Damien Grant: Taxman cracks down on avoidance scams

Andrew Krukziener's Metropolis changed Auckland's skyline. Photo / Doug Sherring

Opinion

We need people like Andrew Krukziener. They get up in the morning and build things. The Auckland skyline bears his imprint and I tip my hat to him for this.

So it was with mixed feeling that I read about the recent High Court tax judgment against him.

Krukziener borrowed just over $5 million from his various entities. The repayment arrangements were murky.

He argued that property developers must borrow from their projects to fund their personal expenses, as the cashflow occurs right at the end, if at all. The money he took was a loan, creating a debt between him and his companies. A loan is not taxable income.

The Inland Revenue Department took a different view. It claimed there was no real intention to repay the money so it should be treated as income.

The High Court has agreed with the IRD. Krukziener must now try his luck with the Court of Appeal or pay the tax.

There are some other aspects that are specific to the case but the principal is this: if you borrow money from your company and do not intend to repay it then it is income. Directors who have overdrawn current accounts over many years beware.

Another judgment doing the rounds at the moment is the Penny and Hooper case. Here two surgeons with six figure incomes set up a company owned by their trusts.

They paid themselves a nominal wage from the company, paid tax on the profits and returned the profits to their trusts.

They did this because the trust and company rate of tax was lower than the tax rate for individuals, the difference being the money ended up in their trust bank account and not their personal account.

The IRD took them to the Court of Appeal and won. The setup was a tax avoidance scheme to get around the higher rate of marginal tax that existed at the time.

The case is going to the Supreme Court.

It is right that the IRD won both cases. Messrs Penny, Hooper and Krukziener all knew that they were entering into schemes of arrangement to try to minimise their tax.

These are people in privileged positions who probably benefited in their youth from subsidised education.

The taxman has put company directors seeking to creatively minimise their tax obligations on notice. In its recently released annual report IRD talks explicitly about using the "full force of the law" to enforce tax compliance.

Still, the Metropolis is a marvellous building and Penny and Hooper are no doubt excellent surgeons.

I hope they stay. The country needs highly skilled surgeons almost as much as we need creative property developers (and hobbits), and far more than we will ever need insolvency practitioners like myself.

damien@waterstone.co.nz