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TRA takes a harder line

By Rob Hosking

Friday 27th June 2003

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Companies that restructure their businesses for reasons unrelated to tax may now be penalised if the effect is to reduce their tax.

An interim ruling from the Taxation Review Authority on a dentist who changed to operating as a trading trust suggests the authority is now taking a much harder line on such trusts.

The dentist ­ whose name has been suppressed ­ wanted to protect himself from any liability from his dental partner, and also to avoid future possible claims from both his spouse and his partner's spouse.

The dentist set up a family trust, with a company as a trustee ­ which effectively made it a trading trust ­ and then dissolved the dental partnership. The dentist was an employee of the trust. Costs were shared between the trust and the partner, and income from the trust was distributed among the beneficiaries, resulting in tax savings.

The authority accepted that the restructuring was for non-tax reasons, and that the tax savings were incidental.

However, in his interim ruling, Judge Barber placed a strong emphasis on the fact that the "effect" of the restructuring was a lower tax liability, even though he accepted that this was not the purpose of the change.

Tax practitioners are now concerned this represents a shift in emphasis by the authority to a more outcomes related test of whether tax avoidance or evasion has taken place.

Until now the stress has been more on whether the intent or purpose of any company restructuring has been to avoid tax.

Inland Revenue has tended to take a somewhat jaundiced view of trading trusts. However, the department did not get it all its way in the ruling ­ Judge Barber also criticised the IRD for its approach in the case.

The IRD reconstructed the dentist's arrangement as if the change had not occurred, and assessed his tax bill accordingly.

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