Decision date: 15 May 2013
Case: Accent Management Ltd & Others v Commissioner of Inland Revenue
Act(s): Income Tax Act 1994, Lawyers and Conveyancers Act 2006
Keywords: Trinity, tax avoidance, removal/debar Crown Law Office
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 taxpayers' interpretation of the protocol they could clearly comply with their obligations to the Court.
This decision considers the protocol between the Commissioner of Inland Revenue and the Solicitor-General. The Court of Appeal held that the protocol allows both parties to act with sufficient independence so that Crown Law can meet their obligation to the Court and the Commissioner does not delegate her assessment power.
This appeal relates to the Trinity tax avoidance litigation. The Trinity scheme taxpayers had claimed deductions for the 1997 and 1998 tax years under subpart EG of the Income Tax Act 1994 ("ITA"), but the Commissioner disallowed the deductions on the basis of section BG 1 and imposed penalties. The Supreme Court upheld the Commissioner's decision in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue  NZSC 115,  2 NZLR 289 ("Ben Nevis"). During the course of the hearing in the Supreme Court, some of the taxpayers sought leave to argue, for the first time, that deduction and spreading issues should have been determined under subpart EH of the ITA, rather than subpart EG. The Court declined to hear those arguments.
Some of the investors in the Trinity scheme have continued to litigate various issues and this was an appeal against a decision of Woodhouse J, in the High Court, dismissing the applications made by the taxpayers for orders that the Crown Law Office ("Crown Law") be debarred from acting for the Commissioner in various proceedings to which the taxpayers and the Commissioner are parties (Commissioner of Inland Revenue v Accent Management Ltd  NZHC 1430, (2012) 25 NZTC 20-130).
The application to debar Crown Law was primarily based on allegations that Crown Law could not act with the required degree of independence and could not comply with its duties to the Court. This was because Crown Law had allegedly colluded in assessments being made fraudulently or knowingly on the basis of Part EG rather than EH and had wrongly maintained that position in the Ben Nevis proceedings.
As well as dismissing the taxpayers' application, Woodhouse J also awarded indemnity costs against them. Both of these rulings were challenged on appeal.
In oral argument before the Court of Appeal, Dr Muir for the investors reduced considerably the scope of the appeal. The allegation that Crown Law was insufficiently independent of the Commissioner to meet its professional obligations under rule 13.5 of the Client Care Rules became the principal focus of the appeal. For the sake of completeness, the Court also addressed other issues raised in the written submissions.
The Court considered that their assessment of the merits of the argument required them to consider the terms of a protocol in place between the Solicitor-General and the Commissioner ("the protocol").
The protocol states that the Solicitor-General is "the Crown's principal professional legal adviser", and, as part of this role, the Solicitor-General has responsibility for "determining the Crown's view of what the law is and conducting the Crown's litigation in the Courts". The Commissioner is "an independent officer of the Crown" and in performing his or her functions he or she will at times require legal advice on the meaning of the law.
The protocol records that Crown Law and Inland Revenue will "respect each other's roles" and "must work together with the aim of ensuring that [both departments] have consistent positions on the interpretation and application of tax laws".
Dr Muir's argument focused on part 5 of the protocol. Dr Muir said that clauses 5.1 and 5.2 of the protocol provided that the Solicitor-General had an absolute discretion over the conduct of litigation involving the Commissioner. He submitted that this meant that Crown Law was not independent from the Commissioner when conducting litigation. In effect Crown Law was both client and advocate.
Dr Palmer for the Commissioner replied that the protocol simply reflected constitutional orthodoxy. He submitted that clause 4.1 sets out that the Commissioner will consult the Solicitor-General on legal issues, but under clause 4.3, the Commissioner retains independence for determining how Inland Revenue will apply the Solicitor-General's advice. He went on to submit that part 5 of the protocol simply reflect that the Solicitor-General is constitutionally responsible for conducting the Crown's litigation.
Dr Muir submitted that by giving the Solicitor-General the final say in the conduct of litigation involving the Commissioner, the Commissioner unlawfully delegated the Commissioner's powers under sections 6 and 6A Tax Administration Act 1994. This meant that the Solicitor-General and Commissioner were too closely entwined for the Solicitor-General to comply with his or her duties to the Court under rule 13 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Client Care Rules).
The Court held that Dr Muir's argument was flawed in two respects. First, clause 4.3 of the protocol makes it clear that how the Commissioner applies the law is left to the Commissioner; the Commissioner does not delegate her assessment power. Second, the issue under rule 13.5.3 is whether the Solicitor-General and Crown Law can discharge their duties to the Court. Even if Dr Muir's interpretation of the protocol was correct, clauses 5.1 and 5.2 make it clear that the Solicitor-General is free to conduct litigation as he or she chooses. The Solicitor-General is thus free to comply with his or her obligations to the Court.
The Court considered that the protocol set out the boundaries of a consultative working relationship between the Solicitor-General and Commissioner, reflecting their constitutional roles. The Commissioner is an independent officer of the Crown and clause 4.3 of the protocol recognises that the Commissioner retains independence in determining how Inland Revenue will interpret the law. Litigation against the Commissioner is litigation against the Crown and so it is constitutionally proper that the Solicitor-General should have the final say about how litigation involving the Commissioner is conducted as recognised in clauses 5.1 and 5.2 of the protocol.
The Court concluded that the answer to this ground of appeal was that there was nothing in the protocol that raised a risk that Crown lawyers would not be able to discharge their professional obligations in the extant challenges. The Court concluded that there was nothing to suggest that Crown Law would have any "compromising influences or loyalties" (rule 5) that would prevent it from acting.
Was there an estoppel preventing Woodhouse J from considering the application of the Lawyers and Conveyancers Act 2006 and the Client Care Rules to Crown Law?
Woodhouse J did not find that there was an estoppel. The Court of Appeal confirmed that the taxpayers had no reasonably arguable factual foundation for their allegations against Crown Law.
Was Woodhouse J correct to award indemnity costs against the taxpayers?
The Court reiterated that the award of indemnity costs is the exercise of a judicial discretion, as set out in rule 14.6(4)(a) of the High Court Rules, and held that the taxpayers did not demonstrate that Woodhouse J erred by acting contrary to principle, disregarding a material factor or being wholly wrong.
The Court considered this appeal proceeding also a further step in the "gaming" referred to by Woodhouse J in the High Court and considered that the present proceeding is one in a long line of attempts to re-litigate the Ben Nevis proceedings, and another attempt to make allegations of fraud and concealment against the Commissioner and Crown Law that have already been dealt with.
The appeal was dismissed and indemnity costs awarded to the Commissioner.