Sentencing by Elias CJ, Tipping, McGrath, William Young and Gault JJ in:

Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, 9 November 2012

Background:

In Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115 the Supreme Court held that the taxpayers in the Trinity scheme were party to a tax avoidance arrangement. The assessments disallowing the claimed deductions and imposing penalties on the investors for taking an abusive tax position were upheld. The same conclusion was reached in the earlier decisions: Accent Management Ltd  v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC);  Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 231, (2007) 23 NZTC 21,323.  

Following the Supreme Court decision in Ben Nevis, Accent Management Ltd and six other Trinity investors including one of the taxpayers in this proceeding (Redcliffe Forestry Investment Ltd) brought  judicial review proceedings with respect to a review of the assessments upheld by the Supreme Court. That application was struck out: Accent Management Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,126 (HC) (the 2004 judgment). 

This proceeding

In 2009, new proceedings were commenced by the taxpayers against the CIR seeking orders setting aside the orders made by Venning J in Accent Management Ltd v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 (HC).

The taxpayers’ contentions - 
CIR presented false case & prior judgment fraudulent

The taxpayers contended that in calculating certain expenditure incurred by the participants in the Trinity scheme the CIR was required to apply sub-pt H rather than the depreciation allowance provisions of sub-pt EG which were applied by the CIR when making the assessments. Advice that sub-pt EH should be applied to that effect was given to Inland Revenue officials by a tax consultant prior to the issue of the Notices of Proposed Adjustment (NOPAs) on which the assessments in the Ben Nevis proceedings were based. The tax adviser’s advice was unknown to the taxpayers until after the Court of Appeal judgment in Ben Nevis and they did not see the document containing the advice until after the Supreme Court judgment was delivered. The taxpayers contended that the CIR had a statutory duty to refer in the NOPAs to the “existence, application and effect” of sub-pt EH 8 but deliberately and as part of its litigation strategy did not do so. If the CIR had met those mandatory obligations then the assessments would not have been confirmed in the court proceedings. As such the CIR suppressed the true legal position, presented a false case to the High Court and obtained judgment based partly on the wrong provisions of the ITA.

The taxpayers also contended that the nullity of a judgment is a further exception to the principle of finality and conclusiveness. As a consequence of the CIR’s failure to discharge his obligations concerning the application of sub-pt EH8(1) the assessments were unauthorised by Parliament and incapable of confirmation by the High Court in its 2004 judgment.

The taxpayers accepted that the decision of a court is final and a trial court is functus officio. However, they relied on the exception which allows a judgment to be attacked on the ground of fraud.

The CIR’s contentions

The CIR objected to the High Court’s jurisdiction under r 5.49 and sought orders dismissing the proceeding on the ground that the 2004 judgment was final and could not be reopened. The CIR did accept that the Supreme Court had jurisdiction to vary that judgment. 

The High Court decision - Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2011] 1 NZLR 336

In the High Court, Venning J dismissed the taxpayers proceeding.  His Honour held that only fraud in a strict legal sense sufficed to bring a proceeding within the fraud exception; judgment having been obtained by conscious and deliberate dishonesty (applying The Ampthill Peerage [1977] AC 547 (HL)). In this case what was pleaded by the taxpayers was that the CIR had a duty to refer to the existence, effect and likely application of sub-pt EH of the ITA 2004 but did not do so. If the CIR was wrong to assess under sub-pt EG when sub-pt EH applied he was wrong at law. That was not fraud. Venning J noted there was no pleading concerning the involvement of false evidence, the suppression of material evidence or the creation of false documents which would be fraud.

Accordingly the allegations of fraud contended by the taxpayer were not of a kind that came within the exception to the principle of finality of judgments that had been subject to a completed appellate process.

Further Venning J held that he had no jurisdiction to declare that his 2004 judgment was a nullity. The assessment had effect until declared a nullity by a competent court which could only be done through challenge proceedings under the TAA. The nullity issue had not been raised in the challenge proceedings the subject of the 2004 judgment. Therefore the Court had no jurisdiction to consider the taxpayers substantive proceeding to set aside the 2004 judgment.  The CIR’s objection was upheld and the taxpayers’ proceeding dismissed.

The Court of Appeal decision - Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2011] NZCA 638  

The Court of Appeal allowed the appeal, quashed the High Court’s order dismissing the proceeding and remitted it to the High Court where the CIR could apply to have the proceeding struck out. The Court accepted the taxpayers’ contentions that r 5.49 was confined to cases where there were issues of territorial jurisdiction or exclusion of jurisdiction by statute; and the CIR ought to have brought its objection based on finality by applying to strike out the taxpayers proceeding under r 15. Because of the procedure that had been followed the taxpayers had been denied the opportunity to amend its pleading and meet the strike out application with affidavit evidence of the alleged fraud.

The appeal to the Supreme Court

The CIR obtained leave to appeal to the Supreme Court. The issues before the Supreme Court were whether:

1. the CIR’s challenge was appropriately brought under r 5.49
2. and whether the High Court judgment would have been upheld ie when a party to litigation against whom judgment has been given and whose appeal rights are exhausted, may apply to have the judgment set aside.

Decision:

(1)     The CIR’s appeal was allowed and the High Court’s judgment dismissing the taxpayers’ proceeding was restored.

(a)     Objection to jurisdiction -  rule 5.49

The Supreme Court noted that the Court of Appeal (finding this case to be on all fours with Doug Hood Ltd v Gold and Resource Developments (NZ) Ltd (1999) 13 PRNZ 362 (CA)) concluded that, in dealing with the CIR’s application as an objection to jurisdiction under r 5.49, Venning J had fallen into the error of confusing the High Court’s power to grant relief by setting aside the 2004 judgment with its jurisdiction to hear and determine the setting aside proceeding. That analysis was not correct. The appellant in the Doug Hood case argued that the High Court had no jurisdiction to determine whether it had power to entertain the application for leave to appeal. That was not the CIR’s argument in this case, rather it was contended that the High Court was no longer competent to deal substantively with the taxpayers claim because the 2004 judgment was confirmed on appeal. Therefore the contention went to the Court’s power to hear and decide the taxpayers’ proceeding rather than to whether the Court could grant the relief sought. Had the Court of Appeal addressed that argument it would have determined that the CIR’s objection to the High Court’s jurisdiction fell within one of the categories of cases to which, on the test which the Court of Appeal had formulated r 5.49 applied.

The CIR contended that the taxpayers’ challenge to the 2004 judgment could not be determined by the High Court, but rather the Supreme Court because the taxpayers were challenging the correctness in law of that Court’s judgment and the CIR’s application was directed to the competence of the High Court to decide the dispute which is a proper function of r 5.49 (Doug Hood).

It was further held that the Court of Appeal’s view of the scope of what can be addressed in an objection to jurisdiction under r 5.49 was too restricted. The rule should be given its ordinary meaning.

(b)     Finality in litigation and the fraud exception 

The fraud exception to the finality of judgments does not apply to legal errors allegedly made in the reasons for judgment, even if a party’s conduct is said to contribute to the making of the alleged error. It was clear that the taxpayers in their proposition that the true legal position was that the case was governed by sub-pt EH was directly challenging the conclusions of the Supreme Court on matters of law which it was competent to address. It was not a case which rested on an allegation of fraud involving perjury or dishonest suppression of evidence bearing on findings of fact – the primary responsibility of the High Court as the trial court.

It is the High Court which is best placed to determine any subsequent issue of whether the evidence on which a final judgment in the case was based is tainted by fraud so that the judgment must be set aside and a new trial ordered. That is not the position where the error allegedly induced by fraud is one of law. The High Court has no power to recall or set aside judgment on questions of law which have been the subject of appellate decision. 

Where the fraud exception to finality is properly invoked, the party challenging the judgment will be able to show that their ability to mount an effective case was compromised by the fraudulent conduct of the other party. That was not applicable in this case. The subpart was in the legislation and was inherently incapable of concealment. It was noted that the potential applicability of the subpart was signalled in the NOPA, so it was not concealed and the taxpayers’ counsel at the High court trial were well aware of this potential applicability as was apparent from cross-examination of a witness showed.

(c)     Nullity

The Supreme Court noted that the nullity contention rested on two propositions:

1. the true legal position was governed by sub-pt EH
2. and the failure to apply it deprived the High Court of jurisdiction to confirm the assessment.

The first proposition that underpinned the allegation of fraud was subject to the same objection as the fraud exception, by challenging conclusions of the Supreme Court on a matter of law which it was competent to address. The High Court has no power to recall or set aside its judgment on the questions of laws which has been the subject of appellate decision.

Legislation cited:

1. Income Tax Act 2004, sub-pts EG, EH ss EH 8 (1)
2. Income Tax Act 1994, sub-pts EG, EH
3. Tax Administration Act 1994, s 89F, 138P
4. High Court Rules, rr 5.49, 6.27, 6.28, 6.29, 7.9, 15