Topic – Tax planning and anti-avoidance
Company A and Company B were both active trading entities until 31 March 2017. The two individuals (Mr A and Mr B) held equally 100% shares in Company A. They also held 50% of the shares in Company B (in the same ratio, Mr A 25%, Mr B 25%). The other 50% of the shares in Company B were held by another independent individual (Mrs K). Both companies were conducted their businesses from the same premises but their operations were entirely separate.
On 1 April 2017 the three shareholders (Mr A, B and Mrs K) resolved to merge the activities of Company A and Company B and agreed that they should form a new Company Z in which they would each hold one-third of the shares (33.3% each). Company Z would acquire businesses of Company A and Company B and will provide services and deal with all related matters for the joint business.
An independent expert valued the shares in Companies A and B to be acquired by Company Z. Companies A and B were not liquidated, the amount standing to the credit of shareholders being represented in Company Z as the loans. Company Z did not pay sum to acquire the shares of Companies A and B. The retained earnings of Companies A and B prior to merger (reconstruction) totalled approximately $400,000.
All the three shareholders (Mr A, B and Mrs K) agreed that after a few months retained earnings of Companies A and B will be distributed to Company Z and Company Z will pay in full the outstanding loans for the purchase price of shares to shareholders.
- Write a report to the shareholders advising them of any problems, you see in the above arrangement and whether the arrangement is acceptable, or is void as against the Commissioner by virtue of s BG 1 ITA 2007. You must apply the facts above and use appropriate references to the relevant sections of the Income Tax Act 2007 and conclude whether there has been a “tax avoidance arrangement” which could be attacked by Inland Revenue under the general anti-avoidance rule [GAAR] of the Income Tax Act 2007 and state what the consequences would be.
- Your report should cover the following:
(1) At least three significant/relevant New Zealand tax cases to support your opinion. You can refer also to leading cases from other jurisdictions and other New Zealand cases.
(2) The steps from the Interpretation Statement issued by the IRD on 13 June 2013 and relevant tests with relevant case law. (The Interpretation Statement issued by the IRD on 13 June 2013 is available on Blackboard under the assessment icon)
(3) Your report should also consider what (if any) shortfall penalties the shareholders may be liable for. Include statutory authorities (The Income Tax Act 2007 and The Tax Administration Act 1994).
Allocation of marks
Marks for the report are allocated on the basis of the professional judgment of the marker and will be based on the following:
– the presentation, structure, legal writing style and referencing of your report. (5 marks)
– the quality and reasoning behind your opinions provided in the report. (25 marks)
– the effectiveness of the report in communicating your opinions. (10 marks)
Your report must:
- be word-processed (font Times New Roman, size 12) and 1.5 line spaced.
- use appropriate headings.
- use formal language and legal writing style, with clear, succinct explanations.
- be no more than 3,000 words in length. This is an absolute maximum. Include a word count on the final page, excluding the bibliography and footnotes.
- be correctly referenced so that the report conforms to the New Zealand Law Style Guide (2nd edition).
- include a bibliography and a list of cases. Note that the full case name should be stated – see examples in the Master Tax Guide Case Table or New Zealand Taxation Table of Cases or New Zealand Law Style Guide.
- be stapled on the left-hand corner – do not bind or use a plastic folder. Refer to Business Programmes Assessment & Study Handbook on Blackboard, which includes information on: Assignments (Format, Presentation, Referencing, Submission).