Tax­ing the wind­fall from Ponzi schemes

Jamaica Gleaner - - BUSINESS - Ever­ald De­war Ever­ald De­war is se­nior tax­a­tion man­ager at BDO Char­tered Ac­coun­tants in Kingston. evadew@ya­

IATAXPAYER in a re­cently de­cided case in the Court of Ap­peal learnt the hard way when, based on his grounds of ap­peal, he re­ceived the sen­tence even be­fore a ver­dict was reached against him.

Wil­liam An­drew Chang chal­lenged Tax Ad­min­is­tra­tion Ja­maica (TAJ) over its as­sess­ment of his gains from the Olint in­vest­ment scheme.

Get­ting a sense of the na­ture or source from which the in­come arose, Olint was later ex­posed as a Ponzi scheme.

A Ponzi scheme is where the op­er­a­tor pays re­turns to one in­vestor from new cap­i­tal he re­ceived from other in­vestors, rather than from profit earned through trade or busi­ness.

In the twists and turns of his case, David Smith, Olint’s op­er­a­tor, was even­tu­ally jailed for de­fraud­ing mem­bers of the in­vest­ment scheme.

A Ponzi scheme is re­ally a fraud per­pe­trated on in­vestors and is there­fore il­le­gal. But are the gains not also il­le­gal and there­fore not sub­ject to tax?

The tax au­thor­i­ties are clear that once it is es­tab­lished that a trade or busi­ness was in op­er­a­tion, any prof­its or gains aris­ing from it is tax­able. It would not mat­ter if they are il­le­gally ob­tained.

In Chang’s case, Olint was os­ten­si­bly car­ry­ing on a busi­ness. Also, what was in the tax­payer’s mind at the time is vi­tally im­por­tant. To the tax­payer, there was noth­ing to say he knew or should have known that he was in­volved in a fraud­u­lent trans­ac­tion.

Law lords at the Privy Coun­cil, Lord Clyde and Lord Den­ning, ex­pressed con­trary views in other cases – cast­ing doubt that sys­tem­atic crime it­self can con­sti­tute trad­ing. This would mean that gains from, say, ‘lotto scam­ming’ could not be deemed ‘tax­able in­come’.


Some will ar­gue that in these schemes the tax­payer never made any gains, as such; or that these gains were cap­i­tal ac­cu­mu­la­tion. It is ba­si­cally like a ‘part­ner’ – an in­for­mal but pop­u­lar sav­ings sys­tem in Ja­maica where, from a reg­u­lar con­tri­bu­tion made daily, weekly or monthly by mem­ber/ part­ners, the ac­cu­mu­la­tion is paid to one of the part­ners. The scheme closes when all of the part­ners col­lect their lump sum.

How­ever, the tax­payer’s ac­coun­tant shut the door on this propo­si­tion when he re­ported the gain, de­scrib­ing it as “in­come on in­vest­ment”.

As the court noted: “Sur­pris­ingly, the source was never dis­puted”.

The tax­payer, through his at­tor­ney, went down the rab­bit hole and ar­gued about pro­ce­dural im­pro­pri­eties and con­sti­tu­tional breach. He asked that pre­cepts, set by the court in ear­lier judg­ments, be set aside.

The court had dif­fi­cul­ties with this. They felt bounded by prece­dent. And this was noth­ing short of chal­leng­ing their ear­lier judg­ments and the ju­ris­dic­tion of the court it­self.

The tax­payer ar­gued based on premises grounded in the 1986 case of Win­ston Lin­coln v Com­mis­sioner of In­come Tax, which was de­cided against the Tax Com­mis­sioner. How­ever, the law has long been changed on these mat­ters. As the judge hand­ing down the de­ci­sion ex­plained: “On vir­tu­ally ev­ery is­sue raised by the tax­payer, the court was asked to re­vise mat­ters that have al­ready been cov­ered” in ear­lier judg­ments.

The tax­payer also claimed that he acted as agent on be­half of a per­son over­seas. It should be noted that the court was not say­ing that he was to be taxed for money earned by a non­res­i­dent in­vestor, but that he failed to prove that this was so.

All cases must be de­cided on their own merit. It would be fair to say that this case does not set a prece­dent that gains from in­vest­ment in il­le­gal schemes are tax­able.

It may be that other tax­pay­ers could face chal­lenges with the TAJ where they do not give an ac­cept­able ex­pla­na­tion of how you came by their gains, and would be ‘up the creek’ were they to say it came from a Ponzi scheme.



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