Krukziener loses loan tax appeal

Andrew Krukziener. Photo / Neville Marriner

A High Court judgment rejecting Auckland property developer Andrew Krukziener's appeal against the tax authority will "send shivers down the spine of some taxpayers", an accounting firm says.

Krukziener unsuccessfully appealed against the Taxation Review Authority (TRA) decision which found that loans he received from 1991 to 2002 worth $5 million could be classified as income and taxed.

Ernst & Young tax partner Aaron Quintal said that Justice Patricia Courtney's decision confirmed that borrowing money from your business rather than paying yourself a salary could be seen as tax avoidance.

Quintal said the court accepted that loans made to Krukziener from his trusts were genuine loans but because for some years no interest was charged and there were no fixed repayment dates set, the reason for the advances was seen to be tax avoidance.

"The situation of trusts providing loans to beneficiaries on favourable terms is very common and has never been considered tax avoidance in the past. Where those loans are funded out of businesses carried on by the trust, taxpayers now need to be aware that the IRD may try to treat those loans as if they were salaries paid to the beneficiaries. Where this leaves the beneficiary from a tax position, if and when they did repay the loan, is anyone's guess," he said.

"The court seems to be applying a 'smell' test and is saying that no taxpayer can have numerous profitable ventures, receive $5 million over the course of a decade, and still have no tax to pay. Even if that logic sounds reasonable, that does not help taxpayers understand where the line between legitimate structuring and tax avoidance will be drawn."

Since 1985, Krukziener, through various entities, undertook over 80 property investments or developments.

The overall management and control of these projects lay with the Felix Trust during 1988 to 1996, and with Krukziener Properties from 1996 to 2002.

In the judgment delivered on Friday, Justice Courtney said there was nothing remarkable about this structure, and that it was one commonly adopted to isolate the creditor's risks associated with individual projects to avoid affecting the rest of the group.

Krukziener's living expenses were met from advances made to him by these entities, usually through the payment of his personal credit card debts.

Justice Courtney added that although these advances were recorded as loans, there was no agreement regarding repayment of them.

There was no evidence of demand for repayment ever having been made and funds advanced by the Felix Trust remain outstanding.

It was noted that Krukziener did make payments to Krukziener Properties from 1997 onwards, clearing his debt in 2002.

These repayments were made from non-taxable capital made to him following the sale of a property owned by one of the group. Krukziener argued that the TRA was wrong in determining what constitutes a tax avoidance arrangement, that no arrangement existed and that tax avoidance was never a purpose.

But in conclusion Justice Courtney said: "For the reasons already canvassed, the tax benefits to Krukziener stand out as being the dominant purpose of this arrangement. I do not exclude the evidence of other reasons. But those reasons do not account for this longstanding arrangement that enabled Krukziener and the group to avoid paying tax for more than a decade. I consider the TRA's conclusion on this point was right."

Krukziener had not returned the Business Herald's calls by deadline last night.