Tax Avoidance: Causes and Solutions - Scholarly Commons Home

In the case W33 37 , a dentist terminated his partnership and set up a company and a family
trust of which the company was the trustee. The trading trust carried on the taxpayer’s
dentistry practice. While the taxpayer’s relationship with his patients was the same as
before, the trust earned the taxpayer’s income and distributed the net income among the
beneficiaries of the trust by book entry. Barber DCJ held “the trading trust restructuring is
an "arrangement" and, prima facie, comes within the definition of “tax avoidance” and the
arrangement “indirect altering of the incidence of income tax which would have been paid
by the dentist, and there has been, at least, an indirect relieving of liability on him for
income tax as his income has been reduced by the arrangement.”
Income split by way of deduction
Peate v FC of T 38 is the example how income can be split by way of transfer. In this case, a
qualified medical practitioner practiced in partnership with other doctors, On 29 June 1956,
a company called Westbank was formed, which derived the partnership income at the lower
rate. Viscount Dilhorne found the true nature of the case that 39 :
“Before these arrangements were made in 1956 the appellant received fourteen percent of
the net profits of the partnership and was assessed accordingly. After they were made, the
doctors who had been partners treated patients in the same way as they had before but as a
result of these arrangements, their incomes from the practice of their profession were
reduced to the salaries received from the “family” companies, which received either by way
of service fees or dividends the same percentage of the net profits of Westbank as the
doctors had been entitled to under the partnership agreement. In their lordships' opinion
these arrangements have the purpose and effect of avoiding a liability imposed on each
doctor by the Income Tax and Social Services Contribution Assessment Act, 1936–1960.”
The case Jaques v FCT 40 is an example for income split by deduction. In this case, the
taxpayer claimed deduction in respect of calls paid on shares in the Kandos Cement Co Ltd
and Kandos Collieries Ltd. The above two companies is the result of a reconstruction for an
old company. Each of the new company purchased one of the two divisions of the old
37
(2004) 21 NZTC 11,321.
38
[1967] 1 AC 308.
39
Ibid.
40
(1924) 34 CLR 328.
15