英國大學(xué)dissertation Facts or legal arguments in error in the Commissioner's NOPA

Black Carpet Partnership (BCP) is a substantial manufacturer and supplier of asphalt and bitumen. The value of its output is measured in millions of dollars. BCP's business extends over a wide area of the South Island and lower North Island, and which head office for financial and administrative purposes is in Christchurch. During the first half of the 2008 year BCP, on the advice of its lawyers, restructured from a partnership into a company (Black Carpet Limited (BCL)) with subsidiaries for each of its plants, with effect from 1 July 2008. It led to some tax savings for the partners (now directors) of the various companies.

BCP has substantial experience in operating mixing plants; it has carried on its business for over 40 years. A plant of BCP now in issue is a plant situated in Timaru. The particular mixing plant concerned is referred to as "the Timaru plant". The products of Timaru plant are always with high quality, quantity and continuity, which is due to a fairly constant repair, patching and replacement of parts. That is the case for the Timaru plant. And the costs of repair, patching and replacement are increasing year by year. Even though, the Timaru plant faced a great risk of breakdown. The result of breakdown is a disaster for the BCP. In order to avoid this situation and maintain its ordinary output, the partners of BCP decided to overhaul the Timaru plant and made some necessary repairs. The relevant work carried out on the Timaru plant included many parts of work. The tool work took eighteen months starting in January 2007. That is to say, the whole work ended before July 2008.

During July 2009 BCP (now BCL) received a Notice of Proposed Adjustment (NOPA) from the Commissioner of Inland Revenue (CIR) regarding the costs of the project, arguing that all of the costs should be capitalised as they form part of one large project. And the CIR sent a separate letter to BCP/BCL arguing that the restructuring of BCP into a corporate structure (BCL) is tax avoidance on the basis that the tax savings are more than incidental. The Chief Executive Officer (CEO) of BCL, Mr Bit Umen and other directors leave this matter in my CA firm's hands. According with the Income Tax Act 2007 and other laws, as far as our professional experience, we have to point out that there are some mistakes made by the CIR.
First of all, the project of Timaru plant belongs to the BCP, but the BCL. When the project ended, the BCL was in effect. Therefore, the argue of restructure of BCP to BCL is tax avoidance is not based on the facts.

Secondly, after the work of Timaru plant, it was expected that the BCP could continue to produce and supply asphalt of the same grade and same quality as it did previously. There was not any further profit could be gained compared with before. Thus the provisions CIP applied are not suitable.
Thirdly, even there were some parts of the Timaru project not deductible, all of the costs should not be deductible from the NOPA of CIR was not caution enough.#p#分頁標(biāo)題#e#
I will argue these views above in the following contents.

Why you consider the facts or legal arguments in the Commissioner's NOPA are in error

My consideration of the facts or legal arguments in the Commissioner's NOPA are in error based on the the Income Tax Act 2007 and other Case Law.
Section DA 2(1) ITA 2007 denies a deduction for an amount of expenditure or loss to the extent to which it is of a capital nature (unless it is specifically stated to be deductible under Part D or Part E). As we pointed out above, the project of Timaru plant ended at about the end of June 2008, and the BCP became a company of BCL was from July 2008. That is to say, the Timaru project belonged to BCP, but the company of BCL. Thus the project did not have a capital nature.

Mr Umen, the Chief Executive Officer (CEO), who has 18 years experience as an executive or chief executive of BCP, in Board Minutes authorising the work, stated "The plant will have one or two improvements but we will not be producing any more asphalt or bitumen than we are currently." The biggest value of Timaru plant is not its ability to produce, the plant is a marketable asset for the BCP/BCL.

The section DA 2 (1) ITA 2007 clearly provides the meaning of "capital expenditure". Capital expenditure is money spent on (a) acquiring an asset/property or (b) disposing of an asset/property that is no longer advantageous or (c) improving an asset/property to make it more advantageous. To the Timaru project of BCP/BCL, we can see that the expenditure of this project is not fulfil the provisions of "capital expenditure". The Timaru project did not aim at acquiring an asset or property, which was an asset of BCP/BCL all the time; the Timaru plant was also advantageous, the reason to commence the project was the increasing and substantial annual maintenance cost for the Timaru plant, it was not economical.

In fact, the Timaru project is satisfied the general permission in section DA 1ITA 2007 (formerly section BD 2 (1) (b) (i) and (ii) ITA 1994). The general permission includes para (a) and para (b) which in detail provide how a person is allowed a deduction for an amount of expenditure or loss.

(a)incurred by them deriving their assessable income; or their excluded income or a combination of the two; or
(b)incurred by them in the course of carring on a business (for the purpose of deriving their assessable income; or their excluded income or combination of the two).英國大學(xué)dissertation

In accordance with para (a) and para (b), we can find that, the expense of Timaru project was directly relate to the production of the assessable income etc. The Timaru plant was always considered as BCP's flag-ship. The overhaul of the whole plant, as well as the repairs and some necessary replacements are not large enough to constitute a business and incurs expenses in conducting that activity. The whole project was not relate to any particular item of income. In a word, the expense of Timaru project was incurred as part of carrying on the business to earn income. That is to say, the BCP/BCL's Timaru plant project could satisfy either limb of the general permission (para(a) or (b)) to get a deduction. #p#分頁標(biāo)題#e#
Any facts and legal arguments relied on by you

My views and arguments based on the facts of BCP/BCL, and the relevant Income Tax Act 2007, as well as the relevant Case Law.

In determining whether the expense of Timaru Plant Project satisfied the general permission which is found in s DA 1(1) ITA 2007, I referred some available cases. The first one is in Buckley and Young Ltd v CIR [1978] 3 NZTC 61,271 (CA). In the case, the court established two features to s DA 1(1) ITA 2007. The court thought the taxpayer must establish a close nexus between the expense and the income. Compared with the case, we can find that the expenditure of Timaru plant project has necessary relationship both with the taxpayer and the gaining of income or carrying on of a business. And it certainly meets the general permission that we argued above. The tow points were further considered in the case of Buckley and Grieve v CIR (1984) 6 NZTC 61,682, (CA). This case resolved a matter of fact and degree whether there is sufficient nexus (connection) between the expenditure and the resultant income or business. The Timaru plant was considered as flag-ship of BCP/BCL, therefore, the onus to establish the amount is definitely deductible.

In determining the expenditure of the Timaru plant project whether the "capital expenditure" or not, I referred the general limitations in section DA 2 (1) ITA 2007, which is the exclusions of the general permission in s DA 1 ITA 2007 and prohibits some deduction for the expenditure or loss to the taxpayer. The most significant point is to identify whether a payment is capital and not deductible. The most important case in this area is BP Australia Ltd v Commissioner of Taxes [1966] AC 224 (PC). The Privy Council used three criteria in deciding the matter. The three criteria referred the character, the matter and the means of taxpayer's project. Connected with the facts of the Timaru plant, we can argue that, first, the character of the project was not lasting, which ended on the first half of 2008, and the aim of the project was to maintain the current output but further profit making. It is different with the Kemball v Commissioner of Taxes [1932] NZLR 1305 (CA), which gained the enduring benefits from the issued project. Second, although the expenditure of the Timaru project was recurrent, the reason to commence the project was to replace a lasting expenditure of repairing the Timaru plant. The expenditure of Timaru project is not to establish, strengthen or enlarge the business structure, therefore it is not capital. At last, the Timaru project will last for one half and a year, the outlay periodic covering the whole project during this period, and the expenditure was not relate to an identifiable asset. So the expense of the project is deductible. We can take Christchurch Press Co Ltd v CIR (1993) 15 NZTC 10, 2006 for example. In this case, the wages of the taxpayer's maintenance staff were used to install new equipment, thus the expenditures were not deductible.

How the legal arguments apply to the facts#p#分頁標(biāo)題#e#

From the s DA 2 Income Tax Act 2007, we could find some provisions which focus on repairs and maintenance and the capital limitation. For the Timaru plant project, these permission and limitation are very important. Provided expenditure on repairs and maintenance are deductible, the general permission in s DA 1 ITA 2007 must be satisfied first. However, if the expenditure is of a capital nature, no deduction is permitted. As we argued above, the Timaru plant project is not of a capital nature, its repair work involves the replacement or renewal of a worn out or dilapidated part of an asset but not of the whole asset. The purpose of its expense is to maintain the same condition and output of the plant. Therefore, the project is deductible.
We will apply the s DA 2 ITA 2007 to the facts of Timaru project as follows.http://www.ttc-switch.com/dissertation_writing/Law/

For making asphalt the materials of BCP/BCL generally are bulky, heavy and have a high scouring effect when separate or together, so there is a very high wear factor associated with the handling and mixing of the various materials. The expenditure with such purpose is not over and above making good wear and tear, thus it is not capital expense and deductible.

The produce process of Timaru plant may have the effect of clogging and wearing electrical circuitry and switches. The truck used to bring raw materials, the pits at ground level used to stored the raw materials and the conveyor, high level holding bins are all necessary for the asphalt production. Because the wear and tear on a mixing plant is such that there is a fairly constant repair, patching and replacement of parts, it satisfies the general permission of s DA 1 ITA 2007 and the repairs and maintenance of the general limitation of s DA 2 ITA 2007. In particular, the Timaru project would not produces an enduring benefit, it is just to maintain the same quality and quantity as before. Therefore, it is also not related to an identifiable asset.

Usually, the courts adopt a three-step to determine the nature of expenditure. We shall adopt the same three-step to examine whether the Timaru plant is with capital nature or not.

At first, we should identify the Timaru plant project to which the work is being done. The overhaul and repairing work for the Timaru plant is not a distinct physical unit which can function on its own. Every parts of the project, even it may refer to some physical assets, eg a building, it is a part of the whole project and it can not function on its own too.
Secondly, the extent of the project on the Timaru plant is to repair or replace worn out or dilapidated part, not to build a new asset to replace the former one.
Thirdly, the scale, the function, the size and layout of the Timaru plant are still the same; the work is not a reconstruction or replacement of the Timaru plant, but to reconstruct or replace some parts of the Timaru plant; the result of the project did not have a significant improvement in the Timaru plant, it maintain its original condition.

From the analysis above, the conclusion is easily to made, that is, the Timaru plant project is not with capital nature. We can refer to case of Auckland Gas Company Ltd v CIR (2000) 19 NZTC 15,702. The case is not the same as the Timaru plant project, but it is an evidence of the analysis mentioned above. The difference between the two cases is that, in the former one the Timaru plant is the "asset", and in the latter one the "asset" is the exsiting gas network.#p#分頁標(biāo)題#e#

The quantitative adjustments that result to the Commissioner's NOPA

In a word, as far as I am concerned, the Timaru project expenditure is deductible under s DA 1 (1) ITA 2007. Its expenditure is also not capital expenditure under s DA 2(1) ITA 2007.

he quantitative adjustments that result to the Commissioner's NOPA may come from some misunderstanding with the character, the manner and the means of the Timaru plant project. Besides, the restructure from BCP to BCL may result to some misunderstanding too. Therefore, my CA firm has been engaged by Mr Bit Umen to review BCP's and BCL's tax returns and draft a response on the BCP's and BCL's behalf. Hoping this NOR may work in determining whether the company is tax avoidance or not.