Tony Gapes’ Redwood Group unsuccessfully argued it was entitled to an extra $1.6 million from Queenstown’s Five Mile project. In dispute was terms of a 2019 mediation agreement with Mr Gapes using legal gymnastics to claim Inland Revenue confirmation of when sales might be tax free to justify an extra slice of the pie even when sales were liable to tax.
Auckland property developers Craig Greenwood and Tony Gapes, embroiled in multiple court cases over their joint venture at Frankton near Queenstown, thrashed out their differences at a mediation in 2019 finishing at 1.00 am shortly before having to appear in court. All appeared done and dusted; an agreement to settle their differences and divvy up profits from their Five Mile project. Not so. They later disagreed over what was agreed.
The High Court was told part of the mediation centred on whether tax would be payable on profits from sale of Five Mile properties; a mixture of retail, commercial and light industrial. While there were plans to hold some Five Mile properties long term, it was recognised some sales were necessary to pay down bank debt and further sales to buy out Mr Gapes 24.9 per cent interest held through Redwood Group Ltd. Redwood is a property developer. In the normal course of events, its share of profits on sale would be taxable. Tax law catches companies associated with any developer as also being liable to tax; they are ‘tainted.’ Mr Greenwood considered his company was ‘tainted,’ triggering a tax liability for both investors on all immediate Five Mile sales. Profits on sale of properties held long term can be held tax free; application of the so-called 10-year rule.
Evidence was given that Greenwood and Gapes at their 2019 mediation conference could not agree on whether a potential tax liability on sales should be taken into account when valuing Redwood Group’s share of profits. A compromise was reached: Redwood was entitled to an extra $1.638 million if in the next two years it obtained from Inland Revenue a binding ruling that ‘all of the properties in the Five Mile project are held on capital account.’
Redwood subsequently asked Mr Greenwood to sign off an application to Inland Revenue for a binding ruling that if the properties were held for ten years no tax was payable. He refused to sign. This was not consistent with the mediation agreement, he said.
Justice Katz agreed. Both sides were aware at the time of mediation that holding properties for ten years would reduce tax otherwise payable. Inland Revenue confirmation of the ten year rule could not justify an extra payout of $1.6 million in the context of property sales to be made immediately after mediation, Justice Katz ruled.
Mr Greenwood had doubted whether Five Mile could avoid paying tax on profits for sales within ten years. The agreed compromise was to give Mr Gapes an opportunity to get an Inland Revenue ruling stating otherwise.
Clearmont (Queenstown) Ltd v. Redwood Group Ltd – High Court (4.07.22)
22.117