The New Zealand Inland Revenue Department is currently engaged in several legal proceedings over allegations of tax evasion against the local subsidiaries of several Australian based companies. The accusations revolve around the use of “optional convertible notes” (OCN) to avoid New Zealand based tax liabilities.

On September 20th Dr Moorad Choudhry, head of business treasury at Royal Bank of Scotland’s global banking and markets division, gave evidence at the High Court of Auckland, in the IRD’s case against the New Zealand subsidiary of the Australian kitchenware manufacturer Alesco.

Moorad Choudhry explained that the New Zealand branch of Alesco made use of OCNs to effectively issue loans to its Australian parent company. Te subsidiary would also claim tax deductions on the interest component of the OCR. However, the IRD argues that the interest component of the OCN held no economic cost for the company, and using for a tax deduction is tantamount to tax evasion.

The case is being treated as a “test case”, with the IRD promising to pursue similar set ups in other companies, if the High Court rules in the Department’s favor. Telstra, Mediaworks and Toll Holdings are all alleged to also have used OCNs to avoid tax obligations. Cumulatively, the cases involve over NZD 100 million in unpaid taxes and penalties.

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On November 10th Martin Scott, Group Manager of Assurance at the IRD, revealed that the department now posses the tools necessary to monitor all GST claims surroundings property purchases. He commented on the capability, saying “…if someone thinks their activity might be overlooked in the huge volume of property transactions they’re sorely mistaken.” He explained that the recent 2.5 percent GST rate hike may add extra temptation for some taxpayers to dodge their liabilities, due to the potentially vast amount of money involved with a property purchase.

Martin Scott emphasized that despite the IRD’s ability to catch tax evaders, its primary operating objective was not to penalize offenders, but educate tax payers on their tax obligations. Although he conceded that the IRD would take swift and strong action in any case where fraudulent behavior is discovered. He added that taxpayers who commit serious offenses could even face criminal charges. Under current IRD regulations, tax evasion offenses could lead to penalties of up to NZD 50 000, and prison terms of 5 years, along with repayment of evaded tax liabilities.

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James Colin Raea has been a member of the New Zealand Institute of Chartered Accountants for 12 years, in that time he has allegedly been personally involved in tax fraud worth NZD 312 600, and an additional NZD 864 049 through companies he was involved with. Recently, at the Auckland District Court James Colin Raea admitted to 41 charges involving Goods and Service Tax (GST) and income tax, and sixteen similar charges for a company in which he was the sole-director. James Colin Raea chose to defend himself against an additional 31 charges, but was still found guilty.

James Colin Raea is alleged to have committed a series of his tax offenses through three companies in which he was the sole-director: Tuscany Way Limited, Anvil Holdings Limited, and Te Atatu Projects Limited.

The Inland Revenue Department (IRD) has already recovered NZD 280 000 from James Colin Raea’s debts. However, no money has yet been retrieved for tax debts incurred by his operating companies.

Jonathan Matthews, Investigations Manager of Assurance at the IRD, stated that the New Zealand courts take “a dim view of professionals like Mr Raea,” who use their extensive knowledge of the tax system for illicit personal gain.

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Ian David Penny and Gary John Hooper’s application to appeal to take their “company structure” tax evasion case to the Supreme Court was approved on August 2nd. The action revolves around alleged tax evasion committed by the medical professionals through a controversial company structure which was claimed, by the Inland Revenue Department (IRD), to amount to non-payment of their fair market salaries, for the purpose of reducing income tax liabilities.

In June 2010, the New Zealand Court of Appeal agreed with the IRD that the doctors used corporate and family trust structures to greatly downplay their taxable incomes, by paying themselves salaries well below the “market rate”. The IRD claims that Ian David Penny saved a cumulative NZD 102 000 in personal income tax payments through the structure. Gary John Cooper was alleged to have lowered his payments by NZD 65 000.

The case is scheduled to be heard by the Supreme Court in early 2011. Meanwhile the IRD commented on the development, saying that it welcomes the opportunity to hear the Court’s clarification of the Income Tax Act 1994, but until then will continue to apply the laws as set out by the Court of Appeal.

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On July 6th, Stephen Blackman, director and shareholder of Plant and Platform Consultants LTD, was fined NZD 1500 in addition to court costs on July 6th, for two charges of filing false or incomplete tax returns. According to the New Zealand Inland Revenue Department (IRD) Stephen Blackman failed to declare a shareholder salary of NZD 150 150 in the year 2007, and NZD 158 408 in the year 2008. He claimed that he did not receive any payments, and that the IRD was confused by documentation provided by his company which contained “…[an] impressive numbers preceded by a $ symbol”. He argued further, claiming not to be aware of the meaning of the “$” symbol, and stipulating that no one employed in his company understood the “$” either.

Jonathan Matthews, Assurance Manager of Investigations for the IRD, commented on Stephen Blackman, calling his claim of not knowing the “$” as hollow and ridiculous, and despite his alleged ignorance his tax obligation remained. He said further that the IRD will continue to investigate tax evasion to ensure that honest tax payers are not disadvantaged by the actions of evaders. Jonathan Mathews concluded by saying that if taxpayers are genuinely confused by their tax liabilities, they can seek assistance from tax advisers or the IRD.

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Last week the IRD released a statement disclosing its intention to utilize New Zealand’s existing Tax Information Exchange Agreements (TIEA) to catch potential tax evaders. Martin Scott, Group Manager of Assurance, revealed that the IRD is particularly interested in discovering New Zealand tax residents undisclosed offshore bank accounts, overseas life-insurance policies and superannuation benefits.

Under current New Zealand tax legislation, taxpayers are required to disclose all of their incomes, including those from foreign sources. According to Martin Scott, governments worldwide are becoming increasingly cooperative with New Zealand authorities in sharing tax and bank account information for the purpose of audits and criminal investigations. New Zealand is currently engaged in 15 separate bi-lateral TIEA agreements. Martin Scott added that in the future he expects even greater levels of availability of information on financial transactions involving New Zealanders.

Taxpayers who hold undisclosed offshore assets have been advised consult with a professional tax advisers regarding their situation. New Zealanders who are knowingly evading their tax obligations through the use of offshore assets are advised to consider making a voluntary information disclosure to the IRD. Currently, failure to reveal appropriate financial information can attract severe punishment, including a 150 percent shortfall penalties and criminal prosecution. Martin Scott warned tax evaders to make appropriate use of any time left before their assets are discovered in an IRD investigation.

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On April 12th the Wellington District Court sentenced Lance Christopher James to two years jail time for 19 separate tax evasion charges amounting to NZD 365 184. Lance James pleaded guilty to eight charges of failing to file a personal tax return or paying appropriate tax obligations, and 11 charges of failing to pass on employee PAYE deductions. Despite having repaid some of the tax obligation, Lance James still owes NZD 168 000, excluding penalties and interest charges. James has been refused bail pending appeal of his sentencing.

Patrick Goggin, IRD Investigations Assurance Manager, issued a warning to others considering any form of tax evasion, saying, “Others who are tempted to cheat on their taxes should take note of this sentence and be left in no doubt of the very serious consequences if they choose that path.”

Lance Christopher James has held positions as a self-employed property developer since 1993. In many cases, Lance James acted as the sole director and shareholder for his development firms. In 2008, an arrest warrant was issued for James for aiding and abetting Brooklyn Holdings Ltd, Ohiro Properties Ltd, Complex Properties Ltd, Wadestown Properties Ltd, and Brooklyn Rise Ltd to commit tax evasion.

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The New Zealand High Court made a decision to dismiss Westpac’s challenge to IRD’s decision that the bank owes $586 million in taxes for a series of structured finance transactions. The IRD claimed that between 1998 and 2002 the bank undertook a series of offshore transactions whose sole purpose was tax evasion. The court proceedings centered around nine such transactions, ranging between $390 million to $1.5 billion. Westpac has stated they may appeal the decision upon review of the judgment.

Westpac is currently liable for $918 million, $332 million of which consists of interest charged by the IRD on taxes unpaid. This sum could increase if the IRD decided to impose further penalties, though no official decision has been given on this.

Moody’s Investor Services stated that the outcome will not have an effect on Westpac Banking Corp’s credit rating, which currently stands Aa1. Although, the price of Westpac stocks did fall by 0.6% upon release of the news.

Somsanit Phommasa, a West Auckland based tiler, admitted to 121 separate charges of GST, PAYE and income tax evasion. In the period between 1998 and 2007 is accused of having accumulated $1,617,705 worth of evaded taxes.

Charges included imposing GST on customers while making no attempt to pass it onto the Inland Revenue Department. The GST fraud amounted to $479,607. Income tax was also not paid during the same period, it totaled $1,138,098. No PAYE was passed on from employees of Somsanit Phommasa to the IRD.

According to statements made on the 11th of August by Andrew Thorburn, BNZ Chief Executive Officer, the bank will be filing an appeal to last month’s High Court decision. He said “This is a complex area of law, and given the facts of the case, we’re not convinced that the decision was the right outcome.”

The IRD accused the bank of engaging in six separate “structured finance” operations which, according to the IRD, held no commercial utility beyond the lowered taxation liability which resulted for BNZ. The disputed tax amount comes to NZ$416 million, with a possible further liability of NZ$238 million as fees and interest, though no official word has yet been given to these penalties.

BNZ has already put in place a NZ$661 million provision for the payment of this. Ken Christie, BNZ Chief Financial Officer, stated in regards to this amount “We believe we are taking an appropriate and conservative approach in reflecting the impact of the High Court decision in the BNZ financial accounts.” Previous statements made by the bank emphasize that this decision will have no effect on BNZ’s ability to meet its current debt and equity obligations.