THE COMMISSIONER OF INLAND REVENUE v MUIR [2013] NZHC 2881

THE COMMISSIONER OF INLAND REVENUE v MUIR [2013] NZHC 2881 [31 October 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-1132CIV-2011-404-4197[2013] NZHC 2881BETWEEN THE COMMISSIONER OF INLANDREVENUEApplicantAND GARRY ALBERT MUIRRespondentCIV-2011-404-4713BETWEEN THE COMMISSIONER OF INLANDREVENUEApplicantAND ACCENT MANAGEMENT LIMITEDFirst RespondentAND BEN NEVIS FORESTRY VENTURESLIMITEDSecond RespondentAND CLIVE RICHARD BRADBURYFourth RespondentAND GARRY ALBERT MUIRFifth RespondentAND GREGORY ALAN PEEBLESSixth RespondentAND HILLVALE HOLDINGS LIMITEDSeventh RespondentAND LEXINGTON RESOURCES LIMITEDEighth RespondentAND PETER ARNOLD MAUDENinth RespondentAND REDCLIFFE FORESTRY VENTURELIMITEDTenth RespondentAND WAIKATO RESIDENTIALPROPERTIES LIMITEDEleventh RespondentHearing: 6 November 2012Appearances: RL Roff and RA Herne for Commissioner of Inland RevenueGA Muir in Person and for First and Seventh to EleventhRespondents in CIV-2011-404-4731NS Gedye for Second, Third, Fourth and Sixth Respondents inCIV-2011-404-4731Judgment: 31 October 2013JUDGMENT OF TOOGOOD J[Transfer and Consolidation of proceedings]This judgment was delivered by me on 31 October 2013 at 4:45 pmPursuant to Rule 11.5 High Court RulesRegistrar/Deputy Registrar[1] The Commissioner of Inland Revenue seeks to transfer into this Court proceedings currently before the Taxation Review Authority ("the TRA" or "the Authority") and to have them consolidated with each other and with otherproceedings currently in this Court.Background[2] The Trinity tax litigation has been the subject of numerous judgments in this Court, the Court of Appeal and the Supreme Court arising out of a complex schemefor forestry investment ("the Trinity Scheme") devised by Dr Garry Muir, one of the respondents. In December 2008, the Supreme Court issued a judgment in Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue,1 in which it confirmed that the Trinity Scheme was a tax avoidance arrangement.[3] To explain the background, it is useful to incorporate into this judgment abrief summary of the Trinity Scheme and the Commissioner's view of it provided byHammond J on behalf of the Court of Appeal in Muir v Commissioner of Inland Revenue:2The Trinity scheme[6] ... The scheme was the brainchild of Dr Muir. At the heart of the case was the proposition that investors could claim immediate tax deductions for expenses most of which were not payable until 2047 and 2048, thereby effectively granting them a 50-year tax holiday.[7] Some 300 investors in Trinity bought a 50 year licence to grow Douglas Fir trees on land owned by certain Trinity Foundation companies. This land, which was in Southland, was bought for the forestry scheme for about $600 a hectare. The investors agreed to pay a licence fee of $2m per hectare in 2047 when the trees were harvested. Investors depreciated the $2m per hectare fee.[8] The scheme also involved an insurance policy with a British Virgin Islands based company, the substantial cost of which was also claimed as an upfront deduction.[9] To illustrate the impact of the scheme, in 1997 investors spent about $5,000 per hectare. Ostensibly they achieved a tax deduction in the order of1 Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.2 Muir v Commissioner of Inland Revenue [2007] NZCA 334, [2007] 3 NZLR 495.$37,000 per hectare. In 1998 they paid a $50 annual licence fee and ostensibly achieved deductions of about $40,000 per hectare.[10] Investments in the scheme were made by Redcliffe Forestry Ventures Ltd, a loss attributing qualifying company (LAQC) associated with Dr Muir. His partner, Mr Bradbury, was also involved in Trinity. He was associated with Bristol Forestry Ltd, another LAQC investing in the scheme.[11] The High Court found the Trinity scheme was entirely artificial and tax driven. The decision is now reported at (2005) 22 NZTC 19,027. On appeal, this Court agreed ([2007] NZCA 230). It said that the scheme wasundoubtedly "clever . . . but this cleverness should not be allowed to obscure the reality that this particular Emperor has no clothes" (para [140]). The realpurpose of the scheme was not the conduct of a forestry business for profit"but rather [the] generation of spectacular tax benefits" (para [141]). For the1997 and 1998 years alone, some $140 million in tax deductions were involved. The Commissioner of Inland Revenue maintained that up to $3.7b of tax revenue was at risk if Trinity had run for its planned 50 year course. So this was found to be tax avoidance on a grand scale.[4] The 2008 judgment of the Supreme Court resulted in the settlement of a large number of challenges by tax payers to the Commissioner's notices of amended assessment, issued in respect of tax returns based on the Trinity Scheme.[5] A number of challenges remained on foot, however, and further litigation("the Accent Management review proceeding") ensued in an attempt by some of the investors in the Trinity Scheme to relitigate the Commissioner's assessments whichhad been upheld by the Supreme Court in Ben Nevis. That proceeding was struck out in 2010.3[6] The subsequent challenges to the Commissioner's assessments included also a proceeding ("the Redcliffe proceeding") in which a number of tax payers who had invested in the Trinity Scheme applied to set aside a High Court judgment, delivered by Venning J in 2004.4 It was alleged that the Commissioner had failed to fully and frankly disclose the true legal position to the High Court at the time of the 2004 case. It was alleged that the Commissioner knowingly and wrongly applied a depreciation allowance to expenditure incurred by the Trinity investors under sub-part EG of the Income Tax Act 2004 when sub-part EH8(1) of the Act required that the expenditure be calculated under its provisions.3 Accent Management Limited v Commissioner of Inland Revenue (2010) 24 NZTC 24,126 (HC).4 Accent Management Limited v Commissioner of Inland Revenue (2004) 22 NZTC 19,027 (HC).[7] Venning J dismissed the Redcliffe proceeding in February 2010,5 holding that if the Commissioner had been wrong to make the assessments under sub-part EG when sub-part EH applied then that was an error of law, not fraud of a kind which would justify setting aside the 2004 judgment. Venning J also upheld theCommissioner's objection to the setting aside of the judgment, applying r 5.49 of the High Court Rules in holding that the Court had no jurisdiction to set aside the earlier judgment.6 In allowing Redcliffe's appeal against Venning J's 2010 judgment, the Court of Appeal held that the reliance on r 5.49 was in error and that an application to strike out the Redcliffe proceeding should have been made by the Commissioner under r 15.7[8] In December 2012, however, the Supreme Court allowed the Commissioner'sappeal against the Court of Appeal's decision,8 holding that the Commissioner'schallenge to the Redcliffe proceeding was properly bought under r 5.49. The Supreme Court held that Redcliffe's argument that the 2004 judgment should be set aside fell to be determined on the basis of whether that judgment had been procured by fraud, that is, that the true legal position was that the 2004 case was governed by sub-part EH8, a matter that had been dishonestly concealed from the Court by the Commissioner.[9] That argument was dismissed. The Supreme Court agreed with Venning J that the High Court had no power to recall or set aside the 2004 judgment on the questions of law which had been the subject of appellate decision. The High Court'sjudgment in the Redcliffe proceeding was reinstated.[10] Also on foot in this Court are appeal proceedings brought by Accent Management Limited and the other respondents in this proceeding challenging assessments made in relation to the Trinity Scheme. In those proceedings, the appellants applied for orders that the Crown Law Office should cease acting as solicitors for the Commissioner of Inland Revenue and directing that no Crown5 Redcliffe Forestry Venture Limited v Commissioner of Inland Revenue [2011] 1 NZLR 336 (HC).6 At [72].7 Redcliffe Forestry Venture Limited v Commissioner of Inland Revenue [2011] NZCA 638, [2012] 2 NZLR 823.8 Commissioner of Inland Revenue v Redcliffe Forestry Venture Limited [2012] NZSC 94, [2013] 1 NZLR 804.counsel should appear as counsel in proceedings for the Commissioner in respect of the appeals and other related proceedings. Those applications were dismissed by Woodhouse J on 22 June 2012,9 and an appeal against that judgment was dismissed by the Court of Appeal on 15 May 2013.10[11] Against the background of the persistent efforts of the respondents, including Dr Muir personally, to challenge the finding that the Trinity Scheme was a tax avoidance scheme, and to avoid the consequences of that view, the Commissioner has now applied for orders transferring the challenges which remain extant in the TRA into this Court and consolidating those proceedings so removed with the related appeals. The respondents oppose that application.Application to bring transfer proceeding by originating application[12] The Commissioner's application to transfer the proceedings to this Court was made under s 138N(2)(a)(ii) of the Tax Administration Act 1994 ("TAA") which wasthen in force. That section provided that if a disputant commenced a challenge in the TRA, the Commissioner was able to apply to the High Court to have the challenge transferred to this Court. Nothing in the Act, then or now,11 nor anything in the High Court Rules, provides specifically for the procedure by which a transfer application should be made. This application has been made, therefore, by the Commissioner by way of an originating application under Part 19 of the High Court Rules and if the application is to be heard, leave to proceed in that way must be given.[13] In applying for leave, the Commissioner argues that it is just for the application to be dealt with by way of originating application and argues that the authorities confirm the proceeding to be appropriate. In that regard, reliance is made on r 19.5 and the authorities of McIlraith and Deepsea Foods.12 Rule 19.5(1) provides that the Court may permit a proceeding not specifically mentioned in9 Commissioner of Inland Revenue v Accent Management Limited [2012] NZHC 1430, (2012) 25 NZTC 20-130.10 Accent Management Limited v Commissioner of Inland Revenue [2013] NZCA 155, [2013] 3 NZLR 374.11 Section 138N(2) was amended, as from 29 August 2011, by s 180(1) Taxation (Tax Administration and Remedial Matters) Act 2011.12 Commissioner of Inland Revenue v McIlraith (2003) 21 NZTC 18,112 (HC) and Commissioner of Inland Revenue v Deepsea Seafoods (No 1) Limited (2004) 21 NZTC 18,469 (HC).rr 19.2 to 19.4 to be commenced by originating application "in the interests of justice".[14] The respondents oppose the granting of leave, although the second, third, fourth and sixth respondents simply adopt the submissions made by the first and seventh to eleventh respondents on all matters related to the applications for transfer and consolidation.[15] On behalf of the other respondents, Dr Muir presented no written or oral submissions against the use of the originating application procedure despite having filed a notice of opposition which argued that permission could not be given to using that procedure where a consolidation of the separate challenges would amount to a breach of s 138K of the TAA; that the application proposed to consolidate challenges under the TAA with proceedings under the Judicature Act 1908; and that it was made for the stated purpose of striking out proceedings which are yet to be heard and determined, as required by law. Dr Muir also argued that the respondents had protested the jurisdiction of the Taxation Review Authority to make the orders sought by the applicant in the challenges sought to be transferred, and that if the Authority lacked jurisdiction then there was nothing to transfer. Further, it was argued that the "interests of justice" threshold in r 19.5(1) for the granting of permission to commence the proceeding by originating application would not be satisfied where the proceeding would itself be tainted with fraud if the 2004 decision of Venning J13 was found to have been obtained by fraud.[16] I regard it as now well established that the earlier view that the originating application procedure should be confined to cases in which there was no opposing party14 no longer applies, for the reasons given by Randerson J in McIllraith15 at [16]. These applications do not require full pleadings or the application of High Court Rules which apply to ordinary proceedings brought by statement of claim under Part 5.13 Accent Management Limited v Commissioner of Inland Revenue, above n 4.14 For example, Jones v H W Broe Limited (1989) 5 PRNZ 206 (HC), at 207.15 Commissioner of Inland Revenue v McIlraith, above n 12, at [16].[17] Accordingly, leave will be granted to the Commissioner to bring this application by way of originating application.Application to transfer proceedings[18] The schedule to the Commissioner's application for transfer identifies a total of 66 proceedings brought by 11 challengers in the income tax years 1998 to 2009 inclusive. Notwithstanding that the election to make an assessment challenge in the Authority rather than in the High Court is one for the tax payer, the Commissioner argues that transfer of these proceedings to this Court ought to be granted on the following grounds:(a) the High Court is the court of first instance jurisdiction for major litigation where matters are complex and involve significant legal questions, including taxation litigation;(b) there are large sums of money already at stake in the proceedings and it is likely that similar proceedings will continue to be filed in the Authority until a binding precedent is set by the High Court;(c) there are likely to be interlocutory issues and collateral disputes which would make it useful for the parties to have access to this Court's casemanagement and interlocutory procedures and resources;(d) the pleadings before the Authority raise at least implicit criticisms of the conduct of officers of the Department of Inland Revenue, criticisms which have been developed into allegations of bad faith and abuse of power in earlier proceedings before this Court;(e) the likelihood of appeals on both interlocutory and substantive issues means that it is preferable for the proceedings to be dealt with in the first instance in this Court; and(f) there are already proceedings in this Court dealing with identical or similar issues which should appropriately be consolidated with the challenge proceedings currently before the Authority.[19] The Commissioner's submission reflects the relevant considerations for transfer of proceedings from the TRA to the High Court summarised in Deepsea Seafoods:16(a) there is no legislative presumption that taxation disputes should normally be dealt with in the Authority at first instance;(b) the onus is on the Commissioner to show why proceedings which a tax payer had initially chosen to commence in the Authority should be transferred to the High Court;(c) transfer may be justified by the magnitude of the tax in dispute, the general or public importance of the matter, or its extraordinary complexity or difficulty;(d) the High Court may be the appropriate forum where the matter in dispute is likely to arise again in future assessments, the challenge involves significant legal issues of precedent, or the facts of the challenge are in dispute;(e) the likelihood of appeals may favour a High Court proceeding;(f) extant proceedings in the High Court which overlap with the assessment challenges favour the High Court as the appropriate forum; and(g) allegations of bias, bad faith, abuse of power, or lack of integrity, on the part of departmental officers are also best heard in the High Court.16 Commissioner of Inland Revenue v Deepsea Seafoods (No 1) Limited, above n 12, at [18].[20] The Commissioner also argued that transfer of the proceedings from the Taxation Review Authority would reduce the overall costs involved in resolving the numerous challenges and would eliminate the risk of inconsistent decisions.[21] Dr Muir's objection to transfer based on an assertion that the Commissioner is merely seeking to strike out the challenges, does not appear to me to have any relevance to the transfer issue. The question of whether the challenges should be struck out can be made in the High Court as well as in the Authority,17 as conceded by Dr Muir. That issue is already before this Court in the appeal proceedings so no injustice to the challengers arises on that point if the proceedings in the Authority are transferred.[22] Dr Muir submitted that the substantive issue is "a very simple one"; namely whether a depreciation allowance central to the Commissioner's view of the Schemeshould be applied to the expenditure incurred by the Trinity investors under sub-part EG of the Income Tax Act 2004, or whether the expenditure should be calculated under sub-part EH8(1). That proposition, so simply stated, may belie the complexity of the underlying issues. But even if Dr Muir is right, that is by no means an end to the matter as the summary of the relevant factors, referred to at [19] above indicates.[23] Dr Muir argued further that not all Trinity challenges would be dealt with in the High Court if the Commissioner's present application succeeds. He referred, for example, to his personal challenges for the 1998 to 2006 tax years which are part-heard by the Authority. This submission, and Dr Muir's other arguments that there are differences between the details of some of the challenges which are not common to all of them, are not persuasive. The submissions run somewhat contrary to DrMuir's argument that the substantive proposition in all of the cases is a simple one but, in any event, the High Court is more than capable of addressing discrete issues on a case-by-case basis, even if the proceedings are transferred to this Court and heard together.17 Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153 at [50].[24] I am not persuaded either that potential inconsistency between decisions made in this Court and decisions which may have to be decided in the Taxation Review Authority is a sufficient ground to refuse transfer in circumstances where there is a substantial similarity in the issues arising in respect of the 66 proceedings which the Commissioner seeks to have removed to this Court.[25] More compelling, in favour of transfer, is the attitude which has been adopted by the Trinity investors who did not settle their challenges after the Ben Nevisdecision of the Supreme Court. That has been to continue to seek avenues to relitigate the issues decided against them. I accept the Commissioner's propositionthat little confidence can be placed in the challengers accepting any precedent-setting judgment or judgments which might be issued in the proceedings currently before this Court or in any one proceeding which might, as suggested by Dr Muir, be transferred as if it were, in effect, a test case. The prospect that notwithstanding an unfavourable outcome for the appeal proceedings currently before the Court, the other challengers will continue to argue their respective cases is not fanciful given the litigation history.[26] Although Dr Muir touched on the possibility of costs orders being made against the challengers in this Court as being prejudicial to them in circumstances where costs awards are not available in the Authority,18 and was critical of the high litigation costs asserted by the Commissioner, I do not consider the potential liability of the respondents to costs in this Court to be influential. In circumstances where the Commissioner has incurred considerable costs in conducting litigation in respect of the Trinity Scheme over more than a decade, there is a public interest element in transferring proceedings to this Court to eliminate a tier of appeals, particularly in a case where tax payers have demonstrated an appetite for litigation.[27] In Commissioner of Inland Revenue v A Taxpayer,19 O 'Regan J determined that transfer of Trinity litigation underlying the Ben Nevis decision was appropriate18 Section 22 of the Taxation Review Authorities Act 1994 gives the Authority the power to order costs only in circumstances where the Commissioner or disputant fails to appear at the time fixed or fails to give notice of abandonment or where the objection or challenge is determined as frivolous or vexatious, made solely for the purpose of delay.19 Commissioner of Inland Revenue v A Taxpayer (740/02) (2003) 21 NZTC 18,001 (HC).given the complexity of the issues and the amount of tax at stake. To those considerations I would also now add the litigation history since 2002, the administrative convenience of access to the High Court Rules for disposing of the challenges and the consideration that transfer will bring resolution of the Trinity challenges closer to finality. All relevant factors weigh heavily in favour of transfer.[28] I turn to consider consolidation.Application to consolidate the proceedings in this Court[29] Rule 10.12 of the High Court Rules provides a broad discretion to the Court to order consolidation if the Court is satisfied that some common question of law or fact arises in all of the proceedings,20 or the rights to relief claimed are in respect of or arise out of the same events or transactions or series thereof,21 or if "for some other reason it is desirable to make an order" under the rule.22[30] The focus by the respondents on the transfer application indicates the close relationship between the reasons advanced for transfer and those advanced for consolidation. The real benefit of transferring the proceedings from the Taxation Review Authority to this Court is to then deal with all outstanding matters in a comprehensive, efficient and relatively inexpensive manner. Consolidation was ordered in Deepsea Seafoods, following the decision to transfer the proceedings from the Taxation Review Authority on the basis of a substantial overlap between the proceedings and the efficiency of hearing them together.23 The same considerations apply here.[31] The grounds set out in rr 10.12(a) and (b) are well made out in this case as the discussion above indicates. I consider also that consolidation is desirable in order to promote the saving of time and cost for the parties and the Court, notwithstanding such discrete differences between the cases as may be identified. This will result in a more efficient use of judicial resources and eliminate, or at least20 High Court Rules, r 10.12(a).21 High Court Rules, r 10.12(b).22 High Court Rules, r 10.12(c).23 Commissioner of Inland Revenue v Deepsea Seafoods (No 1) Limited, above n 12.reduce, the risk of inconsistent findings. The Court is well placed to order severance in the future, of any proceeding which it appears, on further analysis, might more efficiently or justly be dealt with separately, as noted by Fisher J in Deepsea Seafoods.24[32] In my view, consolidation is appropriate both in respect of the proceedings to be transferred by the orders made in this judgment, and the TRA proceedings and challenges already transferred to this Court as identified in Schedule B to this judgment, being the Muir and Maude proceedings transferred in 2002.[33] Further, those proceedings should be consolidated with the Muir appealsagainst the Taxation Review Authority's decision striking out his "Trinity" challengeand refusing to recall the strike-out decision.Ancillary orders[34] Having reached the conclusion that transfer and consolidation is appropriate, I am satisfied that the ancillary orders sought by the Commissioner should also be made. They will require the respondents to file and serve on the Commissioner statements of claim in all of the transferred proceedings to ensure conformity with the requirements of the High Court Rules and with relevant decisions of this Court, the Court of Appeal, and the Supreme Court, and to apply the relevant provisions of rr 5.64 to 5.68 to the transferred proceedings as if they had been proceedings transferred from the District Court.Orders[35] The formal orders which I make for the reasons given above are:(a) I grant leave to the applicant to bring this application by way of an originating application under Part 19 of the High Court Rules.24 Commissioner of Inland Revenue v Deepsea Seafoods (No 1) Limited, above n 12, at [27].(b) The proceedings listed by number in Schedule A to this judgment, filed in the Taxation Review Authority, shall be transferred to the Auckland Registry of this Court.(c) The proceedings listed in Schedule A and transferred in accordance with Order (b) above, shall be consolidated with the proceedings filed originally in the Taxation Review Authority and subsequently transferred to the High Court, as listed in Schedule B to this judgment.(d) Those proceedings consolidated by Order (c) above shall be further consolidated with the appeals pending in Muir v Commissioner of Inland Revenue CIV-2011-404-1130 and Muir v Commissioner of Inland Revenue CIV-2011-404-4197.(e) On or before 5 December 2013, the respondents shall file and serve on the Commissioner statements of claim in the proceedings listed in Schedules A and B which conform to the requirements of the High Court Rules and which take into account the decision of the Supreme Court in Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue,25 and the decisions of the High Court in Redcliffe Forestry Venture Limited v Commissioner of Inland Revenue,26Accent Management Limited v Commissioner of Inland Revenue,27Commissioner of Inland Revenue v Redcliffe Forestry Venture Limited,28 and any other judgment of the High Court, Court of Appeal or Supreme Court relevant to the issues to be determined in the transferred and consolidated proceedings.(f) By 20 February 2014, the Commissioner shall file and serve statements of defence to the statements of claim.25 Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue, above n 1.26 Redcliffe Forestry Venture Limited v Commissioner of Inland Revenue, above n 5.27 Accent Management Limited v Commissioner of Inland Revenue, above n 3.28 Commissioner of Inland Revenue v Redcliffe Forestry Venture Limited, above n 8.(g) Rules 5.64 to 5.68 of the High Court Rules shall be applied to the transferred and consolidated proceedings as if the proceedings had been transferred to this Court from the District Court.(h) The parties shall have leave to apply for such further orders or directions as may be necessary to give effect to the purpose of the orders for transfer and consolidation.Costs[36] The Commissioner is entitled to costs. Any application for costs shall be made by way of memorandum filed and served no later than 21 November 2013. Any memorandum in opposition to the application for costs shall be filed and served no later than 12 December 2013.[37] Costs shall be determined on the papers, unless the Court directs otherwise................................................. Toogood J