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17 Sep 2009
Appeal Status
Not appealed

Avoidance arrangement and Commissioner's reconstruction confirmed

2009 case note - Income was personal income and not earned by business entities - Avoidance, vendetta, time bar, CIR's Policy Statement.

TRA Dec No 15/2009


The Commissioner's assessments based upon section 99 and section BG1 that income was personal income and not earned by business entities was confirmed.

Impact of decision

Limited to the specific facts.


The disputant was personally assessed for income tax on income derived by various business entities on the basis that the use of those entities (which involved locating and exploitation of loss carrying companies by use of management and agency agreements) were an avoidance arrangement to disguise the fact that the income had been earned by personal exertions.

The disputant challenged the assessments (the tax years 1985 to 2000) on both substantive and procedural grounds.

The case is a complex factual one and the summary above does not include all the finer detail. For this, the decision should be consulted.


The Taxation Review Authority ("TRA") found there were no procedural defects or any substantive errors in the assessments and these were confirmed.

Procedural challenges

These are summarised at paragraph [9] of the judgment. Looking at each the Authority found:

  • Did the assessor have the necessary delegation under section 99 and BG1? Yes at paragraphs [14] to [23];
  • Did the assessor have the necessary delegations to lift the statute bar? Yes at paragraphs [36] to [72]. The Authority concluded at paragraph [71] that of the two options open to the Commissioner for lifting the statute bar, he may rely upon one or the other or both together.
  • Did the assessor comply with the Commissioner's Policy Statement (Feb 1990)? Yes, even though this was not strictly necessary according to the O'Neil decision at the Privy Council. See TRA decision at paragraphs [24] to [35].
  • Was there a vendetta by the Commissioner against the disputant? No (at par [73] to [102]). The Authority concluded there was no evidential basis for concluding there was a vendetta and further concluded that, even if there had been, if the vendetta had not made the assessments incorrect then its existence was irrelevant anyway (see at paragraph [74]).

Substantive challenges

Having dealt with the procedural points the Authority turned to address the actual assessments:

  • Was there an arrangement? Yes, all the parties to the transactions wererepresented by the disputant in various different capacities and were in effect his alter egos) see decision at [131] to [170];
  • Was there tax avoidance? Yes at paragraphs [171] to [189]. The authority referred extensively to the Court of Appeal and Supreme Court decisions in Accent Management case to conclude the use of losses in the way the disputant's arrangement achieved was not in the contemplation of Parliament: "An objective viewing of the facts in terms of commercial sense clearly leads to the conclusion that the arrangement was to avoid tax by using losses in a manner not approved by the law." (at paragraph [187])
  • Was the disputant a person affected? Yes, at paragraph [190] to [206] saying "I now add that those monies were earned by the disputant's personal exertions. He is clearly a person affected by the tax avoidance arrangement because only he controls the profits of that arrangement." (at paragraph [206])
  • Did the disputant receive an advantage from the arrangement? Yes, at paragraphs [207] to [216] as his personal exertions income was not taxed as a consequence of the tax avoidance arrangement.

The Commissioner's reconstruction was confirmed (at paragraphs [217] to [278]). In particular the Authority accepted that a lack of a deduction to the disputant's client (under section 104 of the 1976 Act) did not mean the disputant was not obliged to account for the receipt (see at paragraph [237]) as the fee was not addressed using section 99 or BG1 then the alleged protection of section 99(4) did not apply (at [240]).

The Abusive Tax Position Shortfall Penalty was also confirmed with the Authority wondering why a penalty for Evasion had not been applied (at paragraph [284]).

Income Tax Act 1976