2007 Revenue Alert considers the sale of private homes to loss attributing qualifying companies to generate tax deductions.
Explanation: Status of release
A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about significant and/or emerging tax planning issues that are of concern to Inland Revenue. At the time an alert is issued risk assessments will already be underway to determine the level of risk and to consider appropriate responses.
A Revenue Alert will identify:
- the issue (which may be a scheme, arrangement or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy;
- the common features of the issue;
- our current view; and
- our current approach.
An alert should not be interpreted as being Inland Revenue's final position. Rather, an alert outlines the Commissioner's current view on how the law should be applied. For any alert we issue it is likely that some investigatory work has already been carried out.
Issue: The sale of private homes to loss attributing qualifying companies to generate tax deductions.
Some loss attributing qualifying companies (LAQCs) are causing us concern. Those of most concern involve people selling their own or family home to a LAQC, then renting the property back to themselves and claiming tax deductions for the property that would otherwise be considered to be private expenses.
The arrangements we are concerned about typically have these features:
- A person owns their own home;
- And sets up a LAQC and becomes the sole or controlling shareholder;
- They then sell their home to the LAQC or have the LAQC purchase a home for them;
- And then rent the property from the LAQC at a market rate;
- The LAQC claims income tax deductions for normal property costs, including maintenance, depreciation, interest, rates, and insurance. In total these expenses exceed the rental income. The loss is then attributed to the shareholders under the LAQC rules, and they offset this loss against their other income.
Our current view is that this type of LAQC is a tax avoidance arrangement and will fall under section BG 1 of the Income Tax Act 2004, as many of the expenses would not be deductible if the home was personally owned because the Act does not intend that private expenses can be deducted.
To determine whether a particular LAQC has resulted in tax avoidance we review the arrangement to determine the purpose or effect of setting it up and whether it is consistent with the relevant tax laws.
We will also look at how the LAQC reduces or defers a tax liability, whether it is commercially realistic, and whether it is deducting expenses which would normally be considered private or domestic expenses.
We acknowledge that section BG 1 might not apply to all instances where a home is rented from a LAQC. We review each case on its own facts and cases are independently reviewed before a final decision is made.
We have already investigated a number of LAQCs and will continue to do so.
Where the Commissioner considers the arrangement to be tax avoidance, those deductions that are considered to be private or domestic expenses will be disallowed. This is likely to mean past returns will be reassessed. Taxpayers are able to dispute these new assessments and the matter may ultimately be decided by the courts.
Taxpayers who are reassessed may also be liable to late payment penalties and Use of Money Interest may also be applied. In addition, shortfall penalties of up to 150% may also apply, although these may be reduced where a voluntary disclosure is made. Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and Standard practice statement INV-251 Voluntary Disclosures (April 2002).
If people have entered into an arrangement similar to the one described above, or are thinking about entering into such an arrangement, they should talk to their tax advisor and/or to Inland Revenue for advice about the likely tax implications.
References to consider
The following references will help customers to determine whether their particular LAQC is subject to the avoidance provisions in the revenue Acts.
|Standard practice statements:||INV-251 Voluntary Disclosures (April 2002).|
|Other policy statements:||Appendix C - Explanation to the application of section 99 of the Income Tax Act 1976 Tax Information Bulletin Vol. 1, No 8 (February 1990).|
|Consequential amendments to Part G - Avoidance and non-market transactions Tax Information Bulletin Vol. 8, No 9 (November 1996).|
|Revenue Alerts items:||N/A.|
|Date issued:||October 2007|
|Authorised by||Martin Scott, |
|Contact (via email):||[email protected]|
|Media queries:||[email protected] |
(04) 890 1698