GST: Staithes Drive v. Inland Revenue

The High Court dissallowed a GST refund of $505,000 where serial tax litigant John George Russell used a complex ownership structure for buying land having as the ultimate beneficial owner a company struck off back in 1996.

Justice Edwards ruled the buyer and seller in a $4.55 million land deal were “associated persons” and no GST refund was payable.  She further ruled the deal amounted to tax avoidance in any event.

The court was told Staithes Drive Development Ltd agreed in February 2006 to purchase a a block of land from Whitby Holdings Ltd for $4.55 million.  Title was transferred immediately without the agreed deposit being paid.  Scheduled contract payments were not paid on time and when paid were not paid in cash.  Instead, credit for payment was made by journal entries between Whitby as vendor and Capital Project Management Ltd, a company controlled by a Mr Mason who was formerly director of Whitby but now director of Staithes Drive.  In the background stood Mr Russell: companies he controlled were ultimate shareholders of both Staithes Drive and Whitby.

When Staithes Drive claimed a GST refund of $505,550 on the purchase from Whitby, Inland Revenue said the two parties were “associated persons” as defined by the Goods and Services Tax Act and Staithes refund was limited to the amount of GST paid by Whitby on its purchase of the land.  This was zero. Whitby was not registered for GST.

Mr Russell argued Staithes Drive and Whitby were not related.  The legal owners of each company were companies he controlled, but his companies were not the beneficial owners, he said.  They held the shares in trust for others: a company called Emmanuel Construction Ltd (in receivership and liquidation) in respect of Staithes Drive and two US residents named as a Mr & Mrs Manning in respect of Whitby.

Justice Edwards said the “voting interests” test for determining associated persons looks at legal ownership of the shares, not beneficial ownership. 

Staithes Drive v. Inland Revenue – High Court (21.10.15)

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Computer Crime: Dixon v. R

Downloading files from a database without authority is a crime, the Supreme Court ruled.  Security guard Jonathon Dixon must serve four months community detention and 300 hours community work after trying to make money selling CCTV footage of England rugby player Mike Tindall’s behaviour in a Queenstown bar during the 2011 rugby world cup.

This Supreme Court ruling makes it easier to threaten with prosecution errant employees and contractors who download business files without authority but gain no immediate commercial advantage from the files copied.  

The Queenstown CCTV compilation featured Mr Tindall, married to the Queen’s eldest grand-daughter, socialising with a female patron and leaving the bar with her.  When Dixon failed to find a media buyer, he posted the compilation on YouTube.  He was charged with accessing a computer system for a dishonest purpose, in breach of the Crimes Act.  The narrow legal issue before the Supreme Court was whether a downloaded file amounted to “property”.  Conviction would have been easier if Dixon had made money selling the footage; that would be in breach of the Crimes Act as obtaining a “pecuniary advantage” from the downloaded file.  But Dixon didn’t find a buyer.  Police argued it was enough that Dixon “obtained any property” and the download was “property”.

The Supreme Court was told the bar owner demanded Dixon hand over the USB stick holding CCTV footage.  Dixon refused.  He failed to find any buyers after hawking the footage to overseas media, though the Sun newspaper in London took at least one still image.

The Court said digital files can be identified, have a value and can be transfered to others.  They have a physical presence, despite requiring a computer system and appropriate software to view them.  Files are “property”, the court ruled.  They are not simply information having no physical existence.

Dixon v. R – Supreme Court (20.10.15)

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Credit Contracts: Torchlight Fund v. Johnstone

Late payment fees of $A500,000 per week promised by George Kerr as a sweetener to get a sixty day $A37 million short-term loan in 2012 for his financially pressed Torchlight Fund were struck down by the High Court as an unenforceable penalty after Australian businessman John Grill tried to recover fees of over $A30 million for late payment.

Torchlight was set up by Mr Kerr in 2009 to invest in distressed assets.  Torchlight itself was in dire financial straits in mid-2012, up against a repayment deadline to Bank of Scotland.  Raising equity was not an option; Mr Kerr was very much in the public eye with the Financial Markets Authority looking into his business activities.

The High Court was told he turned to Mr Andrew Skidmore, fomerly associated with Macquarie Bank in Sydney, to find short-term funding.  Evidence was given of Mr Skidmore acting as go-between in negotiations between Mr Kerr and Mr John Grill, a wealthy Australian engineer and founder of publicly-listed WorleyParsons.  Negotiations took a little over two weeks, with Mr Skidmore providing written updates for Mr Kerr to be presented to Bank of Scotland where repayment was already overdue.  These updates were deliberately misleading, designed to have the Bank think negotiations were closer to finality than they in fact were.  To get the deal over the line, Mr Kerr suggested a late payment fee of $A100,000 per week be written into the contract.  Mr Grill countered with a weekly late payment fee of one million, settling later on $A500,000.

After getting the $A37 million loan, Torchlight defaulted on repayment due in October 2012.  It eventually made full repayment in tranches over the subsequent seven months.  Wilaci Pty Ltd, the corporate vehicle used by Mr Grill, later sued for just over a further $A30 million claimed payable on the late payment clause.

The courts do not enforce penalty clauses in credit contracts if they bear no relation to the creditor’s expected losses, but rather are designed to terrorise the debtor into making payment.  Mr Grill had not used his own funds to finance the Torchlight advance; he borrowed from Credit Suisse against his WorleyParsons shares and was liable for interest on this advance.

Wilaci argued the late payments levied were not a penalty, they were fees payable for a collateral agreement extending the loan to Torchlight beyond sixty days.  Justice Muir rejected this argument.  There was no evidence of any agreement that the loan would be extended.  He ruled the late payment clause was a penalty, unrelated to Wilaci’s losses, and was unenforceable.  There was evidence the weekly late payment fee claimed from Torchlight was some fourteen times greater than the ongoing interest payments Wilaci would be paying Credit Suisse.

Torchlight Fund was ordered to pay $1.18 million for fees incurred when Wilaci put it  into receivership.

Torchlight Fund v. Johnstone – High Court (19.10.15)

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Waiheke: Hauraki Gulf Enhancement v. Auckland City

Resistance to Waiheke Golf Club extending its present nine hole course into neighbouring reserve land moved a step forward with a local lobby group ordered to pay $12,500 as security for court costs should its current legal challenge fail.     

The High Court was told it has taken twenty five years of regulatory and bureaucratic hurdles for Waiheke Golf to get Council approval for a course extension on to reserve land.  Hauraki Gulf Enhancement Society Incorporated is challenging Council approval.  It says the approval breaches the Reserves Act and that inadequate public notice was given.  Waiheke Golf is suspicious of the Society’s bona fides, alleging it is a front for members of the local Walden family who oppose the expansion.  The Society has no assets beyond several hundred dollars in the bank and has for years failed to levy any annual subscriptions from its supposed fifty-strong membership.  Mr Paul Walden, chair of the Waiheke Island Local Board, said individual members preferred to remain anonymous.  Mr Walden personally has bankrolled the legal challenge to date.

Justice Toogood ordered the Society pay $12,500 into court as part payment for any future costs award in favour of the Golf Club.  He warned delays in payment could result in the litigation being struck out.

Hauraki Gulf Enhancement Society v. Auckland City – High Court (16.10.15)

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Maori: Paki v. Maori Land Court

Over 140 years on and legal rights over use of Lake Horowhenua are still in dispute. In fact, there is still a dispute over settling the rules to decide how to settle the dispute.  Attempts by the Maori Land Court to set up an accord between local authorities and Maori owners of the Lake were given the go-ahead by the High Court.

Rights to Lake Horowhenua have a tortured history.  Colin Paki of Muaupoko has been a high-profile defender of local Maori interests.  He sued in the High Court complaining that an accord brokered by the Maori Land Court between local Maori (represented on the Lake Horowhenua Trust), the Lake Horowhenua Domain Board, the Horowhenua District Council, the Horizons Regional Council and the Department of Conservation was invalid.  The accord is intended to create a decision-making body capable of reaching agreement over use of the lake.

The High Court was told a forerunner of the present Maori Land Court decided in 1873 that Muaupoko own Lake Horowhenua.  This right of ownership has never been lost, though there has been confusion over which members of Muaupoko hold ownership and in what proportions.  An 1898 Land Court ruling confirmed the lake could not be sold.  It is held in trust in perpetuity for Muaupoko with fishing rights held by Muaupoko owners.  No satisfactory governing structure has been put in place to govern use of the lake and its environs.  Government legislation in 1905 confirmed Maori ownership and their fishing rights, but declared the lake to be a public domain open to all for use in “aquatic sports and pleasures”.  This left undecided the relationship between traditional Maori owners, the new Domain Board and local territorial authorities.

Local Maori have been vocal in highlighting environmental damage in and around the lake.  Drainage work has lowered lake levels, destroying shellfish beds and creating a “dewatered” area around the margins.  Untreated sewage from a local sewage treatment plant is discharged into the lake after heavy rain.  They resent the manner in which a predominately pakeha local population has historically prevailed over the historical rights of Muaupoko in use of the lake.  The High Court described governance arrangements for the lake as dysfunctional.

Mr Paki challenged attempts by the Maori Land Court in 2012 to set up a new governance body.  He claims the Court failed to comply with rules already in place for governing the lake and further failed to ensure proper representation of Muaupoko members.  In the High Court, Justice Clifford said the 2012 accord is no more than a non-binding framework intended to advance discussions on an appropriate trust structure to govern use of the Lake, something which has never been properly addressed since the original 1873 court decision.   

Paki v. Maori Land Court – High Court (14.10.15)

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