Amendments to the Income Tax Act cut back on the loopholes to which=20 firms have become accustomed. Karen Harverson reports
A tax loophole, which effectively meant Inland Revenue made a loan to the=
taxpaying public, has been stopped.=20 This was one of the 1995 amendments to the Income Tax Act, passed in=20 July and reviewed at a Price Waterhouse tax seminar this week. A set of rules has been introduced to regulate the timing of interest paid =
financial instruments such as bonds, and promissory notes . =D2Previously there has been a mismatch between the timing of when the=20 issuer of the instrument deducted the interest incurred on the income=20 instrument and the time when the holder of that instrument was taxed on=20 the income from it,=D3 says Price Waterhouse partner Kevin McManus. The issuer would deduct the interest immediately but the holder of that=20 instrument would often only be taxed on the interest received at a later=20
=D2So, in effect the revenue was losing out on the time value of the money=
payable,=D3 says McManus. Another loophole, now closed, enabled a company to use the tax write-off=20 on the cost of buying an aircraft to reduce its overall tax. Forty percent of the cost could be written off in the first year and the=20 remainder over three years. A similar allowance was available for building=
or buying a ship. =D2Various schemes were devised by certain companies to take advantage of=
this tax incentive, even though they had no use for an aeroplane in their=
mainstream businesses,=D3 says Price Waterhouse partner Fabian Goody. Tax-paying companies exploited the provision by forming a partnership=20 with a non-tax paying organisation which required a plane for its=20 operations, such as a charity providing medical services. Both organisations benefit from the scheme. The tax-paying company=20 deducts the expenditure on the plane from its overall income which will=20 result in it paying less tax overall. The non-tax paying organisation, through the partnership, pays much less=20 for the plane through the use of the tax-paying company=D5s tax capacity. The Act has since been amended to make the incentive less attractive. =20 Now only 20 percent can be written off in the first year and the remainder=
over the next four years. =D2There=D5s still money to be made but it has effectively been reduced by=
half,=D3 says Goody.