Decision by Elias CJ, Tipping and William Young JJ in:

Russell v Commissioner of Inland Revenue [2012] NZSC 73, 13 August 2012

Background

The taxpayer was assessed for income tax for the years 1985 to 2000 (with accumulated penalties and interest the amount claimed by the CIR stands in excess of $177 million).

Assessment Details

The assessment was made based on the income of a partnership which the taxpayer controlled (the CM Partnership). The CIR contended that by using this partnership the taxpayer avoided paying tax on the income earned through the Russell template transactions and the taxpayer was therefore, a party to a tax avoidance arrangement.

Income Discrepancies

The taxpayer did declare a total income of over $298,000 for the tax years 1985 to 2000 inclusive. However, the CIR contended that the income that the taxpayer should have declared was in excess of $15 million.

Use of template for tax avoidance

The CM partnership (which had two partners both of which were controlled by the taxpayer) was involved in a tax avoidance arrangement. That arrangement was based on a template.

Under the template arrangement, the partnership would receive consultancy fees from trading companies in the template group. Income of companies in the group would be set off against losses of loss companies in the group. The loss companies were acquired by the taxpayer when insolvent, and after obtaining control, the taxpayer purported to trade the insolvent companies under agency and management agreements.

The taxpayer's personal exertion income was treated as income of the partnership income and diverted to the loss companies under the agency and management agreements. Surpluses or net profits from those untaxed monies were forwarded daily from that partnership to the group finance companies.

All entities were controlled by the taxpayer, who directed the use of those funds. The finance companies acted as bankers to the taxpayer's template group of companies and other entities; and all cash in the group was used at the taxpayer's direction, including the business income of the partnership.

On a yearly basis, there were changes to the companies which made up the partnership, and the loss companies were replaced when losses were extinguished. The arrangement continued when the business of the partnership was taken over on 1 April 1997.

Taxpayer disputed assessments but CIR upheld

The taxpayer disputed the assessments. The CIR’s position was upheld by the TRA, Case Z19 (2009) 24 NZTC 14,217 and on appeal by the High Court, Russell v Commissioner of Inland Revenue (No 2) (2010) 24 NZTC 24,463. 

In Russell v Commissioner of Inland Revenue [2012] NZCA 128 the Court of Appeal rejected the taxpayer’s objection to the tax assessment. The Court held that the assessment was made on the basis of a tax avoidance arrangement and the taxpayer was liable to pay income tax on the basis of a reconstruction undertaken by the CIR.

The taxpayer then applied for leave to appeal to the Supreme Court.

Decision:

(1)   Leave to appeal was dismissed by the Supreme Court. Their Honours held that the statutory criteria for leave had not been made out by the taxpayer. None of the matters sought to be raised by the taxpayer were matters of general or public importance nor was there any basis for concern that a substantial miscarriage of justice might occur if leave was not given. Further the granting of leave would not be in the interests of justice as the points the taxpayer sought to raise were not reasonably arguable in his favour. The Court of Appeal was correct in its conclusions to which it came on the facts of the case.

(2)   The Court of Appeal’s decision represented the well settled principles to the facts of this case. The Court of Appeal upheld the findings of the lower Court and the TRA that there was an arrangement; its purpose or effect was to alter the incidence of tax; the taxpayer was affected; and the tax avoidance involved was more than merely incidental. Further the Court of Appeal was satisfied that the taxpayer had not shown the CIR’s reconstruction to be wrong.

(3)   The Supreme Court noted that the Court of Appeal granted leave to the taxpayer to advance a point (not taken in the High Court) concerning the effect of s 99(4) of the ITA 1976 and determined that there was no merit in that contention.

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