SSRN Id1625604 PDF

The Test for Tax Avoidance in New Zealand:
A Judicial Sea Change
CRAIG ELLIFFE* JESS CAMERON*
Professor of Taxation Law and Policy, Senior Solicitor,

University of Auckland Chapman Tripp, Barristers and Solicitors.
Consultant,
Chapman Tripp, Barristers and Solicitors.
Full fathom five thy father lies;

Of his bones are coral made;
Those are pearls that were his eyes;
Nothing of him that doth fade,
But doth suffer a sea-change
Into something rich and strange,
Sea-nymphs hourly ring his knell:

Ding-dong.
Hark! now I hear them — Ding-dong, bell.1
1 INTRODUCTION
The last few years have seen the Commissioner of Inland Revenue exercising his powers to void
taxpayers’ transactions for tax purposes. It is now time to evaluate the impact of these decisions. The
chronology of events goes like this:
First, in late 2008, the recently constituted New Zealand Supreme Court considered, for the first time,
the application of New Zealand general anti-avoidance rules (“GAARs”) and handed down two
significant judgments within the space of a month (Ben Nevis Forestry Ventures Ltd & Ors v
Commissioner of Inland Revenue; Accent Management Ltd & Ors v Commissioner of Inland Revenue2
(Ben Nevis) and Glenharrow Holdings Ltd v Commissioner of Inland Revenue3 (Glenharrow)).
* The writers would like to acknowledge and thank the anonymous reviewer for their very helpful comments, and also the
contribution of the co-speakers (Ellis J and Mark Keating) at a seminar on this topic at the University of Auckland Business
School Taxation Seminar Series on 17 June 2010. Also thanks to the editors of NZBLQ for their excellent and appreciated
suggestions.
1 From the song sung by the spirit Ariel in William Shakespeare’s The Tempest (Act I, Scene ii).
2 Ben Nevis Forestry Ventures Ltd & Ors v Commissioner of Inland Revenue; Accent Management Ltd & Ors v Commissioner
of Inland Revenue (2009) 24 NZTC 23,188 (SC).
3 Glenharrow Holdings Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,236 (SC).
440
Electronic copy available at: http://ssrn.com/abstract=1625604

The Test for Tax Avoidance in New Zealand
Secondly, throughout 2009, whilst tax experts dissected the judgments to discern what, if anything,
these cases added to or changed about the way the GAAR should be applied, the lower courts were
grappling with the same issue as they sought to apply the Supreme Court’s ratio in several high profile
avoidance cases (Penny v Commissioner of Inland Revenue; Hooper v Commissioner of Inland
Revenue4 (Penny), BNZ Investments Limited & Ors v Commissioner of Inland Revenue5 (BNZI (No. 2))
and Westpac Banking Corporation v Commissioner of Inland Revenue6 (Westpac)). Thirdly, whilst
these three High Court cases were appealed, on Christmas Eve 2009 the two structured finance cases
involving BNZI (No. 2) and Westpac were settled, leaving only the Penny decision to be heard in the
Court of Appeal. Fourthly, on 4 June 2010, the Penny Court of Appeal judgment was released, with the
appeal by the Commissioner being successful.7 Leave to appeal to the Supreme Court has been granted
to the taxpayers, and the appeal expected to be heard in 2011. Finally, there have been several High
Court judgments released since the Court of Appeal’s judgment in Penny that apply the Ben Nevis and
Glenharrow judgments, and also take guidance from the other cases mentioned above in applying the
Supreme Court’s test for avoidance.8
By analysing Ben Nevis, Glenharrow and the Court’s subsequent application of these cases in certain
of the above judgments, the article seeks to determine whether these cases add anything “rich and
strange” to our understanding of the way the income tax GAAR should be applied? Or do they simply
represent the latest iteration of the various judicial glosses that have sprung up over the last 50 years as
a result of the inherent difficulty in applying this enigmatic provision and countering inappropriate tax
avoidance?
What emerges is that there appears to be a sea change. Although the “scheme and purpose” approach
remains, it is modified by two factors. First, there is an explicit acknowledgement that, in a “tandem
approach”9 to interpretation of the black letter law and the GAAR, the GAAR is to be given equal
weight and purposively interpreted. Secondly, the test is modified by the addition, or some might say
substitution, of a “Parliamentary contemplation”10 test.
The result of both of these significant changes is an empowering of the judiciary to pursue a form of
interpretation that is much less formalistic, and that necessarily involves even more of an enquiry into
the commercial and business motivations of the taxpayer. A natural consequence of this may be a
greater reliance on the attitude of the judges applying the test and definitely a significant loss of
certainty for the taxpayers. The result is that the pendulum has swung in favour of the Revenue.11
4 Penny v Commissioner of Inland Revenue; Hooper v Commissioner of Inland Revenue (2009) 24 NZTC 23,406 (HC).
5 BNZ Investments Limited & Ors v Commissioner of Inland Revenue (2009) 24 NZTC 23,582 (HC).
6 Westpac Banking Corporation v Commissioner of Inland Revenue HC Auckland CIV-2005-404-2843, 7 October 2009.
7 Commissioner of Inland Revenue v Penny and Hooper [2010] NZCA 231. This has now been appealed to the Supreme Court
with leave to appeal being granted on 2 August 2010, Penny and Hooper v Commissioner of Inland Revenue [2010] NZSC
94.
8 See for example, Krukziener v C of IR HC Auckland CIV-2010-404-728, 17 September 2010; and Russell v C of IR HC
Auckland CIV-2009-404-6653, 3 September 2010.
of Inland Revenue (2009) 24 NZTC 23,188 (SC) at [103].
10 Ibid, at [107]-[109].
11 Mark Keating “Supreme Court lays down tax avoidance for first time” (2009) 1 NZ Tax Planning Reports.
December 2010 441
Electronic copy available at: http://ssrn.com/abstract=1625604

ELLIFFE and CAMERON
2 THE SUPREME COURT DECISIONS OF BEN NEVIS AND GLENHARROW

A brief background to the crucial Supreme Court decisions may be helpful. Dr Garry Muir conceived
of the “Trinity scheme”, New Zealand’s largest tax planning scheme to date involving a potential
$3 billion of deductions.12
The underlying investment was the development of a Douglas-fir forest due for harvest by 2048. The
facts are set out in Michael Littlewood’s case note for the British Tax Review on the decision,13 but
briefly:
• the taxpayers undertook to pay an inflated licence fee in 2047 to use the forestry land; and
• also entered into a captive insurance arrangement so that, if the net proceeds of the sale of
harvested trees were not be sufficient to fund the payment of the licence premium in 2048, the
investors could still meet the payment.
The bulk of the licence and insurance premium payment obligations were satisfied by the issue of
promissory notes by the taxpayers, so that, per year, for a cash outlay of $50 per ha, they could obtain
tax deductions of approximately $41,000 per ha.
The High Court and Court of Appeal both found in favour of the Commissioner — this was a tax
avoidance arrangement. The taxpayers appealed to the Supreme Court and they agreed that it crossed
the line of acceptable tax planning.14
In Glenharrow a GST input tax credit claimed for one-ninth of $44,920,000 with respect to the
supply of a mining licence (a “second hand good”) by Mr Michael Meates to Glenharrow Holdings
Limited. The mining licence was initially issued on 15 November 1990 for a 10-year term. The licence
was sold in 1993 for $5,000 and in 1994 for $100. Mr Meates acquired it in December 1996 for
$10,000.
In 1997 Mr Meates was approached by Mr Fahey about selling the licence to his company,
Glenharrow. After receiving a valuation by his cousin, Mr Meates nominated $45m as his price and
Mr Fahey accepted this on the basis that there would be full vendor finance except for the deposit of
$80,000. The vendor finance (extended by way of cheque swap) was to be supported by a mortgage
back to Mr Meates for the remainder of the price over the licence and the company and the shares in
the company, but with no recourse to Mr Fahey. Glenharrow experienced considerable difficulties in
obtaining the necessary resource consents to begin operations and very little rock was extracted during
the remaining licence term. Glenharrow, did however, claim a GST input tax credit of one-ninth of
$44,920,000 on the basis that the remaining purchase price had been “paid” by way of cheque swap.
The Supreme Court began by concluding that the technical or “black letter” requirements of the
Goods and Services Tax Act 1985 were met, so Glenharrow was technically entitled to the substantial
GST refund.15 However, “consistent with the approach to interpretation of [GAARs] in the income tax
12 Craig Elliffe and Mark Keating “Tax Avoidance – Still Waiting for Godot?” (2009) 23 NZULR 368 at 370.
13 Michael Littlewood “Ben Nevis Forestry Ventures Ltd and Others v CIR; Glenharrow Ltd v CIR — New Zealand’s new
Supreme Court and Tax Avoidance” (2009) 2 BTR 169.
14 For a full analysis of the Supreme Court’s reasoning see Craig Elliffe and Mark Keating “Tax Avoidance – Still Waiting for
Godot?” (2009) 23 NZULR 368 at 370.
15 Glenharrow Holdings Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,236 (SC) at [20].
442
context”16, if s 76 is at issue, then the Court must look “beyond the technical legality of the constituent
parts of the arrangement”17 and the taxpayer must show that the GAAR does not apply. The taxpayer
could not do so.18
This article begins with an analysis of these two Supreme Court decisions, and subsequently
examines how this has been applied by the lower courts. The logic behind this approach is to focus
primarily on the case law of binding authority, and not give undue weight to the subsequent decisions.
That said, they tend to support the analysis of that there is a new test for avoidance.
3 WHAT DO THESE DECISIONS TELL US? (AND IS IT ANYTHING “RICH

AND STRANGE”?)
The Ben Nevis scheme in particular was an especially egregious arrangement in many respects. There
was a large disparity between the magnitude of the tax advantages claimed, as compared to the
economic burden borne. It was also clear from both the statements made by the architect of the scheme,
Dr Muir, and the insertion of various artificial steps into the arrangement that this scheme had been
very carefully engineered to maximise tax benefits, with little regard for the purported business purpose
of the transactions.
Notwithstanding the extreme nature of the facts in these cases, there are several key principles that
emerge from the decisions.
3.1 Commercial Certainty

Commercial certainty is not an “absolute value”19 and taxpayers cannot expect to receive any sympathy
from the courts in asserting this need.
In contrast to some past decisions, the majority was unsympathetic to the pleas from the taxpayer that
the courts should not deprive commercial parties of tax beneficial choices and that the GAAR should
be interpreted in such a way as to provide reasonable certainty in tax planning. The majority stated that
taxpayers have the freedom to structure transactions to their best tax advantage. In doing so they may
utilise tax incentives but the legislation must be read in the light of its context and purpose. Part of this
context is a proscription against use of the provisions contrary to the general anti-avoidance
provision.20 So whilst the taxpayers argued that tax avoidance legislation needs to be interpreted in a
way that provides taxpayers with reasonable certainty in their tax planning:21
“Parliament has left the general anti-avoidance provision deliberately general … The courts should
not strive to create greater certainty than Parliament has chosen to provide. We consider that the
approach we have outlined gives as much conceptual clarity as can reasonably be achieved. As in
many areas of the law, there are bound to be difficult cases at the margins. But in most cases we
16 Ibid at [34].
17 Ibid at [34].
18 For a full analysis of the Supreme Court’s reasoning see Craig Elliffe and Mark Keating “Tax Avoidance – Still Waiting for
Godot?” (2009) 23 NZULR 368 at 370.
19 A term used in Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA) at [40]
21 Ibid, at [112].
December 2010 443

ELLIFFE and CAMERON
consider it will be possible, without undue difficulty, to decide on which side of the line a particular
arrangement falls.”
3.2 English Decisions
English decisions and judicial glosses are not helpful. Where the legislature has chosen to include an
explicit GAAR in tax legislation, then this should be the basis upon which tax avoidance is countered.
The majority summarised the position when it stated:22
“As a result of this difference it has been suggested that the English purposive approach involves
considerations that are somewhat removed from the wording of the New Zealand statute. A
purposive approach is, in any event, limited in the extent to which it can avoid arrangements on its
own. Such an approach is, however, reinforced in New Zealand by the presence in our legislation of
the general anti-avoidance provision. Care must, therefore, be taken when applying English cases in
the different New Zealand context in which the meaning and scope of the general anti-avoidance
provision, as well as that of specific provisions, must be addressed and applied.”
However, this is a point upon which the majority of the Supreme Court (Tipping, McGrath and Gault
JJ) and the minority (Elias CJ and Anderson J) disagreed.
3.3 Tax Mitigation

The distinction between tax mitigation and tax avoidance (born out of the Privy Council’s approach in
Challenge)23 is also not helpful (as it is conclusory).24 The majority in Ben Nevis observed, citing
Commissioner of Inland Revenue v BNZ Investments Ltd25 (BNZI (No. 1)), Peterson v Commissioner of
Inland Revenue26 (Peterson) and Miller v Commissioner of Inland Revenue27 (Miller) as examples,
that:28
“Subsequent case law generally has proceeded, sometimes implicitly, on the basis of [Richardson’s]
scheme and purpose approach, but consistently with the underlying reasoning of the Privy Council by
paying attention to whether the commercial reality of a transaction is consistent with its legal form.
The distinction between tax mitigation and tax avoidance is now seen as conclusory and unhelpful.”
3.4 Objective Purpose (and Subjective Purpose)
It is said that it is the objective purpose of the arrangement that is relevant, and apparently, not the
subjective motive of the parties (consistent with Newton)29 This is clear from the Glenharrow
decision.30 In Glenharrow there was no evidence of a subjective purpose of tax avoidance, however the
23 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (PC).
25 Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA).
26 Peterson v Commissioner of Inland Revenue [2006] 3 NZLR 433 (PC).
27 Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC).
29 Newton v Commissioner of Taxation of the Commonwealth of Australia [1958] AC 450.
30 Glenharrow Holdings Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,236 (SC).
444
Court concluded that upon an objective examination of the tax advantage, it could establish, that such a
tax avoidance purpose was more than merely incidental to the commercial decisions of the parties.31
For the reasons given below, the writers believe this does not accurately state the position. In addition
to the objective purpose test, there will be times when the taxpayer’s subjective purpose is a critical
part of a court’s assessment of non-commerciality, consistent with a purpose of tax avoidance. One
needs look no further for proof of this than the Court’s view of the insurance arrangements as
non-commercial in Ben Nevis. The majority thought this comment by Dr Muir was “highly
significant”:32
“The real benefits of the deal are tax concessions that can be obtained now by the investors and the
foundation. One of the conditions required to gain the tax relief is that the insurance must be in place.
The actual outcome of the deal in 50 years time is not considered material.”
They also noted the fact that Dr Muir required “extra confidentiality” for the arrangements from
AMS (a BVI company that specialised in “captive insurance management” and in opportunities “to
reduce, defer or avoid taxes”).33
Therefore, while the courts may argue that subjective purposes are irrelevant, evidence of such
subjective purposes is likely to be highly influential in the Courts’ decisions.
3.5 How Much Can You Spend?

Based upon the two Supreme Court decisions, the principle in Cecil Bros Pty Ltd v Commissioner of
Taxation of the Commonwealth of Australia,34 that it is not for the Commissioner to tell a taxpayer how
much to spend in deriving its income), is still good law.
It is noted that it is the lack of actual payment that was the problem in Ben Nevis and Glenharrow and
not the inflated amounts the taxpayers had agreed to pay. 35
That said, non-market consideration will be an indicia of non-commercial transactions, and a critical
one at that. As we will discuss later, this was a factor in the Court of Appeal decision in Penny, with the
salaries adopted being described as:36
“…so far removed from commercial reality as to be contrived and artificial. They could not be
regarded in any sense as within the acceptable limits of commercial practice.”
3.6 Economic Substance
The court will have no hesitation (and in fact, will find it necessary) to look through the legal form of
the arrangements to the economic substance of the taxpayers arrangements. There is more and more
emphasis by the court being placed on this factor.37
31 Ibid, at [54].
34 Cecil Bros Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia (1964) 111 CLR 430.
35 See Craig Elliffe and Mark Keating “Tax Avoidance – Still Waiting for Godot?” (2009) 23 NZULR 368 at 380.
36 Commissioner of Inland Revenue v Penny and Hooper [2010] NZCA 231 at [122].
December 2010 445

ELLIFFE and CAMERON
In addition to the points discussed above in ss 3.1 to 3.6, two particularly important concepts emerge
from the cases:
(1) the tandem approach to reconciling the GAAR and specific provisions; and
(2) The Parliamentary Contemplation test for tax avoidance.
3.6.1 Tandem approach to applying specific provisions and the GAAR
The real problem in interpreting the statute in this area is that because “every case on a GAAR starts
from the position that the taxpayer’s transactions satisfy the black letter requirements of relevant tax
legislation”,38 the question of when the GAAR overrides the charging (or exempting) provisions
becomes a question of statutory construction.
Prior to Accent Management (CA) and Ben Nevis (SC), it has been argued that the GAAR is:
(a) to be given a narrow interpretation i.e. once the technical requirements of the specific provision are
met, the GAAR cannot have any further application. This is typified by the “threshold approach”
which was argued in (and rejected by) the Supreme Court in Ben Nevis;39
(b) merely a long stop for the Revenue, and that a purposive approach to the specific provisions
(typified by the UK Courts) will effectively counteract tax avoidance without the need for recourse
to the GAAR (in Auckland Harbour Board, Case V2040 and minority in Ben Nevis); and
(c) is to be given an overriding interpretation, in that compliance with black letter provisions is
effectively irrelevant if there is a more than merely incidental purpose of tax avoidance. See for
example Woodhouse P in Challenge:41
“I think that sec 99 is of general application, that sec 191 is subordinate to it, and that it is
intended to operate as a kind of proviso to other provisions of the Act wherever the issue of tax
avoidance may seem to have relevance.”
The Supreme Court in Ben Nevis rejected both the “long stop” and “threshold” approaches above,42
and confirmed that the specific provision of the Act and the GAAR are to be given equal weight and
application when analysing a transaction; neither trumps the other. Both are to be interpreted
purposively to give appropriate effect to each. The purpose of the two provisions is, however, different.
The GAAR is the principal vehicle to address tax avoidance and specific provisions have a focus,
determined primarily by their ordinary meaning, established in the light of their specific purpose.43
3.6.1.1 The long-stop approach

Geoffrey Clews states that:44
38 Craig Elliffe and John Prebble “General Anti-Avoidance Rules and Double Tax Agreements: a New Zealand Perspective”
(2009) 19 Revenue LJ 48 at 51.
40 Case V20 (2002) 20 NZTC 10,233.
41 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513, at 540.
of Inland Revenue (2009) 24 NZTC 23,188 (SC) at [100], [103].
43 Ibid at [103].
44 Geoffrey Clews “Tax Avoidance Clarified?” (2009) Geoffrey Clews — Barrister, Specialist Tax and Trusts Counsel
<www.taxcounsel.co.nz>.
446
“The decisions represent a shift from the former view (expressed by the Privy Council) that the anti-
avoidance rule is a ‘longstop’ provision. They signal the rule should now be considered in tandem
with specific provisions.”
This is a correct assessment of the previous position and subsequent change based on the precedential
effect of previous decisions. The Privy Council was previously the highest New Zealand Court to rule
on the issue and New Zealand Courts were therefore bound to follow its “long stop” approach (see for
example Case V20).45 However, in practice some New Zealand judges had started to express concerns
about this approach, and there was (of course) previous New Zealand authority to the contrary.
Therefore, there was a divergence between New Zealand Courts and UK Privy Council on this issue,
even before the constitution of our own indigenous Supreme Court. See for example BNZI (No. 1)
where Thomas J stated (albeit in a dissenting judgment):46
“… the Privy Council’s view is contrary to more indigenous perceptions of the function of s 99. In
New Zealand, the general anti-avoidance provision is regarded as a core provision … The section is
not to be relegated to a “long stop”; it is the core bulwark against tax avoidance and the central
means of protecting the integrity of the tax system in this country …”
3.6.1.2 The relationship between black letter law and the GAAR
Eugen Trombitas argues that the development of recent case law has “unnecessarily” taken the test for
avoidance “into uncertain territory.”47 He asserts that the Income Tax Act should be interpreted as
follows:48
“The proper approach in this area is to look at the words of the statute, applying established
principles of statutory construction, so as to discern the true intention of Parliament.”
The concern he has is that there is a fine balancing act between right and wrong policy outcomes.
Consequently he believes “in some cases, the taxpayer is utilising a gap in the legislation which only
Parliament-rather than the Courts-should remedy.”49
Trombitas cites Lord Hoffmann’s article in the British Tax Review as support for the proposition that
“the statute means what it says”50 as follows:51
“There is only one way to know the intention of Parliament and that is to read the statute. So
avoidance of tax assumes that you are not paying a tax which, on a fair reading of the statute, you
ought to have paid.”
There is a great deal to recommend the approach advocated by Trombitas. It is the writers’ belief that
his approach is consistent with the approach taken by Richardson J in Challenge (echoed in BNZI and
endorsed explicitly by the Court of Appeal in Accent Management) that:52
(a) the GAAR is not superior to the specific provisions as:53
45 Case V20 (2002) 20 NZTC 10,233.

46 Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA) at [76].
47 Eugen Trombitas “The Conceptual Approach to Tax Avoidance in the 21st Century” (2009} 15 NZJTLP 352 at 366.
48 Ibid, at 360.
49 Ibid, at 358.
50 Ibid, at 359.
51 Lord Hoffmann “Tax Avoidance”[2005] British Tax Review, No 2, 197, at 204.
52 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at 548-549.
December 2010 447

ELLIFFE and CAMERON
“clearly the Legislature could not have intended that sec 99 should override all other provisions of
the Act so as to deprive the taxpaying community of structural choices, economic incentives,
exemptions and allowances provided for by the Act itself.”
(b) nor are the specific provisions superior to the GAAR as “sec 99 would be a dead letter if it were
subordinate to all the specific provisions of the legislation”;54
(c) but rather they live “in an uneasy compromise”;55
(d) where their application turns “on an overall assessment of the respective roles of the particular
provision and sec 99 under the Statute and of the relation between them”;56 and
(e) where “the necessary starting point is that each section has its function under the Statute.”57
Neither Trombitas nor Richardson J’s views hold much sway because what the Supreme Court in
Ben Nevis decided was that the GAAR should really be given equal importance. This means that in a
scheme and purpose approach it receives consideration even in circumstances where the scheme of the
Act actually provides for the tax outcome sought by the taxpayer. The majority judgment seeks to
describe the relationship between the specific provisions and the GAAR by contextualising in their
respective roles. The general anti-avoidance regime is the principal vehicle to address tax avoidance.
So that:58
“[103] … the general anti-avoidance regime is designed for that purpose, whereas individual specific
provisions have a focus which is determined primarily by their ordinary meaning, as established
through their text in the light of their specific purpose. In short, the purpose of specific provisions
must be distinguished from that of the general anti-avoidance provision.
“[104] Parliament must have envisaged that the way a specific provision was deployed would, in
some circumstances, cross the line and turn what might otherwise have been a permissible
arrangement into a tax avoidance arrangement. Ascertaining when that will be so should be firmly
grounded in the statutory language of the provisions themselves. Judicial attempts to articulate how
the line is to be drawn have in the past too often been seized on as if they were equivalent to statutory
language. Judicial glosses and elaborations on the statutory language should be kept to a minimum.”
(emphasis added)
In assessing and giving equal weight to the statutory provisions, the Supreme Court is drawing a
distinction between the purpose of the GAAR and the purpose of other provisions. Accordingly, this is
a fundamental change because of the likelihood that the GAAR may be read down under the
Richardson approach.59 These would be situations where a taxpayer was using the statutory language
correctly but in a manner inconsistent with what Parliament would have contemplated. One problem
with the approach that Trombitas advocates is that, in relying on the principle “often the statute means
53 Ibid.
54 Ibid, at 548-549.
55 Ibid.
56 Ibid.
57 Ibid.
of Inland Revenue (2009) 24 NZTC 23,188 (SC) at [103], [104].
59 See the later discussion in the application of the Supreme Court’s decision in subsequent cases relating to the decision in
Penny v Commissioner of Inland Revenue; Hooper v Commissioner of Inland Revenue (2009) 24 NZTC 23,406 (HC).
448
what it says”,60 he is not giving full purposive interpretation to the GAAR itself. The Supreme Court
says that we should.61
3.6.2 Use of the phrase “Parliamentary contemplation”

For the first time, the Supreme Court framed the essential test for whether or not an arrangement is a
“tax avoidance arrangement” as a two step approach; that is, the taxpayer must satisfy the Court that:62
(1) the use made of the specific provision is within its intended scope; and
(2) it has not used the provision, viewed in the light of the arrangement as a whole, in a way which
cannot have been within the contemplation and purpose of Parliament when it enacted the
provision.
This statement was based on a purposive interpretation of the GAAR and the definition of “tax
avoidance arrangement”, the Supreme Court holding that the purpose of the GAAR is:63
“… to avoid the fiscal effect of tax avoidance arrangements having a more than merely incidental
purpose or effect of tax avoidance. Its function is to prevent uses of the specific provisions which fall
outside their intended scope in the overall scheme of the Act.”
The Court goes on to repeatedly use the phrase “Parliamentary contemplation” as a handle when
analysing elements of the arrangement. The use of this phrase left taxation experts wondering whether
this new phrase required a different analysis from the “scheme and purpose” approach of Richardson J
in Challenge or whether it was simply expressing the same test using different, but synonymous,
words. At first blush, one would expect that, if the purpose of the Court had been to endorse
Richardson J’s “scheme and purpose” approach, the Supreme Court would have done so explicitly. The
use of a somewhat different phrase, and the implicit rejection of Richardson J’s threshold approach,
suggests that the “Parliamentary contemplation” test was intended to be different. There is also a
notable absence in the Ben Nevis judgment of the phrase “scheme and purpose” except when referring
to the phrase in the context of the Challenge decision and subsequent approaches.64 However, the
phrase “scheme and purpose” is used in Glenharrow,65 implying that it may be synonymous with
Parliamentary contemplation.
As noted in a previous article, interpretation of statutes has undergone considerable development in
the 20th century.66 Although generally formalistic in approach, the rules and principles of statutory
interpretation have progressively changed, allowing an increasing focus on the purpose of Parliament.
The literal rule has been replaced by the golden rule only to be superseded by the mischief rule. In
60 Eugen Trombitas “The Conceptual Approach to Tax Avoidance in the 21st Century” (2009) 15 NZJTLP 352 at 359.
61 See above the emphasised quote from Ben Nevis Forestry Ventures Ltd & Ors v Commissioner of Inland Revenue; Accent
Management Ltd & Ors v Commissioner of Inland Revenue (2009) 24 NZTC 23,188 (SC) at [103].
62 Ibid, at [107].
64 Westpac Banking Corporation v Commissioner of Inland Revenue HC Auckland CIV-2005-404-2843, 7 October 2009 at
[98].
66 Craig Elliffe and John Prebble “General Anti-Avoidance Rules and Double Tax Agreements: a New Zealand Perspective”
(2009) 19 Revenue LJ 48 at 52.
December 2010 449

ELLIFFE and CAMERON
2001, in MacNiven, Lord Hoffmann indicated that “there is ultimately only one principle of
construction, namely to ascertain what Parliament meant by using the language of the statute.”67
Robert Summers identified and labelled what he described as “two methodological polarities” of
statutory interpretation.68 The first he described as “strict” interpretation, which is formal and
“recognises grounds of decision in the form of interpretive arguments that adhere closely to that
meaning, ordinary, technical, or special, expressed in the statutory language”. The second, “free
interpretation”, allows the interpreter to “roam beyond the statutory language for grounds of decision
rooted in purpose, policy, principle or equity.” He further described free interpretation as:69
“ … much less meaning-oriented and embodies a far wider concept of authoritative statutory content
and which essentially substantive considerations of intention, purpose, policy, principle, equity, and
the like, may directly inform content in complex, and not so complex, ways.”
The purposive approach to interpreting the GAAR seems to have at least some leaning towards free
interpretation rather than strict interpretation. This may explain the Supreme Court’s reliance on
particular legal or commercial factors that indicate that the arrangement in question may be using
provisions outside of Parliamentary contemplation.
While not determinative, the Supreme Court listed these indicia70 of tax avoidance (which will vary in
persuasiveness depending on the particular facts) to provide some more concrete guidance to taxpayers
as to how the Court is likely to apply the conceptual test of Parliamentary contemplation. These factors
include:71
(1) the manner in which the arrangement is carried out;
(2) the role of all relevant parties and any relationship they may have with the taxpayer;
(3) the economic and commercial effect of documents and transactions;
(4) the duration of the arrangement;
(5) the nature and extent of the financial consequences that it will have for the taxpayer; and
(6) the structuring of an arrangement so that the taxpayer gains the benefit of the specific provision in
an artificial or contrived way (“a classic indicator of a use that is outside Parliamentary contempla-
tion”).72
Highlighting some of these factors is nothing new. Artificiality, contrivance, pretence, circularity of
funds, timing mismatches, unnecessary insertion of steps into a transaction, lack of a business purpose,
a divergence between the economic and legal effects of a transaction and dealings between non-arm’s
length parties have often been cited as hallmarks of tax avoidance arrangements. Therefore, the
Supreme Court’s reference to these factors does not necessarily represent a departure from the
orthodox, but the emphasis on the examination into the background economic and commercial
considerations seems to be a focus on the substance of the transaction and the purpose behind it, and a
67 MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd (2001) 73 TC 1, [2001] 2 WLR 377 [29] (HL).
68 Robert Summers “The Formal Character of Law” (1992) 51 Cambridge LJ 242 at 253.
69 Ibid, at 254.
70 Craig Elliffe and Mark Keating “Tax Avoidance – Still Waiting for Godot?” (2009) 23 NZULR 368.
of Inland Revenue (2009) 24 NZTC 23,188 (SC) at [108]-[109].
72 Ibid.
450
move away from a focus on the legal form that it takes. In particular, in expenditure related tax
avoidance cases, the test of whether the economic burden is actually shouldered by the taxpayer is
fundamental to the tax avoidance test, regardless of the legal form.73
Mike Lennard74 argues that Ben Nevis essentially establishes two tests for avoidance — one for the
“pointy heads” who like the conceptual rigour of the scheme and purpose/Parliamentary contemplation
tests and one for the “sniff testers” who like to be able to point to concrete factors that contribute to the
overall foul smell of a transaction. He suggests that, in practice, it is the sniff test which is more
commonly applied, citing Ben Nevis, Miller, Hadlee and other cases as examples of where the “scheme
and purpose” analysis gave way to the indicia of avoidance as the primary test for avoidance.
In the writers’ view, one of the Supreme Court’s contributions to tax avoidance jurisprudence
through its judgments in Ben Nevis, is to clarify the link between the sniff test factors and the more
abstract concepts of Parliamentary contemplation/scheme and purpose. The Supreme Court directly ties
these factors into the interpretational test by asserting that the tax avoidance factors are indicative of a
use of provisions outside Parliamentary contemplation. The tandem approach to interpretation,
involving a purposive reading of the GAAR, possibly in a manner akin to free interpretation, allows the
Court to focus on factors indicative of tax avoidance, without due focus on legal form. This is because
they point to a use of the provisions in an inherently unusual and artificial way. As Parliament’s
purpose in enacting specific provisions is axiomatically targeted at the most commonplace and
conventional issues which arise, anything that indicates an unusual or contrived application of a
provision is also likely to indicate that the provision was not used in the way Parliament thought it
would be. If enough of these abnormalities are present, and are also accompanied by tax advantages,
then it is a fair conclusion that the use is outside Parliamentary contemplation and the GAAR applies.
The Supreme Court’s comment in Glenharrow that: “[t]ransactions which are driven only by
commercial imperatives are unlikely to produce tax consequences outside the purpose of the
legislation”75 echoes this link.
4.0 SUBSEQUENT APPLICATION OF THE SUPREME COURT DECISION

It is interesting to compare the above reasoning and analysis with decisions on tax avoidance
subsequent to the Supreme Court decision.
4.1 Application in Penny

The decision in Penny may be the most illuminating of the three disputes because of the difference in
approach in the High Court and Court of Appeal. While formally adhering to the conceptual analysis
required by Ben Nevis, the tone of MacKenzie J’s judgment was more reminiscent of taxpayer
favourable decisions such as Duke of Westminster, Cecil Bros and Auckland Harbour Board.76 He
made numerous references to the right of a taxpayer to make choices available under the Act and
interpreted the overall scheme and purpose of the Act in a way that did not preclude those choices.
73 Craig Elliffe and Mark Keating “Tax Avoidance – Still Waiting for Godot?”(2009) 23 NZULR 368 at 379-380.
74 Mike Lennard “Two Tribes and an Elephant Called Ben Nevis” (2009) 22 Taxation Today.
76 IRC v Duke of Westminster [1936] 19 TC 490, Cecil Bros Pty Ltd v Federal Commissioner of Taxation (1964) 111 CLR 430,
Commissioner of Inland Revenue v Auckland Harbour Board [2001] 3 NZLR 289.
December 2010 451

ELLIFFE and CAMERON
MacKenzie J also makes it clear that the question of tax avoidance is not to be clouded by an
“intuitive subjective impression of the morality”77 of the arrangement, but must be determined on the
basis of the scheme and purpose of the Act as objectively discerned from the Act itself. This is nothing
new (see O’Neil v CIR),78 but does give some indication of where MacKenzie J may fall in the
philosophical “tax avoidance” spectrum.
MacKenzie J slightly reframes the test in Ben Nevis, stating at one point:79
“If the tax effect of a choice available under the specific provisions of the Income Tax Act is to be
overridden by the operation of s BG 1, there must be a legislative indication apparent from the
scheme of the Act of the circumstances in which the choice may or may not legitimately be made.”
This interpretation favours the taxpayer in the default — if no indication to the contrary can be found
in the legislative scheme or the specific language of the Act, then s BG 1 cannot apply. This
observation is supported by the fact that MacKenzie J essentially concludes that, in this case, the
scheme and purpose is not offended (and no tax avoidance arrangement exists) as there is nothing in
the Act to indicate that the taxpayer could not have chosen to structure his business in the way that he
did. There is also nothing in the Act that governs the payment of inadequate (as opposed to excessive)80
salaries or remuneration in family situations.
However, when dealing with potential avoidance, it will often be the case that there is nothing
apparent from the text or the scheme of the Act that suggests that a taxpayer is not entitled to make the
choice that he has. This is because, by their very nature, avoidance schemes are cleverly designed to fit
within the words, and increasingly, particular schemes of the Act.
In the Court of Appeal the majority81 overturned the High Court decision. In a telling paragraph
Randerson J gave his view of the Supreme Court’s approach in Ben Nevis emphasising that the scheme
and purpose approach taken in earlier decisions, while generally endorsed by the Supreme Court, had
received some important clarification:82
“A key concept clarified by the Court is the relationship between specific tax provisions and the
general anti-avoidance provision. While this has long been accepted that compliance with specific tax
provisions does not oust the application of the general anti-avoidance provision, the Supreme Court
has rejected the approach adopted by Richardson J in the Challenge Corporation case which
effectively reconciled conflicting provisions by reading down the scope of the general avoidance
provision.”
(emphasis added)
The judgment of Hammond J is also insightful on this point drawing a relationship between an
economic substance doctrine and the breadth of interpretation of legislative purpose:83
77 Penny v Commissioner of Inland Revenue; Hooper v Commissioner of Inland Revenue (2009) 24 NZTC 23,406 (HC) at [75].
78 Ibid.
79 Penny v Commissioner of Inland Revenue; Hooper v Commissioner of Inland Revenue (2009) 24 NZTC 23,406 (HC) at [74].
80 Income Tax Act 2007, s GB 23.
81 Randerson and Hammond JJ.
83 Ibid at [154], [155].
452
“[154] … But, as with respect the Supreme Court of New Zealand has identified, the ultimate and
particularly challenging question is: “were the benefits arising from the avoidance transaction
intended by Parliament?”
(My words, emphasis added)
“[155] In such an analysis, the language of the statue can be difficult. Lord Hoffmann seems to have
thought that making a distinction between terms of the arts and terms of life, is a “not …
unreasonable generalisation” in some cases. But, and this was His Lordship’s crunch point, it should
not provide a substitute for a close analysis of what the statute means. To put this another way, the
extent to which the economic substance doctrine is relevant in an anti-avoidance analysis depends on
the Court’s interpretation of the legislative purpose. Or yet again: the narrower the view one takes of
the legislative purpose, the less relevance there is in the economic substance doctrines.
(emphasis added)
The majority of Court of Appeal took the view that the Supreme Court test is broader, more
purposive, and more concerned with economic substance than the previous Richardson J test. This
would accord with the writers’ understanding of the majority judgment in the Supreme Court set out in
3.6.1.2 above.
The reasoning of the Court of Appeal, namely:84
(1) the adoption of legitimate legal structures is no barrier to the finding of tax avoidance if the
arrangements are artificial, contrived or amounts to a pretence; and
(2) the orthopaedic surgeons had previously operated on their own account and then chose to incorpo-
rate their practices whereby the personal income of the surgeons dropped to approximately 18 per
cent and 33 per cent of the net pre-tax income they had previously enjoyed; and
(3) the salaries were accepted to be at levels substantially below what they could have expected if that
been employed independently arms length; and
(4) the timing and consequence of the incorporation of their practices was no coincidence with the
increase in the top personal tax rates; and
(5) none of the features which would accord with commercial practice whereby an employee would
agree with an employer to accept the salary reduction were present in this case; and
(6) the ability of the respondents to effectively control the relevant salary levels and cash flow thus
enabling the benefits of enhanced personal income to themselves and their families,85
led to the conclusion that the avoidance of tax was more than a merely incidental purpose or effect of
the arrangement.
The existence of the company structure and the respondents’ family trusts were accepted as being
referable to ordinary business or family dealings, but insufficient to displace the more than merely
incidental purpose or effect of tax avoidance.86 No weight was given to the suggestion that the
84 Commissioner of Inland Revenue v Penny and Hooper [2010] NZCA 231 at [110]-[122].
85 It should be noted, per Penny v Commissioner of Inland Revenue; Hooper v Commissioner of Inland Revenue (2009) 24
NZTC 23,406 (HC) at [16], that Randerson J acknowledged that Mr Hooper’s trust had not distributed income to the
beneficiaries but had used the funds from the company to purchase a holiday home and invest in bank deposits and the
family home.
December 2010 453

ELLIFFE and CAMERON
company structure was necessary to protect the respondents from negligence claims.87 A subsequent
discussion of the case by Inland Revenue was made by way of a “Revenue Alert” statement88and this
highlights the key areas that are likely to be attacked in Inland Revenue action. In a recent Webinar89 it
was indicated that approximately 30 cases on the Penny and Hooper issue were currently in dispute.
The approach by Inland Revenue will involve looking for clear indicia of similar features to those
present in Penny.
The Department of Inland Revenue intends to confront and assess what they see as “low hanging
fruit” or the most blatant of personal services alienation structures. This includes situations that involve
(inter alia):
(1) the use of interposed entities to derive personal services type income;
(2) involving a significantly reduced (or artificial low) salary from that which a reasonable person
would expect them to earn (having regard to all the circumstances);
(3) Where the business has been transferred, whether the business operated substantially the same as
previously, and the extent to which the business actually operates according to the legal form it
has;
(4) the degree of control of the economic product and cash flows by the individuals or their family,
including whether there is a redistribution of underlying income from the structure to the person(s)
or family;
(5) The significance of non-tax reasons for the structure; and
(6) The tax benefits arising from the structure.90
4.2 Application in BNZ
Consistent with MacKenzie J, Wild J treats the Ben Nevis approach as a “scheme and purpose”
approach.91
In accordance with Ben Nevis, Wild J analyses in detail the conduit regime and also identifies the
various indicia of tax avoidance that were present in the transaction. He also showed the same
willingness as the Judges in Ben Nevis and Glenharrow to strip transactions down to their economic
substance to determine whether the resulting tax benefits were consistent with Parliamentary
contemplation.
While the court has always had this ability, when dealing with cases of potential tax avoidance, the
propensity to use it has varied throughout the last 30 years. Therefore, while the emphasis on the
economic substance of the transaction in recent decision is not new, the increasing importance placed
on it seems to be indicative of a trend in judicial attitude toward tax avoidance.
87 Ibid at [121].
88 Inland Revenue Department, Revenue Alert RA 10/01, issued 21 June 2010.
89 NZICA Webinar held on 27 July 2010 (Panelists Graham Tubb of Inland Revenue, Craig Macalister of NZICA and Mark
Keating and Craig Elliffe of University of Auckland).
90 This last feature may be less important after the changes to the tax rates announced on Budget night 2010 when the
Government announced the highest personal tax rate would fall to 33 per cent, aligning with the trustee tax rate. However,
the possibility of income spreading using lower marginal for beneficiary income (as low as 12.5 per cent) does not eliminate
this potential problem.
91 BNZ Investments Limited & Ors v Commissioner of Inland Revenue (2009) 24 NZTC 23,582 (HC) at [125].
454
The judiciary appears to be less tolerant of diverging economic and legal effects of transactions and
more likely to “call a spade a spade” (or in the case of BNZI (No.2), a loan a loan).
In applying the Supreme Court’s test Wild J states as follows:92
“… the question for the court at step 2 is necessarily an hypothetical one. Guided by the
considerations and the approach set out by the Supreme Court in [108] and [109] in Ben Nevis, the
court is essentially asking itself: had Parliament foreseen transactions of this type when enacting the
specific provisions deployed in the transactions, would it have viewed them as within the scheme and
purpose of those specific provisions?”
(emphasis added)
Despite the fact that, on an analysis of the text and scheme of the Act, the conduit regime clearly
envisaged (and accepted as the price for attracting foreign investment) the tax asymmetry resulting
from allowing a tax deduction in respect of exempt income, Wild J was seemingly so revolted by the
smell of the transaction’s “tax avoidance indicia” that he could find no room for taxpayer autonomy in
respect of the arrangements. He even attributed to Parliament an intention that conduit relieved income
must be paid out to a foreign parent to fall within the provision (a contention which was dismissed by
Harrison J in Westpac).93
Wild J adopted the Commissioner’s description of the transaction as a “tax machine”94 and made
numerous references to the cost of the transactions to New Zealand society.95 This introduced a
somewhat unnecessary element of subjective morality into his decision. That said his decision is
consistent with a broad purposive interpretation of the GAAR referred to above.
4.3 Application in Westpac

Harrison J analyses explicitly whether the Ben Nevis Parliamentary contemplation test departs from
the past approach. The taxpayer had submitted that the Ben Nevis decision was merely “a restatement
of the proper approach to the general anti avoidance provision as it had been articulated in earlier
decisions”.96 In Harrison J’s view this proposition was not tenable:97
“I agree with Ms Ellis in rejecting Mr Farmer’s first submission that Ben Nevis is essentially a
restatement of Richardson J’s settled principles in Challenge …
“I read Ben Nevis at [84]-[89] as expressing what Ms Ellis called a ‘diplomatic rejection’ of
Richardson J’s judgment in Challenge while endorsing Woodhouse P’s approach in the same case.
Ben Nevis marked out two clear points of departure from Richardson J. One was from his emphasis
on the specific provision, thereby reading down or negating the reach of the general anti-avoidance
section. The other was from a formalistic or juristic approach which necessarily excluded an
examination of the circumstances in which the deductible loss arose …
92 Ibid at [135].
[610].
94 BNZ Investments Limited & Ors v Commissioner of Inland Revenue (2009) 24 NZTC 23,582 (HC), at [364], [369] and [436].
95 Ibid, at [475], [477] and [496].
[171]-[178].
97 Ibid.
December 2010 455

ELLIFFE and CAMERON
“The Court also referred in Ben Nevis at [96]-[98] to decisions subsequent to Challenge which had
applied the scheme and purpose approach (BNZ Investments (No 1), Miller and Peterson), before
concluding that that approach does not simply require a Court ‘to focus on the specific provisions in
isolation of wider considerations’: at [99] … ”
(emphasis added)
Harrison J suggests in the following passage that the new avoidance test is wider and more inquiring
into the broad factual matrix:98
“Ben Nevis represents, I think, a significant shift in identifying the principles to be applied when
construing s BG 1, mandating a broader inquiry than was previously required – a ‘wider perspective’
– consistent with settled principles of statutory interpretation: at [99]. Ms Ellis observes that the
phrase ‘scheme and purpose’ is conspicuously absent from the ratio. I doubt that the Court was
rejecting the scheme and purpose approach of itself but was instead expanding its scope. The
previous constraints imposed by a legalistic focus, to the exclusion of economic realism, have gone.”
(emphasis added)
Harrison J’s statement that the constraints of a legalistic focus “to the exclusion of economic realism,
have gone” fires a shot across the taxpayers’ bow, indicating that the Court is more prepared than ever
to look through the clever guise of the taxpayer’s form to the substance of the arrangement.99 This is
the view previously expressed100 in an earlier article which states that, despite a applying a traditional
scheme and purpose approach in Ben Nevis, the Supreme Court sent “an unmistakable warning to
taxpayers who engage in aggressive tax planning” and:101
“ … clearly put tax advisers and taxpayers on notice that only if they actually suffered the true
economic cost expected to be paid under the black letter law can they keep the resulting tax benefit.”
The other contribution to the understanding of the Ben Nevis judgment is Harrison J’s analysis of the
“merely incidental qualification”:102
“The ‘not merely incidental’ test did not arise for direct consideration in Ben Nevis. But the Supreme
Court emphasised a taxpayer’s freedom to structure transactions to its best possible tax advantage
provided it did not act in a way proscribed by s BG 1: at [111] … What is perhaps most germane to
this case is the Court’s observation that:
‘[114] … It will rarely be the case that the use of a specific provision in a manner which is outside
parliamentary contemplation could result in the tax avoidance purpose or effect of the arrangement
being merely incidental …’”
Harrison J expanded on this by stating that “two judicial statements continue to provide authoritative
guidance on the ‘not merely incidental’ test”:103 Europa Oil (NZ) Ltd v CIR104 and Woodhouse P’s
famous statement in Challenge, which included the following:105
98 Ibid, at [194].
99 Ibid.
101 Ibid at 392.
[202]-[207].
103 Ibid at [208].
104 Europa Oil (NZ) Ltd v CIR [1976] 1 NZLR 546 (PC).
105 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (PC) at 533-534.
456
“As a matter of construction I think the phrase ‘merely incidental purpose or effect’ in the context of
s 99 points to something which is necessarily linked and without contrivance to some other purpose
or effect so that it can be regarded as a natural concomitant. Many taxpayers when considering a
course of action are likely to appreciate and welcome an opportunity provided by the Act for
achieving some tax benefit as an aspect of it. But this should not bring the transaction or transactions
almost automatically within the avoidance provisions of s 99. By itself conscious recognition and
acceptance that a commercial transaction will be accompanied by a degree of tax relief is not the
issue.”
Ultimately, Harrison J concluded that cases to which the “not merely incidental” test might apply lie
within a spectrum that has, at one end, compliance with the “black letter law” but transparent tax
avoidance purpose or effect, and at the other end, transactions that have a clear and definable
commercial purpose where the alteration of tax liability is no part of the decision-making process as to
whether to proceed:106
“Transactions falling in between, where a reduction in the incidence of tax is a real or appreciable
purpose but there is also a concurrent commercial purpose, present the difficulties. Drawing the line
between permissibility and avoidance in such cases requires an evaluative judgment, to be exercised
according to the facts and degree of the particular circumstances.”
While this does not add a lot to our understanding of the Parliamentary contemplation test, it does
confirm:
(1) that the “merely incidental” exception does still have a place in tax avoidance analysis (the relative
importance of which is still to be seen);
(2) the current authorities on the meaning of the “merely incidental” exception (Europa Oil and
Challenge) still represent good law; and
(3) whether or not the exception applies will require an evaluative judgment based on the facts and
degree of the particular circumstances (essentially a sniff test).
5.0 CONCLUSION
Ben Nevis and Glenharrow, signify a significant change in direction in the interpretation and
application of the GAAR in New Zealand. The detailed consideration of the tax avoidance cases of the
past 30 years in those judgments has culminated in a refined and definitive statement as to the approach
to applying avoidance. In the view of the writers what has emerged is a clearer, more robust approach.
It is a modified “scheme and purpose” approach in which the “ultimate question is whether the
impugned arrangement, viewed in a commercially and economically realistic way, makes use of the
specific provision in a manner that is consistent with Parliament’s purpose.”107 In assessing and giving
equal weight to the statutory provisions, the Supreme Court is drawing a distinction between the
purpose of the GAAR and purpose of other provisions. This is a fundamental change to the
Richardson J approach which tolerated the likelihood that the GAAR may be read down under. This
encompasses situations where a taxpayer is using the statutory language correctly but in a manner
inconsistent with what Parliament would contemplate.
[211]-[212].
December 2010 457

ELLIFFE and CAMERON
In determining whether an arrangement is consistent or inconsistent with Parliament’s purpose, a host

of factors will be relevant including artificiality, pretence and circularity and all importantly, the
underlying economic substance of the arrangement. There is also still some application for the scope of
the merely incidental test, though it remains to be seen whether this will be more directly built into the
scheme and purpose approach.
The test remains deliberately vague; the courts having little sympathy for the taxpayers’ pleas for
commercial certainty.
Due to the vagueness of the test, the existence (or not) of tax avoidance will depend significantly on
the judicial evaluation of Parliamentary contemplation. This necessarily causes problems with certainty
for taxpayers. When a court asks as the hypothetical question “when Parliament enacted this legislation
would it have foreseen the statute being used in this way?” it raises the following issues:
(a) which Parliament is to be asked this question? The current Parliament or the enacting Parliament?
Different political parties are likely to have quite different views of the arrangement in question.
It is unclear what the correct answer to this question is. Presumably, it should be the Parliament that
passed the legislation but it is hard to envisage the 1916 Parliament108 being called back (even
hypothetically in the mind of the Judge) to give guidance on what they contemplated in formulating the
rules that determine the source of New Zealand income. Furthermore it appears that only a limited
range of evidence was examined in seeking to determine Parliament’s contemplated purpose for
provisions. The Supreme Court and the Court of Appeal did not appear to consider the material
produced under the Generic Tax Policy Process (GTPP).109
(b) does this approach not simply allow the judge to substitute his or her own view under the guise of
answering the question for a hypothetical Parliament?
The approach may provide for more judicial influence in the determination of what is permissible (or
more importantly impermissible) tax planning. Some, on the one hand, will welcome the idea of senior,
clever respected legal minds analysing a transaction to see whether it had commercial validity; others
will say that making judge made law is not the role of the judiciary as it completely undermines the
indisputable role of Parliament as elected representatives of the people to raise tax and establish what is
108 The political party in power was a grand coalition headed by William Massey of the Reform Party. Arthur William de Brito
Savile Foljambe, 2nd Earl of Liverpool was New Zealand’s first Governor General and lived in England. The Ranfurly
Shield (held by Wellington in one of that Province’s longer tenures) was not contested because of the war.
109 The 16-stage GTPP that has been followed in New Zealand since the early 1990s has generated a wide range of consultation
and discussion prior to a new proposal becoming law. The range includes:
• Consultative Documents issued by the IRD and/or Treasury;
• The submissions lodged in response to the Consultative Document;
• The draft legislation referred to the Finance and Expenditure Select Committee (FEC);
• Submissions made by interested parties to the FEC;
• The Report of the FEC;
• The Officials’ reports to the FEC and recommendations on the submissions;
• Amendments passed/rejected during the second and third reading stage;
• The speeches of the members including the Minister’s speech when the Bill was introduced;
• Commentary provided by the IRD after the Bill has been passed into law.
458
tax legislation. After all, the Magna Carta had something to say about the consensual notion of
taxation.110
(c) could this be an inroad towards allowing the judges “intuitive subjective impression of the
morality” of the arrangement to influence his or her decision?
This is a concern from the consistency and certainty of taxpayers and administrators.
(d) is this simply an opening allowing the Court to correct what is sees as defective legislation
retrospectively, turning the Court into a de facto legislator?
Could this make our tax administrators, who are extremely competent and efficient by world standards,
complacent, whilst making business transactions hard to progress in a climate of uncertainty?
A similar concern was expressed by the Privy Council in Auckland Harbour Board where it was
stated:111
“In the present case, there is no tension between the commercial and juristic character of the
transaction. It is, in legal, commercial or any other terms, a transfer of financial arrangements for no
consideration. Such a transaction either attracts a deduction or it does not. The Commissioner accepts
that it does, but claims the right under s 64J(1) to be able to amend the law to ensure that it does not.
Their Lordships do not think that the section was intended to confer such a power. It would amount
to the imposition of tax by administrative discretion instead of by law.”
So, in summary Ben Nevis represents a conceptual change in approach to avoidance, empowering the
judiciary to void technically compliant transactions that exhibit certain factors such as artificiality,
circularity or the claiming of a tax benefit where the economic cost associated with the benefit is not
borne out. For example, in the past, a Court looking at the cheque swap in Glenharrow or the
promissory notes in Ben Nevis may have accepted the fact that these common commercial instruments
technically constitute “payment” and refused to look through the form to the economic reality that the
burden of the payment was not born.
Another indication of this shift in judicial attitude can be seen in the approach to pre-tax negative
transactions. Past Courts (and the Commissioner in his 1990 Policy Statement on s 99)112
acknowledged that transactions can be pre-tax negative without being damned as tax avoidance.113
However, in both BNZI (No.2) and Westpac, the Court put a great deal of weight on this factor. The
Courts also appear to be heavily influenced by subjective factors such as comments by tax advisors
(Ben Nevis) and issues of morality, such as the economic cost to New Zealand society of tax avoidance
(BNZ (No.2)).
Mark Keating argues that Ben Nevis and Glenharrow represent a swing of the tax avoidance
pendulum in favour of the Commissioner, stating that:114
110 Refer to Article 12 of the Magna Carta. See the British Library virtual collection and translation
<www.bl.uk/treasures/magnacarta/index.html>.
111 Commissioner of Inland Revenue v Auckland Harbour Board [2001] 3 NZLR 289; (2001) 20 NZTC 17,008; [2001] STI 150
at [12].
112 1 Tax Information Bulletin 8, February 1990.
113 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (PC) at 549; Peterson v Commissioner
of Inland Revenue [2006] 3 NZLR 433 (PC) at [44]; Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1
NZLR 450 (CA).
114 Mark Keating “Supreme Court lays down tax avoidance for first time” (2009) 1 NZ Tax Planning Reports.
December 2010 459

ELLIFFE and CAMERON
“… the Court has effectively put taxpayers on notice that their tax structures may be subjected to
detailed scrutiny, with all aspects being examined to determine if they can be justified on commercial
grounds. If the arrangement contains unusual or non-commercial features, particularly regarding
payment, the general anti-avoidance provisions will be likely to apply.”
Mike Lennard summarises it aptly when he states: 115
“The significant cases which have decided the existence or otherwise of tax avoidance wholly or
partly in reliance on this [scheme and purpose] approach show how difficult this test is to apply in
practice. It is undeniable that both Richardson J and Lord Templeman were among the finest tax
minds around in the mid-1980s. Yet they came to opposing conclusions as to whether the transaction
in Challenge complied with the scheme and purpose of the legislation. Similarly the Privy Council in
Peterson was split 2:3 on whether the transaction complied with or frustrated the Parliamentary
intention. Given this scope for ambiguity and disagreement, it is not surprising, as above, that most
cases seem to be decided on sniff test factors.”
The writers note, in addition to the cases above, we may now add the Court of Appeal’s majority
judgment (Randerson and Hammond JJ) in Penny, which differed from that of the minority (Ellen
France J) and the High Court (MacKenzie J). It is still to be seen whether, on appeal, the Supreme
Court will agree with the majority of the Court of Appeal or MacKenzie and Ellen France JJ.
Accordingly, Penny will be one of the most highly anticipated tax cases of 2011 and may provide
further guidance on how the test for tax avoidance is to be applied to (arguably) more borderline fact
situations, as opposed to those such as Ben Nevis and Glenharrow.
In the meantime, it is the writers’ view that there has been a sea change in the judicial approach to tax
avoidance cases. The scheme and purpose approach is modified with a more purposive interpretation of
the GAAR, backed by a judiciary hostile to tax avoidance and prepared more than ever to focus on the
economic consequences of a transaction, rather than its legalistic form.
115 Mike Lennard “Two Tribes and an Elephant Called Ben Nevis” (2009) 22 Taxation Today at 9-10.
460

SSRN Id1625604 PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SSRN Id1625604 PDF

Uploaded by

Copyright:

Available Formats

The Test for Tax Avoidance in New Zealand:

A Judicial Sea Change

CRAIG ELLIFFE* JESS CAMERON*

Professor of Taxation Law and Policy, Senior Solicitor,

Full fathom five thy father lies;

Sea-nymphs hourly ring his knell:

Electronic copy available at: http://ssrn.com/abstract=1625604

December 2010 441

Electronic copy available at: http://ssrn.com/abstract=1625604

2 THE SUPREME COURT DECISIONS OF BEN NEVIS AND GLENHARROW

3 WHAT DO THESE DECISIONS TELL US? (AND IS IT ANYTHING “RICH

3.1 Commercial Certainty

December 2010 443

3.3 Tax Mitigation

3.5 How Much Can You Spend?

December 2010 445

3.6.1.1 The long-stop approach

45 Case V20 (2002) 20 NZTC 10,233.

December 2010 447

3.6.2 Use of the phrase “Parliamentary contemplation”

December 2010 449

4.0 SUBSEQUENT APPLICATION OF THE SUPREME COURT DECISION

4.1 Application in Penny

December 2010 451

December 2010 453

4.3 Application in Westpac

December 2010 455

December 2010 457

In determining whether an arrangement is consistent or inconsistent with Parliament’s purpose, a host

December 2010 459

You might also like