Commissioner properly exercised discretion not to grant financial relief
2005 case note - Court found trusts were extensions of taxpayer's financial personality - judicial review, financial relief, serious hardship.
Mr McLean had a substantial tax debt arising from his participation in certain tax-driven investments schemes. The scheme deductions were disallowed by the Commissioner and penalties were applied. Mr McLean applied for financial relief but that was declined as the Commissioner was of the view that personal wealth had been quarantined into trusts which were effectively under the control of the taxpayer. Mr Mclean sought judicial review of the Commissioner's decision. The Court upheld the decision agreeing that the trusts were extensions of Mr McLean's financial personality.
In 1994-95, through LAQCs the plaintiff invested in the Digitech and Salisbury Investment schemes. The Commissioner investigated the schemes and subsequently disallowed the tax losses claimed by the investors in them, including the plaintiff. Some of the investors in the schemes took challenge proceedings but their counsel conceded the challenges during the course of dispute resolution processes on 20 November 2000 (Digitech) and 20 February 2001 (Salisbury). Formal notices of reassessment were then issued to the investors. In the plaintiff's case a reassessment issued in December 2000 in relation to the Digitech tax losses claimed by the plaintiff and in March/April 2001 for the tax losses claimed in respect of the Salisbury scheme.
In the mid-1990s the plaintiff was a successful real estate agent. He traded using the company Samuel Vaile and Sons Limited. On 28 February 1996 the plaintiff established two trusts, the St Albans Trust (SAT) and the 1843 Trust (1843 Trust). The plaintiff is the primary beneficiary of both trusts. He is not married and does not have children. The initial trustees were the plaintiff and one of the accountants who promoted the Digitech and Salisbury schemes. On establishing the trusts the plaintiff immediately sold 8,000 of the 10,000 shares in Samuel Vaile and Sons Limited to the 1843 trust for $160,000. At the same time he advanced $160,000 to the 1843 Trust to complete the purchase. The purchase price was left outstanding with no demand to be made for 12 years.
The plaintiff transferred his residential property to SAT subject to the existing mortgage and a life interest in his favour and in 1997 the plaintiff's mother rewrote her will naming SAT as a beneficiary for one-third of the residue, effectively in place of the plaintiff.
During September 1999 the plaintiff came under pressure from financiers to sell down some of the properties owned by SAT. In March 2000 he surrendered his life interest in the St Albans Avenue property to SAT in exchange for $227,697 to enable SAT to sell the St Albans Avenue property. The $227,697 was payable upon demand, but the plaintiff agreed to postpone making demand for a period of 20 years. There was no provision for interest.
On 31 March 2001 the plaintiff gifted $27,000 to SAT. This continued gifting which had been made in 1998 and 1999. Between April 1997 and March 2000 the 1843 Trust borrowed money from Samuel Vaile and Sons Limited. In turn monies were drawn from the trust by the plaintiff for living expenses and for the purposes of SAT.
On 22 July 2001 the plaintiff's mother died. On 2 May 2002 the plaintiff entered a deed with the trustees of SAT and the trustees of his mother's estate recording that a mortgage registered over one of the properties owned by his mother's estate secured advances made for the benefit of both Samuel Vaile and Sons Limited and the plaintiff. The deed recorded that the mother's estate would discharge the debt and the repayment would constitute a partial distribution of SAT's entitlement to a third of the residuary estate. It further recorded that the sum was to be applied in reduction of the debt owned by SAT to the plaintiff.
On 21 June 2002 the plaintiff entered a deed with the trustees of the 1843 Trust in which he discharged the liability of the 1843 Trust for the $160,000 owed by the trust to him. He retook the 8,000 shares in settlement of the debt. However, by June 2002 the shares in Samuel Vaile and Son Limited were worthless. On the same day the 1843 Trust retransferred the rights to the use of the name Samuel Vaile and Sons Limited to SAT for $27,000.
During this time, the plaintiff applied to the Commissioner for financial relief, citing "serious hardship". He said he did not personally have any funds, but offered the Commissioner the shares in the LAQC companies he had used for the purposes of the Digitech and Salisbury schemes or alternatively $5,000 in cash which he stated he would have to borrow from his sister. In 2002 he made another settlement offer of $36,000 over three years and finally $72,000 over three years. The Commissioner took the view that the plaintiff's dealings with his trusts and the effective alienation of his assets into those structures, disentitled him from financial relief. The Commissioner sought and obtained judgment for the debt as it then stood but agreed to a stay of execution pending the outcome of these judicial review proceedings.
His Honour Justice Venning traversed the above facts in some detail and reviewed the case law on judicial review of debt matters. Counsel for the plaintiff sought to distinguish the Raynel and Clarke & Money decisions on the bases that they were "take-it-or-leave-it" offers or that the plaintiff had not wound up his LAQCs. His Honour did not consider those points of distinction material. He dismissed the application as being entirely without merit and awarded costs on that basis.
"Those actions show a willingness by the plaintiff to engage in transactions with the trusts, ultimately designed to reduce his assets, primarily the debts owing by the trusts to him, at a time when he was well aware of the Commissioner's challenge to the Digitech and Salisbury schemes and further even during the period after he had sought relief from the Commissioner."
"In the present case while the plaintiff's offer is not on a take it or leave it basis, in the context of the size of the taxation liability the offers and the terms are modest. The initial offer of $5,000 on the basis he had nothing and would have to borrow from his sister was in commercial terms, a try-on. The Commissioner was entitled to treat the offers that followed, for payment over a long time period of a figure substantially below the core debt, with circumspection."
"A particularly material factor the Commissioner was entitled to take into account was that while the plaintiff was engaged in the negotiation process with the Commissioner, he was also engaged in transactions that reduced the value of his assets. The plaintiff or for that matter, another taxpayer can not put himself in a financial position in order to force the Commissioner to accept whatever offer he chooses to make."
"In the present case the following factors are relevant to the Commissioner's decision:
- The plaintiff participated in a tax avoidance arrangement.
- The plaintiff took steps to alienate his property and transfer it to trusts.
- The plaintiff engaged in an exercise to forgive or set off the debts the trusts owed him at a time he knew the Commissioner challenged the tax write off.
- A number of the transactions he entered with the trusts support an inference that he intended to defeat the Commissioner's claims.
- The plaintiff did not make completely full and frank disclosure. In light of those matters, the Commissioner was entitled to reject the appication for relief and settlement offers of the plaintiff."
"I endorse the comments of Randerson J in Raynel. The Commissioner in the present case was quite entitled and indeed obliged to have regard to the integrity of the tax system and the importance of promoting compliance with the Inland Revenue Acts. In this case the clear inference is that notwithstanding the plaintiff's knowledge of his obligations to the Revenue the plaintiff ordered his affairs principally through the use of the SAT and 1843 trusts to do as much as he could to reduce his personal assets and to place as many obstacles as possible in the way of the Commissioner recovering funds from him personally. It would do nothing for the integrity of the tax system if the plaintiff were permitted to act in that way to force the Commissioner to accept a settlement."
"As I have noted the review was misguided. The plaintiff and his advisers are aware of the decision of Raynel. Despite knowledge of that clear statement of principle the plaintiff pursued these proceedings. He is to pay the costs consequences of that. Costs to the Commissioner on a 2B basis together with disbursements."
Tax Administration Act 1994