KEY POINTS:
The Supreme Court has confirmed the Inland Revenue Department's right to disclose private taxpayer information.
In a unanimous decision, the court said IRD was within its rights to disclose confidential information gathered from and about third parties when conducting tax litigation.
The decision, in Westpac Banking Corp versus CIR (Commissioner of Inland Revenue), arose out of the tax department's ongoing litigation against all the major trading banks.
IRD has alleged that structured financial transactions, or "repo" deals, set up by the banks, are large-scale tax avoidance.
These were complex cross-border transactions with large overseas parties involving hundreds of millions of dollars. Because the trading banks are foreign owned, they were able to take advantage of a loophole in the Income Tax Act that let them deduct expenses while the overseas income was tax free.
The transactions resulted in estimated tax savings to the banks of $360 million a year.
In 2004, the loophole was closed, and IRD began re-assessing all the banks on the grounds the transactions constituted tax avoidance. Re-assessments totalling almost $1.7 billion were issued.
With this amount of money at stake the subsequent litigation is being fought hard. The banks separately and collectively have made a number of pre-trial procedural manoeuvres to gain an advantage, so far without success.
The question of confidentiality arose because all banks participated in the same type of repo deals. IRD alleges they are off-the-peg tax schemes that are each so similar they amount to "template transactions".
IRD therefore wants to prove its case against each bank using evidence gathered during its investigations into the others. So in its litigation with Westpac, the department plans to use confidential information and evidence gathered during its investigation of BNZ and ASB.
Inland Revenue had never attempted such disclosure of information in tax litigation before. Not surprisingly, the banks objected.
They wanted to fight the upcoming litigation transaction by transaction, not as part of a larger examination of the merits of the repo deals.
The banks lost their bid in the High and Appeal Courts, and finally in the Supreme Court last week.
This frees IRD's hands to disclose any information it reasonably considers necessary to advance its case.
This ruling goes much further in allowing IRD to disclose secret information to other taxpayers than previously understood.
The only previous case where public disclosure of confidential taxpayer information was permitted was in 1995 when IRD released Fay Richwhite's tax records to the Wine Box Inquiry to defend itself against allegations of corruption and incompetence.
But this is the first time such information has been released in ordinary tax litigation, albeit in large-scale tax-avoidance cases.
Taxpayers have almost no recourse to prevent their confidential information being released. As the Supreme Court noted, use of third-party information is intended to give IRD a potent weapon to investigate, assess and litigate against non-complying taxpayers.
But the judgment may not be all bad for taxpayers. By freeing up what can be disclosed, the decision may allow taxpayers to obtain information about third parties from IRD.
It is possible taxpayers, including the banks, may use the wider disclosure rules to seek information about their competitors' tax records that would otherwise not have been available.
* Mark Keating is a senior lecturer at the University of Auckland Business School.
