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27 Sep 2019
27 Sep 2019
Appeal Status

Commissioner successful in tax avoidance case

The first proceeding was in relation to Mr Brown personally. The second proceeding was in relation to DLC as trustee of the DLC Family Trust.

[2019] NZTRA 5
Legal terms
Tax avoidance, Arrangement, Trust, Income, Rental income, Interest expenses, Reconstruction, Trustee income, Beneficiary income, Income under ordinary concepts, Time bar

Income Tax Act 2004 (ITA), ss BG 1, CA 1, DA 1, DB 6, GB 1, HH 3, HH 4 and OB 1
Tax Administration Act 1994 (TAA), ss 59(3), 89C(k), 108, 141B, 141D and 149A


This matter relates to two proceedings heard at the same time.

The first proceeding was in relation to Mr Brown personally (“the Mr Brown proceedings”). Mr Brown challenged income tax assessments for the 2001 and 2003 to 2008 income tax years in which the Commissioner of Inland Revenue (“the Commissioner”) rejected Mr Brown’s proposed adjustments removing income of $857,848 attributed to Mr Brown on the basis there was a tax avoidance arrangement.

The second proceeding was in relation to DLC as trustee of the DLC Family Trust (“the DLCFT proceedings”). DLC challenged income tax assessments for the 2014 and 2015 income tax arrears in which the Commissioner rejected DLC’s proposed adjustment seeking to have interest deductions of $256,680 attributed to DLC in each year on the basis that these interest deductions arose from a tax avoidance arrangement. In both proceedings the Taxation Review Authority (“the Authority”) found that there was a tax avoidance arrangement and upheld the Commissioner’s assessments.


This decision was an orthodox application of the law on tax avoidance as set out in the Supreme Court’s decision in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289. The decision highlights the fiction or the “artifice or contrivance” involved in arrangements of the type undertaken by the disputants in this matter. This case also reinforces that the onus is on the taxpayer in tax challenges to put before the court documentary evidence proving the assessments are wrong and by how much.


The arrangements at issue involved the sale of properties from one of Mr Brown’s family trusts (“KSFT”), to another of his family trusts (“XPT”), to another of his family trusts (“BFCT”) and finally to the contemporaneous family trust which is the subject of the second proceedings, the DLCFT. Each sale created a debt in the subsequent trust to an associated entity. This debt provided Mr Brown with an interest expense which offset rental income Mr Brown derived from his 1/3rd interest in the properties which he continued to retain. This meant that throughout the relevant period (2001, 2003 to 2008) Mr Brown was in a loss position.

DLC as trustee of the DLCFT filed conservative tax returns paying the tax owing in 2014 and 2015 but proposed adjustments to those assessments by including interest deductions which would have the effect of significantly reducing its taxable income.


Judge Sinclair applied the law of tax avoidance to the facts of this case by analysing the following issues in relation to the Mr Brown proceedings:

  1. Was there a tax avoidance arrangement involving BFCT to offset rental income by way of an interest expense?
  2. Was the Commissioner able to reconstruct income under the tax avoidance arrangement to Mr Brown?
  3. Has Mr Brown met the onus of proving that the amount of income reconstructed by the Commissioner onto him was incorrect, and by how much it was incorrect?
  4. Does the operation of the time bar prevent the Commissioner from reassessing Mr Brown?

In respect of the DLCFT proceedings the legal issue was:

  1. Did the interest deductions proposed by DLC in the 2014 and 2015 tax years form part of a tax avoidance arrangement, and are therefore void against the Commissioner under s BG 1 of the ITA?


The Authority confirmed that both the disputants were compliant with the black letter law. This was accepted by the Commissioner, see [2019] NZTRA 5 at [55], with respect to the interest deductibility provisions, Income Tax Act 2004, ss DA 1 and DB 6, and the financial arrangement rules.

The Authority held that in both arrangements the interest deductibility provisions and the financial arrangement rules were not used in a way which was within Parliament’s contemplation. The Authority concluded that the arrangements lacked a commercial reality and were essentially designed to allow Mr Brown to obtain tax benefits. Both arrangements were therefore held to be void against the Commissioner under s BG 1. See [2019] NZTRA 5 at paragraphs [56] to [87].

The Authority held that the Commissioner’s reconstruction was correct for both disputants. Mr Brown failed to put before the Authority documentary evidence explaining why amounts he used and that he classified as inter trust loans, investments or reimbursements for expenses paid on behalf of the beneficiaries of his family trust (his children) but were in fact personal expenditures should not be reconstructed onto him as income. The Authority concluded that Mr Brown did not meet his onus of providing the assessments were incorrect and by how much. See [2019] NZTRA 5 at paragraphs [97] to [118].

The Authority held that because the arrangement involving BFCT was a tax avoidance arrangement, BTC1 as trustee of the BFCT did not comply with all its tax obligations and consequently BFCT was a non-qualifying trust. This affected the rate of tax payable upon distribution of amounts reconstructed to Mr Brown as income in relation to BFCT. See [2019] NZTRA 5 at paragraphs [119] to [123].

The Authority held that the Commissioner was not time barred from amending the disputant’s assessments on the basis that his returns were wilfully misleading and omitted to mention income from BFCT. See [2019] NZTRA 5 at paragraphs [124] to [144].