The Inland Revenue Department has increased its focus on
situations where it considers tax avoidance exists, meaning
the issue has become more prominent, Dunedin tax expert Peter
Where avoidance exists, IRD has the ability to reconstruct
the arrangement to overcome the tax mischief it has
identified as having occurred.
Mr Truman, a tax partner with Deloitte Dunedin, said IRD
recently released a draft ''Questions We've Been Asked''
statement for public consultation, covering the practical
application of some possible tax avoidance scenarios.
The statement was useful as it applied IRD's policy to
''It is common practice for Inland Revenue to generally
consult with the tax professional community before these
statements are finalised to ensure all possible angles have
''While the document is in draft form it can't be relied
upon. However, it gives a significant insight into Inland
Two scenarios highlighted by IRD were worth considering.
They were on interest deductions where shareholder loans are
replaced and debt capitalisation, Mr Truman said.
In the first scenario, a company is wholly owned by a trust,
with the trust having advanced $1 million to the company for
use in its business operations.
The trust buys a holiday home for $1 million and asks the
company to repay the loan.
The company borrows $1 million from a bank to refinance the
original loan, secured over the assets of the trust, and
claims a tax deduction for interest paid to the bank.
''Looking at the overall picture, it could be argued the bank
borrowings are used to purchase the holiday home and
therefore the interest shouldn't be deductible,'' he said.
IRD's draft position was the arrangement was not tax
avoidance on the basis of Parliament's intention for interest
deductions to be available where the funds had been used by
the borrowing entity to fund taxable income-earning assets.
In the scenario, borrowed funds were used to replace the
original shareholder loan that funded business assets.
A shareholder in a company was entitled to require a loan to
be repaid to fund the purchase of another asset.
If confirmed, the view from IRD would be welcomed by
shareholders who wished to extract funds advanced to a
company so they could purchase additional assets, even when
those assets were private, Mr Truman said.
IRD's draft view on debt capitalisation was it could, in some
situations, be tax avoidance, on the basis it overcame the
debt remission otherwise arising, particularly when there was
a sole shareholder capitalising a non-trading company.
While many insolvent companies would not have any assets to
pay tax assessed on a debt remission, in some cases,
shareholders could have a personal liability for unpaid
''The draft approach will encourage shareholders to think
more carefully, at the time when funds are used by a company,
whether they are injected as share capital or as a