RUSSELL V THE COMMISSIONER OF INLAND REVENUE COA CA654/2010

RUSSELL V THE COMMISSIONER OF INLAND REVENUE COA CA654/2010 [3 April 2012]IN THE COURT OF APPEAL OF NEW ZEALANDCA654/2010[2012] NZCA 128BETWEEN JOHN GEORGE RUSSELLAppellantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 1-2 February 2012Court: Glazebrook, Randerson and Stevens JJCounsel: Appellant in personM S R Palmer, M J Ruffin and R J Wallace for RespondentJudgment: 3 April 2012 at 3.00 pmJUDGMENT OF THE COURTA The application for leave to raise additional grounds of appeal is granted in part. Leave granted only to argue the additional ground dealing with the application of s 99(4) of the Income Tax Act 1976.B The appeal is dismissed.C The appellant must pay the respondent costs for a standard appeal on a band B basis and usual disbursements. We certify for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Stevens J)Table of ContentsPara NoCommissioner's assessment challenged [1]Factual background [8]The broad contentions [8]The Russell template [12]The wider background [13]The structure of the CM Partnership [18]The CM Partnership cashflows [24]Funds for the appellant or his family [26]Statutory context [30]The applicable law [33]The High Court judgment [43]First ground of appeal - scope of the arrangement [47]The appellant's submissions [47]The High Court's findings [49]Second ground - a tax avoidance arrangement? [56]Third and fourth grounds - a person affected by the arrangement and obtaining a tax advantage [61]Reconstruction to the appellant? [68]Fifth (additional) ground - s 99(4) [76]The competing positions [76]The factual context [79]Our evaluation [80]Quantum [88]Result and costs [89]Commissioner's assessment challenged[1] The Commissioner of Inland Revenue (the Commissioner) assessed the appellant, Mr Russell, for taxation in the years 1985 to 2000 having considered the appellant was a party to, and affected by, arrangements said to constitute tax avoidance. In the main the arrangements concerned the activities of a company known as Commercial Management Ltd (CML) from 1978 to 1984 and an entity known as the Commercial Management Partnership (CM Partnership) from 1985 to 2000. The appellant as disputant unsuccessfully challenged the assessments at a 64-day hearing in the Taxation Review Authority (the Authority).1 He then appealed unsuccessfully to the High Court where all grounds of appeal were rejected by Wylie1 Case Z19 (2009) 24 NZTC 14,217 (TRA) [TRA decision].J.2 The Judge concluded that the appellant was affected by an arrangement having the purpose and effect of tax avoidance by which he obtained a tax benefit from the arrangement, so the Commissioner's assessment of the appellant's income tax shouldbe upheld.[2] The appellant appeals to this Court. He filed a notice of appeal raising four grounds, namely, that the Judge was wrong to find that:(a) there was an ―arrangement as alleged by the Commissioner;(b) the alleged arrangement was a tax avoidance arrangement;(c) the appellant was affected by the alleged arrangement; and(d) the appellant obtained a tax advantage from the alleged arrangement.[3] It was not surprising that the notice of appeal was limited to these grounds:they were the ―live issues in the High Court,3 where the appellant was represented by counsel. Other grounds of appeal were not pursued in the High Court after counsel obtained explicit instructions to that effect from the appellant and confirmed to the Court the receipt of such instructions.4[4] When the appellant filed his submissions on appeal, his written outline raised five additional grounds of appeal as follows:(a) the majority of the assessments were time barred under s 25(2) of the Income Tax Act 1976 (the 1976 Act);(b) the threshold of proving the ingredients of tax avoidance required by the Privy Council in Peterson v Commissioner of Inland Revenue5 has not been met;2 Russell v Commissioner of Inland Revenue (No 2) (2010) 24 NZTC 24,463 (HC) [the HighCourt judgment].3 Referred to at [74] of the High Court judgment.4 As described by Wylie J at [71]–[72] of the High Court judgment.5 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433.(c) the requirement inferred in s 99 of the 1976 Act and particularised inthe Commissioner's Policy Statement for a careful and thoroughanalysis has not been met;(d) the assessment process was incomplete because s 99(4) of the 1976 Act had been ignored; and(e) the assessments were a product of an alleged longstanding vendetta practised by the Commissioner against the appellant.[5] The question of leave to add these additional grounds was the subject of an exchange of written submissions and further oral submissions at the commencement of the hearing. We considered the submissions and informed the parties that the only additional ground for which leave would be granted was that dealing with s 99(4) of the 1976 Act. We said that our reasons for not granting leave on the remaining grounds would be included in the judgment. We explain them now.[6] There was no dispute as to the applicable law regarding leave.6 We note that each of the proposed additional grounds had been dealt with in considerable detail by the Authority.7 All of these grounds had been determined against the appellant by the Authority. None had been argued on appeal to the High Court. We were of the view that the only ground that had even a remote chance of success was the s 99(4) point. The other additional grounds had no prospect of success. Moreover, the appellant provided no evidential foundation to explain his change of stance between his first appeal to the High Court and the appeal to this Court.[7] Having granted leave to raise the s 99(4) point at the hearing, we will address the merits of the argument later in this judgment. We will also consider a further and separate issue arising from our conclusions on the first four grounds of appeal:6 The question was whether the proposed amendments would enable the real issues to be resolvedon the record before the Court. The existence of any prejudice to the respondent is relevant.The existence of prejudice may mean that it is unfair to allow the amendment. But the overalltest is whether it is in the interests of justice to allow the late amendments. See PongakawaSawmill Ltd v New Zealand Forest Products Ltd [1992] 3 NZLR 304 (CA) at 309 and Mitchell vTrustees Executors Ltd [2011] NZCA 519 at [28]–[29].7 Each of the proposed additional grounds are dealt with in the TRA decision at [36]–[72] for thetime bar; [155]–[158] for the onus of proof; [24]–[35] for the Commissioner's Policy Statementanalysis; [235]–[278] for the s 99(4) point and [73]–[102] for the vendetta question.whether the Commissioner was correct to reconstruct the income to the appellant personally.Factual backgroundThe broad contentions[8] The alleged tax avoidance relates to an intricate scheme of companies, partnerships and trusts that operated in the period 1985 to 2000 inclusive. Wylie Jdescribed the factual matrix as being of ―labyrinthine complexity.8[9] The current appeal relates mainly to the CM Partnership, whose activities during the period 1985 to 2000 were conducted by two partners. Both were companies controlled by the appellant. Under agency and management agreements (and declarations of trust) with loss companies, the income received by the partners in the CM Partnership was attributed to the loss companies, so that they could offset their losses against their returns. As a result, the partners in the CM Partnership paid no tax on their income.[10] The Commissioner contended that, by using the CM Partnership, the appellant avoided paying tax on the income earned through the Russell template transactions, which we explain below. While the appellant declared a total income of $298,700.76 for the tax years 1985 to 2000 inclusive, the Commissioner said that the appellant should have declared an income for the period of $15,757,556.18.9 It is on this reassessed figure that the Commissioner seeks to recover tax from the appellant. By contrast, the appellant has consistently denied that the scheme involved committing tax avoidance on the basis that he personally never received any of the income assessed to him.8 The High Court judgment at [7].9 The Commissioner reassessed the appellant's personal income for the years ended 31 March1985 to 31 March 1995 under s 99(3) of the Income Tax Act 1976, and for the years 1996 to2000 under s GB 1 of the Income Tax Act 1994. With penalties and interest the sum which theCommissioner seeks to recover is in excess of $177 million.[11] The essence of the dispute concerns the monies that are the net profits of the partner companies in CM Partnership and sometimes the net profits of other corporate entities associated with a second partnership, established later and also controlled by the appellant. The origin of these profits stemmed from the 1970s when the appellant developed a tax avoidance scheme that came to be known as the Russell template. Participants in the scheme found it attractive, as did a considerable number of other taxpayers who, keen to pay less tax, paid to become involved in the scheme or others like it. The popularity of the scheme meant that the CM Partnership or other corporate entities controlled by the appellant derived substantial income from consultancy and administration fees, accountancy fees and advisory fees. To set the present appeal in context, we will describe briefly the gistof the Russell template, noting that the scheme had been found by this Court to be ―ablatant tax-avoidance scheme, elegant though its components may separately havebeen.10 Application of the Russell template with slight differences was also found to be tax avoidance in the unsuccessful appeal to this Court in Wire Supplies Ltd v Commissioner of Inland Revenue.11The Russell template[12] The scheme involved trading companies and their shareholders taking advantage of the offer by the appellant to take, year by year, the entire net profits of the trading companies and immediately return them to the shareholders (less remuneration or fees for services) in the form of tax-free capital. In order to provide some more detail of the scheme, we respectfully adopt the following description by Lord Hoffmann in the Privy Council in Miller:[6] The first step was for the shareholders to agree to sell their sharesto a company controlled by Mr Russell, the price being left outstanding and secured by a mortgage over the shares. This transaction was not intended to be a sale in any commercial sense. The vendors declared themselves trustees of the shares for Mr Russell's company but remained on the register and theyremained directors, continuing to run the company as before. And they had an option to repurchase the shares when the scheme had run its course. The10 Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA) at 300. Such a conclusionwas upheld by the Privy Council when it dismissed the appellants' appeal against the dismissalof their application for judicial review: Miller v Commissioner of Inland Revenue [2001]3 NZLR 316 (PC).11 Wire Supplies Ltd v Commissioner of Inland Revenue [2007] 3 NZLR 458 (CA).sale had two purposes, both of which were entirely tax-related. The first wasto make the appellants' company part of a group of companies controlled by Mr Russell, some of which had tax losses. This would enable Mr Russell to take advantage of the group relief provisions in s 191. The second was to create a debt to the shareholders which could be satisfied out of the profits of their company.[7] The next step was for the trading company to agree to pay its net profits, half yearly, to the purchaser company controlled by Mr Russell. This was called an administration charge. It was income in the hands of the purchaser company, but group relief under s 191 was relied upon to avoid tax. In reality the administration charge was partly a conduit for the money which was to be returned to the shareholders, and partly a fee payable to Mr Russell for the use of the scheme. The proportion was calculated by reference to the amount of tax saved. In addition, the company paid a consultancy fee representing 5 per cent of the administration charge to another Russell company.[8] The third stage was for the Russell company to pay the shareholders their part of the administration charge. This was designated an instalment of the purchase price. The amount of the purchase price was calculated, not by reference to the value of the company but to enable the scheme to mop up a given number of years of expected net profit. When that had been accomplished, the appellants could exercise their option to repurchase the company and carry on as if nothing had happened. Alternatively, ashappened in the case of the O'Neils, Mr Russell's company could agree tobuy a release of the option for a sum which would create a sufficient new capital debt to enable the scheme to start up again.The wider background[13] The appellant started out as a chartered accountant. From 1972 to 1977 he was employed as the managing director of Securitibank Ltd (Securitibank). Theappellant's employment ended when Securitibank went into liquidation, although theappellant thereafter assisted the liquidator for a short period. When he was employed at Securitibank, the appellant carried out some accountancy and business advisory work on his own account. We do not need to resolve the dispute as to the nature and extent of that work. It seems that while working for Securitibank the appellant earned consulting income personally and paid tax on that income.[14] Between the late 1970s and 2000 the appellant developed an elaborate maze- like structure of companies, partnerships and trusts which he controlled and directed. The appellant provided consultancy services through that structure, providing advice to taxpayers on how to avoid tax through their participation in Russell template transactions. The appellant received only a nominal salary. More particularly, fromaround 1977 (after the appellant set up CML), he distributed all income as director'sfees and seems to have paid tax thereon. Then, from 1981, when income increased, distributions ceased (apart from a nominal salary). Once the CM Partnership was established the appellant still received only a nominal salary.[15] The subject of the present appeal is the elimination of taxation on income received by the various corporate entities controlled by the appellant through the CM Partnership from 1985 to 2000. The structure and processes that achieved that elimination of taxation in this period had been put in place by the appellant in prioryears. They had their origins in the appellant's consultancy practice earlierdescribed. The appellant incorporated CML in 1977 at the same time as he incorporated Corporate Securities Ltd (CSL). The appellant controlled both entities.12 Pursuant to a business consultancy agreement dated 1 April 1980, CML was managed by CSL. There was a further business consultancy agreement between CSL and the appellant under which he was retained to provide consultancy services in return for consulting fees and reimbursement of expenses. CSL had no other staff. By a similar means the appellant controlled a large number of other companies which were managed by CML.[16] CML sold Russell template arrangements as part of its business. In December 1982 this business was taken over by a partnership formed by the appellant with partners comprising CML and Business Properties Ltd (BPL), another company controlled by the appellant. The partnership traded successfully and at times employed up to 55 staff. Much of CML's income was derived from the sale ofRussell template arrangements. Further income was generated from the payment (every six months) of consulting fees both by the trading company and the parent company involved in a template transaction. The Commissioner alleged that, in the income years 1978 to 1984, CML was involved in tax avoidance that benefitted the appellant. But for various reasons the Commissioner proposed no adjustment for that period.12 The precise details of how such control was achieved are summarised by Wylie J at [11] andfollowing of the High Court judgment.[17] In May 1984 CML sold its business to a new partnership, the CM Partnership. We do not need to recite the intricacies and complexities of how this structure operated.13 It will suffice to outline in summary form below the gist of the arrangements. The CM Partnership conducted the business which continued to earn substantial income from fees and other earnings derived principally from the sale and use of the Russell template arrangements. It seems that there was a significant increase in such income from 1981.The structure of the CM Partnership[18] There were two partners in the CM Partnership,14 both of whom were controlled by the appellant. The partnership business was managed by CML and it was appointed as agent by the partnership for the purpose of entering into contracts on behalf of the business. It seems also that there were similar management and control arrangements between the two partners and CML.15 The net effect of this structure was that the appellant controlled the CM Partnership through the consulting arrangements between CML and CSL and between CSL and himself personally. The appellant not only controlled the CM Partnership but also both CML and CSL and all of the associated entities via the complex ownership structure. This was effected through a raft of management and control agreements and declarations of trust. All of the various agreements between the parties were signed by the appellant either personally or as a director or duly authorised signatory on behalf of these entities.[19] The next step involved the introduction by the appellant of companies with accumulated tax losses. Again, these loss companies were controlled by the appellant. During the 1985 tax year, agency and management agreements and declarations of trust were entered into by both the partners with a loss company,16 the13 The particulars are carefully and comprehensively described in the High Court judgment at[18]-[58]. Such description was accepted by both parties, apart from a few minor reservationsby the appellant which are not material.14 We will not complicate this outline by referring to the names and ownership of the partners.They are accurately set out in the High Court judgment at [18]–[20]. The details are not indispute on appeal.15 Wylie J was unable to make firm findings on this point with respect to one of the partners due toan absence of documentation: at [20] of the High Court judgment.16 The means by which the appellant acquired control was following liquidation or receivership ofthe loss company. The appellant appointed himself receiver and then in that capacity signed theagency and management agreements with the parties.legal effect of which was that the loss companies became the beneficial owners of the income that came to the partners. Given that both of the loss companies had accumulated tax losses, they were each able to offset against the tax losses the income to the partners (of which the loss companies were the beneficial owner in each case). The result was that no tax was paid on any income earned by the partners.[20] This methodology could only last as long as the loss companies had available accumulated losses to offset against the respective partner's income. In the case ofeach of the partners, the available losses first ran out in the 1987 tax year.17 Only part therefore of the income for that year could be assigned to the original loss companies. The appellant then established new agency and management agreements and new declarations of trust between both partners and new loss companies. Each of these companies took an assignment of the remaining portion of the respectivepartner's income which was offset against the accumulated losses of the replacement loss company.18 As time moved on, the losses were used up. New loss companies needed to be introduced again in the 1992 tax year.[21] The CM Partnership as a separate partnership continued to exist throughout the period 1985 to 2000. However, the original partners retired from the partnership in July 1991. Those retiring partners were replaced by new corporate partners, each of which was controlled by the appellant. The CM Partnership did not trade in the 1999 and 2000 tax years. No income was assigned to the partners in those years.[22] For completeness we record that a second partnership was formed in April 1994. It had new corporate partners, each of which was controlled by the appellant. The second partnership seems to have been structured on similar lines to the CM Partnership. From the 1995 tax year onwards, partners in the second partnership received income. The assumption on the part of the Commissioner was that the net17 Details of the income for the 1985 and 1986 tax years, and the assignment of that income by thepartners to their respective loss companies, are described by Wylie J at [25]–[34] of the HighCourt judgment. The figures are not in dispute.18 Assignment of income to the replacement loss companies continued from 1987 until the 1990tax year. Two further replacement loss companies were introduced then. Details of the incomeand assignments in these years are at [35]–[41] of the High Court judgment.profits in the hands of each partner were assigned to loss companies, an assumption which the appellant did not dispute.19[23] In order to understand the broad cashflows to be described in the next section, it is necessary to refer to the use of finance companies by the appellant. One such finance company was Money Market Securities Ltd, which was controlled by the appellant.20 Where the partners advanced funds (which they did on a regular if not daily basis) to a finance company such as Money Market Securities Ltd, no interest was paid to the partners. But the partners were able to, and did, draw down money from Money Market Securities Ltd when they required funds. The partners did not pay interest on the monies received.The CM Partnership cashflows[24] The income of the CM Partnership comprised two sources. First there was the income from Russell template sources, namely, consulting fees of five per cent and other fees paid from the 22.5 per cent administration charges to the Russell template trading companies. Out of the total income earned by the CM Partnership, there is no dispute that approximately 90 per cent represented income from Russell template sources. Secondly, the remaining ten per cent comprised income from other sources, including consulting fees and professional income generated by the appellant. The total net profit for the CM Partnership over the period 1985 to 1995 was $13,611,973.21 Over the same period the net advances to the finance companies by the partners amounted to $13,725,315.22[25] From the net profit of the CM Partnership in any given tax year, 50 per cent was allocated to the partners at the relevant time. By virtue of the agency and management agreements and declarations of trust, the loss companies linked to the19 See for example the observations of Wylie J at [55(a)–(d)] of the High Court judgment.20 The shareholders in Money Market Securities Ltd were CML and one of the partners (BPL). Itprovided funds for the extensive corporate group controlled by the appellant. Other financecompanies also controlled by the appellant were used as a repository of the net income generatedby the CM Partnership.21 A figure referred to in the TRA decision at [257].22 As noted in the TRA decision at [258].partners then became the beneficial ―owners of the income.23 As surplus funds became available from the income (minus any expenses incurred by the CM Partnership), they were forwarded from the CM Partnership to either Money Market Securities Ltd or one of the other finance companies controlled by the appellant.24 Such funds were for the credit of the relevant partners of the CM Partnership, although as already noted, the partners did not receive any interest. But the partners were able to draw down on their accounts with Money Market Securities Ltd whenever they required funds. In terms of cashflow, it seems that the cash surpluses were sent from the CM Partnership to Money Market Securities Ltd almost on a daily basis. This was treated as net profit (of the CM Partnership)―advanced to the partners by way of circular transactions.25Funds for the appellant or his family[26] Throughout the period 1985 to 2000 the appellant allocated to himself a modest income for the provision of consulting services to CSL. The amounts of income treated as salary varied from a low of $15,000 to a high of $30,000,26although the latter sum was paid in only one year.[27] In January 1989, the appellant settled the Russell Family Trust (the Trust), the trustees being the appellant and his wife. Neither the appellant nor his wife werebeneficiaries, but the primary beneficiaries were the appellant's children andgrandchildren. The appellant and his wife in their capacity as trustees entered into a loan agreement as borrowers with the appellant being the lender. The appellant thereby advanced unspecified sums of money to the Trust, such advances being made for a period of 20 years and not bearing any interest. Following the establishment of the Trust there are examples of funds being advanced from the23 The amounts allocated to the partners in each tax year and the assignments to the loss companiesare described by Wylie J at [25]–[58] of the High Court judgment. Again, none of the figures arein dispute.24 Such as Charity Finance Ltd, referred to by Wylie J at [35(d)].25 Wylie J gave as an example (at [28] of the High Court judgment) a transaction on 3 January1986 whereby Money Market Securities Ltd advanced $290,000 to the CM Partnership. On thesame day, the partnership paid $141,978.93 to each of the partners, and they in turn advanced themoney back to Money Market Securities Ltd.26 The details are recorded in the High Court judgment. In most years the nominal salary was fromCSL, although from the 1996 tax year the income was referred to as nominal income from theRussell Family Trust.current account of the appellant with Money Market Securities Ltd to the Trust.27Having received the advance, the Trust in turn put the funds on term investment with Money Market Securities Ltd.[28] During the 1994 tax year there was an advance from another finance company, Charity Finance Ltd, to a Russell controlled property to enable the latter to purchase a property in Clevedon. Other examples of the Trust withdrawing funds from the finance companies are set out in the agreed factual statement. One such transaction occurred during the 1997 tax year when funds went from the Trust'saccount with Charity Finance Ltd to Downsview Finance Ltd (another Russell- controlled finance company). The Trust then withdrew four payments totalling $128,083.52 from Downsview Finance Ltd.28[29] The Trust was not the only one established by the appellant. In August 1996 he settled the Kawakawa Trust. This trust was later used during the 1998 tax year to purchase property in Auckland. The purchase was financed by means of the Russell Family Trust withdrawing funds from Downsview Finance Ltd and then paying a portion of those funds to the Kawakawa Trust, which used the funds to purchase the property.29Statutory context[30] The Commissioner relied on various anti-avoidance provisions in the tax legislation when reassessing the appellant's income tax over the period 1985 to 2000.Section 99 of the 1976 Act applied during the income years 1985 to 1995, while ss BB 9, GB 1 and GZ 1 of the Income Tax Act 1994 (the 1994 Act) applied to the income years 1996 to 1997. Sections BG 1 and GB 1 of the 1994 Act applied to the income years 1998 to 2000. Section 99 is the predecessor to s BG 1 and for present purposes the two sections are the same.27 For example, in September 1989 and November 1989 respectively, sums of $250,000 wereadvanced from the appellant's current account with Money Market Securities Ltd to the RussellFamily Trust.28 Described in more detail by Wylie J at [55(g)].29 A more detailed analysis of these and other transactions involving the Trust and the KawakawaTrust is set out in the High Court judgment at [56(g)–(i)].[31] Section 99 of the 1976 Act provided: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 thatarrangement 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 theCommissioner 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.[32] As the anti-avoidance provisions in the 1994 Act do not the affect the criteria set down by s 99, it remains relevant to the current appeal.The applicable law[33] The law on tax avoidance has been settled by the Supreme Court in three cases: Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue,30Glenharrow Holdings Ltd v Commissioner of Inland Revenue31 and Penny v Commissioner of Inland Revenue.32 In the latter case the Supreme Court confirmed that Ben Nevis ―explained the proper approach to questions of tax avoidance.33 In summary, tax avoidance will be found where:(a) a taxpayer enters into an arrangement that uses specific provisions of tax legislation;(b) in a manner that is outside Parliament's contemplation (of whichcontrivance and artificiality is an important factor); and(c) for a tax purpose or effect that is more than merely incidental.[34] The first step in applying s BG 1 (or in this case, s 99) is to determine what isthe ―arrangement as defined by s OB 1 of the 1994 Act. The term is broadly defined and may be found in the wide range of circumstances. The existence of an30 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009]2 NZLR 289.31 Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009]2 NZLR 359.32 Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433.33 Penny at [33].arrangement is to be objectively determined by reference to all the available facts. As was said by the majority in Ben Nevis:[105] The key statutory concept in the general anti-avoidance provision is of a tax avoidance arrangement, as Parliament has defined it. By means ofthe definition of ―tax avoidance, a tax avoidance arrangement includes anarrangement 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.[35] The term ―arrangement is defined in s OB 1 to mean any contract, agreement, plan or understanding whether enforceable or not. It includes all steps and transactions by which it is carried into effect. The concepts of contract, agreement, plan or understanding predicate some prior planned linking or sequencing, or both. A transaction or scheme must therefore apply in a concerted way as part of a pre-determined end in order to constitute an arrangement. But there is no requirement that there be consensus or meeting of minds and indeed the disputant need not be a party to the arrangement, nor be privy to its details. As Lord Millett, giving the judgment of the Privy Council in Peterson v Commissioner of Inland Revenue, stated:34Their Lordships do not consider that the ―arrangement requires a consensusor meeting of minds; the taxpayer need not be a party to ―the arrangementand in their view he need not be privy to its details either.[36] In Peterson the Privy Council confirmed the ability of the Commissioner to examine part of what might otherwise be seen as a single composite scheme when identifying an arrangement for the purpose of s BG 1.35 This follows logically fromthe statutory definition of ―arrangement, which includes (among other things) acontract. Moreover, the Supreme Court in Penny emphasised that:3634 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433 at [34]. Wedo note, however, that this Court has provided conflicting authority on whether consensus isneeded or not for an arrangement to exist: see Commissioner of Inland Revenue v BNZInvestments Ltd [2002] 1 NZLR 450 (CA) at [50]. We will discuss this divergence of opinion at[49]—[50] below.35 At [33].36 At [34] (footnotes omitted).Tax avoidance can be found in an individual step in a wider arrangement. That step, when taken, can make the wider arrangement a tax avoidance arrangement.[37] The Ben Nevis methodology next involves a consideration of whether the specific provisions of the tax legislation have been used in accordance with their intended scope. The specific provisions at issue must be interpreted in accordance with ordinary statutory principles.37 The taxpayer must satisfy the court that the arrangement made use of the specific provision within its intended scope.38 If that is shown, a further question arises as to whether the arrangement used the specificprovisions in a manner consistent with Parliament's contemplation and purpose (thisinquiry can be referred to as the Parliamentary contemplation test).[38] This stage of the inquiry focuses on the question of what is outside Parliamentary intention. The majority in Ben Nevis put it this way:[108] A classic indicator of a use that is outside parliamentarycontemplation 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 notwithin Parliament's purpose for specific provisions to be used in thatmanner.[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 thespecific 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.[39] The Parliamentary contemplation test is an intensely fact-based inquiry. It is not simply a matter of seeking to divine what members of Parliament actually intended or had in mind when enacting the relevant provisions. Rather, thedetermination of whether a particular arrangement would be within Parliament'scontemplation is a hypothetical inquiry. As the Supreme Court in Ben Nevisconfirmed,39 the general anti-avoidance provisions require the taxpayer to show that37 See Ben Nevis at [106].38 Ben Nevis at [107].39 At [106].the steps taken were within the purpose and contemplation of Parliament and that the arrangement does not constitute tax avoidance.[40] The final step involves establishing that the arrangement has a purpose or effect of tax avoidance that is more than merely incidental (see s 99(2) of the 1976 Act). This Court in Tayles v Commissioner of Inland Revenue held that the phrase―purpose or effect is to be taken as a composite term that should not be bifurcated.40The Supreme Court endorsed that approach in Glenharrow Holdings Ltd.41 The focus is on an objective assessment of the purpose of the arrangement, not the purpose of the parties. Oral evidence showing a different purpose or effect is irrelevant. As was explained in Glenharrow:[38] It is because the objective purpose is deduced from the effect that the phrase ―purpose or effect in general anti-avoidance provisions has been said to be a composite term.[39] The present case is unusual because evidence was given that the taxpayer did not consider GST. Whether or not evidence of that character isaccepted, any such finding is not determinative. Just as the taxpayer's stateof mind concerning taxation is not determinative of purpose when the taxpayer is known to have been aware of taxation considerations, so it cannot be determinative if he or she was unaware of them. The purpose of the arrangement may be deduced entirely from the arrangement and its effect.(Footnotes omitted.)[41] We accept that an arrangement may have a tax avoidance purpose or effect and yet not be a tax avoidance arrangement. That is because it will only be a tax avoidance arrangement for the purpose of s BG 1 if the purpose or effect of the arrangement is more than merely incidental, as required by the definition of tax avoidance arrangement in s OB 1 of the 1994 Act. As the majority in Ben Nevisstated:[113] we should recognise that para (b) of the definition of a taxavoidance arrangement refers to cases where the tax avoidance purpose oreffect of an arrangement is ―merely incidental. If that is so, thearrangement is not a tax avoidance arrangement. It is apparent therefore that the use of a specific provision which alters the incidence of tax is permitted in two situations.40 Tayles v Commissioner of Inland Revenue [1982] 2 NZLR 726 (CA) at 734.41 Glenharrow Holdings Ltd at [38]–[39], citing the Privy Council in Ashton v Commissioner ofInland Revenue [1975] 2 NZLR 717 (PC).[114] The first is when the specific provision is used in a manner which is within parliamentary contemplation, as discussed above. The second iswhen the tax avoidance purpose or effect of the arrangement is ―merelyincidental. It will rarely be the case that the use of a specific provision in amanner which is outside parliamentary contemplation could result in the tax avoidance purpose or effect of the arrangement being merely incidental. In the present case the appellants did not seek to rely on the merely incidental concept, so nothing more need be said on that subject.[42] The determination of whether a tax avoidance purpose is merely incidental to another purpose or effect is a separate enquiry from the Parliamentary contemplation step. Yet both steps will require consideration of many of the same factors including whether the arrangement is commercially realistic and whether the arrangement has secured the benefit of the specific provisions in an artificial or contrived way. If an arrangement has been found to be contrived under the Parliamentary contemplation test, it will usually be difficult for a taxpayer to establish that the tax purpose is a natural concomitant of a non-tax purpose.The High Court judgment[43] The determination of this appeal does not require a detailed and extended recitation of the factual aspects of the arrangement as found in the High Court. That is because the High Court had before it a 123-page agreed factual statement from the Authority hearing outlining the basic facts relied on by the Commissioner. Further, in the High Court, counsel for the appellant accepted the basic facts of thetransactions as described in the Commissioner's Statement of Position, theadjudication report and the decision of the Authority.42 Wylie J made factual findings relating to the transactions, arrangements and cashflows in all of the relevant tax years.43 On appeal, the appellant accepted all of these findings save a few minor points of little or no consequence. In this Court some of the points of assumption in the judgment of Wylie J were able to be agreed upon by the parties. For present purposes, the facts may be treated as settled, having been the subject of concurrent findings in the Authority and the High Court. Any other relevant detail may be drawn from the agreed statement of facts.42 At [76] of the High Court judgment.43 Set out comprehensively at [18]–[58] of the High Court judgment.[44] In the High Court, counsel for the appellant made a limited concession in the following terms:[77] Mr Judd 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'spersonal 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.[45] In terms of the facts, the appellant has accepted that every transaction that the Commissioner relied on as having happened did indeed happen. The appellant alsoaccepted that his role is correctly described in the Commissioner's Statement ofPosition and in the decision of the Authority, which record that ―John Russell was a director of all these companies. All of the money cashflows and payments wereaccepted as having occurred as the Commissioner said they had occurred. Finally, the fact that the appellant controlled every company and relevant entity was not contested.[46] As we propose to discuss the four grounds of appeal (as well as the reconstruction point) and the additional ground in separate sections to follow, a detailed analysis of the High Court judgment is not necessary at this point. We simply adopt Mr Ruffin's convenient summary of the parts of the High Courtjudgment determining the issues raised on appeal from the Authority. Thus, the judgment of Wylie J:(a) analysed the anti-avoidance provisions and relevant case law;44(b) determined, in relation to the scope of the alleged arrangement, that the scope of the broader arrangement was as asserted by the Commissioner;4544 At [87]–[95].45 At [96]–[103].(c) determined that the broader arrangement was a tax avoidance arrangement;46 and(d) determined that the appellant was a party affected by the arrangement and that he obtained a tax advantage from it.47First ground of appeal - scope of the arrangementThe appellant's submissions[47] The appellant contends that the Judge was wrong to find that there was an arrangement as alleged by the Commissioner. The Commissioner, according to the appellant, simply recorded a series of transactions between 1985 and 2000 and claimed that such transactions are an arrangement. By contrast, the appellant submitted that all that exists is a historical record of events involving numerous entities, some of which were not even in existence when the alleged arrangement was said to have commenced. Elaborating on this first ground, the appellant in his written submissions stated that:19. [t]he essential ingredients of an arrangement include these factors:(a) More than one person involved.(b) A meeting of minds of the parties to the arrangements.(c) A general understanding of a modus operandi.(d) Documentary evidence of what constitutes the arrangement.(e) Agreement on the duration of the arrangement.20. None of these ingredients exist in this case. What the respondent is saying is that the appellant had an arrangement with himself that included events into the future by some 15 years. In the mountains of largely irrelevant documentation the respondent has produced there is not a single document that supports any of the essential ingredients mentioned.21. It follows that a recital of historical events over some 15 years is on the balance of probabilities unlikely to be an ―arrangement. It would be46 At [104]–[138].47 At [139]–[148].likely that if such a long term arrangement had existed it would have been carefully documented and if for the benefit of the appellant that would have been explicitly spelt out.[48] The appellant also, in further written submissions, stated that if it is held that there is an arrangement, then there are five distinct but connected arrangements as follows:(1) CML;(2) Marketing Agencies Ltd and BPL (partners in the CM Partnership);(3) BPL and Personal Loans Ltd (also partners in the CM Partnership);(4) Hamlin Facilities Ltd and The Tag Gun Company Ltd (partners in the second partnership); and(5) Mahalo Ltd (a loss company).The High Court's findings[49] There was only one legal issue of relevance to this ground. It concerned the difference in views between this Court in Commissioner of Inland Revenue v BNZ Investments Ltd,48 and the Privy Council in Peterson v Commissioner of Inland Revenue,49 as to whether an arrangement requires a consensus or a meeting of minds between the parties involved that the other will act in a particular way. The Court of Appeal stated that an arrangement did require consensus.50[50] In the Privy Council, however, Lord Millett (with whom Baronness Hale and Lord Brown agreed) concluded 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.51 The Supreme Court in Ben Nevis did not need to decide whether to depart from the judgment of the Privy Council in the Peterson48 Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA).49 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433.50 Commissioner of Inland Revenue v BNZ Investments Ltd at [50].51 Peterson at [34].case.52 Wylie J noted that the Authority considered that it made no difference which view was preferred.53 On either approach there was clearly an arrangement.54[51] Next Wylie J made factual findings that informed his decision as to the scope of the arrangement.55 Apart from three minor quibbles which are again of no consequence, the appellant accepted the accuracy of these factual findings for the purposes of this appeal. As to the scope of the arrangement, Wylie J held:[99] 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.[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:[Mr Russell] controlled [the parties'] every movement. Eachdanced 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 with52 See the discussion in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008]NZSC 115, [2009] 2 NZLR 289 at [161].53 At [95] of the High Court judgment.54 TRA decision at [158].55 At [96(a)–(r)] of the High Court judgment.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.(Footnotes omitted.)[52] We can find no fault with the reasoning of Wylie J on this issue. We agreewith his conclusion that there was an ―arrangement as defined in s OB 1 of the 1994 Act and the anti-avoidance provisions of the 1976 Act.56 All of the factual findings made by the Judge at [96(a)–(r)] amply support the legal determination that the appellant had entered into an arrangement. The appellant has failed to demonstratethat the Judge's conclusion was wrong.[53] We are satisfied that there was an arrangement far broader in scope than the limited form of arrangement which the appellant conceded through his counsel in the High Court and in his submissions.57 The concession in the High Court that there was a tax avoidance arrangement between the partner companies of the CM Partnership and the loss companies was properly made. But the arrangement was not so limited. The appellant put in place one overall arrangement that operated over the years 1985 to 2000. There was undoubtedly an overall plan here, conceived by the appellant and implemented by him through the various formal agency and management agreements and the declarations of trust. This overall plan had theappellant's fingerprints on it at every turn, be it in the formation of the corporate entities involved, the creation of the various partnerships and management agreements, the establishment of the finance companies and the settling of the trusts.[54] We agree with the Judge that if consensus is needed, the appellant provided any necessary consensus for the purposes of the overall plan. The appellant orchestrated the whole arrangement. However, we note that the statutory definitionof ―arrangement does not require such consensus: a plan will suffice. Here theoverall plan was that created, designed and executed by the appellant. We note alsothat an arrangement includes ―all steps and transactions by which it is carried into effect. Again, no consensus is needed.56 At [102] of the High Court judgment.57 See [44] and [48] above.[55] None of the appellant's arguments against the High Court conclusions on this ground can succeed. The first ground of appeal must fail.Second ground - a tax avoidance arrangement?[56] The appellant says that the Judge was wrong to conclude that the overall arrangement had the effect of altering the incidence of income tax. The appellantsought to characterise the Commissioner's complaint regarding tax avoidance as inreality arising from the fact that the principal partners in the business had tax losses―which they reduced by their share of the profits so they did not actually pay anymoney to the [Commissioner]. The appellant explained his submission bycontending that this must be so because had these partners not carried forward losses then they would have paid tax on their share of the profits and no tax avoidance would have been perceived. Consequently this is the issue to focus upon. The appellant added:It is the appellant's submission that the tax losses of the beneficial partnershave been dealt with correctly because:(a) Parliament plainly meant companies having tax losses to be permitted to obtain an income stream to utilise their losses because it allowed for third parties to acquire a controlling interest and also to offset losses with other taxpayers owned partially by third parties.(b) Had the companies with losses traded directly in the market place no avoidance would have been perceived. In this case agency agreements were used to comply with insolvency laws. That is correct procedure in such circumstances.(c) The statutory provisions view a reduction in losses as equivalent topaying tax as witness the Commissioner's practice of convertingimputation credits into losses rather than making a refund.[57] The Judge found that the arrangement did have the effect of altering the incidence of income tax.58 The Judge also found that the arrangement put in placeby the appellant was ―contrived59 and ―involved pretence.60 The Judge commented:6158 At [116]–[117] of the High Court judgment.59 At [118].60 At [119].61 At [118].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.[58] Moreover, the Judge was satisfied that the steps taken by the appellant were―not within the purpose or contemplation of Parliament when it enacted the loss off- set provisions.62 Thus the structure resulted in the appellant gaining a tax advantage―in an artificial and contrived way.63 That was found to be its ―primary purpose.64[59] We are satisfied the overall arrangement established and operated by the appellant had the purpose or effect of tax avoidance in the sense that that term has been interpreted by the Supreme Court discussed at [37] to [39] above. Contrary tothe appellant's submissions, this arrangement was overarching in nature, rather than dealing with a number of discrete transactions. The transactions and structure established by the appellant were designed to receive income obtained from the Russell template arrangements and to ensure that the income from setting up and running those template arrangements was in turn sheltered from taxation. Such arrangements aimed at sheltering the income in the Russell group of companies were in many respects of a similar nature to those arrangements held to be tax avoidance in the template cases,65 and thus they are clearly tax avoidance.[60] We agree with the conclusion of both the Authority and Wylie J66 that the steps taken by the appellant were not within the purpose or contemplation of Parliament when it enacted the loss offset provisions contained in s 191 of the 1976 Act and pt I, sub-pt G of the 1994 Act. The unlimited transfer of the losses through the mechanism of the agency and management agreements was artificial and contrived.67 It had the effect of eroding the tax base by bypassing the grouping rules. Before considering the reconstruction question we deal first with the third and fourth grounds of appeal.62 At [132].63 At [135].64 At [138].65 For example, the Miller decision in both this Court and the Privy Council.66 At [132] of the High Court judgment. And see the TRA decision at [181], [182] and [188].67 We note that, during the 1995 tax year, the appellant failed to disclose documents to theAuthority, despite being ordered to do so. This is another relevant indicator when it comes toassessing whether this was a commercially realistic set of transactions.Third and fourth grounds - a person affected by the arrangement and obtaining a tax advantage[61] We will deal with both grounds together. The appellant says that the Judgewas wrong to find that he was affected by the alleged ―arrangement and that his taxassessment was not therefore susceptible to adjustment under s 99(3). While it was true that he signed many documents over the 15 year period, none of them were signed by him in a personal capacity. The appellant has consistently said that he would never enter into any business transaction personally. Accordingly he submitted he was not a party. Neither could it be said he personally benefitted in any way from the arrangement.[62] The appellant supported that submission by contending that he did not receive any income or any money from the business conducted by the CM Partnership. He acknowledged that he received an annual income but said that that was from other sources and none of it came from the CM Partnership. Similarly the appellant referred to the money that went from the finance companies to the family trusts. He submitted that at all times the trusts had current accounts with the finance companies and had money on deposit which they drew back. All current accounts with the trusts were in credit so it followed that, if at any time there was a debit, it has now been repaid. Accordingly it could not be said that he was personally affected if the trusts lent money to the finance company. As theappellant's counsel submitted in the High Court, the appellant ―did not receive a dollar from the arrangement, either directly or indirectly. The Judge rejected that submission.[63] We are satisfied that the appellant was a person affected by the arrangement. He was directly a party to the arrangement and was directly affected by it. This is evident from the way in which the appellant controlled all the entities involved, but particularly through the business consultancy agreement between himself and CSL and the business consultancy agreement between CSL and CML. Further, as Wylie J found, the untaxed funds generated by the CM Partnership were paid to the financecompanies controlled by the appellant.68 From those funds, advances were made to the appellant to enable him to meet his personal obligations and further advances were made to various trusts the appellant had settled for the benefit of his family. Effectively, he ended up in control of the untaxed monies generated by the arrangement.[64] There is no doubt that the appellant was the only real person underpinning the whole arrangement – as both the Authority and Wylie J found.69 These transactions did not happen by accident: they were the brainchild of the appellant who was undoubtedly affected by the arrangement.[65] We are also satisfied that the appellant obtained a tax advantage from the arrangement that was more than incidental.70 The appellant did not pay tax on any income that derived from the Russell template transactions. It is true that the business of the CM Partnership was carried on by means of various partnership and corporate entities. But neither did any of these pay any income tax. This was the result of the artificial introduction by the appellant of the various loss companies alongside the partners to offset the net profits earned by the CM Partnership. It is an extraordinary proposition to suggest that neither the appellant nor any of the entities in the overall arrangement should pay any tax when the net profits to the partners from the CM Partnership business between 1985 and 1995 was in excess of $13.6 million.[66] We agree with the finding of Wylie J that tax avoidance was not merely incidental to the arrangement.71 One area where our reasoning would differ from that of Wylie J is in respect of his reliance on the notion that the monies resulting from the CM Partnership business ought to be characterised as ―personal exertion income.72 We do not consider that such a descriptor necessarily assists the analysis. We prefer to rest our conclusion as to the purpose of the overall arrangement and the tax advantage derived from it on a broader basis. The overall scheme was the means68 At [145]–[146] of the High Court judgment.69 At [143] of the High Court judgment.70 The appellant did not seriously argue the ―merely incidental point before us. Rather hisargument was based on the proposition that there was no tax avoidance arrangement at all.71 At [117] of the High Court judgment.72 For example, at [146] and [148] of the High Court judgment.by which the appellant laundered the profits on the Russell template transactions and other related income without paying any income tax.[67] For the reasons we have given, both the third and fourth grounds of appeal must also fail.Reconstruction to the appellant?[68] A centrepiece of the appellant's submissions was that what occurred throughthe overall arrangement was not tax avoidance because he had not received in any form whatsoever any of the income that had been assessed to him. The appellant submitted that it was entirely permissible for him to carry on his consultancy business through a partnership and corporate entities as it was they, not him personally, that received the income. The appellant therefore argued that the Commissioner ought not to have reconstructed the income to him personally.[69] We reject this argument. The Commissioner has broad powers of reconstruction under s 99(3). Speaking for the Court in Miller,73 Blanchard J stated:74Section 99(3) gives the Commissioner a wide reconstructive power. He―may have regard to the income which the person he is assessing would have or might be expected to have or would in all likelihood have received but for the scheme, but the Commissioner is not inhibited from looking at the matter broadly and making an assessment on the basis of the benefit directly or indirectly received by the taxpayer in question.[70] The onus is on the taxpayer to establish that the reconstruction is wrong and by how much.75 We are not persuaded that the appellant has satisfied that onus. Our outline of the broader facts at [13]—[14] above shows how the appellant earned income personally and paid tax on it during his employment with Securitibank. In the period 1977 to 1982 the relatively modest income from CML was distributed to73 Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA).74 At 302.75 Buckley & Young Ltd v Commissioner of Inland Revenue [1978] 2 NZLR 485 (CA) at 498; andBen Nevis at [171].the appellant as director's fees.76 The appellant formed the first partnership in December 1982 to take over the business of CML. The CM Partnership was formed by the appellant in May 1984 using the structure already described. Once established the CM Partnership was controlled and managed by the appellant as its sole architect. The appellant made all the decisions as to where the money went and how income was treated by the partners. Throughout the whole period 1985 to 2000 the appellant manipulated the partnership, corporate, finance company and trust entities as he saw fit.[71] The appellant saw to it that he received only nominal income for the provision of consulting services to CSL.77 As substantial sums flowed in to the CM Partnership these were placed on deposit with one of the finance companies controlled by the appellant in the manner already described.78 With respect to the low levels of salary received by the appellant, Mr Ruffin referred to some similarities with Penny v Commissioner of Inland Revenue.79 He accepted that there was no question here of the appellant failing to comply with specific taxation provisions. On one level the structures used were lawful and unremarkable, subject to the observation of Wylie J about ethics and professional responsibilities.80[72] But what the appellant was doing involved more than just income allocation for genuine business reasons. The appellant was seeking to launder through the CM Partnership and the other partnership and corporate entities controlled by him the whole of the substantial income from the Russell template system, itself a clear tax avoidance scheme. This had extensive and dramatic financial consequences. No taxation was paid by the appellant or the partners in the CM Partnership or the later partnership over a 15 year period. We consider that these considerations amply justify the conclusion that the income should be attributed to the appellant. And we so find.76 The adjudication report of 27 November 2002 states that while the appellant was a director ofCML, the company's profits for each year were distributed as director's remuneration. Theappellant paid tax on his remuneration as a director of CML.77 The amounts received are described at [26] above.78 At [23] above.79 Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433.80 At [117].[73] Wylie J considered it to be a decisive factor that the appellant was diverting into the CM Partnership the income which he generated by his personal exertions.We differ from the Judge's reasoning on this topic. This ought not to becharacterised as income earned by the appellant personally. It was income earned by the CM Partnership and other entities within the structure set up by the appellant, utilising the staff employed by those entities.[74] The income between 1985 to 2000 is to be attributed to the appellant because he was affected by the arrangement on a Penny basis and because he was the governing mind of the template arrangements and those other structures and arrangements designed to shelter from tax the income earned from the template arrangements in the Russell group of companies. We accept that it is not inevitable that a tax avoidance arrangement by a company will or should be attributed to a shareholder. Each case will depend on its own facts. But these are very unusual facts. The income itself came from tax avoidance arrangements orchestrated by the appellant and was sheltered by similar tax avoidance arrangements also orchestrated by him.[75] For these reasons the appellant's argument cannot succeed. We are satisfiedthat the Commissioner was correct to reconstruct the income to the appellant personally.Fifth (additional) ground - s 99(4)The competing positions[76] This is the only additional ground we permitted, despite the fact that theappellant's counsel had not pursued it in the High Court. The appellant says that theCommissioner has not completed the assessment process required by s 99 of the 1976 Act in that the adjustments required by s 99(4) have not been carried out. Section 99(4) provided:Where any income is included in the assessable income of any personpursuant 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.[77] The appellant contends that on its correct interpretation s 99(4) is―instantaneous and automatic and requires the Commissioner to make an adjustment as soon as any income is included in the assessable income of any person pursuant to s 99(3). This is because that income is deemed by s 99(4) to be derivedby the person assessed and ―shall be deemed not to have been derived by any otherperson. The appellant submitted that the failure by the Commissioner to adjust asrequired by s 99(4) ―vitiates the assessments which should be cancelled as a result.[78] The Commissioner confronts the appellant's contention on this issue head on. Mr Ruffin accepted that s 99(4) provided a statutory immunity so that where any income is reconstructed under s 99(3), that income shall be deemed not to have been derived by any other person. But he submitted that, for the appellant to be able to rely on s 99(4), he would need to show that the quantum of assessable income confirmed in the CM Partnership accounts (even though it was offset to loss companies) had already been assessed to some other person. Mr Ruffin submitted that the appellant had failed to show that. He went further and submitted that, if that were to be the case, the appellant would be the person ideally placed to prove it and the appellant would have had no basis for setting up this tax avoidance arrangement in the first place.The factual context[79] Within the Russell template an administration charge of 22.5 per cent of the net profit of the trading companies was reconstructed to the managers of the relevant trading companies. The management fee payable by that trading company to the CM Partnership was expressed to be five per cent of the administration charge. In addition, the appellant maintained in evidence before the Authority that there were three other fees (each of five per cent) charged by the CM Partnership or CML. The impact of these charges and fees for tax purposes is a matter of some complexity which, for the reasons we shortly address, we need not consider in detail.Our evaluation[80] When the question of whether the Russell template scheme involved tax avoidance came before the Privy Council, it was held that the artificial grouping ofthe trading company with the appellant's tax loss companies made the scheme viable. This was because it enabled the appellant's companies to receive the profitswithout themselves becoming liable to tax. The Privy Council held that the artificial arrangements for payment by the trading company of administration and consultancy fees enabled the trading companies to eliminate their own liability to tax by claiming deductions under s 104 of the 1976 Act. The primary objective of the scheme was to give the shareholders of the trading company the tax advantage of receiving part ofthe company's profits without paying income tax.81[81] In the course of the judgment of the Privy Council, Lord Hoffmann referred to the different assessments that had been made by the Commissioner in his attempts to deal with the scheme. These were described as Track A and Track B.82Lord Hoffmann stated:[12] the Commissioner appears to have concentrated upon the tax saving afforded to the trading company by the disappearance of its profits in the form of administration fees. He made assessments upon the companies on the basis that the administration fees would not have been allowable deductions. This form of assessment has been called ―Track A. TheCommissioner discovered, however, that the assessments went unpaid because the trading company was an empty shell which had disposed of its assets and goodwill to a successor. He then turned his attention to what Their Lordships regard as the essence of the scheme and assessed theappellants on the footing that they would have received the company's net profits as remuneration. These assessments were called ―Track B and those made upon the O'Neils and the McDougalls form the subject-matter of this appeal.[82] The Privy Council then dealt with the various challenges made by the appellants before dealing with an argument by the appellants based on s 99(3) of the81 Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC) at [11].82 The case has since progressed to the point where the Authority and the Courts have been calledupon to consider challenges to other assessments which have been referred respectively to asTracks C, D and E. For the reasons given in this part of the judgment, there is no need for us toconsider or discuss the assessments made in relation to any of Tracks C to E (inclusive). TrackC assessed the administration charge against the parent company. Track D assessed theconsultancy fee against the appellant personally. Track E also assessed certain income againstthe appellant personally.1976 Act. The submission was that only one party can obtain a tax advantage from the arrangement concerned. The appellants had argued that, if the Commissioner thought that the trading company had obtained an advantage, he could not properly have thought that the appellants had obtained one. The Privy Council rejected this submission and stated:[31] Section 99(3) says that the Commissioner shall adjust theassessable income of any person affected by the arrangement to counteractany tax advantage that person has obtained. There is no reason why an arrangement should not confer tax advantages upon more than one person and, as Their Lordships have already explained, this one plainly did. There were different tax advantages in relation to different payments. Mr Russell'scompany obtained the advantage of using group relief on income received from the trading company; the trading company obtained the advantage of deducting the administration and consultancy charges: and the shareholders received the advantage of receiving payments as capital when they would otherwise have been income. There was no reason why the Commissioner should not adjust the assessable income of each or any of these persons. Of course his assessments would have to be consistent with each other. He could not maintain an assessment on Mr Russell's company on the basis thatit had received the whole trading profit but was not entitled to group relief and at the same time assess the shareholders on the basis that they had received the trading profit in the form of remuneration. But provided that he was not using inconsistent hypotheses for his reconstructions, he was inTheir Lordships' opinion entitled to assess any party who had obtained a taxadvantage.[83] The Privy Council next considered a submission on behalf of the appellants that the Track A and Track B assessments were in fact inconsistent. It was asserted that the Commissioner could not validly make a Track B assessment while a Track A assessment in respect of the relevant company was outstanding. However, the Privy Council also rejected this argument:[33] Their Lordships consider that an assessment which wrongly includes income deemed, by virtue of s 99(4), to be the income of someone else is not void, any more than an assessment which is wrong on some other ground. It is merely open to objection under s 30. It follows that the Commissioner or the authority may remedy the position by amending the inconsistent assessment at any time before the objection proceedings have run their course. It is only when the assessments are no longer open to amendment that an objection on grounds of inconsistency will be incapable of remedy.[84] The principles there articulated have relevance in the present context. Assuming that any part of the assessment made by the Commissioner in respect of the appellant for the income years 1985 to 2000 included income deemed by virtue of s 99(4) to be the income of someone else, such an assessment is not void. It isopen to the Commissioner, or the Authority, to remedy the position at a later point. Itfollows that the appellant's argument that the effect of s 99(4) is ―instantaneous and automatic cannot succeed.[85] We consider that it is a matter for the Commissioner to remedy the position if persuaded that there is any genuine inconsistency in the assessments made. We agree with Mr Ruffin's submission that, in the present case, the appellant would bethe person ideally placed to establish the true position and to bring any inconsistency to the notice of the Commissioner. Thereupon it would be open for the Commissioner to remedy the inconsistent assessment by making an appropriate amendment at any time before the objection proceedings had run their course.[86] In any event we consider that the only relevant inconsistency that would need to be considered would arise from attributing the fee income from the template transactions both to the appellant and to his companies and/or partnerships. We do not consider that there is any inconsistency in effectively taxing the shareholders of the template companies on the fees paid to the Russell group of companies83 and also attributing those fees to the appellant personally for taxation purposes. Money paid may often be non-deductible on one side (and paid out of tax paid income) and yet be assessable to another party to whom it is paid. In this case, the fees paid were treated as non-deductible because they were paid for a tax avoidance scheme. However, that does not make the fees any less assessable when paid to entities established by the appellant as payment for services rendered.[87] The appellant has not succeeded in establishing that there is any merit in the s 99(4) point. Even if we were wrong on this view, that would not render the assessments against the appellant void. It is for the Commissioner or the Authority to make any necessary amendment to remedy the inconsistent assessments. For the above reasons, the fifth ground of appeal also fails.83 This Court held in Miller that the shareholders involved in the Russell template transactionsshould be taxed on the full income, despite some of that being paid to the Russell group ofcompanies. See Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA) at 301–303.Quantum[88] For completeness, we note that the amount that was the subject of the reconstruction by the Commissioner was $15,757,556.18, excluding penalties and interest. This figure comprised the total net profit of the CM Partnership and the other entities involved over the period 1985 to 2000. The quantum of this total (or its component parts) was not in dispute.Result and costs[89] All grounds of appeal advanced by the appellant fail. The appeal is dismissed. The appellant must pay the respondent costs for a standard appeal on a band B basis and usual disbursements. We certify for second counsel.Solicitors: Crown Law Office, Wellington for Respondent