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Krukziener in the High Court

The old moniker used to be that the taxpayer is under no obligation to arrange his affairs “as to enable the Inland Revenue to put the largest possible shovel into his stores.” (Ayrshire Pullman Motor Services v. Inland Revenue Commissioners (1929) 14 T.C. 754)   Those of us who practice in this area did not take this to mean that any arrangement designed to avoid paying tax was OK, simply that a taxpayer wasn’t under a positive obligation to expose his business affairs to taxation.  In legislative terms; we understood there was no “tax advantage” to an arrangement simply because the taxpayer could have (with some effort) arranged his affairs so as to pay more tax.   This seemed to us an application of clear law and common sense.  This High Court decision calls even that principle into question.

For the entire period Mr Krukziener was allegedly involved in his tax avoidance arrangement (or arrangements) his businesses spent more money than they made.  In legal terms he applied the assessable income from one development to meet the deductible expenses of the next.  In the end – his expenses exceeded his income.  Like a gambler at the roulette wheel, his property deals kept getting bigger and bigger until eventually he  lost everything.  The offensive bit, apparently, is that while he wasn’t making any income from his business, he continued to borrow money against the net assets of his business to meet his living expenses.

Krukziener could have paid himself a salary but a salary is, of course, an anathema to those involved in real estate development.  No-one working a real estate deal gets paid anything for their efforts until the development is sold.  It is not unusual for land-rich taxpayers to borrow money against their property as a way of getting their hands on some tax free cash.

The Commissioner, on the other hand, gets paid every fortnight and has his tax deducted at source.  Based on his experience as a career public servant, he took a critical look at Mr Krukziener’s “lavish lifestyle”  and thought he ought to make some changes.

Why he picked on Krukziener rather than any other un-salaried property developer is something known only to the Commissioner and his advisers.  However the High Court (and the Court of Appeal in Penny & Hooper) seem to feel that these people have the skills, resources and wisdom to separate the sheep from the goats on these sort of questions, so I guess we shouldn’t be too worried about this aspect of the case.

What is worrying, is that the Commissioner’s solution: paying a salary from a business that had no income, would have been wholly unorthodox and horribly tax inefficient.  Requiring the taxpayer to do so to puts him under an obligation to arrange his affairs as to enable the Inland Revenue to put the largest possible shovel into his stores.

Harley famously said, after argument before the Court of Appeal case in Wattie, that, if he lost, he would give up the law and become a chicken farmer.  In the end Harley won.  For my part, if Krukziener expresses the law in New Zealand, I might be taking a long hard look at those chickens.

One Response

Gerard Gunn on September 29, 2010 at 2:14 pm

Unfortuntealy in this already tough econimic climate, why take any risk, if you have pay tax even though you may not have made anything yet What’s next?

You are not working, and therefore not paying tax so that is tax avoidance?

PAYE eaners should look at as well. if they take unpaid leave to do a job around the house, that avoids PAYE on their wages and avoids GST and income tax on the person they would have hired to do the job. (or even do the job on their paid leave)

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