11.2 31%2c32%2c33%20Tax%20Avoidance%20%28continued%29%2c%20Attribution%2c%20Evasion.ppt

11.2 31%2c32%2c33%20Tax%20Avoidance%20%28continued%29%2c%20Attribution%2c%20Evasion.ppt

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Unformatted text preview: ACIS 254: ACIS Introduction to Taxation Introduction Lectures 31, 32 and 33: Tax Avoidance (continued), The Attribution Rule and Tax Evasion Attribution Alistair Hodson Department of Accounting & Department Information Systems, University of Canterbury, Christchurch Christchurch 1 Outline of Lecture Tax Avoidance (continued) A recap – case law prior to 2000 recap Recent Case Law: Recent CIR v BNZ Investments Limited (2001) (Court of Appeal) (Court Peterson v CIR (2005) (Privy Council) Accent Management Ltd v CIR (2007) Trading Trusts – tax avoidance CIR’s Exposure Draft Statement on CIR’s section BG1 (September 2004) section 2 Outline of Lecture (continued) • Attribution of Personal Services Income Rules & Exceptions Defined terms & calculations Deductions • Chelle Properties (NZ) Ltd v CIR (2007) • Tax Evasion 3 Recent Case Law on Avoidance (Pre 2000) 1. Tax mitigation (concept unhelpful) is not universally Tax accepted as being a legitimate method of minimising tax. tax. 2. Transactions with contrived or artificial aspects with the Transactions dominant purpose of tax avoidance & no real business or commercial purpose have fallen foul of the general anti-avoidance section. 3. Where taxpayer attempts to gain a tax advantage not 3. Where available to other taxpayers of the same class, there is a good case for tax avoidance. good 4. Where taxpayer attempts to gain a tax advantage Where through a legitimate way of doing business available to all taxpayers, there is less argument for tax avoidance.4 Recent Case Law on Avoidance (Pre 2000) 5. Not every case involving tax avoidance will lead to the Not application of the general anti-avoidance section. application 6. The purpose or effect of an arrangement must be The determined objectively. Taxpayer’s motives for entering into a particular arrangement are not decisive. entering 7. The existence of a legitimate business or family The purpose within an arrangement may mean that any tax avoidance purpose or effect is merely incidental. avoidance 8. The amount of tax saved by the arrangement is a factor The relevant to the existence of a tax avoidance purpose or effect. effect. 5 CIR v BNZ Investments Ltd (CA) (CA) • BNZI funded by BNZ & a series of redeemable BNZI • preference share investments in entities provided by Capital Markets Ltd (part of Fay Richwhite Group). Downstream (CML) & upstream (BNZI) parts, effected Downstream by transactions involving conversion of interest received abroad into dividends of an exempt character by movement through tax haven jurisdictions. by Held (Majority): Must be a contract, agreement, plan or understanding in which taxpayer was a participant. understanding Did not exist for BNZI unless formally or informally Did even if unenforceable - a consensus between BNZI & another or others as to what, in general terms, would occur pursuant to the arrangement. NB: Minority’s 6 views. views. • • Peterson v CIR (2005) (Privy Council) • Peterson was a member of a syndicate of Peterson • • • • investors. investors. Two films – ‘Lie of the Land’ and ‘Utu’. Investors led to believe actual cost of film was Investors {$X} + {$Y}. {$X} Item {$X} was the actual cash invested. Item {$Y} consisted of a limited recourse Item loan. 7 Peterson v CIR (2005) (Privy Council) (continued) (continued) • Deductibility of item {$Y} – loan was circular, had Deductibility • • • effect of increasing the available deductions. effect Privy Council 3:2 decision found for the taxpayers. Investors were entitled to depreciate the full Investors acquisition cost of both films. acquisition Did not depend on how the investors obtained the Did funds or what the production company spent the purchase price on, or what it cost the production company to produce the two films. company 8 Peterson v CIR (2005) (Privy Council) (continued) (continued) • The fact that half the purchase price was funded by a The limited recourse loan did not mean that the taxpayers had not suffered the economic burden of purchasing the two films. the The fact that the production company had made a The secret profit as a result of the circular funding was also irrelevant. Minority judgment – were prepared to examine the Minority circular nature of the limited recourse loan by focussing on what actually happened to the money. 9 • • Peterson v CIR (2005) (Privy Council) (continued) (continued) • Main difference between majority and minority was Main over the extent to which the Court should have regard to the circular funding which provided the limited recourse loan. recourse Essential difference of majority and minority was Essential how they interpreted the scheme and purpose of the depreciation regime. depreciation Majority adopted a form approach, as opposed to a Majority substance approach. substance 10 10 • • Peterson v CIR (2005) (Privy Council) (continued) (continued) • The Majority made the following points: CIR – CIR may identify whole or part of scheme as the arrangement under section BG1. arrangement Arrangement – Arrangement under section BG1 does not require a consensus or meeting of minds. consensus taxpayer – A taxpayer does not need to be a party to an arrangement to be affected by it, knowledge of arrangement’s details is also unnecessary. arrangement’s 11 11 Peterson v CIR (2005) (Privy Council) (continued) (continued) • Last two points run directly counter to the Court of Last • • • Appeal findings in CIR v BNZ Investments Ltd. CIR Their Lordships preferred the minority views of Thomas J in BNZ Investments. Thomas Privy Council’s approach has since been applied in Privy New Zealand (Wire Supplies v CIR (2005)). New Deferred deduction rule to overcome tax benefits of Deferred non-recourse loans – Sections GB 45 to GB 48. non-recourse 12 12 Accent Management Limited v CIR (2007) The ‘Trinity’ Case • The Court of Appeal dismissed an appeal by the taxpayers. • Spectacular tax benefits, well ‘over the line’. • Scheme was clever, ‘this particular emperor has no clothes’. • Series of complicated transactions, designed by Auckland Series lawyer, Dr Garry Muir. lawyer, • Known as the Trinity scheme. 13 13 Accent Management Limited v CIR The ‘Trinity’ Case (continued) • Involved 300 wealthy investors. • Tax deductions of about $140 million in 1997 / 1998. • Expend $50 per hectare, ‘achieve’ tax deductions of Expend • • • $40,000 per hectare. $40,000 Some investors settled with Inland Revenue. 100 % shortfall penalties, use of money interest. Up to $3.7 billion was at risk if Trinity had run its Up planned 50 year course . planned 14 14 Trading Trusts and Tax Avoidance • Case W33 (2004) 21 NZTC 11,321 Case W33 Dental – Dental surgeon practicing in partnership wished to restructure to limit liability / avoid possible claims. claims. Held – Held that the 1995/96 salary was set at an artificially low figure – accordingly tax avoidance not ‘merely incidental’. avoidance Some – Some commentators consider reasoning of case is inconsistent. is Hooper – Penny v CIR; Hooper v CIR case. 15 15 Trading Trusts and Tax Avoidance • Case Y1 (2007) 23 NZTC 13,001 Case Y1 – Bakery business – trading trust structure used. Artificially – Artificially low management fee between trading trust and a partnership of the two taxpayers. and Allowed – Allowed one of the taxpayers to maximise family support benefits. support – Accountant evidence – no clear response. Taxpayers – Taxpayers had to ‘borrow’ from the trading trust to pay their living expenses. their Manner – Manner in which the trading trust structure was used was artificial and contrived. 16 16 CIR’s 2004 Draft Statement on Section BG 1 • Former statement on Section 99 [BG1]. Had examples – now Former virtually out of date. virtually • Examines legislation & leading cases on avoidance to isolate Examines key principles relevant to ss. BG 1 & GB 1. • Aims to reconcile different & sometimes conflicting objectives Aims of general anti-avoidance provision and other provisions of the Act. Act. Parliament’s intended operation of the Act. Parliament’s • Assess whether arrangement facilitates, rather than frustrates, Assess • Summarises legal principles (see flowchart). 17 17 CIR’s 2004 Draft Statement on Section BG 1 CIR’s (continued) (continued) • Exposure Draft to be refined before it is published. • CIR may issue additional statements on detail relating CIR to ss BG 1 & GB 1 ITA 2007 if necessary. to • No examples were included. • Will require modification to reflect Privy Council Will approach in Peterson. 18 18 Practical Guidelines Practical • • • • • • • • Refer to CIR’s interpretation statement on s. BG 1. Rigorously examine the facts. Analyse the consequences of s. BG 1 applying. Do the cases cover the point or issue? Is the transaction unique or does it occur elsewhere? Have you taken advantage of the Act or survived Have specific anti-avoidance provisions? specific Is it of a genuine commercial nature - seek a binding Is ruling? ruling? Consider seeking further particulars from the IRD. 19 19 Attribution of Personal Services Income • Main legislation in sections GB 27 to GB 29 Income Main • • Tax Act 2007. Tax Rule does not apply if services are essential support Rule for a product (e.g. for software support). for Rule applies from 1 April 2000 when new 39% Rule marginal rate applied to individuals (Note: recent tax rate changes – new highest individual marginal rate is now 38%). now Arrangements made before 1/4/00 are subject to rule. • 20 20 Attribution of Personal Services Income Attribution (continued) (continued) • Ways to structure affairs: • Interposed entity contracts with more than one Interposed • • • person, those persons not being associated with each other, or Interposed entity has ‘substantial business assets’ More than one person (not being relatives) More physically perform services provided by interposed entity. entity. Beware of general anti-avoidance rules (e.g. s BG 1). 21 21 Attribution of Personal Services Income Attribution (continued) (continued) • Attribution rule is generally intended to apply when: Person (person C) has structured his or her Person relationship so an entity (person B) is between themselves & their service purchaser (person A). themselves • And if result is that income is diverted, or alienated, to And an associated person: • Effect of attribution rule is, in defined circumstances, Effect to attribute person B's net income from services to person C, who personally provided the services. • Use of net income means that any deductible expenses Use incurred by person B will still be deductible. 22 22 Attribution of Personal Services Income Attribution (continued) (continued) • Rule applies only when five key criteria are met: • Person C personally providing services (the working Person person) & interposed entity, person B, must be associated persons. associated • At least 80% of income from services of person B must At be derived from a single source, person A, or persons associated with A. associated 23 23 Attribution of Personal Services Income Attribution (continued) (continued) • At least 80% of income from services of person B At must relate to services personally provided by person C (the working person) & related persons. (the • Person C must have income over $60,000 after Person application of attribution rules. application • Substantial business assets are not a necessary part of Substantial business structure used to derive income from services. services. 24 24 Attribution of Personal Services Income Attribution (continued) (continued) Defined terms, Exceptions Substantial business assets: • Depreciable assets whose cost is more than $75,000 or Depreciable 25% or more of associated entity’s total income from services -up to 20% private use is allowed. services • Exceptions: • If amount that would otherwise be attributed under the If • rule is less than $5,000, then rule does not apply. rule Rule does not apply if interposed entity and person Rule performing services are non-resident. performing 25 25 Attribution of Personal Services Income (continued) Attribution Calculation of attributed amounts Calculation • Amount to be attributed is lesser of: • Person B's net income from services, or • Person B's net income, • Allowance is made to reduce amount by income Allowance • distributed by person B to person C in the form of beneficiary or partner income, or as dividends. beneficiary If intermediary is a company, losses transferred from If other companies may not be used. 26 26 GST and Tax Avoidance • Section 76 of Goods and Services Tax Act 1985 is a Section • general anti-avoidance provision. general Ch’elle Properties (NZ) Ltd v CIR (2007) 23 NZTC 21,442 21,442 – – – 114 conditional contracts to purchase property. Deferred settlement. GST Act intends and requires an overall balance will be GST achieved between the outputs and inputs of a registered person. person. – The Act intends the effects of mismatching be minimised. 27 27 Tax Evasion • Civil penalties for tax evasion. • Criminal offence category of evasion – Obtaining refunds not entitled to – Knowingly not accounting for tax deductions 28 28 Key Points • • • • • • • New Zealand Taxation 2009 readings. BNZ Investments, Peterson, Accent Management cases. BNZ cases. GST tax avoidance Chell’e Properties case. Trading trusts cases – W33 and Y1. Trading W33 Y1. CIR’s Draft Interpretation Statement – due to replace CIR’s former statement on s 99 – will need modification to reflect decision in Peterson. Peterson. Attribution of Personal Services Income Rules. Attribution Tax evasion. 29 29 ...
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This note was uploaded on 12/23/2009 for the course BCOM ACIS 254 taught by Professor Alistairhodson during the Spring '09 term at Canterbury.

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