IRD slightly nervous about its latest idea

Inland Revenue officials are urging investors to make their views known on the department’s discussion document on "mass marketed" tax schemes.

The document covers schemes which allow investors to claim greater tax deductions than the amount of money invested – similar in approach to some of the bloodstock and film based investment schemes of the early 1980s.

IRD officials concede that their proposals, as written, are likely to catch legitimate investments.

"We don’t want to catch your everyday forestry investment scheme, for example," IRD portfolio manager Jim Gordon says.

"We want to know what we have caught, and we are aware that we’ve cast a wide net and we’re probably even slightly nervous of the outcomes. But that’s why we’ve put the document out there."

The IRD characterises a typical scheme thus:

Mary puts $10,000 into a joint venture (JV) that forecasts losses of $100,000 over the first three years. It forecasts income of $150,000 in year four, which in fact does not arise.

The promoter of the scheme sells fixed life intangible property to the JV for $95,000. This is depreciable over three years. The JV pays $5,000 cash (from Mary’s investment) for the property, with the balance of $90,000 funded by a non-recourse loan from the promoter. The JV spends the remaining $5,000 in a fashion that causes it to be deductible.

Mary receives tax deductions of $100,000 over three years, saving her $39,000 if the 39% marginal tax rate applies. This is $29,000 more than she has or will invest. She has made a substantial gain even though the JV has been unsuccessful.

Some forestry investment schemes use this method, officials say. Another twist is that often the "fixed life intangible property" is some form of intellectual property.

Last year the department netted about $100 million in unpaid taxes from such schemes.

About 1,000 investors have been involved in these schemes, as a mix of individuals, companies and trusts.

"Some promoters are involved in quite a few of them – and we watch closely what those promoters are doing," the department's general manager of service delivery, Bruce Thompson, says.

Officials have proposed two main law changes: deferring the tax deductions from such schemes until matching income is earned, to the extent that tax deductions claimed exceed the amount the investor actually puts at risk; and registration with Inland Revenue of certain schemes and notification of registration to investors.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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