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08 Nov 2006
Appeal Status
Not appealed

Over-market payments to a related person in the course of business

2006 case note – avoidance - disputant paid an above-market income to an administration assistant provided by a related company with carry-forward losses.

TRA Decision Number 15/2007

Income Tax Act 1994


The disputant had entered into an arrangement to pay an above-market income to an administration assistant provided by a related company. As that company had significant carry-forward losses, a significant tax advantage accrued to the disputant. This was held to be so by the Taxation Review Authority ("TRA").


This case involved challenges to assessments for the 2002 to 2005 income tax years.

Prior to the years in question, the disputant, a real estate agent, directly employed a sub-agent to assist in making property sales on his behalf. He also directly employed an administration assistant whom he paid $15.00 per hour and worked approximately 20 to 25 hours per week.

The administration assistant provided support to both the disputant and his sub-agent even though the disputant paid for these administrative services. The disputant contends that he had a problem in that he was unable to on charge the sub-agent for the administrative services so a new arrangement was created which would allow him to on charge any future sub-agent for these services.

The disputant entered into a contract with OSL, of which he was the sole director and equal shareholder with his wife, to supply him with management and administrative services. OSL had losses brought forward of $192,844.82 and under the contract; OSL provided an administration assistant to the disputant and charged him $65.00 per hour plus Goods and Services Tax ("GST") for her services. OSL paid the administration assistant $15.00 per hour.

The disputant obtained an inflated income tax deduction for the $65.00 plus GST he paid to OSL but did not suffer the full economic consequences of that. The annual profits of OSL were transferred to the disputant who received them as capital because they were repayments of a shareholder's loan by him to OSL. The disputant was thus able to claim a deduction of $64,659 in each year while the administration assistant was only paid $16,388.


The Fee Charged

Judge Barber held that payment of $65.00 plus GST per hour was very excessive in marketplace terms, for administrative support in the real estate industry. It was almost four times what needed to be paid, what had previously been paid, and what was in fact paid by OSL to the administration assistant. He also commented that a multiplier rate of 3.869 used by the disputant to arrive at the $65.00 per hour rate was "ridiculously high".

Tax Avoidance

Judge Barber held that the arrangement amounted to tax avoidance. He found the fee of $65.00 per hour for an administration assistant's services to be excessive, un-commercial and integral to an arrangement which decreased the disputant's taxable income by providing him with an inflated deduction, without him suffering the economic consequences of paying the higher administration fee.

From any sensible tax approach, there was little to be gained by the new structure because the multiplier used for the administration assistant's services for the charging out by OSL to the disputant was out of line with commercial sense.


Judge Barber accepted that there is no requirement on the Commissioner to reconstruct but stated that, whenever reasonably possible, the Commissioner should take the extra step of trying to resolve the disputed issues over tax avoidance by a sensible and agreed reconstruction.

Judge Barber accepted however that this was not an appropriate case for an agreed reconstruction as there was no evidential basis on which to do so. No satisfactory evidence was put to the Authority as to what an appropriate commercial rate or mark-up for a company providing administrative support in the real estate industry would be and Barber J therefore agreed with the Commissioner's approach not to reconstruct.

Shortfall penalty

Judge Barber found for an unacceptable interpretation rather than an abusive tax position because he accepted that the disputant, having been advised by his accountant on the arrangement, honestly thought the structure was valid at law. The shortfall penalty was fixed at 20% with a reduction for previous good behaviour.