Beacham v The Commissioner of Inland Revenue

JurisdictionNew Zealand
CourtHigh Court
JudgeGoddard J
Judgment Date14 November 2014
Neutral Citation[2014] NZHC 2839
Docket NumberCIV-2014-485-7319

[2014] NZHC 2839

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2014-485-7319

BETWEEN

UNDER the Income Tax Act 2004 and the Tax Administration Act 1994

Gregory Marc Beacham And Vilma Amelia Beacham
Appellants
and
The Commissioner of Inland Revenue
Respondent
Counsel:

R J Cullen for Appellants

H Ebersohn for Respondent

Appeal from a decision of the Taxation Review Authority that the Commissioner of Inland Revenue had been entitled to reconstruct the appellants' income for the 2007 tax year and impose shortfall penalties — appellants had entered into a tax avoidance arrangement to whichs BG 1 Income Tax Act 2004 (ITA04) (Avoidance arrangement void) applied — Commissioner reconstructed the appellants income and also imposed shortfall penalties for taking an abusive tax position — whether there was an outstanding tax advantage notwithstanding the tax avoidance arrangement was void as against the Commissioner for income tax purposes — whether the reconstruction carried out was within the scope of GB 1(3) ITA04 — whether shortfall penalties should not have been applied as the arrangement was not entered into with a dominant purpose of avoiding tax.

The issues were: whether there was an outstanding tax advantage notwithstanding the tax avoidance arrangement was void as against the Commissioner for income tax purposes; whether the reconstruction carried out was within the scope of GB 1(3); and whether shortfall penalties should not have been applied as the arrangement was not entered into with a dominant purpose of avoiding tax.

Held:(1) Outstanding tax advantage: Section BG 1 entitled the Commissioner to completely disregard the arrangement and any ensuing transactions, so far as they had the purpose or effect of avoiding tax. Disregard of some tax arrangements was sufficient to negate the tax advantage achieved by the taxpayer. For other arrangements however, it might be necessary for the Commissioner to use Part G to counteract a tax advantage obtained from or under a tax avoidance arrangement by using her powers of reconstruction.

Section BG 1(1) operated to void the arrangement only “as against the Commissioner for Income Tax purposes”. The arrangement was not void as between the parties to the arrangement. For this reason, the debt between BHL and Dr B was repaid by the crediting of the current account. The tax avoidance arrangement had the effect of repaying Dr B's overdrawn account in BHL and leaving the balance of the purchase price for the shares in BHL available to be accessed in future as a repayment of loan capital (and would not be income under the ITA07). This was self-evidently a case in which the arrangement being void against the Commissioner did not remove the tax advantage; and thus it was open for the Commissioner to reconstruct the appellants' income tax assessments.

(2) Application of GB 1(3) or GB 1(1) ITA04; The proposition that the Commissioner's powers were limited to the powers the company had to declare dividends under company law principles took no account of the differences between dividends for the purpose of the ITA regime and dividends under company law. The Companies Act 1993 provided limits on dividends; whereas the focus of the Income Tax Act regime was to ensure that all transfers of value by the company to its shareholders were caught. As a result, the dividend provisions in the ITA regime were drafted more widely.

In the present case, the purpose and effect of the arrangement was to transfer value from the appellants' companies to the appellants themselves. Had the value been transferred directly, that consideration would have been a dividend. Axiomatically the arrangement would not have been entered into if the appellants were not shareholders. They received the benefit of the consideration for no economic cost. They still owned the shares in BHL (via BGL). A person who was not a shareholder would not receive a transfer of value on such terms. Therefore it was reasonably open for the Commissioner to form the view that the consideration received by the appellants for the sale of their shares in BHL was “consideration in substitution for a dividend” and s GB 1(3) applied.

The alternative basis on which the Commissioner made her assessment was the general reconstruction provision in s GB 1(1). Where an arrangement was void in accordance with s BG 1 and the taxable income of any person was affected by that arrangement, the Commissioner was entitled to adjust the amounts included in calculating the appellants' taxable income in the manner the Commissioner thought appropriate, so as to counteract any tax advantage obtained under the arrangement. In the present case, the Commissioner was entitled to take into account the gross income (by way of dividends) which the appellants would in all likelihood have received had the tax avoidance arrangement not been made or entered into.

The Commissioner had jurisdiction to use the powers under Part G to reconstruct the appellants' 2007 income tax assessment and that it was reasonable to reconstruct under either GB1(3) or GB (1).

(3) Shortfall penalties: For an abusive tax position shortfall penalty under s 141D TAA to apply; the following requirements had to be satisfied:

  • (1), the taxpayer took a tax position leading to a tax shortfall exceeding $20,000;

  • (2) the tax position was an “unacceptable tax position”, being a tax position which, when viewed objectively, failed to meet the standard of being as likely as not to be correct.

  • (3) viewed objectively, the tax position was taken in respect, or as a consequence, of an arrangement entered into with a dominant purpose of avoiding tax.

The first two elements were satisfied. When the appellants filed their income tax returns for the 2007 year, they took a tax position. For the reasons already given, the tax position failed to meet the standard of being as likely as not to be correct.

The sole issue was whether the arrangement was entered into with a dominant purpose of avoiding tax. “Dominant purpose” meant the most influential, important, prevailing or ruling purpose. The purpose to be assessed was that of the arrangement itself. The motive or intention of the taxpayer was irrelevant. It was relevant that the appellants did not lead any evidence to establish any commercial or other purpose for the restructuring of their companies. It was also relevant that a “dominant purpose” of the arrangement was clearly stated by the appellants' tax consultant as being to offset the value of the shares against the overdrawn current account in BHL. Other features of the arrangement indicated a “dominant purpose” of the arrangement was to avoid tax. For instance, the structure of the arrangement meant there was no real or economic cost incurred by the appellants; the appellants retained their shares ownership or control of all the relevant companies; Dr B's overdrawn current account with BHL was repaid in full; and there were no longer any retained profits in BHL available to be paid directly to the appellants.

The arrangement was entered into with a dominant purpose of avoiding tax.

Appeal dismissed.

JUDGMENT OF Goddard J

Introduction
1

This is an appeal from the decision of Judge Sinclair sitting as Taxation Review Authority (the Authority). The appeal is brought by Dr and Mrs Beacham 1 pursuant to s 26A of the Taxation Review Authorities Act 2004 and Part 20 of the High Court Rules.

2

The grounds of appeal are that the Authority has failed to apply the tax avoidance sections BG 1( 1) and (2) and GB 1 (1) and GB 1(3) of the Income Tax Act 2004 (the ITA 2004) correctly to the facts of the appellants' case, by creating a liability for income tax for the appellants where it is contended no such liability properly existed. Broadly, the issues are first, whether the Commissioner's reconstruction of the appellants' 2007 income tax assessments was outside the scope of her powers; and second, whether the imposition of shortfall penalties was incorrect.

The agreed statement of facts and issues
3

An agreed statement of facts was submitted to the Court, together with a bundle of documents. The salient features of the background to this proceeding can be summarised under three headings: the facts before the restructuring of the appellants' companies; the restructuring itself; and the effect of the restructuring.

The facts before the restructuring
4

Beacham Holdings Ltd (Beacham Holdings) was incorporated in 1991 as Beacham Cars Ltd. Dr Beacham was the sole director and held 296,000 shares. Andrew Rafferty held the remaining 4000 shares. On 30 October 2000 Mrs Beacham purchased Mr Rafferty's shares.

5

Beacham Jaguar Ltd (Beacham Jaguar) was incorporated in 1994 as Major Trauma Research (New Zealand) Ltd. Dr Beacham and Mrs Beacham each held 50 per cent of the shares in the company.

6

Dr Beacham was, and is, a medical practitioner and owner of a medical practice. In 1996, he transferred ownership in his medical practice to Beacham Cars Ltd and changed its name to Beacham Holdings. Beacham Holdings' medical practice was profitable but its car restoration business was not. Beacham Holdings was able to utilise the losses of the car restoration business to reduce or eliminate the assessable income of the profitable medical practice. In 2000, Major Trauma Research (New Zealand) Ltd changed its name to Beacham Jaguar; and later that year Beacham Holdings transferred its car restoration business to Beacham Jaguar.

7

Dr Beacham and Mrs Beacham operated a current account with Beacham Holdings which funded their living expenses. By November 2006 Dr Beacham's current account with Beacham Holdings was overdrawn by approximately $1,079,657.60.

Facts in respect of the restructuring
8

Beacham...

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