Tax schemes and aggressive tax planning
As part of its ongoing compliance programme, Inland Revenue is continuing to identify inappropriate schemes, tax planning and structures that unlawfully minimise tax. It is also focusing on the small group of individuals and businesses that use and promote them.
A new page on IRD’s website, Tax schemes and aggressive tax planning, sets out the types of schemes that concern the department, the risks in investing in a scheme, and what you can do if a client has made a mistake. You can find the page at www.ird.govt.nz (keyword: tax schemes). IRD’s Compliance Focus document 2011-12 also draws attention to a number of areas that fall into the category of tax avoidance.
The recent Supreme Court decision in Penny & Hooper v CIR  NZSC 95 confirms that income allocation or diversion arrangements can constitute tax avoidance.
IRD acknowledges that there are legitimate reasons for using entities such as trusts or companies in many business situations. Therefore the mere use of alternative business structures will not, on its own, amount to a tax avoidance arrangement. Each case of tax avoidance is dependent on the facts of that case.
IRD published a refreshed Revenue Alert (RA 11/02) – available at www.ird.govt.nz – shortly after the Penny & Hooper decision to further clarify a number of the issues.
Current concerns include structures or transactions that produce the following inappropriate outcomes:
Income shifting or sheltering
Income is allocated or shifted to a taxpayer with the lowest tax rate, or losses to use, and deductions and/or credits are allocated to those in the highest tax brackets. An example of income sheltering is where a non-resident sells credits to a resident because the non-resident has no use for them.
Income recognition is deferred or smoothed to a year with a lower taxable income. In this way, income is kept under the highest tax rates (this does not include the income equalisation scheme).
Accelerating the use of losses or credits
There may be schemes that artificially bring forward a liability to income tax that is offset against losses or credits. This is commonly used when future shareholder changes may otherwise result in the loss of a company's tax benefit (such as tax losses or imputation credits).
Creating or inflating expenses
The Ben Nevis case is the most well-known example of creating expenses for tax purposes where there is either no, or nominal economic cost. Similarly, some transactions look to inflate the expenses associated with the scheme (to increase the deduction or GST credit claimed).
Changing the character of receipts or outlays
This occurs where a taxpayer tries to change a transaction's characteristics so that income that would otherwise be liable for tax is exempt or not within the tax rules, or expenses that would not be ordinarily be deductible are changed to something that is.
- Payments/invoice basis arbitrage ‒ generally the person seeking the credit brings forward their entitlement to claim the credit while the person liable for the GST defers this for as long as possible using: timing advantages, structuring around thresholds and unregistered persons.
- Inflating expenses while avoiding the output liability.
- Attempted avoidance of the associated persons rules.
- Avoiding GST consequences of ending business or forced sales (for example, under mortgagee sales).
Misuse of charities
IRD is concerned with certain structures inappropriately using the tax exempt status of charities. It will continue to work closely with the Charities Commission to identify charities which misuse their tax-exempt status.
To get it right
If you or a client uses an inappropriate tax structure, or one you think may be inappropriate you can let IRD know by making a voluntary disclosure by completing the Voluntary disclosure (IR 281) form. You can email any enquiries about tax structures to the dedicated team at PersonalServices@ird.govt.nz.
- If you know of any aggressive tax planning activities you can let IRD know anonymously through our website, www.ird.govt.nz (keyword: anonymous).
- Request a binding ruling for new funding arrangements or transactions to minimise uncertainty.
- Refer to the Revenue Alert (RA 11/02) which further clarifies the Commissioner’s view on this issue following the Supreme Court’s decision in Penny & Hooper v CIR.
- Visit the new webpage Tax schemes and aggressive tax planning.
*Graham Tubb is Inland Revenue’s Group Tax Counsel Assurance, and Tracey Lloyd is Investigations Manager, Assurance.
This article was published in LawTalk 783, 21 October 2011, page 9.
Last updated on the 11th May 2012