J G RUSSELL V THE COMMISSIONER OF INLAND REVENUE HC AK CIV 2009-404-006653

J G RUSSELL V THE COMMISSIONER OF INLAND REVENUE HC AK CIV 2009-404-006653 3 September 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2009-404-006653BETWEEN JOHN GEORGE RUSSELL Appellant AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 26, 27, 28, 29 and 30 July 2010 and 3 August 2010 Appearances: S R G Judd for the Appellant M J Ruffin and R J Wallace for the Respondent Judgment: 3 September 2010 at 3:30 pmJUDGMENT OF WYLIE JThis judgment was delivered by Justice Wylie on 3 September 2010 at 3:30 pm pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar Date:Solicitors/Counsel:Ladbrooks Solicitors, P O Box 37 633, Parnell, Auckland Meredith Connell, P O Box 2213, Shortland Street, Auckland 1140 S R G Judd, P O Box 3320, Shortland Street, Auckland 1140 M J Ruffin, P O Box 1662, Shortland Street, Auckland 1140ContentsIntroduction............................................................................................................. [1]Background facts .................................................................................................... [7]1972 to 1978 ................................................................................................. [9]1978 to 1984 ............................................................................................... [11]1985 tax year ............................................................................................... [18]1986 tax year ............................................................................................... [34]1987 tax year ............................................................................................... [35]1988 tax year ............................................................................................... [36]1989 tax year ............................................................................................... [37]1990 tax year ............................................................................................... [40]1991 tax year ............................................................................................... [42]1992 tax year ............................................................................................... [44]1993 tax year ............................................................................................... [48]1994 tax year ............................................................................................... [49]1995 tax year ............................................................................................... [53]1996 tax year ............................................................................................... [54]1997 tax year ............................................................................................... [55]1998 tax year ............................................................................................... [56]1999 tax year ............................................................................................... [57]2000 tax year ............................................................................................... [58]The Authority's decision ...................................................................................... [59]The appeal ............................................................................................................. [69]The notice of appeal .............................................................................................. [71]The submissions .................................................................................................... [75]Analysis .................................................................................................................. [84]Introduction ................................................................................................. [84]The anti-avoidance provisions .................................................................... [87]Was any arrangement void by reason of tax avoidance? ............................ [90]Arrangement ............................................................................................... [93]Did the arrangement have the purpose or effect of tax avoidance? .......... [104]Was Mr Russell a person affected by the arrangement? Did Mr Russell obtain a tax advantage for the arrangement? ........................................... [140]Result.................................................................................................................... [149]Costs ..................................................................................................................... [150]Introduction[1] Mr Russell appeals against a decision of the Taxation Review Authority ("the Authority") given by Judge P F Barber on 17 September 2009. 1 The decision followed a hearing which lasted a total of 64 days, extending over the period 3 October 2005 to 30 April 2009. [2] The essential issue before the Authority was the correctness of assessments against Mr Russell for the years 1985 to 2000 inclusive. The Commissioner of Inland Revenue ("the Commissioner") considered that Mr Russell was a party to, and affected by, arrangements which constituted tax avoidance. The arrangements involved: a) a company known as Commercial Management Limited ("CML") over the period 1978 to 1984; and b) an entity known as the Commercial Management Partnership, and a company called Mahalo Limited, for the period 1985 to 2000. The Commissioner did not seek to reassess income for the years 1978 to 1984. He did, however, reassess Mr Russell's personal income for the years ended 31 March 1985 to 31 March 1996 under s 99(3) of the Income Tax Act 1976, and for the years 1997 to 2000, under s GB1 of the Income Tax Act 1994. [3] The total income returned by Mr Russell over these years was $298,700.76. The Commissioner took the view that the total income returned, but for the arrangements, should have been $15,757,556.18 — a difference of $15,458,855.42. He assessed Mr Russell accordingly and sought to recover tax on the reassessed income at the applicable tax rates over the years. He also sought to recover interest and shortfall penalties for the 1998, 1999 and 2000 years pursuant to s 141D of the Tax Administration Act 1994.1 Case Z19 (2009) 24 NZTC 14,217 (TRA).[4] The income which the Commissioner says should be assessed to Mr Russell is the net profit of the Commercial Management Partnership and Mahalo Limited for the period 1985 to 2000. [5] There were some minor adjustments made subsequently as a result of inputting errors and because some returns were filed late by Mr Russell. These were recorded by the Authority in its decision. 2[6] Allowing for accumulated penalties and interest, as at 22 April 2010, the amount the Commissioner claimed was owing was $138,796,819.38. Penalties and interest will have continued to accrue and the amount said to be owing will have increased significantly since that date.Background facts[7] The factual matrix is of labyrinthine complexity. There were some 289 folders of documents before the Authority containing thousands of pages of information. Mr Russell appeared on his own behalf. He also gave evidence. He called as witnesses a former IRD officer, Mr Frank Bosch, and an officer who still worked for the Department, Ms Denese Latimer. The Commissioner called evidence from a senior officer, Mr Philip Blakeley, and from the assessor, Mr Eduard Oosterwijk. Mr Russell did not file a substantive brief of evidence in advance. Rather, he gave his evidence at the hearing. It was lengthy. A number of the prepared briefs of evidence were also lengthy. For example, Mr Blakeley's brief was 349 pages long. Cross-examination went into every aspect of the case in fine detail. The transcript of the cross-examination of Mr Russell alone runs to almost 500 pages. The notes of evidence in total comprise some 2,455 pages. Moreover, during the hearing, the parties presented the Authority with an agreed statement of facts. In itself this is a lengthy document. It is 123 pages (467 paragraphs) long. [8] In its decision, the Authority referred to the agreed statement of facts and recorded that, if necessary, it could be made a schedule to its decision.3 It can2 At [262] – [264].3 At [3].similarly be annexed to this decision. The following is very much a truncated summary.1972 to 1978[9] Mr Russell was a chartered accountant. From 1972 until 1977 he was employed as the managing director of Securitibank Limited. That company went into liquidation. Mr Russell's employment came to an end, but he remained on for a short period to assist the liquidator. His duties with Securitibank finally ceased in April/May 1977. [10] While he was employed by Securitibank, Mr Russell carried out some accountancy and business advisory work on his own account. The extent and nature of that work is in dispute.1978 to 1984[11] On 1 April 1977, Mr Russell incorporated two companies — CML and Corporate Securities Limited ("CSL"). Mr Russell held 9,999 shares in CML. The other share was held by another company that he controlled — Money Market Securities Limited. He was a director of CML, along with his wife, and he was also the company secretary. The position with CSL was similar. Mr Russell held 9,999 shares and another company controlled by him, Downsview Nominees Limited, held one share. The officers of CSL were Commercial Management Partners and Commercial Management Associates — Mr Russell was a partner in both partnerships and both were Russell-controlled entities. [12] The Commissioner says that Mr Russell continued the private consultancy work he had commenced while working at Securitibank Limited through CML and that he continued to personally provide accountancy, taxation and business advice services.[13] CML was managed by CSL pursuant to a business consultancy agreement dated 1 April 1980. Further, there was a business consultancy agreement between CSL and Mr Russell. Mr Russell was retained by CSL to provide consultancy services to it and as directed by it. CSL agreed to pay Mr Russell consulting fees and to reimburse his expenses. It had no other staff. Through these arrangements, Mr Russell controlled both companies. By the same route, he also controlled a large number of other companies which were managed by CML. [14] CML sold what became known as "Russell template" arrangements as part of its business. This template involved complicated arrangements designed to convert the profits of trading companies into capital receipts in the hands of shareholders. The arrangements were subsequently found to amount to tax avoidance. 4 Much of CML's income was derived from these sales. Moreover, once a group of companies had entered into a template arrangement, both the parent company and the trading company in the group paid a "consulting fee" of five per cent of its trading surplus to CML every six months. [15] In December 1982, a partnership was formed. The partners were CML and another company controlled by Mr Russell — Business Properties Limited ("BPL"). The shareholders in and directors of BPL were CML and Money Market Securities Limited (at the time a company could be a director of another company). [16] The partnership took over the business of CML. It traded successfully and at times employed up to 55 staff. [17] The Commissioner alleges that through the income years 1978 to 1984, there was a tax avoidance arrangement involving CML which benefited Mr Russell.4 The template arrangement was discussed in detail by Lord Hoffman in Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC) at [6] – [8]. See also Douglas v Commissioner of Inland Revenue [2006] 1 NZLR 513 (HC) at [9] – [12]. The arrangement in issue in the present appeal has similarities to the Russell template arrangements, in that both involve the use of companies with accumulated losses which are not within a corporate group. However, the arrangements are not identical. This appeal is concerned with the liability to pay tax inter alia on the profits resulting from the sale of the Russell template arrangement and the receipt of the 5 percent consultancy fee referred to by Lord Hoffman in Miller at [7], and by Courtney J in Douglas at [10]. The Privy Council's decision in Miller that the Russell template arrangement involved tax avoidance does not directly assist in determining whether the company/trust arrangements at issue in this appeal involve tax avoidance.However, as noted, for various reasons he has proposed no adjustments for these income years.1985 tax year[18] In May 1984, CML sold its business to a new partnership set up by Mr Russell. The partnership was known as the Commercial Management Partnership. The partners were Marketing Agencies Limited ("MAL") and BPL. MAL's already noted, Mr Russell controlled BPL. He also controlled MAL. MAL's shareholders were CML and Downsview Nominees Limited and its directors were Commercial Management Partners and Commercial Management Associates. [19] The partnership business was managed by CML and it was appointed as agent by the partnership for the purpose of entering into contracts relating to the conduct of the business. Further, in July 1984, a declaration of trust was entered into between CML and the Commercial Management Partnership whereby the partnership took over the existing management contracts of CML. (As I understand it, the existing management contracts referred to were management contracts that CML was a party to as a result of the sale of the Russell template arrangement.) [20] Shortly thereafter, in October 1984, one of the partners — MAL — appointed CML to manage and control it. It seems likely that there was a similar arrangement involving BPL, although no documents have been produced which confirm this. In April 1985 CML appointed Charity Construction Limited to manage it. Charity Construction was majority owned by CSL. Not all contractual arrangements were carried into effect, however, and it is unclear whether the agreement with Charity Construction was implemented, but this makes no difference. The end result was that Mr Russell controlled the Commercial Management Partnership through the consulting arrangements between CML and CSL and between CSL and him personally, and perhaps through the agreement between CML and Charity Construction Limited. Further, he controlled the partnership through his ownership of both CML and CSL and of all the associated entities.[21] All of the various agreements between the parties were signed by Mr Russell, either personally, or as a director or as authorised signatory on behalf of the various entities. Insofar as I am aware, not one of them was signed by anyone else. [22] During the financial year, agency and management agreements and declarations of trust were entered into between the partners and two companies which had accumulated tax losses and which were controlled in one way or another by Mr Russell. [23] The first loss company was an entity known as Glamour Accessories NZ Limited. The directors of this company were a Mr Oremland and CML. An order was made for the winding up of Glamour Accessories on 20 October 1982 and Mr Oremland assigned a debenture he held over the company to Mr Russell on 14 November 1982. Mr Russell appointed himself as receiver, and in that capacity, he entered into an agency and management agreement with BPL and CML on 16 April 1984. Pursuant to the agreement, BPL agreed to enter into such business activities as it saw fit on Glamour Accessories' behalf. The activities were to be conducted for the benefit of Glamour Accessories. The agreement recorded that BPL was managed by CML and that BPL was permitted to pay CML such amounts as might be due by Glamour to CML in respect of its services to BPL. BPL could also make payments to the debenture holder, to the receiver, and to the liquidator. Providing the aggregate of the amounts paid by BPL was not less than 22.5 per cent of the surplus arising from any transactions entered into, Glamour Accessories could not issue any legal proceedings to recover any further amount which might be owed to it from time to time by BPL. Accompanying this agreement was a declaration of trust between BPL and Glamour Accessories recording that BPL had formed a partnership with MAL, that all benefits, rights and obligations it had in respect of the partnership were held in trust for Glamour Accessories, and that Glamour Accessories would pay such sums as were agreed for its services as trustee. [24] The second loss company was known as Valencia Licensed Restaurant 1974 Limited. Valencia had granted a debenture to another Russell-controlled company — Downsview Nominees Limited. Through Downsview Nominees, Mr Russell appointed himself as a receiver of Valencia on 4 April 1984. On the same day, anorder was made winding up the company. Mr Russell ceased to act as receiver shortly thereafter, but in the interim, on behalf of Valencia, and also on behalf of MAL and CML, he entered into a similar agency and management agreement and a similar declaration of trust. [25] The income earned by the Commercial Management Partnership during the year ending 30 June 1985 was $338,361. The net profit of $283,954 was split equally between the partners — MAL and BPL. The amount received by each partner was $141,978.93. [26] The monies received by BPL and MAL were forwarded on by them on a daily basis direct to Money Market Securities Limited. Money Market Securities Limited was a finance company. As already noted, it was controlled by Mr Russell. At the relevant time, its shareholders were CML and BPL and its officers were Commercial Management Partners and Commercial Management Associates. It provided funds for the extensive corporate group controlled by Mr Russell in large part through the Russell template arrangements. It also, from time to time, made advances to Mr Russell personally or for his benefit. [27] Money Market Securities Limited did not pay BPL or MAL any interest on the monies they advanced to it. They in turn could and did draw down money from Money Market Securities Limited when they required funds and they did not pay any interest on those advances. [28] Because cash surpluses were forwarded from the partnership to Money Market Securities Limited on a daily basis, the net profit was "advanced" to the partners by way of circular transactions. On 3 January 1986, Money Market Securities Limited advanced $290,000 to the Commercial Management Partnership. On the same day, the partnership paid $141,978.93 to each of the partners, and they in turn advanced the money back to Money Market Securities Limited. [29] Pursuant to the agency and management agreement and the declaration of trust, both Glamour Accessories and Valencia were the beneficial owners of the income. Therefore, BPL recorded in its books of account that it had received its halfshare of the partnership income on behalf of Glamour. Similarly, MAL recorded in its books of accounts that it had received its share of the partnership income on behalf of Valencia. Both Glamour Accessories and Valencia had accumulated losses, and both offset the allocated income against those losses. The result was that no tax was paid on the income earned by the partners, BPL and MAL. [30] No cash was paid by either BPL or MAL to either Glamour Accessories or Valencia. [31] Mr Russell's nominal income for the provision of consulting services to CSL for the year was $15,000. He declared this sum in his personal return. Although he controlled BPL and MAL through CML and CSL, he received no income from either company. Nor did he receive any income as a director from CML. [32] Mr Russell had a current account with Money Market Securities Limited. During the course of the year, he withdrew by way of advance $70,424.21. His current account remained in credit and at 31 March 1985, it stood at $823,203. [33] While the entities changed, this basic model remained in place for each of the financial years in question.1986 tax year[34] During the year ended 30 June 1986: a) The amount of consulting income received by the partnership increased to $907,059. The net profit split equally between the partners was $707,929. They each received $353,964.50. b) In terms of the agency and management agreements, the beneficial owners of the income were the loss companies — Glamour Accessories and Valencia. Each returned its allocated net income and offset it against its losses in its return. As a result, no tax was paid by the partners.c) The net surplus forwarded by the partners to Money Market Securities Limited was $794,050. d) Mr Russell's nominal salary from CSL increased to $20,000. e) Mr Russell withdrew $31,973.24 by way of advances from Money Market Securities Limited. f) Mr Russell's current account with Money Market Securities Limited remained in credit. It increased from $823,203 to $1,122,840.25 (as at 31 March 1986).1987 tax year[35] During the year ended 30 June 1987: a) The amount of consulting income received by the partnership increased to $1,069,901. The net profit was $793,970. It was split equally between the partners at $346,955 each. b) Only part of BPL's income was assigned to Glamour Accessories. A new agency and management agreement and a new declaration of trust were entered into between BPL, CML and another company with accumulated losses — Quality Knitwear NZ Limited. It was assigned the balance of BPL's income. Glamour Accessories and Quality Knitwear each returned its allocated net income and offset it against its losses in its return. As a result, no tax was paid by BPL. c) Similarly, only part of MAL's income was assigned to Valencia. A new agency and management agreement and a new declaration of trust were entered into between MAL, CML and another company with accumulated losses — J & P Harding Limited. Valencia and J & P Harding each returned its allocated net income and offset itagainst its losses in its return. Again, as a result, no tax was paid by MAL. d) The sum of $490,291.26 was forwarded by the partners to Money Market Securities Limited. A further sum of $265,100 was forwarded to another Russell-controlled finance company — Charity Finance Limited. Its shareholders were Charity Construction Limited and Downsview Nominees Limited. Its officers were Mr Russell and Commercial Management Associates. (I assume that Charity Construction was a Russell-controlled company. While the burden was on the Commissioner to establish this, I note that it was accepted by Mr Judd that Mr Russell controlled all of the relevant finance companies.) e) Mr Russell's nominal salary from CSL increased to $30,000. f) Cash payments advanced to Mr Russell by Money Market Securities Limited totalled $21,250. g) Mr Russell's current account with Money Market Securities Limited increased from $1,122,840.25 to $2,257,866.13 (as at 31 March 1987).1988 tax year[36] During the year ended 30 June 1988: a) The amount of consulting income received by the partnership was $1,269,844. The net profit split equally between the partners was $933,466. Each received $466,733. b) The agency and management agreements with Glamour Accessories and Valencia were not relied upon to assign income and letters were sent terminating the agreements. The agreements with QualityKnitwear and J & P Harding Limited remained in force. Each partner assigned its share of the net profit to the relevant company. Each company returned its allocated net profit and offset it against its losses. No tax was paid by the partners. c) The amount of $1,013,227.18 was deposited by the partners with Money Market Securities Limited. d) Mr Russell's salary from CSL was $15,000. e) Mr Russell withdrew by way of advance $7,208.64 from Money Market Securities Limited. Other minor payments were made on his behalf. f) Mr Russell's current account with Money Market Securities Limited increased to $2,867,992.09 (as at 31 March 1988).1989 tax year[37] During the year ended 30 June 1989: a) The amount of consulting fees received by the partnership was $1,121,902. The net profit split equally between the partners was $687,948 — being $343,974 each. b) The partners' respective shares in the net income were allocated to Quality Knitwear and J & P Harding. Each company returned its allocated net profit and offset it against its losses. No tax was paid by the partners. c) The partners forwarded $239,353.45 to Money Market Securities Limited and $587,200 to Charity Finance Limited.d) Mr Russell's nominal salary from CSL increased from $15,000 to $25,000. e) Money Market Securities Limited made cash advances to Mr Russell totalling $6,940. f) Mr Russell's current credit balance with Money Market Securities Limited increased from $2,867,992.09 to $2,900,684.69 (as at 31 March 1989). [38] The Russell Family Trust was created by deed on 31 January 1989. The settlor was Mr Russell, and the trustees were Mr Russell and his wife. The primary beneficiaries were members of Mr and Mrs Russell's family. [39] Further, Mr and Mrs Russell in their capacity as trustees entered into a loan agreement as borrowers with Mr Russell as lender whereby Mr Russell agreed to advance to the Trust unspecified sums of money. The parties agreed that the advances were to be made for a period of 20 years, and that they were not to bear interest. The agreement recorded Mr Russell's intention to advance the Russell Family Trust monies in the near future.1990 tax year[40] The Commercial Management Partnership continued, but new loss companies were introduced. CSL was introduced as a new loss company via an agency and management agreement dated 1 July 1989 between it, MAL and CML. There was an accompanying declaration of trust entered into on the same day. Another loss company — Billy-Joe's Nite Spot Limited — entered into an agency and management agreement and a declaration of trust on the same day with BPL and CML.[41] During the year ended 30 June 1990: a) The amount of consulting fees received by the partnership was $2,020,874. The net profit split equally between the partners was $1,582,481, being $791,240.50 each. b) The partners' respective shares in the income were allocated to CSL and Billy-Joe's Nite Spot. Each company returned its allocated net profit and offset it against its losses. No tax was paid by the partners. c) The partners forwarded $1,617,170 to Charity Finance Limited. There was a "net negative flow" of funds to Money Market Securities Limited of $52,100. d) Mr Russell's nominal salary from CSL decreased from $25,000 to $15,000. e) In September 1989 and November 1989 respectively, two separate sums of $250,000 were advanced from Mr Russell's current account with Money Market Securities Limited to the Russell Family Trust. It in turn put them on term investment with Money Market Securities Limited. Also during the year, judgment was entered against another Russell-controlled company — Downsview Nominees Limited — and Mr Russell personally in the sum of $638,709.33. Part of this judgment debt — $494,044.82 — was paid to the solicitors for the plaintiffs by Money Market Securities Limited by way of debit to Glen Eden Motors Limited. (I do not know whether Glen Eden Motors was a Russell-controlled company, although it is clear from the agreed statement of facts that there were a number of other companies with the words "Glen Eden" in their name which were controlled by Mr Russell.) Further, the amount of $1,630,000 was transferred from Mr Russell's current account with Money Market Securities Limited to a current account Mr Russell had with Charity Finance Limited.f) Mr Russell's current account with Money Market Securities Limited decreased from $2,900,694.69 to $1,195,080.32.1991 tax year[42] The Commercial Management Partnership continued. A new loss company — Davill Shoes Limited — was introduced. An agency and management agreement and a declaration of trust were entered into between BPL, CML and Davill Shoes on 1 January 1991. [43] During the year ended 30 June 1991: a) The amount of consulting fees received by the partnership was $2,437,582. The net profit split equally between the partners was $1,908,708, being $954,354 each. b) The partners' respective shares in the income were allocated by MAL to CSL and by BPL to Billy-Joe's Nite Spot in part and to Davill Shoes in part. Each company returned its allocated net profit and offset it against its losses. No tax was paid by the partners. c) Mr Russell's nominal salary from CSL remained at $15,000. d) The partners forwarded $1,911,250 to Charity Finance Limited. e) Mr Russell withdrew by way of advance $10,000 from Money Market Securities Limited. The balance of his current account — $1,185,080.32 — was transferred from Money Market Securities Limited to Charity Finance Limited. Despite orders being made by the Authority, Mr Russell did not make the records for Charity Finance Limited available to the Commissioner, and the details of his current account with that company are not known.1992 tax year[44] On 1 July 1991, MAL retired from the partnership. It was replaced by Downsview Debt Collections Limited. The shareholders in Downsview Debt Collections Limited were Mr and Mrs Russell. They held the shares for the Russell Family Trust. Commercial Management Partners and Commercial Management Associates were the company officers. [45] On 2 July 1991, BPL retired from the partnership. It was replaced by Personal Loans Limited. The shareholders in Personal Loans Limited were Mr and Mrs Russell and again they held the shares for the Russell Family Trust. Mr Russell and Commercial Management Associates were the officers of the company. [46] New loss companies were introduced. Downsview Debt Collections Limited entered into an agency and management agreement and a declaration of trust with an entity known as Plim Builder Limited. Personal Loans Limited entered into an agency and management agreement and a declaration of trust with a company known as Paul Finance Limited. [47] During the year ended 30 June 1992: a) The amount of consulting fees received by the partnership was $2,392,739. The net profit, split equally between the partners, was $1,974,775, being $987,387.50 each. b) The partners' respective shares in the income were allocated to Plim Builders and to Paul Finance. Each company returned its allocated net profit offset against its losses. The partners paid no tax. c) The partners forwarded $1,862,988.04 to Charity Finance Limited. d) Mr Russell's nominal salary from CSL remained at $15,000.e) Mr Russell withdrew $5,000 from Charity Finance Limited and the Russell Family Trust received $150,300 from the same company.1993 tax year[48] During the year ended 30 June 1993: a) The amount of consulting fees received by the partnership was $1,994,425. The net profit split equally between the partners was $1,527,179, being $763,589.50 each. b) The partners' respective shares in the income were allocated to Plim Builders and to Paul Finance. Each company returned its allocated net profit offset against its losses. The partners paid no tax. c) The partners forwarded $1,672,150 to Charity Finance Limited. d) Mr Russell's nominal salary from CSL remained at $15,000. e) Mr Russell withdrew $4,000 from Charity Finance Limited, and the Russell Family Trust received $31,500 from the same company.1994 tax year[49] The Commercial Management Partnership comprising Downsview Debt Collections Limited and Personal Loans Limited continued, but a second partnership was formed by Mr Russell on 6 April 1994. The partners in the second partnership were Hamlin Facilities Limited and The Tag Gun Company Limited. At the time, the shareholders in Hamlin Facilities Limited were Commercial Administration Limited and Glen Eden Limited. Mr Russell and Commercial Management Associates were the controlling officers. The Tag Gun Company Limited had the same shareholders and officers. Commercial Administration Limited was a Russell- controlled company. Mr Russell was a director of the company and the shares were held by Glen Eden Holdings Limited on trust for the Russell Family Trust. CMLheld all of the shares in Glen Eden Holdings Limited. (I do not know whether Glen Eden Limited was a Russell-controlled company. However, I note that it is not disputed that Mr Russell controlled both Hamlin Facilities Limited and The Tag Gun Company Limited.) [50] The partnership agreement recorded that Hamlin Facilities Limited and The Tag Gun Company Limited were to purchase the business consulting business conducted at 6 Downsview Road under the name of Commercial Management. There does not appear to have been an agreement for sale and purchase of the business, and Mr Russell advised the Commissioner in correspondence that Downsview Debt Collections Limited and Personal Loans Limited continued trading in partnership under the trade name Commercial Management. [51] During the year ended 30 June 1994: a) The amount of consulting fees received by the Commercial Management partners was $2,329,565. The net profit split equally between the partners was $1,745,129, being $872,564.50 each. b) The partners' respective shares in the income were allocated to Plim Builders and to Paul Finance. Each company returned its allocated net profit offset against its losses. The partners paid no tax. c) The partners forwarded $1,682,350 to Charity Finance Limited. d) Mr Russell's nominal salary from CSL remained at $15,000. e) Mr Russell withdrew by way of advance $32,436.50 from Charity Finance Limited. The Russell Family Trust received $5,990 from the same company, and $3,807.62 was advanced by Charity Finance Limited to another Russell-controlled entity — Kawakawa Bay Properties Limited. Further, Charity Finance Limited advanced $197,844.46 to Kawakawa Bay Properties Limited to enable it to purchase a property at 1439 Clevedon-Kawakawa Bay Road.[52] Mr Russell was a director of Kawakawa Bay Properties Limited. Its issued share capital comprised 1,000 shares which were held by Equity Capital Investments Limited. The shares in Equity Capital Investments Limited were in turn owned by Commercial Administration. Glen Eden Holdings Limited held the shares in Commercial Administration Limited in trust for the Russell Family Trust. CML owned all of the shares in Glen Eden Holdings Limited. Mr Russell was a director of CML, and at the time Commercial Administration Limited held all the shares in CML.1995 tax year[53] Relevantly: a) During the year ended 30 June 1995, the first partnership (Downsview Debt Collections Limited and Personal Loans Limited) received consulting income and depreciation recovered of $1,300,732, and showed a net profit of $1,279,880, being $639,940 to each partner. Despite orders made by the Authority, documents were not disclosed by Mr Russell. The Commissioner does not have information as to which particular loss companies the profit was allocated to. He proceeded on the basis that the same process of assignment of the income to loss companies occurred and this has not been disputed. b) During the year ended 31 March 1995, the second partnership (Hamlin Facilities Limited and The Tag Gun Company Limited) received consulting fees of $335,298. It initially returned a nil net profit, and therefore there were no assignments of profit by the partners to loss entities. Further investigation revealed that the consulting fee income should have been $448,131.27 with expenses of $412,404.06, leaving a net profit of $35,727.21. Returns were belatedly filed, which identified profits upon which no tax had been paid. Mr Russell has asserted that agency and management agreements were not employed in relation to this second partnership, but he has provided no evidence to support that assertion.c) The agreed statement of facts does not record whether there were any advances by either partnership or the partners to a Russell-controlled finance company. The Commissioner has assumed that this occurred, and again I do not understand this to be disputed. d) The agreed statement of facts also does not record what salary Mr Russell received from CSL, but the Commissioner's statement of position and the assessor's report assert that it was $15,000. e) Mr Russell withdrew by way of advance $120 from Charity Finance Limited.1996 tax year[54] Relevantly: a) During the year ended 30 June 1996, the first partnership (Downsview Debt Collections Limited and Personal Loans Limited) received a net profit of $143,546.04, which was split equally between the partners. b) During the year ended 31 March 1996, the second partnership (Hamlin Facilities Limited and The Tag Gun Company Limited) received a net profit of $1,115,590 — apportioned between the partners as to 50 per cent each. c) No further relevant information is set out in the agreed statement of facts, although it is noted that the Commissioner has assumed that the arrangements continued, that net profits were attributed to loss entities and that cash surpluses were forwarded to finance companies. This has not been disputed. d) Mr Russell received nominal remuneration of $20,047.76 from the Russell Family Trust.1997 tax year[55] Relevantly: a) During the year ended 30 June 1997, the net profit of the first partnership was $178,448. b) During the year ended 31 March 1997, the net income of the second partnership is noted in the agreed statement of facts as being $1,115,590. This is the same figure as was earned in the 1996 year. I suspect it is in error. Mr Judd submitted that the net income was $315,466.70. The Commissioner's statement of position suggests that the income ascertained, which is presumably the combined income of both partnerships, was $559,635.79. The parties did not make the base documents available to me, or, if they did, they were "lost" amongst the very many other papers I received. I have not been able to reconcile the figures. c) In both cases, the net income was apportioned between the partners. d) No further relevant information is set out in the agreed statement of facts, although it is noted that the Commissioner assumed that the arrangement continued, that net profits were attributed to loss entities and that cash surpluses were forwarded to finance companies. Again, this has not been disputed. e) Mr Russell received nominal remuneration of $20,358.20 from the Russell Family Trust. f) There was a further change in the partnership entities. The partners in the second partnership (Hamlin Facilities Limited and The Tag Gun Company Limited) sold the Commercial Management Partnership business owned by them to Mahalo Limited. The agreement was entered into on 1 April 1997. The purchase price was $10,000. Theshareholders in Mahalo Limited were CML and Downsview Nominees Limited. The officers were Mr Russell and Commercial Management Associates. g) The amount of $20,000 was withdrawn by the Russell Family Trust from Charity Finance Limited. Further, the balance in the Russell Family Trust's account with Charity Finance Limited of $1,190,391 was transferred to another Russell-controlled financial company — Downsview Finance Limited. The Russell Family Trust then withdrew four payments each totalling $128,083.52 from Downsview Finance Limited. A further payment of $30,000 was noted as being the payment of a deposit on a house being purchased by a Michelle Lowndes. (I assume Ms or Mrs Lowndes is Mr and Mrs Russell's daughter. A Michelle Russell was one of the beneficiaries of the Russell Family Trust. A person with the same christian names is referred to by the name "Lowndes" in the Kawakawa Trust deed as being a member of the Russell family.) A further $30,000 was paid in relation to the purchase of a property at 3-165 Great South Road, Drury by a Mr and Mrs Henry. Mrs Henry is one of Mr Russell's daughters. The Russell Family Trust also transferred $73,096.11 to a branch of the ANZ Bank in Queensland to an account in the name of Downsview Nominees Limited. h) On 1 August 1996, Mr Russell formed another trust — the Kawakawa Trust. The trustees of the trust were Mr Russell and a company called Trustman Services Limited. Mr Russell was the settlor and the primary beneficiaries were members of Mr and Mrs Russell's family. i) On 30 September 1996, there was a loan agreement between Mr and Mrs Russell as trustees for the Russell Family Trust, and Mr Russell and Trustman Services Limited as trustees, recording an agreement in relation to future advances between the Russell Family Trust and the Kawakawa Trust.1998 tax year[56] During the year ended 30 June 1998: a) Mahalo Limited returned consulting income of $32,141, financial services income of $51,000, and interest income of $588. It claimed expenses, and returned a net loss of $44,532. b) The first partnership (Downsview Debt Collections Limited and Personal Loans Limited) had a net profit of $28,498.65, which was apportioned between the partners as to 50 per cent each. c) The second partnership (Hamlin Facilities Limited and The Tag Gun Company Limited) continued to trade. It had a net profit of $56,822.58, which again was apportioned equally between the partners. d) No further relevant information is set out in the agreed statement of facts, although it is noted that the Commissioner has assumed that the arrangement continued, that net profits were attributed to loss entities and that cash surpluses were forwarded to finance companies. This has not been disputed. e) Mr Russell received a nominal income of $20,179.10 from the Russell Family Trust. f) Mr Russell withdrew $100,000 from Downsview Finance Limited. He advanced this money to the Russell Family Trust. g) The Russell Family Trust withdrew $541,085.75 from Downsview Finance Limited. It paid $195,000 to the Kawakawa Trust, and the Kawakawa Trust purchased a property in Meola Road. The Russell Family Trust also paid $389,085.75 into Downsview Nominees Limited's account with the ANZ Bank in Queensland.h) There were four payments totalling $444,320.92 from the Downsview Nominees Limited account with the ANZ Bank in Queensland to an account with the Bank of Queensland. The account was in the name of Mr and Mrs Russell as trustees of the Russell Family Trust. i) The amount of AUD$300,000 was transferred from the Russell Family Trust account with the Bank of Queensland to a second account with the same bank in the name of Mr Russell and Trustman Services Limited as trustees of the Kawakawa Trust.1999 tax year[57] The Commercial Management Partnership arrangement continued. Relevantly: a) Mahalo Limited received consulting income of $79,312, financial services income of $5,868, and $342 by way of interest income. It claimed expenses and returned a net loss of $38,508. b) The first partnership (Downsview Debt Collection Limited and Personal Loans Limited) did not trade during the year. c) The second partnership (Hamlin Facilities Limited and The Tag Gun Company Limited) received a net profit of $1,423.28, which was apportioned equally between the partners. d) No further relevant information is set out in the agreed statement of facts, although it is noted that the Commissioner has assumed that the arrangement continued, that net profits were attributed to loss entities and that cash surpluses were forwarded to finance companies. This has not been disputed. e) Mr Russell's nominal income was $18,149.25 from the Russell Family Trust.f) The Russell Family Trust withdrew $100,000 from Downsview Finance Limited.2000 tax year[58] Relevantly: a) Mahalo Limited returned consulting income of $154,737, financial services income of $5,065, and interest income of $572. It claimed expenses, and returned a net profit of $42,426. That net profit was offset against its carry forward losses. b) The first partnership (Downsview Debt Collection Limited and Personal Loans Limited) did not trade. c) The second partnership (Hamlin Facilities Limited and The Tag Gun Company Limited) received a net profit of $464.18, which was apportioned equally between the partners. d) No further relevant information is set out in the agreed statement of facts, although it is noted that the Commissioner has assumed that the arrangement continued, that net profits were attributed to loss entities and that cash surpluses were forwarded to finance companies. This is not disputed. e) Mr Russell received a nominal income of $19,735.01. He received New Zealand Superannuation. His self-employed income returned was $10,000. f) The Kawakawa Trust withdrew $20,000 from Downsview Finance Limited.The Authority's decision[59] Judge Barber began by observing that the essential issue before him was the correctness of the assessments against Mr Russell for the years 1985 to 2000 inclusive. He then outlined the various matters he was required to consider as identified by the parties. He divided them into process issues and substantive issues. The Judge's findings on the process issues have not been challenged on appeal, and I do not comment on them. [60] Judge Barber observed that there were two preliminary issues: a) whether Mr Russell was a sole trader prior to 1 April 1978; and b) the nature of any tax avoidance arrangement involving a company of Mr Russell's throughout the income years 1978 to 1984 prior to the commencement of the Commercial Management Partnership. He recorded the substantive issues as follows: c) Was there an arrangement at material times? d) Was any such arrangement an avoidance arrangement in terms of the avoidance provisions of the tax statute(s)? e) Was Mr Russell a person affected by the tax avoidance arrangement? f) Did Mr Russell obtain a tax advantage? g) Was the reconstruction to counteract the tax advantage correct and reasonable? h) Was the shortfall penalty correctly imposed? [61] In considering whether Mr Russell was in business as a sole trader from 1972 to 1977, Judge Barber referred to relevant case law and to the evidence, and herecorded the competing submissions. He found that Mr Russell was in business as an accountant/business and financial consultant over the period 1972 to 1977. 5 He then considered what happened between 1978 and 1984. Again he referred to the submissions and to the evidence. He found that CML continued to provide accounting, taxation and business advisory services which had previously been performed by Mr Russell on his own account. He found that CML received income for those services and that it offset its income by deducting the costs of the consulting services it purchased from CSL, which in turn offset its income by purchasing services from other companies controlled by Mr Russell. He found that all of the companies controlled by Mr Russell paid reduced amounts of tax by offsetting income against available losses, and that the only person to provide the consulting services was Mr Russell, purportedly, through companies within the group he controlled. [62] The Judge noted that the loss companies had no staff of their own, that they were unable to engage in consulting activities, and that all staff were employed by CML. He observed that cash surpluses were regularly forwarded to finance companies, including Money Market Securities Limited, within Mr Russell's group, and that the finance companies ultimately used some of that money, inter alia, to purchase assets for the benefit of Mr Russell and his family. He also found that when the Commercial Management Partnership took over the activities of CML on 1 June 1984, it carried on writing off income streams against losses of companies supposedly in a group controlled by Mr Russell. 6[63] The Judge then dealt with each of the substantive issues. [64] First he held that there was an arrangement. He noted:7On a year by year basis, there were changes to the companies which made up the [Commercial Management] Partnership and there were changes to loss companies used because, obviously, they had to be replaced when losses were extinguished. These were part of the inherent nature of the arrangement. Even when [Mahalo] Ltd took over the business of [Commercial Management] Partnership on 1 April 1997, the arrangement5 At [114].6 At [128] – [130].7 At [139].continued. This was because this business structure had been used throughout by [Mr Russell] to avoid payment of income tax on what is his personal exertion income.His Honour considered that the scope of the arrangement was a matter of fact. He referred to the evidence in some detail, and concluded that there were clearly contracts, agreements and a plan or understanding. He noted that Mr Russell always signed the documents on behalf of those involved and observed that he was the person putting the plan or understanding into effect. He considered that each of the parties to the arrangements had an expectation that the other parties would act in a particular way as all of their actions were orchestrated by Mr Russell. 8 He referred to the agreed summary of facts, and noted that it flew in the face of reason to deny that what was there set out was an arrangement.9 He found that the finance companies were simply a cash box where the Commercial Management Partnership and other companies within the group put by way of advance their daily surplus cash. 10 He noted that despite the agency and management agreements on their face purporting to have the relevant Commercial Management partner earn income on behalf of the loss companies, the cash stayed with the finance companies, and was retained there. He considered that Mr Russell had the effective use and disposition of the cash, even though it was not in his name.11 He concluded as follows:12There can be no doubt that the monies assessed to [Mr Russell] are derived from a group of companies and partnerships which were his alter ego, or nominee, or agent. He was the principal behind each of them and controlled the group and the use of its profits. ...[65] Judge Barber went on to consider whether the arrangement was an avoidance arrangement in terms of s 99 of the Income Tax Act 1976. He reviewed the facts and the authorities. He found as follows:[182] In this case, the creation of the loss offsetting is not by way of a profit company within a group having its profit offset against a loss company in the group. The agency and management agreement is used to purport to achieve this grouping in a de facto way. I am not persuaded that offsetting the profits of the [Commercial Management] Partnership, via the agency and8 At [149].9 At [158].10 At [163].11 At [167].12 At [168].management agreement to ultimate loss companies, was within the contemplating of Parliament when it enacted the loss offset provisions. ... [187] [Mr Russell]'s approach that the loss companies are merely using their own tax losses does not address the issue that the use of the agency and management agreement, as described, is an attempt to achieve the grouping in a de facto way. An objective viewing of the facts in terms of commercial sense clearly leads to the conclusion that the arrangement was to avoid tax by using losses in a manner not approved by the law. [188] [Mr Russell] was creating income in his group through his own personal exertions. He gained control of loss companies. To use the losses in those companies (in a way which he considered, and still seems to consider, legitimate) he formed the [Commercial Management] Partnership of two companies so that those two companies trading in that partnership could appear to earn what would otherwise be his personal exertion income. Then, in order to match up the net profit of the partnership and interface it with the available losses, he brought the loss companies into an agency and management agreement. If that were valid, it would permit unrestricted transfer of losses regardless of the legislated grouping rules. [189] The said arrangement is an avoidance arrangement under our Revenue legislation.[66] Thirdly, Judge Barber asked himself whether or not Mr Russell was a person affected by the arrangement. Again, he reviewed the submissions and the authorities. He found as follows:[196] [Mr Russell] is a party to the arrangement. The purpose of the tax avoidance arrangement is to shelter what would otherwise be the personal exertion income of [Mr Russell] which would have been assessable income as a sole trader but for the tax avoidance arrangement. In terms of all the written agreement making up the arrangement, [Mr Russell] (albeit in different capacities) is the only person who has signed the agreements. The steps taken to implement the agreement are all steps which were controlled and directed by [Mr Russell]. [197] The shares in the companies involved in the arrangement (apart from the ultimate loss companies where the shareholding is left intact, but the loss company is controlled by [Mr Russell]) are all interlocked with no visible person other than [Mr Russell] as shareholder and employee of [CSL]. [198] ... The arrangement is designed to ensure that no tax is paid within the arrangement. ... [199] In his very extensive brief of evidence, Mr Blakeley refers to the method by which [Mr Russell] obtains control of loss companies by means of a debenture accompanied by being appointed receiver. The loss companies have usually traded for a period before control is gained and have incurred losses. [Mr Russell] becomes involved when the companies areinsolvent and have usually ceased genuine trading. ... After obtaining control, [Mr Russell] purports to trade the insolvent companies under the agency and management agreements which cover a great area of business activity. The labyrinth of companies created by [Mr Russell] is difficult to penetrate. It distances the business activity from [Mr Russell] personally and so seeming to reduce his tax liability as a result of the arrangement. [200] When one goes through the labyrinth of companies controlled by [Mr Russell], it is only when one gets to [CSL] that [Mr Russell] is found as the real person shareholder. That was available as a matter of public record, but the business consultancy agreements were not a matter of public record. By business consultancy agreement dated 1 April 1980 between [CSL] (as consultant) and [CML] (as the client), [CSL] was responsible for managing the work required by [CML] and providing consulting services to it. This document is part of the ambit of the [Commercial Management] Partnership arrangement. [201] [Mr Russell] then, personally, interfaces with [CSL] under the business consultancy agreement dated 1 August 1980 between [CSL] (the client) and [Mr Russell as] business consultant (the consultant). Thereby, [CSL] [employs] the consultant ([Mr Russell]) to do and perform work required by [CSL] whereby [CSL] would pay business consulting fees to [Mr Russell] to cover the time spent on the business of [CSL], plus pay all actual and reasonable expenses incurred in it, plus an amount of $200.00 per month being reimbursement of travelling and general expenses. [202] There was no other real person than [Mr Russell] underpinning the [Commercial Management] Partnership arrangement. No other real person controlled the entities within it. No other real person directed the steps taken to implement the arrangement and direct employees of the [Commercial Management] Partnership to carry out work under his supervision. [Mr Russell] is the person who obtains the tax advantage. [203] In his brief of evidence, Mr Blakeley succinctly summarised the evidence of what [Mr Russell] personally did in relation to all the parties in the [Commercial Management] Partnership arrangement as follows: [a] [Mr Russell] signed all correspondence and tax returns. [b] He was cheque signatory. [c] He signed all documents entered into between all the companies that dealt with [Mr Russell] as receiver, or the duly authorised signatory. [d] He was personally the receiver of all the companies in receivership. [e] He appeared personally in all the court cases. [f] He was a partner within two other partnership[s] solely set up to be recorded as directors or as the secretary of the companies.[g] All financing was done by [Russell]-controlled companies. [h] [Mr Russell] promoted avoidance schemes to clients and clients knew to contact him personally with problems and queries. [204] Mr Ruffin particularly noted that [Mr Russell] does not really deal with the issue of his control of all the entities involved in the said arrangement, but simply reiterates that he did not receive a dollar and that he stands or falls on that aspect. ([Judge Barber's] emphasis). [205] Mr Ruffin reminded me that, at one stage in this long hearing, I had said to [Mr Russell] that the IRD are simply saying that he has received the monies assessed to him because they are in bank accounts controlled by him and him alone; that the money got into those bank accounts by a route which involved profits of [Commercial Management] Partnership; and that the issue is not simply whether [Mr Russell] received any money or not, but that he controlled all the money in issue, and no one else could ever have it other than him unless he distributed it to others who have no entitlement to it. [206] I now add that those monies were earned by [Mr Russell]'s personal exertions. He is clearly a person affected by the tax avoidance arrangement because only he controls the profits of that arrangement.[67] Finally for present purposes, Judge Barber dealt with the issue of whether or not Mr Russell obtained a tax advantage from the arrangement. He found as follows:[211] ... The tax advantage obtained by [Mr Russell] from or under that arrangement must be identified. The identifiable amount of the tax advantage obtained by [Mr Russell] is that the "net profit" of [Commercial Management] Partnership or [Mahalo] Ltd set out in its profit and loss account in each relevant year which would have but for the arrangement, been the assessable income of [Mr Russell] as a sole trader. [212] I agree with Mr Ruffin that a "tax advantage" involves an income tax benefit, or a better income tax position, obtained from the tax avoidance. The tax advantage which arose from [Mr Russell]'s said arrangement was the tax which was avoided to the extent that he did not become liable for income tax on the income derived from his personal exertion, net of expenses allowed by his deductions. This was simply the net profit in the profit and loss account for [Commercial Management] Partnership or [Mahalo] Ltd for the relevant income year. [213] The tax advantage obtained by [Mr Russell] is that no tax was paid on that net profit. This is not a strict assignment of income case, but is one where that features as a background factor to the s 99 arrangement. [214] Mr Ruffin also referred to my having put it to [Mr Russell], in an endeavour to help him in the course of the hearing, that the respondent Commissioner is saying that under his direction the partnership carried on various activities which resulted in big profits after expenses. Those profits went to the partners of the [Commercial Management] Partnership and no tax has been paid on those profits which have ended up in bank accountswhich [Mr Russell] controls and no one else can touch except him. Mr Ruffin is correct that [Mr Russell] has not really responded to those simple propositions, other than to deny that the profits of the [Commercial Management] Partnership arose from his own personal exertions and would have been assessed to him but for the arrangement. ... [216] Clearly, [Mr Russell] obtained a tax advantage from the said arrangement because net income earned by him (and controlled by him alone) has not been taxed (until the avoidance provisions were applied by IRD).[68] All of the assessments against Mr Russell were confirmed.The appeal[69] The appeal is brought pursuant to s 26A of the Taxation Review Authorities Act 1994. It proceeds by way of rehearing pursuant to r 20.18 of the High Court Rules. Both parties were agreed that the approach outlined by the Supreme Court inAustin, Nichols & Co Inc v Stichting Lodestar applies.13 The following principles can be derived from that decision: a) the appellant bears the onus of satisfying the appeal court that it should differ from the decision under appeal; 14b) it is only if the appellate court considers that the appealed decision is wrong that it is justified in interfering with it; 15c) the appeal court has the responsibility of arriving at its own assessment on the merits of the case; 16d) no deference is required beyond the customary caution appropriate where the first instance fact finder had a particular advantage such as13 [2008] 2 NZLR 141 (SC).14 At [4].15 At [4].16 At [5].technical expertise or an opportunity to assess the credibility of witnesses; 17e) the appellate Judge is entitled to use the reasons of the first instance decision-maker to assist him or her in reaching his or her own conclusions, but the weight the Judge places on them is a matter for the Court.18[70] The position is summed up in the judgment of Elias CJ as follows:19Those exercising general rights of appeal are entitled to judgment in accordance with the opinion of the appellate court, even where that opinion is an assessment of fact and degree and entails a value judgment. If the appellate court's opinion is different from the conclusion of the tribunal appealed from, then the decision under appeal is wrong in the only sense that matters, even if it was a conclusion on which minds might reasonably differ. In such circumstances it is an error for the High Court to defer to the lower Court's assessment of the acceptability and weight to be accorded to the evidence, rather than forming its own opinion. (footnotes omitted)The notice of appeal[71] The initial notice of appeal was filed on 12 October 2009. An amended notice of appeal was filed on 12 February 2010. The amended notice of appeal raised 14 separate issues. It soon became apparent that Mr Russell was not intending to pursue all matters raised in the amended notice of appeal, and, following questions by me, Mr Judd filed a memorandum on behalf of Mr Russell regarding the points of appeal during the course of the hearing. In his memorandum, Mr Judd explained that Mr Russell no longer wished to pursue the points on appeal set out in the amended notice of appeal save for those advanced in the written submissions filed on his behalf. This was not particularly satisfactory because the written submissions filed included as an attachment the submissions made by Mr Russell to the Authority. Nevertheless, Mr Judd confirmed that Mr Russell was no longer pursuing the grounds numbered 1 to 8, 13(b) and (c) and 14 in the amended notice of appeal.17 At [5].18 At [17].19 At [16].[72] One of the matters raised in the amended notice of appeal — ground 1 — was an assertion that Judge Barber should have disqualified himself from hearing Mr Russell's challenge proceedings. Mr Russell had asked Judge Barber to recuse himself prior to the hearing before the Authority. Judge Barber refused to do so and Mr Russell then sought judicial review of that refusal. He sought an interim order pursuant to s 8 of the Judicature Amendment Act 1972 staying the proceedings before the Authority pending the outcome of his application. That interim application was dismissed by Keane J on 27 September 2005. 20 The substantive judicial review application was heard by Cooper J between 31 March 2008 and 2 April 2008. His Honour gave judgment on 19 December 2008 dismissing Mr Russell's application. 21 An appeal was lodged against that judgment by Mr Russell on 5 February 2009. The hearing of that appeal has been delayed for various reasons. It was, however, due to be heard on 5 August 2010, although I was advised that Mr Russell was applying for another adjournment because he was unwell. In the course of discussing the points on appeal with Mr Judd, I noted that, if Mr Russell did not pursue the assertion made in ground 1 in the notice of appeal, this might well count against him when and if the appeal proceeds before the Court of Appeal. I gave Mr Judd the opportunity to discuss this issue with Mr Russell. The memorandum I have referred to and the advice I received from Mr Judd confirming Mr Russell's stance in relation to the amended notice of appeal, was given to me after Mr Judd had had the opportunity to discuss matters with Mr Russell. [73] Given Mr Judd's advice, and given that Mr Russell bears the onus of satisfying me that I should differ from the decision under appeal, I dismiss Mr Russell's appeal in relation to the matters raised in paras 1 to 8 (inclusive), 13(b) and (c) and 14 in the amended notice of appeal. I deal below with costs in relation to those matters later in this decision. [74] I now turn to the live issues. a) In para 9 of the amended notice of appeal, Mr Russell alleged that Judge Barber was wrong to find that there was an arrangement as20 Russell v Taxation Review Authority HC Auckland CIV-2005-404-5203, 29 September 2005.21 Russell v Taxation Review Authority (2009) 24 NZTC 23,284 (HC).alleged by the Commissioner. In his memorandum, Mr Judd noted as follows:In relation to ground 9, the appellant accepts that there were "arrangements" for the purposes of section 99 of the Income Tax Act 1976 and its successor between the commercial management partners and the various loss companies over the period 1985 – 2000 formed by the management and agency agreements and the deeds of trust by which the income derived by the commercial management partnerships was treated as the income of the loss companies. To the extent that the judge found a different or wider arrangement, His Honour was wrong to do so because it is only the arrangements between the commercial management partners and the loss companies that had the purpose or effect of tax avoidance and there was no relevant different or wider arrangement.b) In para 10 of the amended notice of appeal, Mr Russell alleged that Judge Barber was wrong to find that the alleged arrangement was a tax avoidance arrangement. In the memorandum, Mr Judd advises as follows:In relation to ground 10, the appellant accepts that the "arrangements" between the commercial management partners and the various loss companies referred to in the previous paragraph were tax avoidance arrangements for the purposes of section 99 of the Income Tax Act 1976 and its successor. To the extent that the judge found that any different or wider arrangement was tax avoidance, His Honour was wrong to do so because only the arrangements between the commercial management partners and the loss companies had the purpose or effect of tax avoidance.c) Para 11 of the amended notice of appeal is maintained. It challenges the decision as follows:The Judge was wrong to find that the appellant was affected by the alleged arrangement because: (a) There is no evidence that the appellant received any income or any other benefit from the alleged arrangement; (b) The fact that an individual is a director of or in control of another legal entity does not mean that the person is affected by an arrangement;(c) The fact that a company receives income as a result of the personal exertion of a human being does not mean that the human being is treated as receiving the income; (d) The judge has failed to apply the fundamental principle of company law that a company is a separate legal person; (e) The fact that a person controls other legal entities is not evidence to prove that the person has received income or other benefits received by those entities; (f) The income that the respondent has assessed to the appellant has been properly returned by the commercial management partners. If the respondent considers that there has been a tax avoidance arrangement then the persons affected by that arrangement would be the commercial management partners and the respondent should re-assess those entities.d) Similarly, para 12 is maintained. It asserts that the Judge was wrong to find that the appellant obtained a tax advantage from the alleged arrangements. The particulars given are the same as those relied on for para 11 set out immediately above. e) Mr Russell also maintains para 13(a) in the amended notice of appeal. Para 13(a) reads as follows:The appellant says that any reconstruction must involve only those affected by the alleged arrangement, being the commercial management partners.The submissions[75] Mr Judd asserted that the appeal should succeed on the following point — namely that the Commissioner was wrong to assess the income to Mr Russell because Mr Russell was not a party to or a person affected by the tax avoidance arrangement or arrangements, and because he did not obtain a tax advantage from the arrangements as alleged by the Commissioner, or indeed any tax advantage. It was argued that Mr Russell did not receive "a single cent" of the income that has been assessed to him, and that it was wrong for the Commissioner to reconstruct theCommercial Management Partnership income to him. It was suggested that the Commissioner's real complaint against Mr Russell concerns the propriety of his actions as a director of the companies that were parties to the tax avoidance arrangement, and that the correct legal route is for the Commissioner to challenge Mr Russell's actions as a director. It was further submitted that the Commissioner's statutory powers to reconstruct tax avoidance arrangements do not extend to permit him to include income earned by a company in the assessment of a company director's income when the income was not received by the director in any form. [76] Mr Judd accepted the basic facts of the transactions set out in the Commissioner's statement of position, the adjudication report, and the Authority's decision. Indeed it was argued that they support Mr Russell's view of events rather than the view of the Commissioner. It was submitted that the facts show that the income was earned by the partnerships, and not by Mr Russell personally. It was noted that the Commissioner's case is based on the fact that Mr Russell was a director of the companies that received the income, and that he had control of the income received by the companies. It was accepted on Mr Russell's behalf that he was a director of, or that he controlled, all the relevant companies, but nevertheless, it was submitted that he did not receive any of the income. [77] Mr Judd referred to s 99(2) and (3) of the Income Tax Act 1976, and to the equivalent provisions in s GB(1) of the Income Tax Act 1994. He advised that Mr Russell does not contest that the arrangement by which the six commercial management partner companies diverted their income to loss companies amounted to tax avoidance, and that it is void as against the Commissioner. He did contest that Mr Russell's personal relationship with the companies as director was part of the tax avoidance arrangement. It was submitted that no tax was avoided as a result of the director/company relationship, and that Mr Russell was not a party to or affected by the tax avoidance arrangements. [78] It was argued that each company was a separate legal entity, and that there was no legal basis for lifting the corporate veil to assess income to Mr Russell as a director only because he was a director. It was submitted that the Commercial Management partners were the taxpayers affected by the arrangement, that they hadearned the income in question, and that they had obtained the tax advantage by using the arrangement to divert their income to the loss companies. It was accepted that a taxpayer does not need to be a party to an arrangement in order to be affected by it, but it was argued that unless a taxpayer has obtained a tax advantage as a result of the arrangement, the taxpayer cannot be said to be affected by the arrangement and the taxpayer's income cannot be adjusted. It was submitted that there was no evidence of any tax advantage obtained by Mr Russell. The submission was made that the Commissioner is not entitled to tax mere exertion or effort, and that Mr Russell was entitled to sell his business to a company, and then conduct business through the company. It was also submitted that the income of the Commercial Management Partnership was generated by the work of a large number of employees, and that it could not just be the personal exertion income of Mr Russell alone. It was accepted that he was the manager, and that his exertion contributed to the income, but it was argued that there was also exertion by numerous other employees. [79] Finally, it was argued that the Commissioner is not empowered to reconstruct income to a person because that person designed or created a tax avoidance arrangement, and that the powers are limited to counteracting any tax advantage obtained from an impugned arrangement. It was submitted that a person might design and control a tax avoidance arrangement, but obtain no tax advantage from it at all. [80] It was submitted that Judge Barber's analysis rested on the following two propositions: a) that the income of the Commercial Management Partnership should be regarded as Mr Russell's income that he would have earned as a sole trader because the income was derived from his personal exertion; and b) that even though Mr Russell did not personally receive any of the income, the monies should be treated as his income, because, as director of the companies, he controlled the monies.It was submitted that both of these propositions were flawed. [81] In seeking to have the appeal dismissed, Mr Ruffin for the Commissioner argued that Mr Russell was a party to a tax avoidance arrangement and that as a consequence it was open to the Commissioner to reassess his income. He defined the arrangement considerably more widely than Mr Judd. Mr Ruffin argued that the arrangement comprised the total structure created by Mr Russell and that it was created for the purpose of diverting income from his personal exertions into entities that carried losses. He submitted that the arrangement resulted in only nominal tax being paid by Mr Russell. It was argued that the arrangement consisted of the totality of transactions whereby Mr Russell's personal exertion income was diverted to other entities by means of consultancy, agency and management agreements, declarations of trust, and the like. It was noted that all of the various entities involved in the arrangement were controlled by Mr Russell, and that each had available to it losses carried forward by the entity itself or by other companies introduced to the group by Mr Russell. It was submitted that the arrangement was void against the Commissioner pursuant to s 99(2), and that Mr Russell's income was taxable under s 99(3) and its successors. It was submitted that the salary Mr Russell received was purely nominal when compared to the large profits generated from the business services provided by Mr Russell through the various entities he controlled and directed. [82] Specifically, it was argued that Mr Russell traded as a sole trader during the period 1972 to 1977, and that what he did prior to the Commercial Management tax avoidance arrangement, plus what he did during the operation of the CML arrangement, was relevant to the issue of reconstruction. It was submitted that the Authority was correct to find that Mr Russell was in business as an accountant and a business and financial consultant over the period 1972 to 1977, and further that the Authority was correct to find that CML took over that business and continued to provide accounting, taxation and business advisory services, and to receive income for those services, throughout the years 1978 to 1984. It was submitted that the Authority was correct to determine that the only person who provided the consulting services was Mr Russell through companies within the group he controlled. It was further submitted that the Authority was correct in holding that the structure in itstotality was an arrangement, and that it was an avoidance arrangement in terms of the relevant provisions contained in the legislation. [83] Further, Mr Ruffin submitted that the Authority correctly determined that Mr Russell was a person affected by the arrangements. It was noted that all steps taken to implement the arrangement were steps taken or controlled or directed by Mr Russell, albeit in different capacities, and that there was no other real person other than Mr Russell behind the Commercial Management Partnership, and no other real person controlling the entities within it. It was also submitted that Mr Russell was clearly a person affected by the tax avoidance arrangement, because only he controlled the profits of the arrangement. Finally, it was submitted that Mr Russell obtained a tax advantage from the arrangement, because the net income earned by him, and controlled by him alone, has not been taxed.AnalysisIntroduction[84] The most significant points of difference between the parties concern: a) the scope of the arrangement; b) whether any extended arrangement, as contended for by the Commissioner and as found by the Authority, had the purpose or effect of tax avoidance; and c) whether Mr Russell was a person affected by such arrangement as existed, and whether he obtained a tax advantage from it. [85] Although he argued the point before the Authority, Mr Russell has, for the purposes of this appeal, accepted that the agreements in place from time to time between the Commercial Management partners and the loss companies, the way in which the Commercial Management partners allocated their income to the loss companies, and the way in which the loss companies set off that income against theirlosses, was an arrangement which was void as against the Commissioner for income tax purposes. He says, however, that the parties affected by the arrangement, and the parties who obtained a tax advantage from it, were the Commercial Management partners. [86] The Commissioner, for his part, says that the arrangement comprises the much wider structure which was set up by Mr Russell involving Mr Russell personally, CSL and CML, the partners in the Commercial Management Partnership, the loss companies, the finance companies, and the trusts. The Commissioner says that the purpose or effect of the overall structure was to ensure that Mr Russell's personal exertion income was diverted into entities that carried losses, and that as a result, no income tax was paid on that income.The anti-avoidance provisions[87] The Commissioner relied on the anti-avoidance provisions contained in the tax legislation in re-assessing Mr Russell's income. Section 99 of the Income Tax Act 1976 applied during the income tax years 1985 to 1995; ss BB9, GB1 and GZ1 of the Income Tax Act 1994 applied to the income tax years 1996 to 1997, and ss BG1 and GB1 of the Income Tax Act 1994 applied to the income tax years 1988 to 2000. While there were some changes to s 99 introduced by the Income Tax Act 1994, it is common ground that those changes do not affect the position in the present case. [88] Section 99 read as follows:99 Agreements purporting to alter incidence of tax to be void(1) For the purposes of this section—Arrangement means any contract, agreement, plan, or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect:Liability includes a potential or prospective liability in respect of future income:Tax avoidance includes—(a) Directly or indirectly altering the incidence of any income tax: (b) Directly or indirectly relieving any person from liability to pay income tax: (c) Directly or indirectly avoiding, reducing, or postponing any liability to income tax. (2) Every arrangement made or entered into, whether before or after the commencement of this Act, shall be absolutely void as against the Commissioner for income tax purposes if and to the extent that, directly or indirectly,— (a) Its purpose or effect is tax avoidance; or (b) Where it has 2 or more purposes or effects, one of its purposes or effects (not being a merely incidental purpose or effect) is tax avoidance, whether or not any other or others of its purposes or effects relate to, or are referable to, ordinary business or family dealings,— whether or not any person affected by that arrangement is a party thereto. (3) Where an arrangement is void in accordance with subsection (2) of this section, the assessable income of any person affected by that arrangement shall be adjusted in such manner as the Commissioner considers appropriate so as to counteract any tax advantage obtained by that person from or under that arrangement, and, without limiting the generality of the foregoing provisions of this subsection, the Commissioner may have regard to such income as, in his opinion, either— (a) That person would have, or might be expected to have, or would in all likelihood have, derived if that arrangement had not been made or entered into; or (b) That person would have derived if he had been entitled to the benefit of all income, or of such part thereof as the Commissioner considers proper, derived by any other person or persons as a result of that arrangement. (4) Where any income is included in the assessable income of any person pursuant to subsection (3) of this section, then, for the purposes of this Act, that income shall be deemed to have been derived by that person and shall be deemed not to have been derived by any other person. ...[89] The anti-avoidance provisions generally and s GB1 specifically were recently discussed by the Supreme Court in Ben Nevis Forestry Ventures Ltd v Commissionerof Inland Revenue. 22 The Court reviewed the legislative history. It then endeavoured to settle the approach which should be applied to the anti-avoidance provisions in New Zealand. Inter alia it held as follows:[101] ... we keep in mind that the present form of the general anti- avoidance provision remains largely the same as that adopted in 1974, when Parliament chose, in reframing the then s 108, not to specify with any particularity the kind of arrangements to which it would apply. This was left to the courts to work out. Parliament did not regard it as inconsistent with the judicial function for the courts to decide which arrangements, having a purpose or effect of saving tax, would be caught by the amended general anti-avoidance provision. Of greater legislative concern was that however carefully the general provision might be drafted, the results of taxpayers' ingenuity in adapting the forms in which they did business could not be predicted. [102] It is accordingly the task of the courts to apply a principled approach which gives proper overall effect to statutory language that expresses different legislative policies. It has long been recognised those policies require reconciliation. The approach must ensure that the particular case before the court is examined by reference to the respective legislative policies. It must enable decisions to be made on individual cases through the application of a process of statutory construction focusing objectively on features of the arrangements involved, without being distracted by intuitive subjective impressions of the morality of what taxation advisers have set up. [103] We consider Parliament's overall purpose is best served by construing specific tax provisions and the general anti-avoidance provision so as to give appropriate effect to each. They are meant to work in tandem. Each provides a context which assists in determining the meaning and, in particular, the scope of the other. Neither should be regarded as overriding. Rather they work together. The presence in the New Zealand legislation of a general anti-avoidance provision suggests that our Parliament meant it to be the principal vehicle by means of which tax avoidance is addressed. The general anti-avoidance regime is designed for that purpose, whereas individual specific provisions have a focus which is determined primarily by their ordinary meaning, as established through their text in the light of their specific purpose. In short, the purpose of specific provisions must be distinguished from that of the general anti-avoidance provision. [104] Parliament must have envisaged that the way a specific provision was deployed would, in some circumstances, cross the line and turn what might otherwise have been a permissible arrangement into a tax avoidance arrangement. Ascertaining when that will be so should be firmly grounded in the statutory language of the provisions themselves. Judicial attempts to articulate how the line is to be drawn have in the past too often been seized on as if they were equivalent to statutory language. Judicial glosses and elaborations on the statutory language should be kept to a minimum. [105] The key statutory concept in the general anti-avoidance provision is of a tax avoidance arrangement, as Parliament has defined it. By means of22 [2009] 2 NZLR 289 (SC).the definition of "tax avoidance", a tax avoidance arrangement includes an arrangement which directly or indirectly alters the incidence of any income tax. It is arrangements of that and allied kinds which are void against the Commissioner under s BG 1(1). An arrangement includes all steps and transactions by which it is carried out. Thus, tax avoidance can be found in individual steps or, more often, in a combination of steps. Indeed, even if all the steps in an arrangement are unobjectionable in themselves, their combination may give rise to a tax avoidance arrangement. [106] Put at the highest level of generality, a specific provision is designed to give the taxpayer a tax advantage if its use falls within its ordinary meaning. That will be a permissible tax advantage. The general provision is designed to avoid the fiscal effect of tax avoidance arrangements having a more than merely incidental purpose or effect of tax avoidance. Its function is to prevent uses of the specific provisions which fall outside their intended scope in the overall scheme of the Act. Such uses give rise to an impermissible tax advantage which the Commissioner may counteract. The general anti-avoidance provision and its associated reconstruction power provide explicit authority for the Commissioner and New Zealand courts to avoid what has been done and to reconstruct tax avoidance arrangements. [107] When, as here, a case involves reliance by the taxpayer on specific provisions, the first inquiry concerns the application of those provisions. The taxpayer must satisfy the court that the use made of the specific provision is within its intended scope. If that is shown, a further question arises based on the taxpayer's use of the specific provision viewed in the light of the arrangement as a whole. If, when viewed in that light, it is apparent that the taxpayer has used the specific provision, and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement. ... [108] The general anti-avoidance provision does not confine the court as to the matters which may be taken into account when considering whether a tax avoidance arrangement exists. Hence the Commissioner and the courts may address a number of relevant factors, the significance of which will depend on the particular facts. The manner in which the arrangement is carried out will often be an important consideration. So will the role of all relevant parties and any relationship they may have with the taxpayer. The economic and commercial effect of documents and transactions may also be significant. Other features that may be relevant include the duration of the arrangement and the nature and extent of the financial consequences that it will have for the taxpayer. As indicated, it will often be the combination of various elements in the arrangement which is significant. A classic indicator of a use that is outside parliamentary contemplation is the structuring of an arrangement so that the taxpayer gains the benefit of the specific provision in an artificial or contrived way. It is not within Parliament's purpose for specific provisions to be used in that manner. [109] In considering these matters, the courts are not limited to purely legal considerations. They should also consider the use made of the specific provision in the light of the commercial reality and the economic effect of that use. The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament's purpose.If that is so, the arrangement will not, by reason of that use, be a tax avoidance arrangement. If the use of the specific provision is beyond parliamentary contemplation, its use in that way will result in the arrangement being a tax avoidance arrangement. (footnotes omitted)Was any arrangement void by reason of tax avoidance?[90] The Commissioner had to decide first, whether there was an arrangement, secondly, whether the arrangement had the purpose or effect of avoiding tax, and finally, whether Mr Russell was a person affected by that arrangement and subject to the reconstruction power conferred by the legislation so that his income could be adjusted so as to counteract any tax advantage obtained by him. 23[91] I suspect that in practice questions one and two will often shade into each other, because whether there is an end purpose or effect (other than a merely incidental purpose or effect) will often inform the question of whether there was an arrangement to achieve that end. Further, the end purpose or the effect achieved will generally provide guidance as to the scope of any arrangement. [92] Here, the Commissioner concluded that there was an arrangement in the sense outlined in [81] and [86] above. He also considered that the arrangement amounted to tax avoidance and that Mr Russell was a person affected by it. These conclusions were detailed in the statement of position prepared by the Commissioner and forwarded to Mr Russell. The onus then passed to Mr Russell to persuade the Authority that there was no arrangement as alleged, and/or that the arrangement was not a tax avoidance arrangement, and/or that he was not a person affected by the arrangement. 24 Having heard the parties, the Authority concluded that there was an arrangement and that the scope of the arrangement was as asserted by the Commissioner. It also found that the arrangement was a tax avoidance arrangement, that Mr Russell was a person affected by the arrangement and that his income should be adjusted to counteract the tax advantage he obtained from it. The onus is on23 See Ben Nevis at [160]–[161]; Peterson v Commissioner for Inland Revenue [2006] 3 NZLR 433 (PC) at [33].24 See Tax Administration Act 1994, s 149A(2)(b), and see Ben Nevis at [115].Mr Russell to persuade me that the Authority was wrong in these regards and that I should differ from its conclusions.Arrangement[93] As noted, the word "arrangement" was defined in the anti-avoidance provisions in the relevant income tax statutes: see s 99(1) of the Income Tax Act 1976 and s OB1 of the Income Tax Act 1994. [94] The definition of the word "arrangement", and its predecessors and successors, has been considered in a large number of cases. Specifically, it was discussed by the Court of Appeal in Commissioner of Inland Revenue v BNZ Investments Ltd. 25 The majority (Richardson P, Keith and Tipping JJ) held, per Richardson P, that an arrangement: 26 involves a consensus, a meeting of minds between parties involving an expectation on the part of each that the other will act in a particular way. The essential thread is mutuality as to content. The meeting of minds and bodies in expectation as to future conduct. There is consensus as to what is to be done.The Privy Council in Peterson v Commissioner for Inland Revenue disagreed with this view. It held, per Lord Millet (with whom Lord Bingham and Lord Scott agreed), that an arrangement did not require a consensus or meeting of the minds, and that the taxpayer need not even be a party to the arrangement or privy to its details. 27 In Ben Nevis, the Supreme Court did not find it necessary to decide whether to depart from the Privy Council's judgment in the Peterson case. 28[95] The Authority in the present case appears to have considered that it made no difference which view was preferred, and that on either approach there was clearly an arrangement. 2925 [2002] 1 NZLR 450 (CA).26 At [50].27 Peterson, above n 19, at [34] and [93].28 At [161].29 See, for example, at [158] of its decision.[96] In considering the scope of the alleged arrangement, it is important to examine the relevant facts. The evidence establishes the following: a) In May 1984 Mr Russell set up the partnership known as the Commercial Management Partnership. Both partners, MAL and BPL, were controlled by Mr Russell. He held all of the shares in the partner companies, either directly or through other entities he controlled. He was a director of one of the partner companies and was effectively in control of the other through other entities he owned and controlled. b) Mr Russell arranged for the partnership to buy the business of CML. He had set up that company. c) The partnership business was managed by CML. CML in turn was managed by CSL pursuant to a business consultancy agreement. Mr Russell was retained by CSL to provide consultancy services to it and as directed by it. CSL had no other staff. Nobody other than Mr Russell would provide the consultancy services CSL had contracted to provide, and as a consequence Mr Russell controlled CSL, CML and the Commercial Management Partnership. d) In later years, new partners were introduced by Mr Russell. This did not change the basic structure. Mr Russell controlled all new partners. Similarly, he controlled Mahalo Limited when it took over the partnership business. e) The Commercial Management partners entered into agency and management agreements and declarations of trust with loss companies. Those loss companies were introduced to the partnership by Mr Russell, sometimes in his capacity as a receiver, on occasion in his capacity as a liquidator, and on occasion as a director. f) Mr Russell was responsible for all business carried out by the partnership from time to time. He personally promoted the Russelltemplate; he could be contacted personally by clients; he supervised all staff employed by CML; he signed all correspondence; he signed all cheques; he signed all agreements on behalf of the partners; he was receiver, liquidator or director of all loss companies; he signed all agreements on behalf of the loss companies; he corresponded on behalf of the partnership with the loss companies; he introduced new loss companies when needed. g) The net profit generated by the Commercial Management Partnership was split equally between the partners and they in turn allocated their half share of the partnership income to the loss companies. Mr Russell prepared the books of account of the partners recording this and he allocated the appropriate share of the net profit to the loss companies. h) The loss companies filed returns, and offset their share of the income against their losses. Mr Russell prepared the returns. i) Mr Russell could and did control what monies were paid out by the partners to other entities controlled by him. j) Mr Russell ensured that no cash was paid by the partners to the loss companies. Rather, he sent letters to the loss companies confirming that more than 22.5 per cent of the surplus arising from transactions entered into on their behalf by the partners had been paid out. He advised that as a result, the partners were not intending to make any further payments to the loss companies and he noted in correspondence that in terms of the agency and management agreements he had signed on their behalf, the loss companies were not entitled to issue legal proceedings to recover any further amount which might be owed from time to time to them by the relevant partner.k) The monies received by the partners were forwarded on by them on a daily basis direct to a finance company. As the person controlling the partners and the partnership, Mr Russell made the decision to forward on the monies. l) The finance companies to whom the monies were sent over the years were Money Market Securities Limited, Charity Finance Limited, and Downsview Finance Limited. All were companies owned either directly or indirectly by Mr Russell. m) No interest was paid to the partners by the finance companies. The decision not to pay interest was made by Mr Russell. n) Because cash surpluses were forwarded by the partners to the finance companies on a daily basis, at the end of each financial year, profits were "paid" to the partners by means of circular transactions. The finance company would "advance" the profit to the partnership; the partnership would pay half the advance to each partner; the partner would then advance its share of the money back to the finance company. These transactions were documented and controlled by Mr Russell. He structured them as "advances" to avoid any income connotations attaching to the payments. o) The half share of the partnership income was not returned by either partner. Mr Russell signed the partners' returns. p) Mr Russell controlled the finance companies and he determined what advances would be made by them. q) Both Mr Russell and other entities controlled by him or in which he or members of his direct family were interested received advances from the finance companies. Monies from the finance companies were used on occasion to meet Mr Russell's personal obligations.r) Mr Russell did declare consultancy fees he received for providing consulting services to CSL. He also declared in later years remuneration he received as a trustee of the Russell Family Trust. The income declared was a nominal income. It was set by Mr Russell. [97] The Commissioner was entitled at his option to identify the whole or any part or parts of the overall structure as the contract, agreement, plan or undertaking which constituted an arrangement for the purpose of s 99.30 Here the Commissioner identified the whole of the overall structure as constituting the arrangement. The Authority agreed. [98] The Court of Appeal has recently noted that an arrangement is not necessarily limited to a specific transaction or agreement. It can embrace a series of decisions and steps taken which together evidence and constitute an arrangement. It can be continued on over each of the income years in question or it may be varied from year to year. 31[99] In my judgment, there was one overall arrangement over the years 1985 to 2000 (inclusive). It was put in place by Mr Russell. It comprised a convoluted series of interlocking contracts, agreements, understandings and plans. They collectively evidenced and constituted the arrangement. There were changes to entities involved in the arrangement over the years. The partners in the Commercial Management Partnership changed. There were changes to the loss companies over the years. Indeed changes to the loss companies were inevitable. It was inherent in the model that new loss companies would be required from time to time as losses in the old loss companies were exhausted. The fact that new entities were, from time to time, introduced to maintain the structure does not preclude there being one overall arrangement. Regardless of the entities, the end result was that income was diverted into companies that had losses and those losses were utilised to avoid the payment of income tax on the income. This basic arrangement remained essentially unchanged for 15 years. This points to there being one overall arrangement.30 Peterson v Commissioner of Inland Revenue [2006] 3 NZLR 433 (PC) at [33].31 Commissioner of Inland Revenue v Penny (2010) 24 NZTC 24,287 (CA) at [78] per Randerson J.[100] The level of involvement by Mr Russell in all that occurred, in my judgment, is the most relevant factor in concluding that there was one overall arrangement. He was clearly the lynchpin on which all turned. To paraphrase a description used by Lord Denning M R in Wallersteiner v Moir: 32[Mr Russell] controlled [the parties'] every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of him. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them.[101] On the facts in the present case, it is beyond dispute that Mr Russell controlled everything. He was the architect of the overall plan. The contracts and agreements between various parties were derived and executed by Mr Russell. Other parties, such as the finance companies, were not bound by formal agreements or contracts, but were nevertheless part of the overall plan or understanding. Mr Russell controlled them and he determined what steps they took and what transactions they would enter into. Steps and transactions involving them were taken for the purpose of carrying the arrangement into effect. Each of the parties to the arrangement, starting with Mr Russell and finishing with Mr Russell, had the expectation that others would act in a particular way, because all of their actions were orchestrated by Mr Russell. In effect, Mr Russell provided consensus, although I doubt that this is a necessary ingredient of any arrangement. 33[102] In my view, there was clearly an "arrangement" as that word is defined in the anti-avoidance provisions. Moreover, in my judgment, the arrangement was not confined to the agreements between the partners and the loss companies. I say that because the partners and the loss companies derived no benefit from the arrangement and because they took no independent role in the overall plan. In my judgment, they were functionaries that acted at Mr Russell's behest. The arrangement started with the consultancy agreement between Mr Russell and CSL, whereby Mr Russell assumed and then maintained control, and ended with Mr Russell, when he decided how untaxed monies he directed into the finance companies were to be utilised.32 [1974] 1 WLR 991.33 An arrangement is defined to include a "plan". The use of the word "plan" in contradistinction to with the words "contract and agreement", suggests that consensus is not a necessary ingredient. A plan can be devised and carried out, as here, by one person.[103] Mr Russell has not discharged the onus on him of persuading me that I should differ from the decision of the Authority that there was an arrangement as asserted by the Commissioner, and I decline to do so.Did the arrangement have the purpose or effect of tax avoidance?[104] In Ben Nevis the Supreme Court noted that a Court considering the anti- avoidance provisions must apply a principled approach which gives proper overall effect to the statutory language that expresses different legislative policies. 34[105] In the present case, it is a trite observation that both the Income Tax Act 1976 and the Income Tax Act 1994 were concerned primarily with taxing income. Income tax was imposed by s 38 of the Income Tax Act 1976. It was payable by every person on all income derived by him or her during the year for which the tax was payable. The equivalent provision in the Income Tax 1994 was s BB1. The word "income" was widely defined. It included all profits or gains derived from any business, and income derived from any other source whatsoever. 35 The definition in the Income Tax Act 1994 extended the definition of the assessable income of any person to all monetary remuneration. [106] Here Mr Russell does not place reliance on any specific provision in the income tax legislation. Indeed it was accepted before me that the company grouping provisions contained in s 191 of the Income Tax Act 1976 did not apply to the relationship between the Commercial Management partners and the loss companies. Mr Judd did place some reliance upon the general principle that companies are legal entities as distinct from their officers and directors. He directed me to evidence given at the hearing by Mr Russell that the business he was involved in was inherently risky, and that he would not have exposed himself to the risks of trading on his own account. He referred to Salomon v Salomon, 36 and submitted there was no legal basis to lift the corporate veil in a tax case to assess income to a director just because he is a director. He also referred in this regard to the judgment of Cooke J34 At [102].35 See Income Tax Act 1976, s 65 and Income Tax Act 1994, s BD4.36 [1897] AC 22 (HL).in Loader v Commissioner of Inland Revenue, 37 to the first instance judgment of McKenzie J in Penny v Commissioner of Inland Revenue, 38 and to the dissenting judgment in that case of Ellen France J in the Court of Appeal. 39 Mr Judd noted that s 99(2) renders arrangements void as against the Commissioner for income tax purposes, only if and to the extent that, directly or indirectly, the purpose or effect of the arrangement is tax avoidance, or, where the arrangement has two or more purposes or effects, one of its purposes or effects is tax avoidance. He submitted that it is only the part of the arrangement which constitutes tax avoidance which is void for income tax purposes. He submitted that the Commissioner cannot assert that the total structure set up by Mr Russell is void for income tax purposes simply because a small part of it constitutes a tax avoidance arrangement. [107] The Commissioner argued that the overall arrangement put in place by Mr Russell was designed to avoid the payment of income tax by him personally. He submitted that the Commercial Management partners brought the business conducted by CML over the years 1978 to 1984 and that this was the same business as was run by Mr Russell personally as a sole trader over the years 1972 to 1977. He submitted that the income that was diverted into the entities which carried losses in order to avoid income tax being assessed against that income was Mr Russell's personal exertion income. [108] The most recent and helpful case in this area is the decision of the Court of Appeal in Penny. In that case, the taxpayers, Messrs Penny and Hooper, practiced as orthopaedic surgeons. Initially, they conducted their practices on their own account. Later, each set up a company to purchase their respective practices. The companies were substantially owned by their respective family trusts and the taxpayers were employed by the companies at a salary which the Commissioner considered to be artificially low. The Commissioner concluded that this arrangement had a more than merely incidental purpose of tax avoidance. In reconstructing the taxpayers' affairs, the Commissioner increased their incomes and taxed them at the top marginal tax rate, in line with their affairs prior to entry into the company and trust arrangements.37 [1974] 2 NZLR 472 (SC) at 478-47038 [2009] 3 NZLR 523 (HC).39 Commissioner of Inland Revenue v Penny (2010) 24 NZTC 24, 287 (CA).The taxpayers argued that the tax advantages were merely incidental to the restructuring of their affairs, and that the main purpose in effect was to obtain better protection from creditors. [109] The taxpayers succeeded before McKenzie J in the High Court. His Honour accepted that the structures adopted by the taxpayers were legitimate choices for the conduct of their respective businesses. He also found that the way in which they conducted their affairs did not constitute tax avoidance, and that the arrangements were not contrary to the scheme and purpose of the Act. [110] The Commissioner appealed to the Court of Appeal. By a majority — two to one — the appeal succeeded. The leading majority decision was given by Randerson J. Inter alia, his Honour noted that: a) the Commissioner did not challenge the legitimacy of the company/trust structures adopted by the taxpayers. 40 Rather the focus of the Commissioner's case was on the manner in which the structures had been used; 41b) there was no question that one of the effects of the arrangement was to alter the incidence of the taxpayers' personal income in the income years at issue; 42c) absent the general anti-avoidance provision, the taxpayers were entitled to take advantage of the differential tax structure applicable to individual and company taxpayers. His Honour considered that the issue was whether, in light of the arrangement as a whole, the taxpayers had used the specific provisions of the tax legislation to alter the incidence of income tax in a way that cannot have been within the contemplation or purpose of Parliament. 43 He noted the observations of the Supreme Court in Ben40 At [46] and [72].41 At [72].42 At [86].43 At [88].Nevis that the presence in the Act of the general anti-avoidance provision suggests that Parliament meant it to be the principal vehicle to address tax avoidance. He also referred to the observations of Lord Templeman in Commissioner of Inland Revenue v Challenge Corporation,44 to the effect that the section would be useless if a mechanical and meticulous compliance with some other section of the Act was sufficient to oust its application.45[111] Randerson J commented that whether the adoption of a business or other structure has the effect of diverting or splitting income generated by the personal exertions of individuals in a way which undermines the graduated personal tax regime is a relevant consideration in assessing whether the arrangements are within parliamentary contemplation. 46 He noted that the adoption of legitimate legal structures is not a barrier to a finding of tax avoidance if the arrangements are artificial, contrived, or amount to a pretence. 47[112] His Honour concluded that the arrangements before the Court not only had the effect of altering the incidence of income tax, but that that was at least one of their purposes. Moreover, he considered that it was not a merely incidental purpose or effect. 48 In reaching this conclusion, his Honour did not criticise the adoption of corporate vehicles by the taxpayers. He did, however, note that the net income before tax that each taxpayer was receiving was dramatically reduced from the year 2000 onwards, when the top personal tax rate was increased. He further noted that both taxpayers continued to devote their personal exertions to the generation of their income from their practices exactly as they had before when receiving income at much higher levels, and that there had been no diminution of hours of work or degree of effort on their part. He noted that surplus company profits were transferred by way of dividend to the respective family trust as shareholders, the effect of which was to benefit the taxpayers and their families. He considered that the structures were the vehicle by which they were able to obtain the advantage of44 [1986] 2 NZLR 513 (PC) at 559.45 At [93].46 At [106].47 At [110].48 At [112].the lower company tax rate while still enjoying the full benefit of the income of the companies for themselves personally and their families. [113] Hammond J agreed with the result arrived at by Randerson J. Moreover, he did so for substantially the same reasons. 49 His Honour also referred to Ben Nevisand noted that the way in which the arrangement was put together and the effect of it in economic and commercial terms, may be significant in determining whether or not it constitutes a tax avoidance arrangement. He noted that a combination of various elements may well be critical, in particular the structure of an arrangement so that the taxpayer gains the benefit of the specific provisions in an artificial and contrived way. 50[114] In my view, this decision is in many respects directly applicable to the issues raised by the present appeal. [115] Here Mr Russell claims that he has used legitimate corporate and trust structures. That may be the case, but Penny makes clear that this is not the end of the matter. The Commissioner does not challenge the legitimacy of the structures put in place by Mr Russell. Rather, he challenges the way those structures have been applied. Penny requires me to look at the arrangement and decide whether or not it had the effect of altering the incidence of income tax, and whether that was one of its purposes and not merely an incidental purpose or effect. As noted in Ben Nevis, the legislation does not confine the matters I may take into account. 51[116] I have reached the view that the arrangement did have the effect of altering the incidence of income tax. Indeed, in my judgment, the arrangement put in place by Mr Russell was designed to ensure: a) that income which Mr Russell earned through his personal exertions, was diverted into a series of partnerships and companies controlled by him;49 At [33].50 At [140].51 At [108].b) that no tax was paid on that income; and c) that Mr Russell retained control and could direct how the untaxed monies were used. [117] I do not accept the argument that the income generated was the Commercial Management partners' income, and not income derived from Mr Russell's personal exertions. I accept that Mr Russell may have preferred to trade through a corporate structure to avoid any personal liability (albeit that in so doing he breached r 60(b) of the then relevant New Zealand Society of Accountants Rules 1958). I also accept (if one ignores Mr Russell's professional and ethical obligations) that this was a proper and rational business decision. That, however, is not the end of the enquiry. Pursuant to s 99, an arrangement can be void against the Commissioner for income tax purposes if it has two or more purposes or effects, and one of those purposes or effects (other than a merely incidental purpose or effect) is tax avoidance. Here, in my judgment, it cannot be suggested that tax avoidance was a merely incidental purpose or effect of the arrangement. [118] First, the arrangement put in place by Mr Russell was contrived. It involved a myriad of companies, partnerships, and trusts. Yet each was controlled by Mr Russell. The arrangement was in my view so tortuous that it is hard to escape the conclusion that it was put in place simply to obfuscate the situation and to confuse even the most diligent tax inspector. Indeed I note that Mr Russell, in cross- examination, accepted that various payments were treated as capital payments to avoid any "income connotations" attaching to them, and that the Kawakawa Trust was set up as a "defensive mechanism" to protect family assets from what he considered were "unlawful and vendetta inspired raids", presumably by the Commissioner, on Russell Family Trust assets. [119] Secondly, the arrangement involved pretence. Until this appeal was heard, Mr Russell pretended that the income he generated from his personal exertions was income earned by the loss companies. He now says the income belonged to theCommercial Management partners. 52 In reality, in my view, the evidence establishes that Mr Russell was tapping into the losses in the loss companies, to avoid paying tax on his personal exertion income. [120] It is helpful to consider the way in which Mr Russell traded prior to 1985. [121] Over the years 1972 to 1977, Mr Russell was in business on his own account. a) He consistently described himself in his tax returns as an accountant. b) His letterhead recorded his professional accountancy qualifications. c) He derived professional fees earned in his capacity as an accountant in addition to his salary from Securitibank Limited. Details are as follows: Year Salary from Securitibank Professional Fees 1972 $21,042.00 $1,291.00 1973 $22,500.00 $2,146.00 1974 $30,292.00 $2,150.00 1975 $51,971 (including directors fees) $3,414.26 1976 $40,434.00 $2,105.00 1977 $43,110.00 $2,974.0052 It should be noted, however, that the companies could not hold themselves out as being chartered accountants, or trade as such. To the extent that they did so, they were committing an offence — s 32 of the New Zealand Society of Accountants' Act 1958, s 32. Membership of the Society was confined to registered persons, and the Act made it clear that admission was only open to real persons, and not to corporate entities — see, for example, s 14(1).d) In the report prepared for the Court on the liquidation of Securitibank, it was noted that staff at that company were from time to time engaged in private work for him, and that Securitibank accountants did work for his clients for which he personally collected fees. e) In an Auckland Star article dated 15 April 1977, he was quoted as saying that he had had private clients for some time, and that there were a lot of small businesses that were sticking by him. He said that he hoped to be off to a flying start with his new business, CML. The business was described as one which would concentrate on providing financial and management consultant services, particularly advice on investment opportunities. f) He considered that he was in the business of advancing money at the time. Indeed he sought to write off losses made in that regard against his income and he argued this point both before the Authority53 and this Court on appeal.54[122] Mr Judd referred me to a passage in the evidence where Mr Russell asserted that he was merely doing tax returns and the like for friends and family members while he was at Securitibank. This assertion does not, and cannot, stand if reference is made to the documents and statements made by Mr Russell at the time. The contemporaneous materials show that Mr Russell's personal accountancy business was not insignificant. The income he earned was not, as a percentage of his then total income, insubstantial. [123] The Authority concluded that Mr Russell was in business as an accountant/ business advisor/financial consultant over the period 1972 to 1977. I agree with that finding. Mr Russell has not persuaded me that I should differ from it. [124] Further, in my view it is clear that this personal business provided the springboard for the years 1978 to 1984.53 Case E31 (1981) 5 NZTC 59,204.54 Russell v Commissioner of Inland Revenue (1984) 6 NZTC 61,753 (HC).a) As already noted, CML was incorporated on 1 April 1977. Mr Russell was a director of the company, along with his wife. Mr Russell was the company secretary. Mr Russell held 9,999 shares in the company. It had a share capital of 10,000 ordinary $1 shares and the other share was held by another company controlled by him, Money Market Securities Limited. The company was clearly Mr Russell's alter ego. b) There are the comments made by Mr Russell himself, noted at [121] above. Those comments suggest that Mr Russell intended to carry on the business which he had previously carried out as a sole trader through his new company, CML. c) On 25 June 1979, Mr Russell wrote a letter to a firm of accountants advising that he had been asked to provide taxation and consulting services, including the preparation of accounts and taxation returns, on behalf of some individuals and a company they were associated with. The letter was signed by Mr Russell as managing director of CML, and it was on CML letterhead. d) That letter resulted in a complaint being made by the accountants concerned. They considered that Mr Russell was a director of, and a shareholder in CML, and that CML was carrying on the business of accounting, in breach of the New Zealand Society of Accountants Rules then in force. The Society commenced disciplinary proceedings against Mr Russell in October 1979. The Disciplinary Committee found against him. The decision was appealed by Mr Russell, but this was dismissed by the Appeal Committee on 21 February 1980. e) The Disciplinary Committee imposed costs of $500 against Mr Russell, and the Appeal Committee imposed further costs of $250 against him. Mr Russell paid the costs orders, and then claimed a deduction for the same, as well as legal expenses totalling $1,402.60.This claim was disallowed by the Commissioner. Mr Russell challenged the Commissioner's decision. He filed handwritten submissions in support of his case stated. The submissions recorded as follows:At the relevant time objector was the beneficial owner of all the capital of Commercial Management Limited and was a director and secretary of the company. The objector conducted his business as a consultant under the name of the company and worked full-time in that business. The major portion of the objector's income in the years 1979 and 1981 were (sic) derived either directly or indirectly from the business which the objector conducted in the name of Commercial Management Limited.The submission also noted, "These are not advising services. I actually do the job." f) There is also the agreement between CSL and CML dated 1 April 1980, whereby CML retained CSL as its consultant and manager. Mr Russell signed the agreement on behalf of both entities. Mr Russell was CSL's only employee. There was nobody other than Mr Russell who could provide the consulting and management services required. g) CML could not offer accountancy services. [125] In my view, the evidence, and in particular the various statements made by Mr Russell at the time, clearly establish that he continued what was initially his personal accounting business through CML. The income derived by CML was income earned by Mr Russell through his personal exertions. [126] CML's business — in effect Mr Russell's personal business — was sold to the Commercial Management Partnership which was set up by Mr Russell in May 1994.55 Mr Russell continued his direct personal involvement through the agreements put in place by CML and CSL and between CSL and him. 56 On 1 July55 See [18] above.56 See [19] and [20] above.1991, MAL retired from the partnership. It was replaced by Downsview Debt Collections Limited. On the following day — 2 July 1991 — BPL retired from the partnership and it was replaced by Personal Loans Limited. The underlying business of the partnership did not change. 57 Nor did it change when the second partnership comprising Hamlin Facilities Limited and The Tag Gun Company Limited started trading in April 1994. 58 Those entities were to purchase the Commercial Management business, although both partnerships continued trading for a period.59Nor did the position change when Mahalo Limited was purchased by the Commercial Management Partnership business in April 1997.60 Indeed, Mr Russell was eventually struck of the list of chartered accountants as a result of trading as an accountant through Mahalo Limited. [127] At various times, CML employed up to 55 staff. Mr Judd placed some emphasis on this point. He submitted that it detracted from any suggestion that the income earned was Mr Russell's personal exertion income. [128] I do not accept this argument. Indeed it is, in my judgment, flawed. Solicitors, accountants and others who practice in partnership do not return only the income they personally generate. Rather, they return their share of the partnership income which is often generated in large part by employees. [129] Moreover, the case law is against Mr Judd. In Hadlee v Commissioner of Inland Revenue, 61 the taxpayer was a partner in a national firm of accountants. He had been allocated a number of the shares in the profits, capital profits and losses of a local office of the partnership. He set up a trust for the benefit of his family, and assigned part of his interest in the partnership to the trustees of the trust. The trustee returned as income for the trust the percentage of the income attributable to the share in the partnership assigned to them. The Commissioner assessed the whole of the income from the taxpayer's share in the partnership to the taxpayer. The taxpayer objected, contending that the partnership income was not derived from his personal57 See [44] to [45] above.58 See [49] above.59 See [50] above.60 See [57]f) above.61 [1989] 2 NZLR 447 (HC); [1991] 3 NZLR 517 (CA); [1993] 2 NZLR 385 (PC).services or exertions, but from his rights under the partnership agreement which amount to a proprietary interest which he had assigned and from which income flowed to the trustees. In the High Court, Eichelbaum CJ reviewed the evidence in some depth. He noted evidence given by the taxpayer about the part played by staff in the earning performance of the partnership, and the beneficial effect of a high staff/partnership ratio. His Honour considered that these were only matters of degree. He observed that the elements of input of personal effort by partners, and their presence in providing decision making, leadership, supervision and control, are as essential in the case of a large staff as with a small one, although noting that the proportion of time devoted to each aspect, and its relevant importance, might differ considerably from firm to firm. He did not consider the taxpayer's evidence in this regard as materially affecting the relationship between his personal exertions and the earning of a partnership income. 62 These findings were not challenged on appeal. [130] Further, in the present case, the evidence is clear that Mr Russell supervised all of the activities of the various employees. He reviewed their work. He signed all correspondence, including cheques. In my view, the fact that some or even much of the no doubt mechanical work was undertaken by employees does not materially affect the relationship between Mr Russell's personal exertions and the earning of the income by CML. [131] I agree with the Authority that Mr Russell continued to trade as an accountant, a business advisor, a tax consultant, and a financier, through the various companies over the years. He started that business over the years 1972 to 1977. He remained the driving force when that business was taken over first by CML, and subsequently when it was acquired by the partners in the Commercial Management Partnership. While there were employees, they were supervised and controlled by Mr Russell. Like the taxpayers in Penny, Mr Russell continued to devote his personal exertions to the generation of income. He allocated to himself a nominal salary each year. That salary was first paid by CSL and later by the trusts. It did not bear any relationship to the work Mr Russell undertook, or to salaries properly payable in the marketplace. Very significantly, Mr Russell retained control of the62 [1989] 2 NZLR 447 (HC) at 459 – 460.whole of the income generated; only he could direct how it was to be applied. The income of the Commercial Management partnership was in my judgment derived from Mr Russell's personal exertions and he retained complete control over it. [132] The Authority found 63 that the steps Mr Russell took were not within the purpose or contemplation of Parliament when it enacted the loss offset provisions contained in the income tax legislation. 64 I agree with that conclusion. The unrestricted transfer of profits to loss companies included in the group purely because of the losses they brought with them in the manner here sought to be achieved would bypass the company grouping rules contained in the legislation, and significantly undermine the tax base. That cannot have been Parliament's intention. [133] Further, in my view, the steps taken by Mr Russell to divert the income which he generated by his personal exertions into the Commercial Management partnership were not within the contemplation of Parliament. Parliament clearly intended that individuals should pay income tax at the appropriate rate on their net income. In Hadlee, the Court of Appeal endorsed an obiter statement from an earlier High Court decision,65 noting that no taxpayer can, by way of assignment, escape assessment of tax on income resulting from his or her personal activity, and that such income always remains truly as income and is derived by him irrespective of the method he may adopt to dispose of it. 66 The Privy Council expressly agreed with these observations. 67[134] These observations are directly on point. Mr Russell was creating income through his personal exertions. In order to avoid the payment of tax on that income, he formed the Commercial Management partnership. The partnership consisted of two companies. Those two companies purported to earn what would otherwise have been Mr Russell's personal exertion income. In order to avoid the payment of tax on the net profits of the partner companies, Mr Russell introduced loss companies into the arrangement. The loss companies entered into agency and management63 At [176] in its decision.64 Income Tax Act 1994, s 191; Subpart 1G, Income Tax 1994.65 Spratt v Commissioner of Inland Revenue [1964] NZLR 272 (HC).66 [1991] 3 NZLR 517 (CA) at 521-522 and 532-533.67 [1993] 2 NZLR 385 (PC) at 387-389.agreements with the partner companies. Pursuant to those agreements, the partners asserted that such income as they derived (in reality from Mr Russell's exertions) was the income of the loss companies. This enabled the partner companies to access the losses in the loss companies and avoid paying tax. [135] Mr Russell structured the arrangement so that he gained a tax advantage in an artificial and contrived way. In my view, the purpose of the complex corporate structure was to divert income from Mr Russell's personal exertions, whether generated either directly through Mr Russell's activities, or indirectly through his control of employees, into companies, who were able to access the losses in the unrelated companies to avoid the payment of income tax. [136] Moreover, at no stage did Mr Russell lose control of the monies. They could only be applied as he directed. The companies and other entities used were all ultimately controlled by Mr Russell. The result was that at no point was the income beyond his direct control. Indeed, ultimately Mr Russell and other entities which he was interested in or controlled, benefited from advances made by the finance companies. [137] If such arrangements were immune from the Commissioner's purview, taxpayers would be able to assign their income to other entities, and thus escape the assessment of tax at the appropriate rate on income resulting from their personal activities. That would be contrary to the fundamental tenet of the income tax legislation. [138] In my view, the arrangement the subject of this appeal not only had the effect of altering the incidence of income tax, but that was its primary purpose. Notwithstanding the corporate structure which was put in place, the arrangement is void as against the Commissioner, and by virtue of s 99(3), the Commissioner could adjust the assessable income of any person affected by the arrangement so as to counteract any tax advantage obtained. [139] I now turn to consider whether Mr Russell is a "person affected" by the arrangement, and whether he obtained a tax advantage from it.Was Mr Russell a person affected by the arrangement? Did Mr Russell obtain a tax advantage for the arrangement?[140] Once the existence and scope of the tax avoidance arrangement has been established, all those taxpayers who have benefited from it are subject to corrective adjustment by the Commissioner in the exercise of the reconstruction powers conferred by the anti-avoidance provisions. No question of mutuality or even awareness by a benefiting taxpayer arises. 68[141] Mr Judd submitted that Mr Russell was not a person affected by the arrangement. He argued that Mr Russell did not receive a dollar from the arrangement, either directly or indirectly. [142] With respect to Mr Judd, that is not the test. The correct test is whether Mr Russell was a person affected by the arrangement through obtaining a "tax advantage" from it. I have already explained why I consider that Mr Russell was a party to the arrangement. I accept that he did not directly receive any of the income generated by the arrangement, but that was because the purpose of the arrangement was to ensure that he did not have to pay tax on that income. I have agreed with the Authority that the income was Mr Russell's personal exertion income. He was a person affected by the arrangement and he obtained a tax advantage from it because he did not pay tax on the income he would have earned but for the arrangement. [143] I also agree with the Authority that Mr Russell was the only real person underpinning the arrangement. Mr Russell was the person who pulled all the strings, and he was the one who obtained the tax advantage. Further, Mr Russell controlled all of the untaxed monies through the finance companies. [144] For the sake of completeness, I acknowledge Mr Judd's argument that the evidence shows that Mr Russell was in credit with the finance companies at all relevant times and that there is no evidence to show that any of the income generated by the Commercial Management partners and deposited with the finance companies, was paid directly to Mr Russell.68 Ben Nevis at [164] and [167] – [168].[145] In my view, however, this is beside the point. The untaxed monies were paid to the finance companies. At that point, they became intermingled with other monies which the finance companies already held. The reality, however, remains that Mr Russell controlled all the monies held by the finance companies; no one else could access them unless he permitted them to do so. Monies were advanced by the finance companies to Mr Russell to enable him to meet his personal obligations. Monies were also advanced to various trusts which Mr Russell had settled for the benefit of his family. The Commissioner has not tried to trace the untaxed monies, and his reconstruction is not directly referable to the withdrawals from the finance companies. Rather, the Commissioner contends that the income properly reconstructed to Mr Russell is the income derived by the partners from time to time in the Commercial Management Partnership. [146] In my view, the conclusion is inescapable that Mr Russell was a person affected by the arrangement. He obtained a tax advantage, in that he did not pay tax on the vast majority of his personal exertion income. He was also affected, because he ended up in control of the monies which were untaxed pursuant to the arrangement. [147] The Authority concluded that the Mr Russell was a party affected by the arrangement. I agree with that conclusion. Mr Russell has not persuaded me that the Authority erred in that regard. [148] The Authority went on to hold that it was appropriate for the Commissioner to attribute all monies earned by the partners in the Commercial Management Partnership to Mr Russell as his personal exertion income. The Authority's conclusion in that regard was not directly challenged before me. I record that I agree with the Authority's conclusion in this regard as well. Indeed, it is an inevitable consequence once it is concluded that there was an arrangement, that its scope was as alleged by the Commissioner, that its purpose or effect was tax avoidance, and that Mr Russell was a person affected by it because he obtained a tax advantage from it.Result[149] It follows that the appeal must be dismissed and that it is open to the Commissioner to reconstruct Mr Russell's assessable income to counteract the tax advantage obtained by him. He has done so and there has been no challenge to the quantum of the Commissioner's reconstruction. The Authority's findings in that regard must stand.Costs[150] The Commissioner is entitled to his reasonable costs and disbursements. Unless the parties can reach agreement, I direct that a memorandum in that regard be filed by the Commissioner within 10 working days from the date of this decision. Mr Russell is to respond within a further 10 working days. I will then deal with the issue of costs on the papers, unless I require the assistance of counsel. Wylie J