Lives ruined by tax-savings scheme, says judge

Hundreds of business people face financial ruin after their tax-saving scheme fell foul of the authorities.

In the 1980s and 90s, up to 1100 medium-sized companies were believed to have signed up for various versions of a controversial scheme designed by Auckland tax consultant John George Russell.

But when the Inland Revenue Department said it wanted its tax and penalties, many people had already spent the money they thought they had saved.

In the past decade, cases involving the Russell tax-saving method have gone through the Taxation Review Authority, the High Court and Court of Appeal.

Last month, one case went before the Privy Council in London as Mr Russell's lawyer, Gary Judd, QC, argued that the scheme was lawful.

But the Solicitor-General, Terence Arnold, QC, and lawyers Mike Ruffin and Barbara Corbett said the scheme amounted to tax avoidance, and that the IRD was entitled to its money.

A decision is expected within a month.

In an earlier ruling, where a number of taxpayers had their cases heard together, Judge Paul Barber, of the Taxation Review Authority, said that for some years he had called for a commission of inquiry into "these Russell situations."

He said Mr Russell had introduced his tax savings/avoidance scheme into many medium-sized manufacturing or trading groups. They had stopped paying tax and may have believed that the scheme was legal.

"Some years later the respondent's department [the IRD] has reviewed the tax affairs of those taxpayers and has issued assessments for very large sums with consequential penalties," said Judge Barber.

"I have no doubt that the so-called tax savings are ineffective at law so that eventually assets and/or businesses must be sold or bankruptcy will come upon the people involved."

Judge Barber said that while many taxpayers had been put in a "sad mess which could benefit from the attention of the Executive and of Parliament," Mr Russell seemed convinced that the law would eventually come out in his favour.

"Perhaps it will, but I think that such an outcome is most unlikely," the judge said.

"In the meantime, many New Zealand taxpayers, and their families and staff, are having their lives ruined by financial stress which seems likely to continue for years and years."

The judge said there had been reference to 500 to 1100 firms using the Russell idea. On that basis it would affect at least 2000 and up to 3500 people.

Mr Russell yesterday called the figures "absolute garbage.

He said 77 companies had used his scheme and the tax involved was $17 million.

Mr Russell, a chartered accountant, said that the cases had been dogged by breaches of the Bill of Rights and a failure to observe natural justice in the courts for the past 10 years.

"This is a story that is absolutely horrifying and makes [Act MP] Rodney Hide's stories look quite tame," he said.

Mr Russell agreed that lives had been ruined, but maintained that it was because of the way the IRD conducted cases and litigation - not because of his system.

He said the IRD was vindictive and ruined lives all the time.

Mr Russell said that Mr Hide had outlined numerous cases of the IRD being vindictive.

"The difference between them and me is that I stand up for myself," he said.

He maintained that the courts condoned the IRD's behaviour and had encouraged the commissioner to act in an "oppressive and abusive fashion."

In the eyes of the IRD, his clients were considered guilty by association with him, said Mr Russell.

He pointed to another case before the Taxation Review Authority - not involving the scheme - where Judge Tony Willy found that the IRD had not acted impartially.

Judge Willy said: "It was quite wrong for the commissioner's staff to allow their feelings for Mr Russell personally ... to rebound to the detriment of the objector."

The judge said wrangling had become the norm in any case involving Mr Russell and the feuding had to stop.

Mr Russell said: "The fuss is not about these cases. It is about the war between them and me."

Judge Barber said that, "grossly-oversimplified," the usual application of the scheme had shareholders in a trading or manufacturing firm selling their shares in that company to JGR (John George Russell) entities at an inflated price - the latter paying for those shares using the profits earned by the company, less fees to JGR entities.

Effectively, the judge said, the profits of the trading or manufacturing company passed to loss-owning JGR entities and, less JGR fees, were paid back to the shareholders as capital.

The vendor shareholders continued to manage the business and usually had an option to buy it back after a time for a nominal sum when, sometimes, the whole process started again.