A long, long time ago, a company with tax losses “charged” a related trust over $1m in “management fees”. Eleven years later the High Court upheld the TRA’s decision that the management services were not in fact provided, and the charging of the fees amounted to tax avoidance. Cue shortfall penalties, interest, a huge tax bill, plus legal and court costs.
Let’s take some learnings from this case:
- If you are going to charge for management services, make sure you have someone to actually perform those services
- Agree between the parties, before the event, that services will be charged and what services will be provided (and to whom)
- Evidence, documented at the time of performance, that where an individual is carrying out the services they are doing so for the management company in question (and not another management company within the group)
- Actually charge for the services on a regular basis, including charging GST
- Base the fee on something concrete and commercial such as cost plus; time cost; or percentage of income (but not 100% of income)
- Don’t journal 12 months’ worth of services between the two parties months after year end, and as consecutive entries
- Don’t accumulate prior year management fees into a later year’s charge
- Don’t charge a management fee that just so happens to match to the dollar the payer’s taxable income
- Don’t on-charge management fees when the services were not provided for the benefit of the payer
- Don’t charge management fees for services benefiting the payee’s own company
- Don’t use a company that has never provided management fees before as a one-off charge merely to suck up tax losses before they are extinguished by a share sale
- Don’t expense management fees from your usual management company as well as your “new” management company without showing that the new management company did something more and different
“ In the end, it is difficult not to agree with the Commissioner that, in reality, the management 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 on.” - Justice Rebecca Ellis. Honk Land Trustees Ltd v CIR HC Wellington  NZHC 1316, 17 June 2016
What is acceptable?
- Choosing one entity to be the management company for a group
- Changing who that management company is from time to time, provided it is documented, the services are provided and not a one-off to suck up tax losses
- Charging management fees based on cost plus; a percentage of profit; or on-charging management fees paid with a reasonable but not excessive margin may be acceptable
- Having a management “agreement” that is less than a formal agreement, but you need more than a retrospective charge for undocumented services arguably performed by another party
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