Taxation
Introduction:
This report is to find out whether the tax avoidance arrangements exists in the situation of taxpayers restructured their business as a trading trust for the purposes of section BG1 of the Income Tax Act 2007.
Issue:
Mr A and Mr B, two independent shareholders work full time in the IT Consultancy business. They were paid $80,000 salary each in the first year but decreased to $50,000 in the second year because business has gone down due to earthquake. They had received a dividend which from last year profit. After that, they restructured business as a trading trust. They then entered into an employment contract with the company corporate trustee to work full time for the trust. The net income was distributed to the beneficiaries of the trust, who are shareholders spouses and children in the age group between 16-19 years, all studying.
The Commissioner of Inland Revenue tried to attack the taxpayers under general anti-avoidance rules (GAAR) that there was a tax avoidance arrangement for the purposes of s BG1 and they tried to use Commissioner’s power to adjust the taxable income of the taxpayers affected by the arrangement under s GA1.
This was appeal by the taxpayers to the decision of the Commissioner.
The grounds of appeal were as follows:
1. Did the Commissioner err in attacking that there was a tax avoidance arrangement for the purposes of a BG1 of the Income Tax Act 2007?
2. If a tax avoidance arrangement did exist, was the reconstruction power exercised by the Commissioner correctly exercised?
Law:
(a)Section BG1 Tax avoidance
(1) A tax avoidance arrangement is void as against the Commissioner for income tax purposes. Reconstruction
(2) Under Part G (Avoidance and non-market transactions), the Commissioner may counteract tax advantage that a person has obtained from or under a tax avoidance arrangement.
(b) YA 1 Definition
(1) Arrangement
Arrangement means any contract, agreement, plan, or understanding, whether
This report is to find out whether the tax avoidance arrangements exists in the situation of taxpayers restructured their business as a trading trust for the purposes of section BG1 of the Income Tax Act 2007.
Issue:
Mr A and Mr B, two independent shareholders work full time in the IT Consultancy business. They were paid $80,000 salary each in the first year but decreased to $50,000 in the second year because business has gone down due to earthquake. They had received a dividend which from last year profit. After that, they restructured business as a trading trust. They then entered into an employment contract with the company corporate trustee to work full time for the trust. The net income was distributed to the beneficiaries of the trust, who are shareholders spouses and children in the age group between 16-19 years, all studying.
The Commissioner of Inland Revenue tried to attack the taxpayers under general anti-avoidance rules (GAAR) that there was a tax avoidance arrangement for the purposes of s BG1 and they tried to use Commissioner’s power to adjust the taxable income of the taxpayers affected by the arrangement under s GA1.
This was appeal by the taxpayers to the decision of the Commissioner.
The grounds of appeal were as follows:
1. Did the Commissioner err in attacking that there was a tax avoidance arrangement for the purposes of a BG1 of the Income Tax Act 2007?
2. If a tax avoidance arrangement did exist, was the reconstruction power exercised by the Commissioner correctly exercised?
Law:
(a)Section BG1 Tax avoidance
(1) A tax avoidance arrangement is void as against the Commissioner for income tax purposes. Reconstruction
(2) Under Part G (Avoidance and non-market transactions), the Commissioner may counteract tax advantage that a person has obtained from or under a tax avoidance arrangement.
(b) YA 1 Definition
(1) Arrangement
Arrangement means any contract, agreement, plan, or understanding, whether
Bibliography: Cases: Ben Nevis Forestry Venture Ltd v C of IR (2009) 24 NZTC 23,188 (SC) Penny $ Hooper v C of IR (2011) NZSC95 Russell v C of IR (2012) NZSC731 W33 (2004) 21 NZTC 11,321 V20 (2002) 20 NZTC 10,233 White v C of IR (2010) 24 NZTC 24,600 Statutes: