Test for intention/purpose

Summary

The High Court clarified that the CIR does not need to look at the intentions of the individual partners but left it open for an individual partner to show a different intention or purpose from the other partners.

The High Court also discussed the intention/purpose test.

Facts

In 1993 the Railtons purchased a pastoral lease - the Mt Rosa Station. In November 1994, Mr Railton wrote to the Commissioner for Crown Lands (CCL) regarding the prospect of free holding the property under the tenure review process.

In early 1996, the Railtons discussed with the Boanas the prospect of their joining in partnership in the Mt Rosa station and the farming operation there. In April 1996, a partnership agreement was entered into between the parties; it was agreed that the partnership would be kept secret from the CCL.

On 13 May 1997, a formal agreement between the Railtons and the CCL was concluded that provided for the surrender of the pastoral lease, the division of the land into two parts and a freehold title for 1400 hectares be sold to the Railtons.

Various events occurred prior to and after 13 May 1997 in relation to the Mt Rosa Station. These included making submissions on district plans, seeking professional advice on accounting and tax issues, exploring options of using the land, seeking professional advice on using the land (eg, for subdivision, water, a four-wheel drive and a fly-by-wire venture, vineyard potential) and banking advice.

In May 1999, a conditional sale/purchase agreement was entered between the partners and Management Systems Ltd. This contract did not proceed. On 11 February 2000, the partners agreed to sell the Mt Rosa Station for $4.32 million to Antimony Investments Ltd, the shares of which were held equally by Jeremy Railton and Guy Boanas.

The Commissioner investigated and assessed the $4.32 million as assessable income to the partners. On 21 September 2005, Peter Consedine, area manager, made the assessment but the assessments were placed into account review by the computer system and not released from there until 13 October 2005. The time bar allowing for the extension under section108B TAA94 commenced on 1 October 2005.

The partners challenged the assessment and were successful in the Taxation Review Authority (TRA) on the intention/purpose issue (ie, they did not have an intention/purpose) - Case Y3, (2007) 23 NZTC 13,028; there was also a supplementary decision - Case (2007) 23 NZTC 13,097. The Commissioner appealed to the High Court on the intention/purpose issue. The findings of the TRA were that it was the individual partners intention/purpose that was relevant and that the building and curtilage may be apportioned and exempt under section CD1(3) of the Income Tax Act 1994. The partners cross-appealed the TRA decision that the assessments were made before the commencement of the time bar.

Decision

The High Court firstly dealt with the issue of the time bar as, logically, if the assessments were time barred there were no assessments to challenge. The Court confirmed that CIR v Canterbury Frozen Meat Co Ltd established the essential requirements for a valid assessment and held:

[15] "The assessment" is that exercise of judgment by the Commissioner's delegate, and it is clearly not any particular piece of paper. It is accepted that there is no requirement to give notice of the making of an assessment to the affected taxpayer within any particular time.

[16] The concurring judgment of McKay J emphasises that it has to be the best the Commissioner can do, on the information available to him at the time. It must represent the delegate's honest opinion on what is available to him. It cannot be arbitrary, tentative or qualified.

The Court went on to hold that Peter Consedine was unaware of the prospect of account review:

[19] ... and by the time he had signed off, he treated his work as definitive and the reflection of an honestly held opinion as to the extent of the taxpayers' liability, subject only to challenge by the disputes process.

The Court held that the position would have been different if the Commissioner's delegate was conscious at the time s/he purported to make the assessments that the assessments would thereafter be subjected to further internal review; in those circumstances the purported act of assessing the taxpayers would be conditional or less than definitive (paragraph 21).

Having determined that the assessments were not time barred, the Court went on to consider the approach the Court took on an appeal.

The Court clarified how an appeal is to be considered by the Court.

[35] The Court is not necessarily obliged to consider for itself the entire record in order to arrive at its own view on what the correct result should be.

and deference to the original decision-maker is not presumptive; see Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar [2008] 2 NZLR 141.

The Court then considered the law of "purpose/intent" under section CD 1(2) (a) ITA94. Firstly the Court considered what "purpose" and "intention" meant. In many situations intention will be more immediately manifested at the time of acquisition whereas a purpose may not manifest until after acquisition. A conditional purpose may constitute the requisite purpose but not in all cases; it is a question of fact and degree and the purpose or intention need only be one amongst a number of purposes or intentions.

[57] ... However, in reconstructing the purposes of a purchase, it is as if managers with delegated authority have to justify the purchase to a board of directors or the company's shareholders, in the business sense, ie Why did you buy? How do you justify having spent the money you did? Although not universally applicable, these are questions, the answers to which should reveal the purpose or object of the acquisition in cases like the present.

The Court went on to consider that, in the absence of a general capital gains tax, section CD 1 (2)(a) is, in effect, where the land is treated as if a trading asset. The requisite purpose or intention on acquisition will not necessarily manifest in plans for development or in pursuit of initiatives such as to procure zoning changes.

Having set out the legal position, the Court then considered the issue of whose purpose or intention - the individual taxpayer's or the partnership's. The Court found it was the partnership's and the Commissioner did not need to start by attempting to attribute purpose/intention on an individual basis; thus the Authority adopted the wrong approach. However, the error was not one that was material to the TRA's reasoning on the outcome as factually the partners all acted together. The Court left open that, in very limited circumstances, an individual partner may be able to establish a purpose/intention different from that of his/her partners.

The Court then analysed the factors identified and addressed by the Commissioner as preventing the partners from negating the intention/purpose. The Court finally "stood back" and tested the overall impact of these matters and:

[129] Overall, I consider the evidence establishes a tolerably clear picture of these four taxpayers as users of the property they had free held to best advantage, rather than being a partnership that acquired the land with a purpose or intention of disposing of it, whether that was a single purpose or one among a number.

and:

[132] Accordingly, as the test in section CD 1(2)(a) is to be applied to the factual circumstances of this acquisition, I am satisfied that the taxpayers were correctly treated as discharging the onus on them of off-putting the existence of a purpose or intention of resale at the time of acquisition of the freehold in 1997.

The Court did not address the issue of apportionment of the buildings and curtilage for the purposes of the business premises exemption. The Court, given its finding that the partners did not have a purpose/intention, did not need to address this issue.