TELSTRA NEW ZEALAND HOLDINGS LIMITED V COMMISSIONER OF INLAND REVENUE HC AK CIV 2010-404-6563

TELSTRA NEW ZEALAND HOLDINGS LIMITED V COMMISSIONER OF INLAND REVENUE HC AK CIV 2010-404-6563 10 February 2012IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2010-404-6563[2012] NZHC 101UNDER Tax Administration Act 1994IN THE MATTER OF Income Tax Act 1994BETWEEN TELSTRA NEW ZEALAND HOLDINGSLIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantCIV 2009-404-2490AND BETWEEN TOLL GROUP (NZ) LIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantCIV 2010-404-3372AND BETWEEN TOLL GROUP (NZ) LIMITEDFirst PlaintiffAND TOLL FINANCE (NZ) LIMITEDSecond PlaintiffAND TOLL LOGISTICS (NZ) LIMITEDThird PlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantCIV 2007-404-5853CIV 2007-404-5854AND BETWEEN RADIOWORKS LIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantCIV 2007-404-5854AND BETWEEN TVWORKS LIMITEDPlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantHearing: 9 February 2012Counsel: R G Simpson, M McKay and H C Roberts for TelstraR B Lange for TollA Whitehouse for RadioWorks and TVWorksB W F Brown QC, M S R Palmer and R L Roff for Commissioner ofInland RevenueJudgment: 10 February 2012JUDGMENT OF HEATH JThis judgment was delivered by me on 10 February 2012 at 11.00am pursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors/Counsel:Mr L McKay – Lindsay@barrists.co.nzBell Gully, Auckland – Ralph.simpson@bellgully.com /mathew.mckay@bellgully.comMr B Brown QC, Wellington - brendan.brown@xtra.co.nzMr M Palmer, Wellington – matthew.palmer@crownlaw.govt.nzMr J Coleman, Wellington - james.coleman@terracechambers.co.nzMs R Roth, Crown Law Office, Wellington – Rachel.roff@crownlaw.govt.nzIntroduction[1] The proceedings brought by Telstra New Zealand Holdings Ltd (Telstra), Toll Group (NZ) Ltd, Toll Finance (NZ) Ltd and Toll Logistics (NZ) Ltd (collectively, Toll), RadioWorks Ltd and TVWorks Ltd each challenge decisions made by the Commissioner of Inland Revenue (the Commissioner) to treat certain interest deductions as tax avoidance. Consequential disputes arise in respect of reconstruction and shortfall penalty issues.[2] All proceedings arise out of the use of optional convertible notes. As a result of directions made in these and another proceeding on 15 April 20111, similar claims, brought by Alesco New Zealand Ltd and its subsidiaries, were heard in September 2011. I delivered judgment on 12 December 2011. I found in favour of the Commissioner on issues of tax avoidance, reconstruction and shortfall penalties.2Appeals have been lodged against that decision. The parties hope that the Court of Appeal may be able to allocate a hearing in August or September this year.[3] A conference was held yesterday to determine which of the remaining proceedings should go to trial in a block of time allocated between 3 September 2012 and 9 November 2012. It transpires that agreement has been reached in respect of proceedings brought by Toll, RadioWorks and TVWorks. There is an outstanding issue in respect of the Telstra proceeding with which I deal separately.The Toll proceedings[4] Agreement has been reached between Toll and the Commissioner by which each party undertakes to be bound by the ultimate outcome of the Alesco litigation, after appeal processes have been exhausted. For that reason, no hearing time is required.1 Alesco New Zealand Ltd v Commissioner of Inland Revenue HC Auckland CIV 2009-404-2145, 15April 2011 at para [26].2 Alesco New Zealand Ltd v Commissioner of Inland Revenue (No. 2) HC Auckland CIV 2009-404-2145, 12 December 2011 at para [181].[5] The Toll proceeding is stayed. Counsel may apply on notice if any consent orders are required after the final appellate decision in Alesco has been given; otherwise, a notice of discontinuance may be filed.The RadioWorks and TVWorks proceedings[6] Agreement has also been reached in the proceedings brought by RadioWorks and TVWorks. The parties have given mutual undertakings to be bound by the ultimate outcome of the Alesco proceeding. As with the Toll proceeding, either a notice of discontinuance or a consent order will be required following a final appellate judgment. The RadioWorks and TVWorks proceedings are stayed on the same basis as the Toll proceedings.[7] On 2 February 2012, an application by RadioWorks and TVWorks to review a discovery decision made by Associate Judge Abbott on 5 December 2011 was listed before Courtney J. The Judge was informed of the agreement reached in respect of the substantive proceeding. She adjourned the application for me to determine today. As the review application is now otiose, it is dismissed.The Telstra proceeding[8] In my judgment of 15 April 2011, it was anticipated that the Telstraproceeding would proceed to trial after August 2012. Timetabling orders to achieve that goal were made.3 Telstra has given an undertaking that it will be bound by tax avoidance and shortfall penalty decisions in Alesco, after completion of the appellate process. However, it has declined to provide a similar undertaking in respect of reconstruction issues. The possibility of an adjournment application being made on that basis was signalled at an earlier hearing.[9] On 7 February 2012, Telstra filed an application to vacate the proposedhearing on the grounds that its "circumstances [as to reconstruction] are potentiallymaterially different" to those considered in my Alesco judgment of 12 December3 Alesco New Zealand Ltd v Commissioner of Inland Revenue HC Auckland CIV 2009-404-2145, 15April 2011 at para [21].2011. For Telstra, Mr Simpson submitted that it would be unjust for Telstra to be forced to go to trial when a reconstruction hearing may not be required. The Commissioner opposes Telstra's application. In his notice of opposition of 8 February 2012, the Commissioner contends that the undertaking offered is unsatisfactory and that there is no reason why the proceeding cannot be heard in the block of time allocated this year.[10] The Commissioner's position has been affected by an historical event which has given rise to a degree of distrust in relation to Telstra's intentions to address its own proceeding promptly. A proceeding brought by Telstra (in respect of a previous tax year) had been set down for hearing in 2010, as a designated test case. Nevertheless, Telstra discontinued the proceeding shortly before trial. Understandably, that caused concern to the Commissioner, in relation to his ability to deal promptly with the optional convertible note litigation. However, an application to set aside the discontinuance was dismissed by Wylie J, on the grounds that, while the decision to discontinue had been made in the private commercial interests of Telstra, there was no abuse of the Court's processes.4[11] I agree with Mr Simpson that the current issue about whether Telstra'sproceedings should be heard this year ought not to be clouded by that prior conduct. I do not intend to take that into account in resolving Telstra's present application.[12] I indicated to counsel that I was not prepared to determine the application today. Rather, I wished to receive evidence to support the application and to explain the grounds on which it is resisted. The Registrar shall set down the application for a hearing of one hour on the first available date after 30 March 2012. To facilitate a hearing at that time, I make the following directions:(a) Any affidavits in support of the application shall be filed and served on or before 23 February 2012.4 Telstra New Zealand Holdings Ltd v Commissioner of Inland Revenue HC Auckland CIV 2009-404-120, 6 December 2010.(b) Any affidavits in opposition shall be filed and served on or before 8 March 2012.(c) Submissions in support shall be filed and served on or before 15 March 2012.(d) Submissions in opposition shall be filed and served on or before 22 March 2012.[13] While not restricting the evidence counsel may wish to adduce, I wouldappreciate assistance on the reasons for Telstra's contention that a reconstruction might be materially different to that arising in the Alesco case and the reasons for the Commissioner's concerns, if the Telstra hearing were vacated at this stage.Other stayed proceedings[14] A number of other proceedings, not currently before me, have been stayed pending the outcome of the Alesco litigation. The Commissioner has written to relevant taxpayers seeking agreement to their being bound by the ultimate outcome of the Alesco proceeding.[15] I make no orders in respect of these proceedings. Should the Commissioner form the view that the stays should be lifted, appropriate applications on notice to the taxpayers must be made.Mandatory convertible note proceedings[16] In his memorandum for the conference, the Commissioner raised the possibility of any surplus time available in the September/November period (due to optional convertible note proceedings not proceeding at that time), being used to hear other proceedings dealing with mandatory convertible notes.[17] Parties to the mandatory convertible note litigation were not before the Court and I declined to consider those issues, in the context of a conference called to dealsolely with procedural questions arising out of the optional convertible note proceedings.[18] I have dealt with this issue in a separate Minute that will be sent to counsel for the Commissioner and copied to counsel for the taxpayers in the relevant proceedings._______________________________P R Heath JDelivered at 11.00am on 10 February 2012