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MHK Chartered Accountants Warning On Management Fees

Tuesday 26 July 2016, 3:47PM

By Beckie Wright

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Many businesses incur an expense of Management Fees as part of their operations.  In many cases, these are fairly charged for work performed by a Management company, and there are generally no issues with these. However in other cases, a Management Fee is not calculated and charged until after year end, as real expenses cannot be determined until the accounts of the Management Company have been completed, and for tax efficiency reasons. 

 

Ian Malcolm, Managing Director of MHK Chartered Accountants Ltd, warns, “If you or your accountant charges a Management Fee only at year end, for tax minimisation reasons with a group of related entities, beware!  The IRD can challenge such instances, and that can be extremely costly if the Management Fee is not validly charged for work preformed.  You must both be able to identify the relevant services performed, and show that they were actually performed, and not just simply charge a Management Fee because you have tax losses in an associated entity”.

In June 2016, the IRD won a case involving an accountant, former Ernst & Young tax partner David Tauber, and former Dragon Den star Paul Webb, both at the time being directors of the Honk group of companies. IRD were investigating the pair and related entities, and seized records from their homes.  The pair and a number of companies in the group sought a court order requesting IRD return documents seized and to destroy or deliver any photos or videos taken, which was dismissed by both the High Court and the Court of Appeal.

Honk Land Trustees (HLT) had claimed over $1.1 million income tax deductions for the 2005 financial year in a rather unsophisticated ex post facto contrivance designed solely to effect the transfer of the precise amount of taxable income upon which an associated Trust would otherwise have had to pay tax. These deductions related to a management fee of $1,116,000 which HLT paid to an associated company, Honk Land Ltd (HLL), and $36,824 that was charged by Basin Ridge Management Ltd, Mr Tauber’s management company.

The Taxation Revenue Authority had already sided with the IRD over its decision to not allow HLT the deduction and to impose a 50 per cent penalty for taking an abuse tax position. Justice Rebecca Ellis refused to overturn the decision, stating, "It is difficult not to agree with the Commissioner that ... the fee was a rather unsophisticated ex post facto contrivance designed solely to effect the transfer of the precise amount of taxable income upon which the trust would otherwise have had to pay tax," she said in her decision.

Ian Malcolm agrees, stating, “The TRA correctly disallowed the deduction for this management fee; in this case there was definitely insufficient nexus between the management fee and the gaining or producing of a trust’s assessable income or the carrying on of its business. That is one of the basics when seeking to claiming a tax deductible expense,” he continued.

“It was obvious in this instance that no deduction could be claimed by a taxpayer for the cost of services which had not been provided to it, these management fees should never have been claimed. The only purpose of the management fee was to avoid tax by moving profits out of the Trust to HLL, and the deduction was therefore claimed with the dominant purpose of eradicating HLT’s tax liability.  A foolish claim, by people who should have known better. The High Court also validly upheld the imposition of a shortfall penalty of 50% for taking an abusive tax position.

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