Trust used for tax avoidance

Press, 28 June 1989, Page 21

Trust used for tax avoidance

PA Wellington Assigning personal income to a trust is a form of tax avoidance, Chief Justice Sir Thomas Eichelbaum has ruled. In what is described as a test case, he has dismissed an objection by a Christchurch chartered accountant, Mr Barry George Hadlee, against a decision of the Commissioner of Inland Revenue. The hearing took place in the High Court at Wellington over five days late last year. The case related to an assessment of income tax payable by Mr Hadlee and a family trust for the years ending March 31, 1981 and 1982. Mr Hadlee was a partner in a national firm of accountants. Peat Marwick. It ran a profit-sharing scheme where profits were divided in direct proportion to capital ownership. At the time Mr> Hadlee was entitled to 32 units out of a total of 452. For the year ended March, 1981, Mr Hadlee allocated 19.2 units or $25,302 as personal income and assigned 12.8 units or $7516 as income for the trust. The next year this unit division worked out at $44,250 for himself and $24,671 for the trust. The Commissioner considered the arrangement Mr Hadlee had with the family trust amounted to tax avoidance, as covered by the Income Tax Act, 1976. The Commissioner

claimed the income earned by the trust belonged to Mr Hadlee and should be taxed accordingly. Sir Thomas said the tax advantages of the arrangement, if successful, were obvious.

"A significant proportion (40 per cent) of the objector’s income would be alienated to a trust where it would be taxed at lower rates,” he said. The scheme opened the way for income of more than $22,000 to be taxed at lower rates. The potential saving for the year ended March 31, 1981, was more than $6OOO and for the next year $BOOO plus. “In my opinion the purpose and effect of the arrangement was tax avoidance,” Sir Thomas said.

The potential tax benefits were so significant and obvious that it would require a considerable degree of naivety to conclude that they played merely an incidental part in the scheme. The Inland Revenue director, Mr Tony Bouzaid, said both parties regarded the matter as a test case which would affect several hundreds of taxpayers in similar situations.

The judgment amplified the legal position in New Zealand and should help both the Commissioner and taxpayers to judge the scope of the tax-avoid-ance clause in the Income Tax Act.