Tax assessment reversed

Press, 16 August 1984, Page 22

Tax assessment reversed

PA Auckland The High Court has allowed an objection by the Challenge Corporation, Ltd, against the Inland Revenue Department, reversing a tax assessment by the department in favour of the Challenge group of companies and the liquidator of securitibank.

Mr Justice Barker, in a judgment in the Auckland High Court, said the case raised questions on the interpretation of what was now section 99 of the Income Tax Act, 1976.

He said the section was the successor, with amendments, to the “notorious” section 108 of earlier income-tax legislation.

It was the first time the effect of the amendments had fallen for determination by the Court

The circumstances of the case involved the sale of taxloss companies on the initiative of the liquidator of Securitibank to Challenge Corporation.

Challenge Corporation, now part of the Fletcher Challenge grOup, became interested in buying shares in one of the companies involved in the Securitibank collapse, Kelmac Property Consultants, Ltd. It had incurred a substantial loss in the income year ended March 31, 1978. His Honour said that also involved in the proposal was Merbank Corporation, Ltd, a Securitibank subsidiary and a shareholder in Kelmac, and another Securitibank company. Security Real Estate, Ltd. He said that when Challenge acquired Merbank’s shareholding in Perth Property Developments, Ltd (formerly Kelmac), and Security it had hoped its tax liability would be grouped with that of other companies in its group under the then section 191 of the Income Tax Act

In general terms, said his Honour, if Challenge had not bought these shares in Perth and Security, then the Challenge group's taxable income would have been higher by $5.83M and $484,000, respectively. “Given company income tax at 45c in the dollar, the result of these transactions, if they can be sustained, is to reduce

the Challenge group’s tax liability by approximately 52.85 M.”

His Honour said that, initially, correspondence between Challenge and the Commissioner of Inland Revenue concentrated on sections 188 and 191 of the act

The Commissioner, he said, had then sought to invoke section 99 to strike down the transactions for tax purposes. Counsel for Challenge had submitted that section 99 did not apply to the transactions. Challenge, had submitted it was immaterial that the transaction was entered-into purely for the purpose of minimising its tax liability. It was submitted that such a transaction was no different from that of a salaried taxpayer buying life insurance to qualify for a tax exemption. His Honour said that in his view the transaction came within the range of section 99.

However, he said, he had to consider whether the fact that Challenge complied to the letter with specific provisions in the statute, relating to grouping and carrying forward of tax losses, negated the effect of that section.

“The effect of holding that section 99 could strike down arrangements which came within the four comers of a specific part of the act could have far-reaching implications,” said his Honour.

"For example, a company carrying on business to obtain export incentives could find its business threatened by the use of section 99 by the Commissioner.

“Moreover, the existence of an anti-avoidance provision in the grouping and loss carrying forward parts of the statute shows that the legislature turned its mind to avoidance in that context”

His Honour said that, in his view, while section 99 applied to the transaction, its application was prevented in a case such as the present where the taxpayer had observed to the letter an express and complicated provision in the act, even where the tax-payer’s aim was to reduce its tax liability.