February Tax Alert

Article

Happy New Year – a taxpayer (pyrrhic) victory, and a refresher on Parliamentary sovereignty

Tax Alert - February 2020

By Campbell Rose – Partner and Michael McInerney-Heather - Consultant

 

A Court of Appeal judgment released in late 2019 – a taxpayer win – serves as a useful reminder of some fundamental statutory interpretation principles. That same day, the Government moved quickly to overturn its outcome, by announcing a legislative amendment to be included in the current Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill when that Bill has its second reading. Despite this, the Court has sent a clear signal that tax law is to be construed by reference to its text and Parliament’s purpose, not through the lens of tax policy officials’ comments.

 

Background and first stage of statutory interpretation

In Roberts v CIR [2019] NZCA 654, the Court had to decide whether the forgiveness of debt owed by a charity was a “gift [of money]” or a “monetary gift” of $5 or more that was paid by the creditor (Mrs Roberts). If so, Mrs Roberts was entitled to the tax credits that she claimed in respect of the debt forgiveness.

Inland Revenue’s Disputes Review Unit had sided with the Commissioner at the conclusion of the pre-litigation disputes process, but Mrs Roberts successfully challenged this in the High Court.

The Court of Appeal started its analysis by referring to the dual requirements of section 5 of the Interpretation Act 1999, namely, that the text of a statutory provision and its purpose will determine the correct interpretation. Justice Stevens observed that even when a meaning of a provision appears clear, it is necessary to cross-check that meaning against its purpose (and where the meaning is not clear, context and purpose become essential guides to meaning).

In relation to the ordinary meaning of the statutory text, the Court agreed with Mrs Roberts, that “monetary” and “money” mean more than just cash, and have a wider definition for the purposes of the tax credit rule.

 

Use of legislative history/extrinsic aids

In seeking to cross-check that conclusion against Parliament’s purpose, the judge noted that Inland Revenue had placed “considerable emphasis” on what it described as “compelling” extrinsic interpretative aids and legislative history, to identify that purpose. Inland Revenue referred to comments by its tax policy officials in two discussion documents (published in 2001 and 2006), in commentary to a tax bill introduced in 2007, and in an officials’ report to the Finance and Expenditure Committee in November 2018 regarding a proposed legislative amendment to overturn the High Court’s decision in Roberts. These
officials’ comments were said to support Inland Revenue’s argument that
Parliament’s purpose was to exclude debt forgiveness and only include “cash”
gifts within the ambit of the tax credit rules (i.e. a transfer of money from
donor to donee).

The Court of Appeal observed that these extrinsic aids did not analyse the boundary between “cash” and “non-cash” donations, nor were they precise in terms of what those terms mean. Justice Stevens noted that the reference to “cash donations” in those documents differed from the statutory language. His Honour then set the scene for a refresher on statutory interpretation by stating that “imprecise paraphrases of this kind [do not] provide any real assistance in interpreting the statutory language”.

Although there had been somewhat of a “disconnect” for a number of years between the actual wording of the legislation and the commentary/discussion generated by officials, there was “no support” for the Commissioner’s interpretation that required a donation to be “in cash”. The clearest guidance from the Court in this respect is worth setting out in full (from paragraph [62] of the judgment):

Comments in reports by officials about ‘cash’ do not assist the Commissioner when that is not the wording of the statute (…) The task of the Court is to interpret the words used in the statute, not paraphrases, and in particular imprecise paraphrases, used in discussion papers and officials’ reports. We should add that comments by officials, unless they form part of the parliamentary record, are not an especially reliable, or orthodox, form of legislative history.

In relation to the November 2018 amendment (which sought
to overturn the High Court judgment), his Honour rejected Inland Revenue’s
submission that that subsequent amendment confirmed it was not Parliament’s
purpose for gifts of forgiveness of debt to qualify for donation tax credits as
having ‘no merit’. In this regard, the Court described the officials’ report in
respect of that amendment as expressing the “so-called” policy intent for the
first time (to address the issue of forgiveness of debt).

Policy grounds

Finally, the Court of Appeal did not find any of the policy grounds advanced by the Commissioner to be persuasive.

An argument by Inland Revenue that finding against it
would result in significant compliance and administrative costs was said to be
“exaggerated” (and Parliament could address any such concerns through more
detailed and specific drafting of the relevant rules). Inland Revenue’s
concerns about tax avoidance opportunities if Mrs Roberts’ argument was
accepted were “overstated”.

The Court closed by observing in relation to policy
grounds that such arguments:

(…) cannot succeed in carrying the day in circumstances where the words used in the statute do not support the Commissioner’s case and the legislative history is at best unhelpful.

 

Observations

In practice we often see Inland Revenue referring to discussion documents and officials’ reports in seeking to establish application of the general anti-avoidance rule. The courts have confirmed that – in that context – those materials can provide some assistance.

However, the Court of Appeal’s statements in Roberts serve as a clear reminder that, when construing tax legislation on a black letter basis (before any potential
application of the general anti-avoidance rule), the words of Parliament (including the Parliamentary record such as Hansard) are critical. Inland
Revenue cannot simply rely upon its own officials’ statements regarding
Parliament’s purpose. The Court has made clear that officials’ comments must be
treated with caution given they are not a “reliable” or “orthodox” extrinsic aid to interpreting legislation.

All of which serves to underscore the crucial importance of getting the legislation as clear as possible in the first place. In a world where the volume and complexity of tax legislation passing through Parliament each year are increasing exponentially, getting it ‘right first time’ through drafting unambiguous tax rules is critical to the smooth functioning of New Zealand’s tax system. Or – where the first attempt has not quite hit the mark, then equally critical is an effective process by which post-enactment reviews and remedial amendments are considered and implemented.

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