Published 9 September 2007The Supreme Court has given the final thumbs down to a tax avoidance scheme devised by twice-bankrupt North Shore property investor Nigel Ashby in the late 1990s.
The court of Justices Peter Blanchard, John McGrath & Noel Anderson rejected the claim by Ch’elle Properties (NZ) Ltd against an Appeal Court decision in favour of Inland Revenue, which confirmed the view of both the Taxation Review Authority & the High Court that the arrangement under which Ch’elle sought to obtain gst input tax credits constituted tax avoidance and was void.
Mr Ashby, an investor in sausage-block flats in the 1980s, introduced rent-to-buy schemes for tenants when Finance Minister Robert Muldoon introduced his rent & interest-rate freezes. Mr Ashby was bankrupt from December 1986-89 and again from May 2001-2004. In between, he devised this scheme in which he had 114 shell companies incorporated.
Those companies agreed to buy 114 lots in a subdivision for $70,000 each, payable on 31 August 1999, and then to resell them to Ch’elle, another shell company formed by an associate of Mr Ashby’s, Ian Ayson. The price payable by Ch’elle for each lot was about $700,000. A deposit of $30,000 was payable at a time when a gst tax refund was expected to have been received. The balance of the price was deferred for between 10-20 years, by which time each property was to be developed.
Ch’elle was subsequently sold to Willi Bardohl, of Rothesay Bay, who onsold half the company in April to Martin Pasel, of Kamen in Germany. Mr Pasel was appointed director on 19 April and Mr Bardohl resigned as a director on 27 April. But Mr Ashby was involved in the company’s affairs at least in 2004-05, when he filed Ch’elle’s annual returns.
Mr Ayson took over in 1997 as director of a long list of companies set up by Mr Ashby. Mr Ashby remains a director of Hinau Property Developments Ltd (struck off the register on 29 March) & Queen City Property Group Ltd (struck off the register in October 2006).
Gerard Hulst, as liquidator of one Ayson company, Ginian Coy Ltd, had 15 other Ayson companies placed in liquidation in the Auckland High Court in 2003. All were involved in gst refund applications, totalling $2.7 million, relating to residential subdivision & housing. All up, 265 Ashby/Ayson companies had claimed $65 million in gst refunds.
The Supreme Court said in its judgment, released on 6 September: “The use of 114 companies enabled the value of the taxable supplies by each company to be kept at less than $1 million in the year in question, and so each company could choose to account for gst upon receipt of payments. On the other hand, Ch’elle was to account on the usual invoice basis and could claim an immediate tax credit, which plainly was to be the source of funding the amounts payable to the subdivider. The balance between inputs & outputs was, by this means, to be artificially distorted to the advantage of the promoter of the arrangement.”
Ch’elle argued that the Court of Appeal erred in finding that it was unnecessary for Inland Revenue to show an intention on Ch’elle’s part to defeat the intent & application of the GST Act. Secondly, Ch’elle argued that an arrangement can defeat the intent & application of the act only if there is a tension between the commercial & the juristic nature of the transaction.
The Supreme Court responded: “It is unnecessary for us to express any view on the merits (or otherwise) of these arguments, which incidentally do not appear to be available on the current version of section 76 of the act (in force since 2000), because the Taxation Review Authority in fact made findings, amply justified on the facts, that Ch’elle did have an intention to defeat the intent & application of the act and that, absent the input tax refunds, the arrangement was wholly inexplicable in commercial terms.
“The third proposed ground is equally hopeless. It is that the taxpayer did not gain a ‘tax advantage’ from the arrangement. But section 76 contained a definition of that term, and one of the specifically included species of tax advantage is ‘any increase in the entitlement of any registered person to a refund of tax’. So quite clearly section 76 contemplated that a type of tax advantage could be obtained by means of obtaining a refund, which is exactly what Ch’elle was seeking to achieve from the arrangement.
“Even if the language from the definition which we have quoted does not in itself stretch far enough to encompass what occurred in this case, the definition was inclusive and there was certainly an advantage of the same general kind which is covered by the expression ‘tax advantage’ read in the light of the specific example from the definition.”
Attribution: Supreme Court judgment, story written by Bob Dey for this website.