There
was no tax evaded by claiming deductions for payments promised to a
non-existent captive insurance company when the half-baked scheme fell through
because of incompetence and carelessness the High Court ruled in dissallowing
Inland Revenue attempts to re-open tax returns outside the four year time
limit.
As a general rule, tax assessments cannot
be reopened after four years unless the tax return is fraudulent or wilfully
misleading. Inland Revenue alleged
Hawkes Bay contractor Brian Donald Edwards was party to fraud claiming
deductions of some $859,000 in 2004-2008 tax years for insurance costs relating
to two businesses: a farming partnership and a construction company. Faced with heavy cashflow commitments when paying
insurance premiums, Mr Edwards hit upon using a captive insurer. It was intended a Brisbane business owned by
Mr Edwards and his brothers, Craybay Construction Pty Ltd, was to become their
insurer with premium payments to Craybay in the form of promissory notes not
cash. The High Court was told Craybay
never at any stage complied with Australian law to become an insurer and never
declared its five years premium income of $859,000. At no time did it provide insurance services
to Mr Edwards’ businesses. Continued use
of a captive insurer was dropped in 2008 after Mr Edwards had an acrimonious split
with his brother Ross. Business time and
resources were then diverted to restructuring the businesses and paying out his
brother. During this process the
previous five years’ insurance premiums were reversed in filed tax accounts.
Inland Revenue became suspicious of the whole
deal when undertaking a three year tax audit starting in 2010. No record of the promissory notes could be
found, though they were eventually discovered stored in a warehouse, there was
no evidence of an insurance contract between Mr Edwards’ businesses and Craybay
the supposed captive insurer and no insurer appeared to exist. Craybay had not registered with the
appropriate authorites in Australia nor put up the required statutory insurance
bond. Claiming deductions for
non-existent insurance amounted to fraud, Inland Revenue said.
Justice Williams said Mr Edwards was
grossly careless rather than fraudulent.
He had taken specialist tax advice about setting up a captive insurer,
but had never properly implemented the scheme.
The improper deductions were later reversed without the prompting or
threat of a possible Inland Revenue tax audit.
Penalties of some $52,000 imposed by
Inland Revenue for tax evasion were overturned.
Edwards
v. Inland Revenue – High Court (5.08.16)
16.121