HONK LAND TRUSTEES LIMITED v COMMISSIONER OF INLAND REVENUE [2016] NZHC 1316 [17 June 2016]

HONK LAND TRUSTEES LIMITED v COMMISSIONER OF INLAND REVENUE [2016] NZHC 1316 [17 June 2016]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2015-485-564[2016] NZHC 1316UNDER the Income Tax Act 2007 and the TaxAdministration Act 1994IN THE MATTER OF an appeal from a decision of the TaxationReview Authority dated 29 June 2015BETWEEN HONK LAND TRUSTEES LIMITEDAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 7 April 2016Counsel: M Lennard for AppellantA Goosen and K Walton for RespondentJudgment: 17 June 2016RESERVED JUDGMENT OF ELLIS JI direct that the delivery time of this judgment is2 pm on the 17th day of June 2016Table of ContentsBackground [3]Approach on appeal [8]Issues [9]Were management services provided by HLL to the Trust? [11]Shortfall Penalties [34]The law: shortfall penalty for taking an unacceptable tax position [39]The law: shortfall penalties for taking an abusive tax position [43]HLT's appeal [48]Analysis [49]Result [64][1] In this appeal Honk Land Trustees Limited (HLT) contends that the Taxation Review Authority (the TRA) was wrong to confirm an assessment made by the Commissioner of Inland Revenue (the Commissioner) disallowing a $1.1 million income tax deduction it had claimed in the 2005 tax year.1 The deduction related to a management fee that, in its capacity as the corporate trustee of the Honk Land Trust (the Trust), HLT had paid to a related entity, Honk Land Limited (HLL).2[2] Judge Allison Sinclair, sitting as a TRA, upheld the Commissioner's positionthat the management fee was not deductible because it did not relate to any relevant services actually provided by HLL and (alternatively) that it was a contrivance designed to enable the Trust to avoid the payment of tax. The TRA also upheld theCommissioner's imposition on HLT of a 50 per cent shortfall penalty for taking an abusive tax position.Background[3] The Trust was established by deed dated 27 September 2002. The settlor was Mr David Andrew Tauber, who is also a discretionary beneficiary of the Trust. Mr Tauber is, or was in 2005, the controlling mind of a number of companies and other entities that were beneficially owned by the Trust (through HLT) and which collectively comprised a wider business enterprise and which tends to be referred to for convenience as "Honk". More particularly, HLT directly owned Honk Group1 By which is meant the year ending 31 March 2005.2 XXX v The Commissioner of Inland Revenue [2015] NZTRA 10, (2015) 27 NZTC 3-009.Limited which, in turn, directly and indirectly owned various other companies that were conducting different business activities. One of those subsidiary companies was HLL.[4] In the 2005 tax year:(a) the Trust earned income from commercial rentals, dividends and interest income from associated entities;(b) two of the three Auckland commercial properties owned by the Trust were sold;(c) HLL owned two commercial buildings in Takapuna worth $20 million and with a rent roll in excess of $2 million.[5] The financial statements of the Trust for the 2005 year recorded:(a) management fees totalling $1,152,824 as an expense to the Trust, comprising:(i) $1,116,000 that was charged by HLL;(ii) $36,824 that was charged by Basin Ridge Management Ltd (BRML), Mr Tauber's management company.[6] The income tax effect of the putative $1,116,000 management fee expense was that:(a) the Trust claimed a deduction for the payment of the fee, with the result that the Trust had no tax to pay on the income it had received from elsewhere;(b) HLL offset the payment it received against its existing losses with the result that it paid no tax on the management fee income.[7] As I have said, this appeal essentially relates to the TRA's confirmation of theCommissioner's decision disallowing the deduction claimed by the Trust.Approach on appeal[8] In the TRA, the onus was on HLT to prove (on the balance of probabilities)that the Commissioner's assessment was wrong, and by how much. And on appealfrom that decision, it bears the burden of establishing that this Court should differfrom the TRA's decision. There is, however, no dispute that the appeal is by way of rehearing and that, on the approach in Austin, Nichols, this Court is entitled to come to its own conclusion.3 It is only if this Court considers that the TRA's decision iswrong that it is justified in interfering with it.Issues[9] At a general level, the questions raised by these proceedings are:(a) whether the $1,116,000 management fee deduction claimed by the Trust in the 2005 income year was deductible under s BD 2(1)(b)(i) or (ii) of the Income Tax Act 1994 (the ITA);(b) if the management fee was deductible, whether it was part of a tax avoidance arrangement under s BG 1 of the ITA;(c) if there was a tax avoidance arrangement, whether the voiding of the arrangement counteracted the tax advantage obtained by the HLT under the arrangement, or whether the Commissioner was obliged to reconstruct under s GB 1 in accordance with what HLT says would have happened, had the arrangement not been entered into; and(d) whether the Trust is liable for an "abusive tax position" shortfall penalty or, alternatively, an "unacceptable tax position" shortfall3 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [3] and [4].penalty, under ss 141D and 141B respectively of the Tax Administration Act 1994 (TAA).[10] Mr Lennard advanced a number of factual and legal contentions which, he submitted, meant that the TRA was wrong to find against HLT on each of these issues.4 But the first and most fundamental question raised by the appeal is whether management services were in fact provided by HLL to the Trust at all. If they were not, then all other grounds of appeal necessarily fail. That question will, accordingly, be considered at the outset.Were management services provided by HLL to the Trust?[11] The TRA's key findings on this issue were expressed between [59] and [68] of her decision as follows:5[59] The financial statements of the Trust record a management fee expense of $1,116,000 paid to [HLL]. I agree with the Commissioner thatsuch an entry in the Trust's financial statements does not establish thatmanagement services were provided.[60] The investigator gave evidence that no documentary evidence of any services having been provided by [HLL] to the Trust had been produced. Mr [Tauber] disagreed and told the Authority that there were numerous emails and other documents showing work done in relation to various property development and property management activities. He was of the view that it was plain from the documentation that significant services were being provided to the Trust. The Commissioner had had access to all these documents. Nothing of this material was before the Authority.[61] There was no evidence of any company resolution or any agreement between the Trust and [HLL] for the charging of management services. There was no invoice for the management fee or supporting accounts for any of the work allegedly done. Mr [Tauber] gave evidence that the management fee was in fact set by reference to the income of the Trust. Mr [Tauber] considered that the fee was reasonable in the context of the value of the services provided and compared the fee to charging practices adopted in property management and professional firms where fees are charged on an agreed percentage or time cost basis.[62] Mr [Tauber] gave a broad description of the various projects and other activities that entities in the [Honk] Enterprise were involved in during the 2005 tax year. However he did not provide any detail of the particular4 In the notice of appeal there were 14 separate alleged errors (some of which had sub-errors).These had been reduced (or at least consolidated) in to 12 by the time the appellant'ssubmissions were filed.5 Although the names of the various players were necessarily anonymised in the decision under appeal, their real names have been substituted for the purposes of this judgment.services for which the management fee was charged and for which entity the particular work was done.[65] It is not in issue that the Trust required management. However there is simply no evidence that any management services were in fact supplied by [HLL] to the Trust. It is noteworthy that as well as the sum of $1,116,000, the Trust paid management fees direct to Mr [Tauber]'s company of$36,824.00 together with office and parking rental in the 2005 year.Furthermore, during the second half of the year two of the Trust's buildingswere sold which inevitably would have resulted in less management services being required. In the absence of any evidence as to those services and possible quantum, the issue of fee apportionment does not arise.[66] Mr [Tauber] gave evidence that the 2005 management fee also included charges for work undertaken for the Trust in 2004. The Commissioner contended that such expenses ought to have been allocated in the earlier tax year. In any event no breakdown of such expenses was provided and Mr [Tauber] gave evidence that he was uncertain as to the split between the two years. It is therefore unclear whether any amounts should properly have been allocated to the 2004 year. In view of my other findings this issue is not significant.[67] The disputant relies upon the decision in Lockwood in support of itscontention that a "rough and ready" allocation of expenses is usual andacceptable. That case is distinguishable on its facts. In Lockwood the parent company provided management services to Lockwood and other companies in the group. The costs which it incurred were properly documented. The parent company did not attempt to recover the full amount of these costs and the fee was fixed on a global basis in an amount sufficient to appropriate all of the profit made by Lockwood. The issue for determination in that case was whether part of the amount paid was capital or revenue. Williams J specifically noted that the question as to whether Lockwood had demonstrated the necessary nexus between itself and the expenditure was not a matter in contest.[68] In the present case there is no record of services provided and the fee is not fixed by reference to costs incurred but simply by reference to theTrust's total income.[12] Mr Lennard was critical of the TRA's findings of fact for several reasons. In particular he said:(a) the TRA was wrong to hold (at [65]) that "there is simply no evidence that any management services were in fact supplied by [HLL] to the Trust";(b) the TRA was wrong to "require" documentation establishing a management agreement as a pre-requisite to being satisfied that management services were provided to the Trust by HLL;(c) the TRA failed to weigh or evaluate Mr Tauber's oral evidence andthe available inferences that the management services were provided; and(d) as a consequence the TRA failed properly to evaluate the evidence as a whole.[13] Three points may be observed at the outset.[14] First, Mr Lennard's challenge to the statement in [65] that there was no evidence that any management services were in fact supplied by HLL to the Trust is, I suppose, arguable. As the earlier part of the TRA's decision records in some detail, Mr Tauber gave lengthy evidence, the tenor of which was directed towards this issue.[15] But the difficulty is that (as will be more fully discussed later) much of what Mr Tauber said was vague, at best. On my reading of the transcript he never clearly or squarely addresses the critical issue of what management services were in fact provided by HLL to the Trust. But even if Mr Tauber's evidence could properly be characterised as a full frontal attack on the Commissioner's contention about theabsence of the provision of services, it would be impossible not to view the impugned sentence as merely an accidental ellipsis. When read in the context of the judgment as a whole the sentence can easily be read as meaning that:(a) there was no documentary or independent evidence to support Mr Tauber's oral evidence (which there was not); and(b) the TRA rejected any oral evidence given by Mr Tauber on the point.[16] Without more, therefore, this point goes nowhere.[17] Secondly, and contrary to the submission recorded at [12](b) above, the TRAdid not "require" a written management agreement as a pre-condition to being satisfied that management services were provided to the Trust. Rather, she viewed the absence of documentation as one (admittedly important) matter which countedagainst HLT's position that the services were provided.[18] Relatedly, I reject the proposition that the TRA failed to weigh or evaluate Mr Tauber's oral evidence and the available inferences. When the decision is read as a whole it seems quite plain that the TRA merely drew a contrary inference that no management services were provided by HLL to the Trust from the other evidence before her. As well as the undisputed absence of any written management agreement between the Trust and HLL or other supporting documentation, these included (in no particular order):(a) the undisputed absence of any actual payment by the Trust to HLL for the management fees (journal entries recorded the transactions at the end of the financial year);6(b) the undisputed fact that HLL had never charged either the Trust or any other entity management fees in any year other than 2005, which also happened to be the first year the Trust made a profit;7(c) the undisputed fact that in the 2004 income year, the Trust paid management fees of $378,393 directly to the management companies of Mr Tauber and Mr Webb;(d) the undisputed fact that HLL had no employees but, instead, was itself charged for management services it received from BRML and6 The Trust's general ledger account shows that 12 consecutively numbered journal entries of $93,000 each were used to raise the management fee expense in the Trust's financial statements. All of these journal entries were dated as having being made on the last calendar day of the consecutive months from April 2004 to March 2005. The consecutive numbering indicates that the entries were all made at the same time. Mr Tauber confirmed in evidence that the entries were recorded after the end of the financial year at the same time.7 There were no management fee payments made to HLL by the Trust in the years preceding the 2005 year or in the 10 months of the 2006 year up to the settlement of the sale of HLL. Indeed, HLL had, until June 2004, been the Corporate Trustee of the Trust and had paid for management services it received in that capacity.Mt Richmond Investments Ltd (both being Mr Tauber's management companies), and the Chester Family Trust (an entity connected with Paul Webb who was Mr Tauber's business associate);(e) the undisputed fact that the total management fee expense incurred by HLL in the 2005 year of $497,970 was less than half of the fee it charge the Trust ($1,116,000). Some of those management fees were incurred by HLL in managing its own commercial building at Takapuna; and(f) the undisputed fact that the management fee that was charged by HLL to the Trust was for managing all of the companies in the group andthe "related trusts", which included HLL itself.[19] It is also undisputed that:(a) without the management fee expense the Trust would have recorded income of $1,685,529.21 for the 2005 year;(b) the Trust could not offset its profit against the losses of related companies because the ITA does not permit a trust to offset income to a company. Losses may be transferred only between two or more companies from the same group;(c) in a resolution dated 30 June 2005 HLT (as trustee of the Trust) resolved to distribute the entire dividend income it had received to Mr Tauber;(d) after the distribution of this dividend income, the Trust would have had income of $1,116,000 with tax to pay of $368,280;(e) the management fee expense of $1,116,000 therefore preciselymatched the Trust's income with the effect that the Trust would pay no tax;(f) the management fee was set at the end of the financial year by reference to the profit that the Trust would have made had the management fee not been charged;(g) HLL was the only company in the group with available losses;(h) without the management fee income in 2005 HLL would have had a taxable loss of $966,788;(i) HLL would shortly have lost the advantage of those losses because the company was about to be sold;8 and(j) there were no other companies in the group in a profit position that could have set off HLL's loss in 2005.[20] In my view, the above matters collectively formed a more than adequate basis for the TRA to draw the conclusions that she did. But there were also other, independent, reasons for putting to one side the evidence given by Mr Tauber. As I have already said his evidence was, in a number of important ways, implausible, contradictory, vague and equivocal. I refer to the following aspects of his evidence by way of example only.[21] First, when asked by Mr Goosen in cross-examination whether he could produce documentary evidence to support his contention that during the 2005 tax year HLL had provided management services to the Trust and had incurred significant costs in doing so, Mr Tauber said:Well I didn't come prepared to produce evidence.[22] I simply observe that this appears to me to be a remarkable statement forsomeone of Mr Tauber's experience and understanding of tax matters and the tax disputes process.8 One of the reasons that HLT replaced HLL as the trustee of the Trust on 9 July 2004 was that HLL was to be sold and all of HLL's shares were in fact sold pursuant to an agreement dated 12 July 2005. Once the sale and transfer of the shares was complete HLL would not have had the requisite continuity of shareholding which would mean that neither the selling nor the purchasing shareholder would have been able to use the losses to reduce taxable income.[23] Secondly, in relation to Mr Tauber's evidence that HLL "clearly should have"charged management fees in 2004 for services which he said it had performed in that year (and so had, instead, added those charges to the 2005 year), there was the following exchange:9Q Are you saying that there was a decision in earlier years to provide management services to the trust through Honk Land Limited but you decided not to charge for that or you forgot to charge?A Probably the latter.Q You forgot to?A Yeah or forgot to or the –Q Overlooked it?A Overlooked it or possibly the accountant didn't process somethingshe should have.Q In any event you didn't, in the end Honk Land Limited didn't chargemanagement fees.A Yeah.Q But you had made a conscious decision at that point to provide services to the trust through Honk Land Limited?A Well that was the reality, there were resources in Honk Land Limited being actively deployed for Honk Land Trust activities so I supposethat's active in a way because that's what was happening.Q And then when you did charge management fees from Honk Land Limited to the trust in 2005 you charged more, you charged for both years is that right?A I wouldn't specifically say that.Q I thought that was what you said –A Yeah, well there's a bit of catch up but when you say specifically interms of what proportion related to provision of services in earlier years and that year, most of it would relate to 2005 but some of itwould've related to a bit of catch up, yeah, in terms of whether it's one third, two thirds, I'd have to reapply my mind to that.[24] The lack of clarity in this evidence, and Mr Tauber's rather cavalier attitudeto it, really speak for themselves.9 As I understand it this point was principally relevant to the issue of why HLL had "suddenly"decided to charge a fee in 2005 and also to the legal issue of allocation (which I do not need to address in this judgment).[25] Thirdly, and in relation specifically to the issue of whether HLL was providing management services to the Trust, Mr Tauber had said in his main brief of evidence:79. Honk Land Trust undertook management services for related companies and trusts, in particular:79.1 Management obligations on all companies and affiliates controlled by Honk Land Trust, including Honk Land Limited [emphasis added][26] This statement was, on its face, quite contrary to the whole thrust of HLT'scase and other parts of Mr Tauber's evidence, which was that it was HLL that had undertaken management services for the Trust. After this discrepancy had been put to him in cross-examination there was the following exchange between Judge Sinclair and Mr Tauber:Q Can I just enquire then why 79 is worded like that? I come back to the same issue that Mr Goosen has, it says "Honk Land Trustundertook management services for related companies and trusts. As you just described the activities Mr Tauber they seem to be performed anyway by Honk Land Limited?A. Yeah, well maybe Honk Land Limited is, should be – because it had the management structure there but in respect of the other entities and other interests –Q Well you talk about it being management of numerous contracting advisors and employees, all group enterprises, funding obligations et cetera, when you look at that paragraph you pretty much describe what you say Honk Land Limited was doing?A Well it was, ah, Honk Land Limited was providing those services forthe trust but it was the trust's responsibility to deliver all thoseservices.Q So what do you mean by "undertook management services"?A Well, it took management services because it had secured the services from Honk Land Limited, Honk Land Trust had secured theservices of myself and the resources, I mean we could've parked thecosts structure in the top entity but that wouldn't have been prudentand is not the commercial norm, the commercial norm is to isolate the management function in a subsidiary entity and that provides the services to the parent that then recharges, the parent being Honk Land Trust.Q. Right well I understand what you're saying but it doesn't seem to meto reflect in that paragraph which perhaps you might have a read of over lunchtime.A I can maybe see if I want to alter it or refine it.[27] Mr Tauber did not, however, subsequently alter or refine what he had said in his brief. His evidence on the issue therefore remained confused and equivocal, at best.[28] Lastly, I am unable to agree with Mr Lennard that there were specific facts and evidence which formed an evidential basis upon which an inference that HLL managed the Trust could or should have been drawn. More particularly, I think Mr Goosen was correct to submit that:(a) the fact that Mr Webb's company did not charge a management fee to the Trust is neutral;(b) the fact that a management fee $36,824 was also paid to Mr Tauber's company, BRML, is at best for the appellant neutral. It points to management services being provided by someone other than HLL;(c) the fact that payment of the management fee is recorded in the statements of account is neutral;10(d) the fact that HLL was charged (by other entities) for management fees of $497,970 in 2005, when in 2004 HLL was charged a management fee of $424,282, and did not charge the Trust for management services is neutral;(e) the fact that the Statements of Financial Performance for HLL and the Trust record that both incurred some expenses associated with running an office, is neutral. It is not disputed that neither the Trust nor HLL employed staff in the relevant year 2005.10 See [18](a) and footnote 6 above.(f) the contention that HLL paid a salary to Mr Tauber in 2005 is incorrect; he was no longer a shareholder and the financials reflect that the provision for his shareholder salary of $750,000 in the 2004 year was later reversed by $520,000 in the 2005 year, with no salary paid in the 2005 year. No inference of management of the Trust can be drawn from that; and(g) the fact that no other entity (besides BRML) provided management services to the Trust does not invite the inference that HLL provided those services.[29] As the TRA accepted, it may well be that HLT required some management and, in the absence of its own employees, might reasonably have paid some other person or entity for that. But the onus was on HLT to establish that management services were provided to it by HLL, satisfaction of which would logically entail both the identification of the relevant services and proof that they were performed by HLL. Putting to one side his failure to identify any specific services that were provided to the Trust at all, my general sense of Mr Tauber's evidence was that hewas suggesting either that:(a) HLL provided services by acting as some form of conduit for services that were in fact performed by other entities within the Honk Group(such as Mr Tauber's own management company) the charge for which was simply passed on with a hefty premium added (which meant that the total charge happened to equal the Trust's total income)for so doing; or(b) all the entities in the Honk Group were so intertwined that he could effectively choose which entities should charge and pay for the cost of managing the entire group by reference to their respective financial positions.[30] In my view both positions are facile. Although at trial evidence was called from a tax accountant, Mr Macalister, as to the apparent prevalence of this type of arrangement at the time for the reasons I later give I do not find it compelling.[31] In the end, it is difficult not to agree with the Commissioner that, in reality, the management fee was a rather unsophisticated ex post facto contrivance designed solely to effect the transfer of the precise amount of taxable income upon which the Trust would otherwise have had to pay tax.[32] Accordingly, in my assessment the TRA was not only not wrong, but was right, to find that no management services were provided by HLL to the Trust. There is, therefore, no need to consider the legal aspects of the appeal. I merely note that if management services were in fact provided, notwithstanding the view that both Judge Sinclair and I have taken that they were not, I would also agree with her (for the reasons she gave) that:(a) the requisite nexus with the earning of the Trust's assessable income is absent; or (if that is wrong) –(b) the payment of the fee formed part of or constituted a void tax avoidance arrangement that was appropriately reconstructed by the Commissioner.[33] On that basis the only matter that requires further consideration is the imposition of shortfall penalties, which I do now.Shortfall Penalties[34] A shortfall penalty may be imposed by the Commissioner when there is a tax shortfall. A shortfall is the difference between the tax effects of the taxpayer's position and the correct position.[35] In the present case the Authority upheld the Commissioner's position that a tax shortfall of $368,280 arose when HLT filed its tax return on 24 March 2006 claiming the management fee of $1,116,000 as a deduction.[36] The question that then arose was whether a shortfall penalty should be imposed:(a) under s 141D of the TAA for taking an abusive tax position; or(b) under s 141B of the TAA for taking an unacceptable tax position.11[37] The TRA held that the transaction had a dominant purpose of avoiding tax and the imposition of a (100 per cent) shortfall penalty for taking an abusive tax position was appropriate.[38] Before turning to consider the grounds for appeal against this finding it is necessary to say something about the relevant law.The law: shortfall penalty for taking an unacceptable tax position[39] Section 141B of the TAA renders a taxpayer liable for a shortfall penalty if the taxpayer takes an unacceptable tax position. An unacceptable tax position is one which, viewed objectively, fails to meet the standard of being about as likely as not to be correct. There are monetary thresholds the meeting of which is not in dispute in the present case. The applicable shortfall penalty payable is 20 per cent of the tax shortfall.[40] Section 141B(7) stipulates that when determining whether a taxpayer has taken such a position account must be taken of:(a) the actual or potential application to the tax position of all the tax laws that are relevant (including specific or general anti-avoidance provisions); and(b) decisions of a court or the TRA on the interpretation of tax laws that are relevant (unless the decision was issued up to one month before the taxpayer takes the taxpayer's tax position).11 There was no dispute that, in either event, any penalty imposed should be discounted by 50 per cent under s 141FB of the TAA.[41] Section 141B(5) provides that whether an interpretation is unacceptable is to be determined as at the time the tax position is taken by the taxpayer.[42] The meaning of "about as likely as not to be correct" was considered by the Supreme Court in Ben Nevis.12 The plurality of the Court stated:[184] On its terms this standard does not require that the appellant's tax position had a 50 percent prospect of success but, subject to that qualification, the merits of the arguments supporting the taxpayer's interpretation must be substantial. The stipulation of an objective test means that the taxpayer's belief that the position taken was correct, or not unacceptable, is irrelevant.The law: shortfall penalties for taking an abusive tax position[43] Shortfall penalties for taking an abusive tax position are governed by s 141D of the TAA. Again, there are monetary thresholds the meeting of which is not in dispute in the present case. The applicable shortfall penalty payable is 100 per cent of the tax shortfall. Whether an interpretation is abusive is to be determined at the time the tax position was taken by the taxpayer.[44] Section 141D also relevantly provides:(1) The purpose of this section is to penalise those taxpayers who, having taken an unacceptable tax position, have entered into or acted in respect of arrangements or interpreted or applied tax laws with a dominant purpose of taking, or of supporting the taking of, tax positions that reduce or remove tax liabilities or give tax benefits.(2) A taxpayer is liable to pay a shortfall penalty if the taxpayer takes an abusive tax position (referred to as an abusive tax position).(4) This section applies to a taxpayer if the taxpayer has taken an unacceptable tax position.(6) A taxpayer's tax position may be an abusive tax position if the tax position is an incorrect tax position under, or as a result of, either or both of—(a) a general tax law; or12 Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.(b) a specific or general anti-avoidance tax law.(7) For the purposes of this Part an abusive tax position means a tax position that,—(a) is an unacceptable tax position at the time at which the tax position is taken; and(b) viewed objectively, the taxpayer takes—(i) in respect, or as a consequence, of an arrangement that is entered into with a dominant purpose of avoiding tax, whether directly or indirectly; or(ii) where the tax position does not relate to an arrangement described in subparagraph (i), with a dominant purpose of avoiding tax, whether directly or indirectly.[45] What it means to have a dominant purpose of "avoiding tax" in subs (7) is to be inferred from subs (1), namely having "a dominant purpose of taking, or of supporting the taking of, tax positions that reduce or remove tax liabilities or give tax benefits".13[46] Section 141D therefore contemplates two kinds of case where a taxpayer can be found to have taken an abusive tax position, namely where:(a) the Commissioner or the court has found that there is a void tax avoidance arrangement that was entered into with the dominant purpose of avoiding tax; or(b) there is no such arrangement but the relevant position was nonetheless taken with a dominant purpose of avoiding tax.[47] In either case, the taking of an unacceptable tax position must first be established.13 Similarly, s OB 1 of the ITA defines "tax avoidance" as including:(a) Directly or indirectly altering the incidence of any income tax:(b) Directly or indirectly relieving a person from liability to pay income tax:(c) Directly or indirectly avoiding, reducing or postponing any liability to income tax:HLT's appeal[48] For convenience, I set Mr Lennard's written submissions on the shortfallpenalties issue out in fall. He said:80.1 Even if there is "tax avoidance", as above, the "tax advantage" is nil:consequently there is no "tax shortfall";80.2 In any event, given the novel and unusual approach which the Commissioner has adopted, it cannot be said that against the law atthe time, HLT's approach was "unacceptable":80.2.1 The arrangement has to be considered in the light of the law at the time (2005): s 141B(5) of the TAA 1994;80.2.2 Mr Macalister's evidence as to the prevalence of this type ofarrangement;80.2.3 Macalister evidence as above and Lockwood as to acceptability of arbitrary allocation of management charges around group entities according to ability to pay, shifting profits etc.80.3 And that given the commercial drivers for this arrangement, and that the tax advantage could have been delivered in unassailable ways, it cannot be said that it was entered into with a "dominant purpose" ofavoiding tax.Analysis[49] It will immediately be observed that a number of the grounds upon whichHLT challenged the TRA's conclusions on shortfall penalties are predicated on aspects of the tax avoidance analysis. Because I have found that no managementservices were provided by HLL to the Trust and that HLT's case fails at the blackletter deductibility stage that analysis is no longer relevant.14 I do not consider these grounds further.[50] The grounds which are based on Mr Macalister's evidence can also be put toone side.15 His evidence in chief was not based on what I consider to be the correct premise. Indeed, a review of the transcript shows that Mr Macalister was questioned at some length about whether it would (in his opinion) be legitimate for a taxpayer to claim a deduction for a management fee that was charged or paid when no14 In particular, the grounds that there was no relevant "tax advantage" and that the Commissioner's tax avoidance analysis was "novel and unusual".15 Mr McAlister is a tax accountant who was called as an expert witness by HTL.management services had been provided. His responses were so evasive that the TRA had to intervene more than once in order to attempt to elicit an answer from him. The elusiveness of Mr Macalister's evidence on the issue no doubt reflects the unsurprising reality that, regardless of whether claiming a deduction for expenses which have not in fact been incurred has ever been a common practice, it could not possibly have been viewed as an acceptable one by reputable tax practitioners.[51] The decision in Lockwood was dealt with expressly by the TRA in terms in which I can discern no error.16 In that respect Judge Sinclair said:[67] The disputant relies upon the decision in Lockwood in support of itscontention that a "rough and ready" allocation of expenses is usual and acceptable. That case is distinguishable on its facts. In Lockwood the parent company provided management services to Lockwood and other companies in the group. The costs which it incurred were properly documented. The parent company did not attempt to recover the full amount of these costs and the fee was fixed on a global basis in an amount sufficient to appropriate all of the profit made by Lockwood. The issue for determination in that case was whether part of the amount paid was capital or revenue. Williams J specifically noted that the question as to whether Lockwood had demonstrated the necessary nexus between itself and the expenditure was not a matter in contest.[52] In other words, in Lockwood there was no dispute:(a) that identified management services had in fact been provided;(b) that identified management expenses had in fact been incurred; or(c) as to the quantum of the expenses incurred.[53] Nor (as the TRA noted) was the deductibility of the expenses in question, or determined, in those proceedings.[54] By contrast, each one of those matters was in issue in the present case.Lockwood is of no assistance in resolving them.16 Lockwood Building Ltd v Commissioner of Inland Revenue [1996] 2 NZLR 58 (HC).[55] In light of the views I have already expressed, therefore, there are just two questions that needed to be determined for shortfall penalty purposes, namely:(a) whether, viewed objectively, claiming the deduction was about as likely as not to be correct and, if not:(b) whether the deduction was claimed with a dominant purpose of avoiding tax.[56] The first issue is straightforward. As the Commissioner says, it is obvious that no deduction can be claimed by a taxpayer for the cost of services which have not been provided to it. That HLT's tax position was not about as likely as not to be correct is unarguable and therefore, in terms of s 141B, unacceptable.[57] As for the second issue, Mr Goosen submitted that indicators of the existence of a dominant purpose of avoiding tax may include artificiality, contrivance, circularity of funding, concealment of information and non-availability of evidence, and spurious interpretations of tax law.[58] Mr Lennard submitted that a dominant tax avoidance purpose could not be inferred because the same result could have been achieved in other (legitimate) ways. As I understood it, that submission was based on the proposition that the Trust could have distributed its profits to HLL as beneficiary income. But I cannot accept that submission.[59] First, I am inclined to view with scepticism Mr Tauber's evidence that hisdecision to charge the management fee instead of having the Trust distribute the income to HLL was made because the fee more correctly reflected the commercialreality. As Mr Goosen said, that was not a matter raised in HLT's statement ofposition. For that reason, and putting to one side s 138G admissibility issues, it smacks of ex post facto justification.[60] But even were that not the case, I accept Mr Goosen's submission that whilea distribution from the Trust to HLL might have had the same tax consequences forHLT, it would not have had the same tax consequences (and would have been disadvantageous) to either both HLL or Mr Tauber personally.17 Accordingly to the extent that a distribution was contemplated at the time as an alternative means oftransferring the Trust's profits it was, no doubt, rejected as less advantageous from atax perspective. That only serves to emphasise the tax driven (tax avoidance) purpose of what occurred.[61] And lastly, like the TRA, I note the statement by the Court of Appeal inAlesco New Zealand Limited v Commissioner of Inland Revenue that:18[39] The question is whether the particular arrangement had the effect of avoiding or reducing any liability to income tax. It is not whether Alesco NZwould have been equally able to avoid or reduce its liability by implementing an alternative and permissible arrangement. Contrary to Mr McKay's submission, we do not construe the definition provisions as allowing for a hypothetical point of reference, based upon what might have happened if a taxpayer had chosen some years previously to structure its transaction differently.[62] Although that statement was made specifically in the context of an argument about the reconstruction of a void tax avoidance arrangement it seems to me equally applicable in the context of determining whether a taxpayer has taken an abusive tax position. The focus must be on ascertaining the dominant purpose of what was actually done, not on what might have been done instead, had the taxpayer at the time been able to foresee the unfortunate outcome of future litigation.[63] In the end, the simple point is that if management services were not in fact provided to the Trust by HLL the only purpose of the fee can have been to avoid tax by moving profits out of the Trust to HLL. All the factors I have listed at [18] and[19] above point to the conclusion that reducing (and in fact eradicating) HLT's taxliability was the dominant driver here.17 Imputation credits otherwise received by Mr Tauber would have gone to HLL. Because HLL was in a loss position it could not have used the imputation credits, which would have been converted to further losses to carry forward. Because it was planned to sell HLL Mr Tauber would know that those losses could never have been utilised.18 Alesco New Zealand Limited v Commissioner of Inland Revenue [2013] NZCA 40, [2013] 2 NZLR 175.Result[64] For the reasons I have given the appeal is dismissed. The Commissioner is entitled to costs on a 2B basis."Rebecca Ellis J"Solicitors: Carmine Law, Auckland, for AppellantsCounsel Instructed: M Lennard, WellingtonCrown Law, Wellington, for Respondent