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20 Dec 2010
Appeal Status

High Court declines to add new defendants to tax litigation

2010 case note – taxpayer's application to add more parties to long-running litigation denied by High Court - joinder of parties.

"Y" Limited v Commissioner of Inland Revenue


The taxpayer sought to add more parties to long-running litigation on the basis that the Commissioner had not correctly identified a tax avoidance arrangement and that without the other parties no one was capable of paying the taxes if the Commissioner was ultimately successful. The application was declined by the High Court.

Impact of decision

The decision rebuts any suggestion that liability to taxes should be linked to recovery of the same taxes when a tax challenge is proceeding. The same logic would apply to the disputes process under the Tax Administration Act 1994 ("TAA"). First the liability to pay taxes needs to be established prior to any issue of recovery being addressed.

The decision is clear that argument regarding the scope of the arrangement does not necessitate adding additional parties and such addition would be detrimental to those parties.


This was an interlocutory application by the taxpayer to add further defendants to the case. This is possible under High Court Rule 4.56(1).

The case was a tax challenge by Y Limited against assessments made by the Commissioner on the basis of tax avoidance by the taxpayer for the income tax years 1996 to 1998 inclusive.

The taxpayer argued that certain banks should be added to the proceedings because the:

  1. banks were said to have owed money to Y Limited under the arrangement and without recovery by Y Limited against the banks the Commissioner would not be able to recover any taxes owed from Y Limited
  2. Commissioner's identified tax avoidance arrangement was wrong and should include a purported wider tax avoidance arrangement the taxpayer had identified and a resulting advantage to the banks
  3. Commissioner had a duty under section 6A (3) of the TAA to collect the highest net revenue, and that implied joining the banks to assure recovery.

The Commissioner opposed the application on the following grounds:

  1. The issue of recovery was irrelevant to a challenge about the liability for the taxes. The two matters were separate issues and could not be run together. This also addressed the section 6A argument advanced by Y Limited.
  2. There was no arrangement involving the banks and, if there were, it did not excuse the tax advantage obtained by Y Limited.


Justice Mackenzie declined to add the banks and dismissed the application. Of each ground the Judge concluded:

The present proceeding is concerned only with the determination of the extent of the plaintiff's tax liability. It is not concerned with recovery by the Commissioner of the amount of that tax liability. That would be a later stage. Only at that later stage of collection of tax could the Commissioner's duty under section 6A (3) of the Tax Administration Act 1994 have any relevance. Further, if it were relevant, it is for the Commissioner, not this Court, to determine how that duty is fulfilled. The Commissioner has a wide managerial discretion as to the best means of obtaining the highest net return. I do not consider that section 6A provides any support for the proposition that, either in the ordinary case which I have described or in this case, debt recovery proceedings against a third party should be joined with a challenge to the Commissioner's assessment [17].
The Commissioner has not taken any steps against the banks alleging that they are parties to a tax avoidance arrangement so as to affect their tax liability. If the banks were joined as parties, and if the plaintiff were successful in its contention that the banks were involved in a wider tax avoidance arrangement, then the banks would, as parties, be bound, as a matter of res judicata, by the Court's findings on that issue. That might expose the banks to subsequent reassessment by the Commissioner, which the banks might not be able to fully defend under the usual processes, by reason of the findings in this litigation [24].
On the other hand, Y [Limited] will not be precluded from making any arguments which it may wish to make as to the extent of any wider tax avoidance arrangement, so far as that may affect the tax liability of Y [Limited], if the banks are not parties. Full details of the arrangement will (subject to the constraints of the Tax Administration Act) be able to be adduced, if the banks are not parties. Any necessary evidence from the banks can be obtained, if the banks are not parties, by the use of the available interlocutory proceedings [25].

High Court Rules, Tax Administration Act 1994