Digi-Tech mastermind John Reid still a headache for IRD

Having sent the Serious Fraud Office packing in 1994 – its flagship $16 million investment fraud prosecution of the Digi Tech scheme unsuccessful – its mastermind, John Reid, has turned the tables on the Inland Revenue.

Having sent the Serious Fraud Office packing in 1994 – its flagship $16 million investment fraud prosecution of the Digi-Tech scheme unsuccessful – its mastermind, John Reid, has turned the tables on the Inland Revenue.

Stretching the long-running saga towards a decade, Mr Reid is alleging criminal conduct during the IRD’s investigation of his convoluted 1990s tax benefit scheme.

That saw him back at Auckland High Court this week, pulling the case apart once again, as he prepares to sue the IRD for misfeasance in its failed fraud case against him.

Designed to give investors about $300,000 tax savings over 10 years – Digi-Tech has previously been described in court as a charade, a sham, deceit and a fraud on the IRD and investors.

Although Mr Reid has earlier admitted aspects of fiction and sham, the former merchant banker has strenuously denied fraud.

He and his associates – Peter Russel, Peter Connolly and John Currie – were tried and acquitted of SFO charges relating to the scheme in 2004 and eventually won $1 million costs against them.

Mr Reid would not reveal how much he now wants from the IRD as he prepares for the trial.

He told NBR ONLINE he first wanted a declaration the IRD is liable for losses and damages, followed by an inquiry into how much that could amount to.

The trial was meant to have started in March, but he was not ready, having unexpectedly abandoned his bid to claw back $60 million from investors in N-Tech, the vendor of shares in Digi-Tech, on the 19th day of trial last October.

Represented himself

Mr Reid represented himself at Auckland High Court on Tuesday, defending allegations he told “porkies” about the tax effectiveness of the scheme as the IRD sought security of costs for the trial.

Justice Pamela Andrews reserved her decision, possibly until next year, which means – for now – Mr Reid can get back to “rebuilding myself” in a new job he says involves looking for international opportunities backed by patents and taking them offshore.

Speaking outside court, Mr Reid told NBR ONLINE he had spent three months preparing to fight the IRD, saving himself hundreds of thousands of dollars in legal fees.

“I’m so incensed with what these guys did and if I don’t do it, no one else will," Mr Reid says. “I’ve caught these guys with their pants down."

In court on Tuesday Mr Reid claimed the IRD made false accusations against him and his company and supported the SFO’s criminal prosecution against him by withholding relevant discoverable documents from him – in breach of court orders.

He told Justice Andrews the IRD’s fraud complaint was a “cut and paste” job from IRD’s earlier, unrelated fraud complaint made in respect of the Salisbury transaction, a tax-driven investment which accounting form Gosling Chapman marketed prior to Digi-Tech.

The IRD argued fraudulent misrepresentations had been made to Digi-Tech investors about the scheme. Namely, that an insurance premium would be deposited on trust

But Mr Reid told the court Digi-Tech investors got what they bargained for when they signed up.

There was no evidence to support the IRD’s allegation the insurance premium was to be deposited on trust and that loan transactions were illusory.

Documentary evidence

Although his allegations against the IRD may be surprising, Mr Reid says he had strong documentary evidence to back them up.

The allegations include that the SFO and IRD had an agreement to not make records of their dealings and ran a secret file attempting to keep some documents secret. In some other instances the SFO destroyed a number of other relevant documents – but some were not part of this case, Mr Reid’s submissions reveal.

The acts and omissions were only uncovered through third-party discovery orders, years of Official Information Act requests, the passage of time and by "inadvertent references" by an IRD employee after the failure of the criminal prosecution who had not been involved in the misconduct.

Otherwise, Mr Reid says he would have been none the wiser.

“There are so many ‘acts’ for the commissioner and his officers to explain. They can’t all be explained away as acts of incompetence or accidental acts. Some acts will not be explainable. Put together, the only real explanation is that of misfeasance,” he said in his submissions.

“These allegations of misconduct by government officers are extremely serious and need to be cleared up, one way or the other.

“The matters raised must be of public interest and are matters that relate to the integrity and honesty of government officials who administer ‘justice’ and the tax system within the country and within its courts.”

Mr Reid’s plight got support from NBR ONLINE readers this week.

“For those outraged over the state's handling of Dotcom raid, etc, start getting angry over the IRD. They have more power than the police ... and will spare no expense to whip anyone who crosses them. All with your money,” one said.

IRD attacks Mr Reid’s 'shotgun' approach

IRD lawyer Harry Ebersohn told Justice Andrews the "shotgun" manner with which Mr Reid was pursuing the case, with no effort at refining the issues, supported security for costs being granted.

"This throw-everything-into-the-mix approach of the plaintiffs has created a monster litigation and has massively inflated costs," Mr Ebersohn said.

"The commissioner is being forced into a large expensive convoluted fight with Mr Reid where his cause of action has no merit."

Mr Reid had created his own misfortune, Mr Ebersohn said.

"The essence of the matter is that Mr Reid created, by reverse engineering, and promoted a crude tax avoidance arrangement and lied about it."

The IRD’s position is that the arrangement was a sham, set up to avoid tax, and that the deductions, which related to an insurance premium that was part of the scheme, were not allowable.

About Digi-Tech

Digi-Tech was wholly owned by N-Tech, the Reid-led company used to sell shares in the Digi-Tech tax plan.

It involved the sale of shares in Wellington-based company Digi-Tech Communications.

The typical investor would by $1 million worth of shares in Digi-Tech, with the bulk of the purchase price deferred for 10 years.

The investor companies took out the loans to pay for an insurance policy, which ostensibly covered any loss at the end of the scheme if the purchased shares had not reached a certain value.

The insurance policies cost a multiple of $500,000, depending on the number of shares bought. The investors paid a 4% deposit on the policy, but the rest was paid by loan.

The investors never saw the money being advanced, which was up to $5.76 million in the case of the largest borrower. It was paid straight to the insurer.

But the transaction, if obviously somewhat artificial and not intended to be commercial, nonetheless allowed the LAQC’s to record a $1 million loss against other income for that year. So tax would not have to be paid on that amount.

The tax write-off would therefore be worth abound $300,000 in the first year for the high earners who invested in the scheme.

gbond@nbr.co.nz

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