Debt capitalisations and Look Through Company (“LTC”) elections by liquidating companies are two of four scenarios in a recent draft Inland Revenue Questions We’ve Been Asked (“QWBA”) item. The draft QWBA considers that both are shocks to the tax system which require the tax avoidance rules to be deployed. This, in Inland Revenue’s view, is required to preserve the integrity of the tax system.
Briefly, the Commissioner considers these are tax avoidance arrangements because there are alternatives which create taxable income. The Commissioner’s analysis is that the avoidance of these alternative tax liabilities was not contemplated by Parliament.
The Commissioner’s analysis raises a fundamental issue. The basic proposition is that a taxpayer can no longer have due regard to the tax consequences of their actions when determining what to do. In fact, it suggests taxpayers must take the course of action which results in the highest tax payable. That is the most concerning feature of the draft QWBA as it is a significant change in approach.
There is an opportunity to provide comment on the draft QWBA. It should be taken in a real effort to persuade the Commissioner that her conclusions are invalid. Otherwise urgent law changes will be required to allow these transactions to proceed.