Decision by Kós J in:
R v Rowley and Skinner  NZHC 1778, 20 July 2012, Wellington
- Crimes Act 1961, ss 66, 117(e), 217, 228(b), 361D and 347
- Evidence Act 2006, s 35
- Income Tax Act 2007, s CB 32
- Tax Administration Act 1994, ss 17, 19, 109, 143B(1)(c) and 143B(1)(f)
Invoicing Scheme Established
The accused were accountants and tax agents (Rowley and Skinner) who were charged with 89 counts of using clients’ GST and income tax returns dishonestly to obtain a pecuniary advantage, under s 228(b) of the Crimes Act 1961. The Crown case was that over a five year period, the accused devised a scheme to issue false invoices, which they supplied to their clients, and which enabled the clients to claim the invoice payments as deductible expenses in their income tax returns, and to claim input credits in GST returns. The Crown alleged that the invoices were false, and relate to services or goods never provided, and never intended to be provided.
Detection & Raid
The invoicing scheme was detected towards the end of 2009, and the CIR raided the accused’s offices on 14 April 2010. Twelve Inland Revenue officers attended, and those officers conducted a room-by-room search of the offices over 12 hours. The officers seized material and carried out forensic imaging of computers.
Evidence & Personal Gain
Evidence before the Court showed that around two-thirds of the invoice payment was returned to clients, with the balance being retained to the accused’s practice, Tax Planning Services Ltd (TPS); a large part of that was then disbursed to the accused personally. The Crown alleged that fictitious invoices totalled in excess of $9,500,000, and that the resultant shortfall to the Revenue (ie benefit to clients) was in the order of $3,100,000. Most of that was retrieved as a result of clients’ voluntary disclosure and reversal of deductions and GST inputs claimed. The personal benefit to the accused was said to exceed $2,300,000.
Wilful Attempts to Pervert Justice
In addition the accused were jointly charged with seven counts of wilfully attempting to pervert the course of justice, pursuant to ss 117(e) and 66 of the Crimes Act 1961. Those charges related to meetings with, and documents given to, clients in advance of compulsory interviews those clients were to attend with the CIR under s 19 of the Tax Administration Act 1994 (TAA 1994). The Crown alleged that the accused attempted to persuade various clients to provide evidence at their s 19 interviews with evidence that the accused knew to be false.
Providing False Information
Further, each accused also faced five individual counts of knowingly providing false information to the CIR, pursuant to ss 143B(1)(c) and (f) of the TAA 1994. These charges related to the personal tax returns of each accused.
Former Participant Gives Evidence for Crown
Thirteen of the total charges were laid on the basis that the accused had acted together with a Mr Stevens, a former chartered accountant, and in relation to former clients of Stevens, who the latter had referred to the accused on the basis that they would participate in the alleged scheme. In these cases, the returns were filed by Stevens on behalf of his clients, and the accused allegedly supplied the false invoices and handled payments thereof. Stevens pleaded guilty to those charges (and others) and was sentenced in the Wellington District Court to 10 months’ home detention and 150 hours’ community work. He was also ordered to pay reparation of $121,852. Stevens gave evidence for the Crown in the trial of the accused.
Invoice writing scheme: Crown case
The Crown alleged that the scheme typically operated as follows:
– a client with tax to pay was identified by the accused. The accused would explain that they could assist by entering into a transaction which would reduce the client’s indebtedness to the CIR. The client would be assured that the transaction was a legitimate method of tax reduction. In some cases clients were told they were purchasing a tax loss from another business.
– An invoice was supplied to the client, but for goods and services never provided, and never intended to be provided.
– The client then paid the face value of the invoice into an account held or controlled by the accused, usually the TPS trust account.
– On the same day (or within the next 48 hours) a large portion of the payment was transferred back to the client by the accused. Typically the amount was some two-thirds the original payment.
-The remaining one-third or so retained in the TPS trust account would then be distributed, usually to an account in one of the accused’s names, or to an associated trust or company.
The full value of the invoice was then claimed by clients for income tax and GST purposes. The payment of the invoice was typically coded in the client’s accounts as “sub-contracting” or “(project) consultancy”. The scheme benefited clients of TPS because the combined effect of the income tax deduction and GST input credit exceeded the amount that the accused retained. There were a number of different invoicing entities (corporates and trusts), and TPS was, at one time or another, the registered tax agent for each of those entities.
In summary, the accused submitted that the Crown must show, beyond reasonable doubt:
(a) that there was no genuine transaction and that the accused knew that; or
(b) that the tax effect of the transaction was not as claimed and the accused knew that; and
(c) (in either case) that the accused was knowingly involved in the filing of the relevant returns.
In respect of some counts the accused submitted that the clients were those of Stevens, and not theirs, and that there was no evidence that they had knowledge of what Stevens told his clients, what tax position he advised them to take, and what position they took. In the case of any in which they did have involvement, they did not believe that false tax returns would be filed. In respect of the other charges, the accused submitted there were real transactions which they believed generated the tax effects reflected in the relevant returns. Further, in relation to one particular transaction singled out by the Crown in relation to a car park contracting project, the accused contended that the transaction gave rise to a genuine input credit for GST purposes and a genuine income tax deduction. As payments were received in the TPS trust account on account of invoicing entities, payments were made direct to the accused in reduction of the indebtedness of an investment company (owned by Rowley and Skinner) to the accused and their trusts. In relation to payments received by the TPS trust account for other corporate entities associated with a Ms Madondo, the accused submitted that they were obliged to make the payments because moneys were genuinely payable to Ms Madondo pursuant to the entity invoices.
Response to charges of attempting to Pervert the course of justice
In relation to the charges of attempting to pervert the course of justice, the accused submitted that their clients were summoned by the CIR to attend compulsory interviews under s 19 of the TAA 1994, and to produce all relevant documents in their custody and control. The clients asked their accountants (including the accused) for documents in the course of responding to that requirement. The accused submitted that they supplied the clients with the documents “and with an explanation as to how the transaction in question worked so as to enable their clients to comply with their obligations under s 19”. The accused stated that they believed that the information they supplied was correct, and that they had no apprehension at the relevant time that criminal charges were a possibility. Their actions were therefore not influenced or motivated by that consideration.
The accused further submitted that the Crown had to prove;
(a) that they knowingly supplied false information to their clients;
(b) they did so with the intention that that information would be used in the course of the investigation; and
(c) that their purpose was to deflect the CIR from prosecuting a criminal offence or adducing evidence as to true facts and thereby avoid a Crown prosecution.
Dishonest use of a document to obtain a pecuniary advantage
(1) Kós J found the accused Skinner guilty on 80 of the dishonest use of a document charges and acquitted him of nine. His Honour convicted Rowley of 75 of those charges, and acquitted him of 14.
(a) Kós J was satisfied beyond reasonable doubt that, beginning in September 2005, the accused together devised (in conjunction with Stevens) a scheme to invoice clients for “planning”, “consultancy” or “subcontracting” services (and occasionally goods) where there was no underlying supply at all (or very occasionally, a supply which was inflated beyond the face value of the invoice).
(b) The scheme was sold to willing and in many cases credulous clients of the accused’s accounting and tax planning practice as a means of reducing the amount of tax payable by them.
(c) Kós J did not accept the various explanations for the transactions offered by the accused, stating that none of those explanations were true. The scheme worked by repaying to clients approximately two-thirds of the face value of the invoices (or payments made in the absence of invoices). However in exchange for that net one-third cost, the clients could claim income tax deductions and GST input credits, and the scheme did not work from the clients’ perspective unless they did so. The payments were then accounted for as expenditure in the clients’ financial statements (most of which were prepared by the accused’s accounting practice), and a tax deduction followed. The result was a reduction in assessable income returned in the clients’ income tax returns. GST input credits were also claimed, as intended.
(d) Kós J noted that various invoicing entities were used, and that the accused in evidence sought to distance themselves from those entities, by for example, placing them instead under the control of Ms Madondo and another client of theirs, Mr Uren. His Honour found that at all times all the invoicing entities were under the direct control of the accused.
(e) Kós J also noted that when the scheme started to unravel, the accused had offered new explanations for the transactions, based on the contention that instead of the services described in the invoices, clients had instead acquired various real property interests (car park licences and apartments in the Wellington CBD) or other contractual obligations necessitating payments. Kós J noted however, that this explanation “came as news to all but two clients”; and that the evidence of those two on that aspect was unreliable. None of these agreements had been signed (apart from one, which occurred in late 2010 after the Inland Revenue investigation was in full swing). His Honour found that the new explanations had no foundation in fact. Most notably, the accused tendered in evidence a portable computer hard drive which attempted to show that the property agreements had been created at about their apparent dates. Forensic evidence tendered by the Crown, however, showed convincingly that the time stamps in the metadata on the portable hard drive had been altered in the period between 24 and 27 April 2012, ie in the days immediately prior to the commencement of the trial.
(2) In relation to charges on which the accused were acquitted:
- Count 17, which concerned GST returns by Esk Contractors had not been proved beyond a reasonable doubt, as the charge was not substantiated by the voluntary disclosures submitted by Esk Contractors, and prepared by the accused.
- Counts 43 and 45, which concerned two GST returns for Nigel Hall Decorators Ltd had not been proved beyond a reasonable doubt. In the absence of evidence of payment of the first sum disclosed in the voluntary disclosure and invoices covering either payment, and given that the voluntary disclosure was not prepared under the direction of the accused, Kós J was not satisfied that those two counts had been proved to the requisite standard.
- Counts 49-50, and 75-77, which related to GST and income tax returns of Topline Tailors Ltd and Mangiare Foods Ltd, had not been proved beyond reasonable doubt. Kós J was unable satisfactorily to connect the payments shown to have been made to GST input credit claims in the absence of the relevant invoices, a voluntary disclosure document approved by the accused, or more satisfactory evidence from the director of both companies who had taken the accounting work for the two businesses to TPS in 2006.
- Counts 65-69, which related to the tax returns of Skinner’s sister, who was also a client, had not been proved beyond reasonable doubt against Rowley. Those charges had however been proven against Skinner, as there was no genuine underlying supply for the payments made by Ms Skinner for the amounts expensed in her accounts as “consultancy” for each of the five tax years charged; or at least not to the level claimed. While TPS provided some general business/advice, the payments were also part of a scheme whereby some of the fees were repaid to Ms Skinner from a trust. Kós J was satisfied that Skinner knew that those inflated expenses would be used to justify income tax deductions to which his sister was not entitled. The evidence left real doubt however, as to whether Rowley, had anything to do with the matters the subject of those counts.
- Count 87, which related to a GST return filed by BRMVR Holdings Ltd had not been proved beyond reasonable doubt. The relevant invoice was the subject of very little examination in evidence, and the accused were not cross-examined on it. In those circumstances Kós J was not satisfied that he could form a view beyond reasonable doubt that the invoice was used by BRMVR, or that the accused intended it so to be used, for BRMVR’s November 2009 GST return (although it was likely).
Perversion of the course of justice
(3) Kós J convicted each accused on each of the seven joint charges of wilfully attempting to pervert the course of justice. His Honour was satisfied beyond reasonable doubt in each case that the accused supplied false information (explanations and documents) to their clients with the purpose of deflecting the CIR from adducing evidence of the true facts regarding those clients’ tax affairs and thereby avoiding criminal prosecution.
- Kós J stated that at the point at which the CIR’s raid took place on 14 April 2010, the accused, fully cognisant of their fraudulent conduct, could have been in no doubt that the CIR’s investigations might result in charges against them (or their clients). The accused then generated the property transactions and other contract documents, and other correspondence, to suggest a genuine basis for the payments, albeit in terms unrelated to the invoices. The accused then jointly set about seeking to persuade certain clients to justify or explain the payments in those new terms, when interviewed by the CIR. By this time the clients had been summonsed to compulsory interviews under s 19 of the TAA. Unknown to the accused, one of the clients (a former police officer) made a recording of the meeting he had with Skinner before his s 19 interview on his iPhone, and that recording showed Skinner counselling the client to give explanations to the CIR which were irreconcilable with proven facts.
- Kós J noted that contrary to the accused’s plan however, most clients told the truth to the CIR when interviewed, and that those that did not made unconvincing liars. At least one confirmed the true position following the interview. Most clients submitted voluntary disclosures to the CIR, seeking reversal of the deductions and GST input credits hitherto claimed. The accused encouraged them in that course, on the basis that it reduced the level of penalties clients were potentially exposed to.
Knowingly providing false information
(4) Kós J was satisfied beyond reasonable doubt that the Crown had established that the accused knew that their personal tax returns were understated, and that the accused intended to evade the assessment or payment of tax.
(a) The invoice-writing and payment scheme in respect of which convictions were entered on counts 1 to 93 was a fraud on the revenue, which sufficed in itself. It appeared also likely to have constituted also a fraud on clients who paid the money on the basis that they were doing so pursuant to a legitimate means of reducing their tax exposure, only then to find it was nothing of the sort and that they had been reassessed with substantial tax to pay and penalties.
(b) The effect of s CB 32 of the Income Tax Act 2007 was to make the unremitted retained payment proceeds part of the gross income of the accused.
- The income was required to be declared by them regardless of the entity invoicing or the entity receiving. All of these were entities within the power and control of the accused. Kós J did not accept the accused’s defence that the investment company was indebted to the accused, so that the money then looped back to the accused by way of repayment of prior advances and was now not income in their hands. The evidence showed rather that the accused simply helped themselves to distributions from the TPS trust account without bothering with the niceties of advance and repayment, or any formal documentation.
- The accused gained the possession and control of property which they obtained without claim of right. To accept the accused’s defence would be to enable a fraudster to wash proceeds of a fraud via a further scheme of their own devising so that it ended up with an entity indebted to them, and avoid payment of tax on the proceeds of that fraud. Kós J stated that this outcome would be entirely contrary to the purpose and effect of s CB 32, albeit that as proceeds of crime, the proceeds might eventually be recovered in their entirety under other legislation.
(c) The accused could not point to receipts of moneys ostensibly on account of two invoicing entities as money which was neither in their power and control nor to which they were not entitled by reason of trusteeship to Ms Madondo. Kós J had found as a matter of fact there was no obligation to pay any sum to Ms Madondo. To the extent the accused did so, that was their own free choice. Those moneys were first required to be declared by the accused as gross income under s CB 32.
(d) It followed that the personal tax returns of the accused in the years 2006 to 2010 were false in as much they did not declare the moneys obtained by them as a consequence of their fraudulent conduct. “False” in the context of s 143B(1)(c) of the TAA 1994 simply means “inaccurate” or “incorrect”.
(e) Kós J was satisfied beyond a reasonable doubt that the Crown had shown that the accused knew that the returns were false. That knowledge could be inferred from the fact that the accused must have known that they were committing frauds (from which they received benefits), that they received substantial portions of the net benefit of those frauds into their personal accounts (or other associated accounts), that they applied the money to their own personal interests (or those of their associated trusts) and, because, given their knowledge as accountants and tax agents (with a speciality in tax planning), they must have known that income, even if the proceeds of fraud, must be declared for tax purposes. In reaching this conclusion, his Honour did not accept the accused’s characterisation of themselves as somewhat “dull-witted or out of touch with the fundamentals of tax law”. This was inconsistent with the evidence and the tax-focused nature of the practice they engaged in on behalf of clients.
(f) Finally, Kós J was also satisfied that the accused intended to evade the assessment or payment of tax, noting that an evasive intent involves knowing that the act or omission intended is wrong or acting deliberately or recklessly as to whether or not the act or omission is wrong: Babbington v Commissioner of Inland Revenue (No 2)  NZLR 152 (HC). Where the accused knew they were deliberately understating their income in the relevant tax returns (as had been found by Kós J), then the “only available inference” was that they intended to evade the assessment or payment of tax.
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