Inconsistent treatment challenge not struck out
2015 case note – Inconsistency of treatment challenge by Michael Hill group of companies - Strike out, inconsistent treatment, administrative law, invalidity.
The Michael Hill group of companies entered into a transaction in which it transferred its intellectual property and franchising operations within the group from New Zealand to Australia, using an Australian Limited Partnership (“ALP”) as part of the finance structure. Michael Hill Finance (NZ) Ltd (“Michael Hill”) owned 95% of the ALP and had applied for a binding ruling on the application of the Income Tax Act 2007, including s BG1, the tax avoidance provision. The Commissioner of Inland Revenue (“the Commissioner”) formed the view that s BG1 applied. Michael Hill then amended its ruling application to exclude consideration of s BG1 and self-assessed on the basis that s BG1 applied. It proposed an adjustment to the self-assessment which the Commissioner rejected. Michael Hill then filed challenge proceedings on two grounds - that the Commissioner was inconsistent with her treatment of Michael Hill compared to other taxpayers using the same, or materially the same, ALP structure and the Commissioner’s treatment of the transaction is wrong in that it is not tax avoidance. The Commissioner applied to strike out the inconsistency grounds of the challenge. The High Court dismissed the strike-out application.
Michael Hill’s inconsistency challenge will be heard as part of its substantive challenge to the Commissioner’s refusal to accept its proposed adjustments. Should Michael Hill’s inconsistency challenge ultimately be successful, the Commissioner may be required to treat materially similarly placed taxpayers consistently, regardless of the correctness of the tax assessment.
Taxpayers may be able to challenge the Commissioner on the basis that they have been treated inconsistently with other taxpayers in materially similar positions. Further, it is possible that the courts may not limit the types of administrative law challenges that may be brought within the Part 8A Tax Administration Act 1994 challenge procedure.
The Commissioner has appealed to the Court of Appeal and, at the date of this issue of the Tax Information Bulletin, the appeal is still pending.
The Commissioner made an application for an order striking out the part of Michael Hill’s challenge which alleges that the Commissioner breached a duty to treat taxpayers consistently (the inconsistency challenge).
In December 2008, the Michael Hill group of companies entered into a transaction in which it transferred its intellectual property and franchising operations within the group from New Zealand to Australia. An ALP was used as part of the finance structure. Michael Hill owns 99.5% of the ALP. The ALP was used to create asymmetric tax treatment in the relevant years. The effect of this was that in both New Zealand and Australia there were deductions and that the Australian deduction was not assessable income in New Zealand.
Michael Hill applied for a binding ruling from the Commissioner on the application of the Income Tax Act 2007 (“ITA”), including s BG 1, to the transaction. A binding ruling was provided in relation to the “black letter” tax treatment of the structure, but the Commissioner formed the view that s BG 1 applied.
Michael Hill amended its application for a binding ruling to exclude consideration of s BG 1, and then self-assessed the tax liability on the basis that s BG 1 did apply. Subsequently, Michael Hill proposed an adjustment to its self-assessment. The Commissioner rejected Michael Hill’s proposed adjustment by issuing a notice of response.
Michael Hill then initiated challenge proceedings on the following grounds:
- An inconsistency challenge: Michael Hill alleges the Commissioner has taken an inconsistent approach in her treatment of Michael Hill and other taxpayers who have used the same, or materially the same, ALP structures in breach of her duty to treat all similarly placed taxpayers alike.
- A correctness challenge: Michael Hill says the Commissioner's treatment of the transaction is wrong in law in that it is not a tax avoidance arrangement.
The Commissioner accepted the correctness challenge was an orthodox challenge but applied to strike out the inconsistency challenge on the basis it could not stand alone as a valid ground for challenge.
For the purposes of the strike-out application, Toogood J assumed the following facts to be true:
- There are a number of transactions by other taxpayers that are materially the same as the Michael Hill transaction.
- Those other transactions have the same tax effects.
- The Commissioner has, in relation to those other transactions, provided binding rulings that s BG 1 does not apply to certain of them, or made a decision not to investigate certain of them, or investigated certain of the other transactions and formed the view that s BG 1 does not have an application to them.
Michael Hill's position
Michael Hill's position was that the inconsistency in treatment should lead to a declaration that the Commissioner has acted unlawfully in rejecting Michael Hills' proposed adjustments, and as a consequence the assessments are unlawful; or that pursuant to s 138P of the Tax Administration Act 1994 ("TAA"), a determination that each of the assessments be cancelled, reduced or modified, or otherwise varied, or a direction that the Commissioner alter each of the assessments in a way that conforms with the Court's determination.
The Commissioner's position
The Commissioner's position was that the inconsistency challenge is a collateral attack on assessments, which is untenable and unarguable because there is no basis in law to adjust an otherwise correct assessment on the grounds of inconsistent treatment as between taxpayers; the Court will determine the correctness of the assessments in issue by the way of a de novo hearing that is curative of any defects; and the inconsistency challenge does not fall within the narrow category of cases that would not turn on correctness.
The first issue was whether there was an arguable case that the Commissioner has an enforceable duty to act consistently.
Toogood J was not persuaded that Michael Hill’s position was inarguable. It was, he said, consistent with the treatment of the consistency principle in New Zealand case law and also academic opinion.
As Toogood J read the case law, there are essentially two questions to be answered when a claim of inconsistency is made against the Commissioner:
- First, are the facts or circumstances identical for all material purposes, such that there is a true inconsistency because the assessments or rulings at issue cannot be reconciled as a matter of law?
- Second, if there appears to have been inconsistent treatment, is the discrepancy explicable and not unfair?
The second issue was whether the facts of the challenge make it untenable that Michael Hill could succeed in enforcing such any such duty.
Toogood J found that, on the current pleadings, the pleaded facts (which for the purposes of the strike-out application are assumed to be provable) did not render the inconsistency argument untenable.
The third issue was whether ss 109 and 114 of the TAA prevent a taxpayer from raising administrative law grounds in challenge proceedings except in "exceptional circumstances".
The Commissioner argued that the effect of ss 109 and 114 of the TAA, and the decision of the Supreme Court in Tannadyce Investments Ltd v Commissioner of Inland Revenue  NZSC 158 (“Tannadyce”), was to limit the ability of a taxpayer to raise administrative law grounds in challenge proceedings other than in “exceptional circumstances”, and that Tannadyce cannot be said to have expanded the Court of Appeal decision in Westpac Banking Corp v Commissioner of Inland Revenue  NZCA 24 (“Westpac”).
Toogood J found that it was distinctly arguable that the test in Westpac was not the test that determines whether an invalidity challenge is properly brought within Part 8A of the TAA, and that in any event the majority in Tannadyce appeared to have overruled the test in Westpac.
It was at least arguable that the Supreme Court’s decision in Tannadyce allowed Michael Hill to bring a challenge under Part 8A of the TAA on inconsistency grounds. It was arguable that there are no limitations on the types of administrative law challenges that may be brought within the Part 8A procedure.
The fourth issue was, in challenge proceedings, whether a finding that the Commissioner's decision was correct trumps any invalidity which might otherwise result from a breach of the duty of inconsistency.
Toogood J found it was arguable that a taxpayer was not prevented from raising administrative law grounds of challenge despite a claim by the Commissioner that the correctness of the decision remedies any invalidity resulting from the decision-making process.
The fifth issue was whether the inconsistency challenge should be struck out.
On the basis of his conclusions for issues one through four, Toogood J did not consider it plain and obvious that Michael Hill’s inconsistency challenge could not succeed, and dismissed the Commissioner’s application to strike it out. He also awarded costs to Michael Hill on a category 2B basis, plus disbursements.
The Commissioner has appealed the decision and at the date of this Tax Information Bulletin, the appeal is still pending.
Tax Administration Act 1994, High Court Rules 2008