Frucor and New Zealand's sudden death penalty regime

This article summarises the long-awaited New Zealand Supreme Court decision of Frucor Suntory New Zealand Limited v Commissioner of Inland Revenue [2022] NZSC 113, a decision requiring 15 months of deliberation, and includes our observations on the judgment.

The Supreme Court was tasked with examining the application of New Zealand's general anti-avoidance rule (GAAR) within sections BG 1 and GB 1 of the Income Tax Act 2004 (ITA).

In a 4-1 split decision, the majority of the Supreme Court concluded that Frucor's financing transactions with Deutsche Bank were tax avoidance and that the transaction scould be reconstructed. To many, that conclusion was unsurprising. However, the majority decision to impose a 100% shortfall penalty on Frucor for taking an "abusive tax position" have left taxpayers and advisors alike 'scratching their heads'. This decision is even more surprising, particularly in light of Justice Glazebrook, dissenting in the Supreme Court, the New Zealand Court of Appeal and the New Zealand High Court all concluding that shortfall penalties should not apply.