Trust Tax Appeal Dismissed

Press, Volume CVI, Issue 31224, 23 November 1966, Page 3

Trust Tax Appeal Dismissed

(N.Z. Press Association) WELLINGTON, Nov. 22. In three separate judgments, the Court of Appeal has unanimously dismissed an appeal by Edwin Louis Elmiger and Wilfred Trevor Elmiger, both of Taupo, contractors, against a decision of Mr Justice Woodhouse in the Supreme Court at Hamilton on March 24, 1966.

In the Supreme Court, the appellants had appealed, by way of case stated, against an income tax assessment made by the Commissioner of Inland Revenue.

The decision of Mr Justice Woodhouse upheld the Commissioner’s assessment.

The Court of Appeal has upheld this decision. The cases centred on a trust set up in November, 1962 by the father of appellants, and an initial fund of £lO, of which the appellants became trustees. The immediate beneficiaries were their respective wives and children. Mr Justice Woodhouse, in his decision, said the trust deed contained a remarkable provision that at the termination of the trust on March 31, 1968, the trust capital should revert to the trustees.

In November, 1962 the appellants sold to the trust two of their earthmoving machines at a price cf £5250, which was treated as an interest-free loan payable on demand. The appellants then hired back the machines from the trust. Assessment Revised

The Commissioner of Inland Revenue formed the opinion that transactions between the appellants and the trust were void in terms of section 108 of the Land and Income -Tax Act, 1954, and revised the tax assessment on the partnership. It was against this assessment that the appellants appealed. In dismissing the appeal, Mr Justice Woodhouse found that it was a purpose of the transactions to diminish income receipts and so achieve a favourable alteration in the incidence of income tax for the appellants.

The Court of Appeal comprised Mr Justice North, Mr Justice Turner and Mr Justice McCarthy.

Mr M. F. ChilwelL Q.C., with him Mr P. S. Lewis, appeared for the appellants.

Mr J. C. White, Q.C., with him Mr I. L. M. Richardson, appeared for the Commissioner. “For Avoiding Tax” Mr Justice North said that notwithstanding the unusual nature of the trust arrangement and the liberty which the appellants gave themselves to alter the terms of hiring as it suited them, the Commissioner had not attempted to argue that there was any sham or pretence disclosed. It was therefore solely a question of whether what was done contravened the relevant section of the Land and Income Tax Act. His Honour said: “I came unhesitantly to the conclusion that the appellants adopted this arrangement for the primary purpose or object of avoiding income tax. The facts speak not in a whisper but in a loud and clear voice.” His Honour said that the scheme cut almost in two the income which the appellants had previously enjoyed from the business. In giving the unanimous apinion of the Court that the appeal be dismissed, the judgment allowed the Commissioner costs of £2OO and disbursements.

Second Opinion In his judgment, Mr Justice McCarthy said the appellants’ contracting operations, in the years material to the case, were substantial. The trust arrangement they entered into was not one of these family dealings so common in New Zealand, where income-earning assets are transferred so that the income earned by the assets can be said not to come into the hands of the donor.

“Here, on the contrary, the appellants continued their business to all intents and purposes as before, they continued to use the machines, and the total earnings produced by the combination of their labours and the use of the machines, continued to come into their hands as income in their business,” said Mr Justice McCarthy. “Clearly, those earnings were income derived by them on which tax would be payable,” except for expenses which could be properly deducted.

But the appellants had claimed that they were entitled to set off against that income the payments they had contracted to make under the trust arrangement, which the Commissioner declared void. "I view what happened here as an obvious and deliberate attempt by the appellants to rid themselves of the payment of tax, the liability for which would, if the transaction had not been entered into, have fallen clearly and inevitably on them. I have no doubt that Mr Justice Woodhouse was right when he came to the conclusion that the different manoeuvres viewed together amounted to a concerted action to reduce the tax payable by the appellants,” said Mr Justice McCarthy. In his decision, Mr Justice Turner said the facts showed overwhelmingly that the arrangement was for the diminution of the appellants’ assessable income. Section 108 of the Act said any contract, agreement or arrangement was void insofar as, directly or indirectly, it

had, or purported to have, the purpose or effect of in any way altering the incidence of income tax, or relieving any person from his liability to pay income tax. The only difference the arrangement made to the appellants was that, from the same gross income, they contended they were now able, by virtue of the arrangement, to set up a new deduction. Mr Justice Turner said he had no difficulty in concluding that the transactions with which the Court was concerned amounted to an arrangement to relieve the appellants of income tax. As the arrangement contravened the relevant section of the Act, it was void as against the Commissioner of Inland Revenue.