ANZ NATIONAL BANK LTD V CIR HC WN CIV-2005-485-1037

ANZ NATIONAL BANK LTD V CIR HC WN CIV-2005-485-1037 3 April 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2005-485-1037IN THE MATTER OF the Tax Administration Act 1994 BETWEEN ANZ NATIONAL BANK LIMITED Plaintiff AND COMMISSIONER OF INLAND REVENUE DefendantCIV-2005-485-1038AND BETWEEN UDC FINANCE LIMITED Plaintiff AND COMMISSIONER OF INLAND REVENUE DefendantCIV-2005-485-1039AND BETWEEN TUI ENDEAVOUR LIMITED Plaintiff AND COMMISSIONER OF INLAND REVENUE Defendant Hearing: 29 March 2006 Appearances: L McKay and M J Crawford for the plaintiffs D J White, QC, and E J Norris for the defendant Judgment: 3 April 2006 at 2.15 p.m.JUDGMENT OF MACKENZIE J Background[1] These three proceedings are challenge proceedings under Part 8A of the Tax Administration Act 1994 "the Act"). All plaintiffs are members of the ANZ National Bank group. The plaintiffs seek what is described in the application as an adjournment, but which might more accurately be described as a stay, of these proceedings. [2] The Commissioner has issued a number of notices of proposed adjustment ("NOPA") to the plaintiffs, relating to a number of income years. The NOPA relate to two transactions, which the Commissioner considers to involve tax avoidance under ss BG1 and GB1 of the Income Tax Act 1994. The sums involved are substantial. The total effect of the NOPA would be to increase the taxable income of the group by $90 million over four years for one transaction, and $82 million over three years for the other. For the March 2000 year, which is the year in issue in these proceedings, the effect of the NOPA for both transactions is to increase the taxable income of the group by $51 million. I need not, for present purposes, set out the effect for each of the companies in the group. [3] The NOPA were issued, and notices of response ("NOR") were given by the taxpayers. Both the NOPA and the NOR were substantial documents, setting out the respective contentions of the parties at some length. The NOPA and the NOR are required procedures under Part 4A of the Act. Because the time limit for making an amended assessment in respect of the March 2000 year expired on 31 March 2005, an amended assessment, incorporating the adjustments proposed in the NOPA, was issued by the Commissioner for each taxpayer. The taxpayers in turn, to preserve their rights, issued these proceedings. The March 2001 year will become barred if an assessment is not issued on or before 31 March 2006. At the date of hearing, an assessment had not been issued, but both parties expected that it would be issued. The taxpayers will necessarily issue further proceedings in respect of that assessment.[4] The application for adjournment was made on 12 August 2005. The grounds on which the application was made are set out in the application as follows:(a) That the transactions, which are the subject of these proceedings, have certain tax consequences for the plaintiffs for each of the income years ended 31 March 2000 to 2004. The defendant disputes those tax consequences; (b) That these proceedings solely relate to the plaintiffs' tax consequences in respect of the income year ended 31 March 2000; (c) That the plaintiffs are presently furthering the dispute resolution procedure set out in Part IVA of the Tax Administration Act 1994 ("Part IVA Procedure") in relation to the tax consequences of the transactions relating to later income years, namely, 2001 and beyond. The Part IVA procedure and, if necessary, Adjudication of the tax consequences in dispute, will concern the precise same facts and matters that are the subject of these proceedings. (d) That the plaintiff will, therefore, be put to additional, significant management time and expense by being compelled to further these proceedings whilst, at the same time, furthering the Part IVA procedure; (e) That the scheme and purpose of the Part IVA procedure supports the plaintiffs' request to adjourn these proceedings; (f) That the defendant will not be prejudiced by the adjournment sought[5] The Commissioner opposes that application. The grounds of his opposition are as follows:1. The factual and legal issues raised by the transactions in these tax avoidance proceedings are already before the Court not only in these proceedings but also in other proceedings involving other New Zealand trading banks which have not been, and are not being, referred to the Adjudication Unit of the Inland Revenue Department. 2. The issues in these proceedings should also be determined by the Court rather than by the Adjudication Unit because – 2.1 They are already before the Court in the other proceedings and will be determined in those proceedings by the Court. 2.2 It would be inappropriate for the Adjudication Unit, an internal unit of the Inland Revenue Department, to be simultaneously considering and determining the same issues. 3. These particular proceedings need to be pursued in the High Court now so that they remain eligible for designation as test cases under s 138Q of the Tax Administration Act 1994 in respect of the various transactions currently and potentially before the Court or for stayunder s 138R of that Act and/or for consolidation with the other proceedings under rule 382 of the High Court Rules. 4. The High Court is now the more suitable forum for the expeditious and efficient determination of the factual and legal issues raised by the transactions in these proceedings by virtue of – 4.1 The nature and complexity of the transactions; 4.2 The fact that the plaintiffs have not yet made full disclosure or discovery of all relevant documents; 4.3 The fact that the tax avoidance issues are strongly disputed by the plaintiffs; 4.4 The fact that the plaintiffs have not yet pleaded or fully disclosed the purpose(s) of the transactions; and 4.5 The substantial amounts of core tax at issue in these proceedings and the other proceedings already before the Court. 5. Pursuit of these proceedings in the High Court now will avoid unnecessary delay, duplication of resources and unnecessary costs for the parties. 6. Apart from the statutory requirements to issue notices of proposed adjustment (NOPAs) and notices of response (NORs), the disputes procedures in part IVA of the Tax Administration Act 1994 are not mandatory and do not include adjudication by the Adjudication Unit. 7. In respect of the transactions covered by these proceedings and subsequent years, the Tax Administration Act did not and does not require the Commissioner of Inland Revenue to issue a disclosure notice in respect of the relevant NOPA or a corresponding statement of position (SOP). 8. The plaintiffs had and have no statutory right to require the Commissioner of Inland Revenue to refer the transactions covered by these proceedings or subsequent years to adjudication by the Adjudication Unit. 9. For all of these reasons and in terms of the statutory duties imposed by ss 6 and 6A of the Tax Administration Act 1994, the Commissioner of Inland Revenue has decided that in the circumstances of this case it is in the public interest not to progress any of the transactions covered by these proceedings or subsequent years through the Inland Revenue Department disputes resolution procedure.Issues[6] It is convenient to approach the issues which are raised by the application and the notice of opposition under two broad heads: (a) The extent to which the disputes procedures should be regarded as mandatory; and (b) Other factors which are relevant to the exercise of the Court's discretion to adjourn or stay the proceedings. [7] To a certain extent, these two issues are interrelated, in that it is not contended by the plaintiffs that the steps which it desires to follow are mandatory, so as to entitle it as a matter of law to a stay of these proceedings while the dispute procedures are followed, regardless of other factors. That is clear from the terms of the legislation, and is confirmed by PLM Software Ltd v Commissioner of Inland Revenue (2001) 20 NZTC 17,336, where an assessment issued to protect time when the processes had not been completed was held to be valid. To this extent, therefore, the existence of the dispute procedures is simply a factor to be taken into account in the exercise of the Court's discretion. However, as the plaintiffs place considerable reliance on the proposition that the legislative framework indicates an intention that those proceedings should be followed in all cases, this is a sufficiently important issue to be addressed separately.The disputes procedures[8] Part 4A was introduced into the Act with effect from 1 October 1996. It arose out of recommendations made by the Organisational Review Committee chaired by Sir Ivor Richardson. The purposes of the disputes procedures are set out in s 89A. Section 89B provides that the Commissioner may issue NOPAs in respect of a tax return or an assessment. Under s 89C, he must issue a NOPA before making an assessment except in certain specified situations. Under s 89D, a taxpayer may issue a NOPA in response to a notice of assessment. The contents of a NOPA are prescribed by s 89F. Under s 89G, to reject a proposed adjustment, the recipient of the NOPA must, within the response period, notify the issuer that the adjustment is rejected by issuing a NOR, containing the information specified in s 89G(2). If noNOR is issued, the NOPA is deemed to be accepted. Under s 89M, the Commissioner may issue a disclosure notice, which provides the Commissioner's statement of position on the relevant issues. The disputant, who has issued the response notice, must then present its statement of position. Those respective statements of position become, by s 138G, definitive of the matters which the Commissioner and the disputant respectively may raise in a challenge under Part 8A to the assessment, as to the facts and evidence and the issues arising from them and the propositions of law that may be raised. [9] Although Part 4 is headed "Disputes Procedures", and its purposes are concerned with the establishment of procedures in relation to disputes, Part 4A does not expressly contain any procedures as to how the disputes identified by a NOPA and a NOR are to be resolved. The detailed provisions as to the administrative procedures to be followed are contained in a Tax Information Bulletin, Volume 8, No. 3 (August 1996) ("TIB"). A flow-chart summarising the procedure is attached to this judgment. Speaking broadly, the position in the present case is that instead of following the "No" arrow from the second diamond-shaped box in the Occurrence column, to a Conference, the Commissioner has issued the assessments. The essence of the plaintiffs' application for adjournment is that the proceedings should be adjourned or stayed for a period to enable the remaining steps in that flow-chart to be followed. [10] The dispute procedures have elements of both a quality assurance process and a dispute resolution process. The first of those is reflected in s 89A(1)(a), and the second in other subparagraphs of that subsection. It is a quality assurance process to the extent that the procedures set out in the TIB ensure that, within the Inland Revenue Department, the views of a specialist expert unit, the Rulings and Adjudication Unit ("the Unit"), are obtained before an assessment initiated by the relevant part of the Department concerned with the affairs of the taxpayer involved is issued. The process has elements of a dispute resolution process, insofar as the procedures contemplate that the Unit may make a final decision that an assessment will not in fact be issued, if the Unit determines issues in the taxpayer's favour.[11] That dual function of the procedures is relevant, in my view, in considering whether the Court should make an order which is, from the plaintiffs' perspective, intended to require the Commissioner to engage in those procedures. From the quality control perspective, it is relevant to note that the range of cases which may become subject to the NOPA/NOR procedures will range from those involving simple issues, and very small amounts of tax, at one end of the scale, to those involving extremely complex legal and factual issues, and large amounts of tax, at the other. Insofar as the process is one of quality control, it might be expected that the Commissioner would have a degree of flexibility to determine for himself how he could best ensure, in the light of his statutory responsibilities for the operation of the Department, that the Department properly considered issues before an assessment was issued. That consideration points against the proposition that an intention should be inferred that the process set out in TIB would invariably be followed in all cases, to the exclusion of a discretion on the part of the Commissioner to adopt some other means of ensuring that the assessment was properly and fully considered before it was issued. [12] Insofar as the process is one of dispute resolution, it is to be noted that it is in essence a one-sided process, or, as Mr McKay described it in submissions, a "win/no lose" situation for the taxpayer. If the issue is resolved in the taxpayer's favour by the Unit, no assessment will issue. If the issue is resolved in the Commissioner's favour, an assessment will issue, but the statutory challenge procedures will be available to the taxpayer. That is an important consideration in considering whether it was intended that all cases should be referred through that process. In my view, it is not reasonable to infer from the legislation and the Commissioner's processes as set out in the TIB an intention that the Commissioner would invariably allow matters to be resolved by such a process. Where the issues in a particular case are of such complexity that the Commissioner would wish to ensure that the matter was placed before either the Taxation Review Authority or this Court, and was unwilling to subject the case to the risk that the Unit might foreclose that possibility, I consider it is unlikely that an intention should be attributed to him, or to the Legislature, that the adjudication process must always be followed.[13] Mr McKay places considerable reliance, in support of the submission that the plaintiffs should be allowed an opportunity to proceed through the disputes process, on the fact that the Part 4A procedures have subsequently been amended, to make further stages mandatory. The broad effect of the 2004 amendments was to make the stage of disclosure statement and statements of position mandatory, except where certain statutory exceptions apply. It is to be noted that the disputes resolution aspect of the process, that is referral to and decision by the Unit, remains governed by administrative procedures, not by explicit statutory provision. Furthermore, as Mr White points out, there is in s 89N(3) the ability for the Commissioner to apply to this Court for an order that completion of the disputes procedures is not required. Mr McKay submits that the power in subsection (3) is to be exercised only in cases analogous to those set out in subsection (1). While the issue does not strictly arise for decision here, I incline to the view that, in the scheme of the procedures as a whole, subsection (3) is intended to confer a wider discretion to authorise a departure from the dispute processes, in cases where such a departure may be appropriate, and is not limited to cases where there may be a dispute whether the conditions in subsection (1) have been satisfied, or in situations which are analogous to, but not strictly covered by, that subsection. I therefore place little weight on the subsequent changes as indicating an intention that the disputes procedures are intended to be followed, even in cases which would more suitably be dealt with in this Court. [14] Mr McKay also places considerable reliance on the decision of this Court inAlpe v Commissioner of Inland Revenue (2001) 20 NZTC 17,372. In that case, an adjournment to enable the dispute procedures to proceed was granted. Potter J said at paragraph 35:In my view the plaintiffs are entitled to the opportunity to explore alternative dispute resolution and should be granted an adjournment which reasonably enables them to do so.I consider that it is clear that the reference to the plaintiffs being entitled to the opportunity to explore alternative dispute resolution is an assessment of the appropriate exercise of the Court's discretion in that case, rather than a decision that a taxpayer has a legal right, in all cases, to have the procedures in the TIB carried through to completion. The preceding discussion in the judgment makes that clear.[15] Accordingly, while I pay considerable regard to that decision, I consider it necessary to examine whether the factors which led to the exercise of discretion in favour of adjournment in that case are relevant here. In that case, it was clear that the Commissioner had initially considered the disputes resolution process appropriate, in that he had sought a waiver of the time bar to enable it to continue. While his view had changed by the time of the adjournment application, his initial willingness suggests that he did not regard the case as unsuitable. That is different from the situation here, where the Commissioner has made quite clear, both in evidence and through counsel's submissions, that he has decided that it is in the public interest not to progress any of the transactions through the procedure. A second feature of Alpe was that the case was not seen as a test case, or one which involved an issue upon which a large number of other cases turned. Here, the issues involved do involve other cases, some of which are already before this Court. [16] In the light of the foregoing, I consider that the proper approach, on the first issue which I have identified in paragraph 6, is to treat the dispute resolution proceedings as relevant to the exercise of the discretion whether to grant an adjournment, and entitled to considerable weight. That is, however, subject to other factors which may be present in a particular case, if those other factors are sufficient to outweigh the expectation that the procedures will be carried through.Other factors relevant to discretion[17] That brings me to the second aspect of this application, namely whether there are such other considerations. The considerations on which the Commissioner relies are set out in, in particular, paragraphs 4 and 5 of the notice of opposition. The first is that this Court is a more suitable forum for the expeditious and efficient determination of the issues raised by the transactions. Mr McKay submits in response that the nature and complexity of the transactions, the fact that tax avoidance issues are strongly disputed by the plaintiffs and the substantial amounts of core tax at issue in these proceedings and the other proceedings before the Court provide no principled bases for rejecting the plaintiffs' adjournment application. He submits that the Unit is, as it was intended to be, an expert an quasi-independentbody, possessing greater expertise than the audit division of the Department which issued the income tax assessments the subject of the present challenge. He submits the tax disputes involving tax avoidance contentions, and very large amounts of tax in dispute, and arising out of complex transactions, are daily fare of the Unit. [18] I have already referred to the dispute resolution aspect of the Unit's work. I do not consider that it is realistic to expect that the matters in issue in these proceedings could be resolved in the Unit. There must be an extremely high probability that, if the matter were to proceed through the dispute processes, resort to this Court would be necessary. I do not consider that there is a realistic prospect that this litigation would be avoided, rather than merely delayed, if the disputes process were carried through. So far as the quality assurance aspect of the Unit's work is concerned, Mr White points out the fact that these proceedings have been issued will have ensured that there will be a high level of scrutiny, within the Department and by external advisers, of the Commissioner's position. That also weighs against requiring the matter to be considered by the Unit. [19] The Commissioner raises issues as to the extent of discovery which has been given. Mr McKay for the plaintiffs rejects the proposition that they are in some way guilty of substantive failure of disclosure. It is not necessary for me to discuss the extent of compliance. The essence of the plaintiffs' submission is that the formal discovery procedures in this Court would be unduly burdensome. As Mr White points out, the process of discovery, and the heavy burdens imposed on a party giving discovery, may enable the Commissioner to obtain a greater level of discovery in the proceedings than would be available through the audit processes available to the Department. In a case of this complexity, extensive discovery is likely to be necessary. The procedures available in this Court can ensure that this is achieved, but limited to relevant and necessary discovery. There is another aspect of discovery which arises in this case. As my judgment in BNZ Investments Ltd & Ors v Commissioner of Inland Revenue (High Court, Wellington, CIV-2004-485-1059, 1045, 2712, 22 March 2006) shows, there are large and novel issues of discovery which arise in these and the related proceedings. The Commissioner has indicated an intention to rely upon transactions entered into by other taxpayers in support of his contention that the transactions here involve tax avoidance. Conversely, heintends to rely upon evidence of these transactions in the proceedings by other taxpayers. Those aspects raise novel issues, which must inevitably be resolved in this Court and cannot be resolved by the disputes procedures. [20] The Commissioner further says that pursuit of the proceedings in this Court will avoid unnecessary delay, duplication of resources and unnecessary costs. Mr McKay submits that those considerations support the progressing of these disputes through the dispute resolution process and the adjourning of the proceedings. That might be so if there appeared to be a realistic possibility that the dispute resolution process might resolve the matter. As I have said, I do not regard that as a realistic possibility. Accordingly, I consider that to adjourn the proceedings so that the dispute resolution procedures can be implemented is very likely to lead to delays, unnecessary costs and a duplication of resources. [21] The plaintiffs also place reliance on the fact that the transactions each involve more than one year, and that there are still some years open, in which assessments have not been issued, where the dispute procedures are still available. I attach little weight to that consideration. The issues involved in each year will be the same, and all should be resolved in one forum. [22] The Commissioner also raises, in support of his contention that this Court is the more appropriate forum, the substantial amount of tax in issue, the need for an examination of the purposes of the transaction, and the fact that the tax avoidance issues are strongly disputed. Examination of the taxpayers' purpose in entering into the transactions is likely to require a close examination of the surrounding circumstances, with oral evidence, a process available only in this Court. That points overwhelmingly in favour of this Court as the appropriate forum, and is a strong indicator that an adjournment of these proceedings to enable the disputes process to proceed would serve little useful purpose, and any possible benefit would be far outweighed by the additional cost and delay which this would entail. [23] In reaching that conclusion, I have borne in mind that, because of the Commissioner's clearly expressed decision that it is in the public interest not to progress the transactions through the disputes procedures, it may be problematicwhether, if an adjournment were granted, the rationale for granting the adjournment would be achieved. This is not an application for judicial review of the Commissioner's decision in that regard. It is for this Court to make its own decision whether the circumstances are such that an adjournment should be granted. I am of the clear view that the appropriate course is to allow the proceedings in this Court to continue. [24] In support of the application for adjournment, the plaintiffs have adduced evidence, including evidence from a senior tax barrister, addressing the advantages which ANZ and other taxpayers may see in pursuing the dispute procedures in preference to litigation. That evidence provides some background to the operation of the disputes procedure in practice. I have not referred to it in my discussion of the issues, since I have found it of only marginal assistance in resolving the issues. Evidence as to the Commissioner's practice in other cases, and evidence as to the extent to which the disputes procedure is used (and there is some conflict in the evidence as to that), is of limited relevance in determining whether the circumstances of this case are such as to require that an adjournment be granted. [25] For these reasons, the application for an adjournment is refused. [26] The Commissioner is entitled to costs on this application. I indicate that my preliminary view is that costs on a 3C basis would be appropriate. If the parties are unable to resolve costs in the light of this indication, they may submit memoranda. "A D MacKenzie J"ADMINISTRATIVE PROCEDURES – PARAGRAPH 9SolicitorsRussell McVeagh, Auckland, for plaintiffs Crown Law Office, Wellington, for defendant