Report to the Treasurer and Minister of revenue - by a committee of experts on tax compliance

Bill Birch Treasurer

Report to the Treasurer and Minister of revenue

By a committee of experts on tax compliance

Chapter 2 -
The Rewrite Project

Introduction

2.1 The first of the committee's terms of reference requires the committee to consider 'tax compliance costs, including how tax laws may be simplified and made more coherent and understandable In amplification, the committee's guidelines state: 'the committee should comment on the extent to which the rewrite and simplification projects are achieving this term of reference'11. An extract from the guidelines asks:

Are there changes to the rewrite project which would enable it to better achieve the term of reference? In particular, is the rewritten Act: appropriately structured; with an appropriate level of detail; and expressed in plain language; given: the complexity of the policy expressed in the Act; and the ability of taxpayers to exploit lack of detail?

2.2 The guidelines might equally have referred to taxpayers' ability to exploit an excess of detail: sometimes, broadly stated rules are more effective than detailed rules.

2.3 This part of the report addresses these issues, but the committee notes that the rewrite is an ambulatory project that has a long distance to travel before it is complete. So far, the former legislation has been reorganised into the proposed new structure, the 'core provisions'12 have been enacted, with consequent alterations throughout the Act. The alterations that are consequent on the terms of the core provisions are largely mechanical, but they are extensive. The government plans to release a proposed draft of parts C, D, and E of the Act (receipts, expenditure and timing) in June 1999. Subsequent stages of the rewrite process will include the redrafting of parts F to O.

2.4 The release of the draft of parts C, D, and E will not occur before the committee's report is finalised. As a result, the committee does not have a finished product to work on in its attempt to evaluate the rewrite project. The burden of the committee's comments is therefore directed to matters of principle, though the report comments on matters of detail where the rewrite project has reached a stage where that is possible. The committee considers in particular the issue of the interpretation of the Income Tax Act 1994, having posed the following questions:

    What approach is taken by the courts to the interpretation of tax legislation?

    What changes were introduced with the enactment of the legislation in 1994, in particular sections AA 1 and AA 3?

    Did the changes introduced in the 1994 Act achieve their objective?

    What does the committee recommend should be done?

2.5 In summary, the committee has found first, that the New Zealand courts have adopted a relatively restrictive approach to interpreting tax statutes, see para 2.22. Secondly, the objective of the interpretation provisions in the 1994 Act appears to oblige the court to adopt a more purposive approach and to abstain from a restrictive construction, but sections AA 1 and AA 3 promise more than they achieve, see para 2.90. Among many recommendations, both specific and general, the committee has been led to recommend that there should be an assessment of whether the Act should change to a regime-based structure. This change would entail a significant shift of direction for the rewrite process, see para 2.141.

2.6 This section of the report should be read bearing two factors in mind. First, even commentators who conscientiously take into account the unfinished state of the rewrite run some risk of inadvertent unfairness to the project. Secondly, the organisation of the statute and certain other major characteristics of the rewrite were fixed not by officials within Inland Revenue, but on the basis of government decisions.

Principles of Statutory Interpretation

Introduction

2.7 People often have difficulty with interpreting legislation, particularly tax legislation. When applied to the facts of a particular case, the words of a statute may be ambiguous or, while apparently clear, may lead to a result that seems to be unjust, absurd, or out of line with other parts of the Act. In these circumstances courts turn for help to principles of statutory interpretation that have developed over many decades. For lawyers and officials, therefore, the term 'statutory interpretation' carries a great deal of freight. It refers to whole volumes of principles, rules, and maxims that courts call in aid to help them to interpret difficult passages in statutes.

2.8 One of the more important objectives of the rewrite project appears to be to affect in some degree the process of statutory interpretation as it applies to the Income Tax Act. A number of different objectives have been explained to the committee. This report will explain and evaluate those different objectives in due course, and will attempt to determine the extent to which the objectives are achieved or achievable. First it is helpful shortly to explain what statutory interpretation entails, and how courts go about interpreting legislation.

Interpretation of penal and remedial statutes

2.9 Courts adopt a number of approaches to statutory interpretation. One approach involves categorising the statute in question, and employing principles that are thought to be appropriate for that category of legislation. In the present context, the categories of 'remedial' and 'penal' are relevant. Remedial legislation is designed to repair some defect that has become apparent in the existing law. Penal legislation, which includes criminal statutes, exacts penalties for breaking rules.

2.10 Historically, courts have adopted opposing approaches to these two categories. Since Heydon's case (1584)13, whenever a court has categorised legislation as remedial it has tried to work out the purpose of the legislation, and in interpreting the statute it has endeavoured to promote that purpose. For example, when a provision is ambiguous, the court will interpret it in the manner that best promotes what the court sees as the overall purpose of the Act.

2.11 In contrast, when courts categorise statutes as penal they are apt to interpret them restrictively, in order to narrow their scope. The reason is that by imposing penalties penal statutes interfere with the liberty of the subject or take the subject's money or property by fines or forfeitures. Courts take the view that penalties should be imposed only when it is very clear that such was Parliament's intention. Importantly in the present context, courts historically categorised tax statutes as penal, or analogous to penal, because they take money compulsorily from the citizen.

2.12 The judgments of New Zealand courts expressly hewed to this approach to revenue statutes until relatively recent times. For example, in Plimmer v CIR14, Barrowclough CJ cited with approval the following passage from IRC v Ross & Coulter (Blandoch Distillery Ltd): 'If the provision is reasonably capable of two alternative meanings, the courts will prefer the meaning more preferable to the subject15.' In Mangin v CIR16, the Privy Council approvingly quoted from Rowlatt J in Cape Brandy Syndicate v IRC17. In what is possibly the most cited explanation of the restrictive approach to interpreting tax statutes in English jurisprudence, Rowlatt J said:

One has merely to look at what was clearly said. There is no room for intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

2.13 For a long time, New Zealand's Parliament has tried to prevent courts from interpreting penal, tax, or any other statutes in a restrictive manner. Instead, by section 5(j) of the Acts Interpretation Act 1924, Parliament deemed all statutes to be 'remedial', which meant that courts should interpret them according to the purposive approach ordained by Heydon's case. To make sure that there was no doubt, section 5(j) goes further, and directs that every Act shall 'receive such fair, large, and liberal construction and interpretation as will best ensure the attainment of the object of the Act according to its true intent, meaning, and spirit'.

Interpreting tax statutes

2.14 Although section 5(j) deems all statutes to be remedial and lays down rules of interpretation that appear to be generally applicable, the courts do not accord section 5(j) a status that is superior to judge-made rules of statutory interpretation. There is not a hierarchy of rules. Rather, courts treat the rules of statutory interpretation as a group of principles whose status is initially equal. In any individual case, a court gives primacy to the most appropriate principle. In statutory interpretation, the courts avoid hard and fast rules. The importance of any particular principle varies from case to case depending on the facts of the case and on the provision that is to be interpreted.

2.15 One result is that when it comes to interpreting tax legislation, section 5(j) has little effect on New Zealand courts. In CIR v International Importing Ltd18,Turner P said that section 5(j) 'is normally of little material assistance in the construction of revenue statutes'. His Honour explained that the reason is that the object of a revenue statute is to collect tax, and surely it cannot be right that all tax statutes should be interpreted to, in the words of section 5(j), 'ensure the attainment of [that] object'. To put it another way, the courts would explain that they do not approach the Income Tax Act with an assumption that the statute has an overall purpose to maximise tax. In other words, classifying a statute as a tax statute does not of itself help to resolve ambiguities.

2.16 Rowlatt J's approach in the passage quoted above from Cape Brandy Syndicate v IRC appears to conflict with section 5(j) of the New Zealand Acts Interpretation Act 1924. To mention one point of difference, consider the judge's reference to 'equity about a tax'. Here, the judge uses the word 'equity' in its archaic meaning of 'the equity of a statute'. In this meaning, 'equity' refers to the spirit or underlying meaning of the statute. Rowlatt J denies that a tax statute can have an 'equity' or spirit, but section 5(j) directs the courts to identify the 'true intent, meaning and spirit' of all Acts, and to interpret them in that light. As explained above, the Privy Council cited Rowlatt J with approval in Mangin v CIR.

2.17 Part of the explanation may be that although the principles of statutory interpretation are often called 'rules' the courts treat them more as guidelines whose importance varies relative to one another depending on the facts and nature of the case. One commentator went as far as to say, 'A court invokes whichever of the rules produces a result that satisfies its sense of justice in the case before it'19. In declining to apply section 5(j), and in approving Rowlatt J's mot, Turner P in the International Importing case and the Privy Council in Mangin were treating section 5(j) as if it had the same status as other 'rules' of statutory interpretation.

Modern developments in the interpretation of tax statutes

2.18 Modern courts tend to draw back from the unequivocal import of Rowlatt J's words. In CIR v Alcan New Zealand Ltd20, the Court of Appeal referred to the quotation from Cape Brandy Syndicate v IRC and to the surrounding text in the judgment in Mangin v CIR. Speaking for the court, McKay J said: 'It would be a mistake to read this passage as putting revenue statutes in some different category from other legislation with their own peculiar rules of interpretation.'

2.19 Whether New Zealand courts, or some of them, continue to make the 'mistake' that was identified by McKay J, of treating tax statutes differently from other legislation, is not something that can be demonstrated scientifically one way or the other. The difficulty is that legal reasoning in general, and statutory interpretation in particular, do not lend themselves to scientific analysis, nor even, beyond a certain point, to the rules of logic.

2.20 Take the decision in the Alcan case itself. After detailed analysis, the court interpreted the statutory provision in question according to its literal meaning and came down against the Commissioner. But many people would conclude that Parliament, had it thought about the matter, would not have intended the result of that decision, which was, in effect, to allow the taxpayer to exploit a loophole in the legislation.

Summary of the position up to the 1994 Act

2.21 In the circumstances of the case, bearing in mind New Zealand courts' ordinary approach to statutory interpretation, the committee, and most lawyers, would say that in Alcan, the court had no option but to apply the literal words of the Act. Some would say that although the Alcan court applied the existing legislation correctly, the law needed changing in order to enjoin a more purposive approach to interpreting tax statutes. Others would argue that even the existing law that the court purported to apply should have led the court to a more purposive interpretation, closed the loophole, and decided the case in favour of the Commissioner. Yet others would oppose such a degree of purposive interpretation, taking the view that the law is what Parliament says it is, not what Parliament might have said, had it thought further.

2.22 Whichever opinion is correct as far as the Alcan case is concerned, it is certainly true that in comparison with, say, United States courts, New Zealand courts adopt a relatively restrictive approach to statutory interpretation in general and to interpreting tax statutes in particular. Whether it is desirable to move to this more purposive approach is a matter for debate.

Changes wrought by 1994 Act

2.23 In the preceding paragraphs, the committee has tried to explain just what it is that the text of the 1994 Act, as amended in 1996, addresses about the way in which income tax legislation is interpreted. Secondly, the committee has tried to shed light on the difficulty of the drafters' task by explaining something of the considerations that entrenched the traditional approach. In summary, the objective of the interpretation provisions in the 1994 Act appears to be to oblige the courts to adopt a more purposive approach in interpreting the Act, and to abstain from restrictive construction. In the next sections of this report the committee attempts to evaluate the success of the 1996 drafting.

2.24The foundations of the interpretation provisions of the Act are sections AA 1 and AA 3(1), which read:

AA 1 Purposes of Act
AA 1 The main purposes of this Act are
(a) to impose tax on income;
(b) to impose obligations in respect of tax;
(c) to set out rules to be used to calculate the tax and to satisfy the obligations imposed.

AA 3 Interpretation
AA 3(1) The meaning of a provision of this Act is found by reading the words in context and, particularly, in light of the purpose provisions, the core provisions and the way in which the Act is organised.

Significance of section AA 1

2.25 On the face of it, section AA 1 is so obvious as to be redundant. But considering section AA 1 in the light of judicial statements both explicit and implicit to the effect that revenue statutes do not have purposes that can helpfully be consulted to inform the process of statutory interpretation, the committee can understand the objectives of the drafters of section AA 1. If there is to be an attempt to instill a more purposive approach to the interpretation of the Income Tax Act, it is worthwhile to attempt to set out the fundamental purpose of the statute if it can be done in such a way that is helpful to interpretation.

2.26 As it stands, section AA 3(1) tries to instruct judges to interpret the Act in the light of its purpose, and section AA 1 makes that purpose explicit: to wit, and broadly, to impose tax. That is, sections AA 1 and AA 3(1) appear to be intended to oblige courts (or to entitle them, depending on one's point of view) to interpret the Income Tax Act in a more purposive way, more akin to the American manner than to the traditional New Zealand approach.

2.27 Ordinarily, if Parliament expresses purposes like the purpose in section AA 1 at all, it makes them part of the long title of the statute in question. Importing the purpose into the first section of the Act itself, and adding section AA 3, seems to have been calculated to raise the Income Tax Act's primary purpose provision to a greater level of significance.

2.28 The difficulty with what the drafters seem to have tried to achieve in section AA 1 is the problem that this report has already discussed: fundamentally, the objective of any revenue legislation is to collect tax, whether this objective is expressly stated as in section AA 1 or not. The courts have long taken the view that Parliament cannot mean that any ambiguity in a taxing statute should be resolved in favour of maximising the tax take21.

2.29The terms of section AA 1 may provide grounds for arguing that a court construing the Income Tax Act 1994 should revise the view that has just been described. But in the opinion of the committee this argument would not be successful, and section AA 1 would not achieve that objective. That objective would require a much more fundamental change on the part of the courts. If Parliament seeks to change the courts' approach to interpreting the Income Tax Act in this radical manner, it will be necessary to enact much more specific purpose provisions than section AA 1 and, one might add, much more specific directory provisions than section AA 3.

Evaluation of section AA 3(1)

2.30 Section AA 3(1) requires more extended evaluation, organised by reference to the four factors that it stipulates as having to influence interpretation: context, purpose provisions, core provisions, and the way in which the Act is organised.

2.31 The committee first disposes of a drafting comment: the section should read as originally drafted by the Law Commission22, not 'in light of the purpose provisions' but 'in the light of the purpose provisions'. Syntactically, English prose requires the use of the definite article 'the' in this passage, because the metaphor in section AA 3(1) refers to a particular light (the light of the purpose provisions), not to light in general nor to light as an abstract concept.

Context

2.32 Section AA 3(1)'s opening words are no more than a statement of one of the common law approaches to statutory interpretation: 'The meaning of a provision of this Act is found by reading the words in context' However, reported cases show that 'context' in this sense has different meanings depending on the relevant circumstances of the case in question. The meaning of the word varies from the total historical context of an Act together with Parliament's apparent intention at the time that the Act was passed, or to merely the language of the adjacent part of the statute, or something in between. Sometimes a judgment mentions more than one meaning of 'context'.

2.33 For example, in CIR v Alcan New Zealand Ltd23, the Court of Appeal quoted Richardson J in Challenge Corporation Ltd v CIR to this effect:

Consideration of the scheme of the legislation requires a careful reading in its historical context of the whole statute, analysing its structure and analysing the relationships between the various provisions and recognising any discernible themes and patterns and underlying policy considerations.24

In deciding the case the Alcan court considered both the 'historical context of the whole statute' and 'the relationships between [its] various provisions'. In the end, the court gave precedence to the latter, with the result, as mentioned, of allowing the taxpayer to exploit a loophole.

2.34 If the court had instead given the full effect to the historical context of the provision that was urged by counsel for the Commissioner, it would have overridden the literal words of the statute and reached the opposite conclusion, and decided the case in favour of the Commissioner. This contrast reflects a relatively common pattern in tax cases where statutory construction is finely balanced: a narrow, literal interpretation helps the taxpayer, whereas a broader, more purposive interpretation helps the Commissioner. It follows that the word 'context' alone, without amplification, does not advance the apparent objective of the rewrite with which this part of the committee's report is concerned: to instill into courts a generally broader purposive approach to interpretation of tax statutes.


Footnotes

11For the text of the guidelines, see appendix 1.
12 Part B, Income Tax Act 1994.
13 3 Co Rep 7a.

14 [1958] NZLR 147 at 151
15 [1948] 1 All ER 616<
16 [1971] NZLR 591 at 594
17 [1921] 1 KB 64 at 71
18 [1972] NZLR 1095 at 1096
19 Willis, 'Statute Interpretation in a Nutshell' (1938) 16 Canadian Bar Review 16, quoted in Dias, RWM, 1964, Jurisprudence, 2d ed 108.
20[1994] 3 NZLR 439 at 443
21 CIR v International Importing Ltd [1972] NZLR 1095 at 1096 per Turner J, CA, discussed above in para 2.15.
22NZLC R17 A New Interpretation Act, 1990, page 12.
23 [1994] 3 NZLR 439 at 444.2.15.
24[1986] 2 NZLR 513 at 549 [1994] 3 NZLR 439 at 444 [1986] 2 NZLR 513 at 549