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03 Sep 2010
Appeal Status

JG Russell unsuccessful in appeal of his personal tax assessments

2010 case note - appeal rejected by High Court and assessments based upon tax avoidance reconfirmed - Russell template, personal exertions.

John George Russell v Commissioner of Inland Revenue


An appeal by the taxpayer from a Taxation Review Authority (TRA) decision had been rejected by the High Court. Assessments based upon tax avoidance have been reconfirmed.

Impact of decision

The decision is no surprise given the clear tax avoidance purpose or effect of the arrangement.
The taxpayer has filed a further appeal in the Court of Appeal.


This was an appeal from the TRA (Case Z19 (2009) 24 NZTC 14,217).

The taxpayer was the designer and promoter of the “Russell template” tax avoidance scheme. This case addressed his personal tax affairs from 1985 to 2000. It has little to no relationship with the template litigation.

Mr Russell had earned income through his personal exertions including, but not confined to, the sale of the Russell template. Originally a sole trader, he had entered into a partnership structure using two companies that he controlled to create the Commercial Management Partnership. The income earned by Mr Russell’s activities was attributed to the partners. Throughout the life of the partnership new partners would be introduced to replace old ones.

In addition the partners individually would enter agency and management agreements with tax loss companies. The tax losses companies were controlled by Mr Russell. The partners would account to the loss companies for any income earned and that income would be sheltered by the loss in the loss company. As the tax losses of any particular company were used up, a new tax loss company would be substituted in (using agency and management agreements). The cash would, however, be “banked” with finance companies controlled by Mr Russell.

The TRA concluded that the structure was tax avoidance and that Mr Russell was a person affected by it (under section BG1 and its predecessor section 99), confirming the Commissioner’s reconstructive assessments to Mr Russell personally.

The taxpayer appealed the TRA decision on all points but at the High Court abandoned most of the points taken and confined the appeal to three main points.

In summary those points were that if there was an arrangement then it was properly confined to that between the partner companies and the tax loss companies (the agency and management agreements) and not the wider arrangement the Commissioner argued for. If the taxpayer was correct then there was no rationale to reconstruct to Mr Russell personally.


Relying upon Ben Nevis, Justice Wylie had little difficulty finding the existence of an arrangement. He rejected the narrow arrangement contended for by the taxpayer in favour of the Commissioner’s wider arrangement, primarily because of Mr Russell’s complete control of the entire structure.

The Judge relied upon the recent Court of Appeal decision in Penny & Hooper v CIR to agree that, while the taxpayer had used legitimate corporate, partnership and trust structures, the Commissioner was entitled to challenge the way those structures were employed. The arrangement did alter the incidence of tax, it was contrived, and involved pretence.

His Honour concluded that there was a tax advantage: firstly by Mr Russell divesting himself of personal exertions income into the structure and then, secondly, by the use of the tax loss companies to shelter that income.

The Judge rejected a submission by the taxpayer that he received no tax advantage as he did not receive any money from the arrangement, observing that this was not the test. The proper test was whether there was a tax advantage and the arrangement did confer a tax advantage on Mr Russell (by divesting him of his personal exertions income and then avoiding tax on that income).

Income Tax Act 2007, Tax Administration Act 1994