Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230; (2007) 23 NZTC 21,323 (11 June 2007)

Last Updated: 1 January 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA21/05

[2007] NZCA 230

AND BETWEEN ACCENT MANAGEMENT LIMITED
BEN NEVIS FORESTRY VENTURES LIMITED
BRISTOL FORESTRY VENTURES LIMITED
CLIVE RICHARD BRADBURY
GREENMASS LIMITED
GREGORY ALAN PEEBLES
ESTATE OF THE LATE KENNETH JOHN LAIRD
LEXINGTON RESOURCES LIMITED
REDCLIFFE FORESTRY VENTURES LIMITED
Appellants

AND COMMISSIONER OF INLAND REVENUE
Respondent

Hearing: 4, 5, 6, 7 and 8 September 2006

Court: William Young P, O'Regan and Robertson JJ

Counsel: G J Judd QC for Accent Management Limited and Lexington Resources Limited
C R Carruthers QC, R B Stewart QC and G J Harley for Bristol Forestry Ventures Limited, C A Bradbury and Redcliffe Forestry Ventures Limited
M Hinde for Ben Nevis Forestry Ventures Limited, Greenmass Limited, G A Peebles and the Estate of K J Laird
D J White QC and J H Coleman for Respondent

Judgment: 11 June 2007 at 3 pm

JUDGMENT OF THE COURT

1. The appeal is dismissed.
2. The appellants are ordered (jointly and severally) to pay to the Commissioner costs of $30,000 and usual disbursements.
   

REASONS OF THE COURT
(Given by William Young P)

Table of Contents Para No

Introduction [1]
The factual background [3]
The way the scheme was meant to work – the taxpayers’ contentions [15]
The High Court litigation [21]
Were the insurance arrangements a sham? [24]
Overview [24]
The structure of insurance arrangements [25]
The set-up of the insurance arrangements [31]
The Parentis transaction and its impact on the funds available to CSI [41]
The approach of the Judge [44]
The arguments in this Court [48]
Our conclusions [54]
Were the taxpayers required to spread deductions associated
with the insurance premium payable in 2047? [66]
Was the licence fee premium payable in 2048 deductible under s EG1? [78]
The relevant contractual provisions [78]
The taxpayers’ arguments [83]
The relevant legislative provisions [84]
The approach of Venning J [88]
The arguments in this Court [94]
Discussion [97]
Is the scheme void for tax avoidance? [103]
The legislation [103]
Inconsistency between general anti-avoidance
provisions and specific tax rules – an overview [109]
The approach of the Judge [127]
The arguments of the taxpayers on appeal [132]
The Commissioner’s response [137]
Applying the principles to the facts [140]
The position of Greenmass, Ben Nevis and
Messrs Peebles and Laird [147]
Reconstruction [150]
Penalties [157]
Overview [157]
The issues [160]
Are the shortfall assessments premature? [161]
Did the taxpayers’ relevant tax position involve an
interpretation of s BG 1? [163]
Was the taxpayers’ interpretation unacceptable? [167]
Was the taxpayers’ interpretation abusive? [169]
In the case of the LAQCs was there any relevant tax shortfall? [171]
Should the shortfall penalties be withdrawn
because of settlements in the other cases?
The estate of Kenneth John Laird [177]
Orders [185]

Introduction

[1] This case concerns a complex forestry investment which is usually referred to as “the Trinity scheme”. The scheme involves unusual insurance and licence to use land arrangements. The appellants (to whom we will generally refer as the taxpayers) were all investors and claimed substantial tax deductions associated with insurance premiums mainly payable in 2047 and fees for the licence which are due to be paid in 2048. The tax efficacy of the underlying scheme was challenged by the Commissioner of Inland Revenue and this, in the end, resulted in Venning J delivering a judgment ((2000) 22 NZTC 19,027) in which he found against the taxpayers on the deductibility issues and upheld the Commissioner’s assessments (which included substantial penalties). The taxpayers now appeal and the Commissioner challenges some of the conclusions reached by Venning J which favoured the taxpayers. The Commissioner’s challenge is formally by way of cross-appeal but in substance largely represents an attempt to uphold the conclusions of the Judge on grounds other than those relied on by him.
[2] We will discuss the case under the following headings:

(a) The factual background.

(b) The way the scheme was meant to work – the taxpayers’ contentions.

(c) The High Court litigation.

(d) Were the insurance arrangements a sham?

(e) Were the taxpayers required to spread deductions associated with the insurance premiums payable in 2047?

(f) Was the licence fee premium payable in 2048 deductible under s EG 1?

(g) Is the scheme void for tax avoidance?

(h) Reconstruction.

(i) Penalties.

(j) The estate of Kenneth John Laird.

(k) Orders.

Factual background

[3] The expression “Trinity scheme” applies to a series of related forestry investments associated with a douglas fir forest which has been planted and is now growing in Southland. The scheme was very much the brain child of Dr Gary Muir, a partner in the law firm Bradbury and Muir. The other partner in the firm, Mr Clive Bradbury has also been involved in the development and implementation of the scheme.
[4] This case concerns investments made through Trinity Foundation (Services No 3) Ltd (to which we will refer as “Trinity 3”) but similar investments forming part of the same general scheme were also made through Trinity Foundation (Services No 1) Ltd and Trinity Foundation (Services No 2) Ltd (“Trinity 1” and “Trinity 2”, respectively). Trinity 1, Trinity 2 and Trinity 3 are subsidiaries of Trinity Foundation Ltd (“Trinity Foundation”).
[5] Trinity Foundation is a non-trading charitable entity established to receive distributions from its subsidiaries, ie Trinity 1, Trinity 2 and Trinity 3. These companies were established to buy the land on which the forest was to be established. Trinity Foundation is itself owned by the Trinity Foundation Charitable Trust which was set up on the instructions of Dr Muir and which for practical purposes can be regarded as being under the control of Dr Muir and Mr Bradbury.
[6] Southern Lakes Forestry Joint Venture (SLFJV) is a syndicate in which the taxpayers were members. Its purpose was to take a licence from Trinity 3 and to participate in the development and eventual harvesting of the forest.
[7] Under the associated arrangements, the taxpayers assumed obligations to make a number of payments to Trinity 3. These were calculated on the basis of the plantable hectares in the licensed area and were as follows:

(a) On 21 March 1997, $1,350 per plantable hectare to establish the forest.

(b) Also on 21 March 1997, $1,946 per plantable hectare. The primary purpose of this payment was to acquire the land in 2048 for 50% of its then value.

(c) Also on 21 March 1997, $1,000 in relation to a lease option.

(d) Fifty dollars per annum per plantable hectare by way of licence fee.

(e) On 31 December 2048, $2,050,518 per plantable hectare as a licence premium.

We note that promissory notes were provided in relation to the licence premium.

[8] In return for this, the taxpayers were to receive the net stumpage derived from Trinity 3 on the sale of the forest and, as noted, an option to acquire the land for 50% of its then value. On this basis the profitability of the venture depends on whether the net stumpage which the taxpayers will receive on the sale of the forest will cover the costs (including the time value of money) of their investment.
[9] A striking feature of the way the scheme was financed was that the land used for the forest was acquired for approximately $600 a hectare. So the payment referred to in [7](b) above for an option to acquire the land at half its value in 2048 was three times more than what was required to purchase the land outright in 1997. This throws into stark relief the unusual nature of the licence premium which was also to be paid in 2048. In effect the taxpayers were agreeing to pay for the use of land the purchase of which had been funded with their own money.
[10] A complicating and very important feature of the case is the associated insurance arrangement. Under this arrangement, the taxpayers:

(a) Paid, on 21 March 1997, to CSI Insurance Group (BVI) Ltd (“CSI”) an insurance premium of $1,307 per plantable hectare; and

(b) Agreed to pay, on 31 December 2047, $32,791 per plantable hectare to CSI.

The ostensible purpose of the insurance arrangements was to cover the contingency that the stumpage to be received on the sale of the forest would be insufficient to enable the licence premium to be paid. We note that promissory notes were executed in relation to the obligations referred in (b) above.

[11] In their tax returns for the 1997 tax year, the taxpayers claimed deductions for $34,098 per plantable hectare for the insurance premiums (being the initial $1,307 paid on 21 March 1997 and the $32,791 which they agreed to pay on 31 December 2047). They also made a claim for depreciation on a proportionate part of the $2,050,518 per plantable hectare licence premium payable on 31 December 2048 amortised over 50 years. For the 1997 year, the depreciation claim was not particularly significant (as the transaction was entered into on 21 March 1997, only ten days before the end of the financial year). But for the 1998 tax year, the corresponding claim (based on 1/50th of $2,050,518) was of more moment, around $41,000 per plantable hectare. As we understand the evidence, the Trinity 3 phase of the Trinity scheme involves 484 plantable hectares from a total area licensed to the SLFJV of 538 hectares. So the total tax at stake is considerable.
[12] For the 1997 year, the taxpayers expended a total sum a little under $5,000 per plantable hectare and ostensibly achieved a tax deduction in excess of $37,000 per plantable hectare. For the 1998 income year, apart from allowable silviculture costs, the taxpayers paid $50 per hectare (being the annual licence fee) and ostensibly achieved tax deductions of approximately $40,000 per hectare.
[13] The Commissioner initially accepted the deductions but subsequently issued notices of proposed adjustment (NOPAs) to the taxpayers in respect of the insurance premiums for the 1997 year and the amortised licence premium for both years. In due course the Commissioner issued revised assessments disallowing these deductions and fixing penalties for the 1998 year.
[14] This case concerns investments made by Accent Management Ltd, Lexington Resources Ltd, Redcliffe Forestry Ventures Ltd, Bristol Forestry Ventures Ltd, Ben Nevis Forestry Ventures Ltd and Greenmass Ltd. Redcliffe Forestry is a loss attributing qualifying company (LAQC) associated with Dr Muir. Bristol Forestry is an LAQC which was owned by Mr Bradbury. Ben Nevis is an LAQC which was owned by Mr Gregory Peebles. Greenmass is an LAQC in which the late Mr Kenneth Laird was a shareholder. The significance of Redcliffe Forestry, Bristol Forestry, Ben Nevis and Greenmass being LAQCs is that the losses associated with their investments in the Douglas fir forest were transferred by s HG 16 of the Income Tax Act 1994 (“the Act”) to their shareholders.

The way the scheme was meant to work – the taxpayers’ contentions

[15] Under the arrangements two insurance premiums were payable by the taxpayers to CSI, first $1,307 per plantable hectare in 1997 and secondly $32,791 per plantable hectare on or before 31 December 2047.
[16] The taxpayers maintained that they were entitled to deductions in relation to the insurance premiums under s DL 1(3) or s BB 7 of the Act.
[17] Section DL 1(3) provided:

• (3) A person who carries on a forestry business on any land in New Zealand shall, in calculating the assessable income derived by that person in any income year, be entitled to deduct any expenditure incurred by that person in that business in that income year, being expenditure which is not deductible otherwise than under this section,—

(a) By way of ... insurance premiums ... or other like expenses.

[18] Section BB 7 provided:

BB 7 Expenditure or loss incurred in production of assessable income—

In calculating the assessable income of any taxpayer, any expenditure or loss to the extent to which it—

(a) Is incurred in gaining or producing the assessable income for any income year; or

(b) Is necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year—

may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred.

[19] In order for the scheme to work as intended, the 21 March 1997 payment of $1,307 per plantable hectare and the deferred payment of $32,791 had to be either:

(a) In the nature of an insurance premium and, as well, “expenditure incurred” in the 1997 tax year (for the purposes of s DL 1(3)); or

(b) An “expenditure or loss” which was incurred in the 1997 tax year for the purposes of gaining or producing assessable income (for the purposes of s BB 7).

[20] On the taxpayers’ argument, the licence was “a right to use land” for the purposes of the 17th Schedule to the Act and was depreciable under s EG 1. The taxpayers assert that depreciation was to be calculated on the basis of the “cost of the property to the taxpayer” (being the total amount of the licence premium) and using the straight-line method. On this basis they were entitled to annual deductions of 1/50th of the licence premium with an apportionment being necessary in relation to the 1997 tax year as the arrangements were put in place towards the end of that year.

The High Court litigation

[21] Venning J was confronted with a large number of issues most of which have been re-litigated in this Court. We have already identified the key issues which remain (see [2](d)-(j) above) and we will discuss the relevant parts of his judgment when we address each of those issues.
[22] There is, however, one aspect of the High Court litigation to which we should refer now. The present appellants were initially only some of a much larger group of investors who challenged the reversal of deductions associated with their involvement with Trinity 3. Shortly before trial, a number of documents associated with the set-up and operation of CSI were obtained by the Serious Fraud Office and made available to the Commissioner. When these documents surfaced, most of those challenging the assessments elected to settle with the Commissioner. The present appellants persisted with their challenges.
[23] These settlements are relevant (or possibly so) for three reasons:

(a) Those who settled with the Commissioner achieved financial outcomes which were far better than the appellants’. This forms the basis for an application by the appellant taxpayers to have the judgment of Venning J recalled. They maintained that the Commissioner should not discriminate between those who settled and those who went to trial. This topic is addressed in the recall appeal judgment which is being released simultaneously with this judgment, see Accent Management Ltd and others v Commissioner of Inland Revenue [2007] NZCA 231.

(b) A similar discrimination argument was also advanced in relation to the penalties imposed on the appellant taxpayers: see [157] below.

(c) The reaction of other litigants to the surfacing of the CSI documents might be thought to provide a measure of empirical evidence in relation to whether the tax position adopted by the appellants involved an “unacceptable interpretation”, see [157] and following below.

Were the insurance arrangements a sham?

Overview

[24] In the High Court the Commissioner claimed that the insurance arrangements were shams in relation to the LAQCs associated with Dr Muir and Mr Bradbury. This contention was rejected by Venning J and the Commissioner has cross-appealed on this point. Indeed in this Court the Commissioner sought to argue that the insurance arrangements were shams in relation to all taxpayers.

The structure of the insurance arrangements

[25] The policy issued by CSI provides for payment by CSI to the insured of the “loss of surplus” up to the figure of $1,230,311 per plantable hectare on the occurrence of “an affecting event”. This is defined as:

Any event or series of events which individually or cumulatively has the effect of preventing the market value of the net stumpage of Douglas Fir in New Zealand at any time during the Indemnity Period [period beginning with the occurrence of the affecting event and ending not later than 31 December 2048] reaching $2,050,518 (excluding GST) per hectare (being a Plantable Hectare), thereby causing loss of surplus to the Insured that is neither expected nor intended by the Insured nor subject to an exclusion, for which insurance is current and where liability is admitted or would be but for the application of an Excess.

[26] The insured are defined as Southern Lakes Forestry Ltd and Trinity 3 and the associated documentation makes it clear that Southern Lakes Forestry Ltd was contracting as bare trustee for the members of the SLFJV who were severally (and not jointly) liable to CSI. For ease of reference, we will omit future reference to Southern Lakes Forestry Ltd and treat the relevant contracting parties as the SLFJV and its members.
[27] The policy required the SLFJV to pay as premiums $1,307 per hectare (by implication forthwith) and $32,791 per hectare on or before 31 December 2047 and Trinity 3 to pay $410,104 per hectare on or before 31 December 2047. The last figure was to be adjusted by the amount of any negative difference between the assessed market value of the net stumpage and $2,050,518 per hectare but with the total amount to be paid not to exceed $1,230,311.
[28] There was a letter of comfort of 3 February 1997 from Trinity Foundation Charitable Trust to CSI under which the Trust undertook to provide funds to CSI to meet any claim under the policy, provided CSI had exhausted its resources and its ability to call on “contributors and/or insurers or reinsurers” in meeting claims. We see no reason why this undertaking by the Trust should not be construed as creating a binding legal obligation.
[29] The insurance arrangements thus created were, to say the least, unusual. As will become apparent, CSI was not expected to accumulate (at least to any significant extent) the premium income it received on 21 March 1997. Nor were any reinsurance arrangements entered into. Indeed, on the structure of the insurance arrangements there was no need for either accumulations of premiums or reinsurance. This was because the net effect of the arrangements was that either Trinity 3 would default in its obligations to CSI (thus releasing CSI from any liability to make payment) or alternatively the 2047-2048 wash up would occur in a way which was self-funding from the point of view of CSI. That this is so is apparent from a chart prepared by Dr Muir which, as explained and amplified in his evidence at trial, showed:

(a) At any net stumpage value in excess of $787,000 per plantable hectare, the wash up would be self-funding from the point of view of CSI which could perform and still make a profit; but

(b) At stumpage values of less than $1,230,000 Trinity 3 would not perform and on default would release CSI from its obligations.

The letter of comfort from Trinity Foundation Charitable Trust (the ultimate owner of Trinity 3) provided CSI with additional comfort as well as creating an additional element of circularity to the insurance arrangements.

[30] Against that background, it is useful to refer to some aspects of the way in which the insurance arrangement developed.

The set-up of the insurance arrangements

[31] As we have noted, shortly before the trial the Commissioner came into possession of a number of documents relating to CSI which had been obtained by the Serious Fraud Office from the British Virgin Islands. These documents caused Dr Muir much difficulty at trial. In the first place, the Judge concluded that he had been in breach of his discovery obligations. As well, the documents were not consistent with positions he had previously taken. His attempts to explain some of the documents did not impress the Judge. Indeed the Judge was extremely critical of Dr Muir. Counsel for the taxpayers did not invite us to revisit the Judge’s credibility findings and in light of this, the moral dimension to the non-production of these documents is of little moment for the purposes of this appeal and we see no need to discuss it further, save for one brief comment at [168] below. We should record, however, that even now the documentary trail associated with the set-up of CSI is far from complete and that this must be largely a function of the actions or inaction of Dr Muir.
[32] The first version of the eventual insurance arrangements was set out in a letter of 5 December 1996 from Dr Muir (on Bradbury and Muir letterhead) to Mr Barry Mitchell, a friend of Dr Muir who was based in the British Virgin Islands. This letter had obviously been preceded by prior discussion. The letter commenced in this way:

The insurer will receive a sum for writing the policy today of approximately NZ$40 per hectare of planted Douglas Fir. Since it is envisaged that there will be 2700 hectares planted that would be a net fee of NZ$108,000 for writing the policy. The term sheet actually provides for the insurer to be paid NZ$1027 per hectare (or NZ$2,272,900 for 2700 hectares) but almost all of this sum will either be paid in non-resident withholding taxes, or as introduction fees.

Mr Mitchell put Dr Muir in touch with Brian Jackson of AMS, a Virgin Islands based group of companies. He also wrote to Dr Muir advising him to make it clear to another AMS employee (Nigel Bailey) who was working on the proposal, “that there is no real risk in the whole thing”.

[33] On 13 January 1997 Mr Jackson wrote to Dr Muir noting:

It will be indisputable that this is a properly licensed BVI insurance company and there will be an annually issued licence to support this. It will be housed at our insurance management office, as are some thirty other such companies. In order to add “substance” to the company we can do any or all of the following:

(1) Install dedicated telephone and fax lines.

(2) Have signs made both to the main entrance directory and also the outside of the actual “office” that the company will use.

(3) Dedicate one employee as a full time employee of the company.

(4) Prepare stationery and letterhead for the company.

(5) Rent a dedicated “office” to the company within our overall office.

All of the above is not unusual for this type of company and can be carried out within the already agreed fee structure.

In addition Nigel said that I should emphasise the complete confidentiality that that this matter would receive from both ourselves and the BVI authorities. Once licensed here the company would be fully protected under BVI law. I should perhaps add that Nigel, before joining us was the Inspector of Insurance Companies here and was responsible for drafting the law in 1994.

If the above can offer a level of confidence that you are seeking then please let us know how you will wish us to proceed.

[34] On 16 January 1997 Dr Muir wrote to AMS authorising them to proceed with the application for the insurance licence previously discussed and identifying the proposed name for the company as CSI Insurance Group (BVI) Limited. In the course of this letter Dr Muir said:

We are happy for the application to proceed with you providing the shareholders and directors, acknowledging that the shareholder will be on a trustee/nominee basis. We note that we will provide you with the details of beneficial ownership at a later date.

[35] On 30 January 1997 Bradbury and Muir sent a hand-written fax to Mr Mitchell which showed that it was then proposed that:

(a) The shares in CSI be held either directly by the Christian Services Charitable Trust or by a nominee for the Trust based on the island of Nevis;

(b) The Christian Services Charitable Trust would need a one dollar settlor and a trustee;

(c) The one share in Trinity Foundation would be held by the Trinity Charitable Trust which had the same objects as Trinity Foundation and also needed an offshore one dollar settlor and an offshore trustee; and

(d) The Trinity Charitable Trust was not to do anything apart from “control” the directors of Trinity Foundation whose New Zealand objects would be “mainly Anglican charities”.

[36] On 31 January 1997 Dr Muir faxed to AMS draft deeds associated with Trinity Foundation (providing for its charitable purposes), Trinity Foundation Charitable Trust (vesting power to appoint trustees in Dr Muir and Mr Bradbury) and Christian Services Insurance Trust (again with Dr Muir and Mr Bradbury having power to appoint trustees). The draft trust deeds for the Trinity Foundation Charitable Trust and the Christian Services Insurance Trust are reasonably similar as, at least to some extent, are the objects. In each case there is specific provision for charitable purposes associated with the Anglican Church.
[37] On the same day Dr Muir wrote to AMS about a business plan which had been prepared for CSI. It is clear that the original business plan had been prepared by AMS from material originally supplied by Dr Muir. The evidence as a whole supports the inference that the draft business plan prepared by AMS (on which Dr Muir was commenting) included the following statement:

1.3 The real benefits of the deal are tax concessions that can be obtained now by the investors and the foundation. One of the conditions required to gain the tax relief is that the insurance must be in place. The actual outcome of the deal in fifty years time is not considered material.

In his letter, Dr Muir did not comment on this part of the draft business plan which, in the end, was carried into the business plan as adopted. The information on which cl 1.3 was based must have come from Dr Muir and it is a striking feature of the case that its inclusion in the draft did not evoke any comment or complaint from him.

[38] In the same letter, Dr Muir indicated that the directors of CSI were to be Messrs Bailey and Jackson of AMS and that if the shareholder was not to be a Nevis associate of AMS, it was to be the trustee of Christian Services Insurance Trust.
[39] On 5 February 1997 Mr Mitchell sent Dr Muir a fax seeking clarification as to why his clients were reluctant to register the trust as a charitable trust in New Zealand and why the “Nevis company was in the structure”. He hypothesised that this was to achieve “extra confidentiality”. If there was a response, it was not produced in evidence.
[40] The detail of the ownership structures associated with CSI are of no great moment. The ultimate shareholder is the Christian Services Insurance Trust which is, for practical purposes, under the control of Dr Muir and Mr Bradbury. The directors of CSI are, for practical purposes, also under the control (or act on the direction) of Dr Muir and Mr Bradbury. And the same is true of the Trinity Foundation Charitable Trust which is the ultimate owner of Trinity 3.

The Parentis transaction and its impact on the funds available to CSI

[41] The initial premium of $1,307 per plantable hectare was first applied to cover the costs of establishing CSI and to provide the US$200,000 bond required by the inspector of insurance in the British Virgin Islands. A substantial part of the remainder (along with funds paid by investors associated with Trinity 1 and Trinity 2) was paid as a “finder’s fee” to Parentis Finance and Investment Inc (Parentis) and was then made available to trusts associated with Dr Muir and Mr Bradbury. The net result was that of the initial payment of $1,307 per plantable hectare, only $157 per plantable hectare was retained by CSI for possible accumulation.
[42] The transactions associated with all of this were murky. Parentis was incorporated in March 1997 at the instance of Dr Muir. Arawak Trustee Co Ltd, a trustee company in the British Virgin Islands, held the shares for Trinity Foundation. The settlor of the trust was an employee of a firm of solicitors in the British Virgin Islands. CSI paid Parentis approximately $3m (ostensibly as commission although Parentis in fact performed no services which could have justified such a payment) and Parentis advanced this money to family trusts associated with Dr Muir and Mr Bradbury. So the Muir and Bradbury family trusts have thus had the benefit of the vast bulk of the initial premiums.
[43] From the balance of funds left with CSI, around US$250,000 was invested. The investment failed. As at 28 February 2001, CSI’s audited accounts disclose that it has only US$16,773 in cash reserves to carry forward. CSI has no other business.

The approach of the Judge

[44] In the High Court, the Commissioner maintained that the arrangements involving CSI did not involve “true” insurance at all and that in any event they were a sham. The taxpayers maintained that the transactions were by way of insurance or that, in any event, they were deductible anyway.
[45] The Judge dealt with the first of these arguments in this way:

[184] The insured, SLFJV, have an insurable interest in the subject matter of the contract, namely the returns from the rotation of exotic Douglas fir trees on the plantable hectares by reason of their entitlement to the balance of the net stumpage proceeds in accordance with cl 21 of the licence agreement. The contractual arrangements prima facie satisfy the requirements for an insurance contract at law.

[185] Once it is established that CSI is a registered insurer that issued a policy to SLFJV and Trinity 3 and the arrangements satisfy the definition of an insurance contract at law (as they do) then absent sham, the financial obligations, namely the payments due in relation to the policies, are properly categorised as insurance premiums for the purposes of s DL 1(3). The Commissioner alleges sham in relation to the insurance arrangements, but only as against Dr Muir and Mr Bradbury. Whether the insurance taken overall was "real and effective" or alternatively was without economic substance or commercial credibility seem in my view to be matters more relevant to the general avoidance issue, rather than the black letter law issue.

[186] For present purposes I accept the premiums are prima facie deductible under s DL 1(3).

[46] He also concluded that they were primarily deductible under s BB 7:

[189] Although counsel focussed on s DL 1(3), s BB 7 precedes it in the Act. It is in more general terms. The premiums fall within the definition of "expenditure". I note s DL 1(3) applies where the expenditure "is not deductible otherwise than under this section". It follows the premiums would be deductible under s BB 7 primarily, or, if not, in any event under s DL 1(3).

[47] The Judge dismissed the sham arguments as well. In this regard he referred to the leading cases, Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (CA), MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311 (HL), Paintin and Nottingham Limited v Miller Gale and Winter [1971] NZLR 164 (CA) and NZI Bank Ltd v Euro-National Corporation Ltd [1992] 3 NZLR 528 (CA). He discussed whether it was now possible to look at sham in a somewhat broader way, before concluding that the authorities just referred to were controlling. He then went on:

[222] The principal difficulty for the Commissioner in the argument that the insurance arrangements involving Redcliffe Forestry Ventures, Dr Muir, Mr Bradbury and Bristol Forestry Ventures Limited are a sham is that according to that settled test for sham, the parties to the documents must have had a common intention that the acts or documents were not to create the legal rights and obligations which they gave the appearance of creating. The insurance arrangements in issue are principally the proposals and policy. The parties to those documents are not only Dr Muir, Mr Bradbury and CSI. There were other parties to the insurance arrangements, namely the other investors in SLFJV. There is no evidence to suggest, and the Commissioner did not submit, that those other parties were parties to a sham or that those other parties shared a common intention that the documents did not create the legal rights and obligations that they purported to. The same policy issued to all SLFJV investors. Put shortly, the insurance contract or arrangements cannot be a sham insofar as they relate to Dr Muir and Mr Bradbury but not a sham in relation to the other investors.

[223] There are a number of the features relating to the establishment and operation of CSI that give cause for concern. It may be that CSI is under the control of Dr Muir and may not be in a financial position to be able to perform its obligations in 2047/2048 if called on. The insurance offered by CSI may not be recognised as insurance that experienced insurers would provide. However, none of those points mean the insurance is a sham in terms of the accepted principles, albeit that they may be relevant to the issue of tax avoidance.

...

[225] In the present case CSI exists. It has been issued with a licence to provide insurance. Contracts have been signed between CSI and Southern Lakes Forestry Limited for SLFJV. There is a douglas fir forest growing in Southland. The initial insurance premiums of $1,307 per hectare have been paid. It may be that CSI is not particularly sound financially, and also that Dr Muir (in particular) and Mr Bradbury had their own reasons for incorporating CSI and for fixing and controlling the insurance premiums to be paid to it but those reasons, while they may be relevant to other factors in the case, particularly the issue of whether the insurance arrangements are part of a tax avoidance arrangement, do not themselves support a finding of sham.

The arguments in this Court

[48] For the Commissioner, Mr White QC contended that the evidence showed clearly the arrangements were not in the nature of insurance and were properly categorised as a sham. The taxpayers, while not necessarily disavowing the conclusion of the Judge that the arrangements were by way of insurance (thus enabling s DL 1(3) to be invoked) placed their primary reliance on s BB 7. The Commissioner’s primary basis for rejecting their invocation of s BB 7 seemed to come down to the sham argument. We note in passing that the taxpayers’ caution about relying on s DL 1(3) may well have been associated with some awkward downstream consequences for them in terms of the accruals rules if the arrangements with CSI are properly to be regarded as involving insurance.
[49] The Commissioner’s argument was advanced most firmly in relation to Dr Muir and Mr Bradbury. Dr Muir was the architect of the scheme and party, as the Judge inevitably held, to the unhappily expressed cl 1.3 of the CSI business plan. By 2047 he will, if still alive, be a nonagenarian. The shareholders in Redcliffe Forestry (his LAQC) will, in all probability, have changed and its ability to make any payment will depend on the value of the harvest. No guarantee from Dr Muir was sought or offered. Mr Bradbury is in a broadly similar position, save that he is not tied so closely to the awkward CSI documents as Dr Muir (although his family trust was a beneficiary of the Parentis transaction). By 2047 he will be 93. His LAQC (Bristol Forestry) has no assets other than its interest in the forestry venture and he has not given a personal guarantee.
[50] Mr Christopher Verissimo (whose company is Accent Management) if still alive in 2047 will be 90. He is a close friend of Dr Muir and another of his companies, Sierra Developments Ltd, received the Parentis payment associated with Dr Muir, as it is the trustee of Dr Muir’s family trust. He did not give a guarantee although Accent Management has assets other than its investment in the forest. Mr Peebles (whose LAQC is Ben Nevis Forestry Ventures Ltd) will be 93 or 94 in 2047 (if he is still alive). He did not give a personal guarantee. Similar considerations apply in the case of Mr Algie and the late Mr Laird (who were both associated with Greenmass Ltd).
[51] Mr White also referred to us a line of authority that indicates that a finding of sham may be made against a party to a purported contract who goes along with a shammer either not knowing or not caring whether a transaction is genuine or otherwise not caring what he or she is signing, see Midland Bank Plc v Wyatt [1997] 1 BCLC 242 (HC), Re Esteem Settlement (Abacus (CI) Ltd as Trustee) [2003] JLR 188 (Royal Court of Jersey) and Hitch & others v Stone [2001] STC 214 (CA).
[52] Mr White maintained that in any event the contracts of insurance represented by the policy purported to create distinct policies between CSI and each of the investors in SLFJV and that accordingly he was entitled to run the narrow Snook sham argument against the LAQCs associated with Dr Muir and Mr Bradbury even if it could not succeed against the other taxpayers.
[53] Mr Stewart QC, who was primarily responsible for arguing this aspect of the case for the taxpayers, maintained that the argument now advanced went beyond what had been signalled by the Commissioner in the pleadings and at trial where the sham argument was only invoked against the entities associated with Dr Muir and Mr Bradbury. He generally adopted the conclusions of the Judge and maintained that there was no basis for concluding that the transactions were not intended to take effect according to their tenor.

Our conclusions

[54] At trial the argument against the taxpayers other than those associated with Dr Muir and Mr Bradbury was that the arrangements were shams because they were not true insurance arrangements. The conclusion does not follow logically from the asserted premise. A contract can be mislabelled without being ineffective. If the relevant arrangements were mislabelled as “insurance” but were nonetheless intended to create real legal obligations which were to be honoured, they would necessarily not be shams. But more significantly for present purposes, this line of argument did not directly engage with the relevant states of mind of the other taxpayers. In this Court, the Commissioner has maintained that the other taxpayers entered into the insurance arrangements neither knowing nor caring whether they were genuine and in this way were tainted by the shamming state of mind that he attributes to Dr Muir and Mr Bradbury. We are left with the view that this involves such a dramatic shift in the focus of the case against the other taxpayers (involving as it does an inquiry into their actual states of mind which was not made in the High Court) that it would be inappropriate to allow the Commissioner to run, as against them, the sham argument.
[55] On the other hand, we agree with Mr White that the structure of the insurance policy means that it would be possible on orthodox Snook principles to treat the insurance arrangements as a sham in relation to the taxpayers directly associated with Dr Muir and Mr Bradbury even though, as we have just held, it is not open to the Commissioner now to allege that the other taxpayers were implicated. This is because the policy in effect creates separate insurance arrangements for each member of the SLFJV. So we are in respectful disagreement with Venning J as to the primary basis upon which he rejected the sham argument in relation to Dr Muir and Mr Bradbury (see [222] of his judgment set out above).
[56] The aspect of the case presents two different problems. The first is the artificiality of the transactions and the second is whether they were intended to create genuine legal obligations.
[57] Our account of the transactions indicates clearly that they are highly artificial and indeed contrived.
[58] In substance they offer nothing to the parties which could not have been more easily, cheaply and directly achieved between the key participants in the forestry venture (assuming one leaves aside tax benefits and the Parentis transaction). The insurance premiums paid in 1997 have been almost entirely dissipated and, in any event, their retention was always recognised (at least by Dr Muir) as irrelevant to the ability of CSI to perform during the wash up. Also irrelevant to CSI’s ability to perform is payment of the premiums due from the taxpayers in 2047. Unsurprisingly therefore, no real steps have been taken to enhance the likelihood that the taxpayers will pay those premiums (for instance by taking personal guarantees or security other than over the forest). The ability of Trinity 3 to perform is entirely dependent on the value of the forest. So in all probability, the only “real” money in the system which will be available to fund the wash up payments will be the proceeds of sale of the forest. Those circumstances raise the question why the insurance arrangements were put in place, a question to which there is an obvious answer, albeit one which has nothing to do with the mitigation of risk.
[59] But artificiality and lack of commercial point (other than tax avoidance) are not indicia of sham. And the concepts of sham and tax avoidance are not correlatives. As well, while there are elements of pretence (and certainly concealment) associated with CSI transactions, these are explicable on bases other than sham; this given the nature of the Parentis transaction and the possibility of disallowance by the Commissioner for tax avoidance.
[60] The more difficult question is whether Dr Muir and Mr Bradbury intended the provisions as to the 2047-2048 wash up to be a dead letter.
[61] These obligations which are not required to be met for five decades may be defeated by a number of factors, for instance the liquidation of the taxpayers or further arrangements between the key parties (which are likely enough given the commonalities of interest and the over-arching control presently vested in Dr Muir and Mr Bradbury in relation to Trinity Foundation Charitable Trust and the Christian Services Insurance Trust). Relevant to this assessment is the assertion in cl 1.3 of the business plan to which we have referred. As well, as we have noted, the probabilities are that no money will be introduced into the wash up other than what will be associated with the value of the forest. It is thus unsurprising that no serious attempt has been made to ensure that Trinity 3 and the taxpayers will be able to perform their wash up obligations.
[62] We see this aspect of the case as closely balanced. Our impression is that Dr Muir and Mr Bradbury do not (and could not sensibly be thought to) have anything like a settled intention that their LAQCs will pay the 2047 insurance premiums as they fall due (or indeed meet the obligations to Trinity 3). Instead we are left with the view that in 1997 they regarded what is ostensibly to happen during the wash up as immaterial and as something which they (if they are still alive) or their successors can address when the times come. Their state of mind at the time the transactions were entered into can perhaps best be categorised as involving indifference to whether the wash up transactions occur. This is understandable as the whole scheme offered Dr Muir and Mr Bradbury very substantial immediate personal benefits whereas any possible down-side associated with the wash up is so far away as to be largely irrelevant. Given that their LAQCs are interposed between them and Trinity 3 and CSI and given as well their current control over Trinity 3 and CSI, they are presumably of the view that they can avoid, one way or another, the possibility that they (or their successors) will suffer any appreciable adverse consequences associated with the wash up obligations.
[63] By a narrow margin, however, we have reached the view that we cannot classify the transactions as shams. An obligation can be genuinely entered into even though subject to legal or practical defeasance or entered into on the basis that it might be replaced by another amended obligation. In a strange way, the very circularity which is involved in the transactions might be thought to be consistent with a desire that they be at least capable of achievement (or legally agreed variation) during or prior to the wash up. Whether these transactions are shams depends primarily on the states of mind of Dr Muir and Mr Bradbury as to their genuineness. Given that it is not to their advantage that the transactions be shams, it might be thought a little perverse to attribute to them states of mind which are inconsistent with their best interests.
[64] Accordingly we reject the contention that the insurance transactions are shams.
[65] Although the issue whether the contracts between the taxpayers and CSI were truly by way of insurance did not loom large in the arguments before us, we should say that we see no reason to differ from the conclusion of the Judge. No doubt the purpose of the arrangement (at least when viewed from the point of view of the architects of the scheme) was not mitigation of risk and, as well, the arrangements made for CSI meant that it incurred no practical risk in relation to the wash up transactions. But the contract did nonetheless, as Venning J recognised, satisfy the requirements for an insurance contract at law. As well, while there were no doubt other mechanisms which would have been cheaper and at least as effective for mitigating the risk the taxpayers were taking as to the value of the forest on maturity, the actual mechanism that was chosen was insurance. We see no reason to treat this as mislabelling.

Were the taxpayers required to spread deductions associated with the insurance premium payable in 2047?

[66] One of the striking features of the Trinity scheme is the way in which the taxpayers have sought to take advantage of timing differences. This is particularly so in relation to the insurance premiums for which the taxpayers sought full deductibility in the 1997 tax year even though most of the premiums are not to be paid until 2047. This aspect of the case not only is relevant to tax avoidance which we discuss later but also gives rise to the question whether deductions for the insurance premiums were required to be spread under the accruals rules. Venning J ruled against the Commissioner on this point and the Commissioner has cross-appealed.
[67] The key issue on this aspect of the case is whether the premiums should be regarded as “accrual expenditure”. If so, the effect of s EF 1 is that the taxpayers were required to spread the premium over the fifty year life of the policy.
[68] “Accrual expenditure” is relevantly defined by s OB 1 in this way:

Accrual expenditure ... in relation to any person, means any amount of expenditure ... by the person that is allowed as a deduction under this Act ... , other than expenditure incurred—

...

(b) In respect of any financial arrangement ...

It is common ground now that the 2047 premium is “accrual expenditure” unless incurred in respect of “any financial arrangement”.

[69] “Financial arrangement” is defined in s OB 1 in this way:

Financial arrangement—

(a) Subject to paragraph (b), means—

(i) Any debt or debt instrument; and

(ii) Any arrangement (whether or not such arrangement includes an arrangement that is a debt or debt instrument, or an excepted financial arrangement) whereby a person obtains money in consideration for a promise by any person to provide money to any person at some future time or times, or upon the occurrence or non-occurrence of some future event or events (including the giving of, or failure to give, notice); and

(iii) Any arrangement which is of a substantially similar nature (including, without restricting the generality of the preceding provisions of this subparagraph, sell-back and buy-back arrangements, debt defeasances, and assignments of income);—

but does not include any excepted financial arrangement that is not part of a financial arrangement:

The double negative at end of this definition obscures the meaning intended by Parliament. Further, the definition does not seem to make sense unless the word “wider” is interposed before “a financial arrangement”. We treat this part of the definition as if it read:

but does not include any excepted financial arrangement unless it is part of a wider financial arrangement.

[70] The expression “excepted financial arrangement” is defined as follows:

Excepted financial arrangement means any of the following arrangements:

...

(b) A contract of insurance or membership of a superannuation scheme:

The 2047 insurance premiums are payable under “an excepted financial arrangement” as the liability arises pursuant to a contract of insurance (as Venning J held). However it was common ground before us that Venning J was correct to conclude (at [204]) that this contract of insurance was part of a wider financial arrangement.

[71] That brings us to s EH 2 which provides:

EH 2 Excepted financial arrangement that is part of financial arrangement—

The amount of the gross income deemed to be derived or the expenditure deemed to be incurred by a person in respect of a financial arrangement under the qualified accruals rules shall not include the amount of any income, gain or loss, or expenditure, that is solely attributable to an excepted financial arrangement that is part of the financial arrangement.

[72] The Commissioner succeeds on this point. The premium is “solely attributable” to a contract of insurance and thus to an “excepted financial arrangement”. Accordingly, on the basis that the contract of insurance is “part of [a] financial arrangement” the premium is nonetheless not attributable to that financial arrangement given s EH 2 and thus not excepted from the definition of “accrual expenditure”.
[73] For the sake of completeness we note that the result is the same even if the contract of insurance is not “part of financial arrangement” (ie a wider financial arrangement). If this is so, it is not a “financial arrangement” at all, given the definition of “financial arrangement” and accordingly the relevant expenditure would not be excluded from the definition of “accrual expenditure”.
[74] In his judgment Venning J made a broadly similar analysis of the statute to the one we have adopted. He took the view that the insurance contract was part of a wider financial transaction and was thus required to consider the impact of s EH 2. But it was at this point that his approach differs significantly from the one we have adopted. Having set out the terms of s EH 2, he said (at [205]) that the insurance premium due in 2047 fell within the definition and was thus not required to be spread under the accrual rules.
[75] With respect to the Judge, he thereby misapplied s EH 2. If s EH 2 applies, the relevant expenditure is not incurred “in respect of a financial arrangement” and accordingly is not excluded from the definition of “accrual expenditure”. Instead the relevant expenditure is accrual expenditure and is required to be spread.
[76] Counsel for the taxpayers sought to defend the conclusion reached by the Judge, but, as we see it, the words of s EH 2 are too clear to admit any meaning other than the one we have placed on them.
[77] On this point we thus agree with the argument of the Commissioner albeit that this conclusion is of no ultimate importance given our findings as to tax avoidance.

Was the licence fee premium payable in 2048 deductible under s EG 1?

The relevant contractual provisions

[78] There are two relevant contracts, an agreement to grant licence and options entered into on 28 February 1997 between Southern Lakes Forestry Ltd and Trinity 3 and a licence agreement of 21 March 1997 between the same parties.
[79] Clauses 3.1 and 4.1 of the agreement to grant licence and options provide:

3.1 Grant of Licence

In consideration for the Purchaser's promise in clause 4.0 to pay the Licence Premium, the Vendor agrees to grant the Purchaser a licence to use the Property for the purpose of carrying on the Purchaser's forestry business on the Property for a term and on the conditions set out in the Licence Agreement.

4.1 Agreement to Pay Licence Premium

In consideration for the Vendor agreeing in clause 3.0 [sic] to grant the Purchaser a licence to use the Property on the terms described therein, the Purchaser agrees to pay the Licence Premium to the Vendor on the Final Expiry Date.

[80] Clause 2 of the licence agreement grants a licence to use the land:

2.0 GRANT OF LICENCE

The Land Owner hereby grants to the Licensee (for the consideration disclosed in the Original Agreement) a licence to use the Land for the purpose of carrying on the Licensee's business on the Land during the Licence Term and the Licensee accepts that grant. The Licensee acknowledges that while the within grant entitles the Licensee to possession of the Land the grant does not confer on the Licensee a legal right of exclusive possession (as that expression is discussed in paragraph 5.008 et seq. of Hinde, McMorland and Sim, Land Law 1978) or any estate or interest in the Land (whether by way of lease, easement or otherwise). The Land Owner further grants to the Licensee the authority to act as agent of the Land Owner to take all lawful steps to exclude trespassers from the Land. ... Notwithstanding that the Land Owner will (subject to clause 20.2) have property in the trees in the Forest by virtue of its ownership of the Land, the Licensee shall have all rights to sell, lease or otherwise dispose of Biomass rights/pollution credits in respect of the Forest.

[81] Mr Stewart submitted the premium is payable for the right to go onto and use the land – a right which is necessary to enable the taxpayer to be able to grow the forest, which is its business.
[82] The key provisions of the licence agreement relate to the establishment, maintenance and harvesting of a Douglas fir forest on the land. Under these provisions, the licensee is required to establish, manage and protect the forest on the land in accordance with sound forestry principles (cl 12). The land can only be used for that purpose (cl 17). The licensee may not cut down, remove or dispose of any standing trees or naturally fallen timber except for production thinning (cl 20). Under cl 21 the licensee must arrange for the sale of the standing trees and naturally fallen timber from the forest between 1 January 2044 to 31 December 2048. The sale is to be by public tender or a process approved by the landowner, Trinity 3. The proceeds of sale are to be deposited into a bank account to be held with the landowner. In particular, after payment of:

(a) GST;

(b) costs in connection with the sale;

(c) the promissory note regarding the insurance premium; and

(d) the promissory note for the licence premium;

the balance (if any) is to be paid to the licensee on the licence expiry date, namely 31 December 2048.

The taxpayers’ argument

[83] On the taxpayers’ argument, the licence was “a right to use land” for the purposes of the 17th Schedule to the Act. Accordingly it was “depreciable intangible property” as defined in s OB 1 and in turn “depreciable property” which is also defined in the same section. On this basis a depreciation deduction was claimable under s EG 1. Under s EG 3(2) this deduction was to be calculated using the straight-line method and based on the “cost of the property to the taxpayer”, see s EG 2. The taxpayers maintain that the “cost of the property to the taxpayer” is the total amount of the licence premium and accordingly they were entitled to annual deductions of 1/50th of the licence premium with an apportionment being necessary in relation to the 1997 tax year as the arrangements were put in place towards the end of that year.

The relevant legislative provisions

[84] It is appropriate to discuss in a little detail just how this argument works in terms of the legislative scheme.
[85] For the 1998 tax year, s OB 1 defined depreciable property as:

(a) ... any property of that taxpayer which might reasonably be expected in normal circumstances to decline in value while used or available for use by persons—

(i) In deriving gross income; or

(ii) In carrying on a business or the purpose of deriving gross income; but

(b) Does not include—

...

(ii) Land (excluding buildings and other fixtures and such improvements as are listed in Schedule 16):

(iii) Financial arrangements:

(iv) Intangible property other than depreciable intangible property:

The definition for the 1997 tax year was different but in a way which is not material for present purposes.

[86] As noted, the taxpayers maintain that the licence is “depreciable intangible property” which is itself defined in s OB 1 as meaning:

intangible property of a type listed in Schedule 17, which Schedule describes intangible property that has—

(a) A finite useful life that can be estimated with a reasonable degree of certainty on the date of its creation or acquisition; and

(b) If made depreciable, a low risk of being used in tax avoidance schemes ...

Schedule 17 includes “the right to use land”.

[87] A noticeable feature of this analysis is that the deferred nature of the licence fee payment is irrelevant to the deduction arguments other than in respect of tax avoidance. If the taxpayers’ arguments are otherwise correct – and leaving aside the tax avoidance issue – the fact that the payment is not due until 2048 is irrelevant to the entitlement of the taxpayers to deduct 1/50th of the amount to be paid on an annual basis.

The approach of Venning J

[88] The taxpayers’ argument raised a number of questions:

(a) Was the licence “property ... which might reasonably be expected in normal circumstances to decline in value” for the purposes of the s OB 1 definition?

(b) If not, did this matter if it was within the definition of “depreciable intangible property”?

(c) Was there a “low risk of [the licence] being used in tax avoidance” for the purposes of the definition of “depreciable intangible property”?

(d) If not, did it matter given that “the right to use land” is specifically provided for in Schedule 17?

(d) Was the licence fee truly payable for “the right to use land”?

[89] In his judgment, Venning J held that the licence fee was not paid for “the right to use land” but he otherwise answered these questions broadly in favour of the taxpayers. In his view, the inclusion of “the right to use land” in Schedule 17 meant that the risk of the licence in question being used for tax avoidance was irrelevant. As well, and perhaps more questionably, he held an asset which fell within the definition of “depreciable tangible property” was thus “depreciable property” even if not of a kind which “might reasonably be expected in normal circumstances to decline in value”. Mr White for the Commissioner supported the Judge’s conclusion that the licence fee was not paid for “the right to use land” and he did not seek to revisit in this Court the Judge’s other conclusions. For this reason we need only set out the Judge’s reasoning on the “right to use land” issue.
[90] Venning J identified the competing arguments in this way:

[133] The real issue on the question of whether the licence premium may be deducted under s EG 1 is the one I averted to earlier, namely whether the licence premium was paid for the right to use land. Mr White's principal submissions in closing for the Commissioner on this issue emphasised the contractual arrangements between Trinity 3 and SLFJV. Mr White submitted such an analysis led to the conclusion that the SLFJV investors agreed to pay the licence premium for the right to share in the balance (if any) of the net stumpage and not for the right to use Trinity 3's land.

[134] Mr Stewart submitted the licence premium was paid for the right to use land. He submitted the actual grant of licence was set out in cl 2 of the licence agreement itself and was limited to those conditions. He categorised the other rights as collateral upon the grant of the licence. He submitted the Commissioner's approach was nothing more than an argument for economic equivalence which was an approach that had been consistently rejected by the Court.

[91] The Judge reviewed the leading authorities on the inappropriateness of taxation by economic equivalence and concluded:

[140] The Court's role is thus not to determine the nature of the transaction by reference to its overall economic consequences, but rather it is to first determine the legal effect of the contract or contracts that make up the arrangements in issue and then to determine, upon analysis of the contractual arrangements taken as a whole under which the payment was made (or in this case the deduction was claimed), whether the true legal character of the payment (in this case the deduction) accords with the relevant description, in this case a payment for the right to use land or not.

...

[142] In the present case then the Court must determine the legal effect of the provisions of the relevant contractual documents which are, on this issue, the agreement to grant licence and the licence agreement both between Trinity 3 and Southern Lakes Forestry Limited for SLFJV.

[92] The Judge did not, however, see this conclusion as resolving the question in favour of the taxpayers:

[143] The question is: is the legal effect — as distinct from the economic consequences — of the provisions of the relevant interrelated contracts, such that the plaintiff taxpayers paid the licence premium (as distinct from the annual licence fee) for the right to use land, or have they paid the licence premium for some other right, such as the right to receive the balance of the net stumpage proceeds as the Commissioner contends? That is a valid inquiry for the Court to make. It is not directed at the economic consequences of the transaction but rather it is directed at and dependent upon the construction of the legal effect of the documentation before the Court.

[144] Reference can be made to the decision of [C of IR v Renouf Corporation Ltd (1998) 18 NZTC 13,914 (CA)] where Blanchard J in delivering the decision of the Court emphasised:

In determining in a taxation case the true meaning and effect of a transaction which is not alleged to be a sham the Court examines and construes that transaction in the same way as it would do if the parties to it were in dispute about its meaning and effect. The Court assumes that the parties were intent on achieving a result which makes commercial sense.

[93] Having reviewed the relevant contractual terms, the Judge found against the taxpayers. The reasons for this conclusion appear in the following passages from his judgment:

[153] As noted, none of the clauses in either agreement define or explain the SLFJV's business, which the plaintiffs say is the reason for the grant of the licence, namely the right to use the land. While cl 12 of the licence agreement provides for SLFJV to establish a forest the wording of the clause is more consistent with an obligation rather than a right. Further, a party is normally entitled to the fruits of their business activities as of right. However, the licence agreement confirms that the proceeds from the product of the only business activity identified in the licence, the stumpage from trees harvested from the forest, belong to Trinity 3, not to the licensee. SLFJV is only entitled to share in the proceeds of that business by virtue of cl 21.

[154] Although SLFJV was required to pay an annual licence fee in addition to the licence premium, the legal effect of the contractual arrangements leads to the conclusion that the licence premium was not paid for a right to use land. SLFJV had an obligation rather than a right to establish the forest on Trinity 3's land. The trees in the forest were owned by Trinity 3, not SLFJV. It is only by cl 21 of the licence agreement that the SLFJV has any entitlement in the proceeds of sale of the mature forest. Absent that clause SLFJV would have no such right. Clause 12 does not provide such a right.

...

[158] ... the provisions of the agreement to grant licence are clear. Clause 3.1 provides the licence is granted on the conditions set out in the licence agreement. Condition 21 of the licence agreement is one such condition. It provides for SLFJV to share in the proceeds of sale of Trinity 3's trees. A draft of the licence agreement was attached as an appendix to the agreement to grant licence. Nor does Mr Stewart's submission directly address the effect of cl 12 as an obligation on SLFJV to plant and maintain the forest rather than as a right.

...

[165] I conclude that the combined legal effect of the agreement to grant licence and the licence agreement concluded between the parties is that rather than providing for SLFJV to have "a right to use land" the agreements provide for a bundle of rights and obligations, foremost amongst them the obligation to plant the forest (which it subcontracted to Pine Plan) with the quid pro quo that in exchange inter alia, for the discharge of that obligation and payment of the licence premium SLFJV is to share in the net proceeds of sale of the forest which otherwise belongs to Trinity 3 as landowner. In my judgment, properly construed, the licence premium was paid to ensure the right to share in the net proceeds of sale (if any) rather than for the use of land.

The arguments in this Court

[94] The arguments for the taxpayers on this aspect of the case were presented by Messrs Judd QC and Carruthers QC. To a considerable extent these arguments proceeded along the following overlapping lines:

(a) Trinity 3 was the land-owner and, as such, the owner of any trees planted on the land and no one had the right to enter onto the land and work on it without a licence from Trinity 3.

(b) In asking whether the taxpayers agreed to pay the licence fee for the right to use land, the Judge conflated what were really two questions: did the taxpayers acquire property which consisted of “a right to use land” and, if so, what was the cost to the taxpayers of that property.

(c) It is inescapable that the taxpayers did acquire a “right to use land” as they would not otherwise be entitled to plant trees on the land. It is, for these purposes, irrelevant that the taxpayers have obligations associated with the planting and maintenance of the forest as the existence of such obligations is not inconsistent with a licence, cf London Borough of Hounslow v Twickenham Garden Developments Ltd [1970] 3 All ER 326 (Ch) and Mayfield Holdings Limited v Moana Reef Limited [1973] 1 NZLR 309 (SC).

(d) In determining the cost to the taxpayers of that property right (ie the right to use land) the Court must go to the contractual documents to see what they require the taxpayers to pay to acquire that right.

(e) Under the relevant contractual provisions the cost to the taxpayers of the right to use the land is what is specified as the licence premium. This lump sum payment created a capital asset, the cost of which was properly seen as being amortised and deductible over its term. As to this the taxpayers emphasised that Trinity 3 does not have an interest in the harvesting proceeds beyond its entitlement to the licence fee.

(f) Associated with this last point is the contention that the Judge impermissibly decided this aspect of the case on the basis of broad ideas of economic equivalence (cf Commissioner of Inland Revenue v Wattie [1999] 1 NZLR 529 (PC)); this despite him denying that he was doing so.

[95] In his submissions Mr Carruthers relied heavily on Wattie, Regent Oil Ltd v Strick [1966] AC 295 (HL), Tucker (Inspector of Taxes) v Granada Motorway Services Ltd ([1979] 2 All ER 801 (HL) and Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 (CA). He argued that the licence was a capital asset, its cost was defined by the agreements and it was entirely orthodox for that cost to be treated as being on capital account and depreciated over the term of the licence. A taxpayer who acquires a capital asset for business purposes will naturally wish to recoup the cost from revenue derived from it but this does not have the consequence that the payment for the capital asset relates to or is made for the anticipated revenue returns. On the argument of Mr Carruthers, the Judge confused the purpose for the making of the licence premium payment (which was to acquire the licence to occupy the land) with the overall purpose of the taxpayers (which was to use that asset for the purpose of deriving revenue from the eventual harvest of the forest).
[96] For the Commissioner, Mr White largely adopted the reasoning of the Judge. Without seeking (at least expressly) to rely on economic equivalence considerations, he contended for a common-sense commercial approach. He characterised the taxpayers’ argument as involving the contention that the licence premium of around $2m a hectare was being paid by the taxpayers for the purpose of enabling them to gain access to the land for the purpose of discharging their contractual obligations (ie to plant and maintain a forest), a contention which he suggested did not make sense commercially. Instead he maintained that the premium was paid for the right to share in the balance (if any) of the net stumpage. Relying on remarks of Megarry J in the Twickenham Garden Developments case (at 343), he argued that the licence is not distinct from the contract of which it forms a part. He also asserted that the way in which the licence premium was described in the contractual documents (ie its label) was not itself determinative (relying on Fatac Ltd (in liquidation) v CIR [2002] 3 NZLR 648 (CA) and Ralli Estates Ltd v Commissioner of Income Tax [1961] 1 WLR 329 (PC) at 334). His position was that at worst from the point of view of the Commissioner an apportionment would be required, see Buckley and Young Ltd v Commissioner of Inland Revenue [1978] 2 NZLR 485 at 498-99 (CA) per Richardson J for the Court.

Discussion

[97] In deciding this question we must ignore elements of the scheme which are primarily relevant to tax avoidance arguments. The timing differences between tax benefits associated with deductibility and actual payment (and related time value of money issues) are thus irrelevant. So too are commerciality considerations relating to the plausibility (or otherwise) of the underlying business model and alternatives to it which were open to potential forestry investors. We also accept that ideas of economic equivalence are to be put to one side.
[98] On the other hand, the label which the parties to a contract apply to a particular payment is not conclusive. The fact that the payment of $2m a hectare is described as a licence premium is not the controlling consideration. This is particularly so given that the case turns on the application of the Act (and in particular the statutory concept of a “right to use land”). Accordingly the fundamental issue is one of statutory and not contractual interpretation.
[99] If a licence premium had been paid at the outset (ie in 1997), this would have removed what to the Commissioner is the most objectionable feature of this aspect of the scheme, the timing difference between claimed deductibility and payment. As well, the premium would presumably have been pitched at a level which reflected the value of the licence because the taxpayers would not have been prepared to put up “real” money on any other basis. This in turn would probably have addressed the Commissioner’s commerciality concerns. If the transaction had been so structured we think it clear that the licence premium would have been treated by the Commissioner as the cost of a “right to use land” and (given the other conclusions reached by the Judge which are no longer in issue) thus able to be depreciated over the term of the venture.
[100] Does it matter that the premium is not to be paid until 2048? The coincidence of the timing of the payment with receipt of the anticipated proceeds of the harvest of the forest makes it easier to correlate the purpose of the payment with the right to receive the harvest proceeds rather than the acquisition of the background licence (or “right to use land”). In this way the deferral of the payment of the licence premium until 2048 makes it tempting to treat the contractual provisions associated with it as simply a mechanism for the dividing up of the proceeds of the harvest between the taxpayers and Trinity 3. After all, as a matter of economic substance that is exactly what it is. But viewing the arrangements in this way involves impermissible resort to ideas of economic equivalence.
[101] It would have been open to the parties (ie Trinity 3 and the taxpayers) to put in place a joint venture under which Trinity 3 contributed the land and the taxpayers established and maintained the forest with the proceeds of the harvest distributed in accordance with a formula which produced net economic consequences identical to those which are provided for in the documents which go to make up the scheme. That, however, is not the way the scheme was structured. We have to take the scheme as we find it. Under the scheme, the forest is established and maintained by the taxpayers who require a licence from Trinity 3 to do so. That licence is a right to use land for the purposes of the Act. The structure of the scheme is that Trinity is paid for conferring on the taxpayers that right to use land and we can see no escape from the conclusion that the payment to be made in 2048 is therefore made for that right. We likewise see no escape from the conclusion that that payment is “the cost” of the relevant “right to use land”.
[102] So on this aspect of the case we agree with the taxpayers.

Is the scheme void for tax avoidance?

The legislation

[103] The provisions relevant to this aspect of the case are s BB 9 for the 1997 year and s BG 1 for the 1998 year.
[104] Section BB 9 provided:

Every arrangement made or entered into, whether before or after the commencement of this Act, shall be absolutely void as against the Commissioner for income tax purposes if and to the extent that, directly or indirectly,—

(a) Its purpose or effect is tax avoidance; or

(b) Where it has 2 or more purposes or effects, one of its purposes or effects (not being a merely incidental purpose or effect) is tax avoidance, whether or not any other or others of its purposes or effects relate to, or are referable to, ordinary business or family dealings,—

whether or not any person affected by that arrangement is a party to it.

[105] Section BG 1 provides:

Arrangement void

(1) A tax avoidance arrangement is void as against the Commissioner for income tax purposes.

Enforcement

(2) The Commissioner, in accordance with Part G (Avoidance and Non-Market Transactions), may counteract a tax advantage obtained by a person from or under a tax avoidance arrangement.

[106] Section OB 1 defined “tax avoidance” for both years as including:

(a) Directly or indirectly altering the incidence of any income tax:

(b) Directly or indirectly relieving any person from liability to pay income tax:

(c) Directly or indirectly avoiding, reducing, or postponing any liability to income tax:

[107] For both years “tax avoidance arrangement” is defined as:

an arrangement, whether entered into by the person affected by the arrangement or by another person, that directly or indirectly—

(a) Has tax avoidance as its purpose or effect; or

(b) Has tax avoidance as one of its purposes or effects, whether or not any other purpose or effect is referable to ordinary business or family dealings, if the purpose or effect is not merely incidental.

[108] Sections BB 9 (for the 1997) year and BG 1 (for the 1998 year) are the successors to broadly similar provisions in earlier tax legislation, s 99 of the Income Tax Act 1976 and s 108 of the Land and Income Tax Act 1954. We will refer to them collectively as general anti-avoidance provisions.

Inconsistency between general anti-avoidance provisions and specific tax rules – an overview

[109] We have held that the licence fee premium payable in 2048 is within the depreciation rules relied on by the taxpayers. As well, on the basis of our conclusions so far, the insurance premiums are, subject to tax avoidance considerations, deductible (albeit in the case of the payment required in 2047, to be spread under the accruals rules). Under the specific tax rules relied on by the taxpayers, they are entitled to deductions for the licence and insurance premiums. On the other hand, if the Trinity scheme was a tax avoidance arrangement as the Commissioner contends, it would fall foul of the relevant general anti-avoidance provisions. There is not much difficulty in concluding that the Trinity scheme is caught by a literal reading of the general anti-avoidance provisions. The case raises what is now a reasonably familiar problem: which part of the Act takes priority, the general anti-avoidance provisions relied on by the Commissioner or the specific tax rules relied on by the taxpayers.
[110] In Mangin v Commissioner of Inland Revenue [1971] NZLR 591 at 602 (PC) Lord Wilberforce (in dissent) posed two questions:

Is there a distinction between "proper" tax avoidance and "improper" tax avoidance? By what sense is this distinction to be perceived?

The first of these questions is easily answered as there plainly is a distinction between “tax advantage” which is not subject to avoidance and “tax avoidance”, which is. But a simple test for distinguishing between these two concepts remains elusive, as exemplified by the differences of opinion in Peterson v Commissioner of Inland Revenue [2006] 3 NZLR 433 (PC).

[111] What has confounded this area of the law is that tax legislation necessarily creates both incentives and disincentives and it would be perverse to hold that rational and intended taxpayer responses to such incentives (or disincentives) are caught by general anti-avoidance provisions despite being within their letter.
[112] The first of the modern cases is Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (CA). Of particular significance is the scheme and purpose approach taken by Richardson J at 549:

Section 99 thus lives in an uneasy compromise with other specific provisions of the income tax legislation. In the end the legal answer must turn on an overall assessment of the respective roles of the particular provision and s 99 under the statute and of the relation between them. That is a matter of statutory construction and the twin pillars on which the approach to statutes mandated by s 5(j) of the Acts Interpretation Act 1924 rests are the scheme of the legislation and the relevant objectives of the legislation. Consideration of the scheme of the legislation requires a careful reading in its historical context of the whole statute, analysing its structure and examining the relationships between the various provisions and recognising any discernible themes and patterns and underlying policy considerations.

Certainly the scheme and purpose approach to statutory analysis will not furnish an automatic easy answer to these interpretation problems. Tax legislation reflects historical compromises and it bears the hands of many draftsmen in the numerous amendments made over the years. It is obviously fallacious to assume that revenue legislation has a totally coherent scheme, that it follows a completely consistent pattern, and that all its objectives are readily discernible. There is force in the thesis that in many respects the tax base is so inconsistent and contains so many structural inequities that a single general anti-avoidance provision such as s 99 cannot be expected to provide an effective measure by which to weigh the exercise of tax preferences (see GJ Harley, "Structural inequities and concepts of tax avoidance" (1983) 13 VUWLR 38). Nevertheless, that emphasis on trying to discern the scheme and purpose of the legislation is likely to provide the legal answer to the relation between s 99 and other provisions of the Act that best reflects the intention of Parliament as expressed in the statute.

Although the actual judgment of this Court in Challenge was overturned in the Privy Council, the approach taken by Richardson J remains current. Lords Bingham of Cornhill and Scott of Foscote, for instance, endorsed it in their dissenting judgment in Peterson at [61] and we do not understand the majority opinion in that case to have adopted a different approach.

[113] It was very much on the basis of Richardson J’s Challenge judgment and Peterson that the taxpayers, through Mr Carruthers, advanced their “threshold question” argument. On their contention, unless it could be shown that the deductions lay outside the scheme and purpose of the provisions of the Act which were invoked by the taxpayers, the Commissioner’s case failed. We accept that this proposition of law is well-supported by current authority and that we should apply it. But how it should be applied is not altogether easy. This is illustrated by the way the taxpayers’ argument proceeded. They maintained that the tax system operates on the basis that taxpayer autonomy should be respected, time value of money considerations are irrelevant (at least in the absence of specific legislation), timing mismatches between the economic cost of expenditure and associated deductibility are thus to be expected and artificial business structures contrived to capture associated tax benefits are perfectly acceptable. On this very specific approach, there is no inconsistency between the deductions claimed by the taxpayers and the scheme and purpose of the Act. This approach, of course, does not leave much scope for a general avoidance provision. Indeed the premise which underlay much of what Mr Carruthers said is that our law should follow that established by English tax cases in the line of authorities which starts with W T Ramsay Ltd v Inland Revenue Commissioners [1981] UKHL 1; [1982] AC 300 (HL) despite those cases being decided in the context of a regime which does not contain a general avoidance provision.
[114] We note that a simpler way of resolving the inconsistency problem would be to give general anti-avoidance provisions a primacy that is displaced only when there is a discernible legislative intention that a particular type of transaction should not be subject to them.
[115] The dissenting judgment of Woodhouse P in Challenge proceeds very much along the lines just discussed and there are passages in the Privy Council judgment in that case, which can be read in the same way. Such an approach has the advantage of being reasonably faithful to the statutory text. It would also perhaps be more certain (and undoubtedly more favourable from the point of view of the general body of taxpayers) than its alternatives. That said, the drift of modern authority (including Peterson) puts it beyond the power of this Court to adopt the stance that the general anti-avoidance provisions are to be accorded primacy over specific tax rules.
[116] In contradistinction to the approach just discussed, the threshold question as postulated and developed by Mr Carruthers would give primacy to specific tax rules and a secondary role, at best, to general anti-avoidance provisions. Indeed Mr Carruthers placed so great a reliance on English cases which were decided in the absence of such a provision, that he sometimes came close to maintaining that general anti-avoidance provisions have no role at all. In this context, it is important to recognise that what we are referring to as specific tax rules are not always very specific. The depreciation, insurance and general deductibility provisions relied on by the taxpayers of course are very general. Similar considerations apply in respect of the broader principles he relied on, for instance that timing mismatches between “real” expenditure and deductibility are contemplated by the income tax system. In a real sense, general anti-avoidance provisions are at least as “specific” in their targeting of tax avoidance as specific deductibility rules are in relation to deductions and thus there is no obvious reason why specific deductibility rules should occupy the whole or most of the ground.
[117] It is now elementary that:

(a) Anti-avoidance provisions apply to counteract tax advantages which, but for the anti-avoidance provision would be available to the taxpayer, cf Peterson at [4];

(b) So there is no need to prove that the impugned transaction is a sham, see for instance Challenge at 532-33 per Woodhouse P; and

(c) A transaction which complies with a specific anti-avoidance provision may nonetheless be struck down under the general anti-avoidance provisions (as Challenge in the Privy Council indicates).

[118] On the current authorities, what might invoke application of the general anti-avoidance provisions?

(a) Transactions which are “technically correct but contrived”, see Challenge at 532 per Woodhouse P.

(b) Elements of pretence, see the remarks of Lord Templeman in Challenge in the Privy Council at 562. In this context, “pretence” does not necessarily mean falsehood as the explanation given by Lord Templeman indicates.

(c) Although the tax system does not provide for taxation by economic equivalence, considerations of economic reality inevitably are material, see Challenge at 535 per Woodhouse P and at 562 per Lord Templeman. In Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071 (HL) at 1079 Lord Nolan, in the lead judgment, observed:

The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability.

These remarks were cited in the majority judgment in Peterson (at [38]) as applicable in the New Zealand context.

[119] The position was summarised by Richardson P (writing for himself, Keith and Tipping JJ) in this way in Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA) at [39]-[42]:

[39] For the reasons discussed in the cases (eg Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at p 545), s 99 as the expanded successor of the old s 108 of the Land and Income Tax Act 1954 is perceived legislatively as an essential pillar of the tax system designed to protect the tax base and the general body of taxpayers from what are considered to be unacceptable tax avoidance devices. By contrast with specific anti-avoidance provisions which are directed to particular defined situations, the legislature through s 99 has raised a general anti-avoidance yardstick by which the line between legitimate tax planning and improper tax avoidance is to be drawn.

[40] Line drawing and the setting of limits recognise the reality that commerce is legitimately carried out through a range of entities and in a variety of ways; that tax is an important and proper factor in business decision making and family property planning; that something more than the existence of a tax benefit in one hypothetical situation compared with another is required to justify attributing a greater tax liability; that what should reasonably be struck at are artifices and other arrangements which have tax induced features outside the range of acceptable practice – as Lord Templeman put it in Challenge at p 562, most tax avoidance involves a pretence; and that certainty and predictability are important but not absolute values.

[41] The function of s 99 is to protect the liability for income tax established under other provisions of the legislation. The fundamental difficulty lies in the balancing of different and conflicting objectives. Clearly the legislature could not have intended that s 99 should override all other provisions of the Act so as to deprive the taxpaying community of structural choices, economic incentives, exemptions and allowances provided by the Act itself. Equally the general anti-avoidance provision cannot be subordinated to all the specific provisions of the tax legislation. It, too, is specific in the sense of being specifically directed against tax avoidance; and it is inherent in the section that, but for its provisions, the impugned arrangements would meet all the specific requirements of the income tax legislation. The general anti-avoidance section thus represents an uneasy compromise in the income tax legislation.

[42] Line drawing represents the legislature’s balancing of the relevant public interest considerations. In terms of s 99, that line drawing is directed to three elements, each of which contains its own limits. There must be an arrangement coming within the section. The arrangement must have a more than merely incidental purpose or effect of tax avoidance. And where those two ingredients are present, the assessable income of any person affected by the arrangement is adjusted so as to counteract any tax advantage obtained by that person from or under that arrangement.

[120] The other recent decision to which we obviously must refer is Peterson, a case concerned with non-recourse loan financing of film investments. The non-recourse loan was referred to in the judgment as “$y” whereas as the money directly paid by the investors for production costs was referred to as “$x”. Ostensibly each investor had paid a total of $x + y for production costs.
[121] Because the taxpayers relied heavily on this case, we should set out the reasoning of the majority:

[36] In Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at p 549 Richardson J pointed out that it was obviously never intended that transactions should be struck down merely because they were influenced by the prospect of obtaining a tax advantage. In many cases, but for the anticipated availability of a tax benefit, the taxpayer would never have entered into the transaction at all. Basic features of the tax system, such as depreciation and trading stock valuations, he said, clearly allow for the deliberate pursuit of tax advantage.

[37] When that case reached the Board, Lord Templeman explained at p 561 the distinction between an acceptable tax advantage (which he described as tax mitigation), which was not caught by s 99, and an unacceptable one (which he described as tax avoidance), which was:

The material distinction in the present case is between tax mitigation and tax avoidance. A taxpayer has always been free to mitigate his liability to tax . . .

Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income or entitle him to reduction in his tax liability . . .

Section 99 does not apply to tax mitigation where the taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability.

Section 99 does apply to tax avoidance. Income tax is avoided and a tax advantage is derived from an arrangement when the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction. The taxpayer engaged in tax avoidance does not reduce his income or suffer a loss or incur expenditure but nevertheless obtains a reduction in his liability to tax as if he had.

(Emphasis added.)

[38] Lord Nolan said much the same in the English case of Commissioners of Inland Revenue v Willoughby (1997) 70 TC 57 at p 116:

The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability . . . But it would be absurd in the context of [the provision there affording relief from tax] to describe as tax avoidance the acceptance of an offer of freedom from tax which Parliament has deliberately made.

[39] Investors in films are entitled to depreciate their full acquisition costs. This is so however much the film actually costs the production company to make and by whatever means the investors have obtained the funds to finance the acquisition. Given the fact, never challenged and now conceded by the commissioner, that the investors paid $x+y to acquire the film, they incurred the expenditure which Parliament contemplated should entitle them to the depreciation allowance which they claim. If viewed alone this amounted to a tax advantage but not to tax avoidance within the scope of the section.

[40] It is, however, necessary to look a little further and consider the acquisition of the film in its wider setting. Their Lordships endorse the observations of Richardson P in Challenge Corporation Ltd v Commissioner of Inland Revenue at p 549:

. . . s 99 would be a dead letter if it were subordinate to all the specific provisions of the legislation. It, too, is specific in the sense of being specifically directed against tax avoidance . . . while the use [of trusts and companies] is regarded as legitimate and not on its own affected by s 99, it may be only one element in a wider arrangement which is caught by the section.

The wider setting on which the commissioner relies includes the false inflation of the costs of production, the leverage obtained by use of a non–recourse loan and the recycling of the loan to the lender.

[41] Before considering the effect of these features, Their Lordships must say something about the purpose for which depreciation allowances are granted by Parliament. They are not specific to film financing but are of general application and have nothing to do with encouraging people to invest in films or indeed anything else. The statutory object in granting a depreciation allowance is to provide a tax equivalent to the normal accounting practice of writing off against profits the capital costs of acquiring an asset to be used for the purposes of a trade (see Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2004] 3 WLR 1383 per Lord Nicholls of Birkenhead at para [39]).

[42] Consistently with the statutory purpose, it is not only necessary but also sufficient that the taxpayer should have incurred capital expenditure in acquiring an asset for the purposes of trade. The focus is on the party who acquires the asset. It does not matter what the party who disposes of the asset does with the money (see Barclays at para [39] per Lord Nicholls of Birkenhead). It is therefore quite wrong to suggest that the purpose of the statutory depreciation regime, when invoked by persons who have incurred a liability to pay a capital sum to acquire a film, is not satisfied unless the disponor applies the proceeds in making the film. If the commissioner had shown that the features on which he relied, singly or in combination, had the effect that the investors, while purporting to incur a liability to pay $x+y to acquire the film, had not suffered the economic burden of such expenditure before tax which Parliament intended to qualify them for a depreciation allowance, then he could invoke s 99 to disallow the deduction.

[43] This, however, the commissioner never succeeded in doing. The inflation of the costs of making the film meant that the production company made a secret profit at the investors’ expense; but it did not alter the fact that they incurred a liability to pay $x+y to the production company in accordance with the contract to acquire the film. The costs of making the film were incurred by the production company, and these must not be confused with the costs incurred by the investors, which were the relevant costs in respect of which the deduction was claimed. The fact that the production company made a profit of $y at the expense of the investors did not mean that they did not suffer the economic cost of paying it. As Lord Diplock, speaking for the Board, said in Europa Oil (NZ) Ltd v Commissioner of Inland Revenue [1976] 1 NZLR 546 at p 556:

Their Lordships’ finding that the monies paid by the taxpayer company . . . is deductible under s 111 as the actual price paid by the taxpayer company for its stock–in–trade under contracts for the sale of goods entered into with Europa Refining . . . is incompatible with those contracts being liable to avoidance under [the predecessor of section 99]. In respect of these contracts the case is on all fours with Cecil Bros Pty Ltd v Federal Commissioner of Taxation [1964] HCA 82; (1964) 111 CLR 430 in which it was said by the High Court of Australia ‘it is not for the Court or the commissioner to say how much a taxpayer ought to spend in obtaining his income.’ (ibid p 434).

[44] The leverage obtained by use of a non–recourse loan meant that the investors did not sustain an economic loss after the tax deduction is taken into account. Their Lordships suspect that it is this feature of the scheme which has most exercised the commissioner. But a moment’s reflection shows that what Lord Templeman had in mind was expenditure or loss before any tax advantage is taken into account. Tax relief often makes the difference between profit and loss after tax is taken into account; and a transaction does not become tax avoidance merely because it does so. The fact that the investment was funded by a non–recourse loan did not alter the fact that the investors had suffered the economic burden of paying the full amount of $x+y. It was not and could not be suggested that either loan was on terms which meant that it was unlikely ever to be repaid. The investors have repaid one of the loans in whole or in part, albeit out of the film receipts; and they incurred a liability to repay the other if the film generated sufficient receipts, as it was hoped it would.

[45] The circular movement of money sometimes conceals the fact there is no underlying activity at all. But each of the payments in the circle must be examined in turn to see whether it discharged a genuine liability of the party making the payment. It does not matter whether external funds were introduced into the circle or whether cheques were handed over and duly honoured. If the money movements did not discharge a genuine liability the introduction of external funds will not save it; if they did, their absence will not affect it. In either case the payments are interdependent, in the sense that each of the payments is dependent on the receipt which funds it and each receipt on the payment by which it is funded. On the way in which the commissioner put his case the relevant payments were those by which the investors received the non–recourse loan and paid it out to the production company. Subsequent payments through the circle of which the investors were unaware and which they could not control or prevent did not alter the fact that they had borrowed $y and used it towards the discharge of their liability to pay $x+y to the production company, thereby suffering the loss or incurring the relevant expenditure for which the depreciation allowance is granted.

[46] The $x+y was ostensibly paid as consideration for the acquisition of the film, and while the commissioner was at pains to argue that it was never “truly” paid, it was no part of his case at any stage that it was paid for any other purpose. Before the Board he conceded that it was paid as consideration for the making of the film. Their Lordships consider that this concession, which was inevitable from the way in which the commissioner has conducted the case throughout, is fatal to his case.

(Emphasis in original)

[122] For the sake of completeness, we should set out two passages from the minority judgment (of Lords Bingham and Scott). The first is in general terms. After referring to the history of New Zealand and Australian general anti-avoidance provisions, Lords Bingham and Scott went on:

[58] ... By contrast, the United Kingdom had, and has, no general anti–tax avoidance statutory provision. The Courts of this jurisdiction have developed principles under which certain tax-avoidance arrangements can be held to fail to achieve their intended fiscal effect (see Ramsay (WT) Ltd v Inland Revenue Commissioner [1981] UKHL 1; [1982] AC 300; Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991 and MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311). But, as was pointed out by Thomas J at para [74] of his dissenting judgment in Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 the jurisprudential development of these principles in the United Kingdom has little, if any, relevance to the correct interpretation and application of s 99. It is the legislature, not the judiciary, that has provided the counter to tax avoidance in New Zealand. Whether the application of s 99 by the commissioner is permissible must be decided as a matter of statutory construction.

...

[60] One of the main difficulties, as it seems to us, to which the application of the section may give rise – and indeed the main difficulty to which it does give rise on the facts of these appeals – is the difficulty of distinguishing between those tax advantages which are to be nullified by the commissioner and those tax advantages which are legitimate and could not have been intended by the legislature to be at risk under s 99. The term “tax advantage” is usually used in order to draw a contrast between, at one extreme, “tax evasion”, which is criminal and, at the other extreme, “tax mitigation”, which is no more than legitimate tax planning. The line to be drawn between “tax evasion” and “tax avoidance” is clear enough. The former is criminal. The latter is not. It may be socially undesirable but is within the letter of the law. But the line to be drawn between “tax mitigation” and s 99 tax avoidance is by no means clear. Suppose a statutory regime under which the part of salary paid into a personal pension fund, earmarked to provide a pension on retirement, is free of income tax. We are very familiar with such a regime in this country. As a matter of ordinary language a salary earner who avails himself of this statutory privilege is doing so in part to provide for his retirement, but also in part to obtain the tax advantage that the regime offers. No one could sensibly suggest that the scheme agreed upon between the pension provider (usually an insurance company) and the salary earner was a s 99 “arrangement” that was vulnerable to being nullified under subs (3).

[61] This is a problem about s 99 that was faced in Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513. Woodhouse J in the Court of Appeal said at p 533 that:

... it must be kept in mind that the section is concerned not with outright impropriety but with finding a line between what is acceptable and so unaffected by it and what is undeserving and so for tax purposes made void.

and Richardson J commented at p 548 that:

Clearly the legislature could not have intended that s 99 should override all other provisions of the Act so as to deprive the tax paying community of structural choices, economic incentives, exemptions and allowances provided for by the Act itself.

Richardson J at p 549 then pointed to the approach to be followed in trying to resolve the difficulty:

That is a matter of statutory construction and the twin pillars on which the approach to statutes mandated by s 5(j) of the Acts Interpretation Act 1924 rests are the scheme of the legislation and the relevant objectives of the legislation. Consideration of the scheme of the legislation requires a careful reading in its historical context of the whole statute, analysing its structure and examining the relationships between the various provisions and recognising any discernible themes and patterns and underlying policy considerations.

When the case reached the Privy Council nothing was said by Their Lordships casting any doubt on the approach recommended by Richardson J. The approach is one that we would respectfully endorse.”

Then, when dealing with the merits:

[91] It has been suggested, in support of the argument referred to, that if an investor is asked to pay and agrees to pay an inflated price for the film rights in a particular film, he is entitled ... to depreciate the whole of the cost of acquisition, whether inflated or not. We doubt this proposition. The statutory right to depreciate an item of cost and to deduct the amount of the depreciation from assessable income is plainly a tax advantage. Whether it is a tax advantage vulnerable to attack under s 99 depends, in our opinion, on whether it is within the purpose of the statutory regime. We cannot believe that, if the cost of acquisition of a film is inflated for no commercial reason other than that of qualifying for a higher tax deduction than would otherwise be available, the amount of the inflation could be regarded as the sort of cost that the statutory regime was intended to assist or encourage. In any event, in the present case the amount of each non–recourse loan was not presented to the investors as a premium on the cost of production that they had to pay. It was presented to them on the basis that the amount was needed for the cost of production and that it would qualify for depreciation as part of the cost of production. The non–recourse loan was, in fact, nothing of the sort but was no more than a device to produce a higher capital sum to be depreciated and, thereby, a higher tax deduction. Moreover the amounts represented by the non–recourse loans were not received by the respective production companies as premiums that had to be paid as part of the investors’ acquisition costs. They were not recorded in their books as having been received at all.

[92] If the approach recommended by Richardson J in the Challenge case is followed (see para [61] above) it seems to us that these appeals cannot succeed. The arrangements ... were tax-avoidance arrangements of a plainly undesirable kind and of a kind that cannot, in our opinion, be reconciled with the statutory purpose of encouraging investment in the production of films. To hold that the apparent ignorance of the investors excuses them from vulnerability to the statutory avoidance measures provided by s 99 would be, in our opinion, to emasculate the section. We are not willing to be party to that emasculation and would advise that these appeals ought to be dismissed.

[123] The majority (at [42]) considered that the Commissioner would have succeeded if he had:

[S]hown that the features on which he relied, singly or in combination, had the effect that the investors, while purporting to incur a liability to pay $x+y to acquire the film, had not suffered the economic burden of such expenditure before tax which Parliament intended to qualify them for a depreciation allowance, then he could invoke s 99 to disallow the deduction.

The minority (at [91]) saw the case as depending on whether the deduction claimed was “within the purpose of the statutory regime”. These two formulations of the test are similar and the difference between the two approaches seems to have come down to a difference of opinion as to whether the investors had, in truth, suffered the pre-tax economic consequences which were intended by the legislature to be the prerequisite of deductibility.

[124] In the result, as is apparent from what we have already said, we accept that the proposition of law which underpins Mr Carruthers’ threshold question is partially correct (albeit that we are not persuaded that it is necessary to use the description “threshold question”).
[125] Obviously, there is a need to recognise that in some instances the legislature must have intended to encourage particular types of behaviour. Behaviour of that type (being the sort of behaviour which was within the contemplation of the legislature) cannot be within the general avoidance provisions because the overall legislative purpose is that such behaviour should attract the tax consequences provided for by Parliament. Likewise, it may sometimes be obvious that the specific tax rules relied on were not intended to confer the tax benefit in issue. Such a case, however, is likely to be decided simply by construing the relevant specific tax rules so as to accord with the legislative intent and without any need to resort to the general anti-avoidance provisions.
[126] Cases which lie in between the two extremes just identified still raise a question of statutory interpretation but one which, in our view, cannot be addressed solely by reference to the specific tax rules relied on by the taxpayer. The general anti-avoidance provisions are also relevant. Given the generality of cases to which specific tax rules necessarily apply, it would be unrealistic to confine the application of general anti-avoidance provisions to transactions which lie outside of a discernible specific legislative purpose. When construing such specific rules and looking for their scheme and purpose, it is necessary to keep general anti-avoidance provisions steadily in mind. On this basis, it will usually be safe to infer that specific tax rules as to deductibility are premised on the assumption that they should only be invoked in relation to the incurring of real economic consequences of the type contemplated by the legislature when the rules were enacted. Further, it also seems reasonable to assume that deductibility rules are premised on a legislative assumption that they will only be invoked by those who engage in business activities for the purpose of making a profit. Further, schemes which come within the letter of specific tax deductibility rules by means of contrivance or pretence are candidates for avoidance. The result in any given case comes down to a question of evaluation, or as Richardson P put it in BNZ Investments, an exercise in “line drawing”.

The approach of the Judge

[127] In his judgment, Venning J addressed at considerable length what he called “the commerciality of the investment”. This was very much a result of the way in which the case was presented to him. Commerciality considerations received much less attention before us. In part this was because none of the parties had any enthusiasm for a detailed challenge to the conclusions of Venning J but, perhaps more importantly, his conclusions were not regarded as controlling the outcome of the appeal.
[128] The Judge’s approach to this aspect of the case is nonetheless of importance and should be recorded.
[129] Throughout the case, the Commissioner’s position has been that the forestry investment would not achieve the returns necessary in order to enable the taxpayers to meet the licence premium of $2,050,518 per hectare in 2048 as required. In effect the Commissioner argued that the investment was not a bona fide commercial proposition.
[130] As the Judge noted, the parties were agreed as to how this contention should be evaluated:

[42] While unable to agree on the commerciality of the forest venture, the plaintiffs and the CIR were able to agree that whether the forest would be commercially viable or not was dependent on three principal factors:

• the initial figure taken for stumpage in 1997;

• the figure for log price growth over 50 years;

• the average annual inflation rate over 50 years.

The Judge addressed each of these issues. He also used a discount rate to allow for timing differences in relation to anticipated receipts and payments but given that the bulk of the anticipated receipts and payments will occur effectively simultaneously, the discount rate is of little moment. After allowing for all these factors, the Judge’s conclusions were as follows:

[109] The result is that ... I have found after considering the expert evidence the forestry investment will not return a positive net present value. On that analysis the forestry investment in Trinity 3 will not be a successful investment.

[110] That however is not an end of the matter. As is apparent from the exercise required to arrive at that conclusion there are a number of variables involved that are themselves subject to a number of assumptions. Although the conclusion can be expressed in a mathematical table, there is no mathematical certainty in the exercise. Mr White accepted in his closing for the Commissioner there is a possibility of return from the forest — albeit a remote possibility. In my view, against the evidence I have heard, I consider that the prospect of a positive return from the forest at maturity is unlikely, but it cannot be ruled out.

[131] The Judge later went on to discuss the legal principles by reference to the leading authorities. Having done so he found against the taxpayers for reasons which appear in the following passages of his judgment:

[289] The Commissioner's acceptance [that] the silviculture expenses are deductible, or that there is a possibility, albeit in his view remote, of the forest returning a profit in 2047 does not preclude a finding that the arrangement in issue, the Trinity scheme, has as its purpose or effect tax avoidance and nor does it preclude a finding that the related issue of whether that purpose or effect was more than merely incidental.

[290] Nor does the fact that the specific provisions allow deductibility of licence and/or insurance premiums preclude the application of general avoidance provisions ... .

...

[292] The issue of whether there is tax avoidance in this case requires consideration of the scheme and purpose of the Act as a whole and the specific statutory provisions in issue. Apart from the specific provisions which have been considered above, that requires consideration of whether the arrangement:

• directly or indirectly alters the incidence of income tax;
• directly or indirectly relieves any person from liability to pay income tax;
• directly or indirectly avoids, reduces or postpones any liability to income tax.

...

[295] There is in my judgment a difference between claiming deductions in 1997 and 1998 as opposed to claiming those deductions in 2047 and 2048. Even assuming the premiums would otherwise be deductible in 2047/2048 the Trinity scheme has been structured to achieve the acceleration of the availability of those deductions. At the very least the effect, putting purpose to one side, is to relieve, reduce or postpone liability to income tax. ...

...

[297] That leads to consideration of the final and perhaps most important requirement, namely whether the arrangement was undertaken with more than an incidental purpose of achieving the tax benefits or advantages identified.

...

[304] ... I have come to the clear view that tax avoidance was more than a merely incidental purpose of the arrangement known as the Trinity scheme. The fact the legislation permits deductions in advance of income does not, having regard to the particular facts of this case, assist the plaintiffs. As Lord Templeman said in Challenge Corp v CIR:

Tax avoidance schemes largely depend on the exploitation of one or more exemptions or reliefs or provisions or principles of tax legislation. Section 99 would be useless if a mechanical and meticulous compliance with some other section of the Act were sufficient to oust s 99.

[NZTC p 5,223; NZLR p 559]

[305] This question is ultimately determined by the scheme and purpose of the legislation: [C of IR v BNZ Investments Limited (2001) 20 NZTC 17,103; [2002] 1 NZLR 450 (CA)] per Richardson P:

... it is inherent in the section [section 99] that, but for its provisions, the impugned arrangements would meet all the specific requirements of the income tax legislation.

[306] The evidence leads me to conclude that tax avoidance was more than incidental and rather, was the dominant purpose of the Trinity Scheme for the following reasons.

[307] On the basis of some of the assumptions and scenarios discussed in evidence the value of the forest in 2047/2048 may be such that the trees will be worth more than the licence premium due at that time, and in some, even less likely scenarios the investment may have a positive return. On the evidence, however, the more likely scenario is that the investment will not achieve a positive return on capital and, in some instances will not reach the nominal return required to satisfy the premium payment.

[308] The uncertainty of the profitability of the forest venture is in stark contrast to the certainty and extent of the deductions and consequent tax advantages the scheme provided the plaintiffs as investors.

...

[312] Next, while the transaction overall cannot be categorised as a circular transaction in that the ultimate beneficiaries of Trinity 3 and Trinity Foundation are charities and the plaintiffs are on the other hand, investors, the degree of relationship and circularity between the payments or potential payments required by the principal parties to the arrangement including the plaintiffs is significant.

...

[315] Without the tax advantages that have been identified the Trinity scheme was inferior to an ordinary forestry venture. ...

[316] While at law the CSI arrangements satisfy the requirements for insurance practically the insurance arrangements are highly unusual ... .

...

[318] The admission in cl 1.3 of CSI's draft business plan that the real advantage from the scheme was the tax benefits and that the actual outcome of the deal in 50 years time was not considered material.

[319] The unusual structure of the investment.

...

[320] The plaintiff investors were able to choose the extent or amount of their investment to suit their own tax needs. The investment was not offered in fixed amounts or tranches.

[321] The plaintiff investors are experienced and astute commercial business people. They may have had a general interest in investing in forestry, perhaps even in a douglas fir plantation. However, the reason they invested in this particular investment, the Trinity scheme, was the tax benefits associated with the scheme. Without the tax benefits of the Trinity scheme it was less attractive than other investments. As experienced business people they would have been well aware of that fact, and of other opportunities available to them.

[322] The Trinity scheme was established and structured the way it was to achieve the mismatch of the deductibility of the licence and insurance premiums in 1997, and in the case of the licence premium, over the course of the investment (or at least until remedial legislation was passed) as opposed to the obligation the plaintiffs may have had as investors to pay the ultimate licence and insurance premiums in accordance with the promissory note in 2047/2048.

[323] The douglas fir forest on Trinity 3's land might deliver a positive return. Whether it will or not is subject to a number of uncertainties. The result will not be known until 2047/48. What the plaintiff investors knew in 1997, however, and could be certain about was that in joining the Trinity scheme and entering the arrangements that formed that scheme they had the ability to claim significant deductions in 1997/1998 and subsequent years in relation to the insurance and licence premiums against their other, substantial income and for a very limited financial outlay that bore no relation to the tax advantages they obtained. The certainty of that tax deductibility and the significant advantages to them of that in 1997 and the immediately following years was the dominant reason for their entry into the arrangement.

The arguments of the taxpayers on appeal

[132] Mr Judd argued that if the scheme runs through to completion, there will be substantial tax generated from the payment of insurance premiums into CSI and with the payments which the investors receive either from CSI or from the harvest proceeds (in the event those proceeds exceed the payments required of the investors). He maintained that the dynamics are such that it will be in CSI’s best interests to perform and that there is every reason to suppose that the wash up contractual arrangements will be honoured. He noted that as well as the stumpage, the taxpayers had an entitlement to half the value of the land. He maintained that “tax is increased rather than avoided as a result of the arrangement”.
[133] On the licence premium component of the case, Mr Judd maintained that the taxpayers clearly intended to make a profit and it is not for the Commissioner (or the Courts) to tell a taxpayer how much should be paid for business inputs. If it turns out that the taxpayer has made a bad bargain, that is irrelevant. It does not matter that the “value” of the tax deductions are greater than the commercial returns. Such an approach is not available in the tax avoidance context and, as well, inappropriately relies on time value of money considerations which are irrelevant. The focus on the value of early deductions (and associated arguments based on a literal approach to the general anti-avoidance provisions) has never been applied to unrelated parties and linear payments. He also rejected arguments based on the availability of other forestry investments which would have offered more profit and less deductions, arguments which he treated as a collateral attack on the taxpayer autonomy principles.
[134] Primarily, however Mr Judd relied on Peterson which he asserted was a complete answer to the Commissioner’s case, particularly [44] in which the majority observed:

The leverage obtained by use of a non-recourse loan meant that the investors did not sustain an economic loss after the tax deduction is taken into account. Their Lordships suspect that it is this feature of the scheme which has most exercised the commissioner. But a moment’s reflection shows that what Lord Templeman had in mind was expenditure or loss before any tax advantage is taken into account. Tax relief often make the difference between profit and loss after tax is taken into account; and a transaction does not become tax avoidance merely because it does so.

[135] The admissibility of the business plan was challenged.
[136] In his submissions Mr Carruthers covered much of the same ground as Mr Judd although he placed heavy reliance on his “threshold question” argument which we have discussed. He too relied heavily on Peterson and the judgment of Richardson J in Challenge. His contention was that the relevant statutory scheme is simple, that in the context of a long term investment (such as forestry) the deliberate timing of deductions into a current period is consistent with the scheme and purpose of the underlying statutory provisions. He maintained that a net present values approach is an “anathema in the income tax world of nominal tax dollar cash flows”. The taxpayers had not illegitimately exploited that scheme. The Judge had under-estimated the possible benefits to the taxpayers of the legislative scheme. Although there were elements of circularity, the circularity relied on by the Judge was not tied into reasoning why such circularity was offensive in a tax avoidance context. As well, the unusual and captive nature of the insurance arrangements were likewise not of relevance in this context.

The Commissioner’s response

[137] Mr White, for the Commissioner, largely adopted the Judge’s reasoning. He also challenged head-on the contention that the deductions in question were within the scheme and purpose of the relevant provisions of the Act. It is this aspect of his argument which warrants specific discussion.
[138] He denied that there is a “threshold question” as contended for by counsel for the taxpayers. He accepted, of course, that not everything which comes within the literal words of the definition of “tax avoidance” is properly to be regarded as such. But he saw the distinction between “legitimate” and “illegitimate” tax avoidance as turning on whether “the line has been crossed”, a question which required close factual analysis and a number of evaluative questions, such as whether the scheme involved “pretences”, “artifices”, “tax induced features outside the range of acceptable practice” and, in particular, whether the effect of the scheme was to allow taxpayers “to obtain reductions in their tax liability without incurring the economic consequences”.
[139] In any event he maintained that the Trinity arrangements were not consistent with the scheme and purpose of the relevant provisions of the Act which, in the case of depreciation, were plainly not intended to facilitate tax avoidance and in respect of both depreciation and insurance premiums were in any event intended to apply only in relation to costs which had been genuinely (ie in economic terms) incurred in respect of genuine business activities.

Applying the principles to the facts

[140] In a real and tangible sense, there is a business (namely the growing of a douglas fir forest). It is likely enough (although not certain) that this forest will be maintained until harvest and that some revenue will then be produced. It is even possible that this revenue may be sufficient to provide an actual return for the investors. All of this leaves plenty of scope for argument based on taxpayer autonomy and choice, with the taxpayers maintaining that it is irrelevant that they could have made other more commercially advantageous (although less tax effective) forestry investments. A forestry venture with its long timeframes necessarily involves the possibility of mismatches between the actual incurring of expenditure and receipt of proceeds on the one hand and, on the other, tax recognition of expenditure and income. So the Trinity scheme is clever. But, this cleverness should not be allowed to obscure the reality that this particular emperor has no clothes.
[141] It is clear that the real purpose of the arrangement is not the conduct of a forestry business for profit, but rather generation of spectacular tax benefits. The end result (ie the profitability or otherwise of the venture) was never seen as being material. The corollary of this statement is that there never was a “real” purpose of making a profit from the harvesting of trees.
[142] The CSI business plan is candid to say the least and the relevant passage, although set out above, is worth repeating:

The real benefits of the deal are tax concessions that can be obtained now by the investors and the foundation. One of the conditions required to gain the tax relief is that the insurance must be in place. The actual outcome of the deal in fifty years time is not considered material.

The Judge concluded (as he was entitled to) that this acknowledgement originated with Dr Muir. The statement could fairly be attributed therefore to Dr Muir’s LAQC (Redcliffe Forestry), Mr Bradbury and Mr Bradbury’s LAQC (Bristol Forestry). More importantly, the business plan is part and parcel of the overall arrangements and thus the tax avoidance arrangement identified by the Commissioner. It is thus admissible in relation to all who were parties to or affected by that arrangement. It is important as it reflects an understanding at the inception of the scheme that the end results were not “material” and that the “real benefits” and thus the purpose of the arrangements in which the taxpayers participated were “tax concessions”.

[143] This statement in the plan is, in any event, a statement of the obvious:

(a) The structure makes no commercial sense at all. For practical purposes the taxpayers provided all the funds which were necessary to acquire the land and plant the forest. There is no commercial reason why they should agree to pay another $2m a hectare for the privilege of using land the purchase of which they had funded. The option to acquire the land at half its value does not go anywhere near to balancing the ledger. The prospects of a profit are remote.

(b) The insurance arrangements likewise make no commercial sense. If Trinity 3 and the taxpayers are treated as a single entity (as they largely are under the insurance policy) the insurance arrangements offer no substantial reduction of risk (given their circularity). The proceeds of payment of the initial insurance premiums were largely paid by the insurer to entities associated with Dr Muir and Mr Bradbury.

(c) It is of no real significance to Trinity 3 whether the taxpayers meet their liabilities which fall due in the wash-up phase. If it was of significance, one would expect Trinity 3 to have sought personal guarantees from the individuals in behind the companies with which it was formally dealing, securities over non-forestry assets and other commercial safeguards against the risk of default.

(d) As the other side of the coin to the point just mentioned, the apparent obligation to meet these liabilities is likewise of no real significance to those who have incurred them. The individuals behind the companies have the practical ability to walk away from the liabilities.

(e) The considerations just mentioned cannot simply be brushed aside as irrelevant given taxpayer autonomy principles because they are manifestations of the absence of a genuine business purpose on the part of the taxpayers.

[144] Applying the analysis required by Peterson, Challenge and BNZ Investments to the depreciation claim:

• (a) The taxpayers have met the technical requirements of deductibility, see [102] above. But;
• (b) Section BG 1 requires the Court to look at the scheme and purpose of the provisions under which the deductions are claimed. In a case involving a depreciation claim, that is, as noted by Richardson P in BNZ Investments, to depreciate the cost of capital assets acquired for a business purpose.
• (c) In this case the licence fee which is payable is not a cost of the kind contemplated by the depreciation provisions relied on; this because of the essentially voluntary nature of the obligation to pay the fee. The taxpayers have not suffered the pre-tax economic burden (as opposed to a technical legal liability) which Parliament intended as the pre-condition of deductibility, cf Peterson at [43] and the remarks of Lord Nolan in Willoughby. As well, there is no business purpose, simply a purpose of generating deductions, and in this respect too the taxpayers have not met what Parliament must have contemplated as a precondition of deductibility.
• (d) So the arrangement is “technically correct but contrived” in the words of Woodhouse P in Challenge (at 532) and is an artifice with “tax induced features outside the range of acceptable practice”, see the remarks of Richardson P in BNZ Investments at [40].

[145] Broadly similar considerations apply in the case of the insurance premiums.
[146] Given the conclusions just expressed, the scheme is caught by the general anti-avoidance provisions even on the most stringent version of Mr Carruthers’ “threshold question” test. In short, we are satisfied that this scheme is well and truly across the “line” referred to by Richardson P in BNZ Investments.

The position of Greenmass, Ben Nevis and Messrs Peebles and Laird

[147] Greenmass and Ben Nevis are LAQCs. This means that their losses were automatically transferred to their shareholders (Messrs Peebles and Laird). In their relevant returns Greenmass and Ben Nevis acknowledge the statutory attribution of losses which were also acknowledged in the returns filed by Messrs Peebles and Laird.
[148] Ms Hinde maintained that Greenmass and Ben Nevis necessarily derived no tax advantages as their losses were transferred and mopped up by them writing back as assessable income the deductions which were claimed by their shareholders. We will discuss this point shortly, in relation to reconstruction.
[149] Further, and more to the present point, she claimed that Messrs Peebles and Laird were not themselves parties to, or parties affected by, the tax avoidance arrangement. We disagree. The set up of Greenmass and Ben Nevis, their adoption of LAQC status and the distribution of their losses to Messrs Peebles and Laird were all part and parcel of the tax avoidance arrangement, as the Judge found. Messrs Peebles and Laird were therefore either parties to, or affected by, the arrangement.

Reconstruction

[150] For the 1997 tax year, s GB 1 provided:

Where an arrangement is void in accordance with section BG 1, the amounts of assessable income, deductions, and available net losses included in calculating the taxable income of any person affected by that arrangement may be adjusted by the Commissioner in the manner the Commissioner thinks appropriate, so as to counteract any tax advantage obtained by that person from or under that arrangement, and, without limiting the generality of this subsection, the Commissioner may have regard to—

(a) Such amounts of assessable income, deductions, and available net losses as, in the Commissioner's opinion, that person would have, or might be expected to have, or would in all likelihood have, had if that arrangement had not been made or entered into; or

(b) Such amounts of assessable income and deductions as, in the Commissioner's opinion, that person would have had if that person had been allowed the benefit of all amounts of assessable income, or of such part of the assessable income, as the Commissioner considers proper, derived by any other person or persons as a result of that arrangement.

For the 1998 tax year, it was amended with the phrases “gross income” substituted for “assessable income” and “allowable deductions” substituted for “deductions”.

[151] In the amended assessments the Commissioner completely disallowed the deductions claimed in relation to CSI in 1997 and the depreciation allowances claimed in 1997 and 1998. These amended assessments were upheld in the High Court:

[324] Mr Stewart submitted that in the event the Court found the contrary to the plaintiffs' submissions there was tax avoidance in this case that parties should be given leave to make further submissions as to the consequences of that under s GB 1. Mr White submitted the Commissioner had effectively reconstructed the arrangements in the amended assessments issued. In the present case the only deductions affected by the tax avoidance structure are the deductions claimed in relation to the insurance premium and the amortised licence premium. Those deductions have been specifically identified in the amended assessments issued by the Commissioner. The plaintiff taxpayer's tax positions have already been adjusted accordingly in the amended assessments. In my view there is no need to reserve leave for further submissions directed at the issue.

[152] In this Court, Mr Judd maintained that the approach adopted by the Judge assumed what was in issue. Mr Judd argued that all that was wrong with the licence premium was that it was too large. He said that it followed, logically, that there was a point at which the licence premium would have been acceptable. By completely disallowing the deduction the Judge therefore took more from the taxpayers than was necessary to counteract their illegitimate tax deductions.
[153] A somewhat different objection was taken by Ms Hinde on behalf of the LAQCs, Greenmass and Ben Nevis. She asserted that there could be no reconstruction against them as they had obtained no tax advantage. This argument is closely related to two other argument she advanced, one of which we have just discussed and the other of which we will come to in relation to penalties.
[154] We reject the arguments against the reconstruction, effectively for the reasons advanced by Mr White.
[155] The effect of ss BB 9 and GB 1 is that the scheme is void as against the Commissioner. Under that void scheme, the taxpayers claimed deductions to which they were not entitled. The entirety of the deductions was thus illegitimate and their extent provides the measure of the tax advantages which the Commissioner must counteract. The counter-factual envisaged by s GB 1(a) is the position “if that arrangement had not been made or entered into”. There is thus no need for the Commissioner (or Court) to conjure up an alternative and more effective scheme into which the taxpayers might have entered.
[156] In the case of Greenmass and Ben Nevis, the fact that they passed to their shareholders the tax advantages which they obtained is not inconsistent with them having obtained those tax advantages in the first place.

Penalties

Overview

[157] This aspect of the case involves only the 1998 tax year (as the relevant penalties regime was not in effect for the 1997 tax year).
[158] The Commissioner’s position was the taxpayers had taken a position in their tax returns which was both “unacceptable” for the purposes of s 141B of the Tax Administration Act 1994 and “abusive” under s 141D of the same Act and that accordingly each was liable to a 100% penalty on the resulting tax shortfall.
[159] The Commissioner’s entitlement to act in this way primarily turns on the application of ss 141D and 141B. They relevantly provide:

141B Unacceptable tax position

(1) In relation to a tax position taken by a taxpayer, an unacceptable interpretation—

Is an interpretation or an interpretation of an application of a tax law; and

(b) Viewed objectively, that interpretation or application fails to meet the standard of being about as likely as not to be correct.

(2) A taxpayer is liable to pay a shortfall penalty if—

(a) The taxpayer's tax position involves an unacceptable interpretation of a tax law; and ...

...

(7) The matters that must be considered in determining whether the taxpayer has taken an unacceptable tax position include—

(a) The actual or potential application to the tax position of all the tax laws that are relevant (including specific or general anti-avoidance provisions); and

(b) Decisions of a court or a Taxation Review Authority on the interpretation of tax laws that are relevant (unless the decision was issued up to one month before the taxpayer takes the taxpayer's tax position).

141D Abusive tax position

(1) The purpose of this section is to penalise those taxpayers who, having applied an unacceptable interpretation to a tax law have entered into or acted in respect of arrangements or interpreted or applied tax laws with a dominant purpose of taking, or of supporting the taking of, tax positions that reduce or remove tax liabilities or give tax benefits.

(2) A taxpayer is liable to pay a shortfall penalty if the taxpayer takes an abusive tax position (referred to as an “abusive tax position”).

(3) The penalty payable for taking an abusive tax position is 100% of the resulting tax shortfall.

...

(6) A taxpayer's tax position may be an abusive tax position if the tax position is an incorrect tax position under, or as a result of, either or both of—

(a) A general tax law; or

(b) A specific or general anti-avoidance tax law.

(7) For the purposes of this Part ..., an abusive tax position means a tax position that,—

(a) At the time at which the taxpayer's tax position is taken, involves the taking of an unacceptable interpretation of a tax law; and

(b) Viewed objectively, the taxpayer takes—

(i) In respect, or as a consequence, of an arrangement that is entered into with a dominant purpose of avoiding tax, whether directly or indirectly; or

(ii) Where the tax position does not relate to an arrangement described in subparagraph (i), with a dominant purpose of avoiding tax, whether directly or indirectly.

The issues

[160] The arguments for the appellants on this aspect of the case involve the following questions:

(a) Are the shortfall assessments premature? If not;

(b) Did the taxpayers’ relevant tax position involve an interpretation of s BG 1? If so;

(c) Was the taxpayers’ interpretation unacceptable? If so;

(d) Was the taxpayers’ interpretation abusive?

(e) In the case of the LAQCs was there any relevant tax shortfall?

(f) Should the shortfall penalties be withdrawn because of settlements in the other cases?

Are the shortfall assessments premature?

[161] Mr Judd argued that the shortfall assessments are premature. He maintained that the statute provides for an absolute standard, being the “correct position”, see the definition of “tax shortfall” in s 3 of the Tax Administration Act, and that the “correct position” cannot be known with confidence until there is a conclusive resolution of the dispute as to the tax effects of the Trinity scheme. In support of this argument, Mr Judd noted that the entitlement to a deduction can only be tested by claiming the deduction. He maintained that taxpayers should be free to do this without facing significant penalties which can act as a fetter on the right of access to the courts.
[162] Mr White responded to this argument primarily by pointing to s 94A(3) of the Tax Administration Act which provides:

The Commissioner may assess a shortfall penalty before or after unpaid tax has been assessed, or has become assessable or payable, or has been paid.

We agree with Mr White that this section disposes of the argument advanced by Mr Judd. In any event, we note that the taxpayers could have sought a binding ruling from the Commissioner, a consideration which reduces, at least to some extent, the moral weight of Mr Judd’s argument. Further, if Mr Judd’s argument were right, it would lead to an undesirable increase in litigation, with the questions whether a taxpayer’s position involved an unacceptable interpretation and was abusive having to be addressed separately from the primary tax dispute.

Did the taxpayers’ relevant tax position involve an interpretation of s BG 1?

[163] The Commissioner disallowed the licence premium deduction on a black letter approach to the relevant deductibility sections, an approach which the Judge upheld but we have not. The penalties arguments, however, have always primarily focused on s BG 1 which in the High Court were only an alternative or further ground for disallowing the deductions. In this Court, our judgment against the taxpayers proceeds solely on s BG 1.
[164] Mr Judd argued that when the taxpayers lodged their returns, they were not required to form a view about the possible application of s BG 1.
[165] We consider that Mr Judd’s argument misses the point. The returns filed by the taxpayers proceeded on the premise that the taxpayers were entitled to the deductions they claimed, a premise which in turn depended on the Trinity scheme not being void for tax purposes. We can see no escape from the conclusion that the tax returns as filed thus necessarily involved an interpretation of s BG 1, that is an interpretation under which the deductions were properly able to be claimed. We note that ss 141D(7)(b)(i) and 141D(6)(b) both refer to general anti-avoidance provisions, references which would probably be of little effect if Mr Judd’s primary argument is right.
[166] The position is the same for the LAQC shareholders whose tax returns involved the taking of tax positions which necessarily included the tax positions of their LAQCs, see for instance the judgment of Williams J in Chapman v CIR (2002) 20 NZTC 17,950 (HC) with which we agree.

Was the taxpayers’ interpretation unacceptable?

[167] The approach of the Judge was as follows:

[365] In the present case the particularly relevant factors are:

• The plaintiffs claimed deductions in their 1998 returns for the licence and insurance premiums payable in 2047 and 2048.

• The deduction for the licence premium was not deductible.

• The arrangement pursuant to which they claimed the deductions was a tax avoidance arrangement.

Looked at objectively, the plaintiffs took a tax position that was not about as likely as not to be correct.

(Emphasis in original)

We note in passing that the reference to insurance premiums was wrong (as that deduction was claimed in relation to the 1997 tax year).

[168] As the Judge noted, the statutory test requires the Court to consider whether the relevant interpretation, when viewed objectively, “was about as likely as not to be correct”. There is, perhaps, some element of fuzziness in the underlying concept cf the approaches taken in Case U47 (2000) 19 NZTC 9,410 (TRA), Erris Promotions Limited v CIR (2003) 21 NZTC 18,330 (HC) and Walstern v FCT [2003] ATC 5076. There is little point in attempting to restate the test in terms of probability percentages because on any sensible approach to that test, the interpretation of s BG 1 taken by the taxpayers was unacceptable. This was an entirely artificial tax driven scheme as acknowledged in documentation which formed part of the scheme’s fabric. We appreciate that the insurance premium component of the scheme is not in issue in relation to the penalties questions. But the acknowledgement in the CSI business plan was applicable to the scheme as a whole. No person aware of that documentation could sensibly have concluded that the interpretation relied on (ie that s BG 1 did not apply) “was about as likely as not to be correct”, a conclusion which we think is perhaps supported by both the settlements which occurred once this documentation surfaced and, indeed, by the failures of discovery in relation to it.

Was the taxpayers’ interpretation abusive?

[169] On this issue the Judge observed:

[366] The next issue is whether it can be said that the plaintiffs took an abusive tax position. An abusive tax position may arise if the tax position is incorrect under or as a result of either or both of — a general tax law or a specific or general anti-avoidance tax law: s 141D(6). For the Court to find an abusive tax position in this case the Court must be satisfied that the plaintiffs have taken an unacceptable interpretation of tax law and, viewed objectively, the tax position was taken — in respect or as a consequence of an arrangement entered into with the dominant purpose of avoiding tax whether directly or indirectly.

[367] Mr Stewart emphasised the need for the Court to make a finding of dominant purpose. He submitted that Ronald Young J was incorrect in Erris Promotions to suggest the dominant purpose relates to the arrangement itself. He submitted that the better view was it is the purpose of the taxpayer to which the section is directed.

[368] In Erris Promotions v C of IR (2003) 21 NZTC 18,330 Ronald Young J said at para 374:

The second part of the definition requires an abusive tax position to be taken. As has been said, this requires, in addition to an unacceptable interpretation, that at the same time, viewed objectively, the position of the taxpayer must be as a consequence of an arrangement that is entered into which has as its dominant purpose tax avoidance. And so I must consider if the dominant purpose of the joint venture, viewed objectively, was tax avoidance. Here s 141D(7)(b)(i) is concerned not with the taxpayers intent or knowledge but with whether their claim for depreciation losses arose as a consequence from a scheme which had as its dominant purpose tax avoidance.

[369] I agree with Ronald Young J's approach. The only matter that can be viewed objectively, as the subsection is drawn, is whether the arrangement was entered with a dominant purpose of avoiding tax. The purpose of the section "to penalise those taxpayers who ... have entered into ... arrangements ... with a dominant purpose of taking ... tax positions that reduce or remove tax liabilities or give tax benefits" as set out in subs 141D(1) is not met if the objective test is to be applied only to whether the taxpayer took a tax position in respect or as a consequence of an arrangement. The objective test applies to the assessment of dominant purpose.

[370] In the present case the plaintiffs may well have had a general interest in investing long-term in a douglas fir forest. But for the reasons set out earlier, viewed objectively the dominant purpose of the arrangement entered in this case was undoubtedly to achieve the taxation benefits of the arrangement, at least for the first years before any corrective legislation was passed. The evidence satisfies me that were it not for those tax benefits the plaintiffs would not have entered into the investment in the Trinity Scheme. The plaintiffs became part of the Trinity Scheme with the dominant purpose of achieving those tax benefits.

...

[372] I conclude that the penalties were properly imposed under s 141D on the basis that the plaintiffs took an abusive tax position.

[170] Although the Judge’s approach was challenged by Mr Judd, we are well satisfied that it is right and for the reasons which the Judge gave. On the clear wording of the section, the subjective intentions of the taxpayers are not decisive. Instead the Court must focus on the purpose which is to be attributed to the underlying arrangement. On that basis, this aspect of the case is too clear for argument.

In the case of the LAQCs was there any relevant tax shortfall?

[171] Greenmass and Ben Nevis maintain that there was no relevant tax shortfall (which forms the basis of the penalties assessment); this on the basis that any tax benefit apparently derived by them was passed on to their shareholders. We recognise that there may be some timing issues here at least as to Ben Nevis and Greenmass because each became LAQCs somewhat after the event. But in substance all LAQCs operated, in the end, as conduits through which the tax losses they generated were passed onto their shareholders. The approach taken by the Commissioner has resulted in an apparent doubling up of penalties, with separate penalties imposed on both the LAQCs and their shareholders in relation to what was, in effect, one tax shortfall.
[172] The expression “tax shortfall” is defined in s 3 of the Tax Administration Act in this way:

Tax shortfall, for a return period, means the difference between the tax effect of—

(a) A taxpayer's tax position for the return period; and

(b) The correct tax position for that period,—

when the taxpayer's tax position results in too little tax paid or payable by the taxpayer or another person or overstates a tax benefit, credit, or advantage of any type or description whatever by or benefiting (as the case may be) the taxpayer or another person.

(Emphasis added)

[173] The expression “tax position” is defined in the same section in this way:

Tax position means a position or approach with regard to tax under one or more tax laws, including without limitation a position or approach with regard to—

...

(g) The incurring of an amount of expenditure or loss, or the allowing or denying as a deduction of an amount of expenditure or loss:

(h) The availability of net losses, or the offsetting or use of net losses:

...

[174] We have no difficulty with the conclusion that each of the LAQCs took a “tax position” as to the losses which were claimed and that there is a difference between that position and the correct position. In the context of the penalties regime, that “tax effect” has to be able to be expressed in monetary terms. Logically, one would expect it to be the relevant tax difference, in monetary terms, for the taxpayer between the two positions. Because the losses suffered by the LAQCs were negated as part and parcel of the same scheme as gave rise to them, there was no difference in their end tax position as they asserted it and as it truly was. For this reason we have struggled to interpret the penalty provisions so that they do not apply to the LAQCs, essentially because there seems to be a doubling up of penalties. But the words which we have emphasised in the definition of “tax shortfall” require us to conclude that the tax position of each LAQC resulted in a relevant tax shortfall associated with the tax paid or payable by their shareholders. Accordingly each became liable to penalties under s 141D(3). There is nothing in the Act to provide that the impact of reconstruction and shortfall penalties on their shareholders operates to release the LAQCs from this liability. As to this we note that s 141 provides for a set off to occur in relation to tax shortfalls in some closely defined circumstances, but the present case is not within those circumstances.

Should the shortfall penalties be withdrawn because of settlements in the other cases?

[175] Where the Commissioner has settled with other participants in the Trinity scheme, he has not insisted upon penalties. Mr Judd maintained that this meant that the assessments against the taxpayers in the present case could not stand, essentially on the basis that if the Commissioner has not imposed penalties on taxpayers similarly situated to those involved in the present appeal, he cannot insist on them in this case.
[176] We disagree for reasons which are discussed in the recall appeal judgment Accent Management Ltd & Ors v The Commissioner of Inland Revenue [2007] NZCA 231.

Estate of Kenneth John Laird

[177] Kenneth John Laird filed tax returns for the 1997 and 1998 years in February 1998 and 1999 (respectively). He died the following year. Amended assessments were issued in March 2002. The amended assessment for the 1997 year was addressed to "Mr Kenneth John Laird". The amended assessment for the 1998 year was directed to "Mr Kenneth John Laird (Deceased)”.
[178] Section 138P of the Tax Administration Act provides:

138P Powers of hearing authority

(1) On hearing a challenge, a hearing authority may—

(a) Confirm or cancel or vary an assessment, or reduce the amount of an assessment, or increase the amount of an assessment to the extent to which the Commissioner was able to make an assessment of an increased amount at the time the Commissioner made the assessment to which the challenge relates; or

(b) Make an assessment which the Commissioner was able to make at the time the Commissioner made the assessment to which the challenge relates, or direct the Commissioner to make such an assessment.

...

(5) The time bars in sections 108, 108A, and 108B do not apply with respect to—

(a) A determination of a hearing authority made under subsection (1)(a) ...; or

(b) An assessment made by a hearing authority under subsection (1)(b) of this section or the Commissioner under subsection (3) of this section.

[179] Venning J did not see the failure of the Commissioner to issue assessments in the names of the executors as being fatal:

[387] The amended assessment in 1997 should clearly have been and, subject to Mr Stewart's second argument, could have been addressed to either the executor or the trustees of the estate of Kenneth John Laird. Just as the Court may amend the parties to a proceeding and substitute the executor and/or trustee of a party that has died during the course of the proceedings, again subject to Mr Stewart's second point, the Commissioner could readdress the assessment or the Court could, pursuant to s 138P confirm an assessment which the Commissioner was able to make by directing the assessment be to the named executor and/or trustees of the deceased's estate. Section 138P(1) contemplates that an assessment can be varied, which is a broader concept than simply altering the dollar amount of the assessment. Section 138P is not restricted to simply monetary amounts. The right to vary an assessment includes the right to amend or rectify an incorrect name on an assessment. For example, if a taxpayer's name was misspelt then it would be open for the Court to vary an assessment by directing a correction to the taxpayer's name.

[388] I note in passing that the plaintiffs have seen fit to issue these proceedings styling the plaintiff as Kenneth John Laird (Deceased) (the 1997 proceedings) and, the executors of Kenneth John Laird and the trustees of the estate of Kenneth John Laird (the 1998 proceedings). The plaintiffs do not suggest that their proceedings are invalid on that basis.

[180] Ms Hinde challenged this reasoning, contending that the error in the assessments meant that they were “void” and maintained that s 138P powers could only be exercised in relation to a “valid” assessment. Interestingly, Ms Hinde never contended that the assessments were so absolutely void that Mr Laird’s executors could have ignored them. Instead she treated them as sufficiently effective to require the executors to resort to the challenge procedure. So she seems in effect to have accepted that they had some conditional validity. But even that limited acceptance of their conditional validity paid insufficient heed to the concept of “relative invalidity” which is discussed in AJ Burr Ltd v Blenheim Borough Council [1980] 2 NZLR 1 (CA), a concept of special significance in relation to assessments and the challenge procedure and confirmed by s 114 of the Tax Administration Act which provides that assessments are not invalidated for failure to comply with that Act. In short, we regard the Judge’s reasoning on this point as unassailable.
[181] Ms Hinde also maintained that the Judge was wrong in assuming (as he obviously did) that it would have been open to the Commissioner, in 2002, to have assessed the executors.
[182] Section 43 of the Tax Administration Act provided:

43. Returns by executors or administrators

(1) The executor or administrator of a deceased taxpayer shall in respect of all gross income derived by that taxpayer in the taxpayer's lifetime make the same returns as the taxpayer ought to have made or would have been bound to make if the taxpayer had remained alive; and the Commissioner may from time to time require the executor or administrator to make such further returns relative to that gross income as the Commissioner thinks necessary, and may assess the executor or administrator for income tax on that income in the same manner in which the taxpayer might have been assessed had the taxpayer remained alive.

(2) The tax so assessed shall be deemed to be a liability incurred by the deceased taxpayer in the deceased taxpayer's lifetime, and the executor or administrator of the taxpayer shall be liable for the same accordingly.

[183] An argument which was essentially the same as that advanced by Ms Hinde in this Court was rejected by Venning J in his judgment:

[391] Mr Stewart submitted that the operative words in s 43(1) were "on that income" and that they related back to the returns required to be filed by the Commissioner under s 43(1). He submitted that the executor or administrator could only be liable for the tax assessed on the returns that the executor or administrator was obliged to file. He drew support for the submission from the law change which applied from 1 April 2002 which amended the section to provide a new subsection, subs (3):

(3) Income tax assessed in respect of a deceased taxpayer, whether or not under subsection (1), is to be treated as a liability incurred by the deceased taxpayer during their lifetime, and the executor or administrator of the taxpayer is liable for the same accordingly.

[392] I am unable to accept Mr Stewart's submission. The effect of it would be that there would have been no power for the Commissioner to amend an incorrect assessment if the taxpayer died after filing the return. Section 43 need not be read in such a restrictive way. Certainly in the Public Trustee v Fowler (1991) 13 NZTC 8,042 Williamson J considered that the relevant provision of the then Income Tax Act 1976 (which was in similar terms to the provisions of s 43 in issue), created a liability on the executor to pay a reassessment issued by the Commissioner after the taxpayer's death.

[393] Mr Stewart's submission is based on the proposition the words "on that income" are the operative words in s 43(1). He reads it as a reference to returns required by the executor or administrator. But the reference to "that income" is a reference to the gross income referred to earlier in the section. That is:

All gross income derived by that taxpayer in the taxpayer's lifetime.

[394] The reference in the section to the Commissioner assessing the executor or administrator for income tax on that income is not limited to an assessment on the returns made by the executor and administrator. Section 43(1) provides for an obligation on the executor/trustees to make returns but also empowers the Commissioner to assess the executor or administrator for income tax on all gross income derived by the taxpayer during life, which includes, where that assessment was a reassessment by the Commissioner, an assessment issued after the taxpayer's death. The only requirement is that the assessment relate to gross income derived during the taxpayer's life. Significantly s 43(1) is not restricted in its application to the income year of the deceased's death. It is said to apply to all gross income derived by that taxpayer in the taxpayer's lifetime.

[395] Section 43(2) has the effect of deeming the tax to be a liability incurred by the deceased in his or her lifetime, and provides the executor or administrator is liable for the same accordingly. The executor or administrator therefore is liable for that tax assessed on gross income derived by that taxpayer during life.

[396] In my judgment it was open to the Commissioner to issue amended assessments relating to the tax assessed on gross income derived by the taxpayer Kenneth Laird during his lifetime. The resultant tax liability is a liability the executor and/or trustees are liable for. To avoid doubt I direct the Commissioner to issue varied assessments directed to the named executors and trustees of the estate of Kenneth Laird.

[184] Despite Ms Hinde’s best efforts to argue to the contrary we regard that reasoning as impeccable. As well, given that the Court acted under s 138P, the time bar is inapplicable, see s 138P(5).

Orders

[185] Given the nature of the Commissioner’s cross-appeal and the outcome of the case generally, we see no need to make orders as to the cross-appeal. We dismiss the appeal. The appellants are ordered (jointly and severally) to pay costs of $30,000 and usual disbursements.

Solicitors:
Wynyard Wood, Auckland for Appellants
Crown Law Office, Wellington for Respondent