The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 38 of 1997

 

BNZ Finance Limited Appellant

v.

(1) Harry Graham Holland, Commissioner of Inland

Revenue and

(2) John David Nash, an Officer of the Inland

Revenue Department  Respondents

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

---------------

JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 30th October 1997

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Hoffmann

Lord Hutton

Lord Saville

Mr. Justice Gault

  ·[Delivered by Lord Hutton]

 

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1. This is an appeal by BNZ Finance Limited from a decision of the Court of Appeal of New Zealand which concerns the construction and application of section 276 of the Income Tax Act 1976 which relates to the liability of a new company for tax which could have been assessed upon a former company which had substantially the same shareholders or was under the control of the same persons as the new company.

 

2. Section 276 provides:-

"Liability of new companies for tax payable by former companies with substantially same shareholders or under same control - (1) For the purposes of this section -

`Company' means a New Zealand company or an overseas company within the meaning of this Act:

 

`New company' means a company carrying on business in New Zealand and consisting substantially of the same shareholders as an original company or being under the control of the same persons as an original company:

 

`Original company' means a company which, having at any time carried on business in New Zealand, has, whether before or after the commencement of this Act, ceased to carry on business in New Zealand; and includes any such company that has been wound up.

 

   (2) Where an original company has been wound up, its shareholders and directors, as on the commencement of its winding up, shall respectively be deemed to be the shareholders and the persons having control of the company for the purposes of this section.

 

  (3) Where an original  company was, when  it  ceased  to carry on business in New  Zealand, liable under this Act for any income tax or was liable to be assessed for any such tax, and that tax has not  been paid, the new company shall, for

the purposes of  this Act, be deemed to be the agent of the original company and shall be liable for all tax payable  by

the original company. It shall also be liable for all tax  for which the original company would have been liable if it had

continued to carry on business in New Zealand."

 

The factual background.

BNZ Finance Deposits Limited ("Deposits") was a wholly owned subsidiary of BNZ Finance Limited.  Deposits ceased to carry on business in February 1994 and on 17th February the Board of BNZ Finance resolved to wind up Deposits together with other non-operating subsidiaries.  In order that the dissolution could take place under section 335A of the Companies Act 1955 a notice was required from the Commissioner of Inland Revenue ("the Commissioner") that he had no objection to the proposed dissolution.  This notice was requested by the solicitor for BNZ Finance and on 13th April 1994 the Commissioner gave such written notice.  In due course on 1st September 1994 pursuant to section 335A(7) the Registrar of Companies declared that Deposits was dissolved.

 

3. The background to the relevant assessments issued by the Commissioner was helpfully set out in the judgment of Fisher J. in the High Court as follows:-

"Between 1988 and 1992 Deposits Ltd derived income from investments in redeemable preference shares and debentures with Poena Holdings Ltd, Amboy Investments Ltd and Consummo Investments Ltd.  It formed part of a scheme known as the `NCN arrangements' associated with Capital Markets Ltd.  Deposits Ltd treated the income as non-assessable and paid dividends to BNZ Finance equivalent to the whole of its income.

  The Commissioner's assessment against Deposits Ltd for the 1989 to 1992 income years originally accepted that Deposits Ltd was not liable to pay income tax on the income derived from those investments. ...

 

  Subsequently the Commissioner had cause to re-examine the assessability of income derived from this scheme.  He formed the view that it was a tax avoidance scheme for the purposes of s 99 of the Income Tax Act.  In consequence he decided that Deposit Ltd's income from that source had been assessable after all.  Not realising that by this stage Deposits Ltd had been dissolved, on 31 March 1995 the Commissioner sent documents to BNZ Finance purporting to be amended notices of assessments for Deposits Ltd assessing $4,075,471 as Deposits Ltd's assessable income for the 1989 income year and $8,969,684 for the 1990 income year.  When it was pointed out to the Commissioner that by this stage Deposits Ltd had been dissolved, the Commissioner wrote again on 23 May 1995 advising that the income tax liability arising from the amended assessments of 31 March 1995 would be recovered from another company in the BNZ Finance Ltd Group.  He followed that with a letter of 21 July 1995 summarising the facts, referring to s 276, and then stating:

`Following the principles in the Instant Finance case, upon the issuance of the 1995 assessment, BNZ Finance Ltd will have the right to object.  It would appear that the objection can cover the application of section 276 and the imposition of tax.  To best facilitate this procedure I would appreciate it if you would file the 1995 tax return for BNZ Finance Ltd direct with me.'

 

4. He further stated:

`I propose to amend the grounds of assessment by treating the MCN (sic) arrangements in their totality as financial arrangements, with income accruing to BNZFDL.  The grounds for taking this step are outlined in the reply to the FR paper, and I will further particularise the grounds before amending my assessment.  Any amended assessment will not increase the amount of tax, only expand the grounds.  I will be prepared to discuss all issues with you when you have received the Fay, Richwhite paper and my reply.'

 

5. BNZ Finance was concerned that if the assessment foreshadowed in the letter of 21 July 1995 were made, BNZ Finance would have to pay a substantial part of the tax pending determination of its liability.  On 4 March 1996 it brought these proceedings seeking a declaration that the proposed assessment [for the income years 1989-1992] under s 276 would be ultra vires."

 

The proceedings in the High Court and in the Court of Appeal.

It was common case in the High Court and in the Court of Appeal that Deposits came within the definition of "Original company" and that BNZ Finance came within the definition of "New company" contained in section 276(1).  Three issues were argued before the High Court and the Court of Appeal.  The first and most important issue was whether BNZ Finance was liable for tax in respect of the income derived by Deposits from the investments under the "NCN arrangements" notwithstanding that both at the date when Deposits ceased to carry on business in February 1994 and at the date of dissolution on 1st September 1994 an assessment had not been issued by the Commissioner against Deposits for tax in respect of such income.

 

6. Before considering the judgments of Fisher J. and the Court of Appeal it is appropriate to set out some other relevant sections of the Income Tax Act 1976.

 

7. Section 23 provides:-

"Amendment of assessments - (1) The Commissioner may from time to time and at any time make all such alterations in or additions to an assessment as he thinks necessary  in  order  to  ensure  the  correctness  thereof,

notwithstanding that tax already assessed may have been made.

 

  (2) If any such alteration or addition has the effect of imposing any fresh liability or increasing any existing liability, notice thereof shall be given by the Commissioner to the taxpayer affected."

 

8. Section 25 provides:-

"Limitation of time for amendment of assessment - (1) When any person has made returns and has been assessed for income tax for any year, it shall not be lawful for the Commissioner to alter the assessment so as to increase the amount thereof after the expiration of 4 years from the end of the year in which the [notice of original assessment was issued]."

 

9. Section 266 provides:-

"Agent to make returns and be assessed as principal - Every agent shall make returns of the income in respect of which he is an agent, and shall be assessed thereon in the same manner as if he were the principal, save that he shall be entitled to no special exemption or rebate other than such exemption or rebate (if any) as his principal may be entitled to."

 

10. Section 274 provides:-

"Guardian of person under disability to be his agent - Every person who, as guardian, manager, or otherwise, has the receipt, control, or disposition of any income derived by a person under any legal disability shall for the purposes of this Act be the agent of that person in respect of that income, and shall make returns and be assessable and liable for income tax accordingly."

 

11. Section 275 provides:-

"Liability of mortgagee in possession - For the purposes of this Act, a mortgagee in possession of any land or other property shall be deemed to be the agent of the mortgagor in respect of any income derived by that mortgagee from that land or other property on behalf of or for the benefit of the mortgagor, and the mortgagee shall make returns and be assessable and liable for tax on that income accordingly."

 

12. Section 277 provides:-

"Company deemed agent of debenture holders - Save as otherwise provided in sections 192 and 278 of this Act, every company which has issued debentures, whether charged on the property of the company or not, shall for the purposes of this Act be the agent of all debenture holders, whether absentees or not, in respect of all income derived by them from those debentures, and shall make returns and be assessable and liable for income tax on that income accordingly."

 

13. In the High Court Fisher J. held that (subject to part of the Commissioner's proposed assessments being statute-barred by section 25(1) and subject to the issue of estoppel) the Commissioner was entitled to claim payment from BNZ Finance under section 276(3).  After a careful analysis of the wording of the subsection the learned judge stated that in his opinion the phrase "liable to be assessed" in the third line of the subsection "seems intended to embrace the situation in which, at the date when the original company ceased to carry on business in New Zealand, there had been either no assessment at all or no completion of the potential assessment process including all possible amendments".

 

14. On appeal the judgment of Fisher J. on this issue was upheld by a majority of the Court of Appeal constituted by McKay J., Thomas J. and Blanchard J., with Richardson P. and Henry J. dissenting.  In his judgment dismissing the appeal McKay J. stated:-

"The words `such tax' mean simply `income tax', the latter words being the obvious and nearest antecedent.  They do not suggest that all the elements of the first limb are to be understood as if repeated, and there is no necessity to so extend the words `such tax'.  The words `and that tax has not been paid' refer to the income tax payable under the first limb or assessable under the second.  Whether as at the date of ceasing business quantified and payable under the first limb or assessable and payable under the second, the tax may well be paid at some time thereafter.  Once it has been paid, whether by the original or by the new company, s 276(3) will no longer apply.  There is nothing in the subsection which suggests that the words `or was liable to be assessed' should be restricted to a liability that was already assessed or otherwise identified and quantified ...

 

15. I see no problem in reading the words `liable to be assessed for any such tax' as encompassing an amended as well as an original assessment.  In either case there is taxable income for which the taxpayer is liable to be assessed.  If there has been an earlier assessment, then until amended that assessment is by s27 to be `conclusively deemed and taken to be correct' and liability to be determined accordingly.  That must be read, however, with the Commissioner's power under s23 to issue an amended assessment, `notwithstanding that tax already assessed may have been paid'.  The taxpayer remains liable to tax on any taxable income not included in the assessment, and is `liable to be assessed' for that tax.  He cannot be sued for the additional tax without an amended assessment first being issued, but he is certainly `liable to be assessed' for it."

 

16. In his dissenting judgment Richardson P. stated a number of reasons for his decision that the appeal should be allowed.  His first reason, which was strongly adopted by the appellant in its submissions before their Lordships' Board, was as follows:-

"... the phrase `and that tax has not been paid' necessarily refers to a specific amount of tax and by implication to an amount which has been ascertained as at the relevant date, that is when the original company ceased to carry on business in New Zealand.  It is that `tax payable by the original company' for which the new company is liable."

 

17. In his dissenting judgment Henry J. stated that section 266 was not of assistance to the Commissioner and said:-

"It requires the agent to make returns of the income `in respect of which he is an agent', and makes the agent liable to assessment on that income, i.e. the income in respect of which he is agent.  It is that aspect of the agency relationship which makes the agent liable to assessment.  There is nothing in s276(3), or in any other provision in the Act, which operates to make BNZFL an agent in respect of the income of Deposits.  Section 276 is to be compared with other agency provisions, such as ss274 (persons under disability) 275 (mortgagee in possession) and 277 (debenture holders), all of which deem the agent to be the agent in respect of the principal's  income.   Similar provisions can be found in ss280-284 relating to absentees, and ss287 and 288 relating to non-residents.  Furthermore, and significantly in my view, they all expressly require the agent to furnish returns and make the agent assessable, as well as liable to pay tax.  Sections 285, 285A and 286 relating to absentee shareholders investors and debentureholders, also expressly provide for the making of returns by the agent and a liability for the agent to be assessed.  No such obligation or liability is expressed in s276(3), and I see no room for implication.

 

  I do not think the words `for the purposes of this Act' in s276(3) can bring in s266.  They simply avoid the deeming provision being given effect outside the Act.  The deemed agency under s276(3) does not create an agency in respect of the income of the principal, which is a necessary pre-requisite to the application of s266.  Section 266 is also a general provision.  All the other provisions, including s276 are special.  They stand alone and express their own particular obligations.  The repetition in those other sections of obligations already expressed in s266 are otherwise superfluous.  Their omission from s276(3) cannot be ignored.

 

  In my opinion if a deemed agent, that is one who is not an agent in fact but only by statutory fiction, is to be assessed as if the principal, clear words of expression are required.  Section 276 does not envisage an agent standing in the shoes of the principal for the purposes of assessment and undertaking the objection procedure.  It does no more than create a liability for payment of tax which is payable by the original company.  If it is to be relied on, liability on the part of Deposits for payment of the tax sought to be recovered must first be established.  The Commissioner is now endeavouring to assess not Deposits, which of course he cannot do, but BNZFL.  I do not construe s276 as allowing that course of action."

 

The decision of the Board.

Section 276(3) undoubtedly presents difficulties in interpretation, but in the opinion of their Lordships the decisive words pointing to the correct interpretation are the words "or was liable to be assessed for any such tax, and that tax has not been paid".  The words "that tax has not been paid" refer back to the position where the original company had been assessed and  "was,  when  it  ceased to carry on business in New Zealand, liable under this Act for any income tax"; but it is clear that they also refer back to the position where the original company "was liable to be assessed for any such tax".  But such a situation is one where the original company has not been made subject to an assessment and where the tax has not been quantified.  Therefore it is clear that the words "and that tax has not been paid" include by implication tax which is not payable under an assessment but which would have been payable if an assessment or an amended assessment had been made on the original company.

 

18. Before their Lordships' Board Mr. Harley, for the appellant, strongly relied on the words "shall be liable for all tax payable by the original company" in the sixth and seventh lines of the subsection, and submitted that as there had been no assessment on the original company and as there was no quantifiable tax payable by it, there was no "tax payable by the original company" and accordingly no liability rested on BNZ Finance.  Their Lordships do not accept that submission because they consider that the word "tax" in the sixth line must have the same meaning as the word "tax" when it appears in the fourth line of the subsection, and that the words "tax payable by the original company" in the sixth and seventh lines of the subsection include by implication tax which would have been payable if an assessment or an amended assessment had been made on the original company.

 

19. In the opinion of their Lordships this construction is supported by a consideration of the history of section 276.  Similar provisions to those contained in section 276 were first enacted by section 21 of the Finance Act 1937.  Goldmining companies at that time were liable for income tax on dividends paid to shareholders, as distinct from profits.  To avoid paying tax a company would declare a single substantial dividend and then be dissolved before it could be assessed for tax.  This process took place when the assets of the dissolved Waihi Gold Mining Company Limited were taken over by a new company, Martha Gold Mining Company (Waihi) Limited without payment of tax by the former.  Section 21 of the Finance Act 1937 was enacted to counter such a procedure.

 

20. It is clear from the statement of the leader of the Council in the debate on the Finance Bill in 1937 that the Waihi Gold Mining Company Limited had gone into liquidation and had been  dissolved  before  an  assessment could be issued against

it.  Subsection (4) of section 21 of the 1937 was similarly worded to subsection (3) of the section 276, but section 21 contained a further subsection, subsection (5), referring directly to the Waihi Gold Mining Company Limited and the Martha Gold Mining Company (Waihi) Limited and expressly imposing liability for tax on the latter company notwithstanding the dissolution of the former company before the passing of the 1937 Act.  Therefore, in the opinion of their Lordships, it is clear that section 21(4) was enacted so that it would apply prospectively if the same procedure were adopted by other companies in the future, notwithstanding that the original company had been dissolved before an assessment had been made upon it.

 

21. Counsel for the appellant submitted that the words "Where an original company was, when it ceased to carry on business in New Zealand, ... liable to be assessed for any such tax" related to a situation where the company had not been assessed before it ceased to carry on business in New Zealand but where it had been assessed before it was dissolved, and that the words in the sixth and seventh lines of the subsection that the new company "shall be liable for all tax payable by the original company" did relate to such a situation, but could not relate to the situation where the original company had not been assessed before its dissolution and where the tax had not been quantified.  Their Lordships do not accept that submission because, as they have stated, they consider that section 21(4) of the 1937 Act and section 276(3) were intended to include a situation where the original company had ceased to carry on business and had also been dissolved before an assessment or an amended assessment had been made.  Such a situation could arise, as in the present case, where the Commissioner revises his opinion of the nature of a transaction and decides that an arrangement fell within the ambit of section 99 of the 1976 Act as an avoidance device, or where by reason of fraud the Commissioner is prevented from making an assessment until after the date of dissolution.

 

22. In further support of his submission that section 276(3) only imposed liability on the new company where, before its dissolution, the original company had become liable to pay tax under an assessment or was liable without assessment to pay a quantified amount of tax, for example, in respect of PAYE or non-resident withholding tax, counsel argued that section 276(3) contains no machinery for making an assessment or an amended  assessment  on  the  new company, and he expressly adopted the reasoning of Henry J. set out in an earlier part of this judgment.

 

23. Their Lordships are unable to accept this submission.  It is their opinion, for the reasons already stated, that the subsection imposes liability on the new company to pay tax for which the original company was liable to be assessed, notwithstanding that no assessment had been issued against it prior to its dissolution.  As the new company is liable to pay such tax Parliament must have intended the new company to be subject to assessment in respect of it.  Their Lordships consider that this intent is given effect by the words "the new company shall, for the purposes of this Act, be deemed to be the agent of the original company".  These words, in the context of the subsection which is intended to impose liability on the new company for tax notwithstanding that the original company had not been assessed, when read together with the words that the new company "shall be liable for all tax payable by the original company" are sufficient, in the opinion of their Lordships, to require the new company to make a return and to enable it to be assessed.  Their Lordships consider that the fact that section 276(3) does not expressly provide, as do sections 266, 274, 275 and 277, that the agent is deemed to be the agent "of the income" of the other person, is not sufficient to lead to the conclusion that the new company is not liable to make a return and to be assessed. Where (as here) the new company is liable for the tax payable and is deemed to be the agent of the original company for the purposes of the Act, by implication it is the deemed agent in respect of the income on which the tax is payable so that section 266 applies.  If the new company is not so liable no effect would be given to one of the purposes of the subsection and, where there had been no assessment against the original company before its dissolution, no effect would be given to the words deeming the new company to be the agent of the original company and making it liable to pay all tax payable by that company.

 

24. It was further argued on behalf of the appellant that it would be unreasonable and unfair to impose a liability on the new company to make a return and to be assessed where the business records of the original company might have been destroyed and the deemed agent would normally know nothing about the affairs of the dissolved company.  Their Lordships consider that this submission is lacking in weight as  the  new  company  will  be  one which consists substantially of the same shareholders as the original company or is under the control of the same persons as the original company.

 

25. Before their Lordships the Commissioner did not seek to rely on the second sentence of section 276(3), and neither counsel for the appellant nor counsel for the Commissioner was able to suggest an intelligible meaning to be given to that sentence.  In the opinion of their Lordships the meaning of the sentence is obscure.  It may be, as McKay J. suggested, that the sentence was added by a cautious draftsman in case he had overlooked anything.  But their Lordships consider that the obscurity of the second sentence does not alter the construction which their Lordships think it right to give to the first sentence of the subsection.  Accordingly the opinion of their Lordships is that under section 276(3) the new company can be liable to pay tax in respect of income received by the original company notwithstanding that no assessment in respect of that income had been issued against the original company prior to its dissolution.

 

26. The second issue which arose before Fisher J. and the Court of Appeal related to estoppel.  Section 335A of the Companies Act 1955 provided for a procedure in short form for the dissolution of solvent companies.  The section provided:-

"(2)An application for a declaration of dissolution shall be in writing and shall be accompanied by -

...

(c)Written notice from the Commissioner of Inland Revenue stating that the Commissioner has no objection to the Registrar making a declaration of dissolution of the company."

 

27. As already stated the Commissioner gave this notice on 13th April 1994 and Deposits was dissolved on 1st September 1994.

 

28. An argument by BNZ Finance that the Commissioner's acquiescence in the dissolution of Deposits estopped him from invoking section 276 against it was rejected by Fisher J. and by the Court of Appeal.  Before their Lordships BNZ Finance advanced a similar argument and submitted that in consenting to the dissolution of Deposits the Commissioner chose:

 

(a)not to invoke his general powers of investigation and reassessment against Deposits whilst that company remained in existence; and

 

(b)not to exercise the special powers given to him by section 12 of the Income Tax Act 1976 to require a company which had ceased to carry on business in New Zealand and was in the course of being wound up to make a special return of income; and

(c)not to exercise his power under section 428 of the Income Tax Act 1976 to require Deposits to retain documents.

 

29. Accordingly it was contended that, having regard to the existence of these powers and the decision of the Commissioner not to exercise them, it was not open to him to assert against a new company liability for tax relating to a dissolved company which had not been assessed and to assess the new company as agent.  Their Lordships do not accept that submission.  Their Lordships consider that there was no inconsistency between the Commissioner consenting to the dissolution of Deposits under section 335A and then claiming payment of tax from BNZ Finance under section 276.  Their Lordships are in agreement with the observation of Fisher J. that:-

"The Commissioner is perfectly entitled to say to himself `I do not mind if BNZ Finance dissolves one of its tax-liable subsidiaries in view of the substituted liability which the Act will automatically and immediately impose upon BNZ Finance as the holding company under section 276(3)'."

 

30. Their Lordships are of opinion that there is nothing in the provisions of section 335A or section 12 of the 1976 Act which bars the Commissioner from making a subsequent claim under section 276(3).  Their Lordships further consider that in consenting to the dissolution under section 355A the Commissioner made no representation that he would not institute a claim under section 276(3).

 

31. The third issue raised before Fisher J. related to the four year limitation period for amended assessments laid down by section 25.  BNZ Finance argued that in March 1995 it was too late for the Commissioner to issue amended assessments for the years 1989 and 1990.  Fisher J. accepted this argument and held that amended assessments could not be issued in respect of those years so that the claim of the Commissioner was confined to the years 1991 and 1992.

 

 

32. The Commissioner by cross-appeal appealed against that ruling but the cross-appeal was dismissed by the Court of Appeal.  The Commissioner does not challenge that ruling of the Court of Appeal so the issue does not arise before their Lordships' Board.

 

33. Accordingly for the reasons given their Lordships will humbly advise Her Majesty that the appeal ought to be dismissed.  The appellant must pay the respondents' costs before their Lordships' Board.

 

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