VINELIGHT NOMINEES LIMITED V COMMISSIONER OF INLAND REVENUE HC AK CIV-2011-404-5457

VINELIGHT NOMINEES LIMITED V COMMISSIONER OF INLAND REVENUE HC AK CIV-2011-404- 5457 [7 December 2012]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-5457[2012] NZHC 3306UNDER the Income Tax Act 1994 and the TaxAdministration Act 1994IN THE MATTER OF an appeal from a decision of the TaxationReview Authority dated 5 August 2010BETWEEN VINELIGHT NOMINEES LIMITEDFirst AppellantAND WEYAND INVESTMENTS LIMITEDSecond AppellantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 28 and 29 February 2012Appearances: M T Lennard for AppellantsJ H Coleman for RespondentJudgment: 7 December 2012JUDGMENT OF PETERS JThis judgment was delivered by Justice Peters on 7 December 2012 at 4 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate: ...................................Solicitors: Chapman Tripp, Aucklandcasey.plunket@chapmantripp.com / james.burt@chapmantripp.comCrown Law, Wellington: david.lemmon@crownlaw.govt.nzCounsel: M T Lennard, Wellington: mike.lennard@xtra.co.nzJ H Coleman, Wellington: james.coleman@terracechambers.co.nzIntroduction ............................................................................................................... [1]Issues ......................................................................................................................... [7]Approach to appeal ................................................................................................... [9]Background ............................................................................................................. [13]Issue 1 – Was Weyand resident in New Zealand between March 1999 andOctober 2003? ........................................................................................................ [42]Issue 2 – Was VNL liable to deduct RWT? ............................................................ [72]Section NF 2(4)(b)(ii) Income Tax Act 1994 and section 138G Tax AdministrationAct 1994 .............................................................................................................. [77]Is VNL relieved of liability by s NF 5(1) Income Tax Act 1994? ....................... [83]Sections 99 and 108 Tax Administration Act 1994 ............................................. [98]Issue 3 – Assessment of non-resident withholding tax/tax avoidance agreement [108]Section NG 2(1)(b) Income Tax Act 1994 ......................................................... [110]Arrangement ...................................................................................................... [115]Tax avoidance ................................................................................................... [117]Tax avoidance arrangement .............................................................................. [118]Merely incidental .............................................................................................. [131]Powers to counteract......................................................................................... [133]Issue 4 – Penalties ................................................................................................. [140]Result .................................................................................................................... [155]Introduction[1] The Appellants appeal against a decision of the Taxation Review Authority("Authority") dated 5 August 2011.1[2] The issues before the Authority and on appeal arise from payments of interest that Vinelight Nominees Limited, in its capacity as trustee of the Vinelight Trust,made to Weyand Investments Limited ("VNL", "the Trust" and "Weyand"respectively) between March 1999 and February 2005. The Trust paid ApprovedIssuer Levy ("AIL") at 2 per cent in respect of each payment. The Commissioner ofInland Revenue ("Commissioner") maintains that VNL and Weyand should havereturned substantially more than 2 per cent of those payments.[3] The Commissioner has assessed:(a) VNL:(i) For resident withholding tax ("RWT") at 30 per cent in respect of the periods ended 31 March 1999, 31 October 2000, 31 December 2001, 31 October 2002 and 31 December 2002.(ii) For non-resident withholding tax ("NRWT") at 15 per cent inrespect of the periods ended 31 October 2003, 31 January 2005 and 28 February 2005. The Commissioner accepts that Weyand was not resident in New Zealand from October 2003 onwards.(b) Weyand for income tax at 30 per cent in respect of the years ended 31 March 1999 to 31 March 2003 inclusive.1 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177(1-011).[4] At the time of assessment, the Commissioner also imposed "shortfall penalties" of 100 per cent ("penalties") on each Appellant on the basis that each had taken "an abusive tax position".2 The Commissioner then reduced these penalties to50 per cent of the tax shortfall on account of the Appellants' record of prior compliance.3[5] The Appellants challenged the assessments and imposition of penalties beforethe Authority. The Authority upheld the assessments but allowed the Appellants'challenge to the penalties.[6] The Appellants appeal the Authority's decision upholding the assessmentsand the Commissioner cross appeals the Authority's decision disallowing thepenalties.Issues[7] The issues which arise are as follows:(a) Was Weyand resident in New Zealand for income tax purposes from 31 March 1999 and October 2003 inclusive?(b) If so, was VNL liable to deduct RWT from its payments to Weyand during this period?(c) For periods in which Weyand was not resident in New Zealand, did the circumstances in which VNL paid AIL constitute a tax avoidance arrangement that was void against the Commissioner pursuant to s BG 1 Income Tax Act 1994 ("Act") and, if so, does theCommissioner have power to counteract such advantage as was obtained?(d) Were the Appellants liable for the penalties?2 Tax Administration Act 1994, s 141D.3 Ibid, s 141FB.[8] The Authority answered the first three questions in favour of the Commissioner and the fourth in favour of the Appellants.Approach to appeal[9] This appeal is a general appeal and so the approach outlined by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar applies.4 I adoptWylie J's summary of that approach in Russell v Commissioner of Inland Revenue Department, as follows:5a) the appellant bears the onus of satisfying the appeal court that it should differ from the decision under appeal;b) it is only if the appellate court considers that the appealed decision is wrong that it is justified in interfering with it;c) the appeal court has the responsibility of arriving at its own assessment on the merits of the case;d) no deference is required beyond the customary caution appropriate where the first instance fact finder had a particular advantage such as technical expertise or an opportunity to assess the credibility of witnesses;e) the appellate Judge is entitled to use the reasons of the first instance decision-maker to assist him or her in reaching his or her own conclusions, but the weight the Judge places on them is a matter for the Court.(footnotes omitted)[10] The evidence before the Authority, and subsequently before this Court, comprised some 2,500 pages of documentary evidence. The Authority heard oral evidence, in chief and in cross examination, on various days between December 2009 and December 2010. The Authority's decision is 72 pages long, andis fully reasoned with extensive reference to the evidence and to the parties'submissions.4 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.5 Russell v Commissioner of Inland Revenue Department (2010) 24 NZTC 24,463 (HC) at [69].[11] In reaching my decision I have considered the evidence to which I have been referred by the parties, which essentially comprised the contemporaneous documents, and parts of the briefs of evidence and the transcript of the oral evidence.[12] In addition, counsel supplied to the Court copies of the relevant provisions as they stood at the material time. Counsel advise that any amendments to the provisions during the period in dispute are immaterial to the issues that fall to be decided.Background[13] This case concerns Mr Rodney Chin and Mrs Sandra Chin ("Mr and Mrs Chin") and various Chin family entities.[14] Mr and Mrs Chin lived in New Zealand from 1949 to 1973, in Hong Kong from 1973 to 1989, and in New Zealand from late 1989 onwards.[15] Weyand was one of Mr and Mrs Chin's entities. It was incorporated inHong Kong in 1982. At all material times prior to 1997, Mr and Mrs Chin weredirectors and shareholders of Weyand.[16] Vinelight Investments Limited ("VIL") was another Chin family entity.Mr and Mrs Chin incorporated VIL in New Zealand in 1990. The shares in VIL were held by Mr and Mrs Chin and their three children, Ross, Paul and Joanna(collectively "the children"). From 1989, Mr and Mrs Chin lived in Auckland. Atvarious times their children lived in Hong Kong and Mr and Mrs Chin visited Hong Kong from time to time.[17] By late 1996, VIL held the shares in several subsidiary companies, some or all of which held investments in real property. Those subsidiaries were or included Iron Vinelight Properties Limited, Golden Vinelight Properties Limited, Mirimar Development (New Zealand) Limited and Mirimar Development (Albany) Limited.[18] In 1989 Mr and Mrs Chin made advances to Weyand. Weyand in turn madean advance to VIL in or about 1990. Weyand's advance to VIL was replaced byequity when VIL issued redeemable preference shares to Weyand in 1991. VIL redeemed these shares in November 1996, following which VIL was indebted toWeyand for more than $3 million ("debt").6[19] In 1996, Mr Chin consulted Ernst & Young ("EY"), Auckland for accountingand tax advice. EY devised a plan to allow income earned in New Zealand by VIL and its subsidiaries and another Chin family company, 195 Khyber Pass Rd Limited("195 Khyber Pass"), to be paid to Weyand, subject only to payment of AIL at 2 per cent of such payment.[20] I set out below the principal components of the plan. It is common ground that some documents were backdated, so that the date that appears on the face of the document cannot necessarily be taken as the date on which the document was executed.Settlement of the Trust[21] The first step that was undertaken was for Mr Chin to settle the Trust. Mr Chin executed a deed of trust in October 1996. Subsequently EY discovered that the form of deed Mr Chin had executed (which had been prepared by solicitors) included provisions inconsistent with the end sought to be achieved, in that it included Mr and Mrs Chin and the children as beneficiaries. Mr Chin executed another deed of trust remedying these defects in November 1996.[22] VNL was the sole trustee of the Trust. VNL acted at all material times in itscapacity as trustee of the Trust. Mr and Mrs Chin were VNL's sole directors.Transfer of shares[23] Secondly, on or about 2 May 1997 Mr and Mrs Chin executed transfers of their shares in Weyand to the children as transferees. Ross, Paul and Joanna were living in Hong Kong at the time and after the transfer they held all the shares6 All sums are in New Zealand dollars unless otherwise stated.in Weyand. Ross, Paul and Joanna were also appointed directors of Weyand on 2 May 1997, so that at all material times thereafter Weyand's directors wereMr and Mrs Chin, Ross, Paul and Joanna.[24] By letter dated 9 July 1997 to Mr Chin, EY advised that Mr and Mrs Chin should re-negotiate the transfer of their shareholding in Weyand to the children, as the earlier sale had been at an undervalue and potentially was subject to gift duty. New documents to transfer the shares were prepared in December 1997 and executed after that time, although they were dated 2 May 1997.VNL's assumption of liability[25] The third step was to have VNL assume liability for VIL's debt to Weyand.Two documents were executed.[26] The first was a Deed of Acknowledgment of Debt between VNL and Weyand. This Deed is dated 2 May 1997 but the document was not prepared until after December 1997. The recitals to the Deed record that Weyand had advanced $3,097,800 to VNL by way of loan and, in the body of the Deed, VNL acknowledges that it is indebted to Weyand in that sum. There was no such advance from Weyand to VNL, only from Weyand to VIL. The terms of the Deed also record thatWeyand's advance was repayable on demand and that, subject to demand beingmade, VNL would pay interest annually on 31 March, at an agreed rate.[27] The second document was a Deed of Assignment of Debts and Acknowledgment of Debts between VIL, 195 Khyber Pass, VNL, Weyand and Mr Chin on behalf of the Chin family. This Deed is dated 18 December 1998 and it appears likely it was executed on or near this date.[28] The recitals to the Deed record that VIL was indebted to Weyand in the sum of $1,822,320; that VIL had advanced $3,202,674 to 195 Khyber Pass; that VIL had agreed to assign to VNL its advance to 195 Khyber Pass in consideration of VNLassuming liability for VIL's debt to Weyand; and that 195 Khyber Pass and Weyandconsented to the assignments. The provisions in the body of the Deed include VNL'sacknowledgement that, as at the Date of Settlement (defined as 15 October 1997 or any other agreed date), it was indebted to Weyand in the sum of $1,822,320, repayable on demand and that, pending repayment, VNL would pay interest to Weyand on the debt at 16.5 per cent per annum if interest were demanded prior tothe 31 March following Weyand's balance date.7 VNL also undertook that it would pay AIL at the rate of 2 per cent of such interest payments.[29] The differing sums in the Deeds, that is $3 million in one, and $1.8 million in the other was a consequence of repayments that VIL had made to Weyand.Approved issuer regime[30] The fourth step comprised putting the Trust in a position to take advantage of the approved issuer regime under the Stamp and Cheque Duties Act 1971 ("SACD").The AIL regime was introduced on 1 August 1999 to "relax the NRWT regime as itapplied to interest income of non-residents".8 A resident would apply to the Commissioner, first for registration as an approved issuer and, secondly, for registration of a debt owed by the approved issuer to a non-resident.[31] In March 1998 the Trust, through EY, applied to the Commissioner for approved issuer status and the Commissioner granted that status. In March 1999 the Trust, again through EY, applied to the Commissioner for registration of the debt toWeyand as a "registered security". This registration too was granted. On the face ofit, this permitted the Trust or VNL to pay AIL at 2 per cent on interest payments to Weyand and did not require the deduction of NRWT at 15 per cent of the payment.[32] The case and appeal proceeded on the basis that VNL's assumption ofliability to Weyand was eligible for registration as a registered security under Part 6B SACD. I mention that because Part 6B SACD allows the Commissioner toregister a transaction "involving money lent to" an approved issuer. On registration,7 Weyand's balance date was 31 December. Weyand altered it to 31 March with effect from15 August 2002. See Common Bundle of Documents dated 9 November 2011, Volume 4 at 1020.8 Taxation Policy Business Tax Policy 1991, Hon Ruth Richardson and Hon Wyatt Creech, 30 July1991 at 8.the transaction is a "registered security" for the purposes of Part 6B SACD and AIL is to be computed in respect of such security at the rate of 2 per cent of any interest payment.9 The Commissioner has not suggested that VNL's assumption of liability to repay VIL's debt to Weyand was ineligible for registration as a registered security, even though the transaction did not involve money lent to VNL but rather money lent to VIL, which VNL undertook to repay.Demand of interest[33] The fifth step was to enable income to the Trust to be paid to Weyand. This income derived from interest and/or management fees paid to VNL by Chin family companies.[34] Weyand demanded that VNL pay interest on the debt at 16.5 per cent per annum. The interest rate was fixed at that rate to ensure that the majority of income to the Trust would be paid to Weyand as interest, as to which see [59] below.[35] The first demand was made by letter from Weyand to VNL. This letter was dated 31 March 1998 but drafted and executed after that date, as to which see [58]below. Thereafter Weyand made similar demands for interest until 2005, when the loan was repaid.[36] VNL made its first interest payment to Weyand's account in March 1999,following which Weyand declared a dividend to shareholders. In subsequent years, VNL did not transfer funds to Weyand but rather credited the sum due as interest toWeyand's account in VNL's financial records.[37] On or about 1 April 2001, Weyand and VNL agreed to reduce the interest rate payable on the debt from 16.5 per cent per annum to 10 per cent per annum. VNL made subsequent payments to Weyand at that rate.9 Stamp and Cheque Duties Act 1971, ss 86J and 86F.[38] VNL complied with the requirements of the AIL regime as to when payments of AIL should be made and returns filed.Summary of parties' positions[39] The Commissioner's case was that Weyand was resident in New Zealand until October 2003 and that RWT was due in respect of payments of interest to thatdate. The Appellants' case was that, on the facts, Weyand was not resident inNew Zealand during that period and that, even if it were, VNL was not liable todeduct RWT. The Authority upheld the Commissioner's position.[40] Turning to the period after October 2003, the Commissioner accepted that Weyand was by then a non-resident. However, although on the face of it VNL was entitled to pay AIL of 2 per cent of its interest payments, in fact the steps by which VNL had become so entitled was a tax avoidance arrangement, and the Commissioner was entitled to counteract the advantage gained. The Appellants denied that there was a tax avoidance arrangement. The Authority upheld theCommissioner's position on this issue also.[41] Lastly, and as I have said, the Commissioner had imposed the penalties. The Authority disallowed these.Issue 1 – Was Weyand resident in New Zealand between March 1999 and October 2003?[42] The first issue is whether Weyand was resident in New Zealand within the meaning of the Act between 31 March 1999 and October 2003 ("relevant period").VNL could be liable to deduct RWT from its interest payments to Weyand only if Weyand was resident.[43] The Appellants' case is that Weyand was not resident in New Zealand prior to31 March 1999 and that it remained non-resident thereafter.Section OE 2(1)[44] The issue as to Weyand's residency is governed by s OE 2(1) of the Act, which reads as follows:OE 2 Determination of residence of company(1) A company is resident in New Zealand within the meaning of this Act if—(a) It is incorporated in New Zealand; or(b) It has its head office in New Zealand; or(c) It has its centre of management in New Zealand; or(d) Control of the company by its directors, acting in their capacity as directors, is exercised in New Zealand, whether or not decision-making by directors is confined to New Zealand.Authority's determination as to residency[45] The Authority determined that Weyand was resident because its centre of management was in New Zealand.10 The relevant passages of the Authority'sdecision are as follows:11[224] I have endeavoured to set out much of the detail put to me. In my view it shows that the central management of WIL took place in New Zealand by [Mr and Mrs Chin], and not in Hong Kong....[235] Having stood back and absorbed the detailed submissions for each side, I find that, at all material times, the disputants were managed by [Mr Chin] from New Zealand. It is clear to me that the centre of management was in New Zealand. Also Mrs [Chin] attended to muchroutine administration under [Mr Chin's] direction without needing tounderstand matters. It is arguable whether [Mr Chin] also controlled the directorate of WIL and its decisions. To a large degree, he was the controlling mind of the disputants. There was not a great deal needing to be done at material times and, apart from giving instructions to the accountants and heeding and implementing their rather aggressive tax advice, nothing10 Income Tax Act 1994, s OE 2(1)(c).11 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177 (1-011).controversial to the family was undertaken. The adult children were busy professionals who respected their parents and their acumen and so werecontent to implement [Mr Chin's] suggestions. However, they are all intelligent and sensible and could not be regarded as controlled by [Mr Chin] except, perhaps, to some degree by default. They left it to [Mr Chin] to obtain and implement specialist tax advice.[236] Accordingly, I find that WIL was a New Zealand tax resident at all material times ...Ground of appeal[46] On appeal the Appellants submit that the finding that Weyand's centre of management was in New Zealand was based on a "misapplication of the settled lawto the facts as found by the Authority".12[47] At [47] of its decision, the Authority held that a company's centre of management was where the "day to day management at an administrative day to day level" takes place. In reaching its decision that Weyand was resident inNew Zealand, the Authority took into account that Mr Chin, in New Zealand, had attended to numerous matters for Weyand. These included the control andmanagement of preparation of Weyand's financial statements; the control and management of Weyand's communications with the Inland Revenue Department("IRD") after March 2004; the fact that Mr Chin was the contact point for Weyand'scommunications with Wong Lam Leung & Kwok, the firm of accountants in Hong Kong which attended to preparing Weyand's tax returns to the Hong KongIRD; the fact that Mr Chin sought advice from and gave instructions to EY; and that Mr Chin executed documents for Weyand recording the terms of its loan to Jireh Wakefield Limited ("JWL") in early 2003. JWL was incorporated inNew Zealand and its purpose was to carry out a joint venture between the Chin family interests and another investor.[48] The Appellants submit that the Authority erred in its conclusion that acompany's centre of management is where its "day to day management at anadministrative day to day level" takes place. The Appellants' case is that this error12 Appellants' submissions dated 13 February 2012 at [20].led the Authority to accept that (in the Appellants' words) minor, trivialadministrative tasks carried out in New Zealand were sufficient to establish New Zealand residence.13[49] The Appellants submit that a company's centre of management is the place where its "superior management" takes place. The Appellants' case is that after 1998Weyand engaged in few activities, with such superior management as there was taking place in Hong Kong. If routine, administrative tasks are to be taken into account, the Appellants submit that many companies would be held to be managed by their employees or by their accountants. The Appellants contend that their submission, as to the acts that constitute management for the purpose of s OE 2(1)(c), is in accordance with De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes),14 New Zealand Forest Products Finance NV v Commissioner of Inland Revenue15 and Wood v Holden.16 In reply, the Appellants also made a further submission that, in this case, VNL made the final interest payment assessed for RWT in December 2002 and so events after that date are irrelevant to the enquiry as to thelocation of Weyand's centre of management.[50] The Appellants submit that there were three acts of superior management within the relevant period, and that each was undertaken in Hong Kong. These wereWeyand's declaration of a dividend to shareholders, Weyand's agreement to reducethe interest rate that it charged on the debt, and matters relating to Weyand's loan toJWL. I note that loan was made in early 2003, which is outside the December 2002 time frame that the Appellants submit is relevant.[51] The Commissioner supports the conclusion that the Authority reached,namely that a company's centre of management is located where its day to day administrative management occurs. The Commissioner submits that, on the facts of this case, Weyand was resident in New Zealand during the relevant period. In fact,13 Ibid, at [30].14 De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes) [1906] AC 455 (HL).15 New Zealand Forest Products Finance NV v Commissioner of Inland Revenue [1995] 2 NZLR 357(HC).16 Wood v Holden [2006] 1 WLR 1393 (EWCA).the Commissioner pointed to several matters, additional to those referred to by theAuthority, as reinforcing the Authority's conclusion.[52] The Commissioner also submits that Weyand was resident not only pursuant to s OE 2(1)(c) but also pursuant to s OE 2(1)(d). It is not clear from the decision whether the Authority reached a decision on whether Weyand was resident on the basis of s OE 2(1)(d). In any event, the Commissioner submits that Weyand was so resident and the Appellants submit that it was not. Given the view I take of the application of s OE 2(1)(c), it is unnecessary for me to consider s OE 2(1)(d).Discussion[53] I am satisfied that Weyand had its centre of management in New Zealand during the relevant period. That is so whether the centre of management is where acompany's administrative, day-to-day management is undertaken or whether it is where its superior management is undertaken, and whether in this particular case one includes or excludes from consideration acts that took place after December 2002.[54] For that reason, it is unnecessary for me to determine what acts should andshould not be taken into account in determining the location of a company's centreof management.[55] The enquiry as to where a company's centre of management is located isfactual and is to be considered by reference to the nature of the company's businessand activities.17 In De Beers the House of Lords said that a company's place of residence is "a pure question of fact to be determined upon a scrutiny of the course of business and trading".[56] Weyand was a privately held company, incorporated in Hong Kong. During the relevant period, the company participated in the tax planning arrangements that EY proposed. Mr Chin, in Auckland, instructed EY regarding the affairs of various17 De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes) [1906] AC 455 (HL); andNew Zealand Forest Products Finance NV v Commissioner of Inland Revenue [1995] 2 NZLR 357(HC).companies including Weyand. There is no evidence that Mr Chin consulted anyone outside New Zealand in making the decision to engage EY to advise Weyand, or onWeyand's implementation of EY's advice as it affected Weyand.[57] The arrangements proposed in EY's advice required Weyand to agree thatVNL, rather than VIL, should be liable for repayment of Weyand's sole asset,namely the debt. It was on the instructions of Mr Chin in Auckland that EY prepared the two Deeds that Weyand executed, referred to in [26] and [27] above, those Deeds purporting to effect a substitution of VNL as the debtor. Weyand executed the Deeds in New Zealand by Mr and Mrs Chin, two of its directors.[58] Weyand's demand of interest on the debt was also made by Mr Chin, inAuckland on Weyand's behalf, by letter dated 31 March 1998. The demand could not have been made prior to December 1998 because that was when EY first prepared the draft letter of demand.18[59] Weyand's demand for interest was addressed to VNL at Mr Chin's residential address in Auckland. The making of the demand followed a letter dated 5 October 1998 from EY to Mr Chin in Auckland, in which EY advised as follows:19... the majority of the [the Trust's] income remaining after distributions to thebeneficiaries will be paid to [Weyand] by way of interest subject to approved issuer levy at the rate of 2 %. Given the interest income is not taxed in Hong Kong this provides tax savings exceeding $NZ40,000 in the current year. This directly benefits your children as shareholders in Weyand ...As highlighted at the beginning of this facsimile, we recommend [the Trust] pays interest of $NZ137,813 on the loan from Weyand of $NZ1,822,320. This interest is calculated at the rate of 16.5% for 5.5 months.Approved issuer levy of $NZ2,756 (being 2% of $NZ137,813) will be payable by the 20th of the month following the month of payment. To ensure the AIL liability is not triggered as at 31 March 1998 we will treat theinterest cost as a general accrual on [the Trust's] accounts....18 Common Bundle of Documents dated 9 November 2011, Volume 6 at 1733.19 Ibid, Volume 2 at 586.[60] An undated EY file note records that EY subsequently discussed with Mr Chin their letter of 5 October 1998 and he agreed with its contents.20 There is no evidence that Mr Chin discussed the letter with anyone outside New Zealand.[61] I now come to Weyand's reduction of the interest rate to 10 per cent perannum, with effect from 1 April 2001. The Appellants submit that this reduction isindicative of Weyand's centre of management being in Hong Kong.[62] The evidence is that on or about 5 March 2002, Mr Chin faxed Joanna and Paul a draft agreement recording the reduction. This was preceded by a fax from Mr Chin to a New Zealand adviser, Mr Alan Lau,21 in which Mr Chin stated:Re – Adjustment of Interest between [the Trust] and [Weyand].Faxed please find the original Deed of Debt which item/clause 4 describes that interest will be paid at a rate agreed by the parties.In view of the above may be a letter of agreement between [the Trust] and Weyand to set new interest at 10% will be adequate for A/C purposes.[63] Mr Chin's accompanying fax, also dated 5 March 2002, to Joanna and Paulwas as follows:22Dear Paul and JoannaFaxed herewith is a letter agreement to change the interest rate set some 5 years ago (16.5% PA) to a more realistic rate of 10% PA. This move is necessary in order not to attract query from Inland Revenue Dept.The draft should be looked at by Joanna and change as necessary before Paul type it out.Both of you are director of Weyand Investments so you could sign before send letter back to me so that we could use it for the 2001 to 2002 financial year accounting....[64] Counsel for the Commissioner submitted that it was telling that Mr Chin had pointed out to Joanna and Paul in this fax that they were directors of Weyand. The20 Ibid, Volume 3 at 609.21 Ibid, Volume 4 at 983.22 Ibid, Volume 11 at 2785.Appellants emphasised that the Authority had accepted that Joanna and Paul might have declined to sign the agreement.[65] I do not consider it particularly significant that Joanna and Paul might have declined to agree to the reduction in the rate of interest. What is significant is that the advice that a reduction was desirable and ought to be made came from Mr Chin in New Zealand.[66] Another matter on which the Appellants rely is Weyand's declaration of a dividend to shareholders following VNL's first interest payment to Weyand'sHong Kong bank account in March 1999. The Appellants' case is that Weyand'sdirectors decided that Weyand should declare a dividend whilst all were present in Hong Kong in February or March 1999. The Appellants also contend that the resolution declaring the dividend was signed in Hong Kong and they submit that declaration was an act of central management, as well as being an act of control bythe company's directors. The Commissioner's submission, which I accept, is that thedeclaration of a dividend was effected by Weyand's board of directors, and so morerelevant to the issue of where the directors of the company exercised control, that is s OE 2(1)(d), rather than being an act of central management. That said, I am satisfied that the circumstances in which the dividend was declared (assuming theytook place in Hong Kong) would lend some support to the Appellants' contention.[67] Another relevant matter is evidence of how Weyand ensured that it met its compliance obligations in New Zealand and Hong Kong. Compliance comprised the preparation of financial statements in New Zealand and the filing of tax returns in Hong Kong. The Appellants characterise these tasks as routine. My view is thatensuring the company's compliance with its regulatory obligations was a management function. The Authority found that Mr Chin attended to these matters in New Zealand.[68] The Appellants also rely upon matters relating to Weyand's advance of$2 million to JWL in January 2003. To make the advance Weyand borrowed approximately $1.27 million from the children.[69] The Appellants submit that Weyand's borrowing from the children and its advance to JWL is evidence that Weyand's centre of management was not inNew Zealand, the relevant resolutions having being passed outside New Zealand. On the other hand, the Commissioner relied on Mr Chin having signed, for Weyand, the documents recording the loan that Weyand made to JWL and his having done so in New Zealand.[70] There is no doubt that Weyand's decisions to borrow from the children and tolend were significant and the Authority accepted that Weyand would not have made the loan to JWL if the children had not wished that it should do so.[71] However, this one transaction, even if taken with the other matters on which the Appellants rely, is not in my view sufficient to establish that the Authority erredin concluding that Weyand's centre of management was in New Zealand and that the company was resident accordingly. On the contrary, I am satisfied that Weyand was so resident.Issue 2 – Was VNL liable to deduct RWT?[72] If this Court upholds the Authority's finding as to Weyand's residency, as ithas, the Appellants submit that VNL was not liable to deduct RWT.[73] The Appellants make three submissions.[74] The first submission is that VNL was not liable to deduct RWT because it did not satisfy the criteria in s NF 2 of the Act and particularly s NF 2(4)(b)(ii) which, inthis case, requires that VNL made the interest payments "wholly or partly in the course of or furtherance of a taxable activity",23 as that phrase is defined in s OB 1 of the Act.[75] The second submission is that VNL is relieved of liability to account for RWT by s NF 5(1) of the Act.23 Income Tax Act 1994, s NF 2(4)(b)(ii).[76] The third submission is that the Commissioner's assessment of VNL forRWT is time barred in respect of any payment of interest up to and including 31 December 2001.24Section NF 2(4)(b)(ii) Income Tax Act 1994 and section 138G Tax Administration Act 1994[77] Regarding the first submission in [74] above, s NF 2(4) of the Act reads as follows:NF 2 Liability to pay resident withholding tax(1A) A person is liable to pay to the Commissioner, in relation to apayment that is or includes resident withholding income, a tax(called resident withholding tax) of an amount given by subsection(1) or (1B) if—(a) the person makes the payment and is required to make a deduction of resident withholding tax from the payment:(b) the person is an RWT proxy for the payer of the resident withholding income, the recipient of the resident withholding income, and the resident withholding income.(1AB) A person who makes a payment that is or includes resident withholding income must deduct resident withholding tax from thepayment if the person is not excluded by the rest of this section fromliability to make the deduction....(4) A person shall be liable to deduct resident withholding tax from anypayment of resident withholding income only if—(a) ... and(b) Either—(i) ...(ii) That payment is made wholly or partly in the course of or furtherance of a taxable activity, whether thatperson is acting in the capacity of agent or trusteefor any other person or persons, or otherwise; or...24 Tax Administration Act 1994, ss 99 and 108.[78] The Commissioner disputes this submission and also submits that it is not open to the Appellants to challenge VNL's liability to deduct RWT by virtue ofs 138G Tax Administration Act 1994 ("TAA"), which reads as follows:138G Effect of disclosure notice: exclusion of evidence(1) Unless subsection (2) applies, if the Commissioner issues a disclosure notice to a disputant, and the disputant challenges the disputable decision, the Commissioner and the disputant may raise in the challenge only—(a) The facts and evidence, and the issues arising from them; and(b) The propositions of law,—that are disclosed in the Commissioner's statement of position and in the disputant's statement of position.(2) A hearing authority may, on application by a party to a challenge to a disputable decision, allow the applicant to raise in the challenge new facts and evidence, and new propositions of law, and new issues, if satisfied that—(a) The applicant could not, at the time of delivery of the applicant's statement of position, have, with due diligence, discovered those facts or evidence; or discerned those propositions of law or issues; and(b) Having regard to the provisions of section 89A and the conduct of the parties, the hearing authority considers that the admission of those facts or evidence or the raising of those propositions of law or issues is necessary to avoid manifest injustice to the Commissioner or the disputant.(3) For the purposes of subsection (1), a statement of position includes any additional information that the Commissioner and the disputant agree (under section 89M(13)) to add to the statement of position.[79] The Authority considered that VNL had not previously disclosed the issue it sought to raise regarding s NF 2(4)(b)(ii) but determined the issue of VNL's liabilityto deduct on the merits.2525 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177 (1-011) at [238].[80] There is no express reference to the "taxable activity" issue in the parties'statements of position. The Appellants submit that it is implicit in theCommissioner's statements of position regarding each of VNL and Weyand that theCommissioner contended VNL was liable to deduct RWT under s NF 2. On that basis, the Appellants submit that s NF 2 was put in issue, including the issue of whether VNL was liable to deduct under s NF 2(4)(b)(ii).[81] I consider that the effect of s 138G(1) is to prevent the Appellants taking any point under s NF 2(4)(b)(ii). The purpose of s 138G TAA is to ensure that thedisputes process is "focused on and by the terms upon which the dispute is raised and responded to".26 If the Appellants proposed to contest their liability to deduct RWT because the criteria in s NF 2(4)(b)(ii) were not satisfied, then the issue had to be raised, there needed to be disclosure of the basis on which it was contended there was no such liability and the Appellants had to disclose the facts and evidence on which they proposed to rely. On the Appellants' submission it would be open toVNL to contend that it was not required to deduct because any of the many requirements of s NF 2(4) were not met.[82] The issue not having been disclosed, it was not open to the Appellants to make submissions as to that issue at first instance and they may not pursue the matter on appeal.Is VNL relieved of liability by s NF 5(1) Income Tax Act 1994?[83] Regarding the second submission, in [75] above, the Appellants submit that VNL is not liable to pay any amount by way of RWT by virtue of s NF 5(1) of the Act. The Authority rejected this submission.[84] Section NF 5 reads as follows:26 Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2008] NZSC 115, [2009]2 NZLR 289 at [153].NF 5 Non-resident withholding tax deducted in substitution for resident withholding tax(1) No person shall be liable to pay any amount to the Commissioner by virtue of any of the provisions of the RWT rules where, in relation to any payment or (in any case where that person is acting as agent or trustee for another person) receipt, that person—(a) On reasonable grounds and having made all reasonable inquiries, concluded that that payment or receipt constituted non-resident withholding income as being an amount derived by a person not resident in New Zealand and was for that reason not resident withholding income; and(b) Complied with all the obligations on the part of that person which would have been applicable under this Act or the Tax Administration Act 1994 had that payment or receipt constituted non-resident withholding income.(2) Where any person has, by virtue of the application of this section, been relieved from liability under the RWT rules, for the purposes only of determining any liability of that person under the RWT rules, the payment or (in any case where that person is acting in relation to that receipt as agent or trustee for any other person) receipt in question shall be deemed to be derived by a person not resident in New Zealand.[85] Accordingly, to be relieved of liability to pay RWT, the person concerned must satisfy each of s NF 5(1)(a) and (b).[86] The Authority held that VNL had not satisfied s NF 5(1)(a) because it had notmade "all reasonable inquiries" and had not concluded "on reasonable grounds" thatits payments to Weyand were non-resident withholding income because Weyand was not resident in New Zealand.27[87] The Authority also determined that VNL had not satisfied s NF 5(1)(b) in respect of its payment of interest to Weyand in March 1999 because, at the time ofthe payment, the IRD had not registered VNL's debt to Weyand as a "registered security" for the purposes of SACD. The Authority held that, in the absence ofregistration by the date of payment, Weyand could not satisfy s NF 5(1)(b).2827 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177 (1-011) at [283].28 Ibid, at [281][88] The Appellants submit that the Authority erred in its conclusion on both matters.[89] Given the conclusion that I have reached as to s NF 5(1)(a), it is unnecessary for me to address the submissions made as to s NF 5(1)(b).Section NF 5(1)(a)[90] The Appellants submitted, first, that VNL had all the factual information required to decide whether Weyand was resident because Mr and Mrs Chin were directors of both VNL and Weyand. Accordingly, VNL could be taken to have made all reasonable inquiries as to the facts going to whether Weyand was resident. The Authority accepted this submission and so do I.[91] Secondly, the Appellants submitted that VNL had made all reasonable inquiries regarding the legal issues which might affect whether Weyand was resident. The gist of this submission was that contemporaneous documents showed that EY had considered, and had discussed with Mr Chin, the proposal that VNL should pay AIL in respect of its interest payments to Weyand and that it was a prerequisite to such a proposal that Weyand be a non-resident. Accordingly, the Appellants submitted that VNL had made all reasonable inquiries as to the legal issues which might arise and there was little more that VNL could have done to satisfy itself on the issue. The Authority did not accept this submission.29 The Authority's view wasthat VNL could not have made all reasonable inquiries in the absence of advice from EY on the precise issue of whether or not Weyand was resident in New Zealand. No such advice was taken until mid 2003.30[92] The Appellants also submitted that VNL had concluded that Weyand was not resident and that conclusion was reached on reasonable grounds, particularly given that, on their view of it, there is a reasonable argument that Weyand was not resident29 Ibid, at [283].30 Ibid, at [286].between 1999 and 2003. The Authority did not accept that VNL had reasonable grounds on which to conclude Weyand was non-resident.31[93] On appeal, the Appellants contend that the lack of advice from EY prior to mid 2003, on whether or not Weyand was resident, was not critical as "it is obviousfrom all the circumstances, including [correspondence passing between EY and Mr Chin], that EY, as Vinelight's advisers at the material times both knew therelevant factual background and considered that Weyand was non-resident".Discussion[94] To satisfy the requirements of s NF 5(1)(a), the liable person must establish:(a) That it concluded that its payment or receipt constituted non-resident withholding income because it was derived by a person not resident in New Zealand.(b) That it reached that conclusion after making all reasonable inquiries. Presumably those inquiries would be particularly directed to the recipient of the payment.(c) That it reached that conclusion on reasonable grounds.[95] I am satisfied that VNL, by its actions, must be taken to have concluded that its payment to Weyand constituted non-resident withholding income because it was derived by a person not resident in New Zealand.[96] I also accept the Appellants' submission that VNL can be taken to have madeall reasonable inquiries. VNL would have been in possession of all facts relevant to an assessment of whether Weyand was or was not resident, given that Mr Chin was a director of both VNL and Weyand. For myself, I am not sure that VNL was required to take advice from EY.31 Ibid, at [283].[97] I am not satisfied, however, that the conclusion referred to above was reached on reasonable grounds. It appears to me that VNL did no more than proceed with a course of action that EY had devised, in the hope or on the assumption that Weyand was non-resident. In my view, such a hope or assumption does not constitute reasonable grounds for a conclusion and I do not consider that the requirements of s NF 5(1)(a) are satisfied in this case.Sections 99 and 108 Tax Administration Act 1994[98] The third submission to be considered is whether, as the Appellants say, theCommissioner's assessment of VNL for RWT is time barred for periods before and including 31 December 2001. This submission is based on s 99(2) TAA which incorporates s 108 TAA. The Authority rejected this submission.[99] The relevant provisions read as follows:3299 Assessment of Resident Withholding Tax Deductions(1) The Commissioner may make an assessment of any amount that, inthe Commissioner's opinion, any person is liable to account for orpay to the Commissioner under the RWT rules, and any person who is so assessed shall be liable to pay the amount so assessed, except so far as the person establishes in proceedings challenging the assessment that the assessment is excessive or that the person is not liable to account for or pay the amount so assessed.(2) Sections 108 to 111, 113, and 114 shall apply, so far as may be, with respect to every assessment made under subsection (1) of this section, as if—(a) The term "income tax for any year" in section 108(1) included an amount assessed under subsection (1) of thissection and the term "gross income" in section 108(2)included an amount of resident withholding income; and(b) The term "taxpayer" in sections 109, 111, and 113 included a person who is assessed or is liable to be assessed under subsection (1) of this section; and(c) The term "tax already assessed" in section 113 included an amount already assessed under subsection (1) of this section.32 Section 108 was amended in the period subject to dispute. The parties have agreed that theamendments made do not bear on the matters in issue.(3) An assessment made under this section shall be subject to challenge in the same manner as an assessment of income tax imposed under section BB 1 of the Income Tax Act 1994, and Parts VII and VIIIA of this Act shall apply accordingly.108 Time bar for amendment of assessment of taxable income, income tax liability and tax payable under Income Tax Act 1994(1) Except as specified in this section or in section 108B, if—(a) a taxpayer provides a tax return and is assessed for the taxable income of the taxpayer and the income tax liability of the taxpayer and the tax payable by the taxpayer; and(b) 4 years have passed from the end of income year in which the taxpayer provides the tax return,—the Commissioner may not alter the assessment so as to increase the amount assessed.(1A) Unless subsection (2) or section 108B applies, the Commissioner must not issue an income statement under Part IIIA if 4 years have passed since the end of the income year that follows the income year to which the income statement would apply.(2) If the Commissioner is of the opinion that a tax return provided by a taxpayer—(a) Is fraudulent or wilfully misleading; or(b) Does not mention gross income which is of a particular nature or was derived from a particular source, and in respect of which a tax return is required to be provided,—the Commissioner may alter the assessment at any time so as to increase its amount.(3) This section overrides every other provision of this Act, and any other rule or law, that limits the Commissioner's right to amend assessments.(4) Subsection (1) applies to all returns filed on or after 1 April 1997.[100] There is an obvious difficulty with s 99(2)(a), because s 108(1) does notinclude the words "income tax for any year". These words were deleted froms 108(1) on 1 October 1996,33 but that is not significant given the view I take of this issue.33 Tax Administration Amendment (No 2) Act 1996, s 29.[101] The Appellants submit that, when applied in the context of s 99, s 108(1) precludes an assessment for the periods to which I have referred, because VNL furnished an AIL return, made an assessment of the levy payable, and four years had passed from the end of the tax year in which it had done so. They also submitted that to apply s 108(1) with that effect would accord with the general policy of tax law, namely that non-disclosure of information is treated adversely whereas mischaracterisation is not.34 The Appellants submit that an AIL return provides the Commissioner with all of the financial information that would be required for the Commissioner to assess for RWT or NRWT. Also the three regimes – RWT, NRWT and AIL – are distinct. One only of three returns can be filed. The Appellants say that s 108(1) applies in the context of s 99(1) if the liable party has filed "a return of interest paid", and not only a return of resident withholding income.[102] The Commissioner's submission was that, for the purposes of s 99, the phrase"provides an income tax return" in s 108(1)(a) must be read as "provides an RWTreturn", so that the time bar in s 108(1) applies only if an RWT return has been filed and not if an AIL return has been filed. The Commissioner's submission was that AIL returns are different from RWT returns in form and in substance. AIL is levied under the SACD and the reporting requirements under that Act are separate and distinct from those under the tax statutes. Also there is an implicit assertion in an AIL return that the recipient of the payment is a non-resident. An RWT return acknowledges that the recipient of the payment is a resident.[103] I consider that s 108(1)(a) is to be read as substituting the phrase "RWT return" for "income tax return" when applied in the context of s 99.[104] First, I accept the Commissioner's submission that an RWT return is differentin form and substance from an AIL return.[105] Secondly, s 99 falls within Part 6 of the TAA. Part 6 contains provisions which, amongst other things, confer power on the Commissioner to assess for different types of tax. Section 108 is not applied as a matter of course but only in34 Cross v Commissioner of Inland Revenue (1987) 9 NZTC 6,101 (CA).particular instances. For instance, s 100, which allows the Commissioner to assess for NRWT, does not incorporate s 108. Accordingly, Parliament must be taken to have drawn distinctions as to when it was appropriate to provide for a time bar.[106] In my view, these matters suggest that Parliament intended that an RWT return, and not some other form of return, must have been filed if the Commissioner is to be subject to the time bar in s 108(1) when seeking to assess for RWT.[107] Accordingly, I am satisfied that the Commissioner's assessments of RWT upto and including December 2001 were not made out of time.Issue 3 - Assessment of non-resident withholding tax/tax avoidance arrangement[108] The next issue which arises is whether there was a tax avoidance arrangementin respect of VNL's payments to Weyand of interest accruing after October 2003("post October 2003 period").[109] VNL paid AIL at 2 per cent of such payments. The Commissioner accepts that Weyand was not resident in New Zealand after October 2003 but has assessed on the basis that there was a liability to return NRWT at 15 per cent.Section NG 2(1)(b) Income Tax Act 1994[110] Payments of interest to a non-resident constitute non-resident withholding income.35 Section NG 2 imposes NRWT on such income, although the tax is zero rated in the circumstances of s NG 2(1)(b)(i), that provision being material in this case. If the NRWT that is due is zero rated pursuant to s NG 2(1)(b)(i), the approved issuer must pay AIL, as VNL did in this case.35 Income Tax Act 1994, s NG 1(2)(b).[111] The relevant parts of s NG 2 are:NG 2 Non-resident withholding tax imposed(1) Every person who derives non-resident withholding income shall be liable to pay non-resident withholding tax upon that income—...(b) At the rate of zero percent of so much of that non-resident withholding income as consists of—(i) Interest ... paid by an approved issuer in respect of a registered security and derived by a person who is not an associated person of the approved issuer; or...(c) At the rate of 15% of so much of that non-resident withholding income as consists of non-resident withholding income to which neither ... paragraph (b) applies.[112] It is common ground that the requirements of s NG 2(1)(b)(i) were satisfied during the period after October 2003. VNL or the Trust was an approved issuer, the debt to Weyand was a registered security and Weyand was not an associated person of the Trust.36[113] Despite that, the Commissioner's position is that the circumstances in whichthe Appellants came to meet the requirements of s NG 2(1)(b)(i) constituted a tax avoidance arrangement within the meaning of the Act, that the arrangement was void against the Commissioner and that the Commissioner was entitled to assess for NRWT, as he did. The Authority agreed with the Commissioner on all matters. The Appellants submit that the Authority erred in doing so.Statutory provisions[114] The relevant statutory provisions are s BG 1 which is to the effect that a tax avoidance arrangement is void as against the Commissioner for, in this case, NRWT36 Persons are associated for the purposes of s NG 2(1)(b)(i) in the circumstances set out in s OD 7(1) of the Income Tax Act 1994. It is common ground that Weyand and VNL, in its capacity as trustee of the Trust, were not associated within that provision.purposes37 and the definitions of "arrangement", "tax avoidance" and "tax avoidance arrangement" in s OB 1. These provisions read as follows:BG 1 Avoidance(1) A tax avoidance arrangement is void as against the Commissioner for income tax purposes.(2) The Commissioner, in accordance with Part G (Avoidance and Non- Market Transactions), may counteract a tax advantage obtained by a person from or under a tax avoidance arrangement....OB 1 Definitions...Arrangement means any contract, agreement, plan, or understanding (whether enforceable or unenforceable), including all steps and transactions by which it is carried into effect:...Tax avoidance, in sections BG 1 ... includes–(a) Directly or indirectly altering the incidence of any income tax:(b) Directly or indirectly relieving any person from liability to pay income tax:(c) Directly or indirectly avoiding, reducing, or postponing any liability to income tax:...Tax avoidance arrangement means an arrangement, whether entered into by the person affected by the arrangement or by another person, that directly or indirectly–(a) Has tax avoidance as its purpose or effect; or(b) Has tax avoidance as one of its purposes or effects, whether or not any other purpose or effect is referable to ordinary business or family dealings, if the purpose or effect is not merely incidental.37 Income Tax Act 1994, s NG 17(2).Arrangement[115] There is no dispute that there was an arrangement within the definition in s OB 1, although there is some dispute as to the steps that made up that arrangement.The Commissioner's case, which the Authority accepted, is that the arrangementincluded the following:(a) The steps taken to ensure that the party liable to Weyand on the debt was not associated with Weyand for the purposes of s NG 2(1)(b)(i). To this end the Trust was settled on terms that avoided association with Weyand.(b) The incorporation of VNL as trustee of the Trust, VNL at all material times being under the control of Mr and Mrs Chin.(c) The Trust's registration as an approved issuer for the purposes ofPart 6B SACD.(d) VNL's assumption of liability for repayment of the debt.(e) The registration of Weyand's advance as a registered security for thepurposes of Part 6B SACD.(f) Weyand charging and VNL paying interest on the debt.[116] The Appellants' case is that the arrangement was the agreement by which (d)above was achieved. I do not accept that submission. Each step was required to achieve the outcome that was sought and, in my view, constituted the arrangement.Tax avoidance[117] It is also common ground that the arrangement, directly or indirectly, avoided liability for NRWT.Tax avoidance arrangement[118] What is not common ground is whether the arrangement was a tax avoidance arrangement, that is whether the arrangement.[119] In Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue38 the Supreme Court addressed the issue of when the use of a specific provision, such as s NG 2(1)(b)(i), will constitute a tax avoidance arrangement and be void against the Commissioner. In such a case, the Court said that:[107] ... a further question arises based on the taxpayer's use of thespecific provision viewed in the light of the arrangement as a whole. If, when viewed in that light, it is apparent that the taxpayer has used the specific provision, and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement....[120] Accordingly, the arrangement by which the parties used s NG 2(1)(b)(i) constitutes a tax avoidance arrangement if they have used the provision in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision.[121] If it were so used, a second issue arises, namely whether the tax avoidancepurpose or effect of the arrangement was "merely incidental". The arrangement isnot a tax avoidance arrangement if the tax avoidance purpose or effect was merely incidental.[122] The Authority described the contemplation and purpose of Parliament when enacting the AIL regime as follows:39[316] The policy behind the AIL regime was to reduce the cost of overseas borrowing to New Zealand borrowers and was aimed at lenders who would typically only lend to New Zealand businesses if they were compensated for38 Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.39 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177 (1-011).any withholding taxes which had to be paid: see Taxation Policy – Business Tax Policy 1991 30 July 1991. The policy paper continued on to state that, when the issuer and the non-resident holder of the security are associated parties, NRWT will continue to apply to the payment of interest. It was clearly not intended that associated parties be able to access the AIL regime.[317] The purpose of association rules is basically to identify common control and common ownership. Where there is that level of common control or ownership, then the concession is not intended to be available because it can be inferred, in that situation, the lending to the New Zealand borrower would have occurred in any case. There is no need to provide the same incentive sought by genuine third-party lenders. Parliament does not intend to extend the incentive where that arms-length aspect is missing, particularly, when the loan is already in place and, by necessary implication, was made in the knowledge that full NRWT would have to be paid.[123] The Appellants agree with the description the Authority gave in [316] but submit that the Authority went too far when it said in [317] that the purpose ofassociation rules is to "identify common control and common ownership". The Appellants' submission is that Parliament chose to define the concept of associationfor the purposes of s NG 2(1)(b)(i) as it did and that the inference to be drawn is that Parliament made a deliberate decision to limit association to those defined categories.[124] I am satisfied that the Authority identified the policy behind the AIL regimein [316] of its decision. I am also satisfied that the Appellants' use of s NG 2(1)(b)(i)could not have been within Parliament's contemplation and purpose when it enactedthe provision.[125] First, this was not a new loan from Weyand to a non-associated party. The loan was existing.[126] Secondly, Weyand had not demanded interest of VIL at any time whilst VIL was liable for the debt.[127] Thirdly, it was envisaged the Trust would be in receipt of income.[128] Fourthly, the whole purpose of the arrangement was to ensure that VNL would not pay income tax on income that it received and paid to Weyand as interest,subject only to payment of AIL at 2 per cent. An EY internal memorandum dated 8 October 1998 makes this express and states:401) Per the diagram below, our objective is to mitigate the NZ group's tax byshifting all profit up to the trust (VT) and paying it out by way of interest subject to AIL....[129] I am satisfied that Parliament did not contemplate that the AIL regime would be used for such a purpose.[130] The following statements of the majority in Ben Nevis are apposite:[108] The general anti-avoidance provision does not confine the Court as to the matters which may be taken into account when considering whether a tax avoidance arrangement exists. Hence the Commissioner and the courts may address a number of relevant factors, the significance of which will depend on the particular facts. The manner in which the arrangement is carried out will often be an important consideration. So will the role of all relevant parties and any relationship they may have with the taxpayer. The economic and commercial effect of documents and transactions may also be significant. Other features that may be relevant include the duration of the arrangement and the nature and extent of the financial consequences that it will have for the taxpayer. As indicated, it will often be the combination of various elements in the arrangement which is significant. A classic indicator of a use that is outside Parliamentary contemplation is the structuring of an arrangement so that the taxpayer gains the benefit of the specific provisionin an artificial or contrived way. It is not within Parliament's purpose forspecific provisions to be used in that manner.(emphasis added)Merely incidental[131] The Appellants' next submission was to the effect that, if the arrangement hadtax avoidance as one of its purposes or effects, that purpose or effect was merely incidental. I do not accept that submission. If tax avoidance was not the sole purpose of the arrangement, I am satisfied that it was the predominant one.40 Common Bundle of Documents dated 9 November 2011, Volume 2 at 591.[132] Accordingly, in my view, the Authority was correct to hold that the arrangement was a tax avoidance arrangement and void against the Commissioner accordingly.Powers to counteract[133] The Appellants submit that, if there were tax avoidance, the Commissioner was not able to exercise a reconstruction power in respect of that avoidance.[134] The Commissioner has imposed an additional 13 per cent tax on the interest payments in respect of the period after October 2003, in addition to the 2 per centAIL paid at the time. The Appellants' case is that s GB 1 of the Act, which confers power to reconstruct, is confined and does not allow the Commissioner to do as he has. Section GB 1 reads as follows:GB 1 Agreements purporting to alter incidence of tax to be void(1) Where an arrangement is void in accordance with section BG 1, the amounts of gross income, allowable deductions and available net losses included in calculating the taxable income of any person affected by that arrangement may be adjusted by the Commissioner in the manner the Commissioner thinks appropriate, so as to counteract any tax advantage obtained by that person from or under that arrangement, and, without limiting the generality of this subsection, the Commissioner may have regard to—(a) Such amounts of gross income, allowable deductions andavailable net losses as, in the Commissioner's opinion, thatperson would have, or might be expected to have, or would in all likelihood have, had if that arrangement had not been made or entered into; or(b) Such amounts of gross income and allowable deductions as,in the Commissioner's opinion, that person would have hadif that person had been allowed the benefit of all amounts of gross income, or of such part of the gross income as the Commissioner considers proper, derived by any other person or persons as a result of that arrangement....[135] The Appellants submit that the Commissioner's power to counteract islimited to adjusting amounts of gross income, allowable deductions and available netlosses included in calculation the taxable income of any person affected by the arrangement.[136] The Commissioner disputes this submission. The Commissioner's position isthat s GB 1 allows the Commissioner to counteract the tax advantage derived in the manner the Commissioner thinks appropriate. In addition, the Commissioner takesthe same preliminary point as he did regarding the Appellants' argument pursuant tos NF 2(4)(b)(ii), namely that the Appellants are seeking to raise an argument and proposition of law that they did not raise in their statements of position.[137] Although the Commissioner raised this objection before the Authority, the matter was not addressed in the decision. I am satisfied that s 138G TAA precludes the Appellants from raising this issue. The extent to which VNL raised this issue in its statement of position was to say that, if it were a party to a tax avoidance arrangement, an issue arose as to the adjustment if any that should be made as a result.41 In my view that falls short of what s 138G TAA requires.[138] In addition, in its statement of position VNL says "The reconstruction powersin s GB 1 are exercisable against any person to remove the tax advantage obtainedby that person".42 This statement indicates an acceptance that the Commissioner'spowers under s GB 1 allow the Commissioner to counteract any tax advantage, and not purely by adjusting the specific items to which I have already referred.[139] I accept the Commissioner's submission that the Appellants are seeking toraise a matter not disclosed in their statement of position and that s 138G TAA precludes them from doing so.Issue 4 – Penalties[140] The Commissioner may impose penalties in respect of a shortfall, which is the difference between the tax that should have been paid and the amount paid in fact. The assumption as to Weyand's residency and the tax avoidance arrangement41 Statement of Position of Vinelight Nominees Limited at [3.2].42 Ibid, at [46.3].have given rise to shortfalls in two respects. The first is the difference between the 2 per cent AIL rate and the RWT rate of 30 per cent for payments prior to October 2003. The second part is the difference between AIL and NRWT at 15 per cent in relation to the post October 2003 period.[141] The Commissioner may impose penalties in respect of a shortfall for a number of reasons. In this case, the Commissioner imposed penalties because he considered the Appellants had taken an abusive tax position.[142] The Authority approached the matter by examining both the Appellants'position in regard to residency and the tax avoidance arrangement. The Authority appears to have treated the whole matter as a single "tax position" for the purpose ofimposing penalties.43 The Authority upheld the Appellants' challenge to thepenalties because it was not satisfied that the Appellants had taken an abusive tax position.44[143] There is no dispute that the Appellants are liable to pay the penalties to which I have referred if they took an abusive tax position. An abusive tax position is defined in s 141D(7) TAA as follows:141D Abusive tax position...(7) For the purposes of this Part , an abusive tax position means a tax position that,—(a) is an unacceptable tax position at the time at which the tax position is taken; and(b) viewed objectively, the taxpayer takes—(i) in respect, or as a consequence, of an arrangement that is entered into with a dominant purpose of avoiding tax, whether directly or indirectly; or43 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177 (1-011) at [348] and [352].44 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177 (1-011) at [351].(ii) where the tax position does not relate to an arrangement described in subparagraph (i), with a dominant purpose of avoiding tax, whether directly or indirectly.[144] Section 3(1) TAA defines tax position as follows:tax position means a position or approach with regard to tax under one ormore tax laws, including without limitation a position or approach with regard to—(a) A liability for an amount of tax, or the payment of an amount of tax:(b) An obligation to deduct or withhold an amount of tax, or the deduction or withholding of an amount of tax:...[145] Section 141B(1) TAA sets out the circumstances in which a taxpayer takes an unacceptable tax position, as follows:141B Unacceptable tax position(1) A taxpayer takes an unacceptable tax position if, viewed objectively, the tax position fails to meet the standard of being about as likely as not to be correct.(5) For the purposes of this section, the question whether any tax position is acceptable or unacceptable shall be determined as at thetime at which the taxpayer takes the taxpayer's tax position.(6) The time at which a taxpayer takes a tax position for a return period is—(a) the time at which the taxpayer provides the return containing the taxpayer's tax position, if the taxpayer provides a taxreturn for the return period:(b) the due date for providing the tax return for the return period, if the taxpayer does not provide a tax return for the return period.(7) The matters that must be considered in determining whether the taxpayer has taken an unacceptable tax position include—(a) The actual or potential application to the tax position of all the tax laws that are relevant (including specific or general anti-avoidance provisions); and(b) Decisions of a court or a Taxation Review Authority on the interpretation of tax laws that are relevant (unless thedecision was issued up to one month before the taxpayertakes the taxpayer's tax position).[146] There was and is no dispute that the Appellants took a "tax position". Theissue before the Authority was, first, whether they had taken an unacceptable tax position and, secondly, whether they had done so for the dominant purpose of avoiding tax. A finding in favour of the Commissioner on both matters was necessary to a finding that the Appellants had taken an abusive tax position and therefore to their liability for an abusive tax penalty.[147] On appeal, the Commissioner submits that the Authority erred in its finding because it considered the tax position that the Appellants had taken subjectively, rather than objectively, as s 141B (1) TAA requires. The Authority said:45[351] It seems to me that [Mr Chin] (and his family) were entitled to think, from the professional advice received, that the relevant tax returns and manoeuvres were, at least, as likely as not to be correct. I am conscious that is a subjective approach and the criterion in s.141B(1) is "viewed objectively". Nevertheless, in the particular context of this quite complicated case, I think that [Mr Chin] said structures seem compliant until deeply analysed. Perhaps, I am stretching the point but, although I find the position unacceptable, I do not find that the disputant actually took any unacceptable tax position as defined.[148] I accept that this paragraph suggests that the Authority did not consider the tax position that each of VNL and Weyand took wholly objectively.[149] In Ben Nevis, the majority said that the standard of objectively being "about as likely as not to be correct" did not require that the tax position had a 50 per centprospect of success, but that the merits of the argument supporting the taxpayer's interpretation must be "substantial";46 that the stipulation of an objective test meantthat the taxpayer's belief that the position taken was correct, or not unacceptable, isirrelevant; and that whether a taxpayer's interpretation meets the standard in any case45 V Trust v Commissioner of Inland Revenue [2011] NZTRA 7; Case 11/2011 (2011) 25 NZTC 15,177 (1-011).46 Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2008] NZSC 115; (2009)24 NZTC 23,188 at [184].comes down to a judgment of the weight of the arguments that support thattaxpayer's position and the application of the law to the relevant facts.47[150] Viewed objectively, I am satisfied that each tax position taken was an unacceptable tax position.[151] In so far as concerns the argument that Weyand was not resident in New Zealand prior to October 2003, I consider it clear that Weyand was resident because its centre of management was in New Zealand. I have already stated that I do not consider VNL had reasonable grounds to conclude that Weyand was non-resident and I consider that applies equally to Weyand. I do not consider that the arguments to the contrary, that is those suggesting that RWT should not be paid, have substantial merit.[152] I also do not consider that the arguments that VNL and Weyand were not parties to a tax avoidance arrangement or that tax avoidance was a merely incidental purpose or effect have substantial merit. On the contrary, the matters to which I have referred put the matter beyond doubt.[153] For these reasons I consider the Appellants took an unacceptable tax position. I am also satisfied that s 141D(7)(b) is met.[154] Accordingly, I allow the Commissioner's cross appeal.Result[155] I dismiss the appeal and allow the cross appeal. The parties may submit memoranda on costs if they are unable to agree...................................................................M Peters J47 Ibid, at [183] – [185].