If reading about the ins and outs of tax avoidance tickles your fancy, then have I got the dream document for you! IR’s finalised interpretation statement on tax avoidance – IS 23/01 ‘Tax avoidance and the interpretation of the general anti-avoidance provisions sections BG 1 and GA 1 of the Income Tax Act 2007’, has been issued.
The document is 138 pages long, a little like a “Gone with the Wind” novel. If that puts you off at the outset, then I’d recommend that you at least read the accompanying QBWA’s – QB 23/01 and QB 23/02, which covers the following six scenarios – each with IR’s views on whether or not a tax avoidance arrangement may be present:
Family trust loaning funds to associated company;
Individual on 39% tax rate borrowing from bank, deducting interest and investing in PIE;
Individual on 39% tax rate investing in PIE;
Use of a limited partnership company;
Formation of a limited partnership by a loss company; and,
Use of a family trust to pay income to corporate beneficiary or beneficiary on the lowest marginal tax rate.
I suspect that items one and six will be of most interest and relevance to you. The latter, particularly for those who start to get a little nervous when adding a tax loss company as a beneficiary of the family trust, so that income of the trustees can be distributed to the corporate beneficiary to soak up the tax losses. Hopefully, the item and its content will put your mind somewhat at rest.
Finally, instead of reading the 138-page epic, the Commissioner has been kind enough to release IS 23/01 FS, a 9-page fact sheet summarising the commentary covered by IS 23/01. The fact sheet briefly discusses the key elements of section BG 1, being:
- Purpose or effect
- Tax avoidance and,
- Merely incidental
The fact sheet concludes with a brief discussion surrounding the use of section GA 1, which can be used by IR if voiding the arrangement in accordance with section BG 1, does not appropriately counteract the tax advantages arising under the arrangement.