Watson in $60m tax-avoidance case
A company belonging to Eric Watson owes the Government nearly $60 million in unpaid tax, the commissioner for the Inland Revenue Department alleges.
The complex tax trial for the rich-lister’s Cullen Group opened in the High Court at Auckland on Monday, before Justice Matthew Palmer.
Cullen Group is challenging Inland Revenue’s allegations that it was involved in tax avoidance totalling $59.5m.
In a pre-trial judgment released in December, Justice Mark Woolford noted that in November 2002, Watson sold all the ordinary shares in Cullen Investments to a newly incorporated company, Cullen Group.
Inland Revenue alleged Watson retained control over both Cullen Investments and Cullen Group through various trusts and directorships, the judgment said.
Watson made two loans totalling $291m to Cullen Group – $193m to Modena Holdings and $98m to Mayfair Equities.
Both companies were nonresident companies incorporated in the Cayman Islands, he said.
Under New Zealand tax law, interest paid to a non-resident such as Modena or Mayfair was ordinarily subject to non-resident withholding tax at 15 per cent.
However, if certain conditions were met a 2 per cent levy could be paid instead, the judge said.
One condition was that the payer and the recipient were not ‘‘associated persons’’ under the relevant Income Tax Act.
Cullen Group paid the 2 per cent levy.
But Inland Revenue alleges that the arrangement was not a genuine arm’s-length transaction.
In her opening, Inland Revenue lawyer Gillian Coumbe, QC, said Watson was ‘‘essentially loaning money to himself’’.
Once use-of-money interest was taken into account Watson’s company owed $112m, excluding late payment penalties, she said.
In his opening address, Cullen Group lawyer David Cooper said Watson moved funds to the Cayman Islands at about the same time as he was moving to the United Kingdom.
The reasons were for tax purposes and were legal, he said.
When Justice Palmer asked why the Cayman Islands was chosen, Cooper was not able to provide an explanation.
The Inland Revenue versus Cullen Group case continues.