ASSIGNMENT
Scenario:
Akaroa Views Ltd (Akaroa) was incorporated in April 2012 to purchase, subdivide and sell a subdivision known as The Channel Subdivision (Channel), a 50-hectare area of land near the town of Akaroa on Banks Peninsula, Canterbury. It was envisaged that Channel would be subdivided into approximately 150 sections primarily for residential development. Mr Lavaud is the sole director of Akaroa, a major shareholder, and a guarantor of Akaroa's loan from the ABC Bank Ltd (ABC Bank). Mr Lavaud is also the director and a shareholder of another land development company, French Bay Developments Ltd (French Bay). Rather than undertake the subdivision work itself, Akaroa subcontracted the management of Channel to an independent surveying management company, Benoit Surveying Ltd (Benoit). Ms Jolie is the sole director and major shareholder of Benoit.
By mid-2015, Akaroa was in significant financial difficulty, owing over $10 million to ABC Bank. The debt to ABC Bank was secured by way of a mortgage over the title held by Channel. While it had completed some of the development work, it had only sold 10 of the 150 sections. In order to improve its financial situation, Ms Jolie arranged for Akaroa to enter into a conditional sale and purchase of Channel to Grehan Property Development Ltd (Grehan) or its nominee. The purchase price was set as the amount owed to ABC Bank by Akaroa as at the date of settlement.
Cachalot Holdings Ltd (Cachalot) was incorporated in March 2016 with share capital of $100. One of its two directors is Mr Lavaud; the other is Ms Muter (both hold collectively Cachalot's shares as nominees for other investors). In effect Cachalot is a "shell company". In late July 2016, Grehan nominated Cachalot to be the purchaser of Channel. At this time the rateable value of the land was approximately $5.5 million and the market value was estimated to be $5.2 million. Cachalot relied on Ms Jolie to determine the 'market value' and did not obtain an independent valuation of Channel or pay anything for the land. Instead, Cachalot became liable to ABC Bank for the debt owed over the land when it accepted the title to the land subject to the mortgage held by the ABC Bank.
Settlement took place on 22 August 2016. This involved Akaroa issuing a settlement statement to Cachalot for the purchase price of $9.1 million (including GST). On that date, Akaroa issued a tax invoice to Cachalot which recorded the sale price at $10,465,000, and included GST of $1,365,000. Akaroa did not pay any GST in relation to the transfer of Channel as it was on the payments basis for GST. On 25 August 2016, ABC Bank consented to the transfer of the remaining Channel land to Cachalot subject to the mortgage the ABC Bank held over the land.
On 20 September 2016, Cachalot registered for GST with effect from 1 August 2016. This was followed by Cachalot filing a GST return on 14 October 2016 with the Inland Revenue Department (IRD) for the two month period ending 30 September 2016. The GST return claimed an input tax credit of $9.1 million (amongst other items) and a GST refund of $1,327,500. The GST refund sought was slightly lower than the GST on the purchase price because Cachalot had sold 2 further sections for a total of $250,000 (plus GST) during the period covered by the GST return. Cachalot requested that the GST refund be paid to ABC Bank in order to reduce the amount it owed to ABC Bank.
You receive a telephone call from Mr Lavaud. You arrange to meet with him and other key personnel, including Ms Muter and Ms Jolie. During your meeting, Mr Lavaud produced a copy of the Commissioner of Inland Revenue's (Commissioner's) Notice of Proposed Adjustment (NOPA) that he received the previous week. Mr Lavaud is keen to formally engage your firm to act for him, Akaroa and Cachalot, along with Ms Muter. He asks your firm to prepare a Notice of Response (NOR), and to seek to negotiate a satisfactory settlement of the tax dispute (if this is possible). Your firm has agreed that you will act for Mr Lavaud, Ms Muter, and Cachalot, but that another firm will need to act for Akaroa to avoid any potential conflict of interest. Mr Lavaud specifically seeks to engage your firm for advice on the GST and associated issues in relation to the following:
(1) The Commissioner has denied the GST refund sought by Cachalot and ordered an additional GST payment of $16,500. The total GST refund denied is therefore $1,344,000. The Commissioner has concluded that Cachalot was engaged in a tax avoidance arrangement with Akaroa and others. She also seeks to impose a shortfall penalty of 50% of the GST refund denied to Cachalot for taking an abusive tax position under s 141D of the Tax Administration Act 1994 (TAA), reduced by 50 percent for previous good behaviour under 141FB (TAA). Specifically you need to consider:
a. Was there an "arrangement" for the purposes of s 76 of the Goods and Services Tax Act 1985 (GST Act)?
b. If there was an "arrangement", did that arrangement have a tax avoidance purpose or effect?
c. If there was an "arrangement", did it have a tax avoidance purpose or effect that was not merely incidental?
d. If there was a tax avoidance arrangement, was the Commissioner incorrect when she disallowed (and adjusted/reconstructed) the whole of the GST refund sought by Cachalot?
e. Was the Commissioner's assessment of shortfall penalties correct?
(2) Whether there is any realistic chance of settling with the IRD, either prior to preparing a NOR, or at some stage after sending a NOR to the Commissioner. Mr Lavaud is interested in the potential benefits and drawbacks of settlement, and the likelihood that the IRD would agree to a settlement (assuming settlement is a realistic option).
(3) The likelihood that a court would uphold the imposition of any shortfall penalties. Assuming that a court would be likely to uphold the imposition of shortfall penalties, Mr Lavaud seeks your advice as to how these penalties may be reduced, (if at all), plus how Use Of Money Interest (UOMI) can be kept to a minimum.
Required:
A. Items to be submitted to the ACCT drop box located on Level 2 of the Business and Law Building by 5pm, Wednesday 5 April 2017:
1. Part 1: Your letter of advice to Mr Lavaud, Ms Muter and Cachalot (2,500 words maximum)
2. Part 2: Your client file (containing all correspondence and evidence of your research)
B. A peer and self-assessment (at least 200 words in length) is to be completed separately, and emailed to the course supervisor.
A summary of your effort in all aspects of the project relative to that of your partner. Please refer to and comment on each of the written requirements.
2. A summary of your partner's effort in all aspects of the project relative to your effort. Please refer to and comment on each of the written requirements.
Hint: To assist your recall of effort and contribution to the project, it may be useful to keep a diary of the tasks you and your partner(s) performed throughout the project.