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Inland Revenue welcomes ACTONZ court ruling


Inland Revenue welcomes ACTONZ court ruling

Inland Revenue's Director of Litigation Mike Lennard welcomed the court judgement released today saying it sends a clear message to investors.

"This successful result is a tribute to the hard work put in over several years by the investigations team at the Inland Revenue Wellington Office, and the litigation team from Inland Revenue and the Crown Law Office together with senior counsel Jim Farmer, QC," said Mr Lennard.

While it remains to be seen whether this decision will be appealed to the Court of Appeal or further, this judgment sends a strong message that investment in schemes which promise to deliver more in tax savings than they cost is a very risky business.

"Anyone doing so can expect that Inland Revenue will investigate, will disallow the tax advantages, will impose penalties, and that matters will go to court. As the Judge said in this case (at page 125) "At best, these investors shut their eyes to what they must have known was a scheme that was too good to be true. As is so often the case where an investment scheme appears to be too good to be true, it was"."

In the present case ACTONZ had valuations from PriceWaterhouse Coopers and a tax opinion from Lindsay Mackay a respected tax barrister. This judgment also sends a message that simply because a scheme may appear to have a favourable opinion from a respected individual or organisation associated with it, that does not necessarily provide much comfort.

Mr Lennard said there was also a GST aspect to the case with a disputed $60million of GST which is yet to be heard.

Background

ACTONZ Management Limited purported to purchase six software packages at the end of 1996 for $685m. A large number of investors took part in a joint venture and claimed depreciation losses in their tax returns from this $685m purchase. The total depreciation involved was 33% of $685 million, or about $226 million. The Commissioner of Inland Revenue disallowed their claims, and imposed penalties of 100% of the tax. The Commissioner says this is the second-largest tax avoidance scheme in New Zealand history.

The Inland Revenue income tax investigation began in late 1998 and following internal review, assessments were issued in 2002 and the income tax litigation commenced shortly after that.

In a judgment released today from the Wellington High Court Justice Ronald Young upheld Inland Revenue's claims in every respect. He held that three of the six purported transactions were shams, in that the software did not exist or the people from whom they were purportedly bought did not own them, he held that depreciation claims were only available for $6.00 (Editors; note, this is correct $6.00) rather than $685 million, and in any event the transactions constituted a void tax avoidance scheme. He held that the investors were correctly penalised at 100% of the tax which they tried to avoid.

Very few of the investors have paid the tax or penalties assessed: this will now have to be collected.

The cost of the Inland Revenue investigation has been substantial: while precise figures are not available immediately the investigation team will have cost several million dollars and the litigation costs will be well over half a million dollars.

422 investors have been involved in the ACTONZ scheme. Of these 66 decided not to claim the purported tax advantages and a further 36 had settled * at a reduced level of penalty * with the Commissioner before the case went to Court. The remaining 310 investors are affected by this judgment.

ENDS.

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