Tax Avoidance Sample

MEMO

Subject: Research for Potential of John’s Situation to be deemed as Tax Avoidance

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1. Introduction

The tax statute in NZ has a general anti-avoidance rule that serves to protect the tax base and also prevent uses of specific provisions which fall outside their intended use in the act. S BG 1 of the Income Tax Act 2007(ITA 2007) provides that a tax avoidance arrangement is void against the Commissioner for income tax purposes and the Commissioner has the power to counteract a tax advantage a person has obtained through a tax avoidance arrangement.

2. Identification of Arrangement

According to the flowchart in the Exposure Draft provided by Inland Revenue Department(IRD), the first step in determining whether or not s BG 1 applies to an arrangement is to first define the arrangement. As defined in s YA 1 of the ITA 2007, an arrangement means an agreement, contract, plan or understanding, whether enforceable or unenforceable, including all steps and transactions by which it is carried into effect. In John’s case, the arrangement would be the entire process of restructuring his business. It includes setting up of the Fish Trust(FT), selling Grey Cod to FT and FT purchasing it by borrowing a loan, John establishing a new company called Grey Cod Limited(GCL) and selling his business operations to it, GCL leasing the boat from FT and John organizing GCL in a way that he is employed by GCL and GCL pays a salary to John and his wife. This restructuring plan falls under the definition as an enforceable plan including all the steps listed to carry the plan into effect.

3. Examination of Commercial Reality and Economic Effects of Arrangement

A tax avoidance arrangement refers to an arrangement entered into by a person that directly or indirectly has tax avoidance as its purpose or effect or has tax avoidance as 1 of its purpose or effects, whether or not any other purpose or...