Kensington Developments Limited (in receivership) v Commissioner of Inland Revenue [2015] NZCA 60 (11 March 2015)

Last Updated: 17 March 2015

IN THE COURT OF APPEAL OF NEW ZEALAND
CA64/2014 [2015] NZCA 60
BETWEEN	KENSINGTON DEVELOPMENTS LIMITED (IN RECEIVERSHIP) Appellant
AND	COMMISSIONER OF INLAND REVENUE Respondent

Hearing:	16 February 2015
Court:	Randerson, Winkelmann and Keane JJ
Counsel:	S R G Judd for Appellant M Deligiannis and K I S Naik-Leong for Respondent
Judgment:	11 March 2015 at 10:00am

JUDGMENT OF THE COURT

A The appeal is dismissed.

2. The appellant must pay the respondent’s costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Winkelmann J)

[1] The appellant, Kensington, commenced challenge proceedings in the Taxation Review Authority (TRA) in August 2011. In April 2013 the Commissioner applied to transfer the proceeding to the High Court. Kensington appeals the decision of Allan J granting that transfer.^[1] It says that the Judge applied the wrong test and that he was otherwise wrong to order transfer when Kensington had elected to proceed in the TRA, a transfer would be prejudicial to Kensington, and there were no factors weighing significantly in favour of the transfer.

Background

[2] Kensington has been in receivership since July 1994. Mr John Russell is the receiver. Kensington has filed annual tax returns claiming interest deductions increasing from $302,398 in the 1997 income tax year to $2,191,870 in the 2008 income tax year. This is interest in respect of a purported loan from the Bank of New Zealand (BNZ). Kensington has also claimed deductions for interest expenditure in respect of a debenture held by Downsview Finance Ltd (Downsview), in each of the tax years from 1997 to 2009 inclusive. Mr Russell and his wife are the beneficial owners of the shares in Downsview.
[3] Although Kensington has accrued a liability to make these interest payments, it has not paid any interest to either the BNZ or Downsview.
[4] As well as the above transactions, Kensington has acquired debentures over 14 companies. Mr Russell is the receiver of each of those companies. Many of these 14 companies have also claimed interest expenditure deductions on a yearly basis in respect of interest they owe under the debentures, although Kensington has not received any interest payments from them.
[5] The consequence of these transactions to which Kensington is a party is that it, and other companies controlled by Mr Russell have accumulated substantial losses through the deduction of interest expenses.
[6] Mr Russell commenced the proceedings on behalf of Kensington before the TRA on 12 August 2011. A taxpayer has the right to commence challenge proceedings before either the TRA or High Court.^[2] It is relevant background that Mr Russell has also been involved in litigation with the Commissioner over a period of 32 years, as a taxpayer, tax agent or director or receiver of taxpayer companies.
[7] The proceeding the subject of the application for transfer concerns only the losses claimed by Kensington. These total $15,756,946.76. The Commissioner’s position is that the interest expenses have not been suffered by Kensington and that the deductions claimed should be denied as part of a tax avoidance arrangement under s BG 1 of the Income Tax Act 2004.^[3] Kensington challenges the Commissioner’s rejection of its returns and her application of shortfall penalties.
[8] The Commissioner’s application for transfer of the proceeding to the High Court was filed some 20 months after the commencement of the challenge. It was brought under the provisions of s 138N(2) of the Tax Administration Act 1994:

138N Proceedings may be transferred to different hearing authorities

...

(2) If a disputant commences a challenge in a Taxation Review Authority, the Commissioner may apply to the High Court to have the challenge transferred to the High Court.

High Court decision

[9] The High Court Judge applied the principles identified by this Court in Commissioner of Inland Revenue v Erris Promotions,^[4] adopting the following summary of those principles appearing in Commissioner of Inland Revenue v McIlraith:^[5]

[a] Although there are no statutory criteria set out for transfer applications to the High Court under s 138N(2)(a)(ii), there is no legislative intent to change the role of the TRA and the High Court in taxation matters.

[b] The criteria set out in s 136(4) or s 138O may still be considered if relevant in the circumstances of the case.

[c] The taxpayer has the initial choice of forum and the onus is on the Commissioner in seeking a transfer to provide reasons why that should occur.

[d] The Court is required to consider the factors relied upon by the Commissioner and the reasons for the taxpayer's choice of forum against the background of the scheme of the legislation and the role of the TRA and the High Court in taxation disputes.

[e] The TRA was designed to provide a more informal and less complex forum as evidenced by the anonymity provisions, and the fact that costs cannot be awarded in favour of any party. Although it is a specialist in taxation disputes, there is no presumption in the legislation that taxation disputes should normally be dealt with in the TRA at first instance.

[f] The High Court is the Court of first instance jurisdiction for major litigation and, in particular, where matters are complex and involve matters of major legal significance. That is also the case for taxation litigation.

[g] The amount of money involved does not necessarily equate with complexity but it does bear upon the issue of significance, both for the Commissioner and the taxpayers involved.

[10] The Judge acknowledged that there were advantages to Kensington in having the proceeding before the TRA. Mr Russell would be able to represent Kensington as of right, whereas in the High Court, a corporate party must be represented by counsel.^[6] Moreover, party and party costs are not generally awarded before the TRA as they are in the High Court, so an order for transfer would expose Kensington to an increased risk of an adverse costs award.
[11] The Judge said the Commissioner’s delay in bringing the application was a neutral factor. He said that having regard to the subject matter of the challenge, and the very long history of the case, it was difficult to see how any significant disadvantage could have been suffered. He noted that Kensington did not claim to have been prejudiced by the delay in the application.
[12] The Judge considered that the cumulative weight of four particular factors outweighed the advantages inherent in a hearing before the TRA. The first was complexity. He characterised the case as moderately complex, noting that Kensington’s claimed losses exceeded $15 million, a moderately high figure.
[13] The second factor he identified was the “precedential effect of any judgment”. The Judge said it was common ground that a number of companies, all associated with Mr Russell, had accumulated losses on much the same basis as Kensington. Any judgment in the present case would be likely to serve as a precedent for a number of the other cases also.
[14] The third factor identified was the high likelihood of an appeal.
[15] The final factor, was that Kensington’s challenge included an allegation that the Commissioner was pursuing a vendetta against Mr Russell, was abusing her power, and that her actions amounted to a fraud on the taxpayer. The Judge considered that where such allegations were made, the proper forum was the High Court rather than the TRA.

Approach on appeal

[16] It is common ground that this is a general appeal and that the approach described by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar applies.^[7] The Court of Appeal may take a different view from the High Court. However the appellant bears the onus of satisfying the appeal court that it should differ from the decision under appeal. It is only if the appellate court considers that the appealed decision is wrong that it is justified in interfering with it.

First ground of challenge: the Judge applied the wrong test

[17] Kensington argues that when considering an application to transfer a challenge before the TRA to the High Court, the Court is obliged to apply a presumption that the taxpayer’s choice of hearing authority should prevail, particularly when that choice is the TRA. Acknowledging that the principles identified in Erris are against it on this point, Kensington says that the discussion in Erris was obiter and asks us to clarify the law.
[18] Kensington argues that the existence of such a presumption emerges from the legislative history, and the existing scheme of the legislation. The starting point for its argument is that the scheme of the legislation establishes the TRA as the “usual” forum for taxpayer challenges. Under the objections regime, which preceded the present challenge regime, the usual course was for the Commissioner to state a case before the TRA. Both the Income Tax Act 1976 and the Tax Administration Act provided for an objection to be referred directly to the High Court on a question of law only, or by the agreement of the parties, or as provided in s 136(4) of the Tax Administration Act:^[8]

... with the leave of [the High Court] granted on the application of the objector or the Commissioner, [as the case may be], upon the ground that in the opinion of the Court, by reason of the amount of the tax in dispute between the parties or of the general or public importance of the matter or of its extraordinary difficulty or for any other reason, it is desirable that the objection be heard and determined by [the High Court] instead of by a Taxation Review Authority.

[19] Kensington argues that the use of this language, particularly the words “general or public importance” and “extraordinary difficulty” convey the Parliamentary intent that the TRA is the usual first instance hearing authority, with the High Court reserved for truly important or extraordinary cases.
[20] Kensington acknowledges that these provisions relate to the objection regime. They are now superseded by the disputes procedures set out in Pt 4A of the Tax Administration Act and the challenge regime in Pt 8A that applies to this proceeding. However Kensington says that the statutory change from the position under the objection regime to that under the challenge regime is simply to add a presumption in favour of taxpayer choice, because the taxpayer may choose to commence a challenge in either the TRA or High Court. Since the statutory scheme is to make the TRA the usual body for disputes, and the High Court the place where only disputes that are of general or public importance, or are extraordinarily difficult are determined, where a taxpayer chooses the TRA that presumption particularly applies.
[21] We are satisfied that the Judge applied the correct test and that the Erris principles gave proper effect to the statutory provisions. While the factors set out in s 136(4) may be relevant to a transfer decision in a particular case,^[9] those factors do not create a presumption that the hearing should be in the TRA.^[10] There is also clear indication that the court’s discretion in respect of applications under s 138N was not intended to be constrained by the considerations listed in s 136(4), given the absence of a similar provision in Pt 8A.
[22] We do not therefore see any merit in Kensington’s argument that a presumption in favour of taxpayer choice applies. As this Court acknowledged in Erris because the taxpayer has the initial choice of forum, the onus is on the Commissioner when seeking a transfer to provide reasons why that should occur.^[11] Requiring the Commissioner to show reason for the transfer gives effect to the statutory scheme that it is the taxpayer’s choice as to the forum in which the proceedings are commenced. No more recognition is required to give effect to the scheme of the Act or to the particular provisions.

The second ground of challenge: no grounds made out for transfer

[23] The appellant argues that whether or not the presumption it argues for applies, there are no proper grounds made out for the transfer. Having heard argument, we consider that the Judge was correct to order transfer.
[24] The determinative consideration in reaching this view is the precedent the decision in this proceeding will establish. The Commissioner is currently involved in two other disputes and has active investigations in progress which raise identical issues to the challenge that is the subject of this application.^[12] These disputes and investigations all involve an insolvent taxpayer company in receivership (with Mr Russell as receiver). The company has continued to claim deductions for interest owing under a debenture held by a company of which Mr Russell is a director and/or receiver. The taxpayer company has been in receivership for a period exceeding 10 years and has during that time accrued millions of dollars worth of purported losses. In each of these cases, the Commissioner is alleging that the taxpayer company entered into a tax avoidance arrangement void against her pursuant to s BG 1 of the Income Tax Act 2004.^[13]
[25] Kensington argues that the precedent the decision will establish carries little weight since Mr Russell does not accept that the finding will dispose of the other disputes and investigations. He claims there are other factual issues raised by those disputes. That however does not answer the point that a decision by the High Court in this challenge proceeding will be binding on the TRA in future disputes that involve identical issues. It will be binding on other similarly positioned taxpayers and will be a significant precedent even if Mr Russell chooses to argue otherwise.
[26] We agree with the Judge that an additional reason for transfer is the complexity of the proceeding. Kensington argues that the Judge erred in characterising the proceedings as involving issues of moderate complexity. Since most of the facts are agreed (as evidenced by the agreed statement of facts), the only significant factual dispute is whether or not the BNZ loan existed. The facts are not themselves complex. Although the Commissioner points to the 14 debentures Kensington holds over other companies, those companies and their debentures are irrelevant to the issues before the TRA. Kensington argues that the law relating to tax avoidance is now well-settled following the decision in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue.^[14]
[27] We agree with the Judge’s assessment that this is a case of moderate complexity. Although the law in the area may be relatively settled, it does not follow that its application to new fact situations will be straightforward. As to the relevance of the 14 debentures and the associated companies, the hearing authority will need to consider whether the overall structure served any commercial purpose, or was set in place for the purposes of tax avoidance. The arrangements concerning the 14 debentures are similar to those in connection with the Downsview debenture the subject of the challenge. They also bear upon the issue of Kensington’s solvency. These transactions and arrangements could very well be relevant to the determination of the challenge before the hearing authority.
[28] The Commissioner also contends that it is significant that the court hearing the challenge will have to consider the duties of a receiver and best practice of a receiver under the Receivership Act 1993 because this bears upon the commerciality of the arrangements. She argues that such issues are better dealt with in the High Court. We attach no weight to this point. Although the law in connection with the duties and obligations of receivers is traditionally administered in the High Court, we expect that the TRA would have no difficulty in interpreting the statutory framework and the body of case law that has emerged in the 20 plus years since the Receivership Act came into force.
[29] For these reasons we agree with the Judge that the moderate complexity weighed in favour of transfer to the High Court but could not on its own be decisive.
[30] The Judge also considered that the administrative law challenges mounted by Kensington weighed in favour of transfer to the High Court relying on Dandelion Investments Ltd v Commissioner of Inland Revenue and Commissioner of Inland Revenue v McIlraith.^[15] Counsel for Kensington says it would abandon those challenges if it meant the difference to a transfer decision. Although allegations such as those we have referred to at [15] above may weigh in favour of transfer to the High Court in some cases, in this case it is not the determinative factor. We therefore do not consider the issue further, particularly in light of Kensington’s indication.
[31] Kensington argues the Judge was wrong to view delay in applying for a transfer as a neutral factor. However, Kensington accepts no particular prejudice arises from this delay, pointing only to the fact that until the application Kensington had been preparing on the basis that the hearing would be in the TRA. That does not amount to prejudice. In the absence of prejudice attributable to delay, we too regard the delay as irrelevant to this issue of transfer. We note too that the Commissioner has given an explanation for the delay which we consider helps to moderate the significance of this issue.
[32] Finally, we agree with Allan J that the likelihood of appeal is relevant to consideration of the application. As this Court said in Erris, even if the TRA can provide an earlier hearing date (and it is not clear that it can in this case) this will not necessarily mean less delay in final resolution where appeal is likely, as starting in the TRA adds a further layer of appeal.^[16] Appeal is very likely in this proceeding. The matters at issue in this proceeding are significant for the parties, particularly given the extent of similar disputes involving the Commissioner and companies controlled by Mr Russell.
[33] It is relevant that Kensington has chosen the TRA as the forum for its dispute and there clearly are advantages for it in that choice. Mr Russell would be able to appear for Kensington and there is a reduced exposure to adverse costs orders. However the Judge was correct that the Commissioner has shown good cause for the transfer of the proceeding to the High Court notwithstanding these considerations. We have taken a slightly different approach to the Judge in our analysis of the relevant factors but the outcome remains the same. Although the complexity of the issues weighs in favour of transfer, in our view the important precedent value of this proceeding alone is determinative in favour of granting the application for transfer.

Outcome

[34] For these reasons, the appeal is dismissed.
[35] The appellant must pay the respondent’s costs on a standard band A basis and usual disbursements.

Solicitors:
Ladbrook Law Limited, Auckland for Appellant
Crown Law Office, Wellington for Respondent

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^[1] Commissioner of Inland Revenue v Kensington Developments Ltd [2013] NZHC 3537, (2013) 26 NZTC 21-059.

^[2] Tax Administration Act 1994, ss 3 (definition of “hearing authority”), 138B and 138C.

^[3] Or the corresponding provisions in the Income Tax Act 1994 and 2007.

^[4] Commissioner of Inland Revenue v Erris Promotions [2002] NZCA 265; [2003] 1 NZLR 506 (CA).

^[5] Commissioner of Inland Revenue v McIlraith (2003) 21 NZTC 18,112 (HC) at [18].

^[6] Re G J Mannix Ltd [1984] 1 NZLR 309 (CA).

^[7] Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4].

^[8] Income Tax Act 1976, s 33; Tax Administration Act 1994, s 136(4).

^[9] Commissioner of Inland Revenue v Erris Promotions, above n 4, at [21].

^[10] Commission of Inland Revenue v Erris Promotions, above n 4, at [23].

^[11] At [23].

^[12] Including Commissioner of Inland Revenue v Bell Road Developments Ltd [2014] NZHC 1841, (2014) 26 NZTC 21-090, currently under appeal.

^[13] Or the corresponding provisions in the Income Tax Act 1994 and 2007.

^[14] Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.

^[15] Dandelion Investments Ltd v Commissioner of Inland Revenue [2002] NZCA 311; [2003] 1 NZLR 600 (CA) and Commissioner of Inland Revenue v McIlraith, above n 5.

^[16] Commissioner of Inland Revenue v Erris Promotions, above n 4, at [25].