Skip to main content
23 Oct 2009
Appeal Status

Own-home LAQC was tax avoidance arrangement

2009 case note – Taxpayer rented home from loss attributing qualifying company in which she was sole shareholder – tax avoidance.

TRA Decision No 16/2009


The Court held that because Mrs B rented her residential home from an LAQC in which she was the sole shareholder there was a tax avoidance arrangement.

Impact of decision

This is the first "own-home LAQC" case to be considered by the Courts.
This case provides clear authority that a taxpayer cannot use an LAQC structure to claim deductions for expenditure that would otherwise be of a private or domestic nature.
This judgment is consistent with the Department's published view in various publications such as Revenue Alerts RA07/01, the Smart Tax Weekly Bulletin 20 July 2004 and 4 December 2007, and an Inland Revenue media release on 19 July 2004, to inform taxpayers and tax advisors that the Commissioner considers such an arrangement could constitute a tax avoidance arrangement.


Mrs B settled a family trust on 23 November 2002. Mrs B was trustee of the family trust along with her accountant. Mrs B was also a discretionary beneficiary under the trust along with Mrs B's daughter.

An LAQC was incorporated on 7 November 2002 with Mrs B as its sole shareholder and the accountant as its sole director. LAQC status was granted with effect from 31 March 2003.

The LAQC became the registered proprietor of a residential property. The purchase price of $290,000 was financed by a $292,000 loan from the family trust (with interest). The trust financed that loan by borrowing $292,000 from Mrs B. Mrs B had borrowed $160,000 from the Public Trust. The Pubic Trust loan is repayable by Mrs B over 20 years. The LAQC provided security by a mortgage over the residential property to the Public Trustee. (There is no clear evidence as to how Mrs B obtained the further $132,000 to make up the loan from her to the trust.)

The LAQC entered into a tenancy agreement with Mrs B. Mrs B pays $300 per week to the Public Trust Office for payments due on her borrowings. This $300 is treated by the LAQC as rent paid by Mrs B to it. Neither the LAQC nor the family trust has bank accounts.

As a result of the residential activity, the LAQC has returned losses for the four years ended 31 March 2003 to 2006 inclusive. The losses were attributed to Mrs B by the LAQC and allowed Mrs B to reduce the amount of income tax she would otherwise have had to pay.

The Commissioner formed the opinion that the above facts constitute a tax avoidance arrangement for the purposes of sections BG 1 of the Income Tax Act 1994 and the Income Tax Act 2004. As such, the Commissioner can counteract any tax advantage obtained under section GB 1 of the relevant Acts.


The parties agreed that there was an arrangement [paragraph 62] but the disputant denied that it was a tax avoidance arrangement. Judge Barber went on to determine whether or not the arrangement should be void for tax avoidance.

At paragraph 44, Judge Barber said that the main judgment of the Supreme Court in Ben Nevis constitutes a comprehensive statement of law of income tax avoidance in New Zealand.

Judge Barber applied the Ben Nevis Forestry Ventures Limited and Ors v CIR [2008] NZSC 115; [2009] 2 NZLR 289; [2009] 24 NZTC 23,188 (SC)two-step approach. He agreed with the Commissioner that when looked at in isolation, each of the component parts of the arrangement entered into by the disputant falls within the ambit of the specific black letter taxing provisions and regimes [paragraph 63]. Judge Barber also agreed with the Commissioner that when viewed as a whole, the arrangement entered into by the disputant is not of a kind that would conceivably have been contemplated by Parliament when enacting the LAQC and deduction provisions [paragraph 65].

Judge Barber agreed with the Commissioner that the arrangement was artificial and contrived [paragraph 69].

Judge Barber found that the arrangement allowed for deductions that would otherwise be private or domestic expenditure and not deductible [paragraph 72].

Judge Barber held that there is a tax avoidance arrangement and the whole arrangement is void. As a consequence Judge Barber held that section GB 1 should be applied to counteract the tax advantage obtained.

Income Tax Act 1994 and Income Tax Act 2004