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: 8 April 2008 Counsel: L McKay, S J Katz and M J Austint for Plaintiffs D J White QC and P H Courtney for the Defendant Judgment: 15 April 2008JUDGMENT OF WILD J: CIR'S DISCOVERY APPLICATION Introduction[1] By application filed on 13 February the CIR sought four orders requiring the ANZ to discover specific categories of documents. [2] Order 4 is no longer required, so I dismiss the application for that order. [3] The other orders sought are:Order 1 (Accountants' Documents)1. That the plaintiffs confirm that they have discovered and provided copies on inspection of all documents, whether in hard copy or electronic form, of the following nature: 1.1 All KPMG advice documents relating to the transactions and all documents relating to preparing the advice; 1.2 All PwC tax advice documents relating to the transactions and all documents relating to preparing the advice; 1.3 All PwC quarterly tax shelter spreadsheets and all documents that include analysis of the possible or actual use of tax shelter. 1.4 Any communications surrounding the tax shelter concept developed by PwC, including the model itself.Order 2 (Disputed Privilege Claims)2. That the plaintiffs, in respect of the documents identified in Exhibits A and B inclusive annexed to the affidavit of Margaret Dianne Ramsay filed in support of this application, provide details of: 2.1 The author or recipient who provided or requested the legal advice that is the subject of the claim for privilege; 2.2 Alternatively, if neither the author nor the recipient are legal advisers, the grounds for the privilege claim.Order 3 (Explanation for document classification change)3. That the plaintiffs, in respect of the documents identified in exhibit C to the Ramsay affidavit provide an explanation (as requested in the letter from counsel for the defendant dated 27 November 2007) about what the nature of the information the documents contain and why while considered relevant initially, they now are not.[4] Welcome agreement between the parties disposes of all but orders 1.1 and 1.2. First, counsel advised that orders 1.3 and 1.4 can be made by consent. Second, there is agreement that the detail sought by order 2, including in the CIR's 8 February request, will be provided by 16 May, so an order is not required. Third, the explanation sought in order 3 has been provided, and no order is required at this stage. [5] Thus, I am only required to rule on the CIR's application that the ANZ discover the documents relating to the tax advice it received from KPMG and PwC about the transactions in issue. Argument narrowed the questions to two: whetherthese tax advice documents are relevant and, if they are, whether confidentiality protects them from disclosure.Relevant?[6] Mr McKay distinguished between KPMG and PwC. The latter only gave the ANZ accounting advice. With the exception of three documents, the ANZ accepts that the KPMG documents "are discoverable where relevant". Each of the three documents "repeats or discusses" legal advice given by Chapman Tripp. My understanding is that legal advice privilege is or will be claimed for those three documents. [7] Similarly, the ANZ accepts that it must discover "PwC documents generated in its capacity of essentially providing an 'in house' tax function for ANZ (during the relevant period)". [8] The only documents the ANZ submits are irrelevant, and thus not discoverable, are "PwC tax advice opinions relating to the operation and effect of tax legislation". PwC was the ANZ's primary tax adviser in relation to the transactions. [9] There was not – and could not be – any dispute that the test for tax avoidance is an objective one. In the Court of Appeal in CIR v Challenge Corporation Ltd[1986] 2 NZLR 513 at 533 Woodhouse P said that whether an arrangement is tax avoidance: is something to be decided, not subjectively in terms of motive, but objectively by reference to the arrangement itself.[10] That essentially adopted the earlier formulations of the Privy Council inNewton v Commissioner of Taxation of the Commonwealth of Australia [1958] 2 All ER 759 (PC) at 763 and 764 and Ashton v CIR (1975) 2 NZTC 61,030 at 61,034. That an objective assessment is required was reiterated by the Court of Appeal inCh'elle Properties (NZ) Ltd v CIR (2007) 23 NZTC 21,442 at [26]. It is also implicit in the Court's detailed review of the development of tax avoidance case law inAccent Management Ltd & Ors v CIR (2007) 23 NZTC 21,323 (CA), starting at[110]. In particular, the Court states "the scheme and purpose approach taken by Richardson J (in Challenge) remains current", although it notes that the Court of Appeal's judgment in Challenge was overturned by the Privy Council. [11] Thus, what the Court is determining is the effect which the arrangement itself has, not the effect the taxpayer and/or the taxpayer's advisors intended it to have. [12] That is the basis for Mr McKay's submission that the subjective opinion of the ANZ and/or its tax advisers as to the taxation consequences of the transactions in issue cannot be relevant to the Court's determination whether they constitute tax avoidance arrangements. [13] Mr White supported his arguments for the CIR by relying on Accent Management. The arrangements there (the judgment calls them "the Trinity scheme") were devised by Dr Muir, whose LAQC was one of the appellant taxpayers. The arrangements included insurance provided upon payment of a premium to CSI, an insurance company incorporated in the British Virgin Islands. On 31 January 1997 Dr Muir wrote to AMS (a Virgin Islands based group of companies) about a business plan which had been prepared for CSI. In relation to this business plan Dr Muir stated:The real benefits of the deal are tax concessions that can be obtained now by the investors and the Foundation. One of the conditions required to gain the tax relief is that the insurance must be in place. The actual outcome of the deal in fifty years time is not considered material.[14] The Court said this about the CSI business plan:[142] The CSI business plan is candid to say the least (the passage just quoted is then set out). The Judge concluded (as he was entitled to) that this acknowledgement originated with Dr Muir. The statement could fairly be attributed therefore to Dr Muir's LAQC (Redcliffe Forestry), Mr Bradbury and Mr Bradbury's LAQC (Bristol Forestry). More importantly, the business plan is part and parcel of the overall arrangements and thus the tax avoidance arrangement identified by the Commissioner. It is thus admissible in relation to all who were parties to or affected by that arrangement. It is important as it reflects an understanding at the inception of the scheme that the end results were not "material" and that the "real benefits" and thus the purpose of the arrangements in which the taxpayers participated were "tax concessions".[15] Mr McKay submitted that this passage in Accent Management had no application here. He said he was unaware of any material suggesting that PwC, as tax adviser to the ANZ, was remotely in the same position as Dr Muir, who was the designer of the Trinity scheme. He contended that PwC "was just a conventional tax adviser" to the ANZ. [16] Mr McKay submitted that the more pertinent authority is the Court of Appeal's decision in Green v Housden [1993] 2 NZLR 273. That was a successful appeal against a decision of this Court dismissing an application by two advisers to a taxpayer, seeking judicial review of the CIR's exercise of his powers under s17 Inland Revenue Department Act 1974 (the current equivalent is s17 TAA). The successful appellants were the taxpayer's accountant and solicitor. The CIR had issued the s17 notices in the course of investigating the taxpayer which had claimed export incentive credits. [17] The Court's judgment, at 282-283, sets out part of the submission of counsel for the appellants. The nub of this was that the advice and opinions of the taxpayer's accountant and solicitor could never be necessary or relevant to the purposes of s17. In particular, counsel submitted that advice and opinions provided to the taxpayer about the validity of its claims for export incentives "would not assist the CIR in the administration or enforcement of the (tax legislation) particularly as the CIR had already formed a view as to the correctness of those claims as evidenced by the issue of amended assessments and the disallowance of (the taxpayer's) objections to those assessments". [18] The Court then said this (at 283):Clearly there may be cases where the facts as laid by the taxpayer before its adviser may be different from the appearance given by the company's own records. If so, that may be relevant to the commissioner's consideration of the factual position and of the application of the legislation including any anti-avoidance provisions. But there is no suggestion in the regional controller's evidence that the request for (the accountant's) papers was motivated by considerations of that kind. There is no evidence that (the CIR) was seeking factual information concerning the basis of the accounts furnished for income tax purposes. It is elementary law that statutory power must be used bona fide for the purposes for which it was conferred and that its exercise must not exceedwhat is reasonably required in the circumstances of the case. To require production of the adviser's papers simply to see what he thought of the tax position of his client and of the department's conduct of the investigation would constitute an abuse or exceeding by the commissioner of his powers (New Zealand Stock Exchange v CIR [1992] 3 NZLR 1 (PC) at pp 6-7). In relation to (the accountant's) own papers and advice we cannot see any proper foundation in the regional controller's evidence for that production requirement.[19] Anticipating Mr White relying on the first part of that statement, Mr McKay contended that it drew a distinction between the factual content of a tax advice document and the opinion part. In other words, Mr McKay accepted that whether or not a taxpayer had been full and frank with its adviser as to the facts of the arrangement may be relevant to tax avoidance. But the adviser's opinion or advice based on those facts is irrelevant. [20] For the CIR, Mr White submitted there are some eight respects in which the tax advice documents of KPMG and PwC, and any documents relating to their preparation, may contain information tending to prove or disprove a matter of consequence to the determination of these proceedings. They include: a) Scope of the "arrangement": it is anticipated that the tax opinions may contain material that refers/explains/seeks to justify aspects of the transactions and the steps taken as part of the arrangements. b) The numerous contrived and artificial steps within the arrangement, including the purpose and the pricing of those steps: the accounting documents might be expected to contain information about why steps were included in the arrangements and details surrounding those. c) Anything relating to the "guarantee procurement fee", which the Commissioner has alleged is a sham, rather than a payment for the procurement of the guarantee (in respect of the transactions containing that feature). d) The purpose of the plaintiffs' entering into the transactions: it is anticipated that the accounting documents may contain material thatrefers/explains/seeks to justify the plaintiffs' actions. Although the test for purpose is objective, subjective statements of the taxpayers and their advisers may be relevant to the determination of the objective purpose of an arrangement. e) The accounting treatment of the plaintiffs' interests in the various overseas issuer entities, including the accounting treatment and presentation of the income, expenses and tax charges. It would be surprising if there is not material in the accounting documents that refers/explains/seeks to justify the treatment adopted. f) Cash flow information including its relationship with the split of the transaction benefits with the counterparties: it is anticipated that the accounting documents may contain information about how and why the split of the transaction benefits was reached. g) The structuring of transactions including the use of special purpose vehicles and the accounting treatment the bank adopted at both a "single entity" and reporting entity "consolidated" level; reporting of tax charge; and impact on the effective New Zealand tax rate in the accounts. It would be surprising if there is not material relating to these issues in the accountants' documents. h) The management of the plaintiffs' tax shelter capacity with reference to the level of actual New Zealand tax paid and the inflating of the tax expense ratio in the reported results; the concept of tax shelter, the process of allocating tax shelter, and the calculation of the most profitable usage of tax shelter. It would be surprising if the accountants' documents do not contain material relating to these issues. The ANZ has agreed to discover documents relating to the tax shelter concept developed by PwC, including the model itself. So respect h) is conceded.[21] Mr White pointed out that Mr McKay's submissions dealt only with (d) in this list. And, in relation to (d), he submitted that Mr McKay's arguments were simply wrong. The established objective test did not require the Court to disregard tax advice received by the taxpayer. That advice may assist the Court to determine the objective purpose of the arrangement. Certainly, a taxpayer cannot seek to avoid a finding of tax avoidance by relying on documents preceding or contemporaneous with the arrangement, in which the taxpayer asserts "I am not entering into this arrangement to avoid tax – the resulting tax benefits are incidental". However, the CIR can call in aid documents generated by the taxpayer or the taxpayer's accountant tax advisers which state that tax avoidance is an aim of the arrangement:Accent Management at [142]. In other words, there is an "asymmetry" in the parties' ability to rely on documents of this sort. [22] I accept Mr White's submission that the ANZ's accountants' tax advice documents may be relevant in one or more of respects a)-c) and e)-h) set out in [20] above, rendering those documents discoverable. Each is an aspect relevant to the Court's task of assessing, objectively, the scheme and purpose of the arrangement, and thus in judging whether it constitutes tax avoidance. It is significant that the ANZ has conceded this in respect h). Further, Mr White is correct in saying that issue was taken only with d). I assume that was because no sensible challenge could be advanced. I do not think it could be. [23] Strictly that makes it unnecessary for me to rule on aspect d), upon which argument focused. In case it be relevant, I record my preference for the CIR's argument. It is supported by the first part of the passage in Green v Housden set out in [16] above, at least in relation to the factual part of the tax advice documents. I also regard Accent Management as supporting the CIR. I accept Mr McKay's point that, unlike Dr Muir, PwC was not the designer of the structured finance transaction used by the ANZ here. But there is considerable force in Mr White's counter- argument. He argued that, if Dr Muir's business plan is relevant, then a fortiori the tax advice of the ANZ's accountant tax advisers given before the arrangements were entered into is relevant. They were independent professionals, and to that extent were objective. Further, their opinions can be said to be "part and parcel of the overall arrangements" (the wording used at [142] in Accent Management), because"sign off" from the accountants was required by the ANZ. This "sign off" requirement emerges from these parts of the evidence: a) The transcript of an interview IRD conducted with Mr Paul Mersi of PwC on 16 December 2004. The relevant question and answer are:(Mike Lennard): Paul, just to set the scene, can you tell us um what your current position is at PricewaterhouseCoopers, particularly in relation to the ANZ Bank? (Paul Mersi): I'm a tax partner at PricewaterhouseCoopers New Zealand. Ah I am the Principal Tax Adviser for ANZ. Um at the moment I am effectively Acting Head of Tax in a ah in terms of technical issues and um a person to whom management looks to for sign-off on matters that a normal in-house head of tax would normally um be asked to sign off on. b) In a file note 22 August 2003, following a meeting that morning with officers of the IRD, Mr Mersi recorded:1 Overview of PwC's role with ANZWe outlined briefly PwC's role as effectively being the tax team of ANZ [24] To a lesser extent, there is support for the CIR in Ronald Young J's judgment in Erris Promotions Ltd & Ors v CIR (2003) 21 NZTC 18,330 at [24], [26], [361] and [380]. In those paragraphs the Judge refers to a tax opinion about the scheme which was provided to the taxpayers by an independent professional adviser. The Judge notes the taxpayers' assertion that they had relied on that opinion, and makes some observations about it. Significantly, one of the Judge's observations is that a "full and open disclosure of all the facts" had not been provided by the promoter of the scheme to the tax adviser. That is the very sort of situation contemplated by the Court of Appeal in its judgment in Green v Housden, as a situation: that may be relevant to the commissioner's consideration of the factual position and of the application of the legislation including any anti- avoidance provisions. I do not overlook one of the final comments made by Ronald Young J:[382] I have considered the subjective position of the taxpayers here, although s141D does not require me to do so. Indeed, it requires me to consider the position objectively. Confidentiality?[25] Should I rule the accountants' tax advice documents relevant, Mr McKay submitted that I should nevertheless not order the ANZ to discover them. [26] This submission invoked s69(2)(b) Evidence Act 2006, which gives the Court an overriding discretion to order non-disclosure of confidential communications, if the public interest in disclosure is outweighed by the countervailing public interest in: (b) Preventing harm to a relationship of confidence; or (c) Maintaining activities that contribute to or rely on the free flow of information.[27] Mr McKay submitted that there is a significant public interest in effective voluntary compliance with tax laws, which necessarily relies on the relationship of confidence between tax adviser and taxpayer, and on the free flow of information between them. In support he referred to the Law Commission's paper Tax and Privilege: Legal Professional Privilege and the Commissioner of Inland Revenue's Powers to Obtain Information (Report 67, October 2000), to Government discussion paper Tax and Privilege: a proposed new structure, and to media statements by the Minister of Finance. For example, in a statement on 14 September 2004 the Minister said: clients are likely to be more open with their tax advisors if the advice they receive is confidential, which will ultimately help voluntary compliance with the law.[28] The ANZ's confidentiality argument also sought support from the Court of Appeal's judgment in Frucor Beverages Ltd v Rio Beverages Ltd [2001] 2 NZLR 604 at 611:(Section 35 Evidence Amendment Act (No 2) 1980) is intended to meet the case of people, such as accountants, bankers, psychologists, counsellors, social workers, teachers, journalists, and others without going so far as to confer a complete statutory privilege.Section 35 has its current equivalent in s69 Evidence Act. It provided:35. Discretion of Court to excuse witness from giving any particular evidence – (1) In any proceeding before any Court, the Court may, in its discretion, excuse any witness (including a party) from answering any question or producing any document that he would otherwise be compellable to answer or produce, on the ground that to supply the information or produce the document would be a breach by the witness of a confidence that, having regard to the special relationship existing between him and the person from whom he obtained the information or document and to the matters specified in subsection (2) of this section, the witness should not be compelled to breach.Section 35 was concerned with the giving of evidence in Court, not with discovery of documents. That is clear from the heading to s35 and also from s35(2) which requires the Court to: consider whether or not the public interest in having the evidence disclosed to the Court is outweighed Section 69 permits the Court to direct that various types of confidential information "not be disclosed in a proceeding". I consider that refers to production for inspection and adducing in evidence at the hearing, but does not encompass discovery. To list a document in an affidavit of documents, coupled with a claim to confidentiality for the content of that document (pursuant to the HCR, as outlined in [29]f) below) is not to disclose the document. Certainly, it does not involve disclosing its contents. [29] For all the reasons advanced by Mr White for the CIR, I reject the ANZ's claim to confidentiality for its tax advice documents. Briefly, these reasons are: a) Accountants' tax advice is not privileged and is discoverable and must be produced for inspection, if it is relevant (as I have ruled it is). b) The ANZ's request for blanket protection is contrary to Parliament's clear legislative intent (in ss 20 and 20B TAA – the latter insertedonly in 2005, and ss 54 and 56 Evidence Act 2006) not to extend privilege to cover accountants' advice. c) Given b), it would not be a proper exercise of the Court's discretion under s69 Evidence Act, to direct that accountants' advice as a class should be kept confidential. d) There is not before the Court evidence that the relationship between the ANZ and its accountant tax advisers (or between such advisers and their clients generally) would be adversely affected, unless confidentiality is ordered. e) Nor has the ANZ laid a proper evidential foundation for asserting confidentiality for an individual document(s), whether in whole or in part. The Court of Appeal's judgment in Port Nelson Ltd v Commerce Commission (1994) 7 PRNZ 344 is authority that such a foundation is required. f) Nor has the ANZ complied with its obligations under the HCR, in terms of a claim for confidentiality for documents in its affidavit. The relevant rules and their requirements are:• Rule 298(1)(c), which would requires the ANZ to identify or list the documents for which it claims confidentiality, together with a statement as to the nature and extent of the confidentiality.• Rule 297(2)(e), which requires the ANZ to state the restrictions it proposes to apply in order to protect confidentiality for a document or part of a document. [30] I accept the CIR's submission that any claim by the ANZ for confidentiality is properly dealt with once the documents are discovered, on the basis of claims made in the terms outlined in [29]f) above. That claim can then be dealt with, ifnecessary, by the Court, which may need to inspect the document(s) for which confidentiality is claimed.Result[31] I dismiss the application in respect of order 4. [32] By consent, I order the ANZ to discover documents in these two categories:• All PwC quarterly tax shelter spreadsheets and all documents that include analysis of the possible or actual use of tax shelter.• Any communications surrounding the tax shelter concept developed by PwC, including the model itself. [33] I order the ANZ to discover documents in these two categories:• All KPMG advice documents relating to the transactions and all documents relating to preparing the advice.• All PwC tax advice documents relating to the transactions and all documents relating to preparing the advice. [34] The documents set out in the orders in [32] and [33] are to be discovered in an affidavit(s) to be filed and served by 16 May 2008 (with leave reserved to either party to revert if a different date is agreed upon, or sought). [35] I direct that any claim to confidentiality in respect of any document(s) so discovered is to be properly detailed by the ANZ in accordance with the HCR (as outlined in [29]f) above).Costs[36] The ANZ is to pay the Commissioner'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