Question

ANTI-AVOIDANCE PROVISIONS

Access and examine section 17 of the Income Tax Act of Jamaica, then perform the following tasks:

1. Distinguish between a fictitious transaction and an artificial transaction

2. Outline the anti-avoidance provisions as they relate to: • the transfer of property to a child, a trust, or a connected person • dealings in security

Answer 1

1.  Distinguish between a fictitious transaction and an artificial transaction.

Ans: “ ‘Artificial’ is an adjective which is in general use in the English language. It is not a term of legal art; it is capable of bearing a variety of meanings according to the context in which it is used…their Lordships reject the trustees’ first contention that its use by the draftsmen of the subsection is pleonastic, that is, a mere synonym for ‘fictitious’. A fictitious transaction is one which those who are ostensibly the parties to it never intended should be carried out.   ‘Artificial’ as descriptive of transaction is, in their Lordships’ view a word of wider import. Where in a provision of a statute an ordinary English word is used, it is neither necessary nor wise for a court of construction to attempt to lay down in substitution for it, some paraphrase which would be of general application to all cases arising under the provision to be construed.”

“…in this context a transaction is “artificial” if it has, as compared with normal transactions of an ostensibly similar type, features that are abnormal and appear to be part of a plan. They are the sort of features of which a well-informed bystander might say, “This simply would not happen in the real world.” Recognising a transaction as artificial in this sense is an evaluative exercise calling for legal experience and judgment. It is certainly not an ordinary question of primary fact… A transaction is not artificial merely because it is not commercial, or not fully commercial. Income tax affects transactions by way of bounty as well as commercial transactions. But if a transaction effected in a commercial context is attacked as uncommercial that may be a reason for looking at it closely.   To repeat what Lord Diplock said in the passage quoted above, it is necessary to examine the particular transaction and the circumstances in which it was made and carried out.”

2. Outline the anti-avoidance provisions as they relate to: • the transfer of property to a child, a trust, or a connected person • dealings in security.

Ans: The transfer of property to a child : Where a person transfers property to his child, either directly or indirectly, or through the intervention of a trust or by any other means whatsoever, such person shall, nevertheless, during the period of the minority of the child, be liable to be taxed on the income derived from such property, or from property substituted therefor, as if such transfer had not been made, and subsequent to such period of minority, the transferor shall continue to be taxed in respect of the income derived from such property, or from property substituted therefor, as if such transfer had not been made, unless the Commissioner is satisfied that such transfer was not made for the purpose of evading the taxes imposed under this Act.

A trust, or a connected person: Where by virtue of subsection (2), any income tax becomes chargeable on and is paid by the person by whom a transfer of any property was made, and the Commissioner is satisfied that such transfer was not made for the purpose of evading the tax imposed under this Act, that person shall be entitled-

   (i)   to recover from any trustee or other person to whom the income is payable by virtue or in consequence of the transfer the amount of the tax so paid; and

   (ii)   for that purpose to require the Commissioner to furnish to him a certificate specifying the amount of income in respect of which he has so paid tax and the amount of tax so paid, and any certificate so furnished shall be conclusive evidence of the facts appearing thereby.

   (b) Where any person obtains in respect of any allowance or relief a repayment of income tax in excess of the amount of the repayment to which he would but for the provisions of this subsection have been entitled, an amount equal to the excess shall be paid by him to the trustee or other person to whom the income is payable by virtue or in consequence of any such transfer of property as aforesaid, or, where there are two or more such persons shall be apportioned among those persons as the case may require.

   (4) Where a person transfers property in trust and provides that the corpus of the trust shall revert either to the donor or to such persons as he may determine at future date, or where a trust provides that during the lifetime of the donor no disposition or other dealing with the trust property shall be made without the consent, written or otherwise, of the donor, such person shall nevertheless be liable to be taxed on the income derived from the property transferred in trust, or from property substituted therefor, as if such transfer had not been made.

   (5) Any income which is deemed by virtue of this section to be the income of any person shall be deemed to be the highest part of his income.

   (6) Nothing contained in this section shall be deemed to prevent a decision of the Commissioner, made in the exercise of any discretion given to him by this section, from being questioned in any appeal against an assessment under the provisions of this Act.

   (7) For the purposes of this section the expression "disposition" includes any settlement, trust, covenant, agreement, arrangement or transfer of assets, and "child" includes a stepchild, an adopted child or an illegitimate child.

Dealings in security:(1) Where- (a)   in any such circumstances as are mentioned in subsection (2); and

   (b)   in consequence of a transaction in securities or of the combined effect of two or more such transactions,

a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fidecommercial reasons or in the ordinary course of making or managing investments, and that none of them had as their object, or one of their objects' to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions.

   (2) The circumstances mentioned in subsection (1) are that-

   (a)   in connection with the distribution of profits of a company, or in connection with the sale or purchase of securities, being a sale or purchase followed by the purchase or sale of the same or other securities, the person in question, being entitled (by reason of any exemption from tax or by the setting off of losses against profits or income) to recover tax in respect of dividends received by him, receives an abnormal amount by way of dividend; or

   (b)    in connection with the distribution of profits of a company or any such sale or purchase as aforesaid the person in question becomes entitled, in respect of securities held or sold by him, or in respect of securities formerly held by him (whether sold by him or not), to a deduction in computing profits or gams by reason of a fall in the value of the securities resulting from the payment of a dividend thereon or from any other dealing with any assets of a company; or

   (c)   the person in question receives, in consequence of a transaction whereby any other person-

         (i)   subsequently receives, or has received, an abnormal amount by way of dividend; or

         (ii)   subsequently becomes entitled, or has become entitled, to a deduction as mentioned in paragraph (b),

      a consideration which either is, or represents the value of, assets which are (or apart from anything done by the company in question would have been) available for distribution by way of dividend or is received in respect of future receipts of the company or is, or represents the value of, trading stock of the company, and the said person so receives the consideration that he does not pay or bear tax on it as income.

   In this subsection-

   (i)   references to profits include references to income, reserves or other assets;

   (ii)   references to distribution include references to transfer or realisation including application in discharge of liabilities); and

   (ii)   references to the receipt of consideration include references to the receipt of any money or money's worth,

but the assets mentioned in paragraph (c) do not include assets which (while of a description which under the law of the country in which the company is incorporated is available for distribution by way of dividend) are shown to represent a return of sums paid by subscribers on the issue of securities.