Consistency argument survives strike out

Michael Hill Finance (NZ) Limited v CIR [2015] NZHC 3144

A decision by the High Court which refused the Commissioner’s application to strike out part of MHFL’s claim has the tax community buzzing. That is because the Court accepted that it was at least arguable that the Commissioner of Inland Revenue has a duty to treat like taxpayers consistently and that a failure to do so could trump any argument that the assessment of one of those taxpayers, on a different basis than others, is correct. Not surprisingly the Commissioner argued that as long as the assessment in contest was correct, the fact that it might represent a different approach from that taken by the Commissioner with other like taxpayers was irrelevant.

The case concerns a transaction put in place by MHFL which took account of an asymmetrical tax treatment of flows on either side of the Tasman. IP and franchising operations were transferred from NZ to an Australian limited partnership.  MHFL alleged that the Commissioner was not simply wrong in law in saying that this was tax avoidance, but that she had acted inconsistently between MHFL and other taxpayers who had used the same limited partnership structure and not been treated as avoiding tax. It was alleged that in some cases the IRD had gone as far as to issue rulings on the same type of structure, clearing it of any tax avoidance concern.

The Commissioner applied to have the inconsistency aspect of the MFHL claim struck out. It is not surprising that she did so because that aspect of the claim could involve difficult issues for the Commissioner in discovery, under which the way she had treated other taxpayers would be directly in issue. She faced a problem balancing her role in litigating against MHFL with expectations she would keep the affairs of other taxpayers confidential.

The Court concluded that it is at least arguable that consistency can be a separate basis for action against the Commissioner. It position was based on two propositions:
  1. The Supreme Court had held in Tannadyce that administrative law issues should, where possible, be pursued in tax challenge proceedings rather than by way of judicial review; and
  2. The decision of the High Court in Westpac, dealing with the banking conduit cases, left open the prospect that in some cases the Commissioner could be subject to an obligation to act consistently regardless of anything else.
The tension the decision creates is obvious. Inland Revenue has always taken the view that, despite it having ruled one way on one transaction, it may assess another differently if at that time it considers the different assessment to be correct. This is based on the view that rulings are locked in for a certain time but only between the IRD and the taxpayer whose affairs have been ruled on and the Commissioner is free to review and amend her approach outside such a ruling.

On the taxpayer’s side, the existence of differing tax outcomes for the same type of transaction makes for uncertainty and undermines the belief of taxpayers that they are being dealt with fairly, impartially and according to law, one of the fundamental administrative obligations on the Commissioner.  The issue will now have to be dealt with at trial unless the Commissioner decides that the damage occasioned by the need to discover material relating to other taxpayers warrants a retreat (not a likely outcome I suggest).

In the meantime, many taxpayers are seizing on this decision as if it has ruled that the IRD must act consistently. Aggrieved taxpayers can often find stories of “the one that got away” to suggest that they are being unfairly targeted by Revenue. While there are no doubt instances of this, they would do well to recall that the Court in this case had a very specific focus on the high threshold for striking out a claim. In essence the Commissioner had to be able to show that the consistency point was not in any way arguable to be able to strike it out. To have been able to convince the Court that there is an arguable basis for the taxpayer's position is a far cry from winning the point substantively.

There is much more to be argued before consistency is confirmed as a separate basis for challenging an assessment.

© G D Clews, 2016     

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