Report to the Treasurer and Minister of revenue - by a committee of experts on tax complianceBill Birch Treasurer
Report to the Treasurer and Minister of revenue
By a committee of experts on tax compliance
CHAPTER 13 - APPLYING
13.1 A central focus of the committee's terms of reference is to report on the robustness of the tax system. A robust tax system requires, in addition to robust tax laws, robust administration by the revenue authority - in New Zealand's case, the Inland Revenue Department. This chapter considers the robustness of New Zealand's tax administration, where it may have been deficient, and where it can be improved.
13.2 Maintaining a robust tax administration is not just an obviously desirable objective of a revenue authority. In New Zealand, it is a statutory duty imposed on the Commissioner of Inland Revenue and all departmental staff. Under sections 6 and 6A of the Tax Administration Act 1994, the Commissioner and his staff are charged with the task of care and management of the tax system and upholding the integrity of that system.
13.3 Encouraging voluntary compliance with tax laws is the strategy adopted by Inland Revenue to maintain the integrity of the tax system. This approach is an orthodox one that has also been adopted by comparable overseas tax authorities - the Australian Tax Office, the United Kingdom Board of Inland Revenue, Revenue Canada and the United States Internal Revenue Service. Encouragement of voluntary compliance involves a number of aspects. One is that those who set out not to comply with the tax laws must be brought to account in an appropriate way. If people see some sections of society being able to escape their legal tax obligations, the tax system will be seen to be unfair and voluntary compliance will be undermined.
13.4 Taxpayers are entitled to consider the tax consequences when deciding whether and how to act or to refrain from acting, so that no more tax is paid than the law requires. Moreover, it can be the duty of company officers and directors to ensure that no more tax is paid than the law requires.192
13.5 The incentive to create schemes intended to test the boundaries of the legislation is high. So also is the temptation to devise schemes, often deliberately complex, in an attempt to confuse the department and so, to fail to meet legal obligations. The tax system needs to be robust if it is to cope.
13.6 In these circumstances, proper enforcement of the law requires the Inland Revenue Department to:
invoke general anti-avoidance laws where they apply;
invoke the criminal law where fraud and not just avoidance is involved;
use other legal means available to it, including the use of injunc-tions and declaratory judgments, to ensure that the tax system is not undermined for the benefit of a few.
13.7 This chapter sets out the committee's views on these issues for the future guidance of the department, tax advisers and taxpayers.
13.8 Until the 1970s the tax scene in New Zealand was relatively peaceful. After that time, however, a number of New Zealand companies and advisers took a more aggressive approach to reducing their tax liabilities. In the committee's view, the Inland Revenue Department seemed slow to react to the possibility of harm to the system. It fell behind this more aggressive approach to the law by elements in the busi-ness and tax community.
13.9 The department, realising its operational deficiencies, has since restructured to become more responsive to taxpayers, and as part of this restructuring, has ensured that more legal advice is available to it.
13.10 The committee has found much to admire in the way the depart-ment is handling the challenges facing it in the present economic and social environment. Although the task is far from over, determined and, in many ways already successful, efforts are being made to produce a streamlined, coherent, comprehensible and efficient system with the lowest economic costs. These steps include the restructuring of the department and the development of the generic tax policy process to enable consultation on proposed legislation. The changes the Inland Revenue Department is making places very heavy demands on it. The standards expected by the Tax Administration Act 1994 are very high, and although the committee considers that the department should aspire to the highest standards, it recognises that this aspiration needs to be balanced by practical hindrances to the achievement of those standards.
13.11 There are, nevertheless, some core requirements that the Inland Revenue Department must always meet. The department should never:
fail to assess the revenue that is lawfully due otherwise than in accordance with the care and management requirements set out in the Tax Administration Act 1994;193
yield to pressure for favourable treatment; or194
grant amnesties from prosecution that could and should be brought.195
13.12 The committee notes a related requirement: that officials must be alert not to overlook the possibility that an arrangement may be fraudulent, and the possible need to obtain the appropriate legal advice.
13.13 In general, maintaining the robustness and integrity of the tax system requires the Inland Revenue Department to apply the law without fear or favour. This principle was laid down by the Court of Appeal in Reckitt & Colman (NZ) Ltd v Taxation Board of Review and the Com-missioner of Inland Revenue where it stated:
Every taxpayer shall be treated exactly alike, no concession being made to one to which another is not equally enti-tledâ€¦ Where there is no express provision for discretionâ€¦ and none can be properly implied from the tenor of the statute, the Commissioner can have none; he must with Olympian impartiality hold the scales between the taxpayer and the Crown giving to no one any latitude not given to others?196
13.14 The committee understands that the department accepts this ap-proach. An example of the implementation of this approach is the de-partment's new Adjudication & Rulings unit, the mandate of which is to use its best endeavours to reach a conclusion that it consider the courts would reach on technical issues before it.
13.15 The committee considers that in carrying out its responsibilities the department has taken too restrictive a view of the secrecy provisions. The department should follow the more liberal interpretation recently adopted by the courts.197 In addition, the legislation should be amended to clarify that the secrecy provisions are not intended to, and do not in fact prevent the department from taking action, such as providing infor-mation leading to criminal prosecutions, to protect the integrity of the tax system.
13.16 Finally, the committee recognises that the onerous duties placed on department also fall on its individual officers. In any large organisa-tion disagreements over how particular matters should be handled will inevitably arise. In the department's case, these disagreements can go to the heart of how best to protect the integrity of the tax system. That being the case, and considering the need to protect the confidentiality of individual taxpayer affairs, the department needs to be especially vigilant in establishing satisfactory procedures for resolving internal disagree-ments over the handling of individual taxpayer's cases.
13.17 In the Commissioner's Comment column in the department's newspaper, Revenews, the present Commissioner said:
There is no denying that public attitudes towards the integ-rity of the tax system and the fairness of the department have suffered during the course of the [Winebox] hear-ingsâ€¦ The perception that customers hold concerns us all because, if it is negative, it can harm voluntary compliance and make it more difficult for us to achieve our overall ob-jective of maximising revenue.198
13.18 The committee agrees with this conclusion. Every New Zealander has a real interest in the proper and impartial administration of the tax laws.199 The damage to public attitudes towards the integrity of the tax system, and towards perceptions of fairness of the department, must be cured, and must be seen to have been cured, before the tax system can be considered fully robust. The committee believes that that damage will be cured only when it has become apparent to all citizens of New Zealand that the department is able to match the ingenuity of the most powerful. Two examples from the past illustrate this point.
Certain tax loss schemes
13.19 Since the late 1970s, one New Zealand tax agent has been offering a 'service' involving the use of tax loss companies. In Miller v CIR; Man-aged Fashions Ltd v CIR,200 the Court of Appeal has held that the schemes were void as tax avoidance. Considering the ubiquity of these schemes, the department should have been aware of them from an early stage.
13.20 Although this scheme is now a matter of history, the proliferation of such schemes was such that their cumulative effect on the revenue of New Zealand apparently reached tens of millions of dollars of tax. It has been only since the 1990s that cases involving those schemes have been brought before the courts, which have consistently held that they were void as tax avoidance.
13.21 It appears that this episode is now being brought to a satisfactory conclusion. However, this result was not achieved without a significant delay and cost. It is imperative that in the future such aggressiveness should be dealt with swiftly and efficiently.
Tax shelter schemes
13.22 Film tax shelters offer another example from the past where the Inland Revenue Department seemed to struggle with a change to a more aggressive environment.
13.23 Although, over the past decade, a concerted and successful effort has been made to achieve neutrality in the tax system and to prevent tax preferences driving investment and commercial decisions (see para 6.21), calls are sometimes made for the restoration of some such preferences with a view to both encouraging businesses and offsetting preferences said to be enjoyed by trading competitors of New Zealand enterprises. Some arbitrage opportunities, which caused the department problems during the 1980s,201 seemed to enable, in some cases, multiple approaches to the pad-ding of allegedly deductible expenses claimed for schemes involving goat raising, apricot growing, film making, bloodstock breeding, garlic pro-duction, game bird breeding, and other schemes.
13.24 Many advisers had no doubt that there was substance to the notion that some schemes were illegal and fraudulent. They raised three particu-lar concerns, first, that the schemes were starkly uncommercial; secondly, that the purported costs of goods and services were falsely inflated; and finally that, in so far as they had been falsely inflated, costs simply could not have been deductible for tax purposes, even though, on the advice of the promoters of the schemes, taxpayers were claiming that they had been incurred.
13.25 The decision of the House of Lords in Ensign Tankers (Leasing) Ltd v Stokes,202 shows the English judges dismissing claims for deductions for expenditure on a film-making scheme not essentially different from dozens of New Zealand schemes, some relating to films and some focused on other investments. In the course of reported judgments on various procedural matters arising from an inquiry into certain New Zealand films, Judge Barber held those schemes to have been frauds on the revenue.203
13.26 A civil suit against a promoter, by investors who claimed to have been defrauded, was settled this year for a payment of the investors' entire losses together with all their legal costs.
13.27 The healthy scepticism required to deal with such schemes can be illustrated by the workings of a typical film scheme. When any such scheme is considered, it is unsurprising that they can have seemed fraudulent. The schemes were usually touted to investors on the basis that the investors would be required to put up only, perhaps, one third of the alleged costs of making the film. The remaining 'costs' were supposed to be met from 'advances' made by companies which were located in jurisdictions not noted for welcoming inquiries from tax authorities, or indeed from investors.
13.28 On the strength of the proposition that these additional 'costs' were genuine, and were being genuinely borrowed by the investors, the promoters advised the investors to claim the whole of the 'costs', and not just the one-third which they were paying with their own real money. The tax relief that they stood to obtain often exceeded the amount they were putting at risk. So even if the film made nothing at all, the investors would have been much better off than if they had never invested and lost their money in the film in the first place.
13.29 But the genuineness of the 'costs' which were being 'funded' by the offshore 'borrowing' was far from apparent. For one thing, the off-shore 'lenders' generally had little capital and lacked any visible means of support, let alone the resources to 'lend' millions of dollars for film making.
13.30 Another reason for doubting the genuineness of the claims was that the sums being 'funded' by the offshore companies were to be repayable only out of the profits of the films. In its judgment in Mirage Entertainment Corp Ltd (In Receivership) v Arthur Young,204 the High Court found that it was well known, at that time, in the film industry in New Zealand, Australia and the United States 'that only one in ten films covers its costs ... [and that] on average New Zealand films have only recovered 30 to 40 per cent of their costs.' In a number of films scrutinised in that case, only four films recovered any of their cost. That there were almost never any profits made it essential to view with the greatest scepticism any claim that offshore 'financiers' were intent on throwing away millions of dollars just so that investors in New Zealand could claim tax deductions in New Zealand in excess of true costs.
13.31 The committee is aware that, in April 1987, the Minister of Reve-nue published an estimate of the tax loss that related only to the film schemes. That estimate was $56 million.
13.32 To the extent that revenue loss was due to inflated expenses, the deductions should have been disallowed. Provided it had reasonable grounds for challenging the deductions, the department did not have to prove that they were not legitimate. The law places the burden of proof on those who wish to dispute the correctness of the department's deci-sion in such cases to prove that the expenses were costs incurred within the principle laid down by the House of Lords in Ensign Tankers.
13.33 From the evidence, it seems that the Inland Revenue Department in common with many advisers and investors had difficulties in under-standing some of the film transactions. While not all film investments were of the type described, and many that were of this type were suc-cessfully challenged by the department, it appears that the department was unable to take the swift and decisive action that could have been taken. The issue is whether this situation persists.
Improvements in the Inland Revenue Department
13.34 In the light of events of the past, the committee sought information from the department to help it form a view on whether the public is now entitled to take a more positive view of the integrity and robustness of the system.
13.35 The committee has been advised that the department has taken steps since the time these schemes were developed. Along with the re-structuring of the department, and the introduction of the generic tax pol-icy process, a new disputes resolution procedure has been put in place. Under parts IVA and VIIIA of the Tax Administration Act 1994, inspec-tors faced with similar situations to those described above, would now is-sue a notice of proposed adjustment, and the disputes procedure involving the department's Adjudication unit then would proceed.
13.36 The department clearly is resolute that such questions will not be permitted to arise again. In August 1998 it issued Standard Practice Statement INV-350 on Finalising Agreements in Tax Investigations. Among the many valuable points it made, the department said:
There are circumstances or situations where Inland Reve-nue will not enter into negotiations. These [include] not as-sessing an amount which is clearly assessable, or allowing a deductionâ€¦ that is clearly not allowable.
13.37 The committee is pleased to record this approach. However, those new procedures, of themselves, do not overcome any past inadequacies in the quality of the legal advice relied on by the department. The committee has been informed that an objective of departmental restructuring has been to ensure that appropriate legal skills are available at all stages of the proc-ess involving audit, investigation, assessment, dispute resolution and litigation. Barristers and solicitors are employed in the technical and legal support groups in service centres throughout the country (20), by Corporates segment (10), by Adjudication & Rulings unit (27), by Litigation Management (12). In addition, the department has access to the Solicitor-General and barristers and solicitors employed as Crown counsel or As-sistant Crown counsel by the Crown Law Office and by Crown Solicitors offices throughout the country, and by barristers who are instructed prelitigation by the department, or post litigation by the Crown Law Office.
13.38 The committee has found it very difficult to assess the quality of legal knowledge and analysis within the Inland Revenue Department. A major impediment is that most Inland Revenue decisions are confidential between the department and the taxpayers. This consideration applies in particular to almost all decisions in favour of the taxpayer, because a tax-payer who has the benefit of a favourable decision has no reason to appeal to the courts. Moreover, even if the committee had had access to files within the Operations group of the department, it did not have time or resources to assess decisions recorded in those files. As a second best op-tion, the committee has examined a number of Inland Revenue Depart-ment decisions of recent years that are public knowledge.
13.39 This chapter mentions decisions that relate to Winebox transactions and to certain widely marketed tax shelters. Chapter 6 discusses three interpretation statements where departmental legal decision making has been set out and published. The committee found shortcomings there and in the other legal analyses that it examined.205 The committee put to officials a number of questions that the committee hoped would discover whether past shortcomings had been rectified. Officials answered these questions by reference to the systemic changes that the committee records in paras 13.35 to 13.37 of this report.
13.40 The committee cannot say whether these systemic changes have had the necessary effect. The committee is concerned that of necessity it has been left in this state of uncertainty. Very many Inland Revenue officers make essentially legal decisions every week. Often, the transactions in question require the decision maker to have a basic knowledge of the legal system, some grasp of the rules of evidence, and some knowledge of criminal law, to say nothing of the knowledge of tax and business law that people expect of Inland Revenue officers in any event. The committee is not in a position to say whether New Zealand officers in general have these skills at the levels that are necessary for the complexities of the tasks that they severally face.
13.41 The skills of Inland Revenue Department staff are crucial to the integrity of the tax system. The committee cannot assure the government that the Inland Revenue staff as a body have the expertise that they need. Further, the committee has the impression that at the moment the govern-ment is not certain about the level of competence that it should require of the department, nor, which must follow, whether the department meets that level. The committee recommends that the government should ensure that the Inland Revenue Department reviews staff skill levels, and further, that the department should ensure that recruitment, retention, and con-tinuing education policies are fully adequate to establish and maintain the staff skill levels that are necessary.
Applying the general anti-avoidance provisions
13.42 In order to match aggressive tax behaviour, it is essential that the department should invoke the general anti-avoidance provisions when ap-propriate. Some of the film investment schemes considered in the first part of this chapter were ineffective because, once properly analysed and un-derstood, they often did not meet the statutory criteria upon which tax re-lief depended.
13.43 In some cases, taxpayers might find ways in which to structure arrangements which apparently or actually comply with the detailed provi-sions of the Act, but in so doing, they cause the law to operate in a way which Parliament could not possibly have intended. As the committee has pointed out in chapter 7, the common law can neutralise that result in many cases of apparent compliance. If the common law fails to have that effect, sections BG 1 and GB 1 act as a backstop to protect the integrity of the tax system. When the arrangement is of the type contemplated by the anti-avoidance provisions, the arrangement is void for tax purposes from the outset (see the discussion in paras 6.38 to 6.53).
13.44 When confronted by ingenious schemes that otherwise appear to comply with the Act and with the common law, but which appear to do so in a way that is likely to undermine the integrity of the tax system, the first resort of the Inland Revenue Department, therefore, must be to a compe-tent analysis and application of these backstop provisions. The depart-ment's task is not to consider whether to apply the provisions. They apply of their own force. The duty is to consider whether they do apply, and, if so, to assess accordingly.
13.45 Mr David Russell QC, of Queensland, in his paper on Substance v Form - the ATO Approach,206 prefaced his remarks with this comment:
The necessity for some form of protection of the Revenue from artificial, blatant and contrived tax avoidance schemes will be self-evident. No objection could be taken to legislation whose effect was that identified in [those passages from the reasons of the majority in] Challenge.
13.46 In his address, he said that 'you could have no complaint with a provision like s 99 [now s BG 1] as construed by the Privy Council in Challenge'.
13.47 The committee believes that the issue is not so much the deficiencies in the anti-avoidance provisions, as in the Commissioner's past understanding and application of those provisions. This view is echoed in the report of the Davison Commission,207 where the observation was made that the Inland Revenue Department had adopted a 'conservative inter-pretation' of the general anti-avoidance provision on the tax avoidance issue,208 and that 'the weakness exposed by the Winebox deals is not the legislation itself ... but the use of it by the Commissioner'.
13.48 The department has published a statement on the approach to be taken to the interpretation of the anti-avoidance legislation.209 The committee considers the statement to be unsatisfactory and inaccurate. The committee understands that the department finds the statement inadequate, and intends to withdraw it. As outlined in para 6.101, the committee considers that the statement should be withdrawn immediately without waiting for a replacement.
13.49 As the committee observed in para 6.43, section BG 1 of the Income Tax Act 1994 applies by force of the statute. It is not intended by Parliament to be applied at the discretion of the Commissioner. This intention makes it imperative that this provision must not be undermined. The committee believes that the department should move quickly to apply section BG 1 to any scheme that displays an evident tax avoidance purpose or effect, to disallow any challenge that is not compelling, and, relying on the taxpayer bearing the onus of proof, to attempt to obtain a speedy judgment on the case.
13.50 During that process, the committee expects that the department would use its powers to inquire of the responsible advisers whether the scheme was being applied or recommended in other cases. If it were, the committee would expect that the revenue also would move swiftly to halt any proliferation of the scheme.210 The department should never act so slowly or indecisively so as to expose the revenue to any unnecessary risk or shortfall.
13.51 The committee was advised by the Inland Revenue Department that it has, in recent years, been making assessments on the basis of sec-tion BG 1 a great deal more frequently, and that, since January 1994, it has done so in 352 cases. In 223 of these cases, the person assessed has conceded, or the court has ruled in favour of the department. In 45 cases, the department has either lost or conceded to some extent. The remaining 84 cases remain unresolved at this time. These figures emphasise the value of section BG 1 to the tax system.
13.52 Officials also advised the committee that there is a process for identifying schemes that pose a potential threat to the tax base and quantifying the associated fiscal risk. This process means that Ministers are advised periodically of those fiscal risks so that they can be incorporated in the government's fiscal forecasts. This in turn means that as well as investigating these schemes, the need for a policy response is considered. This consideration has resulted in base protection measures being in-cluded in three recent tax Acts and a current tax bill.211
13.53 The committee recommends that, in addition to the recommendations in chapter 6, the department should remove from its internal practices and procedures and from public statements any suggestions that section BG 1, as interpreted by the Privy Council in Challenge,212 should be read restrictively rather than liberally.
Applying the criminal law
13.54 In some cases, the aggressiveness of taxpayers can lead them to go beyond avoidance and commit fraud on the revenue. In such cases, it is important that the department brings criminal charges against those involved, including those who promote such activities. In the past, it seems that some officers of the Inland Revenue Department were under the mistaken belief that fraud could be proved only by direct evidence. While it is true that the onus of proof is on the prosecution in criminal cases, it is also true that this burden can be met in some cases by circumstantial evidence, that is, by inference from the facts.
13.55 Inference is the standard means of proof of intentional acts. Some examples may assist. In his closing argument on 27 August 1971, in the trial of Lieutenant William Calley for murder at My Lai in Vietnam, counsel for the United States told the Court Martial and the jury:
Now we have an additional element that we must satisfy as to all of the specifications: did the accused have the required criminal state of mind at the time he killed these individuals. To be guilty of premeditated murder, gentlemen, you have to intend to kill the victim. You have to intend that he die...
How does the government perceive what a man is thinking? What Lieutenant Calley was thinking on the day in question? How do we show you that? First of all, we rely on your own common sense and understanding and recognition of the way the human mind functions, recognition of the way people think and act. We rely upon the fact that you can take these facts, you can take his acts, his conduct, the observations of others, and find what he was thinking. We can prove it to you. We have proved it to you, because what is the evidence of a man's intent, what he intends to do? A man's actions are the mirror of a man's mind. You can prove intent two ways, just as you can any other element of an offense, or any other fact. You can prove it by direct evidence, and what is that? When a man tells you what he's thinking. You can prove it by circumstantial evidence; even though he doesn't tell you, you know by what he does what he intended.213
13.56 By way of further recent example, the summing up in May 1995 of Williamson J, in the trial in Dunedin of David Bain for murder included this passage:
As a jury you are entitled to draw inferences. Inferences are not guesses. They are logical, reasonable, fair deductions from facts which have been proved. It is important in this case, as in most criminal cases, because the Crown is ask-ing you to draw the inference from the combination of a number of different circumstances that the accused did shoot each of the victims, although he may now be blank-ing it out of his mind. It is for you to decide whether that is the appropriate and reasonable conclusion to come to from all the evidence that you have heard. Evidence by way of inference is often referred to as circumstantial evidence. It is evidence of facts from which the jury may infer the ex-istence of the vital fact in issue. Circumstantial evidence is often contrasted with direct evidence such as eye-witness evidence. Usually circumstantial evidence derives its force from the fact that it consists of a number of items all pointing to the same conclusion. It is really a process of reasoning. Because crimes, if premeditated, are usually committed by stealth or in secrecy, it is not uncommon that there is no direct evidence. Sometimes when facts are just taken one by one, item by item, they don't have a strong probative value but when they are considered together, they do. So you must weigh the combined effect of all the circumstances which have been proved in this case to decide whether you are satisfied beyond reasonable doubt of the accused's guilt.214
13.57 When no signed confession or incriminating document that admits the offence is available, so that a fraud cannot be proved by direct evidence, there are well-settled circumstantial elements that can justify the inference of fraud nonetheless. For example, there may be a lack of reasonable ground for taking a particular course of act or omission. In R v Waterfall, the English Court of Appeal ruled that 'the absence of reasonable ground may point strongly to the fact that the belief is not genuine'.215
13.58 In R v Mackinnon, another English judge put it in this way:
Often in the case of alleged fraudulent statements the only evidence of dishonesty consists of evidence that no grounds exist on which any reasonable man could have believed in the truth of the statement. In my experience, juries are not slow in a proper case to draw the inference of fraud.216
13.59 In Westminster City Council v Croyalgrange Ltd, the House of Lords made the following findings:
Such [guilty] knowledge may be proved either by proving actual knowledge or by showing that the defendant had deliberately shut his eyes to the obvious or refrained from inquiry because he suspected the truth but did not want to have his suspicions confirmed; furthermore [per Lord Brightman], if all the other ingredients of the offence are proved, if the defendant chooses not to give evidence of his absence of knowledge, the court may infer that the defendant did have the requisite knowledge.217
13.60 In the Equiticorp criminal trial in 1992, R v Adams,218 some of the counts revealed offshore company structures of what Tompkins J de-scribed as 'impressive complexity'. One structure comprised 50 compa-nies in Hong Kong, five companies in the Turks and Caicos Islands and one in Vanuatu, all purchased at once. Every one of these companies had a bank account opened for it. 'The whole edifice was in reality an elaborate facade, set up to pass Equiticorp funds' to another company in loans each of which would be below the limit at which board approval would have been required.
13.61 Another loop of companies in three offshore jurisdictions was set up in order to make transactions in three currencies, and in order that the owners of the structure could not be able to be detected.219 In the circumstances before him, Tompkins J found that the purpose of the setting up and use of the loop was clear beyond reasonable doubt.
It was expensive to set up and use. A clear example of this is transaction 4 where the money travelled from [the so-licitors'] trust account, through the Yeoman Loop, back to [the solicitors'] trust account at a cost of $37,000. When regard is had to those costs, if the use were legitimate, an explanation of that legitimate use could be expected...
It was set up and used in order to conceal the payments that were intended to be, and were, made, and to make it difficult for any person who had cause to inquire, to find out what they were, and their source. The cumulative effect of [the complexity of the scheme and the absence of any legitimate tax or other explanation] leads to the clear conclu-sion that the only reasonable inference that can be drawn is that the concealment was dishonest - that is, with intent to defraud. Concealment for innocent purposes is not a reasonably possible inference.
Was anyone defrauded? If the purpose of the structure were dishonest concealment, the question answers itself. The persons the conspirators intended to defraud were those from whom it was intended to conceal. It is not necessary that these be specifically identified. But it is easy to see that they would embrace... the Revenue, and enforcement agencies.
13.62 References in documents to avoiding possible 'detection' by the Commissioner, to attempts being made to 'confuse the enemy' [apparently the Commissioner], to an arrangement by the taker of a put option that 'should the structure ever be contested by the New Zealand Inland Revenue that we run with the objection procedure for as long as possible', al-though only 'until the issue becomes too hot to handle' were found by the Court of Appeal, in European Pacific Banking Corp v TVNZ, to justify it finding that:
There may also be room for the inference that those trans-actions were conceived and documented as they were in or-der to conceal any connection with the contemporaneous payment of tax in the Cook Islands.220
13.63 On the basis of that inferred intent, the court was able to find that the TVNZ had made out an arguable case that European Pacific Banking Corporation were guilty of iniquity. That finding justified the court declaring that the company could run a programme based on those documents notwithstanding the otherwise confidential nature, and notwith-standing the fact that it was claimed that the documents had been stolen. 'Why conceal?' the court effectively asked, 'unless because one knows that the tax credit claim at least 'may be' in contravention of the law.'
13.64 As the House of Lords held, in Wai Yu-tsang v R:
'intent to defraud' [can] exist where there was no other in-tention than to deceive a person responsible for a public duty from doing something, or failing to do something, which he would not have done, or failed to have done, but for the deceit.221
13.65 In other words, when it lacks the convenience of a signed confes-sion, the Crown sets out to prove all the known circumstances. It then in-vites the court to draw from them the necessary inference that wilful fraud has been committed by the taxpayer. In Spies v United States, the United States Supreme Court made an expressly non-exhaustive list of the badges of fraud:
[W]e would think affirmative wilful attempt may be in-ferred from conduct such as keeping a double set of books,222 making false entries or alterations, or false in-voices or documents, destruction of books or records, con-cealment of assets or covering up sources of income, han-dling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.223
13.66 Another circumstance that can point strongly to wilfulness is the sheer size of deficiencies, which can be such that the court will infer that the taxpayer did not believe that his return was honest.224 Repetition of substantial deficiencies year in year out is another circumstance from which such an inference can be drawn in appropriate cases.225 The use of dummy names is yet another example.226 So, also, is lying to the revenue about why one has not filed past due returns.227
13.67 If breaches of penal provisions of the taxation laws, which the taxpayer claims were not wilful, were to have arisen in the course of transactions or arrangements which included deliberate breaches of other stat-utes or of the general law, the taxpayer's claim that the taxation breaches were unintentional or inadvertent may meet a sceptical reception from the court.
13.68 Thus, during the 1980s, section 62 of the Companies Act 1955 was regarded as an irritating obstacle to corporate takeovers and to the accessing - often as part of tax schemes which relied on deception - of corporate assets. It forbade the provision by a company of financial assistance for the purpose of purchases of shares in its capital. Because the sanction was a fine of only $200, there were those who were prepared to disregard the prohibition, and treat the fine as, in effect, a licence fee.
13.69 Such an argument was run and rejected in the prosecution of the former chief executive officer of the Australasian Investments Corporation Group. Temm J held:
While the penalty is minimal, the purpose of the section is plain. Any person who deliberately embarks upon a course of conduct, whether in the market place or anywhere else, in deliberate defiance of the provisions of the section must take the consequences. Where a person breaks the law knowingly and deliberately, that can be strong evidence of dishonest intention.228
13.70 Some transactions may be so large, so questionable, so complex, or so adverse in their potential effect on the revenue, that failure to obtain expert advice, or expert advice independent of the in-house advice, also may be a factor assisting the court to infer a dishonest intention.
Dealing with schemes hard to find
13.71 In Inland Revenue Commissioners v Stype Investments (Jersey) Ltd the English Court of Appeal said of a transfer by executors of Â£20 million out of the United Kingdom to Jersey within two months of the death of the deceased:
It does not seem credible that no discussion took place or that no investigation was made of the capital transfer tax position. Despite the magnitude of the sum involved, no evidence has been produced that the advice of English counsel was sought after the death of Sir Charles. In these circumstances there is a grave possibility that the object of directing the Prudential to pay Â£20m in Jersey was to evade tax on Â£20m. If this was in fact the object, it may have been the product of a criminal conspiracy to defraud the Revenue. This court feels very strongly that the Inland Revenue should ask the Director of Public Prosecutions to investigate.229
13.72 Running tax driven transactions offshore can be undertaken to disable the revenue authorities from doing their duty, namely, considering whether, on all the true facts, there is any matter requiring consideration in connection with the liability to tax of anyone who is resident in, or who is deemed to be resident in, New Zealand; or with the liability to tax of anyone who may have derived income from New Zealand. The Commissioner has the right to know, and the duty to find out.
13.73 The operations of tax haven entities, which are bona fide, are not concealed from the revenue. Examples are the Netherlands Antilles sub-sidiary of the New Zealand company which figured in New Zealand Forest Products Finance NV v CIR,230 and Pan Eastern Refining Company Ltd, the Bahamas subsidiary of the objector in Europa Oil (NZ) Ltd v CIR.231
13.74 As a percentage of the total company registrations in tax havens, the number of non-puppet companies would be very small. In most tax haven companies, there will be the usual puppet structure, and the whole object of the exercise is to see that the Commissioner does not get the necessary full disclosure.
13.75 Credible reasons for legitimate use of secrecy in this context will rarely, if ever, suggest themselves. In the absence of a credible alternative explanation, the secrecy will point to illegitimate obstruction of the Reve-nue authorities. At first instance in Agip (Africa) Ltd v Jackson,232 Sir Peter Millet observed that 'secrecy is the badge of fraud'.
13.76 The following year, reviewing a book on money laundering, Sir Peter wrote:
Giving evidence before me in the course of civil proceed-ings last year, a Swiss fiduciary agent who had actively as-sisted his clients to launder their funds was indignant at the suggestion that he had done anything wrong. 'I never sus-pected for a moment', he told me. 'that the money repre-sented the profits of drug-trafficking' (which it did not) 'or the proceeds of fraud' (which it did). When asked what he thought the money was, he told me that he assumed that it was 'merely' the proceeds of tax evasion or breaches of exchange control, or a bribe. 'It is usually a bribe', he explained, in tones which suggested that that made everything above board. When asked what steps he had taken to satisfy himself that the money did not represent the proceeds of criminal activities, whether drug-trafficking or fraud, he admitted that he had taken none; it was simply not practicable to do so.
International fraud is a huge and growing business. Electronic transfer of funds, the widespread use of nominee companies and offshore funds and the existence of havens like Panama and D'jibouti, where investigation is impossible, all contribute to the ease with which fraudsters can transfer substantial sums instantaneously from one country to another and conceal their source and ownership. They are significantly assisted by the reluctance of banks and professional men to enquire into their clients' affairs, and by the attitude of mind displayed by the Swiss fiduciary agent. In his case, wilful blindness was a positive virtue; it was part of his job description.233
13.77 In R v Jones,234 the defendant was found guilty of a number of counts of fraud, including the use of a document to obtain a pecuniary advantage, which had cost the Revenue more than $800,000. He was sen-tenced to four years' imprisonment. While it was the jury that decided guilt, one of the important indicia undoubtedly would have been the factor noted by Judge Deobhakta in his sentencing, namely that the defendant had utilised:
several companies in order to avert any attention by the Inland Revenue as to what was happening in connection with these series of transactions that were entered into. ... [T]hese are serious offences. They are calculated offences and they occurred over a period. The scheme involved was such that it would have been pretty difficult for an ordinary investigator to notice them on the face of it.
13.78 When matters which could be consistent with wilful concealment are nonetheless claimed to have been legitimate and bona fide, it is rea-sonable to expect that those responsible for the arrangements will explain to the court the bona fide use of the complex web of offshore companies. In R v Adams, Tompkins J held on this issue:
Nominee companies and off-shore companies are com-monly used for reasons, amongst others, of secrecy. Such uses may not of themselves be dishonest. They only be-come dishonest if it can be shown that their use was known to those setting up and using them to be for a dishonest purpose, such as dishonest concealment. However, when they are legitimately used, those responsible should be able to give credible reasons for the secrecy.235
13.79 In the absence of credible and honest commercial explanation, concealment generally leaves little room for doubt that the schemes are fraudulent. The committee considers it important to highlight the possible criminal consequences of concealment from the Commissioner as these may not be fully appreciated by taxpayers and their advisers. A taxpayer who is confident that an arrangement is effective for tax purposes but who takes active steps to conceal the arrangement from the Commissioner may be guilty of conspiracy to defraud, even if the arrangement is in fact effective: O'Donovan v Vereker,236 and R v Forsyth.237 In the former case, Northrop J said that even 'an honest belief that the scheme is effectiveâ€¦ does not prevent the finding of a criminal intent'.238
13.80 A robustly-managed tax system would not permit those involved in the promotion of fraudulent schemes to escape investigation and prosecution simply because they were so well-masked that it took years to expose them. For a tax system to permit that possibility would be for it to send all the wrong signals to those intent on such fraud.
Delay in prosecution
13.81 Section 10B of the Crimes Act 1961 provides that, after 10 years from the date of commission, certain offences cannot be prosecuted under that Act without the prior consent of the Attorney-General. The justifica-tion for that is readily apparent. The relevant offences are only those pun-ishable by maxima of less than $2,000 in fines or 3 year's jail. The provi-sion is a way of preventing the relatively trivial from accumulating and threatening the investigation of the very serious.
13.82 That is the only statutory limitation period relating to the prosecu-tion of offences under the Crimes Act 1961. It cannot, for example, apply to provisions such as section 257 of the Crimes Act 1961, which creates the offence of conspiracy to defraud the revenue. There is also a 10-year limitation on some, but not all, tax offences under section 150A of the Tax Administration Act 1994.239
13.83 Apart from those express statutory limitations the principles are set out in Halsbury's Laws of England:
Except where there are statutory provisions to the contrary, criminal prosecutions may be commenced at any time after the commission of the offence.
Prolonged delay in starting or conducting criminal proceedings may be an abuse of process as, for example, where substantial delay has been caused by some improper use of procedure by, or inefficiency on the part of, the prosecution and the accused has not himself caused or con-tributed to it and has been prejudiced by it. The jurisdiction to decline to allow criminal proceedings to continue should be used sparingly.240
13.84 In the Equiticorp criminal trial, having found that a complex off-shore structure had been used in that case to conceal from legitimate in-quiry transactions known to be unlawful, the judge ruled that:
A person who conceals a dishonesty to avoid it being de-tected has an intent to defraud. An intention to obstruct anyone who might be called upon to investigate a transac-tion if dishonesty can be shown is itself a fraud.241
13.85 Tax fraud is an area in which the courts speak always with a strong voice. It is 'a very grave offence' said Lord Salmon in Inland Revenue Commissioners v Rossminster Ltd,242 echoing Lord Denning in the same case who held tax evaders to be 'parasites who suck out the life-blood of society'.243
13.86 The New Zealand courts, likewise, treat tax fraud with the greatest seriousness. In its decision in R v Petherick,244 the Court of Appeal en-dorsed the views that, where large tax fraud is concerned: Prosecution un-der the Crimes Act 1961 is the proper approach. Imprisonment is the nor-mal punishment. This echoed a similar finding by that court in R v Fuller.245
13.87 In Maxwell v CIR, tax fraud was described as:
a deliberate evasion of one's duties as a citizen, while at the same time advantage is taken of the rights of citizenship. Through such action added burdens are thrown on those members of the community who with integrity face their proper obligations, obligations which at no time are light. This class of offence is usually born of greed and should be seen in that light. ...[I]n those cases where the offence is deliberate and substantial as to amount there is much to be said for the view that imprisonment is the punishment which really fits.246
13.88 The message the courts are sending is not restricted to taxpayers. It is applicable with equal force to the Inland Revenue Department. If the department fails to recognise the need for, and the bases of, prosecution, it will undermine the robustness of the tax system. It also will undermine the express intent of section 6(1) of the Tax Administration Act 1994.
13.89 The court has expressed its views strongly that tax fraud is very serious and is appropriate to be dealt with by the Crimes Act 1961. The committee is concerned that officers in the department may not be sufficiently aware of this view, nor of the established principles of evidence. The committee recommends that the department should be always alert to the possibility of criminal fraud by taxpayers. When fraudulent activity is detected, the department should ensure that its officers are aware that the Crimes Act 1961 is the appropriate vehicle for prosecution.
13.90 The committee notes that the perception of the public is that big corporations do not run the same risk of prosecution as smaller enterprises and individuals. While fraud may be rare in this area, such businesses are not immune from charges of fraudulent activity.
13.91 Officials provided a table showing penal action undertaken by the Corporates segment from 1994 to 1997.
|TABLE 7: NUMBER OF PENAL ACTIONS UNDERTAKEN|
| Asked for a letter of explanation
Issues with a warning/obligation letter
Prosecuted, convicted, and or charged
with penal tax
Charged with penal tax
Amount of penal tax charged
13.92 Outside the corporate sector shown in table 4, the average num-ber of cases where penal tax was charged between 1994 and 1997 was 128 per annum. The committee was concerned that the comparison be-tween this figure and that in the table showed a low level of evasion and fraud being detected in the corporate sector. However, officials informed the committee that Corporates segment handles only 1,900 head files, and the group comprises mainly large companies for which the normal penal offences such as GST fraud, non-accounting for PAYE and sup-pressed sales would be uncommon.
13.93 In addition, the department has advised that there is a large in-crease in proportional terms expected in the 1998-99 year, with requests for letters of explanation sent to, and other penal action expected to be taken against five companies and five individuals. It was pointed out that with such a small sample, statistical variation of this magnitude can be expected. The committee was also advised by officials that data from the new penalties regime shows that the likelihood of penalties being im-posed increased with the size of the organisation. This point is illustrated in Table 8. This shows, for example, that 1 per cent of business taxpay-ers have a turnover exceeding $10M, while 2 per cent of taxpayers on whom shortfall penalties were imposed fell into this category.
|TABLE 8: NUMBER OF PENALTIES IMPOSED|
|Annual turnover|| % of total business
| % of cases of shortfall
Injunctions and declaratory judgments
13.94 The committee also considers that the department should make greater use of injunctions and declaratory judgments than it seems to have done in the past. If the evidence establishes a risk that a scheme may be applied in other cases as well, and if there is great potential for damage, other measures are available to the department. For example, it may be open to the department to apply for an injunction to limit the proliferation of a tax avoidance scheme.
13.95 In the recent past, in the United States of America, a firm of accountants was allegedly operating a scheme which it described as 'expanding' the use of a statutory tax credit for property used in manufacturing. The 'expansion' comprised misdescribing247 various items so that the credit would be claimed, and, in the absence of a building inspection by the revenue, would be allowed unchecked. This activity was not tax avoidance but tax fraud. The accountants were touting for business on the basis that they offered this 'service'. They were advising prospective clients that they could help them claim more of a credit than allowed under 'traditional methods'.
13.96 The United States Internal Revenue Service sought an injunction to prevent the accountants from any further promotion of their 'service', from advising clients to use deceptive terminology, from creating false documentation to support improper claims to the tax credit, and from hindering the efforts of the revenue to discover the identities of all taxpayers who had used the 'service'. The injunction was granted by the Eleventh Circuit Court of Appeals United States v Ernst & Whinney.248 While it re-lied on various express provisions of the Internal Revenue Code of the United States, which conferred injunctive power on the District [ie trial] Court, the Court of Appeals made clear that those provisions were subject to the usual rules of equity.
13.97 The inherent jurisdiction of the High Court of New Zealand, and the tenor of the Commonwealth authorities,249 mean that such relief is ar-guably available in New Zealand, and an application for it should be seri-ously considered in an appropriate case.
13.98 In addition, the court can declare whether, on a true construction, a statute applies to the facts of a particular case. Section 3 of the Declaratory Judgments Act 1908 provides that:
Where any person... desires to do any act, the... legalityâ€¦ of which depends on the construction... of any statute,... such person may apply to the High Court... for a declaratory order determining any question as to the construction... of such statute.
13.99 The committee considers that the department should make greater use of the resources that exist in the legal system to enhance its position when it is confronted by aggressive tax planning.
The requirement of secrecy
13.100 As the committee has discussed above, prosecution under the Crimes Act 1961 is the proper way to deal with major tax fraud. In the past, the Inland Revenue Department staff seem to have viewed the statutory secrecy obligation imposed on them by section 81(1)(a) of the Tax Administration Act 1994 as an obstacle to prosecution of income tax delinquency under the Crimes Act 1961. The department construes the ex-emptions in the section narrowly.
13.101 As recorded by the Court of Appeal, counsel for the Crown in R v Petherick gave as a reason for prosecution delays in that case, that:
It is the department's view that the secrecy requirements of s 13 of the Inland Revenue Department Act 1974 preclude it from instituting prosecutions under the Crimes Act, and that this may be done only by the Serious Fraud Office.250
Even as late as July 1998, the department seemed to be adopting the same approach.251
13.102 The committee believes that this provision is not the obstacle the department perceives it to be. By its very terms, the statutory obligation is subject to an express exception for disclosure that is required 'for the purpose of carrying into effect' the Inland Revenue Acts.
13.103 The possibility of prosecution under a provision of the Crimes Act 1961, aimed at securing a conviction and a possible sentence of imprisonment, is likely be a very effective means of securing compliance with, and therefore 'carrying into effect', the Income Tax Act 1994. In this re-spect, the committee cannot see any requirement in section 81 that the 'carrying into effect' cannot occur when the prosecution is brought by an-other agency of the Crown rather than the Inland Revenue Department itself.
Effect of the exceptions
13.104 If the committee's view is correct, then disclosure to the police, or to a court, for the purpose of prosecuting, say, a charge of conspiracy to defraud the revenue contrary to section 257 of the Crimes Act 1961, would fall squarely within the express exception of disclosure for the pur-pose of 'carrying into effect' the Inland Revenue Acts.
13.105 It is true that, in subsection (4) of section 81, Parliament has en-acted a number of specific instances in which 'nothing in' the enactments requiring secrecy save for the purpose of 'carrying into effect the Inland Revenue Acts' shall be 'deemed to prohibit' the Commissioner from dis-closure in specified circumstances.
13.106 But whatever the scope of subsection (4), the primary focus of section 81 is clear. It is subsection (1), and only that subsection, which enacts the requirement of secrecy. The important feature of this requirement of secrecy in subsection (1) is that it is not absolute. The secrecy requirement is a qualified one only. That is to say, it is a requirement to maintain 'the secrecy of all matters relating toâ€¦ the Inland Revenue Acts... except for the purpose of carrying [them] into effect'. The sec-tion contains within itself a critical exception that appears to the com-mittee to be all the authority the department needs in order lawfully to lay an information with the police for a charge under the Crimes Act 1961 relating to the Income Tax Act 1994.
13.107 The President of the Court of Appeal appears to have read it that way in Knight v Commissioner of Inland Revenue:
Parliament has also provided that the basic principle is itself subject to the 'carrying into effect' exception. The list in section 13(4) does not help in determining the true scope of that exception. It may well be that some of the matters specifically listed could also fall within the exception but have been included in the list to avoid doubts.252
13.108 The committee is aware that section 143 of the Tax Administra-tion Act 1994 imposes a liability to fine and imprisonment for 'knowing contravention' of section 81. For that reason alone, its officers must take care. But by section 6(1), officers must take care also to 'protect the in-tegrity of the tax system'.
Maintaining the integrity of individual departmental officials
13.109 As mentioned previously, section 6(1) of the Tax Administration Act 1994 imposes on all officers of the Inland Revenue Department the duty 'at all times to use their best endeavours to protect the integrity of the tax system.'
13.110 Officers of the Inland Revenue Department who are solicitors are also officers of the High Court. As such they are under the professional obligation identified by Temm J in an address to newly-admitted solicitors in June 1993:
Sometimes lawyers think that their duty to their clients is their first responsibility. That is not right... The desire to do one's best for one's client is commendable, but there are limits... [The lawyer] has an overriding duty to the court, to the standards of his profession, and to the public, which may and often does lead to a conflict with his client's wishes or with what the client thinks are his personal interests.... You will prosper wherever you be if you give good service, tell your client what the law says he should know and never, never, tell a client only what he wants to hear.253
13.111 These dual professional and statutory obligations at times may require officers of the Inland Revenue Department to express reasoned disagreement with views they see being relied on if they think those views to be contrary to the law. This is an issue that creates difficulties for all large organisations. In all such organisations differences of views will inevitably occur. The problem is that any large organisation, especially a law enforcement agency, needs to be able to reach consistent views on important issues. It would not be acceptable, for example, for different officers of the department to apply tax law differently according to their own personal views. On the other hand, individual officers can be placed in an invidious position if they see decisions being taken in relation to individual taxpayers that do not appear to accord with the tax law enacted by Parliament.
13.112 As noted above, the need to resolve internal disagreements is common to all large organisations. In the Inland Revenue Department's case, such disagreements can go to the heart of the integrity of the tax system. While this indicates that the issue is a fundamental one for the department, it is also worth bearing in mind that it can be equally fun-damental to the core functions of other organisations, especially government bodies in areas such as health care and education.
13.113 The best way to resolve this issue is to have appropriate procedures in place to ensure that Inland Revenue officers can raise these issues in full confidence that any concerns will be seriously considered without fear of recrimination or victimisation. In fact, the reporting of any such issues should be considered the duty of Inland Revenue em-ployees. Inland Revenue's Code of Conduct for employees reflects this. It states:
If you believe in good faith that you have evidence of wrongdoing or misadministration in the department, your first step would be to take the matter up with a senior manager. If it is a serious wrongdoing, or you feel unable to discuss the matter with senior management, or that the matter has not progressed, you may report it directly to the Commissioner by notifying the National Advisor Fraud Prevention and Investigations within Internal Audit, National Office. The wrongdoing will then be investigated in terms of the Internal Audit investigations procedures.254
13.114 In normal circumstances, this procedure should ensure that departmental employees feel able to raise issues of concern to them. However, it still leaves open the possibility that an employee could identify wrongdoing without recourse if senior management of the department do not take action. The common law principle of iniquity would protect an employee who makes disclosure to the proper authority of any fraud or criminal activity within the department. This gap in procedures would also be covered by the Protected Disclosures Bill, which is before Parliament, sponsored by the Minister of State Services.
Protected Disclosures Bill
13.115 In summary, provided they are made in accordance with the pro-visions of the Bill, disclosures of information of serious wrongdoing in an organisation are protected and anyone making such a disclosure is granted immunity from civil and criminal proceedings. If any retaliatory action is taken against anyone disclosing such information, a personal grievance action under the Employment Contracts Act 1991 is available, and protection is also given under the Human Rights Act 1993.
13.116 Serious wrongdoing is defined to include the unlawful, corrupt or irregular use of public funds or public resources, acts constituting either an offence or maladministration by a public official, or constituting a serious risk to public health or safety, to the environment, or to the maintenance of law. 'Maladministration' is 'an act, omission, or course of conduct that is unlawful, oppressive, improperly discriminatory, or grossly negligent'.
13.117 Under the Bill, public sector organisations are required to set up internal procedures for receiving and dealing with information about se-rious wrongdoing. Disclosures follow these procedures unless the person to whom the disclosure is to be reported is, or may be, involved in the wrongdoing, or is associated with someone who is. Disclosure may then be made to the head of the organisation or to an appropriate authority in certain circumstances.255
13.118 An 'appropriate authority' is a defined term. As well as public sector organisations, it includes 'a private sector body which comprises members of a particular profession or calling and which has power to discipline its members'. The Bill also provides for a second level of dis-closure, to a Minister of the Crown or the Chief Ombudsman, if the matter has not been investigated or if no action has been taken. The Om-budsman is not given any additional powers.
13.119 Although nothing in the Bill explicitly sets out the action that the person or organisation receiving the disclosure is required to take, it is implicit that an investigation, and appropriate action, is to be undertaken. It seems to the committee that any concerns it has in this area would be met by the enactment of this Bill.
13.120 In summary, the committee noted its concerns that, in the past, officers of the department may not have been sufficiently alert to the possibility that particular arrangements may have been fraudulent, and may not have obtained the appropriate legal advice. It also noted that in carrying out its responsibilities, the department may have taken too re-strictive a view of the secrecy provisions of the Tax Administration Act 1994. A mistaken view of the secrecy provisions seems sometimes to have led the department to fail to initiate prosecutions under the Crimes Act 1961. Officials informed the committee that since the time of the events that led to the committee's concern, the department has been re-structured, and the generic tax policy process and the new disputes resolution procedures have been introduced. Along with these changes, officials advised that the attitude of the department has altered.
13.121 However, some concerns remain as to the quality of legal knowl-edge and analysis within the department, and the committee recom-mends:
The government should ensure that the department reviews the skill levels of its employees to determine their adequacy, and should ensure that recruitment, retention and continuing education policies are adequate.
The department should remove from its internal practices and procedures and from public statements any suggestion that section BG 1 should be read restrictively.
The department should be always alert to the possibility of criminal fraud activity by taxpayers, and should ensure that officers are aware that the Crimes Act 1961 is the appropriate vehicle for prosecution, and that the secrecy provisions of the Tax Administration Act 1994 are not an obstacle to such prosecution.
- Re George Inglefield Ltd  Ch 1 at 26: ' If a man so conducts his affairs that he places himself outside the operation of an Act of Parliament, he cannot be said to be either evading it or defeating it. He has done nothing that is unlawful, and he has done nothing that calls for adverse comment from the court.'
- For example, W & A McArthur Ltd v Federal Commissioner of Taxation (1930) 45 CLR 1 at 9, Isaacs CJ
-  1 All ER 769 at 790
- Declared in cases such as Czarnikow v Roth Schmidt & Co  2 KB 478 at 488, Scrutton LJ
-  NZLR 1032 at 1042
- See the Court of Appeal decisions in Knight v Barnett (1991) 12 NZTC 8,014; CIR v ER Squibb & Sons Ltd (1992) 14 NZTC 9,146; Fay Richwhite & Co Ltd v Davison (1995) 17 NZTC 12,011
- Issue 15, September 1997
- In New Zealand Insurance Company v Commissioner of Stamp Duties  NZLR 1011 at 1018, Barrowclough CJ declared that: 'Every person in New Zealand is interested in seeing that all taxation which Parliament has authorised is, in fact, levied and collected.'
- (1998) 18 NZTC 13,961
- The report of the Davison Commission pointed out 'the Commission not having investigated many of the allegations madeâ€¦ which are outside the scope of its inquiry, it is not to be taken as in any way saying that there is or is not any substance in them'.
-  1 All ER 769
- See Re an Inquiry into [A] Films Limited (No 1)  DCR 686, and Re an Inquiry into [A] Films Limited (No 2)  DCR 970.
- (1992) 6 NZCLC 68,213
- See the discussion that follows in paras 13.47 and 13.48
- At page 3:1:50
- At page 3:1:41
- Tax Information Bulletin, volume 1, No 8, February 1990.
- By appropriate public statements, concerted investigation and fast-tracking dispute resolution proce-dures.
- 1998 No 7, 1998 No 101, 1998 No 107 and Bill 1998 No 241
- (1986) 8 NZTC 5,219
- Lief et al, 1998, Ladies and Gentlemen of the Jury, pages 368-369
- McNeish J, 1997, The Mask of Sanity: The Bain Murders, page 262
-  1 QB 148 at 151
-  QB 150
-  2 All ER 353
- Unreported, High Court, Auckland, T240/91, 18 December 1992
- Maxwell v Commissioner of Inland Revenue  NZLR 708 is another New Zealand case in which attention was drawn to the centrality of any explanation which may be given by the defendant.
-  3 NZLR 43 at 46
-  4 All ER 664 at 668
- As in Petera Pty Ltd v Federal Commissioner of Taxation (1985) ATPR 46,884, where a restaurateur who kept one set of books for his own purposes, and one for his tax accountant, understated his income in one year alone by $90,000.
- 317 US 492 (1943)
- McGovern v Galt  VLR 285, O'Brien J; Commissioner of Inland Revenue v Parisienne Gown Co Ltd  NZLR 442, McGregor J
- Commissioner of Inland Revenue v Frethey  NZLR 245, McCarthy J
- McGovern v Carra  VLR 454, Sholl J
- United States v Goodyear 649 F 2d 226 (1981) [4th cir]
- In R v Rodney Hamish Worn (unreported, T135/91) page 11
-  3 All ER 419 at 430
- 1995) 19 TRNZ 452
-  NZLR 321
-  4 All ER 385 (affd ibid 451)
- In Lloyd's Maritime and Commercial Law Quarterly, 1993, page 415
- Unreported, District Court, Auckland, T 65/94
- Unreported, High Court, Auckland, T 240/91, 18 December 1992
- Unreported, High Court, Auckland, T 240/91, 18 December 1992
- (1987) 76 ALR 97, Full Fed Ct
- (1990) 20 ATR 1818
- At page 116
- The form of this legislation creating, and dealing with, offences is unhelpful and unfriendly. It is, for example, not user friendly in its extensive cross-referencing without each cross-reference carrying with it an indication of its subject matter. There is thus required a great deal of cross-referencing in order to see just what the applicable provisions might be.
- Volume 11(1) Halsbury's Laws of England, 4ed, para 786
- R v Adams, (unreported, High Court, Auckland, T 240/91, 18 December 1992, pages 37-40)
-  2 WLR 1 at 52
- At page 19
- (1994) 18 TRNZ 662 at 666
-  1 NZLR 323
-  NZLR 708 at 714
- For example, the firm would describe ineligible concrete-block walls as 'knock-out panels'; fixed walls as 'moveable partitions'; and doors as 'moveable partitions-wood'.
- 735 F 2d 1296 (1984)
- Referred to in, for example, Meagher et al, 1992, Equity, 3d ed, para  pages 562-563
- (1994) 18 TRNZ 662 at 665
- Police v van der Bosch (unreported, District Court, Dunedin, Judge Saunders, 6 July 1998) where, in a prosecution for GST fraud, a departmental officer refused to testify on the question of GST regis-tration because the prosecution, being a police prosecution, was considered not to be for the purposes of carrying into effect the Inland Revenue legislation.
-  2 NZLR 30 at 36
- Law Talk, June 1993, page 3
- At page 22
- Where the person making the disclosure has reasonable grounds for believing the head of the organisation is, or may be, involved in the wrongdoing, or that urgency, or some other exceptional circumstances, justifies that action or that, despite two written requests for information on a disclosure, no action has been taken on that disclosure within a reasonable timeframe.
To the 13th National Convention of the Taxation Institute of Australia in Melbourne on 21 March 1997. At pages 9-10 he set out the views of the majority of their Lordships in CIR v Challenge Corporation Ltd (1986) 8 NZTC 5,219.