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05 Aug 2011
Appeal Status

Approved issuer levy structure found to be tax avoidance

2011 case note – structure found to be tax avoidance but shortfall penalty did not apply - trust, investment company, unacceptable position, RWT, statute bar.

VI Limited and WI Limited v Commissioner of Inland Revenue

Income Tax Act 1994, Tax Administration Act 1994


Taxpayer WI Limited ("WIL") is a Hong Kong resident company. It incorporated a company VI Limited ("VIL") in New Zealand. WIL made substantial loans to VIL which were converted to redeemable preference shares in VIL. The Commissioner asserted that WIL was a New Zealand tax resident and accordingly should have resident withholding tax (RWT) as opposed to payment of an approved issuer levy (AIL). The Commissioner also asserted that the structure had a purpose or effect of avoiding non-resident withholding tax (NRWT) as tax avoidance.

The Taxation Review Authority (TRA) found in favour of the Commissioner on issues 1 to 4 but concluded that a shortfall penalty did not apply.

Impact of decision

The TRA has suggested that a subjective test for unacceptable tax position may be relevant where the case is complicated or the structure used appears compliant until "deeply analysed" and that an objectively unacceptable position may not be an "unacceptable tax position" for the purposes of the penalty provisions.

Further, it is implied from the decision that while the position may have a dominant purpose of tax avoidance (on an objective basis) the position may still be an "acceptable tax position".


WIL is a Hong Kong registered company, incorporated in 1982 when the C family resided in Hong Kong. In 1989, the family moved back to New Zealand and incorporated a company VIL to undertake property investment. In 1990, WIL made substantial loans to VIL which were converted to redeemable preference shares in VIL. These were redeemed in 1996 by VIL on the basis that their value was left as a debt owing by VIL to WIL as an "on demand" loan.

In May 1997, Mr and Mrs C transferred their shares in WIL to their three children who were appointed additional directors. A deed was executed recording that V Trust owed WIL over $3 million (the loan owed by VIL to WIL was novated to the V Trust). The loan was repaid in 2005. An AIL was paid in respect of the interest payments.

The Commissioner accepted WIL remained a Hong Kong resident until 1998 (and again from 2004 onwards). The Commissioner asserted that from 31 March 1999 to 31 March 2003, WIL was a New Zealand tax resident and accordingly should have deducted RWT as opposed to AIL. The Commissioner asserted that for the purposes of the 2004 income year and following (and, should the Commissioner be incorrect in his residency arguments, also in relation to the 1999 to 2003 income years) a tax avoidance arrangement existed which had the purpose or effect of avoiding NRWT.


The TRA found in favour of the Commissioner in respect of tax residency, filing RWT returns, statute bar issues and tax avoidance, however concluded that the shortfall penalty did not apply.


The TRA accepted that the centre of management test in section OE 2(1)(c) of the Income Tax Act 1994 ("ITA") refers to day-to-day management at an administrative level and that the control test in section OE 2(1)(d) refers to directorial control, being something distinct from management on a day-to-day basis. Barber DJ also agreed that the residency test is a factual enquiry about actual control and actual management functions as opposed to de jure control or management. The TRA rejected the submission that in a period where little or no business was carried out there is "insufficient business to identify a place of either central management; or director control".

With respect to directorial control, the TRA also accepted that the law indicates that it is where the "brain which controls the company resides" even if the majority of the directors live elsewhere. Barber DJ also accepted that the control test is satisfied if control by the directors is exercised from New Zealand on a continuing basis and any occasional control from outside New Zealand is not relevant.

Barber DJ concluded on the facts that the centre of management of WIL was in New Zealand, based on a large amount of documentary and oral evidence. The TRA also agreed with the Commissioner that the directorial control was exercised by Mr C in New Zealand (even taking into account the fact that he considered the children as professionals could have resisted Mr C's advice had they thought it necessary).

In concluding on his residency remarks, Barber DJ again restated that the centre of management of WIL was carried out by Mr C in New Zealand. However, the TRA stated that it was arguable that Mr C also controlled the directorate of WIL and its decisions, accepting that to a large degree he was the controlling mind of the companies, but stating that as the children were all intelligent and sensible they could not be regarded as controlled by Mr C except to some degree by default (they respected their parents and their acumen and left it to Mr C to obtain and implement tax advice).

Sections NF 2(4) and NF 5

The disputants had raised a new argument that even if WIL was a tax resident, section NF 2(4) did not apply and so the V Trust was not required to pay RWT. The TRA accepted that the interest payments were made in the course or furtherance of V Trust's taxable activity of lending money, investing in shares, managing property and leasing cars. Accordingly, WIL was obliged to account for RWT.

The disputants had also argued that section NF 5 applied to excuse V Trust from accounting for RWT as it concluded the payment was non-resident withholding income on reasonable grounds and having made all reasonable enquiries. Barber DJ concluded that Mr and Mrs C needed to have obtained advice from the accountants (who had been instructed since 1996) to have reasonable grounds and to have made reasonable inquiries. The TRA accepted that there was no evidence of the disputants having received any such advice until May 2003. Accordingly, section NF 5 did not apply to excuse payment of RWT.

Statute bar

The disputants had argued that the filing of AIL returns precluded it from filing NRWT and RWT returns and, therefore, the AIL returns should be construed as the relevant RWT returns for the purposes of section 108 of the Tax Administration Act 1994 ("TAA"). Barber DJ accepted the Commissioner's submission that AIL returns are not RWT returns, noting these are prescribed in section 50 of the TAA as being the IR 15P form. Barber DJ also referred to section NF 13 of the ITA which provides that the provisions of the TAA apply to every amount a person is liable to pay in the RWT rules as if it were income tax.

The TRA also stated (citing Miller v CIR (1998) 18 NZTC 13,961) that it was irrelevant that there may be some overlap of information in the AIL and RWT returns. Barber DJ also referred to section NF 5 and noted that this provision excuses a person from the obligation to pay RWT when AIL returns are filed and all reasonable inquiries have been made, implying that if not all reasonable inquiries are made, the expectation is that RWT will be paid irrespective of whether AIL returns have been filed.

The disputants also argued that as annual IR 15S reconciliation forms had been filed (to account for RWT paid in periods not in dispute) arguably RWT returns had been filed. The TRA accepted the Commissioner's submission that the IR 15S does not constitute a return for the periods where no IR 15P was filed - it only reconciles the RWT paid in the periods where a return has been filed. Barber DJ stated that section 99(2) of the TAA deems the Commissioner to have made an assessment on the receipt of each IR 15P form.

Accordingly, section 108 did not apply and the assessments were not statute barred.

Tax avoidance

The TRA referred to the Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 decision, concluding there was a tax avoidance arrangement which frustrated the scheme of the AIL and RWT regimes and clearly had tax-induced features as its dominant purpose. The TRA rejected the disputants' submission that using a clear, concessionary provision (the AIL regime) could not frustrate the scheme and purpose of the TAA, concluding that the arrangement was contrived in that the disputants colluded to siphon profits from New Zealand investment companies into the V Trust and remit those profits to WIL at a 2% tax rate.

Abusive tax position

The TRA concluded that Mr C was relying on professional accounting advice and so was entitled to assume he was complying with "quite subtle tax laws" and the position taken was at least as likely as not to be correct. Barber DJ acknowledged that this was a subjective approach and the test is an objective test, but considered that in the context of a quite complicated case the "structures seem compliant until deeply analysed". Barber DJ stated that while he may be "stretching the point" and although he found the position taken was unacceptable, it was not an unacceptable tax position as defined.

With regard to the dominant purpose of tax avoidance element of the provision, despite stating that he considered the dominant purpose in the mind of Mr C was to pay as little tax as he needed as opposed to actually voiding tax, he stated that he could conclude on an objective basis that the dominant purpose of the arrangement was tax avoidance.

The TRA concluded that no penalty applied because the disputants did not take an unacceptable tax position.