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Dow V Acc (168/2004) Social rehabilitation - discretion

#1 User is offline   ernie 

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Posted 24 September 2004 - 08:47 PM


District Court, Wellington (168/2004)
Judge D A Ongley

Mr J Miller, for Appellant
Mr McBride, for Respondent

  • Mr Dow was rendered a tetraplegic when a motor bike he was riding went off a cliff on 6 December 2000. He was then 18 years old, and had recently left home to work as a farm hand. The issue in this appeal is whether the Corporation has an obligation to fund the construction of an independent housing unit for him to live on his parents' residential section.


  • Mr Dow is fully dependent for all transfers and full assistance is required to meet his hygiene needs. He is fully dependent for bowel and bladder management. He is completely dependent on meals and fluids being prepared for him. He is not able to re-position himself or regulate his body temperature. The ACC appointed assessor stated that the appellant’s level of dependence across all areas of function would necessitate 24 hour care both direct and indirect.

  • As a tetraplegic the appellant needed his accommodation modified for his needs and to enable him to maximise his independence. The Corporation appointed an assessor to carry out a home modification assessment.

  • All parties considered it best for Mr Dow to live close to his parents at 2 Bruce Street, Ngongotaha near Rotorua. An extension to his parent’s home was the option preferred by the family and accepted by the ACC appointed assessor. Initially the assessor thought a unit could be transported onto the section. That option was investigated but was not viable. The focus then turned to extending the home to include a self contained unit. The family wanted it linked to the house by a carport and access ramp. The Corporation considered that the unit did not need to include kitchen and laundry facilities because they were available in the main house.

  • A particular reason for wanting a self-contained unit was to minimise the impact on Mr Dow's father’s mental health. He is a returned serviceman who suffers from Post Traumatic Stress Disorder. The family recognised that the presence of the son's caregivers in the main living area would adversely effect the father’s health. The Corporation considered that the impact on the father’s health was not a relevant consideration when making home modification decisions. The matter was resolved because the family was able to get funding for that aspect of the modification from the local RSA.


  • In February 2001 the Appellant was referred to Joanne Smith, Neurological Occupational Therapist, for assessment of initial housing modifications to the Appellant's parents' house in Ngongotaha. In March 2001 Ms Smith completed an initial Home Modification Assessment for the Appellant. The report noted that:

    The Appellant's parents did "not see it as appropriate for the family home to be altered to become wheelchair accessible ".

    The Appellant's parents intended moving from their current home and possibly from Rotorua in the next 2 - 5 years.

    The Appellant's family "are considering the option of an independent unit at the rear of the section with a covered pathway to the main house in order that Shawn and a caregiver could be accommodated on the family property". Any such unit was to be removed from the property if the Appellant's parents moved.
    Alternatives, in particular the option of ACC and Community Housing modifying a close-by Housing New Zealand home, were raised with the Appellant's parents.

  • Ms Smith stated that confirmation needed to be obtained that the option of a unit was viable, and that the Appellant's parents were in a position to meet any potential costs associated with the option of a self-contained unit, as well as clarifying ACC's responsibilities both initially and in the event that the Dows were to sell their home. She recommended that an architectural draftsman be consulted about the technical viability of placing a removable self-contained unit on the property.

    Statutory provisions

  • The requirements for the provisions of home modifications are in clause 39 and the assessment requirements are in clause 41 of the First Schedule to the 1998 Act. The housing modification must be “necessary and appropriate” clause 39(3)(b). The only question here was whether it was necessary to duplicate the kitchen and laundry facilities when building a unit next to the parents' house which already contained them.

  • The need is assessed under clause 41. Matters to be taken into account in making the assessment include at clause 41(4)(f) achieving the relevant rehabilitation outcome in the most cost effective way. The provisions are here set out:

    41 Assessment and reassessment of need for social rehabilitation

    (1)An assessment under this clause assesses the insured's need for social rehabilitation and identifies the specific social rehabilitation that the insured needs.

    (4)The matters to be taken into account in an assessment or reassessment are—

    (a)The activities of daily living the insured was able to perform before suffering the personal injury:

    (b)The activities the insured is able to perform after suffering the personal injury:

    ©The limitations suffered by the insured as a result of the personal injury:

    (d)The kinds of social rehabilitation that are appropriate for the insured to minimise those limitations:

    (e)The rehabilitation outcome that would be achieved by providing particular social rehabilitation:

    (f)The alternatives and options available for providing particular social rehabilitation so as to achieve the relevant rehabilitation outcome in the most cost effective way:

  • Cost effectiveness is a consideration under cl 41 and also a mandatory requirement in cl 47 following:

    47Modifications to the home: matters to which insurer to have regard

    (1)In deciding whether to provide modifications to the home, the insurer must have regard to—

    (a)Any rehabilitation outcome that would be achieved by providing them; and

    (b)The difficulties faced by the insured in doing the following without the proposed modifications:
    (i)Gaining access to his or her home:
    (ii)Enjoying reasonable freedom of movement in his or her home:
    (iii)Living independently in his or her home; and

    ©The likely duration of the insured's residence in the home; and
    (d)The cost, and the relevant benefit, to the insured of the proposed modifications; and

    (e)If the home is not owned by the insured, whether the owner agrees to the modifications being done; and

    (f)The likely cost of reasonable alternative living arrangements; and

    (g)The likely duration of the disability arising from the personal injury for which the insured has cover.

    (2)For the purposes of subclause (1)(b)(iii), the assessment of whether an insured is living independently is not affected by whether the insured lives with others.

  • So that under cl 47(1)(f) likely cost of a reasonable alternative becomes relevant. It is not the actual cost of a reasonable alternative.


  • In August 2001 the Serious Injury Manager gave approval in principle to the housing modifications and the funding of a bedroom, therapy room, ensuite and ramps. A plan was drafted including the utility room and three quotes were obtained for the cost of construction. The most cost effective quote for building the unit was $91,275.75. In the executive summary prepared by the case manager the cost of a utility room seen as being outside the responsibility of the ACC was calculated at $12,785. Leaving the remaining contribution required by ACC at $68,322.18. The RSA advised that it would contribute towards the costs.

  • As an alternative the insurer also obtained an estimate from an architect of $42000 for the cost of modifying a three bedroom house. The Housing Advisory Panel reported as follows:
    The Housing Advisory Panel discussed the proposed modifications on the 28 November 2001 and 19 December 2001 and noted the following:

    1.That Shawn has confirmed his long term residential intent and provisions have been made to bequeath the family home to Shawn and his sister.
    2.That the proposed attached unit provides a practical solution to meet Shawn's assessed needs as Shawn is not able to live within the family home due to his father's condition.
    3.The request to fund the entire project (less the RSA contribution) as well as the cost of continuing rest home fees.

    The Panel requested that the building advisor provide an estimate of the typical modifications required to a standard 3 bedroom home to achieve essential wheelchair accessibility. This estimate is $42,000.00 (GST inclusive). The panel recommends that this be used as the basis of ACC's contribution based on the following rationale:
    1.This estimate would likely meet Shawn's assessed injury related needs had Shawn owned or rented a standard 2 or 3 bedroom home.
    2.The family's initial request for a stand alone unit and the subsequent compromise of an attached unit to the family home is not solely based on the claimant's assessed injury related needs, but to also minimise the impact carers in the family home would have on the father's mental health.


    Shawn Dow is a 19-year-old man who has resided in a continuing care facility for the elderly since June 2001. While the panel's recommended level of contribution, if agreed, is unlikely to be acceptable to the family, the panel consider that ACC should base it's contribution on the estimated cost of modifying a standard 2-3 bedroomed house to meet the needs of a claimant with tetraplegia.

  • The architect's assessment was presented as follows:
    The following are cost estimates for typical modifications required to a typical 3 bedroom single storey home to achieve essential wheelchair accessibility, as requested.

    Shower Room Modifications 6 m2 $14,200.00
    New Carport & ramp 30 m2 $16,800.00
    Modifications for bedroom widen door from corridor $ 1,000.00
    New exterior door, Landing & Ramp from wheelchair
    bedroom for emergency egress $ 9,000.00
    Modifications for Therapy room widen door from corridor $ 1,000.00

    Total Estimate $42,000.00

  • The matter then went to the ACC Housing Advisory Panel for comment. In a memorandum dated 8 January 2002 the Corporation recorded its decision to contribute only $42,000 towards modifications of the existing family home. A memorandum of rehabilitation analyst Ross Kelly dated 16 February 2002 explained the matters taken into account:

    When considering this option of modifying a rental property against the specific provisions of clause 47 the Panel made the following conclusions:

    1. Modifying a rental property close to his parents would achieve the rehabilitation outcome of assisting Shawn live as independently as possible having regard to the limitations caused by his injury, while maintaining close contact with his parents (1)(a).

    2. Providing bathroom modifications, a new carport and ramp, bedroom modifications, a second ramped exit from his bedroom for emergency purposes and modifications to a bedroom for therapy purposes would cost $42,000.00 to a typical three bedroom rental property. This would meet his difficulties faced gaining access to the home, enjoying reasonable freedom of movement within the home and living as independently as possible within the home (1)(b).

    3. A long term tenancy agreement would ensure Shawn was able to reside within the property for a reasonable period (1)©.

    4. While a unit attached to the family home has the relevant benefit of his parents being in close proximity, the option of modifying rental accommodation close by would have a similar benefit. Shawn will also be provided with attendant care and would be entitled to a suitably modified vehicle. This would enable Shawn to visit his parents as well as accessing other supports (1)(d).

    5. The panel note that his parents have agreed to the proposed modifications to their property. Similar agreement would be obtained from the owner of a rental property were this option pursued (1)(e).

    6. The likely cost of reasonable alternative living arrangements would be the cost of rental accommodation, either Housing NZ or privately. A three bedroom home would enable Shawn to have a flatmate to share costs as is age appropriate and accommodate an attendant carer is assessed as necessary overnight. The likely cost to ACC is $42,000.00 to modify the property (1)(f).

    7. The Panel notes that the duration of disability is permanent (1)(g).

    Having regard to the above matters requiring consideration within the current legislative provisions, the Panel concluded that the cost of modifications to a rental property close to his parents would be the basis of ACC’s contribution to his preference of building a unit attached to his parent’s property.


  • The reviewer considered that the Corporation had properly exercised its discretion in the provision of social rehabilitation with the purpose of restoring the appellant's independence in terms of section. He applied the principle that it is only appropriate to interfere with the exercise of a discretionary provision where it is shown that that discretion has been exercised on a wrong principle or that there has been a miscarriage of justice.

  • He found it implicit in the Corporation's considerations that it weighed the cost effectiveness of the proposal under cl 41(4)(f) of the Accident Insurance Act 1998 and that was a proper use of its discretion. He found the Corporation's reasoning well set out in Mr Kelly's memorandum of 16 February 2002

    Appellant's submissions

  • Mr Miller submitted that the Act contains guiding principles for rehabilitation including cl 28 of the Accident Insurance Act 1998:

    28. Insured's and insurer's obligations in relation to rehabilitation
    An insured who has suffered personal injury for which he or she has cover -

    (a)Is responsible for his or her own rehabilitation to the extent possible having regard to the consequences of his or her personal injury; but
    (b)Is entitled to be provided by the insurer with rehabilitation, to the extent provided by this Act, to enable the insured to lead as normal a life as possible, having regard to the consequences of his or her personal injury.

    [*And by cl 38 the purpose of social rehabilitation is to assist the insured to undertake the activities of daily living to the greatest extent possible, having regard to the consequences of his personal injury.

  • The appellant submits that once the Corporation has actually decided to fund modifications to a particular home it cannot then limit the amount it pays towards appropriate and necessary modifications by relying on matters listed in section 47(1).

  • Mr Miller argued that the decision is based on an alternative option not actually pursued by the Corporation. The amount of $42,000 is the estimate given as the typical cost of modifying a standard three bedroom home to accommodate a tetraplegic person and give wheelchair access. The appellant's central submission is that the Corporation does not have the statutory discretion to limit its contribution towards home modification based on an estimate of what it would typically cost to modify a home for the average or typical tetraplegic person. No enquiry was made concerning availability of rental properties close to the family home in Ngongotaha and it was not practically assessed as a reasonable alternative.

  • The appellant also submits that once a decision has been made to modify a particular home, the Corporation cannot then limit its contribution towards the proposed modification just because an alternative option may have been cheaper. The appellant submits the Corporation has a statutory obligation to fund the necessary and appropriate modifications recommended by its assessor. In this case the cost of the modifications considered necessary and appropriate by the ACC was $68,322.18, after excluding the cost for the kitchen and laundry.

  • The appellant submits that without specific evidence that renting a three bedroom home in Ngongotaha was a reasonable alternative living arrangement the Corporation did not have the discretion to limit funding for the home modifications based on what it would typically cost to modify a three bedroom home generally, rather than the likely cost for the appellant's specific needs and location.

    Respondent's submissions

  • Mr McBride for the respondent submitted that the Corporation had proper regard to the statutory requirements to take account of “The likely cost of reasonable alternative living arrangements” - clause 41(4)(f); and “The alternatives and options available for providing particular social rehabilitation so as to achieve the relevant rehabilitation outcome in the most cost effective way" - clause 47(1)(f). The complaint is that ACC took account of the cost-effectiveness factor. It was not only entitled to do so, but was obliged to do so. That is not an extra-statutory fetter of the type alleged; rather it is ACC properly exercising its discretion. An increase of the additional $26,322 sought by the applicant is substantial given that the Act requires focus on cost-effectiveness.

  • Mr McBride submitted that it was not established that the most suitable environment for his rehabilitation is in a stand alone unit on the Appellant’s parents’ property. The appellant had left the home as a young adult and close-by rental accommodation was a realistic alternative with the advantage that he might have a flatmate of a similar age or accommodate an attendant carer overnight. Living in modifications to his parents’ house was not a consequence of the injury, but a preference.

  • Mr McBride submitted that the grant of compensation for housing modifications is a broad discretionary exercise and the Corporation correctly took account of the statutory factors in reaching its decision.


  • As Mr Miller submitted, cl 47 is expressed with reference to modification of a particular home. The Corporation adopted the approach of addressing the nature and cost of modifications to that home before looking at the question of reasonable alternative cost. Clause 47(1)(f) requires consideration of the likely cost of reasonable alternative living arrangements. The provisions do not require an exact cost based on a plan for the claimant and the locality. It is sufficient to consider the likely cost so long as that is done on a reasonable basis.

  • I cannot see that the basis can be regarded as unreasonable in the absence of evidence to show that the actual cost would have been greater. There is no material that suggests the cost of modifying a rental property in Ngongotaha would be significantly different from the cost of a similar exercise anywhere else in suburban New Zealand.

  • Mr Miller quite reasonably argues that once the Corporation accepted that it was suitable for Mr Dow to live on his parents' property it had selected one of two most suitable options and then should have funded it. However I do not accept that the s47(1)(f) consideration then became completely redundant.

  • The operation of cl 47 occurs when "deciding whether to provide modifications to the home". It is not a provision for fixing the cost but for selecting the scheme to be adopted to assist the insured to undertake the activities of daily living to the greatest extent possible. Once the scheme has been selected, while having regard to the likely cost of reasonable alternative living arrangements, the latter cost does not dictate the compensation. In a similar way, cost-effectiveness is a consideration under cl 41 but it is not an overriding consideration.

  • The Corporation is not directed to limit the cost to the most cost effective of various alternatives. It would have been open to the Corporation to decide that the more expensive of two possible alternatives was appropriate for Mr Dow and then to fund that proposal. In view of his devastating injury that would have been a fair and reasonable approach. Housing modifications are so fundamental to Mr Dow's rehabilitation that they should not be provided with cost-effectiveness as the main objective.

  • I agree however that the court should not interfere with the exercise of the discretion in this case. The reports do not suggest that the Housing Advisory Panel misdirected itself in applying the legislation. While a different approach would have been more reasonable in the interests of Mr Dow's rehabilitation it remains a matter of discretion.

  • For those reasons the appeal is dismissed. It is reasonably brought and the appellant will have costs of $800.


#2 User is offline   ernie 

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Posted 24 September 2004 - 09:09 PM

While Judge Hole had sympathy for the appellant in Dow, the leading NZ case on the exercise of discretion would indicate he was correct in law to decline to interfere with ACCs exercise of discretion. See below. This is the sort of situation that we wont win in the Courts - but only through pressure for legislative change.








Coram: Gault J, Thomas J, Keith J
Hearing: 24 July 2001
Counsel: L McKay and R G Simpson for Appellant
T Arnold QC and A Beck for Respondent

Judgment date: 30 July 2001


The question in issue
  • The question in issue in this appeal is whether the Judge at first instance exercised her discretion properly in refusing the appellant’s application to separate the trial and resolve five questions as preliminary issues pursuant to r 418 of the High Court Rules.

    Background facts

  • Alex Harvey Industries Ltd (AHI), the appellant, entered into the three transactions in issue in the 1986 and 1987 income years. For convenience, these transactions have been referred to as the NZIMD1, NZIMD2 and SIFL transactions.

  • Each of the transactions consist of a complex series of separate transactions involving different parties. But they share certain common features which were listed by AHI’s counsel, Mr McKay, as follows; money was borrowed by AHI from an unrelated third party; interest was payable by AHI to the lender; in each case AHI on-lent the proceeds of the borrowing to AHI Group Ltd, its immediate parent; interest was payable to AHI by AHI Group Ltd on those on-lendings; and the rate of interest payable by AHI Group Ltd was in each case at a margin over AHI’s own interest cost to the third party lender. The same transactions took place between AHI Group Ltd and its parent, Carter Holt Harvey Ltd.

  • As a consequence of on-lending at a margin over its own borrowing costs, AHI derived assessable interest income at levels greater than the amount of interest deductions taken by it in respect of the NZIMD2 and SIFL transactions. Through an omission to set the on-lending margin at a level sufficient to cover fees incurred in the establishment of the transaction in the NZIMD1 transaction, AHI’s deductions exceeded its assessable income by just over $104,000.

  • Mr McKay frankly acknowledged that the transactions were "circular". He accepted that they invited the Commissioner of Inland Revenue to claim that they were "artificial and something of a pretence".

  • The Commissioner took just that view. He ruled that the three transactions constituted arrangements for the purpose of s 99(1) of the Income Tax Act 1976 and that each was void as against the Commissioner in terms of s 99(2), having for its purpose or effect tax avoidance.

  • As a result, the Commissioner adjusted the assessable income of AHI. He disallowed, in the case of the NZIMD1 and NZIMD2 transactions, in whole, and in the case of the SIFL transaction, in part, the interest deductions claimed by AHI on account of its interest payments to third party lenders. The Commissioner did not, however, and this is AHI’s complaint, deduct the tax costs arising from or under those arrangements by way of an offset against the alleged tax advantage.

  • AHI made an application under r 418 seeking the resolution of five separate questions as preliminary issues. The questions are as follows:

    Does section 99(3) limit the power of adjustment conferred upon the Commissioner by that section to that sufficient to "counteract any tax advantage" derived by the relevant taxpayer from any arrangement that is void in accordance with subsection 99(2) of the Act?

    When quantifying the tax advantage obtained by the appellant from or under each of the three arrangements …, must the Commissioner deduct the tax costs arising from or under those arrangements, by way of offset against any tax advantage?

    In relation to the NZIMD1 transaction, what was the tax advantage (if any) obtained by the appellant from or under that arrangement for each of the income years in question?

    In relation to the NZIMD2 transaction, what was the tax advantage (if any) obtained by the appellant from or under that arrangement for each of the income years in question?

    In relation to the SIFL note issuance transaction, what was the tax advantage (if any) obtained by the appellant from or under that arrangement for each of the income years in question?

  • The first two of these questions are questions of law. Mr McKay described the second question as the key issue to be determined by the Court. The remaining three questions are questions of fact relating to the quantum of the tax advantage obtained by AHI. Mr McKay is confident that the answers to these three factual questions are capable of being resolved by agreement between counsel and, if not, says that they can be determined by the Court largely as a matter of formal proof.

    The judgment in the Court below

  • The application, which was opposed by the Commissioner, came before Potter J. The learned Judge shared the Commissioner’s concern about proceeding on the basis proposed by AHI and declined the application in an admirably succinct judgment. So much of her conclusions as are relevant read as follows:

    …In my view there is little to be gained, and there is potential for delays and increased costs in the longer term, in attempting to put the cart before the horse, to determine as a preliminary issue the question the Court will need to address under s.99(3), if and when on the basis of the evidence and argument presented to it at a full hearing, it determines there is an arrangement, and that one of the purposes or effects of the arrangement is tax avoidance.

    Attractive though it may seem, at least superficially, to obtain preliminary interpretation of s.99(3), to do so in a vacuum is unlikely to be helpful in the long run. Unless the interpretation of s.99(3) is made in relation to established facts, there is the real likelihood that when all the facts are before the Court, the interpretation and application of s.99(3) will again require to be considered by the Court on the basis of the facts as determined by the Court, and the determinations made on other relevant issues which precede the application of s.99(3). The interpretation and application of s.99(3) on the basis of the established facts is chronologically the final step in the process, and should be addressed by the Court in proper order.

    Our decision

  • In this Court, Mr McKay launched a lengthy attack on the learned Judge’s reasoning. He failed to persuade us, however, that Potter J exercised her discretion improperly. The decision which she reached was undoubtedly open to her.

  • Mr McKay favoured the test enunciated in Fitzgerald v Beattie [1976] 1 NZLR 265, at 268, and adopted by the majority (Thomas J dissenting) in Neumegen v Neumegen and Co [1998] 3 NZLR 310 at 320, when deciding an appeal against the exercise of a discretion. The Court, it was said, will not disturb the order made in the discretion of the Judge at first instance unless it is satisfied that the Judge had proceeded on a wrong principle or had given undue weight to some factor or insufficient weight to another or is plainly wrong.

  • But this Court has more recently indicated that it prefers the formulation in May v May [1982] 1 NZFLR 165, at 170, to that of the Court in Fitzgerald v Beattie. See Harris v McIntosh CA 279/98, 30 September 1999, at 4-5. That formulation reads:

    … an appellant must show that the Judge acted on a wrong principle; or that he failed to take into account some relevant matter or that he took account of some irrelevant matter or that he was plainly wrong.

  • The significant difference is that the latter test omits any reference to the Judge having given undue weight to some factor or insufficient weight to another. Weighing and balancing the various factors is an integral part of a Judge’s exercise of his or her discretion. This Court will not repeat that exercise unless the Judge has given such excessive weight to some factor or such patently inadequate weight to another as to be "plainly wrong". The problem is that, if the phrases "undue weight" and "insufficient weight" have this meaning, they are tautologous and unnecessary. If, on the other hand, they do not have that meaning they suggest that the Court will be prepared to substitute its view for that of the Judge – which it will not do.

  • We therefore reiterate that the formulation in May v May, as endorsed in Harris v McIntosh, is to be treated as the applicable test for examining on appeal the exercise of a discretion in the Court below.

  • Relying upon the test in Fitzgerald v Beattie, however, much of Mr McKay’s submissions were directed at showing that Potter J gave undue weight to some factors and insufficient weight to others. It is true that in his oral submission Mr McKay decried the significance of these phrases and sought to rely on the contention that the Judge was plainly wrong. In fact, however, much of Mr McKay’s submission was an open attempt to persuade the Court to enter upon the exercise of remaking the decision reached by the learned Judge in the exercise of her discretion. But he could not point to a wrong principle and fell far short of demonstrating that Potter J was plainly wrong.

  • Several features in our decision not to disturb the judgment of the Court below may be elaborated.

  • In the first place, it became clear that Mr McKay perceived the strength of his argument to rest on the assertion that the Commissioner’s interpretation of s 99(3) was "fundamentally flawed". Thus, he urged, the prospect of incurring unnecessary delay and additional costs should the questions be resolved as preliminary issues is to be balanced against the fact that the Commissioner’s position is completely untenable in law. For his part, the Solicitor-General was reluctant to enter upon the merits of the argument. We shared this reluctance, but explored the issue to a sufficient extent to ensure that there is no reason to depart from the established approach to an appeal of this kind.

  • AHI’s argument that the Commissioner’s assessment under s 99(3) is fundamentally flawed is based on the express language of the subsection. The subsection reads:

    (3) Where an arrangement is void in accordance with subsection (2) of this section, the assessable income … of any person affected by that arrangement shall be adjusted in such manner as the Commissioner considers appropriate so as to counteract any tax advantage obtained by that person from or under that arrangement, and, without limiting the generality of the foregoing provisions of this subsection, the Commissioner may have regard to such income as, in his opinion, either-
    That person would have, or might be expected to have, or would in all likelihood have, derived if that arrangement had not been made or entered into; or
    That person would have derived if he had been entitled to the benefit of all income, or of such part thereof as the Commissioner considers proper, derived by any other person or persons as a result of that arrangement.

  • Mr McKay contends that the Commissioner’s power to adjust or reconstruct the taxpayer’s assessable income is limited to counteracting any tax advantage obtained by the taxpayer whose assessment is in issue from or under that arrangement. He described the subsection as "taxpayer specific". In this case, AHI is a separate taxpayer, and it is that company’s assessment which is in issue. In order to quantify the tax advantage to AHI the Commissioner must take into account any tax costs or disadvantages arising under the arrangement as a whole. It was, Mr McKay argued, then a matter of arithmetic to determine that no tax advantage was obtained by AHI in respect of the NZIMD2 and SIFL arrangements. In respect of both transactions AHI derived a greater sum of assessable income from the arrangement than it claimed by way of deductions from the arrangement. A "net tax disadvantage" accordingly arose to AHI. With reference to the NZIMD1 arrangement, AHI obtained a tax advantage of $104,167 representing the excess of the deductions claimed by it over the level of assessable interest income derived from the arrangement. Mr McKay urged that, to disallow the appellant over $100 million in deductions but to leave as assessable income the sum of $101 million which would not have arisen but for the arrangements, cannot be a correct application of the Commissioner’s power of reconstruction under s 99(3).

  • Notwithstanding his reluctance to enter upon this question, the Solicitor-General sought to broadly outline the Commissioner’s position. The Commissioner takes the view that the deductions were "manufactured deductions" reflecting an attempt to change the cost of capital into tax deductible interest payments. He has chosen to reassess AHI as it was the company in which the arrangement to manufacture the deductions originated, and it was that company into which, following the "circular" transactions which are part of the arrangement, the deductions entered the corporate group. Thus, he claimed, it is that company which gets the advantage of the manufactured deductions. It is immaterial, the Solicitor-General argued, that these deductions might be passed on to others within the group. The Commissioner is not obliged to trace the internal transactions of the group to ascertain which company in the group has the ultimate tax advantage in the terms insisted upon by Mr McKay.

  • Another way of making this point, as we understand it, is to begin with the fact that an arrangement is void under subs (2) for income tax purposes if it has the "purpose or effect" of tax avoidance. Arguably, tax avoidance was the "purpose" of each arrangement initiated by AHI, and the "effect" of the arrangement was complete when the deductions entered the group through that company. The arrangement became void at either point. It is that arrangement which is the "arrangement" for the purposes of readjustment and reconstruction under subs (3), and it is inappropriate to look at the fate of the deductions at a later point in time.

  • Mr McKay is undoubtedly correct to stress that in the express terms of the subsection, the adjustment must be directed to counteracting the tax advantage obtained by AHI. Assuming that the subsection applies and that the Commissioner must rely on s 99(3) to assess the tax payable on AHI’s assessable income, the Commissioner will need to meet the argument that the tax advantage is not the difference between the total interest and fee deductions paid by AHI to, say, NZIMD2 over the 1987 to 1989 years and the assessable income derived by AHI from the loan to AHI Group Ltd over the same period. It would seem that the answer can only lie in a close examination of the arrangements as a whole, and for that reason the Commissioner should have the opportunity to establish the arrangements, and to seek to confirm his perception of those arrangements, in evidence. We do not regard the "model" statement of facts proffered by Mr McKay as an adequate basis for what will obviously be a difficult question of law.

  • While the Commissioner may face some difficulties with the express wording of s 99(3), therefore, we are not presently persuaded that the issue is as straight-forward as Mr McKay would have it. Certainly, we are not inclined to accept that AHI’s legal contention is so strong as to warrant a departure from the established principles governing an application under r 418.

  • It is to be emphasised, in the second place, that AHI wishes to pursue the preliminary questions on the basis of what are essentially "hypothetical" facts. For the purpose of determining the preliminary questions, AHI is prepared to assume each and every fact agreed to or asserted by the Commissioner in his Points of Objection Notice relating to ss 99(1) and (2), including the details of each arrangement and the nature of the tax avoidance purpose or effect of each arrangement. Thus, Mr McKay argued, the Commissioner could not improve his position by insisting upon a trial. But AHI makes this concession for the purpose of the preliminary hearing only. The company does not concede that the transactions constitute tax avoidance. It is in this sense that the facts are hypothetical.

  • There may be cases where facts are to be assumed for the purpose of hearing and determining a separate issue pursuant to r 418. But we do not think that this is such a case. In effect, the Court is being asked to give an opinion on the meaning of s 99(3) in the absence of a finding that the prerequisite to the operation of that subsection, that is, that the arrangements constituted tax avoidance, has occurred. It may well be, as counsel for AHI undertook to the Court that, if the Court’s interpretation of subs (3) accords with the interpretation pressed on the company’s behalf, AHI will end the litigation. It would no longer be economically feasible for it to contest the question whether the transactions constituted tax avoidance. But the fact remains that the interpretation of subs (3) would have been arrived at on a hypothetical basis in that no Court will have pronounced on the critical question under subs (2), which is a prerequisite to the operation of subs (3).

  • In the third place, we take the view, as did Potter J in the Court below, that the determination of the scope and true meaning of subs (3) will benefit from having the facts relating to the transactions in question established at trial. Having heard witnesses, including apparently accounting and expert witnesses, the Court may well obtain a more complete appreciation of the facts than is possible from a written outline. This Court has repeatedly stressed the perils of trying to decide a complex question of law in advance of a hearing and a comprehensive determination of the facts. It is an exhortation which seemingly needs to be constantly reiterated. The relationship of the facts to the law is more often than not impenetrably close, and it is unlikely to promote justice in the individual case or serve the broader requirements of the law to seek to determine questions of law in the abstract. The greatest caution, if not reluctance, is required before the Court will be prepared to enter upon such an inquiry. See Sew Hoy & Sons Ltd (In Receivership and in Liquidation) v Coopers & Lybrand [1996] 1 NZLR 392, at 407.

  • The wisdom of this reluctance on the part of the Court became apparent when discussion during oral argument focused on the wording of the questions posed by Mr McKay, especially the key question relating to the interpretation of s 99(3). It became evident that, while the terms of this question may reflect what AHI wishes to establish, the question as worded may not adequately encompass the Commissioner’s competing arguments. The precise issue to be resolved will no doubt emerge with greater precision from the evidence which is adduced at trial.

  • A further factor which we regard as relevant in this regard relates to the ability of the Commissioner, subject always to the Court’s overall supervision of its processes, to press his claim in the manner which he considers most appropriate. The Solicitor-General left us in no doubt that the Commissioner wishes to proceed with the trial. As already noted, this is not a case where the taxpayer has conceded that the transactions in issue constitute tax avoidance. We therefore consider that the Commissioner should have the latitude to determine which issue is to be pursued first.

  • Finally, we consider that Potter J was correct, and certainly not plainly wrong, in accepting that the risk of exacerbating the delay and costs of the proceeding outweighed any advantage in separating the issues. The Court must be concerned to avoid a multiplicity of appeals and a wasted use of resources. See Strathmore Group Ltd v Fraser [1992] 3 NZLR 385. In this case, the High Court’s decision on the preliminary questions would almost certainly be appealed to this Court. There is then a real likelihood that there would be an appeal to the Privy Council. If AHI were unsuccessful, the case would return to the High Court for the trial which had been deferred. It is then possible that there would be further appeals to this Court and to the Privy Council. In these circumstances, the risk of further delay and additional costs cannot be justified.

  • We also consider in this connection that the Solicitor-General’s point relating to the procedural nature of this issue is not without merit. Whether the issue under subs (2) or the issue under subs (3) is to be heard separately is essentially a procedural question falling for decision in the Court which is to hear and determine the proceeding. Such a question cannot be divorced from case management. Cooke P has aptly made this point. See the Note to Levi Strauss & Co v Kimbyr Investments Ltd (1992) 5 PRNZ 577, at 580. The Note reads:

    …although we are now dealing with an application for leave to appeal made directly to this Court and not with an appeal from Barker J, in accordance with the normal practice we attach considerable weight to the exercise of the Judge’s discretion. That factor is of special importance in a case concerned as this essentially is with a matter of case management in the Judge’s registry. (Emphasis added).

  • For the above reasons we reject AHI’s claim that the decision of Potter J was plainly wrong. To the contrary, we consider that the decision was a correct exercise of her discretion.

  • The appeal is dismissed. There will be costs to the Commissioner in this Court in the sum of $5,000, together with disbursements which, failing agreement, are to be fixed by the Registrar.


Bell Gully, Auckland for Appellant
Crown Law Office, Wellington for Respondent

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