Watson structured affairs to dodge tax, High Court finds

Tuesday, 12 March 2019

A company owned by Eric Watson has been found liable for $51 million in tax, plus use-of-money interest and penalties that will more than double the amount owing.

Cullen Group has been involved in a dispute with Inland Revenue, which claims it structured its affairs to avoid tax.

In a judgment released on Tuesday from the High Court in Auckland, Justice Matthew Palmer sided with the department, handing the rich lister a big bill in the process.

Watson moved to the United Kingdom in 2002, selling his personal effects, closing his bank accounts and cancelling credit cards.

* Rich Lister Eric Watson holidays in Europe instead of giving evidence in tax case

* Rich-lister Eric Watson's Cullen Group defends $60m tax avoidance allegations in High Court**

He restructured his business affairs so that shares in Cullen Investments, formerly Blue Star Capital, were replaced by loans worth $291m, owed by Cullen Group to companies in the Cayman Islands, Modena Holdings and Mayfair Equity.

Because Modena and Mayfair were not 'associated persons' with the Cullen Group, the arrangements fell into the approved issuer levy (AIL) tax regime.

This regime was set up to encourage investment in New Zealand by reducing the cost of New Zealanders borrowing from non-residents. But in this case, the arrangement introduced no new funds to New Zealand.

However, it meant Cullen Group could pay tax at 2 per cent on the $397 million of interest it paid the companies, rather than non-resident withholding tax of 15 per cent.

Inland Revenue assessed Cullen Group as having avoided $59.5m of non-resident withholding tax in this manner, while it paid only $8m in AIL.

In court, Inland Revenue said the loans were not a genuine arms-length transaction and Cullen Group gained the benefit of the levy regime in a contrived way.

Cullen Group said the arrangement restructured Watson's affairs in order to achieve certainty about his change of tax residency from New Zealand to the United Kingdom and to plan for application of the United Kingdom's laws governing remittance of foreign-sourced income.

But the judge backed Inland Revenue, saying that the group owes $51.5m in tax plus use-of-money interest and penalties. Use-of-money interest had reached an additional $60.5m in August last year.

'Watson retained a high degree of control over the relevant entities and was on both sides of the loans. I do not consider the arrangement was within the contemplation and purpose of Parliament in enacting the AIL regime.

'It had a more than merely incidental purpose or effect of altering the incidence of tax. It was a tax avoidance arrangement and void against the Commissioner.'

Inland Revenue welcomed the judgment.

'The outcome of the High Court process is the result of hard work and dedication by the Inland Revenue team, Crown Law and counsel. This was a long running issue and shows the dedication of our people in unravelling what went on,' legal service leader Karen Whitiskie said.

Cullen Group has been approached for comment.