26 July 2013

Tax evasion: R. v. O'Connor, Gilchrist & Anderson



Three Wellington businessmen were convicted of tax evasion after Inland Revenue uncovered a tax scam using fictitious invoices and false tax deductions to understate taxable profit.  Some of the questionable behaviour stretched back over two decades.  Convicted were Paul William O’Connor (who operated a media clipping business called Media Search), Brent John Gilchrist (a tax adviser) and Scott Crawford Anderson (convicted as a party to the production of false invoices).
The High Court in Wellington was told Inland Revenue began investigating Dr O’Connor’s tax position after he was found to be one of about 400 investors in the Actonz tax minimisation scheme, widely touted in the late 1990s to high net worth individuals as a means of reducing their tax.  This scheme promised to generate substantial tax losses with accelerated deductions claimed for computer software.  It was later nullified by the High Court as tax avoidance.
Inland Revenue said its investigations found Dr O’Connor was party to some highly aggressive tax arrangements and downright fraudulent transactions intended to minimise the profits from his very successful businesses.  His primary business was a media clipping service which contracted to provide customers with media stories on a particular business, industry or product.  In 1996, the business had gross annual revenue of some one million dollars and earnings of $311,000 before interest, depreciation, amortisation and an allowance for notional shareholder salaries.
Inland Revenue alleged Dr O’Connor compounded his evasion by delaying tax return filing so to avoid alerting tax authorities and reorganised his affairs so that when tax was assessed the taxpaying entity charged had no assets.
Dr O’Connor was convicted of multiple charges: of knowingly not providing information to Inland Revenue with the intent to evade the assessment or payment of tax; of tax evasion in relation to fictitious invoices; and tax evasion in relation to overvalued intellectual property.
In 1996, Dr O’Connor and a fellow director signed a restraint of trade agreeing not to compete with their own business for a period of five years in return for a one-off payment of five million dollars.  This amount was then credited to their shareholder current accounts.  Justice Simon France said this transaction was not commercially credible.  It was an attempt to evade tax by extracting funds from the business as capital rather than taxable income.
Evidence was given that Dr O’Connor had invested personally in the Actonz tax minimisation scheme at a cost of $300,000 when writing off a personal loan of that amount owed to him by Mr Anderson who was promoting the Actonz scheme.  But for tax purposes, the Actonz “investment” was treated as a business asset rather than a personal asset.  Justice Simon France ruled that Dr O’Connor wanted quit of the investment when it became apparent the courts were going to rule against the Actonz scheme.  He wanted the tax effect of the failed scheme to fall on his business, not his personal financial position.  The court’s view was reinforced by business restructuring which left the original business insolvent, unable to meet a revised tax assessment following the failure of the Actonz scheme.
This business reorganisation saw business assets sold into a new entity: a trading trust called Media Search Trust.  The Trust then sold its intellectual property to a freshly formed company owned by Dr O’Connor for a nominal sum which then leased back to the Trust a seven year right to use this intellectual property at a cost of one million dollars.  The million dollar cost was amortised as intangible property in the Trust’s tax accounts.
Justice Simon France said this price was grossly inflated.  Independent evidence valued the intellectual property at no more than $250,000 to $300,000.  Claiming an amortisation expense for a grossly overvalued asset amounted to tax evasion.
Claiming tax deductions for fictitious expenses was also evasion.  Mr Anderson was also convicted as a party to this offence.  The High Court ruled that he submitted invoices to Dr O’Connor’s businesses for work never done knowing that a tax deduction was to be claimed.  Payment was made on some of these invoices, but Justice Simon France concluded that this money had completed a “round trip” via Vanuatu. 
Evidence was given regarding one set of invoices that Mr Anderson billed the Trust in 2002-2004 for software development work and merger advice totalling $874,000.  It was argued these were legitimate invoices for work actually done, as evidenced by the fact payment was made.  Justice Simon France considered there was an air of commercial unreality about the transactions – a businessperson is unlikely to pay $450,000 for advice around the sale of business assets when those assets are being sold for just $1.5 million.  He said it was most likely the payments made were returned to Dr O’Connor via a Vanuatu bank account opened in his name, less a fee paid to Mr Anderson.
Such “round trip” payments were similar to a series of fraudulent transactions for which both Mr Gilchrist and Mr Anderson were convicted in the High Court.
An accountant given name suppression described how the fraud worked.  He had previously been convicted and sentenced after pleading guilty to charges relating to the fraud.  False invoices for consultancy services or accounting support services were issued by interests associated with Mr Anderson.  The false invoices were used to support GST claims and expense deductions for tax.  Payment was made on the invoices but then refunded less an 8.5% fee.  The refund was made with payment from a Vanuatu bank account in Mr Anderson’s name to a newly opened Vanuatu bank account in the accountant’s name: he then repatriated the funds to New Zealand.  The court was told this meant the accountant received the benefit of tax deductions and got back all but 8.5% of the money paid; the payment received by Mr Anderson meant he effectively repatriated funds held in his name in Vanuatu; and Mr Gilchrist and Mr Anderson shared the 8.5% fee.
Mr Gilchrist strenuously denied he was party to the fraud.  He said he had introduced the accountant to Mr Anderson but had only offered general advice on setting up an off-shore consultancy for outsourcing routine work.  After that, he said, he had little to do with what went on.  He said it was not credible for a tax adviser to become involved in such an unsophisticated tax fraud paying such paltry sums: his supposed share of the 8.5% fee would be $3500 on any false invoices totalling $100,000.
Justice Simon France said Mr Gilchrist’s level of involvement was wholly at odds with what he claimed.  He was copied in on email traffic between the accountant and Mr Anderson, responded to questions on the amounts and wording of invoices and helped facilitate transfers between the Vanuatu bank accounts.  The judge dismissed Mr Gilchrist’s claim that he was duped by Mr Anderson and unaware of the underlying invoice fraud.  The judge said there was irrefutable evidence that Mr Gilchrist was a party to false paper trails laid to mislead Inland Revenue, had been willing to create false invoices to mislead a bank and had a propensity to destroy email records to cover his tracks.
Justice Simon France ruled that both Mr Anderson and Mr Gilchrist were party to, and jointly the architect of, the fictitious invoice writing scheme.
R. v. O’Connor, Gilchrist & Anderson – High Court, Wellington (26.07.13)
R. v. Gilchrist & Anderson – High Court, Wellington (26.07.13)
13.019