In this edition, I will discuss avoidance in Goods and Services Tax context, which is different and separate from general tax avoidance.
S76 of the Goods & Services Tax Act provides that “A tax avoidance arrangement entered into by a person is void against the Commissioner for tax purposes.”
This gives you a question, as a first step, “What is the arrangement for the purpose of this section?”
As before, it is good to use an example.
The first party involved in the arrangement is John himself who is not GST-registered at all. He owns a residential property in his name that has a value of $650,000.00. The property is located in Christchurch.
The 2nd entity is a company John set up recently. John sets up a company where he appointed himself as a director and sole shareholder. The company, called Paper Company, is not registered for the GST.
There is another company, which is the third entity involved in this arrangement. John, once again, sets up another company, called Piss Off Co Ltd and registered the company with GST on an invoice basis. He appointed himself as a director and sole shareholder of the company.
John enters into an Agreement to sell the property to the Paper Company at $650,000.00 inclusive of GST, if any. This is the 1st Agreement. Then, he onsells the land to Piss Off Co Ltd at a price of $700,000.00 inclusive of GST, if any. This is the 2nd Agreement. There are numerous term in this Agreement but it is sufficient to note two things here – that the settlement of the transaction is 20 years after the date of the Agreement, being June 2036 and also that the deposit paid by the Piss Off Company to the Paper Company is $100 only.
As expected, he then claims input tax credit from the tax department based on the 2nd agreement. The amount of the GST component, if successful, is $91,304.
Let’s now examine the above mentioned facts by reference to the wording of the 76 GST Act. John, the 1st entity and the 2nd entity are all associated in the light of the Income Tax Act. The 2nd transaction appears to be designed to claim GST input tax. The settlement date under the 1st Agreement is scheduled for 20 years after and this appears to be designed to allow the purchaser, being the Paper Company, to make payment of the purchase price in 20 years later. The amount of the deposit under the 2nd Agreement, being $100, is designed to allow the Piss Off Company to pay a symbolic amount of money and then “legalize” the transactions. The two Agreements are “designed and devised” for the Piss Off Company to claim GST, as opposed to “record the terms of the deals between the parties where the deals are done on an arms-length.”
There are artificialities here and there. It is not a common practice in the market to agree that the settlement is to take place in 20 years. It is also not common to note that transactions over a same property and on the same day show $50,000 difference. The transactions set out above are likely to be an arrangement by virtue of 76 of the Act.
The next question is what is the outcome of the arrangement? It is reminded that the same section provides that “arrangement is void against the Commissioner.” Simply speaking, the taxpayer is unable to claim gst against the IRD.
This is the moment for the court to find that there are “arrangements” and the arrangement is not just an incidental outcome.
The author obtained hints from the Tale Holdings Ltd v CIR. The court found that the taxpayer’s arrangement was a tax avoidance scheme. There is another case which is very similar to Tale Holdings – Nicholls. In the Nicholls, the court allowed the Commissioner to impose penalty on the taxpayer.
This article is designed to give general information to the audiences and readers of this article. This is not designed to provide a legal advice to a particular person of particular circumstance. If you have any enquiries, you should seek legal advice on that issue. A. B. Lawyers Limited does not accept any liability arising from misjudgment by the audience, without having independent legal advice on his/her case.
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