Two Tribes and an Elephant Called Ben Nevis – September 2009
The tax avoidance provision, section BG 1 Income Tax Act 2007 (“ITA 2007”) first came before the Supreme Court last year, with a decision delivered right at the end of the year: Ben Nevis Forestry Ventures Ltd v CIR; Accent Management Ltd v CIR (2009) 24 NZTC 23,188 (“Ben Nevis”). There are two decisions, agreeing as to result, but not necessarily as to approach. The decision of three judges expressly aimed to “settle” the approach which should be adopted in New Zealand.
In the succeeding eight months, there has been a flurry of academic writing and two significant first-instance decisions, each seemingly drawing something different from the judgment of the majority.
In this respect, the situation may be likened to the Indian fable of the blind men and the elephant, wherein a group of blind men touch an elephant to learn what it is like. Each one touches a different part, such as the side or the tusk. They then compare notes on what they felt, and learn they are in complete disagreement.
One more blind man can scarcely make things worse, so in this article the author gives his “take” on the judgment, discusses its application in the recent BNZ Investments decision and expresses some views as to what areas remain unresolved, and on what issues tax avoidance litigation is likely to be decided in the light of Ben Nevis.
Section BG 1 ITA 2007 is the materially identical successor of similarly named sections in the 2004 and rewritten 1994 Acts, which in turn replace the original sBB9 ITA 1994, s99 ITA 1976, and s108 Land and Income Tax Act 1954. The major change to these provisions was the 1975 amendment which introduced the concept of an arrangement being void for income tax purposes, gave the Commissioner a reconstruction power, removed the judicial gloss that appeared to save an arrangement from being tax avoidance provided one of its purposes involved ordinary business or family dealings, and introduced the exemption for “merely incidental” tax avoidance purposes or effects.
The key features of the legislation can be summed up as follows:
· A tax avoidance arrangement is one which has a more than merely incidental purpose or effect of tax avoidance
· A tax avoidance arrangement is void against the CIR for income tax purposes
· The CIR has the power to reconstruct a tax avoidance arrangement so as to counteract the tax advantage obtained by a person (whether or not a party to that arrangement) from or under that arrangement
“Tax Avoidance” Definition
The source of many of the problems which have dogged judicial attempts to articulate a test for tax avoidance lies in what must be the deliberately wide definition of the very concept of “tax avoidance”, which includes –
(a) directly or indirectly altering the incidence of any income tax:
(b) directly or indirectly relieving a person from liability to pay income tax or from a potential or prospective liability to future income tax:
(c) directly or indirectly avoiding, postponing, or reducing any liability to income tax or any potential or prospective liability to future income tax
Literally defined, anything which has a tax effect is “tax avoidance” as defined. The most ordinary of commercial contracts alters the incidence of tax by giving one party a deduction which did not exist before, and the other a liability to income tax which did not exist before.
More than Incidental the answer?
At this stage, it can be observed that the “more than merely incidental” qualifier to the definition of “tax avoidance arrangement” fails to provide a simple and fair test which enables literal application of the definition of tax avoidance yet exempts unexceptionable transactions from being tax avoidance arrangements. The qualifier clearly does prevent many arrangements from being tax avoidance arrangements, whatever the test of “tax avoidance” may be – an accountant acquiring a new computer is doing so to better carry on his business, and the tax deductions from buying or leasing it are merely incidental. However, in many instances, transactions carried out solely for tax advantage will also be unexceptionable and cannot have been intended by Parliament to have been struck down. For example:
· A taxpayer having established a new business, elects LAQC status while it finds its feet and until it makes a profit.
· A taxpayer buys a business making a loss, and puts it in an LAQC while it is being restructured/redeveloped
· A taxpayer buys a rental property and leases it for less than the combined interest and depreciation
In all of these situations the tax savings may be the dominant reason for the arrangements put in place. The “merely incidental” test will therefore not save situations which are caught by the literal words of the “tax avoidance” definition but which would not be considered by most informed practitioners to be tax avoidance.
Judicial Glosses on the Section
The instinctive judicial revulsion against a literal definition, which would stigmatise huge numbers of people as tax avoiders simply because they were carrying out normal, socially useful and commercially unexceptionable transactions, led to a series of tests or “glosses” on the concept.
These tests or judicial “glosses” on the statutory definition of “tax avoidance” included (but were not limited to):
· Excluding from tax avoidance a transaction which can be explained as “ordinary business or family dealing” – Newton (PC) (as above, this test was legislated away in the 1970s)
· Distinguishing between avoidance and “Mitigation” – Challenge (PC) (disapproved of in Miller in the Privy Council)
· Applying a standard of “impropriety” – Miller (High Court) (also disapproved of in Miller in the Privy Council)
· Tax avoidance happens when a taxpayer claims a deduction for a cost which is “not incurred” – Challenge (PC)
· “Line drawing” – BNZ Investments (CA)
· “Commercial reality” and “True construction of legislation” – Miller (PC)
· “Structural choices” – Challenge (CA)
· Whether, having regard to an overall assessment of the respective roles of the particular provision and s BG 1, it was intended that s BG1 apply to a transaction – Challenge (CA)
Two Schools of Thought
In the island where tax practitioners, rightly shunned by ordinary people, live, there are two tribes. Faced with the different tests expressed by the Courts, the tribes have each adopted different views and approaches in relation to tax avoidance analysis. In one tribe, whose land is dotted with ivory towers, live the pointy-headed tax boffins who carefully dissect a transaction and meticulously scan the legislation to see whether it comes within or without the scheme and purpose of that legislation. In the other tribe are the rough and ready, down-to-earth folk who look at the facts in the round in the light of commercial morality and good common sense, and apply the “old sniff test” to spot artificiality, contrivance and lack of commercial purpose, whooping with joy or howling with dismay whenever a circular flow is spotted.
The Supreme Court hearing of the appeal in Ben Nevis had been seen by many as the final battle between the sniff testers and the pointy heads, and the judgment was expected to represent a decisive victory for one or the other tribe.
The Ben Nevis decision concerned the “Trinity” scheme, so-called after companies at its heart. The scheme involved forestry investment with a twist – investors bought a licence entitling (indeed, obliging) them to grow fir trees, and under the terms of the agreement they did not own the land, or the trees, but they had a right to the proceeds from harvesting the trees. In return, they paid a relatively small up-front fee and agreed to pay a premium for the licence when the trees came to be harvested – in around 50 years’ time. The cost of the licence payable in the future was based on present value of tree harvest, extrapolated by inflation and real price growth, and hence a large amount (a little over $2 million/hectare). The licence was Fixed Life Intangible Property and its cost, payable in 50 years’ time, was depreciable on a straight-line basis. According to the CIR, approximately $3.7 billion would have been at stake had the transaction run its course and all tax deductions been claimed.
The CIR won at all levels: Accent Management Ltd v CIR (2005) 22 NZTC 19,027 (HC), Accent Management Ltd v CIR (2007) 23 NZTC 21,323 (CA) and Ben Nevis Forestry Ventures Ltd v CIR; Accent Management Ltd v CIR (2009) 24 NZTC 23,188 (SC).
Ben Nevis, Supreme Court, Minority decision
The minority decision, of Elias CJ and Anderson J, reflects a view that “purposively and contextually interpreted”, the Trinity scheme fell outside the intended application of the [depreciation] provisions, and hence – even without the application of BG1, the transactions were ineffective. This view, however, is inconsistent with the majority view and hence does not represent the law at the moment.
The majority judgment (of Tipping, McGrath and Gault JJ) is a comprehensive statement of the law – as noted above, their Honours set out to “settle” the approach to section BG 1 – para . As a precursor to this, they commenced by noting (at paragraph  onwards) the history of the anti-avoidance since its first appearance in 1878, the CIR’s active reliance on it from the 1960s onwards and the various cases. The Court identified the fundamental issue of how to reconcile section BG 1 with the rest of the Act at paragraph  and :
12 The expanded provision, and its successors, did not, however, explicitly resolve a central issue that had arisen with s 108 of the 1954 Act. That was the relationship between the general anti-avoidance provision and the many “specific provisions” that allow tax concessions, principally through authorising deductions and depreciation allowances. Taxpayers enter into many transactions which have been structured with the purpose of taking advantage of specific provisions in order to reduce tax. While the general anti-avoidance provision is expressed broadly, its purpose cannot be to strike down arrangements which involve no more than appropriate use of specific provisions. On the other hand, strict compliance with the requirements of specific provisions cannot have been intended to immunise all arrangements involving their use against being categorised as tax avoidance arrangements, which it was the purpose of the general provision to avoid.
13 The present appeals are the first occasion this Court has had to consider when use of specific provisions will amount to proscribed tax avoidance. There is little explicit guidance in the legislation and the current case law has become complex, through being encumbered by considerations and tests that the legislation does not specify. Through a process of interpretation of all the relevant statutory provisions, we must identify a means for determining where permissible use of specific provisions ends and tax avoidance begins.
During an extensive survey of the cases to date, the majority expressed the view at paragraph  that the distinction between mitigation and avoidance was “conclusory and unhelpful”. As will be seen, it is the author’s view that even the majority’s test and approach, at least in some aspects, could be labelled conclusory.
Key conceptual paragraphs
Paragraphs  to  of Ben Nevis together express a sustained and coherent progression of ideas. Paragraphs  to  set out the conceptual ideas. Then, increasingly, the emphasis changes from the concepts to the mechanics, to how BG 1 should be applied.
In particular, paragraphs  and especially  are important in explaining the practical implications of the ideas in earlier paragraphs:
“[the function of sBG 1] is to prevent uses of the specific provisions which fall outside their intended scope in the overall scheme of the Act”.
“ When, as here, a case involves reliance by the taxpayer on specific provisions, the first inquiry concerns the application of those provisions. The taxpayer must satisfy the Court that the use made of the specific provision is within its intended scope. If that is shown, a further question arises based on the taxpayer’s use of the specific provision viewed in the light of the arrangement as a whole. If, when viewed in that light, it is apparent that the taxpayer has used the specific provision, and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement.”
Paragraph  seems to the author to express an extremely important concept – that tax avoidance can arise in two different ways.
· One way is use of specific provisions in a way which is outside their intended scope. This will involve a focussed consideration of the scheme and purpose of the relevant provisions, and a consideration of whether the way in which those provisions were employed furthers or frustrates that scheme and purpose. This is the approach which the pointy-heads use.
· The second way is to use a wider arrangement (utilising specific provisions or sets of specific provisions) in a way which produces a result which cannot have been within Parliament’s intention. In this aspect of tax avoidance, frustration of Parliament’s scheme and purpose is a conclusion not an indicator. This approach is favoured by sniff testers.
Paragraph  – factual factors pointing to avoidance
Paragraph  then progresses to specific factors which may point to the conclusion that tax avoidance is present:
· The manner in which the arrangement is carried out;
· The role of all relevant parties and the relationship they have with the taxpayer;
· The economic and commercial effect of documents;
· The duration of the arrangement;
· The nature and extent of financial consequences of the arrangement;
· Whether the arrangement has been structured in a contrived and artificial way.
These factors, by and large, are the sort of things which the sniff testers rely on in attempting to discern objectionable tax avoidance from transactions which do not cross the line.
In considering what may be contrived or artificial, Ben Nevis seems to the author to reinforce that circularity of money flows is always a “bad look”. If money circulates but a tax advantage appears, it is a paradigm example of a cost not being truly incurred (a test from Challenge which appears to have stood the test of time). In this respect the Privy Council decision in Peterson v CIR seems hard to reconcile with cases before or since, except on the basis of concessions apparently made by the Crown during hearing.
Two examples of circularity arose in Ben Nevis and the High Court and Court of Appeal Accent Management judgments.
The first example involved the relationship between the investors, the Trinity Foundation and an overseas “captive” insurer. Venning J in the High Court considered that the mix of actual payments and future (potential and fixed) payments and obligations between these parties, constituting different amounts payable at very different periods of time, amounted to offensive circularity which he could take into account in ascertaining tax avoidance which “crossed the line”. At paragraph 132 of the High Court judgment Venning J said:
Next, while the transaction overall cannot be categorised as a circular transaction in that the ultimate beneficiaries of Trinity 3 and Trinity Foundation are charities and the plaintiffs are on the other hand, investors, the degree of relationship and circularity between the payments or potential payments required by the principal parties to the arrangement including the plaintiffs is significant.
While the taxpayers on appeal to the Court of Appeal appear to have argued that any degree of circularity was inoffensive, the Court of Appeal cited the passage above from Venning J with approval and identified an additional element of circularity at paragraph :
The letter of comfort from Trinity Foundation Charitable Trust (the ultimate owner of Trinity 3) provided CSI with additional comfort as well as creating an additional element of circularity to the insurance arrangements
These findings were in turn relied upon by the Supreme Court at paragraph :
The letter of comfort dated 3 February 1997 given to CSI by the Trinity Foundation Charitable Trust, which was the ultimate beneficial owner of the Trinity Foundation, demonstrates that although technically CSI was at risk, it was, at least in part, an indemnified risk leading to a substantial element of circularity in the whole insurance arrangement. It is a strong inference from this fact alone that the insurance was simply a method whereby substantial tax benefits could be obtained by deducting in one lump sum in 1997, a premium not payable in commercial terms until 2047
The various aspects of circularity were also relied upon at paragraphs  and  of the Supreme Court decision. This decision, which must be considered authoritative, illustrates that even if transactions involve real payments, a circularity of relationships, underpinned by a formulaic relationship, may be regarded as an indicator of tax avoidance.
The Ultimate Question
The ultimate question expressed in paragraph  is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament’s purpose? This ultimate question is expressed in the language which the pointy heads use.
As explained above, paragraph  makes it clear that this ultimate question must be ascertained by considering:
· First, whether the transactions in question use each aspect of the legislation in a way contemplated by the legislation (first part Ben Nevis paragraph ), and if so,
· Whether the transactions as a whole produced an end result which accords with what Parliament must have intended as a result from the particular legislation which delivers the tax result (second part Ben Nevis paragraph ).
Questions of artificiality, contrivance, and lack of commercial reality to a transaction may be strong indicators that the steps are being taken to produce a tax result that Parliament did not specifically anticipate and would not have intended. These factors of themselves may amount to a test (Ben Nevis para ).
In addition, the lack of commercial attractiveness without the tax advantage may, if tax avoidance is present, be conclusive as to the non-incidental nature of such avoidance.
The second part of the Ben Nevis paragraph  test in the cases
The second part of the Ben Nevis paragraph  test is particularly important because, in practice, most tax avoidance is found to exist in reliance on this type of approach than on the “compliance with the scheme and purpose of the regime” approach in the first test. For example:
· In considering the deductions for the licence premium in Ben Nevis the Court considered:
o The commercial aspects of the transaction: paragraph .
o The “payment” by a promissory note which would only be paid in 50 years time: paragraphs  to . It was an artificial component of the arrangement which the Court was satisfied “was included for the purpose of tax avoidance”: paragraph .
o The real risk that the arrangement would never deliver a profit: paragraphs  and . The expected after-tax returns to the investors only equalled the amount of licence premium to be paid out of the proceeds such that the only perceived benefits to the investors would be the tax deductions to be enjoyed: paragraph .
o The timing mismatch between when the expenditure was legally incurred and the point when it was required to be paid in an economic sense: paragraph . Under the arrangement the taxpayers received the tax benefits but (because of the time difference, and investment through single-purpose companies) would probably never incur the real expenditure: paragraph .
o That the taxpayers funded the purchase of the land by paying over three times its cost for an option to acquire the land for half its value in 2048: paragraph .
o That the taxpayers had no commercial reason to pay for the use of the land when they had already funded it: paragraph .
o The Court then undertook a similar exercise in respect of the deductions for the insurance arrangement, relying on no analysis whatsoever of the scheme and purpose of the premium deductibility provision (section DL 1(3)) but instead examining the artificiality and contrivance inherent in those aspects of the arrangement, ending with the conclusion that “The insurance arrangements, as constructed, cannot have been within the contemplation of Parliament when it enacted s DL 1(3)”.
o The various aspects of circularity in the arrangement noted above
· In Erris Promotions Ltd v CIR (2003) 21 NZTC 18,330 (HC) the taxpayers paid real money for real computer programs (but promised to pay considerably more money on inflated terms, and depreciated the programs on the basis of the whole amount promised and paid). The decision considers the artificial and overtly tax-driven way in which the transaction was undertaken and deduces tax avoidance accordingly; there is no real scrutiny of the scheme and purpose of the depreciation regime as it applies to intangible property, or to any other particular aspect of the legislation;
· In Miller v CIR  3 NZLR 316 (PC) and Miller v CIR  1 NZLR 275 (CA) neither court examined in great detail the scheme and purpose of the company loss grouping regimes which the JG Russell template exploited;
· In Dandelion Investments Ltd v CIR  1 NZLR 600 (CA) the transaction was not examined in terms of whether the scheme and purpose of the particular legislation permitted cross-border arbitraging between deductible interest and tax-free dividends, but rather was dismissed (at 623) as circular, involving no real expense, and an artifice. This led the court to the conclusion that the concessional treatment for interest deductibility which was relied upon was not intended to be used in the way in which it was.
· In Hadlee v Commissioner of Inland Revenue  3 NZLR 517 (CA) the partner in an accounting firm who assigned his income to a family trust was held (at 525) to have acted in a way “that is contrary to the intent of the Act as a whole and s 99 [the equivalent of s BG 1] in particular”;
· In the “paddock trust” cases, which include Marx v CIR; Carlson v CIR  NZLR 182 (CA); Mangin v CIR  NZLR 591 (PC) and CIR v Gerard  2 NZLR 279 (CA) there is no discussion of the scheme and purpose of any of the underlying provisions or regimes exploited. Instead the arrangements as a whole were considered contrived, artificial and hence void.
Compliance with Parliament’s contemplation may be conclusory
The way in which the second part of paragraph  is expressed, “If… the taxpayer has used the specific provision… in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision”, seems to treat compliance with Parliament’s contemplation as a conclusion or alternative way of describing the existence void tax avoidance, rather than a means of forensic determination of whether tax avoidance exists. This impression is strengthened when, as above, one considers the essentially factual considerations set out in paragraph .
It may be that, even given this, there remains a vital role for consideration of compliance with Parliament’s contemplation and purpose as a sort of “sanity check” once the paragraph  factors have been considered. It is possible to conceive of transactions which have all sorts of non-market, contrived, or circular factors but where the tax result under consideration is normal and commonplace. In other words, the tax result still may not be the result of any of the unusual aspects of the transaction.
Summary – the Ben Nevis Test
In summary, the author’s view is that three key propositions can be drawn from the majority’s approach:
· Firstly, a specific provision is designed to give the taxpayer a tax advantage if its use falls within its ordinary meaning and/or intended scope in the overall scheme of the Act. This will be “a permissible tax advantage” – paragraph .
· Second, the way a specific provision was deployed may, in some circumstances, cross the line. Ascertaining whether that is the case is “firmly grounded in the statutory language” of the provisions – paragraph . This is the first of the two ways in paragraph  where the taxpayer’s use of the provisions may constitute tax avoidance. This is the approach the pointy heads use.
· Finally, even if all the steps in an arrangement are unobjectionable in themselves, their combination may give rise to a tax avoidance arrangement – paragraph . This is the second of the two ways in paragraph  where the taxpayer’s use of the provisions may constitute tax avoidance. The sniff test factors in paragraph  are common indicators of a transaction which has crossed the line in this way. In this aspect of tax avoidance, frustration of Parliament’s scheme and purpose seems to be more a conclusion than an indicator – or at best, it is a final “sanity check”.
This may be shown by the following diagram, where the danger of a transaction being a void tax avoidance arrangement is shown in a range from safe green to dangerous red:
Uncertainties which remain
So has the Ben Nevis reduced the fertile island of tax practitioners to a desolate wasteland, over which the ravenous Commissioner can roam at will? The author suggests not.
The first area of uncertainty which remains is an essentially factual and value-laden issue of what crosses the line. In particular, what amounts to artificiality or contrivance which takes a matter outside the range of acceptable practice? It is not uncommon for Inland Revenue investigators to assert that, for example, transferring assets to a trust is “artificial” and/or “contrived”. And in one sense, they are right: most business concepts are artificial and contrived, in the sense of having no physical reality and being entirely man-made constructs. A company has no physical existence; it is simply a series of relationships between certain people, some property or wealth and the rest of the world, which we all adhere to because of habit, usage and the law. Even the concept of property or ownership in a thing is simply a series of understandings and conventions, separate from physical possession (I can own something and not possess it; I can possess something and not own it).
It seems that the better view of law is that the types of artifice and contrivance which will offend s BG1 are those “which have tax induced features outside the range of acceptable practice” – BNZ Investments, cited with approval in Ben Nevis. In view of the essentially subjective nature of these considerations, even expressed in this way (one person’s unacceptable may be another person’s normal), it may well be that in applying the Ben Nevis tests in practice the Courts will adopt a cautious approach before categorising a transaction as sufficiently artificial or contrived to fall foul of s BG 1. In this respect the recent decision of MacKenzie J in Penny v CIR; Hooper v CIR (2009) 24 NZTC 23,406 is a good example of a Court disagreeing with the CIR’s categorisation of a transaction as artificial or contrived, simply because it involves a change in structure and produces a tax advantage.
The second area is the issue of compliance with parliamentary contemplation, beloved by the pointy heads. The significant cases which have decided the existence or otherwise of tax avoidance wholly or partly in reliance on this approach show how difficult this test is to apply in practice. It is undeniable that both Richardson J and Lord Templeman were among the finest tax minds around in the mid 1980s. Yet they came to opposing conclusions as to whether the transaction in Challenge complied with the scheme and purpose of the legislation. Similarly the Privy Council in Peterson was split 2:3 on whether that transaction complied with or frustrated the parliamentary intention. Given this scope for ambiguity and disagreement, it is not surprising, as above, that most cases seem to be decided on the sniff test factors.
The ambiguity, and hence the scope for debate and differences in possible outcomes, in the above two areas is perhaps shown by the diagram set out above, where a simple less to more scale is used rather than percentages to rate factors such as contrivance and artificiality; any attempt to rate a transaction on a numerical scale would be essentially meaningless.
The next area where there will continue to be disagreement is the scope of the arrangement. While the Commissioner effectively defines what the relevant arrangement is, if he defines it too widely, he risks a Court finding there is no arrangement, just a series of unconnected events – AMP Life Ltd v CIR (2000) 19 NZTC 15,940 (HC). On the other hand, if he defines it too narrowly, he risks a finding that any tax advantage is not “from and under” the arrangement – CIR v BNZ Investments Ltd  1 NZLR 450 (CA).
An area which appears unresolved in the Ben Nevis judgment was the scope of reconstruction. The CIR can adjust the taxable income of a person affected by the arrangement in a way he thinks appropriate, in order to counteract a tax advantage obtained by the person from or under the arrangement. The question arises as to whether the appropriate degree of reconstruction is to remove all tax advantage, or only that attributable to those features which cross the line? While on a textual analysis the former would appear to be the correct answer (the arrangement is void, not simply those factors which cause the arrangement to be tax avoidance) the existence of the reconstruction power may imply some neutral “base case” back to which, and no further, the CIR should reconstruct. This approach was recognised in the obiter remarks of McGechan J in BNZ Investments Ltd v CIR (2000) 19 NZTC 15,732 (HC) and the possibility that it was good law appears to have been entertained by the Supreme Court in dismissing the Ben Nevis taxpayers’ appeal to this approach, at least in part, on the factual basis that they had not discharged the burden of proof (paragraphs  and ).
BNZ Investments #2
In mid July Wild J delivered his judgment on whether “structured finance” transactions entered into by the BNZ in the late 1990s were tax avoidance, finding in favour of the CIR. While an appeal is likely, the case is instructive for the way in which a first-instance judge has applied Ben Nevis to a large and complex fact pattern.
Wild J’s approach to these decisions is set out at para  to . He accepted the CIR’s submission that the decisions render earlier case law largely redundant, specifically holding at paragraph  that:
a) Spells an end to the tax mitigation/tax avoidance distinction drawn by the Privy Council in cases such as Challenge Corporation Ltd v CIR  2 NZLR 513 at 562. ()
b) Also stumps the Privy Council’s view, in CIR v Auckland Harbour Board  3 NZLR 289 at , that s BG 1 was merely “a longstop for The Revenue” (, ).
c) Ends the “threshold” approach (see fn 113 to  in the main judgment in Ben Nevis) favoured by Richardson J in the Court of Appeal in Challenge at 549-550. Because the taxpayer met the threshold of literal compliance with the specific provisions (in Challenge they related to the tax treatment of subvention payments), Richardson J held that such compliance could not consistently be treated as tax avoidance. The main judgment in Ben Nevis observes:
 The effect was to reconcile conflicting provisions by reading down the scope of (now, s BG 1) so that it did not operate on arrangements that complied with the particular specific provision in the legislation. The scheme and purpose of the legislation required that (s BG 1) be read in the context of the special concession provisions which were dominant.
In short, the taxpayer does not avoid the reach of s BG 1 by surmounting step 1 set out in 0 [sic] below. (, , , )
d) Endorses the approach of treating any artifice or pretence in an arrangement as highly relevant in deciding whether that arrangement has a purpose of tax avoidance: Miller v CIR  3 NZLR 316 (PC) at ; Dandelion Investments Ltd v CIR  1 NZLR 600 (CA) at  and CIR v BNZ Investments Ltd  1 NZLR 450 (CA) at . (, )
His view is that Ben Nevis requires a two-step analysis, which he sums up at paragraph :
a) Step 1 requires me, upon an ordinary interpretation of the applicable specific provisions, to decide whether the arrangements comply with those provisions.
b) Step 2 requires me to decide, upon the scheme and purpose of the Act including s BG 1, whether the legislature would have contemplated and intended that the specific provisions be deployed as they were deployed by the taxpayer in the transactions in issue.
This observation is orthodox and inevitable – one has to ascertain whether the transactions at “black letter” deliver the claimed tax results, and only then consider whether the anti-avoidance provision applies. However, the author considers that it is interesting to consider the way in which the second step should be approached. The step 2 articulated by Wild J appears to conflate the two tests in paragraph  of Ben Nevis back into one. Here the judge accepted the CIR’s submission, which he described at paragraph :
[T]he question for the Court at step 2 is necessarily an hypothetical one. Guided by the considerations and the approach set out by the Supreme Court in  and  in Ben Nevis, the Court is essentially asking itself: had Parliament foreseen transactions of this type when enacting the specific provisions deployed in the transactions, would it have viewed them as within the scheme and purpose of those specific provisions?
In doing so, he rejected the opposing submission from the bank as “involving the same literal interpretation of the specific provisions required at step 1.”
The application of these principles to the facts, issues and specific legislation occupies a large portion of the judgment and is based on a seemingly thorough examination of what the Judge sees as the scheme and purpose of the FTC and conduit regimes, together with issues of artificiality, contrivance and marked circularity which he found present in the transactions. Accordingly the judge does pay full attention to what appear to the author to be two discrete areas of inquiry required in the light of the Ben Nevis decision, albeit he has framed the issues as one test and in what may be seen as a partly conclusory way.
As the majority of the Ben Nevis bench said at paragraph , perhaps with a hint of irony, “The courts should not strive to create greater certainty than Parliament has chosen to provide”. Uncertainties still abound, but at least there is a coherent conceptual framework which can be applied to tax avoidance disputes. Far from providing a decisive victory to either tribe, the Supreme Court has created a tax avoidance world where the pointy-heads and the sniff testers each have a part to play and can perhaps live together in harmony.
 The provision actually considered was the materially identical ITA 1994 version
 Paragraph 
 By s 9 of the Land and Income Tax Amendment (No 2) Act 1974
 Now in section YA 1 ITA 2007
 Newton v CT  AC 450
 CIR v Challenge Corporation Ltd  2 NZLR 513
 Miller v CIR  3 NZLR 316
 Miller v CIR; McDougall v CIR (No 1) (1997) 18 NZTC 13,001
 CIR v BNZ Investments Ltd  1 NZLR 450
 A phrase used by Barber DCJ in Case V3 (2001) 20 NZTC 10,021
 see paragraph 136 of the Court of Appeal decision
 The report at  1 NZLR 811 is considerably abridged
 BNZ Investments Limited & Ors v CIR (Unrep 15 July 2009, High Court Wellington, CIV 2004-485-1059, Wild J)