Taxpayers fail to overturn convictions for tax evasion

The Court of Appeal has dismissed appeals against conviction by the taxpayers, Honk Barges Ltd, Honk Marine Ltd, Mr Tauber and Mr Webb, and dismissed an appeal against sentence by Mr Webb. The Court of Appeal sided with the High Court Judge’s decision (reported as R v Honk Barges Ltd [2018] 28 NZTC ¶23-065, [2018] NZHC 1890). The Court of Appeal said that the transactions were pre-planned, undertaken in anticipation of the tax advantages which would flow, and with the intention that moneys lent would be repaid in short order. The Court of Appeal also said that sham does not need to be proved whenever a person is charged with providing false information to Inland Revenue with intention of evading tax but would have been prepared to find the transactions were shams.

The background

The appellants were charged under ss 143B(1)(c) and (f) and 148(1) of the Tax Administration Act 1994. The Crown alleged that Honk Barges Ltd (HBL) and Honk Marine Ltd (HML) were guilty as principal offenders and the individual appellants, Mr Tauber and Mr Webb and B were guilty either as principal offenders or as parties under s 148 of the Tax Administration Act. Charges one to four arose from deductions that HML claimed in each of its income tax returns in year-end 31 March 2007 to 2010 inclusive. The deductions were for interest on three loans from Asian Syndicate Finance Ltd (ASFL). These loans were of $3.625m in July 2006, $3m in September 2007, and $2.65m in September 2008.

Charge 1 concerned the interest deducted on the loan of $3.635m, charge 2 interest on that loan and the loan of $3m, and charges 3 and 4 interest on all loans. The Crown alleged that HML did not incur interest on the loans, or at least not for any extended period because the loans were repaid. Hence, the Crown’s case was that HML’s returns were false.

Charges five to nine concerned deductions for depreciation that HBL claimed in each of its income tax returns in year-end 31 March 2007 to 2011 for depreciation of three barges , Soundcem1, 2, and 3 (S1, S2 and S3, together the “barges”). In year-end 31 March 2007, HBL claimed depreciation on S1 and S2, which were acquired in the course of the same transaction during that tax year. S1 was acquired in the year ended 31 March 2008 and HBL claimed depreciation for all three barges in that year and subsequently. Another asset referred to as a “jack-up” (JU) barge was purchased in 2008.

The third ASFL loan was linked to the acquisition of the JU barge, but no issue relating to depreciation arose as it was purchased by an Australian subsidiary of HML. Although HBL was entitled to depreciate the barges, the issue was quantum. The Crown alleged that the deductions HBL claimed were false because they were calculated on more than cost. To give an example, HBL claimed depreciation on S1 and S2 on the basis of a cost to it of $2m per barge. The Crown’s case was that the cost was AU$220,000 per barge.

The High Court held that the claims to interest incurred and depreciation in all income tax returns were false. The Judge said that while she did not find it necessary to determine whether any particular agreements were shams, there were compelling reasons to “argue” that the agreements, particularly in relation to the transactions regarding S3 and JU, were shams.

On 23 July 2018, the High Court found HML guilty of four charges of tax evasion, HBL guilty of five charges of tax evasion, Mr Tauber guilty of each of the nine charges — eight as a principal offender along with either HML or HBL, and one as a party to offending by HBL, Mr Webb not guilty of six of the charges, but guilty of three, all as a party — two together with HML, Mr Tauber and a co-defendant, Mr X, and one together with HBL, Mr Tauber and Mr X, and Mr X not guilty of three of the charges, but guilty as a party, of one charge together with HML and Mr Tauber, of two charges together with HML, Mr Tauber and Mr Webb, of another two charges together with HBL and Mr Tauber, and of one charge together with HBL, Mr Tauber and Mr Webb.

On 11 October 2018, HML was fined $100,000, HBL $125,000, Mr Tauber was sentenced to three years and three months’ imprisonment, Mr Webb to nine months’ home detention and 400 hours’ community work and Mr X to 12 months’ home detention and 400 hours’ community work. HML, HBL and Mr Tauber appealed their convictions to the Court of Appeal. Mr Webb appealed both his convictions and the sentence imposed on him. There was no appeal by Mr X.

The Court of Appeal’s decision

The Court of Appeal dismissed the appeals against conviction by HBL, HML, Mr Tauber and Mr Webb. The appeal against sentence by Mr Webb was also dismissed. The Court found as follows:‍

Was it necessary for the Crown to prove sham beyond reasonable doubt?

• There was no exceptional reason in the present case requiring the Crown to prove that the documents evidencing the various transactions were shams.
• The Crown did not commit itself to proving beyond reasonable doubt that the transactions were shams. While the Crown in its closing submissions did submit that the tax returns were false, inter alia, because the transactions were shams, that was only one of the arguments presented.
• The authorities relied on by HML, HBL and Mr Tauber did not support the other propositions advanced on their behalf as clearly as was suggested.
• The fact that arrangements are made with the purpose or effect of obtaining a tax advantage did not of itself mean that the arrangements were a sham. Rather, a sham, in the taxation context, is an arrangement designed to lead the taxation authorities to view the documentation as representing what the parties have agreed when it does not in fact record their true agreement. The purpose is to obtain a more favourable taxation outcome than that which would have eventuated if documents reflecting the true nature of the parties’ transaction had been submitted to the revenue authorities.
• The position taken by the judge was not in error. Whether or not the transactions were shams was not an element of the offences charged but rather was a circumstance going to proof of the falsities alleged.
• Even if this view was wrong, the Court would have been prepared to find that the transactions here in issue were shams. The Judge found that the transactions comprised a series of interrelated agreements. Read together, the finding was open to the Judge that they were shams. Their purpose was to create tax deductions, first by hiding the true cost of the barges to HML, and secondly by giving the impression that interest was owing on loans, said to have been incurred to finance the cost of the barges, which were not in fact loans at all, but rather circular transactions which ended up with the monies lent being returned to the lender. Although a sham must reflect the common intention of all of the parties to the impugned transaction, it was not necessary to call Mr Lau or Mr Y to find out what their intention was.
• If the actions and knowledge of Mr X, or of Messrs X, Tauber and Lau, were attributed to Mr Y and ASFL, then a finding of sham would clearly have been open on the Judge’s factual findings. She would have had sufficient information on which to make findings as to the common intention of all parties to the transaction. This would have been an alternative route to the convictions. It was not, however, a route the Judge was required to take.

Was it necessary for the Crown to prove that Mr Lau, LCL and PFDC were nominees?

• Knowledge of the nominee status of the intermediary, and of the potential tax consequences, by HML, HBL and Mr Tauber was not required. The Crown was only required to prove knowledge of the falsities and of the intention to evade tax. It was not required to prove knowledge by the defendants of the tax consequences of Mr Lau, LCL and PFDC being nominees.
• Section YB 21 of the Income Tax Act 2007 was an alternative route to the convictions that was open to the Judge which she did not, and was not required, to take, given her view of the facts.

High Court’s analysis of the evidence

• The Judge was entitled to draw the conclusions she drew, on the evidence which had been adduced by the Crown and which she accepted. Moreover, she was clearly correct in the inferences she drew. There was nothing from HML, HBL or Mr Tauber from which any alternative inference could be drawn. The Judge was entitled to conclude that the charges relating to S1 and S2 were proved beyond reasonable doubt.
• The appellants were unable to point to any clear evidence supporting their contention that they had no alternative but to deal with ASFL and buy S3 on Mr Y’s terms. Indeed, the evidence was to the contrary. There was nothing to support the submission and there was no proper basis on which the Judge could have inferred. It was simply not a reasonable possibility.
• The argument that the Judge made a fundamental error when she assumed that, because the wiring diagrams which she referred to in her judgment showed ASFL as having been paid by another entity associated with Mr Y, that meant that the Honk entity had in turn paid ASFL, and thereby discharged the HML liability could not succeed on the facts of the case.
• The transactions were pre-planned, undertaken in anticipation of the tax advantages which would flow, and with the intention that moneys lent would be repaid in short order. The backdating of documents, the use of legally non-existent entities, the belated giving of instructions to intermediaries, and the circular money trails, all pointed to preconceived dishonesty. It was not a situation where the nature of the payments made fell to be determined only by what the recipient did with them.
• The Judge did not err in her analysis of the JU acquisition. The Judge accepted that some of the evidence pointed in favour of the defendants but despite that, she was satisfied that the payment made by LCL to ASFL of $2.66m, calculated as it was to include interest, must have been intended to repay ASFL’s loan to HML. The Judge did not rely solely on the wiring diagrams and the ultimate inferences she drew as to JU were not in error.
• Section 33 of the Evidence Act 2006 provided that in a criminal proceeding, no person other than the defendant, or the defendant’s counsel or the Judge, may comment on the fact that the defendant did not give evidence at his or her trial. It would have been open for the Judge to record that Mr Tauber did not give evidence and that no representative from either of the defendant companies gave evidence.
• The fact that the Judge did not adopt cross-propensity reasoning did not undermine the consideration she gave to each individual charge. The common modus operandi adopted by HML, HBL, Mr Tauber, Mr Webb and Mr X in relation to the various transactions did, however, provide support for the verdicts she reached in relation to each charge.

Were HAL and HBL associated?
‍It did not matter whether or not HAL and HBL were associated within the meaning set out in the Income Tax Acts 2004 and 2007 because HAL was a nominee which could be looked through for tax purposes. The Judge was entitled to look at the reality of the transaction but she was not required to go on and find, as an element of the offence alleged in, inter alia, charge 5, that the transaction was a sham.

‍Mr Webb’s appeal
‍The sentence imposed on Mr Webb was not manifestly excessive given his culpability in the dishonesty which occurred. If anything, the sentence was lenient.

‍Honk Barges Ltd v R CA [2019] NZCA 157, 15 May 2019.