The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 55 of 1997

 

Golden Bay Cement Company Limited Appellant

v.

The Commissioner of Inland Revenue Respondent

 

FROM

 

THE COURT OF APPEAL OF  NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 29th October 1998

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Nolan

Lord Hope of Craighead

Lord Clyde

Sir John Balcombe

  ·[Delivered by Lord Nolan]

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1. The appellant, Golden Bay Cement Company Limited (“Golden Bay”) has at all material times been the parent of four wholly owned subsidiaries, Waitomo Portland Cement Limited (“Waitomo”), Wilsons NZ Portland Cement Limited (“Wilsons”), Golden Bay Concrete and Gravel Limited (“Gravel”) and Delta Petroleum Limited (“Delta”).

 

2. By virtue of section 191(1) and (3) of the Income Tax Act 1976 the five companies constituted a group for the purposes of the section, the group relationship being established by those provisions where, inter alia, not less than two-thirds of the paid up capital in the companies concerned is held directly or indirectly by the same person or persons.  By virtue of section 191(1) and (4) the five companies also formed a specified group for the purposes of the section, a specified group being one in which the whole of the paid up capital of each company is held directly or indirectly by the same person (or the same persons in the same proportions).

 

3. Section 191(2) provides that:-

 

“Subject to this section, every company included in a group of companies shall be assessable and liable for income tax in the same manner as if it were a company not included in a group of companies.”

 

4. Section 191(5) provides that:-

 

“Subject to section 188A of this Act and subsection (7A) of this section … the whole or part of any loss which has been incurred in that income year by any company included in the specified group in that year … may, if that company so elects by notice in accordance with subsection (5A) of this section be deducted from the assessable income of … such other company or companies included in the specified group as is or are nominated by that company.”

 

5. Section 191(7) provides that “Subject to subsection (7A) of the section”, where a company in a group incurs a loss, and another company in the group pays to it the whole or part of that loss pursuant to an agreement, the payment will be deductible by the paying company and deemed to be assessable income of the receiving company.

 

6. By virtue of section 191(7A) any deduction allowable under subsection (5) or subsection (7) of the section in respect of a loss incurred by any other company is not to exceed the amount which could be carried forward pursuant to section 188 of the Act by that other company if that other company had claimed to carry forward the loss to the income year immediately succeeding the income year in which the loss was incurred.  This limitation picks up the provisions of section 188(7), under which the right to carry forward a loss incurred in any income year to any later income year cannot be claimed if there has been (to put it shortly) a more than 60% change in the vote carrying ordinary share capital of the company during that later income year.

 

7. Finally, section 191(8) provides as follows:-

 

“The Commissioner may, in his discretion, on application in writing by or on behalf of all the companies included in a group of companies, make a joint assessment of the income tax payable in respect of the income derived in any income year by every company included in that group of companies, and, in any such case, each company included in that group of companies shall be severally liable for an amount of income tax equal to the amount that would have been assessed if a separate assessment of income tax in respect of the income derived by that company in that income year had been made.”

 

8. Their Lordships now turn to the facts which have given rise to this appeal.  From the income year ending 31st March 1985 (being the appellant’s accounting year ending 31st December 1984) the appellant and its subsidiaries were subject to a single joint assessment under section 191(8).  For the 1987 income year (being their accounting year ending 31st December 1986) the appellant and Delta filed income tax returns showing that each of them had made a loss, while the returns for each of Waitomo, Wilsons and Concrete and Gravel disclosed a profit.  A joint assessment was made for all of the companies for the 1987 income year, in which the losses of the appellant and Delta and the profits of the other companies were aggregated.  Notice of that assessment was given on 22nd August 1988.

 

9. In May 1987 more than 60% of the shares in the appellant changed hands.  In consequence, the right of the group to set the losses of the appellant and Delta against the profits of the other group of companies for the 1987 income year under section 191(5) was retrospectively taken away by section 191(7A).  The appellant contends, however, that this is immaterial because the joint assessment made under section 191(8), which is not subject to subsection (7A), automatically aggregates the profits and losses of the group and limits the charge of tax to the net total.  The Commissioner, for his part, contends that section 191(8) is simply a procedural measure designed to facilitate the collection of tax, and has no bearing on substantive tax liability.  In accordance with his contention, in August 1992 the Commissioner amended the August 1988 assessment and disallowed the losses.  The appellant objected to the amended assessment, the Commissioner disallowed the objection and a case was stated for the opinion of the High Court.  In the High Court, Salmon J. decided the matter in favour of the Commissioner, and his decision was upheld by the Court of Appeal.

 

10. In addition to lodging and pursuing its objection to the amended assessment the appellant initiated judicial review proceedings claiming that the amended joint assessment issued in August 1992 fell foul of the statutory time limit in section 25 of the Act, because separate assessments had been made on Waitomo, Wilsons, and Gravel and Delta in late 1987.  Those proceedings were decided against the appellant in Golden Bay Cement Company Limited v. Commissioner of Inland Revenue both in the High Court [1995] 3 N.Z.L.R. 475 and in the Court of Appeal [1996] 2 N.Z.L.R. 665 (“Golden Bay (No. 1)”).

 

11. Mr. Goldsmith Q.C. put forward five submissions in support of his contention that section 191(8) was a substantive and not merely a procedural provision.  First he relied upon the language of the subsection.  He pointed out that it authorises the Commissioner to “make a joint assessment of the income tax payable in respect of the income derived in any income year by every company included in that group of companies …”.  It was thus an assessment provision just as much as section 19 of the Act, the normal assessment provision which requires the Commissioner to “make assessments in respect of every taxpayer of the amount on which tax is payable and of the amount of that tax”.  The crucial feature of section 191(8), submitted Mr. Goldsmith, is that it allows a departure from the normal section 19 requirement and permits a joint assessment to be made on a group of taxpayers, the members of that group being treated in effect as a single taxpaying entity chargeable on the aggregate of their profits and losses.  Once the group of companies is treated for tax purposes as a single entity, that is to say a single taxpayer, it is not necessary nor indeed possible to apply either section 191(5) or (7).  Those provisions only apply where there are two or more companies.

12. Their Lordships are unable to accept this submission. It proceeds upon the assumption that it is the assessment which imposes the liability to tax, whereas in truth that liability can only be imposed by the application of the charging and relieving provisions of the Act.  As Lord Dunedin said in Whitney v. Commissioners of the Inland Revenue [1926] AC 37 at page 52:-

 

“Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable.  Next, there is the assessment.  Liability does not depend on assessment.  That, ex hypothesi, has already been fixed.  But assessment particularizes the exact sum which a person liable has to pay.  Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.”

 

Similarly, in Commissioner of Inland Revenue v. Canterbury Frozen Meat Co. Limited [1994] 2 N.Z.L.R. 681 at page 690 Richardson J. said:-

 

“An assessment is the quantification by the Commissioner of the statutorily imposed liability of the particular taxpayer to tax for the year in question. The making of an assessment including an amended assessment requires the exercise of judgment on the part of the Commissioner in quantifying that liability on the information then in the Commissioner’s possession.  It involves the ‘ascertainment’ of the taxable income and of the resulting tax liability just as it does under the Australian definition  of ‘assessment’ which uses the expression ascertainment.  So, as Kitto J. said in Batagol v. Commissioner of Taxation of the Commonwealth of Australia (1963) 109 C.L.R. 243, 251-252, it is ‘the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case’.”

 

13. In making the section 191(8) joint assessment the Commissioner must, therefore, ascertain the profits and losses of the group members by reference to the substantive charging and relieving provisions, and calculate the tax payable accordingly.

 

14. It would be strange indeed if the substantive statutory liability to tax of the group as a whole could be reduced by the agreement of the Commissioner to make a joint assessment under section 191(8).  As was pointed out by Salmon J. and the Court of Appeal it would be surprising in particular if subsection (8) was intended to enable losses to be offset against the profits of other members of the group without being made subject to the restrictive provisions of subsection (7A).

 

15. The Court of Appeal also attached significance to the fact that the latter part of section 191(8) provides for each of the group members to be “severally liable for an amount of income tax equal to the amount that would have been assessed if a separate assessment of income tax in respect of the income derived by that company in that income year had been made”.  Mr. Goldsmith submitted that the effect of these words were simply to give the Commissioner a degree of flexibility in selecting the company or companies from which he could recover the tax charged by the joint assessment, while at the same time limiting the liability of each company to what it would have had to pay if separately assessed.  The Court of Appeal considered, however, that:-

 

“If each company in the group is liable to pay the same amount of tax as it would be liable to pay if separately assessed, then there can be no tax advantage in a joint assessment … The liability of the individual companies is not changed by the mere fact of joint assessment.”

 

16. Their Lordships agree.  The language of section 191(8) supports the case for the Commissioner rather than the case for the appellant.

 

17. Nonetheless, submitted Mr. Goldsmith, the statutory precursor to section 191(8), which was couched in similar terms, had produced a substantive change in the liability of the group to income tax.  Why should its terms no longer have that effect?

 

18. In order to understand the nature of the precursor to section 191(8) in its original setting their Lordships think it best to begin with section 141 of Land and Income Tax Act 1954.  This section was introduced at a time when the rate of tax payable by a company depended upon the size of its profits.  Taxpayers therefore had an incentive to avoid tax by dividing their activities amongst a number of companies.  Section 141 was designed to counter this avoidance by enabling the Commissioner to treat companies under the requisite degree of common ownership or control as a single entity.  Its precise terms were as follows:-

 

“141.  If the Commissioner is satisfied with respect to two or more companies consisting substantially of the same shareholders or under the control of the same persons that the separate constitution or the separate continuance of those companies is not exclusively for the purpose of more effectively carrying out their objects, but is wholly or partly for the purpose of reducing their taxation, the Commissioner may, for the purposes of income tax, treat those companies as if they were a single company, and in any such case those companies shall be jointly assessed and jointly and severally liable, with such right of contribution or indemnity between themselves as is just.”

 

19. It will be seen that the section was concerned wholly with the aggregation of profits for the purpose of calculating the rate of tax properly payable by the group of companies.  It made no provision for the setting off of losses, nor for subvention payments.  It was designed to prevent, not to bring about, a reduction in tax by the profit making companies.

 

20. Their Lordships would observe in passing that the substantive taxing effect of section 141 is produced by the legislative authority given to the Commissioner to treat the group of companies, for the purposes of income tax, as if they were a single company.  The closing three lines of the section, providing for the assessment and recovery of the tax, are merely machinery for giving effect to the statutory liability.

 

21. In October 1967 the Taxation Review Committee (“the Ross Committee”) presented its report, recommending two changes which are relevant for present purposes. The first was the mandatory joint assessment of companies in the same group, in place of the discretionary section 141 regime.  Mandatory joint assessment was said to be more equitable to company groups generally, and to overcome the practical difficulties experienced by the Commissioner in establishing a tax reduction purpose before utilising his powers under section 141.  The second was the introduction of a capacity to group losses and profits of group members.  Two regimes were proposed.  The first, applicable to companies wholly owned by the same persons involved mandatory offsets by a deduction mechanism.  The second regime, which was to apply to companies with substantially the same shareholders, involved the making of subvention payments by profit making to loss making group members, the payments being treated as income of the recipient company and as a deductible expense of the paying company.  These recommendations were substantially implemented by subsections (4), (6) and (7) of a new and expanded section 141 which was introduced by section 27 of the Land and Income Tax Amendment (No. 2) Act 1968, but with the significant difference that subsection (4), instead of providing for the joint assessment of the companies in the group, provided for their incomes to be aggregated for the purpose of calculating the applicable rate, thus achieving the same substantive effect as the discretionary aggregation by the Commissioner which had been authorised under the original section 141.  The new section 141(4) said nothing about assessment or recovery.  Nor did the loss relieving provisions of subsections (6) and (7). Subsection (9), however, the forerunner of the later section 191(8), permitted the Commissioner, in his discretion, to make a joint assessment on the income of the companies in the group, and also, like the original section 141, provided for the companies to be jointly and severally liable for the tax.  Subsection (9) was worded in precisely the same language as the later section 191(8) save that it opened with the words “notwithstanding anything in subsection (4) of this section”.

 

22. Mr. Goldsmith submits that these opening words make it clear that, in cases where there was a joint assessment under section 141(9), it was the joint assessment which had the substantive effect of imposing tax liability upon the combined profits and losses of the group at the appropriate rate.  It superseded and went wider than the aggregation for rate purposes produced by subsection (4).

 

23. This submission too their Lordships are unable to accept.  It places a weight upon the opening words of section 141(9) much greater than they will bear.  The submission might be stronger if the legislature had literally followed the first recommendation of the Ross Committee and had made the joint assessment the statutory means of imposing the appropriate rate of tax. Their Lordships doubt, however, whether the Ross Committee intended the assessment itself to produce a substantive result.  But be that as it may, both in its original and in its amended and finally enacted form the new section 141 appears to their Lordships clearly to preserve the distinction between the substantive provisions of subsections (4), (6) and (7) and the procedural assessment and recovery provisions of subsection (9).  This was the conclusion reached by the Court of Appeal who relied again upon the concluding words of section 141(9), later section 191(8), as showing that the joint assessment leaves each company liable for the same amount as if it had been assessed individually, and cannot therefore have a substantive effect.

 

24. For the sake of completeness it should be noted that in 1976 the graduated income tax was abolished. Thereupon the requirement for mandatory aggregation of the profits for group companies came to an end, and subsection (4) and the opening words of subsection (9) were repealed.

 

25. Mr. Goldsmith’s third submission was that section 191(8) should be regarded as an earlier and simpler version of the consolidation regime introduced as the next stage in the taxation of groups, which took effect from the income year 1993-94.  In order to give full weight to this submission it is necessary to bear in mind the appellant’s complaint that the deprivation of loss relief to which the group was retrospectively subjected by reference to the provisions of section 188(7) and section 191(7A) was unfair and unjustifiable in principle.  Mr. Goldsmith pointed out that subsection (7A) had only been introduced to section 191 in 1980, that is to say twelve years after the original section 141(9), the ancestor of section 191(8), had come into force; and that subsection (7A) is expressed to apply to subsections (5) and (7), but not to subsection (8).  The combination of section 191(7A) and section 181(7), producing a retrospective disallowance of the benefit of group losses and subvention payments if there were a more than 60% change in the shareholding of the parent company during the year following the year in which that benefit accrued, served in his submission no legitimate legislative purpose and had in fact disappeared in the 1993 consolidation. The role of section 191(8) was to provide a means by which the bane of subsection (7A) could be removed with the Commissioner’s agreement, until the law was corrected in 1993.

 

26. Again, their Lordships are unable to accept this submission.  The provisions of subsequent legislation cannot be invoked in order to construe an earlier Act unless the earlier Act is ambiguous (see Kirkness v. John Hudson & Co. Limited [1955] A.C. 696 per Viscount Simmonds at page 713) and their Lordships can find no ambiguity in the relevant provisions of section 191.  Nor, more generally, is it legitimate in an income tax context to construe a particular provision as if it were designed to anticipate an already planned improvement in the law. For income tax is an annual tax, and in the absence of express retrospective legislation, must be imposed in strict accordance with the law in force for the year for which it is charged.  Finally upon this submission, and reverting to a point earlier made, their Lordships would observe that the harsh result of which Mr. Goldsmith complains must inevitably affect group companies which have been the subject of separate assessments, and it would be unfair and inappropriate for them to fare less well than those - a very small number their Lordships were told - who had applied for and secured the Commissioner’s agreement to a joint assessment.

 

27. Fourthly, Mr. Goldsmith relied upon the practice of the Commissioner in applying the section 191(8) system.  The original aggregation of profits and losses within a specified group under section 141(6) was abolished by the Income Tax Amendment Act (No. 2) 1977.  Under the provisions of that Act the mandatory offset procedure became elective, and it became and remained necessary for the loss making company to nominate the other group company or companies in whose favour the loss was to be credited.  When making joint assessments, however, the Commissioner did not in practice require elections to be made for this purpose.  Nor, it was said, in applying section 191(7) did he require subvention payments to be made.  His practice was simply to aggregate the income and losses of the group companies in order to produce a single group figure upon which the section 191(8) joint assessment was made.  This practice demonstrates, submits Mr. Goldsmith, that the appellant did not need to invoke subsection (5) - or, if it became relevant, subsection (7) - in order to obtain loss relief.  The appellant was therefore unaffected by subsection (7A).  Mr. McKay, for the Commissioner, accepted that the Commissioner’s past practice, as set out in his Technical Rulings Manual, made no reference to the need for an election under subsection (5A) to secure the grouping of losses with profits.  He said that the Manual, correctly or incorrectly, but in any event fairly and reasonably treated a subsection (5A) election as implicitly made by a group coming into the section 191(8) regime.  Their Lordships do not find that a satisfactory answer because one of the features of the election procedure was, of course, that the benefit of the loss should go to the nominated company or companies rather than automatically being distributed pro rata.

 

28. The Technical Rulings Manual does not suggest any relaxation of the rule that a subvention payment had to be made in order to secure the benefit of subsection (7), but in the light of the appellant’s assertions their Lordships are prepared, like the Court of Appeal, to approach the matter on the basis that, to put it no higher, the Commissioner may have dispensed with the need for subvention payments when accepting the subsection (7) deduction.

 

29. The Court of Appeal added:-

 

“We are not satisfied, however, that any such practice can be regarded as a proper interpretation of the section.”

 

30. Their Lordships agree.  Putting it a little more fully, their Lordships would say that the concept of an implied election under subsection (5A) cannot be justified by reference to the language of the subsection.  Nor can the obtaining of relief under subsection (7) be justified without an actual subvention payment being made.  If, in what they see to be the best interests of all concerned, the Commissioner and his officials take short cuts through the legislation they run a risk of embarrassment if no more, a risk which has materialised in the present case. What is certain is that the unauthorised practice cannot alter the law.

 

31. Mr. Goldsmith’s fifth and final submission was that, if the Commissioner’s arguments were to be accepted, it followed that section 191(8) was superfluous; it served no useful purpose.  This, however, brings the argument back to the original question - does the subsection have a substantive effect, or is it merely procedural?  Their Lordships are satisfied, for the reasons given, that the subsection has no substantive effect: but that does not deprive it of a useful procedural function as a means of assessing and recovering the tax payable from the group.

 

32. Their Lordships will therefore humbly advise Her Majesty that the appeal should be dismissed.  The appellant must pay the costs of the respondent before their Lordships’ Board.

 

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