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01 Sep 2005
Appeal Status

Taxpayer unsuccessful in appealing TRA decision on Russell template

2005 case note - taxpayer unsuccessful in appealing decision regarding the Russell template for tax avoidance - res judicata, issue estoppel.

N T H Douglas v The Commissioner of Inland Revenue


The taxpayer was unsuccessful in appealing the TRA's decision regarding the Russell template for tax avoidance.


This is a Russell template-related matter. It is an appeal from Case T59 and Case V2.


The taxpayers were part of the Russell template which has been found to be a tax avoidance arrangement in Miller (1998) 18 NZTC 13,961 and O'Neil (2001) NZTC 17,051. Despite an attempt to distinguish this arrangement from the template Courtney J found insufficient difference to justify a different treatment of these taxpayers. [41]

The Commissioner argued that the case was subject to res judicata through issue estoppel as the Russell template was the same for all issuers and because Mr Russell was the common factor (as agent) for all litigants. The effect of this is to preclude any argument regarding the characterisation of the template. Her Honour concluded that while these litigants were not parties to the earlier cases there was a public interest in preventing case after case advancing the same arguments. Accordingly, emphasis was placed upon the identical nature of the template and Mr Russell's role in it and the earlier litigation to conclude that res judicata did apply. [42-61]

Her Honour rejected a submission that the fact the taxpayers did not know the scope of the arrangement was relevant [62-65] and one that the earlier decisions were in judicial review and not tax objections meant res judicata could not apply. [62-70].

The taxpayers next argued the Commissioner's assessments were unintelligible (submission broken down into five subparts). Her Honour considered whether or not this was the case was a factual inquiry [76] but judged objectively the assessments were in fact intelligible and none of the five grounds of unintelligibility advanced by the taxpayers applied. [76-117]

In response to the taxpayers' submission that the introduction of a Track C assessment rendered the Track B assessments (the subject of the appeal) incorrect Her Honour concluded that the BASF principle (see (1995) 17 NZTC 12,136) would render the Track C assessment invalid to the extent they re-opened any issue being determined as part of Track B. [118-125]

Her Honour declined to address an argument regarding the exhaustion of the Commissioner's discretion under section 99(3) as it was not within the ambit of the TRA case and therefore not properly part of the appeal. [126-127]

The taxpayers' reiterated unsuccessful submissions regarding a named officer of Inland Revenue giving evidence made in a judicial review (see Wire Supplies CP 526/SD99). These were unsuccessful here. [128-132]

The taxpayers sought access to legal opinions by two departmental solicitors on the basis the privilege had been waived when these were referred to in internal memos. However, Her Honour considered that the officers preparing the internal memos probably did not consider the prospect of those reports being part of litigation so there was no waiver of the privilege:

"I do not consider that the reference in a discoverable document to a privileged document is sufficient to amount to a waiver of the privileged document". [133-151]

The TRA had observed that a funding charge for interest-free funding by Russell entities to the taxpayers would be an allowable deduction but, for lack of evidence did not allow one. This was not changed on appeal where there was still no evidence more than the "speculative" to justify any such a deduction. [152-159] A similar result was given on the issue of apportioning the administrative charge the taxpayers had failed to discharge the burden of proof on them. [160-174]

The taxpayers accepted they could not directly challenge the time bar [175] but sought to challenge the officer's re-opening the time bar as not evidenced appropriately (the Commissioner relied upon certificates of re-opening). Her Honour was satisfied the certificates were sufficient. [181]

Income Tax Act 1976