Commissioner of Inland Revenue (New Zealand) v Challenge
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 October 1986 |
| Date | 20 October 1986 |
| Court | Privy Council |
Privy Council.
Mr. P. Neazor Q.C. (Solicitor-General) and Mr. P.J.H. Jenkin (both of the New Zealand Bar) (instructed by Messrs. Allen & Overy) for the Commissioners of Inland Revenue.
Mr. R.L. Congreve and Mr. R.A. Green (both of the New Zealand Bar) (instructed by Messrs. Freshfields) for the taxpayer.
Before: Lord Keith of Kinkel, Lord Brightman, Lord Templeman, Lord Oliver of Aylmerton and Lord Goff of Chieveley.
The following cases were referred to in the judgment:
Black Nominees Ltd. v. Nicol (H.M.I.T.) TAX(1975) 50 T.C. 229
Chinn v. Collins (H.M.I.T.) UNK[1981] 1 All E.R. 189
Eilbeck (H.M.I.T.) v. Rawlings ELR[1982] A.C. 300
I.R. Commrs. v. Burmah Oil Co. Ltd. TAX[1982] BTC 56
I.R. Commrs. v. Duke of Westminster ELR[1936] A.C. 1
W.T. Ramsay Ltd. v. I.R. Commrs. ELRUNK[1982] A.C. 300 (H.L.); [1979] 3 All E.R. 213 (C.A.)
Privy Council - New Zealand income tax - Group of companies - Agreement to sell issued share capital of subsidiary company to another group of companies - Taxpayer companies purchasing tax benefit of loss sustained by another company - Sole purpose of sale to gain tax benefit - Whether loss of one group member deductible from assessable income of another - section 99 section 191Income Tax Act (New Zealand) 1976, sec. 99, 191.
This was an appeal by the Commissioners of Inland Revenue for New Zealand against a decision of a majority of the Court of Appeal that the taxpayer company was entitled to deduct a tax loss incurred by another member of the same group of companies from its assessable income.
C was the parent company of a number of subsidiary companies including the taxpayer subsidiaries which had made assessable profits exceeding $5.8 m. C and its subsidiaries formed a specified group of companies for the purposes of section 191sec. 191 of the Income Tax Act 1976 which allowed losses to be transferred in certain circumstances between members of a group of companies. P, which was a member of a different group made a deductible loss of $5.8 m. before 28 February 1978. By an agreement on that date, P's then parent company sold to C the whole of the issued share capital of P at a price of the higher of $10,000 or a sum equal to 22% of the amount of the tax loss of $5.8 m. incurred by P which proved to be deductible from the assessable income of the C group. The purpose of the agreement was to reduce the liability to income tax of the C group by $2.85 m.
The Revenue refused to allow C's claim to deduct the loss from its own assessable income on the ground that the agreement on 28 February 1978 was an arrangement absolutely void against the Revenue for income tax purposes because its purpose and effect was tax avoidance under section 99 subsec-or-para (2)sec. 99(2) of the Income Tax Act 1976.
The question arose whether, as the Revenue contended, section 191sec. 191 took effect as if the agreement to sell did not exist, or whether as C contended, section 191sec. 191took effect as if section 99sec. 99 did not exist.
In the High Court of New Zealand, Barker J. found in favour of C. He was upheld by a majority of the Court of Appeal (Cooke and Richardson JJ., Woodhouse P. dissenting). The Revenue appealed to the Privy Council.
C contended that section 191sec. 191 provided an exemption for a group of companies which fulfilled the conditions laid down. Therefore, section 99sec. 99 was not applicable where those conditions were satisfied. Moreover, section 191sec. 191 contained its own particular tax avoidance provision which by necessary implication excluded the general anti-avoidance provisions of section 99sec. 99.
Further, if C's chosen method of taxation was not rendered effective by the court any commercial transaction or family arrangement would be vulnerable to action by the Revenue under section 99sec. 99.
Held, allowing the Revenue's appeal (Lord Oliver of Aylmerton dissenting):
1. section 191Section 191 was intended to give effect to the reality of group profits and losses. When one member of a group made a profit of $5.8 m. and another made a loss of $5.8 m., the reality was that the group made neither a profit nor a loss and members of the group should not be liable to tax. section 191Section 191 was not in those circumstances an instrument of tax avoidance. However, in the present circumstances, the reality was that C never made any loss. The loss was made by P and fell on the parent company before C contracted to buy. section 191Section 191 was there an instrument of tax avoidance which fell foul of section 99sec. 99.
2. The provisions of section 99sec. 99 were of general application and in the absence of an express distinction by Parliament excluding section 191sec. 191 from the ambit of section 99sec. 99, it had to be applied in the present circumstances. This conclusion was supported by the legislative history of section 99 section 191sec. 99 and 191.
3. The material distinction in this case was between tax mitigation and tax avoidance. section 99Section 99 did not apply to tax mitigation where a taxpayer reduced his income or incurred expenditure in circumstances which reduced his assessable income or entitled him to a reduction in his tax liability. It did apply to tax avoidance where the taxpayer did not reduce his income or suffer a loss or incur expenditure but nevertheless obtained a tax reduction as if he had.
4. Apart from the risk of losing $10,000, C never risked, lost or spent anything but claimed to deduct a loss of $5.8 m. C had practiced tax avoidance to which section 99sec. 99 applied. The tax advantage stemmed from the arrangement with the parent company to purchase and not from any loss sustained by C.
5. The agreement was therefore absolutely void against the Revenue under section 99sec. 99 to the extent that its effect would enable the tax loss of P to be deducted from the assessable income of the C group.
6. (per Lord Oliver of Aylmerton dissenting) The only possible reconciliation of section 99 section 191sec. 99 and 191 was to treat the latter as providing the code for group taxation and one which contained its own exhaustive anti-avoidance provisions. Consequently, section 99sec. 99 fell to be read as subject to a limitation that it did not avoid a transaction authorised in terms by section 191sec. 191.
Lord Templeman: By an agreement dated 28 February 1978 Merbank Corporation Limited ("Merbank") sold to the respondent, Challenge Corporation Limited ("Challenge"), the whole of the issued share capital of Perth Property Developments Limited ("Perth") at the price of $10,000 or at the price equal to 221/2% of the amount of the tax loss of $5.8 m. incurred by Perth which proved to be deductible from the assessable income of the Challenge group of companies, whichever price should prove to be higher.
By section 99sec. 99 of the Income Tax Act1976 of New Zealand, any "contract" shall be "absolutely void as against" the appellant Commissioner of Inland Revenue "if and to the extent that, directly or indirectly, its purpose or effect" is to reduce "any liability to income tax".
The purpose of the agreement dated 28 February 1978 was to reduce the liability to income tax of the Challenge group of companies by $2.8m. The agreement is therefore absolutely void against the Commissioner to the extent that its effect would enable the tax loss of Perth to be deducted from the assessable income of the Challenge group.
Challenge asserts that, notwithstanding section 99sec. 99, Challenge is entitled to treat the agreement as valid against the Commissioner, because section 191sec. 191 of the Act allows losses to be transferred in certain circumstances between members of a group of companies.
The question is whether, as the Commissioner contends, section 191sec. 191 takes effect as if the agreement did not exist, or whether, as Challenge contends, section 191sec. 191takes effect as if section 99sec. 99 did not exist. In the High Court of New Zealand, Barker J. found in favour of Challenge. He was upheld by a majority (Cooke andRichardson JJ.) of the Court of Appeal (Woodhouse P. dissenting). The Commissioner appeals to the Board.
section 99Section 99 is headed "Agreements purporting to alter incidence of tax to be void" and, so far as material, provided in the relevant income tax year ended 31 March 1978 as follows:
(2) For the purposes of this section:
(3) "Arrangement" means any contract, agreement, plan, or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect:
(4) "Liability" includes a potential or prospective liability in respect of future income:
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(5) "Tax avoidance" includes:
(a) Directly or indirectly altering the incidence of any income tax:
(b) Directly or indirectly relieving any person from liability to pay income tax:
(c) Directly or indirectly avoiding, reducing, or postponing any liability to income tax.
(6) Every arrangement made or entered into, whether before or after the commencement of this Act, shall be absolutely void as against the Commissioner for income tax purposes if and to the extent that, directly or indirectly,:
(a) Its purpose or effect is tax avoidance; or
(b) Where it has two or more purposes or effects, one of its purposes or effects (not being a merely incidental purpose or effect) is tax avoidance, whether or not any other or others of its purposes or effects relate to, or are referable to, ordinary business or family dealings,
(7) whether or not any person affected by that arrangement is a party thereto.
(8) where an arrangement is void in accordance with sub-section (2) of this section, the assessable income of and the non-assessable income of any person affected by that arrangement shall be adjusted in such manner as the Commissioner considers appropriate so as to counteract any tax advantage obtained by that person from...
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