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New Zealand

The income tax liability of a recipient of profits on the disposal of assets has long been a grey area of income tax law. Problems arise when trying to distinguish between taxable income and non-taxable capital gains. The recent decision of the Privy Council in Rangatira Limited v The Commissioner of Inland Revenue provided an opportunity to clarify the law in this area. Hence the decision had been keenly awaited by the New Zealand investment market.

Rangatira is an unlisted public company majority-owned by a number of charities. Over a period of years the company consistently invested in shares in sound, well-performing companies. From time to time shares were disposed of, occasionally yielding substantial profits. Prior to 1983 these profits were accepted by the Commissioner as capital gains rather than taxable income. However, between 1983 and 1990 Rangatira made 41 share sales, the profits from which were assessed as taxable by the Commissioner.

At first instance, Gallen J in the High Court held that, while some parcels of shares were purchased with the intention of resale and so gave rise to taxable income, the remaining share dealings during the 1983 to 1990 period did not generate taxable income. On appeal, the Court of Appeal held that Rangatira was in the business of share trading during the 1983 to 1990 period and so the profits realized on all share sales during that period were taxable.

The Privy Council set aside the decision of the Court of Appeal and reinstated the High Court decision. Their Lordships held the Court of Appeal had incorrectly overturned a finding of fact made by Gallen J in the High Court. Accordingly, it was not necessary for the Privy Council to attempt to clarify this difficult area of law. However, the decision does reaffirm the distinction between taxable income and non-taxable capital gains. The Court of Appeal had held that as some shares were purchased with the intention of resale at a profit and were not identified as part of some separate and distinct business, such transactions inevitably coloured the other transactions. The Privy Council disagreed. This suggests that it is possible to conduct specific transactions with the intention of making a profit without tainting all other transactions.

Denis Clifford and Chris Maher

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