Supreme Court confirms Frucor’s tax avoidance and finds shortfall penalties apply

The Commissioner of Inland Revenue (Commissioner) disallowed interest deductions claimed by the predecessor of Frucor Suntory New Zealand Limited (Frucor) in respect of a tax-driven structured finance transaction it entered into in March 2003 involving associated companies and the Deutsche Bank.

The Commissioner contended that the funding arrangement was a tax avoidance arrangement in terms of s BG 1 of the Income Tax Act 2004 (ITA) and denied a portion of Frucor’s claimed interest deductions in the 2006 and 2007 income tax years. The Commissioner also contended that Frucor took an unacceptable tax position and an abusive tax position such that shortfall penalties should be imposed.

Frucor challenged the assessments and was successful in the High Court, with that Court holding that the funding arrangement was not a tax avoidance arrangement. The Commissioner’s assessments for 2006 and 2007 were thereby cancelled.

The Commissioner appealed and the Court of Appeal allowed the appeal, set aside the orders of the High Court, reinstated the Commissioner’s assessments based on tax avoidance with regards to the disallowed deductions but held that shortfall penalties did not apply.

Frucor appealed the finding on tax avoidance and the Commissioner cross-appealed the finding that shortfall penalties did not apply.

The Supreme Court dismissed Frucor’s appeal, finding there was tax avoidance and allowed the cross-appeal, finding shortfall penalties for taking an abusive tax position also applied.

Tax Information Bulletin Vol 35 No 1, February 2023