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Disputant O v Commissioner of Inland Revenue [2015] NZTRA 20 (27 November 2015)

Last Updated: 21 December 2015

BEFORE THE TAXATION REVIEW AUTHORITY

TRA 021/11

[2015] NZTRA 20


IN THE MATTER OF Part VIIIA, Tax Administration Act 1994, the Goods and Services Tax Act 1984 and the Income Tax Act 2007

BETWEEN XXX

Disputant

AND THE COMMISSIONER OF INLAND REVENUE

Defendant

Hearing: 31 October 2012 at Auckland

Numerous memoranda, further submissions and affidavit evidence 2013 to 2015

Hearing continued: 24 August 2015 at Christchurch


Appearances: G A Muir for the Disputant until mid-2013
Disputant in person thereafter
P Courtney and A Goosen for the Defendant

Decision: 27 November 2015


RESERVED DECISION OF JUDGE AA SINCLAIR AS
TAXATION REVIEW AUTHORITY

THE ISSUES

[1] The disputant has been assessed under s 61 of the Goods and Services Tax Act 1985 (“the GST Act”) as agent for three companies referred to in this decision as AB 1 Limited (“AB 1”), AB 3 Limited (“AB 3”) and AB Ventures Limited (“ABV”) together referred to as “the Companies” which were placed into liquidation on 30 June 2010 for GST liabilities totalling $1.7 million.
[2] The issues for determination are:

THE PROCEEDINGS

[3] This claim has had a lengthy history which I briefly summarise. The matter initially came before me on 31 October 2012. The facts were not in dispute and the parties filed a 24 page Agreed Statement of Facts. Both counsel delivered submissions. Following the hearing I issued a Minute seeking evidence (relevant to the jurisdiction issue) as to the Official Assignee’s position with regard to the challenge proceedings. At a subsequent telephone conference it was agreed that this evidence would be provided by affidavit but reserving to the disputant the right to cross-examine if required and/or produce further evidence limited to addressing any matters raised in the affidavit(s).
[4] An affidavit was provided by Mr Grant Slevin an employee of the Insolvency and Trustee Service (“the Insolvency Service”). Subsequently, Dr Muir withdrew as counsel as he had personal knowledge of events and considered that he would likely be required to give evidence. The disputant then commenced acting for himself. Over the next period affidavits were filed by Dr Muir and the disputant and two reply affidavits were filed by Mr Slevin and by Mr Terry Marshall another employee of the Insolvency Service. The disputant indicated that he wished to cross-examine the Insolvency Service employees. Before a hearing date was allocated the disputant made an application to lead further evidence alleging bad faith by the Commissioner. This application was dismissed in a decision issued on 2 December 2014. The matter eventually came back before me in Christchurch on 24 August 2015.[1]

FACTUAL BACKGROUND

[5] The company, called in this decision Property Limited, was incorporated in November 1997. It was the GST Group representative member under s 55 of the GST Act for a number of companies that were part of the Property Group of Companies (“the GST Group”). The disputant was the managing director of Property Limited and remained so until that company was liquidated in July 2010.
[6] The companies in the GST Group included AB 1, AB 3 and ABV. All the shares in AB 1 and AB 3 were held by Property Limited while 70 of the 100 shares in ABV were held by Property Limited and 30 by another company in the GST Group. At all material times the disputant was the managing director of AB 1, AB 3 and ABV.
[7] By April 2008 Property Limited and a number of its subsidiaries had substantial outstanding liabilities to creditors including PAYE arrears and other liabilities owing to the Commissioner. The Commissioner served a statutory demand for $104,100.32 (dated 11 July 2008) on Property Limited and one for $267,714 (dated 15 July 2008) on another company in the GST Group.
[8] At this time Property Limited was owed significant amounts by some of its subsidiary companies including AB 1, AB 3 and ABV. The directors of Property Limited decided to sell certain assets of its subsidiaries to generate funds to pay the debts of Property Limited and other subsidiaries. By the end of July 2008 the disputant had negotiated agreements for sale and purchase pursuant to which the entity, called in this decision “XYZ”, agreed to purchase properties owned by AB 1, AB 3 and ABV and also by another subsidiary of Property Limited called in this decision “EFL”.
[9] In July 2006 Property Limited provided a guarantee to a finance company in relation to the indebtedness of a company called in this decision Holdings Limited (“Holdings”). Holdings was a property development company and was also the largest subsidiary by value in the GST Group. The finance company held a first ranking registered General Security Agreement (GSA) over both Holdings and Property Limited. In July 2008 the finance company placed Holdings into receivership.
[10] Against this background the directors of Property Limited were concerned that if the finance company became aware of the sale of the properties to XYZ it would take action to ensure that it received the net sale proceeds. In particular, the directors were concerned that the finance company would or might appoint receivers to all of Property Limited’s assets. If this happened then the finance company would have control of all the shares of the companies undertaking the sales to XYZ. It would be in a position to demand repayment of the intercompany advances owed to Property Limited and to then use those funds to reduce its own debt.
[11] The disputant and the other directors of Property Limited did not consider that such action by the finance company would be in the best interests of Property Limited or the group as a whole as funds were required to meet claims from a large number of creditors. After taking legal advice it was decided to incorporate the company called in this decision PQR Holdings Limited (“PQR”) and for that company to acquire shares in certain subsidiaries of Property Limited including those companies selling properties to XYZ and to acquire, by way of assignment, the intercompany debts owed by those subsidiaries to Property Limited.
[12] PQR was incorporated on 1 August 2008. The disputant was its sole director. Of the 100 shares issued, the disputant held 3 A class shares and a trustee company held 97 B class shares. The A class shares had full voting rights but no entitlement to receive capital distributions or dividends. The B class shares had no voting rights but had entitlement to receive all capital distributions or dividends.
[13] The trustee company held the shares in PQR as trustee for Property Limited. This shareholding structure meant that although the value of PQR remained in Property Limited, the control resided with the disputant so that if the finance company did appoint receivers to the assets of Property Limited, the companies could complete the sales to XYZ and deal with the proceeds without the finance company’s interference.
[14] On 1 August 2008 the Companies and EFL entered into the agreements for sale and purchase with XYZ. The sale by EFL was on a going concern basis. In respect of the sales by each of the other Companies the sale price was plus GST.
[15] On 4 August 2008 Property Limited transferred all 100 shares held by it in AB 1 to PQR. It also transferred 51 of the 100 shares which it held in AB 3 and in ABV to PQR. In each case, the consideration was $1.00. The respective share transfers were signed on behalf of Property Limited by the disputant and one other in their capacities as directors of Property Limited and on behalf of PQR by the disputant in his capacity as director of that company.
[16] Also on 4 August 2008 the Commissioner received separate applications from Property Limited (all dated 31 July 2008) to exclude 8 companies from the GST Group as from 1 July 2008 including AB 1, AB 3 and ABV.
[17] As well, on 4 August 2008 Property Limited and PQR entered into a Deed of Assignment assigning debts in the total amount of $14,932,498 to PQR. These debts included amounts owed by AB 1 ($1,773,097); AB 3 ($2,086,743) and ABV ($8,530,243). The consideration for the assignment was $1.00. To secure these debts, the Companies granted mortgages over the land contained in the various certificates of title that were the subject of the sale and purchase agreements. These mortgages were not registered. Each of these Companies also granted a GSA to PQR.
[18] On 6 August 2008 GST invoices were issued by the solicitors acting for the Companies. The GST output liabilities of each company arising from the sale transactions were:
[19] As at 6 August 2008, after the Companies had issued the GST invoices to XYZ, the financial position of each company (excluding any GST output liability) was as follows:

Assets

Price of land and buildings sold to XYZ

(GST inclusive) $6,159,375.00

Liabilities
Registered mortgages ($4,226,297.03)

Debt to PQR ($1,773,097.00)

Total liabilities ($5,999,394.03)

Excess of liabilities over assets

(excluding GST liability) $159,980.97

(b) Particulars of AB 3’s assets and liabilities

Assets
Price of land and buildings sold to XYZ
(GST inclusive) $5,512,500.00

Liabilities
Registered mortgages ($4,418,932.69)

Debt to PQR ($2,086,743.00)

Total liabilities ($6,505,675.60)
Excess of liabilities over assets
(excluding GST liability) ($1,605,675.69)

(c) Particulars of ABV’s assets and liabilities

Assets
Price of land and buildings sold to XYZ
(GST inclusive) $4,500,000.00
Unknown asset disposed of in May 2009
(GST inclusive) $225,000.00

Total assets $4,725,000.00

Liabilities
Registered mortgages ($3,065,632.36)

Debt to PQR ($8,530,243.00)

Total liabilities ($11,595,875.36)

Excess of liabilities over assets

(excluding GST liability) ($7,370,875.36)

[20] Each of the sale and purchase agreements settled on 8 August 2008. The disputant in his capacity as managing director of each of the Companies, Property Limited and PQR made the decision to apply the net proceeds to pay the intercompany debts which had been assigned to PQR. He subsequently used those funds to pay certain debts of Property Limited and some of its subsidiaries.
[21] Between 8 August 2008 and 14 August 2008 the total amount transferred from the Companies to the trust account (held by the Group’s solicitors) for PQR was $3,246,547.70. Of that amount, the sum of $3,243,700 was subsequently paid (or transferred) from that trust account to the bank account of Property Limited or to an accountant, called in this decision Accounting Limited. These payments were made on the instructions of the disputant and are detailed below:
[22] On 23 October 2008 Property Limited (as assignor) and PQR (as assignee) entered into a deed titled “Agreement” signed by the disputant in his capacity as director of Property Limited and as director of PQR. The recitals provided:
[23] The operative part of the Agreement stated:
[24] After the net proceeds had been paid to PQR there were no remaining funds or assets left in the Companies to pay the GST liabilities. The GST returns for each of the Companies for the period ending 31 August 2008 which were required to have been provided on or before 28 September 2008 were received by Inland Revenue on 29 October 2008. The returns were signed in each case by the disputant. No agreements that resulted in the Companies having input credits in the relevant GST period were included.
[25] In respect of the GST period ended 31 August 2008 the Companies had the following GST liabilities:

The Companies each failed to comply with statutory demands served on them by the Commissioner in respect of these GST liabilities and in June 2010 the High Court made orders putting each of the Companies into liquidation.

[26] The disputant was assessed as agent on 25 August 2009 and in November 2010 he was adjudicated bankrupt.[2] The Commissioner has filed a proof of debt in the bankruptcy for the amount of the assessments. The Official Assignee has not admitted, rejected or quantified any of the claims as there are no funds available to meet any provable debts.
[27] The present challenge proceedings were issued by the disputant in May 2011 some months after the disputant’s bankruptcy.

ISSUE 1: JURISDICTION OF THE AUTHORITY

(a) Functions of the Authority engaged?

Disputant’s contentions

[28] In summary, the disputant contends that the functions of the Taxation Review Authority are not engaged and therefore the Authority has no power to make orders under s 138P of the Tax Administration Act 1994 (the “TAA”).
[29] The disputant says that while the power to dismiss under s 21 of the Taxation Review Authorities Act 1994 relates only to challenges and not to defences, the Authority nevertheless retains the right and duty to determine the extent of its jurisdiction and powers and to dismiss proceedings which are beyond its competence. He submits that in order to make orders confirming, cancelling or varying an assessment under s 138P (and in particular to determine the amount owing (s 138P (1B)), the Authority must, by virtue of the exercise of its powers, determine what sum is owing as tax by the disputant to the Commissioner. However, as the disputant has been adjudicated bankrupt, the Authority is prevented from making such orders by virtue of the operation of s 76 of the Insolvency Act 2006 (the “ISA 2006”).
[30] The disputant further contends that the obligation to pay as agent existed only as a contingent debt at the time the disputant was adjudicated bankrupt. Those debts were subject to variation or cancellation under s 138P of the TAA. As well, the disputant submits that a further contingency arose on bankruptcy. That was the need under the ISA 2006 for the Commissioner to prove in the disputant’s bankruptcy and to have that proof quantified and then accepted by the Official Assignee before any amount could be claimed to be owed. The disputant contends that no contingent or other debt, other than one in respect of which a proof of debt has been accepted by the Official Assignee, independently survives an adjudication of bankruptcy as a collectible or quantifiable debt. The only exception is in respect of proceedings commenced prior to bankruptcy where the High Court consents to the action being continued pursuant to s 76 of the ISA 2006.
[31] The disputant submits that the current proceedings before the Authority are to recover a “debt” which, until the Commissioner’s claim is quantified and accepted by the Official Assignee, is no longer either payable or able to be proved to be owing. As a consequence there is no amount presently payable to the Commissioner under a tax law and accordingly the Authority lacks powers to make orders under s 138P.

Discussion

(i) Effect of s76 of the Insolvency Act 2006?
[32] The functions of an Authority are to sit as a judicial authority for hearing and determining ... challenges to assessments of tax.[3] The Authority shall have all the powers, duties, functions and discretions of the Commissioner in making the determination.[4] On hearing a challenge, the Authority has the powers set out in s 138P of the TAA including the power to confirm, cancel or vary an assessment or reduce the amount of the assessment.
[33] In this case the Commissioner assessed the disputant as agent of the Companies for the unpaid GST liability. That assessment is a disputable decision and the disputant elected to engage in the disputes and challenge process provided under Parts 4A and 8A of the TAA. Before the notice of claim was filed the disputant was adjudicated bankrupt. The disputant contends that this proceeding is now halted by virtue of the operation of s76 of the ISA 2006. This section provides:

S 76 Effect of adjudication on Court proceedings

(1) On adjudication, all proceedings to recover any debt provable in the bankruptcy are halted.

(2) However, on the application by any creditor or other person interested in the bankruptcy, the Court may allow proceedings that had already begun before the date of adjudication to continue on the terms and conditions that the Court thinks appropriate.

[34] The Commissioner submits that the present claim is not a proceeding to recover a debt. The disputant commenced the challenge process by filing a notice of claim after the disputant was adjudicated bankrupt and the Commissioner contends that she is entitled to defend her assessment. I agree. As Mrs Courtney, counsel for the Commissioner, so succinctly put it, the Authority’s function is to decide, taking into account the facts and the law, whether the Commissioner’s assessment is correct that is, whether the requirements for the disputant being assessed as agent of the Companies were satisfied and whether the amount of the tax liability has been correctly quantified. If the Commissioner’s assessment is upheld then in the normal course separate proceedings would be filed in the High Court to obtain judgment and recover the debt.
[35] A similar view was taken by Judge Moore in Case H85.[5] In that case His Honour was considering the application of s 32 of the Insolvency Act 1967 the predecessor of the current s 76, and stated:

Disputed penal tax in the present situation is a contingent liability (contingent that is upon the outcome of the objection proceedings) of the bankrupt objector arising by reason of his actions and obligations prior to adjudication. Because they are brought about by the objector acting for his own advantage and not by the respondent [the Commissioner] the objection proceedings are not “proceedings to recover any debt provable in bankruptcy” rather they are proceedings to secure the cancellation or reduction of what would otherwise be a debt provable in bankruptcy. Thus sec 32 of the Insolvency Act 1967 does not stay the objection proceedings

[36] For the above reasons I do not consider that s 76 of the ISA 2006 has any application in this case.

(ii) Contingent debt prior to Adjudication?

[37] The disputant contends that the obligation to pay as agent only existed as a contingent debt at the time he was adjudicated bankrupt in that the assessment was subject to variation or cancellation under s 138P of the TAA. The Commissioner says that a debt can be presently owing but payable on a future date. In this case the tax assessed is presently owing but because of the challenge proceedings it is not presently payable. The hearing before the Authority is de novo.[6] I agree with the Commissioner’s submission that if the disputant’s challenge is unsuccessful, the tax debt will be confirmed as correct and will then be presently payable. It will not bring the debt into existence.
[38] In Allen v Commissioner of Inland Revenue[7] the Court of Appeal accepted that assessments are valid until set aside by a court of competent jurisdiction and that is supported by the clear policy that underpins s 109 of the TAA. This section states:

Except in .....a challenge under Part 8A,--

(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.

[39] I further agree with the Commissioner that the TAA contemplates a tax debt being an actual debt despite a challenge to the underlying assessment being on foot. Section 138I(2) of the TAA allows a taxpayer to defer payment of tax in dispute while s 138(2B) provides that notwithstanding s 138I(2), the Commissioner may require a disputant to pay all tax in dispute that is subject to the challenge if she considers that there is a significant risk that it will not be paid if the challenge is successful. It follows logically that the tax would not be able to be collected if the assessed amount was not in fact a debt.

(iii) Position on Bankruptcy?

[40] The disputant submits that a further contingency arose on bankruptcy. This was the need under the ISA 2006 for the Commissioner to prove in the disputant’s bankruptcy and to have that proof accepted by the Official Assignee before any amount could be claimed to be owed.[8]
[41] In the normal course where there was the possibility of a dividend payment the Official Assignee would assess the proofs of debt filed and accept or reject the claims as appropriate. These are powers reserved to the Official Assignee under the ISA 2006. In the present case this has not occurred as no funds are available for distribution.
[42] The disputant submits that the Authority is purporting to exercise its powers under s 138P of the TAA where the procedure under the ISA 2006 now applies. For the reasons discussed above, I do not accept that the current proceedings are to recover a debt and accordingly I do not consider that there is any merit in the disputant’s argument.
[43] However, the Official Assignee has responsibility for all aspects of the administration of the disputant’s estate and in these circumstances the issue arises as to the disputant’s standing to bring these proceedings. As discussed in my outline of the proceedings above, I sought evidence from the Official Assignee and further submissions. This issue is now addressed below.

(b) Disputant’s standing to bring these proceedings?

[44] Section 101 of the ISA 2006 sets out the status of the bankrupt’s property following adjudication. Section 101(1) provides:

(1) On adjudication,—

(a) all property (whether in or outside New Zealand) belonging to the bankrupt or vested in the bankrupt vests in the Assignee without the Assignee having to intervene or take any other step in relation to the property, and any rights of the bankrupt in the property are extinguished; and

(b) the powers that the bankrupt could have exercised in, over, or in respect of any property (whether in or outside New Zealand) for the bankrupt’s own benefit vest in the Assignee.

[45] Property is defined in s 3 of the ISA 2006 as meaning “property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise”. It is a very broad definition and clearly encompasses choses in action.
[46] In Case H85[9] the Commissioner had imposed penal tax. The taxpayer objected and a case was stated to the Taxation Review Authority. The taxpayer was subsequently adjudicated bankrupt. His accountant continued to pursue the objection. During the course of the hearing the Authority became aware of the bankruptcy and the issue arose as to whether the taxpayer had the right to continue with the objection. Judge Moore said:

The right of a taxpayer to object to an assessment of penal tax and to participate in the hearing of that objection is possibly “property” and certainly “a power in respect of property” for the purposes of sec 42 of the Insolvency Act 1967. As such, upon adjudication, those rights are vested in the Official Assignee who is bound, as was the taxpayer, by sec 27 of the Act [Income Tax Act 1976].

Thus the Official Assignee, and he only, was entitled to exercise the objector's rights and powers to participate in the hearing of the present case ....

[47] The disputant contends that there is no property in a statutory right to argue that a party owes a lesser sum. He submits that whatever the result of such an action there will still be a debt and there is no property in a debt. This submission is surprising in view of the fact that one of the options available to the Authority is to cancel the assessment. The disputant further submits that Case H85 is “distinguishable”. I do not consider that there is any basis on which to distinguish the decision in relation to the application of s 101(1) of the ISA 2006. In any case, I respectfully agree with Judge Moore’s analysis and am satisfied that the right of the disputant to issue challenge proceedings passed to the Official Assignee on the disputant’s bankruptcy pursuant to s 101(1) of the ISA 2006.
[48] The issue that then arises is whether the Official Assignee otherwise assigned the right or consented to the issue of these proceedings. Evidence was given by two employees of the Insolvency Service and by the disputant and his former counsel.
[49] Mr Slevin told the Authority that he had been made aware of possible litigation by the disputant in relation to GST on the sale of the properties to XYZ. He subsequently received a telephone call from Dr Muir who inquired whether the Official Assignee’s consent was required for the ‘appeal’. Mr Slevin stated that he recalled saying to Dr Muir that he was not sure and would need to look into it. He told the Authority that he remembered some discussion as to whether such a right was property that had vested in the Official Assignee. He said that Dr Muir was of the view that it was not. Dr Muir also suggested that there would be no prejudice to creditors if the matter proceeded because he would be acting pro bono and if successful the estate would benefit from a reduction in the debts to be paid. It was Mr Slevin’s recollection that at the end of the conversation Dr Muir said that he did not think the disputant needed the Official Assignee’s consent and would be going ahead.
[50] Mr Slevin told the Authority that he would not have made a decision to consent himself. It was his practice when dealing with assignment requests (which includes requests for consent to litigate) to investigate the merits and provide advice to the Official Assignee. Furthermore, before doing that he would have required a written request with supporting reasons so that he could assess the merits of the ‘appeal’. None of this was done in the present case. Mr Slevin stated that he had since considered the issue and was of the view that the right to issue challenge proceedings was a right in relation to property and vested in the Official Assignee.
[51] Dr Muir gave evidence that he recalled speaking to Mr Slevin and it was his recollection that it was agreed that consent was not required. Other evidence given was of no particular relevance to this issue.
[52] It is apparent on the evidence that the Official Assignee did not assign or otherwise consent to the disputant issuing the challenge proceedings. Neither Mr Slevin nor Dr Muir kept a file note of their discussion. I would find it surprising that Mr Slevin would have agreed with Dr Muir that consent was not required without first having researched the matter. In any case I am of the view that it is quite clear that the right to issue these challenge proceedings vested in the Official Assignee.
[53] In these circumstances I find that the disputant has no standing to bring these proceedings and the claim is dismissed accordingly.

ISSUE 2: APPLICATION OF s 61 OF THE GST ACT 1985.

[54] I also heard argument on the substantive issue being the Commissioner’s assessment under s 61 of the GST Act. In the event that I am wrong in my finding that the disputant has no standing to bring these proceedings I turn now to consider this issue.
[55] Section 61 of the GST Act provides that s HD 15 of the Income Tax Act 2007 (asset stripping of companies), as far as it is applicable and with any necessary modifications, shall apply for the purposes of the GST Act as if every reference therein to income tax or to tax were a reference to goods and services tax.
[56] Section HD 15 (1) applies when:

Specific defences are provided in s HD 15(3) in relation to the liability of a director however, these defences are not relied upon by the disputant in this case.

[57] I turn now to consider the application of s 61 in this case:
(i) Was an “arrangement” entered into?
[58] “Arrangement” is defined in s YA1 as being:

Arrangement means an agreement, contract, plan or understanding, whether enforceable or unenforceable, including all steps and transactions by which it is carried into effect.

[59] The meaning of “arrangement” has been considered in the tax avoidance context. In Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue[10] the majority stated:

... An arrangement includes all steps and transactions by which it is carried out. Thus, [an arrangement] can be found in individual steps or, more often, in a combination of steps. Indeed, even if all the steps in the arrangement are unobjectionable in themselves, their combination may give rise to a[n] .... arrangement.

[60] In the present case, the Commissioner says that the disputant entered into an arrangement in relation to the Companies that included the following steps:
[61] The Commissioner contends that the above transactions (collectively referred to as the “Arrangement”) were sufficiently connected to form an arrangement entered into in respect of each of the Companies. She submits that all of the transactions happened within a relatively short period of time and would not have been carried out in isolation. They were steps in an overall plan.

Disputant’s Contentions

[62] The disputant contends that s 61 has no application in the present case as no relevant arrangement exists because:

I address these arguments below.

(1) Payment of Pre-existing Debts?

[63] The disputant submits that the Companies had pre-existing debts which they chose to pay rather than to wait until the expiry of the GST period on 31 August 2008 to ascertain whether they also owed money to the Commissioner and then decide which creditor to pay.
[64] The disputant says that if a debt is paid in satisfaction of that pre-existing liability, the existence of any subsequent arrangement for payment of the pre-existing debt cannot have the effect of rendering the Companies unable to pay their debts where the transfer of assets satisfies the pre-existing debt. This is because the Companies neither incurred the debts nor decided to pay them under the Arrangement as s HD 15 requires.
[65] The disputant further submits that it is irrelevant to the operation of s HD 15 that:
[66] The Commissioner contends that while the Companies had pre-existing debts which they owed to Property Limited, they did not have pre-existing debts owing to PQR. Those debts arose only after the debts had been assigned to PQR as part of the Arrangement. I agree with the Commissioner.
[67] Prior to the Arrangement the Companies had current account debts owing to Property Limited. Under the Arrangement those debts were assigned to PQR. At that point they became debts owing to PQR. The Companies made payment to PQR following settlement of the property sales to XYZ. In these circumstances I am satisfied that the amounts paid to PQR were not paid in satisfaction of liabilities already owing to PQR by the Companies prior to the Arrangement.
[68] The disputant also submits that the alleged Arrangement did not have the effect of preventing the Commissioner from obtaining clear title had any amounts in fact been paid to her. This submission has little relevance other than to note that it was not in dispute that the unregistered mortgages and the registered (and later discharged) GSAs given by the Companies to PQR were ineffective and did not therefore provide valid and enforceable security for the intercompany advances assigned by Property Limited to PQR.

(2) Unilateral decision?

[69] The disputant further contends that there cannot be an arrangement consisting of the mind of only one person. He relies on the decision of the Supreme Court in Glenharrow Holdings Limited v Commissioner of Inland Revenue[12] where the Court held:

[35] There is a two stage process before the Commissioner can carry out a reconstruction under s 76. First, the Commissioner must have been justified in coming to the view that there was an “arrangement”[13] entered into between at least two persons ..... secondly, the Commissioner must have been properly satisfied that the arrangement was entered into between the parties to it to defeat the intent and application of the Act or any provision of the Act.
The Commissioner submits that the statutory wording of s 76 of the GST Act which was relevant in that case required that “an arrangement has been entered into between persons to defeat the intent and application of this Act”. Subsequently this wording was removed from s 76. The Commissioner contends that s HD(1) does not make any reference to “between persons” and Glenharrow is able to be distinguished accordingly.

[70] The extract quoted above contains a footnote (included below) referring to the definition of “arrangement” in 76(4). This definition largely mirrors that set out in s YA1 of the Income Tax Act 2007 above. The definition describes what an arrangement is. It does not make any reference to numbers of persons required.
[71] The disputant contends that it is the Courts which have interpreted an arrangement as involving two or more persons. In Glenharrow it was not a matter of interpretation as the former wording of s 76(1) specifically referred to “between persons”. The disputant also relies on what he submits is a similar statement of principle in Ben Nevis at [159]:[14]

We have concluded that all appellants entered into a tax avoidance arrangement simply by becoming members of the syndicate and parties to the arrangements with Trinity 3.

In my view this statement simply records a factual finding reached on the evidence in that case and does not establish any particular principle.

[72] The Commissioner submits that the law is clear and that there can be an arrangement where there is only one party involved in the decision making. Earlier authorities held that an arrangement required two or more persons and also required a consensus or meeting of minds.[15] Subsequently in Peterson v Commissioner of Inland Revenue[16] the Privy Council had to consider whether an arrangement requires a consensus or meeting of minds between the parties involved that the other party would act in a particular way. The Privy Council stated at [34]:

Their lordships do not consider that the “arrangement” requires a consensus or meeting of minds; the taxpayer need not be a party to “the arrangement” and in their view he need not be privy to its details either.

[73] The issue of whether there can be an arrangement where there is one person (one controlling mind) involved in the decision making was considered by the Court of Appeal in Russell v Commissioner of Inland Revenue.[17] In that case the taxpayer controlled all of the entities and was the architect of the overall plan.[18] He argued that the essential ingredients of an arrangement consisted of a number of factors including that there must be more than one person involved and that there must be a meeting of minds of the parties to the arrangement. The Court of Appeal upholding the decision of the High Court that there was an arrangement, stated:[19]

We agree with the Judge that if consensus is needed, the appellant provided any necessary consensus for the purposes of the overall plan. The appellant orchestrated the whole arrangement. However we note that the statutory definition of “arrangement” does not require such a consensus: a plan will suffice. Here the overall plan was that created, designed and executed by the appellant. We note also that an arrangement includes “all steps and transactions by which it is carried into effect”. Again, no consensus is needed.

[74] In the present case the disputant is director and consequently the controlling mind of all the relevant companies involved in the various transactions making up the Arrangement. In my view the transactions were closely connected; they all occurred over a relatively short period and formed part of an overall plan. The disputant played an active role in the implementation of the various transactions. In these circumstances I am satisfied for the purposes of s 61 that an arrangement was entered into involving each of the Companies and consisting of the transactions collectively referred to as the Arrangement.

(ii) Was it an effect of the Arrangement that each company cannot meet a tax liability?

[75] The term “effect” has been considered in the context of anti-avoidance provisions. In Auckland Harbour Board v Commissioner of Inland Revenue[20] Richardson P, delivering the majority judgment, stated that the word “effect” had its standard meaning of “the end accomplished or achieved”. This was in reliance on the following quotation from Lord Denning in Newton v Federal Commissioner of Taxation:[21]

In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect – which it does – irrespective of the motives of the person who made it. Mr Justice Williams put it well when he said:

The purpose of a contract, agreement, or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. Those terms may be oral or written or may have to be inferred from the circumstances but, when they have been ascertained, their purpose must be what they effect.


[76] I agree with the Commissioner that the word “effect” should be interpreted similarly in s 61 of the GST Act. That section refers to “an effect of that arrangement”. The use of the indefinite article “an” implies that there may be more than one effect and that the section refers to any one effect of the arrangement. Determining an “effect” of an arrangement is an objective test having regard to the outcome(s) of the arrangement.
[77] Under s 61 of the GST Act an effect of the arrangement must be that the company cannot meet a tax liability (either an existing liability or one that arises later). The ordinary meaning of “cannot” is an inability to do something.[22] The word “meet” means relevantly to “fulfil or satisfy”.[23] Accordingly, under s 61 of the GST Act an outcome of the Arrangement must be that the company is unable to satisfy a tax liability.[24]
[78] A business tax policy statement[25] outlined the reasons for the enactment of the amended s 276 of the Income Tax Act 1976 a predecessor to s HD15 as follows:

The new recovery provision

...Section 276 will allow the Commissioner to recover tax from directors and shareholders of companies that have entered into arrangements or transactions to deplete the assets of the company so that it has been unable to meet its tax liability.

...

The new recovery provision will be triggered by arrangements or transactions that have been entered into to deplete the company of its assets so that it has insufficient funds to fully meet its tax liabilities.

...

Recovery of the outstanding tax that results from these asset stripping arrangements will be sought from those taxpayers that were directors and shareholders of the company at the time the arrangement was entered into.

[79] In this case, the sale of the properties converted the Companies’ assets from one form to another. The net sale proceeds were then stripped from the Companies under the Arrangement. After the transactions that made up the Arrangement had been completed, the Companies were unable to satisfy their GST liabilities. I agree with the Commissioner’s submission that this was the effect of the Arrangement.

(iii) Conclusions able to be reasonably drawn?

[80] As noted above, the third requirement is that it must be reasonable to conclude that –

I address these issues separately as follows:

(a) Is it reasonable to conclude that a purpose of the arrangement is that a company cannot meet a tax liability?

[81] Notably s HD 15(1)(c)(1) uses the indefinite article “a purpose of the arrangement.” Accordingly, if any purpose of the arrangement was to have the effect of depleting the assets of the company, that purpose is sufficient. I was informed by counsel that the principles relevant to determining the purpose of an arrangement have not been considered by any Court in respect of s 61 of the GST Act.
[82] The Commissioner submits that the approach applied by the Supreme Court in Glenharrow[26] in the context of the general anti-avoidance provision of the GST Act is appropriate. I agree. As previously noted, Glenharrow considered s 76 of the GST Act as it read prior to the amendment in October 2000. At [35] the Court stated that it was required to consider objectively what was the purpose of the arrangement:

Whether or not a particular arrangement constitutes tax avoidance should not depend on difficult judgments about what the taxpayer had in mind. If it did, a scheme which was void if devised and implemented by one taxpayer could be immune from s 76 if developed by another in different circumstances. That cannot be so, for such an approach would produce different results for identical arrangements depending on whether the parties were or were not driven wholly or in part by a desire to produce a particular tax consequence. It would also require the courts to assess the veracity of the parties, who are always likely to say that tax consequences were not in the forefront of their minds. The courts are on much firmer ground disregarding subjective purpose, as they have always done in applying general ant-avoidance provisions in income tax statutes, as will be seen.


[83] The Court then discussed how to determine the purpose of an arrangement:

[37] In Newton v Commissioner of Taxation of the Commonwealth of Australia,[27]in giving the advice of the Judicial Committee, Lord Denning said that in the phrase “purpose or effect” in the Australian general anti-avoidance provision of that time the word “purpose” meant not motive but the effect which it was sought to achieve – the end in view. The word “effect” meant the end accomplished or achieved. It was necessary, his Lordship said, to look at the arrangement itself and see its effect irrespective of the motives of the person who made it.

[38] What Lord Denning was emphasising was that the general anti-avoidance provision was concerned not with the purpose of the parties but with the purpose of the arrangement. That is a crucial distinction. Once you put the purpose of the parties to one side and seek by objective examination to find the purpose of the arrangement, you must necessarily do that by considering the effect which the arrangement has had – what it has achieved – and then, by working backwards as it were from the effect, you are able to determine what objectively the arrangement must be taken to have had as its purpose. That approach is inevitable once any subjective purpose or motive is rule out of contention, as the authorities say it must be. The position is summed up in a passage from the advice of the Privy Council in Ashton v Commissioner of Inland Revenue,[28] where Viscount Dilhorne said:

If an arrangement has a particular purpose, then that will be its intended effect. If it has a particular effect, then that will be its purpose and oral evidence to show that it has a different purpose or different effect to that which is shown by the arrangement itself is irrelevant to the determination of the question whether the arrangement has or purports to have the purpose or effect of in any way altering the incidence of income tax or relieving any person from his liability pay income tax.

This passage may at first sight appear somewhat circular but must be read as a whole. Viscount Dilhorne was clearly ruling out evidence of subjective purpose or motive and requiring the objective purpose to be determined from the effect of the arrangement.[29] He went on immediately to approve what Lord Denning had also said in Newton:[30]

In order to bring the arrangement within the section you must be able to predicate – by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax.

It is because the objective purpose is deducted from the effect that the phrase “purpose or effect” in general anti-avoidance provisions has been said to be a composite term.[31]

[84] The disputant contends that the purpose of that part of the Arrangement involving the assignment to PQR of the Companies’ debts owed to Property Limited was so that the Companies could complete the sales to XYZ and be free to deal with the proceeds in the event that the finance company appointed receivers to the assets of Property Limited. Irrespective of what may have been the purpose or motive of the parties, it is the purpose of the Arrangement (viewed objectively) which is the focus.[32]
[85] In this case the Companies were insolvent and could not pay both the GST and PQR.[33] The Arrangement involved payment of the net sale proceeds to PQR which left the Companies with no assets and consequently no ability to pay their GST liabilities.[34] As the Supreme Court held in Glenharrow, if an arrangement has a particular effect, then achieving that is likely to be at least part of its purpose. In the present case, I am satisfied that viewed objectively, it is reasonable to conclude that a purpose of the Arrangement is to have the effect that each Company cannot meet their respective GST liability.
[86] The disputant also contends that there is no general obligation when making a supply to account for the GST portion of that supply whether by way of payment direct to the Commissioner at the point of supply or to place the funds in trust.[35] It was not the Commissioner’s contention that the amounts received as GST on supplies must be held in trust for her benefit nor that in the normal course of events, GST received on supplies represents an identifiable and severable portion of funds received as payment for supplies. However, the Commissioner submits that when suppliers are operating while insolvent further considerations come into play, in particular:

The Commissioner contends that these considerations mean that it is contrary to the scheme of the GST Act and the policy underlying s 61 for that section to be interpreted as meaning that registered persons are free to use funds required to satisfy GST liabilities for their own purposes when their financial position does not clearly allow those liabilities to be satisfied from other sources of funds. I do not see such analysis as being necessary or helpful. In my view the wording of s HD1 is clear and whether an effect of an arrangement is that the company cannot meet a tax liability (either an existing liability or one that arises later) will, involve a factual enquiry in each case.
(b) Is it reasonable to conclude that if the disputant made reasonable enquiries he could have anticipated at the time that the GST liability would or would likely, be required to be met?

[87] In the Agreed Statement of Facts the disputant admitted that he:

...anticipated at the time of the agreement for sale and purchase of real property involving AB1, AB3 and ABV were entered into that 12.5% GST was required to be added to the agreed purchase price and that any input credits available to the company would be substantially less than the outputs required to be returned.[36]

The test is an objective one. I am of the view that it is reasonable to conclude on the basis of the above admission that if the disputant as director of the Companies at the time of the Arrangement had made reasonable enquiries, he could have anticipated that the GST liabilities of $1.7 million arising at the time of supply of the properties to XYZ would, or would likely, be required to be meet.
Conclusion

[88] I am satisfied that the requirements of s 61 of the GST Act have been met and that the Commissioner was correct in treating the disputant as agent of the Companies and in assessing him as jointly and severally liable for the Companies’ respective GST liabilities totalling $1.7million.

DECISION

[89] For the reasons set out above the following orders are made:

Judge AA Sinclair
Taxation Review Authority


[1] The Commissioner had argued in the interim that there were no factual disputes necessitating a further hearing. Taking into account the submissions made by the disputant and specific reservation of rights I considered that the disputant should be able to cross- examine these employees.

[2] As at the date of this decision the disputant has yet to be discharged from bankruptcy.

[3] Section 13A Taxation Review Authorities Act 1994.

[4] Section 16(2) Taxation Review Authorities Act 1994.
[5] Case H85 (1985) 8 NZTC 592 at 596.
[6] Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153.

[7] Allen v Commissioner of Inland Revenue [2004] NZCA 184; (2004) 21 NZTC 18,718 (CA) at [58].
[8] The exception being those proceedings commenced before bankruptcy where consent is given by the High Court to continue pursuant to s 76 of the ISA 2006.

[9] Case H85 (1985) 8 NZTC 592 at 596.
[10] Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2009] 2 NZLR 289, 331 at [105].
[11] It is not in dispute that the unregistered mortgages and GSAs and payments made by the Companies to PQR were voidable transactions.
[12] Glenharrow Holdings Limited v Commissioner of Inland Revenue [2008] NZSC 116 (2009) 24 NZTC 23,236 (SC) at [35].
[13] Section 76(4).
[14] Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2009] 2 NZLR 289.

[15] Newton v Commissioner of Taxation of the Commonwealth of Australia [1958] AC 450 (HL); Commissioner of Inland Revenue v BNZ Investments Limited [2001] NZCA 184; [2002] 1 NZLR 450 (CA) at [43] and [50].
[16] Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433.

[17] Russell v Commissioner of Inland Revenue [2012] NZCA 128, (2012) 25 NZTC 20,120.

[18] Ibid at [101].

[19] Ibid. at [54].
[20] Auckland Harbour Board v Commissioner of Inland Revenue [1999] NZCA 225; (1999) 19 NZTC 15,433 at 15,451.

[21] Newton v Federal Commissioner of Taxation [1958] AC 450 (PC).

[22] (11 Ed, Oxford University press, New York 2004)

[23] Concise Oxford English Dictionary (11th Ed Oxford University Press New York 2004).
[24] The predecessor of s HD15 (s HK11 of the Income Tax Act 2004) referred to the company being “unable to satisfy” the liability for tax. Further no intentional changes to the provision are listed in Schedule 51 of the Income Tax Act 2007. In these circumstances, it would seem that the rewritten provision has the same meaning as the previous provision.
[25] Minister of Finance Ruth Richardson Business Tax Policy Statement (Government discussion document, policy advice division of Inland Revenue, 30 July 1991).

[26] Glenharrow Holdings Limited v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR 359.

[27] Newton v Commissioner of Taxation of the Commonwealth of Australia [1958] AC 450 at p 465.

[28] Privy Council in Ashton v Commissioner of Inland Revenue [1975] 2 NZLR 717 at p 722 (PC).
[29] See also Commissioner of Taxation of the Commonwealth of Australia v Hart [2004] HCA 26; (2004) 217 CLR 216 at para [65] and Calder v Commissioner of Taxation {2005) 226 ALR 643 at para [96] (FCA).

[30] Ashton, at p 722, citing Newton, at p 466.

[31] Tayles v Commissioner of Inland Revenue [1982] 2 NZLR 726 at p 734 per McMullin J (CA).

[32] Newton v Commissioner of Taxation of the Commonwealth of Australia (supra).
[33] The Commissioner accepts that having completed the sales of the properties to XYZ, the Companies did not have sufficient funds to pay both their GST liabilities and other debts. In these circumstances, she says that the Companies were insolvent and should have been liquidated. If this had occurred then the Commissioner would have been entitled to prove in the liquidation and receive a dividend.
[34] The liability to pay GST arises on the supply. Rob Mitchell Builder Ltd (in liquidation) v National Bank of New Zealand Ltd [2003] NZCA 276; (2004) 21 NZTC 18,397 (CA). In this case the Companies became liable for GST on their respective supplies of the properties on 6 August 2008 being the time of the supply. Each company was registered to make monthly GST returns. In respect of the GST period ending 31 August 2008 the Companies were required to calculate the amount of tax payable and furnish a return on or before 28 September 2008. They were also required to pay the tax payable in that period on or before 28 September 2008. In the event each company’s GST return for the period ending 31 August 2008 was not received by Inland Revenue until 29 October 2008 and none of the Companies paid the GST they self-assessed as being payable in that period. Instead between 8 August 2008 and 14 August 2008 the Companies paid the net sale proceeds to PQR.
[35] The disputant at the hearing contended that this was a new issue and the Commissioner was precluded by s 138G of the TAA from raising it. However, the issue was clearly raised in the disputant’s statement of position and the Commissioner is entitled to reply to the same. Commissioner of Inland Revenue v Delphi Fishing Company Limited (2004) 21 NZTC 18,525 at [57].

[36] ASF at [39]

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