KENSINGTON DEVELOPMENTS LIMITED (IN RECEIVERSHIP) v COMMISSIONER OF INLAND REVENUE CA64/2014 [2015] NZCA 60

KENSINGTON DEVELOPMENTS LIMITED (IN RECEIVERSHIP) v COMMISSIONER OF INLAND REVENUE CA64/2014 [2015] NZCA 60 [11 March 2015]IN THE COURT OF APPEAL OF NEW ZEALANDCA64/2014[2015] NZCA 60BETWEEN KENSINGTON DEVELOPMENTSLIMITED (IN RECEIVERSHIP)AppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 16 February 2015Court: Randerson, Winkelmann and Keane JJCounsel: S R G Judd for AppellantM Deligiannis and K I S Naik-Leong for RespondentJudgment: 11 March 2015 at 10:00amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent's costs for a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Winkelmann J)[1] The appellant, Kensington, commenced challenge proceedings in theTaxation Review Authority (TRA) in August 2011. In April 2013 the Commissionerapplied to transfer the proceeding to the High Court. Kensington appeals thedecision of Allan J granting that transfer.1 It says that the Judge applied the wrongtest and that he was otherwise wrong to order transfer when Kensington had electedto proceed in the TRA, a transfer would be prejudicial to Kensington, and there wereno factors weighing significantly in favour of the transfer.Background[2] Kensington has been in receivership since July 1994. Mr John Russell is thereceiver. Kensington has filed annual tax returns claiming interest deductionsincreasing from $302,398 in the 1997 income tax year to $2,191,870 in the 2008income tax year. This is interest in respect of a purported loan from the Bank ofNew Zealand (BNZ). Kensington has also claimed deductions for interestexpenditure in respect of a debenture held by Downsview Finance Ltd (Downsview),in each of the tax years from 1997 to 2009 inclusive. Mr Russell and his wife are thebeneficial owners of the shares in Downsview.[3] Although Kensington has accrued a liability to make these interest payments,it has not paid any interest to either the BNZ or Downsview.[4] As well as the above transactions, Kensington has acquired debentures over 14 companies. Mr Russell is the receiver of each of those companies. Many ofthese 14 companies have also claimed interest expenditure deductions on a yearlybasis in respect of interest they owe under the debentures, although Kensington hasnot received any interest payments from them.[5] The consequence of these transactions to which Kensington is a party is thatit, and other companies controlled by Mr Russell have accumulated substantiallosses through the deduction of interest expenses.[6] Mr Russell commenced the proceedings on behalf of Kensington before theTRA on 12 August 2011. A taxpayer has the right to commence challengeproceedings before either the TRA or High Court.2 It is relevant background that1 Commissioner of Inland Revenue v Kensington Developments Ltd [2013] NZHC 3537, (2013) 26 NZTC ¶21-059.2 Tax Administration Act 1994, ss 3 (definition of "hearing authority"), 138B and 138C.Mr Russell has also been involved in litigation with the Commissioner over a period of 32 years, as a taxpayer, tax agent or director or receiver of taxpayer companies.[7] The proceeding the subject of the application for transfer concerns only thelosses claimed by Kensington. These total $15,756,946.76. The Commissioner'sposition is that the interest expenses have not been suffered by Kensington and thatthe deductions claimed should be denied as part of a tax avoidance arrangementunder s BG 1 of the Income Tax Act 2004.3 Kensington challenges theCommissioner's rejection of its returns and her application of shortfall penalties.[8] The Commissioner's application for transfer of the proceeding to theHigh Court was filed some 20 months after the commencement of the challenge. Itwas brought under the provisions of s 138N(2) of the Tax Administration Act 1994:138N Proceedings may be transferred to different hearing authorities(2) If a disputant commences a challenge in a Taxation Review Authority, the Commissioner may apply to the High Court to have the challenge transferred to the High Court.High Court decision[9] The High Court Judge applied the principles identified by this Court inCommissioner of Inland Revenue v Erris Promotions,4 adopting the followingsummary of those principles appearing in Commissioner of Inland Revenue vMcIlraith:5[a] Although there are no statutory criteria set out for transfer applications to the High Court under s 138N(2)(a)(ii), there is no legislative intent to change the role of the TRA and the High Court in taxation matters.[b] The criteria set out in s 136(4) or s 138O may still be considered if relevant in the circumstances of the case.[c] The taxpayer has the initial choice of forum and the onus is on the Commissioner in seeking a transfer to provide reasons why that should occur.3 Or the corresponding provisions in the Income Tax Act 1994 and 2007.4 Commissioner of Inland Revenue v Erris Promotions [2003] 1 NZLR 506 (CA).5 Commissioner of Inland Revenue v McIlraith (2003) 21 NZTC 18,112 (HC) at [18].[d] The Court is required to consider the factors relied upon by the Commissioner and the reasons for the taxpayer's choice of forum against the background of the scheme of the legislation and the role of the TRA and the High Court in taxation disputes.[e] The TRA was designed to provide a more informal and less complex forum as evidenced by the anonymity provisions, and the fact that costs cannot be awarded in favour of any party. Although it is a specialist in taxation disputes, there is no presumption in the legislation that taxation disputes should normally be dealt with in the TRA at first instance.[f] The High Court is the Court of first instance jurisdiction for major litigation and, in particular, where matters are complex and involve matters of major legal significance. That is also the case for taxation litigation.[g] The amount of money involved does not necessarily equate with complexity but it does bear upon the issue of significance, both for the Commissioner and the taxpayers involved.[10] The Judge acknowledged that there were advantages to Kensington in havingthe proceeding before the TRA. Mr Russell would be able to represent Kensingtonas of right, whereas in the High Court, a corporate party must be represented bycounsel.6 Moreover, party and party costs are not generally awarded before the TRAas they are in the High Court, so an order for transfer would expose Kensington to anincreased risk of an adverse costs award.[11] The Judge said the Commissioner's delay in bringing the application was aneutral factor. He said that having regard to the subject matter of the challenge, andthe very long history of the case, it was difficult to see how any significantdisadvantage could have been suffered. He noted that Kensington did not claim tohave been prejudiced by the delay in the application.[12] The Judge considered that the cumulative weight of four particular factorsoutweighed the advantages inherent in a hearing before the TRA. The first wascomplexity. He characterised the case as moderately complex, noting thatKensington's claimed losses exceeded $15 million, a moderately high figure.[13] The second factor he identified was the "precedential effect of anyjudgment". The Judge said it was common ground that a number of companies, all6 Re G J Mannix Ltd [1984] 1 NZLR 309 (CA).associated with Mr Russell, had accumulated losses on much the same basis as Kensington. Any judgment in the present case would be likely to serve as a precedent for a number of the other cases also.[14] The third factor identified was the high likelihood of an appeal.[15] The final factor, was that Kensington's challenge included an allegation thatthe Commissioner was pursuing a vendetta against Mr Russell, was abusing herpower, and that her actions amounted to a fraud on the taxpayer. The Judgeconsidered that where such allegations were made, the proper forum was theHigh Court rather than the TRA.Approach on appeal[16] It is common ground that this is a general appeal and that the approachdescribed by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestarapplies.7 The Court of Appeal may take a different view from the High Court.However the appellant bears the onus of satisfying the appeal court that it shoulddiffer from the decision under appeal. It is only if the appellate court considers thatthe appealed decision is wrong that it is justified in interfering with it.First ground of challenge: the Judge applied the wrong test[17] Kensington argues that when considering an application to transfer achallenge before the TRA to the High Court, the Court is obliged to apply apresumption that the taxpayer's choice of hearing authority should prevail,particularly when that choice is the TRA. Acknowledging that the principlesidentified in Erris are against it on this point, Kensington says that the discussion inErris was obiter and asks us to clarify the law.[18] Kensington argues that the existence of such a presumption emerges from the legislative history, and the existing scheme of the legislation. The starting point forits argument is that the scheme of the legislation establishes the TRA as the "usual"forum for taxpayer challenges. Under the objections regime, which preceded the7 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4].present challenge regime, the usual course was for the Commissioner to state a casebefore the TRA. Both the Income Tax Act 1976 and the Tax Administration Actprovided for an objection to be referred directly to the High Court on a question oflaw only, or by the agreement of the parties, or as provided in s 136(4) of theTax Administration Act:8 with the leave of [the High Court] granted on the application of theobjector or the Commissioner, [as the case may be], upon the ground that in the opinion of the Court, by reason of the amount of the tax in dispute between the parties or of the general or public importance of the matter or of its extraordinary difficulty or for any other reason, it is desirable that the objection be heard and determined by [the High Court] instead of by a Taxation Review Authority.[19] Kensington argues that the use of this language, particularly the words"general or public importance" and "extraordinary difficulty" convey theParliamentary intent that the TRA is the usual first instance hearing authority, withthe High Court reserved for truly important or extraordinary cases.[20] Kensington acknowledges that these provisions relate to the objectionregime. They are now superseded by the disputes procedures set out in Pt 4A of theTax Administration Act and the challenge regime in Pt 8A that applies to thisproceeding. However Kensington says that the statutory change from the positionunder the objection regime to that under the challenge regime is simply to add apresumption in favour of taxpayer choice, because the taxpayer may choose tocommence a challenge in either the TRA or High Court. Since the statutory schemeis to make the TRA the usual body for disputes, and the High Court the place whereonly disputes that are of general or public importance, or are extraordinarily difficultare determined, where a taxpayer chooses the TRA that presumption particularlyapplies.[21] We are satisfied that the Judge applied the correct test and that the Errisprinciples gave proper effect to the statutory provisions. While the factors set out in s 136(4) may be relevant to a transfer decision in a particular case,9 those factors do8 Income Tax Act 1976, s 33; Tax Administration Act 1994, s 136(4).9 Commissioner of Inland Revenue v Erris Promotions, above n 4, at [21].not create a presumption that the hearing should be in the TRA.10 There is also clearindication that the court's discretion in respect of applications under s 138N was notintended to be constrained by the considerations listed in s 136(4), given the absenceof a similar provision in Pt 8A.[22] We do not therefore see any merit in Kensington's argument that apresumption in favour of taxpayer choice applies. As this Court acknowledged inErris because the taxpayer has the initial choice of forum, the onus is on theCommissioner when seeking a transfer to provide reasons why that should occur.11Requiring the Commissioner to show reason for the transfer gives effect to thestatutory scheme that it is the taxpayer's choice as to the forum in which theproceedings are commenced. No more recognition is required to give effect to thescheme of the Act or to the particular provisions.The second ground of challenge: no grounds made out for transfer[23] The appellant argues that whether or not the presumption it argues for applies, there are no proper grounds made out for the transfer. Having heard argument, we consider that the Judge was correct to order transfer.[24] The determinative consideration in reaching this view is the precedent the decision in this proceeding will establish. The Commissioner is currently involved in two other disputes and has active investigations in progress which raise identical issues to the challenge that is the subject of this application.12 These disputes and investigations all involve an insolvent taxpayer company in receivership (with Mr Russell as receiver). The company has continued to claim deductions for interest owing under a debenture held by a company of which Mr Russell is a director and/or receiver. The taxpayer company has been in receivership for a period exceeding 10 years and has during that time accrued millions of dollars worth of purported losses. In each of these cases, the Commissioner is alleging that the taxpayer10 Commission of Inland Revenue v Erris Promotions, above n 4, at [23].11 At [23].12 Including Commissioner of Inland Revenue v Bell Road Developments Ltd [2014] NZHC 1841, (2014) 26 ¶NZTC 21-090, currently under appeal.company entered into a tax avoidance arrangement void against her pursuant to s BG 1 of the Income Tax Act 2004.13[25] Kensington argues that the precedent the decision will establish carries little weight since Mr Russell does not accept that the finding will dispose of the other disputes and investigations. He claims there are other factual issues raised by those disputes. That however does not answer the point that a decision by the High Court in this challenge proceeding will be binding on the TRA in future disputes that involve identical issues. It will be binding on other similarly positioned taxpayers and will be a significant precedent even if Mr Russell chooses to argue otherwise.[26] We agree with the Judge that an additional reason for transfer is the complexity of the proceeding. Kensington argues that the Judge erred in characterising the proceedings as involving issues of moderate complexity. Since most of the facts are agreed (as evidenced by the agreed statement of facts), the only significant factual dispute is whether or not the BNZ loan existed. The facts are not themselves complex. Although the Commissioner points to the 14 debentures Kensington holds over other companies, those companies and their debentures are irrelevant to the issues before the TRA. Kensington argues that the law relating to tax avoidance is now well-settled following the decision in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue.14[27] We agree with the Judge's assessment that this is a case of moderatecomplexity. Although the law in the area may be relatively settled, it does not follow that its application to new fact situations will be straightforward. As to the relevance of the 14 debentures and the associated companies, the hearing authority will need to consider whether the overall structure served any commercial purpose, or was set in place for the purposes of tax avoidance. The arrangements concerning the 14 debentures are similar to those in connection with the Downsview debenture the subject of the challenge. They also bear upon the issue of Kensington's solvency.These transactions and arrangements could very well be relevant to the determination of the challenge before the hearing authority.13 Or the corresponding provisions in the Income Tax Act 1994 and 2007.14 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.[28] The Commissioner also contends that it is significant that the court hearing the challenge will have to consider the duties of a receiver and best practice of a receiver under the Receivership Act 1993 because this bears upon the commerciality of the arrangements. She argues that such issues are better dealt with in the High Court. We attach no weight to this point. Although the law in connection with the duties and obligations of receivers is traditionally administered in the High Court, we expect that the TRA would have no difficulty in interpreting the statutory framework and the body of case law that has emerged in the 20 plus years since the Receivership Act came into force.[29] For these reasons we agree with the Judge that the moderate complexity weighed in favour of transfer to the High Court but could not on its own be decisive.[30] The Judge also considered that the administrative law challenges mounted by Kensington weighed in favour of transfer to the High Court relying on Dandelion Investments Ltd v Commissioner of Inland Revenue and Commissioner of Inland Revenue v McIlraith.15 Counsel for Kensington says it would abandon those challenges if it meant the difference to a transfer decision. Although allegations such as those we have referred to at [15] above may weigh in favour of transfer to the High Court in some cases, in this case it is not the determinative factor. We thereforedo not consider the issue further, particularly in light of Kensington's indication.[31] Kensington argues the Judge was wrong to view delay in applying for a transfer as a neutral factor. However, Kensington accepts no particular prejudice arises from this delay, pointing only to the fact that until the application Kensington had been preparing on the basis that the hearing would be in the TRA. That does not amount to prejudice. In the absence of prejudice attributable to delay, we too regard the delay as irrelevant to this issue of transfer. We note too that the Commissioner has given an explanation for the delay which we consider helps to moderate the significance of this issue.15 Dandelion Investments Ltd v Commissioner of Inland Revenue [2003] 1 NZLR 600 (CA) andCommissioner of Inland Revenue v McIlraith, above n 5.[32] Finally, we agree with Allan J that the likelihood of appeal is relevant to consideration of the application. As this Court said in Erris, even if the TRA can provide an earlier hearing date (and it is not clear that it can in this case) this will not necessarily mean less delay in final resolution where appeal is likely, as starting in the TRA adds a further layer of appeal.16 Appeal is very likely in this proceeding. The matters at issue in this proceeding are significant for the parties, particularly given the extent of similar disputes involving the Commissioner and companies controlled by Mr Russell.[33] It is relevant that Kensington has chosen the TRA as the forum for its dispute and there clearly are advantages for it in that choice. Mr Russell would be able to appear for Kensington and there is a reduced exposure to adverse costs orders. However the Judge was correct that the Commissioner has shown good cause for the transfer of the proceeding to the High Court notwithstanding these considerations. We have taken a slightly different approach to the Judge in our analysis of the relevant factors but the outcome remains the same. Although the complexity of the issues weighs in favour of transfer, in our view the important precedent value of this proceeding alone is determinative in favour of granting the application for transfer.Outcome[34] For these reasons, the appeal is dismissed.[35] The appellant must pay the respondent's costs on a standard band A basis andusual disbursements.Solicitors:Ladbrook Law Limited, Auckland for AppellantCrown Law Office, Wellington for Respondent16 Commissioner of Inland Revenue v Erris Promotions, above n 4, at [25].