May 2009

Contents:

The Australian Federal Budget was released on 12 May by Treasurer Wayne Swan and some of the economic forecasts (a budget deficit of $57.6 billion for the next financial year and unemployment to reach 8.5%) do not bode well for Bill English's first budget, to be released this Thursday.  The Australian Budget also contains a number of proposed tax changes which will be of interest to those on this side of the Tasman.  The announcements signal Australia's commitment, even in difficult economic times, to ensuring that tax policy does not unduly inhibit the global competitiveness of Australian based multinationals, and Australia's managed funds industry.

The Australian announcements that are of particular interest include:

1. an in principle agreement to establish a trans-Tasman retirement savings portability scheme with New Zealand, which would allow transfers from certain Australian superannuation schemes to KiwiSaver (and vice versa);
2. a proposal to repeal Australia's FIF regime, and replace it with a narrow anti-avoidance rule targeted at investments in offshore funds which allow low risk interest-like returns to be accumulated offshore in a low tax jurisdiction;
3. proposals to modernise the Australian CFC rules, including to amend the definitions of active and passive income by, among other things, removing base company income from being passive income;
4. allowing managed investment trusts to elect to be taxed only under the CGT regime in respect of disposals of certain types of property (thus essentially deeming such property to be held on capital account for income tax purposes); and
5. replacing existing R&D tax concessions with a new R&D tax credit not dissimilar to that which was repealed by the New Zealand Government after only one year.

In a speech given on 15 May, Revenue Minister Peter Dunne announced that, while the Taxation (International Taxation, Life Insurance and Remedial Matters) Bill is still expected to be reported back from Select Committee by 30 June, it is not expected to be passed before August.  This has implications for the application date of the amendments contained in the Bill that are expressed to come into force on, or a specified time after, the date of enactment.

In a postscript to the Trinity tax avoidance case (reported as Ben Nevis Forestry Ventures Limited v CIR; Accent Management Limited v CIR (2009) 24 NZTC 23,188) the Commissioner applied for a recall of certain paragraphs of the Supreme Court's judgment. In paragraphs [152] to [155] of the December judgment, the Supreme Court expressed reliance on CIR v V H Farnsworth Ltd [1984] 1 NZLR 428 (CA) as "... the leading case on what can be argued at a hearing...", without referring to the more recent case of CIR v Zentrum Holdings Ltd [2007] 1 NZLR 145 (CA).  In Zentrum the Court of Appeal held that Farnsworth does not apply to litigation which is preceded by the statutory disputes process in Part IVA of the Tax Administration Act 1994 (as in Ben Nevis).  The Ben Nevis judgment therefore gave rise to uncertainty as to whether the Supreme Court regarded Zentrum as correct, given the Court's reliance on Farnsworth, which the Court of Appeal in Zentrum had effectively overruled. 

The Supreme Court dismissed the Commissioner's application to have the paragraphs recalled but stated that the relevant paragraphs "should not be regarded as representing this Court's view of the correctness or otherwise of either the Farnsworth or the Zentrum cases in light of Part IVA".  In the absence of a view from the Supreme Court one way or the other, the Court of Appeal's decision in Zentrum should, for now, continue to be regarded as correct.

In Begg & Ors v CIR [2009] NZCA 160 the Court of Appeal considered the timing of gifts for gift duty purposes under a gifting programme devised by the Public Trust.  Under the programme documentation, donors gifted amounts to their relatives on a periodic basis, although the gifts remain unpaid as interest free debt, to be paid by the donor from the proceeds of the sale of their homes.  Payment would occur upon the earlier of the death of the donor or the sale by the donor of their home without buying a replacement within three months.  Until payment, the donor would hold their home on trust for themselves and the donees to the extent of their respective interests from time to time (including amounts previously gifted).  The purpose of the gifting programme was to reduce the value of the donor's assets, which could be advantageous in the event of asset testing for schemes such as subsidised elderly residential care.  Significantly from the Commissioner's perspective, the amounts purported to be gifted in each year were equal to or less than the $27,000 threshold for imposing gift duty. 

The Commissioner contended that a gift was made only when the money was actually paid, rather than in each year, with the result that the gift when ultimately made would breach the $27,000 gift duty threshold.  Interestingly, the Commissioner conceded that the arrangement resulted in the creation of a trust in respect of each donor's home to the extent of the amount of the gift; ie, a donor was considered to hold his or her home on trust for the donee to the extent of a fixed dollar amount.  The question was whether this creation of trust amounted to a "disposition of property".  "Disposition of property" was defined by way of a "means ... and includes ..." style of definition, ie, there was a general definition, followed by specific inclusions.  Among the specific inclusions was "the creation of a trust". 

The Commissioner's first argument in support of his contention was that the creation of a trust in this case was not a "disposition of property" as defined, as it did not meet the general part of the definition (which required there to be a conveyance, transfer, assignment, settlement, delivery, payment or other alienation of property, whether at law or in equity).  His second argument was that the donees obtained no legal or equitable interest in the donor's home.  The Court of Appeal rejected both of these arguments and reversed the decision of Dobson J in the High Court. 

In respect of the first argument the Court disagreed with the approach of the High Court to the interpretation of the definition and held that, where a specific paragraph in the definition is satisfied, it is not necessary to also satisfy the general part of the definition.  The legislative history in this case supported that conclusion.  However, the Court's reasoning potentially applies equally to other "means ... and includes ..." style definitions.

In rejecting the Commissioner's second argument, the Court followed the long-standing decision in Perry v Commissioner of Stamps (1913) 32 NZLR 1194, which involved similar facts, and held that the creation of the trust did give the donees an interest in the property.  The Court of Appeal made some interesting comments of general application in this context, concerning the doctrine of precedent:

Even if we had some doubt as to the correctness of Perry, we would be loath now to overrule it.  It has stood for almost a century.  It has been cited in cases since then, without criticism.  Parliament has enacted three new substantive statutes and numerous amending statutes since it was decided, and has at no stage sought to reverse it.  Finally, the Public Trust is probably not alone in having ordered its or its client's affairs on the basis of Perry being the law.  The Commissioner has in the past probably collected revenue on the basis of its authority.

This approach is to be welcomed, and should serve as a starting point in respect of tax legislation more generally.  Where legislation is prescriptive and detailed, and is the subject of frequent amendment, it is reasonable to proceed on the basis that innovation should be left to Parliament, not to the Courts.

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