Investors Face Full Penalties In New Zealand's Second Largest Tax Case

by Mary Swire, Tax-News.com, Hong Kong

19 November 2003

The High Court in New Zealand has ruled that the investors behind the Actonz case, the second largest tax case in New Zealand’s history at $226 million, are liable for 100% penalties, leaving many facing payments of almost $1 million in tax.

At the end of 1996, Actonz Management Limited purported to purchase six software packages for $685m. A large number of joint venture investors claimed depreciation losses in their tax returns of 33% of their proportion of the purchase price. The Commissioner of Inland Revenue then disallowed their claims, and imposed penalties of 100% of the tax avoided.

In a 128 page judgement delivered last week, Justice Ronald Young held that three of the six purported transactions were shams, in that the software did not exist, or the people from whom it was purportedly bought did not own it. He also held that the depreciation claims were only available for $6.00 rather than $685 million, and argued that in any event the transactions constituted a voidable tax avoidance scheme.

"At best, these investors shut their eyes to what they must have known was a scheme that was too good to be true,” Justice Young observed in his ruling. “As is so often the case where an investment scheme appears to be too good to be true, it was."

Some 422 investors were involved in the Actonz scheme, and of these 66 decided not to claim the purported tax advantages. A further 36 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.

The government is also hoping to prevent future Actonz style schemes by enacting new legislation part of which contains a “deferred deduction rule” aimed at stopping aggressive tax arrangements. The bill is currently undergoing the final stages of parliamentary scrutiny and will be ready in the coming weeks if approved.

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