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

• Jurisdiction: New Zealand
• Judge: Harrison J
• Judgment Date: 21 June 2016
• Neutral Citation: [2016] NZCA 276
• Docket Number: CA30/2016
• Court: Court of Appeal
• Date: 21 June 2016

Between

Commissioner of Inland Revenue

Appellant

and

Michael Hill Finance (Nz) Limited

Respondent

[2016] NZCA 276

Court:

Harrison, Miller and Cooper JJ

CA30/2016

IN THE COURT OF APPEAL OF NEW ZEALAND

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.

Counsel:

M R Heron QC and H W Ebersohn for Appellant

S E Fitzgerald and M F Mabbett for Respondent

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 and/or the financing of its acquisition was a tax avoidance arrangement.

[7] Michael Hill amended its application for a binding ruling to exclude consideration of s BG 1. Michael Hill then self-assessed the tax liability on the basis that s BG 1 did apply, but subsequently proposed an adjustment to its self-assessments. The Commissioner rejected the proposed adjustment by issuing a notice of response. Accordingly, Michael Hill initiated the challenge proceeding.

7 Michael Hill brought its proceeding in the High Court as the appropriate hearing authority under pt 8A of the Tax Administration Act 1994 (TAA). The company challenges the correctness of the Commissioner's assessment in her notice of response — effectively a challenge to the Commissioner's binding ruling that its transaction was a tax avoidance arrangement. Both parties accept that Michael Hill's correctness challenge must be determined on its merits at trial.

8 Toogood J explained the evidential foundation for Michael Hill's inconsistency challenge as follows:

[13] Michael Hill's advisers raised the inconsistency of treatment between the Michael Hill transaction and other “IRD Approved Structures” with the Commissioner on several occasions. The Commissioner initially indicated that she was reviewing other ALP arrangements and, if there were no materially distinguishing features, she would act consistently. Following further submissions from Michael Hill's advisers, the Commissioner suggested that the question of consistency be removed from the agenda for future discussions. She has since declined to discuss the matter further.

[14] The similarity between the Michael Hill transaction and other transactions is said by the plaintiff to be demonstrated by an inadvertent disclosure by the Inland Revenue Department (“IRD”) of another taxpayer's identity to Michael Hill when drafting the Michael Hill binding ruling. The Commissioner has since said that there are “significant differences” between the transactions entered into by the other taxpayer and those entered into by Michael Hill, but the Commissioner has not provided any further explanation of the claimed “significant differences”. The similarity between the Michael Hill transaction and the other transactions is said to have been observed by a member of the Commissioner's staff who, in a file note about the inadvertent disclosure, noted that “it could be deduced from the text that [redacted] had entered into a similar arrangement”.

9 In this respect, we note Mr Heron's point that the mechanism for Michael Hill's challenge is the Commissioner's refusal to invoke s 113 of the TAA to amend the company's self-assessments and that under this provision the Commissioner can only amend an assessment “in order to ensure its correctness”. While Mr Heron may be right, we must determine the arguability of Michael Hill's underlying claim of inconsistency.

10 In more detail, Michael Hill pleads these elements of its inconsistency claim:

• (1) Other taxpayers had entered into transactions or arrangements with eight itemised features (the IRD Approved Structures) which were materially the same as Michael Hill's restructuring transaction.

• (2) The tax effects of the IRD Approved Structures and Michael Hill's transaction were materially the same in that (a) dividends derived through its associated company and an Australian limited partnership in the IRD Approved Structures are exempt under s CW 9 of the ITA and in a particular income year not subject to a foreign dividend payment liability; and (b) interest payable by those entities is deductible for Australian tax purposes and also for New Zealand tax purposes for Michael Hill and the New Zealand company, the latter being the limited partner of the Australian limited partnership.

• (3) The Commissioner...