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)
14.052