ANZ NATIONAL BANK LIMITED, UDC FINANCE LIMITED, TUI ENDEAVOUR LIMITED, TUI SECURITIES LIMITED, CORTLAND FINANCE LIMITED AND ARAWATA FINANCE LIMITED V COMMISSIONER OF INLAND REVENUE CA CA273/2008

ANZ NATIONAL BANK LIMITED, UDC FINANCE LIMITED, TUI ENDEAVOUR LIMITED, TUI SECURITIES LIMITED, CORTLAND FINANCE LIMITED AND ARAWATA FINANCE LIMITED V COMMISSIONER OF INLAND REVENUE CA CA273/2008 28 April 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA273/2008 [2009] NZCA 150BETWEEN ANZ NATIONAL BANK LIMITED, UDC FINANCE LIMITED, TUI ENDEAVOUR LIMITED, TUI SECURITIES LIMITED, CORTLAND FINANCE LIMITED AND ARAWATA FINANCE LIMITED Appellants AND COMMISSIONER OF INLAND REVENUE Respondent Hearing: 4 March 2009 Court: William Young P, Hammond and O'Regan JJ Counsel: L McKay and S J Katz for Appellants D J White QC and P H Courtney for Respondent Judgment: 28 April 2009 at 2.30 pmJUDGMENT OF THE COURT A The appeal is dismissed. B We award costs to the Commissioner for a complex appeal on a band A basis and usual disbursements.REASONS OF THE COURT(Given by O'Regan J)Issue[1] The issue in this appeal is whether ANZ is required to discover opinions provided to it by its tax adviser, PricewaterhouseCoopers (PwC) in proceedings instigated by ANZ National Bank Limited and the other appellants, challenging tax assessments made by the Commissioner of Inland Revenue. We will use the term "ANZ" to represent the appellants collectively. The central issue in the challenge proceedings is whether the transactions to which the opinions relate constitute, or are part of, tax avoidance arrangements, as the Commissioner alleges they are. In the High Court, Wild J ruled that the tax opinions were discoverable: ANZ National Bank Ltd v Commissioner of Inland Revenue (No 2) (2008) 23 NZTC 21,918. ANZ appeals against that ruling.Context[2] The litigation between ANZ and the Commissioner involves a challenge by ANZ to assessments made by the Commissioner in relation to financing transactions known as "repo" transactions. The nature of substantially similar transactions was summarised in an earlier decision of this Court, BNZ Investments Ltd v Commissioner of Inland Revenue [2008] 1 NZLR 598 (BNZ Investments (CA)) at [7] – [8], to which ANZ was a party. That summary provides sufficient background to the present case, without the need to repeat it in this judgment. This Court's decision was upheld on appeal to the Supreme Court: BNZ Investments Ltd v Commissioner of Inland Revenue [2008] 2 NZLR 709. The Commissioner says that ANZ's transactions form part of tax avoidance arrangements in terms of ss BG1 and OB1 of the Income Tax Act 2004, and ANZ's proceedings challenge that position.[3] ANZ received advice from PwC in relation to the repo transactions that are the subject of the challenge proceedings. At the relevant time a partner of PwC was providing what was essentially the in-house tax function at ANZ and, in addition, PwC provided "sign off" opinions on the tax aspects of the repo transactions. ANZ accepts that the descriptions of the factual elements of the transactions contained within these tax opinions are discoverable, but says that the actual advice given on the tax aspects of the transactions is not relevant to the Court's decision as to whether the arrangements of which the transactions formed part amounted to tax avoidance, and should not therefore be discoverable. It also argues that the Commissioner's obligations under the Tax Administration Act 1994 (TAA) make it improper to seek discovery of tax advice in cases like the present.The Peruvian Guano case[4] The focus of the argument for both parties was on whether the PwC tax advice was relevant to the challenge proceedings. It is important, however, to remember that the concept of relevance in the context of discovery is broad. The often quoted test outlined by Brett LJ in The Compagnie Financiere et Commerciale Du Pacifique v The Peruvian Guano Company (1882) 11 QBD 55 (CA) makes this clear. Brett LJ said (at 63):It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may—not whichmust—either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words "either directly or indirectly," because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of inquiry, which may have either of these two consequences.[5] We consider it significant that relevance for discovery purposes is not necessarily the same as relevance in terms of s 7 of the Evidence Act 2006: BNZ Investments (CA) at [41]. In particular, it is sufficient in the former case that a document may lead a party to a train of inquiry which enables that party to advance its own case or damage its adversary's case.[6] The breadth of the Peruvian Guano test has been the subject of controversy. This Court described the test as "expansive" in M v L [1999] 1 NZLR 747 at 750, but it continues to apply, despite efforts at reform aimed at limiting its scope. The New Zealand position can be contrasted with that applying in England and Wales, where reforms have been made to limit the scope of discovery in civil litigation: see Zuckerman Zuckerman on Civil Procedure (2ed 2006) at [14.5] – [14.11]. [7] There is no exception from the Peruvian Guano test for tax litigation. InKnight v Commissioner of Inland Revenue [1991] 2 NZLR 30 at 35 (CA), Cooke P made it clear that the Commissioner is required to "comply with the ordinary obligations of a litigant to make discovery of relevant documents". More recently, inBNZ Investments (CA), this Court observed at [78] that, as the Commissioner faces the usual burdens of those engaged in commercial litigation, it would be going against the tide to hold that he is not entitled to exercise the rights of an ordinary litigant. Requiring the taxpayer involved in challenge proceedings to make discovery is one of those rights. This Court's decision in Accent Management Ltd v Commissioner of Inland Revenue (2007) 23 NZTC 21,366 also made it clear that the Commissioner has the benefits and burdens of an ordinary party to litigation in challenge proceedings. [8] It is also necessary to distinguish the Commissioner's power to require disclosure of information under the TAA and the discovery requirements which apply once challenge proceedings have been commenced and the parties are engaged in litigation. At the investigation stage, the Commissioner can require information to be furnished to him under s 17 of the TAA, but ss 20B – 20G of the TAA provide that a document which is a tax advice document does not need to be disclosed in response to a s 17 requirement. However, this has no relevance once challenge proceedings have been commenced and the parties are involved in what is essentially commercial litigation: BNZ Investments (CA) at [76]. Tax advice provided by a lawyer may attract legal professional privilege but such advice provided by a non- lawyer, as is the case here, does not.Relevance of the tax advice[9] The principal submission made in support of the appeal by counsel for ANZ, Mr McKay, was that the tax advice was not relevant to the question of whether the arrangements of which the repo transactions form part were tax avoidance arrangements. He argued that the determination of whether an arrangement amounts to tax avoidance requires an objective assessment. There can be no dispute that that is correct, as has been recently confirmed by the Supreme Court in Glenharrow Holdings Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,236 at [36] – [38] and Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,188 at [108] – [109]. Mr McKay argued that, in light of the objective nature of the assessment required, subjective views of a tax adviser as to the way in which disputed transactions could be effected by tax legislation were of no relevance.The High Court's approach[10] In the High Court Wild J also accepted the objective nature of the tax avoidance evaluation (though his decision predated Glenharrow and Ben Nevis). At [20] he set out eight respects in which the Commissioner submitted the tax advice documents could be relevant: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 that refers/explains/seeks to justify the plaintiffs' actions. Although the test for purpose is objective, subjective statements of the taxpayers and theiradvisers 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.[11] The appellants agreed to discover documents relating to the tax shelter concept, thus conceding ground (h). Further, Wild J did not regard the submissions advanced by the appellants as challenging grounds (a) – (c) and (e) – (g). For this reason, he found the tax advice documents were discoverable. Although not strictly necessary, Wild J went on to record his views in relation to the only ground that was the subject of serious argument, ground (d). [12] Wild J began by noting that the objective test for tax avoidance does not require the Court to disregard tax advice received by the taxpayer. Such advice may assist in determining the objective purpose of the arrangement. He did note at [21], however, that: 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.[13] Relying on Green v Housden [1993] 2 NZLR 273 (CA), Wild J then noted the potential relevance of the way in which the appellants described the transaction for their advisers, especially where this description differed from that contained in their own records. This rendered, at the least, the factual portion of the tax advice documents discoverable. In relation to the advice given, a parallel was drawn between the PwC tax advice and the business plan prepared by the architect of the Trinity scheme (which was the subject of the litigation that culminated in the Supreme Court's decision in Ben Nevis), Dr Muir. The Trinity business plan was held to be relevant because it formed "part and parcel of the overall arrangements":Accent Management Ltd v Commissioner of Inland Revenue (2007) 23 NZTC 21,323 (CA) at [142]. In Ben Nevis at [136], Tipping, McGrath and Gault JJ described the relevant part of the business plan as "highly significant". Wild J concluded at [23] that this description was equally applicable to the PwC tax advice; he noted, especially, that the appellants required PwC's "sign off" in relation to tax matters.ANZ's submissions[14] Mr McKay concentrated on ground (d), as he had in the High Court. He said that grounds (a) – (c) and (e) – (g) were generic and not peculiar to the disputed transactions, apart perhaps from ground (c). He said that if discovery in relation to those grounds was required, this would mean that the opinion of a tax adviser on the operation and effect of tax legislation would always be discoverable, which has never been the law in New Zealand. [15] In any event, Mr McKay submitted that the agreement to disclose the factual aspects of the PwC opinions and to disclose accounting advice given by KPMG met grounds (a) – (c) and (e) – (g). [16] In relation to ground (d), Mr McKay said that the subjective view of a tax adviser could not possibly be relevant to the objective assessment required in relation to tax avoidance arrangements. He said that the High Court Judge's conclusion in relation to asymmetry (that the Commissioner can adduce documents to demonstrate an avoidance made on the part of the taxpayer, but the taxpayer cannot adduce such documents to demonstrate the opposite) was incorrect.The Commissioner's submissions[17] Counsel for the Commissioner, Mr White QC, said that subjective views as to the purpose of transactions may be relevant to the objective assessment required. He relied in part on the observation by Elias CJ and Anderson J in Ben Nevis at [8] that, although the taxpayer's motive was not determinative of the purpose of an arrangement, it may "be evidence which sheds light on a purpose of tax avoidance and so is not wholly irrelevant". [18] Mr White also relied on the fact that the judgment of the plurality in Ben Nevis gave considerable weight to the indication in the Trinity business plan that the purpose of the arrangement in that case was tax avoidance (see [13] above). Mr White supported Wild J's conclusion that the business plan in the Ben Nevis case was analogous to the PwC tax advice in the present case. [19] More generally, Mr White said that it was not in dispute that the advice given by PwC dealt with the tax effects of the transactions at issue in the present litigation, and that at least some of that advice would inevitably have focussed on the tax consequences of the structuring of the arrangements and the implementation. He said that Green v Housden did not apply here because the purpose of disclosure was not so that the Commissioner could make any point about the correctness or otherwise of the advice given or conclusions reached. [20] Mr White said that what the Commissioner wanted was to see the purpose and focus of the advice (whether it was driven by the tax consequences sought by ANZ or the commercial objectives ANZ wanted to achieve) and the steps required to achieve the desired outcomes. He said this would be directly relevant to issues of artificiality and contrivance, which are key elements of the tax avoidance evaluation which will be required at trial. [21] Mr White said that the High Court Judge's comment about asymmetry was slightly confusing, and that the question which had to be applied in all cases was relevance. The fact was that tax advice of the kind given in this case was likely to be relevant for the reasons already discussed, whereas tax advice that a transaction doesnot constitute tax avoidance might establish the taxpayer's motive, but that would not be relevant to the assessment of purpose which is required.Our assessment[22] We agree with Mr McKay that there is no proper analogy between the PwC tax advice in this case and the Trinity business plan. The author of the Trinity business plan, Dr Muir was the architect of the Trinity arrangement and was instrumental in establishing the entities set up to carry it out. PwC, on the other hand, gave tax advice to ANZ on a scheme devised by others. [23] We also see the asymmetry argument as unhelpful. The test to be applied is that established by the Peruvian Guano case, and each case must be assessed on its merits. [24] The focus of the argument before us was on the relevance and therefore admissibility of the tax opinions, i.e. relevance in terms of s 7 of the Evidence Act 2006. But as indicated earlier, the key issue in this case is relevance in terms of thePeruvian Guano test, which is not the same as the test for relevance when determining admissibility of evidence. In terms of the test enumerated by Brett LJ, it is sufficient if the tax opinions could fairly lead the Commissioner to a train of inquiry which may have the effect of advancing his case or damaging that of ANZ. [25] We are prepared to accept for the purpose of argument that discovering the factual aspects of the opinions and KPMG's accounting advice, as well as PwC's advice on tax shelter capacity will meet grounds (a) – (b) and (e) – (h) identified by the Commissioner in argument (see [10] above). So our focus is on (c), the allegation that the guarantee procurement fee is a sham, and (d), the purpose of the arrangements. [26] In our view, the tax opinions meet that broad relevance test in relation to those two issues. Mr McKay accepted that some of the PwC advice would have involved suggestions for changes to the proposed transactions and we consider it likely that these could assist the Commissioner's case in relation to contrivance orartificiality. We do not accept Mr McKay's argument that the objective nature of the tax avoidance evaluation means the analysis is limited to the transaction documents:BNZ Investments (CA) at [43] specifically states that that is not the case. We also reject his contention that the tax advice is akin to a subjective statement of purpose. We think it is far more likely that it will contain an arm's length assessment of the commercial and tax purposes and effects of the transactions. This may well be relevant to the evaluation required under the test set out in Ben Nevis for identifying whether an arrangement is or is not tax avoidance and, more specifically, may lead to a chain of inquiry by the Commissioner in relation to the avoidance issue. [27] The tax advice may also assist the Commissioner in establishing the scope of the arrangements at issue. We agree with Mr McKay that, to the extent that the opinions constitute a statement of ANZ's subjective purpose, they will not assist, but we think it is too simplistic to consider the opinions as having only that element to them. We also consider it likely that, if they include advice on the nature and size of the guarantee procurement fee and the purpose for which that fee is charged, they will be relevant to the Commissioner's sham argument. Whether they will be admissible as evidence can be determined later: as already indicated, their discoverability does not necessarily mean they will be admissible. [28] As Mr White pointed out, if the tax advice fails the relevance test in challenge proceedings, it would also fail the more stringent relevance criterion in s 17 of the TAA. If that were so, there would be no need for the provisions protecting against disclosure of tax advice under s 17: ss 20B – 20F of the TAA. It may be that there is a case for similar protection against discovery to the Commissioner of tax advice in the context of challenge proceedings. But Parliament chose to limit the ambit of the ss 20B – 20F protection to disclosure under s 17 and did not extend it to protection from discovery: Blakeley v Commissioner of Inland Revenue (2008) 23 NZTC 21,865 at [12] (HC). [29] We conclude that the tax opinions are relevant in the Peruvian Guano sense.Impropriety[30] Mr McKay submitted that the Commissioner, by seeking discovery of the tax advice, was acting in contravention of s 6 of the TAA. Section 6 requires the Commissioner to use his best endeavours to protect the integrity of the tax system by ensuring the rights of taxpayers to have their liability determined fairly, impartially and according to law. He supported this submission by reference to the decision of this Court in Green v Housden. In that case, Richardson J, giving the judgment of the Court, said at 283 that a requirement by the Commissioner under s 17 of the TAA that a tax adviser produce papers simply so that the Commissioner can see what the tax adviser thought of the tax position of his client would constitute an abuse or exceeding of the Commissioner's powers. [31] As we have already noted, the discovery requirements applying once challenge proceedings are in the courts are governed by the Peruvian Guano test, and observations made by the Courts about the limits of the Commissioner's power under s 17 of the TAA in Green v Housden do not assist a court applying thePeruvian Guano test. In any event, the Commissioner's purpose in seeking discovery is not the improper purpose identified in Green v Housden because his interest is not in what PwC thought of the tax position but in what their advice tells him about the purpose of the arrangements in issue and the commerciality of them. [32] The purpose of the present appeal is to determine whether the tax opinions are discoverable in terms of the Peruvian Guano test. The High Court has already ruled that they are. The Commissioner is, therefore, entitled to discovery of those documents in accordance with the rules of Court, subject only to the outcome of the present appeal. We do not accept that, by enforcing discovery of documents to which he has a right as a civil litigant (or seeking to do so through use of the Court's processes), the Commissioner is abusing his powers or acting inconsistently with his obligations under s 6 of the TAA.Result[33] We therefore dismiss the appeal. [34] We award costs to the Commissioner for a complex appeal on a band A basis and usual disbursements.Solicitors: Russell McVeagh, Auckland for Appellants Crown Law Office, Wellington for Respondent