Commissioner of Inland Revenue v Michael Hill Finance (NZ) Ltd

JurisdictionNew Zealand
CourtCourt of Appeal
JudgeHarrison J
Judgment Date21 Jun 2016
Neutral Citation[2016] NZCA 276
Docket NumberCA30/2016

[2016] NZCA 276

IN THE COURT OF APPEAL OF NEW ZEALAND

Court:

Harrison, Miller and Cooper JJ

CA30/2016

Between
Commissioner of Inland Revenue
Appellant
and
Michael Hill Finance (Nz) Limited
Respondent
Counsel:

M R Heron QC and H W Ebersohn for Appellant

S E Fitzgerald and M F Mabbett for Respondent

Appeal against a High Court decision dismissing the Commissioner of Inland Revenue's (CIR) application to strike out the respondent's inconsistency claim — the CIR ruled that the respondent was liable to pay income tax on a financing transaction, viewing it as part of a tax avoidance scheme under sBG 1 Income Tax Act 2007 (tax avoidance) — the respondent had filed in the High Court a challenge to CIR's consequential assessments of its liability to pay tax and separately challenged the CIR's ruling on the ground of its inconsistency with an earlier assessment that materially similar transactions entered into by another taxpayer were not liable to tax — whether ss6 and s6A Tax Administration Act 1994 recognised a standalone duty of consistency owed by the CIR to a taxpayer when exercising her statutory powers in assessing the tax payer's liability to pay tax, by reference to the CIR's assessment of materially similar transactions undertaken by another taxpayer — if not, whether the CIR, as a decision-maker, was subject to a standalone duty imposed by administrative law principles to act with both procedural and substantive consistency.

Held: Michael Hill's claim presupposed that the CIR's s6(1) ITA (Responsibility on Ministers and officials to protect integrity of tax system) obligation to protect the integrity of the tax system imported a duty to act consistently as between taxpayers. Section 6(2) ITA specified two discrete rights vested in the taxpayer and three discrete responsibilities imposed on the taxpayer and the CIR. A taxpayer's only right on an assessment was to have its liability “determined fairly, impartially and according to law” under s6(2)(b) ITA. The CIR's correlative duty must be limited to the same three elements when determining liability to tax. The first two duties of fairness and impartiality affirmed administrative law principles of natural justice; the third duty referred to legal or substantive correctness.

It was telling that s6(2) ITA omitted any reference to a fourth standalone duty of consistency and there was no warrant for reading that requirement separately into the meaning of the “integrity of the tax system”. The CIR was using her best endeavours to protect the integrity of the tax system when she determined liability on a transaction according to law. The duty of consistency did not need to be imported into the statutory framework to ensure the CIR's conduct was subject to public scrutiny. Other channels were expressly designed to promote the CIR's public accountability.

Sections 6 and 6A TAA did not recognise a standalone duty of consistency owed by the CIR to a taxpayer when exercising her statutory powers in assessing the tax payer's liability to pay tax by reference to the CIR's assessment of materially similar transactions undertaken by another taxpayer. There was nothing in ss6 and 6A TAA to displace correctness as the sole criterion for determining liability to tax. The statutory regime was the exclusive machinery for determining an appeal from an assessment. There was no scope for importing an absolute duty of consistency into that framework where it may undermine a discrete process for deciding a challenge to a determination of liability made according to law.

The CIR's overriding duty was to determine Michael Hill's liability on its transaction correctly according to law. The CIR's interpretation of the relevant taxing provisions in a similar case involving another taxpayer may inform the CIR in determining Michael Hill's particular liability but otherwise it was of no moment. The CIR was not obliged to justify to one taxpayer her taxation treatment of a transaction entered into by another taxpayer. The degree of similarity between the two transactions was immaterial. The CIR was entitled to adopt two fundamentally inconsistent approaches when assessing different taxpayers' liability to tax on materially similar transactions. It would be appropriate for her to do so if she considered the earlier approach wrong.

A duty of consistency of taxation treatment or interpretation, if it existed, was owed to the public at large. An individual taxpayer did not acquire a correlative right of action for breach. If the CIR's assessment of Michael Hill's liability to tax was correct, the company had no greater interest than the general public in ensuring rectification of the CIR's incorrect assessment of the other taxpayer. Liability under the revenue legislation was imposed by statute, not by the CIR. There was no discretion to be exercised when assessing the amount of liability. The hearing authority must be bound by the same statutory obligation on an appeal: its power to cancel, vary or reduce was limited to the degree, if any, necessary to rectify the incorrectness of the CIR's assessment. The s138P TAA (powers of hearing authority) power was not a true discretion in the orthodox sense.

The appeal was allowed. Michael Hill's cause of action based on the ground of inconsistency was struck out.

A The appeal is allowed. The respondent's cause of action based on the ground of inconsistency is struck out.

B The respondent is ordered to pay the appellant costs for a standard appeal on a band A basis together with usual disbursements. We certify for second counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Harrison J)

Table of Contents

Introduction

[1]

Strike-out principles

[4]

Michael Hill's claim

[6]

Tax Administration Act 1994

[16]

Decision

[21]

(1) Legislative framework

[21]

(a) Introduction

[21]

(b) Sections 6 and 6A

[23]

(c) Tannadyce

[32]

(d) Summary

[43]

(2) New Zealand authorities

[44]

(a) Reckitt and Colman

[44]

(b) Subsequent authorities

[54]

(c) Summary

[59]

(3) English authorities

[60]

(4) Additional component

[73]

(5) Remedies

[79]

(6) Reconstruction

[86]

Result

[92]

Introduction
1

The Commissioner of Inland Revenue has ruled that Michael Hill Finance (NZ) Ltd is liable to pay income tax on a financing transaction. In the Commissioner's view, it was part of a tax avoidance scheme. Michael Hill has filed a challenge in the High Court to the Commissioner's consequential assessments of its liability to tax. The company relies on the orthodox ground that her ruling is incorrect in law.

2

Michael Hill separately challenges the Commissioner's ruling on the ground of its inconsistency with her earlier assessment that materially similar transactions entered into by another taxpayer are not liable to tax. Michael Hill claims the Commissioner has breached a duty owed to it of consistency of taxation treatment of comparable transactions. Toogood J dismissed the Commissioner's application to strike out Michael Hill's inconsistency claim. 1 The Commissioner now appeals.

3

The conceptual nature of Michael Hill's inconsistency claim is best understood by reference to its ultimate objective. The company's claim necessarily presupposes

that when undertaking its comparative assessment the High Court will use the materially similar transactions as the benchmark. Michael Hill's commercial purpose can only be to secure cancellation of its liability as the equivalent measure of the Commissioner's inconsistency even if she has otherwise calculated the company's liability correctly according to law. Mr Heron QC for the Commissioner describes Michael Hill as running “a race to the bottom”.
Strike-out principles
4

The parties are at one about the principles to be applied on an application to strike out a claim. 2 Michael Hill's allegations of fact must be accepted at this interim stage unless there is plain evidence that they are unsupportable — that is, entirely speculative and without foundation. The jurisdiction to strike out a pleading if it discloses no reasonably arguable cause of action is to be exercised only in plain and obvious cases. 3 Special caution is required where a claim involves a developing area of the law. 4

5

The rationale for these principles is obvious. A party should not be deprived of the opportunity to have its pleaded claim considered and determined in the ordinary way on evidence given at trial. However, that factor carries less weight where, as here, the tenability of a cause of action is not dependent upon evidence but can be determined solely by reference to settled legal principles.

Michael Hill's claim
6

In dismissing the Commissioner's application, Toogood J succinctly summarised the background circumstances to Michael Hill's claim as follows:

[5] In December 2008, the Michael Hill group of companies entered into a transaction in which it transferred its intellectual property and franchising operations within the group from New Zealand to Australia (“the Michael Hill transaction”). An Australian Limited Partnership (“ALP”), established under Queensland law, was used as part of the finance structure. Michael Hill owns 99.95 per cent of the ALP. The ALP was used to create asymmetric tax treatment in the relevant years. The effect of this was that in both Australia and

New Zealand there were deductions, and that the Australian deduction was not assessable income in New Zealand.

[6] Michael Hill applied for a binding ruling from the Commissioner on the application of sections of the Income Tax Act 2007 (“ITA”), including s BG 1 (the tax avoidance provision), to the transaction. A binding ruling was provided in relation to the “black letter” tax treatment of the structure, but the Commissioner formed the view that s BG 1 applied; that is, that the transfer of the intellectual property...

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