Disputant v The Commissioner of Inland Revenue

JurisdictionNew Zealand
CourtTaxation Review Authority
JudgeJudge P F Barber
Judgment Date27 January 2010
Date27 January 2010
Docket NumberDecision No. 3/2010

[2010] NZTRA 3


Decision No. 3/2010

TRA No. 03/08

In the Matter of the Income Tax Act 1994 and the Tax Administration Act 1994

The Commissioner of Inland Revenue

Mr M Lennard, Barrister, for disputant

Mr H W Ebersohn, Crown counsel, and Ms C R Bryant, for defendant Commissioner

Challenge as to assessment of tax penalties — disputant using series of loans from entities for living expenses — whether loans were capital or income — whether disputant was part of a tax avoidance scheme — whether certain years for tax assessments were time barred

Held: D had entered into an arrangement for the dominant purpose of avoidance tax. The arrangement could not be explained by any commercial purpose and the only objective was to avoid tax. The tax years were not time barred as D did not mention the loans from his entities in his tax returns and he needed to do so in order to attract the protection of the time bar under s108 TAA. D was liable for penalties under s141D TAA for the years 1998–2001. D's challenge was dismissed and relevant assessments confirmed.

DECISION OF Judge P F Barber


The Issue

The disputant has been assessed for the total of a regular series of loans made to him over the years 1991 to 2002 from his group of entities (mainly trusts) involved in ongoing property developments. The loans totalled $5,094,442 over that 12 year period. The disputant took those current account drawings for (rather high) living purposes from entities associated with him over those income years and had his accountants treat those drawings as loans. Simply put, the issue is whether those loans were capital or income in the hands of the disputant.

The Stance of Each Party

The defendant Commissioner contends that the drawings or loans were part of a tax avoidance arrangement and must be reconstructed to the disputant as income, and that he is liable for an abusive tax position shortfall penalty. The evidence is that, over the 12 years 1991 to 2002, there were also some modest wages paid to the disputant from his group but he only paid total income tax of $27,324/22 over those years and $8,478.45 of that was refunded to him.


The disputant has been involved in a large number of property development and property investment activities over the said years. These activities have been carried out through special purpose entities, generally one for each project. Typically, each entity used by the disputant was a trust with a corporate trustee and, often, the disputant was a beneficiary of the trust.


At the outset, Mr Lennard put it that the Commissioner's case seemed to be that the loans were in substance salary. Mr Lennard noted this stance of the Commissioner even though the majority of the loans have now been repaid, interest has been charged, returned, and assessed on some of the loans, and fringe benefit tax has been returned in respect of no interest loans from companies. Mr Lennard submitted that, at all times, the disputant taxpayer expected to, and did to a large extent, repay the loans from capital or tax paid distributions to him from the various trusts or some of them.


Mr Lennard noted that the extensive pleadings and attachments came down to the stance of the Commissioner being that the disputant has been avoiding income by being eligible to receive tax paid or capital distributions as a beneficiary of the trusts, because he should have been working for each trust in a salaried capacity; and the drawing down by way of loans on a current account for each trust should be categorised as salary income, even though he was liable to repay these drawings. For the disputant, Mr Lennard submits this is “a wholly incoherent invocation of the anti-avoidance provision”.


Mr Lennard also submits that, for the years 1997 to 2000 inclusive, the assessments are time-barred because for those years, at the time of the disputed assessments, four years had passed since the making of the relevant returns of income, the returns were not fraudulent or wilfully misleading, and the returns mention income which is of a particular nature or was derived from a particular source being (he puts it) “income of the same nature and source as the recharacterised loans from [a property development company in the disputant's group].” The defendant Commissioner contends that the time bar, found in s.108 of the Tax Administration Act 1994, does not apply because the returns of the disputant did not mention income of the particular nature or from the particular source as the income reassessed onto the disputant.

Further Basic Facts

The disputant is a property developer and entrepreneur. He has numerous entities through which he carries on his business and, over the years, has been involved in projects worth, at least, hundreds of millions of dollars.


Over the material years the disputant was involved with a number of companies and trusts generally dealing in property development or investment, particularly, the F trust from 1988 to 1996 and the KPL company from 1996 to 2002. Over the relevant years the disputant operated current accounts with that trust, that company, and other entities, mainly trusts, established for specific ongoing development projects. In the period 1997 to 2002, the disputant made substantial cash repayments towards his indebtedness to that company. In August 2002 the disputant's remaining indebtedness to that company was met by a three way transaction involving the distribution of part of an undisputed capital gain made by a particular trust which was owed money by the company and of which the disputant was a beneficiary.


Mr Lennard emphasised that those capital distributions, applied to the disputant's current accounts, have meant that a little after the period with which this dispute is concerned, the disputant had in fact an overall negligible or nil exposure to his current accounts. Debits and credits were cancelled out across all the relevant entities other than the F trust. In the years 1997 to 2000, the disputant did receive some shareholder salary from that company KPL.


A point emphasised by counsel for the Commissioner is that, allegedly, the disputant lived an extravagant lifestyle so that the drawings in issue were very high. I do not see that aspect as particularly relevant to this income tax issue.


I understood that these projects, involving developing land on revenue account, were effected in separate trusts and, at the end of each project, the profit was distributed to the next trust development project, which would be in start-up at that stage and so on and so on. Some projects seem to be the erection (or renovation) of buildings on land for resale but, very often, for retention by the disputant's group as a letting enterprise.


Simply put, in order for the disputant and his family to live in the manner he wished, there were constant and very regular drawings by the disputant from his entities. Generally, no salary was paid to him, and the drawings were treated by his accountants, and for the purposes of his tax position, as loans of capital. Mr Lennard's strong submission is that capital was the character of the advances by these group entities to the disputant over the said 12 years.


As I understand it, the said technique applied by the accountants and advisers for the disputant, leading to him not appearing to receive earnings, continued unnoticed by the IRD for many years until one of the development projects led to significant losses for the particular group entity. As it happens, I regard that project as a fine amenity to the particular city and aesthetically very pleasing). In examining the fallout from that failure, the regular and systematic drawings taken for living by the disputant, and set out in the relevant book-keeping as loans, showed up, possibly, because creditors saw them as an asset of the lender trust entity to be repaid by the disputant.


The disputant's group operated in a tax efficient manner. Virtually no income tax was paid. It is submitted for the defendant that the arrangement was a device whereby the disputant could live off funds obtained from his entities without paying any tax and that there is no other objective rationale for the arrangement.


In the disputant's statement of position p 4 paragraph 2.6 it is stated: “Generally, a specific trust or company has been established by the taxpayer to “ring fence” risk associated with particular project”. In other words, given the limited liability of companies, including corporate trustees, these entities provided a level of protection to the disputant.


As noted at paragraph 4 of the disputant's brief: “I am in all respects the “key person” or “entrepreneur” behind the group's activities.” He controlled all the entities in his group.


Entities or trusts from which the disputant received funds include:

  • [a] The said F Trust. Between 1991 and 1996 the disputant received $379,911.90 from that trust, which he has never repaid.

  • [b] The said company. Between 1996 to 2002, the disputant received $3,663,146.57 more from that company than was repaid during this period. This amount has purportedly been repaid (so it is put for the defendant) subsequent to the commencement of this investigation.

  • [c] Various other relevant entities.


At all material times, the disputant's lifestyle and living expenses have been funded from such current account drawings. Although the flow of funds from these entities is to the disputant, he has made some payments to these entities. I am told that the above figures are the amounts received after repayments have been made. Most of these repayments were made by book entry. These loan repayments to the disputant's entities were apparently made from capital funds...

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