Jersey Unreported Judgments

Taxation.

[2023]JRC052

Royal Court

(Samedi)

28 March 2023

Before     :

Sir Timothy Le Cocq, Bailiff, sitting alone.

 

Advocate S. A. Meiklejohn for the Appellant

C, Director for B Limited the Respondent

judgment

the bailiff:

1.        This is an appeal by the Comptroller of Revenue ("the Appellant") against a decision of the Commissioners of Appeal for Tax ("the Commissioners") of 28 March 2022 ("the Determination") in which the Commissioners concluded that a pension scheme established outside of Jersey was an 'equivalent scheme' for the purposes of Article 131CG of the Income Tax (Jersey) Law 1961 ("the 1961 Law").  ("B Limited"), represented by ("C"), is the Respondent. 

2.        On 8 April 2021, a Jersey personal pension scheme (the "Scheme") submitted a request to transfer the pension of one ("D") into the Respondent's scheme, namely the B Limited superannuation scheme established in New Zealand.

3.        On 29 April 2021, the Respondent's letter of undertaking was emailed to the Appellant.  On 7 May 2021, the Appellant emailed to notify the Scheme that the request to transfer D's pension had not been approved.

4.        On 16 May 2021, the Respondent lodged an appeal against that decision.

5.        On 8 July, the Appellant completed its own internal review of the decision and confirmed that the transfer would not be approved.  On 20 July 2021, the Respondent emailed the Appellant with a number of arguments suggesting that the transfer should be approved.

6.        A statement of agreed facts was compiled by the Respondent and signed by both the Appellant and the Respondent.

7.        On 7 February 2022, the Commissioners heard the Respondent's appeal and their determination was issued on 28 March 2022 upholding the appeal and directing the Appellant to approve the pension transfer.

Statutory Framework

8.        The statutory framework in which the Appellant took his decision and the Commissioners considered it is as follows:

(i)        Article 131C(A) of the 1961 Law provides that a Jersey retirement trust scheme will be approved when it meets the requirements set out;

(ii)       Article 131CG details when a transfer may be permitted from such an approved scheme and, as far as is relevant, provides as follows:

"(4)     An approved Jersey scheme may, subject to the prior written approval of the Comptroller, permit -

(a)        The pension holder, at any time when he or she is not resident in Jersey or

(b)        ....

to elect to transfer the whole of the fund value to an equivalent scheme established outside Jersey.

(5)       An approved Jersey scheme may permit the pension holder or, following the pension holder's death, his or her dependent, to elect to transfer into the approved Jersey scheme the whole of the fund value to an equivalent scheme established outside Jersey.

(6)       The scheme manager of an approved Jersey scheme must notify the Comptroller, in writing of -

(a)        the date of a transfer received in accordance with paragraph 5;

(b)        the amount of the transfer;

(c)        the name of the scheme from which it was transferred;

(d)        the jurisdiction in which the scheme is established; and

(e)        whether benefits have commenced from that scheme.

(7)       For the purposes of this Article, a scheme established outside Jersey is an equivalent scheme if the Comptroller agrees that it is an equivalent scheme.

(8)       The Comptroller may agree that a scheme established outside Jersey is an equivalent scheme if, in the Comptroller's opinion, the scheme has characteristics which are consistent with the characteristics of an approved Jersey scheme."

9.        Article 131I provides for pension contributions made in the year of assessment to be deductible as an expense for each year of assessment, up to a maximum amount of £50,000. 

10.      Article 131K provides for an income paid out to a pension from an approved Jersey scheme is treated as earned income and as such that income is taxed. 

11.      Article 131N provides an exception to tax on the transfer of a Jersey approved scheme to an approved equivalent scheme under Article 131CG. 

12.      Article 131Q(i)(f) of the Law provides the right of appeal to the Commissioners where a person is aggrieved by the Appellant's decision that a scheme is '....an equivalent scheme'.

13.      Paragraph 2 of the Article goes on to state that:

"Part 6 applies, with the necessary modifications, to an appeal under paragraph (1) as if it were an appeal against an assessment."

14.      Article 79 of the Law provides that tax will be 'computed on the full amount of a person subject to the deduction of any income tax which has been repaid in respect of the pension in the place where it has arisen.'

15.      Article 29 of the Law deals with the procedure on appeals and the power which is afforded to the Commissioners following an appeal.  It states:

"...(4)  If, on any appeal, it appears to the Commissioners present at the hearing, by examination of the appellant on oath, or by other lawful evidence, that the appellant is overcharged by an assessment, they shall direct the assessment to be abated or reduced accordingly, but otherwise every such assessment shall stand good.

(5)       If, on an appeal, it appears to the Commissioners that the person assessed ought to be charged in an amount exceeding the amount contained in the assessment, they shall direct that the person be charged with the excess."

16.      This is the Jersey statutory regime that applies to the instant case.  As set out above, Article 131Q(i)(f) permits a right of appeal to the Commissioners in the instant case and paragraph (2) provides that there should be an amendment as necessary to Part 6 of the Law and therefore those Articles set out above. 

17.      The Appellant suggests that, as the amendments to Part 6 of the Law are not specified, it is unclear what amendments should be made when the Commissioners are considering an appeal against a decision of the Comptroller not to agree that a scheme has equivalence.  The Respondent suggests some very basic amendments to allow Part 6 of the Law to apply to appeals against a determination by the Appellant.  The Respondent suggests that those amendments might be in the following form:

"Part 6

Appeals and Relief for Mistake

27.      Right of appeal

(1)       A person aggrieved by any assessment on him or her made by [a decision of] the Comptroller [to disagree, under Article 131CG(7), that a scheme is an equivalent scheme shall be entitled to appeal to the Commissioners, on giving notice in writing to the Comptroller, within 40 days of the notice of such assessment [decision].

Provided that if it is shown to the satisfaction of the Comptroller that, owing to absence, sickness or other reasonable cause, any person has been prevented from appealing within that time, the Comptroller may admit the appeal if notice of it is given to the Comptroller without reasonable delay.

(2)       If an appellant fails to attend or to be represented at a hearing of which the appellant has been duly notified, the Commissioners may -

(a)        unless they are satisfied that there is good and sufficient reason for such absence, hear and determine the proceedings in the absence of the appellant or the appellant's representative; or

(b)        postpone or adjourn the hearing:

Provided that, if any representations in writing or otherwise have been submitted by or on behalf of the appellant in response to the notice of the hearing, the Commissioners shall consider such representations and shall give the Comptroller an opportunity to be heard in regard to those representations before they decide to hear and determine any proceedings in the absence of the appellant or the appellant's representative.

(3)       If the Comptroller wishes to be heard, he or she may appear in person or be represented by another officer.

28.      Other provisions as to appeals

(1)       In the case of an appeal against any assessment [a decision of] the Comptroller [to disagree, under Article 131CG(7), that a scheme is an equivalent scheme], the appellant shall, in the notice of appeal, specify the grounds of the appeal.

Provided that, if on the hearing of the appeal the appellant desires to go into any ground of appeal which was not specified in the notice and the omission of that ground  from the notice was, in the opinion of the Commissioners, not wilful or unreasonable, the Commissioners shall not, by reason of anything in this paragraph, be precluded from allowing the appellant to go into that ground or taking it into their consideration."

18.      Clearly any amendments must permit an effective appeal against any determination by the Appellant that there is a lack of equivalence.  Without needing to determine the point, I do not think that there is any difficulty with the formulation of the amendments suggested by the Respondent above.

19.      It is clear, however, from the statutory position set out above, that it is the person applying for the approval of the transfer that puts forth the justification for holding that the scheme is equivalent, and the Comptroller's agreement is required that it is indeed an equivalent scheme.  The Comptroller may give that agreement if the scheme has characteristics which are consistent with the characteristics of an approved Jersey scheme.

20.      It seems to me axiomatic that the Comptroller's decision to give or withhold his approval must not be unreasonable or capricious but must be based on clear justification. 

21.      One of the issues before me is, in effect, did the Comptroller take into account factors which he should not have done in reaching his decision?  The factor, in this case, is the statutory regime, namely that of New Zealand, that would apply should the transfer be approved.  In other words, was the Comptroller justified in taking into account that statutory regime in determining whether the scheme itself is equivalent.  The wording set out at Article 131CG of the 1961 Law may suggest that it is only the nature of the scheme that should be taken into account and not the statutory regime in which it would then be intended to operate.  However, there are matters to take into account when considering this element. 

22.      The Determination of the Commissioners is, so far as is relevant, in the following terms:

"In the matter of the appeal by [B] hearing on the 7th of February 2022, the Appellant's appeal is successful on the basis that the provisions of the [B] scheme, together with the undertaking provided by the Appellant, create a pension scheme that demonstrates equivalence to the Jersey pension scheme for which the transfer is requested.

We find the Respondent's consideration of broader jurisdictional factors beyond the specific parameters of the pension schemes at issue is not supported by the relevant provisions of the Income Tax Act (Jersey) 1961.

We note that the reference to the 'Income Tax Act' is erroneous and it is in fact a reference to the law."

23.      Under the heading 'Reasons for the decision', the Commissioners state, amongst other things:

"[B] Limited submitted that the Comptroller may only consider the characteristics of the overseas scheme to that of an approved Jersey scheme, such as the rules on contributions or benefits, and not the taxation system of the jurisdiction where the overseas scheme is located."

24.      And further, they state:

"....Article 131CG as enacted does not reference a wider legislative framework review in determining whether a foreign scheme is an equivalent scheme.

Our view is that there is no scope within Article 131CG for the Comptroller to consider jurisdictional factors outside the specific parameters of a particular scheme when determining its equivalence to a Jersey scheme."

25.      The Commissioners went on to consider the effect of the undertaking given by the Respondent to restrict conditions under which the pension holder could withdraw funds from the scheme, which the Commissioners considered an integral matter in determining equivalence and went on to say:

"In our view, the undertaking amends the trust deed sufficiently to meet the requirements of a Jersey approved scheme, thereby making it an equivalent scheme."

The grounds of appeal

26.      In the summary grounds of appeal, the Appellant argues as follows:

"(1)     The Commissioners have erred as a matter of Law as they have substituted their own discretion for that of the Appellant and do not have the requisite power to do so.  The Appellant avers that as the Commissioners for Appeal for Tax are a statutory body, they accordingly do not have inherent jurisdiction or powers.  Rather their powers are restricted to what is expressly set out in the relevant legislation.  The discretion to determine whether a pension scheme is 'equivalent' for the purposes of Article 131CG of the 1961 Law is a decision which only the Appellant may properly make and therefore the Appellant contends that matter should have been remitted back to him to re-make his decision on the basis of the Commissioners' finding.

(2)       The Commissioners have erred as a matter of Law in their construction of Article 131CG of the 1961 Law.  The Appellant disagrees that the Article restricts the Appellant's discretion when determining the 'equivalence' of a pension as found by the Commissioners.  The Appellant avers that the Article is worded as to be permissive and does not provide specific restrictions or criteria upon which the Appellant must assess equivalence and so it was entirely proper for him to consider the jurisdictional context of the proposed transfer, and in particular the legislative framework within which that overseas scheme sits."

27.      Accordingly, this Court must consider the Commissioners' powers under an appeal, the discretion afforded to the Appellant in the decision taken under Article 131CG of the Law, and the relevance or not of the foreign statutory regime. 

The foreign statutory regime

28.      As has already been indicated, the intended jurisdiction of transfer of the pension scheme was New Zealand.  There is a double taxation agreement between Jersey and New Zealand which extends to the taxation of pensions.  Article 5 of the double taxation agreement provides as follows:

"1.      Pensions (including government service pensions), and other similar remuneration paid to an individual who is a resident of a party in consideration of past employment shall be taxable only by that party.

2.        Pensions and other payments made under the social security legislation of a party to an individual who is a resident of the other party shall be taxable only by that other party.

3.        However, paragraphs 1 and 2 shall not apply where the pension, payment or other similar remuneration is not subject to tax by the party of which the party is resident."

29.      It is not necessary to go into significant detail as to the statutory environment in New Zealand.  It is governed by the Income Tax Act 2007 ("the NZ Law") which provides that distributions made from a complying trust to a beneficiary of that trust is 'exempt income' so long as the amount is not 'beneficiary income' for income tax purposes.

30.      A complying trust includes a superannuation fund.  The NZ Law goes on to provide that:

"Beneficiary income does not include -

(a)        An amount of income derived by a trustee of a trust in an income year for which the trust is a superannuation fund...."

31.      I am informed that the Inland Revenue of New Zealand has issued an annual 'Individual Income Tax Return Guide' which contains, under the section entitled 'Pensions', the following:

"Do not include the following pensions or annuities in your tax return:

·         Non-taxable pensions or annuities from either life insurance funds or superannuation schemes registered with the Financial Markets Authority...."

32.      I am also informed that overseas pensions are taxable and such pensions are defined as 'a regular payment, generally from a foreign superannuation scheme or pension fund when you reach retirement age'.

33.      There are other provisions of New Zealand law put before me but I do not think that I need to set them out for these purposes.

34.      Suffice it to say that on my understanding there are very significant differences between the way the pension scheme operates under New Zealand legislation with the way it would operate in Jersey.  One such example is the applicable tax provisions.  Jersey pension contributions are not subject to tax but the payments out of a scheme are so subject.  In New Zealand, the contributions are taxed, as indeed is the growth of any fund.  However, the payments out of the fund are not taxed. 

35.      As the Appellant says in its skeleton argument, the consequences of that would be if a pension is transferred from Jersey to New Zealand the beneficiary would not have paid tax either on the contributions or on the payments subsequently received. 

36.      It is clear that this was an important consideration in the decision taken by the Comptroller.  The Respondent argues that it is far from certain that the individual who is entitled to the pension would be free of any New Zealand tax liabilities but, be that as it may, prima facie, a transfer would give rise to the possibility that there would not be any tax paid by the beneficiary. 

37.      Accordingly, a situation could quite feasibly exist where the terms of a scheme, in the sense of what it permits and what its benefits and ability to draw down may provide, may indeed have a high measure of equivalence, whereas the statutory regime in which it operates would mean the effect of the transfer of the scheme would create a very different financial reality.  One of the key questions in this case, therefore, is whether the statutory regime is a matter that it is permissible for the Comptroller to take into account. 

The Appellant's and Respondent's arguments

38.      The Appellant argues that there are two questions that the Court must determine that are 'crucial to the determination of this appeal'.  Firstly, the question of the Commissioner's powers under an appeal and, secondly, the extent to which the Appellant is restricted in its consideration to whether agreement to a transfer should be given.

39.      Following the determination of those issues, so it is argued, the Court will then need to determine whether or not the tax outcome for the individual concerned will be the same regardless of where the scheme is based and whether this is a proper basis upon which the Appellant may decline approval.

40.      Turning to the first argument, the point may be simply stated.  The Appellant argues that the Commissioners have no inherent jurisdiction as they are a creature of statute and therefore their powers are limited to those set out under the relevant legislation.  There is no specified necessary modifications and there is a fundamental difference between an appeal against a determination of the correct amount of tax payable in respect of which, so it is argued, there is a right or wrong answer, and an appeal where there is no right or wrong answer in effect because it involves the taking of a discretionary decision, as in the instant case. 

41.      There is no statutory provision to enable the Commissioners to substitute their discretionary opinion on behalf of the Appellant and in the event that an appeal against the Comptroller's decision under Article 131CG is successful, the Commissioners should then remit it back to the Appellant to reconsider it or to quash that decision. 

42.      The Respondent, for its part, points to the statutory position which makes it entirely clear that the Commissioners do have jurisdiction to determine just such an appeal and that there is no difficulty with making necessary modifications to Part 6 for the purposes of that determination. 

43.      As already set out above, Article 131QIF of the Law provides that a right of appeal exists to the Commissioners by a person aggrieved with the appellant's decision that a scheme is 'an equivalent scheme'. 

44.      It is clear, therefore, that the Commissioners have jurisdiction to make that determination and the issue before me is what the consequences are of the determination that the Commissioners made. 

45.      The Appellant goes on to argue that the wording employed under Article 131CG must be examined.  The parameters of the Appellant's discretion are not defined within that provision and paragraph 7, as set out above, provides that a scheme is only an equivalent scheme if the Appellant agrees that it is.  Hence, the Appellant argues, it is for him to make a determination and there is no intent to restrict the exercise of his discretion other than by ordinary public law principles such as reasonableness. 

46.      Sub-paragraph (8) of Article 131CG is again in permissive terms.  It does not require the Comptroller to agree that any scheme established outside of Jersey is an equivalent scheme and he certainly may not do so if the scheme has characteristics which are inconsistent with the characteristics of an approved Jersey scheme.  In summary, the Appellant argues, consistent characteristics are essential but not sufficient for the Appellant to agree equivalence and that, so it is argued, is clear from the statutory provisions.  There is nothing prohibiting the Appellant from considering the tax treatment or indeed any other treatment that would be applied to a scheme when determining whether equivalence should be agreed.

47.      The Appellant also argues that Article 131CG(6) sets out what the Appellant needs to be notified of in respect of incoming transfers and this includes '(d) the jurisdiction in which that scheme is established'.  If, so it is argued, this is an important consideration for transfers in then it must be at least a consideration for transfers out.  There is nothing in the statutory provision that expressly prevents the Comptroller from taking this factor into account.  It demonstrates that the Appellant's discretion is not restricted to a comparison between the scheme rules, but the statutory environment generally which impacts upon the functioning of the scheme fall to be included within consideration.

48.      Although it is for this Court to construe the statutory provisions as to their effect, it is argued that regard may be had to the Treasury and Resources White Paper of 8 October 2013 which sets out the anticipated process in respect of approvals for transfers of pensions.  It states this:

"Where a transfer involves a non-Jersey pension scheme it will be the pension holders / dependant's responsibility to obtain professional advice which indicates the similarities and the differences between approved Jersey schemes and the particular non-Jersey pension scheme involved and the accompanying legislative framework."

This emphasises, so it is argued, that this is a factor that falls to be considered.

49.      The Respondent argues that the effect of Article 131CG is that the Appellant is 'relegated' to a person who agrees or disagrees that an overseas scheme is equivalent.  It is argued that it is not correct to say that it is for the Appellant to make that determination.

50.      I pause to say that this seems to me to be a strained interpretation.  Whilst it is true that an application has to be made to the Appellant to agree the equivalence of a scheme, to say that his agreement or otherwise is something other than the result of a determination that he must make seems to me to be a strange assertion.  The Appellant cannot agree or disagree without himself making a determination as to equivalence and it is difficult to understand what function he would be exercising were it to be otherwise.

51.      Much is placed by the Respondent on the distinction between the Appellant's agreement (which the Respondent argues is the correct way to look at things) or his determination (which the Respondent argues is not the correct way to look at things).  This does not seem to me to be a realistic distinction to make as I have indicated above.  The intent of the statute cannot be to render the Appellant as a mere cypher to someone else's determination - he must form his own independent view which, as I have said, means that he must in effect make a determination.  As I have already indicated above, however, that determination, as a result of which the Appellant agrees or disagrees, must not be either capricious or unreasonable. 

52.      The Respondent also argues that in considering whether or not a scheme is equivalent, the Appellant is restricted to considering the nature of the scheme itself and gives a number of examples which, so it argues, show that a scheme is to be considered outwith the environment in which it is intended to function.  The Respondent further argues that the White Paper referred to above provided clear examples of what it considered to be areas of equivalence, none of which related to the taxation environment in which any scheme existed.  The Respondent makes a further quotation from the White Paper in the following terms:

"Such transfers are subject to certain conditions that must be fulfilled.  Essentially the non-Jersey pension scheme will need to be equivalent to an approved Jersey scheme (eg the provision of an income for at least the remainder of the pensioner's life; a limited availability of a lump sum payment, etc)."

53.      Clearly the quotation above was meant to give examples and was not intended to be an exclusive determination of what equivalence would amount to.  The Respondent also points to the thrust of the consultation with which the White Paper was concerned to the approval of many more international transfers.  The Respondent cites a number of responses of concern raised in the consultation process, but I do not think that that can assist me in the determination that I have to make.

54.      Lastly, the Appellant makes reference to the tax consequences for the individual concerned.  In the light of the provisions referred to above, the Appellant argues that D would be in an improved financial position because New Zealand and Jersey have completely different approaches to the taxation of pensions.  Whether or not this is, in fact, the position, in the specific case of D I do think the information before me is sufficient to make an absolute determination.  Nonetheless, as indicated above, it must be the case that the apparently substantial differences between New Zealand and Jersey tax law may well mean that the operation of the scheme, in terms of the outcomes for D, may be very different indeed. 

Conclusion

55.      I am conscious that in setting out the arguments above, I have not purported to be exhaustive and a number of points were made in detail, particularly in the lengthy contentions lodged by the Respondent. 

56.      In essence, however, it is for me to determine what the powers of the Commissioners are, whether or not they exceeded them, whether or not the Respondent is entitled to take into account the foreign tax environment in which a scheme would operate if transferred, and what the tax consequences would be for the individual concerned.

57.      For the reasons that I have set out above, I do not see any merit in the distinction made by the Respondent between the agreement of the Comptroller or a determination by him.  The former must follow from the latter if it is to be other than meaningless approval.

58.      It is unhelpful that there is not greater clarity in the provisions on appeal for other than a simple determination as to the amount of tax paid, but as I have said, I do not think the exercise in creating such provisions is the obstacle which the Appellant suggests.

59.      The statutory provisions set out above with regard to the Comptroller's powers in connection with the transfer of a scheme and the approach and, indeed, the information that would be provided for a transfer in, suggests:

(i)        That the Comptroller's agreement is a matter for his discretion;

(ii)       He must exercise that discretion on reasonable and non-capricious bases;

(iii)      It is clear that the characteristics of the scheme itself are important considerations for him to take into account;

(iv)      There is no suggestion in the statutory framework that those are the only considerations to be taken into account and indeed there is some suggestion that it is appropriate to consider the tax regime which would apply. 

60.      It appears to me that the statute is not restrictive as to the factors that can be taken into account and it is indeed open to the Comptroller to take any reasonable factor into account when determining equivalence.  It is to be implied from provisions relating to the transfer in of a pension scheme, that jurisdiction is capable of being a reasonable consideration to take into account.

61.      In light of the above, in my judgment:

(i)        The Commissioners have jurisdiction to determine whether or not the Comptroller is right to withhold his agreement as to a scheme's equivalency;

(ii)       In the circumstances of the statutory context, however, the Commissioners erred in determining that the Comptroller was not able to take into account the statutory regime in which the scheme would operate were it to be transferred and the characteristics of that environment;

(iii)      In finding as they did in the light of the statutory reservation of the decision to the Comptroller, the Commissioners should have quashed the Comptroller's decision and referred it back to him to take again on the basis that they determined.  In the event, in my judgment that basis was incorrect;

(iv)      There is a real prospect that the effect on the individual concerned will be materially different between the scheme as operated under the Jersey tax regime and the New Zealand regime.

62.      Accordingly, I allow the appeal.

Authorities

Income Tax (Jersey) Law 1961.