IRD wins again

March 6th, 2013 at 11:00 am by David Farrar

Hamish Fletcher at NZ Herald reports:

International investors could be scared off by a Court of Appeal decision yesterday which saw Inland Revenue notch up another big win, say specialists.

Alesco New Zealand lost another leg of its stoush with the yesterday over whether a funding structure used to buy two other companies was a arrangement.

The amount at issue in the Alesco case is $8.6 million, but yesterday’s judgment could have implications for other tax avoidance disputes with the IRD where hundreds of millions of dollars are estimated to be at stake.

Decisions in these cases were awaiting the outcome of the Alesco litigation, the Court of Appeal said.

University of Auckland Business School senior tax law lecturer Mark Keating called yesterday’s decision a “slam-dunk” for the IRD.

“If there’s an imaginary line that you cross between tax planning and tax avoidance, then IRD have been taking cases that go closer and closer to that line,” Keating said.

“The [corporate] taxpaying community are basically waiting for a case where the IRD overstretch and there were a number of people who hoped and believed that Alesco would be that case.”

Ernst & Young senior tax partner Jo Doolan said yesterday’s judgment was an “alarming result”.

“It reinforces the feeling of many inbound investing corporates that the NZ tax environment is too uncertain. It may discourage them from continuing to do business here,” she said.

I’m sorry, but I just don’t accept the argument that companies will not invest here if they are not allowed to avoid paying tax.

I’m all in favour of lower tax rates to encourage investment. But I’m also in favour of plugging tax loopholes.

I think it is commendable that IRD has been very effective in making sure companies don’t avoid paying tax purely through use of artificial mechanisms that have no commercial basis except tax avoidance. They managed to get the banks to cough up an extra billion dollars or so, and I understand APN (owners of the Herald) are also in court and fighting over $50 million or so of disputed tax.

The best tax system is low rates, broad base and few loopholes.

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45 Responses to “IRD wins again”

  1. GPT1 (2,042 comments) says:

    I’m all in favour of lower tax rates to encourage investment. But I’m also in favour of plugging tax loopholes.
    Well said. Tax should be as low as possible and as simple as possible but it should be paid.

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  2. Manolo (12,617 comments) says:

    P.G. must be a bundle of joy and sporting a wide grin after reading the news.
    As any loyal follower, he reckons the effectiveness of his beloved Dunne, Minister of Revenue, justifies keeping him regardless of who wins the next election.

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  3. Redbaiter (6,464 comments) says:

    If we were able to rid ourselves of the scourge of socialism, and thereby think clearly on issues such as taxation, it would become plain that company tax is an illusion.

    Companies will never pay tax.

    Where do you think the money that the company uses to pay its tax comes from? Out of thin air? Off trees?

    I’ll tell you.

    It comes from the customer, and that is you. Every time you buy a product from a company, you pay that company’s tax as it is BUILT INTO THE PRICE OF THE PRODUCT.

    Company tax should be abolished. It merely serves as a smokescreen, a means to disguise the greed and rapaciousness of socialist government.

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  4. Alan Wilkinson (1,798 comments) says:

    “Between 2003 and 2008 Alesco NZ claimed deductions for amounts treated as interest liabilities on the notes in accordance with a determination issued by the tax commissioner. But the commissioner then denied Alesco the interest deductions and treated the funding structure as a tax avoidance arrangement.” – http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10869338

    If the IRD is free to change the rules at will (which I understand to be the case) then business will evaluate opportunities in accordance with that risk and uncertainty. Tax should be as simple and as certain as possible which seems not to be the case.

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  5. RRM (8,988 comments) says:

    Weddy you are spot on, but as usual you ruin it with a premenstrual whinge about how the socialists are ruining everything and all those who oppose you are corrupt and/or idiots.

    Serious question now… if you were put in charge of fixing the NZ tax system, what would it look like when you’d finished?

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  6. MarkF (89 comments) says:

    The rights or wrongs of the judgement be as they may but to me more worrying is this from Tuesday’s Herald

    ” Between 2003 and 2008 Alesco NZ claimed deductions for amounts treated as interest liabilities on the notes in accordance with a determination issued by the tax commissioner.

    But the commissioner then denied Alesco the interest deductions and treated the funding structure as a tax avoidance arrangement.”

    If the above statement is true then I find it somewhat shocking that after a determination issued by the tax commissioner a company arranges their finances so, only to have the tax commissioner then change his decision.

    Surely one should be able to rely on the fact that a decision by the tax commissioner is not able to be reversed. Imagine if we tried to pull that in reverse.

    Public servants seem not to be accountable to anyone for making wrong decisions then correcting them but you still have bear the brunt of the cock up.

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  7. Redbaiter (6,464 comments) says:

    “Serious question now… if you were put in charge of fixing the NZ tax system, what would it look like when you’d finished?”

    I usually don’t respond to questions from recognised left wing trolls, but seeing you asked so nicely, just this once I will make an exception.

    There is only one fair and equitable system of tax and that is a poll tax. That it really is fair and equitable is the reason that the left hate it. They want me to pay their tax, and they see no shame in having their tax paid from the blood and sweat of another. In more enlightened times progressive taxation will be seen as the slavery it really is. (Why I mentioned socialism above. It will disappear one day)

    A poll tax on every person eligible to vote not only makes every one pay a fair share it also forces government to act with the necessary restraint it does not exercise today.

    When each and every individual is obliged every year to write out a cheque to the government covering his share of the cost of that government, it brings home very solidly how much is being taken from that citizen. Nowadays, people really have no idea what they are truly paying.

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  8. RRM (8,988 comments) says:

    Thanks Weddy, I appreciate the answer.

    Wouldn’t a poll tax provide the bludging class an even stronger incentive to vote for generous social welfare though? (As their main/only means of income from which to pay the poll tax?)

    “Vote labour and all beneficiaries will have their poll tax paid by WINZ” for example.)

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  9. barry (1,317 comments) says:

    This sounds similar to the Wine Box – If I understand things, these guys were claiming an expense of paying interest when in fact they hadnt paid a cent.

    Alan Wilkinson (1,448) Says:
    March 6th, 2013 at 11:13 am ……I dont think IRD changed the rules – I think the point is that the company actually didnt pay any interest – but claimed that they had. And IRD found out that in fact they hadnt actually psid anything.

    Maybe its something about these convertable notes (or whatever theyre called) whereby interest can simply be ‘paid’ by a book entry to the value of the notes. I note the interest payments claimed have been called “Interest Liabilities” which implies that they are actually liabilities and HAVE NOT been paid.

    The IRD are quite right to take the view they have. If there hasnt been a payment, then surely they cant claim the paper entry as a real expense. I cant and no one else can – so why should these guys.

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  10. labrator (1,691 comments) says:

    “…the NZ tax environment is too uncertain”

    That’s the crux of the issue, not the strawman of corporates wanting to pay no tax. It’s like all things, don’t change the game after you’ve started playing. If the tax commissioner gave advice and they followed it it’s pretty crap to spend years traipsing through a foreign legal system to find out where you’re at. The IRD should be working with the government to make the system as simple as possible and as stable.

    This decision reminds me of the IRD case against the dentists (or surgeons) who restructured their finances after Labour’s 40% tax change. I bet they wish they’d just left the country.

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  11. Redbaiter (6,464 comments) says:

    “Vote labour and all beneficiaries will have their poll tax paid by WINZ” for example.)

    Yep, I could just see you voting for a party that would increase the amount of the cheque you would have to fork over every year.

    Progressive taxation is like a millstone around the neck of every economy.

    It is entirely counter productive to a thriving economy.

    Secondly, compliance with taxation regulation is a massive drain on the country’s productive resources. Not only in accountancy fees but in th ecost of running th eIRD and dealing with cases Farrar has exampled in his post.

    A poll tax would see the end of these shackles to our prosperity and productivity and give rise to a nation much more prosperous.

    Its like you having an epiphany and realising Redbaiter has been right all this time, only on a country wide scale. It changes the outlook of each and every individual in the tax system and therefore it changes the country.

    “Bludgers” would not exist in anything like the numbers they do today. You do realise many people do not work today because the benefit is close to what they would earn if they did? And if they still wanted any kind of benefit, they should take out private insurance. As a last resort, we could deal with “bludgers” (your term) the way the Swiss do- have their family or their direct community maintain them.

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  12. krazykiwi (9,188 comments) says:

    Serious question now… if you were put in charge of fixing the NZ tax system, what would it look like when you’d finished?

    1. Set a living wage ($lw) being x% of the average, full annual income of our MP’s. Any reduction of x% to require 80% parliamentary support.

    2. Zero tax is paid on income up to $lw

    3. All beneficiaries (DPB, sickness, pension etc) are entitled to $lw. There are no other entitlements. Workers incl low-wage and part time are topeed up to $lw

    4. All income over $lw is taxed at flat 25%. This drops to 20% if the state represents more than 30% of GDP in 5 year time.

    There. fixed the welfare system, the tax system, and the government would spend billions less on IRD, ACC, MSD etc
    :)

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  13. queenstfarmer (696 comments) says:

    It is good. Remember how Labour & the Greens said that National was “gutting” the IRD in order to prevent prosecutions of its “rich mates”? Wrong again.

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  14. Alan Wilkinson (1,798 comments) says:

    @barry, if you are charged interest and pay it as a reduction of your capital by book entry you are still paying it even though no cash changes hands. I don’t know if this applies in this case but Jo Doolan is not exactly naive on tax matters so I would expect the situation is less simple than you suggest.

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  15. RRM (8,988 comments) says:

    Yep, I could just see you voting for a party that would increase the amount of the cheque you would have to fork over every year.

    I could see ALL of the beneficiaries voting for that. :-P

    I like your system, and I like KK’s system, but I think KK’s system would stand a better chance of coming to pass.

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  16. peterwn (2,933 comments) says:

    Alan – IRD did not change the rules at will. The writing has been on the wall for the last 30 or so years with commentators warning that that artificial arrangements without a genuine commercial purpose ewould attract the ire of IRD. If there is any rule change involved it was not in tax legisation at all, but the Interpretation Act 1999 where s5(1) states “The meaning of an enactment must be ascertained from its text and in the light of its purpose”. This was a significant change from the former ‘black letter’ interpretation on which tax avoidance schemes relies and which made it very difficult for IRD to sheet home anti-avoidance provisions. The tax consultancy industry should have sat up and taken notice, but instead kept their heads buried. They and their clients are now wailing and gnashing their teeth as the gravy train is over.

    There are two serious types of tax avoidance ‘unacceptable’ and ‘abusive’. The recent cases (AFAIK) all fall in the ‘abusive’ category – the judges were quite clear on this. The ‘line’ may not be very ‘bright’ but in these cases it was well and truely crossed. There was little ‘uncertainty’ in these cases.

    IRD would be failing in its duties to the government and public if it let big corporates get away with tax ‘murder’ while individuals ans small and medium businesses are generally too scared stiff to have IRD on.

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  17. Alan Wilkinson (1,798 comments) says:

    peterwn, as far as I can see IRD continually changes the rules at will, the latest example being its proposed FBT grab on employee phones. But the Commissioner is empowered to deem anything tax avoidance irrespective of prior custom or determinations. Tax minimisation IS a genuine commercial purpose just like every other commercial efficiency.

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  18. tvb (3,938 comments) says:

    This was probably an aggressive structure designed by Accountants rather than lawyers

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  19. Viking2 (10,703 comments) says:

    smart arse accountants are getting nailed. That’s why they are squealing like stuck pigs.
    Penny & Hooper were wrong wrong wrong and so are these dudes.

    Guess KPMG’s liabilities just go bigger now they might get sued for bad advice.

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  20. Pete George (21,798 comments) says:

    as far as I can see IRD continually changes the rules at will

    They wouldn’t need to “change the rules” so much, or make controversial rulings, if companies didn’t keep changing the pay they try and work around the rules to avoid paying tax..

    Lower tax rates would reduce the incentive for creative avoidance but some would probably always try and get away with what they can.

    Manolo – I haven’t checked the details on this or other moves to tighten up on other loopholes. I agree in princip;ple that loopholes should be eliminated wherever possible, but the cost of measures taken can be greater than the gains in tax take.

    I have sympathy for honest businesses having too much compliance cost and difficulty.
    I don’t have sympathy for those who moan about perk elimiabntion being looked at.

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  21. lastmanstanding (1,154 comments) says:

    This is not the first time the Commissioner has welched on a advice to a tax payer. NZ will quickly get a reputation as a place not to invest where the IRD issues an advisory on a tax matter, the tax payer follows the advisory and then the Commission changes the rules and brings a case against the tax payer.
    It would the same as the Police prosecuting a citizen for a matter that was legal at the time it occurred but was then declared illegal and backdated to that time.
    What all taxpayers are entitled to and the Parliament and the Commissioner should be obliged to do is create a situation of certainty.
    That is I know the law as it stands so I take action knowing that at a later stage I wont be hauled into Court and have my actions declared illegal even though they werent at the time i took the action.

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  22. nickb (3,629 comments) says:

    I think it is commendable that IRD has been very effective in making sure companies don’t avoid paying tax purely through use of artificial mechanisms that have no commercial basis except tax avoidance.

    If this statement had any foundation in fact then I might agree with you.

    What is happening is that IRD is issuing binding rulings and then changing the rules when they decide they need to be raising more revenue. Even worse, they are interfering and reconstructing arms-length arrangements between third parties. Given the Alesco case and the recent Penny/Hooper decision, it is becoming clear that the IRD (and by implication PEter Dunce / the NZ Government’s) view is that you must arrange your affairs in such a way that pays the most tax.

    It is hugely damaging to New Zealand’s international reputation.

    I predict more self-righteous pontificating from the retard that is known as the “Minister of Revenue” and further assaults on legitimate commercial transactions. There are some more interesting avoidance cases emerging in respect of changes to the dairy farmers’ herd scheme which sound like an insane and absurd use of the anti-avoidance provision. Given that dairy farmers have a strong lobby group, unlike overtaxed orthopaedic surgeons and multinationals, hopefully the ful story is put in the public eye instead of just one-eyed comments from the government and pom pom waving blog posts such as this.

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  23. somewhatthoughtful (436 comments) says:

    krazykiwi, a GMI doesn’t do anything to ACC – which is certainly still a better, simpler option than private accident insurance and individual liability.

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  24. barry (1,317 comments) says:

    @Alan Wilkinson

    But you cant mix income(taxable) and capital(non-taxable). Hell – if you could do that no one would pay tax. What you suggest turns a taxable activity into a non taxable activity. Its a principle of the system that you cannot do that.
    The basic rule remains that you actually have to PAY OUT THE money for it to be an expense.

    And Jo Doolan has an interest in this – the more the parties go to court, the more people like him.her stand to make.

    re Phones. The IRD has not changed any rulings – as far as I know theyve never ruled on the use of mobile phones. Its like the use of company computers for private use. I know a company where an employee had to go overseas urgently. The company couldnt access his computer to get vital costings. Id suggest that the computer could be classified as his machine for his exclusive use – including private use. In which case since it has been treated as a legitimate business expense, then the user should be paying FBT.

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  25. Nigel Kearney (747 comments) says:

    There’s just no principled way to operate a system where income and capital gains are taxed at different rates. It can only be done by making a never-ending series of highly subjective court rulings as people keep changing their arrangements to try to shift gains to the capital account and losses to the revenue account. These rulings will never to converge to a stable situation where we all know exactly what is required in order to pay the minimum we are legally required to pay.

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  26. Alan Wilkinson (1,798 comments) says:

    @barry: “But you cant mix income(taxable) and capital(non-taxable).”

    Of course you can. As soon as you buy an income generating asset that is exactly what you do.

    re Phones – they are proposing to do just that: http://www.3news.co.nz/IRD-plans-tax-on-company-phones/tabid/421/articleID/288607/Default.aspx

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  27. Ed Snack (1,535 comments) says:

    Here’s where I part company from the usual anti-tax brigade; if we have rules they should be simple. The mechanism used by Alesco had no commercial basis (unless like Alan Wilkinson one believes that avoiding tax is an adequate commercial reason, one BTW that is usually declared specifically NOT to be a commercial reason in the statute book) and was thus abusive and thoroughly deserved to be declared a nullity for tax purposes.

    The Penny/Hooper case was very similar, there two people set up an arrangement to minimize their tax payments that was set up so with that effective sole purpose. If it wasn’t, could you get them to work for the public system for the salary that they were ostensibly paying themselves (around $65K pa from memory, versus an actual nominal salary paid via their trust of over $500K)? No way, it was a legal fiction. If they had been less greedy and paid themselves reasonable salaries out of the Trust the IRD would probably have ignored them. The lesson being if you wish to claim that something is not specifically designed to avoid tax as its primary purpose, then don’t make it so bloody obvious that it was.

    Although i agree that one follows the letter of the law rather than some ephemeral spirit, the intent of the law is also important in its interpretation, and I doubt that the kind of schemes such as Penny/Hooper and Alesco were how the law makers envisaged the law working. In this case, the letter of the law says that you cannot set up a legal structure whose purpose has no commercial basis other than to minimize tax (or words to that effect). Aggressive tax planners are well aware of this, and try to work around it. When they get too aggressive, they get pinged. Jo Doolan has been around for a very long time and has helped many wealthy NZ’ers avoid paying very large sums in tax, and so is more than very well aware of the anti-avoidance provisions.

    With all that, I’m generally in favour of company taxation in the NZ implementation. Because of imputation credits, companies with NZ shareholders essentially don’t actually pay any tax as such. They make tax payments on behalf of their shareholders, and to the extent that the company pays tax, the shareholder doesn’t. Thus a company that, say, has a profit of $1M and pays 30% of that in tax, can pay out any amount of the balance to shareholders with a 30% tax imputation credit, making it tax-free in the shareholders hands. If that same company, through aggressive tax planning, paid 0% tax on the $1M, could pay out up to $1M to shareholders, and that income would (as dividends anyway) be fully taxable in the shareholders hands. (please excuse any slight inaccuracies, this is not intended as a anything more than an outline).

    Of course the usual “trick” is to turn that profit into a capital profit through some scheme, a scheme such as the Alesco one which has that effect, so as to avoid taxation altogether.

    For overseas shareholders though the NZ Imputation credits may or may not be available through double-tax agreements, so we do at least get some taxation from overseas shareholders.

    I’d support a zero tax for companies too, after all the actual tax incidence falls on some combination of employees, customers, shareholders, and wider stakeholders, real people pay tax. But if we have to have a corporate tax, imputation is, IMHO, the best way to go.

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  28. peterwn (2,933 comments) says:

    Alan – you need to be more specific. For example if an employee has a company mobile phone, there is no need for the employee to have his home phone paid by the employer. The fundamentals behind the rules are quite clear – if an employee gains a personal benefit from things paid by the employer then FBT is payable – IRD has rules to take account of practicalities, but as circumstances change then it is reasonable that the rules be updated eg not allowing a home phone and a mobile phone to be both tax free. Again there is the matter of fairness between a taxpayer who receives perks and one who does not. Lower paid people who actually pay tax (ie their tax payments exceed any welfare/ FBT they receiver) who do not have any work perks would have every reason to feel aggrieved when they see highly paid people ripping the tax system through perks worth thousands of dollars and corporates ripping off millions through dodgy transactions.

    tvb – the beathtaking avoidence schemes in the Trinity/ Ben Nevis forestry investment scheme was the brainchild of a lawyer who is fighting tooth and nail to save himself from financial destruction.

    lastmanstanding etc – Before claiming that IRD is welching, the circumstances need to be looked at more closely. In case A there could be a genuine commercial reason for the transaction and in case B no such reason. Or in (say) case A there were aspects IRD was not aware of when seeking a binding ruling etc.
    Take the case of the two surgeons. IRD is unlikely to be bothered with a business owner paying himself a pinchgut salary (and not receiving anything else) to help grow the business. But the two surgeons paid themselves a salary far below ordinary rates and stuck the rest in their family trusts. They then borrowed from their family trusts at nil interest and no immediate intention of repayment to finance their lifestyles. They were not growing their businesses as they can only replace so many hips a day. All their equipment etc would have been provided by the hospital and charged to the patient – so there was little ‘business’ element unlike say a dentist who needs $100k or so to set up. The whole exercise had ‘rort’ written all over it – no wonder they copped it. IMO the interest free loans from the trusts was the clincher as far as the judge was concerned.

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  29. Alan Wilkinson (1,798 comments) says:

    @peterwn: “The tax would be applied to the bill the employer receives for private, outside-hours phone calls, data and messaging, if it was more than “incidental” use.”

    How the hell is anyone going to do the accounting for that? Considering bundled plans, self-employed, on-call staff, business need to be contactable, negligible marginal cost to the business? It’s certainly not a perk worth thousands of dollars.

    Ed Snack, I don’t care what the Statute Book declares. Minimising tax IS a commercial purpose. The law can declare black is white as often as it likes but it doesn’t make it so and everyone knows it.

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  30. peterwn (2,933 comments) says:

    Alan re “Minimising tax IS a commercial purpose” – there has to be a commercial purpose apart from minimising tax. That is the gist of the various court judgments on tax avoidance.

    Alternatively there need to be a purpose expressed or implied in tax legislation. For example tax legislation encourages individuals to use PIE’s when investing so they obtain an equitable tax treatment on their savings. So use of PIE’s would not be questioned unless someone finds an ingenious way of using PIE’s which was not intended and an obvious tax rip-off.

    In the ‘telephone’ case IRD is obviouly not going to audit each phone bill with a fine tooth comb. IRD is obviously setting the scene to deal with grossly abusive behaviour such as an employer paid phone being used to run a side business such as telemarketing, etc.

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  31. Viking2 (10,703 comments) says:

    The taxman is urging businesses with “Penny and Hooper-like disclosures” to do so by March 31 or risk penalties.

    Penny and Hooper, two Christchurch orthopaedic surgeons, were found to have reduced their income tax obligations through an income diversion arrangement.

    At the end of February, more than 271 taxpayers in positions that were broadly equivalent to Penny and Hooper had made voluntary disclosures resulting in nearly $7 million being collected.

    IRD said taxpayers had until the end of this month to take advantage of its concession to make a voluntary disclosure.

    http://www.stuff.co.nz/business/money/8389884/Firms-urged-to-come-clean-over-tax

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  32. Alan Wilkinson (1,798 comments) says:

    I don’t think it is at all obvious IRD is only going to pursue big fish. Every time a little guy gets audited this will just be yet another opportunity to hit them with their massive penalty regime. The compliance costs will be horrendous and no doubt failure to keep detailed records will be made a crime.

    Minimizing tax is always a commercial purpose and will continue to be so. Companies will do whatever it takes to achieve that and avoiding this country is often an option.

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  33. wreck1080 (3,522 comments) says:

    “The best tax system is low rates, broad base and few loopholes”

    Didn’t know you supported a capital gains tax!

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  34. slijmbal (1,133 comments) says:

    NZ had the beauty of one of the simplest tax (and thus effective systems in the ‘developed’ world in the 90s. It has gradually become more complex with the corresponding inefficiencies (=cost) and loopholes.

    Any taxation that results in constructions that are economically inefficient is stupid. If it is more convenient and cheaper for me to provide phones to my staff then if I then have to worry about tax consequences that are expensive and potentially -ve against my staff financially then I am being forced to add costs to my business to avoid tax. Why? We don’t tax phoning home from work from a land line – that is just as much a ‘benefit’ as a cell phone?

    It is more cost effective to run 2 cars – one cheap one for private use if you are a ‘contractor’. That is because FBT is punitive. Economically, this is daft. Ditto the rules about taking ‘company’ cars home. There is no allowance for the practicalities that these types of actions essentially benefit the company and that this is the main driver. The benefit to the individual is a consequence but is treated as predominantly a benefit to the individual rather than a side effect. Utterly daft.

    On the corporate side – historically the IRD was a bit of wimp and did not chase this stuff. With enough $ it is not that hard to construct one’s arrangements to minimise tax. Often the construct has the sole purpose of reducing tax, which is illegal under NZ law. We are not talking about the choice between approaches some of which have a lesser tax exposure. We are talking about mechanisms created for the sole purpose of reducing tax. Good to see that are chasing some of these, finally.

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  35. Ed Snack (1,535 comments) says:

    Alan, that’s tantamount to approving tax evasion. It is not and never should be a commercial purpose to purely avoid tax. Sorry, but legally and morally you are quite incorrect. And, sorry to inform you, but when parliament passes a law that specifies that, then that is the law like it or not. Change it if you can.

    Would you also approve of outright fraud to reduce tax, making up book entries to pretend that one paid interest when one didn’t ?

    And another one, also ruled illegal in NZ but another way way to avoid paying tax. Take an NZ domiciled but foreign owned company, lets say IntCo NZ, IntCo has a $1B turnover and is seriously profitable with a $200M net profit before tax as currently constituted. Sell the entire set of assets into a new company, a $100 shell company IntCo 2013 Limited. Finance the deal with $2B in loans from a Cayman islands entity at 20% interest. Now the company turns over $1B, and has a profit of $0 with $200M being shipped overseas to the cayman islands where no tax is payable (or rather, a very minimal tax is levied). A nice little earner, only illegal in NZ (and many other jurisdictions) under what are called “thin capital” rules. Presumably you would approve of this too ?

    And if a company or investor is so determined not to pay any tax at all, then as far as I’m concerned they can fuck off. Plenty of honest businesspeople can turn a profit without such behaviour, and people with that kind of attitude are most typically highly criminal types anyway. As I noted above, for NZ owners, with imputation, the level of taxation at a company level is almost unimportant unless your also using the company as a backdoor way to pay personal expenses. None of that means you can’t and shouldn’t look to minimize taxes and apply the law as it exists. But in this case the law is reasonably clear, there was no reasonable commercial basis for the transaction outside tax avoidance, and that is quite specifically banned under the law.

    Whatever you think are the commercial drivers for tax evasion, they don’t apply in the same way to individuals.

    In case you want to ask, yes, I run my own company with investments. Yes I attempt to minimize the tax I pay, and Yes, I turn down dodgy proposals to minimize even further my company tax by artificial constructs. I haven’t yet been challenged, and IT DOESN’T REALLY MATTER. The more tax my company pays, the less I subsequently pay.

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  36. slijmbal (1,133 comments) says:

    @wreck

    “The best tax system is low rates, broad base and few loopholes”

    “Didn’t know you supported a capital gains tax!”

    Lived in NL for quite a while. It had an amazingly high top tax rate but amazingly I paid less tax there as a %age of my earnings compared to NZ because of the enormous number of loopholes and tax breaks.

    So, in principle I agree that a proper tax system with a decently constructed capital gains would do the trick. I Am also a fan of less general taxation as it is less a brake on the economy.

    However, the huge fear I have is that any capital gains tax will end up as a tool used by the labour/greens as a rich prick tax. It would be a savings tax. I would end up paying yet more tax because I had the good sense to save up for my retirement rather than spend it on booze and large TVs. Savings could end up being taxed up to 4 times.

    One is taxed to earn the money to save, it is taxed on any earnings it has and if I then live off the investments then it is deemed to be investing for earnings and thus then taxable and finally any capital gains tax that is not inflation adjusted would be a tax caused by inflation. Do not say the last will not happen as the so called FDR for foreign investments which is essentially a capital tax in disguise without the need for capital gains (brought in by Cullen of course) is a great example of a tax on saviings with no rational justification for its construction .

    So, despite agreeing that according to economic theory a capital gains tax is a good idea but giving socialists yet another way to take my money and piss it away means I will fight it to the death.

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  37. UglyTruth (3,002 comments) says:

    Sorry, but legally and morally you are quite incorrect.

    The IRD engages in fraud as a matter of normal business practice.

    “You need to file an IR3 return if you earned income other than salary, wages, interest, dividends, and/or taxable Māori authority distributions.”

    http://www.ird.govt.nz/income-tax-individual/end-year/ir3/

    Income is only taxable for persons, not for people in general. Also, need implies a threat and a disregard for law (Bracton’s maxim).

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  38. Ed Snack (1,535 comments) says:

    Beware of posting twice in a row, but the FBT issue is a bit different. FBT is complex and expensive and is die for a proper review. It was made “necessary” by the strenuous attempts made by some people to largely avoid income tax by receiving payment in kind for various benefits. The favourite was of course the company car but there were many other mechanisms. Back in the Muldoon 66% tax days a company car was a seriously useful way around paying huge sums (relatively speaking) in tax.

    There is a problem though in making reasonable rules that can’t be abused. If most people agree that some level of tax is payable for some state provided services, then most would agree that the tax burden should be shared equitably with at least some proportion of progression, although flat taxes are an option. If there’s no FBT regime and businesses are free to pay (and claim) as expenses providing employees with benefits in kind, then that would seriously undermine any tax system.

    The thing with phones must be that they are ubiquitous and that with some exceptions, the actual individual amounts aren’t that large. We have some phones at my work that are strictly business, they have restricted calling for example and are assigned to a role rather than a person so get swapped with shifts. But all the executive and sales team have only one phone, quite a few brought their own number in with them so as to continue to use it for personal access as well. Who after all wants to maintain 2 phones? So the phone is provided because I need one and can be on call, but I use it personally as well. I actually reimburse any significant personal usage (if I went overseas on holiday say), but otherwise it’s all paid for. That’s a small benefit I guess, but in contribution maybe $5 a month in calls and twice that in data. To collect, what, 30% or so of $180 a year, say $60, hell, is it worth it ! Maybe a blanket rule, of X% on business phones allocated to a user full time when personal calling is allowed. Make it 5-10% if you must on the call costs, the monthly fees and handset costs are legitimate business expenses, we incur those on the restricted phones the same as the others.

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  39. krazykiwi (9,188 comments) says:

    ed – I have an interest in the work/personal phone issue. I’m not IRD, more looking at how the shakeout of BYOD and corporate/personal liable may create business opportunities. I’d be keen for a chat. Email me on krazykiwi at icloud.com if you’re interested and willing. Cheers.

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  40. slijmbal (1,133 comments) says:

    @Ed

    1/2 the point is that excessive tax encourages gaming the tax system as it is more effective than actually increasing the profitability of the business. Closing off the loopholes thus made visible by such gaming means that the reasonable behaviour gets essentially punished in the process.

    If you were being truly purist then businesses should be taxed for staff who work unpaid overtime as it is essentially a benefit to the business – for instance.

    Many of the more artificial or complex rules originated because excessive tax made artificial business tax behaviours profitable.

    If I give a staff member a business cellphone then I have the benefit of greater access, which I am paying for by paying for the phone. It is also cheaper for my business to ring them as it is probably under a corporate agreement. Why should the staff member be taxed for an accidental benefit they may receive because it saves me money – an example but a real one.

    Cut down tax rates and all this crap will disappear.

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  41. peterwn (2,933 comments) says:

    UglyTruth

    “The IRD engages in fraud as a matter of normal business practice. ”

    IRD ‘fraud’ was claimed in the Trinity/ Ben Nevis forestry case, but it did not wash with the judges.

    What sort of fraud – criminal or ‘equity’ fraud (unconscionable conduct). Cannot be ‘equity’ fraud as IRD is completely legislation driven and so ‘equity’ does not apply to IRD.

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  42. Harriet (4,010 comments) says:

    In Australia the ‘general rule’ from the tax office is something like this:

    You have to show the tax office that you have done something for ‘another reason’ than ‘just’ avoiding paying tax.

    So if you can show the tax office that you are doing/done at least ‘something’ other than ‘just avoiding tax’ – you are o.k.

    Putting you tax obligations into the next year is not seen as avoidance because you are in effect increasing your cashflow ect ect.

    Minimizing tax obligations is legal in Australia – avoiding tax isn’t.

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  43. UglyTruth (3,002 comments) says:

    peterwn,
    I wouldn’t call it criminal fraud on the part of the IRD as typically there is no intent. The judges won’t do anything about it because the see fraud of this nature as being a necessity. They admit the fraud and continue anyway.

    http://www.actsinjunction.info

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  44. wreck1080 (3,522 comments) says:

    Isn’t the issue that the IRD will not say up front whether a tax strategy is valid or not?

    Just how would you feel if your accountant managed your tax affairs according to accepted practice and the IRD came to you 5 years later and said they’d reconsidered their opinion of ‘accepted practice’ and now view you in breach of tax laws.

    The IRD will not give a pre-judgement on a particular tax scenario either. Why not?

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  45. Alan Wilkinson (1,798 comments) says:

    @Ed Snack, you are dreaming. All companies seek to minimize their tax unless run by besotted idealists or incompetents. Therefore they need to know where the legal line is and not risk it moving after they have made a decision. So do their accountants. Really, it is that simple.

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