Court of Appeal finds tax avoidance, but no shortfall penalties for taking an unacceptable tax position

The Commissioner of Inland Revenue (“Commissioner”) sought to disallow interest deductions claimed by Frucor Suntory New Zealand Limited (“Frucor”) in respect of a tax-driven structured finance transaction it entered in to in March 2003 with the Deutsche Bank. The Commissioner contended that the funding arrangement was a tax avoidance arrangement in terms of s BG 1 of the (now repealed) Income Tax Act 2004 and denied a portion of Frucor’s claims for deductions in the 2006 and 2007 income tax years. She also contended that Frucor took an unacceptable tax position and shortfall penalties should be imposed.

Frucor had been successful in the High Court, with that Court holding that the funding arrangement was not a tax avoidance arrangement; the Commissioner’s assessments for 2006 and 2007 were incorrect and were thereby cancelled; and Frucor did not take an unacceptable tax position (and so the Court would have set aside the shortfall penalties imposed of $1,786,555 and $1,924,779 even if it had been wrong on its principal conclusion).

The Commissioner appealed and the Court of Appeal allowed the appeal, set aside the orders of the High Court, reinstated the Commissioner’s assessments with regards to the disallowed deductions and held that shortfall penalties did not apply.

Tax Information Bulletin Vol 32 No 10 - November 2020