TalkTax

In recent times, we have seen several tax cases being lost by Taxpayers. Analysing the judgments, I believe we have seen a fundamental move when dealing with tax avoidance – a move back towards statutory interpretation. The Newton and Elmiger cases are the policy basis for our anti-avoidance rule as they focus on statutory interpretation and I believe the courts are showing a move back to this ordinary approach (as can be seen in the Banks cases).

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The appeal in Penny and Hooper has been decided in favour of the Commissioner in a 2:1 majority decision of the Court of Appeal released on 4 June 2010.

In the first instance the decision could be considered to have been rendered largely nugatory for the time being given the recent reduction of the top marginal rate to that of the trustee rate. However, with the new company rate now significantly below these rates, the matter of below market salaries will likely be a live issue for some time.

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In Case Z24 the taxpayer had transferred an avocado orchard and her private practice as an anaesthetist to a family company.  In the 2003 and 2004 years she provided her services to the family company for a nil or low salary.   The Commissioner had argued that the rent paid by the family company to the family trust for the lease of the orchard was inflated and the salary paid to the taxpayer for her services was too low.  Judge Barber was unimpressed by the Commisioner’s arguments as to the inflated rent but held that the payment of an artificially low salary was tax avoidance. 

Two elements of this case are troubling:  there was no reference to Penny & Hooper anywhere in the case, notwithstanding the High Court decision was delivered over a year ago; and there is no explanation of how the tax consequences of combining a loss-making business (the orchard) with a profitable business (the private practice) achieved a result that was manifestly outside the contemplation of Parliament.  If it is accepted, which it appears to have been, that in aggregate there was little in the way of distributable profit from both businesses, then what principle of tax law would compel the owner to pay themselves a salary?

The BNZ has confirmed that it has filed a notice to appeal the High Court’s decision in BNZ Investments Limited v C of IR. The High Court had ruled that the bank’s use of six structured finance transactions between 1998 and 2005 was tax avoidance – see James Coleman’s posting below.

On 15 July 2009 Wild J issued his final decision in the long running BNZ structured finance litigation. The decision is BNZ Investments Ltd v C of IR (unrep, HC Wellington, CIV 2004-485-1059; CIV 2005-485-1045; CIV 2006-485-1028; CIV 2006-485-2084; CIV 2008-485-1056, 15 July 2009).

This is the second High Court decision concerning the application of the general anti avoidance provision since the Supreme Court decision in Ben Nevis Forestry Ventures Limited v CIR [2008] NZSC 115 (Ben Nevis).

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