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Case notes 2010

In this section you will find brief notes of decisions made by the Taxation Review Authority, the High Court, Court of Appeal, Privy Council and the Supreme Court. These case notes do not set out Inland Revenue policy, nor do they represent our attitude to the decision.

Title Decision date Case Appeal status

Commissioner's right to withhold refunds confirmed by Supreme Court

16 November 2010

Contract Pacific Limited v Commissioner of Inland Revenue

The Supreme Court confirmed that once notice has been given by the Commissioner under either section 26(4) or 46(5) of the Goods and Services Tax Act 1985 (GST Act), the 15-day working limit set out in section 46(1)(a) to pay the refund no longer applies and no refund is payable until the Commissioner is relevantly satisfied pursuant to section 46(1)(b) of the GST Act.

"Income splitting" case held by the High Court not to be tax avoidance

12 October 2010

Philippa Catherine White v CIR

The High Court held that the amalgamation of the disputant’s medical practice and her husband’s business into a single corporate entity did not give rise to an impugned tax avoidance arrangement. Under appeal.

Arrangement seen as tax avoidance

17 September 2010

Krukziener v Commissioner of Inland Revenue

A property developer lived substantially off “loans” taken from his various companies over a 10-year period. Repayments only occurred after he was audited and only from tax-free capital receipts. In the TRA and now in the High Court, the arrangement has been held to be tax avoidance, and the “loans” are in fact, assessable income. Under appeal.

Supreme Court declined leave to appeal

16 August 2010

Avowal Administrative Attorneys Ltd & N Petroulias v the District Court at North Shore & the Commissioner of Inland Revenue

An application for leave to appeal was declined on the basis that the legal propositions raised did not have a sufficient factual basis and that overall there was an insufficient prospect of success. Under appeal.

Application to commence proceeding under section 138D of the Tax Administration Act 1994

16 August 2010

TRA No. 11/09

The taxpayer did not address the question of why she did not file her notice of response (NOR) or notice of proposed adjustment (NOPA) on tme. There were no "exceptional circumstances" in this case. Not appealed.

A gain "in kind" offsets the loss incurred

23 July 2010

Govind Prasad Saha V CIR

Dr Saha left an accounting partnership but was only required to forfeit 50% of his shares, by way of settlement of an employment dispute. Dr Saha claimed a deduction under the FIF rules for the value of the shares he forfeited. The Commissioner disallowed that deduction. Dr Saha appealed to the High Court and the Court of Appeal. Both Courts upheld the decision of the Commissioner. Dr Saha appealed to the Supreme Court, which also dismissed his appeal. The Court held that under the FIF rules, Dr Saha derived a gain "in kind", which offset the loss he incurred through the forfeiture of the other shares.

Security for costs ordered

9 July 2010 (oral judgment - written decision delivered 19 July 2010)

DT United Kingdom Ltd V CIR

The High Court upheld the Commissioner's security for costs application on the basis that the plaintiff was impecunious and that the Commissioner had a strong case. Not appealed.

Leave to address consequential matters in a decision is not a substitute for an appeal

21 June 2010

TRA No. 03/03 decision [2010] NZTRA 09

While a short ruling, the decision is authority for the proposition that the general leave reserved provision is not a substitute for actual appeal, or ancillary to appeal, or an opportunity to litigate substantive issues again or in addition to the substantive case. It is firmly confined to "consequential matters". Not appealed.

Discovery rights remain notwithstanding the evidence exclusion rule

18 June 2010

Radio Works Ltd, TV Works Ltd v CIR

The applicant sought a review of the decision of Associate Judge Abbott who ordered discovery in a challenge of the Commissioner's assessments. The High Court declined to overturn the orders noting that the Commissioner notwithstanding various disputes process provisions in the Tax Administration Act 1994 ("TAA") is as entitled to discovery as any other litigant. Not appealed.

Contractor not a party to a sham

16 June 2010 (interim decision only)

TRA No. 029/08

Judge Barber held that the disputant was not claiming income tax deductions (or GST inputs) in respect of invoices knowing them to be false. His Honour allowed leave for the parties to make submissions on the legal issue of deductibility (including whether GST inputs can be based on false invoices). However, he considered that the false invoices were costs incurred by the disputant in good faith in seeking to derive assessable income so that they are deductible in the usual way. Not appealed.

Taxpayer fails in attempt to re-litigate claim

11 June 2010

Clarence John Faloon and Ors v CIR

The taxpayer had a claim in the High Court struck out due to having previously failed in the Court on the same issue. An attempt to have the strike-out reviewed failed. Not appealed.

Stay of liquidation pending appeal of compromise application refused

28 May 2010

Property Ventures Investments Ltd and Ors v CIR

The taxpayer companies' applications to the Court of Appeal for a stay of the Commissioner's liquidation proceedings (pending an appeal of the High Court's refusal of their compromise applications) were dismissed. Under appeal.

Commissioner's right to withhold payments

20 March 2010

Riccarton Construction Ltd v CIR

The Court did not exercise its jurisdiction to grant relief to the taxpayer's judicial review application. The Court held that the Commissioner was not yet satisfied with the goods and services tax (GST) return and could continue to withhold payment. Not appealed.

Commissioner's strike out application largely successful

25 February 2010

FB Duvall Ltd v Commissioner of Inland Revenue

The Commissioner was able to have most of the causes of actions in a judicial review by the taxpayer struck out. The taxpayer was required to re-draft its pleadings for the sole remaining cause of action. Not appealed.

Claim struck out for abuse of process

12 February 2010 (delivered on 12 March 2010)

Accent Management Ltd v Commissioner of Inland Revenue (Trinity)

The decision describes the circumstances in which the Courts will strike out a claim for abuse of process. The decision also confirms that there may only be an inquiry into the validity of assessments in the limited circumstances of where what purports to be an assessment is not an assessment and in cases involving conscious maladministration. Under appeal.

TRA finds in favour of taxpayer - no tax avoidance

15 January 2010

TRA Decision 02/2010

The TRA found that the sale of a property on revenue account from a development company to a family trust where it was held on capital account and subject to a prepaid lease was not a tax avoidance arrangement. Not appealed.

Trust in business of holding financial arrangements and allowed bad debt deduction

13 January 2010

TRA Decision No. 01/2010

The TRA held that there was "just, and only just" a sufficient level of activity to support the disputant trustees intention of profit from their holding of financial arrangements to constitute a business. Consequently, the trustees were entitled to a bad debt deduction under s DJ 1 and s EH 54 (3) of the Income Tax Act 1994. Not appealed.

Who is liable for GST: the receiver or the partnership?

4 November 2010

Stiassny and ORS v Commissioner of Inland Revenue

The sale of a forest by a partnership (each party of which was in receivership) created a goods and services tax (GST) liability of $127 million. The receivers paid the GST to the Commissioner and sought a Court order to return the funds. The Commissioner was unsuccessful in having the claim struck out. Under appeal.

Taxpayer entitled to discontinue a test case

3 December 2010

Commissioner of Inland Revenue v Telstra NZ Holdings Limited

The taxpayer's challenge in respect of its 2003-05 tax years was designated as a test case by the Commissioner. Shortly before trial the taxpayer discontinued its challenge, and then commenced new challenge proceedings in respect of later tax years (albeit in respect of the same alleged tax avoidance arrangement). The Commissioner applied to have the discontinuance of the first challenge set aside on the grounds that it was an abuse of process. The Court dismissed the Commissioner's application, holding that the taxpayer was entitled to take the steps they did.

Tax disputes not a vehicle for collateral grievances

29 April 2010

Clarence John Faloon and Ors v Commissioner of Inland Revenue

The decision is positive for the Commissioner, it confirms that courts are unwilling to progress the actions of repetitive litigants with misconceived cases. It also confirms the confinement of the disputes process in Part IVA of the Tax Administration Act 1994 to bona fide tax disputes. The process is not a vehicle for collateral grievances. Not appealed.

Supreme Court denies leave to appeal

16 December 2010

Chesterfields et al v Commissioner of Inland Revenue

No significant error by the Court of Appeal, nor substantial principle sufficient to meet the requirements for leave was shown.

Successful strike-out of a judicial review

23 December 2010

JD Hardie v Commissioner of Inland Revenue

The Court decided in the Commissioner's favour, striking out Mr Hardie's application for judicial review as an abuse of process.

Struck-off company has no legal capacity

23 April 2010

TRA 002/02 Decision Number 006/10

A struck-off company has no legal status and cannot appear before the Taxation Review Authority (TRA); regardless of this, on the facts as found by the TRA there was no issue to address. Not appealed.

Sale of share in a company which gives right to a lease is not a going concern

13 September 2010

Tepe Holdings Ltd v Commissioner of Inland Revenue

The Court held that the true nature of the sale was a sale of shares and not of tenanted property. Therefore, the taxpayer's claim of a supply of a going concern of a tenanted property failed. Under appeal.

Representation of a company by the director

22 December 2010

Commissioner of Inland Revenue v Giovanni Holdings Ltd and Ors

The High Court considered that exceptional circumstances existed to permit the Court to exercise its discretion to allow representation of the company by the director.

Judicial review of assessments refused

4 June 2010

Tannadyce Investments Ltd v CIR

The Commissioner successfully appealed against the refusal of the High Court to strike out the taxpayer's judicial review claim in respect of certain assessments. The conscious maladministration complained of by the taxpayer was not found and this did not affect the validity of the assessments. Under appeal.

Judicial Review: The Commissioner's powers under sections 16 and 16b of the Tax Administration Act 1994

11 May 2010

Avowal Administrative Attorneys Ltd & Ors v The District Court at North Shore & the Commissioner of Inland Revenue

The access operation carried out by the Commissioner pursuant to section 16 of the Tax Administration Act 1994 (TAA) was used to obtain information which was necessary or relevant for the investigation of activities affecting New Zealand tax liabilities.

JG Russell unsuccessful in appeal of his personal tax assessments

3 September 2010

John George Russell v Commissioner of Inland Revenue

An appeal by the taxpayer from a Taxation Review Authority (TRA) decision had been rejected by the High Court. Assessments based upon tax avoidance have been reconfirmed. Under appeal.

Indemnity costs awarded

23 December 2010

Accent Management Limited v CIR - Costs judgment

The Commissioner was awarded indemnity costs following an unsuccessful judicial review application by the taxpayer.

Income splitting ruled by Court of Appeal as tax avoidance

4 June 2010

Penny and Hooper v CIR

The Court of Appeal by majority ruled that income derived by the companies controlled by the taxpayers was substantially earned through the personal exertions of the taxpayers themselves. Therefore, when looked at objectively, remuneration for tax purposes needed to reflect the correct amount expected to be earned from the skills provided to the company. Under appeal.

High Court functus officio

26 February 2010

Redcliffe Forestry Venture Ltd & Ors v Commissioner of Inland Revenue

The High Court held that the plaintiffs did not allege fraud so as to engage the jurisdiction of the Court to set aside its judgment of 20 December 2004. Furthermore, the judgment of 20 December 2004 was not a nullity. Accordingly, the High Court was functus officio. Appealed.

High Court finds tax avoidance in an arrangement to develop and sell software

5 May 2010

Education Administration Limited v The Commissioner of Inland Revenue

The High Court found an arrangement whereby two companies deliberately registered for GST on a mismatched accounting basis and incorporated by non-arm's length individuals for the purpose of developing and selling software was tax avoidance. Consequently, the Commissioner's decision to treat the arrangement as void was correct. Not appealed.

High Court declines to add new defendants to tax litigation

20 December 2010

"Y" Limited v Commissioner of Inland Revenue

The taxpayer sought to add more parties to long-running litigation on the basis that the Commissioner had not correctly identified a tax avoidance arrangement and that without the other parties no one was capable of paying the taxes if the Commissioner was ultimately successful. The application was declined by the High Court.

Double Tax Agreement on pensions not discriminatory

26 April 2010

TRA Decision 7/2010

The Taxation Review Authority struck out the taxpayer's complaint of possible discrimination on jurisdictional grounds, but cancelled the shortfall penalties which had been imposed by the Commissioner. Not appealed.

Default assessments are inevitable where returns are not filed

19 March 2010

John David Hardie v Commissioner of Inland Revenue

This judgment confirms that there are obligations on everyone to pay tax, irrespective of race. It also confirms that when a taxpayer fails to file a return the Commissioner can issue default assessments.

Compromise proposals fail to convince Court

24 February 2010

CIR v Atlas Food & Beverage Ltd & Ors; FM 1 Ltd & Ors v CIR

There were a number of significant irregularities in the debtor companies' compromise proposals. The Court held that it was not appropriate to ratify or grant compromises in these circumstances. The decision is a helpful and thorough analysis of the various creditors' compromise provisions of the Companies Act 1993. Under appeal.

Commissioner to reconsider whether to accept late objection

28 April 2010

Dunphy and others v Commissioner of Inland Revenue

The applicants argued that being on the Second Ernst & Young (EY) "in" List in 1996 was a request for a refund and should have been considered by the Commissioner as an application to accept a late objection, the grounds of the objection being the Rudd Watt & Stone letter in 1986. The Commissioner was directed to reconsider whether to accept the late objections. Not appealed.

Commissioner partially successful on appeal

31 August 2010

Chesterfields Preschools Limited v Commissioner of Inland Revenue

The Commissioner appealed decisions of the High Court. He received directions from the Court of Appeal for the steps necessary to satisfy the earlier orders of the High Court. Under appeal.

As a general rule, insolvent companies should be liquidated

26 October 2010

Commissioner of Inland Revenue v Atlas Food & Beverage Ltd et al

Notwithstanding certain steps taken to satisfy outstanding debts, the Court was satisfied that the companies were insolvent and should be liquidated.

Application to commence challenge proceeding under section 138D of the Tax Administration Act 1994

11 February 2010

TRA Decision 05/2010

Lack of knowledge by the agents of the taxpayers as to the next step in the dispute process, on the facts of this case, and in the circumstances surrounding the issues constituted exceptional circumstance.

Allocated salary important when considering "objective test" in tax avoidance cases

4 February 2010

TRA Decision 4/2010

The disputant is an anaesthetist who transferred her private practice to a company in which she was a shareholder. A minimum salary was paid by the company for her services. It was held that an arrangement was in place, which when looked at objectively had a purpose of tax avoidance. Not appealed.

$5 million of "loans" found to be income after all

27 January 2010

TRA Decision 3/2010

A property developer who lived largely on "loans" and other drawings from his various companies was held to have thereby avoided income tax. Not appealed.


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