The Inland Revenue Department ("IRD") has issued an Exposure Draft in relation to what is a "sham" for the purposes of the Goods and Services Tax ("GST") Act 1985 and the Income Tax Act 2007.

Whether or not a document is a sham becomes important when determining whether the transaction will be given effect for GST and income tax purposes. Where a document is a sham, it will be disregarded for taxation purposes to the extent that it is a sham. The true legal arrangement between the parties will then be ascertained, and that arrangement will be given effect in the place of the sham.

Whether a document is a sham is not the same as deciding whether or not there is a tax avoidance arrangement. Artificiality and lack of commerciality are considerations when considering tax avoidance, but not when deciding whether a document is a sham.

Essentially a sham exists where the documents prepared between the parties are intended to mislead third parties, including the IRD. The parties have created documents but never intend to create the legal rights and obligations recorded in them. It is the parties' subjective intentions that are relevant in determining whether or not there is a sham, not an objective outsider's view of what may or must have been intended.

A transaction is not a sham simply because it is discouraged or prohibited in legislation, or because the parties entered it with an ulterior motive.

A sham can exist at the time the documents are created, or a bona fide document can later become a sham. The conduct of the parties not only before and at the time the document is created, but also afterwards can be taken into account when considering whether a document is a sham.

A party to the document cannot allege sham; cannot argue that they did not intend to be bound by the documents and therefore they are not so bound, unless they also allege fraud, contractual mistake, or contractual misrepresentation.

How it affects you

The IRD is looking closely at transactions and business structures to assess the validity of them. If the IRD alleges that a document is a sham, they must act in good faith in forming that view having regard to the fact the allegation is tantamount to alleging fraud. To challenge the IRD's view, the taxpayer must prove on the balance of probabilities that the IRD is wrong. This can be an expensive and time consuming process. If you have any transactions that have been or may be challenged, seek professional taxation advice.



The IRD has issued an Exposure Draft in relation to whether or not an employer who makes a good or service available to an employee has provided a fringe benefit at the time the goods or services are made available.

Generally speaking, in order for a benefit provided by an employer to an employee to be classified as a fringe benefit (and therefore subject to fringe benefit tax ("FBT")), the benefit must actually be provided.

The IRD's view is that where goods or services have been provided to an employee, and they may or may not use them, the benefit has been provided. For example, if an employee is given tickets to the movies, there is a fringe benefit at the time the tickets are given, even if the employee does not use the tickets.

Where the goods or services are available but have not been provided, such as granting an employee the right to purchase product or services from the employer's business at a discounted rate (e.g. discounted tax returns from an Accounting firm, or discounted grocery items from a supermarket), then the benefit is not provided until such time as the goods or services are purchased at the discounted rate by the employee.

In the case of business assets (other than motor vehicles and business tools) that are capable of being used for private purposes, a
benefit is provided if the employee uses those business assets for private purposes.
phones. If a business tool is available for use a fringe benefit is provided at the time the business tool is made available for the employees use, even if they never use it, unless the business tool is provided mainly for business use and the cost of the item to the employer is no more than $5,000 including GST.

Motor vehicles that are available for private use by an employee also amount to a fringe benefit at the time the vehicle is made available unless it is a work-related vehicle, it is used for emergency calls, or an employee is regularly required, by their employer, to travel away from home for more than 24 hours.

How it affects you

Generally, fringe benefits are subject to FBT which is payable by the employer. The benefit is exempt income for the employee.

A variety of benefits are provided by employers to employees as part of a remuneration package. Some of those benefits are subject to FBT and others are not. If you are providing employees with a benefit, speak to your advisor regarding the correct taxation treatment of it.


The IRD has announced that it will allow investors, for tax purposes, to claim a loss made in the Hanover/Allied debt-for-equity swap if they can prove they acquired the shares with the intention of resale. If the investor can show they disposed of the shares by mid-late January, this will be enough to allow the loss claim.

Expenditure on extending or replacing the inlet race to a dairy shed is capital and not deductible as repairs and maintenance the IRD says.

KiwiSaver will have been running for five years in July and still 34% of those in the scheme are using default options.


'We don't take big punts, or chase the latest investment fad'

Gareth Morgan, KiwiSaver Scheme

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