CanWest linked to biggest NZ tax avoidance case

By Deborah Hill Cone

Friday 19th March 2004

Inland Revenue estimates forestry investment scheme Trinity, which it is challenging in court, gave taxpayers an advantage of $3.2-3.7 billion over the life of the venture.

In what will be the country's biggest alleged tax avoidance case, the IRD is preparing to go to court after challenging deductions made by some investors in the scheme.

As The National Business Review revealed five years ago, (NBR, June 18, 1999) Trinity was promoted to high-net-worth individuals in the mid-1990s, before the Labour government hiked the top rate of personal tax from 33c to 39c.

Investors, divided into tranches, bought cutting rights in central Otago to douglas fir trees a slow-growing conifer variety that takes up to 35 years to mature.

The structure apparently used this long time frame, which meant there is a mismatch between when the expenses can be claimed, usually in the first year, and when the income is brought to account, which may be up to 35 years later.

Investors included clients of professional services firm Ernst & Young as well as TV3's owner, media company CanWest, which tax sources said had taken up to a third of the units.

The IRD's case against seven taxpayers, who have identity suppression, is set down for a hearing in the High Court in Auckland in July but already the parties are scrapping about the structure of the case.

The IRD claims the seven taxpayers it has chosen for the court proceedings are test cases, representing the total of 84 investors who bought into Trinity but the investors don't agree.

Of the seven taxpayers already there, five were closely involved with the promotion of the scheme. Knowledge of the scheme may be a crucial issue in the court hearing.

Last year the Trinity investors went to court to challenge the IRD's choice of representative taxpayers, asking for a judicial review of their decision.

Justice Barry Paterson found they had grounds for review, criticising IRD director of litigation Mike Lennard's system for choosing the cases but declined to allow the review.

The judge said Lennard had filed "argumentative affidavits" and could not be seen as objective or independent.

The IRD argued that another six cases before the Taxation Review Authority should be transferred to the court and Justice Paterson agreed.

In court the IRD will claim the deductions by Trinity investors are not permitted under the Income Tax Act, but if that argument does not succeed, its fallback position is that the Trinity product is a tax-avoidance arrangement.

A key aspect of the investment structure was the use of an insurance policy, which insured against a shortfall if the timber sale returns at the end of the term were less than the licence premium payable.

The IRD will argue the insurance company CSI has no financial substance and the insurance premiums paid, totalling $6.3 million, were returned to New Zealand as loans to family trusts associated with the promoters of the Trinity scheme.

The case is the biggest challenge by the IRD to an investment scheme, with the recent Actonz case, affecting total tax revenue of $400 million, being the second biggest.

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