Artificial structures, real tax bills

Teresa owned a small property development company. The property development company owned two properties, and it had just finished building a small home on each. Teresa was looking to sell both properties once market conditions improved.


Teresa had financed her building project with a $500,000 loan, secured over her two properties. This mortgage was with a second tier-lender, who was charging Teresa over 10% interest per annum.


Teresa approached her mortgage adviser about refinancing her mortgage to a large bank, so she could move to a lower interest rate. The adviser told Teresa that banks usually would not grant a mortgage to a trading company, but he said he could arrange a refinance if the properties were transferred to a holding company. Teresa took this advice, incorporated a new company, and transferred the two properties. The adviser helped Teresa enter into a new mortgage, with a much lower interest rate, around 4.5% per annum.


A few months later, Teresa received a letter from the IRD. Teresa discovered that transferring her properties to the holding company had triggered a large tax liability. She was being charged $88,000 in GST, plus another $35,000 in late fees and penalties.


Teresa’s view

Teresa thought her mortgage adviser was entirely responsible for her GST bill. She said she relied on her mortgage adviser to plan a refinance, and to let her know about any risks. If the mortgage adviser was not qualified to give tax advice, Teresa thought he should have told her to speak with an accountant.


Teresa wanted her mortgage adviser to pay her $190,000, which included her $88,000 GST bill, the $35,000 in late fees and penalties, $35,000 in interest, and $20,000 in legal and accounting fees.

The mortgage adviser’s view

The mortgage adviser did not think he was responsible for any of Teresa’s loss. He said he was hired to provide mortgage advice, not tax advice. He also said that he had advised Teresa to talk to a tax adviser, but she had chosen not to.


The adviser offered to pay Teresa $5,000 to resolve the complaint, but Teresa did not accept. Teresa complained to FSCL.



After reviewing the adviser’s file, we found there were issues with the advice he provided to Teresa. However, these issues had not caused Teresa to suffer any loss.


We found that the mortgage adviser should have encouraged Teresa to obtain independent accounting advice. He was proposing a complex transaction, involving transferring multiple properties from one company to another. He should have been aware that this could have significant tax consequences, and he should have recommended Teresa seek independent advice.


The adviser claimed he had recommended Teresa consult with a tax adviser. However, he was unable to provide any evidence he had made this recommendation. The adviser was responsible for properly recording his advice, and he had not done so, so we had no option but to find that he had not told Teresa to see a tax adviser.


Despite the issues with the adviser’s service, we found that his advice had not caused Teresa to suffer any loss. This came down to two main reasons:

  • Teresa was planning on selling her properties soon. When she sold the properties, she would have had to pay GST on the transaction. This meant she would have had to pay the $88,000 GST eventually, whether or not she followed the adviser’s recommendations.
  • Teresa did, however, have to pay the GST much earlier than expected. This meant that Teresa’s late payment penalties, interest, and accounting fees were losses that she had suffered as the result of the mortgage adviser’s recommendations. However, these losses needed to be balanced against the benefits of the adviser’s recommendations. Because Teresa had moved her properties to a holding company, she was able to obtain a mortgage with a large bank, and she was paying a much lower interest rate on her $500,000 loan. We calculated that Teresa was saving over $27,000 per year in interest payments. After a few years, these savings would outweigh the costs of Teresa’s unexpected GST invoice. These savings were only possible due to the refinance arranged by the adviser so, on the whole, his recommendations had not caused Teresa any loss.



We issued a formal recommendation, finding the adviser’s $5,000 offer was reasonable. Although there were issues with the adviser’s service and he had caused Teresa substantial stress and inconvenience, we did not think his mistake warranted compensation of any more than $5,000. Teresa did not accept the adviser’s offer.


Key insights for the participant

It is important to know the scope of your services, and to know when other professionals need to be consulted. It is useful to evaluate your services every now and again, and identify particular types of transactions or clients who come with a higher degree of risk. It may be useful to consider whether independent advice should always be recommended for these high-risk files.