Tax
deductions and losses totalling nearly $22 million claimed for fifteen tax
years by a John George Russell controlled company were disallowed in the High
Court and a 100 per cent penalty confirmed for taking an abusive tax position. Justice Downs described as deliberate and
cynical steps taken by Mr Russell to bring Great North Motor Company Ltd out of
liquidation only after waiting four years in an attempt to bar Inland Revenue
from reopening its tax file.
Mr Russell has a thirty year history of
grappling with Inland Revenue over tax avoidance. His tax niche lies in attempting to exploit
tax loss companies and tax losses carried forward. He was bankrupted in 2015 after losing a
dispute over his own tax returns.
One year later he was back in court
defending losses claimed by Great North Motor Company Ltd, a company he
controlled as receiver: $19.9 million for interest deductions and $1.7 million
for tax losses brought forward from 1995.
The High Court was told Gt North Motor was
struck of the register of companies in 1996, reinstated the following year and
then put into liquidation in June 1998.
Mr Russell was in charge of the company’s tax accounts throughout this
period. Nothing happened until May 2005
when Mr Russell appointed himself receiver of Gt North Motor's assets using a
debenture issued to Glen Eden Holdings, another company he controlled. Gt North Motor was struck off the register of
companies three days later. Undeterred, Mr
Russell proceeded to file Gt North Motor tax returns for ten years covering
1996-2005. Claimed losses were disputed
by Inland Revenue. Mr Russell was
playing a long game. He waited until
2010 before applying to reinstate Gt North Motor to the company register. Then in a 2011 tax return claimed losses for
Gt North Motor of $22 million for the period 1996-2011 arguing this could not
be challenged; Inland Revenue was time barred from questioning tax losses given
the four years elapsing since Gt North Motor had been struck off.
Justice Downs ruled the time bar
commences only once a company is restored to the register. Prior to that, there is no taxpayer Inland
Revenue can deal with. Removal from the
register of companies means a company as a legal entity no longer exists. Reinstatement brings a company back to life.
Justice Downs dissallowed interest
deductions of $19.9 million ruling the manner in which deductions arose
amounted to tax avoidance. What was
initially a debt of $380,200 was by 2012 a debt of supposedly $20.7
million. The loan contract lacked
arms-length commerciality, His Honour said.
Entities controlled by Mr Russell were both creditor and debtor. Interest was payable at any rate set by the
creditor. Interest was not payable until
demanded. The default interest rate was
28 per cent. Gt North Motor had no means
to service interest payments. The
company has not traded since 1993. Gt
North Motor has never paid a cent of interest, nor will it, and it is most
unlikely it was intended to, Justice Downs said.
Great
North Motor Company v. Inland Revenue – High Court (11.11.16)
16.157