ANZ NATIONAL BANK LIMITED & ORS V THE COMMISSIONER OF INLAND REVENUE HC WN CIV 2005-485-1037

ANZ NATIONAL BANK LIMITED & ORS V THE COMMISSIONER OF INLAND REVENUE HC WN CIV 2005-485-1037 15 April 2008IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2005-485-1037 CIV 2005-485-1038 CIV 2005-485-1039 CIV 2006-485-1111 CIV 2006-485-1109 CIV 2006-485-1105 CIV 2006-485-1108IN THE MATTER OF The Tax Administration Act 1994 BETWEEN ANZ NATIONAL BANK LIMITED & ORS Plaintiffs AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 7 April 2008 Counsel: L McKay and M Corleltt for Plaintiffs D J White QC and R Ellis for the Defendant Judgment: 15 April 2008JUDGMENT OF WILD J: ANZ'S STRIKE OUT APPLICATION Introduction[1] By amended application filed on 13 March the defendant (the CIR) applies to strike out the plaintiffs' (ANZ's) second cause of action on the ground that it is untenable. The CIR relies on Harrison J's 26 October 2007 judgment in Westpac Banking Corporation v CIR (2008) 23 NZTC 21,694, in which the Judge struck out what the CIR alleges was a materially similar cause of action. Westpac has appealed that judgment: no fixture yet.[2] ANZ opposes the application. Its position is that the cause of action is tenable, and that Westpac is distinguishable, in particular because the facts here are materially different. [3] Apart from the second cause of action under challenge, these are conventional tax challenge proceedings. The ANZ challenges the CIR's assessment of the Gen Re, Bergose, Campbell Soup and Rabobank transactions it entered into. When I say "it", I refer to each of the ANZ and National Bank which amalgamated in 2004 to form the plaintiff, and see no need to distinguish. [4] Those parts of the ANZ's fourth amended statement of claim of 27 March relevant to the second cause of action are these (and I have pruned these back to the essentials):112. Before implementation of the Karapiro transaction, on 23 October 1997, the Commissioner issued a private binding ruling ("Karapiro Ruling") in relation to the transaction. The Karapiro Ruling is to the effect that: (a) the dividends derived by Karapiro were exempt (b) the guarantee procurement fees were deductible (c) section BG 1 did not apply 114. The Karapiro Ruling constitutes a representation to (ANZ) that in relation to a transaction sharing the same profile as the Karapiro transaction, (that is sharing the same essential features): (a) guarantee procurement fees do not constitute a sham; (b) such guarantee procurement fees are fully deductible for tax purposes, and are not subject to challenge under the general anti-avoidance provisions; (c) the fact that a funding transaction is pre-tax cash flow negative does not of itself, render that transaction susceptible to challenge under the general anti-avoidance provision. 115. The Rabobank transaction subsequently entered into by (ANZ) shared the same essential features as the Karapiro transaction: (detailed Particulars are then given)116. In entering into the subsequent Rabobank transaction, (ANZ) placed reliance on the Karapiro Ruling, and in particular the interpretation and application of the law to the deductibility of guarantee procurement fees and the application of section BG 1 to the deductibility of guarantee procurement fees paid in the context of repo style financing deals, and the interpretation and application of section BG 1 to financing transactions which may be pre-tax cash flow negative. SECOND CAUSE OF ACTION – UNFAIRNESS 119. The plaintiff repeats (its relevant allegations already pleaded). 120. The Karapiro ruling constitutes a representation by the Commissioner to (ANZ) that in a transaction sharing the same essential features as the Karapiro transaction: (a) the guarantee procurement fees of the nature paid in respect of the Karapiro transaction do not constitute a sham; (b) the guarantee procurement fees and fixed rate swap payments are fully deductible for tax purposes; (c) that tax consequence (ie deductibility) would not subject to challenge under the general anti-avoidance provisions. 121. NZNB entered into the Rabobank transaction (a transaction sharing the same essential features as the Karapiro transaction) in reliance on the representations set out at paragraph 120 above). 122. In issuing the Rabobank assessment, the Commissioner acted unfairly in that the assessment was contrary to the representations set out in paragraph 120. Particulars (a) Determining that the guarantee procurement fees were not fully deductible of tax purposes. (b) Determining that the Rabobank transaction constituted a tax avoidance arrangement capable of being avoided under the general anti-avoidance provision. 123. The unfairness set out in paragraph 122 above constitutes an abuse of power.WHEREFORE THE PLAINTIFF CLAIMS(a) A declaration that the Rabobank assessment is an abuse of power and invalid. (b) A determination that the Rabobank assessment be set aside. Chronology of events[5] A chronology of events needs precede consideration of Westpac:Date Event23.10.97 Karapiro ruling October-December 1997 Karapiro transaction 2/99-10/00 Bergoes transaction 9-12/99 Gen Re transaction 8/00 Rabobank transaction 12/00 Campbell Soup transaction ? CIR audits the four 'unruled' transactions 2004-2006 NOPAS and NORS in relation to the four 'unruled' transactions 30.3.06 Amended assessment to ANZ in respect of the four 'unruled' transactions Note: The dates, which I have extracted from the fourth amended statement of claim, are approximate rather than precise.Westpac[6] Harrison J's judgment (at [47] and [93]) records Westpac's argument in opposition to the strike out shifting before and during the hearing against a draft amended statement of claim. [7] In [47] the Judge records Westpac's counsel acknowledging, of the cause of action which the CIR was applying to strike out: that Westpac's allegation of inconsistency (on the CIR's part) amounting to unfairness is the main plank of its claim, with its alternative expression in legitimate expectation.I will not be referring further to legitimate expectation, since it is no part of Mr McKay's argument for the ANZ.[8] Westpac based its 'consistency' argument on English case law, notably HTV Ltd v Price Commission [1976] ICR 170 (CA) and Preston v IRC [1985] 2 All ER 327 (HL). They are authority that a tax payer can challenge a decision of the CIR on the basis of unfairness amounting to an abuse of power, if the CIR's conduct is equivalent to a breach of contract or a breach of representation giving rise to an estoppel. [9] The steps in Westpac's argument, as Harrison J outlined them, were:• Westpac obtained a ruling on its First Data transaction.• In reliance on that First Data ruling, Westpac entered into a number of similar transactions.• In treating those subsequent transactions as tax avoidance, the CIR breached his obligation to act consistently and fairly in relation to Westpac. That obligation arises from statute (s6 Tax Administration Act 1994 (the TAA)), general public law and the CIR's own stated policy. [10] There appears not to have been any contention in Westpac, and there is not here, that the CIR acted in a manner akin to breaching a contract. The focus inWestpac, as here, is on breach of representation giving rise to an estoppel. [11] Thus, Harrison J considered whether there had been a representation by the CIR, and reliance on that representation by Westpac. Representation and reliance are essentials of an estoppel, though not the only ones. [12] Dealing with representation, Harrison J noted this:[83] Westpac does not plead the existence of a representation or its equivalent. The nearest it gets is to an allegation that the Commissioner previously applied the existing approach as exemplified by the First Data Ruling. He then went on to consider the position should Westpac amend to allege a representation. His views accord with those I express in [18]-[24] below. He alsorejected that the CIR's allegedly inconsistent approach toward similar transactions could constitute an abuse of power within the HTV and Preston principle:[89] In effect, Westpac is saying that when exercising his statutory powers of assessment the Commissioner was prohibited from applying what he was satisfied was the correct view of the law to the taxation treatment of transactions on which he had never bound or committed himself before. Logically extended, this argument obliged the Commissioner in 2004 to adpt what he was satisfied was an incorrect approach, simply because he had applied it to a similar but not the same transaction some years earlier. That is not an abuse of power. [13] Turning to reliance, the Judge observed:[91] Westpac's statement of claim is notably silent on this element.[14] But Harrison J then noted that Westpac's counsel had, in the course of argument, sought to introduce reliance by submitting that:[92] "In reliance on the First Data Ruling (and on an earlier draft ruling to the same effect on a transaction – AIG – which did not proceed), Westpac maintained and entered into a number of such transactions (all of which have now been determined by the Commissioner to constitute tax avoidance)."[15] Upon the undisputed facts, Harrison J rejected this asserted reliance. In short, the First Data Ruling (issued in January 2001) had come after and not before the four transactions Westpac submitted it had entered into in reliance on the First Data Ruling. These four transactions spanned the period September 1998-July 1999. [16] Here, a representation and reliance on it are pleaded, and the latter must be assumed in accordance with established strike out principles. As to those, I adopt Harrison J's succinct formulation at [7] in Westpac. Thus, I accept that the allegation of a representation by the CIR, and the allegation and assumed fact of reliance on that allegation by Westpac, distinguish this case from Westpac.[17] Harrison J's comprehensive judgment in Westpac nevertheless remains very much in point. Given that, and given also that this is an interlocutory application, I intend to keep this judgment brief. Rather than laboriously summarising the opposing arguments, I intend to set out the two main reasons for my conclusion thatthe ANZ's second cause of action is untenable, and must be struck out. I will refer to the opposing submissions where necessary in dealing with each point.No representation[18] First, it is untenable to suggest that the Karapiro Ruling was/is a representation by the CIR that he would afford the same tax treatment to similar transactions by the ANZ. The Ruling (a copy of which was provided to me) is specific to the Karapiro transaction. Under a heading "The Arrangement to Which This Ruling Applies", the Karapiro transaction is described in detail. Under a heading "Assumptions Made by the Commissioner", there is a list of those assumptions, each of which is specific to the Karapiro transaction. Under the heading "How the Taxation Laws Apply to the Applicants and the Arrangement", the Commissioner spells out the way in which he will apply the taxation laws to the applicants and the Arrangement. Notable is this:Anti-avoidance(23) Section BG 1 will not apply to the Applicants in respect of the Arrangement.And, finally, this:The period for which this Ruling appliesThis Ruling will apply for the period from 1 January 1997 to 30 June 2003.[19] In its terms, the Karapiro Ruling is thus specific to and confined to, the Karapiro transaction. Nowhere in the Ruling can I find anything providing support for the ANZ's submission that the Karapiro Ruling represented to ANZ that the CIR would give the same tax treatment to ANZ transactions "sharing the same essential features". [20] The specificity of the Karapiro Ruling accords with the private ruling provisions in Part VA – Binding Rulings – Private Rulings – ss 91E-91EI - of the TAA. The regime is "arrangement" specific, s3(1) providing that an "arrangement":(a) Means a contract, agreement, plan or understanding, whether enforceable or unenforceable, including all steps and transactions by which it is carried into effect: [21] When the Karapiro Ruling was given, s91E(1) provided:Subject to this section and to section 91EF, the Commissioner must make a private ruling on how any taxation law applies to a particular person and aparticular arrangement if the person applies for the ruling. (my emphasis)[22] With effect from 20 May 1999, the sub-section was amended to permit a ruling whether on "a single or a recurring arrangement ". [23] The specificity of the private rulings regime is further demonstrated by s91EA which provides:91EA EFFECT OF A PRIVATE RULING 91EA(1) Application of taxation law in accordance with rulingNotwithstanding anything in any other Act, if – (a) A private ruling on a taxation law applies to a person in relation to an arrangement; and (b) The person applies the taxation law in the way stated in the ruling, - The Commissioner must apply the taxation law in relation to the person and the arrangement in accordance with the ruling. [24] Given the availability to the ANZ of the arrangement specific private bindings regime, and the CIR's mandatory obligation to make a ruling (subject to ss 91E(4) and 91EF), I reject the ANZ's proposition that the Karapiro Ruling is a representation in respect of similar transactions. To hold otherwise would be to create an amorphous and uncertain alternative to the private bindings regime, which aims to give certainty to taxpayer and CIR alike. [25] Further, I agree with Harrison J on two points. The first is that the ANZ's 'representation' argument cuts across the scheme of the TAA. The Judge put it this way:[77] There can be no constitutional proscription on the right of the Commissioner to change his mind on the correct interpretation of the tax avoidance provisions of the ITA. It is a notoriously difficult area of the law. Indeed, the Commissioner is under a duty to change his mind if he concludes his earlier view was wrong: Miller v C of IR (1993) 15 NZTC 10,187 at 10,203-10,204, Blanchard J.[26] As the ANZ alleges unfairness and abuse of power, it is pertinent to note that the CIR issued NOPAs in respect of the four transactions, and the ANZ responded with NORs. The ANZ pleads this exchange of Notices: paragraphs 50-93 of its fourth amended statement of claim. [27] The second point on which I agree with Harrison J is that the HTV andPreston principle could only apply in this context if the CIR attempted to go back on a private binding ruling he had given, after full disclosure by the taxpayer, e.g. if, having given the Karapiro Ruling, the CIR had then changed his mind and assessed the ANZ on the basis that the Karapiro transaction was tax avoidance (see [81] inWestpac). Of course, in such a situation the ANZ would not need to resort to HTVand Preston. It could invoke s91EA which requires the CIR to apply the ruling. [28] Short of that, the equitable doctrine of estoppel by representation has no place in taxation law. Equity and tax are hardly bedfellows. Tax is a matter of interpreting the legislation and applying it to the facts. As Rowlett J famously said in Cape Brandy Syndicate v IRC [1921] 1 KB 64 at 71: in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.No reliance[29] I have already indicated that the pleaded fact of reliance must be assumed for the purposes of this application. However, I accept Mr White's submission that, in no way, can it be seen as reasonable for the ANZ to rely on the Karapiro Ruling in the manner and circumstances alleged in the second cause of action. Again, I gratefully adopt what Harrison J said about this in Westpac:[97] Westpac has no factual or legal basis for an argument of reasonable reliance on the First Data Ruling in any event, given its right to apply for a binding ruling. Mr Farmer answers that it is hardly reasonable or fair to expect taxpayers to go back continually to IRD to sanction under the binding ruling regime identical or substantially s8imilar transactions to those already approved. That is not the point. [98] Westpac had a statutory right to secure the same taxation protection for Koch, GE and CSFB as it enjoyed for First Data. Its reasons for failing to take that step are irrelevant. (It is inexplicable, though, that the bank, which must have acted on professional advice, did not apply for binding rulings for all transactions, given the amounts potentially at issue and the well known vulnerability of redeemable preference share transactions to scrutiny by the Revenue: See C of IR v BNZ Investments Ltd (2001) 20 NZTC 17,103; [2002] 1 NZLR 450 (CA).) The inconvenience factor, put forward by Mr Farmer, is totally inconsequential within this framework and Westpac's omission is, I think, fatal to an argument of reasonable reliance.[30] Perhaps this is just another way of saying that an allegation of unfairness and abuse of power by the CIR is untenable. [31] A last point. Although the pleaded fact of reliance must be assumed at this stage, that will not be the case at trial. Looking ahead, Mr White drew my attention to a 6 August 1999 internal ANZ memorandum about the Rabobank transaction. This records:3.0 TaxationIt is currently proposed that NBNZ will enter into the transaction immediately following negotiation of the transaction documentation. A ruling from the IRD will be applied for subsequent to closing. In the event that the ruling is unsuccessful the transaction may be terminated. Rabobank have agreed to terminate the transaction at Rabobank's funding rate [32] Should the second cause of action still be in the ANZ's statement of claim at trial (i.e. should ANZ appeal successfully from this judgment), this memorandum will present the ANZ with a difficulty in trying to persuade the Court that it relied on the Karapiro Ruling when entering into Rabobank.Result[33] I hold the second cause of action in the fourth amended statement of claim to be untenable. I strike it out. The parts I strike out are the heading above paragraph 119, paragraphs 119-123 inclusive, and the prayer for relief which follows. In case they have any relevance to the first cause of action, paragraphs 114 and 116 can remain.Costs[34] The ANZ is to pay the CIR's costs of this application on a 3C basis. I certify for second counsel.Solicitors: Russell McVeagh, Auckland for the Plaintiffs Crown Law Office, Wellington for the Defendant