Court of Appeal upholds High Court's decision granting Commissioner's transfer application
2015 case note – Court of Appeal upheld High Court decision granting CIR's application - transfer, precedential value, complexity, likelihood of appeal.
The Court of Appeal upheld the High Court's decision granting the Commissioner of Inland Revenue's ("the Commissioner's") application to transfer the challenge proceeding filed by Kensington Developments Limited's (in receivership) ("Kensington") in the Taxation Review Authority ("TRA") to the High Court.
Impact of decision
This decision endorsed the factors set out in Commissioner of Inland Revenue v Erris Promotions  1 NZLR 506 (CA) ("Erris"), which are required to be considered by the Court in determining whether to grant a transfer application under s 138N of the Tax Administration Act 1994 ("TAA"). This decision is also authority that the important precedential value of a proceeding alone can be determinative in favour of granting an application for transfer.
Kensington has been in receivership since 1994 with Mr John Russell ("Mr Russell") as the receiver.
Kensington has claimed interest expenditure deductions for a purported loan from BNZ that has never been paid. It has also claimed deductions for interest expenditure in respect of a debenture held by Downsview Finance Ltd. Mr Russell and his wife are the beneficial owners of those shares.
Kensington has also acquired debentures over 14 companies, with Mr Russell being the receiver of each of those companies. Many of these companies have claimed similar interest expenditure deductions to Kensington. The challenge proceeding filed by Kensington, which is the subject of the Commissioner's transfer application, concerns only the losses claimed by Kensington. These losses total $15,756,946.76.
The Commissioner's position in the challenge proceeding is that the interest expenses have not been suffered by Kensington and that the deductions should be denied as part of a tax avoidance arrangement.
In April 2013, the Commissioner's application to transfer the challenge proceeding filed by Kensington in the TRA to the High Court was successful.
Kensington has appealed the High Court's decision granting the Commissioner's transfer application.
Approach on appeal
The Court began its decision by stating that the appeal was a general appeal and that the approach described by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar  NZSC 103,  2 NZLR 141 at applies. This is that the appellant bears the onus of satisfying the appeal court that it should differ from the decision under appeal.
Presumption that the taxpayer's choice of hearing authority should prevail
Kensington argued that in considering an application to transfer a challenge before the TRA to the High Court, the Court is obliged to apply a presumption that the taxpayer's choice of hearing authority should prevail, particularly when that choice is the TRA. Kensington acknowledged that the principles identified in Erris were against it on this point but Kensington said that the discussion in Erris was obiter and asked the Court of Appeal to clarify the law.
Kensington argued the existence of the presumption emerges from the legislative history and the existing scheme of the legislation. In particular, it referred the Court to the objections regime, the Income Tax Act 1976 and the TAA in support of its submission. Kensington argued that the use of language in s 136(4) of the TAA and in particular the words "general or public importance" and "extraordinary difficulty" convey Parliamentary intent that the TRA is the usual first instance hearing authority, with the High Court reserved for truly important or extraordinary cases.
The Court of Appeal was satisfied that the High Court Judge applied the correct test and that the Erris principles gave proper effect to the statutory provisions. The Court of Appeal stated that while the factors set out in s 136(4) of the TAA may be relevant to a transfer decision in a particular case, the High Court held that those factors do not create a presumption that the hearing should be in the TRA. Further, the Court of Appeal held that there is a clear indication that the Court's discretion in respect of applications under s 138N was not intended to be constrained by the considerations listed in s 136(4), given the absence of a similar provision in Part 8.
Accordingly, the Court of Appeal did not see any merit in Kensington's arguments regarding a presumption in favour of the TRA over the High Court.
No grounds made out for transfer
Kensington argued that whether or not the presumption it argued applied, there were no proper grounds made out for the transfer. The Court of Appeal having heard arguments considered that the Judge was correct to order transfer. When making its decision, the Court considered the following factors.
The Court of Appeal stated that the determinative consideration in reaching the above view is the precedent that a decision in the challenge proceeding will establish. The Court of Appeal noted that the Commissioner is currently involved in two other disputes and has active investigations in progress that raise identical issues to the challenge that is the subject of the transfer application. These disputes and investigations all involve an insolvent taxpayer company in receivership (with Mr Russell as the receiver). The company has continued to claim deductions for interest owing under a debenture held by a company of which Mr Russell is a director and/or receiver. The taxpayer company has been in receivership for a period exceeding 10 years and has during that time accrued millions of dollars' worth of purported losses. In each of these cases, the Commissioner is alleging that the taxpayer company entered into a tax avoidance arrangement, which is void as against her pursuant to s BG 1 of the Income Tax Act 2004.
Kensington argued that the precedent the decision will establish carries little weight since Mr Russell does not accept that the finding will dispose of the other disputes and investigations. The Court of Appeal considered that a decision from the High Court in the challenge proceeding would be binding on the TRA in future disputes that involve identical issues. Further, the Court of Appeal held that it would be binding on other similarly positioned taxpayers and would be a significant precedent even if Mr Russell chooses to argue otherwise.
The Court of Appeal agreed with the High Court Judge that an additional reason for transfer is the complexity of the proceeding. The Court of Appeal also agreed with the High Court's assessment that the challenge case is of moderate complexity. It was held that even though that area of law may be relatively settled, its application to new facts may not be straightforward. No weight was attached to the Commissioner's contention that it is significant that the court hearing will have to consider the duties and best practice of a receiver under the Receivership Act 1993 because this bears upon the commerciality of the arrangements. Although the Court of Appeal recognised that the law in connection with the duties and obligations of receivers is traditionally administered in the High Court, the Court of Appeal expected that the TRA would have no difficulty interpreting the statutory framework and body of case law that has emerged since the Receivership Act came into force.
Accordingly, the Court of Appeal agreed with the High Court that the moderate complexity weighed in favour of transfer to the High Court but could not on its own be decisive.
The Judge in the High Court considered that the administrative law challenges mounted by Kensington weighed in favour of transfer to the High Court. The Court of Appeal noted that counsel for Kensington says it would abandon those challenges if it meant the difference to a transfer decision. The Court of Appeal stated that although allegations including vendetta, abuse of power and actions amounting to fraud on the taxpayer may weigh in favour of transfer to the High Court in some cases, in this case it was not a determinative factor. The Court of Appeal did not consider the issue further in light of Kensington's indication.
Kensington argued that the High Court Judge was wrong to view delay in applying for a transfer as a neutral factor. However, it could not show any particular prejudice arising from the delay, pointing only to the fact that, until the application, Kensington had been preparing on the basis that the hearing would be in the TRA. The Court of Appeal considered this did not amount to prejudice. In the absence of prejudice attributable to delay, the Court of Appeal held that the issue of delay was irrelevant to this issue of transfer. Further, the Court of Appeal noted that the Commissioner gave an explanation for the delay, which helped to moderate the significance of the issue.
Likelihood of appeal
Finally, the Court of Appeal agreed with the High Court that the likelihood of appeal is relevant to consideration of the application. The Court of Appeal noted that as stated in Erris, even if the TRA can provide an earlier hearing date, this would not necessarily mean less delay in final resolution where appeal is likely, as starting in the TRA adds a further layer of appeal. The Court of Appeal considered that appeal is very likely in the challenge proceeding as the matters at issue are significant for the parties, particularly given the extent of similar disputes involving the Commissioner and companies controlled by Mr Russell.
Tax Administration Act 1994