Tax Avoidance: Causes and Solutions - Scholarly Commons Home

2.2.2 Case law
Income split by way of income transfer
In the case Hadlee and Sydney Bridge Nominees Ltd v CIR 34 , Mr Hadlee was a partner a
national accountancy firm. The partnership agreement provided for profits to be allocated
to partners proportionate to the number of “units” of partnership capital owned by them. Mr
Hadlee had assigned 40 percent of his partnership units to a family trust in return for
$16,299. Mr Hadlee argued that this assignment was effective at law with the consequence
being that the trust, not him, “derived” the income on these units.
In the Court of Appeal, Cooke P held 35 : “Without limiting the generality of that agreement,
I attach particular weight to the fact that in return for a relatively minor monetary
consideration, some $16,000, most of which was actually paid out of partnership drawings,
the partner at the age of 39 surrendered to his family trust 40 per cent of his future earnings
in a leading accountancy practice of international stature, yet covenanted to continue
diligently to attend full-time to the partnership business. The return to the trust in the first
two years represented 123 per cent and 159 per cent of the monetary price.”
He endorsed Eichelbaum CJ's opinion in the High Court, that although the arrangement
may have had other purposes, the significant and obvious tax benefits to be derived from
entering into the arrangement pointed against the tax avoidance purpose being merely
incidental. Cooke P viewed the partner as: “trying to obtain a tax advantage over other
chartered accountants and professional people and other earners who pay tax on their
earnings. That is contrary to the intent of the Act as a whole and s 99 in particular”.
In the Case K52 36 , an insurance agent transfers his "insurance register" to a family trust.
Judge Bathgate observed that the arrangement “It directly reduced the liability of S to
income tax. Before the transfer the commissions paid by the company to the trustees after
the transfer, had been paid to S. Those commissions formed part of his assessable income.
By transferring his insurance register to the trustees those commissions were alleged to be
no longer part of his assessable income. As a result his income tax was reduced.”
34
[1991] 3 NZLR 517 (CA).
35
Ibid.
36
(1988) 10 NZTC 426.
14