Three
Wellington businessmen were convicted of tax evasion after Inland Revenue
uncovered a tax scam using fictitious invoices and false tax deductions to
understate taxable profit. Some of the
questionable behaviour stretched back over two decades. Convicted were Paul William O’Connor (who
operated a media clipping business called Media Search), Brent John Gilchrist (a
tax adviser) and Scott Crawford Anderson (convicted as a party to the
production of false invoices).
The High Court in
Wellington was told Inland Revenue began investigating Dr O’Connor’s tax
position after he was found to be one of about 400 investors in the Actonz tax
minimisation scheme, widely touted in the late 1990s to high net worth
individuals as a means of reducing their tax.
This scheme promised to generate substantial tax losses with accelerated
deductions claimed for computer software.
It was later nullified by the High Court as tax avoidance.
Inland Revenue said
its investigations found Dr O’Connor was party to some highly aggressive tax
arrangements and downright fraudulent transactions intended to minimise the
profits from his very successful businesses.
His primary business was a media clipping service which contracted to
provide customers with media stories on a particular business, industry or
product. In 1996, the business had gross
annual revenue of some one million dollars and earnings of $311,000 before
interest, depreciation, amortisation and an allowance for notional shareholder
salaries.
Inland Revenue alleged
Dr O’Connor compounded his evasion by delaying tax return filing so to avoid
alerting tax authorities and reorganised his affairs so that when tax was assessed
the taxpaying entity charged had no assets.
Dr O’Connor was
convicted of multiple charges: of knowingly not providing information to Inland
Revenue with the intent to evade the assessment or payment of tax; of tax
evasion in relation to fictitious invoices; and tax evasion in relation to
overvalued intellectual property.
In 1996, Dr O’Connor and
a fellow director signed a restraint of trade agreeing not to compete with
their own business for a period of five years in return for a one-off payment
of five million dollars. This amount was
then credited to their shareholder current accounts. Justice Simon France said this transaction
was not commercially credible. It was an
attempt to evade tax by extracting funds from the business as capital rather
than taxable income.
Evidence was given
that Dr O’Connor had invested personally in the Actonz tax minimisation scheme
at a cost of $300,000 when writing off a personal loan of that amount owed to
him by Mr Anderson who was promoting the Actonz scheme. But for tax purposes, the Actonz “investment”
was treated as a business asset rather than a personal asset. Justice Simon France ruled that Dr O’Connor
wanted quit of the investment when it became apparent the courts were going to
rule against the Actonz scheme. He
wanted the tax effect of the failed scheme to fall on his business, not his
personal financial position. The court’s
view was reinforced by business restructuring which left the original business insolvent,
unable to meet a revised tax assessment following the failure of the Actonz
scheme.
This business
reorganisation saw business assets sold into a new entity: a trading trust
called Media Search Trust. The Trust
then sold its intellectual property to a freshly formed company owned by Dr O’Connor
for a nominal sum which then leased back to the Trust a seven year right to use
this intellectual property at a cost of one million dollars. The million dollar cost was amortised as
intangible property in the Trust’s tax accounts.
Justice Simon France
said this price was grossly inflated.
Independent evidence valued the intellectual property at no more than
$250,000 to $300,000. Claiming an
amortisation expense for a grossly overvalued asset amounted to tax evasion.
Claiming tax
deductions for fictitious expenses was also evasion. Mr Anderson was also convicted as a party to
this offence. The High Court ruled that
he submitted invoices to Dr O’Connor’s businesses for work never done knowing
that a tax deduction was to be claimed.
Payment was made on some of these invoices, but Justice Simon France
concluded that this money had completed a “round trip” via Vanuatu.
Evidence was given regarding
one set of invoices that Mr Anderson billed the Trust in 2002-2004 for software
development work and merger advice totalling $874,000. It was argued these were legitimate invoices
for work actually done, as evidenced by the fact payment was made. Justice Simon France considered there was an
air of commercial unreality about the transactions – a businessperson is unlikely
to pay $450,000 for advice around the sale of business assets when those assets
are being sold for just $1.5 million. He
said it was most likely the payments made were returned to Dr O’Connor via a Vanuatu
bank account opened in his name, less a fee paid to Mr Anderson.
Such “round trip”
payments were similar to a series of fraudulent transactions for which both Mr
Gilchrist and Mr Anderson were convicted in the High Court.
An accountant given
name suppression described how the fraud worked. He had previously been convicted and
sentenced after pleading guilty to charges relating to the fraud. False invoices for consultancy services or
accounting support services were issued by interests associated with Mr
Anderson. The false invoices were used
to support GST claims and expense deductions for tax. Payment was made on the invoices but then
refunded less an 8.5% fee. The refund
was made with payment from a Vanuatu bank account in Mr Anderson’s name to a
newly opened Vanuatu bank account in the accountant’s name: he then repatriated
the funds to New Zealand. The court was
told this meant the accountant received the benefit of tax deductions and got
back all but 8.5% of the money paid; the payment received by Mr Anderson meant
he effectively repatriated funds held in his name in Vanuatu; and Mr Gilchrist
and Mr Anderson shared the 8.5% fee.
Mr Gilchrist
strenuously denied he was party to the fraud.
He said he had introduced the accountant to Mr Anderson but had only
offered general advice on setting up an off-shore consultancy for outsourcing
routine work. After that, he said, he
had little to do with what went on. He
said it was not credible for a tax adviser to become involved in such an
unsophisticated tax fraud paying such paltry sums: his supposed share of the
8.5% fee would be $3500 on any false invoices totalling $100,000.
Justice Simon France
said Mr Gilchrist’s level of involvement was wholly at odds with what he
claimed. He was copied in on email
traffic between the accountant and Mr Anderson, responded to questions on the
amounts and wording of invoices and helped facilitate transfers between the
Vanuatu bank accounts. The judge
dismissed Mr Gilchrist’s claim that he was duped by Mr Anderson and unaware of
the underlying invoice fraud. The judge
said there was irrefutable evidence that Mr Gilchrist was a party to false
paper trails laid to mislead Inland Revenue, had been willing to create false
invoices to mislead a bank and had a propensity to destroy email records to
cover his tracks.
Justice Simon France
ruled that both Mr Anderson and Mr Gilchrist were party to, and jointly the
architect of, the fictitious invoice writing scheme.
R.
v. O’Connor, Gilchrist & Anderson – High Court, Wellington (26.07.13)
R.
v. Gilchrist & Anderson – High Court, Wellington (26.07.13)
13.019