Skip to main content
17 Sep 2010
Appeal Status

Arrangement seen as tax avoidance

2010 case note – High Court holds arrangement in which property developer lived off 'loans' taken from various companies over a 10-year period to be tax avoidance.

Krukziener v Commissioner of Inland Revenue

Sections 108 and 141 of the Tax Administration Act 1994, TRA Case Z23


A property developer lived substantially off “loans” taken from his various companies over a 10-year period. Repayments only occurred after he was audited and only from tax-free capital receipts. In the TRA and now in the High Court, the arrangement has been held to be tax avoidance, and the “loans” are in fact, assessable income.


The taxpayer is a property developer who operated his businesses through a series of trusts. Each property development project was undertaken through a trading trust set up for that purpose. Most of the developments were successful, and as each development finished, the profits from it were distributed from the trust to another trust in the “group”. That other trust was in a loss position at that stage, as the development for which it was set up was in its “start-up” phase. When that second trust eventually turned to profit, the profits were distributed to the next trust, and so on. The effect of this was that none of the trusts were ever required to pay tax; there was always another trust in a loss position that the profits could be distributed.

The taxpayer operated this structure between 1991 and 2002. During this period, the taxpayer returned very little income. However, he received net funds of over $5 million from the “group” by way of loans, which were used to meet his everyday living expenses. The loans were repaid by way of a capital distribution once the Commissioner's investigation had begun.

The Commissioner took the view that the arrangement was void as tax avoidance and reconstructed the loans as income to the taxpayer. Shortfall penalties for abusive tax position were also imposed.

The taxpayer challenged the assessments in the Taxation Review Authority (TRA) Case Z23 and lost. He appealed to the High Court.


1. Is the arrangement tax avoidance?

  • 1.1 Was there an arrangement?
    The taxpayer argued that there could be no arrangement as some of the steps were not, and could not have been, contemplated at the time the structure was created. To hold there was an arrangement would be to tax retrospectively and would offend the rule of law.

    The taxpayer further challenged the TRA's finding that there were separate arrangements in each of the tax years. Taxpayers must be able to determine, at the end of each year, their tax liability for that year.

  • 1.2 Was the purpose and effect of the arrangement tax avoidance?
    The taxpayer argued that the loans were genuine liabilities that were always intended to be, and were, repaid, and that the TRA had erred in holding that a receipt had to be either income or capital. In this case the receipts were neither; they were loans.

    The taxpayer asserted that there was no requirement to take a salary from the trusts, relying on Penny & Hooper (CA).

  • 1.3 Was tax avoidance merely incidental?
    The taxpayer argued there was a legitimate commercial rationale for using the structure.

2. Were some years time-barred under s 108 of the Tax Administration Act 1994?

  • The taxpayer argued that the assessments for the earlier tax years were time-barred under s 108 of the Tax Administration Act 1994 (TAA) as more than four years had passed since the end of the period in which the relevant return was filed.

3. Were penalties correctly imposed?

  • The taxpayer argued that the tax positions taken were tenable, and could meet the standard of being about as likely as not to be correct.
  • The taxpayer also argued that the tax position taken should be offset against deductions allowed to related entities under s 141(7) of the TAA.


The Commissioner won on all issues.


Her Honour held that the evidence showed there was a plan that the taxpayer would not repay advances unless there was a (tax free) capital distribution available (paragraph [24]). Her Honour also held that the TRA's conclusion that there was more than one arrangement was inevitable (paragraph [26]).

Purpose or effect of tax avoidance and commercial rationale

In responding to the taxpayer's contention that there were practical commercial reasons for not paying a salary from the trusts, Her Honour analysed the Court of Appeal decision in Penny & Hooper and held at [42] that:

  • It may be that the proprietor of a property development business would, for the reasons that Mr Krukziener gave in evidence, be justified in accepting a salary below market or even no salary at all pending the completion of the project. So, in principle, Mr Lennard's submission stands, notwithstanding the Court of Appeal's decision. However, there is an obvious question on the facts of this case as to why Mr Krukziener would not have received any income over such a long period.

The taxpayer's submission that he was building towards a significant project which would leave him with tax to pay was rejected on the facts, and Her Honour went on to note that even if that was the case, the deferral of tax for such a long period would have the effect of tax avoidance [48]-[49]. Her Honour went on to note:

  • Where the proprietor of a business has expended time and effort on a project, and incurred debt waiting for the project to be completed, and the project is completed at a profit, there would seem to be no legitimate reason for some of that profit not to be distributed. The need of the next project for funds does not preclude such distribution since it is always open to the proprietor of the business to advance funds for the next project. In the circumstances of this case, therefore, I do not accept that the level of income provided to Mr Krukziener over such a long period can be regarded as legitimate.

Her Honour accepted that there was a commercial reason for not making distributions to the taxpayer from the profits of the trusts, being to leave the taxpayer in debt as a defensive strategy. However, Her Honour did not put much weight on this rationale for the reasons explained at [51].

Her Honour accepted the Commissioner's argument that, from the trusts' perspective, lending money to the taxpayer interest-free while borrowing elsewhere at commercial rates, pointed to an absence of commerciality [57].

In summary, Her Honour stated [58]:

  • Against these various disadvantages, the tax benefits of the arrangement stand out clearly. Notwithstanding the asserted rationale, the effect of the arrangement was clearly tax avoidance, at least in the sense of deferring the tax obligation. Over more than a decade during which more than 80, mostly profitable, projects were completed under Mr Krukziener's stewardship, he received more than $5 million nett to cover his living expenses on which no tax was paid. He repaid most of that from capital receipts on which no tax was payable and the balance has never been repaid. Nor was interest paid until 2001, by which time Mr Krukziener was aware that his tax affairs were to be investigated. Looking at the overall benefits of the arrangements to Mr Krukziener, it is apparent that the protection offered by the debt had much less effect in commercial terms than the deferment or avoidance of income tax.

Time bar

Her Honour followed the Privy Council decision in Miller v CIR which held that although reconstructed income is deemed to be derived, the nature and source of the deemed income does not change. In this case, that nature and source was loans from the trusts. These were not disclosed, so the time bar did not apply [64]-[65].

Shortfall penalties

Her Honour held that the tax benefits from the arrangement stood out as being the dominant purpose, and therefore the standard of "about as likely as not to be correct" could not be met [71].

Her Honour noted that as the taxpayer had been found to have taken an abusive tax position, set-off under s 141(7) of the TAA was not available, by virtue of s 141(7B).


The structure used in this case had a number of features which meant that, when the arrangement is looked at as a whole, the tax benefits flowing from it were the only explicable reason.

This case is not authority for invoking the anti-avoidance provision simply because a taxpayer takes a loan in lieu of a salary, though the Commissioner is aware there are a number of taxpayers (particularly property developers) using a similar structure who will be affected by this decision. In each case, as with any tax avoidance inquiry, it will be a matter of examining the arrangement to determine the tax effects which flow from it, and the commercial rationale for implementing it.

Appeal period

The taxpayer has 20 working days to appeal. It is understood he will appeal.