IRD offer too late for some as Digi-Tech culls investors

By Deborah Hill Cone

Friday 2nd April 2004

Inland Revenue has backed down in its hardline stance over Digi-Tech investors and is offering them a softer deal to get their disputes settled.

After bankrupting one Digi-Tech victim last month, the IRD now says it will play ball opening the way to do a deal with investors who lawyers say have been "financially devastated" by their involvement in the controversial scheme.

Investors have been at loggerheads with the taxman for more than four years over how much they owe in punishing shortfall penalties.

The Digi-Tech scheme was a complex structure in which investors signed up for sale and purchase agreements to buy shares in Wellington firm Digi-Tech with the bulk of the price payable 10 years in the future, as well as taking out an insurance policy guaranteeing the shares' value would treble in that time and receiving a loan to pay for the insurance premium.

The four men who concocted the product, and another mirror-image investment called NZIL go to trial in the High Court later this year on fraud and money laundering charges.

Most of the investors have agreed to pay the disallowed deductions but have been locked in negotiations with the IRD unable to budge the taxman over the shortfall penalties of 100% and whether they are collectible.

Until now, the IRD had been adamant the investors had taken an "abusive" position and it would not negotiate on the amount owing, which had been set out in lengthy notices of proposed adjustment (Nopa).

The commissioner bankrupted at least one investor who could not pay the amount estimated in his Nopa, and others have chosen to bankrupt themselves.

The IRD change of heart comes too late for them.

One investor, Paul Marra, whose Nopa said he owed $360,000 as a result of Digi-Tech, fought an order from the commissioner trying to adjudicate him bankrupt but lost.

The court said it would not "enhance commercial morality" to let Mr Marra walk away unscathed from his situation.

But weeks later the IRD has sent out letters on a "without prejudice" basis, attached to a deed of settlement which offers investors the chance to settle if they pay the tax owing plus shortfall penalties of between zero and 20% by the end of this month, or by instalment.

A group of about 130 investors, represented by tax barrister Geoff Clews, were preparing to go to court to argue over the shortfall penalties when the IRD changed its position.

IRD director of litigation Mike Lennard said he could not comment on the Digi-Tech case in particular but in general when litigating large tax avoidance schemes the commissioner weighed up the risks.

"Until all the litigation is finished and the money is in the bank ... there must be regarded as some level of risk," Lennard said.

The Court of Appeal had made it clear the department should settle tax litigation where there was a genuine dispute, Lennard said.

Settlement was also consistent with the department's obligation to maximise and encourage voluntary compliance.

"When dealing with tax avoidance schemes voluntary compliance gets to be a relative concept," Lennard said.

Mr Lennard, the head of litigation at IRD for the past eight years, said last month he was leaving the department in June to set up as a barrister.

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