Charging
a global group management fee against one of the group to create a loss offset
between a company and a trust amounted to tax avoidance and justified a fifty
per cent tax penalty for taking an abusive tax position the Court of Appeal
ruled.
The Court was told Mr
Andrew Tauber, a guiding hand behind the Honk Group of companies, arranged a
$1.15 million management fee to be levied removing taxable profits from a
trading trust within the Honk Group setting off this amount against tax losses
in a related entity: Honk Land Ltd. Honk
Land was about to be sold. Honk Land’s existing
tax losses would no longer be available on a change of ownership. No money changed hands. The management fee was recorded as a series
of back-dated book entries written up at the end of the trust’s financial year.
The Court of Appeal
confirmed lower court rulings that this arrangement amounted to tax
avoidance. There was no evidence of any
services in fact being provided in return for the management expense charged. There was no documentary evidence justifying
the size of the fee. Fees charged were
not fixed by any costs incurred but simply by reference to the amount required
to achieve a tax offset. Mr Tauber said
it was impossible to separately itemise management services provided to each one
of a number of taxable entities within the Group. Precise allocation of management costs was
not possible; commercial reality required a global assessment. The Court ruled tax law does not allow a
global approach. Any tax deduction for
management services requires proof of services provided to each specific tax
entity. Complete precision may not
always be possible, said the Court. But
in this instance there was no division of management services at all. A global sum for management of Honk Group could
not be claimed as a deduction by one company alone within the Honk Group.
Honk
Land v. Inland Revenue – Court of Appeal (10.03.17)
17.023