IRD nails dodgy ventures

By BRIAN FALLOW Economics Editor

About 1000 investors involved in tax dodge schemes which the Inland Revenue is cracking down on stand on average to lose $300,000 to $400,000 in tax, as well as interest and penalties.

The IRD recovered $97 million in tax last year from about 200 taxpayers in such schemes and expects to recover at least as much this year.

It is proposing law changes, based on provisions which it says have worked well in Canada, to discourage such schemes.

Commissioner David Butler said this should not be seen as indicating that the existing anti-avoidance provisions of the tax laws were not strong enough.

It was more that an ounce of prevention would spare taxpayers the grief, and the IRD the labour, of applying the existing laws.

The department describes the schemes as mass-marketed, though they seem to have proliferated largely through word of mouth.

They usually involve invitations to invest rather than registered prospectuses.

And they fail the sniff test. "It's an old saying, but if it looks too good to be true, it probably is," Mr Butler said.

The schemes generally revolve around obtaining tax deductions for assets whose valuations are based on potential future income. It is the credibility of those forecasts of future income that is usually the issue.

Typically, they involve participation in a high-risk activity, with optimistic or unrealistic sales projections. They involve transfers of property, often intangible, that is difficult to value precisely.

Transfer at an excessive price amplifies the available tax deductions, which are usually by way of a deduction for depreciation.

Their finance is arranged so that the investor is not at real risk of having to repay loans. This can create inflated interest deductions.

The deductions exceed the amount of money the investor puts up, the idea being that they come out ahead even though the "venture" fails.

The IRD's director of litigation, Mike Lennard, said that in some cases chartered accountants had seen the schemes as a way of adding value to their clients and had held client evenings introducing them to the schemes. The Institute of Chartered Accountants had said that was inappropriate.

"In the long run, on the results to date, they are not doing their clients any favours," Mr Lennard said.

It was a feature of these schemes that their promoters had obtained no binding ruling from the IRD that the promised tax benefits would materialise.

"The absence of such a ruling may be explicable and does not in itself damn a scheme, but it is a question for investors to ask: Have you got a ruling and if not, why not?"

Mr Lennard said people often invested in products on which they did very little due diligence - less than they would do if buying a car.