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J G Russell 30 years on – is the IRD ever going to give up?

…and so the battle continues between a tax “genius” and the IRD. Since the 1980s, Mr J G Russell (Mr Russell) has been involved in legal disputes with the IRD over various schemes designed to reduce liability for income tax on companies he consulted to. The IRD claims that he owes millions of dollars in back taxes, which has since grown, with penalties and interest, to a whopping $138m. The IRD is of the view that Russell has millions of dollars at his disposal as a result of his tax schemes and is trying to get its hands on this money on the basis that tax should have been paid on Russell’s profit from the schemes. At the centre of the current court dispute is whether Mr Russell actually made any money from the tax avoidance schemes he set up.

For those readers who are unfamiliar with the case, in the late 1980’s, Russell (former Securitibank boss) would loan money to companies that were on the brink of collapsing to try and save them. Russell would take over the businesses and purchase the assets of profitable companies in the hope of building them back up. The vendors had the option to repurchase the assets at a later date if they wished to. As a consequence, the companies could file tax losses – Russell simply gained control of loss companies and brought loss companies into an agency agreement. There were over 3,500 taxpayers affected by Russell’s schemes and he charged a consultancy fee (generally 5% of the trading company’s surplus) in respect of the consulting services provided by him.

The Privy Council found the scheme breached anti-avoidance provisions of the Income Tax Act due to the use of the loss companies and the circuitous money route. In the Courts, the onus is on taxpayers to prove that such schemes are not avoidance. However, after lengthy disputes, most tax practitioners (including myself) now agree the scheme itself is tax avoidance. Even Mr Russell has come around and admits that these were tax avoidance schemes.

The IRD claim that Russell benefited financially from the schemes and as a result, he should pay tax on his profits. Russell claims that he did not receive a single cent from the entities he set up in the above scheme and therefore does not owe the IRD anything.

Living a very modest lifestyle, today Russell’s net worth (three houses held in trust) totals only $1.9m. Apart from this, he claims to have no other personal assets.

Its unimaginable how much money and IRD resources have gone into trying to incarcerate Russell, let alone the fees paid to tax lawyers in Russell’s defence. But seriously, is there really any benefit to be gained in continuing this battle and yet spending more and more taxpayer’s money? The IRD know they’re not going to get any tax money from Russell now but just want to prove their point that you should not mess with the IRD. In my view this was proven in the structured finance cases. Enough is enough. Let the J G Russell legend come to an end.

…………………… One does have to wonder though, what on earth happened to all that money???

4 Responses

Adishwar on December 20, 2010 at 9:07 pm

If for many years MR Russell’s scheme has worked than I am sure, he has a scheme or a way the money would not be discovered any time soon…

Daniel Hunt on April 21, 2011 at 4:33 pm

For those readers who are interested – the Court of Appeal has just ordered JG Russell to pay a $138 million tax bill. here.

I wounder what Mr Russell will do… start saving I guess…

Daniel Hunt on May 3, 2011 at 9:13 am

And so the battle continues… JG Russell is now appealing to the Supreme Court.

This is a classic example of how Inland Revenue Disputes can spiral out of control if they are not managed carefully.

Surely the battle cannot go on for much longer… or will it?

Daniel on August 27, 2011 at 6:13 pm

The Supreme Court has been busy – two Avoidance Judgments in a week (Penny & Hooper & JG Russell)

These decisions suggest that the New Zealand courts are currently applying a stricter approach to determining whether arrangements are tax avoidance and that this remains a high priority for Inland Revenue.

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