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03 Dec 2010
Appeal Status

Taxpayer entitled to discontinue a test case

2010 case note - confirms that test case challenges can be discontinued, and latter year challenges are not determined by decisions covering earlier years.

Commissioner of Inland Revenue v Telstra NZ Holdings Limited


The taxpayer's challenge in respect of its 2003-05 tax years was designated as a test case by the Commissioner. Shortly before trial the taxpayer discontinued its challenge, and then commenced new challenge proceedings in respect of later tax years (albeit in respect of the same alleged tax avoidance arrangement). The Commissioner applied to have the discontinuance of the first challenge set aside on the grounds that it was an abuse of process. The Court dismissed the Commissioner's application, holding that the taxpayer was entitled to take the steps they did.

Impact of decision

The decision confirms that challenges designated as test cases are able to be discontinued and that challenges in respect of latter years are not determined by a decision in respect of earlier years.


This is an interlocutory decision relating to Telstra's part in the Optional Convertible Notes (OCN) litigation. The OCN litigation involves challenges to assessments issued by the Commissioner on the grounds that OCN arrangements entered into by a number of taxpayers constituted tax avoidance.

Telstra's challenge of the assessments to its 2003-05 years was designated as a test case in the OCN litigation along with another OCN case. Other OCN challenges were stayed pending the outcome of the test cases.

Telstra's challenge was due to be heard by the High Court in Auckland from 26 October 2010. The proceedings were well advanced, and almost ready for trial, when Telstra discontinued its challenge proceedings on 3 September 2010.

On 5 October 2010 Telstra filed a second challenge to its OCN assessments, this time in respect of the 2006-08 years.

The Commissioner applied to set aside Telstra's discontinuance of the first challenge on the grounds that it was an abuse of process in circumstances where:

  1. Telstra's first challenge was a test case for other litigants, and Telstra had not objected to it being designated as such
  2. the proceedings were substantially ready for trial, and briefs of evidence had been exchanged
  3. Telstra continues to litigate the later years of the same arrangement in its second challenge.

The Commissioner also sought, in the alternative, an order for increased or indemnity costs, on the grounds that Telstra's conduct in discontinuing at the last minute had put the Commissioner to unnecessary expense.



His Honour found on the facts that there was no abuse of process by Telstra in this instance; its decision to discontinue was a commercial decision to not incur the costs of trial. There was nothing in the evidence to suggest that Telstra discontinued in order to gain an improper advantage in the OCN litigation.

Further, the Commissioner was not prejudiced by the discontinuance. The Commissioner saved the costs of a trial, and will be able to use a substantial part of the evidence in defending the next OCN challenge.

His Honour noted that the discontinuance had inconvenienced the Commissioner, but said this was not sufficient to set aside the discontinuance, and that the test case regime "does not abrogate the right of a designated taxpayer to discontinue its tax challenge proceedings". His Honour went on to note that, while the second challenge raised exactly the same questions of fact and law as the first, the second challenge is a separate challenge in respect of different income years and "[a] previous decision, relating to a different year of income, does not determine the tax liability of a taxpayer in respect of later years of income".


His Honour held that Telstra is not liable for increased or indemnity costs as its discontinuance was not unreasonable.

Tax Administration Act 1994