New liability landscape for rural fires

On 1 July 2017 the Fire and Emergency New Zealand Act 2017 repealed  the Forest and Rural Fires Act 1977.  A civil cost recovery mechanism in section 43 of the old Act was replaced with a criminal offence and penalty regime that includes serious offences that are punishable by up to two years imprisonment and fines of up to $600,000.

As a result of these changes, the liability landscape has changed significantly for  those who cause uncontrolled rural fires and those who suffer loss as a result of them.  In particular:

  • Those who cause rural fires are no longer strictly liable to pay compensatory damages for the losses they inflict on others but now face the threat of criminal liability, possible imprisonment, and hefty fines that are payable directly to the Crown.
  • Those who suffer loss as a result of rural fires will now need to establish a common law cause of action to recover compensatory damages from those responsible and much more will be required for successful recovery than simply proving the cause of the fire. 

For more information about these changes, see Veronica's article in the August 2017 edition of LawTalk magazine here:

Five minutes with Veronica Cress

Click the link below to read Veronica's interview with journalist Nerine Zoio of Insurance Business Magazine in which Veronica is asked some deep questions, including:

  • Why are we here?
  • Why did you become a lawyer?
  • Why do you specialise in insurance?
  • What are some of the jobs you have had in the past?
  • Which job had the greatest impact you?
  • What is an interesting case you have been involved in?
  • What do you think the insurance industry needs to be aware of going forward?
  • Who do you see as a role model?
  • What are your interests outside work?
  • What are your quirks?
     

What is "levy avoidance" under the Fire and Emergency New Zealand Act 2017?

INTRODUCTION

From 1 January 2019 insurers and intermediaries doing business in New Zealand will be exposed to joint and several liability to pay shortfall penalties for “levy avoidance”, under the Fire and Emergency New Zealand Act 2017, if they take an incorrect position on the amount of levy payable on an insurance policy. 

However, there is very little detail in the Act about what "levy avoidance" means in the insurance context and how to identify it.  This post outlines what we do know about the legal test for levy avoidance and the factors the courts may look at in levy avoidance cases.

THE FENZ ACT

Shortfall penalties

The new  levy regime is set out in Part 3 of the Act.  Subpart 4 imposes civil penalties for any levy shortfall caused by taking an incorrect position on the amount of levy that must be paid on an insurance policy.  

The penalties are set out in the Act as percentages of the levy shortfall and they vary according to the relative culpability of those involved in taking the incorrect levy position.  At one end of the scale is "not taking reasonable care" which attracts a penalty of 20%.  At the other end of the scale is “taking an abusive levy position”, which includes levy avoidance and levy avoidance arrangements, for which the penalty is 100%. 

Definition of "levy avoidance"

 “Levy avoidance” is very broadly defined in the Act as follows:

“levy avoidance includes directly or indirectly—

(a)      altering the incidence of the levy:

(b)      relieving a person from liability to pay the levy:

(c)      avoiding, postponing, or reducing any liability to pay the levy.”

The definition of “levy avoidance arrangement” is also very broad.  The essence of it is that any arrangement that has levy avoidance as either a purpose or an effect that is more than incidental will be a levy avoidance arrangement.   

This will be a levy avoidance arrangement even if:

  • The arrangement is entered into by someone other than the policyholder, insurer or intermediary whose levy position is affected;
  • The levy avoidance purpose or effect of the arrangement is indirect or an unintended consequence of the arrangement; or
  • The arrangement also has other purposes or effects that are “referable to ordinary dealings”.

Too broad to apply?

The definitions of “levy avoidance” and “levy avoidance arrangement” raise more questions than they provide answers.  Together, these definitions are arguably broad enough to capture almost any insurance purchasing decision or policy arrangement that reduces the amount of levy paid.  This will make it incredibly difficult to identify levy avoidance with any real certainty in many cases.

For example, a decision to self-insure could arguably fall within the definition of a “levy avoidance arrangement” because one of the obvious effects of not buying insurance is that levies are avoided.  However, the Act deals with this situation by expressly stating that self-insuring is not a levy avoidance arrangement. 

Apart from self-insurance, the Act gives very little guidance on what levy avoidance means in the insurance context or how to identify it.  

 

TAX AVOIDANCE CASES

Although the levy avoidance provisions in the Act are new in the insurance context, many have been copied from existing tax avoidance provisions in income tax legislation.  As a result, the courts are likely to have regard to previous tax avoidance cases when interpreting the new levy avoidance provisions in the Act. 

The legal test

The leading tax avoidance case in New Zealand is the Supreme Court decision in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2009] 2 NZLR 289.  The case involved a forestry investment scheme with complex contractual arrangements.  Investors in the scheme had essentially claimed deductions in their 1997 income tax returns for insurance premiums and licence fees that they had contractually promised to pay after harvesting the forest 50 years later.  The IRD argued that the entire investment scheme was a tax avoidance arrangement.

The majority of the Supreme Court expressed the test for tax avoidance in the following way:

“The ultimate question 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.”

The Court described the insurance aspects of the investment scheme in Ben Nevis as “artificial and contrived”.  The payment of insurance premiums and licence fees had been deferred for 50 years.  The promised payments might in fact never be paid.  The insurance company involved had also been incorporated in the British Virgin Islands specifically for the investment scheme and was controlled by an investor who was a tax lawyer and the architect of the entire scheme. 

In context, the contractual promises the investors had made to pay insurance premiums and fees 50 years later, when viewed in a commercially and economically realistic way, could not have been within the contemplation of Parliament when the provisions allowing income tax deductions had been enacted.  As a result, the entire investment scheme failed to pass the 'parliamentary contemplation' test and was a tax avoidance arrangement. 

The taxpayers in Ben Nevis had argued that the courts should interpret tax avoidance legislation in a way that gives taxpayers “reasonable certainty in tax planning.”  However, the Supreme Court declined to give more detailed guidance on the test for tax avoidance.  The majority stated:

“The courts should not strive to create greater certainty than Parliament has chosen to provide. We consider that the approach we have outlined gives as much conceptual clarity as can reasonably be achieved. As in many areas of the law, there are bound to be difficult cases at the margins. But in most cases we consider it will be possible, without undue difficulty, to decide on which side of the line a particular arrangement falls.”

The Ben Nevis case was one that clearly fell on the 'tax avoidance' side of the line.  However, it remains to be seen whether it will be as easy to distinguish levy avoidance from legitimate business decision making in the insurance context.

Relevant factors

There is no restriction on what the court can take into account when considering whether a tax avoidance arrangement exists.  The factors that are relevant and their significance will vary in each case.  However, the features that might be examined include:

  • The economic and commercial effect of documents and transactions;
  • The nature and extent of the financial consequences for the taxpayer;
  • The way the arrangement is carried out;
  • The role of all relevant parties and any relationships between them;
  • The duration of the arrangement; and
  • Whether the arrangement has been structured in an artificial or contrived way.

CONCLUSION

The very broad definitions of "levy avoidance" and "levy avoidance arrangement" in the Fire and Emergency New Zealand Act 2017 make it inevitable that the courts will at some stage be asked to assist with interpreting the Act and applying it in the insurance context.  It remains to be seen:

  • where the courts will draw the line between acceptable insurance policy and pricing arrangements and levy avoidance; and
  • how easy it really is to decide on which side of the line a particular arrangement falls. 

 

The Fire and Emergency New Zealand Act 2017: Key Changes and Dates to Note

INTRODUCTION

The Fire and Emergency New Zealand Act 2017 became law on 17 May 2017.  The Act makes major changes to the funding arrangements for fire and emergency services in New Zealand.  These changes will impact heavily on insurers, intermediaries, and purchasers of property and vehicle insurance in New Zealand. 

The purpose of this blog post, the first in a series on the new Act, is to briefly outline four key changes and the dates on which they will take effect. 

FOUR KEY CHANGES TO BE AWARE OF

1.  A single fire service organisation:  Parts 1 and 2 of the Act make structural and operational changes to the existing fire services.  The key change is the creation of a single fire service organisation for all rural, urban, paid and volunteer firefighters.  This organisation is the existing Fire Services Commission renamed “Fire and Emergency New Zealand” (FENZ) and provided with a significantly wider range of functions, duties and powers.  The expanded functions of FENZ include assisting with road accidents, natural disasters, and medical emergencies.  The fire services were consulted widely on these changes and they are likely to be the least controversial aspects of the Act.

2.  Funded almost entirely by a tax on property insurance:  The Act makes major changes to how fire services are funded.  Under the previous legislation fire services were partly funded by a levy on property insurance but this was combined with funding from a variety of other funding sources.  Under the new Act the levy on insurance policies becomes the principal source of funds and a wider range of insurance policies are captured.  In particular:

  • The levy on fire insurance policies is extended to include all insurance policies for material damage to physical property; and
  • The levy on motor vehicle insurance policies is extended to include third party insurance policies.

3.  Insurers and brokers will be jointly and severally liable for levy shortfalls:  The Act also contains new levy avoidance provisions and shortfall penalties that expose all insurers and insurance intermediaries involved in administering the levy system to liability risks.  The key features to be aware of are:

  •  Shortfall penalties of between 20% and 100% are payable on levy shortfalls caused a wide range of conduct that from failing to take reasonable care through to being involved in a “levy avoidance arrangement”.  
  •  Section 111 of the Act imposes joint and several liability for shortfall penalties on: (a) the insurer; and (b) the policyholder; and (c) “every insurance intermediary who arranged the contract of insurance.”
  • Although a person can avoid joint and several liability if they can prove:  (a) they were not “involved in the contravention”; (b) they reasonably relied on information supplied by another person; or (c) they took reasonable precautions to avoid a contravention that was ultimately due to the act or default of another person, or an accident, or some other cause beyond their control.

4.  A new offence and penalty regime will replace civil cost recovery mechanisms under the Forest and Rural Fires Act 1977:  The Act repeals the Forest and Rural Fires Act 1977 and the old cost recovery mechanisms for rural fires under that Act (which included making civil claims against those responsible for causing fires and landowner levies).  The new Act replaces these with an offence and penalty regime.  The offences for intentional conduct can attract maximum penalties of up to 2 years imprisonment and fines of up to $300,000 for individuals and $600,000 for organisations.  The Act also contains a general regulation-making power for additional offences and “infringement offences” to be created in future.

WHEN THESE CHANGES TAKE EFFECT

The timeline for these changes to take effect is as follows:

  • From 17 May 2017:  Regulations can be issued to increase the levy rates that will be payable during the “2017/18 financial year” (1 July 2017 to 30 June 2018).
  • From 1 July 2017:
    • the new offence and penalty regime will come into force; and
    • levy rates will increase for the “2017/18 financial year” (1 July 2017 to 30 June 2018) but the levy provisions in the previous legislation will otherwise continue to apply.
  • Between 1 July 2018 and 1 July 2019: the new levy regime will come into force in its entirety.  Technically, this could occur on 1 July 2018 and apply to the 2018/19 financial year.  In light of this possibility, insurance companies and intermediaries are advised to complete their change projects for compliance with the new Act as soon as possible before 1 July 2018. 

Becoming a barrister

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After 20 years as a lawyer, and the last 5 as a Partner in DLA Piper’s New Zealand operation, I am excited to be stepping out on my own to join to the independent bar as a barrister sole.  

My chambers are in the Vero Centre at 48 Shortland Street, in the heart of Auckland’s legal and financial district. Call me if you are in the neighbourhood and keen to catch-up for a coffee.