CULLEN GROUP LTD v THE COMMISSIONER OF INLAND REVENUE [2019] NZHC 404

CULLEN GROUP LTD v THE COMMISSIONER OF INLAND REVENUE [2019] NZHC 404 [12 March2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2016-404-765[2019] NZHC 404BETWEEN CULLEN GROUP LIMITEDPlaintiffAND THE COMMISSIONER OF INLANDREVENUEDefendantHearing: 27-31 August, 3, 6, 10 and 11 September 2018Appearances: D J Cooper, J W A Johnson and N G Lawrence for PlaintiffG M Coumbe QC, A B Goosen, M K Nicholson and J Mara forDefendantJudgment: 12 March 2019JUDGMENT OF PALMER JThis judgment was delivered by me on 12 March 2019 at 10.00 a.m.pursuant to r 11.5 of the High Court Rules 2016.Registrar/Deputy RegistrarCounsel/Solicitors:David Cooper, Barrister, AucklandGillian Coumbe QC, AucklandWynn Williams, AucklandCrown Law, WellingtonSummary[1] Mr Eric Watson moved from New Zealand to the United Kingdom in 2002. Herestructured his business affairs so his shares in Cullen Investments Ltd (CIL) werereplaced by loans owed by Cullen Group Ltd (Cullen Group) to conduit companies inthe Cayman Islands, Modena Holdings Ltd (Modena) and Mayfair Equity Ltd(Mayfair). Modena and Mayfair were not, legally, "associated persons" with CullenGroup, so the arrangement fell within the provisions of the Approved Issuer Levy(AIL) tax regime. Accordingly, Cullen Group paid AIL at two per cent of the $397million of interest it paid Modena and Mayfair, rather than Non-Resident WithholdingTax (NRWT) at 15 per cent.[2] The Commissioner of Inland Revenue assessed Cullen Group as havingavoided $59.5 million of NRWT while it paid $8 million in AIL. She assessed the nettax owing as $51.5 million. Use of money interest on that amount came to anadditional $60.5 million as at 27 August 2018. Penalties have not yet been quantified.Cullen Group challenges the Commissioner's assessment. It says the arrangementrestructured Mr Watson's affairs in order to achieve certainty about his change of taxresidency from New Zealand to the United Kingdom and to plan for application of theUnited Kingdom's laws governing remittance of foreign-sourced income.[3] Parliament enacted the AIL regime with the objective of encouraginginvestment in New Zealand, by reducing the cost of New Zealand residents borrowingfrom non-residents. The arrangement here introduced no new funds into NewZealand. It restructured shares in one New Zealand company (CIL) into loans toanother New Zealand company (Cullen Group), which were assigned to overseasentities (Modena and Mayfair) in form but not substance. Mr Watson retained a highdegree of control over the relevant entities and was on both sides of the loans. I donot consider the arrangement was within the contemplation and purpose of Parliamentin enacting the AIL regime. It had a more than merely incidental purpose or effect ofaltering the incidence of tax. It was a tax avoidance arrangement and void against theCommissioner. The Commissioner counteracted the tax advantage lawfully and wasnot time barred in doing so. I dismiss Cullen Group's challenge. Cullen Group is liablefor the $51.5 million of tax plus use of money interest and penalties accordingly.What happened?Moving tax residency[4] There appears to be no material dispute between the parties about the facts. Inmid-2002, perhaps in May, Mr Watson moved from New Zealand to the UnitedKingdom with his son and his son's mother. He sold his personal assets and effects,including art and vehicles, and his Takapuna property, resigned his New Zealand-based clubs and associations, closed some bank accounts and cancelled credit cards;though his home may not have been sold until later.[5] Mr Watson was concerned to ensure his "permanent place of abode", for taxpurposes, changed from New Zealand to the United Kingdom. I accept that, in makingsuch a move, it is common for a high net worth individual to seek to disestablish NewZealand tax residency, and plan remittance of assets and income to the UnitedKingdom accordingly. That could involve using off-shore entities to hold assets, as itdid here.The relevant entities[6] Mr Watson was at the centre of a web of entities relevant to this case:(a) Cullen Investments Ltd was incorporated in 1995 as Blue Star CapitalLtd. Mr Watson held the shares personally. Between 1995 and 2002,Mr Watson realised some of his personal investments and lent theproceeds of around $98 million to CIL. In September 2002, Mr Watson,Mr Maurice Kidd and Mr Philip Newland were directors of CIL. MrMartin Goldfinch became a director in December 2002.(b) Modena and Mayfair were incorporated in the Cayman Islands on 9October 2002. All the shares in Modena and Mayfair were owned byChartered Trust Services Ltd (CTSL) as corporate trustee of theModena Trust:(i) The Modena Trust was settled on 1 November 2002 by MrWatson. He could not appoint trustees but could appoint andremove beneficiaries other than himself and his relatives. Itsonly non-charity discretionary beneficiary was the River GroupLtd.(ii) CTSL was a professional trustee services company,incorporated through a Cayman Islands provider, CloseBrothers. Close Brothers provided director, trustee andgovernance services for Modena, Mayfair and the ModenaTrust.(iii) The River Group Ltd was incorporated on 31 October 2002.Its directors were Mr Archer, Mr Goldfinch and Mr Newland.Its shares were held by Elizabeth Equities Ltd, as trustee of theTower Trust.1. Mr Watson was settlor, appointor and a discretionarybeneficiary of the Tower Trust. As at 21 October 2002, itstrustees were Mr Watson, Mr Kidd, Mr Strowger and MrNewland before Elizabeth Equities Ltd became trustee from22 December 2003.2. Elizabeth Equities Ltd was incorporated on 13 May 2003.Its shares were held by the Cullen Business Trust Ltd(CBTL) as trustee of the Cullen Business Trust.(c) Cullen Group was incorporated on 31 October 2002. Its initialdirectors were Mr Watson, Mr Newland, Mr Goldfinch and Mr LesArcher. Its shares were owned by Victoria Equities Ltd (VEL) as solecorporate trustee of the Valley Trust:(i) The Valley Trust was also settled on 31 October 2002 by MrWatson's mother. Mr Watson was the appointor and had thepower to appoint and remove trustees and beneficiaries and toveto proposed amendments. He was the sole final beneficiaryof the Valley Trust and, for the first few years, the sole namedand non-charity discretionary beneficiary.(ii) VEL was incorporated on 25 June 2002. Its initial directorswere Mr Watson, Mr Newland, Mr Goldfinch and Mr Archer,the same as the directors of Cullen Group. Its shares wereinitially owned by Mr Archer. From 10 October 2003, its shareswere held by CBTL as trustee of the Cullen Business Trust:1. The trustees of the Cullen Business Trust (initially knownas the Cullen Trust) were initially Mr Watson, Mr Kidd, MrStrowger and Mr Newland. On 10 October 2003, they werereplaced as trustees by CBTL. Mr Watson was the settlor,appointor and a discretionary beneficiary of the CullenBusiness Trust. He had the power to appoint and removetrustees.2. CBTL was incorporated in July 2003. Mr Watson was adirector. Its shareholders were Mr Watson, Mr Kidd, MrStrowger and Mr Newland, as trustees of the Gulf Trust.Mr Watson was the settlor, appointor and discretionarybeneficiary of the Gulf Trust.The transaction[7] On 13 November 2002, Mr Watson restructured his ownership of CIL. MrCampbell Rose, then at Russell McVeagh, and from 2012 at Deloitte, was a keyarchitect of the transaction.1 The key steps, all timed for 13 November 2002, were:(a) Mr Watson sold his shares in CIL to Cullen Group, at a (rounded) valueof $193 million, being $291 million less his previous $98 millionshareholder advances.2 The sale was conditional on CIL selling its1 Notes of Evidence [NOE] 28/3–6.2 Precisely, these figures were: $291,347,276; $192,986,181; and $98,361,095. I use the roundednumbers in the judgment, consistently with Cullen Group's submissions. See Agreement for Saleand Purchase of Shares in Cullen Investments Limited, 13 November 2002, Common Bundle (CB)1/6.shares in Medical Holdings Ltd to Mr Watson and on CIL selling itsshares in Vonelle Holdings Ltd to Maintenance Ltd which was ownedby Mr Watson.3(b) Cullen Group's purchase of the CIL shares from Mr Watson was fundedby a vendor loan from Mr Watson of $193 million (Loan A).4 MrWatson also lent Cullen Group $98 million (Loan B) which CullenGroup on-lent to CIL so that CIL could repay Mr Watson's shareholderadvance of that amount.5(c) Mr Watson assigned his rights under Loans A and B to the two conduitcompanies, Modena and Mayfair, respectively.6 Mr Watson madeback-to-back loans of $193 million (Modena Loan) and $98 million(Mayfair Loan) to each of them to fund their payment to him ofconsideration for those respective assignments in return for securityover all property owned by Modena and Mayfair respectively.[8] The position as at 13 November 2002 was represented in an appendix to CullenGroup's statement of claim in this proceeding in the diagram on the following page.7[9] As Mr Cooper, for Cullen Group, summarises it, "[t]he result was thereforethat CIL was owned by [Cullen Group] which owed money to Modena/Mayfair whichowed money to Mr Watson.8 Effectively, instead of Mr Watson owning the shares inCIL, he held loans for the same value to CIL's owner, Cullen Group, through Modenaand Mayfair. He had exchanged equity for debt. I accept the purchase price of $291million was at market rate, based on an independent Ernst & Young valuation, andthat, as the Commissioner accepted, the valuation was on an arms' length basis.93 CB 1/9.4 Loan Agreement, 13 November 2002, CB 1/21 [Loan A Agreement].5 Loan Agreement, 13 November 2002, CB 1/26 [Loan B Agreement]; Loan Agreement, 13November 2002, CB 1/31.6 Deed of Assignment of Debt, 13 November 2002, CB 1/48; Deed of Assignment of Debt, 13November 2002, CB 1/67.7 Statement of Claim, 15 April 2016, at Appendix B.8 Plaintiff's closing submissions, 11 September 2018, [Plaintiff's Closing] at [8].9 Commissioner's Statement of Position, 20 February 2013, CB6/2981 [SOP], at [17].[10] The terms of Loans A and B from Mr Watson to Cullen Group (which heassigned to Modena and Mayfair) included:(a) Modena or Mayfair could only request repayment of the loan fromCullen Group if Mr Watson had previously issued a letter of demandfor repayment of the corresponding Modena or Mayfair Loan, or anypart of it. Modena's or Mayfair's demand was required to becontemporaneous with, and not to exceed the amount specified in, MrWatson's demand.(b) Interest was payable at 16 per cent per annum, calculated six-monthly.I accept the interest rate was struck so as to, and did, reflect that of anarms' length arrangement.10(c) Cullen Group was not able to assign or transfer its rights or obligationsunder the loans.11 Mr Watson, as lender, could assign his rights aslender under the loans.12 Any other lender, including Modena andMayfair, could only assign them back to Mr Watson or with hisagreement.(d) Cullen Group was required to register each loan with the Commissioneras a registered security for AIL purposes and to make the relevantpayment of AIL to the Commissioner.13[11] The only substantive difference between Loans A and B was that the intereston Loan A was credited in account to the lender until the principal was repaid in fullwhereas the interest on Loan B accrued and was paid out. The terms of Mr Watson'sModena and Mayfair Loans largely mirrored Loans A and B. The terms of CullenGroup's on-lending of Loan B to CIL were similar to those of Loan B, though theinterest rate term was different.10 Memorandum by Mr Goldfinch, 7 November 2002, CB 2/861; Mr Shane Hussey, Brief ofEvidence, 29 August 2018, at [89]. NOE 169/5-8, 171/17-19 (Hagen).11 Clauses 9.1 to Loan A Agreement, above n 4, and Loan B Agreement, above n 5.12 Clauses 9.2 to Loan A Agreement, above n 4, and Loan B Agreement, above n 5.13 Clauses 3.2 to Loan A Agreement, above n 4, and Loan B Agreement, above n 5.[12] Mr Watson did not have a formal ownership relationship with Modena orMayfair. But Modena and Mayfair could only make demand on their loans to CullenGroup if Mr Watson made demand on his loans to them. Furthermore, Modena andMayfair entered a Memorandum of Understanding with CIL on 9 December 2002under which their directors delegated to CIL employees the power to effect electronictransfers of funds from Modena's and Mayfair's BNZ accounts to Mr Watson's BNZaccounts, subject to certain approvals and procedures.14 As Mr Rose explained in anemail on 21 November 2002, there was to be "as little hands-on involvement aspossible" from Modena and Mayfair.15 In a memorandum of 18 December 2002, MrRose confirmed cashflows between bank accounts were to be effected in practice byCIL employees.16 And, when CIL sought the consent of third party financiers toimplementation of the 13 November 2002 transaction, CIL stated "[t]he change is aninternal reorganisation and has no practical effect on the control of Cullen and its groupcompanies".17 As Mr Cooper, for Cullen Group, summarises it, "[a]lthough there wereintermediaries (Modena and Mayfair) Mr Watson was the ultimate lender and couldcontrol whether and when the loans were ultimately to be called up".18[13] The expert evidence runs in the same direction. Mr John Hagen's opinion,looking at the substance of the transactions, is that Mr Watson remained "in control ofthe group and the flow of funding at all times".19 Professor Choudhry's opinion was"all entities involved are part of the same controlling network and not operating asindependent parties in any way".20 Mr Hussey, in reply, agreed the structure allowedMr Watson economic control.21[14] Given all this, it is not surprising that Mr Cooper, for Cullen Group,acknowledges Mr Watson retained "some influence over all the relevant entities".22 Ifind Mr Watson had a high level of control over the relevant entities and was on both14 Memorandum of Understanding, CB 3/1108.15 Email from Campbell Rose to Maxine Rawlins, 21 November 2002, CB 2/989; Email fromCampbell Rose to Maxine Rawlins, 27 November 2002, CB 2/1066.16 Memorandum from Campbell Rose to Les Archer, William Gibson and others, 18 December 2002,CB 3/1135 [Rose Memorandum].17 Letter from CIL to Reesby and Company Ltd, 12 September 2002, CB 1/291.18 Plaintiff's opening submissions, 20 August 2018 [Plaintiff's Opening], at [120].19 John Hagen, Brief of Evidence, 16 July 2018 [Hagen], at [81].20 Moorad Choudhry, Brief of Evidence, 16 July 2018 [Choudhry], at [63].21 Shane Hussey, Brief of Evidence in Reply, 29 August 2018, [Hussey Reply], at [101].22 Plaintiff's Closing, above n 8, at [9].sides of the loan transactions. In summary, the arrangement replaced Mr Watson'sshares in a New Zealand company (CIL) with loans to another New Zealand company(Cullen Group), which were assigned to overseas entities (Modena and Mayfair) inform, but not substance.Subsequent developments[15] On five occasions in 2002, 2003 and 2005, Mr Watson demanded part-repayments of principal from Mayfair, amounting to $8.375 million.23 Under Loan B,Mayfair demanded the same repayments, at the same times, from Cullen Group.[16] Mr Watson subsequently made 12 additional loans to Modena totalling $54.5million.24 Modena made corresponding mirror loans to Cullen Group of the sameamounts (with one exception) and at the same times. The terms of these loans weresimilar to Loan A. Most of these were made after corresponding amounts of interest,totalling $56.99 million, were paid by Cullen Group to Mayfair and by Mayfair to MrWatson.25 Mr Cooper, for Cullen Group, submits Mr Watson made these additionalloans to Modena using funds he did not use from the receipt of interest from Mayfair.26[17] As at 30 November 2008, Cullen Group owed Modena, and Modena owed MrWatson, some $587.5 million of principal and interest.27Unwinding[18] On 30 November 2008 the Modena Loan aspect of the arrangement wasunwound, and on 24 and 25 March 2010 the Mayfair Loan aspect was unwound, asfollows:23 Letters of demand, CB3/1146, CB3/1155, CB3/1262, CB3/1282 and CB3/1526.24 Cullen Group's SOP, 21 December 2012, CB 6/2925 at [2.61]; Statement of Claim, above n 7, at[66].25 Statement of Defence at [70]; Statement in Reply at [23].26 Plaintiff's Opening, above n 18, at [179].27 Specifically, $587,536,236.63.(a) Mr Watson made demand for repayment in full of each of his loans,including interest, to Modena and Mayfair of $587.5 million and $140.9million respectively.28(b) Modena and Mayfair assigned to Mr Watson what each was owed byCullen Group under Loans A and B i.e. $587.5 million and $140.9million respectively, for which Mr Watson made demand for paymenton Cullen Group.29(c) Cullen Group entered with Mr Watson deeds setting-off of what it owedMr Watson in return for him subscribing for non-voting redeemablepreference shares issued by Cullen Group, that were immediatelyredeemable at the holder's option, to the value of $587.5 million and$140.9 million respectively with no dividend being payable.30(d) Mr Watson then transferred the preference shares to Novatrust Ltd,trustee of the Summit Trust. To fund that, Novatrust entered loanagreements with Mr Watson for a total of $728.4 million ($587.5 +$140.9 million) with the shares in Cullen Group used as security.(i) Novatrust Ltd was a professional trustee company registeredin Jersey.(ii) The Protector of the Summit Trust was Ms Lisabeth Style, aCIL employee. The Summit Trust had, as discretionarybeneficiaries, Mr Watson and Elizabeth Equities Ltd as trusteeof the Tower Trust.28 Notice of Demand, 30 November 2008, CB 4/2038.29 Deed of Assignment, 30 November 2008, CB 4/2043; Notice of Demand, 30 November 2008, CB4/2032.30 Deed of Set-Off, 30 November 2008, CB 4/2069; Subscription Agreement, 30 November 2008,CB 4/2059; Subscription Agreement, 24 March 2010, CB 5/2318; Subscription Agreement, 25March 2010, CB 5/2465.(e) Modena was wound up on 4 November 2009 and Mayfair was woundup on 29 November 2010. The Modena Trust was terminated on 26October 2010.The tax[19] The day after the 13 November 2002 transaction, as required under the loanagreements, Cullen Group applied for status as an "approved issuer" for the purposesof the AIL regime and applied to register its loans from Modena and Mayfair asregistered securities. Those applications were confirmed by the Commissioner on 22November 2002. From March 2003 to November 2008, under the AIL regime, CullenGroup paid AIL of two per cent per annum on the $397 million of interest it paid, orcredited in account, to Modena and Mayfair, amounting to just over $8 million.[20] Cullen Group made income tax returns but, except for dividend income of$12.6 million received from CIL in 2005, did not return any income. It claimed itsinterest expenses from the loans from Modena and Mayfair as deductions and taxlosses, some $108 million of which was transferred to other Cullen Group companiesby way of subvention payments and loss offsets from 2003 to 2009.[21] In 2010, the Commissioner assessed Cullen Group as liable for NRWT on the$397 million of interest, at 15 per cent, amounting to around $59.5 million.31 TheCommissioner offset that by the $8 million of AIL, at two per cent, it had paid from31 March 2003 to 30 November 2008.32 The resulting tax liability is around $51.5million.33 That assessment is what Cullen Group challenges in this case. As at 27August 2018, use of money interest on the $51.5 million came to $60.5 million.Penalties have not yet been quantified.[22] The Commissioner also suggests the overall effect of Cullen Group's taxavoidance was to reduce its income tax obligations, through subvention payments and31 Statement of Claim, above n 7, at [70]. The precise figures are $396,988,991.67 and $59,548,348.77.32 At [64]. The precise figure is $8,052,221.39.33 The precise figure is $51,496,127.38.loss offsets, by $108 million. Cullen Group disputes there was any material incometax reduction and that was not part of the Commissioner's assessment at issue here.The trial[23] The trial took nine days over three weeks in August and September 2018. Thebreaks in timing were due to the availability of overseas witnesses. Cullen Groupcalled four witnesses, three of them expert witnesses:(a) Mr William Gibson, a senior executive of CIL involved in the 13November 2002 transaction;(b) Mr Shane Hussey, an expert witness in accounting;(c) Mr Murray Brewer, an expert witness in tax accounting; and(d) Mr Edward Powles, an expert witness in United Kingdom tax law.[24] The Commissioner called three expert witnesses:(a) Professor Moorad Choudhry, an expert witness in finance;(b) Mr John Hagen, an expert witness in accounting; and(c) Mr Malcolm Gammie QC, an expert witness in United Kingdom taxlaw.[25] At the beginning of trial, on 27 August 2018, I heard objections by theCommissioner to evidence to be given by two of Cullen Group's witnesses, Mr Husseyand Mr Brewer. I ruled on the objections on 28 August 2018.34 In summary, I ruledthat Mr Hussey's evidence should respond to the positions of the Commissioner andCullen Group directly rather than to reports of experts exchanged by the parties duringthe tax disputes process. I ruled Mr Brewer's proposed evidence about the legal effectof a Double Tax Agreement on the New Zealand withholding tax rate was legal34 Ruling No 1, 28 August 2018.submission and was not to be given as evidence. I allowed Mr Brewer to give evidenceabout the steps a high net worth individual might be expected to take to ensure he wasnot tax-resident in New Zealand and indicated I would assess its admissibility inissuing judgment, in the context of assessing the parties' submissions about anti-avoidance law. Mr Hussey's and Mr Brewer's evidence was led accordingly. Iconsider Mr Brewer's evidence about the steps expected to be taken regarding tax-residency is admissible.Tax avoidance lawTax dispute process[26] The Tax Administration Act 1994 (TAA) sets out the process by which disputesbetween taxpayers and the Commissioner about tax liability are resolved. TheCommissioner issues an assessment, which the taxpayer may dispute by way of anotice of proposed adjustment (NOPA) to which the Commissioner may respond by anotice of response (NOR). If the dispute is not resolved between the parties theCommissioner issues a disclosure notice and the taxpayer issues a statement ofposition (SOP) to which the Commissioner responds with her own SOP. If the disputeis not resolved by Inland Revenue's internal adjudication process, the taxpayer maychallenge the Commissioner's assessment in the Taxation Review Authority (TRA) or,as here, the High Court.[27] Section 89M(13) of the TAA allows the parties to agree to additionalinformation being added to a SOP. Section 138G provides, unless allowed by theCourt, the parties may only raise the issues and propositions of law disclosed in theirSOPs in the later challenge process. But, as the Court of Appeal held in Commissionerof Inland Revenue v Zentrum Holdings Ltd, the parties are not held to pre-assessmentpositions.35 The Court may, on application, allow an applicant to raise newpropositions of law or new issues if satisfied the applicant could not, with duediligence, have discerned them at the time of delivering the SOP and, their raising isnecessary to avoid manifest injustice.35 Commissioner of Inland Revenue v Zentrum Holdings Ltd [2007] 1 NZLR 145 (CA).[28] To succeed in a challenge under s 138P, the taxpayer must prove, on the balanceof probabilities, the Commissioner's assessment was excessive by a specific amountor direct the Commissioner to make such an assessment. The Court may confirm,cancel or vary an assessment.Tax avoidance law[29] The general approach to construing specific tax provisions and the general anti-avoidance provision in New Zealand tax law is now well-settled. Section BG 1 of theIncome Tax Act 2004 (ITA) is the general anti-avoidance provision in relation toincome tax. It is relevant here because s NG 17(2) provides all provisions of the ITAapply as if NRWT is income tax. Section BG 1 states:BG 1 Tax avoidanceAvoidance arrangement void(1) A tax avoidance arrangement is void as against the Commissioner forincome tax purposes.Reconstruction(2) Under Part G (Avoidance and non-market transactions), theCommissioner may counteract a tax advantage that a person hasobtained from or under a tax avoidance arrangement.[30] More informatively, s OB 1 contains the following relevant definitions:tax avoidance arrangement means an arrangement, whether entered into bythe person affected by the arrangement or by another person, that directly orindirectly—(a) has tax avoidance as its purpose or effect; or(b) has tax avoidance as 1 of its purposes or effects, whether or not anyother purpose or effect is referable to ordinary business or familydealings, if the purpose or effect is not merely incidentaltax avoidance includes—(a) directly or indirectly altering the incidence of any income tax:(b) directly or indirectly relieving a person from liability to pay incometax or from a potential or prospective liability to future income tax:(c) directly or indirectly avoiding, postponing, or reducing any liabilityto income tax or any potential or prospective liability to future incometaxarrangement means an agreement, contract, plan, or understanding (whetherenforceable or unenforceable), including all steps and transactions by whichit is carried into effect[31] The leading authority on the application of s BG 1 is the judgment of themajority of the Supreme Court in Ben Nevis Forestry Ventures Ltd v Commissioner ofInland Revenue (Ben Nevis).36 Grounded firmly in the statutory language, the Courtset out the approach for determining whether and when the way a specific provisionis deployed crosses the lines and turns a permissible arrangement into a tax avoidancearrangement.37 As relevant to this case, and bearing in mind the burden of proof is onthe taxpayer, there are three requirements for there to be tax avoidance:(a) There is an arrangement which uses, and falls within, specific taxprovisions.38(b) Viewed in light of the arrangement as a whole, the taxpayer has usedthe specific provisions in a way which cannot have been within thecontemplation and purpose of Parliament when it enacted theprovisions.39(c) The arrangement has a purpose or effect, that is more than merelyincidental, of directly or indirectly altering the incidence of incometax.40[32] Whether there is an arrangement, and what it is, is informed by the definitionof arrangement in s OB 1, which is broad. The parties do not materially disagree onwhat the arrangement was here.[33] Whether an arrangement falls within specific tax provisions is determined, aswith any other statute, "primarily by their ordinary meaning, as established through36 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2NZLR 289 [Ben Nevis].37 At [104].38 At [105]–[107].39 At [107].40 At [113]–[114].their text in the light of their specific purpose", in accordance with s 5 of theInterpretation Act 1999.41[34] The Court in Ben Nevis concluded "[t]he ultimate question is whether theimpugned arrangement, viewed in a commercially and economically realistic way,makes use of the specific provision in a manner that is consistent with Parliament'spurpose".42 The Court indicated the following may be taken into account in thatassessment, depending on the particular facts and considering the commercial realityand economic effect of the use of specific provisions, not just purely legalconsiderations:43(a) the manner in which the arrangement is carried out;(b) the role of all relevant parties and their relationship with the taxpayer;(c) the economic and commercial effect of documents and transactions;(d) the duration of the arrangement;(e) the nature and extent of the financial consequences for the taxpayer;(f) the combination of various elements in the arrangement; and(g) whether the arrangement is structured so the taxpayer gains the benefitsof the specific provision in an "artificial or contrived" way(characterised as a "classic indicator" of a use outside Parliamentarycontemplation).[35] In relation to the more than "merely incidental" requirement, the SupremeCourt observed "[i]t will rarely be the case that the use of a specific provision in amanner which is outside parliamentary contemplation could result in the tax avoidance41 At [103]. See Terminals (NZ) Ltd v Comptroller of Customs [2013] NZSC 139, [2014] 1 NZLR121 at [39].42 At [109].43 At [108]–[109].purpose or effect of the arrangement being merely incidental".44 The "purpose oreffect" of a tax avoidance arrangement is assessed objectively, irrespective of thesubjective motives of the person who made it.45 The Court must focus "objectivelyon features of the arrangements involved, without being distracted by intuitivesubjective impressions of the morality of what taxation advisers have set up".46 InAlesco New Zealand Ltd v Commissioner of Inland Revenue, the Court of Appeal helda tax avoidance purpose will offend s BG 1 "unless it naturally attaches to or issubordinate or subsidiary to a concurrent legitimate purpose or effect".47 It held"[i]dentification of a business purpose will not necessarily protect a transaction fromscrutiny where tax avoidance is viewed 'as a significant or actuating purpose whichhad been pursued as a goal in itself'."48[36] If a tax avoidance arrangement does exist, s BG 1(2) empowers theCommissioner to counteract the taxpayer's tax advantage under part G of the Act. Iexplain this further in the context of issue five below.Tax avoidance case law[37] Some examples of application of the Ben Nevis approach to tax avoidance laware:(a) In Ben Nevis, the Supreme Court found an arrangement involving taxdeductions, for expenditure on a licence premium and insurancepremium that was not incurred in commercial or real terms, was notwithin Parliament's purpose and contemplation when it authoriseddeductions of the kinds in question.49 It dismissed the taxpayer'schallenge to the Commissioner assessing the deductions as void unders BG 1.44 At [114].45 Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR359 at [35]–[40].46 Ben Nevis, above n 36, at [102].47 Alesco New Zealand Ltd v Commissioner of Inland Revenue [2013] NZCA 40, [2013] 2 NZLR175 [Alesco] at [30].48 At [30].49 At [119], [147], [156].(b) In Penny v Commissioner of Inland Revenue, the Supreme Court foundthe structure used by the taxpayers, of transferring their orthopaedicpractices to companies owned by their family trusts, was entirely lawfuland unremarkable.50 But those companies' payment to them ofartificially low salaries meant they suffered no loss of income whileobtaining a reduction in tax liability as if they had.51 It dismissed thetaxpayers' challenge to the Commissioner treating their arrangementsas void under s BG 1.(c) In Alesco New Zealand Ltd v Commissioner of Inland Revenue, theCourt of Appeal held the taxpayer sought the advantage of taxdeductions "totally disproportionate to the economic burden" ofinterest payments, in a manner outside Parliamentary contemplation.52It dismissed the taxpayer's challenge.(d) In Vinelight Nominees Ltd v Commissioner of Inland Revenue, theCourt of Appeal found an artificial transaction involving payment ofAIL, rather than NRWT, had the more than incidental purpose ofavoiding tax.53 I refer to this case in more detail below. For themoment, it suffices to say there was no change of control in the relevantcompany, but interest was newly charged on existing borrowings, andat a non-commercial rate.54 The Court dismissed the taxpayer'schallenge to the Commissioner's counteracting of the tax advantage byassessing the unpaid NRWT under s BG 1.The issues[38] I apply the law of tax avoidance to the facts of this case by analysing six issues:(a) What was the arrangement?50 Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433 at [33].51 At [47].52 Alesco, above n 47, at [113].53 Vinelight Nominees Ltd v Commissioner of Inland Revenue [2013] NZCA 655, (2013) 26 NZTC¶21-055 [Vinelight (CA)] at [60]–[68].54 At [66].(b) What specific tax provisions were used?(c) Were the specific tax provisions used in a way which cannot have beenwithin Parliament's contemplation?(d) Was altering the incidence of tax a merely incidental purpose or effect?(e) Did the Commissioner lawfully counteract the tax advantage?(f) Is the Commissioner's assessment time-barred?Issue 1 What was the arrangement?[39] The Commissioner pleads, and at trial Cullen Group accepted,55 that there wasan arrangement, for the purposes of tax avoidance law, comprising the followingsteps:56(a) the incorporation of Cullen Group on 31 October 2002 with its sharesbeing held by VEL;(b) the sale by Mr Watson of his 15,000 ordinary shares in CIL to CullenGroup on 13 November 2002 and the loan from Mr Watson to CullenGroup to enable Cullen Group to fund the purchase of CIL shares fromMr Watson;(c) the settlement of the Valley Trust on 31 October 2002 and theincorporation of VEL on 25 June 2002 (the corporate trustee of theValley Trust);(d) the incorporation of CBTL on 8 July 2003 as the corporate trustee ofthe Cullen Business Trust (which is the shareholder of VEL);55 Plaintiff's Closing, above n 8, at [17].56 Statement of Defence, 31 May 2016, at [71.3].(e) the assignment of Loan A and Loan B by Mr Watson to Modena andMayfair by deeds of assignment dated 13 November 2002;(f) the registration of Modena and Mayfair in the Cayman Islands withCTSL owning the shares as trustee of the Modena Trust, and theincorporation of River Group Ltd on 31 October 2002;(g) the subsequent agreements including the loan agreement dated 13March 2003 between Cullen Group and Modena and the Deed ofAmendment in Relation to Loan Agreement dated 12 November 2003;(h) Cullen Group applying for AIL status and Cullen Group paying AILand filing AIL returns;(i) the registration by Cullen Group of Loan A and Loan B as two separatevariable securities for the purpose of Part 6B of the Stamp and ChequeDuties Act 1971; and(j) Modena and Mayfair charging, and Cullen Group paying, interest onLoan A and Loan B.[40] The Commissioner also pleaded "all other steps and transactions by which theArrangement was carried into effect" were part of the arrangement. Cullen Groupdoes not accept that. Mr Cooper, for Cullen Group, acknowledges assignment of theloans to Modena and Mayfair constituted steps undertaken as part of one plannedtransaction. But he submits the arrangement, as defined, does not include Mr Watson'smigration to the United Kingdom, nor the repayment of the loans and issue ofredeemable preference shares in 2008 and 2010. Mr Cooper acknowledges the 2008and 2010 transactions show Mr Watson had a degree of control over the entities butobjects they are not relevant to the purpose or effect of the arrangement put in placein 2002.57 This judgment does not depend on the aspects to which Mr Cooper objects.57 Plaintiff's Closing, above n 8, at [19]-[20].Issue 2: What specific tax provisions were used?[41] The parties agree the arrangement used, and fell within, the specific taxprovisions of the ITA and the Stamp and Cheque Duties Act 1971 [SCD], in relationto NRWT and AIL. The parties agree the relevant provisions are those of the ITA2004, unless otherwise specified. There is dispute between the parties about whether,and if so the extent to which, the specific provisions concerning tax residence and thincapitalisation were an animating force of the arrangement. For convenience, Isummarise their effect here too.Non-Resident Withholding Tax and the Approved Issuer Levy[42] In summary, NRWT is imposed at 15 per cent on interest (and dividends androyalties) paid by a New Zealand borrower to a non-resident. Alternatively, the AILregime recognises that non-resident lenders usually require New Zealand borrowersto "gross up" interest payments to cover NRWT. Later, I discuss the purpose of theAIL regime further. Under the AIL regime, a New Zealand borrower who is an"approved issuer" may pay AIL at two per cent on interest paid, in relation to a"registered security", to someone who is not an "associated person".[43] Under the ITA and SCD, the AIL regime works as follows:(a) "Any person to whom money is, has been, or may in future be lent"may apply to the Commissioner to be an approved issuer for thepurposes of the NRWT rules (s NG 5, ITA). Where (and when) theCommissioner has received such an application, the applicant isdeemed to be an approved issuer, unless the Commissioner declines theapplication (s NG 6). Accordingly, s OB 1 defines "approved issuer"as meaning "a person for whom an approval under section NG 6 isin force".(b) An approved issuer may apply to the Commissioner for registration ofany transaction or class of transactions "involving money lent to thatapproved issuer" as registered securities (s 86G, SCD). On application,the Commissioner must register the relevant transaction or class oftransactions and notify the approved issuer (s 86H, SCD);(c) Interest is treated as being paid by an approved issuer in respect of aregistered security only where, and to the extent, the issuer pays AIL onthe leviable value of the security at the time of the interest payment, attwo per cent (ss 86I and 86J, SCD; s NG 1(3), ITA).(d) The NRWT rules apply to "interest or investment society dividends that are derived by a person who is not resident in New Zealand, notbeing a person who is engaged in business in New Zealand through afixed establishment in New Zealand" (s NG 1(2)(b), ITA).(e) NRWT is set at zero per cent for "interest paid by an approved issuerin respect of a registered security and derived by a person who is not anassociated person of the approved issuer". (s NG 2(1)(b)(i), ITA).[44] Section OD 7 of the ITA 1994, which was in force at the date of the transactionon 13 November 2002, defines "associated person" for the purposes of the AIL rulesas follows:58OD 7 Defining when 2 persons are associated persons(1) For the purposes of this Act, unless the context otherwise requires, atany time associated persons or persons associated with each otherare–(a) Two companies where at the time there is a group of persons–(i) The aggregate of whose voting interests in eachcompany is equal to or exceeds 50%; or(ii) In any case where at the time a market valuecircumstance exists in respect of either company, theaggregate of whose market value interests in eachcompany is equal to or exceeds 50%; or58 Cullen Group referred to s OD 7 of the ITA 2004 in its Plaintiff's Opening, above n 18, at [68],and Plaintiff's Closing, above n 8, at [43]. As noted, the parties agreed to use the 2004 Act exceptas they otherwise specify. The Commissioner otherwise specifies in relation to s OD 7, in herOpening of 31 August 2018, at [5.4], and Closing, 10 September 2018, at [27]. Cullen Grouprelies on the Commissioner's pleading in its SOP there are "no material differences" between theITA 1994, 2004 and 2007. I do not consider the differences make any difference to the result ofthis judgment.(iii) Who have control of both companies by any othermeans whatsoever; or(b) A company and any person (other than a company) where atthe time–(i) The person has a voting interest in the company equalto or exceeding 25%; or(ii) In any case where at the time a market valuecircumstance exists in respect of the company, theperson has a market value interest in the companyequal to or exceeding 25%; or(c) Two persons who are at the time relatives; or(d) A partnership and any person who is–(i) At the time a partner in the partnership; or(ii) A person associated at the time (under any of the otherprovisions of this subsection) with a partner in thepartnership.(2) For the purposes of subsection (1)(a) and (b), where any person(referred to in this subsection as the nominee) holds any rights at anytime,–(a) On behalf of or to the order of another person; or(b) Being a relative at the time of another person,–the rights shall be deemed to be held at the time by the other personas well as by the nominee, as if the nominee, the other person, and allother such nominees of the other person were at the time a singleperson.(3) Repealed.(4) Section OD 7(1)(c) does not apply for the purpose of sections HH 3Cand HH 3D.[45] The Commissioner accepts in her statement of defence that Cullen Group wasnot, legally, an "associated person" of Modena or Mayfair, and did not control them,for the purposes of s OD 7 of the ITA.59 I raised a question at trial with both partiesas to whether the relevant entities might, nevertheless, be "associated persons" unders OD 7(1)(a)(iii), which includes where there is a group of persons "who have control59 Statement of Defence at [94]. See also: SOP, above n 9, CB6/2981 at [116]–[117], [198];Addendum to SOP, 16 August 2013, CB6/3059; Commissioner's Notice of Response, 8September 2010, CB5/2724 at [62].of both companies by any other means whatsoever". That definition appeared to mepotentially to encompass control in terms of economic substance as well as control inlaw, despite suggestions to the contrary in: obiter comments about a similar definitionfor GST purposes in Staithes Drive Development Ltd v Commissioner of InlandRevenue;60 a Canadian case;61 and an Inland Revenue Tax Information Bulletin.62However, I accept the Commissioner is bound by her pleadings, which she has notsought to vary, so the issue is not in dispute, was not argued before me and does notarise for my decision in this case.Tax residence and remittance[46] Section OE 1 of the ITA provides a natural person is "resident in New Zealand"if they have a "permanent place of abode" in New Zealand (irrespective of whetherthey have a permanent place of abode outside New Zealand). Permanent place ofabode is not defined in the ITA. As explained by the Commissioner in PublicInformation Bulletin No 180 from 1989, which was still in force in 2002, it wasdetermined by considering all of a person's connections with New Zealand.63[47] The United Kingdom's law concerning tax residence, and remittance planning,is largely agreed upon by the parties' UK tax experts, Mr Powles and Mr Gammie. In2002, there was no comprehensive statutory test of tax residency in the UK. But aperson spending at least 183 days a year in the UK was tax resident there, for thepurposes of UK tax law. So was a person who averaged 91 or more days in the UKover a four-year period.[48] A "non-domiciled resident" of the UK was allowed to pay UK tax only onincome generated in the UK as well as on income generated outside the UK duringUK residence but subsequently remitted to the UK. Accordingly, such taxpayers hadincentives to ensure money remitted to the UK was "clean capital", which did notrepresent income generated during a period of UK tax residence. This was usually60 Staithes Drive Development Ltd v Commissioner of Inland Revenue [2015] NZHC 2593, (2015)27 NZTC ¶22-028 [Staithes Drive] at [93]–[102].61 Duha Printers (Western) Ltd v Canada [1998] 1 SCR 795 at 815-816.62 Inland Revenue Department Tax Information Bulletin Vol 2 No 3 Appendix, Controlled ForeignCompanies (October 1990) at [4.26].63 Inland Revenue, Public Information Bulletin No 180 (June 1989) at [3.12].done by setting up a segregated fund of clean capital outside the UK, to minimise UKincome and inheritance taxes, such as in a tax haven (or "tax neutral jurisdiction" asCullen Group called them at trial).Issue 3: Were the specific tax provisions used in a way which cannot havebeen within Parliament's contemplation?Submissions[49] Mr Cooper submits, for Cullen Group, Ben Nevis requires that whether aspecific provision is used in a way which cannot have been within Parliament'scontemplation must be firmly grounded in the statutory language.64 Accordingly, hesubmits the Commissioner: (a) takes an incorrect, overly broad, approach to statutoryinterpretation; and (b) makes an incorrect reading of the legislative history.[50] First, Mr Cooper submits that, although interpretation should be purposive andcan rely on extrinsic material, the Commissioner's approach rewrites rather thaninterprets the statutory provisions. He submits the statutory language does not justifyrequirements there be: "overseas investment in New Zealand"; "new investment" intoNew Zealand; parties which are not subject to common control/ownership; or loanson arms' length terms. In relation to the common control/ownership element, hesubmits Parliament's definition of "associated person" suggests it did not intend thatphrase would also apply to other relationships of "ownership/control" which falloutside the definition.[51] Second, Mr Cooper traverses the legislative history of the AIL regime andsubmits it does not support the Commissioner's policy objectives. He submits thelegislative history of the "associated persons" definition shows it was intended to focuson the relationship between the parties rather than on the nature of the transactionbetween them. He submits the TRA's reasoning about common ownership and controlin Vinelight, which supports the Commissioner's position, was not adopted by eitherthe High Court or the Court of Appeal judgment in Vinelight.65 He submits the High64 Ben Nevis, above n 36, at [104].65 Vinelight (CA), above n 53; Vinelight Nominees Ltd v Commissioner of Inland Revenue [2012]NZHC 3306, (2012) 25 NZTC ¶20-155 [Vinelight (HC)] at [122]–[124]; Case 11/2011 [2011]NZTRA 07, (2011) 25 NZTC ¶1-011 [Vinelight (TRA)] at [317].Court's obiter comments in Staithes Drive on artificiality of the arrangement there donot support the Commissioner's position.66[52] Mr Cooper also submits artificiality and contrivance are relevant where theycause the alteration in the incidence of tax and are thereby the means by whichavoidance occurs. But here, he submits the factors said by the Commissioner to beartificial and contrived, judged against arms' length standards, are to be expected inthe context of privately held assets. So, he submits:(a) vendor finance with a related company/trust structure are common andcommercially rational;(b) the economic terms of the transaction were not artificial, theinterposition of Modena and Mayfair did not alter the economicsubstance of the arrangement or the incidence of tax;(c) there were rational and legitimate tax residency and remittanceplanning reasons to include Modena and Mayfair in the transactionwhich was not necessary, but prudent;(d) the use of tax havens is not uncommon and made no difference to theincidence of tax in New Zealand or the United Kingdom;(e) any circularity in the payments was superficial rather than substantiveand circularity is both common in commercial transactions andinfrequently enlightening in relation to tax avoidance.(f) Vinelight's features of artificiality and contrivance are absent in thiscase and justify distinguishing it: the overall rationale of thetransactions; the non-commerciality of the interest rate; the contrivedmanagement fee; the sole purpose being tax avoidance; and theexistence of backdated and inaccurate documents.66 Staithes Drive, above n 60.[53] Ms Coumbe QC, for the Commissioner, relying on Vinelight, submits thepurposes of the AIL and NRWT regimes, and the associated persons rules under sOD 7, are:(a) to encourage investment into New Zealand by non-residents;(b) to enable New Zealand borrowers to reduce their interest costs whenborrowing funds from non-associated non-resident lenders who mightotherwise "gross up" the interest charged so the New Zealand residentborrower bears the NRWT;(c) to offer the concession only where the parties are not associated andarms' length dealing is more likely, not where they have a particularlyhigh level of common ownership and control; and(d) to discourage tax avoidance and evasion relating to NRWT.[54] Accordingly, Ms Coumbe submits Parliament's intention is the concessionaryAIL rate is only available to "genuine overseas third party lenders" where there is nota high degree of common control and ownership. She submits this arrangement,viewed as a whole in a commercially and economically realistic way, cannot have beenintended by Parliament to benefit from the concessionary two per cent rate of AIL anda zero-rate of NRWT because:(a) there was no genuine overseas investment from a genuine non-residentlender;(b) the parties were subject to a high degree of common control andownership by Mr Watson in substance even though they were notassociated in legal form, and there were non-arms' length transactions;(c) many features of the loans and transactions are commerciallyunorthodox, as particularly illustrated by their unwinding, and exhibitcircularity, artificiality, contrivance and pretence that are hallmarks oftax avoidance according to Ben Nevis and are unnecessarily complex.[55] Ms Coumbe disputes Cullen Group's submission that Parliament must be takento have contemplated arrangements falling outside s OD 7 qualifying for AIL. Shesubmits that would mean the general anti-avoidance provision in s BG 1 is overriddenor read down by the specific provisions in s OD 7, contrary to Ben Nevis. She submitsthe High Court and Court of Appeal rejected that argument in Vinelight.The difference between purposive interpretation of specific provisions and applicationof the general anti-avoidance provision[56] Counsel's submissions in this case raise directly the question of the differencebetween a purposive construction of specific tax provisions and Parliament'scontemplation of how those provisions should be used. For there to be tax avoidance,the arrangement must fall inside the meaning of the provisions, construed in the lightof their purpose, but outside the way in which Parliament contemplated they be used.[57] Mr Cooper effectively submits that if the arrangement here is outside apurposive construction of the AIL regime, including the definition of associatedperson, then it is also outside the way in which Parliament contemplated the provisionsbe used. There is legalistic logic to this argument. And it resonates with the UnitedKingdom approach to anti-avoidance law and with the minority's judgment in BenNevis.67 But it does not account for how the general anti-avoidance provision worksat New Zealand law.[58] The majority of the Supreme Court in Ben Nevis made clear that specificprovisions of tax statutes are to be construed in the usual way: "primarily by theirordinary meaning, as established through their text in the light of their specificpurpose", in accordance with s 5 of the Interpretation Act 1999.68 That is the sameway courts interpret any statute, as made clear by the Supreme Court in Terminals(NZ) Ltd v Comptroller of Customs.69 I accept Mr Cooper's submission this ispurposive interpretation in the usual way, not "literal" or "black letter" interpretation.70But the text of the statute remains at the heart of even purposive interpretation. As67 Ben Nevis, above n 36, at [2] and footnotes 6 and 7.68 At [103].69 Terminals (NZ) Ltd v Comptroller of Customs, above n 41, at [39].70 James Coleman Tax Avoidance Law in New Zealand (2nd ed, CCH, Auckland, 2013) at 76-77;Plaintiff's Closing, above n 8, at [28]–[29].stated by the leading text, Burrows and Carter Statute Law in New Zealand cited byMr Cooper, "[w]hatever the purpose of an Act may be, there is only so far one can'stretch the meaning of the words' of the provision under consideration".71 Judicialunderstanding of Parliament's purpose in enacting legislation informs, but does notsubstitute for, judicial interpretation of the words Parliament enacted.[59] By contrast, the "parliamentary contemplation" stage of the s BG 1 taxavoidance inquiry is wider than simply a purposive interpretation of the text of specificprovisions. The existence of s BG 1 reflects that "however carefully the generalprovision might be drafted, the results of taxpayers' ingenuity in adapting the forms inwhich they did business could not be predicted".72 Parliament "must have envisaged"some circumstances in which the way a specific provision is deployed would "crossthe line and turn what might otherwise have been a permissible arrangement into a taxavoidance arrangement".73 This is why the Supreme Court rejected the taxpayers'argument in Ben Nevis that "once the ordinary meaning of a specific provision wassatisfied there could be no tax avoidance".74[60] The majority of the Supreme Court in Ben Nevis identified tax avoidance asoccurring when use of a specific provision falls (a) within its ordinary meaning but (b)outside its intended scope in the overall scheme of the Act (and is more than merelyincidental).75 The Court unanimously reinforced that, in Penny v Commissioner ofInland Revenue, when it said "what the Act does require of taxpayers is that theyshould not structure their transactions with a more than merely incidental purpose ofobtaining a tax advantage unless that advantage was in the contemplation ofParliament".76[61] The effect is that, in order to prevent avoidance of the law by clever tax lawyersand accountants, Parliament has passed a general anti-avoidance provision. Thisempowers the judiciary to give more weight to Parliament's purpose, compared to text,71 R I Carter Burrows and Carter Statute Law in New Zealand (5th ed, LexisNexis, Wellington 2015)at 245.72 Ben Nevis, above n 36, at [101].73 At [104].74 At [104] and footnote 113.75 At [106]–[107].76 Penny v Commissioner of Inland Revenue, above, n 50, at [49].than it can under the Interpretation Act 1999 in interpreting a specific provision. Theenactment of s BG 1 means arguments based only on the statutory text of specificprovisions cannot answer the question of whether a taxpayer has avoided tax. Thisdoes not involve rewriting the specific provisions. It involves giving effect to s BG 1,with which they must work in tandem.[62] Furthermore, it is important that it is the "use" of specific provisions which iscompared with their purpose.77 This is an "intensely factual" exercise,78 focussing onhow the taxpayer's arrangement has used, or deployed, the specific provisionsincluding in terms of the variety of considerations stated in Ben Nevis, as outlinedearlier.79 Viewed objectively, in a commercially and economically realistic way, isthat use consistent with Parliament's purpose or contemplation? Artificial andcontrived structuring of an arrangement is a "classic indicator" it is not,80 thoughwhether the indicator is accurate will depend on the circumstances.Was the use of specific provisions here within Parliamentary contemplation?[63] As noted above, the parties agree the use of the AIL regime here, including thedefinition of "associated person", fell within the specific provisions of those regimes.So, was the way in which this arrangement used those specific provisions withinParliament's purpose and contemplation?[64] There is no doubt the arrangement here involved highly complex and contrivedownership structures that would not be found in arms' length commercialrelationships. But there is force in Mr Cooper's submission that a vendor-financedsale to a trust/holding company structure was common and commercially rational innon-arms' length commercial relationships involving private assets, so it should notbe characterised as artificial when judged on an arms' length basis.81 And, as Iaccepted above, it is common for a high net worth individual moving tax residence toseek to disestablish New Zealand tax residency and plan remittance of assets and77 Ben Nevis, above n 36, at [109].78 Alesco, above n 47, at [94].79 See [34] above.80 Ben Nevis, above n 36, at [108].81 Plaintiff's Closing at [112]–[113], relying on expert evidence of Mr Hussey, Mr Brewer, MrChoudhry and Mr Hagen.income to the United Kingdom accordingly, which could involve using off-shoreentities to hold assets. Such entities would not necessarily be arms' length. They arelikely to be related. So artificiality and contrivance are not necessarily the reliableindicators of tax avoidance in these circumstances as they are in other circumstances.[65] As Mr Cooper acknowledges, although Modena and Mayfair wereintermediaries, Mr Watson was the ultimate lender. And it appears Mr Watson maynot have been tax resident in New Zealand at the time, though I do not decide that.So, in this sense – in form – there may have been lending from a foreign lender to aNew Zealand borrower, Cullen Group. But neither the lender nor the borrower wereindependent. Mr Watson had exchanged equity in CIL for debt owed by Cullen Groupto Modena and Mayfair and, ultimately, back to him. As I found above, Mr Watsonretained a determining level of control over Modena and Mayfair through the terms ofthe loans. And he retained a very high level of control over Cullen Group, through thetrust ownership structure involving VEL, the Valley Trust, the Cullen Business Trust,CBTL and the Gulf Trust. That level of control is usually an incident of ownership ofequity, rather than of debt. In reality, Mr Watson was on both sides of the loantransactions, instead of his previous position as a holder of equity. The ownership anddebt relationships were structured in such as a way as to allow Mr Watson, throughCullen Group in New Zealand, to use the AIL regime to pay AIL at two per cent ratherthan NRWT at 15 per cent. Did Parliament contemplate that AIL rather than NRWTshould be payable when the loan is between such highly related parties?[66] As far as the text and scheme of the ITA is concerned, the AIL regime is clearlyan alternative to NRWT. It is available to New Zealand borrowers, as approvedissuers, who pay interest to non-residents. Under s NG 2(1)(b)(i) of the ITA, NRWTis set at zero for 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". TheAIL regime was introduced in Budget Night amendments in the Finance (Revenue)Bill on 30 July 1991. The equivalent clause to s NG 2(1)(b) (s 311(1)(aa) of the IncomeTax Act 1976) came into effect on 1 August 1991. In particular:(a) The explanatory note about the clause which is the equivalent of sNG 2(1)(b) explains interest is zero-rated for NRWT "where the personby whom the interest is derived and the person by whom it is paid arenot related persons".82(b) The Minister of Finance and Revenue's Taxation Policy – Business TaxPolicy document of 30 July 1991 explained the problem that, in aderegulated interest rate environment, non-resident lenders expect anafter-tax risk-adjusted rate of return equivalent to that in otherjurisdictions.83 They "will typically only lend to businesses in NewZealand if they are compensated for any withholding taxes applied totheir interest income" by grossing up the interest paid by the residentborrower. That increases domestic interest rates and deters investmentin New Zealand. The reform would place "increased downwardpressure" on domestic interest rates, stimulate investment and growthand encourage residents currently evading or avoiding NRWT to payAIL, reducing uncertainty and associated costs.84 NRWT wouldcontinue to apply where the issuer and non-resident holder of thesecurity are "associated parties" or "associated persons".85(c) Another document issued by the Ministers of Finance and Revenue onthe same date, Taxing Income Across International borders – A PolicyFramework, outlines the Government's policy framework forconsidering international tax principles and objectives.86 It providesmore detailed analysis of how a tax on interest paid to non-residentscan end up being borne by New Zealanders in higher interest charges.87But, if non-residents were not taxed, it gives examples of how a NewZealander could obtain the same treatment: by becoming a "tax exile",ceasing to be a resident while still having New Zealand source income;remaining a resident but interposing a non-resident legal entity like a82 Finance (Revenue) Bill 1991 (81-1) (explanatory note) at i.83 Ruth Richardson and Wyatt Creech Taxation Policy – Business Tax Policy 1991 (Ministers ofFinance and Revenue, 30 July 1991) at 20.84 At 21.85 At 21 and 22.86 Taxing Income Across International Borders – A Policy Framework (Ministers of Finance andRevenue, 30 July 1991) at 9. Referred to by the Minister of Revenue in introducing the Bill, (30July 1991) 517 NZPD at 3289.87 At 6-8.company or trust not subject to New Zealand tax (such as "Island run-around" tax avoidance schemes), which would lead to substantialerosion of the New Zealand tax base; or divesting New Zealand basedassets overseas.88 The solution was seen to be a "robust regime fortaxing residents on their foreign-source income", with low taxes onnon-residents and without risking erosion of the tax base.89 In additionto the introduction of the AIL regime, that meant proposed reforms tothe Controlled Foreign Company and Foreign Investment Fundregimes.90 The outline of the taxation of debt of non-residents, throughthe NRWT and AIL regimes, is similar to that in the first document.91It contained a separate analysis of taxation of equity supplied by non-residents, which required further work due to complications posed bythe interaction with other countries' tax regimes.92(d) The Associate Minister of Finance's contribution to the ParliamentaryDebates discloses similar objectives of encouraging investment andgrowth in New Zealand by lessening pressure on domestic interest ratesand stopping avoidance and evasion of NRWT by creating anexemption to it.93[67] The s OD 7 definition of "associated person", used for the AIL regime,originated in s 5 of the Land and Income Tax Amendment Act (No 2) 1968. The Billoriginally defined when persons were "at arm's length" but was changed to defineinstead "associated persons".94 It was considered "arm's length" was a term betterreserved to describe the nature of the transactions, whereas "associated persons"would describe the relationship between the parties.95 Section OD 7 is the generaldefinition of "associated persons". The definitions in s OD 8 are used for other specifictax regimes. The definitions are largely broader than s OD 7. I note that, in Staithes88 At 8–9.89 At 9–10.90 At 11-12.91 At ch 3.92 At 15–16.93 (30 July 1991) 517 NZPD at 3293 (Hon Maurice McTigue).94 Land and Income Tax Amendment Bill (No 2) 1968 (66-1), cl 5; Land and Income TaxAmendment Bill (No 2) 1968 (66-2), cl 5.95 (19 November 1968) 358 NZPD 3196.Drive Development Ltd v Commissioner of Inland Revenue, Edwards J considered theparties to a J G Russell arrangement were associated under the wider definition usedin the Goods and Services Tax Act 1985.96 Alternatively, if they were not, sheconsidered the arrangement would fall within the general anti-avoidance provision inrelation to GST, in s 76.97[68] Vinelight v Commissioner of Inland Revenue was a tax avoidance caseinvolving the AIL regime where trust structures were used to break the associationbetween the relevant entities for the purposes of s OD 7. At first instance in the TRA,Judge Barber characterised the policy and purpose of the AIL regime as follows:98[316] The policy behind the AIL regime was to reduce the cost of overseasborrowing to New Zealand borrowers and was aimed at lenders who wouldtypically only lend to New Zealand businesses if they were compensated forany withholding taxes which had to be paid: see Taxation Policy – BusinessTax 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 associatedparties, NRWT will continue to apply to the payment of interest. It was clearlynot intended that associated parties be able to access the AIL regime.[317] The purpose of association rules is basically to identify commoncontrol and common ownership. Where there is that level of common controlor ownership, then the concession is not intended to be available because itcan be inferred, in that situation, the lending to the New Zealand borrowerwould have occurred in any case. There is no need to provide the sameincentive sought by genuine third-party lenders. Parliament does not intendto extend the incentive where that arms-length aspect is missing, particularly,when the loan is already in place and, by necessary implication, was made inthe knowledge that full NRWT would have to be paid.[69] Judge Barber found the arrangement there had the purpose or effect of taxavoidance.99 In dismissing the appeal in the High Court, Peters J quoted theseparagraphs and was satisfied paragraph [316] identified the policy behind the AILregime.100 She was satisfied the taxpayer's use of s NG(2)(1)(b)(i) could not havebeen within Parliament's contemplation and purpose when it enacted the provision.On further appeal, in interpreting s NF 5 of the ITA (which is not at issue in this case),the Court of Appeal summarised the purpose of the AIL regime:10196 Staithes Drive, above n 60, at [84].97 At [110].98 Vinelight (TRA), above n 65, at [316]–[317].99 At [327].100 Vinelight (HC), above n 65, at [122]–[124].101 Vinelight (CA), above n 53, at [34] (footnote omitted). The objective of this regime, which remains in force, is that of encouraginginvestment in New Zealand by reducing the cost to taxpayers of borrowingoffshore. Consistent with that objective, AIL is available only where lenderand borrower are not associated persons as defined.[70] In relation to tax avoidance, the Court of Appeal recorded a submission by thetaxpayer that common control and ownership cannot be relied upon as evidence ofavoidance because Parliament chose a less restrictive definition of "associated person"in s OD 7.102 In finding there was tax avoidance, the Court stated:103As we have noted above, parliament enacted the NRWT and AIL rules toencourage investment in New Zealand. That was not the objective of thearrangement in this case. It is no sufficient answer to say that the arrangementotherwise complied with the letter of the tax laws.[71] The Supreme Court declined an application for leave to appeal the Court ofAppeal's judgment in Vinelight in relation to the time bar, the scope of thearrangement, and the Commissioner's reconstruction powers.104 It was not satisfied itwas necessary to hear and determine the proposed appeal in the interests of justice or,given the factual findings, that any matter of general or public importance wasraised.105[72] My view of what Parliament contemplated in enacting the AIL regime is basedon the statutory text and scheme, the legislative history and the case law. I agree withthe Court of Appeal, High Court and TRA in Vinelight that the objective of the AILregime is to encourage investment in New Zealand by reducing the cost of NewZealand residents borrowing from non-residents. That is pursued by exempting fromNRWT the interest paid by some New Zealand borrowers to non-residents; a costwhich was typically borne by the borrowers due to international market pressures.[73] The arrangement here replaced shares in a New Zealand company (CIL) withloans to another New Zealand company (Cullen Group), which were assigned tooverseas entities in form (Modena and Mayfair), but not substance. Mr Watsonretained a high degree of control over the relevant entities and was on both sides of102 At [61].103 At [67].104 Vinelight Nominees Ltd v Commissioner of Inland Revenue [2014] NZSC 74, (2014) 26 NZTC¶21-076.105 At [7].the loans. I accept the expert evidence that no new funds were introduced into NewZealand.106 Speculation about counterfactuals does not change that.107[74] I consider the use of the AIL regime by this sort of arrangement, which woulderode the tax base, was not within Parliament's contemplation or purpose. CullenGroup has not shown that it was. The success of Mr Watson and his advisers inbringing the arrangement within the terms of the specific AIL provisions does notmean Parliament contemplated that would or should occur. Viewed in light of thearrangement as a whole, Cullen Group has used the specific provisions in a way whichcannot have been within the contemplation and purpose of Parliament when it enactedthe provisions.Issue 4: Was altering the incidence of tax a merely incidental purpose oreffect?Submissions[75] Mr Cooper submits the Modena and Mayfair limb of the arrangement did notalter the incidence of tax. He submits that "one reason" for the restructure of CIL'sownership was ensuring Mr Watson no longer had a permanent place of abode in NewZealand and it was reasonable for him to take all reasonable steps to sever his direct,personal connection with CIL. He submits aspects of the 13 November 2002transaction reflected prudent United Kingdom remittance and tax planning. Heaccepts Mr Watson's assignment of Loans A and B to Modena and Mayfair as conduitswas not necessary for remittance planning purposes but submits it was prudent. Hesubmits the structure adopted was reasonable taking into account Mr Watson'smigration to the United Kingdom and the understanding of the law related topermanent place of abode at the time.108 I treat this submission in the context ofexamining whether the incidence of tax was merely incidental.[76] Ms Coumbe submits the arrangement here was contrived to ensure, and hadthe effect, that the only tax collected anywhere in relation to the interest was AIL at106 Hagen, above n 19, at [80]; Choudhry, above n 20, at [64]–[66]; Hussey Reply, above n 21, at[130].107 Alesco, above n 47, at [38].108 Plaintiff's Closing, above n 8, at [125]–[127].two per cent. She submits payment of AIL rather than NRWT, must have been morethan a merely incidental purpose or effect of the arrangement. She submits neitherUnited Kingdom remittance planning nor tax residency was, objectively, a purpose oreffect of the arrangement.Merely incidental analysis[77] First, it is clear the arrangement, viewed as a whole, used the specificprovisions of the ITA and SCD to alter the incidence of tax. AIL was paid at a rate oftwo per cent, totalling $8 million, instead of NRWT being paid at a rate of 15 per centwhich would have totalled $59.5 million. The incidence of tax was altered in theamount of $51.5 million. But was that alteration of the incidence of tax merelyincidental?[78] I accept one of the purposes of the restructuring of CIL's ownership, and of thearrangement, was to effect Mr Watson's migration to the United Kingdom. I acceptMr Watson may have cut links to New Zealand to do that, and that purpose may haveled him to sell his shares in CIL; even though he retained other shares and he or hiscompanies acquired (less valuable) shares in other New Zealand companies, MedicalHoldings Ltd and Maintenance Ltd, as part of the arrangement. But any tax residencyeffect of selling his CIL shares would have been mitigated by the significant retentionof control by Mr Watson through the arrangement. And selling CIL shares for thispurpose did not require the complex structure set up in the arrangement, particularlythe use of Modena and Mayfair.[79] I also accept United Kingdom remittance planning was a consideration inaspects of the arrangement. Mr Watson could reasonably have been expected to wanta source of "clean capital", typically located outside the United Kingdom, for UnitedKingdom remittance planning purposes. But this did not require conversion of theshareholder advance from Mr Watson to CIL, which was already clean capital, intoLoan B. And the expert evidence is that the assignment to Modena and Mayfair wasnot required for United Kingdom tax purposes and, in some respects, posed addedrisks.109 Perhaps remittance planning could reasonably have gone as far as109 Malcolm Gammie QC, Brief of Evidence, 3 September 2018 at [109]; NOE 187/18–188/5.institutional segregation by assignment of Loan B to a separate entity.110 But Modenaand Mayfair played no independent role in remittance payments; those operating themsimply did what they were told. And there was no risk of inadvertent remittance oftainted capital under Loan A because no remittances were intended to be, or were,made.111[80] Even if all those points are accepted in the most favourable light for CullenGroup, I do not consider they demonstrate the arrangement's avoidance of NRWT byqualifying itself for AIL was merely incidental. Payment of AIL was a key element ofLoans A and B. That was the intention, according to the Rose Memorandum.112 Itwas the effect of the express terms of the loans which required Cullen Group to registereach loan with the Commissioner and make the relevant AIL payment. That was notrequired by tax residency or United Kingdom remittance planning purposes. Yet ithad the effect of avoiding $51.5 million of New Zealand tax. It was hardly "merelyincidental"; Cullen Group has not demonstrated it was.[81] Viewed objectively, I do not consider Cullen Group has demonstrated thataltering the incidence of $51.5 million of tax was a purpose or effect of thearrangement here that was merely incidental. It is not one of the rare cases where taxavoidance was merely incidental. The amount of tax avoided and the integral natureof payment of AIL as a term of the relevant loans indicate tax avoidance was an endpursued in its own right.Issue 5: Did the Commissioner lawfully counteract the tax advantage?Law of counteracting a tax advantage obtained by avoidance[82] If a tax avoidance arrangement exists, s BG 1(2) empowers the Commissionerto counteract the taxpayer's tax advantage under part G of the Act. In that part:(a) Section GB 1 empowers the Commissioner to adjust the amounts ofassessable income, deductions and available net losses, in the manner110 Edward Powles, Brief of Evidence, 30 August 2018, [Powles] at [63]–[72]; and Brief of Evidencein Reply, 30 August 2018 at [7]–[8].111 Rose Memorandum, above n 16 at [3.2(b)] and [4.1].112 Rose Memorandum, above n 16, at [2.13], [2.18] and [4.3].the Commissioner thinks appropriate, so as to counteract any taxadvantage obtained by a person affected by an arrangement that is voidunder s BG 1.(b) Section GB 1(1)(a) provides the Commissioner may, but is not requiredto, have regard to "such amounts of assessable income, deductions andavailable net losses as, in the Commissioner's opinion, that personwould have, or might be expected to have, or would in all likelihoodhave, had if that arrangement had not been made or entered into".[83] In Alesco New Zealand Ltd v Commissioner of Inland Revenue, the Court ofAppeal characterised the Commissioner's discretion as "broad".113 There, theCommissioner disallowed deductions for interest payments under a voidedarrangement. The Court held the Commissioner "may have regard to" an alternativefunding arrangement but is not bound to take that step "and nor should she be wherethe tax advantage can be counteracted simply by disallowing the impermissibledeductions".114 The Commissioner "is entitled to confine herself solely to negatingthe benefit enjoyed" by the taxpayer.115[84] Here, the Commissioner counteracted Cullen Group's tax advantage byassessing for NRWT at 15 per cent, rather than AIL at two per cent. Mr Cooper makesthree submissions about why that was impermissible, which are opposed by MsCoumbe.Does s GB 1 permit the Commissioner to assess NRWT liability?[85] First, Mr Cooper submits s GB 1 does not permit the Commissioner to assessCullen Group as if it were responsible to pay NRWT instead of AIL, because:(a) imposition of NRWT is not an adjustment of income, deductions or netlosses permitted by s GB 1;113 Alesco, above n 47, at [119].114 At [123].115 At [124].(b) the NRWT regime is not concerned with income;(c) the benefit lies with Modena and Mayfair, not Cullen Group, so noadjustment can be made against Cullen Group; and(d) Modena and Mayfair would have benefited from receiving monies paidunder the AIL regime but Cullen Group would be burdened with the taxliability.[86] Ms Coumbe submits the Commissioner did not make an adjustment to the rateof NRWT and did not need to adjust the amount of non-resident withholding incomeor exercise her power under s GB 1. All she had to do was assess NRWT on CullenGroup's reported non-resident withholding income. Alternatively, if she did have tomake an adjustment under s GB 1, Ms Coumbe submits the Commissioner was entitledto assess NRWT or to adjust gross non-resident withholding income from zero to thefull amount of interest assessed.[87] It is clear GB 1 empowers the Commissioner to make certain adjustments forthe purpose of counteracting any tax advantage obtained by that person from or undera tax avoidance arrangement under s BG 1. The power does not have to be exercised,if the purpose of counteracting such a tax advantage can be achieved through a lawfulassessment. Here, there is no doubt counteracting the tax advantage was theCommissioner's purpose. It is also clear the Commissioner's assessment of CullenGroup as liable to pay NRWT on the reported income, instead of AIL, did counteractthe tax advantage. I consider she was entitled to do that. The arrangement was voidby operation of s BG 1(1). The Commissioner was entitled to make her assessmenton that basis, without exercising her discretion under s GB 1. If I am wrong, either ofMs Coumbe's alternatives would be available and would have the same effect.Does a hypothetical counterfactual make a difference?[88] Second, if Modena and Mayfair were not used, Mr Cooper submits Mr Watsonwould have loaned the money to fund the CIL share purchase directly to Cullen Groupand the loans would still have been eligible for AIL rather than NRWT because MrWatson was not "associated" with Cullen Group. Mr Cooper submits theCommissioner's reconstruction needs to be consistent with that. Ms Coumbe submitsthe Commissioner did not reconstruct on that basis and was not required to do so.[89] Ms Coumbe is correct. First, as I have just held, the Commissioner was notrequired to exercise her discretion under s GB 1. Second, there is no factual basis forsuggesting "but for" the assignment, Mr Watson would have held the loan to CullenGroup. Rather, the evidence is that the assignment to Mayfair and Modena was anessential part of the arrangement.116 Third, if the Commissioner did exercise herpower and there was such evidence, it would be irrelevant at law because s GB 1(1)(a)only confers a discretion, and does not impose a requirement, on the Commissioner tohave regard to a counterfactual of her own devising. Fourth, the proposedcounterfactual arrangement would have a similar tax effect as the actual arrangement;it does not avoid the arrangement being avoidance.Should NRWT have been payable at 10 per cent?[90] Third, even if Cullen Group could not have qualified for AIL, Mr Coopersubmits NRWT would have been payable at 10 per cent under art 12(2) of the DoubleTax Agreement between New Zealand and the United Kingdom, so around $31.6million of tax was avoided, not $51.5 million.[91] As Ms Coumbe submits this is also based on the same counterfactual of loansgoing directly from Mr Watson to Cullen Group. The Double Tax Agreement with theUnited Kingdom did not apply to the interest actually paid by Modena and Mayfair inthe Cayman Islands. It fails for the same four reasons.Issue 6: Is the Commissioner's assessment time-barred?Time bar law[92] Section 108 of the TAA provides a four-year time bar on the Commissioneramending an assessment:108 Time bar for amendment of income tax assessment(1) Except as specified in this section or in section 108B, if—116 NOE 9/27–10/13 (Gibson).(a) a taxpayer furnishes an income tax return and an assessmenthas been made; and(b) 4 years have passed from the end of the tax year in which thetaxpayer provides the tax return,—the Commissioner may not amend the assessment so as to increase theamount assessed or decrease the amount of a net loss.[93] In Vinelight¸ in relation to Resident Withholding Tax (RWT), the Court ofAppeal questioned whether the time bar applies to NRWT, because the sectionallowing the Commissioner to assess for RWT expressly incorporates s 108 whereasthe section which allows the Commissioner to assess for NRWT does not.117 But, inany case, the Court held "[a] taxpayer which invokes the time bar against theCommissioner's RWT assessment must point to a return filed in the form prescribedfor RWT".118[94] Here, the Commissioner's assessment on or around 22 March 2010 was morethan four years after the AIL paid by Cullen Group up to and including the returnperiod ending 30 November 2004. Cullen Group filed the form required to accompanyAIL, IR67A, but did not file an NRWT form.[95] Mr Cooper wishes to submit that, if there is tax avoidance here, theCommissioner's assessments relating to the periods from 31 March 2003 to 30November 2004 are time barred under s 108. The argument is that Form IR67A meetsthe requirement of the time bar. Mr Cooper acknowledges the Court of Appeal'sdecision in Vinelight requires me to find the Commissioner was able to issueassessments for NRWT and, because Cullen Group filed AIL returns, rather thanNRWT returns, it cannot rely on a time bar. But Mr Cooper wishes to preserve hisability to argue that on appeal if required. The Commissioner agrees on the effect ofVinelight. The Commissioner wishes to argue that AIL returns are not income taxreturns as required by s 108(1).[96] I accept I am bound by the logic of the Court of Appeal in Vinelight to upholdthe Commissioner's submission, as both parties accept. I do so. Because the issue117 Vinelight (CA), above n 53, at [56].118 At [57].was not fully argued before me I do not express any further view on the arguments tobe made on appeal.Result[97] I dismiss Cullen Group's challenge to the Commissioner's assessment ofCullen Group as liable for the $51,496,127.38 million of tax as assessed, plus use ofmoney interest and penalties.[98] Costs and disbursements should, prima facie, be awarded to the Commissioner.If they cannot be agreed, I give leave for: the Commissioner to file and servesubmissions of no more than 10 pages within 15 working days of the date of thisjudgment; and Cullen Group to file submissions in reply of no more than 10 pageswithin 10 working days of that.Palmer J