Inland
Revenue failed to recover tax on $2.6 million for the 2005 tax year credited to
company director Leslie Fugle’s current account after he paid $90,000 to get his
roading company out of receivership.
The Court of Appeal was
told Mr Fugle drew down $2.2 million dollars over three tax years 2005-2007
from a company he controlled while declaring no taxable income and paying no
tax. Inland Revenue claimed
unsuccessfully the tax accrual rules meant $2.6 million was taxable income in
2005, the year this amount was credited to his current account. The accrual rules have since been changed.
The court was told Mr
Fugle was a director of Chas Pilcher (1986) Ltd when it went into receivership
in 1989 owing Bank of New Zealand $2.6 million.
He had guaranteed the BNZ debt. Pilcher
was a roading company overextended with a contract to dredge the Clutha river
downstream from Clyde dam. Mr Fulger did
a deal. On payment of $90,000, BNZ
assigned its $2.6 million debt to Mr Fulger and released his company from
receivership. It was nearly ten years
later before Pilcher, now renamed as Bathos Properties Ltd, began trading
again. With an April 2004 accounting
entry, the $2.6 million BNZ debt, now owned by Mr Fugle, was credited to his
company current account. At law, Bathos
Properties was committed to making payment to Mr Fugle on demand. Inland Revenue said this was taxable income
in the 2005 year. Taxable income arises
under tax accrual rules when a financial arrangement “matures”. Buying the bank debt was a financial
arrangement. Crediting Mr Fugle’s
current account was not a “maturity”, the Court of Appeal ruled. He did not have access to any cash
immediately following the credit. Bathos
Properties had no means to pay at that time.
Inland
Revenue v. Fugle – Court of Appeal (1.06.17)
17.062