Chapter 2 - The Rewrite Project

Introduction Principles of statutory interpretation Aspects of the rewritten statute Aspects of the rewrite project Additional recommendations

The Organisation of the Act

2.59 The third factor that section AA 3(1) directs to be taken into consideration for interpretation purposes is ‘the way in which the Act is organised’. The organisational scheme of the Act is one of formal function rather than of regime. This functional scheme entails that provisions that operate in the same manner are grouped together in the same part of the Act. Thus, for instance, provisions framed as deductions are grouped in part D, rules framed as anti-avoidance provisions are in part G, and anything that involves a credit is in part L.

2.60 One result is that rules that deal with substantively quite different kinds of factual situations are found cheek by jowl. For instance, within part F, Apportionment and Recharacterised Transactions, Matrimonial Transfers in subpart FF follows Amalgamation (of companies) in part FE and precedes Apportionment of Interest Costs in subpart FG. Another result is that regimes that in the 1976 Act were collected together are scattered in different parts of the 1994 Act. For example, the rules that apply to controlled foreign companies are mostly in subparts CG, MF, and OD.

2.61 A third result is that the location of a rule depends on its form rather than on its substance. Take, for instance, the rule that taxes the profits on certain land sales when the profit is largely the result of a zoning change. Most of this regime is found in section CD 1, particularly section CD 1(2)(e). The bite of this regime tapers by 10 per cent each year until after the taxpayer has owned the land in question for ten years there is no tax to pay at all.

2.62 It happens that when the rules about zoning were inserted in 1975, Parliamentary Counsel chose to frame the tapering rule as a deduction, first capturing the whole of relevant profits, and then allowing a deduction that grows at ten per cent annually until by year 10 of land ownership, there is no profit left to tax. Because it allows a deduction, the tapering rule is separated from the rest of the regime, and appears in the Act as section DJ 14. The rule could just as well, and more consistently with readers’ intuition, have been framed positively, to tax the appropriate percentage of profit for each year of ownership: 90 per cent for one year, 80 per cent for two years, and so on.

Implications of the statute’s form-based organisation

2.63 The formal, rather than substantive, nature of the Act’s organisation that the committee describes above is a fundamental and pervasive aspect of the rewrite. A thorough understanding of the Act’s organisational principles is important to an understanding of the organisation itself. An analogy helps. Consider a criminal code. Criminal codes are ordinarily organised in the manner of the New Zealand Crimes Act 1961. That is, offences of similar kinds are grouped together: fraud, theft, assaults, offences against public order, and so on. As an alternative, it would be possible to organise a criminal code according to penalties or procedures: offences carrying a fine, offences carrying less than three months’ imprisonment, offences carrying less than seven years’ imprisonment, very serious offences, and capital offences would be a possible categorisation, perhaps overlain by procedural aspects of offences: offences triable by information, by indictment, or by either, and with or without the right of trial by jury.

2.64 In fact, as far as the committee knows, no-one has ever organised a criminal code in the manner just described, but such an essentially formal or procedurally based approach affords a reasonably close analogy to the organisation of the rewritten Income Tax Act.

2.65 The discussion above suggests that the place of a rule in the organisational scheme of the Act will ordinarily shed no light on the way in which the rule is to be interpreted. Indeed, and subject to what is said in the next section of this report, as a general principle, a rule’s place in the Act’s scheme will not influence the interpretation of the rule. At best, it would be a factor to consider in some cases. The reason is that if a court calls on the scheme of a statute for help in interpreting it, the court does so because it is trying to work out the substance of Parliament’s intention in respect of that rule. The place of the rule in the statute and its relationship with other rules may help the court in this task. But if the location of the rule is purely a matter of form and of the way in which the rule functions, and not a matter of the relationship between the rule and other rules that together with the rule form a coherent regime, then generally speaking the location of the rule vis-à-vis other rules can shed little light on interpretation problems. Subject to what this reports says earlier about the concept of the local context of a rule within an Act³¹, at best the location will be irrelevant and at worst misleading.

Organisational scheme and local context

2.66 The situation described in the preceding paragraph is in a sense the opposite of what officials intended. Officials explained to the committee that one hoped-for benefit from the Act’s functional organisation was that courts would be more ready to confine rules within their own appropriate local contexts, and would be less inclined to permit, say, an anti-avoidance rule to have the effect of allowing an unintended deduction. The report addresses this issue under the heading ‘Local context’ above, see paras 2.36 to 2.41.

2.67 The result is that, on one hand, the organisational scheme isolates provisions from other sections of the regimes of which they form part, so that courts lose the benefit of being able to interpret sections in the light of other nearby parts of their regimes. Further, because regimes are scattered it is not possible to have over-arching regime-specific purpose provisions to inform the interpretation process.

2.68 On the other hand, if provisions are clearly identified by function, it may be that carefully drafted interpretation rules could ensure that courts would not allow them to influence the interpretation of provisions with other functions.

2.69 In this last context, in theory the functional organisational scheme has the merit of enabling the courts and other readers to identify the purported function of any particular provision. However, that identification process could be achieved in ways that would not require the various regimes and sub-regimes of the Act to be disaggregated and spread through the statute.

2.70 For example, it would be possible within a part of the Act devoted to, say, the imputation regime or trusts or controlled foreign companies to set aside subparts for anti-avoidance rules, for rules that relate to accounts that must be kept, and so on. In principle, such smaller, regime-specific subparts would serve drafters’ purposes better than purely functional subparts, because the operational effect of sections would be limited by both function and regime, and not by function alone, as is the case with the Act’s present organisational scheme.

2.71 The committee recommends that the government should review the way in which the Act’s interpretation provisions together with the organisational scheme operate in relation to what the committee has called the ‘local context’ of a statutory rule. The committee endorses the intention of the rewrite process that the Act should be interpreted in a manner that prevents rules from operating outside the context where Parliament intended them to operate, but is of the opinion that the present interpretation provisions do not achieve that goal.

Reference to organisational scheme in section AA 3(1)

2.72 As mentioned, section AA 3(1)’s reference to the Income Tax Act’s organisational scheme cannot logically refer to substantive, regime-based, relationships between sections because the scheme does not have a substantive basis. What effect might there be from the direction in section AA 3(1) to courts to take into account ‘the way in which the Act is organised’?

2.73 The committee suspects that it is unlikely that courts will be misled. The organisational scheme of the Act is so clearly unrelated to substance that it is hard to see a court being influenced by that organisational scheme in the process of statutory interpretation, notwithstanding the clear direction in section AA 3(1). However, it is hard to predict what might happen in marginal cases, particularly tax cases, which often come before High Court judges who are not familiar with the idiosyncrasies of tax law. Statutory interpretation arguments based on the Act’s organisational structure and authorised by section AA 3(1), but having no substantive merit, could lead to perverse results. The effect of this recommendation, combined with the recommendations in paras 2.41, 2.58 and 2.71, is that the committee recommends that section AA 3(1) should be reviewed as a whole.

2.74 If the government accepts the committee’s recommendation to review the Act’s interpretation provisions insofar as they relate to its organisational scheme these concerns will no doubt be addressed. If that recommendation is not adopted, the committee alternatively recommends that the government should consider whether section AA 3(1) should omit any reference to the way in which the Act is organised, in order to avoid the possibility of perverse interpretations.

2.75 The immediately preceding sections of this report are concerned with the implications that the Act’s formal organisational structure has for interpretation purposes. Elsewhere in this report the committee discusses the advantages that those who established the architecture of the Act have sought from the method of organisation that they specified, see paras 2.126 to 2.147.

Relationship between the Acts Interpretation Act 1924 and the Income Tax Act 1994

2.76 Sections AA 1 and AA 3(1) of the Income Tax Act 1994, taken together, probably do not conflict with section 5(j) of the Acts Interpretation Act 1924. Rather, they may be seen as a particular application of the principles of section 5(j), which is probably the intention of the drafter. However, one member of the committee finds the position uncertain, and foresees possible submissions to courts in future cases that sections AA 3(1) and AA 1 together oust section 5(j) and any other relevant general interpretation provisions from application to the Income Tax Act. The committee believes it unlikely that drafters of the Income Tax Act had this intention. However, if sections AA 1 and AA 3 are to remain in the statute, in order to put the matter beyond doubt, the committee recommends that the Income Tax Act should state that its interpretation provisions do not oust any statutory generally-applicable rules of interpretation unless the former are clearly inconsistent with the latter.

The rewrite’s objectives as to interpretation provisions

2.77 Redrafting the income tax legislation is one thing. The way in which people, especially judges, interpret the redraft is another. Those responsible for the rewrite have clearly given considerable thought to the interpretation question. One result is that the new Act contains a number of interpretation provisions of novel forms. Of these provisions, this report has discussed sections AA 1 and AA 3(1) at some length. However, in the end the committee has been left in a state of some uncertainty as to just what it is that the rewrite process is attempting to achieve as far as interpretation is concerned. There are five explanations, of increasing levels of intensity:

1. There is no intention to change the way in which tax statutes are interpreted at all.
2. There is no intention to change the way in which tax statutes are interpreted, but drafters have added or will add some instructional material (notably sections AA 1 and AA 3(2) and the proposed purpose provisions) for the benefit of readers without legal education, who are not familiar with the principles of statutory interpretation.
3. While there is no intention to change the way in which tax statutes are interpreted, drafters hope the new interpretation provisions will change the result in particular cases.
4. There is no intention to change the general way in which tax statutes are interpreted, but there is an intention to emphasise a principle that rules should be interpreted according to their local context in the Act.
5. There is an intention to make a reasonably major change, towards a more purposive style of interpretation.

2.78 Officials’ explanations to the committee support variously explanations 1 to 4. Officials disavow explanation 5. The committee deals with these possible objectives below, though in a different order.

Instructional objective

2.79 To the extent that the rewrite’s interpretation provisions try to instruct lay people in methods of statutory interpretation they are misconceived. The committee hopes that it has made the point in earlier parts of this chapter that statutory interpretation is an inexact, multi-faceted exercise, replete with guidelines that confuse the uninitiated by (a) often appearing to be inconsistent with one another, and (b) masquerading in the form of rules. It is hard to see that choosing two or three of these guidelines (as section AA 3(1) does) and stating them in a very concise form, will help lay people to interpret the Act.

2.80 Take, for instance, section AA 3(1)’s reference to ‘the way in which the Act is organised’. It is certainly true that this passage reflects the ‘organisation and scheme’ approach to statutory interpretation that is often enjoined by modern judges. But that approach does not take us very far in difficult cases. For example, the Court of Appeal in CIR v Alcan New Zealand Ltd³², quoted Richardson J in Challenge Corporation Ltd v CIR³³,to the effect that the ‘scheme of the legislation’ is one of the ‘twin pillars’ of statutory construction (the other being the ‘relevant objectives’ of the legislation). But in most cases one can look at the scheme of the relevant legislation at different levels of generality.

2.81 The Alcan case was no exception. One possibility, urged by counsel for the Commissioner, was that the scheme of the Income Tax Act insofar as it applied to corporate groups was that all companies that were members of a group had to be resident in New Zealand. Another possibility, ultimately adopted by the court, was that the word ‘company’ retained the same meaning throughout the Act, a meaning that included non-resident companies. The court adopted this second approach because it fitted best with the literal words of the Act. But it is hard to see how lay people could be assisted towards a similar result in respect of either the 1976 Act or the rewritten Act by knowing that they are expected to interpret the legislation by taking into account ‘the way in which the Act is organised’. If anything, lay people taking the instructions in section AA 3(1) at all seriously risk being misled into undue confidence in their interpretations of statutory ambiguities.

The local context rule

2.82 The committee has discussed the rewrite team’s ideas about interpretation according to local context in para 2.52 of this report. It suffices to repeat that while the committee sees some merit in the team’s overall policy of, for example, taking precautions to ensure that anti-avoidance rules cannot be exploited to permit contrived deductions, in the committee’s opinion the measures taken in the rewritten Act will not achieve that objective.

Change of result

2.83 Officials explained that while the rewrite was not calculated to change the courts’ approach to statutory interpretation, it was intended to change the result in particular cases. Two examples were given: the one just mentioned (anti-avoidance rules being exploited to permit deductions) and CIR v Alcan New Zealand Ltd, where the Court of Appeal decided the case by following the literal words of the statute. The result was to sanction a loophole that led to an asymmetry in tax treatment to the advantage of the taxpayer and to the disadvantage of the Commissioner.

Change of approach

2.84 The committee considers that, if the courts were to change their methods of statutory interpretation to a degree that was sufficient to achieve changes of result in cases similar to those just described one could not describe the change as merely a change of emphasis that would lead to different results in particular cases. On the contrary, the changes would mean that the courts are henceforth to take an avowedly purposive approach to interpreting the Act, bearing in mind that its overriding and fundamental purpose is, in the words of section AA 1(a), ‘to impose tax on income’. This change moves away from both the pro-taxpayer tilt seen in such cases as in Plimmer v CIR³⁴,and the according of equal status to the literal and the purposive approaches to statutory interpretation, seen in CIR v Alcan New Zealand Ltd. ³⁵

2.85 The committee would see these developments as a sea change in statutory interpretation. They would entail interpreting the Income Tax Act 1994 in a different manner from other statutes. Officials disagree: they do not see the interpretation provisions as having such a profound effect. Further, it was suggested that the examples of particular cases where results would change had perhaps not been well chosen. Probably, the results in those cases would not change, but results in other, presumably closer, cases would be expected to change, though no examples were suggested.

Interpretation provisions: what should be done?

2.86 The committee concludes from the foregoing discussion that more consideration should be given to the interpretation provisions of the rewritten Income Tax Act, and to the objectives that the interpretation provisions are expected to serve.

2.87 Approaches to statutory interpretation do not fit neatly into two categories, strict and purposive. Rather, there is a continuum, leading from the very strict to the very purposive. Generally, common law jurisdictions tend to be stricter in statutory interpretation than civil law jurisdictions. Among common law jurisdictions, New Zealand and other countries that follow the English approach are more literalist than countries that follow the United States approach.

2.88 Some believe that New Zealand would be better off, at least in tax cases, to move along the continuum towards the more purposive approach of the United States. The committee mentioned in para 2.34 the relatively common pattern in tax cases where interpretation is finely balanced: a narrow, literal interpretation helps the taxpayer, whereas a broader, more purposive interpretation helps the Commissioner. The argument is that a shift along the continuum towards a more purposive approach would achieve a better balance between the taxpayer and the Commissioner.

2.89 Some members of the committee would support a change of this nature. Others do not, noting that a possible cost is that the law might become less certain. Most see at least some case for interpreting tax legislation differently from other legislation, though at this stage the case is not yet fully made out. Be that as it may, it appears that the rewrite process has not yet included a thorough study of the courts’ interpretation of income tax legislation with a view to determining whether Parliament should be satisfied with present practices and emphasis, or whether the rewrite should mandate a change. The committee recommends that the government should consider this issue and, if there appears to be a case for change, proposals should be formulated for study pursuant to the generic tax policy process.

2.90 Secondly, the committee returns to sections AA 1 and AA 3(1). To the committee, these sections promise more than they achieve. It may be that no official has ever expected that they would do more than explain to lay people how the Act should be interpreted (and the committee has explained that such an expectation is misguided). But such is not the public perception of sections AA 1 and AA (3) 1, nor (in the committee’s experience) is it the general expectation in the operations sections of the Income Revenue Department. It behoves the government to decide what the interpretation provisions should achieve, and to have them drafted in a manner that achieves that result.

2.91 An external factor that contributes to the need for this exercise is the possibility that the Acts Interpretation Bill that is currently undergoing study will be enacted. It is at least arguable that the counterpart in the Bill to the existing section 5(j) of the Acts Interpretation Act 1924 mandates a slightly narrower, more literal approach to statutory interpretation than does the text of section 5(j). In particular, the Bill does not deem all legislation to be ‘remedial’, and uses much more restrained language than section 5 (j)’s familiar ‘fair, large, and liberal’. If the Bill indeed mandated stricter approach than the 1924 Act, the government needs to be aware that the Bill will apply to all legislation including income tax law.

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Footnotes

³¹See paras 2.36 to 2.41 Back
³² [1994] 3 NZLR 439 at 444 Back
³³[1986] 2 NZLR 513 at 549 Back
³⁴[1958] NZLR 147, Barrowclough CJ, discussed above, para 2.12 Back
³⁵ [1994] 3 NZLR 439 CA, discussed above, para 2.18 Back