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04 Note Re 2 Specific Anti-Avoidance Rules
04 Note Re 2 Specific Anti-Avoidance Rules
04 Note Re 2 Specific Anti-Avoidance Rules
This note looks at two specific anti avoidance rules in the ITA 2015.
Frustrating the tax plan is relatively straightforward. The loss company’s past losses cannot
be deducted following a change in ownership of the loss company. Section 59(1) provides:
‘(1) If there is a change of more than 50% in the underlying ownership of a
company, any carry forward loss incurred for a tax year before the change is not
allowed as a deduction in a tax year after the change, …’
One difficulty with this rule is its breadth. Not every business story involving the sale of a
loss company is tax driven. Thus the initial rule is qualified. Section 59(1) continues:
‘… unless the company –
(a) carries on the same business after the change as it carried on before the
change until the earlier of either the loss has been fully deducted or the
period for carrying the loss forward under the Act has expired; and
(b) does not, until the earlier of either the loss has been fully deducted or the
period for carrying the loss forward under the Act has expired, engage in
any new business or investment after the change if the principal purpose of
the company or the members of the company is to utilise the loss so as to
reduce the Income Tax payable on the amounts derived from the new
business or investment.’
Suppose further that the income in issue is unearned income, or in other words, property
income.
How could you avoid SRT? The obvious answer is to dispose of the income producing
property. Place the property in the hands of somebody not subject to SRT. One such person is
a trustee. Trustees are subject to a flat tax of 20%. Easy.
But suppose further, that you do not wish to ultimately lose the income nor the income
producing property. How can this be done? Perhaps you could settle the income producing
property on a trustee to hold on trust for yourself but on terms that income of the trust is to be
accumulated.
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Will this solution work? No. It overlooks an old rule of trust law, the rule in Saunders v
Vautier. This rule provides that an adult beneficiary entitled to all rights of beneficial
ownership may at any time order that the trust be terminated and all trust property be
transferred to himself. A trustee in this position is ‘presently entitled’ to all income of the
trust and would be taxed under the Act’s general scheme for taxation of trusts.
Creating an absolute beneficiary trust will not solve the SRT problem. How else then could
things be arranged? Perhaps you could settle the property on the trustee on terms that the
income is to be accumulated and then name someone else as the beneficiary. To ensure that it
is yourself who ultimately benefits, you could retain a power to revoke the trust or to name
yourself as the beneficiary, the plan being to exercise such power before any distributions
become due to the named beneficiary. Fantastic. Only ….
What is being proposed here is not new or novel. Trusts designed in this fashion have a long
history in income tax law. Parliament (or more precisely the draftsperson) is familiar with
such tactics and legislates to frustrate the tax plan.
Section 55 does this in two steps. First, a trust with such terms is identified and given a
particular name. It is called a ‘settlor trust’. Section 55(3) provides:
‘(3) In this section –
“settlor”, in relation to a trust, means a person who –
(a) has transferred money or an asset, or has provided a benefit to the trust;
(b) has the power to revoke or alter the trust so as to acquire a beneficial
entitlement in the whole or part of the capital or income of the trust, or has
a reversionary interest in the capital or income of the trust; and
(c) if the person is a non-resident person, the only income of the trust is
derived from sources in Fiji and the only assets of the trust are Fiji assets;
and
“settlor trust” means a trust in relation to which there is a settlor.’
Note that paragraphs (a), (b) and (c) are cumulative. We need (a) and (b) and if the person is
a nonresident then (c) also before the person is labelled a ‘settlor’ and the resultant trust a
‘settlor trust’.
Second, s.55(1) sets out the tax treatment for a ‘settlor trust’. Section 55(1) provides:
‘(1) For all purposes of this Act, the following apply to a settlor trust -
(a) a settlor trust is not treated as an entity separate from the settlor of the trust;
(b) amounts derived, and expenditures and losses incurred, by the trustee of a
settlor trust are treated as derived or incurred by the settlor;
(c) the assets of a settlor trust are treated as owned by the settlor and any
dealing in the assets by the trustee is treated as a dealing of the settlor.’
The tax treatment in s.55(1) completely frustrates the avoidance tactic. The taxpayer with the
tax problem that prompted creation of the trust is back where he or she started from.
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