CULLEN GROUP LTD v COMMISSIONER OF INLAND REVENUE [2017] NZHC 3260

CULLEN GROUP LTD v COMMISSIONER OF INLAND REVENUE [2017] NZHC 3260 [20 December 2017]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2016-404-000765[2017] NZHC 3260BETWEEN CULLEN GROUP LIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 11 December 2017Appearances: L McKay, S A Armstrong and A F McKenzie for PlaintiffG Coumbe QC and A Goosen for DefendantJudgment: 20 December 2017JUDGMENT OF WOOLFORD JThis judgment was delivered by me on 20 December 2017 at 12:15 pmpursuant to Rule 11.5 of the High Court Rules.Registrar/ Deputy RegistrarDate:Solicitors: Russell McVeagh, AucklandCrown Law, WellingtonCounsel: G Coumbe QC, Auckland[1] In substantive proceedings filed in the High Court at Auckland on 15 April2016, the plaintiff, Cullen Group Ltd (CGL), challenges assessments totalling$59.5 million issued to it by the defendant, the Commissioner of Inland Revenue(Commissioner), for non-resident withholding tax (NRWT). The substantiveproceedings have been set down for a three-week trial commencing on 27 August nextyear. CGL now applies for discovery of certain documents held by the Commissioner.The documents sought are not evidence of facts in issue in the substantive proceedings,but are possible extrinsic aids to ascertain Parliament's intention when it enacted theIncome Tax Amendment Act (No 4) 1991 and the Stamp and Cheque DutiesAmendment Act (No 2) 1991, which together established what is known as theapproved issuer levy (AIL) regime.The arrangement[2] Before the arrangement at issue, Mr Eric Watson personally held all theordinary shares in Cullen Investments Ltd (CIL). On 13 November 2002, Mr Watsonsold all the ordinary shares in CIL to a newly incorporated company, CGL. Mr Watsonthen made two loans totalling $291 million to CGL in the nature of vendor finance.The first loan was for $193 million, being the purchase price of the shares. The secondloan was for $98 million, which was on-lent to CIL to repay shareholder advances toMr Watson. The Commissioner alleges Mr Watson retained actual control over bothCIL and CGL through various trusts and directorships.[3] Mr Watson then assigned the first loan of $193 million to Modena HoldingsLtd (Modena) and the second loan of $98 million to Mayfair Equities Ltd (Mayfair).Both companies were non-resident companies incorporated in the Cayman Islands.CGL paid or accrued interest on the loans which had been assigned to Modena andMayfair. Under New Zealand taxation law interest paid to a non-resident such asModena or Mayfair is ordinarily subject to NRWT at 15 per cent. However, if certainconditions are met a two per cent levy (AIL) can be paid instead. One condition isthat the payer and the recipient are not "associated persons" under the relevant IncomeTax Act.[4] CGL paid two per cent AIL rather than 15 per cent NRWT on interest paid toModena and Mayfair. Mr Watson retained control through back-to-back loans hemade to Modena and Mayfair (for $193 million and $98 million) to fund theassignments. The arrangement ended when repayment was ultimately funded by theassignment of the Modena and Mayfair loans to CGL back to Mr Watson and the issueto him of non-voting redeemable preference shares in CGL. Modena and Mayfairwere then wound up.[5] It is accepted by the Commissioner that under the specific or "black letter"provisions of the relevant Income Tax Act, CGL was not associated with any recipientof the interest payments, that is, they were not "associated parties" in terms of thedefinition contained in s OD7 of the relevant Income Tax Act. However, theCommissioner alleges that this was a tax avoidance arrangement under s BG1 of therelevant Income Tax Act. The Commissioner alleges that the arrangement was not agenuine arms-length transaction and CGL gained the benefit of the AIL regime in acontrived way. She says that the arrangement was carefully designed to bring it withinthe AIL regime. The tax benefit to CGL of paying two per cent AIL instead of 15 percent NRWT was significant.[6] In assessing whether an arrangement is a tax avoidance arrangement unders BG 1, the Supreme Court in Ben Nevis set out a two-step inquiry.1 First, have thespecific or "black letter" provisions been complied with? If so, has the arrangementaltered the incidence of tax in a way which cannot have been within the contemplationand purpose of Parliament when it enacted the specific provision?[7] The key issue at trial will therefore be whether CGL made use of the"associated persons" rule or the AIL regime in a manner contrary to Parliament'sintention at the time Parliament enacted the legislation which established theAIL regime.1 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2009] 2 NZLR 289 (SC) at[106] – [109].Documents sought[8] At the time the AIL regime was introduced in 1991, four definitions of"associated persons" existed in the Income Tax Act 1976, a general definition andthree specific definitions. The general definition of "associated persons" was a defaultdefinition in that, unless otherwise specified, any reference in that Act to "associatedpersons" was a reference to the general definition. The general definition applied inrespect of the arrangement and under that definition the parties agree that CGL wasnot associated with any of the entities to whom it paid interest. However, CGL allegesthat had Parliament chosen to adopt for the purposes of the AIL regime (at least oneof) the other definitions of "associated persons" that existed at the time the AIL regimewas established, CGL would have been associated with those entities.[9] CGL will at trial submit that the application of the AIL regime to thearrangement is not an outcome that is to be regarded as outside Parliament'scontemplation when it enacted the AIL regime. CGL has located through varioussources, including the Parliamentary Information Service, a number of documents thatmay be relevant to the legislation and this application does not seek discovery of thosedocuments. However, CGL has been unable to locate documents in respect of theintroduction of the AIL regime or the decision (or lack thereof) about which definitionof "associated persons" should apply.[10] The documents sought by the CGL application comprise three categories ofdocuments relating to the parliamentary history of legislation enacting:(a) the AIL regime;(b) each of the four "associated persons" definitions; and(c) each new or reformed tax regime which adopted one of the specificdefinitions instead of relying on a general "associated persons"definition.[11] Therefore, in addition to documents relating to the two statutes whichestablished the AIL regime, CGL seeks discovery of documents relating to 20 otherstatutes that were enacted both prior to the drafting of the legislation which establishedthe AIL regime and after the legislation was passed.[12] The documents sought include:(a) all documents created by IRD officials, including:(i) published material, whenever published (unless it is presentlyavailable for public access without charge – for example, on theCommissioner's website);(ii) material provided to Select Committee(s) or Minister(s);(iii) material provided to any special purpose committee or workinggroup established to consider tax policy;(iv) internal documents prepared by IRD officials including(aa) any final reports or internal recommendations; or(bb) any other consideration given to the legislation;(b) all documents created by any special purpose committee or workinggroup established to consider tax policy; and(c) any other documents provided to or obtained by IRD officials.[13] CGL confirmed at the hearing that it accepts that only documents which comewithin the above categories and relate to the selection of the definition of "associatedpersons" to be employed in the legislation should be discovered.Availability of documents[14] In an affidavit dated 25 August 2017, Mr Peter Frawley, a Policy Manager inthe Policy and Strategy Unit (PAS Unit) of the Inland Revenue Department, refers tothe availability of the documents sought by CGL. He acknowledges that the PAS Unithas a file storage facility in which a voluminous number of hard copy documents areretained. These documents contain a wide range of materials including reports toMinisters and Select Committees and other policy background materials. Thedocuments are however paper documents and are not available electronically. Themanual catalogue of this material identifies the 22 statutes at issue only with no furtherdelineation by subject matter. He states that the material cannot be readily identifiedfrom the outset in terms of what may potentially be relevant and/or discoverable inthis proceeding. He is of the opinion that the process of manually searching thesedocuments, reviewing and photocopying them would take many weeks. He alsoanticipates that a request of this magnitude would require several IRD officials to assiston a full-time basis. The time that it would take to carry out CGL's request would bewell in excess of the 20 working days allowed for in the application.[15] Finally, Mr Frawley says that the PAS storage facility may not contain all thedocuments sought by CGL given the breadth of the request, which potentially may gofar beyond those documents prepared or retained by PAS. IRD officials would thenneed to conduct an extensive search throughout the Department to ensure that nomaterial was inadvertently excluded. Such a search would take a significant period oftime and would require several IRD officials to assist on a full time basis.Application under r 8.19[16] CGL applies for particular discovery under r 8.19 of the High Court Rules2016. It provides:8.19 Order for particular discovery against party after proceedingcommencedIf at any stage of the proceeding it appears to a Judge, from evidenceor from the nature or circumstances of the case or from any documentfiled in the proceeding, that there are grounds for believing that a partyhas not discovered 1 or more documents or a group of documents thatshould have been discovered, the Judge may order that party—(a) to file an affidavit stating—(i) whether the documents are or have been in the party'scontrol; and(ii) if they have been but are no longer in the party'scontrol, the party's best knowledge and belief as towhen the documents ceased to be in the party'scontrol and who now has control of them; and(b) to serve the affidavit on the other party or parties; and(c) if the documents are in the person's control, to make thosedocuments available for inspection, in accordance with rule8.27, to the other party or parties.[17] In Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd the Courtfollowed a four-stage approach in considering an application under r 8.19:2(a) Are the documents sought relevant, and if so how important will theybe?(b) Are there grounds for belief that the documents sought exist?(c) Is discovery proportionate?(d) Weighing and balancing these matters, in the Court's discretionapplying r 8.19, is an order appropriate?Relevance of documents sought[18] The documents being sought are all possible extrinsic aids to interpretation. Itwas once the case that extrinsic aids to interpretation were largely disregarded. Therehas, however, been a gradual relaxation, but the courts will generally still only look ata limited range of publicly available extrinsic aids. In Statute Law In New Zealand,Burrows and Carter suggest the following "tentative criteria" for admission ofextrinsic materials:3(i) It must be relevant to the question in issue, and thus be material thatis capable of tending to help the interpreter ascertain meaning.(ii) It must be reliable in that it is a considered statement by a minister orother proponent of the legislation.(iii) It should be publicly accessible.(iv) It should normally have been available before the passing of thelegislation and known to those engaged in the law-making process. Inexceptional cases later action by those responsible for its2 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760 at [14].3 JF Burrows and RI Carter, Statute Law in New Zealand, (5th ed, LexisNexis, Wellington, 2015) at298-299.administration (who may have prepared the legislation) may beadmissible to resolve an ambiguity.[19] These reflect the approach taken in previous cases. It is, however, alwayspossible to find cases where material which does fit the above criteria has been utilised,for instance, where it was readily available and no objection was taken by the opposingparty. However, the drafting of criteria for the admission of extrinsic materials reflectsthe fact that some extrinsic materials are seen as irrelevant and, therefore,inadmissible. In BNZ Investments v Commissioner of Inland Revenue, Wild J stated:4[17] I am not aware of any authority that the views of public servants arerelevant to the interpretation of legislation, or to the intention ofParliament in enacting it.[20] It seems to me, however, that this case is different from other cases in that thedocuments sought are not sought on the basis that they are relevant to the interpretationof ambiguous legislation. The approach to applying s BG1 is settled and there is noambiguity in the relevant "associated persons" definition or in the AIL provisions.Instead, the documents are sought because they may be relevant to the application ofs BG1 in that they may help determine the "intended scope" of AIL regime andwhether Parliament made a conscious choice in choosing the general "associatedpersons" definition to apply to the AIL regime. The Commissioner has herselfpublished guidance which confirms that such documents can be relevant to theapplication of s BG1 stating:5Sometimes extrinsic materials and case law may help when reaching a viewon Parliament's purpose for particular provisions.[21] I am of the view, therefore, that the documents sought may be relevant to the"parliamentary contemplation" test. A document or documents may exist which wouldgive a strong indicator of Parliament's purpose and which would assist the trial judgein determining whether the arrangement was a tax avoidance arrangement. In thosecircumstances, existing case law does not prevent the Court from requiring discovery.4 BNZ Investments Ltd v Commissioner of Inland Revenue HC Wellington CIV-2004-485-1059,22 June 2007 at 17, citing ASB Bank Ltd v Commissioner of Inland Revenue (2014) 26 NZTC 21-098.5 Public Rulings Unit, Office of the Chief Tax Council – Interpretation Statement: Tax Avoidanceand the Interpretation of Sections BG1 and GA1 of the Income Tax Act 2007 (Inland Revenue,IS13/01, 13 June 2013 at [19].Belief that the documents sought exist[22] The documents sought relate only to the selection of the definition of"associated persons" to be employed in the 22 particular statutes identified by CGL.CGL has listed 48 documents which it has obtained from public sources. These are,therefore, excluded from the application. Two of these documents are ministerialreports issued on the same date as the enactment of the two statutes which establishedthe AIL regime. These are:(a) Ministers of Finance and Revenue Taxation Policy: Business Tax Policy1991: A Statement on Government Tax Policy (30 July 1991);(b) Ministers of Finance and Revenue Taxing Income Across InternationalBorders: A Policy Framework (30 July 1991).[23] The reports do not contain any specific material relating to the selection of thedefinition of "associated persons" employed in the legislation enacted on 30 July 1991.[24] It seems to me that there must have been some sort of report to the Minister –either on the Commissioner's own initiative or as a result of a request from theMinister, which may refer to the scope of the intended AIL regime. Such a documentmay have reference to the appropriate "associated persons" definition thought to bestreflect policy as to the scope of the regime. But even if there is no such advice, theabsence of consideration may also be significant. The trial Judge should not be left ina state of uncertainty as to whether or not there are further documents which may assistthe enquiry to be undertaken by the Court.Proportionality[25] Three categories of documents are sought all of which are potentially verybroad. First, all documents created by IRD officials relating to the selection of thedefinition of "associated persons" in 22 statutes enacted between 1968 and 2009.Secondly, all documents created by any special purpose committee or working groupestablished to consider tax policy, again relating to the selection of the definition of"associated persons" in the 22 different statutes. Thirdly, any other documentsprovided to or obtained by IRD officials, again relating to the selection of thedefinition of "associated persons" in the 22 different statutes.[26] Only three of the 22 different statutes are, however, directly related to the AILregime. The Income Tax Amendment Act (No 4) 1991 and the Stamp and ChequeDuties Amendment Act (No 2) 1991 enacted the AIL regime, while the Land andIncome Tax Amendment Act (No 2) 1968 enacted the predecessor or s OD7, the"associated persons" definition used in the AIL regime. The other statutes have noapparent relevance. For instance, it is difficult to see how the use of a particular"associated persons" test in the Income Tax Amendment Act (No 2) 1990, whichrelates to petroleum mining operations, has any relevance to the AIL regime.[27] Even with the three statutes that are directly or indirectly related to the AILregime, the range of documents sought includes both internal and external documentsand documents prepared by IRD officials which concern "internal recommendations"or "any other consideration given to the legislation". It may be argued that the viewsof third parties are not relevant. The same could be said of the views of the IRDofficials who have made internal recommendations or who have given "consideration"to the legislation. However, at this stage I am not prepared to rule that such materialis irrelevant and therefore not discoverable. If these concerns remain after discovery,the Commissioner will be able to challenge the admissibility of particular documents.In the present case, I am of the view that by restricting any order for discovery to threestatutes and only to documents that relate to the selection of the definition of"associated persons" to be employed in the legislation, the enquiry will become moretargeted. It will also not be out of proportion to the substantial financial interests atstake.Discretion[28] Counsel for the Commissioner submits that any potentially relevant extrinsicaids are limited to core classes of documents and then only to the first three statutes inCGL's list, these being the statutes enacting the AIL regime and the s OD7 definitionof "associated persons". The core classes of documents are said to be Bills,explanatory notes to Bills, Hansard debates, reports of Parliamentary SelectCommittees as well as the following:(a) Law reform reports prior to the introduction of a Bill. This includesreports of Commissions or Committees and government white papersrecommending the legislation;(b) Public discussion papers on the proposed legislation issued forconsultation prior to the introduction of a Bill;(c) Submissions and Departmental reports to select committeesconsidering a Bill.[29] Counsel then states that without accepting discoverability, the Commissionerwill provide any documents it may be holding in respect of the first three statutes andwhich are within the limited classes set out above and which CGL could not sourceitself. The Commissioner's responsible attitude bears on the Court's discretion inapplying r 8.19.[30] However, I do not agree that these are necessarily the only relevant documents.One relevant matter I take into account is that the passage of normal legislation usuallyprovides a range of publicly available material which can be utilised to assessParliament's intention. That is not the case here, however. The AIL regime wasintroduced in the 1991 budget. The Bill implementing the regime, the Finance(Revenue) Bill was introduced and passed under "extraordinary urgency" with theBill's second reading, committee stage and third reading taking place through the nightfrom midnight onwards until its enactment as two amending statutes, the Income TaxAmendment (No 4) Act 1991 and the Stamp and Cheque Duties Amendment (No 2)Act 1991.6 Because of the need to pass the legislation in one night, the Bill did not goto a select committee.[31] The only publicly available material is, therefore, the Bill itself, which containsthe usual explanatory notes, the Hansard debates and the two ministerial reports noted6 (30 July 1991) 517 NZPD 3287.in [22]. There are no law reform reports prior to the introduction of the Bill, no publicdiscussion papers on the proposed legislation issued for consultation prior to theintroduction of the Bill and no submissions and departmental reports to a selectcommittee considering the Bill, as it did not go to a select committee.[32] The reasons for Parliament adopting s OD7 as the definition of "associatedpersons" in the AIL regime rather than some other definition is not apparent from thelimited publicly available material.Result[33] In all the circumstances, I am of the view that a limited order for discovery iswarranted. The application in its original form sought orders which are too broad andwhich would have been unduly onerous. However, restricted to three statutes onlyand then only to documents that relate to the selection of the definition of "associatedpersons" employed in the AIL regime, the enquiry is targeted at relevant material andis far more manageable.[34] I therefore make the following orders:(a) Within 20 working days (excluding 20 December 2017 to 20 January2018) the Commissioner is to file an affidavit stating:(i) Whether any of the legislative documents (as defined in [12]above) which relate to three statutes only, being the Income TaxAmendment Act (No 4) 1991, the Stamp and Cheque DutiesAmendment Act (No 2) 1991 and the Land and Income TaxAmendment Act (No 2) 1968 and which relate to the selectionof the definition of "associated persons" to be employed in thelegislation, are or have been in her control, excluding anydocuments that are already in CGL's possession as at the date ofthe hearing of this application; and(ii) If they have been, but are no longer in her control, her bestknowledge and belief as to when the documents ceased to be inher control and who now has control of them;(b) The Commissioner is to serve the affidavit on CGL.(c) If the documents are in her control, the Commissioner is to make thosedocuments available for inspection to CGL, in accordance with r 8.27of the High Court Rules; and(d) The Commissioner is to pay the costs of this application.Woolford J