Investors 'crossed the line'

By PAUL PANCKHURST


Winding up the Inland Revenue Department side of New Zealand's biggest tax dodge case, Douglas White, QC, talked a lot about the insurance company that wasn't.

In closing submissions in the High Court at Auckland, White said investors in the Trinity scheme were not entitled to tax deductions for paying claimed "insurance" and "licence" premiums.

According to a previous court judgment, 200 Trinity investors claimed tax advantages of $70 million a year from 1998.

Investors could have claimed up to $3.7 billion over 50 years but legislation blocked the scheme from the 2004 tax year.

The Trinity scheme involved insurance and licence schemes connected with a venture to grow a Douglas fir forest in Southland.

Investors claimed big tax benefits immediately in connection with payments due in 50 years - a "timing mismatch" investors say was authorised in tax legislation.

A chunk of White's closing remarks focused on CSI, an insurance company in the tax haven British Virgin Islands that featured in Trinity arrangements.

He said evidence in the case showed CSI had not taken on any risk, and therefore had not provided any insurance.

CSI had no office, no staff, no substance.

CSI's "policy" for the Trinity scheme was not an insurance policy, and payments by investors were not "premiums". In short, investors were not entitled to deductions.

White also said a "sham agreement" saw CSI pay $6.5 million to a company that "loaned" the money to the family trusts of two men involved in setting up the Trinity scheme.

He said the pair went to considerable lengths to avoid disclosing the full background of the "insurance" and "loan" arrangements to the IRD and the court.

He referred to evidence that only emerged from sources including about 3500 pages of documents obtained by the Serious Fraud Office from the British Virgin Islands.

Explanations from one of the scheme's designers on how documents from his office found their way to the islands appeared "disingenuous".

Another thrust of the IRD's case is that amortised "licence" premium payments of $2.05 million a hectare by investors - payable in 2048 - were not deductible as "depreciable property".

Viewing the forest as a commercial venture, the licence premium was for the right to share in "stumpage" - timber in standing trees - not for the right to use land.

But the value of stumpage would be appreciating - not depreciating - as harvest approached, failing to meet the definition of "depreciable property".

White told Justice Geoffrey Venning that even if the insurance and licence premiums were deductible, they were rendered void by forming part of a tax avoidance arrangement.

Trinity was structured "to achieve solely or principally the tax benefits from the deductions to be claimed, rather than the possibility of any return from the forest in 50 years' time.

"It clearly crossed the line between legitimate tax planning and improper tax avoidance."