Opinion: Tax avoiders make the rest of society pay

By Simon Louisson of NZPA

Monday 27th December 2004

No one likes paying tax, but few people appreciate tax avoiders or tax cheats either.

The High Court this week ruled the so-called Trinity forestry investment scheme was tax avoidance. The scheme's architect, Auckland lawyer Garry Muir, also got some stick from Justice Geoffrey Venning who labelled him an evasive, unhelpful witness, who was sometimes "simply not credible".

While this scheme was not fraudulent, Justice Venning made it clear in his 118-page summary that its prime purpose was tax avoidance. And we are not talking about petty cash. Had it run its course, the 200-odd investors could have claimed $3.6 billion over the 50-year life of the scheme.

However, government action to close the loophole would have limited tax losses to under half a billion dollars, even if the participants had won the case. With so much riding on the case, an appeal of the High Court ruling is almost certain.

Those involved are mostly professionals - accountants and lawyers - and all are wealthy by most standards.

These clever schemes aim to let these pillars of our society pay little or no tax, despite huge incomes, leaving others to pick up the burden.

Muir and partner Clive Bradbury claimed their controversial forestry venture aimed to make money - in 50 years. That's well beyond most investors' time horizons, even if they're still alive.

The scheme worked through a series of syndicates in which the participants owned shares in companies that bought into a joint venture partnership which owned part of a 5000ha fir forest in the South Island. The joint venture reported immediate multi-million dollar losses from the forest set-up costs. As well, investors were charged a licence fee to be paid in 2048 and this was claimed as "fixed life intangible" asset that could be depreciated from year one of the scheme.

Muir set up an insurance company in the British Virgin Islands, CSI, which insured the forest for more than $10 billion while participants claimed tax-deductible premiums. Another firm, Parentis Finance and Investment, was paid a fee for setting up CSI, which was then lent to the family trusts of Muir and Bradbury.

The joint venture's losses were doled out to investors who then used them to get refunds of their personal tax bills.

One other disturbing aspect of this business is that many of the investors escaped being named. IRD allows confidentiality when cases go to the Tax Review Authority to make it easier for taxpayers to give information needed, whether the taxpayer is a crook or a prostitute.

But once matters came before the courts, then the normal rule that name suppression should only be granted in exceptional circumstances should have applied. Initial name suppression was granted and the participants fought for anonymity right to the Court of Appeal where Justice Hammond expressed the view that "sunlight was the best disinfectant". However, in the end, suppression was only lifted following a Supreme Court hearing. Many of those involved settled out of court with confidentiality clauses and the names of those worthy individuals will now never be disclosed.

IRD's victory in the Trinity case follows on from its success at the end of last year in the previous largest tax case. The so-called Actonz scheme involved investors buying computer software to avoid tax. Actonz Management Ltd purported to purchase six software packages at the end of 1996 for $685m. Some 422 investors took part in a joint venture and claimed depreciation losses in their tax returns.

Of those involved, 66 had decided not to claim the purported tax advantages and a further 36 settled "at a reduced level of penalty" with the IRD commissioner before the case went to court.

The participants had to repay $450m in tax plus the penalties which involve 100% of the deductions claimed plus interest at a steep 11.9%.

Justice William Young held that three of the six purported transactions were "shams", in that the software packages did not exist or the people from whom they were purportedly bought did not own them.

"At best, these investors shut their eyes to what they must have known was a scheme that was too good to be true," his judgment said. That judgment is also being appealed.

The other big tax rort of recent times involved the foundation blocks of the financial establishment - the five main banks. These esteemed Australian-owned organisations, which have been raking in billions of dollars in profits in the last few years, took advantage of a loophole to escape hundreds of millions in taxes.

The Reserve Bank said that closing of the loophole would result in the banks - ANZ, BNZ, Westpac ASB and National - paying $678m more in tax a year.

Although the banks were open about what they were doing, even getting a binding ruling from IRD, there is still a moral issue of being good corporate citizens. As well, IRD, despite giving its ruling, is challenging many of the deductions and the banks are facing claims in tens of million of dollars, and in some instances, hundreds of millions.

The banks' scheme, which involved complex transactions transferring huge sums to tax havens, calls into question their claim to be good corporate citizens, which they assert through sponsorship of many worthy causes.

Westpac, for example has declared that social responsibility is vital to financial sustainability. When asked how that stacks up with the morality of exploiting tax loopholes, Westpac chairman Leon Davis recently told NZPA: "We owe it to our shareholders to give proper returns. It wasn't for some fat cats, it was for our shareholders."

One of the investors in the Trinity scheme, who has agreed to settle out of court, "outed" himself because of his position as head of the Shareholders Association. Bruce Sheppard still believes the Trinity scheme is commercial and, although the tax consequences were "significant", still reckons they were incidental.

"One could argue on the basis of Justice Venning's decision, that any investment that is otherwise commercial and has a tax consequence that is more than incidental, is tax avoidance. That's why his case will be appealed," he said.

"I still don't believe it is tax avoidance any more than I think buying a negatively geared rental property is tax avoidance, but I have to accept he thinks it is."

Sheppard argues that only schemes where there is an element of concealment are morally (and probably legally) wrong. In the Trinity scheme, only the insurance arrangement was concealed and that involved only Muir's first syndicate representing 10% of the total, Sheppard said. His scheme did not use the insurance vehicle because Sheppard all along believed it was dubious.

He said any arrangement whose sole purpose is tax avoidance - such as the Winebox scheme - is "morally wrong because you rely on secrecy so that anyone looking at the transaction doesn't get the full picture".

All parts of Trinity other than the insurance were onshore and transparent, he said.

"We simply made an investment and we didn't attempt to hide anything. It was not a circular transaction - sure there was a big deferred settlement - but nothing was concealed with the exception of Muir concealing certain of the insurance arrangements.

"Is that morally wrong? It had a tax consequence, like all investments. This one had a significant tax consequence."

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