OPINION: During a day in the life of a tax practitioner most things that come across your desktop would bore others to tears, writes Craig Macalister in Taxing Times.
However, from time to time there is an issue that just cries out to be aired publicly.
A recent decision of the Taxation Review Authority (TRA 02/11) is one such example, and has me wondering whether common sense has deserted our tax administrators.
The facts of the case can be stated quite simply. The taxpayer company had two subsidiary companies, one a sheep and beef farming company, and the other a dairy farming company. As is the case in many group family situations, one company will undertake the borrowing and make advances to the other group companies. Also common in these situations is that advances made between related companies are interest-free when they are 100 per cent owned.
Normally, not charging interest does not present problems, and neither should it in family group company scenarios. However, in this case, the borrowing entity was a qualifying company. Qualifying companies do not have the statutory right to deduct all interest costs. Instead, interest costs must meet the general deductibility tests.
Had the borrowing company been a standard company, the outcome would be different. However, the crux of this case is that because the borrowing company did not on-charge interest to the subsidiary companies, the interest cost in the borrowing company was found to be not deductible as it gave rise to no taxable income.
Even if this decision is correct at a technical level, it is very wrong at a policy level. At a policy level, when companies are part of the same group, the tax cost to the group should give an outcome consistently with the result that would have been obtained had the income and expenses arisen in one company entity.
However, unfortunately the taxpayer borrowing company was snookered in this respect, too, as you cannot group losses between qualifying and standard companies.
In all, this case means that the family group as a whole has been overtaxed by not having its interest deductions allowed. While I don't necessarily blame the TRA, it is very disappointing that Inland Revenue has pursued this case to the courts to achieve a result that is contrary to good tax policy.
Unfortunately it seems we live in an era when only winning matters - not getting the right tax outcome.
In my view the taxpayer in this case has every right to feel let down by the whole system.
» Craig Macalister is tax principal at accounting firm WHK. He can be contacted on 03 211 3355.
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