Decision date: 27 March 2013
Case: TRA 18/11
Act(s): Income Tax Act 2004, Tax Administration Act 1994
Keywords: Abusive tax position, accountancy practice, artificially low salary from company, family trust, viewed objectively, dominant purpose, tax avoidance, family assistance
The disputant accepted a re-assessment by the Commissioner of her family support entitlement because her husband was paid an artificially low salary. The family had also received the benefit of distributions from a family trust which was a shareholder in the company her husband worked for. The disputant argued that the Commissioner had not challenged her husband's tax position and accordingly, she could not be held to have taken an abusive tax position.
The Taxation Review Authority found that the dominant purpose of the arrangement was to obtain family assistance the disputant was not otherwise entitled to.
This judgment makes it clear that where a party enters into an arrangement with another party that creates a favourable tax position for both by reducing the income of the second party and allowing the first party to claim family assistance, the Commissioner can challenge the first party's tax position directly under section GC 28 of the Income Tax Act 2004 (the Act), even though they have not challenged the second party's income under general anti-avoidance provisions.
The disputant, who had nil income, began claiming family assistance based on her husband's income following the birth of her first child.
The disputant and her husband were trustees of a family trust which held shares in two companies, one of which was an accounting practice. The husband was the settlor, sole appointee and primary beneficiary of the trust and worked for one of the companies, with his salary paid through the other. The husband's salary was artificially low.
The disputant and her husband moved funds from the accountancy practice to the family trust and used those funds for family expenses.
The Commissioner reduced the disputant's claim for family assistance for the 2006 to 2008 income years (inclusive) and imposed an abusive tax position shortfall penalty in relation to the 2007 income year. The disputant initially challenged the Commissioner's tax assessments. This challenge was subsequently withdrawn. This proceeding solely concerned the imposition of an abusive tax position shortfall penalty.
Sinclair J found that an abusive tax position shortfall penalty will apply if (at ):
It was found on the facts that the requirements in paragraphs (a) and (d) above were satisfied.
The focus of the inquiry was on the application of section GC 28 of the Act which allowed the Commissioner to decrease the tax credits a person was entitled to where they had entered into an arrangement with another person to give a more favourable effect.
The disputant claimed section GC 28 of the Act did not apply. She claimed that her reliance on the income of her husband to claim family assistance was not an abusive tax position to take, because the Commissioner had not challenged the husband's income.
Sinclair J found that the disputant had taken an unacceptable tax position. She did not accept that the interpretation adopted by the disputant was "about as likely as not to be correct". Sinclair J made it clear that for the Commissioner to rely on the specific avoidance provision in section GC 28 of the Act, she does not first have to attack the taxable income of another party to the arrangement under the general anti-avoidance provisions.
Sinclair J found that when viewed objectively, the dominant purpose of the arrangement was to obtain family assistance that the disputant was not otherwise entitled to. She did not accept that there were any commercial reasons (other than tax) for the arrangement.
Sinclair J found that the disputant had not satisfied the onus of proof that the Commissioner's assessment was wrong and to what extent. She found that the disputant was liable for an abusive tax position shortfall penalty for the 2007 income year.