Honk Land Trustees, part of Auckland property developers Andrew Tauber and Paul Webb's Honk group, has lost its bid to claim $1.1 million of management fees were legitimate and not simply a way to avoid paying tax.
The Court of Appeal last week dismissed Honk's application to overturn a ruling that the payment was contrived to avoid paying tax in 2005, a recently published judgment shows. Honk tried to argue that the $1.1 million of fees charged to Honk Land Ltd, a related party, were valid, given the size of the group's property portfolio, and part of a broader chain of fees across the group.
Honk Land Trustees was the trustee for the Honk Land Trust, which sold two of its three commercial buildings in 2005, leading to a fall in gross income to $1.8 million from $2.8 million, the judgment said. However, that same year it paid $1.1 million in management fees to a related party, compared to $378,000 in 2004.
The expense took place in the first year the trust reported a profit and had the effect of eliminating the tax payable. At the same time, it let another Honk entity offset the amount received against its losses, meaning no tax was paid on the management fee income and there were no losses to carry forward on the receiving company which was itself about to be sold. Without the payment, Honk Land Trustees would have been liable for $368,000.
Justices Tony Randerson, Mark Cooper and Helen Winkelmann rejected the appeal just eight days after the case was heard, saying the problem for Honk was that Tauber, in his evidence in the earlier High Court hearing, didn't provide any convincing reason as to what management services were provided or how the sum charged was calculated
"We agree with the judgments below that the proper inference to draw is that the management fees for 2005 were fixed by reference to HLT's (Honk Land Trustee's) taxable income and for the purpose of eliminating its liability for tax in that year," the judges said. "There was no satisfactory evidence to support the claim that management services were provided by HLL (Honk Land Ltd) to HLT or in what amount."
They accepted the IRD's submission that the tax avoidance was "more than merely incidental" and rejected Honk's secondary appeal that a 50 percent shortfall penalty wasn't appropriate.
The bench ordered Honk to pay costs and disbursements.
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