Tax avoidance exists commonly in many societies and it is well-known that whatever individuals or organizations want to reduce tax payment and gain benefit by tax avoidance. The most common method for them is restructuring arrangements. Therefore, Inland Revenue Department (IRD) uses laws and cases to judge whether these arrangements are tax avoidance.
In this case, tax avoidance is the main problem needs to be discussed. James Smith restructured the practice arrangement, which had a high probably to cause the problem of tax avoidance. The report will show the full processes to judge James’ arrangements according to the Income Tax Act 2007, the Tax Administration Act 1994, previous cases, suggests of the Revenue Alert 11/02 and the Interpretation Statement by IRD and the parliamentary contemplation test.
Whether there has been a tax avoidance arrangement.
The effect is on a taxpayer if it is found that a tax avoidance arrangement exists.
Income Tax Act 2007:
s BC 6 Income tax liability of filing taxpayer;
s BG1 Tax avoidance;
s CB 1 Amounts derived from business;
s CD 1–CD 6 Income and Dividend;
s GA 1Cimmissioner’s power to adjust;
s GB1 Arrangements involving dividend stripping;
s GB27-GB29 Attribution rule for income from personal services; s GB34-GB36 Arrangements involving depreciation loss;
s GB 44 Arrangements involving tax credits for families;
s YA1 Arrangement; Tax avoidance; Tax avoidance arrangement. Tax Administration Act 1994:
s 141D(3) Abusive tax position;
s 141FB(2) Reduction of penalties for previous behavior;
s 141G(3) Reduction in penalty for voluntary disclosure of tax shortfall. Revenue Alert 11/02
The Interpretation Statement by IRD on 13 June 2013
Ben Nevis Forestry Venture Ltd v Commissioner of Inland Revenue  NZSC 115;  2 NZLR 289; (2009) 24 NZTC 23, 188 (SC). BNZ Investments Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,582 (HC). Penny v Commissioner of Inland Revenue (2011) 25 NZTC 20-073 (SC); Commissioner of Inland Revenue v Penny  NZCA 231;  3 NZLR 360; (2010) 24 NZTC 24,287 (CA); Penny and Hooper v Commissioner of Inland Revenue  3 NZLR 523; (2009) 24 NZTC 23, 406 (HC) [CB, Chapter 15]. Newton v Federal Commissioner of Taxation  AC 450 (PC).
The arrangement and its tax effect
According to s YA1, arrangement can be an agreement, contract, plan, or understanding, whatever enforceable or unenforceable, and it is carried into effect by all steps and transactions.
In this case, the arrangements show below: James Smith restructured the practice arrangement. James Smith set up a company named Smith Cardiac Care Limited (SCCL) in April 1998 and became the only director. The Smith Family Trust held all the shares of SCCL and James Smith is the only trustee of the Trust. Moreover, James, his wife and their children and future children and grandchildren are the discretionary beneficiaries. All of James obligations of the company at book value. SCCL decided to pay James $130000 per annum as a salary and the trust was distributed the fully imputed dividends of the company so as to accumulate the profit as a fund for school and university education of beneficiaries.
The revenue of SCCL after deducting cost was divided as two parts. One part was used to pay James’ salary income ($130000) who is the sole director of the company and the salary was fixed each year by him and was returned by him as income, which is much lower than other cardiologists paid by the public sector at $800000 per annum. For this part, James’ taxable income needed to follow the basic tax rate of the Income Tax Act as the multiplier and the top marginal rates for individuals earning more than $60000 per annum during 1998 was 33%. So James needed to pay tax up to 33%.
The rest part of profit as the income of the company should paid 33% company tax to Inland Revenue Department (IRD). After paid the tax,...
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