AX INFORMATION BULLETIN · own and operate a business as defined in the Constitution of BOGL, for the commercial processing and marketing of processed olive products which include,

CONTENTS

Get your TIB sooner on the internet 3

Binding rulingsProduct Ruling � BR PRD 03/11 4

New legislationScreen production industry � withholding payments 13

Legislation and determinationsDetermination: Amount of specified withholding payment (being per diem allowancespaid in the screen production industry) that shall be regarded as expenditure incurredin production of payment 14

Legal decisions � case notesFinancial services exemption for club membership 16

Gulf Harbour Development Ltd v CIR

Tax avoidance GST Act 18TRA 091/2003

Regular featuresDue dates reminder 22

AX INFORMATION BULLETIN

This is an Inland Revenue service to people with an interest in New Zealand taxation

ISSN 0114�7161

Vol 15, No 8August 2003

This TIB has no appendix

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Inland Revenue Department Tax Information Bulletin: Vol 15, No 8 (August 2003)

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GET YOUR TIB SOONER ON THE INTERNETThis Tax Information Bulletin is also available on the internet in PDF format. Our website is at: www.ird.govt.nz

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BINDING RULINGSThis section of the TIB contains binding rulings that the Commissioner of Inland Revenue has issued recently.

The Commissioner can issue binding rulings in certain situations. Inland Revenue is bound to follow such a ruling if ataxpayer to whom the ruling applies calculates tax liability based on it.

For full details of how binding rulings work, see our information booklet Adjudication & Rulings, a guide to BindingRulings (IR 715) or the article on page 1 of Tax Information Bulletin Vol 6, No 12 (May 1995) or Vol 7, No 2(August 1995).

You can download these publications free from our website at www.ird.govt.nz

PRODUCT RULING � BR PRD 03/11

This is a product ruling made under section 91F of theTax Administration Act 1994.

Name of the Person who applied for theRulingThis Ruling has been applied for by Barkworth OliveGroves Pty Limited (�BOGL�) � Project No 5.

Taxation LawsAll legislative references are to the Income Tax Act 1994unless otherwise stated.

This Ruling applies in respect of sections EP 1, BD2(1)(b)(i), BD 2(2)(e), EG 1, and the section OB 1definition of �depreciable property�.

This Ruling does not consider or rule on the potentialapplication (if any) of sections EF 1 and BG 1, orDetermination E 10.

This Ruling considers expense deductibility in relation tosection BD 2(1)(b)(i) (incurred by the taxpayer inderiving the taxpayer�s gross income). Accordingly it hasnot been necessary for the purposes of this Ruling toconsider or rule on whether investors are carrying on abusiness for the purposes of the Act.

The Arrangement to which this RulingappliesThe Arrangement is the purchase of a minimum of 250�E� class shares in BOGL, and the growing of olives oncertain land situated in Australia in respect of which theshares provide the right to grow olives, and theappointment of Barkworth Olive Management Limited(�BOML�) to manage the growing, processing andmarketing of those olives. This Ruling only applies toinvestors who appoint BOML to manage their Farms.

All amounts quoted in this Ruling are exclusive ofAustralian GST (if any).

Further details of the Arrangement are set out in theparagraphs below.

1. The Arrangement is governed by the terms of the�Barkworth Olive Groves Project No 5� (�ProjectNo 5�) prospectus dated 9 April 2001 (�theprospectus�). Project No 5 is in no way dependenton the Barkworth Group�s four existing projects andmay be operated independently of the other four.Key aspects of the prospectus are as follows:

(i) Investors (also referred to as �members� or�Grower�) purchase a minimum parcel of 250�E� class shares of $1 each in a land owningcompany (BOGL): additional shares may beapplied for in parcels of 250.

(ii) Holders of �E� class shares have thefollowing rights:

� A member shall have the absolute rightto occupy one �Farm� (or section ofolive grove) in respect of each 250 �E�Class shareholding held by that member,subject to the payment of all moneysdue to BOGL. The Farm shall be anidentified area of land as nearly aspracticable in area to 0.08 hectares andsuitable for the planting of 20 olive treesat spacings of approximately 5 metresby 8 metres. The member�s Farm orFarms will be separately identified on amaster plan maintained under thesupervision of the directors of BOGL.

� A member shall have an absolute rightto process up to 1.5 tonnes of olives perannum in respect of each 250 �E� Classshareholding, subject to the payment ofFactory Access Fees. The time allottedfor each member�s processing

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operations will be advised at least twoweeks prior to commencement of theharvest period. The member mayexchange his or her allotted time withany other member or members with theapproval of BOGL: such approval not tobe unreasonably withheld. The timeallotted per 250 �E� Class shareholdingwill be as near as practicable to onehalf-hour and will be with respect to amachine or machines capable ofprocessing in excess of 3 tonnes perhour.

� A member shall have the right to ownand operate a business, as defined by theConstitution of BOGL, for thecommercial cultivation and harvestingof olives on the member�s Farm and thesale of produce therefrom.

� A member shall also have the right toown and operate a business as defined inthe Constitution of BOGL, for thecommercial processing and marketing ofprocessed olive products which include,but are not necessarily limited to, oliveoil and pickled table olives.

� A member shall have the right to use theagricultural infrastructure whichincludes, but is not necessarily limitedto, roads around the property, access toirrigation mains and storage areas. Thiswill be subject to the reasonableregulations imposed by BOGL�sdirectors.

� A member shall have the right to use theprocessing infrastructure whichincludes, but is not necessarily limitedto, loading and unloading equipment,storage areas, grading and samplingequipment. This will be subject to thereasonable regulations imposed byBOGL�s directors.

� A member shall have the right to appointBOML to manage his or her interests inaccordance with the ManagementAgreement. Alternatively, Growershave the right to manage the businesspersonally or to appoint an employee,contractor, or agent to manage thebusiness on their behalf.

� A member shall have the right to assign,transfer, or otherwise deal with theabovementioned special rights to anyperson, persons, or corporation with theapproval of the directors of BOGL: suchapproval not to be unreasonablywithheld.

(iii) The rights attaching to �E� Class sharesexpire on 1 July 2021 and, in accordance withthe Constitution of BOGL, become ordinaryshares. At that time BOGL will assumeresponsibility for, and the benefits of, theolive trees and from then on the member�sbenefits will be derived from the member�sinterest in BOGL by virtue of shares held.

(iv) A member or his or her assignee is obliged toensure the efficient running of the business.If an employee, contractor, or agent isengaged to fulfil this function, BOGL must besatisfied in regard to the competence of thatperson or corporation and give its writtenapproval.

Relationship between BOGL and members

(v) The members� interests are separate from theoperation of the business of BOGL.

(vi) BOGL will derive income from annual FarmAdministration Fees received from members.The year one Administration Fee in respect ofthe 2001 � 2002 year will be $88 for eachparcel of 250 �E� Class shares allotted to themember.

(vii) In year two the Administration Fee will be$75 payable in advance.

(viii) Thereafter, until and including the year 2021,the annual Administration Fee shall be 10%of the gross income generated from the saleof olives attributable to the member�s Farm.

(ix) BOGL will also derive income from thepayment by the member of Factory AccessFees for each 250 �E� Class shareholding asfollows:

� Year 1 � $22

� Year 2 � $225

� Year 3 and thereafter � 15% of the grossincome generated from the sale ofprocessed olive products attributable tothe member�s processing allocation.90% of all income derived by BOGL forFactory Access Fees will be paid to theFactory Owner and the remaining 10%will be retained by BOGL to coveradministration costs. BOGL may alsoderive income from the commercial useof that residue of BOGL land not beingused for olive growing and from anydirect interest in olive processing whichBOGL may acquire.

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2. The members may appoint BOML as the manager ofthe Farms. The Management Agreement is enteredinto between BOML and BOGL (as the agent of themembers).

3. The Manager�s duties until 30 June 2002 (asprovided in clause 4.1 of the ManagementAgreement) are as follows:

(i) BOML will carry out the duties required tosupply olive trees, plant olive trees on theGrower�s Farm, bring the trees to an initialharvest, process olives (whether those olivesare sourced from the Farm or elsewhere), andmarket olives and processed olive product.Without limiting the generality of this clauseBOML must:

(a) Supply at least 20 olive trees to theGrower selected from high yield stockin healthy condition.

(b) Carry out irrigation works to benefit theGrower�s Farm.

(c) Carry out drainage work and work tohelp prevent soil erosion on theGrower�s Farm.

(d) Prepare the Grower�s Farm so that itwill be suitable for the planting andgrowing of at least 20 olive trees.

(e) Plant the olive trees supplied to theGrower on the Grower�s Farm

(f) Tend the trees and Grower�s Farm in aproper and skilful manner

(g) Comply with BOGL�s constitution in sofar as it relates to the use of the Farmand Grower�s Processing Allocation(except for the payment ofAdministration Fees and FactoryLicense Fees).

(h) At BOML�s discretion, procure rawolives, olive products or both fromsources other than the Farms forprocessing, marketing and selling.

(i) Determine the products into which thoseolives will be processed and theproportions of the various products.

(j) Carry out the processing of some or allof those olives or olive productsattributable to the Grower�s Farmfollowing harvest and olives procuredfrom sources other than the Farms (inthe Responsible Entity�s discretion as itthinks fit and at all times acting in thebest interests of the Grower) in a properand workmanlike manner having regard

to proper workplace practices as well asin accordance with acceptable industrypractices applicable to processing olives.

(k) Subject to the Grower�s rights underclause 6.3 and 6.4 package, market andsell the olives attributable to theGrower�s Farm and the processed olivesattributable to the Grower�s ProcessingAllocation using reasonable endeavoursto obtain the maximum price available.

(l) If BOML markets and sells theprocessed olives attributable to theGrower�s Farm and the processed olivesattributable to the Grower�s ProcessingAllocation, account to the Grower and ifrelevant the Custodian for the proceedsof such sale.

(m) Subject to the Grower�s right to carryout its own weeding under clause 6.1,eradicate as far as reasonably possibleany pests and competitive weeds whichmay affect the growth or yield of trees.

(n) Repair damage to roads, tracks, orfences on the Farms or on neighbouringland resulting from the actions ofBOML or its contractors.

(o) Embark on such operations as may berequired to prevent or combat landdegradation on the Grower�s Farm orland surrounding the Grower�s Farm.

(p) Where the Responsible Entity is notBOML, pay or cause to be paid toBOML the �Barkworth� name licensefee paid under clause 7.1.

4. The ongoing duties of the Manager (as provided inclause 4.3 of the Management Agreement) are asfollows:

(i) BOML must continue to maintain the Farmand source, process, and market olives andolive products following the completion ofthe duties outlined in clause 4.1.

(ii) BOML�s duties must be carried out accordingto sound agricultural, environmental, andproper workplace practices as well as inaccordance with industry practices applicableto growing olive trees and processing andmarketing olives or olive products. Withoutlimiting the generality of this clause, BOMLmust:

(a) Tend the trees and the Grower�s Farm ina proper and skilful manner.

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(b) Subject to the Grower�s right to carryout its own weeding under clause 6.1,eradicate as far as reasonably possibleany pests or competitive weeds whichmay affect growth or yield of the trees.

(c) Comply with BOGL�s constitution in sofar as it relates to the use of theGrower�s Farm and the Grower�sProcessing Allocation (except for thepayment of Administration Fees and, ifapplicable, Factory Licence Fees).

(d) Repair damage to roads, tracks, orfences on the Grower�s Farm or onneighbouring land resulting from theactions of BOML or its contractors.

(e) Embark on such operations as may berequired to prevent or combat landdegradation on the Grower�s Farm orland surrounding the Grower�s Farm.

(f) Subject to the Grower�s right to harvestits own trees under clause 6.2, harvestthe trees on the Grower�s Farm at oraround the time estimated by BOML tomaximise the produce from all theFarms established at or around the sametime as the Grower�s Farm.

(g) At the discretion of BOML, procure rawolives or olive products whether fromthe Farm or from other sources otherthan the Farms for processing,marketing and sale. Any olives or oliveproducts so acquired will be theproperty of, and at the risk of, BOML.However, BOML will account for theproceeds as required under clause4.3(k).

(h) Determine the products into which thoseolives or olive products will beprocessed and the proportions of thevarious products.

(i) During the processing time allowedunder the Grower�s ProcessingAllocation, carry out the processing ofsome or all of the olives attributable tothe Grower�s Farm following harvestand olives procured from sources otherthan the Farms, (in BOML�s discretionas it thinks fit and at all times acting inthe best interests of the Grower), in aproper and workmanlike manner havingregard to proper workplace practices aswell as in accordance with acceptableindustry practices applicable toprocessing olives.

(j) Subject to the Grower�s rights to takeand market olives and processed oliveproducts under clauses 6.3 and 6.4,package, market, and sell the olivesattributable to the grower�s Farm andthe processed olives attributable to theGrower�s Processing Allocation usingreasonable endeavours to obtain themaximum price available.

(k) If BOML markets and sells the olivesattributable to the Grower�s Farm andthe processed olives attributable to theGrower�s Processing Allocation underclause 4.3(j), then account to the Growerand if relevant the Custodian for theproceeds of such sale.

(l) If the Responsible Entity is not BOML,then pay or cause to be paid to BOMLthe �Barkworth� name license paidunder clause 7.2.

5. Subject to complying with the conditions set out inclause 6 of the Management Agreement, Growersmay elect to:

(i) Carry out their own maintenance work

(ii) Have their trees harvested separately

(iii) Harvest their own trees, and

(iv) Market their own olives.

6. The Management Agreement (at clause 7.1) makesthe following provision for remuneration in the firstyear:

(a) for Growers who subscribe to the Projecton or before 31 May 2001:

(i) In consideration of BOML carrying out itsduties (as set out in clause 4.1 of theManagement Agreement), BOML is entitledto be paid:

� $90 for the supply of 20 olive trees tothe Grower (payable on application).

� $1,025 for irrigation works. Irrigationworks consist of the supply andinstallation (above ground) of trickletapes and sprinkler heads (together the�irrigation equipment�) on the Grower�sland (payable on or before 31 May2001). The irrigation equipment isbought by BOML as agent for theGrower.

� $2,558 for the performance ofmanagement duties under clauses 4.1 (c)- 4.1 (e) �preparation and planting fees�(payable on or before 31 May 2001).

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� $2,050 for the performance of thefollowing management duties until30 June 2002,

(a) $1,175 for procuring, processing,packaging and marketing olivesattributable to the Grower�s Farm orsourced externally.

� $875 for the balance ofthe management duties listed inclause 4.1.

(ii) BOML is also entitled to be paid $500 for theuse of the Barkworth name in carrying on theGrower�s business (payable on or before1 July 2001).

(b) for Growers who subscribe to the Projectafter 31 May 2001:

(iii) In consideration of BOML carrying out itsduties (as set out in clause 4.1 of theManagement Agreement), BOML is entitledto be paid:

� $90 for the supply of 20 olive trees tothe Grower (payable on application).

� $1,025 for irrigation works. Irrigationworks consist of the supply andinstallation (above ground) of trickletapes and sprinkler heads (together the�irrigation equipment�) on the Grower�sland (payable on the later of 1 July 2001or two months after application). Theirrigation equipment is bought byBOML as agent for the Grower.

� $4,608 for the performance ofmanagement duties from 1 July 2001until 30 June 2002 (payable on the laterof 1 June 2001 or two months afterapplication, being

(a) $2,558 for the performance ofmanagement duties under clauses4.1 (c) - 4.1 (e) �preparation andplanting fees�.

(b) $1,175 for procuring, processing,packaging and marketing olivesattributable to the Grower�s farm orsourced externally.

(c) $875 for the balance of themanagement duties listed inclause 4.1.

(iv) BOML is also entitled to be paid $500 for theuse of the Barkworth name in carrying on theGrower�s business (payable on the later of1 July 2001 or two months after application).

(v) In addition to the fees set out in clauses7.1(a)(i) to 7.1(a)(ii), if BOML procures andmarkets processed olive products on behalf ofthe Grower, then BOML is entitled to be paid85% of the amount by which the grossproceeds from the sale of the processed oliveproducts exceed prospectus projections.From this fee BOML must pay all costsassociated with procuring and marketingprocessed olive products.

7. The Management Agreement (at clause 7.2) makesthe following provision for remuneration in thesecond year:

(i) In consideration of BOML carrying out itsduties from 1 July 2002 to 30 June 2003,BOML is entitled to be paid:

� $1,175 for procuring, processing,packaging, and marketing olivesattributable to the Grower�s farm orsourced externally; and

� $875 for the balance of the duties listedin clause 4.3.

� The Grower must pay these fees, whichtotal $2,050, on or before 1 July 2002.

(ii) BOML is also entitled to be paid $500 in yeartwo for granting the Grower a license to usethe �Barkworth� name in carrying on theGrower�s business. The fee is payable fromthe gross income generated from the saleproceeds generated under the ManagementAgreement. The fee for the license to use the�Barkworth� name is capped at the amount ofgross income generated from the saleproceeds generated under the ManagementAgreement.

(iii) In addition, if BOML procures and marketsprocessed olive products on behalf of theGrower, then BOML is entitled to be paid85% of the amount by which the grossproceeds from the sale of the processed oliveproducts exceed the prospectus projections.From this fee, BOML must pay all costsassociated with procuring and marketingprocessed olive products.

8. The Management Agreement makes the followingprovision for remuneration in the third year:

(i) In consideration of BOML carrying out itsduties for the third year of the ManagementAgreement, BOML is entitled to be paid 70%of the gross income generated from the saleof processed olives attributable to theGrower�s processing allocation.

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(ii) Payment of the above fees includes a fee touse the �Barkworth� name in carrying on thebusiness of the Grower. The amount of thatfee is the amount paid under year twoincreased by the same proportion as theincrease in the Consumer Price Index over theone-year period from year two to year three.If there is insufficient income earned from thesale of processed olives to pay this amount,the fee is capped at the income earned.

(iii) In addition, if BOML procures and marketsprocessed olive products on behalf of theGrower, then BOML is entitled to be paid85% of the gross proceeds from the sale ofthe processed olive products. From this feeBOML must pay all costs associated withprocuring and marketing processed oliveproducts.

9. The Management Agreement makes the followingprovision for remuneration in the fourth andfollowing years:

(i) In consideration of BOML carrying out itsduties under clause 4.3 for the fourth year andall subsequent years, BOML is entitled to bepaid fees calculated according to thefollowing table

Year No. % of Gross Income % of Gross Incomeof Olives of Processed Olives

4 90% 70%

5 90% 70%

6 60% 70%

7 50% 70%

8 to 20 40% 70%

(ii) In the above table, �Gross Income of Olives�means the gross income generated from thesale of olives attributable to the Grower�sFarm, and �Gross Income of ProcessedOlives� means the gross income generatedfrom the sale of processed olives attributableto the Grower�s Processing Allocation.

(iii) The fees payable are calculated in respect ofthe olives attributable to the Grower�s Farmwhich are produced during the yearcorresponding with the percentage of grossincome of olives.

(iv) If the Grower has made an election to havehis or her trees harvested separately or toharvest the trees themselves such that thegross income of olives is not readilycalculable by BOML, the fees payable inconsideration of BOML carrying out itsmanagement duties under clause 4.3 of theManagement Agreement are as per the fees inthe following table plus or minus anadjustment.

Year No. Management Fees $

4 369

5 538

6 565

7 659

8 692

9 850

10 1,042

11 1,094

12 1,149

13 1,206

14 1,266

15 1,330

16 1,396

17 1,466

18 1,539

19 1,616

20 1,697

(v) That adjustment will be that amount actuallypaid in respect of Farms owned by Growerswho have not made the election. Theadjustment will be credited or charged to theGrower upon it being calculated by BOML.

(vi) If the Grower has made an election to markethis or her own processed olive products, feespayable to BOML for duties carried out underclause 4 of the Management Agreement willbe the sum of the percentage of gross incomeof olives plus additional fees in respect ofsourcing, processing, and related activities asset out below subject to adjustment in respectof years 3 to 20.

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Year No. % of Gross Additional Fees for Income of Olives Sourcing/Procuring

1 - 0

2 - 500

3 - 1,388

4 90% 2,107

5 90% 2,592

6 60% 2,723

7 50% 2,859

8 40% 3,002

9 40% 3,150

10 40% 3,308

11 40% 3,473

12 40% 3,647

13 40% 3,830

14 40% 4,021

15 40% 4,224

16 40% 4,436

17 40% 4,659

18 40% 4,893

19 40% 5,139

20 40% 5,396

10. The projected cashflows for Growers from theoperation of a minimum holding of 250 �E� Classshares in BOGL, if BOML is appointed manager,are as follows:

Investing on or before 31 May 2001

Year Net Project Income

2001 (3,673)

2002 (2,863)

2003 (1,965)

2004 416

2005 632

2006 777

2007 1,099

2008 1,385

2009 1,765

2010 2,008

2011 2,294

2012 2,409

2013 2,530

2014 2,656

2015 2,789

2016 2,929

2017 3,075

2018 3,229

2019 3,391

2020 3,562

2021 3,740

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Investing after 31 May 2001

Year Net Project Income

2001 (90)

2002 (6,446)

2003 (1,965)

2004 416

2005 632

2006 777

2007 1,099

2008 1,385

2009 1,765

2010 2,008

2011 2,294

2012 2,409

2013 2,530

2014 2,656

2015 2,789

2016 2,929

2017 3,075

2018 3,229

2019 3,391

2020 3,562

2021 3,740

11. The Prospectus states that the total net investment(over a period of two years) in respect of eachinterest for a member electing to have BOMLmanage the interests, is $9,136 including the 250 x$1 shares in BOGL. After that time it is projectedthat all costs will be met from revenue the projectwill generate.

12. Growers will be exposed to the normal risks of anycommercial enterprise; some of which will becovered by insurance taken out by BOML.

13. This Ruling does not consider or rule on the taxationimplications of financing arrangements (if any)entered into by Growers in order to invest in thisArrangement.

Assumptions made by theCommissionerThis Ruling is made subject to the followingassumptions:

i) Growers are liable for any repairs to or enhancementof the irrigation equipment required during the lifeof the project.

ii) Growers will participate in the project for the full20 years (until 2021) and have an intention to makea profit from investing in the Arrangement.

Conditions stipulated by theCommissionerThis Ruling is made subject to the following conditions:

Balance date

a) This Ruling applies only to New Zealand residenttaxpayers.

b) The balance date of any Grower for the purposes ofAustralian income tax, is 30 June.

c) Any foreign source income and foreign expenditurethat arises in respect of any Grower�s investment inBOGL has been included in the Grower's annualreturns of income in Australia.

d) No foreign source income, nor foreign expenditurearising from the investment in BOGL, has beenincluded in the Grower�s income tax return for thebase year.

e) Any dividends received from BOGL are to bereturned when derived and not in accordance withsection EP 1.

f) The total net foreign source income (derived fromall foreign activities) of the Grower is less than$100,000.

g) The income derived and expenditure incurred by theGrower from the sale of raw olives and processedolive products is not income derived or expenditureincurred under the �accrual rules�.

h) The shares in BOGL do not give rise to any�attributed foreign income� as defined insection OB 1.

i) The shares in BOGL do not give rise to �foreigninvestment fund income� as defined insection CG 16.

j) BOGL is not a �controlled foreign company� asdefined in section CG 4.

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Factory access fees; procuring, processing and marketingfees; and brand name licensing fees

k) The �year one� factory access fee is payable inrespect of the year ending 30 June 2002.

l) The factory access fee; the procuring, processingand marketing fee; and the brand name licensing feeare all set at an arm�s length rate.

m) In the year ending 30 June 2002, BOML processedolives on behalf of Growers using a part, or all of,their annual allocation of factory access time for theyear ended 30 June 2002.

n) The �year one� procuring, processing and marketingfee is payable in respect of the year ended 30 June2002.

o) In the year ending 30 June 2002, BOML procuredand processed olives on behalf of Growers.

p) The �year one� brand name licensing fee is payablein respect of the year ending 30 June 2002.

q) In the year ending 30 June 2002, Growers used thebrand name �Barkworth� for marketing and sellingolives and olive products.

Irrigation equipment

r) Growers acquire legal and beneficial ownership ofthe irrigation equipment by virtue of the $1,025payment.

s) Growers have not elected to treat the right to use theirrigation equipment as low value property undersection EG 16.

t) Growers have not been allowed a deduction inrespect of the irrigation equipment under any ofsections BD 2(1)(b)(i) and (ii), DJ 6, DJ 11, DL 6,DM 1, DO 3, DO 6, DO 7, DZ 1, DZ 3, EO 5, EZ 5,and EZ 6, or by virtue of an amortisation or othersimilar deduction allowed under any section of theAct.

u) Growers are not entitled to receive compensation forany decline in the value of the right to use theirrigation equipment.

v) No other taxpayers have been allowed a deductionfor the right to use the irrigation equipment.

w) Growers have not elected to treat the property as notdepreciable under section EG 16A.

x) Growers have not elected to treat the right to use theirrigation equipment as a financial arrangementunder section EH 25.

General

y) The financial projections contained in ProspectusNo. 5 demonstrate genuine and commerciallyachievable rates of return.

z) If BOML contracts with itself, under clause 5.2 ofthe Management Agreement, then it will do so on anarm�s length basis.

How the Taxation Laws apply to theArrangementSubject in all respects to any assumption or conditionstated above, the Taxation Laws apply to theArrangement as follows:

� Growers may make an election under section EP 1to use a foreign tax balance date.

� The cost of acquiring shares in BOGL is a capitalexpense and not deductible by virtue of section BD2(2)(e).

� The cost of acquiring olive trees is a capital expenseand not deductible by virtue of section BD 2(2)(e).

� The Preparation and Planting Fee is a capitalexpense and not deductible by virtue of section BD2(2)(e).

� The annual Farm Administration Fee payable toBOGL is deductible under section BD 2(1)(b)(i).

� The payment of the annual Factory Access Fee isdeductible under section BD 2(1)(b)(i).

� The annual Procuring, Processing, Packaging andMarketing Fee is deductible under section BD2(1)(b)(i).

� The annual Brand Name Fee is deductible undersection BD 2(1)(b)(i).

� The irrigation equipment is �depreciable property�.

� The $1,025 payment for the irrigation equipment isdepreciable under section EG 1.

� Section DB 1 does not preclude Growers who arenot registered or liable to be registered forAustralian GST from claiming a deduction in NewZealand for the GST inclusive amount.

The period or income year for whichthis Ruling appliesThis Ruling will apply for the period 1 July 2001 until30 June 2004.

This Ruling is signed by me on the 18th day of June 2003.

Martin SmithGeneral Manager (Adjudication & Rulings)

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NEW LEGISLATION

SCREEN PRODUCTION INDUSTRY �WITHHOLDING PAYMENTSFrom 8 September 2003 payments to independentcontractors engaged in the film production industry willbe subject to a withholding payment tax deduction of20 cents in the dollar.

The new withholding tax rate applies to paymentsrelating to television, video, or film productions orpresentations and includes work commonly involved inthe on-set and off-set pre-production, production andpost-production processes. The rate will not apply tosalary and wages paid within the industry, which continueto be subject to PAYE in the normal way.

A new class of withholding payment overrides all otherclasses of withholding tax that might apply to workerswithin the screen production industry, includingfree-lance journalists and writers.

The new rate of 20 cents in the dollar is consistent withwithholding tax rates applying to payments to residentand non-resident entertainers. Having only one rate ofwithholding tax applying to all independent contractorpayments will simplify tax practices for the screenproduction industry.

The change was approved by Order in Council on4 August 2003.

Income Tax (Withholding Payments) AmendmentRegulations 2003/Number186

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LEGISLATION AND DETERMINATIONSThis section of the TIB covers items such as recent tax legislation, accrual and depreciation determinations, andlivestock values and changes in FBT and GST interest rates.

DETERMINATION: AMOUNT OF A SPECIFIED WITHHOLDING PAYMENT (BEINGPER DIEM ALLOWANCES PAID IN THE SCREEN PRODUCTION INDUSTRY) THATSHALL BE REGARDED AS EXPENDITURE INCURRED IN PRODUCTION OFPAYMENT

IntroductionThis Determination sets out the amount regarded as expenditure incurred in the production of specified withholdingpayments when those payments are per diem (per day) allowances paid to resident and non-resident contractors andresident and non-resident entertainers working in the Screen Production Industry in New Zealand.

Section NC 2 of the Income Tax Act 1994 requires anyone who makes a source deduction payment to deduct tax whenmaking it.

Under section OB 2 (1) of the Income Tax Act 1994 a withholding payment is included in the definition of �sourcededuction payments�. Consequently, any person who makes a withholding payment must deduct tax from it at thetime it is made, unless an exemption applies.

The Screen Production Industry pays per diem allowances to resident and non-resident contractors and resident andnon-resident entertainers working on screen productions when they are working away from their town of normalresidence. These allowances are to cover the costs of breakfast, lunch and dinner as well as other minor incidentalexpenses incurred by a contractor or entertainer while working in the Screen Production Industry in New Zealand.

Money paid to resident and non-resident contractors and resident and non-resident entertainers working in the ScreenProduction Industry in New Zealand, comes within the definition of �withholding payment� in the Income Tax(Withholding Payments) Regulations 1979, so section NC 2 applies.

Therefore per diem allowances come within the definition of �withholding payment� in the Income Tax (WithholdingPayments) Regulations 1979 and the Regulations require withholding tax to be deducted from such payments.

Regulation 7 of the Income Tax (Withholding Payments) Regulations 1979 allows the Commissioner to determine anamount or proportion of any specified withholding payment that is considered to be expenditure incurred in theproduction of that payment. If the Commissioner has made such a determination, the person paying the specifiedwithholding payment is only required to deduct tax from the amount of the withholding payment that exceeds thisthreshold.

ApplicationThis Determination applies to payments of per diemallowances made to resident and non-resident contractorsand resident and non-resident entertainers in the ScreenProduction Industry. It applies:

� to per diem allowances paid on or after1 September 2003,

� where the contractor or entertainer is workingaway from their town of normal residence,

� except where any resident or non-residentcontractor, or any resident or non-residententertainer is also provided with the goodsand services for which the allowance is paidby the payer or another party acting on thepayer�s behalf,

� unless a specific Regulation 7 determinationhas been issued by the Commissioner inrelation to the per diem allowances inquestion, and

� until the Commissioner varies or revokes thisdetermination.

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InterpretationIn this Determination, unless the context otherwiserequires, expressions have the same meaning as in theIncome Tax (Withholding Payments) Regulations 1979and sections NC 2 and OB 2(1) of the Income Tax Act1994.

DeterminationWhere any resident or non-resident contractor, or residentor non-resident entertainer receives a per diem allowancein relation to services provided to a screen production andthat allowance is a withholding payment, the sum of $60per day shall be regarded as expenditure incurred in theproduction of the withholding payment. If the allowanceis less than $60 per day, the total amount of the allowanceshall be regarded as expenditure incurred in theproduction of the withholding payment.

However, to the extent that the resident or non-residentcontractor, or resident or non-resident entertainer is alsoprovided with the goods and services for which theallowance is paid, either by the payer or another partyacting on the payer�s behalf, then the amount that will beexempted by operation of this Determination from theapplication of the Income Tax (Withholding Payments)Regulations 1979 shall be reduced on a pro rata basis.

This Determination is made by me, acting underdelegated authority from the Commissioner of InlandRevenue under section 7 of the Tax Administration Act1994.

This Determination is signed on the 8th day of August2003.

David KellyManagerResources SectorCorporates

Examples1. Contractor/entertainer receives a per diem allowance

of $60 while required to work away from their townof normal residence. The cost of the goods andservices for which the allowance is paid are incurredby the recipient. The payer does not have to deductwithholding tax because the total payment does notexceed $60 per day.

2. Contractor/entertainer receives a per diem allowanceof $60. The contractor is working in their town ofnormal residence. As the contractor is working intheir town of normal residence the determinationdoes not apply. The payer has to deductwithholding tax from the per diem allowance of $60.

3. Contractor/entertainer receives a per diem allowanceof $60. Contractor/entertainer is also provided withall meals while working, either on the set, or atsome other location. The recipient has not incurredthe expense so the determination doesn�t apply. Thepayer has to deduct withholding tax from the perdiem allowance of $60.

4. The payer provides goods and services to the valueof $15 per day to the contractor/entertainer.Therefore the maximum amount that can be paid asa per diem to the contractor/entertainer withoutwithholding tax being deducted, is $45 per day.

5. Contractor/entertainer receives a per diem allowanceof $75. The cost of the goods and services forwhich the allowance is paid are incurred by therecipient. The payer has to deduct withholding taxfrom $15 of each daily payment as the paymentexceeds the $60 threshold on a daily basis.

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LEGAL DECISIONS � CASE NOTESThis section of the TIB sets out brief notes of recent tax decisions made by the Taxation Review Authority, the HighCourt, the Court of Appeal and the Privy Council.

We�ve given full references to each case, including the citation details where it has already been reported. Details ofthe relevant Act and section will help you to quickly identify the legislation at issue. Short case summaries andkeywords deliver the bare essentials for busy readers. The notes also outline the principal facts and grounds for thedecision. Where possible, we have indicated if an appeal will be forthcoming.

These case reviews do not set out Inland Revenue policy, nor do they represent our attitude to the decision. These arepurely brief factual reviews of decisions for the general interest of our readers.

FINANCIAL SERVICES EXEMPTION FORCLUB MEMBERSHIP

Case: Gulf Harbour Development Ltd v CIR

Decision date: 27 June 2003

Act: Goods and Services Tax Act 1985

Keywords: exempt supply, financial services,equity security, composite supply,multiple supplies

SummaryThe supply of membership shares in a golf and countryclub was held to be an exempt supply for GST purposesbecause it was the supply of an equity security.

FactsGulf Harbour Development Ltd (�GHD Ltd�) is therepresentative member of a group of companies whichincludes Gulf Harbour Holdings Limited, Gulf HarbourCountry Club Holdings Limited (�Holdings�) and GulfHarbour Country Club Limited (�Country Club Ltd�).

In March 1996, Country Club Ltd sold membershipshares to Holdings in consideration for Holdings agreeingto pay all of the costs associated with the development ofa golf and country club (Gulf Harbour Country Club:�the Club�). The shareholding in Country Club Ltdcomprises fully paid up $1 ordinary shares and fully paidredeemable preference shares (�RPS�s�). It is the RPS�sthat are the membership shares in issue.

Holdings issued a prospectus for the sale to the public ofthe membership shares in Country Club Ltd. Eachmembership share is issued for a fixed term of just over75 years, all memberships expire on 31 March 2073. Onthat date, each membership share will be redeemed for $1and all rights attaching to each share will cease.

There are three types of membership shares (individual,restricted and corporate) with obligations and restrictionsattaching to each type. All holders of membership sharesare required to pay annual subscriptions; and have noentitlement to participate in dividends or distributions ofany type (except on liquidation), or to vote or attend anycompany meetings (except where members� interests aredirectly affected), or to participate in the company�smanagement and operations (except as described in theprospectus in relation to the establishment and operationof the Club Committee).

The Club board may impose a penalty, fine or suspendrights to use the Club facilities or any other rightsattaching to the relevant membership share if holders failto comply with the obligations and restrictions of thatmembership share. The Club board may also causeCountry Club Ltd to forfeit a holder�s membership sharesin the case of insolvency, criminal conviction, ceasing tobe of good character or failing to comply with theobligations or restrictions of the membership share orwith the Club rules.

GST TreatmentCountry Club Ltd did not charge GST in respect of thesale of membership shares to Holdings, and Holdings didnot receive an input tax credit in respect of that sale.

Holdings did not charge GST on the sale of themembership share to the public because Holdingsbelieved that the on-sale of the membership shares was anexempt supply for GST purposes.

The Commissioner contended that the supply was acomposite supply of club membership. Alternatively, theCommissioner contended if the supply was not acomposite supply, then there were multiple suppliesconsisting of an equity share (exempt supply) and a clubmembership (taxable supply).

GHD Ltd contended there was a single supply of themembership shares and the consideration paid was forshares and not the membership rights.

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The issue was whether the supply of membership sharesin a golf and country club were an exempt supply forGST purposes, by reason of being the supply of financialservices in the form of either equity securities orparticipatory securities.

DecisionBaragwanath J found the supply of membership shareswas the supply of an equity security, and thereforeexempt for GST purposes. Because His Honour foundthis was an equity security, it was not necessary for himto consider the arguments pertaining to participatorysecurities.

His Honour identified some of the features ofmembership (at paragraphs 5, 11-21 and 45), but stated:

�there was no evidence to support the supply ofmore than the shares; the right to membership passednot as a discrete element but as an incident of shareownership.

At paragraph 4, pg 3

Baragwanath J considered the rights attached to eachshare and passing to the purchaser include membership ofthe Club:

The transfer of the member share carries with it theentire bundle of rights which include entitlement touse the Club facilities including the golf course. Thatbundle of rights may be described as entailingmembership of the Club. But such membershiprights inhere in the personal property comprised inthe share which is �a share in the capital of a bodycorporate�. That is Parliament�s definition of whatfalls within the exemption. There is no occasion tolook beyond it.

At paragraph 79, page 32

His Honour found that, in terms of the definition ofequity security, holders of membership shares becameentitled to an interest in or right to share in the capital ofthe body corporate.

Baragwanath J posited the issue in several forms,including:

A lay response to [the] enquiry what was beingsupplied might be, as the Commissioner submits, thatit was membership of the Club provided through thevehicle of a share transfer. A lawyer�s responsemight be, as the plaintiff argues, that it was a chose inaction in the form of a share that carries with it abundle of legal rights which include the right toaccess to Club facilities. Each is correct in fact. Theissue is which is correct in law.

At paragraph 33, page 15

His Honour stated, in distinguishing Court BartonProperty plc v Customs & Excise Commissioners (1985)VATTR 148:

To characterise the present class of transaction as thesupply of country club facilities rather than as a sharesale would infringe the most fundamental principle�of a company�s distinct entity�of the corporate lawwhich Parliamentary counsel, by their reference tothe shares exception, have been at pains to adopt.

At paragraph 62, pp 25-26

His Honour traversed the English authorities before him,and also made comment on the substance and reality test,affirming that in New Zealand, the test as to the truenature of a transaction is to be ascertained by consideringthe legal arrangements actually entered into and carriedout.

The Commissioner has filed an appeal of the decision inthe Court of Appeal.

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TAX AVOIDANCE GST ACTCase: TRA 019/2003

Decision date: 18 July 2003

Act: GST Act 1985

Keywords: Section 76 Tax avoidance arrangement,

SummaryThis case arose because a property /housing developerattempted to take advantage of GST timing differencesbetween the invoice and payments basis which wouldenable the disputant to claim input tax credits withouthaving to return the output tax credits for some 20 years.The effect of this arrangement was to use public moneyto fund the development of $80 million worth of property.This case provides precedent for section 76 of theGST Act.

FactsOn 5 November 1998, the Disputant entered intoconditional agreements with 114 companies (the A Groupof companies) by which it would purchase from each asection of land in a subdivision in which the vendor hadcontractual rights as a conditional purchaser from thedeveloper, W Developments Limited.

Each agreement provided for a purchase price of $70,000,with a deposit of ten dollars to be held by the vendor�ssolicitor as stakeholder, with no other money due untilsettlement.

On 21 May 1999, the A Group of companies entered intoagreements to sell all 114 sections to the taxpayer. Thetotal value of these transactions exceeded $80,000,000.

All agreements had deferred settlement dates, which ingeneral ranged between 10 and 20 years after eachagreement was entered into.

Each agreement provided for a deposit of $30,000,payable by an initial deposit of ten dollars on executionof the agreement with the balance of $29,990 payable onthe later of 20 August 1999 or such other date agreed bythe parties. The disputant has paid the initial $10 depositon each transaction, but nothing more.

Each agreement used the standard form. The formprovides that deposits are held by the recipient asstakeholder until the agreement becomes unconditional.This clause was deleted from all agreements.

Each agreement provided for the relevant A Groupcompany to construct a house to an agreed plan andspecification prior to settlement. The agreed purchaseprice for each contract reflected the improved value ofeach section, and the projected market value atsettlement.

The disputant registered for GST on an invoice basis, andthe A Group of companies were registered on a cashbasis. This meant an input tax deduction could beclaimed by the disputant immediately, but the A Group ofcompanies would not be required to account for GST oneach transaction until settlement funds were received.

In the GST period ended 31 May 1999, the disputantclaimed the input tax credits on the purchase of 13properties. Three of these were existing houses, and theothers were Dominion Road properties. The value ofsupply of each property for GST purposes was the marketvalue of the property at the time the agreement wasentered into.

This method of valuing the supply was based on theagreements for sale and purchase being credit contracts,in terms of a binding private ruling issued by theCommissioner on 15 June 1999. The ruling was to theeffect that each agreement for sale and purchase was acredit contract, and thus pursuant to section 10(5) of theGST Act, the value of the supply was the �cash price� asthat term is defined in the Credit Contracts Act 1981.

In the GST period ended 31 July 1999, the disputantclaimed input tax credits on the purchase of 104properties. Unlike the method used in the period ended31 May 1999, which followed the private binding ruling,the supplies were valued according to the purchase pricespecified in each agreement for sale and purchase. Thismethod meant the total input credit claimed was nearly$9,000,000 instead of just over $3,000,000.

Extracts from the judgment

4. Summary of EvidenceThe judgment goes through the evidence presented insignificant detail at paragraphs 23-100.

The TRA accepted that the disputant was part of a schemeconceived that would enable the disputant beingregistered on the invoice basis to obtain substantialrefunds of GST consequent on the purchase of the 114properties. Further, the sale and purchase agreementswere structured so that the vendor (the A Group ofcompanies) would not be required to give possession forup to 20 years in the future. In the meantime, the vendorscontracted with building companies to develop dwellingson the land.

The price of the property which the disputant agreed topay on settlement included an agreed sum for the value ofall the improvements adjusted upwards to accommodateexpected increases in the price of such properties. TheGST refund claimed is based on this adjusted figure forthe land and buildings payable to the disputant in theGST periods in which the tax invoices are issued.

The 114 vendors being registered on a payments basis arenot required to pay output tax until they receive paymentfor the properties from the disputant. This would notoccur until the agreed settlement date in each case.

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This allows the disputant the timing advantage of the useof the GST input refunds to pay the deposits on eachagreement to the relevant company in the A Group. TheA Group then have the funds to complete the purchase ofthe sections from W Developments Ltd, and along withmortgage finance embark on the building of the houses tofulfil the contracts with the disputant.

The TRA further comments that without the lengthyperiod of mismatch between the GST input refund andany output liability, the scheme is incapable of execution,essentially amounting to the use of public revenues forperiods of up to 20 years.

5 Credit ContractThe TRA held that there is no element of loan in this caseand that the agreements were not credit contracts for thepurposes of either the Credit Contracts Act or the GSTAct.

6 Section 25(4) GST ActThe TRA covers this at paragraphs 120-141 of thejudgment. Inland Revenue considers the result is correcton the cancellation issue. The TRA held:

�GST is a tax on supplies of goods and services embodiedin specific transactions. In this case 114 agreements forsale and purchase of land. Where the agreements arebetween registered persons, as here, section 25(4) providesthat if the contract the subject of the input claim iscancelled, then the purchaser must refund to theCommissioner any input refund paid to the extent that theamount of the refund exceeds the amount of the output taxpayable on the transaction. Hence there is no output taxpayable at the time of supply, and therefore the fullamount of the input which would have been payable to thepurchaser had the contracts not been cancelled must berepaid to the Commissioner or foregone by the purchaserif the refund has not actually been made. See TRAdecision 003/2003 judgment 26 February 2003�.

�In coming to this view I do not overlook the fact that thedisputant paid a $10 deposit in respect of each contract.That is not a supply for the purposes of the GST Act. Thecontracts are not divisible into equitable and legal estates.The �supply� is for all the rights in the plot landcontracted for. Once it is clear that the vendor cannotperform its bargain to convey those rights, then section25(4) supervenes to in effect cancel out any GST refundentitlement of the purchaser. See TRA decision 005/2003judgment 12 March 2003�.

At paragraphs 135 � 139, the TRA discusses therelevance of section 25.

�This argument overlooks section 25. It applies not onlyto contracts which have been cancelled but to those where�The nature of that supply of goods and services has beenfundamentally varied or altered.�

Clearly that is the case here. The nature of the supply tothe disputant has been altered by the fact that to make itgood the vendor must seek to repurchase all of the 114contracts, because it is all of them which are the subject ofthe two GST returns.

That of itself is a �fundamental alteration�. Equally, ifthe vendor is successful in repurchasing only some of theproperties, then the disputant will not be entitled to claimthe GST input refunds it has. It will require amendedreturns (if that is possible) and they will be assessedaccording to their own merits depending upon the preciseterms of any renegotiated contracts for supply. Theamended s.76 will then no doubt become relevant�.

7 Section 76This case applies section 76. The TRA begins bysummarising the circumstances in which the arrangementarose. The TRA accepts that:

� The arrangements were carefully designed to takeadvantage of the mismatch between registration onan invoice and payments basis;

� The centrality to the scheme of the need for thedisputant to secure GST refunds on purchases of$80 million of land where a small company with noassets or income would seek such no doubtexperienced advice, or that some other entity whichhoped to profit from the scheme would do so on itsbehalf;

� The fundamental objective of the scheme was toextract $80 million from the CIR in the form of GSTon the purcahse of the 114 properties.

Application of section 76

The TRA succinctly finds there is an �arrangement� andthat it is �between persons� (paragraphs 160-170).

The judgment goes into more detail on the intent to defeatthe intent and application of the Act. It attempts todistinguish income tax avoidance and GST avoidance onthe basis that with regard to income tax, the taxpayer isalways endeavouring to establish that the transactionshould not be brought to tax, and the CIR that it should.Where there is a GST avoidance arrangement, thetaxpayer is trying to escape paying output tax while beinggranted the input credit.

The TRA recognises that (paragraphs 190-192) �theCourts have held that the intent of the Act in relation tooutputs and inputs is expressed in unequivocal terms.There is no matching symmetry between payment ofoutput tax and deduction of input tax. Each occurs at thetime and in the GST period allowed for by the Act, and atno other time.

This series of transactions has been structured in sucha way so as to ensure that the relevant provisions ofsection 20 apply. There is a liability on the vendor to payoutput tax and there is an entitlement on the part of thepurchaser to claim an input tax refund. The problem forthe revenue base is that it will be many years before theliability to pay the output tax crystalises and in themeantime the disputant being one of the parties to theoverall �plans� will have the use of the inputs and in thatway make the whole series of arrangements financiallypossible.

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This however in my view is an irrelevant consideration.What the disputant taxpayer does with money it receivesby way of an input deduction is entirely a matter for it�.

Subjective

Significantly, the TRA finds that it is the intentions of theparties at the time the arrangement is entered into whichis crucial and that is a �wholly subjective matter�.

In deciding what were the subjective intentions of theparties to the transaction it will be necessary to look at allrelevant circumstances. Each case will turn on its ownfacts, but conventionally one would enquire into:

(a) The relationships of the parties. Are theystrictly at arms length, or is there a degree ofpremeditated collusion in the design of thearrangement?

(b) The significance to the transaction of the GSTconsequences under consideration.

(c) Whether the arrangement is explicable inordinary commercial terms if the contestedGST component is abstracted.

(d) In what way the arrangement defeats theparticular intent and application of the GSTAct which is relevant to the facts.

(e) The identity, relevant experience andfinancial probity of the parties as that toucheson their ability to perform their side of thebargain without the benefit of the contestedGST component.

Viewed in this way the impugned transactions fail onevery count. Thus:

(a) The relationships between Mr A and theoriginal proprietor of the disputant companywere more social than commercial. Thecompany which she formed was to be nomore than a conduit for obtaining the GSTinput refunds.

(b) The arrangement was entirely dependent onobtaining the GST inputs. The disputant hadno ability to pay for any of the landpurchased from its own resources. Similarlywith the input refunds the A Group ofcompanies had no ability to finance thepurchase of the sections which they onsold tothe disputant.

(c) If one removes the input refund from theequation the arrangements are whollyinexplicable in commercial terms. Theycould not and did not come to fruition.

(d) This arrangement defeats the intention of theAct to tax transactions at the time they areentered into by exploiting the mismatcheswhich the Courts have found to exist betweenpayment based and invoice based taxpayers.That served to prevent the application of theAct by denying on the one hand the Crownthe revenue which the Act was designed toexact, and on the other, requiring the Crownto disgorge public monies for private use.

(e) The disputant�s original proprietor had norelevant business experience, and noresources remotely capable of meeting thefinancial obligations undertaken. It isinconceivable that any lending institutionwould have funded the disputant�s purchaseof $80,000,000 worth of property given theidentity, business experience and financialstanding of the original proprietor of thedisputant company, and the assets of thatentity.

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REGULAR FEATURES

DUE DATES REMINDER

September 20035 Employer deductions and employer monthly schedule

Large employers ($100,000 or more PAYE and SSCWT deductions per annum)

� Employer deductions (IR 345) or (IR 346) form and payment due

� Employer monthly schedule (IR 348) due

22 Employer deductions



Employer deductions and employer monthly schedule

Small employers (less than $100,000 PAYE and SSCWT deductions per annum)



30 GST return and payment due

October 20036 Employer deductions and employer monthly schedule




20 Employer deductions



Employer deductions and employer monthly schedule

Small employers (less than $100,000 PAYE and SSCWT deductions per annum)



FBT return and payment due

31 GST return and payment due

These dates are taken from Inland Revenue�s Smart business tax due date calendar 2002 - 2003

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