25 November 2003 Media Release

Crown Forestry Rental Trust Tax Case

The Crown Forestry Rental Trust (“the Trust”) receives rental proceeds on Crown forest licensed land until any Treaty claims on the land have been settled.  It invests the money, and then uses the interest to support claimants to prepare and negotiate Waitangi Tribunal claims that involve Crown forest licensed land.

In 1993, the Inland Revenue Department issued a non-binding ruling that money advanced by the Trust to claimants to assist them to advance their claims was a tax-deductible expense for the Trust.  As the Trust distributed most of its income to claimants, this meant that the Trust paid only negligible tax.

However, in 1996, the IRD reversed its position on the deductibility of claimant expenditure and reassessed the Trust’s tax returns over a number of previous years.  This left the Trust facing a very large tax liability and also created a significant ongoing impact on the Trust’s ability to assist Treaty claimants.

The Trustees believed requiring the Trust to pay tax on its investment earnings was inconsistent with the original agreement between Maori and the Crown that set up the Trust.  They approached the then National Government for assistance, but the Government encouraged the Trust to have the matter resolved through the courts.

After lengthy discussions with IRD, the Trust went ahead with litigation.  Its principal legal argument is that its income is derived for charitable purposes, and is therefore exempt from tax.

The High Court in 2001 and the Court of Appeal in 2002 both agreed the Trust’s main purpose of assisting Maori with Waitangi Tribunal claims involving Crown forestry land was charitable, but both courts found it also had a secondary, non-charitable, purpose which meant it could not use the tax exemption.

The High Court ruled the Trust has a second purpose of receiving and holding the rental proceeds as capital until it is determined who is entitled to them, and that this non-charitable purpose deprived the Trust of the ability to use the charitable exemption for tax purposes.

The Court of Appeal rejected that finding, but found in favour of the IRD for a different reason.  It pointed to a clause in the Trust deed that directs any leftover income to be transferred to the Crown at the end of the Trust’s life.  As a result, the Court ruled the Trust’s income was not derived “exclusively for charitable purposes”.

The Court said it was reluctant to make a ruling that might adversely affect the funding of the Waitangi Tribunal process.

It has always been the Trustees’ preference to seek an appropriate tax treatment for the Trust through political, rather than legal, avenues and they will continue to do so.  However, after taking legal advice, the Trustees have resolved to test the Court’s decision in the Privy Council.

The Trust has been making budget provisions for some time in case it has to pay tax on its interest earnings in prior years.

In December 2001, the Trust made a voluntary tax payment of $21 million to the IRD, in order to minimise the effect of use of money interest on tax which might ultimately be found to be outstanding.  If the Trust is ultimately successful in establishing that it is exempt from tax, however, that payment will be refunded to it with interest.

The Trust’s case is before the Privy Council on Monday and Tuesday 24 & 25 November 2003.

End