Burton v Police

[2013] NZHC 1389

THE IDENTITY OF THE CO-ACCUSED, AB, IN COUNTS 16 TO 21 IS SUPPRESSED.

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CRI 2011-085-5660

[2013] NZHC 1869

THE QUEEN

v

PAUL WILLIAM O'CONNOR BRENT JOHN GILCHRIST SCOTT CRAWFORD ANDERSON

Hearing:

13 May - 5 July 2013

Counsel:

D La Hood, M Ferrier and A Instone/S Lukey for Crown M Lennard and G M Richards for P O

B J Gilchrist in Person
J C Bonifant and S A Pettett for Anderson

Judgment:

26 July 2013

Reissued:

7 February 2020

JUDGMENT OF SIMON FRANCE J

R v GILCHRIST & ORS [2013] NZHC 1869 [26 July 2013]

Table of Contents

Paragraph No.

Introduction  [1]

Overview of charges  [3]

Charges against Paul O’Connor  [3] The separate charges against Mr Gilchrist and Mr Anderson                 [21] Approach to judgment  [24]

Matters applying to a criminal trial  [25]

Some preliminary conclusions  [31]

First transaction:  the Silent Partner charges  [49]

Summary  [49]

Discussion  [50]

Restraints of trade  [80]

Summary  [80]

Discussion  [82]

The Debenture  [103]

Summary  [103]

Discussion  [104]

The ACTONZ investment  [108]

Summary  [108]

Discussion  [111]

The sale of MSCL and relocation of personal assets  [127]

Summary  [127]

Discussion  [128]

MST transactions – the intellectual property  [136]

Summary  [136]

Discussion  [138]

MST transaction – GlobeNet invoices  [153]

Summary  [153]

Discussion  [156]

Client of One invoices  [209]

Summary  [209]

Discussion  [210]

Asset protection/liquidation of MSCL  [219]

Summary  [219]

Discussion  [220]

Late filing of returns  [256]

Summary  [256]

Discussion  [258]

Conclusions on transactions  [266]

Overview of Dr O’Connor’s actions  [268]

Specific charges  [293]

Counts 2 to 7 and 9 to 13  [294]

Counts 14 and 15  [298]

Mr Gilchrist’s liability – counts 1D, 1E, 1F, 8D, 8E, 8F  [299]

Dr O’Connor’s liability  [326]

Summary

Dr Paul O’Connor Brent John Gilchrist

Scott Crawford Anderson

Introduction

[1]    This judgment is the verdict on a tax evasion prosecution brought against    Dr Paul O’Connor. Charged along with him as a party to his alleged overall offending is Mr Brent Gilchrist, a tax adviser. Mr Scott Anderson is charged as a party to one specific component of the alleged course of conduct, namely fictitious invoicing for tax deduction purposes.

[2]    A second judgment is being issued at the same time in relation to charges faced by Messrs Gilchrist and Anderson, but not Dr O’Connor. Those charges were joined to this indictment for propensity reasons. However, it is preferable to issue a separate judgment because of a name suppression issue in relation to Dr O’Connor that cannot be resolved in time for the delivery of verdicts.

Overview of charges

Charges against Paul O’Connor

[3]    Since 1990 Dr O’Connor has run, in conjunction with his de facto wife, a media clipping business, generically called Media Search. Over the relevant period the business traded through two entities – first, Media Search Corporation Ltd (MSCL), and then subsequently Media Search Trust (MST).

[4]    Dr O’Connor is charged as a party to tax evasion, it being alleged that both trading entities, which he owned and controlled, have evaded the payment of tax over a number of years. The case has been presented through the lens of three sets of acts:

(a)transactions during tax years ending 1993–1996 inclusive. These transactions, and the returns filed for those years, are not the subject of charges. The transactions are said to illustrate the commencement of the pattern of tax avoidance activity, and so are to be assessed as propensity evidence;

(b)transactions during the tax years ending 1997–2002 in relation to MSCL. First, there are six charges of filing late tax returns with the intention of evading the assessment or payment of tax. The allegation is that the delay was deliberate so as to defer inquiry by the Inland Revenue Department (“IRD”), and allow asset depletion. It is said there is a pattern of late filing seen through the whole 16 year period. Second, there is a general overall charge of tax evasion which seeks to bring together all the challenged transactions that occurred over this time, and allege that together they represent a course of conduct amounting to tax evasion. The separately charged late filing of  returns is one of these steps relied upon; and

(c)transactions from the tax years ending 2001–2005, and subsequent, in relation to MST. There is here the same pattern of five specific counts of deliberate late filing for evasion purposes, and a general tax  evasion charge. There are also other specific charges relating to certain deductions that are said to be based on fictitious invoices. It is these charges to which Mr Anderson is also alleged to be a party, it being his company that issued the invoices.

[5]Mr Gilchrist is charged as a party to the two general evasion charges.

[6]    In the broadest of terms the case against Dr O’Connor is that over the years he has been party to aggressive tax avoidance transactions, and fraudulent transactions, with the intention of reducing his tax liability. Throughout this period  he has consistently been late in filing returns. At the same time the assets of his trading entities and his own personal assets have been depleted or transferred to  other entities, so that should there be any reassessed tax liability neither the taxpayer nor Dr O’Connor personally would have the capacity to pay. An overview of the  case is best provided by identifying the impugned transactions that will need consideration.

[7]    The first transaction is a series of deductions claimed by MSCL in relation to invoices issued by a company called Silent Partner. Silent Partner was owned and  run by the defendant, Mr Anderson. In the tax years 1993 to 1996 inclusive, deductions amounting to $730,000 were claimed for work done by Silent Partner. The Crown contends the work was never done, and the charges were fictitious. A feature of this transaction is that MSCL never paid any of the $730,000 to Silent Partner. If established, these events are relied on by the Crown for their propensity value in relation to a similar scheme alleged to have been run by the two men some years later.

[8]    The second transaction involves two restraints of trade (ROT) entered into between MSCL on the one hand, and Dr O’Connor and his wife on the other. The first ROT was agreed in 1991. No copy of it is available. It paid Dr O’Connor and his wife $250,000 each for agreeing not to go into competition against MSCL for five years from the date of signing. At the time Dr O’Connor and his wife were the sole shareholders and directors of MSCL. The $500,000 was credited to the shareholders’ current account, and MSCL amortised the ROT at a rate of $100,000 per annum. Dr O’Connor and his wife treated the withdrawals they made from the shareholder’s current account as capital, and therefore not taxable.

[9]    In 1996 the ROT was renewed, but this time for $5 million. This amount was again credited to Dr O’Connor and his wife’s shareholder account, and over the next few years drawn out by them, again as capital payments. Immediately prior to entering into both the 1991 and 1996 ROTs, the shareholders’ current account had been in deficit. After the 1996 ROT, the shareholders stopped paying themselves a shareholder’s salary. The Crown says the 1996 ROT has no commercial reality, and was tax avoidance.

[10]   The third transaction is an investment in a tax avoidance scheme known as ACTONZ. Dr O’Connor, in MSCL’s name, acquired from Mr Anderson  four units in the scheme.   It is said they were allocated as repayment for a $300,000  loan     Dr O’Connor had made to Mr Anderson. Deductions amounting to  $2.2 million were subsequently claimed. When the scheme was held to be avoidance, MSCL

settled its tax liability at $1.2 million; however, by then it was in liquidation and had no capacity to meet the settlement.

[11]   The fourth MSCL “transaction” is the late filing of tax returns. The returns for tax years 1993–1996 were filed on 8 November 1996. There was then no further filing until 6 July 2000, when the 1997–1999 returns were filed together. The Crown alleges this late filing was deliberate, and that the delay was designed to prevent IRD scrutiny, and to allow other actions to occur to prevent recovery of any assessed tax.

[12]   The last step in relation to MSCL’s tax liability was the “sale” of the business in 2000 to a new trading entity, the Media Search Trust (MST). At the same time, another new company was formed to be the corporate trustee of MST. The purchase price paid by MST was, in general terms, the taking over of the Silent Partner debt and a cash payment sufficient to discharge Dr O’Connor and his wife’s personal borrowings. At the time of the sale, Dr O’Connor and his wife took a debenture over the current account of MSCL, there being still a credit in their name of around

$1 million stemming from the 1996 ROT debt. Following this sale, MSCL had no assets and ceased trading.

[13]   Turning then to MST, the first of the transactions involves the intellectual property it purchased from MSCL as part of the sale. At the same time as the  transfer of the business to MST, Dr O’Connor formed another new company, MS–IP. It purchased from MST for $10 the intellectual property that had been acquired by MST from MSCL as a result of the transfer of the business. Concurrently, MS-IP gave back to MST a seven year exclusive right to use the intellectual property. MST eventually valued this right to use the intellectual property (IP) at $1 million and amortised it over its seven year life – the annual rate was $142,000. The Crown says the asset has been grossly overvalued so as to provide an illegitimate deduction totalling $595,000 up until the time the Media Search business was finally sold to a third party purchaser in 2004.

[14]   The second of the challenged MST transactions concerns invoicing by an entity called GlobeNet. It, like Silent Partner, was owned and run by the defendant, Mr Anderson. Over the course of four years up to the sale in 2004 of the Media

Search business to an Australian rival, GlobeNet billed MST $750,000.  Unlike Silent Partner, however, these invoices were paid. The Crown says the invoices were not genuine, with the work never being done or being grossly inflated. It alleges either (i) that Dr O’Connor and Mr Anderson had another enterprise on the go and the invoices were just a device to obtain deductibility for the payments associated with the other  enterprise;  or  (ii)  that  the  money  was  going  to  come  back  to  Dr O’Connor  via  a  Vanuatu  bank  account  that  had  been  set  up  for  him  by  Mr Anderson and Mr Gilchrist. The second set of charges being heard concurrently involve Mr Anderson and Mr Gilchrist doing exactly that, only in relation to a different taxpayer.

[15]   The third of the challenged MST transactions are invoices issued by an entity called Client of One, a company run by Mr Brent Slobbe. Over the tax periods from the tax year ending 2001 to 2004, Mr Slobbe billed Dr O’Connor over $520,000 for work the Crown says was not done. As with GlobeNet, the accounts were paid. Again, the Crown alleges the invoices were designed either to allow transfers of money made for other purposes to become deductible, or because some of the money was coming back, since Dr O’Connor was the signatory of the Client of One bank account.

[16]   Finally, as with MSCL, the tax returns were filed late several years later. The returns for tax years 1997–1999 were filed on 6 July 2000. The returns for tax years 2000–2004 were filed on 22 October 2004.

[17]   To complete the narrative, as noted the Media Search business was sold by MST in 2004 to a third party competitor. There is no suggestion that this was anything other than an arm’s length sale. However, the Crown does focus on the distribution of the proceeds of the sale from MST to a personal trust of Dr O’Connor.

[18]   In addition to the business and tax activities of the two trading entities, the third strand of the alleged evasive activity is the manner in which Dr O’Connor has organised his personal affairs. Personal assets were first put in a trust called the Timaru Trust. There was then part resettlement to another trust called the Hearth Trust.  Then the rump of the Timaru Trust was transferred to two further trusts, the

Oamaru and Kurow trusts. All this is said to have been motivated, at least in part, by Dr O’Connor’s desire to protect his personal situation should the Commissioner seek to attribute tax liability relevant to the MSCL/MST transactions to him personally.

[19]   That concludes the summary of the various strands. It has already been noted where Mr Anderson fits in. It is he who is behind the allegedly fictitious Silent Partner invoices, which are not the subject of specific counts in the indictment. And it is he who is behind the allegedly fictitious GlobeNet charges, which are the subject of specific counts against him and Dr O’Connor, and which inform the general allegation against Dr O’Connor. He also is involved in the Vanuatu arrangements which are said to explain why Dr O’Connor paid the GlobeNet invoices.

[20]   What of Mr Gilchrist? He is a tax adviser. Exactly when he came onto the scene is in dispute, but it is agreed it is at least from mid–2004. The Crown suggests it may be earlier. From mid-2004, Mr Gilchrist took control of Dr O’Connor’s tax affairs. He was responsible for ensuring that MSCL was liquidated, for ensuring the liquidator settled the ACTONZ debt (at a time when the company could not meet the settlement) and he prepared various plans  that  are said  to  be  aimed at  ensuring  Dr O’Connor’s personal protection from any transferred tax liability. The Crown alleges that Mr Gilchrist became knowingly complicit in the tax evasion plan, and assisted its completion. He is therefore charged as a party to the two general tax evasion charges.

The separate charges against Mr Gilchrist and Mr Anderson

[21]   Messrs Gilchrist and Anderson face separate charges of instituting a fraudulent scheme for tax purposes. The alleged scheme is easy to describe. It  is  said Mr Anderson had money in Vanuatu he wanted to get back to New Zealand. His personal circumstances meant this needed to be disguised. Accordingly, a local accountant was approached. The idea was that Mr Anderson’s company would issue fictitious invoices which  the  accountant  would  pay  in  $NZ  in  New  Zealand.  Mr Anderson would then do an internal Vanuatu transfer of the equivalent sum (less 8.5% fee) to the accountant’s Vanuatu account. The accountant would then bring the money back to New Zealand, seemingly unconnected to Mr Anderson. Although that means in direct sums the accountant loses 8.5%, in the interim he uses the invoices for GST returns and claims them as legitimate business expenses.

[22]   It is said Mr Gilchrist promoted the scheme. He was actively promoting Vanuatu as a tax haven, and encouraging people to use its facilities. He set up an account in Vanuatu for the accountant. The money Mr Anderson held in Vanuatu  was then transferred to the accountant’s Vanuatu account, and he in turn brought it back to New Zealand by a series of bank cheques.

[23]   In an earlier separate ruling, these charges were joined to the main indictment. The relevant features supporting joinder were that, if proved, they were an example of Mr Anderson issuing false invoices, something he is said to have twice done in the O’Connor charges. Also, it showed Vanuatu being used, one of the explanations the Crown floats for why Dr O’Connor might have paid the GlobeNet invoices. It is to be recalled Dr O’Connor had a Vanuatu account opened for him, although records establish that he never did actually receive money back through  that account.

Approach to judgment

[24]   It is convenient to move first to an assessment of the individual transactions. The purpose is to decide whether some or all have the illegitimate character contended for by the Crown. It will then be necessary to assess whether, to the

extent the Crown has established its contentions, they are enough to prove the specific charges.

Matters applying to a criminal trial

[25]   The trial proceeded before me sitting alone. Evidence was given in the normal way. Mr Gilchrist represented himself.

[26]   The charges need to be proven beyond reasonable doubt. The true character of many of the transactions that are said to make up the evasive conduct is in dispute. These individual strands, and the other transactions relied on as propensity evidence, need not be proved to the criminal standard. However, the allegation that the GlobeNet invoices are fictitious is in a different category because there are specific charges.

[27]   I remind myself of the need to avoid any prejudice that might arise from the facts, and the propensity evidence called. The evidence in a general sense portrays  an approach to tax responsibility that would be viewed by many as unappealing. However, disapproval of the way in which people have acted is not relevant to the decision making process.

[28]   All three defendants gave evidence. That of course does not change the onus of proof which remains with the Crown throughout. Mr Gilchrist gave evidence by way of a short prepared brief which he read. He was cross-examined, and then made a reply statement. He represented himself ably.

[29]   There will be occasions where I consider the defendants to be lying, either in statements  made to  institutions,  to the  IRD,  or  in  the  witness  box.  In  terms  of s 124(4) of the Evidence Act 2006, I remind myself of the matters set out in s 124(3) when assessing what significance to attach to the fact of a lie.

[30]   AB, an accountant with interim name suppression, was a witness in relation to the separate charges that Messrs Anderson and Gilchrist face. He was jointly charged with their offending, pleaded guilty, and has been sentenced. As such,

s 122(2) of the Evidence Act does not apply. However, it is a matter to be borne in mind and I will refer to it when assessing whether I accept his evidence. Also in terms of s 122(2)(e), the allegations  in  this  case  involve  events  as  long  ago  as 22 years. In assessing the credibility of the defendants’ evidence, I will bear in mind that some events they are being asked to recall and explain are dated. Specifics can be understandably lacking, and to a certain extent I acknowledge supporting documentation may now be unavailable. I accept also that the passing of time must be given weight when assessing what to make of a witness’s professed inability, for example, to explain an email or give context to it. However, I do observe that I have been satisfied that as regards most, if not all events, the nature of the event was of sufficient significance and magnitude at the time to expect some recall even after this time, and generally there was.

Some preliminary conclusions

[31]   Before analysing each transaction it is necessary to identify three broad conclusions which I reached during the trial.

[32]   The first concerns Dr O’Connor’s awareness of tax issues and accounting matters. He was at pains during his evidence to stress his lack of knowledge, a statement that often followed testimony suggesting the opposite. I have no doubt  that Dr O’Connor is very aware of these matters, and quite knowledgeable. I base this primarily on three matters – meeting  agendas  he  prepared,  the  evidence  of Mr Croll, and answers in testimony.

[33]   The record discloses that agendas or issue lists were prepared for meetings about Dr O’Connor’s business affairs. In addition to Dr O’Connor, these meetings were to be attended by either his accountant or his lawyer or both. These agendas show that the author has considerable tax awareness of numerous different and difficult issues. There is no doubt that Dr O’Connor is that author. He sought to distance himself from the significance of this inference by saying that the agendas would have just been reflecting information given to him by other people. It was unconvincing evidence. At times, the alleged other sources of the  information denied that the subject matter was one on which they were giving advice. On other

occasions, even the ability to capture and recast the query reveals knowledge. In my view these agendas were an important item of Crown evidence for establishing that tax considerations were very important for Dr O’Connor and that he was aware of the issues and understood them. Indeed, concern over what the IRD might do, and the tax implications of transactions, were often the primary focus of the documents.

[34]   Second, the Crown called a Mr John Croll. He is the Chief Executive of the Australian company that purchased the Media Search business. Mr Croll testified that during the sale and purchase negotiations, which occurred in the 2003/4 period, Dr O’Connor showed he was very aware of tax issues, and of the constructive trust issues that were being discussed. His evidence was Dr O’Connor’s paramount consideration was tax effectiveness and how the transactions would work with his trust arrangements. Mr Croll said he had never encountered such a level of detail and prominence around tax effectiveness in any other negotiations he had done.

[35]   A different view of Dr O’Connor’s business acumen was given by a defence witness, Mr Stone, a Wellington lawyer. He queried Dr O’Connor’s  knowledge based on his dealings with him. I am, however, obliged to say that Mr Croll’s assessment struck me as much more reliable. Whilst Mr Stone had opportunity to observe Dr O’Connor on various occasions, I consider Mr Croll’s own business awareness and understanding was much more evident than Mr Stone’s. Put bluntly, Mr Croll’s own skill set and knowledge made him a far more reliable person to assess these matters. Further, Dr O’Connor worked for Mr Croll’s company  for some time after the sale, which meant Mr Croll’s opportunity to assess his business acumen was not limited just to the one, albeit prolonged, sale negotiation.

[36]   The third factor on which I place reliance is Dr O’Connor’s own evidence. In over a week of testimony there were numerous occasions where he exhibited an awareness that pointed to greater knowledge than he was willing to concede. His protestations otherwise seemed to me to often coincide with such examples of awareness. One would be hesitant to go only on this, but it did reinforce the contemporary written records such  as  the agendas,1  and Mr  Croll’s  assessment.   It

1      The agendas do not stand alone. There are numerous emails, for example, from Mr Gilchrist to Dr O’Connor that presuppose knowledge and skill, and to  which  Dr  O’Connor replied without

can also be noted that, in terms of business experience, Dr O’Connor worked for BP. In that capacity he assisted in what he called commercialisation projects, and BP’s involvement in joint ventures. He was CEO of a publicly listed company, and then when he had moved back to Wellington he ran a consultancy which involved assisting government departments to commercialise. He stopped this because it was too time consuming, and involved himself full-time in his wife’s media clipping business.

[37]   A second general conclusion that I identify concerns what I call the “paper trail” phenomenon. Particularly when Mr Gilchrist is involved, the evidence is replete with examples of documents being created solely for the purpose of creating a false paper trail.2 On several occasions Dr O’Connor was complicit in this. Surprisingly to me, when the misleading nature of the document was pointed out,   Dr O’Connor was reluctant to accept the inherent dishonesty. This attitude can only cause one to have doubts about his general claims of being honest and straightforward in these disputed transactions.

[38]   As one example of this, at the time of the liquidation of MSCL, Mr Gilchrist was concerned to get in ahead of IRD and appoint what he called a tame liquidator. Throughout this process of setting up the liquidation, Mr Gilchrist would draft documents for the various parties to sign – resolutions, appointment letters and the like. Originally it was envisaged Dr O’Connor’s accountant, a Mr Vijay Manchha, would be liquidator.   Mr Gilchrist  accordingly drafted an  appointment letter for   Dr O’Connor to sign. The letter included an instruction that Mr Manchha get MSCL put back on the register. However, at the time of this letter, to both Mr Gilchrist and Dr O’Connor’s knowledge, the company was already back on the register, courtesy of IRD.

[39]   This aspect of the letter was simply an attempt to create a false impression that  Dr O’Connor  did  not  know  this  at  the  time  he  initiated  the  liquidation.  Dr O’Connor in evidence could not accept that this sort of deception was inappropriate. The same draft letter also had Dr O’Connor telling Mr Manchha that

needing to seek clarification.

2      There are numerous examples discussed in the other judgment being released concurrently.

he would accept Mr Manchha’s advice and contact Mr Gilchrist for tax advice. Again, the intended impression was to be that at the time the liquidation was commenced, Dr O’Connor had not yet been in touch with Mr Gilchrist. The dishonesty of this is obvious, and must have been so to Dr O’Connor who had met Mr Gilchrist, who was of course drafting the letter.

[40]   Another particularly stark example was a document purporting to be a settlement agreement of a claim Mr Gilchrist had against Dr O’Connor. The document recites a series of grievances that  Mr Gilchrist  had and concludes that   Dr O’Connor  had  agreed  to  pay  $75,000  in  damages.  Both  men   signed   it.  Mr Gilchrist sought to explain why it was genuine, but Dr O’Connor accepted the payment was simply advance fees for work he anticipated Mr Gilchrist doing for him. I accepted Dr O’Connor’s evidence on this. The contents of the agreement  were a nonsense in several respects if it really related to the story Mr Gilchrist gave.

[41]   Dr O’Connor expressed regret at signing it when it was misleading. I might have accepted it as a one-off lapse but for these other examples to which I have referred. It is unfortunately just another example of a willingness to be complicit in dishonesty.

[42]   Most of the examples of this sort of conduct date from Mr Gilchrist’s involvement in 2004, so one must be wary about carrying this concern across to the assessment of documents  written  earlier.  But  to  put  it  conservatively,  I  found Dr O’Connor’s readiness to go along with this misleading conduct troubling. It was not the conduct of an honest man, and his evidence in court did nothing to assuage this concern. One needs to bear in mind that apparent agreement with such  deception can sometimes be a case of inattention or inadvertence. I also  acknowledge Dr O’Connor was not the author of these documents. But I do not accept all or most of Dr O’Connor’s involvement to be inadvertent, and consider weight is properly to be given to Dr O’Connor’s plain willingness to be involved in such deception.

[43]   As regards Mr Gilchrist, quite frankly one needs to be aware that nothing is written without an awareness of how it might be read. In addition to the type of

practice just described, emails which contain material that he does not want  disclosed are inevitably accompanied by an instruction to the recipient to print the document, store it safely, and delete the email, together with advice that Mr Gilchrist is doing likewise. Another illustration of Mr Gilchrist’s approach to things comes from the evidence discussed in the concurrent judgment. The email below was written as part  of  him  giving  advice  whether  documents  could  be  destroyed.  Mr Gilchrist wrote:

... Thus in my view, if there are certain records the liquidator did not take possession of then there is no requirement for you to retain them. It’s probably not an issue anyway as IRD would know that once liquidated property they cannot do anything. I would just keep records in private somewhere (for a few years) but if you are asked by IRD for records your response would be “none – refer to liquidator”.

[44]   This speaks for itself, and underpins my conclusion based on many varied examples that any document created by Mr Gilchrist need not be accepted at face value. Also that at times he acts dishonestly.

[45]   A third general conclusion is that Dr O’Connor is careful with money. The relevance of this is that, on occasions, for me to accept the defence evidence as raising a reasonable doubt, or as undermining the Crown characterisation of events, I would have to accept that Dr O’Connor could be careless in terms of expenditure incurred by his business. He himself in evidence claims such carelessness to be a trait. Yet dotted throughout the case are examples that suggest the opposite.

[46]   It  will  be  noted  that   Dr O’Connor   first   met   Mr Anderson   because  Mr Anderson was the sales representative for an accounting package Dr O’Connor was buying. Dr O’Connor explained he chose Mr Anderson because he lived  closest, so any travel costs would be minimised. On another occasion Dr O’Connor explains he decided not to liquidate MSCL in 2001 because he wanted to save the

$10,000 involved. And then in 2004, the reason  he wanted to use his accountant,  Mr Manchha, as liquidator, was because he had seen how expensive liquidations could be, and he wanted to avoid cost. Next, on several occasions, Dr O’Connor refers to avoiding incurring interest on provisional tax, or any unnecessary expenditure because of the current account being overdrawn.  He referred to being

constantly alert to this. Finally, there is an example of him querying his lawyer’s  bill, and having Mr Gilchrist review her letter first.

[47]   Of course, none of this is unusual or in any sense to be criticised. It is noted solely to observe that those actions, and other comments, led me to the firm conviction that Dr O’Connor would not incur expenditure without thought.

First transaction: the Silent Partner charges

Summary

[48]   In 1996 a new accountant took over responsibility for MSCL’s affairs. His first task was to complete the financial reports and tax returns for the tax years 1992– 1995. Whilst doing that, the accountant received correspondence from Mr Anderson, the third defendant, advising that over those four years he had done work for MSCL totalling $731,628.91. These charges were duly included as expenses, in the  amounts advised, for each of the four years and accrued since they remained unpaid. The Crown alleges they are fictitious. Dr O’Connor and Mr Anderson both say that work was done by Mr Anderson and the debt was real.

Discussion

[49]   In 1996 Mr Manchha became responsible for MSCL’s accounts. He had recently bought the accounting business of MSCL’s previous accountant, Silent Partner Limited. Silent Partner was a business owned and run by Mr Anderson, the third defendant.

[50]   The contact between Dr O’Connor and Mr Anderson came about this way. Some years earlier Dr O’Connor had been looking for a new accounting software package for his business. He settled upon one called Quantum 5. Mr Anderson was the local sales representative for this product, and he installed it. Out of that initial meeting, and then ongoing servicing, a relationship grew between the men which eventually led to Mr Anderson’s appointment as MSCL’s accountant. Mr Anderson, as well as being an agent for the accounting software, had his own accountancy practice and he used the opportunities created by his agency role to obtain clients for

the accounting practice. However, it seems he was poor at this accounting work, or  at least not assiduous in meeting his obligations.

[51]   In 1996 when Mr Manchha purchased the business, MSCL’s financial accounts and tax returns for the years 1992–1995 had not been done. Accordingly, it fell on Mr Manchha as the new owner of the business to complete them. In the course of preparing the financial statements, Mr Manchha received a letter written by Mr Anderson on 14 June 1996. It stated:

As per our telephone conversation this is to confirm and advise you that I have over the years provided my client, administration services, as detailed in an agreement between my client and myself.

The cost (gst exclusive) to my client for my services are as follows:

year ended 31 October 1992	99,527.53
year end 31 October 1993	129,344.65
year end 31 October 1994	233,780.05
year end 31 October 1995	268,956.68

Copies of the respective invoices are held in my file, I advise that these charges be accrued in the respective years. My client will in due course arrange payment for my services.

Also I advise that for each respective year $100,000 restraint of trade is written off.

[52]   Mr Manchha duly included these charges in the annual accounts, which in turn formed the basis of the tax returns. The Crown case is that these charges and therefore the deductions claimed are bogus. For the purpose of the case it is not necessary to establish why the charges were created, but the allegation is that they were in return for  Dr O’Connor, three  weeks prior to  the letter, urgently lending  Mr Anderson $300,000 to complete the unconditional purchase of a business called Exicom. As for the precise sums claimed for each year, the first two are 20 per cent of MSCL’s income for the year in question, and the second two 30 per cent.

[53]   The defendants’ explanation  for  the  charges  is  that  it  was  agreed  that  Mr Anderson, in addition to providing accounting services, would undertake a marketing and mentoring role within the business to help boost its income. The two men signed a short written agreement composed by Mr Anderson. A copy of the agreement is no longer available.

[54]   As for how this arrangement had come about, Dr O’Connor says that it was difficult to get Mr Anderson to do the financial statements and tax returns. In an effort to encourage their completion he would visit Mr Anderson at his home.  During these sessions the men talked more generally about the Media Search business, and Mr Anderson had ideas about how to develop MSCL. From these discussions, the agreement emerged. The arrangement appealed to Dr O’Connor because he personally is a very poor salesperson.

[55]   Mr Anderson says he had many of these arrangements with businesses. He terms them “sweat equity” deals and says they are what underlies the name of the business, Silent Partner. The defendants agree that a dispute or misunderstanding arose between them over the terms of the agreement. It is said that on its face the agreement provided for Mr Anderson to receive 20 per cent of total business income, whereas Dr O’Connor believed the intent was 20 per cent of any increase in income subsequent to the agreement.  Both men agree that at some point the figure rose to  30 per cent, but what that 30 per cent related to was never resolved.

[56]   The evidence of the two men differed over how the misunderstanding about the terms of the agreement emerged. It was Dr O’Connor’s evidence that an annual invoice was provided, and indeed that Mr Anderson each year entered its amount in the business’s accounting  system.  It  was  at  that  point  that  it  became  clear  to Dr O’Connor that the basis of the sums was in dispute. Mr Anderson was inconsistent in his evidence on the point, a common characteristic of his evidence, but was of the view that he only did all the calculations identifying the amounts due to Silent Partner around the time he sent the letter of 14 June 1996 to Mr Manchha. He accepts the letter suggests invoices are on file, but thinks if they were he had only just created them.  As  with  Mr Gilchrist,  I  certainly  accept  it  is  possible  that  Mr Anderson would stretch the truth when writing letters such as the present one. As with most of these issues, there are points of varying merit either way, but it is unclear why Mr Anderson would need to advise Mr Manchha on 14 June 1996 of the amount of the charges if they had already been entered into the system on an annual

basis.    If that had happened Mr Manchha would know of them because he was accessing the Quantum 5 system. This suggests they had not been entered.3

[57]   It is common ground that the Silent Partner administration charges were never  paid,  a  key  plank  in  the  Crown  allegation   that   they  were   fictitious.  Dr O’Connor says that it is his practice not to pay any part of a disputed bill until it  is sorted. For some reason, although they discussed it, the men never resolved the dispute, so they remained unpaid. Later, when Dr O’Connor restructured the Media Search business by selling MSCL to a new entity, MST, this liability of $703,000 was transferred as part reduction of the purchase price.

[58]   Mr Anderson is not clear as to why he did not seek payment. He said how he got paid on these sweat equity deals would vary. He often would not bill anything and just see what happened. Sometimes the business would be sold and he would at that point recover a percentage of the sale price. In the case of MSCL, at the time of the 14 June 1996 letter, he was flush with money, so unconcerned to pursue the debt. Later, he was too focussed on other things to worry about it.

[59]   However, at some point down the line the whole debt was allegedly factored to an independent finance entity called Venard Finance. The fact that it was factored is meant to be evidence of its legitimacy. However, no record exists of who or what this company is. Mr Anderson says he cannot remember, but research he said he had done during trial had led him to recall it was based in the British Virgin  Islands.    Mr Anderson says that he is unsure when the debt sale to Venard occurred because it was done by others within his organisation who were looking to raise money. He did not raise the assignment of the debt with Dr O’Connor at the time.

[60]   Dr O’Connor recalls some written notification that the debt had been taken over by Venard Finance, but nothing else. Strikingly, Venard never pursued it. The Crown case is that this lack of energy in recovering the debt is another factor pointing to a fiction. It alleges that Mr Anderson was tied up somehow with whatever Venard Finance was. It submits the fact that an allegedly independent

3      It was never put to Mr Manchha when he gave evidence that these charges were already in Quantum 5.

finance company paid $250,000 for a $700,000 debt, and then took absolutely no steps to recover the debt, speaks volumes for the genuineness of the debt. (It is submitted for Dr O’Connor that if the Venard  factoring is some sort of sham by     Mr Anderson, that does not mean the original debt is untrue. The Venard sham, if that is what it was, is nothing to do with Dr O’Connor).

[61]   A point in issue around the genuineness of these charges is the vagueness in relation to what work was done for the money. In saying that it is important to recall that the work was done, if it was, between 16 and 20 years ago, so due allowance must be given for that. Dr O’Connor’s answer in cross-examination as to what the work was for was (slightly edited):

general administration services which include mentoring, looking, suggesting potential directions to be going, suggesting particular parties that we could approach who would be interested in our services.

[62]   Mr Anderson’s description of the work was in similar terms. It was common ground that these administration charges did not include the actual accounting work done by Silent Partner, which was billed separately. It seems this work, such as it was, was largely done by employees of Mr Anderson. He claimed, unconvincingly, that he also did some accounting work which was included in the administration charges amounts. However, given that MSCL had a software accounting system in place requiring only data entry which could be done by MSCL staff, and given that neither the financial statements nor the tax return were ever prepared, it is not possible to give this evidence any weight. The administration charges had to be for other things.

[63]   It remained wholly unclear what Mr Anderson might have been doing, how he was qualified to do it, and how the vague description of what he was doing fitted in at the time with the Media Search business. The business did not change over time, and I do not accept that the passing of time explains this vagueness. Nor does the level of billing appear remotely justified by the work descriptions the defendants give.

[64]   At the conclusion of the Crown case I had formed the view that these charges required serious examination. First, the quantum is high for the type of work said to

be involved. In saying that, it is of course the case that businesses can spend their money as they see fit, and it must be acknowledged that MSCL’s business income did increase over this period. Second, and most striking, is that the charges were never actually paid, and were never pursued by Mr Anderson. I am less inclined to put weight on the fact that Venard did not pursue the debt. It is inconceivable that an independent Venard would not pursue it if it had bought a genuine debt. However, that can equally point to a sham on Mr Anderson’s part concerning whether there ever was a factoring. It is instructive, though, that Mr Anderson feels the need to support the legitimacy of the invoices by advancing this somewhat incredible explanation.4

[65]   At various points, IRD asked the defendants for an explanation of these invoices. As part of the process of complying with the IRD request, Mr Anderson first provided a draft of his response to Mr Gilchrist, who approved it. Mr Gilchrist in turn forwarded the response to Dr O’Connor who likewise approved it. However, for some reason it was not filed at that time. It was some months later before a reply was provided to IRD by Mr Anderson, and by then the answers had changed. Information as to whether the debt had been paid, and by whom, had changed, and all references to Venard Finance had been removed. Mr Anderson accepted the answers finally given to IRD on these matters were not correct but disclaimed an intention to mislead. I find otherwise; they were lies, designed to mislead IRD.  There is no other rational explanation for the changes that were made.

[66]   It is important to note there is no evidence that Mr Gilchrist or Dr O’Connor saw the amended untruthful answer. It would be surprising to me if Mr Anderson came up with the changes on his own, but there is nothing to implicate Mr Gilchrist in the changes, and no evidence that Dr O’Connor was aware of them.

4      Another curiosity is that this debt was one of the matters that appeared in the meeting agendas Dr O’Connor prepared. It will be recalled the debt was to be accepted by MST in part reduction (about half) of the purchase price. In his agenda Dr O’Connor queries whether any specific action is required to ensure that interest on the debt is deductible and that the interest income is not assessable. It is curious that Dr O’Connor should care about the status of the interest payment in the hands of the recipient creditor. It can be noted there is no evidence of interest ever being charged or paid.

[67]   Dr O’Connor also supplied IRD with answers to the same request for information. He too prepared a draft which he ran by Mr Gilchrist. This was in January 2007 and Mr Gilchrist was by then Dr O’Connor’s tax adviser, so there is nothing to be  read  into  him  seeking  Mr Gilchrist’s  advice.  In  his  draft  reply,  Dr O’Connor had described the work as business development. Mr Gilchrist suggested business maintenance as a better description, and this was the description used in the final reply. Dr O’Connor also advised IRD that invoices were issued, and his answer implied that some of them were paid and some were not. This was of course untrue. None were ever paid.

[68]   Dr O’Connor tried in evidence to distance himself from this inaccuracy, either by disowning authorship of the reply whilst agreeing he signed it, or disputing the plain meaning of the words. This was to be one of the numerous occasions  where Dr O’Connor would not accept what seems to be the plain and intended inference of correspondence. In my view the answer given to IRD by Dr O’Connor was designed to falsely convey that some invoices were paid, so as to increase the impression that they were genuine. I use this falsehood as one of the factors leading me to conclude the invoices were not genuine. The inability of both men to give  IRD a truthful answer is indicative of the falsity of the transaction. I see no other reason for the lie than to try and hide the fact that the deductions were illegitimate.

[69]   In reaching this conclusion I have had regard to the factors I identified at the start of the judgment – that people can lie for different reasons, and that the men were commenting on events some way in the past. However, the most striking feature of these invoices is that they are for a large sum and were never paid or pursued. The lies are targeted at this very feature. Mr Anderson went so far in his letter of reply as to talk of vigorous debt collection being used, again a lie designed to give the charges an air of legitimacy.

[70]   Another transaction between Mr Anderson and Dr O’Connor occurring around this time is of relevance. Mr Anderson, who seems to have been someone involved in many projects, ideas and deals, had entered into an agreement with the receiver of a company called Exicom to buy its assets for $1.2 million. Included amongst the purchase would be a software package and, it seems, some tax refunds.

Mr Anderson says he had investors available to fund the purchase, but they fell by the wayside and he was under pressure to complete the unconditional deal. Pressured, he approached acquaintances, including Dr O’Connor. He says he did so because there was an unarticulated awareness between the men that Dr O’Connor owed him for the unpaid work.5 Dr O’Connor agreed to lend $300,000.

[71]   Mr Anderson says he wanted to give Dr O’Connor security for the loan, so he drew up what is a largely unintelligible agreement that had something to do with the Exicom software being acquired.  The  theory  is  that  pursuant  to  the  agreement Dr O’Connor received an interest in the software but the agreement does not actually say that, and the sum of $300,000 is not mentioned.

[72]   This investment unsurprisingly went nowhere. However, Mr Anderson was shortly to move on to promoting a different scheme called ACTONZ. This was also centred around computer software, and purported to give investors high levels of tax losses comparative to the investment. It was ultimately held by the High Court to be tax avoidance. This is relevant at this point of the judgment because Mr Anderson allocated Dr O’Connor four units in ACTONZ. The transaction records that the units were in recognition of the $300,000 Exicom investment.

[73]The puzzle about all this is why, if Dr O’Connor genuinely owed the

$700,000 or something like it,6 this $300,000 was not offset in some way against that debt. The $300,000 loan has twice separately been recognised – first with the Exicom software agreement, and second with the substituted ACTONZ units, yet at the same time Dr O’Connor purportedly owed $700,000. The answer given in evidence that they were seen as separate issues was unconvincing. I again accept the Crown contention that the more obvious answer is that the administration charges were not real and both men knew it.

[74]   The Crown goes further and submits the charges were invented as a trade off for the $300,000 loan. It is not necessary for the purposes of the case to go that far.

5      This was in May 1996, at which time on his evidence Mr Anderson would only just have “totted up” how much Silent Partner was owed.

6      Dr O’Connor accepted in evidence that on his version the amount he owed was significant, and on another occasion accepted it would have been more than $300,000.

My conclusion is that the charges identified by Mr Anderson in the 14 June 1996 letter were not genuine, and Dr O’Connor knew this. The work alleged to be done that is said to underpin the charges was never done.

[75]   I have set out the reasons why I consider the work was never done but to recap, I focus most on the fact that they were never paid, and payment was not sought. Further, both men struggled to articulate what the work involved. I have reflected on whether that is due to the lapse of time, but consider the correct answer is that it is because the work was not done.

[76]   Both defendants included deliberate inaccuracies in their explanations  to IRD, a factor designed to disguise the fact of non-payment. This was a targeted untruth. Further, the underlying story is inherently implausible. It would not be consistent with Dr O’Connor’s careful attitude to money to allow an arrangement to continue for four years during which time there was allegedly a known disagreement of considerable financial impact over the rate of pay. It seems also that they negotiated a revised rate whilst leaving unresolved the underlying dispute as to what the rate was a percentage of. That too seems incredible.

[77]   It is also of relevance that some years later Dr O’Connor and Mr Anderson again entered into business arrangements, notwithstanding that Dr O’Connor never paid  him  the  $700,000  that  was   allegedly  owed,   and   notwithstanding   that Mr Anderson had allegedly sold what he knew was a disputed debt to a finance company without telling Dr O’Connor or discussing it with him. If any of that were true, it seems most unlikely the men would enter into another business deal.

[78]   The relevance of the false Silent Partner charges is as propensity evidence. The deductions underlying them do not relate to any tax years that are the subject of charges. The appropriate standard of proof in relation to propensity evidence is satisfaction, but I have borne in mind that it is a potentially significant conclusion, especially for Dr O’Connor as it indicates he has from early on been engaging in dishonest tax activity. Recognising,  and bearing carefully in mind the  implications of the finding, I remain satisfied about the conclusions I have reached.

Restraints of Trade

Summary

[79]   In  1991,  and  then  1996,  MSCL  entered  into  restraints  of  trade  with   Dr O’Connor and his wife. Each contract was for a five year period and pursuant to the contract Dr O’Connor and his wife each agreed not to set up in opposition to MSCL. The first contract was for $250,000 to each of Dr O’Connor and his wife. The second contract, in 1996, was for $2,500,000 each.

[80]   Payment of the contracted sums was effected by MSCL crediting the shareholders’ current account. This enabled Dr O’Connor and his wife to withdraw the value of the contract as capital payments. The Crown says the 1996 ROT had no commercial reality and existed solely as a device to withdraw money from the company in a non-taxable format. Dr O’Connor says the motives for creating the restraints of trade were genuine, and that the tax implications were not a consideration.

Discussion

[81]   There are two restraints of trade. The first was entered into in 1991. The second was a renewal in 1996. There is no copy available of the 1991 ROT. The parties were MSCL on the one hand, and Dr O’Connor and his wife, separately, on the other. They were at all relevant times the sole directors and shareholders of MSCL.

[82]   The 1991 ROT was for $500,000, being $250,000 to each of Dr O’Connor and his wife. It was for a five year period as was the 1996 ROT. Dr O’Connor said the 1991 ROT grew out of a concern as to what would happen to the business if there was a marital breakup. Mr Anderson suggested an ROT. The idea was that if one of the couple breached the restraint they would be liable to reimburse the current account by the amount withdrawn up to that point. No thought was given to the tax effect of the ROT at the time it was entered into.

[83]   Turning to the 1996 ROT, Dr O’Connor testified that the motivation to renew that ROT was different. At the time he was trying to get the bank to advance money to MSCL. Up until then the couple had put their own money into the company and were servicing significant personal loans to do so. They were anxious to transfer the borrowing to the business, but the bank was reluctant because the asset position of MSCL was not good enough.

[84]   Again advice was sought of Mr Anderson who suggested renewing the ROT to create an asset on the books. Under prompting from counsel Dr O’Connor also agreed the marital breakup idea remained another motivation.

[85]The document provided:

The payment of the said sum of two million five hundred thousand dollars ($2,500,000) by the covenantee to the current account of the covenantor  shall constitute a full and complete discharge of the covenantee’s obligations.

[86]There was an ROT for each of Dr O’Connor and his wife.

[87]   Concerning the figure of $5 million, Dr O’Connor agreed it was arbitrary. It had to be big to create the desired asset position; it was five times annual gross turnover. Again, tax effectiveness was said not to be a factor in Dr O’Connor’s thinking.7

[88]   The Crown led evidence about the ROT from Mr Charles Cable, a partner in Deloitte Touche Tohmatsu, who specialises in the valuation of businesses, including intangible assets, and in the financial performance of businesses. His evidence was that there was no commercial sense in the value ascribed to the 1996 ROT when the business averaged EBITDA earnings of $311,0008 over the six years leading up to 1996. This is not a surprising or contestable conclusion given Dr O’Connor’s own evidence that it was a figure effectively chosen for convenience to make the

7      Dr O’Connor accepted in evidence that the ROT suddenly appearing as an asset would not survive bank scrutiny as an answer to the bank’s concerns. However, he says it was sufficient  for local branch purposes.

8      Earnings before interest, depreciation and amortisation. The figure ignores the Silent Partner charges, and accords normal shareholder salaries.

company’s asset position look better.9 In addition to observing that the financial performance of the company did not justify a ROT at this level, Mr Cable also placed weight on the fact that the persons the company was seeking to restrain were the sole directors and shareholders. In his opinion they should have entered into the ROT for nil consideration, something he had experienced elsewhere. Mr Cable confirmed in cross-examination that whilst the ROT might create the balance sheet ratio being sought, most analysts would look through it in terms of assessing its value as support for borrowings.

[89]   In my view there is no doubt the ROT is not commercially credible. The real issue for this case is what was behind it, and whether it is an example of a  transaction designed to assist the alleged evasion of tax. The crucial facts are that before ascribing the value of $5 million, the current account was in deficit (that had also been the case in 1991). It then acquired a positive figure (from Dr O’Connor’s viewpoint) of more than $4.5 million. Thereafter, Dr O’Connor and his wife withdrew company money against that balance and treated the withdrawals as capital sums, even though Dr O’Connor knew the whole transaction, and particularly the figure, to be a fiction. At the same time he and his wife stopped taking shareholder salaries.

[90]   Dr O’Connor testified that it was the accountant’s decision not to allocate any shareholder salary in any particular year. And he suggested the accountant had also decided to credit the current account. I note neither of these propositions was put to Mr Manchha, the accountant in question, when he testified. I suspect this was because Dr O’Connor was making this evidence up.  Whilst giving this evidence,   Dr O’Connor professed to be unclear about current account and how it worked. In doing so he appeared to have forgotten that the ROT, which he drafted, expressly required the company to create a credit in the current account in settlement of the debt created.

[91]  

Mention has been made earlier of the meeting agendas that Dr O’Connor created for meetings with his accountant or lawyer. Of some significance is an

9      Surprisingly Dr O’Connor was reluctant to accept it was an illegitimate figure, seemingly on the basis that it was serving a different purpose and worked for them. This was another example of the rather blinkered view Dr O’Connor would take of evidence.

agenda prepared for a meeting to be held on 9 February 2000. This was the period preceding the transfer of the Media Search business from a company (MSCL) as its trading entity to a trading trust (MST). The agreement for sale and  purchase  between these two entities would be signed on 22 February, and this 9 February meeting was obviously to go over plans, and ensure everything was in order.

[92]   Sidetracking briefly to reinforce my earlier conclusion about Dr O’Connor’s knowledge of business, accounting, and tax issues, an example of his knowledge is provided by item two of the agenda which provides:

any specific actions required to ensure that interest is deductible and interest income not assessable (assume document to be prepared as acknowledgement of debt owed to overseas trust by MST with debt, interest repayment terms).

[93]   However, of more direct relevance to the ROT issue, the relevant agenda items provide:

4.ACCOUNTING TREATMENT IN MSCL OF RESTRAINT OF TRADE

–     can this be written off without impact on current account – if so, where to.

–     need an agreement by MSCL that allows O’Connor/Craven dispensation to work for MST

5.DEBENTURE BY O’CONNOR/CRAVEN OVER MSCL

–     current account after sale is $1 million +

–     put $1 million debenture by O’Connor/Craven over this current account balance

–     does debenture not apply for 2 years against a creditor of MSCL10

–     R/T overturn by IRD – could this be possible, effects?

[94]   The last entry is significant. It is to be noted that at this point Mr Gilchrist is not involved, and the accountant is Mr Manchha who did not purport in any sense to be a tax adviser. Mr Stone, the lawyer, was a possible attendee but in evidence he

10 Notwithstanding these various entries about a balance in the current account, taking a debenture, and the limits of the effectiveness of a debenture, Dr O’Connor would testify that the idea of a debenture was his lawyer’s idea, and that he did not understand how it worked, or why they were doing it. I did not believe this evidence.

also eschewed any knowledge of the ROT or its role in creating the current account balance. It is clear that it was Dr O’Connor who was alert to the possibility that IRD might challenge the ROT . I have absolutely no doubt that Dr O’Connor knew this risk existed right through the period when he was treating the current account withdrawals as capital payments.

[95]   Dr O’Connor’s evidence on both the agenda item, and the ROT generally was not credible. Concerning the agenda item Dr O’Connor said it related not to the validity of the ROT, but to the validity of allocating, for sale purposes, $200,000 as the residual value of the ROT. He could not explain why he would express that concern by asking in the agenda whether IRD would overturn the ROT, nor could he explain  why  he  thought  IRD  would   care   about   the   residual   value   figure. Dr O’Connor then suggested the $200,000 transfer figure was “an inducement” but could not articulate who was being encouraged. This is perhaps not surprising since in reality he was selling his own business to himself. In my view the agenda item speaks for itself. He was concerned about what would happen if IRD looked into what he knew to be a device.

[96]   Other  factors  point  both  against  the  legitimacy  of  the  ROT,   and   to   Dr O’Connor’s certain knowledge it would not survive scrutiny. The increase in value from $500,000 to $5 million is not justified either by a change in the company’s circumstances or the couple’s circumstances. The figure of $5 million is indefensible and no serious effort to defend it has been made. Dr O’Connor is a successful and astute businessman who must have been aware of these problems. The agenda item simply confirms what was anyway an irresistible inference.

[97]   I tend to the view that the bank story is just that, but there may be a grain of truth  to it  all.   But  I have  no doubt  that at  no point  did Dr O’Connor believe  the

$5 million credit in current account was legitimate or defensible. It was primarily intended to, and did, provide a means by which money in the company could be extracted at whatever rate seemed desirable.

[98]   In terms of what was happening generally at this time, it can be observed that the 1991 ROT was amortised for the first four years of its five year term, and the

1996 ROT was not amortised at all. Strikingly, for the last year of the 1991 ROT when depreciation was not claimed, and for the life of the 1996 ROT until MSCL was sold to MST, MSCL had the benefit of the ACTONZ losses which provided all that was needed in terms of offsetting the company’s income. In relation to these ACTONZ losses, Dr O’Connor would say more than once in evidence that it was important they were being claimed by a limited liability company.

[99]   I do consider it is significant the 1996 ROT was not amortised. There is no sensible reason for the initial amortisation of the 1991 ROT, the stopping of that  once the ACTONZ investment started, and the decision not to amortise the 1996 ROT, other than it being considered preferable not to draw attention to the 1996 ROT.

[100]   In reaching these conclusions about the ROT I have put to one side, perhaps somewhat generously, a Notice of Response filed on Dr O’Connor’s behalf in which it is expressly accepted that the 1996 ROT was a tax avoidance device. Subsequent documents move away from that, and seek to defend its legitimacy. It is not necessary to place weight on it because the other factors to which I have alluded make the true position clear.

[101]   I also wish to note for the record that I do not consider Dr O’Connor has been hindered in his evidence by the passing of time. I am satisfied he full well recalls the circumstances under which these restraints came into existence. I conclude the ROT is commercially illegitimate, and that Dr O’Connor knew from the outset the

$5 million value was indefensible. He also knew that IRD would not accept the current account withdrawals were capital payments.

The Debenture

Summary

[102]   When MSCL was transferred to a trading trust controlled by Dr O’Connor, Dr O’Connor and his wife took a debenture over the $1 million debt still owed to them from the ROT, and reflected in the current account. The Crown allege this debenture was taken so as to give Dr O’Connor equal status with the IRD should any

of MSCL’s deductions be disallowed. Dr O’Connor says the debenture was taken on legal advice and its effect on IRD’s ability to recover money was not a consideration.

Discussion

[103]   At the time of the transfer of the Media Search business from MSCL to MST, Dr O’Connor and his wife took a debenture over the assets of MSCL.  The Crown has contended that this was another device to ensure that the Department would not receive full measure for any reassessed tax liability.

[104]   Dr O’Connor’s solicitor at the time, Mr Stone, testified that the debenture idea was his. He initiated the thought and Dr O’Connor went along with it. I accept that evidence. I do not accept Dr O’Connor’s evidence that he was unaware of the potential utility of the debenture. I have previously referred to the 9 February 2000 agenda where questions about the debenture’s viability under IRD scrutiny feature prominently. The effectiveness of the debenture against creditors is raised in this agenda at a time when MSCL’s only creditor could be the IRD.

[105]   The debenture is an example of a pattern in the case. Dr O’Connor is not to be seen as someone like Mr Gilchrist who is a very knowledgeable tax practitioner who is capable of planning out a course of action. What he is, though, and I have no doubt about this, is someone keenly interested in minimising the money he pays to the IRD. It appeared to me to be a dominant consideration for him. He would take advantage of opportunities presented to him well as creating his own. The debenture was an example of the former.

[106]   My assessment in relation to the debenture is that it is not evidence of a grand prior plan. It was not Dr O’Connor’s idea but was suggested to him by his lawyer. But as with other things Dr O’Connor saw its utility in relation to tax liability. Documents such as the 9 February 2000 agenda give a lie to any alternative view. Once alert to the possibility, Dr O’Connor was always happy to exploit any opportunity afforded.

The ACTONZ investment

Summary

[107]   In 1996 MSCL acquired four units in what was later held to be a tax avoidance scheme. The scheme had been promoted publicly by Mr Anderson and had about 400 investors. MSCL claimed a total of $2.288 million in losses from its investment. The Crown alleges  that  at  the  time  all  these  losses  were  claimed, Dr O’Connor at least knew they were contestable but went ahead anyway. Some losses were claimed after a High Court ruling declaring them to be illegitimate. The losses  were  claimed  in   returns   filed   in   two   tranches   –   6 July 2000   and   22 October 2004. At the time of the first filing, MSCL had signed an agreement to sell the business to MST, and the Crown says the contestability of the losses was known. At the time of the second filing the High Court had already declared the losses to be illegitimate, and MSCL had had no assets for nearly four years.

[108]   Further, when shortly after the 2004 tax return filings MSCL was put into liquidation, the liquidator signed a settlement of MSCL’s tax liability arising from ACTONZ without advising the IRD the company had no ability to pay the settlement.

[109]   The Crown alleges these two events are examples of Dr O’Connor’s intention to evade the payment of tax. Dr O’Connor submits he was entitled at the times he  did to claim the losses. As for the settlement, the IRD settled with a liquidator so  was on notice to inquire into the company’s financial position if it wished.

Discussion

[110]   In the late 1990’s Mr Anderson promoted a scheme known as ACTONZ. It involved the development and sale of software. It had around 400 investors and offered them very large tax losses in its early years. A key issue in the legitimacy of the scheme was the valuation attached to the intellectual property owned. The ACTONZ promoters had valuations from reputable firms, and tax advice from a senior barrister that the scheme was legitimate. Ultimately the High Court decided otherwise, and the scheme was held to be tax avoidance. Thereafter the IRD entered into negotiations with investors about their liability in relation to losses that had been claimed, and the vast bulk of the taxpayers reached a settlement.

[111]   MSCL was one of the investors. It has been noted earlier that Dr O’Connor had lent Mr Anderson $300,000. He had withdrawn the money from the company as personal drawings, and then advanced it to Mr Anderson. Ultimately Mr Anderson gave Dr O’Connor four ACTONZ units in return. However, despite it ostensibly being a personal loan, the units were not placed in Dr O’Connor’s name but MSCL’s.

[112]   MSCL ceased trading in 2000 when the business was sold to MST. It had no assets and thought was given to winding it up, but this did not happen for reasons to be discussed later. It was still in existence as a shell when Mr Gilchrist came on the scene in mid-2004 as Dr O’Connor’s tax adviser. By this time the ACTONZ scheme was unravelling. The High Court judgment had been released, and although there was talk of an appeal it was plain a significant tax liability loomed.

[113]   IRD had commenced an investigation into MSCL, presumably driven by its status as an ACTONZ investor. Mr Gilchrist considered that winding up MSCL was an important step in dealing with an IRD inquiry that would inevitably widen to all Dr O’Connor’s affairs. He was anxious to control the liquidation process, and spoke frequently about appointing a tame liquidator before the IRD appointed one. Eventually a liquidator, Mr Pearson, was appointed. Mr Pearson has used Mr Gilchrist as a specialist tax adviser since 1993.

[114]   Mr Gilchrist wanted MSCL’s ACTONZ tax obligation to be settled by a liquidator, rather than by Dr O’Connor. Accordingly, the liquidation was begun immediately prior to MSCL settling. The settlement agreement must have been largely in place because Mr Pearson signed it as liquidator two days after his appointment.11 The signing process was not contemporaneous. Mr Pearson signed it and sent it to IRD who signed about a month later. It was clear on the face of the document that MSCL was in liquidation. Not disclosed anywhere was that MSCL had no capacity to pay the settled debt.

[115]   Mr Pearson’s evidence was, by agreement, given by way of a read brief. Concerning MSCL his limited recollection was that it had no funds other than those

11     I apprehend it was largely negotiated on MSCL’s behalf by a prominent law firm that was acting for the bulk of investors.

sufficient to do a straightforward liquidation. He does remember signing the ACTONZ settlement, which he did because it reduced the company’s debt. He does not recall whether he knew MSCL would be able to pay the debt, but I infer he must have known since the company, as he says, had no funds. Mr Pearson says he was unaware at the time of an IRD investigation into MSCL. He did not recall getting instructions about settling (again I infer there must have at least been discussions) but if he did, they would have been from Dr O’Connor and not Mr Gilchrist.

[116]   This aspect of settling the ACTONZ dispute without advising IRD that the company could not meet the settlement sum is relied on by the Crown as part of its case. I will return to it shortly. First, however, there is another component of the handling of the ACTONZ matter on which the Crown rely.

[117]   It will be recalled that MSCL was habitually late with its tax returns. ACTONZ losses formed part of the returned tax figures in the tax years 1997–2002, the losses claimed totalling $2.288 million. In relation to when the returns utilising these losses were filed:

1997 – 1999 were filed on 6 July 2000;

2000 – 2002 were filed on 22 October 2004.

[118]   The Crown’s interest in these dates centres on what inference can be drawn from the inclusion of the ACTONZ losses in these returns. The first losses were claimed on 6 July 2000. There was debate at trial over the point at which an investor might reasonably have apprehended that the validity of the ACTONZ losses was in serious dispute. The most likely source of information in the early days was correspondence to all investors by the ACTONZ promoters. What you make of these mail outs depends on your viewpoint. They inform investors that ACTONZ progress past the IRD is not proving easy. But also, that the promoters are confident, and that they have high powered valuations and legal opinions in support.

[119]   I do not consider it worth dwelling on this in relation to the July 2000 filings. One needs to avoid hindsight. Looking through today’s eyes, the scheme seems obviously to be tax avoidance. Back then? Perhaps not so much.  It  was a time  when large scale tax loss schemes were actively promoted, and the promoters did

have some legitimate material to support their position. More importantly, there is  no basis to single Dr O’Connor out. He was just an investor like all the others; ACTONZ was not his idea, and notwithstanding his relationship with Mr Anderson, there is no evidence of special knowledge. He should be seen as just one of many who invested in what was held to be an avoidance scheme.

[120]   One cannot be quite so sanguine about the 2004 filings because by then the High Court ruling was out. True, there was talk of an appeal but at the time the returns were filed and losses claimed, the state of the law was that it was avoidance, and therefore not a legitimate deduction.

[121]   One can temper the negative inferences to be drawn from still claiming the losses by pointing out that IRD was fully aware that MSCL was an ACTONZ investor, so to that extent it was an open action. However, the returns would just be figures unaccompanied by the financial statements which included the losses, so the inclusion of the ACTONZ losses would not have been obvious. There is no suggestion it was brought to IRD’s attention.

[122]   Of the years covered by the October 2004 filings, the losses claimed really only bit with any significance in the tax year 2000, because that was the last trading year before the MSCL business was sold to MST. But it is a factor to add to the mix that returns were filed in 2004, claiming a tax deduction for each of the tax years 2000–2002, for ACTONZ losses known to be unavailable. It needs also to be noted they were being claimed, despite the High Court decision, by a company known by Dr O’Connor to be insolvent. No provision had been made by MSCL to cover any reassessed liability.12

[123]   The second thread of the ACTONZ tax treatment on which IRD rely is the settling of the tax liability at a time when the company was insolvent. I was troubled by the Crown reliance on this at trial, and remain so. First, it was done by a liquidator, not Dr O’Connor. The Crown chose to allow the liquidator’s evidence to be given by way of a hand up brief, and must accept his evidence. It cannot now  seek to infer Mr Pearson was acting on instructions. Second, it must have been, or at

12     Provisional tax had of course been paid.

least should have been, obvious to IRD at the time it signed that MSCL was in liquidation. If it chose to assume MSCL’s capacity to pay without making inquiries, then that is a matter for IRD. There may have been advantages in having the debt quantified. The agreement effectively voided the settlement if the agreed sum was not paid, so maybe IRD thought it was a no loss situation. The fact remains that by “having” the liquidator sign the agreement, MSCL gave notice to the Commissioner it was in liquidation. I do not consider one can  therefore hold its inability to meet  the settlement sum against the company if the Commissioner chose to proceed without inquiring further.

[124]   To summarise therefore on ACTONZ, I do not place weight on the circumstances in which the tax liability came to be settled. I consider there is some significance to the decision to claim tax losses even though the High Court had already ruled the deductions invalid. The weight to be attached to this is tempered to some degree by the fact that IRD was fully aware MSCL was an ACTONZ investor, although there is no suggestion that the deductions were brought to the Commissioner’s attention at the time of filing. Also, as regards the 2000 tax return where it had the most impact, the return had been deliberately filed late by at least three years.

[125]   Finally,   in  terms  of   what  was  motivating  all  this,   I  have  no  doubt   Dr O’Connor had deliberately placed the ACTONZ investment in the company’s name even though the loan to Mr Anderson which funded the purchase was a personal loan from Dr O’Connor. It illustrates that he was aware that the tax losses would at least be questioned,13 and he wanted them to be claimed by a limited liability company. This no doubt motivated him to continue claiming the losses right to the end, especially given the knowledge that the company had no capacity to meet reassessment.

The sale of MSCL and relocation of personal assets

13 Dr O’Connor said he was initially very surprised  at the  size of the ACTONZ losses, and he  queried them with Mr Manchha. It can be noted the size of the losses in just the first year gave a value to Dr O’Connor equal to the entire purchase price of $300,000. In cross-examination on this topic, Dr O’Connor claimed to have no understanding at that time of what tax avoidance as  a concept was. I regarded this as another example of self-serving evidence that was not credible.

Summary

[126]   This topic is introduced primarily by way of narrative background. It records the transfer of MSCL to  the trading trust.   However,  it is also the time at which    Dr O’Connor’s personal assets begin to be transferred into trusts.

Discussion

[127]   This phase of Dr O’Connor’s affairs marks the start of the use of trusts. It occurs in two ways – his business is transferred to a trading trust, and his personal assets to a family trust.

[128]   In March 1999 Dr O’Connor and his wife purchased a different family home in Seatoun. The real estate agent (who gave evidence) suggested that Dr O’Connor look into a family trust, and as a result he visited a lawyer (who gave evidence). A family trust was set up on 24 March 1999, and  the new home sold  to  the Trust on 27 March 1999. The family trust (later to be renamed the Timaru Trust which is how it will be referred to) purchased the property by way of a loan of $93,000 from each of Dr O’Connor and his wife. The loans were repayable on demand, and a life estate was given to the couple.

[129]   To complete the narrative about what was done around this time with the personal assets, 18 months later a share portfolio owned by the couple was  purchased by the Timaru Trust for $1.6 million. The purchase was funded by a debt back to the couple, repayable in 60 years time (this structure was suggested by their legal adviser, Mr Stone).

[130]   In questioning of Dr O’Connor, the Crown tried to link the setting up of the personal trust with the advice, a month earlier, by IRD to ACTONZ investors of IRD’s dissatisfaction with the scheme. To the extent that this suggests the trust was a plan of Dr O’Connor’s, I do not accept that. As I have said earlier, I have no doubt Dr O’Connor was alert to the advantages of insulating himself from creditors, including IRD, but I accept that the timing of the two trusts was situational and suggested initially by lawyers.

[131]   Turning now to the trading trust, when an asset protection plan was first created for Dr O’Connor by his then lawyer, Mr Stevens, the possibility of transferring the business was mentioned but nothing more. However, some time  later, in circumstances that are not entirely clear and which do not particularly matter, Dr O’Connor received a mail out letter from a different Wellington lawyer, Mr Gordon Neville Stone. Mr Stone was an active promoter of trading trusts, and  the idea appealed to Dr O’Connor, so contact was made.

[132]   Mr Stone agreed it was he who recommended converting MSCL into a trading trust. It was done by setting up MST, and then selling MSCL to it as a going concern. Mr Stone confirmed it was at this time he recommended a debenture over MSCL current account which had a $1 million debt to Dr O’Connor and his wife.  He did not know or inquire as to the origins of the debt.

[133]   To complete the MSCL picture, its other asset was a family bach. It sold this to the Timaru Trust. This meant that from late 2000 MSCL had no assets, and had a current account liability to Dr O’Connor and his wife of over $1 million.

[134]   Following the sale of the Media Search business to MST, Mr Stone suggested liquidation of MSCL, and put Dr O’Connor in touch with a liquidator. He then played no further role in this aspect. The liquidation did not happen. Dr O’Connor said he decided to take the cheaper option and do nothing. He knew that would  mean that the company would eventually be removed from the register. Company records show this happened on 31 January 2002. MSCL was placed back on the register on 8 November 2002 and struck off again on 22 January 2004.  No  one could give any evidence as to  who was responsible for this reregistering.  Then on 25 March 2004 it was put back on the register by IRD, until it was placed in liquidation on 22 March 2005.

[314]   Counts 1E and 1F charge Mr Gilchrist with assisting Dr O’Connor to avoid personal tax responsibility for the tax evasion actions of MSCL. Concerning the full offence I consider there is no evidence that Dr O’Connor has in his personal capacity evaded the assessment and payment of tax. Mr Gilchrist cannot therefore be a party.

[315]   Concerning liability for attempt, the Crown relies upon the liquidation; the resettlement of the Timaru Trust first to Hearth, and then later to the Kurow and Oamaru Trusts; and the completion of a gifting programme for debts owed to the Timaru Trust.

[316]   I have already dealt with the liquidation and resettlements. The gifting programme idea was a surprise to me. I do not consider the Crown has established what gifting was done. I put it to one side.

[317]   Count 8A charges Mr Gilchrist with being a party to the evasion of assessment and payment of tax by MST. The conduct relied upon is:

(a)Mr Gilchrist’s alleged involvement in the setting up of the IP transaction;

(b)the steps taken by Dr O’Connor and Mr Anderson to protect the GlobeNet deductions;

(c)the overall strategy as disclosed by the documents of 1 and 14 July.

[318]   Concerning the IP transaction, I have already concluded I am not satisfied he was knowingly involved in the structure.

[319]   Concerning the GlobeNet transaction, Mr Gilchrist was not directly charged with this offending, a fact I have noted earlier. Throughout the trial, and in giving and leading evidence, Mr Gilchrist was never confronted with the allegation that his actions with the Vanuatu account made him a party to the specific GlobeNet offences alleged against Dr O’Connor and Mr Anderson. I consider, based on how the trial was run, that it would not be fair to found liability for this count based on those actions.

[320]   Count 8B alleges Mr Gilchrist was a party to the evasion by Dr O’Connor of personal liability for the MST deductions in relation to the intellectual property, and the GlobeNet invoices. The Crown relies upon:

the general asset protection plan against the background that from at least early 2005 the possible application of HD15 was specifically known to be a possibility.

[321]   This charge depends upon my agreeing that actions  taken  subsequent  to June 2004 were done pursuant to an asset protection plan that had the intention of avoiding the assessment or payment of personal tax by Dr O’Connor. I have previously held that I had a reasonable doubt as to Mr Gilchrist’s involvement in all but the liquidation. I accept he drafted the 1 July and 14 July documents, but have a reasonable doubt they reflect an intention to evade, or assist Dr O’Connor to evade, assessment or payment of tax.

[322]   Count 8F alleges Mr Gilchrist was  party  to  the  tax  evasion  activities  of Dr O’Connor in relation to his own potential personal tax liability stemming from the avoidance of tax payable by Timaru Trust on distributions received from MST. This is the allegation that the assets resettlement from Timaru Trust to Hearth, and

then to Oamaru and Kurow, were done so as to ensure the Timaru Trust had no capacity to pay tax. I have accepted previously that the evidence of the independent trustee, Mr Stone, as to why this resettlement was done means the Crown allegations must fail.

[323]   I am unsure if the Crown relies upon Mr Gilchrist’s email about resettling Timaru to avoid 45 per cent liability as a basis for sheeting home attempt liability. If it does, I am of the view that the email itself was too remote, and that some actions would need to be taken pursuant to the removal for there to be an attempt. None were, and I accept Mr Gilchrist’s evidence that he shortly after rescinded the advice.

[324]   It follows that Mr Gilchrist is acquitted on counts 1D, 1E, 1F, 8D, 8E and 8F. In relation to the charges stemming from his connection to Dr O’Connor’s affairs I find him not guilty of all counts.

Dr O’Connor’s liability

[325]   Count 8A charges Dr O’Connor with being a party to MST’s tax evasion in relation to the deductions claimed on the right to use the IP and on the GlobeNet invoices. I am satisfied the evidence, which also includes  the late filing of returns for both MSCL and MST over this period, justifies conviction on this general charge.

[326]   I have not overlooked that the late filing and the GlobeNet charges will be the subject of individual convictions. However, the IP is an added  dimension.  Generally, from 2000–2004 through the aggressive structures put in place, the deliberate non-filing of the returns, the deliberate non completion of financial returns, and the fraudulent arrangements reached with Mr Anderson, Dr O’Connor carried on a pattern established much earlier of doing what it took to avoid ever paying tax on some very large income. Obviously the overlap with the specific charges will need to be considered at sentencing, but I am satisfied a general charge such as 8A properly reflects the nature of the offending.

[327]   Counts 8B and 8C can be dealt with together. They relate to the allegation that concurrent with his actions in evasively minimising the tax assessed, and

ultimately able to be paid, by his business entities, Dr O’Connor has put himself in a position where he personally cannot pay any assessed amount.

[328]   There are difficulties with these charges. First, he has not been assessed. Second, there is no evidence that the reason he has not been assessed is because IRD believe he cannot pay. Third, there is no evidence he cannot or will not pay if he is assessed.

[329]   An issue that has been present throughout the trial  is  how it  could  be that Dr O’Connor would be personally liable for the tax evaded by his business. One suggestion is the thorough use of s HD15 of the Tax Administration Act 1994 which places personal liability on directors. In its pre-trial ruling on this case, the Court of Appeal noted that the Crown would need evidence that Dr O’Connor activities were seen as having dissuaded the Commissioner from invoking s HD15.17 None was led. The high point is an email from Mr Gilchrist to Dr O’Connor in which Mr Gilchrist notes that a departmental employee had threatened use of HD15. But if the Crown wanted to rely on the proposition it was somehow dissuaded from using HD15, it needed direct evidence that HD15 was considered, and why it was not used. Without such evidence, it is just a hypothetical way liability could theoretically end up with Dr O’Connor. It is also a hypothetical that Dr O’Connor only knew about in 2005.

[330]   In my view all the substantive counts alleging evasion of payment of personal tax liability by Dr O’Connor fail for this reason. He has never not paid an  assessment (other than a deemed dividend in relation to the ROT which is subject to a disputes process). Nor is there evidence he cannot or will not pay if ultimately assessed with personal liability for any of the transactions discussed in this case.

[331]   Concerning evasion of assessment, there is no specific focus on this alternative in the Crown closing. However, for completeness, I note the only acts relevant to assessment were the late filing of his personal returns. There is no basis  to infer that the late filing was driven by a desire to avoid investigation of his personal tax situation. Indeed, unless and until some issue arose with his business entities, there was no possible liability for him. His personal tax returns in this MST

17     R v G&O [2013] NZCA 146 at [76].

period were correct on their face for the time filed, and not capable of hiding anything.

[332]   Finally, there is an allegation of an attempt. This relies on all the conduct already considered and alleges that the steps in relation to his personal affairs were done with the intention of making him immune from the payment of transferred tax liability through rendering him unable to pay if he was assessed.

[333]   I do not consider the addition of an attempt allegation, made at the start of the trial, advances matters. It is difficult to infer this was his intent when there is no evidence that he cannot pay as a result of those actions. Surely one has to be able to say “and as a result Dr O’Connor positioned himself to be financially unable to meet an assessment”. If I do not know that he cannot pay, and indeed do not know what his current circumstances are, it seems to me to be impossible to be sure that leaving himself unable to pay was the plan. At the same time, there is evidence of independent legal advice to put in place these alleged tax avoidance structures. And, as regards the trust resettlements, there is independent evidence as to the non-tax motives for the resettlements occurring.

[334]   It is of course the case that all asset protection has as an aim of the insulation of assets from creditors. Potentially one of those creditors may be the IRD.  I consider in this case the focus must be more specific. So, looking at the activities:

(a)the 1999/2000 house and share portfolios were done on legal advice which was sought as the result of a recommendation from a land agent at the time the family home was acquired;

(b)the sale of the bach to the trust is really a case of protecting the assets of MSCL rather than personal assets, but again done as part of the same advice;

(c)the transfer  of  passive  assets  to  a  different  trust  was  done  on  Mr Stone’s advice; and

(d)the transfer of active assets from Timaru to two new trusts was done to allow different investment strategies.

[335]   I accept the Crown position that one can be suspicious that one of the motives, or at least perceived advantages, was insulation from the Commissioner. I consider this is most likely to be so in relation to the ROT, since that was as much a personal device (tax free receipts) than it was a device done through his trading entity. But I am not satisfied to the required standard that Dr O’Connor intended by any or all of these actions to avoid the personal payment of tax, should he be assessed. I think it doubtful prior to June 2004 he had anything other than a very vague idea that it was even possible.

[336]   The best evidence of an asset protection plan aimed at the Commissioner were the documents created by Mr Gilchrist after June 2004. I have already discussed  my   assessment   of   Mr Gilchrist’s   intentions.   I   do   not   consider  Dr O’Connor had a different or higher intention than the person who was driving these actions.

[337]   It follows that I have a reasonable doubt in relation to all the charges alleging evasion or attempted evasion by Dr O’Connor of a potential personal tax liability, such liability arising from the tax actions of his trading entities. There is insufficient evidence that the transferred liability was ever a real possibility, and insufficient evidence that Dr O’Connor was sufficiently aware of it to be motivated to avoid it. Further, there is independent evidence explaining the asset protection which was undertaken, and which was initiated by advice from independent advisers who have all testified insulation from IRD was not a purpose.

[338]Accordingly, Dr O’Connor will be acquitted on counts 1B, 1C, 8B and 8C.

[339]   That leaves count 1A. It is the general count alleging that MSCL has evaded tax, and Dr O’Connor is a party to that evasion. On one level the answer might seem straight forward given my earlier conclusions about the various transactions – MSCL plainly did evade the assessment and payment of tax, and Dr O’Connor was plainly responsible for it doing so. But there is a difficulty. Section 150A of the Tax

Administration Act 1974 imposes a time limit on how far back the charges can go. It means that the Crown is limited to conduct occurring after 31 March 2001.18

[340]   The first matter arising after this date on which the Crown relies is the omission to pay. Assessments have been made, and have not been paid. But that is because since late 2000 the company has had no capacity to pay. I accepted the defence’s submission in a pre-trial application, that because of this the charge could not succeed, and discharged the defendants on this count. The Court of Appeal held me to be in error and the charge was reinstated.

[341]   Because of inadequate wording on my part, the appeal focussed on the issue of whether a mere omission (not paying) could constitute the conduct requirement of this offence of evasion. It appeared that I had said it could not and was dismissing the charge for that reason. The Court of Appeal quite rightly said that was wrong. Conceptually a failure to pay, if accompanied by the necessary intention to evade payment, could constitute the offence.

[342]   This focus, caused by my poor drafting in the judgment and of the question of law, means that what I see as the major issue presented by these facts was not discussed in the Court of Appeal. In my view when a taxpayer is wholly incapable  of paying its assessment because it is broke, not trading, and has no capacity to raise money, it cannot be said that its omission (non-payment) is due to an intention to evade. It simply cannot pay.

[343]   I appreciate of course that this seems ridiculous when the reason the taxpayer cannot pay is because it has taken evasive steps to ensure it is unable to. But normally that would not be a problem. One would just prove those prior steps, and that would be enough. It is only because in this case the time limit in s 150A of the Act removes those steps from consideration that the issue arises.

[344]   The Crown accepts this issue was not considered by the Court of Appeal, a point I raise only to explain why I do not consider that ruling dictates the answer I can give to this charge. The Crown seeks to overcome my concern by reliance on

18     This issue is fully discussed in the Court of Appeal judgment.

Tifaga v Department of Labour.19 Mr Tifaga was charged with being an overstayer. He had failed to leave New Zealand on the required date because he had no ability to buy a plane ticket. The Court of Appeal held he could not rely upon his impecuniosity, because he was under an on-going obligation to have the ability to leave the country.

[345]   It is important to understand that Tifaga was argued as a case of involuntariness where it was said the conduct element of the offence was missing. A more credible version of the defence would be if Mr Tifaga was in jail at the time he was obligated to leave. The mens rea of the offence with which Mr Tifaga was charged was knowledge of the obligation to leave and a failure to do so. There is no specific intent component. Had there been, it would have not been necessary for the defendant in Tifaga to structure the defence as he did.

[346]   The situation is different here. In relation to the evasive non-payment of tax by MSCL the requirements to be proved are:

(a)knowledge of the obligation to pay;

(b)failure to pay; and

(c)an intention, at the time of not paying, to evade the tax.

[347]   In my view it cannot be said that subsequent to 31 March 2011 MSCL had that intention because at all times after that date it had absolutely no choice in the matter. I, therefore, consider that on the facts of this case, the Crown cannot rely on the omission to pay the tax assessment to prove its case.

19     Tifaga v Department of Labour [1980] 1 NZLR 235.

[348]   As an alternative, the Crown relies on various positive acts which it says prove the charge. On my analysis of matters these alternatives must involve the evasion of assessment, because the same issue will always arise with evasion of payment.20

[349]   The first positive act relied upon is the liquidation of MSCL. I do not intend to revisit that topic.

[350]   The second is an idea that emerged only in closing that the payment of provisional tax could be relied on as an act of evasion. The proposition advanced  was that MSCL was complying with its tax obligations in this area only so that the Commissioner’s attention would not be drawn to the company by non-payment of provisional tax. This was never, to my recall, suggested to any witness. There is no evidential basis for it, which is a relief because I would not wish to be, I am sure, the first Judge to hold that complying with one’s tax obligations constituted the conduct requirement of evasion.

[351]   The only other possibility on which a conviction for count 1A might be based is late filing. Those charges are proved. There is no basis to enter a further conviction.   Accordingly,    and   not   reflecting   any   positive   assessment   of   Dr O’Connor’s  actions  but  because  all  his  acts  of  evasion  are  time  barred,    Dr O’Connor is acquitted on count 1A.

20 I admit to a conceptual difficulty with this, but consider I am bound by the Court of Appeal decision. The conceptual difficulty is that these acts on which the Crown rely post-date the assessment date. I am unsure how one can evade an assessment already made. I had understood at the pre-trial hearing that this was the reason why the Crown, at least before me, confirmed that count 1 was limited to the evasion of payment. However, before the Court of Appeal it did not  so limit itself, as no argument was raised before me at the trial. So I accept that, based on the Court of Appeal decision, these acts if done with an evasive intent can constitute evasion of assessment.

Summary

Dr Paul O’Connor

Count 1A	Not guilty
Count 1B	Not guilty
Count 1C	Not guilty
Counts 2 to 7	Guilty
Count 8A	Guilty
Count 8B	Not guilty
Count 8C	Not guilty
Counts 9 to 13	Guilty
Counts 14 and 15	Guilty

Brent John Gilchrist

Counts 1D to 1F	Not guilty
Counts 8D to 8F	Not guilty

Scott Crawford Anderson

Counts 14 and 15 Guilty

Simon France J

Solicitors:

Luke Cunningham & Clere, Wellington Public Defence Service, Wellington

G Stone, Solicitor, Wellington

ADDENDUM

[352]   Dr O’Connor was granted interim name suppression. It has not been possible to write this judgment in a way that would allow just anonymisation of his name.   Dr O’Connor’s business is reasonably unique and he would be readily identifiable.

[353]   Name suppression will be resolved shortly. In the interim the judgment must be suppressed. It can only be reported that Wellington businessman has been convicted  of  tax  evasion.   Mr Anderson’s  name  is  not  suppressed.    Nor  is    Mr Gilchrist who has been acquitted of these charges.

APPENDIX

Count 1

THE CROWN SOLICITOR AT WELLINGTON CHARGES that PAUL

WILLIAM O’CONNOR, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was a party to MSCL Holdings Limited (struck off) evading or attempting to evade the assessment or payment of tax relating to deductions claimed by MSCL Holdings Limited (struck off) for losses associated with the ACTONZ and Vencap schemes.

Count 1B

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Evading or attempting to evade the assessment or payment by him and Anne Craven of tax relating to deductions claimed by MSCL Holdings Limited (struck off) for losses associated with the ACTONZ and Vencap schemes.

Count 1C

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Evading or attempting to evade the assessment or payment by him and Anne Craven of tax relating to payments to him and Anne Craven by MSCL Holdings Limited (struck off) purporting to be capital receipts in relation to restraint of trade agreements entered into in 1996.

Count 1D

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN

GILCHRIST, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was a party to MSCL Holdings Limited (struck off) evading or attempting to evade the assessment or payment of tax relating to deductions claimed by MSCL Holdings Limited (struck off) for losses associated with the ACTONZ and Vencap schemes.

Count 1E

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN

GILCHRIST, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was  a party to Paul William O’Connor evading or attempting to evade the assessment or payment  by  Paul  William  O’Connor  and  Anne Craven of tax relating to deductions claimed by MSCL Holdings Limited (struck off) for losses associated with the ACTONZ and Vencap schemes.

Count 1F

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN

GILCHRIST, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was  a party to Paul William O’Connor evading or attempting to evade the assessment or payment  by  Paul  William  O’Connor  and  Anne Craven of tax relating to deductions claimed by MSCL Holdings Limited (struck off) purporting to be capital receipts in relation to restraint of trade agreements entered into in 1996.

Count 2

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 1998 and 6 July 2000, at Wellington, was a party to MSCL Holdings Limited (struck off) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for MSCL Holdings Limited (struck off) for the period ending 31 March 1997.

Count 3

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 1999 and 6 July 2000, at Wellington, was a party to MSCL Holdings Limited (struck off) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for MSCL Holdings Limited (struck off) the period ending 31 March 1998.

Count 4

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2000 and 6 July 2000, at Wellington, was a party to MSCL Holdings Limited (struck off) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment tax.

Particulars: Income Tax return for MSCL Holdings Limited (struck off) the period ending 31 March 1999.

Count 5

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2001 and 22 October 2004, at Wellington, was a party to MSCL Holdings Limited (struck off) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for MSCL Holdings Limited (struck off) the period ending 31 March 2000.

Count 6

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2002 and 22 October 2004, at Wellington, was a party to MSCL Holdings Limited (struck off) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for MSCL Holdings Limited (struck off) the period ending 31 March 2001.

Count 7

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2003 and 22 October 2004, at Wellington, was a party to MSCL Holdings Limited (struck off) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for MSCL Holdings Limited (struck off) the period ending 31 March 2002.

Count 8A

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was a party to Media Search Trust evading or attempting to evade the assessment or payment of tax relating to deductions claimed by Media Search Trust for the amortisation of fixed life intangible property, Client of One invoices and Globe.Net invoices.

Count 8B

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Evading or attempting to evade the assessment or payment by him of tax relating to deductions claimed by Media Search Trust for the amortisation of fixed life intangible property, Client of One invoices and Globe.Net invoices.

Count 8C

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was a party to the Timaru Trust evading or attempting to evade the assessment or payment of tax on distributions received from Media Search Trust as a non-qualifying (non-complying) trust.

Count 8D

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN

GILCHRIST, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was a party to Media Search Trust evading or attempting to evade the assessment or payment of tax relating to deductions claimed by Media Search Trust for the purchase of fixed life intangible property, Client of One invoices and Globe.Net invoices.

Count 8E

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN

GILCHRIST, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was as party to Paul William O’Connor evading or attempting to evade the assessment or payment by Paul William O’Connor of tax relating to deductions claimed by Media Search Trust for the purchase of fixed life intangible property, Client of One invoices and Globe.Net invoices.

Count 8F

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN

GILCHRIST, between 31 March 2001 and 28 November 2011, at Wellington, evaded or attempted to evade the assessment or payment of tax.

Particulars: Was a party to the Timaru Trust evading or attempting to evade the assessment or payment of tax on distributions received from Media Search Trust as a non-qualifying (non-complying) trust.

Count 9

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2001 and 22 October 2004, at Wellington, was a party to Tetari Whai Limited (in Liq) (as trustee of the Media Search Trust) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for Media Search Trust for the  period ending 31 March 2002.

Count 10

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2002 and 22 October 2004, at Wellington, was a party to Tetari Whai Limited (in Liq) (as trustee of the Media Search Trust) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for Media Search Trust for the  period ending 31 March 2001.

Count 11

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2003 and 22 October 2004, at Wellington, was a party to Tetari Whai Limited (in Liq) (as trustee of the Media Search Trust) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for Media Search Trust for the  period ending 31 March 2002.

Count 12

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2004 and 22 October 2004, at Wellington, was a party to Tetari Whai Limited (in Liq) (as trustee of the Media Search Trust) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for Media Search Trust for the  period ending 31 March 2003.

Count 13

THE CROWN SOLICITOR FURTHER CHARGES that PAUL WILLIAM

O’CONNOR, between 31 March 2006 and 14 June 2006, at Wellington, was a party to Tetari Whai Limited (in Liq) (as trustee of the Media Search Trust) knowingly not providing information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax return for Media Search Trust for the  period ending 31 March 2005.

Count 14

THE CROWN SOLICITOR FURTHER  CHARGES  that PAUL WILLIAM

O’CONNOR     AND     SCOTT     CRAWFORD     ANDERSON,  between

20 October 2004 and 13 June 2006, at Wellington, was a party to Tetari Whai Limited (in Liq) (as trustee of the Media Search Trust) knowingly providing false information to the Commissioner of Inland Revenue intending to evade the assessment or payment of tax.

Particulars: Income tax return of the Media Search Trust for the period ending 31 March 2004 which claimed a deduction of $355,555 relating to Globe.Net invoices that were not deductible business expenses.

Count 15

THE CROWN SOLICITOR FURTHER  CHARGES that  PAUL WILLIAM

O’CONNOR     AND     SCOTT     CRAWFORD     ANDERSON,  between

20 October 2004 and 13 June 2006, at Wellington, was a party to Tetari Whai Limited (in Liq) (as trustee of the Media Search Trust) knowingly providing false information to the Commissioner of Inland Revenue intending to evade the assessment or payment of tax.

Particulars: Income Tax return of the Media Search Trust for period ending 31 March 2005 which claimed a deduction of $318,888 relating to Globe.Net invoices that were not deductible business expenses.

Count 16

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN GILCHRIST and SCOTT CRAWFORD ANDERSON, (together with AB) between 1 January 2006 and 3 May 2006, at Wellington, as a party to AB Limited knowingly providing false information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars:    GST   return   for   AB   Limited   for   the   period   ended   31 March 2006.

Count 17

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN GILCHRIST and SCOTT CRAWFORD ANDERSON, (together with AB) between 1 January 2006 and 4 July 2006, at Wellington, as a party to AB Limited knowingly providing false information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: GST return for AB Limited for the period ended 31 May 2006.

Count 18

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN GILCHRIST and SCOTT CRAWFORD ANDERSON, (together with AB) between 1 January 2006 and 3 May 2006, at Wellington, as a party to AB Limited knowingly providing false information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: GST return for AB Limited for the period ended 31 July 2006. Count 19

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN GILCHRIST and SCOTT CRAWFORD ANDERSON, (together with AB) between 1 January 2006 and 3 May 2006, at Wellington, as a party to AB Limited knowingly providing false information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax  returns  for  AB  Limited  for  the  period  ended 31 March 2006.

Count 20

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN GILCHRIST and SCOTT CRAWFORD ANDERSON, (together with AB) between 1 January 2006 and 3 May 2006, at Wellington, as a party to AB Limited knowingly providing false information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Income Tax  returns  for  AB  Limited  for  the  period  ended 31 March 2007.

Count 21

THE CROWN SOLICITOR FURTHER CHARGES that BRENT JOHN GILCHRIST and SCOTT CRAWFORD ANDERSON, (together with AB) between 1 January 2006 and 3 May 2006, at Wellington, as a party to AB Limited knowingly providing false information to the Commissioner of Inland Revenue, intending to evade the assessment or payment of tax.

Particulars: Tax invoices from Barclay Designs Limited, trading as Globe Business Services.