A further Trinity argument estopped
2011 case note – further 'Trinity scheme' argument estopped - tax avoidance, res judicata, abuse of process, issue estoppel.
It was held the assessments made were not prohibited due to the effect of section 114 of the Tax Administration Act 1994 ("TAA"). Furthermore, the assessments were valid due to the presumption of validity and even if there was a technical error, the Taxation Review Authority ("TRA") had jurisdiction to consider the challenge to the assessments.
The Supreme Court judgment is binding on the disputant for the purposes of issue estoppel and could not be re-litigated. Despite the technical black-letter argument, the Trinity Scheme had been found to be tax avoidance. The challenge proceedings were therefore struck out.
Impact of decision
This judgment provides further confirmation that the Supreme Court's judgment in the Trinity test case litigation is the final word on the tax consequences of taxpayers' participation in the "Trinity Scheme".
The judgment also confirmed that the Commissioner's assessments are to be treated as valid until a Court rules otherwise and re-affirmed the TRA power under section 138P of the TAA to confirm, cancel or vary assessments as it sees fit.
In his tax returns for the 1997 to 2006 income years, the disputant claimed attributed loss attributing qualifying company (LAQC) losses and losses brought forward based on his shareholding in an LAQC that was a member of a joint venture participating in the "Trinity Scheme".
The Commissioner of Inland Revenue ("the Commissioner") assessed the disputant disallowing losses brought forward claimed in the 2004 income year and assessed the disputant with 100% shortfall penalties for adopting an abusive tax position in the 1997 to 2003 income years. The Commissioner is yet to reassess the disputant in the 2005 and 2006 income years. That said, the appropriate notices of proposed adjustment and notices of responses have been exchanged.
By way of a background, in the Trinity test case litigation, the High Court, Court of Appeal and Supreme Court upheld assessments made by the Commissioner disallowing deductions on the basis that the Trinity Scheme was a tax avoidance arrangement and imposing 100% shortfall penalties for an abusive tax position (see Accent Management Ltd v CIR 22 NZTC 19,027 (HC), Accent Management Ltd v CIR  NZCA 231; (2007) 23 NZTC 21,366 (CA) and Ben Nevis Forestry Ventures Ltd v CIR  2 NZLR 289; (2009) 24 NZTC 23,188 (SC)).
In these proceedings the disputant sought, amongst other things, a declaration that the Commissioner's assessments were unlawful or should be replaced by assessments allowing the deductions sought under sub-part EH of the Income Tax Act 1994 ("the ITA94") (financial arrangements) or, if those rules did not apply, deductions on a straight-line basis. The disputant additionally contended, on the basis that the Commissioner's assessments were prohibited, that the TRA had no jurisdiction to hear his challenges.
The disputant's submissions
The disputant submitted that the Commissioner's assessments were prohibited because they were calculated under sub-part EG of the ITA94 (depreciation) and it should have been sub-part EH of the ITA94 that was applied.
The disputant said that, in circumstances where sub-part EH applies, its application is mandatory and that it is unlawful to fail to apply it. The disputant claimed that subpart EH is a special regime standing apart from, having superior operation to, and overriding the rest of the ITA94. The disputant additionally contended that, because sub-part EG had no effect in the circumstances, it could not support the Commissioner's assessments which must be quashed accordingly.
The Commissioner's submissions
For the Commissioner it was submitted that the disputant's claim about sub-part EH of the ITA94 was identical, in all material respects, to the taxpayers claim in Ben Nevis so that the relief sought should not be available.
Further it was submitted that the disputant was prevented from running his sub-part EH argument under the doctrines of issue estoppel/res judicata and that it was an abuse of process for him to now seek to do this.
The Commissioner generally supported his relevant assessments and indicated that the only issues were whether there was a tax avoidance arrangement allowing the Commissioner to remove the losses claimed by the disputant and whether the disputant had adopted an abusive tax position and could be penalised accordingly.
Judge Barber held that the Commissioner's assessments were not prohibited and that the TRA did have jurisdiction to hear the disputant's challenges.
At paragraph  Judge Barber commented that:
It seems to me to be elementary that the assessments against the disputant now in issue cannot be regarded as void ab initio, as the disputant is suggesting, due to the effect of section 114 of the Tax Administration Act 1994 ... Accordingly, since at least, prima facie, there are assessments in existence as pleaded, and because the jurisdiction of the Taxation Review Authority is to decide whether assessments are correct, it seems quite untenable to me for the disputant to submit that I do not now have jurisdiction to deal with his challenges.
In respect of the Commissioner's assessments specifically, His Honour commented:
- with reference to section 114 of the TAA, that "... even if there were some technical error in the assessments, that would not make them invalid" ;
- that even if the Commissioner had somehow failed to comply with section EH8 of the ITA94 in carrying out the assessments, these assessments would not be invalidated but instead would merely be incorrect ;
- that there is a presumption of validity and that an assessment will be treated as valid until a Court rules otherwise ;
- that his analysis was supported by the High Court's decisions in Redcliffe Forestry Venture Ltd v CIR (HC Auckland CIV 2009-404-005991, 26 February 2010 Venning J and Accent Management Ltd v CIR (HC Auckland CIV 2008-404-8649, 12 March 2010 Keane J ; and
- that he must regard the assessments as correct .
In respect of the TRA's jurisdiction the Judge specifically commented that:
- the disputant's current argument was contrary to the analysis of the Supreme Court which had been rigorously fought previously in the High Court and Court of Appeal ;
- the TRA's power under section 138P of the TAA is "... never simply to confirm, but to ‘confirm or cancel or vary' as it sees fit ..." ;
- the High Court decisions of Redcliffe and Accent Management confirmed that the TRA had jurisdiction to consider these challenges (,  and ).
Judge Barber held that if the TRA were to dismiss the disputant's challenges for want of jurisdiction, the Commissioner's assessments would stand and accordingly there would be no benefit to the disputant in persisting with his objection to jurisdiction .
His Honour additionally rejected the disputant's arguments based on BASF NZ Ltd v CIR  17 NZTC 12,136 (HC) (-) and commented that the presumption of validity precluded the disputant's assertion that the TRA had any extra-statutory power to "declare" assessments invalid before the challenge process had run its course .
Judge Barber also held that the disputant was prevented from running his sub-part EH of the ITA94 argument under the doctrines of issue estoppel/res judicata and for him to now seek to run this argument amounted to an abuse of process.
In respect of the issue estoppel/res judicata matter, Judge Barber specifically found that:
- with reference to the findings of the High Court, Court of Appeal and the Supreme Court in particular, the disputant "... cannot tenably suggest that he could ever have been entitled to the deduction which he now seeks ..." and that he "... must be estopped by the findings of those Courts from even making the arguments he has so elaborately set out before me" ;
- there had been a final decision as to the appropriate legal analysis of the Trinity Scheme - the Supreme Court having determined that the appropriate analysis was under sub-part EG not sub-part EH of the ITA94 ;
- "... [the] Supreme Court judgment finally determined all matters between the defendant and the plaintiffs in the Trinity litigation including their privies of which the disputant is one. There is a sufficient mutuality of interest to find that the disputant and the plaintiffs in Accent Management/Ben Nevis are privies ... Accordingly, for the purposes of issue estoppel, that Supreme Court judgment is binding on him as if he were a named party to it" .
In respect of the abuse of process matter, His Honour held (at ) that:
... Broadly, I agree that if the disputant were permitted to proceed with his new argument based on sub-part EH of the Act, that would be manifestly unfair to the defendant Commissioner who, at significant expense, has succeeded in Ben Nevis after extensive litigation on the issue. To relitigate matters would bring the administration of justice into disrepute among right thinking people. In the public interest, public money should be carefully spent.
At  Judge Barber indicated that while the disputant was entitled to argue that the assessments were incorrect, he could not relitigate issues which have already been dealt with by the Supreme Court in the Trinity litigation. If the disputant wished to challenge the correctness of the assessments he needed to set out why he considered his case was distinct from those dealt with by the Supreme Court (see also ).
The Judge commented that the disputant's arguments were moot in any event because, even if the Commissioner, the High Court, Court of Appeal and Supreme Court were wrong in their analysis as to the applicability of sub-parts EH or EG of the ITA94, both sub-parts were subject to the general anti-avoidance provision (section BG1 of the ITA94) and the Trinity Scheme had been found to be a tax avoidance arrangement (, ,  and ).
With reference to his previous findings, at  Judge Barber ordered that the disputant's challenge proceedings be struck out.
Income Tax Act 1994