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 £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 £20m in Jersey was to evade tax on £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

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206. 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.

207. At page 3:1:50

208. At page 3:1:41

209. Tax Information Bulletin, volume 1, No 8, February 1990.

210. By appropriate public statements, concerted investigation and fast-tracking dispute resolution proce-dures.

211. 1998 No 7, 1998 No 101, 1998 No 107 and Bill 1998 No 241

212. (1986) 8 NZTC 5,219

213. Lief et al, 1998, Ladies and Gentlemen of the Jury, pages 368-369

214. McNeish J, 1997, The Mask of Sanity: The Bain Murders, page 262

215. [1970] 1 QB 148 at 151

216. [1959] QB 150

217. [1986] 2 All ER 353

218. Unreported, High Court, Auckland, T240/91, 18 December 1992

219. Maxwell v Commissioner of Inland Revenue [1959] 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.

220. [1994] 3 NZLR 43 at 46

221. [1991] 4 All ER 664 at 668

222. 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.

223. 317 US 492 (1943)

224. McGovern v Galt [1948] VLR 285, O'Brien J; Commissioner of Inland Revenue v Parisienne Gown Co Ltd [1956] NZLR 442, McGregor J

225. Commissioner of Inland Revenue v Frethey [1961] NZLR 245, McCarthy J

226. McGovern v Carra [1950] VLR 454, Sholl J

227. United States v Goodyear 649 F 2d 226 (1981) [4th cir]

228. In R v Rodney Hamish Worn (unreported, T135/91) page 11

229. [1982] 3 All ER 419 at 430

230. 1995) 19 TRNZ 452

231. [1970] NZLR 321

232. [1992] 4 All ER 385 (affd ibid 451)

233. In Lloyd's Maritime and Commercial Law Quarterly, 1993, page 415

234. Unreported, District Court, Auckland, T 65/94

235. Unreported, High Court, Auckland, T 240/91, 18 December 1992

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