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$100 million tax scandal snares 'clever' investors

Friday 23rd February 2001

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HIGHLY TECHNICAL SCHEME: This small company in Wellington's Newtown was at the centre of the 10-year investment scheme which targeted sophisticated investors.

SPECIAL REPORT

By Nicholas Bryant

In the biggest tax clawback since the winebox, Inland Revenue is targeting $100 million from investors, who bought into a complex share scheme, and has referred some aspects of the deal to the Serious Fraud Office.

The 110 investors were directors of 74 companies that bought shares in small Wellington technology company Digi-Tech Communications.

The investor list reads like a Who's Who and includes a QC, an international artist, a former New Zealand cricket player and a PR guru.

In a convoluted series of transactions that slotted investors into loss attributing qualifying companies (LAQCs), money changed hands between Auckland trust accounts, a Hong Kong accounting firm, a Dutch insurer, a British Virgin Islands finance company and a Geneva-based bank.

The IRD stepped in when investors tried to claim upfront tax losses for the full amount of their investment, despite it not having been fully paid, in the scheme's first year. "It is considered that the transactions entered into by the various LAQCs are tax avoidance arrangements," the IRD claim says.

At a company tax rate of 33c in the dollar, $74.2 million in tax losses is understood to have been claimed but it is likely interest and some penalties will be added.

The IRD referred information surrounding the purchase of an offshore insurance policy to the SFO to investigate.

Two professional firms involved in promoting the deal, merchant bank Milloy Reid Wong and accountants Gosling Chapman, are engaged in a bitter dispute over who is responsible for it.

Act New Zealand finance spokesman Rodney Hide said convoluted tax schemes flourished in a high-tax economy.

"The IRD's own research, by Professor David Giles, shows that the higher the tax take, the more evasion and avoidance you get, and that the best thing you can do to counter it is to reduce government spending and taxes."

The Digi-Tech dossier

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