BLUE CHIP FINANCIAL SOLUTIONS AGAINST THE INDEPENDENTINTRODUCTION
Blue Chip Financial Solutions Limited (Blue Chip) and two of its officers, Messrs Bryers and Woodhams, complained about a front page article in the weekly business newspaper the Independent. The complaint is upheld on the grounds that it was unfair in linking a ruling of the Inland Revenue Department (IRD) and a pending ASX listing, and that the standfirst did not accurately and fairly convey the substance of the report. Two members of the Council did not support upholding the complaint on the first point.
Both parties, through their solicitors, made detailed submissions and more than one reply-submission. An unprecedented amount of material was put before the Council. It is not necessary to refer to it all.
The article in question appeared on the front page of the Independent published on 26 April 2006 and continued on to the second page. The heading and standfirst read:
Tax hassles for Blue Chip
If the IRD disallows the deduction, 1,500 investors face stumping up thousands of dollars in extra tax.
The first and last paragraphs of the article read:
“NZX-listed property investment company Blue Chip Financial Solutions plans to raise $A20 million in Australia for an ASX listing on 9 May, though it is still awaiting an IRD Ruling on a scheme involving about $16 million worth of investors gross tax deductions in New Zealand.”
“When asked why Blue Chip was planning to list in Australia before the ruling, she said she couldn’t force the IRD to “give Blue Chip a timetable.””
The theme of the article was “alteration compensation” and in particular whether such compensation when received by a landlord was a capital payment.
The alteration compensation scheme is described in general terms. It said that Blue Chip paid its investors two payments each month, one on revenue account which was taxable and one on capital account which was not. The second payment was “alteration compensation” which was a payment made by Blue Chip to an investor for the right not to have to reinstate any alterations or improvements to the property at the end of the lease period.
The article reported that Blue Chip had been using the scheme for nearly five years and that it had been under consideration by the IRD for about 18 months. It was stated that normally alterations compensation is non-assessable for tax purposes on commercial property only and that for the first time in New Zealand Blue Chip had claimed the deduction on residential homes. The article stated:
“If the IRD disallows the deduction, Blue Chip’s 1,500 investors face stumping up thousands of dollars in extra tax.
Blue Chip says in the event of an adverse tax ruling, the company will “cover” the amount.”
Prior to the article being written, there had been telephone conversations between the reporter, an accountant retained by the Independent, Mr Woodhams the Chief Executive of Blue Chip and an independent accounting adviser to Blue Chip. The accountant retained by the Independent was clearly sceptical of the scheme and clearly had reservations as to whether alteration compensation was a non-taxable receipt in the hands of an investor. The article dealt with the likely consequences if the IRD disallowed the scheme. It was clear from the article that “Blue Chip had paid tax on the alterations compensation and had volunteered the scheme to the IRD for a ruling”. Thus if the scheme was disallowed the tax paid by Blue Chip probably exceeded what would need to be paid by the investors. It was noted there was a different structure used in Australia, and that only about 300 of Blue Chip’s New Zealand clients were now using the structure. The Blue Chip accounting adviser was quoted as saying that the other accountant’s analysis “was subjective”. Mr Woodhams noted that the firm had taken extensive legal advice from its accountants, independent lawyers and accountants, including a named Auckland “experienced tax practitioner”.
THE HISTORY OF THE COMPLAINT
Soon after the article appeared Blue Chip’s solicitors wrote a letter of complaint to the Independent alleging that the article was “likely to cause serious damage to Blue Chip’s trading reputation and reputational damage to Messrs Bryers and Woodhams”. The letter expressed the likelihood that it would cause alarm to some 1500 investors. The letter advised that Blue Chip was prepared to resolve the matter on the basis of an agreed correction and apology which had to be agreed within 24 hours of receipt of the letter. There was further correspondence between the parties during which Blue Chip demanded an immediate apology on terms acceptable to it. When it was unable to get such an apology it complained to the Council.
Although the Independent has replied to what it perceived as a complaint as to the manner in which the initial complaint was handled it is noted that this matter is not pursued in the final submissions on behalf of Blue Chip. It is doubtful, in the Council’s view, whether this matter falls within the Council’s jurisdiction and it does not propose to make a ruling on it.
GROUNDS OF COMPLAINT
The initial complaint to the Independent included six allegedly inaccurate or unfair meanings, three points regarding standards of journalism, a suggested correction comprising six further points, and more than 12 alleged factual errors detailed over several pages. The crux of the complaint was that the article was published at a particularly sensitive time for Blue Chip as it was about to list on the ASX. Blue Chip alleged that the article drew a connection between alleged tax issues and the ASX listing and had the potential to affect the success of the ASX listing. Further, it was suggested that this appeared to have been the intent of the article. It was alleged that the points were covered in a “sensationalised way”. There were detailed submissions alleging a lack of accuracy, fairness and balance (principle 1), the failure to draw a clear distinction between matters of fact and opinion (article 6) and that the photo and caption under it put an unfair slant on the article (principles 10 and 11). The photograph was of a substantial home and the caption under it was “A commercial or residential lease?”
The final submission from Blue Chip identified four principal issues:
• The article conveyed a false and misleading impression of the nature of a product offered by Blue Chip;
• The article misleadingly implied that the IRD ruling featured in the article was relevant to the imminent ASX listing of the company;
• The article incorrectly asserted that up to 1,500 investors could face tax payments in the thousands of dollars if the IRD ruling went against Blue Chip’s position on the tax status of the alterations compensation payments; and
• The article carried a clear message that the commercial ethics and integrity of both Blue Chip and Messrs Bryers and Woodhams were questionable.
The main concern of the complaint was said to be the sensationalised nature of the article and the links it misleadingly seeks to draw between the pending IRD ruling and other aspects of Blue Chip’s business and the conduct of its directors and officers.
THE INDEPENDENT’S REPLY
The reply from the Independent’s solicitors comprised 16 pages including schedules dealing with the various principles, comments and alleged meanings. In substance the Independent’s position is:
• The article was a carefully researched investigative work.
• In substantial part the article accurately reported information derived directly from the complainants and, in the absence of any independent alternative information, there was no proper basis for concluding that information was inaccurate.
• The article fairly and accurately reported the underlying issues and both positive and negative perspectives on those issues in a fair and balanced way.
• There is no substance to the complaint as to the manner in which the initial complaint was handled.
the Independent had taped some of the phone conversations between Mr Woodhams, the Independent’s accounting advisor, Blue Chip’s accounting advisor and the reporter. the Independent made transcripts of these tapes available to the Council and both parties made further submissions on them.
SUBSTANTIVE COMPLAINT DISCUSSION
In view of the final submission made by the complainant, it is necessary to address the four principal issues referred to above
Blue Chip complains that the product description referred to above is full of inaccuracies. It has provided its own description of the product. On the basis of that description there are errors in the article. However, the errors appear to be more peripheral rather than substantial. Errors relating to two payments (when there is one payment containing two components, one of which is received on capital account), the misuse of the term “the manager” and other like errors do not give a false and misleading impression of the nature of the product.
Blue Chip in its allegation that the product is misdescribed states that there is an implication that the investor is cheating the IRD because the investor “receives a portion which escapes tax”. In the description of the article there is a statement that alteration compensation “is put into a capital account that is not taxable.” And there is then the statement that:
“The upshot is that of the total the investor receives, a portion escapes tax”.
The Council does not accept that these comments carry the implication that the investor is cheating the IRD. The article is a lengthy one which contains both comments critical of and supportive of the product and in particular alterations compensation in the manner Blue Chip uses it. Clearly, the accountant retained by the Independent had doubts as to whether, for tax purposes, the payment was in fact a capital receipt. However, the article also quotes opposing views from both Mr Woodhams and Blue Chip’s independent accountant.
The article repeats Mr Woodhams’ statement that Blue Chip had taken extensive legal advice from its accountants and independent lawyers and accountants including an experienced named tax practitioner. It also makes the point that Blue Chip has been fully audited by independent experts on both sides of the Tasman. Mr Woodhams noted that the experts had considered all aspects of the company, not just financial statements but products and processes. This was an investigative article which quoted an accountant who was impliedly critical and sceptical of the scheme. The description of the product however did not deliberately mislead or misinform readers by commission or omission and although there were some errors the description was in substance accurate, fair and balanced and in the Council’s view did not carry the implication that Blue Chip was cheating the IRD.
The substantive complaint appears to be the reference to the pending ASX listing and the alleged misleading implication that the IRD ruling was relevant to this listing. the Independent’s position is the ASX listing was a matter of fact and relevant background. It noted that there are only two references to the ASX listing in the article, namely those appearing in the first and last paragraphs as quoted above. Blue Chip takes the point that these are particularly significant references and that they influenced the headline.
In the first paragraph it is stated that Blue Chip intended to list on the ASX “though” it still awaited the IRD ruling on the scheme involving about $16 million worth of investors’ gross tax deductions. “Though” often means “despite the fact that”. This linkage of the proposed listing and the IRD ruling joined by the word “though”, in the Council’s view, is capable of raising the minds of the reader the suggestion that there is something amiss in making the application before the ruling is obtained. The standfirst adds to this impression. The rest of the article then contains a critique of the product and the likely tax consequences if IRD approval is not obtained. However, the final paragraph once again raises a suggestion that there is something amiss in making the application to list in Australia before the ruling is obtained. If the reference to the ASX listing was only background information as claimed by the Independent, there was no need to ask a question which by implication carried the suggestion that the listing should be delayed until after the ruling.
the Independent makes the point that it is a New Zealand newspaper and not read in Australia. However, in these days of electronic communication and websites, it is reasonable to assume that some potential investors in Australia would have access to and read comments published in a national business review in the country in which the applicant operated.
Thus while most of the article does not in the Council’s view infringe the principles of fairness, accuracy and balance, the wording of the first and last paragraphs suggest that the Independent was at least raising for consideration the prospect that there was something amiss in applying to list before the ruling was obtained. On this point the majority of the Council upholds the complaint.
Some Council members took the view that the opening paragraph was reasonable in its reference to two events: the listing on the ASX and the request to IRD for their opinion on the scheme. They suggested that it might be seen as only being fair to prospective investors to raise the matter of listing while a ruling was still pending and possibly imminent. However, that argument was not accepted – and by a clear majority of the Council.
The most substantial complaint relates to the 1,500 investors and the “stumping up thousands of dollars in extra tax”. Blue Chip does not challenge the $16 million referred to in the first paragraph of the article. If there are 1500 investors involved, and this figure is also confirmed by Blue Chip, then thousands of dollars an investor is involved. The Blue Chip complaint is that it was made clear to the Independent that if the ruling was adverse to the investors then the money would be paid by Blue Chip and had already been prepaid to the IRD. This fact does appear in the article in more than one place. Immediately after the reference to “stumping up thousands of dollars”, there is the comment that Blue Chip says it will cover the amount. Then there is the further reference to Blue Chip actually getting a rebate because it had paid more than the likely tax. In the Council’s view, the article itself contained balance on this matter. This issue is whether the standfirst is misleading and inaccurate.
the Independent submitted that whether or not there is any liability on the investors turns on the IRD ruling sought by Blue Chip. The heading and the comment in the paragraph is prefaced with the word “if” which clearly identifies that this may or may not happen. The article also notes that if there is a claim on the investors it will be covered by Blue Chip. The newspaper contended that the fact that Blue Chip would refund any amount to the investors does not alter the fact that the investors would at least in the first instance face the risk of an unexpected tax burden.
The Council is of the view that the standfirst does not accurately and fairly convey the substance of the report. It suggests that if the IRD disallows the deduction, 1500 investors will have to “stump up” money. When the report is read, it is made clear that Blue Chip has said that it will meet any liability of the investors. Further it has said that it has made payments which will cover any liability. There is no suggestion in the article that Blue Chip has not prepaid the tax or that it does not have the ability to “cover” the tax. In the Council’s view the standfirst does not accurately and fairly convey the substance of the report notwithstanding that the initial claim would be made against the investors.
The final issue is whether the article carried a clear message that the commercial ethics and integrity of both Blue Chip and Messrs Bryers and Woodhams were questionable. The Council does not uphold this complaint. The only mention of Mr Bryers is a reference to him founding the company. There is no indication that he is still involved. The references to Mr Woodhams are to him as Chief Executive and to the questions which he answered. In the Council’s view the article certainly questions whether the listing should have gone ahead before the IRD ruling. The reasons for and against Blue Chip’s position are stated with reasonable balance. There is no suggestion of tax evasion or avoidance. Indeed, there is a suggestion that it is not even tax avoidance, which is not illegal. While the use of “manipulation of the market value yield” carries unfortunate connotations, the article when read as a whole does not challenge the ethics or integrity of Blue Chip. The Council does not read into the article that there was any challenge to the commercial ethics and integrity of these people.
There were some important sub-issues in the four principal issues referred to in paragraph 15 above which have not been directly addressed in the previous paragraphs. For the sake of completeness, two of these are noted:
The Council does not uphold the allegation that the newspaper infringed principle 6 by failing to identify opinion from fact. There is a box statement which says:
“The reality of Blue Chip’s substantial investment portfolio is that they will be unlikely ever to make a single renovation on behalf of the manager because it is not commercial.”
It is said that this could be treated as fact rather than comment. However, a reader of this article would not be misled by this statement. It is clearly a quote from the Auckland accountant.
Nor does the Council uphold the complaint under Principle 10 to the effect that the caption under the photograph is an infringement of principles 10 and 11. A reading of the article as a whole makes it clear that the accountant retained by the Independent is of the view that residential properties even under commercial leases should not be treated as commercial properties. The caption under the photograph is “a commercial or residential lease?” The question mark makes it clear that this is a contentious issue. There was no breach of either principles 10 or 11 in respect of the photograph.
For the reasons given above, the complaint is upheld on the following grounds:
The article misleadingly implied that the IRD ruling was relevant to the imminent ASX listing of Blue Chip; and
The standfirst did not accurately and fairly convey the substance of the report.
Press Council members considering this complaint were Barry Paterson (Chairman), Aroha Beck, Ruth Buddicom, John Gardner, Penny Harding, Keith Lees, Denis McLean, Lynn Scott and Terry Snow.