Creative
use of tax rules is getting short shrift from the courts with criticism aimed
at tax advisors who promote the schemes and then stand in court as supposed
independent expert witnesses justifying the tax scheme in dispute.
Accounting firm KPMG
came in for stinging criticism from the Court of Appeal for its role in
litigation between client Alesco (NZ) Ltd and Inland Revenue in a dispute over
the deductibility of interest on an Alesco financing transaction.
In 2003, Alesco’s Australian
parent advanced $78 million dollars to finance further expansion in New Zealand
with Alesco (NZ) issuing optional convertible notes in return. Both the High Court and the Court of Appeal
were to rule that an interest deduction claimed by Alesco (NZ) on the
convertible notes amounted to tax avoidance.
The claimed interest deduction was reversed and penalties of $2.4
million were imposed for what Inland Revenue claimed was Alesco (NZ)’s adoption
of “an abusive tax position”.
At trial, supposed expert
evidence was given by KPMG partner, chartered accountant Michael Schubert. He was described as giving expert opinion on
the correct financial reporting treatment of optional convertible notes. KPMG had provided advice to Alesco from the
outset on the most tax effective way of presenting the transaction.
Mr Schubert’s evidence
was roundly criticised: his narrow financial accounting approach ignored the
economic reality of how the transaction was structured between related parties
– Alesco (NZ) and its Australian parent.
The Court of Appeal said Mr Schubert’s analysis launched hypothetical
arguments which were unrelated to the facts of the case. This did not assist the Court and added
unnecessary complications. The Court of
Appeal emphasised that an expert witness assists a court by providing specialist
non-legal evidence and all expert witnesses have a fundamental obligation to be
impartial. The Court expressed its
dismay at the growing trend for expert witnesses to go into battle on behalf of
a client.
Alesco
v. CIR – Court of Appeal (5.03.13)
13.007