A Week In Review
Hybrid Mismatch Arrangements
Further to the recent OECD publication on the issue, IR has released its own discussion document on the topic, expressing its views as to how NZ legislation may be amended to adopt the OECD recommendations and seeking feedback in this regard. As a recap, hybrid mismatch arrangements are used by multinationals to exploit differences in countries domestic tax rules, the result being to pay less tax. The OECD has recommended the use of linking rules which will change the usual tax treatment of a cross-border transaction to ensure that no advantage is gained. As the measures are essentially of an anti-avoidance nature, the OECD has recommended they are targeted at deliberate exploitation of hybrid mismatches, essentially related party transactions as well as unrelated parties where there has been a deliberate intention to structure an arrangement in a way that produces a hybrid mismatch advantage. IR requests that any submissions are made by 17th October 2016.
No Accrual Income for Taxpayer
The High Court was asked to consider an appeal by the taxpayer from a TRA decision which found a base price adjustment (“BPA”) was required when their shareholder current account had been credited with a sum of $2.5m, resulting in income of approximately the same amount for the taxpayer. In short, the taxpayer was a guarantor for his company’s debt to BNZ, the company had defaulted, the taxpayer was sued and in 1995 he had entered into a deed of settlement, which required him to pay a sum of $90k in full and final settlement. Upon the payment of the $90k, BNZ assigned the $2.5m debt to him, that sum now being due to him by his company. In the 2005 income year the company started trading again so the accountants credited his current account with the $2.5m assignment amount, which he drew down on over the next three years from the trading profits of the company. IR submitted that the credit of $2.5m to his current account amounted to full payment under the deed of assignment, thereby triggering a BPA calculation which resulted in assessable income to the taxpayer of $2.5m less the $90k he had paid to the BNZ. The High Court disagreed with the TRA decision, finding that the credit to the current account was simply recognition of an existing liability some 10 years after the debt had been assigned, there being no payment or cash sums made available to the taxpayer at the time of crediting (the company had no funds until it commenced making trading profits again). The financial arrangement had not matured as there was no sum of money to constitute a payment, there had simply been an assignment of debt, and consequently there had been no final payment under the financial arrangement which would trigger a BPA. It was acknowledged that a dividend or salary credit is an allocation of income or retained earnings to a shareholder which then becomes payable to them, however it is the dividend or salary that is the payment, with the crediting to the current account simply a means of effecting that payment.
IR Rulings Work Programme Updated
IR released their latest update position as at 5th September 2016. The publication sets out IR’s public rulings work programme for 2016-17, identifying items where better interpretation of IR’s position on various issues is seen to be useful for a cross-section of taxpayers and their advisors. Items are often selected for consideration as a result of recent court decisions (the recent Supreme Court Trustpower decision as one example) or due to a number of similar questions IR has received on the application of a specific piece of tax law.
Richard Ashby BBus, CA, CPA
PARTNER
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