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

ANZ NATIONAL BANK LIMITED AND ORS V THE COMMISSIONER OF INLAND REVENUE HC WN CIV-2005-485-1037 16 August 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2005-485-1037 CIV-2005-485-1038 CIV-2005-485-1039IN THE MATTER OF the Tax Administration Act 1994 BETWEEN ANZ NATIONAL BANK LIMITED UDC FINANCE LIMITED TUI ENDEAVOUR LIMITED Plaintiffs AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 24 July 2006 Appearances: L. Turner and L. Gellert for Plaintiffs D.J. White QC and E.J. Norris for Defendant Judgment: 16 August 2006 at 11.45am In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 11.45am on the 16th day of August 2006.JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL Introduction[1] On 7 July 2006 the defendant filed an application seeking orders that the plaintiffs file and serve further and better particulars of their statements of claim. [2] The application is opposed by the plaintiffs.Background Facts[3] These proceedings relate to a number of broadly similar structured financial transactions entered into by each of the plaintiffs. From the various statements of claim filed, it is alleged that the defendant in carrying out audits of each plaintiff's taxation position under these transactions, as a result took the view that certain expenditures which had been claimed as deductions for income tax purposes were not deductible. [4] Between August 2003 and February 2005 the defendant apparently issued information requests to the plaintiffs pursuant to s17 Tax Administration Act 1994, to which responses (including copies of documentation, transaction bibles, and emails) were provided on behalf of the plaintiffs. [5] Then, between 30 September 2004 and 30 March 2005 the defendant issued to the plaintiffs Notices of Proposed Adjustment ("NOPAs") pursuant to s89B Tax Administration Act 1994 in respect of the 2000 income tax year. The NOPAs concerned proposed assessments in connection with the two transactions (referred to in the pleadings as the "Gen Re" and "Bergoes" transactions). The essence of the defendant's position is that the transactions constituted a tax avoidance arrangement. Assessments were later issued by the Commissioner to avoid the statutory time bar contained in s108 of the Tax Administration Act 1994. [6] Within two months of the date of the NOPAs, the plaintiffs provided the Commissioner with detailed Notices of Response ("NORs"). [7] On 31 March 2005 the defendant issued amended assessments for the plaintiffs' 2000 income tax year claiming that the Gen Re and Bergoes transactions are tax avoidance arrangements. [8] On 25 May 2005 the plaintiffs filed and served statements of claim challenging the correctness of those assessments.[9] On 24 June 2005 the defendant filed and served statements of defence and also issued the plaintiffs with detailed notices requesting the plaintiffs to provide further and better particulars of their statements of claim. [10] On 1 August 2005 the defendant filed and served an application for further and better particulars. [11] This application was adjourned on 21 February 2006 pending the outcome of the plaintiffs' application for an adjournment or stay of these proceedings. [12] On 1 June 2006 following the High Court's decision to decline the plaintiffs' adjournment/stay application, the plaintiffs provided a response to the defendant's request for further and better particulars. [13] In making this response, however, the plaintiffs claimed that when these proceedings were commenced on 25 May 2005, many of the matters they concerned had already been traversed extensively by both the plaintiffs and the defendant. The reason these proceedings were issued according to the plaintiffs was so as to avoid their being deemed to accept the defendant's amended assessments. [14] The present application before the Court concerns only ten paragraphs of the plaintiffs' answers to the defendant's request for particulars – paragraphs 7, 12, 13, 15, 18, 19, 20, 23, 42.2 and 44.2. As to these paragraphs, the defendant contends that the plaintiffs' responses are inadequate and/or they do not give the particulars reasonably required by the defendant's notices. [15] On 7 July 2006 the defendant filed and served the present amended application for orders requiring further and better particulars.Counsel's Arguments and My Decision[16] The defendant's present application is made in reliance upon Rules 108 and 185 High Court Rules. McGechan on Procedure at HR185.01 notes the purpose of pleadings from Farrell v Secretary of State [1980] 1 All ER 166 (HL) at p173 as:The primary purpose of pleadingsis to define the issues and thereby to inform the parties in advance of the case they have to meet and so enable them to take steps to deal with it.[17] The relevant legal principles regarding the purpose, and particularisation, of pleadings are uncontroversial. The object of a statement of claim is to "state" the "claim" in each case, so that the Court has sufficient clarity and detail to understand the issues it has to rule on, and the defendant knows the case which is to be met and is able to prepare for trial: Price Waterhouse v Fortex Group Limited (Court of Appeal, Wellington, CA179/98, 20 November 1998, Blanchard, Tipping and McGechan JJ at 18). [18] Rule 108(b) specifically requires that a statement of claim shall give such particulars "of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances as may suffice to inform the Court and the party or parties against whom relief is sought of the plaintiff's cause of action". [19] And it is a particular requirement of Rule 108 that a Statement of Claim must set out the factual circumstances relied upon giving rise to each cause of action alleged and the relief claimed as a consequence - McGechan HR108.04. [20] For present purposes the following points are important: 20.1 The nature and level of the particulars required will depend on the facts of the individual case: Commerce Commission v Qantas Airways Ltd (1992) 5 PRNZ 227 at 230. 20.2 Discovery and interrogatories are only an adjunct, not a substitute for pleading: Price Waterhouse v Fortex Group Ltd (CA179/98) at 14. [21] Factors which the Courts have viewed as relevant when considering whether further particulars are necessary include: 21.1 Has sufficient information been provided to inform the other party of the case they have to meet and to enable them to take steps to respond?Price Waterhouse v Fortex Group Limited.21.2 Is there a real risk that the other party may face a trial by ambush if the further particulars are not provided? Price Waterhouse v Fortex Group Limited. Trial by ambush has long gone out of fashion –Donovan v Graham (HC AK, 22 May 1990, CP1980/89, Eichelbaum CJ). 21.3 Is the request an unreasonable burden or oppressive for the party concerned? Commerce Commission v Telecom Corporation of New Zealand Ltd & Anor (High Court, Auckland, CIV-2004-404-1333, 21 December 2004, Rodney Hansen J). [22] A request for further particulars can be resisted if the request goes beyond the scope of particulars, and is probing for evidence – McGechan HR108.05. [23] Similarly, requests for particulars which seek matters of law are improper: Re Vandervell's Trusts (No 2) [1984] 3 All ER 205 (CA) at 213. [24] Turning now to the present proceedings, here the plaintiffs challenge assessments by the defendant that the financial transactions in question constituted tax avoidance arrangements under ssBG1 and GB1 Income Tax Act 1994 and were therefore void as against the defendant for tax purposes. The defendant says he made the assessments under these provisions on the basis, amongst other things, that– 24.1 the structured finance transactions and all steps taken to implement them were "arrangements" as defined; and 24.2 each "arrangement" had the "purpose" or "effect", or a more than merely incidental purpose or effect, of "tax avoidance" as defined. [25] It is well-established that determination of these issues involves mixed questions of fact and law: CIR v BNZ Investments Ltd [2002] 1 NZLR 450, CA,Peterson v CIR (2005) 22 NZTC 19,089, PC, and Harley, "The Expected Impact of the Supreme Court of New Zealand on Tax Cases" (2006) 22 NZULR 76 at 88.[26] In taxation challenge proceedings, the onus is on the plaintiff taxpayer to demonstrate that the Commissioner's assessment was wrong and, if so, both why it was wrong, and the extent to which it was wrong: Buckley & Young Ltd v CIR[1978] 2 NZLR 485, CA at 498 and s149A(2)(b) Tax Administration Act 1994. [27] The defendant's contention is that in tax avoidance challenge proceedings, when a plaintiff taxpayer puts in issue the factual nature and/or scope or extent of the relevant "arrangement" and/or alleges that "tax avoidance" was not the dominant purpose of the "arrangement", it is incumbent on the taxpayer in compliance with its pleading obligations under the High Court Rules to provide full particulars of – 27.1 the arrangement, including the nature and date of all instruments forming part of the arrangement and the names and particulars of all parties to those instruments and all steps taken to implement the arrangement; and 27.2 the alleged non-tax avoidance purpose(s) of the arrangement as pleaded. [28] Without such properly particularised pleadings, the defendant says that neither he nor the Court will be properly informed of the basis on which the plaintiff taxpayer seeks to challenge the defendant's assessment. [29] According to the defendant, support for this approach to pleading in tax avoidance challenge proceedings is provided by analogous cases involving "contracts, arrangements or understandings" and their "purposes" and "effects" under the Commerce Act 1986: e.g. Commerce Commission v Qantas Airways Ltd(1992) 5 PRNZ 227 and Petrocorp Exploration Ltd v New Zealand Refining Co. Ltd(1993) 7 PRNZ 53 at 55 per Thomas J –The particulars sought are the facts on which Petrocorp relies to reach its conclusion that the purpose and effect of the arrangement was to substantially lessen competition in the particular market referred to. I consider that Petrocorp is obliged to spell out more explicitly how and why the arrangement has had this purpose and effect.[30] In response, the plaintiffs' position is that the particulars sought are quite unnecessary. The plaintiffs contend that challenge proceedings, by virtue of the disclosure regime established under the Tax Administration Act 1994, inherently involve a very significant exchange of relevant information prior to proceedings being filed. The plaintiffs say this process was followed here, before extensive NOPAs (up to 39 pages in length) and NORs (up to 52 pages in length) were exchanged. [31] The plaintiffs note that in his NOPA's the defendant was required (s89F(2) Tax Administration Act 1994) to provide a concise statement of the key facts in sufficient detail to inform the taxpayer of the grounds for the proposed adjustment. He did so, and his "Outline of Facts" (at least as to steps rather than interpretation of their legal effect) the plaintiffs say was essentially adopted by them in their NORs. According to the plaintiffs, those NORs are in turn relied on by the plaintiffs as if pleaded in full in their statements of claim. [32] The plaintiffs say, therefore, that they do not understand the reason for the present application. They maintain that in most instances, the facts which the defendant claims he needs to know to understand the basis of the challenge are clearly set out in the defendant's own NOPAs. Accordingly, it is their contention that there can be no risk of lack of knowledge here or any suggestion from the defendant of trial by ambush. [33] Turning now to consider these arguments advanced by counsel, a useful starting point, in my view, is to keep in mind the words of McGechan J in the Court of Appeal in Price Waterhouse v Fortex Group Limited where at page 14 of his Judgment he said pleadings are: intended to supply an outline of the case advanced, sufficient to enable a reasonable degree of pre-trial briefing and preparation. Discovery and interrogatories are only an adjunct, not a substitute for pleading. In the result, and particularly in complex cases, a rather more detailed factual narrative has come to be required than was the case in earlier and simpler times.(emphasis added)[34] There can be no doubt that the present cases must be seen as "complex cases". As such, in the words of McGechan J, "a rather more detailed factual narrative" will be required. [35] In tax avoidance proceedings such as the present, it is not sufficient in the pleadings to simply look at the transaction documents. To properly consider an arrangement said to be tax avoidance, consideration needs to be extended to all steps and activities by which the transaction in question is carried into effect. [36] As I understand the plaintiffs' position, their real point is that the defendant himself has set out the factual position surrounding the plaintiffs' arrangements in his NOPAs and no issue has been taken with this by the plaintiffs in their NORs. As a result, therefore, no further particulars are required from the plaintiffs. [37] But, as to this contention, the defendant noted the position from the authorities that what is said in a NOPA or NOR is not conclusive as between the parties, and this has been confirmed by the Court of Appeal in Commissioner of Inland Revenue v Zentrum Holdings Limited, 23 May 2006, CA215/05. [38] And, I remind myself that the onus here is on the plaintiffs to demonstrate that the Commissioner's assessment was wrong, and to provide both the reasons for this and details of the extent to which the assessment was wrong – s149A(2)(b) Tax Administration Act 1994. [39] The issues of law involved in this case are whether there were "tax avoidance arrangements" as defined in the Income Tax Act 2004 in place. In considering this, the defendant reiterated that the Court must look at all the factual issues involved. [40] In defining what is an "arrangement" for the purposes of ascertaining a "tax avoidance arrangement", sOB1 Income Tax Act 2004 states:Arrangement means an arrangement, contract, plan, or understanding (whether enforceable or unenforceable), including all steps and transactions by which it is carried into effect.(emphasis added)[41] Clearly from the inclusive part of this definition all steps and transactions by which an arrangement is carried into effect are relevant. The current cases are tax avoidance challenge proceedings, and as the plaintiffs have put in issue first the factual nature and scope or extent of the arrangements, and secondly, their contention that "tax avoidance" was not the dominant purpose of the arrangements, then I am satisfied it is incumbent upon the plaintiffs in their pleadings to provide full particulars of those arrangements and "all steps and transactions by which they are carried into effect", together with full details of the alleged non-tax avoidance purposes of the arrangements. [42] For these reasons, as I see it, the broad requests for further particulars made by the defendant here are fundamental to inform the defendant of the case they have to meet, and to enable him to take steps to respond. And in so far as the plaintiffs refer to the NOPAs and the NORs in the sense that they are relied on by the plaintiffs as if pleaded in full, this does nothing more than to simply create a quite confusing situation. The NOPAs and NORs are detailed and extensive documents. As I see it, the particulars sought by the defendant are relatively limited and ought to be pleaded here. [43] I turn now to consider the further particulars sought by the defendant in relation to the ten specific paragraphs in question in the plaintiffs' Statements of Claim.Paragraphs 7 and 15[44] In his application the defendant seeks that the plaintiffs be required to provide full particulars of the parties to the arrangement now admitted to exist, which the plaintiffs claim the defendant has erroneously determined is a tax avoidance agreement. [45] I accept the defendant's argument here that for this issue to be properly determined, that is to ascertain whether the dominant purpose of the arrangement was tax avoidance, full details of the parties to the "arrangement" need to be provided by the plaintiffs.[46] As I understand it, the plaintiffs have suggested that the defendant should obtain this information himself from the Cayman Islands. I reject this contention. The obligation is clearly on the plaintiffs to provide these details in their pleadings. Information in the public records of the Cayman Islands is not admissible evidence without further proof – Laws of New Zealand Evidence paragraphs 114-119.Paragraph 12[47] This paragraph related to the "guaranteed procurement fee". The defendant maintains that paragraph 12 does not provide full and adequate particulars of the basis upon which the plaintiffs allege that GRCF "agreed to procure the guarantee" of its obligations, or the basis on which the fee rate of 2.95% per annum was calculated. The defendant had determined that this "guaranteed procurement fee" was a crucial part of the tax avoidance arrangement, and that the characterisation of the payment was a sham. It is the plaintiffs' allegation that the defendant's determinations on these issues were wrong. [48] As I have noted, the present application requires particulars as to the basis upon which the crucial 2.95% per annum "guaranteed procurement fee" was calculated, particularly as the fee is characterised by the defendant as a sham. [49] In order for these issues to be properly determined, again, in my view, this information is required in the pleading to fully and fairly inform the Court and the defendant of the case it is facing. An order with respect to these particulars is also to follow.Paragraphs 13, 18, 19, 20 and 23[50] According to the defendant's application, these paragraphs do not provide full particulars of the steps taken to implement the arrangements, which it is said is admitted by the plaintiff. Although the plaintiffs allege these arrangements were erroneously determined by the Commissioner to be tax avoidance arrangements, thedefendant contends the arrangements themselves have not been properly defined by the plaintiffs. [51] To determine this issue, that is by ascertaining the scope of the arrangements and whether their dominant purpose was tax avoidance, I am satisfied that full details of the steps taken by the plaintiffs to implement the arrangements should be provided, and the arrangements themselves need to be defined. [52] And, as I have noted above, in my view the plaintiffs' pleadings need to extend properly to cover all steps by which the transactions in question were carried into effect, and thus the further particulars required here in relation to these paragraphs 13, 18, 19, 20 and 23 should be provided.Paragraphs 42.2 and 44.2[53] According to the defendant's application, these paragraphs do not provide full particulars of the nature, term/s, step/s and purpose/s of the "arrangements" which the plaintiffs allege were erroneously determined by the Commissioner to be tax avoidance arrangements and these should be pleaded. Again, in order that these issues may be properly determined, that is to ascertain whether the dominant purpose of the arrangements were tax avoidance, it is clear in my view that the plaintiffs should be required to provide full particulars of the alleged non-tax avoidance purpose/s of the particular arrangements. [54] The defendant's application with respect to these paragraphs must also succeed. [55] One final point raised in submissions for the plaintiffs needs to be mentioned. This is the suggestion by the plaintiffs that the defendant should await discovery to ascertain details of the particulars he now seeks. This suggestion is clearly misconceived and I reject it. Discovery is not a substitute for proper pleading –Price Waterhouse v Fortex Group Limited.Conclusion[56] For the reasons outlined above, it will be apparent that the defendant's present application for further and better particulars succeeds. An order is now made that the plaintiffs within 20 working days of the date of this judgment are to file and serve more explicit pleadings of their Statements of Claim dated 25 May 2005 to provide the further and better particulars of paragraphs 7 and 15, 12, 13, 18, 19, 20 and 23, and 42.2 and 44.2 sought in the defendant's amended interlocutory application for orders requiring further and better particulars of the plaintiffs' Statement of Claim dated and filed 7 July 2006. [57] As to costs, the defendant has been successful with this application and is entitled to an award of costs, which are ordered on a category 2B basis, together with disbursements, if any, as may be approved by the Registrar. [58] Leave is reserved for either party on two days notice to approach the Court if any clarification of the detail of the order made in paragraph [56] above may be required. __________________________Associate Judge D.I. GendallSolicitors:Russell McVeagh, Wellington for Plaintiffs Crown Law Office, Wellington for Defendant