Court of Appeal upholds strike-out of remaining Trinity tax challenges
2015 case note - Court of Appeal upholds strike-out of remaining Trinity tax challenges - Issue estoppel, tax avoidance, mutuality of interest, privity.
Income Tax Act 1994, Tax Administration Act 1994
The Court of Appeal dismissed an appeal by the Trinity investors against the decision of the High Court striking out their tax challenges. The Court of Appeal considered that issue estoppel prevented the appellants from challenging the tax years already decided by the Supreme Court. In respect of other years, the appellant was unable to recreate or sever off facts or components of the Trinity scheme to suit his new purpose and the investors faced the absolute bar of a finding that the Trinity Scheme was tax avoidance. In awarding the Commissioner of Inland Revenue (“the Commissioner”) indemnity costs, the Court considered the appeal was a collateral attack on the Supreme Court’s decision and brought for an improper purpose.
The preliminary view of the impact of the judgment is as follows:
- If there is a sufficient mutuality of interest between (as here) a stayed case and a test case, then the final determination of the test case will bind the stayed case.
- The sequence of analysing if the deduction is technically available and then considering whether the general tax-avoidance provision applies, may not need to apply where the features of the arrangement which make it tax avoidance under one provision must inevitably also apply if the scheme, steps or elements are used to seek a deduction under another provision.
This is an appeal by Garry Muir and Peter Maude against the decision of the High Court to strike out their Trinity scheme challenges and appeals.
Messrs Muir and Maude appealed the strike-out decision on two related grounds. Firstly, that they were not privies to the Supreme Court Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue  NZSC 115 (“Ben Nevis”) judgment for the 1997 and 1998 years and, secondly or alternatively, that they could claim deductions from 1999 onwards under subpart EH of the Income Tax Act 1994 (“ITA”). Mr Maude adopted Mr Muir’s arguments and the Court of Appeal judgment refers to Mr Muir alone, effectively as representing the interests of both appellants.
The Commissioner had successfully applied in the High Court to strike out the appellants’ proceedings on a number of grounds, arguing that they could not argue they were entitled to the deductions originally claimed under subpart EG and now claimed under subpart EH. Ben Nevis had determined the appropriate legal analysis of the Trinity scheme in terms of subpart EG.
1997/1998 tax years
The first ground of appeal challenged the High Court’s conclusion that an issue estoppel arose because the appellants were privies to Ben Nevis and two later Supreme Court judgments (Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd  NZSC 94,  1 NZLR 804 (“Redcliffe”); and Bradbury v Commissioner of Inland Revenue  NZSC 174, (2014) 26 NZTC 21-112 (“Bradbury”)) as they had sufficient mutuality of interest with the parties to the various proceedings.
The Court rejected Mr Muir’s submission that issue estoppel can only arise if the parties, the facts and the issue in both proceedings are identical.
Firstly, there is no dispute that where a New Zealand Court having competent jurisdiction over the parties to and subject matter of the litigation has pronounced a final judicial decision, any party or its privy is estopped from disputing the decision on its merits in subsequent litigation.
Privity in this context does not require a complete identity or coincidence of legal interests between parties. The law allows for a more flexible standard, consistent with a Court’s power to determine whether issuing a fresh proceeding would produce an unfair or unjust result. The prerequisite is proof of a derivative interest such that a mutuality of interest exists. The question is whether the appellants had the same kind of interest as Redcliffe in Ben Nevis or its subject matter.
In looking at the question of interest it was noted that Mr Muir owned 80% of Redcliffe’s shares and Mr Maude owned 10%. Mr Muir also acknowledged that the losses associated with Redcliffe’s investment were transferred to its shareholders including the appellants. Redcliffe, as their loss attributing qualifying company (“LAQC”), was party to the Ben Nevis appeal. Redcliffe had no interest independent of its shareholders in perusing the Ben Nevis litigation. The Court concluded that the mutuality of interest between Redcliffe and the appellants as its shareholders could not be more compelling.
The Court of Appeal noted that from reviews of the scheme in the numerous judgments, it is a safe inference that Mr Muir encouraged investors by projecting the extent of deductions their participation could generate under subpart EG. The Court considered it would be disingenuous for such a designer to distance himself from the corporate conduit he used to participate in the scheme, for the purposes of attempting to run at a later date a different construction of the arrangements once he appreciated that the Courts were satisfied the scheme was implemented for the purpose of avoiding liability to tax.
The Court also dismissed Mr Muir’s arguments that Redcliffe could not have claimed a deduction under subpart EH in its 1997 and 1998 returns noting numerous attempts to re-analyse Ben Nevis in terms of subpart EH have already been litigated and dismissed.
The Court was satisfied that Ben Nevis created an issue estoppel against Messrs Muir and Maude and it was also an abuse of process to attempt to re-litigate issues which could have been determined in a previous proceeding. These proceedings were no more than another collateral attack on Ben Nevis, continuing what has become an extended pattern or course of conduct. The first ground of appeal must fail.
Mr Muir’s second ground of appeal was that for the taxation years from 1999 onwards, he and Mr Maude could arguably pursue subpart EH deductions on a different factual foundation from the deductions in 1997 and 1998.
Mr Muir alleged the existence of a financial arrangement in terms of the accrual rules under subpart EH and what he called “the statutory facts” under which subpart EH deductions may be claimed, which he says are very different facts from Ben Nevis.
The Court found that Mr Muir’s argument fell at two related hurdles. Firstly, the transactions considered in Ben Nevis were identical to those upon which Mr Muir seeks to rely. The Court considered what Mr Muir calls different facts are no more than arguments based on the same facts, designed to support a different result from Ben Nevis for taxation purposes.
Secondly, the syndicate’s liability to pay a licence premium to Trinity was the foundation for claiming the existence of a deferred property agreement, and thus a financial arrangement under subpart EH. However, based on the findings in Ben Nevis, a Court would necessarily conclude that the agreement to pay the licence premium was an essential step in a tax avoidance arrangement.
The Supreme Court in Ben Nevis found that the 50-year timing mismatch between investors incurring the liability to pay the licence premium and the date of due payment could only be justified for tax avoidance purposes.
In some cases where the Commissioner resorts to the general anti-avoidance provision to disallow deductions claimed under one taxing provision, her analysis might not be transposable to assert a tax avoidance purpose if the taxpayer sought to claim a deduction under different provisions. As a matter of sequence, the Commissioner must first accept the deduction claimed is technically available to the taxpayer and resort to the anti-avoidance provision where the use of the specific provisions were not within Parliament’s purpose and contemplation.
Mr Muir’s argument was that the Commissioner could not use the defence that the scheme amounted to tax avoidance until she had also analysed the taxpayer’s entitlement to claim the deduction under subpart EH.
While there may be cases where the sequence must be followed, the Court was satisfied that the features of the Trinity scheme which make it a tax avoidance arrangement when deductions are claimed under subpart EG, must inevitably also apply if the scheme or steps in or elements of it were used to seek a different deduction under subpart EH. Mr Muir’s argument depended upon adopting the same contractual instrument—the agreement to pay the licence premium—which the Supreme Court found lacked commercial force and was part of an illusory arrangement with tax avoidance as its purpose or effect.
Mr Muir is unable to recreate or sever off facts or components of the Trinity scheme to suit his new purpose. He would always face the absolute bar of a finding that the agreement to pay a licence premium had no commercial purpose and could only be justified as part of a wider scheme to avoid tax.
The Court concluded it would be an abuse of the Court’s processes to allow Mr Muir to continue his claim, it would commit judicial resources for no purpose and bring the administration of justice into disrepute. It would also be unfair to require the Commissioner to expend further costs in defending a position on taxation liability which has been unequivocally and authoritatively answered in the Commissioner’s favour.
The Court of Appeal considered the appeal was hopeless from the outset. Further, it was a collateral attack on the Supreme Court’s decision and brought for an improper purpose. Accordingly, an award of indemnity costs to the Commissioner was justified.