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May 2008
The Supreme Court has released its decision in Westpac Banking Corporation Limited v Commissioner of Inland Revenue [2008] NZSC 24, concerning the scope of the Commissioner’s obligations to maintain secrecy in respect of taxpayer information. The Court held that neither the Commissioner’s statutory obligation to keep taxpayer information secret, nor the doctrine of public interest immunity, prevented the Commissioner from discovering, in proceedings relating to one taxpayer, documents relating to the affairs of, and obtained from, other taxpayers.
This case arose out of proceedings commenced by Bank of New Zealand entities challenging amended assessments the Commissioner had issued in respect of certain cross-border financing transactions. In the course of the challenge proceedings brought by BNZ, the Commissioner sought to discover documents relating to similar transactions that were entered into by other New Zealand banks. The Commissioner had obtained those documents from the other banks, effectively by compulsion, under his information-gathering powers.
BNZ applied to the High Court for orders that the documents relating to the other banks’ transactions should not be discovered in the BNZ proceedings, on the basis that:
- such documents were not relevant to the issues to be determined in the BNZ proceedings; and
- the secrecy provisions in the Tax Administration Act 1994 (“TAA”) prohibited the Commissioner from disclosing details of one taxpayer’s affairs to another taxpayer, in the context of the latter taxpayer’s affairs.
Other banks also challenged the Commissioner’s approach by way of applications to the High Court seeking to protect the secrecy of information the Commissioner had obtained from them. The High Court dismissed these applications, and the Court of Appeal upheld the High Court’s approach. Certain affected banks then appealed the Court of Appeal’s decision to the Supreme Court.
In the Supreme Court, the case proceeded on the basis of the lower courts’ findings that the documents in question relating to, and obtained from one bank, were “relevant” (for discovery purposes) to the proceedings involving another bank. The question for the Supreme Court therefore was how to reconcile the discovery obligation (ie in this case, the Commissioner’s obligation to discover to BNZ as its opponent in the litigation, documents that the Commissioner would seek to rely on) with the Commissioner’s obligation to maintain secrecy of taxpayer information.
Section 81(1) of the TAA provides that Departmental officials must “maintain and aid in maintaining” the secrecy of matters (including taxpayer information) “except for the purposes of carrying into effect” the tax legislation the Commissioner is empowered to administer. The Supreme Court stated that section 81(1) “lays down a rule that restricts use by officials of taxpayers’ information held by the Inland Revenue Department, when discharging the Commissioner’s functions of care and management of taxes”. The Court confirmed that this rule applies equally to information that has been voluntarily disclosed by a taxpayer in a tax return, information that has been provided in response to a statutory information request, or information that has been located by the Department in some other way during the course of investigations to verify the correctness of any taxpayer’s return.
The Court held, however, that the effect of the “carrying into effect” exception, is that the Commissioner can make use of information concerning other taxpayers’ affairs for the purposes of conducting litigation to which the Commissioner is a party, if it is “reasonably necessary” for the Commissioner to do so. Unfortunately, the judgment does not explain in any detail why disclosure was seen as reasonably necessary in this case. There is a suggestion, however, that the Commissioner’s case would be prejudiced if disclosure of a given taxpayer’s documents in a separate taxpayer’s proceedings were not permitted, and that factor was evidently sufficient to satisfy the “reasonably necessary” test.
Counsel for the banks, relying on the Court of Appeal’s decision in Commissioner of Inland Revenue v E R Squibb & Sons (NZ) Limited (1992) 14 NZTC 9,146, argued that the Commissioner’s secrecy obligation was incompatible with disclosing, in litigation, information in a form that specifically identified other taxpayers. In Squibb (a transfer pricing case, in which the Commissioner sought to rely on industry data in support of his argument that the particular taxpayer’s pricing was inappropriate) the solution adopted was for the information to be presented in aggregated form.
In the present case, counsel for the banks argued that all names and identifying features should be masked in the other banks’ documents the Commissioner wished to rely on. However, the Supreme Court stated that it was “reasonably necessary” that the identity of the other banks concerned should be before the Court in the BNZ proceedings, as the Court of Appeal had previously found that the other banks’ documents are arguably part of the wider commercial context in which BNZ’s transactions are to be considered. Further, it was held that the other banks’ documents will have no utility as evidence if the identity of the other banks is not before the court (ie if the identifying details are redacted from the other banks’ documents).
The Supreme Court’s decision therefore leaves a potentially broad, but currently very uncertain, exception to the important principle that taxpayer information held by the Commissioner must be kept secret, and not disclosed to other parties. The one remaining protection for taxpayers is that a taxpayer whose documents are to be disclosed in another taxpayer’s litigation, can seek orders on a document by document basis to protect commercially sensitive details from being disclosed. This, however, is a much weaker form of protection than an absolute prohibition on disclosure. A taxpayer therefore now faces the prospect that information it is compelled by law to provide to Inland Revenue, may end up in the hands of a third party, and possibly even in the public domain, by reason of litigation in which the taxpayer whose information is to be disclosed has no involvement at all.
To view a copy of the decision please click here.
On 2 May, the Government announced that New Zealand’s double tax agreement (“DTA”) with the United States is to be updated. It is intended that there will be a single round of negotiations, to take place on 16 June.
Possible changes to withholding tax rates (which are relevant to interest, dividends and royalties) are flagged as one area on which negotiations may focus. The worldwide trend in the DTA practice of New Zealand’s major trading partners has been towards reductions in withholding tax rates, and any change to the DTA with the United States could be expected to reflect that trend.
New Zealand is also in the process of a wide-ranging renegotiation of the DTA with Australia. The first round of negotiations took place in Canberra in early April, and further negotiations will follow. Withholding tax reductions are also on the agenda as part of that renegotiation.
The recently enacted Limited Partnerships Act 2008 and Taxation (Limited Partnerships) Act 2008 introduce a limited partnership regime, aimed at encouraging venture capital investment into New Zealand. Broadly, a limited partnership will have separate legal entity status for general law purposes, but flow-through treatment (with some limitations) for tax purposes.
Separate legal entity status for limited partnerships is intended to put the New Zealand regime in line with limited partnership regimes in foreign jurisdictions. The separate legal entity status protects limited partners from liability beyond the amount of their capital investment (similar to shareholders investing in a company), while general partners will have unlimited liability. A limited partnership must comprise one or more general partners and one or more limited partners. If there is only one general partner and only one limited partner, they may not be the same person. The intention is that general partners will be responsible for the management of the partnership with limited partners being restricted in the types of management activities they can be involved in.
For income tax purposes, limited partnerships will be taxed as “flow-through” entities. That is, all income, expenses, gains, losses and other tax attributes of the partnership are allocated to the individual partners in proportion to their share in the partnership (supported by an anti-streaming rule). However, the deductions/losses available to limited partners are restricted by reference to their investment (“partner’s basis”) in the partnership, with denied deductions/losses being carried forward to later years.
There is still some work to be done in ensuring that the flow-through works in all cases. An example of this is making certain that for tax purposes Australia recognises a New Zealand limited partnership as a flow-through rather than a separate legal entity. It is to be hoped that that issue will be addressed in the context of the current double tax agreement negotiations with Australia.
To view a copy of the Limited Partnerships Act 2008 click here or to view a copy of the Taxation (Limited Partnerships) Act 2008 click here.
On 23 April Inland Revenue released draft legislation containing new rules relating to the tax treatment of stapled stock. The rules will apply to a debt security issued by a company if: (i) that debt security provides funds to the issuer, and would give rise to an interest deduction for the company; and (ii) the debt security is stapled to a share in that company or in any other company (and the stapling occurred on or after 25 February 2008, which was the date on which the proposed law change was first announced).
A debt security will be considered to be “stapled” to a share if the debt security “can, or ordinarily can, be disposed of only together with the share”. The words “ordinarily can” seem unnecessary, and are somewhat imprecise.
If the rules apply to a stapled debt security then:
- the issuer of the debt security is not entitled to a deduction for any interest payable under it;
- the debt security is treated as a “share” for tax purposes (meaning that: (i) distributions will be treated as dividends; (ii) the debt securities could impact on ownership measurement tests for grouping and continuity of ownership purposes); and
- the debt security and the share to which it is stapled will be treated as a single share in certain circumstances where the Income Tax Act applies a special treatment to shares with a dividend rate that provides a fixed or debt-like return.
Submissions on the draft legislation close on 30 May. The legislation is expected to be included in the Bill due to be introduced to Parliament in late June.
To view a copy of the draft legislation, click here.
The Government released a consultative paper last November proposing changes to the tax rules for petroleum mining (Suggested Changes to the Petroleum Mining Expenditure Rules, 26 November 2007). The stated purpose of the proposals is to remove uncertainty and disincentives that exist within the current rules.
The proposed changes include the following:
- amortised deductions for onshore development expenditure will be allowed from the date the expenditure is incurred (as is presently the case in respect of offshore development expenditure);
- an optional depletion method for amortised development expenditure will be introduced. This is intended to more closely align tax deductions with the depletion of oil and gas reserves;
- an immediate deduction will be allowed for development expenditure on failed production wells; and
- the legislative intent that GST input tax credits can be claimed for site restoration costs after production has ceased will be clarified.
The petroleum mining regime will also be the subject of another amendment, announced by the Government in March 2008. Effective from the date of the announcement, expenditure on petroleum mining operations undertaken through a foreign branch cannot be offset against petroleum mining income from New Zealand.
A recent decision of the Full Federal Court of Australia highlights the need to consider whether taxpayers’ individual circumstances are relevant when imposing penalties in cases of tax avoidance. The decision may have some relevance to the equivalent New Zealand penalty, which is the penalty for taking an abusive tax position.
In FCT v Starr [2007] FCAFC 204 the Federal Court of Australia held that the corresponding Australian penalty applies only if a taxpayer has a purpose of avoiding tax. In other words, the Court considered the taxpayer’s subjective purposes in entering into the relevant scheme. The Court recognised that in many cases, such as the one before it, penal provisions in tax legislation look to punish a taxpayer for their subjective purpose of avoiding tax, as a means of promoting compliance. This principle is particularly relevant where severe penalties are imposed.
The statutory tests for the equivalent penalties differ between New Zealand and Australia. In New Zealand the test (for an “abusive tax position”) is a tax position that is an “unacceptable tax position” (ie one which fails to meet the standard of being “about as likely as not to be correct”) and which “viewed objectively” the taxpayer takes either in respect of an arrangement entered into with a dominant purpose of avoiding tax, or otherwise with a dominant purpose of avoiding tax. The equivalent Australian provision refers to a scheme that “was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax”. There is therefore no express requirement in the Australian regime that the position be “viewed objectively”.
The Starr decision may nonetheless be relevant in the New Zealand context. First, the decision recognises that where onerous penalties are concerned, the conduct of the particular taxpayer should be the focus. (In the New Zealand context, the penalty for an abusive tax position is 100% of the tax shortfall.) Second, while the New Zealand definition of “abusive tax position” includes the words “viewed objectively”, it does not follow that the conduct of the particular taxpayer is irrelevant. It is possible to make an assessment of a particular taxpayer’s purpose while basing that assessment on objective considerations.
The criteria for imposing shortfall penalties for an abusive tax position will be one of the issues considered by the Supreme Court when it hears the appeal in Accent Management Limited v CIR (the “Trinity” case). That appeal is due to be heard next month, in the week beginning 23 June.
To view a copy of the decision please click here.
Hong Kong Court of Final Appeal compares New Zealand and Australian general anti-avoidance provisions
In a recent Hong Kong tax avoidance case (Commissioner of Inland Revenue v Tai Hing Cotton Mill (Development) Limited [2007] HKCFA 2) Lord Hoffmann (sitting as a Judge of the Court of Final Appeal of the Hong Kong Special Administrative Region) discussed the differences between the Australian and New Zealand general anti-avoidance provisions. Lord Hoffmann’s comments are of particular significance because, in his capacities as a member of both the House of Lords, and the Judicial Committee of the Privy Council, Lord Hoffmann has delivered a number of speeches and judgments in cases of alleged tax avoidance. His Lordship delivered the judgment of the Privy Council in two recent New Zealand tax avoidance cases, one being Miller, the other being the Auckland Harbour Board case. (The Auckland Harbour Board case involved a specific anti-avoidance provision which the Privy Council saw as having parallels with the general anti-avoidance provision.)
The relevance of the New Zealand and Australian general anti-avoidance provisions to the case was that Hong Kong’s general anti-avoidance provision (section 61A of the Inland Revenue Ordinance) was modelled on Australia’s general anti-avoidance rule, Part IVA of the Income Tax Assessment Act 1936. Lord Hoffmann noted that section 61A allows the Commissioner to assess the taxpayer “on the hypothesis that there was a transaction which created income, but without the features which conferred the tax benefit”. The Commissioner’s ability to assess the taxpayer on the basis of a hypothetical alternative, made section 61A “a much more powerful and flexible weapon in the hands of the Commissioner than the New Zealand section”.
To view a copy of the decision please click here.
In Blakeley v CIR (High Court, Auckland CIV 2007-404-7017, 3 March 2008, Hansen J) the High Court considered the scope of the right of non-disclosure for tax advice, contained in the Tax Administration Act 1994 (“TAA”). The Commissioner had sought to obtain from a director of a firm of chartered accountants a list of clients to whom certain tax advice had been given. The firm had resisted this request, on the grounds that it was not required to disclose books or documents that are tax advice documents in terms of section 20B of the TAA. It was argued that, because Inland Revenue held a copy of the advice given to one client, disclosure of a list of clients who had received advice on the same subject matter would be tantamount to disclosing to Inland Revenue the tax advice given to particular clients.
At first instance, the District Court had found for the Commissioner. In upholding the District Court’s decision, and confirming that disclosure of the client list was required, the High Court noted that the protection afforded to tax advice provided by Chartered Accountants was a function of the statutory provisions in the TAA. It was not possible to expand the scope of that protection by drawing analogies with legal professional privilege; rather it was simply a question of whether the statutory definitions in the TAA applied. The Court held that the details of clients to whom certain tax advice had been given could not be brought within the definition of a “tax advice document”. Accordingly, the protection against disclosure of tax advice under the TAA did not apply.
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