Dunedin tax specialist Scott Mason is warning tax-dodgers that a decision by the Taxation Review Authority has wide implications for many people in Otago.
The case involved a young widow with a leaky home who used a loss-attributing qualifying company (LAQC) to get a tax deduction for the cost of her own home.
Much has been made of the plight of the young woman "Mrs B" but Mr Mason said some practitioners had been quite active in setting up LAQCs to hold their clients' homes.
"This has always been tax avoidance in my mind. This case merely confirms it.
"The worst cases I have seen in Dunedin are where people have transferred existing homes to LAQCs, or even their trading companies, under advice, to get a tax advantage. This is generally indefensible as it is changing an existing structure for the purpose of avoiding tax."
The latest case extended that principle in that the new home of Mrs B was acquired by the LAQC from unrelated parties.
The key driver was still to turn private domestic expenditure into a deductible loss by way of the company making a loss from rental activities, then attributing that loss to the shareholders via the LAQC regime, he said.
The authority concluded that was also tax avoidance, in line with the published IRD view.
The decision was not surprising.
The LAQC regime was established to encourage small business owners, who had been trading in a partnership, to trade as a company.
If people traded as partners, they had unlimited liability.
If something when wrong, their personal assets were on the line, Mr Mason said.
With the LAQC, it was a half-way house.
Any losses could be accessed by the partnership, where in a company structure they could only be accessed by the company.
"It's a complex regime.
People get it wrong all the time."
Both taxpayers and the advisers recommending those sorts of transactions should be concerned, Mr Mason said.
"The IRD probably knows who they are given data collected and access to electronic databases such as land registry.
"My advice to them is to get independent support and consider voluntary disclosures to the IRD.
"At least there is a chance to mitigate penalties if the taxpayer gets in first."
However, it was not only advisers putting their clients into LAQCs, he said.
People talking about it with friends in the pub were often putting themselves into a LAQC.
The question was a matter of where the boundary sat, Mr Mason said.
He would still argue that if an LAQC held several properties and one became vacant, then if one of the shareholders - or an associate person - moved into it temporarily and paid market rent, that was unlikely to be tax avoidance, in the absence of any intention to avoid tax.
