There has been significant commentary on the Interim Report of the Tax Working Group in recent weeks, primarily focused on a potential capital gains tax and the taxation of retirement savings.

However, an interesting sub-plot is the section of the report addressing tax integrity measures for trusts and small or "closely-held" companies.

In relation to trusts, the report suggests that restrictions may be required in relation to the availability and use of tax losses.

As a matter of policy, tax losses are only able to be carried forward and used by those taxpayers who have borne the economic burden giving rise to the losses.


In the case of a company, this is upheld by the company forfeiting its losses if new shareholders are introduced and the changes in its shareholding exceed a specified percentage.

However, no such rule applies for trusts and cannot apply on an equivalent basis given the difference in legal structure.

The report notes that there is some concern that certain taxpayers may be using this difference to trade in tax losses incurred by trusts.

In relation to closely-held companies, there are some interesting comments made in relation to so-called "dividend avoidance".

The report seems to suggest that even the sale of shares in a company to a related party for a non-taxable capital gain, versus paying that gain to shareholders as a taxable dividend, may be regarded as dividend avoidance in certain cases.

The question will be whether there is any need to extend the existing tax avoidance rules that apply in this context.

There are also comments made in relation to current accounts of closely-held companies.

A current account is essentially an unsecured loan between a shareholder and the company and may give rise to a debt owed to or by the company.


The report notes there is some concern that taxpayers are using current accounts to withdraw funds from companies as non-taxable loan principal rather than as a taxable dividend.

While the loan should be repayable and interest is generally charged if a shareholder owes money to a company, issues can arise if the shareholder does not have the ability or any intention to repay the amount owed and the company has outstanding tax liabilities.

The report recommends that Inland Revenue have the ability to require that a shareholder provide security to Inland Revenue in these circumstances.

These issues will no doubt form part of the more substantive discussion regarding a tax on capital gains but it will be interesting to see what other developments are contained in the Final Report in February beyond the headline issues.

*Greg Neill is a tax partner at Crowe Horwath - Hawke's Bay.

This information is general in nature and readers should seek specialist advice before making financial decisions.