Telstra New Zealand Holdings Ltd v Commissioner of Inland Revenue Hc Ak
| Jurisdiction | New Zealand |
| Judge | Wylie J |
| Judgment Date | 06 December 2010 |
| Neutral Citation | [2010] NZHC 2195 |
| Docket Number | CIV-2009-404-000120 |
| Court | High Court |
| Date | 06 December 2010 |
[2010] NZHC 2195
CIV-2009-404-000120
CIV-2010-404-002826
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
Application for the setting aside of a discontinuance on the basis that it was an abuse of the Courts process. Dispute with Commissioner of Inland Revenue (defendant) over tax deductions. Case against plaintiff was eventually designated a “test case”. After an internal review plaintiff reassessed the benefit of continuing with the proceedings, but issued fresh proceedings concerning the same basic issue but in different income tax years — whether it was an abuse of process to discontinue proceedings that had been designated a test case where substantially the same points were raised in fresh proceedings.
R Simpson and M McKay for the Plaintiff
B Brown QC, MSR Palmer and RL Roff for the Defendant
JUDGMENT OF Wylie J
This application raises a short but interesting point. Has Telstra New Zealand Holdings Limited (“Telstra”) abused the process of the Court by discontinuing proceedings it commenced against the Commissioner of Inland Revenue (“the Commissioner”) in respect of assessments issued for the 2003 to 2005 income tax years, when those proceedings had been designated as a test case by the Commissioner, and where substantially the same points have been raised by Telstra in fresh proceedings challenging assessments issued by the Commissioner for the 2006 to 2008 income tax years?
Telstra is one of a number of taxpayers currently in dispute with the Commissioner over deductions claimed for the notional interest cost component embedded in what are known as optional convertible notes (“OCNs”) issued by New Zealand resident taxpayers to their non-New Zealand resident parents to fund acquisitions or refinance existing operations in New Zealand. The interest cost is notional because no interest is in fact paid. Rather the deductions claimed by Telstra and the other OCN issuers have been quantified by applying a determination issued by the Commissioner on 24 October 1990.
The OCN litigation involves nine taxpayer groups with over 20 sets of proceedings. There is approximately $200 million of potential tax revenue which the Commissioner has assessed as tax avoidance. This figure does not include penalties or use of money interest that will be accruing on the tax that has been assessed. Further, not all income years have yet been assessed, and some taxpayers — including Telstra — are claiming deductions for OCNs still on foot. The Commissioner estimates that there are further potential assessments of approximately $100 million outstanding.
From the outset, these cases had been managed by the Commissioner as a group, due to the substantially identical facts and issues that arise in each dispute.
Telstra claimed deductions for the notional interest cost component of the OCNs it had issued to its Australian parent company for each of the financial years 2003 to 2005 (inclusive).
The Commissioner did not accept those deductions. He commenced the disputes procedure against Telstra by issuing a notice of proposed adjustment under s 89B of the Tax Administration Act 1994 (“the Act”) on 20 April 2007. That notice related only to the 2003 to 2005 income tax years.
Telstra rejected the proposed adjustments and filed a notice of response on 19 June 2007.
Telstra retained counsel — a Mr M McKay. A number of the other taxpayers involved in the OCN litigation also retained Mr McKay.
On 3 August 2007, Mr McKay had a general discussion with a Mr Hendriksen, a solicitor employed by the Commissioner. Mr McKay raised the possibility that “test case” status should be assigned to one of the various taxpayers involved. Mr Hendriksen indicated that that was a possibility, but that the Commissioner had not taken any view on that possibility at that time. Although Mr McKay indicated that Telstra's case might be most appropriate case to be allocated test case status, there is nothing to suggest that this was a formal proposal made on Telstra's instructions.
In August 2007, the Commissioner and Telstra attended a conference to discuss the proposed adjustments. When it became clear that the dispute could not be resolved, Telstra expressed the desire that the parties should move to the next stage of the disputes procedure; namely, that they should exchange statements of position, and then refer the dispute to the Commissioner's adjudication unit.
Referral to the adjudication unit is an administrative practice. It offers the opportunity for an independent determination of the dispute by legally trained officers of the Inland Revenue Department who have not previously been involved in the investigation and dispute. If the matter is decided by the adjudication unit in the taxpayer's favour, the Commissioner will not take the matter further. However, if the adjudication unit decides in the Commissioner's favour, the Commissioner will issue an assessment that reflects his position. The taxpayer can then challenge the Commissioner's assessment in the Taxation Review Authority or in the High Court.
Mr McKay wrote formally to Mr Hendriksen on 15 August 2007 confirming the position and advising that if the dispute was not resolved in Telstra's favour, it would bring High Court proceedings to challenge any resulting assessment.
On 1 October 2007, Mr Hendriksen wrote to Mr McKay advising that the Commissioner was seeking the agreement of other taxpayers involved in the OCN dispute to compromise their processes, so that their disputes would effectively be determined by the adjudication unit's consideration of the dispute between Telstra and the Commissioner. The Commissioner indicated that if the other taxpayers agreed to defer the processing of their disputes, he would be prepared to exchange statements of position with Telstra, and to have the dispute referred to the adjudication unit.
In the event, the Commissioner secured the agreement of the other taxpayers. On 20 November 2007 he wrote to Telstra confirming that all of the affected taxpayers had agreed to adopt the process outlined in the 1 October 2007 letter, and that he would issue a statement of position for Telstra in January 2008. It was the Commissioner's intention that Telstra's dispute be referred to the adjudication unit in the first half of 2008.
On 24 January 2008, the Commissioner issued a disclosure notice and a statement of position to Telstra for the 2003 to 2005 income tax years. On 24 March 2008, Telstra issued its statement of position.
Between May and June 2008, the parties provided further information to each other for inclusion in their respective statements of position. The dispute was then referred to the adjudication unit.
On 17 November 2008, the adjudication unit confirmed the Commissioner's position. As a result, on the same day, the Commissioner issued amended assessments against Telstra. In January 2009, Telstra filed proceedings in this Court under number CIV-2009-404-120 challenging those assessments.
The Commissioner has the power under s 138Q to designate a High Court challenge as a test case if he considers that determination of the challenge is likely to be determinative of all or a substantial number of issues in one or more other challenges.
Here the Commissioner did not immediately designate Telstra's case as a test case under s 138Q. Rather he resisted Telstra's initial application for discovery, to give him time to consider that issue. Telstra was aware of the possibility that its challenge might be designated as a test case, and on 26 May 2009 it and the Commissioner filed a joint memorandum requesting an adjournment of the case management procedures so that the Commissioner could make a decision on whether or not to use the test case procedure, and to stay the other OCN taxpayers' disputes under s 138R.
On 24 June 2009, the Commissioner designated Telstra's challenge as a test case, along with one other challenge. Telstra was given notice of the Commissioner's decision on 26 June 2009. The Commissioner also issued notices staying proceedings under s 138R to those taxpayers whose challenges were not test cases.
At much the same time, the Commissioner sought to impose shortfall penalties on Telstra. Telstra challenged those assessments in separate proceedings (in CIV-2010-404-2826) and requested that they be heard together with the substantive challenge proceedings (in CIV-2009-404-120). The Commissioner agreed to that request and an order was made to this end by Associate Judge Doogue on 6 July 2010.
Telstra had also sought to deduct the notional interest cost component of the OCNs it had issued to its Australian parent for each of the income tax years 2006 to 2008. To avoid the statutory time bar of four years, on 1 March 2010, the Commissioner issued amended assessments for each of those years. Telstra disputed those assessments and issued the Commissioner with a notice of proposed adjustment under s 89D informing the Commissioner that it did not accept the same on 30 June 2010. The Commissioner issued a notice of response on 2 August 2010.
In the latter part of 2009 and in early 2010, Telstra conducted an internal review of the value to it of the disputed OCN deductions and associated tax losses for the 2003 to 2005 tax years. The company has a substantial balance of tax losses available for offsetting against future profits which are independent of those disputed tax deductions, and internal net profit projections within the group made during late 2009 and early 2010 suggested that the tax losses...
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