Trinity tax claims were within the law says QC

By PAUL PANCKHURST


The Income Tax Act sanctioned the investment scheme at the heart of New Zealand's biggest alleged tax dodge, the High Court at Auckland was told.

The Trinity scheme involved contentious insurance and licence payments linked to a venture to grow a douglas fir forest in Southland.

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

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

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

The plaintiffs in the test case are the taxpayers - fighting to avoid paying Inland Revenue assessments.

In his second day of closing submissions for the taxpayers, Bruce Stewart, QC, yesterday said the act recognised forestry was a long-term investment and explicitly accepted tax deductions well in advance of revenue.

"In order for those deductions to be meaningful, they must be able to be offset, if necessary against income from other sources."

In the past, provisions had "ring-fenced" deductions from certain activities or in particular entities, such as special partnerships.

But those provisions were repealed and taxpayers were given the ability to depreciate intangible property, such as the right to use land.

The introduction of loss attributing qualifying companies (LAQCs) enabled closely held companies to transfer losses to shareholders.

Those changes meant the Income Tax Act sanctioned the Trinity arrangements.

It later emerged that allowing the use of LAQCs and the depreciation of intangible property could hurt the country's tax base and a law change from the current tax year was "carefully crafted" to include Trinity.

But the use of the old provisions before the law change was not tax avoidance.

"What is fundamental, the plaintiffs submit, is that the general anti-avoidance provision may not be used to legislate for perceived gaps from a policy perspective."

Another topic tackled by Stewart was the IRD's claim that insurance arrangements involving a company in the British Virgin Islands, CSI, were "a sham". The allegation was without foundation, he said.

Two taxpayers linked by the IRD with the claim were "entitled to have the allegation emphatically rejected and expunged in the judgment to follow in this proceeding".

The IRD claimed Trinity was structured "solely or principally" to achieve the tax benefits claimed, rather than forestry returns.