Gift Duty: Begg v. Inland Revenue

A deferred gifting programme used by Public Trust clients has survived attack by Inland Revenue in the Court of Appeal.  The programme was designed to strip assets from older clients, circumventing asset testing for state social welfare benefits.

In a test case, the court was asked to rule on liability for gift duty on the deferred gifts.  Whether asset stripping could secure better social welfare benefits was not in issue.

Earlier this decade, the Public Trust offered a standard-form asset stripping trust for elderly clients having substantial equity in their family home.  The trust document recited that an annual gift of $27,000 was made to their children.  The figure chosen ensured each gift was under the threshold for payment of gift duty in any one 12 month period.  But no money was paid out.  Payment of the promised gift was deferred until the parents’ death.

This liability had the effect of reducing client assets by the amount of the promised gifts.

Inland Revenue claimed the supposed gifts were not a completed “disposition” at the time of the gift.  This would mean the accumulated total “gifts” were not treated legally as a gift until the parents’ died and the total sum promised was paid – with the result that the accumulated sum would exceed the 12 month gifting limit and gift duty would be payable.

The court ruled that the gift duty definition of a “disposition” was wide enough to include deferred gifts.  Words of gift in a trust amount to a “disposition”.  If not paid on the parents’ death, children had the right to sue their parent’s estates to recover payment.

Begg v. Inland Revenue – Court of Appeal (30.04.09)

08.09.007 

Maritime: Tasman Orient v. NZ China Clays

Which insurance companies will have to bear insured maritime losses turn on whether reckless navigation increased losses after the Tasman Pioneer ran aground off Japan en route to Busan in Korea.

The vessel from the Tasman Orient Line ran aground in May 2001 in the early hours during a heavy rain storm.  Cargo, including NZ Dairy Board exports, was lost as a result of the grounding and subsequent delayed salvage.

Dairy Board losses totalling some $US 498,000 arose when refrigerated reefers were left without power at some unidentified point in the voyage.  If the generators failed prior to the grounding, Tasman Orient accepts liability.  If they failed after the grounding, Tasman Orient says it was not liable, protected by exclusion clauses in its contract of carriage.

Standard international contracts of carriage for shipping exempt the carrier from liability for cargo losses after running aground except where losses arise from reckless management of the vessel.  The actions of the Tasman Pioneer captain in taking a shortcut through the Sea of Japan came before the New Zealand courts.

The court was told the normal route went through the Kanmon Strait.  Compulsory pilotage is required because of strong currents in the narrow strait.

The vessel was behind schedule.  The captain elected to take a shortcut, cutting about 40 minutes off the journey.  Two groundings in quick succession damaged the hull, causing the vessel to list.  Instead of contacting the Japanese coastguard and looking to beach the damaged vessel, the captain steamed at full speed for the main channel in the Strait while the crew pumped water to maintain trim.

Nearly three hours after the grounding, the captain anchored and then alerted the authorities.  Crew were mustered and a story fabricated that the vessel had hit a submerged container.  The ship’s chart was doctored to hide the actual course travelled.

The court ruled that the decision to attempt the shortcut was “unwise”, but the captain had taken this route before, albeit in a smaller vessel.  The claim of reckless navigation arose not from attempting the shortcut, but from the delay in notifying authorities of the grounding.  There was evidence that this delay increased the amount of cargo damage.  Salvage tugs with high capacity pumps would have reached the vessel earlier but for the late notification.

Evidence from the salvors also indicated the Dairy Board reefers were without power during the salvage.  Power cables were cut.  They were hindering the salvage.  There were delays before replacement generators could be put on board.

The Court of Appeal found that the “outrageous” behaviour of the captain in continuing to run at full speed after the groundings and failing to notify the authorities amounted to reckless behaviour such that Tasman Orient could not hide behind the exclusion clause.  It was liable for losses caused by the delay, including losses to the Dairy Board’s refrigerated cargo.

Tasman Orient v. NZ China Clays – Court of Appeal (9.4.09)

08.09.006    

Copyright: Tiny Intelligence v. Resport Ltd

Ripping off merchandise sold to supporters of the Crusaders rugby team cost one entrepreneur $50,000 in payment of profits made.  The Supreme Court refused to award further damages to the true merchandiser as compensation for lost business opportunities.

Back in 2006, a company called Resport Ltd was held in breach of copyright when it produced toy swords and toy trumpets for sale to Crusader supporters.  This merchandise had the status of “artistic works” under copyright law.  A company called Tiny Intelligence Ltd held copyright.

Resport was ordered to hand over all stocks it held and to compensate Tiny Intelligence $50,000 as an assessment of the profit made on the merchandise sold.

There was evidence that Resport copied Tiny’s products not caring whether that amounted to a breach of copyright or not.  Given the flagrant breach, Tiny Intelligence argued it was entitled to more than just an account of profits made.  Lost revenue amounted to an opportunity cost – the cost of expanding its existing business relationships with the potential for new products and a bigger business.

The Supreme Court ruled that any award of additional damages would amount to a penalty or fine – exemplary damages.  This was possible where there had been a flagrant breach of copyright, but by asking for an account of profits Tiny Intelligence was barred from also getting exemplary damages.

The two categories of damages have separate origins.  Exemplary damages come from common law and are intended as a form of punishment and as a warning to others.  An account of profits is derived from equity.  Historically, the two categories of damages are not allowed in tandem.

Tiny Intelligence v. Resport Ltd – Supreme Court (8.04.09)

08.09.005