consider that there is any substance in this submission.    The TRA made it clear that it was dealing with whether the reconstruction of the income by the Commissioner was correct.   Judge Barber specifically declined to deal with the possibility that the reconstruction might be unfair in a general sense as between the various objectors.  The Judge was merely stating what his task was and identifying an aspect which does not fall within the scope of it.

[120]   In any event, the approach of reconstructing the whole of the administration charge to  the  original  shareholders  was  comprehensibly  considered  by Baragwanath J in Miller v C of IR; McDougall v C of IR (No 1).  The learned Judge

held that the Commissioner was, in principle, entitled to assess the plaintiffs individually for the whole of the monies paid to the parent company as an administration charge.   This approach was confirmed by the Court of Appeal in Miller v C of IR; Managed Fashions v C of IR.  As a result, this argument is simply not open to  the  appellants  to  advance  now,  given  my conclusion  regarding the binding effect of the earlier decisions on them.

Inconsistent Tracks – Track C Automatically Renders Track B Incorrect

[121]   In the hearing of Case U23 the objectors raised a new argument which they advanced as a consequence of the Court of Appeal decision in Miller v C of IR; Managed Fashions v C of IR, delivered after the decision in Case T52 but before the hearing of Case U23.

[122]   The Court of Appeal said, in relation to s 99(4):

We  do  not  read  this  provision  as  preventing  the  Commissioner  from changing his mind about the application of s 99. It is a consequential provision, in the sense that it does its work after any valid re-construction but, like s 27, it does not have the effect of limiting the general power of amendment. The existence of assessments against the McDougalls’ trading companies which in terms of s 99(4) deemed the income represented by the administration charges to be their income and not the income of any other person, did not disable the Commissioner from making or amending an assessment against the former shareholders. When that re-constructive assessment has been made s 99(4) then deems the income not to have been derived by the trading companies.   As has been explained, consequential adjustments are required in relation to them, but neither s 27 nor s 99(4) restricts the Commissioner’s assessment and re-constructive powers.

[123]   The appellants relied on this statement to submit that the subsequent Track C and D assessments automatically rendered the Track B assessments incorrect in the same way as the Track B  assessments had  automatically rendered the  Track  A assessments incorrect.  The Commissioner (or TRA) was bound to amend the earlier assessments downwards as a result.

[124]   Although not specifically foreshadowed in any earlier notice of objection, Judge Barber heard the argument.  He focused on the question whether the Track B and C assessments related to the same income and considered that since the effect of s 99 was to annihilate the entire Russell template scheme there could only be one

assessment of the income circulating through the template.   This would mean that Track C assessments could not stand alongside Track B assessments unless they related to different income, which, on the view he held of the template, was not the case.

[125] The rationale for the TRA’s view was that because s 99(4) deemed reconstructed income not to have been derived by any person other than the assessee, it followed that any attempt by the Commissioner to reconstruct income already subject  to  an  assessment  would  be  invalid  and  ineffective.    The  effect  of  this approach was that the Track B assessments would remain unaffected but that the assessee under Track C would be entitled to raise the statutory immunity in s 99(4). However, I note that these comments were necessarily obiter because the TRA was not considering Track C and D assessments.

[126]   In   this   Court   the  appellants   asserted   that   the  TRA’s   approach   was inconsistent with statements by the Court of Appeal in Miller v C of IR; Managed Fashions v C of IR and the Privy Council in O’Neil & Ors v C of IR as to the effect of subsequent assessments.  They advanced their argument as follows:

a)      The Privy Council and the Court of Appeal both held that the Commissioner could make new assessments under s 23.   The Privy Council relevantly stated at [33] that:

Their Lordships consider that an assessment which wrongly includes income deemed, by virtue of s 99(4), to be the income of someone else is not void, anymore than an assessment which is wrong on some other ground.   It is merely open to objection under s 30.   It follows that the Commissioner or Taxation Review Authority may remedy the position by amending the inconsistent assessment at any time before the objection proceedings have run their course.   It is only when the assessments are no longer open to amendment that an objection on grounds of inconsistency will be incapable of remedy.

b)Baragwanath J held that the right to amend was limited to the period prior to a request for a case stated to the TRA.  He based his decision on Thorp J’s decision in BASF New Zealand Ltd v C of IR (1995) 17

NZTC 12,136.

c)       Neither the Court of Appeal nor the Privy Council considered this point because the Commissioner did not cross-appeal on it.  The Privy Council specifically expressed no view on the point and the Court of Appeal simply assumed the BASF principle to be correct (p13,973). As a result the High Court approach to the application of the BASF principle should be regarded as open for reconsideration.

d)Baragwanath J stated the BASF principle too broadly as being that the Commissioner’s jurisdiction under s 23 to amend an assessment was lost once the case had been stated to the High Court or the TRA. Instead the principle as originally expressed by Thorp J should apply i.e. that a second assessment “would be invalid if and insofar as it purported to reopen any issue requiring determination in the original case stated”.

e)       Further, Baragwanath J’s statement was inconsistent with the Privy Council’s statement that an assessment which is incorrect as a result of wrongly including income deemed to be that of another may be remedied any time before the objection proceedings had run their course.  To that extent a decision must be taken to have been reversed.

f)        An assessment that is incorrect because it assesses the taxpayer for more than it should, will always to be open to amendment downwards (the s 25 time bar only applying to assessments upwards).  As a result, the objection proceedings have not run their course and it is both open to and incumbent on the Commissioner to amend the Track B assessments.

b)Mr Horan on 16 March 1992 in respect of Mr L L McDougall for the years ending 31 March 1982 – 86 inclusive;

c)        Ms Foulds on 5 December 1992 in respect of Mr J J McDougall for the years ending 31 March 1984 – 87 inclusive;

d)Ms Foulds on 5 December 1992 in respect of Mr L L McDougall for the years ending 31 March 1984 – 87 inclusive;

e)        Ms Foulds on 5 December 1992 in respect of Mr J U McDougall for the years ending 31 March 1984 – 86 inclusive.

[159]   The certificates are all to the effect that the certifier has formed the opinion after examining the file, including all relevant reports, returns and correspondence that the returns of income furnished by the taxpayer omit income of a particular nature or derived from a particular source.  The appellants say that the Commissioner cannot simply rely on the certificates but must actually prove the formation of the opinion through other evidence.  They criticise the failure of the Commissioner to call Mr Horan and Ms Foulds.   They say that the only evidence of consideration given to lifting the time bar is recorded in the minutes of a meeting of IRD staff in September 1990, which show uncertainty and record a single decision intended to apply globally to all J G Russell cases.  In short, they say that there is no evidence of the  formation  of  an  honest  and  reasonable  opinion  in  respect  of  each  IR150 certificate.

[160]   The Commissioner maintains that the certificate is sufficient and, in  any event, there is evidence to show that the opinions were formed honestly and reasonably.    He  points  to  the  reports  by  investigating  accountant,  Mr  Vonder

1 September 1992 and 19 November 1992 which recommend the reopening of the assessments on the ground that the taxpayers’ returns omitted all mention of income of a particular nature.  The reports refer to an attached copy of part of an opinion from internal solicitor, Mr Clarke.  That excerpt deals with the s 25 issue at some length, specifically referring to concerns raised by Ms Foulds.

[161]   I  consider  that  the  certificate  alone  is  sufficient  evidence  of  an  opinion honestly and reasonably held.   It was open to rebuttal by the appellants and they could have subpoenaed the certifiers for this purpose had they wished.   But in the absence of evidence rebutting the contents of the certificate the TRA was entitled to accept it at face value.

[162]   For the sake of completeness I go on to consider the available evidence on this point.  The 19 November 1992 report which relates to the McDougall brothers in respect of Coils NZ/Slioc for the years ending 31 March 1982 – 86 inclusive was apparently endorsed by Mr Horan (his stamp is next to the signature) with the note that he agrees with the recommendation.   The appellants say that this is insufficient because there is no evidence that Mr Horan actually read the relevant part of the report.  I do not accept that.  There was sufficient evidence for the TRA to find, first, that it was open to Mr Horan to form the view recorded in the certificate and, secondly, that he did so.  I think that it is being unrealistic to suggest that Mr Horan’s endorsement of his agreement with Mr Vonder’s recommendations should not be accepted at face value.   Indeed, the very fact that Mr Horan gave his certificate within a few months of receiving and endorsing his agreement on the report in itself suggests that he agreed with the recommendation.

[163]   In addition there are reports from internal solicitors Mr Lim and Ms Cotton

19 November 1992 and 24 January 1992 recommending the reopening of the assessments under s 25.

[164]   As to Ms Foulds, she made a report 11 July 1990 in which she touched on the question of s 25, expressing doubt that the Commissioner could reopen assessments. However, because the thinking of all those involved was obviously developing as the matter was given further consideration I do not attach any significance to this report. Ms Foulds attended the meeting 27 September 1990.  Other attendees included Mr Vonder and Mr Clarke, the solicitor whose report was attached to Mr Vonder’s reports.   The   minutes   record   the   following   discussion   about   reopening   the assessments under s 25:

It  was  considered  that  we  could  reopen  as  the  original  shareholder  has

‘omitted income of a particular nature’.   Whether  or  not this is  correct interpretation of the section will need to be determined by the Courts.  It was

considered  that  we  reopen  the  assessments  on  this  basis  as  there  is  a

‘reasonable  possibility’  that  the  original  shareholder  had  received  the income.

[165]   The appellants assert that there is no evidence either from Ms Foulds herself or in any document to show that Ms Foulds ever saw Mr Vonder’s report, let alone

agreed  with  it.    However,  Ms  Foulds  was  cross-examined  on  this  issue  in  the Douglas & Henwood group of cases, which were heard after the hearing of Case T52 and before the hearing of Case U23.   Usually this  would  be  inadmissible  in  a different case.   But I am informed by counsel (and this is recorded in the TRA’s decision) that there was agreement between all the Russell clients (including Wire Supplies and the McDougalls), the Commissioner and the TRA that evidence in one template case was available to be referred to in others.  Indeed, I was referred to the transcript of the Foster group of cases in relation to the issue of whether Mr McDermott should have been called.

[166]   In the transcript of the Douglas case (p240/7-36) Ms Foulds made it perfectly clear that she appreciated that the opinion had to be honestly and reasonably formed and that she had done so.  The relevant passage was:

The Commissioner must form his own opinion and I am quite sure that I would have sought advice from Alan Clarke before we finally did adopt that approach. The fact we did adopt the final approach obviously means that the decision supported the premise but there is no way that the Commissioner should levy an assessment and them wait for it to go to court to see if it was right or not.   We would have acted upon the advice that such an avenue would be legally correct before we actually levied the assessment we being Lower Hutt.

[167]   I consider that there was sufficient evidence to find, had it been necessary to do so, that the opinions Mrs Foulds certified were honestly and reasonably formed.

Questions to be Answered

Case T52

Question 1:     Was it correct to find that it matters not that the individual objectors were not the vendors of shares or the owners of the business in the case of SEL when such finding leads to the previous owner of the business not being taxed which is contrary to the decision of the High Court and Court of Appeal in Case R25?

Yes, and further, the TRA’s finding does not lead to a situation contrary to the decisions of the High Court and Court of Appeal in Case R25.

Question 2:     Was it correct to find that departmental officers had “complied in all respects with the CPS” when the evidence was to the contrary and the CPS required each individual case to be assessed independently of any other cases?

The TRA was correct to find that departmental officers had “complied in all respects with the CPS”.   Further, the evidence was not to the contrary and the CPS did not require each individual case to be assessed independently of any other cases.

Question 3:     Was it correct to find that the meeting of 27 September 1990 did not lead to non-compliance with the steps required by the Commissioner from his staff in the CPS and that the documentation and the exhibits show that the processes leading to the assessments complied with the CPS and were open, fair and comprehensive?

Yes, the TRA was correct in finding that the meeting 27 September 1990 did not lead to non-compliance with the steps required by the Commissioner from his staff in the CPS.  Further, the TRA was correct in finding that the documentation and exhibits show that the processes leading to the assessments complied with the CPS and were open, fair and comprehensive.

Question 4:     Was it correct to find that the staff of the respondent had a full grip on the facts of these cases and were absolutely correct in deciding that a fair and reasonable inference can be drawn that tax avoidance is one purpose of the arrangement and that it was not a merely incidental purpose?

Yes.

a descriptive phrase for the assessments is not a fatal weakness and does not indicate that the CPS was not being followed and that the reconstruction is unintelligible?

It was correct to find that the failure of the respondent to find a descriptive phrase for the assessments:

(a) is not a fatal weakness;

(b) does not indicate that the CPS was not being followed; (c) does not mean that the reconstruction is unintelligible.

Question 6:     Was  it  correct  to  find  that  it  is  “quite  proper  for  the departmental officers to reconsider whether that person really is the proper assessee” on the basis of the belief that the proper assessee is found, or is thought likely, to have no money?

The question does not accurately reflect the decision; at paragraph 37 the TRA actually said that “However, where the person first thought of as the proper assessee is found, or is thought likely, to have no money , it is quite proper for the departmental officers to reconsider whether that person really is the proper assessee”.   On the assumption that the question intended to ask whether this finding was correct, the answer is yes.

Question 7:     Was it correct to find that the respondent could change tracks and target a different assessee on the same business structure and still be acting in good faith and in accordance with the law?

Yes.

Question 8:     Was it correct to find that in this case the respondent has been able  to  categorise  the  receipts  and  payments  which  arose  out  of  the

reconstruction?

Yes.

Question 9:     Was it correct to find that because the objection procedure had advanced regarding the first assessments that the purported amending assessment was ineffective?

Yes.

Question 10:   Was it correct to find that the investigative process was  a continuous one, rather than one which stopped with the first assessments under Track A?

Yes.

Question 11:   Was  it  correct  to  find  that  the  consultancy  fee  income  to Commercial Management was not dealt with under s 99 in the assessments of Slioc and Wire Supplies?

Yes.

Question 12:   Was it correct to find that it was a sensible and businesslike decision and a duty to trace the administration charge and implement either Track B or Track C insofar as it is permissible under the law and that such conduct was not in any way an abuse of power?

Yes.

Question 13:   Was it correct to confirm assessments which had already been consequentially and automatically cancelled by the effect of Track C assessments issued to Mr Russell?

and automatically cancelled by the Track C assessments issued to Mr

Russell and it was correct to confirm them.

Question 14:   Was it correct to confirm the Track B assessments against Slioc Enterprises Limited for 1984 to 1990 inclusive when those assessments had already been consequentially and automatically cancelled by the Track C assessments issued to Mr Russell?

The Track B assessments against Coils NZ/Slioc for 1984 to 1990 confirmed by the TRA had not been consequentially and automatically cancelled by the Track C assessments issued to Mr Russell and it was correct to confirm them.

Question 15:   Was it correct to confirm the assessments for the 1989 and

1990 years against Mr John Upton McDougall when those assessments are plainly incorrect as a result of the consequential and automatic adjustment made by way of the Track C assessment process?

The assessments for the 1989 and 1990 years against Mr John Upton McDougall were not consequentially and automatically adjusted by the Track C assessment process and were therefore not plainly incorrect.  It was correct to confirm them.

Question 16:   Was  it  correct  to  confirm  any  of  the  assessments  to  Mr Lyndon McDougall for the years 1982 to 1990 inclusive when some were cancelled and others subject to adjustment as a result of the automatic and consequential effect of the Track C assessment to Mr Russell, and the effect of the Track A assessments to Petbak becoming final?

The TRA identified the assessments against Lyndon Lee McDougall in respect of WSL income for the years 1984 – 1988 as nullities.  Therefore, this question can only relate to the assessments in respect of WSL income for the years 1989 – 1990 and in respect of Coils NZ/Slioc income for the

years 1982 - 1990.   None of these assessments was either cancelled or subject to adjustment as a result of the Track C assessments against Mr Russell.

The Track A assessments of Petbak Holdings Limited could have no effect on the TRA’s findings.

It was correct, therefore, for the TRA to confirm the assessments of Mr

Lyndon McDougall for:

•      1989 – 1990 in respect of WSL income

•      1982 – 1990 in respect of Coils NZ/Slioc income

Question 17:   Was it correct to confirm any of the assessments to Mr John James McDougall for the years 1982 to 1990 inclusive when some are cancelled and others are subject to adjustment as a result of the automatic and consequential effect of the Track C assessment to Mr Russell, and the effect of the Track A assessments to Petbak becoming final?

The TRA identified the assessments against John James McDougall in respect of WSL income for the years 1984 – 1988 as nullities. Therefore, this question can only relate to the assessments in respect of WSL income for the years 1989 – 1990 and in respect of Slioc income for the years

1982 – 1990.  None of these assessments was either cancelled or subject to adjustment as a result of the Track C assessments against Mr Russell.

The Track A assessments of Petbak Holdings Limited could have no effect on the TRA’s findings.

It was correct, therefore, for the TRA to confirm the assessments of John

James McDougall for:

•      1989 – 1990  in respect of WSL income

Question 18:   Was it correct to confirm assessments against Wire Supplies Limited under Track A for 1984 to 1988 inclusive when such assessments have been cancelled and superseded as  a result of the issue  of Track  B number 2 assessments, and where the 1984 year had been conceded by the respondent prior to the hearing?

The assessments under Track A for the years 1984 – 1988 against Wire Supplies Limited were not cancelled and superseded by the Track B assessments.  It was therefore correct to confirm those assessments.

Question 19:   Was  it  correct  to  find  that  the  respondent  was  entitled  to reassess under s 25(2) for the reasons given in the decision?

Yes.

Question 20:   Was it correct to find that s 191(7C) has no relevance to the situation and instead to hold that it is governed entirely by section 99 in these cases?

Counsel for the appellants did not address this point; in written submissions  they  indicated  that  they  would  advise  the  appellants’ position on this issue but did not do so.  I therefore treat this question as abandoned and do not answer it.

Question 21:   Was the respondent correct in deciding that the transactions in this case constituted an arrangement having the purpose or  effect  of  tax avoidance  and  then  subsequently  deciding  that  he  would  change  from Track A  process  of  assessment  to  Track  B  because  he  believed  that  the companies would be unlikely to pay the taxes assessed against them?

In relation to the first question the answer is yes, the respondent was correct in deciding that the transactions in this case constituted an arrangement having the purpose and effect of tax avoidance.

a)The TRA found that the respondent did not decide to change from Track A to Track B because of a belief that the companies were unlikely to pay the taxes assessed against them, but because the Track B assessees were persons who had benefited from the tax avoidance scheme and so long as the respondent acted in good faith and honesty he was entitled to be influenced by where the money he wished to relate assessments to had ended up; and

b)       In any event the respondent’s decision to switch to Track B in assessing Russell template cases has been confirmed by the appeal in Miller v C of IR; Managed Fashions v C of IR which is binding on the appellants.

Case U23

Question 22:   Was   the   Authority   correct   or   even   possessed   of   the jurisdiction to find that the assessments on Track C and Track D are invalid and ineffective when the Authority had been informed by the Commissioner that the evidence he had heard in respect thereof was confusing and from the wrong witness and the correct witness had not yet given evidence on Track C or Track D at the time the decision was issued?

The validity of the Track C and D assessments were not at issue in Case U23.  Therefore the comments of the TRA were necessarily obiter and recognised as such by the TRA (paragraph 30).   It would therefore be wrong to characterise the TRA’s comments at paragraph 22 as a finding, though I consider the comments to be inappropriate.

Question 23:   Was  it  correct  for  the  Authority  to  say  that  he  was  not necessarily concerned with the fair allocation of the tax burden uncovered in terms of s 99 among those who actually received and kept the net profits of the trading company?

Question 24:   Was it correct for the Authority to find that “In fact, it must be sufficient for the IRD to generally characterise such monies (on their assessment) as income flowing from a reconstruction under s 99(3)?

Yes.

Question 25:   Was  it  correct  to  find  that  the  findings  in  T52  were  not affected by the subsequent assessments under Track C and Track D and that there has been nothing in the additional evidence which adds to or detracts from any of the evidence and issues in Case T52?

Yes.

Question 26:   Was   it   correct   on   the   statutory   construction   and   the requirements of natural justice for the Authority to find that it was not improper of the respondent to suppress details of the assessment process in Track C and Track D and withhold such information from the appellants and the Authority?

This question does not fairly reflect the TRA’s decision in Case U23.  At paragraph 30 the TRA said:

I see no imperative at any stage for the respondent to express his views about Tracks C or D until he decided to assess under some such approach.  Also, it does not seem to me to be improper of the respondent in the complex situation of reconstructing the correct income tax position, consequential to the Russell void template scheme, to be cagey and deliberate in ascertaining the correct consequences.

Assuming that the question intended to ask whether these findings were correct, then the answer is yes.  The question as put is incapable of an answer.

relating to the administration charge payment of (sic) the parent company was a sham?

The validity of the Track C and D assessments were not at issue in U23. Therefore the comments of the TRA were necessarily obiter and recognised as such by the TRA (paragraph 30).   It would therefore be wrong to characterise the TRA’s comments at paragraph 31 as a finding, though I do consider them to be inappropriate.

Question 28:   Was it correct for the Authority to find that multi taxation of the same funds within the template is acceptable if it is related to the first level of the template?

No  specific  submission  was  made  to  me  on  the  issue  raised  in  this question and I therefore treat the question as abandoned.

Question 29:   Was it correct for the Authority to reject the submission for the objectors that they had been prejudiced by the conduct of the respondent in non disclosure and in abuse of power and abuse of process contrary to the statutory provisions?

Yes.

Question 30:   Was it correct for the Authority to find that the extent of annihilation cannot be limited to part of the template and that it is void from beginning to end and is to be totally annihilated?

Yes.

Question 31:   Was it correct for the Authority to find that in the event that the income being assessed under Tracks C and D is the same or part of the same income already included in the assessable income of managers under Track B that the Track C and Track D assessees could then claim the benefit of statutory immunity under section 99(4)?

and his comment was therefore obiter and it would be wrong to characterise the comments as a finding.

Question 32:   Was it correct for the Authority to find that s 99 has not been applied to the consulting fee, only s 104?

Yes.

Question 33:  Was it correct for the Authority to claim that the statute barred argument had been settled by the Court of Appeal in Miller & Ors v CIR in view of the characterisation of the income given in evidence of the instant cases?

Yes.

Question 34:   Was it correct for the Authority to find that once a case stated has been filed under one approach that the Commissioner is locked into that approach for assessment and that in all other cases the Commissioner is not limited to coming to a different view of the nature of income and of the omission of that income from any return on the basis of a new approach?

Yes.

Question 35:   Was it correct to find that there was no right of objection in respect of additional tax and that the Authority had no jurisdiction to follow the findings of the High Court in the Withey case and direct a new due date for payment in the instant cases?

Yes.

Question 36:   Was it correct for the Authority to accept the respondent’s submissions on the sham concept when the evidence from the correct witness on Tracks C and D had not yet been heard?

No.

Question 37:   Was it correct for the Authority to increase the assessments for the 1982, 1983 and 1984 years by the inclusion of income streams from both PHL and SEL?

The authority did not increase the assessments for the 1982, 1983 and

1984 years by the inclusion of income stream from both PHL and SEL; while  that  had  been  the  effect  of  Case  T52  (paragraph  88)  it  was corrected in Case U23 (paragraph 55).

Question 38:   Was  it  correct  for  the  Authority  to  find  that  only  a  valid assessment can cancel and supersede an earlier assessment in the light of the statutory provisions and the dicta of the Court of Appeal in Golden Bay Cement Co. Ltd v C of IR?

Yes.

Question 39:   Was it correct to find that in this case the CPS was followed by the Commissioner’s staff and to rely on the dicta of the Court of Appeal in Case R25 when no evidence in respect of the CPS was heard by any Court in that case?

Yes, it was correct to find that the CPS was followed by the Commissioner’s staff.   Further, it is not correct that no evidence was heard by any court in respect of the CPS in Case R25; evidence was adduced in the judicial review proceedings heard by Baragwanath J: Miller v C of IR; McDougall v C of IR (1997) 18 NZTC 13,001.  Later the parties in that case sought to adduce further evidence in the context of the appeal by way of case stated, but were refused.

Question 40:   Was it correct for the Authority to find that an appropriate funding  charge  was  justified  and  then  refuse  to  allow  such  appropriate funding charge as a deduction to the company appellants?

Yes, but only as a result of the appellants’ failing to adduce sufficient evidence on which to base a finding.  Had such evidence been adduced an appropriate funding charge should have been allowed as a deduction.

Question 41:   Was it correct for the Authority to find that the evidence given in respect of Tracks C and D, the funding charge, the characterisation of income assessed to the managers, the suppression of crucial evidence by the Commissioner, the fact of multiple taxation, the effect of statutory immunity, the statute bar and the failure to follow the CPS could have no effect on his previous decision in Case T52?

In respect of each factor identified:

a)Evidence  given  in  respect  of  Tracks  C  and  D  could  not  be relevant to the Track B assessment and therefore could not have any effect on the decision in Case T52;

b)       Because the appellants did not adduce sufficient evidence which would have allowed the TRA to make a finding as to an appropriate funding charge this issue could have no effect on the decision in Case T52;

c)        Because the TRA’s approach to the characterisation of income assessed to the  managers  was  correct  and  in  accordance  with previous binding decisions this factor could have no effect on the decision in Case T52;

d)       There   was   no   evidence   to   support   the   claim   that   the Commissioner had suppressed crucial evidence.   Therefore this factor could have no effect on the decision in Case T52;

e)        The issue of multiple taxation is one that may arise in relation to

Track C and D assessments.  But it has no relevance to the Track

B assessments being considered by the TRA and therefore this issue has no effect on the decision in Case T52;

f)        The effect of statutory immunity may be relevant in relation to Track C and D assessments but it is irrelevant to Track B assessments being considered by the TRA and therefore this issue has no effect on Case T52;

g)The TRA was entitled to accept and rely on the IR150 certificate evidencing the formation of the requisite opinion for the purposes of lifting the time bar under s 25.   Therefore this issue has no effect on the decision in Case T52;

h)       Whether the Commissioner’s staff complied with the CPS does not   affect   the   validity   of   the   Track   B   assessments   being considered and, in any event, the TRA found as a matter of fact that the CPS had been complied with.   There was no basis on which to interfere with that finding.  Therefore this issue has no

effect on the decision in Case T52.

P Courtney J