Loans made in a private capacity by Auckland lawyer Boon Gunn Hong could not be written off against his professional income the High Court ruled, disallowing write-offs totalling $172,280.
Inland Revenue audited Mr Hong’s tax affairs after he failed to file returns for the five year period 2006-2010. His tax return for the 2011 year, at issue before the High Court, was subsequently also filed late in conjunction with the earlier required returns. The court was told Mr Hong wrote off two loans made to clients of his legal practice against taxable income for the 2011 year: $50,000 advanced to a Mr Chan and a further $122,280 being part of a $300,000 loan described in court as the “Tololi’ loan. Mr Hong claimed these were expenses for tax purposes; bad debt write-offs.
Justice Jagose ruled Mr Hong was not in the business of making loans. The bad debts could not be written off against his income as a lawyer. Arranging infrequent ad hoc loans did not amount to a finance business. He did not take security for loans or derive any significant income from lending. Loans were made out of a charitable fund Mr Hong established: Benevolence on the Conscience Loan Fund. The two loans in question appeared to lack a philanthropic purpose. One was repayable on demand with interest payable at ten per cent and was used to cover cost overruns in the client’s restaurant renovation; the other was described as repayable on demand with ‘fair interest’ due on repayment.
Also at issue before the High Court was a question as to when the two debts had been supposedly written off. Inland Revenue said an audit of metadata from Mr Hong’s spreadsheet showed the claimed write off took place after the end of the 2011 tax year. Inland Revenue is justified in charging Mr Hong with Tax Administration Act shortfall penalties for ‘not taking reasonable care’, Justice Jagose ruled. Mr Hong fell well short of the standard of care expected of taxpayers generally, he said.
Hong v. Inland Revenue – High Court (27.09.18)
18.191