Key Points:

The Court of Appeal has told the architects of New Zealand's biggest tax avoidance scheme that their strategy is unacceptable.

But the long-running court battle may not be finished yet.

In a judgment delivered this week the court found in favour of the Inland Revenue Department and ruled that more than $3 billion in tax deductions claimed by investors in the Trinity Foundation constituted tax avoidance.

The Trinity tax scheme, described by the Court as the brainchild of Auckland lawyer Garry Muir, was set up in 1997.

It was based on the right of investors to claim immediate tax deductions for expenses that would not be paid until 2048, giving them a 50-year tax holiday.

The scheme attracted some high-profile investors, but most settled with IRD before a 2004 judgment in which the High Court ruled against the scheme. The names of those participants are suppressed.

The unanimous judgment delivered by Court of Appeal president Justice Willie Young upheld the 2004 High Court judgment of Justice Venning.

It described the tax consequences of the scheme as "technically correct but contrived" and concluded that "we are satisfied that this scheme is well and truly across the line" into being tax avoidance.

"The Trinity scheme is clever. But this cleverness should not be allowed to obscure the reality that this particular emperor has no clothes."

Muir is in France and could not be reached for comment. His legal partner and fellow architect of the scheme, Clive Bradbury, declined to comment.

But the Herald understands they and the other remaining appellants are likely to seek leave to appeal to the Supreme Court against some aspects of the judgment.

The scheme was not only the biggest tax avoidance scheme in New Zealand history, but the cleverest, said Auckland University lecturer and tax specialist Mark Keating.

Tax avoidance existed when an arrangement technically complied with the tax law but was contrary to Parliament's intention, Keating said.

" The line between legitimate tax planning and outright tax avoidance is often difficult to draw - and keeps many top tax lawyers and accountants in business."

The scheme was technically hard to fault, but some inconsistencies in Muir's story appeared to have coloured the opinion of the judges, Keating said.

The judgment said documents Muir presented "were not consistent with the position he had previously taken. His attempts to explain some of the documents did not impress the judge".

The Court relied on a letter submitted to the British Virgin Islands Government by Muir when he set up the scheme in 1997.

This letter, obtained by the Serious Fraud Office in its own investigation of the Trinity arrangement, said the real benefits of the deal were tax concessions that could be obtained by investors and the Trinity Foundation.

The IRD alleged that the arrangement made by Muir and Bradbury was a "sham".

But the Court of Appeal said that although the transactions were "highly artificial and indeed contrived", it concluded by a narrow margin that it was not a sham.

The IRD's director of litigation, Karen Whitiskie, said the ruling sent "a clear message that investors should not enter investment schemes principally looking for tax benefits above business purposes".

The Court ordered the appellants to pay the Commissioner of Inland Revenue total costs of $30,000.

A second judgment, relating to the commissioner's ability to settle tax disputes with taxpayers, was also dismissed and total costs of $6000 were awarded against the appellants.

How it worked

* A complex forestry investment allowed each participant to license land from the Trinity Foundation for 50 years to plant a crop of Douglas fir. The fee for this land was $2 million, or about $40,000 per year.

* But although the $2 million was not to be paid until 2048, it was immediately tax deductible to the investors.

* So the investors effectively claimed a deduction of $40,000 each year.

* The result was a 50-year tax holiday for investors - most of whom would have been in their 90s or older by the time they were due to pay the tax.

* Between 200 and 300 taxpayers were involved, although most settled with the IRD before a High Court judgment in 2004.