Bell Gully acts on a significant tax avoidance win

Thursday 8 November 2018

​Bell Gully represented Frucor Suntory New Zealand Limited in Frucor Suntory New Zealand Limited v Commissioner of Inland Revenue, a High Court decision which marks an important victory for New Zealand tax-paying entities on tax avoidance. 

The decision was released earlier this week. A copy of the judgment is available here​.

The case is a rare victory for a taxpayer on tax avoidance. The taxpayer, represented by Bell Gully and barrister Lindsay McKay, successfully rebutted the allegation that its use of convertible note financing to fund its New Zealand business was a tax avoidance arrangement. In recent years taxpayers have had limited success in resisting tax avoidance allegations and this decision may be the first step in rebalancing the position. 

Bell Gully partner, Mathew McKay, who acted on the matter, describes Justice Muir’s judgment as “logical and insightful” and as being “founded on a firm understanding of the relevant tax principles”. The judgment addresses a number of significant matters:

  • ​It accepts that Parliament would have contemplated that tax​payers would ordinarily be entitled to interest deductions on debt instruments, if set at an arm’s length rate.

  • It confirms that the presence of unorthodox features in an internal arrangement between group companies will not necessarily be regarded as “artificial” features in a tax avoidance analysis – it is the tax outcomes that must be considered.

  • It reinforces the traditional separate legal entity approach in an international tax context.

  • It provides an indication that shortfall penalties will not automatically follow a finding of tax avoidance.

Mathew McKay expects that the judgment “will serve as a reminder to the IRD that future allegations of tax avoidance will need to be built up from rational argument that pays attention to existing policy and legislative design.” 

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