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Case notes 2013

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

Overseas contractor found to have a permanent place of abode in New Zealand

5 December 2013

TRA 43/11; [2013] NZTRA 10

This was a case about tax residency and whether the disputant continued to be a New Zealand tax resident in the four years after he left New Zealand to work overseas. The Commissioner of Inland Revenue ("the Commissioner") considered that the disputant was a New Zealand tax resident for the first four years he was working overseas because he had a permanent place of abode in New Zealand. The disputant argued that he did not have a permanent place of abode in New Zealand during this period.

The Taxation Review Authority ("TRA") found for the Commissioner and also found that the disputant was liable for a shortfall penalty in each of the tax years in question for taking an unacceptable tax position.

Under Appeal

High Court finds no jurisdiction to judicially review the Commissioner's reassessment of goods and services tax

23 December 2013

Peter William Mawhinney as trustee of the Forest Trust v Commissioner of Inland Revenue & Registrar of the Taxation Review Authority [2013] NZHC 3564

The plaintiff applied for judicial review of the Commissioner of Inland Revenue’s (“the Commissioner”) reassessment of goods and services tax (“GST”) on a number of grounds. The Commissioner objected to the jurisdiction of the High Court to hear and determine the causes of action based on Tannadyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR (“Tannadyce”).

The High Court held that it lacked jurisdiction to determine the matter, as the proscription in section 109 of the Tax Administration Act 1994 (“TAA”) prevents litigation of “disputable decisions.

Under Appeal

High Court grants Commissioner's application to transfer a challenge filed in the Taxation Review Authority to the High Court

20 December 2013

Commissioner of Inland Revenue v Kensington Developments Limited [2013] NZHC 3537

This case concerns an application by the Commissioner of Inland Revenue (“the Commissioner”) for an order transferring a challenge proceeding filed by the taxpayer in the Taxation Review Authority (“TRA”) to the High Court under section 138N(2) of the Tax Administration Act 1994 (“TAA”). The High Court granted the Commissioner’s application, and made an order for transfer.

Under Appeal

Commissioner's statutory demands upheld

2 December 2013

Accent Management Limited and Lexington Resources Limited v Commissioner of Inland Revenue

The companies challenged the statutory demands issued by the Commissioner of Inland Revenue (“the Commissioner”) on the grounds that there was a substantial dispute whether or not the debts were owing or due and that the demands ought to have been set aside as an abuse of process. The Court upheld the statutory demand and ordered that the companies pay the amount demanded within 10 working days.

Under Appeal

Indemnity costs awarded to the Commissioner

18 December 2013

Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue

This was a costs decision in relation to an application by Redcliffe Forestry Venture Limited (“Redcliffe”) to set aside a statutory demand made by the Commissioner of Inland Revenue (“the Commissioner”). The Commissioner requested costs on a 2B basis up until 12 September 2013 and thereafter either indemnity or increased costs. Associate Judge Faire accepted the Commissioner’s submission that the arguments advanced on Redcliffe’s behalf were groundless and unsupported

Under Appeal

TRA clarifies scope of "control by any other means whatsoever" associated persons test

17 December 2013

TRA 021/12; [2013] NZTRA 11

The Taxation Review Authority (“TRA”) found that because two companies, the disputant and Company O were “associated persons” under section 2A(1)(a)(iii) of the Goods and Services Tax Act (“GST Act”), the disputant was not entitled to claim the entire goods and services tax (“GST”) component of the purchase price of the property purchased from Company O. The GST input credits available to the disputant were instead limited to the GST component of the significantly lower purchase price Company O had originally paid for the property.

Under Appeal

Liquidation triggers statutory set-off; set-off not a "transaction" for the purposes of the voidable transaction provisions

17 December 2013

David Harlock v Commissioner of Inland Revenue [2013] NZHC 3389

At the date of liquidation, Raiz Enterprises Ltd (“the company”) owed outstanding pay as you earn (“PAYE”) and goods and services tax (“GST”), but was owed a refund for overpaid withholding tax. The Commissioner of Inland Revenue (“the Commissioner”) set off the refund against the amount owed. The liquidator’s application for orders that the set-off was a voidable transaction was declined.

Under Appeal

Indemnity costs awarded to the Commissioner

17 December 2013

Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue

The Commissioner applied to the Court for indemnity costs in relation to Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2011] 1 NZLR 336 (HC) (“Redcliffe”) which was heard in the High Court in 2011 where the plaintiffs alleged that the original Trinity judgment of the High Court (which led to the Supreme Court decision in Ben Nevis Venture Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289(“Ben Nevis”)) should be set aside on the basis that the defendant “presented a false case”.

The Commissioner sought indemnity costs, increased costs or costs on a 2C basis on the grounds that the plaintiffs’ case was vexatious, frivolous or otherwise an abuse of process. The Court determined that the plaintiffs’ case was hopeless from the outset and amounted to a collateral attack on the Supreme Court’s judgment in Ben Nevis and was unnecessary and improper.

Under Appeal

Sovereign's appeal dismissed by the Court of Appeal

17 December 2013

Sovereign Assurance Company Limited v Commissioner of Inland Revenue

The Court of Appeal dismissed Sovereign Assurance Company Limited’s (“Sovereign”) appeal of its income tax assessments for the 2000–06 income years. The Commissioner of Inland Revenue (“the Commissioner”) reassessed Sovereign in accordance with the accrual regime on the basis that the refundable commission transactions under the treaties were a financial arrangement pursuant to subpart EH of the Income Tax Act 1994 (“the Act”).

Under Appeal

Application to set aside freezing order granted and indemnity costs awarded against Commissioner

16 December 2013

Commissioner of Inland Revenue v Marcus Seymour Dymock and Charlotte Jane Dymock [2013] NZHC 3346

The Commissioner of Inland Revenue (“the Commissioner”) obtained freezing orders over the defendants’ bank accounts on 14 November 2013. However, prior to the application being made, and unbeknown to the Commissioner, the defendants had transferred sufficient funds to cover the assessments back to the liquidator of the assessed companies. The defendants’ application to set aside the freezing order was granted and indemnity costs awarded against the Commissioner.

Not Appealed

Residency - RWT and approved issuer levy

16 December 2013

Vinelight Nominees Limited & Anor v Commissioner of Inland Revenue

The Court found the appellants were resident at the relevant time and were, therefore, liable to account for resident withholding tax (“RWT”). Further, the appellants’ arrangement was also confirmed a tax avoidance arrangement.

Appealed

Appeal struck out for failure to pay security for costs

6 December 2013

Wayne Thomas Patterson v Commissioner of Inland Revenue

Mr Patterson filed an appeal for a High Court decision adjudicating him bankrupt. He did not, however, pay security for costs as ordered by the Court of Appeal. The Commissioner of Inland Revenue (“the Commissioner”) therefore applied to have Mr Patterson’s appeal struck out. The Court of Appeal granted the Commissioner’s application and struck out Mr Patterson’s appeal because of his failure to pay security for costs and because the appeal itself had no realistic prospect of success.

Not Appealed

Proceedings struck out for failing to comply with unless orders

21 November 2013

Petroulias v Commissioner of Inland Revenue

The proceedings were struck out by the court for failing to comply with unless orders.

Not Appealed

Unsuccessful claim for recovery of a statutory debt owing under section 46 of the Goods and Services Tax Act, unsuccessful application for judicial review

13 November 2013

Inbound Tour Services Limited v Commissioner of Inland Revenue

The taxpayer was unsuccessful in its claim for a statutory debt owing as the Court held the Commissioner of Inland Revenue (“the Commissioner”) had not breached her obligations under section 46 of the Goods and Services Tax Act 1985 (“GST Act”). The grounds for Judicial Review were rejected.

Not Appealed

Resource consent not a stand-alone asset

12 November 2013

TrustPower Limited v Commissioner of Inland Revenue

The High Court found that resource consents acquired for the purpose of constructing electricity generation projects were not stand-alone assets separate from the projects to which they related.

Appealed

Employee indemnity fund a tax avoidance arrangement

6 November 2013

TRA 11/10

The arrangement did not meet the requirements of sections DC 5, DA 1 DB 6 or DB 7 of the Income Tax Act 2004. The arrangement was also a tax avoidance arrangement and the shortfall penalty for taking an abusive tax position was appropriately applied by the Commissioner of Inland Revenue (“the Commissioner”). Further, the requirements for a deduction under section DB 33 were not satisfied.

Appealed

Property rental activities a business and not a passive investment

31 October 2013

TRA 16/12

The taxpayer and her husband were found to be carrying on a small, residential property rental business. The scale and volume of the operation, and the commitment of time, effort and finance involved were found to have been considerable and not merely passive investments as the taxpayer maintained. This finding resulted in a consequential re-calculation of their Working for Families Tax Credits (“WfFTC”) entitlements.

Not Appealed

Rule in Mannix upheld

31 October 2013 (oral decision)

EngineerOnline Limited v Commissioner of Inland Revenue

The judgment upheld the rule established in the Court of Appeal decision Re GJ Mannix Ltd [1984] 1 NZLR 309, but waived security for costs where the director of the appellant company provided an undertaking to pay costs.

Not Appealed

Case transfer and consolidation

31 October 2013

Commissioner of Inland Revenue v Garry Albert Muir and others

The Commissioner of Inland Revenue (“the Commissioner”) was successful in her application to have a number of cases originally filed in the Taxation Review Authority (“TRA”) transferred to the High Court and consolidated with other High Court cases concerning the same dispute.

Not Appealed

Commissioner's application for strike-out successful

25 October 2013

TRA 40/10

The Commissioner of Inland Revenue’s (“the Commissioner”) application to strike out the remainder of the disputant’s claim was granted.

Not appealed

Trinity investor’s application to set aside the commissioner’s statutory demand dismissed by High Courts

25 October 2013

Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZCA 2818

An application made by the plaintiff to set aside the Commissioner of Inland Revenue’s ("the Commissioner") statutory demand application. The plaintiff submitted that the amount claimed by the Commissioner was yet to be determined. The Court found that the amount owing had been determined in an earlier judgment and ordered the plaintiff to pay the sum of $819,268.18 within 10 workings days of this judgment.

Appealed

Application to stay judgment pending appeal dismissed

25 October 2013

Bristol Forestry Venture Ltd and Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue

The plaintiffs had previously unsuccessfully applied to have the Commissioner of Inland Revenue’s (“the Commissioner”) statutory demands set aside. This application was to stay the orders of the judgment of Faire AJ, pending the hearing and determination of an appeal. The plaintiff’s application was refused.

Appealed

Challenge of commissioner’s assessments

23 October 2013

TRA 009/12

This was a capital/revenue case involving a sale and purchase of a shopping centre that was partially completed at the time of sale. The Commissioner of Inland Revenue (“the Commissioner”) considered that the Sale and Purchase Agreement contained two separate agreements, one for the completed portion of the shopping centre (an undeveloped land) as at the time of the agreement, and the other for subsequent development of the undeveloped portion.

The Commissioner assessed the taxpayer on the basis that monies received for the subsequent development were revenue receipts and taxable income. The taxpayer (“the vendor”) argued there was only one agreement and that all payments were capital receipts and not taxable. The Taxation Review Authority (“TRA”) found for the taxpayer and cancelled the Commissioner’s assessments.

Appealed

Taxpayer's section 89M(11) application dismissed

10 October 2013

Faloon v Commissioner of Inland Revenue

The taxpayer applied to the High Court for leave to bring an Originating Application, for more time to reply to the Commissioner of Inland Revenue’s ("the Commissioner") Statement of Position ("SOP") under section 89M(11) of the Tax Administration Act 1994 ("TAA"). The High Court declined the application. Ronald Young J agreed with the Commissioner’s position that there was no right of reply to the Commissioner’s SOP in a taxpayer-initiated dispute.

Appealed

Application to suspend bankruptcy pending appeal dismissed by the court of appeal

4 October 2013

Jeremy Newland Bioletti v Commissioner of Inland Revenue [2013] NZCA 465

Mr Bioletti was adjudicated bankrupt on 21 August 2013. A request for suspension of bankruptcy was sought pending appeal. The application was dismissed by the Court.

Not Appealed

Commissioner successful in establishing that a section 167(1) trust survives liquidation

1 October 2013

Commissioner of Inland Revenue v Jennings Roadfreight Limited (in liq) [2013] NZCA 455

This case was an appeal from the High Court which held that the statutory trust pursuant to section 167(1) of the Tax Administration Act 1994 (“the Act”) is extinguished upon a company being liquidated. The majority of the Court of Appeal overturned the decision of the High Court and concluded after consideration of the legislative scheme and history and applicable case law that an established section 167(1) trust will not be extinguished upon liquidation.

Appealed

Intention or purpose of one or more trustees attributable to trust as a whole

30 September 2013 (released on 7 October 2013)

TRA 019/11

The decision by the Taxation Review Authority (“TRA”) held that two of the three trustees, Mr and Mrs B, had the intention or purpose to sell when each of the relevant properties were acquired. This intention or purpose was attributable to the Trust as a whole, despite the third trustee asserting that she had no such purpose or intention. The TRA also held that the Trust’s activities amounted to a business of erecting buildings and a taxable activity for goods and services tax (“GST”) purposes. Accordingly, the trustees of the Trust were found to be jointly and severally liable to pay income tax and GST output tax on the sale proceeds from seven properties. The TRA also found that shortfall penalties for gross carelessness applied.

Appealed

Outstanding proceedings not a "substantial dispute" for the purpose of setting aside a statutory demand where there are finalised tax challenges

12 September 2013

Bristol Forestry Venture Limited and Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue

The Judgment dismissed an application by Trinity investors to set aside statutory demands based on assessments confirmed by the Supreme Court. The application relied on another proceeding seeking to dispute the validity of the Court’s previous decisions in relation to the Trinity scheme. The Judge declined to make an order for immediate liquidation but required full payment in 10 working days, failing which liquidation can be applied for. Costs were awarded to the Commissioner of Inland Revenue.

Appealed

Trinity avoidance scheme

11 September 2013

Ben Nevis Forestry Ventures Limited and Bristol Forestry Venture Limited, Clive Richard Bradbury and Gregory Alan Peebles v Commissioner of Inland Revenue

The Judgment upheld the application by the Commissioner of Inland Revenue ("the Commissioner") to dismiss or strike out the claim of judicial bias against Venning J in regard to his 2004 Judgment where he held the Trinity scheme was tax avoidance.

Appealed

Court of Appeal confirms High Court decision

9 August 2013

Strategic Finance Limited (in rec & in liq) v Commissioner of Inland Revenue [2013] NZCA 357

The Court of Appeal confirmed the High Court decision that "accounts receivable" is not limited to "book debts" overturning the decision in Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) (2008) 23 NZTC 22,074 (HC) ("Northshore").

Not Appealed

Supreme Court declines leave to appeal on child support proceeding

19 August 2013

Beavis v De Vere and the Commissioner of Inland Revenue

The Supreme Court declined leave to appeal from the Court of Appeal upholding a child support departure order

No Right of Appeal Exists

Eligibility of goods to be zero-rated for GST purposes

24 July 2013

[2013] NZTRA 04 TRA 31/11

The taxpayer entered into an agreement to export goods to an overseas based purchaser. After entering the agreement there was a change of approach by the purchaser who arranged for the goods to be used in New Zealand to manufacture different goods. The taxpayer argued that its goods were still ultimately exported and therefore that supply could be zero rated for goods and services tax ("GST") purposes. The Court found that the underlying goods had been consumed in New Zealand and therefore were not eligible to be zero rated.

Under Appeal

Existing breeding business required before deductions allowable

15 July 2013

D and Others v Commissioner of Inland Revenue

The plaintiffs were unsuccessful in their challenge to the Commissioner's disallowance of the deductions claimed for the cost of the colt by the plaintiffs as members of the syndicate. The High Court found a breeding business must be in existence before a deduction is allowable pursuant to section EC 39 of the Income Tax Act. An intention to have a breeding business at some time in the future did not meet the requirements of the section.

Not Appealed

Interest deductibility and nexus TRA 02/11

9 July 2013

TRA 02/11

No direct nexus existed between the payments made by the disputant and the disputant's income earning process.

Under Appeal

Interest deductibility and nexus TRA 03/11

9 July 2013

TRA 03/11

The disputant did not incur the interest payments and no direct nexus existed between the payments made by the disputant and the disputant’s income earning process.

Under Appeal

Collateral attack on Supreme Court judgments

17 June 2013

Accent Management Ltd v The Attorney-General of New Zealand and the Commissioner of Inland Revenue

This was an application by the Commissioner to dismiss the claim on the grounds that the High Court did not have jurisdiction to hear the Taxpayer's claim. The Court found that the Taxpayer's application was a collateral attack on two Supreme Court judgments.

Under Appeal

Taxpayer found to have honestly relied on Inland Revenue forms

28 May 2013

Lim v Commissioner of Inland Revenue

The Court concluded that Mr Lim honestly relied on the IR330 forms when he stopped deducting withholding tax

Not Appealed

Application to debar Crown Law from acting

15 May 2013

Accent Management Ltd & Others v Commissioner of Inland Revenue

An unsuccessful appeal by the taxpayers of the High Court judgment dismissing their application to debar Crown Law from acting for the Commissioner in certain proceedings relating to the Trinity tax avoidance scheme.

During the appeal the principal focus became whether the protocol, between the Commissioner of Inland Revenue and the Solicitor-General, allowed sufficient independence and in particular whether Crown Law could meet their obligations under rule 13 of the Client Care Rules. Dismissing the appeal, the Court of Appeal held the issue under rule 13.5.3 is whether the Solicitor General and Crown Law can discharge their duties to the Court and even on the taxpayer's interpretation of the protocol they could clearly comply with their obligations to the Court.

Not Appealed

Interlocutory appeal in advance of substantive hearing

9 May 2013

Ben Nevis Forestry Ventures Ltd & Others v Commissioner of Inland Revenue

This was an appeal of a High Court decision that the Commissioner's interlocutory application should be heard before the appellant's interlocutory application. The Court of Appeal did not disturb the High Court's decision and exercised their discretion not to hear this interlocutory appeal matter before the substantive hearing in the High Court.

No Right of Appeal exists

Judicial review proceedings for assessment under section 113 of the Tax Administration Act is not a bypass mechanism for dispute and challenge procedures

3 May 2013

Arai Korp Ltd v Commissioner of Inland Revenue

Arai Korp Ltd sought to judicially review the Commissioner of Inland Revenue's ("the Commissioner") decision not to invoke section 113 of the Tax Administration Act 1994 ("TAA") in respect of the applicant's income tax assessments for the 2004 and 2005 income years. The original assessments, which were default assessments, were made by the Commissioner in 2006 and were not disputed nor challenged by Arai Korp Ltd (Arai Korp) at that time. Arai Korp's application for judicial review was only filed in August 2011 against a background of liquidation proceedings brought by the Commissioner against Arai Korp. The Commissioner had already successfully prosecuted Arai Korp for failing to file income tax returns.The Court found that the Commissioner had not considered the merits of Arai Korp's application for reassessment but that was not fatal as the Commissioner's decision was not unreasonable based on the facts and because Arai Korp had been attempting to circumvent the disputes and challenge procedures.

Appealed

No special circumstances justifying appearance by tax agent and District Court debt recovery proceeding is not appropriate forum to dispute assessment

2 May 2013

Huston v Commissioner of Inland Revenue

There were no special circumstances justifying the appearance by the appellant's tax agent on the appellant's behalf in the District Court.The effect of section 109 and Tannadyce Investments Limited v The Commissioner of Inland Revenue is that the District Court debt recovery proceeding is not the appropriate forum for assessment matters to be raised.

Not Appealed

Child support primary obligation is children

12 April 2013

D v B & Commissioner of Inland Revenue

The mother successfully applied for a retrospective child support departure order in the Family Court. The High Court overturned the quantum of the departure order and the mother appealed to the Court of Appeal. The Court of Appeal found that the liable parent's primary obligation was to support his children and, after ascertaining the father's true financial ability and resources overturned the High Court's finding on quantum. The Court of Appeal left open whether a departure order could be made retrospectively, although it did substitute a retrospective departure order here.

Appealed

Summary judgment application

4 April 2013

Peter William Mawhinney v Commissioner of Inland Revenue

The plaintiff made a summary judgment application which was unsuccessful on the grounds that the Commissioner has an arguable defence to both of the plaintiff's arguments.

Not Appealed

Abusive tax position taken when making a family assistance claim

27 March 2013

TRA 18/11

The disputant accepted a re-assessment by the Commissioner of her family support entitlement because her husband was paid an artificially low salary. The family had also received the benefit of distributions from a family trust which was a shareholder in the company her husband worked for. The disputant argued that the Commissioner had not challenged her husband's tax position and accordingly, she could not be held to have taken an abusive tax position.

The Taxation Review Authority found that the dominant purpose of the arrangement was to obtain family assistance the disputant was not otherwise entitled to.

Not Appealed

Court of Appeal confirms OCN arrangement is tax avoidance

5 March 2013

Alesco New Zealand Ltd and Others v Commissioner of Inland Revenue

The Court of Appeal has confirmed that the optional convertible notes ("OCNs") arrangement entered into by the Alesco group to claim deductions for interest using Determination G22 and the financial arrangement rules was a tax avoidance arrangement. The Court also held the "abusive tax position" shortfall penalties were correctly imposed.

Leave to Appeal filed

Tax charges laid under section 148 of the Tax Administration Act 1994

13 February 2013

Craig Reece Ross v the District Court

Tax charges can be laid either under section 147 or section 148 of the Tax Administration Act 1994 ("TAA").

Appealed

 

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