Farm Trusts Held Liable To Tax

Press, Volume CIX, Issue 32077, 27 August 1969, Page 26

Farm Trusts Held Liable To Tax

(New Zealand Press Association) WELLINGTON, August 27. The Court of Appeal has ruled that farmers who set up “paddock trusts” in the names of their wives and children, must pay income tax on the revenue earned by the trusts.

The Court announced its decision today in two reserved judgments on three test cases on the issue. During the hearing last month, the Court was told that the validity of about 200 similar trusts in the Canterbury area atone could hinge on its ruling.' A "paddock trust” is defined as a move by a farmer to form a\family trust to farm part or all of his property, with all revenue going to the trust. In one judgment today, a member of the court, Mr Justice McCarthy, said it was “plain as a pikestaff” that one of the purposes of setting up the trusts was to relieve the taxpayer of tax. “Indeed, I would go further, and say that its only purpose was to effect both an alteration in the incidence of tax and to relieve the taxpayer of part of his liability.” In both judgments, involving three farmers, two from Taranaki and one from Canterbury, the Court found in favour of the Commissioner of Inland Revenue. The Court dismissed submissions that the trust arrangements could be regarded as "ordinary family dealings.” The Court comprised the president, Sir Alfred North, Mr Justice Turner and Mr Justice McCarthy. The first case concerned Lawrence William Carlson, a dairy farmer, at Eltham, and Sydney John Marx, a farmer, of Mangatoki, whose appeals against a decision of the Chief Justice (Sir Richard Wild), in the New Plymouth Supreme Court last October, were heard together. “SIMPLE” FLAN The Chief Justice had upheld tax assessments made by the Commissioner of Inland Revenue, who assessed tax said to have been earned by a family farm trust as income derived by the two farmers. In today’s judgment, Sir Alfred North said the trust plan, which presumably was devised by their accountant

o<r solicitor, was engagingly simple. He said both Mr Carlson and Mr Marx were dairy farmers who conducted their farming operations in the usual way before they set up the trusts.

"Both continued to farm their land as before, but each established a family trust and purported to lease his farm to trustees at an agreed rental.

“In one case, Marx accepted employment as manager of the farm at a weekly wage, and in the other, Carlson became a sharemilker on his own farm.

“The result of the arrangement in both cases was that the income from the two farms was divided between the trustees and the appellants, with the attendant income tax advantages. “Throughout the period under review each of the appellants was given authority by their trustees to operate the bank account and in a practical way everything went on as before, save that instead of the appellants be-

ing called upon to pay income tax on the total net income derived from the farming operations, the two appellants and their trustees respectively filed separate income tax returns and if the commissioner had not intervened, each would have been assessed at a lower rate of income tax.” The question for the Court, he said, was whether these arrangements were caught by the wording of section 108 of the Land and Income Tax Act, which made void for income tax purposes all arrangements which had, or purported to have, the purpose of in any way altering the incidence of income tax, or of relieving any person from his liability to pay income tax. MAJORITY DECISION

With Mr Justice Turner dissenting, the Court ruled that the word “relieving” in the section was applicable to a saving of tax on income to be derived in the future. The Court then found that one of the purposes of the transactions was to relieve the taxpayer of tax, and by a majority decision ruled that the farmers’ appeal should be dismissed.

In the second case, the Commissioner of Inland Revenue appealed against a decision by Mr Justice Wilson in the Christchurch Supreme Court on February 4. The Judge had refused to uphold the commissioner’s assessment of tax on Owen Thomas Mangin, a farmer, of Methven, who had set up a similar trust.

Mr Justice Wilson held that income alleged to have been derived by Mangin was in fact derived by the trust and taxable in the hands of the trustees. The Court found in favour of the commissioner on the same basis as in the Marx and Carlson cases.