Fair Trading: Commerce Commission v. Wild South

In giving leave for a criminal prosecution against Wild Nature (NZ) Ltd to continue, the High Court has warned directors against putting their companies into liquidation to avoid potential liability for fines.

Wild Nature pleaded guilty in late 2012 to Commerce Commission charges that it breached the Fair Trading Act by falsely labelling alpaca, merino and southdown wool duvets as being New Zealand made.  These products were sold to tourists from China, Korea and Taiwan brought in by tour operators.

Seven other companies were also convicted.  They were fined between $22,000 and $200,000.  Before Wild Nature could be sentenced, the company was put into voluntary liquidation.  Once liquidation has commenced, all legal proceedings against a company are stopped.  They require court approval to continue.   The Commerce Commission asked the High Court to allow the prosecution of Wild Nature to continue through to sentencing.  It said Wild Nature was the worst offender of the eight companies prosecuted.  Not only did the company mislabel the products’ origin, the company also manufactured false certificates to support the false labelling.  The Commission said these were particularly cynical breaches of the Act.  It would be seeking a fine in excess of the $200,000 penalty imposed on the second-worst offender.

Justice Venning gave leave for the prosecution to continue.  The company has pleaded guilty, only sentencing remains.  He said deterrence and denunciation are important considerations.  Wild South’s behaviour can have an adverse effect on the tourism trade.

Commerce Commission v. Wild Nature (NZ) Ltd – High Court (17.11.14)

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Tax: Beacham v. Inland Revenue

A Hawkes Bay medical practitioner with a passion for restoring classic cars was hit with tax penalties after being held liable for tax avoidance. Together with his wife, they were found to have underpaid tax by some $674,000 on undeclared income of $1.7 million.  The High Court upheld Inland Revenue penalties at fifty per cent of the unpaid tax.

The court was told Dr Beacham transferred his medical practice in 1996 to a company later called Beacham Holdings.  Expenses for both his medical practice and his car restoration business were booked through the company.  The medical practice was profitable; the restoration business not.  Personal living expenses were also charged to the company.  Evidence was given that Dr Beacham’s drawings and expenses charged to the company had reached $1.07 million by November 2006.  In the 2007 year, Beacham Holdings declared taxable income of some $558,000 but was sitting on retained profits of about $1.8 million – a sum taxable if declared as a dividend.  A tax consultant suggested some corporate restructuring to get rid of the contingent tax liability.  This was implemented.  A shell company was formed with Dr and Mrs Beacham as 50/50 shareholders.  The shell company purchased their shareholding in Beacham Holdings for $1.8 million.  To pay for the shares, a series of accounting entries were used to have the shell company’s liability to pay Dr and Mrs Beacham for the shares set off against the Beachams’ overdrawn current account of $1.07 million with Beacham Holdings.  The end result saw the Beachams’ potential tax liability arising from the overdrawn current account in Beacham Holdings converted tax free into a capital investment in the new shell company.

The Taxation Review Authority upheld Inland Revenue’s view that this corporate restructuring was tax avoidance and that the $1.7 million credit generated against their overdrawn current account was taxable as a deemed dividend.  The High Court upheld Inland Revenue’s assessment of tax payable at some $674,000 with penalties at fifty per cent.

The High Court was told the Beachams are taking legal action against their tax consultants: Markhams and Tax Assist Ltd.

Beacham v. Inland Revenue – High Court (14.11.14)

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