Tax schemes and aggressive tax planning

As part of our ongoing compliance programme, Inland Revenue is continuing to identify inappropriate schemes, tax planning and structures that unlawfully minimise tax. We are also focusing on the small group of individuals and businesses that use and promote them.

The recent Supreme Court decision in CIR v Penny & Hooper confirms that income allocation or diversion arrangements can constitute tax avoidance.

We acknowledge that there are legitimate reasons for using entities such as trusts or companies in many business situations. Therefore the mere use of alternative business structures will not, on its own, amount to a tax avoidance arrangement. Each case of tax avoidance is dependent on the facts of that case.

Our current concerns include structures or transactions that produce the following inappropriate outcomes:

Income shifting or sheltering

Income is allocated or shifted to a taxpayer with the lowest tax rate, or losses to use, and deductions and/or credits are allocated to those in the highest tax brackets. An example of income sheltering is where a non-resident sells credits to a resident because the non-resident has no use for them.

Income deferral

Income recognition is deferred or smoothed to a year with a lower taxable income. In this way, income is kept under the highest tax rates (this does not include the income equalisation scheme).

Accelerating the use of losses or credits

There may be schemes that artificially bring forward a liability to income tax that is offset against losses or credits. This is commonly used when future shareholder changes may otherwise result in the loss of a company's tax benefit (such as tax losses or imputation credits).

Creating or inflating expenses

The Ben Nevis case is the most well-known example of creating expenses for tax purposes where there is either no, or nominal economic cost. Similarly, some transactions look to inflate the expenses associated with the scheme (to increase the deduction or GST credit claimed).

Find out more about the Ben Nevis case

Changing the character of receipts or outlays

This occurs where a taxpayer tries to change a transaction's characteristics so that:

• income that would otherwise be liable for tax is:
  • exempt, or
  • not within the tax rules, or
• expenses that would not be ordinarily be deductible are changed to something that is.

GST-specific avoidance

• Payments/invoice basis arbitrage - generally the person seeking the credit brings forward their entitlement to claim the credit while the person liable for the GST defers this for as long as possible using: timing advantages, structuring around thresholds and unregistered persons.
• Inflating expenses while avoiding the output liability
• Attempted avoidance of the associated persons rules
• Avoiding GST consequences of ending business or forced sales (eg, under mortgagee sales).

Misuse of charities

We are concerned with certain structures inappropriately using the tax exempt status of charities. We'll continue to work closely with the Charities Commission to identify charities which misuse their tax-exempt status.

What you can do to get it right

• If you or a client uses an inappropriate tax structure, or one you think may be inappropriate you can let us know by making a voluntary disclosure by completing the
  Voluntary disclosure (IR281) form.
  You can email any enquiries about tax structures to our dedicated team at PersonalServices@ird.govt.nz.
•  If you know of any aggressive tax planning activities you can let us know anonymously by completing the (IR873) Report tax evasion or fraud anonymously form.
• You can request a binding ruling for new funding arrangements or transactions to minimise uncertainty.
  Find out more about binding rulings
• Read our Revenue Alert (RA 11/02) which further clarifies the Commissioner’s view on this issue following the Supreme Court's decision in CIR v Penny & Hooper.