essay -
T opic - Tax Avoidance
Facts
John and Kristy sold their family home at market value to a...

Question

essay - 
T opic - Tax Avoidance
Facts
John and Kristy sold their family home at market value to a look-through company (LTC);
The home is used by the LTC as a rental asset and is rented to John and Kristy
	
Document Preview: Topic  -  Tax AvoidanceFactsJohn and Kristy sold their family home at market value to a look-through company (LTC);The home is used by the LTC as a rental asset and is rented to John and Kristy at market rate;John and Kristy own 100 per cent of the shares in the LTC;The LTC borrowed from a bank to fund the purchase and John and Kristy guaranteed equally a bank loan of $300,000;John and Kristy then use the funds raised from the sale to purchase a new investment property;John and Kristy, in their capacity as holder of an effective look-through interest in the LTC, claimed a deduction for the interest incurred by the LTC on the loan.Required:Apply the above facts and conclude whether there has been a tax avoidance arrangement or not under the general anti-avoidance provision of the Income Tax Act 2007, s BG 1 and s YA 1 and relevant cases.  Also outline the effect on a taxpayer if it is found that a tax avoidance arrangement exists.  (Maximum 1,000 words)							 Instructions for this assignmentyour material.Created with an evaluation copy of Aspose.Words. To discover the full versions of our APIs please visit: https://products.aspose.com/words/PAGE  

Robert · Accepted Answer

SOLUTION: 
Part –G of the Income tax Act, 2007 deals with avoidance and non-market transactions. Yes, 
there has been tax avoidance being done by John and Kristy by transferring there Family home to 
Look-Through-Company, in which they were having 100% shares, and also they are paying rent 
to the company on the market basis. They are claiming interest paid to the bank on the loan of 
$3, 00,000 borrowed in purchasing the new investment property.  
This case will not be covered under Subpart GC-5 because the rent John and Kristy are paying to 
Look-Through Company is on market basis, whereas the subpart deals with leases in inadequate 
rent. The tax avoidance practice performed by John & Kristy is covered under Sub part GB45, 
46, 47 and 48
i
. They are paying rent to Look Through Company of which they are 100% 
shareholders, hence rent paid by them is just an arrangement of the transferring income from one 
person to another rather we can classify it as a dummy transaction. The amount of interest paid to 
the bank will also be disallowed as the loan is taken in financing the new property, by 
guarantying the old property which is owned by the company, hence interest payments on such 
loan will be completely disallowed from the income of John and Kristy. The law relating to such 
transactions is already framed and reads as follows:  
Sub part GB45- Arrangements involving money not a risk reads as follows:a person sells or 
issues, or promotes the selling or issuing of, the arrangement, whether or not for remuneration; 
and a person (the participant) who is a party to the arrangement or affected by it, considered 
together with their affected associates, has for an assessment period a total amount of deductions 
from the arrangement that is more than their total amount of assessable income from the 
arrangement, having regard to the rules in subsection (2); and as part of or for the purposes of the 
arrangement, the participant or an affected associate borrows a limited-recourse amount under a 
limited-recourse loan; and on the relevant balance date,

essay - T opic - Tax Avoidance Facts John and Kristy sold their family home at market value to a look-through company (LTC); The home is used by the LTC as a rental asset and is rented to John and...

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