Final payment triggers a base price adjustment
2016 case note – TRA ruling that final payment triggers a base price adjustment - financial arrangement rules.
The assignment of a debt was a financial arrangement and on crediting of the debt amount to the disputant’s current account, the financial arrangement matured and a base price adjustment ("BPA") was required.
This decision confirms that when a distribution is made available to a shareholder(s) for draw down, that constitutes a final payment (and maturity of a financial arrangement) and a BPA is triggered in accordance with the financial arrangement rules.
The disputant is the sole shareholder and director of Properties Ltd ("Properties").
In 1986, Properties entered into a large construction contract for which ABC Bank ("ABC") provided loan facilities.
The disputant personally guaranteed the lending in respect of Properties' debts and Properties gave ABC a debenture over its assets to secure the lending.
Properties then ran into financial difficulty and ABC appointed receivers to Properties' assets.
Litigation commenced between ABC and the disputant. By way of settlement of this dispute, agreement was reached between the parties and a Deed of Admission of Liability and Settlement ("Deed") was executed.
The Deed included: an acknowledgement of $2,659,442.06 in debt to ABC an admission by the disputant of liability for the debt under the guarantee; agreement that, if $90,000 ("the Settlement Sum") and interest thereon was paid by the disputant, ABC would assign to the disputant the liability of Properties Ltd; agreement that until the Settlement Sum and interest was paid in full to ABC, Properties and the disputant would remain fully liable to ABC for the total debt; and agreement that after payment of two of the instalments making up the Settlement Sum, the receivers would retire from Properties.
The receivers did retire in 1993 and after the last portion of the monies due was paid in February 1996, ABC assigned the debt to the disputant.
Properties did not trade again until 2004 when it commenced a property development project.
Properties recorded an opening balance in the disputant’s current account of $2,659,442 in the 2005 year (being the amount of the debt assigned under the Deed). Losses carried forward from previous years had the effect that there was no income tax payable in the 2005 income year.
Financial statements for Properties for the 2005 to 2007 income years showed net drawings over this three year period of $2,238,592 but the assigned debt was not recorded in the financial statements as a term liability.
The disputant ultimately returned no taxable income for the 2001 to 2010 income years.
The disputant had no bank account, did not draw a salary from Properties and he drew money from his current account to fund family living expenses.In the 2005 to 2007 income years, the disputant and his partner also claimed approximately $35,000 in Working for Families Tax Credits.
The Commissioner of Inland Revenue ("the Commissioner") contended that the assignment of the debt was a financial arrangement and on the crediting of the $2,659,441 to the disputant’s current account the financial arrangement matured and a BPA was required.
The disputant argued that no event occurred in 2005 which triggered a BPA. Even if something had happened materially in that year, the disputant contended that it would not amount to a payment which required a BPA.
The disputant’s claim was dismissed.
The Taxation Review Authority ("the Authority") was satisfied that a payment of the assigned debt of $2,659,442 was made to the disputant in 2005 by the crediting of this sum to his current account and available for the disputant to draw down. This was not a simple entry to reflect the change in party to whom the debt was owed nor was it a term loan owed to the disputant. Accordingly, the financial arrangement matured and a BPA was required in the 2005 year.
Accordingly, the Authority held that it was not necessary to address the Commissioner's alternative arguments and consequently whether this alternative argument could be raised by the Commissioner under s 138G of the Tax Administration Act 1994.
As for whether the disputant could rely on documents not previously discovered in support of an additional issue, the Authority was of the view that the disputant could have located the documents and discerned the issue at the time of delivery of his statement of position. The disputant was therefore unable to pursue this issue. Furthermore, the Authority did not consider that the raising of the additional issue was necessary to avoid any manifest injustice to the disputant.
In any event, as to the admissibility of the undiscovered documents, the Authority considered that the disputant was clearly well aware of his discovery obligations and because of her view on the merits of the disputant’s proposed argument, the documents did not have any particular significance to the disputant. There was therefore no real risk of prejudice to the disputant if the documents were not produced. Accordingly, the disputant’s application to admit the documents was declined.
Tax Administration Act 1994, Income Tax Act 1994, Income Tax Act 2007