Honourable Mr Dunne, below I have (re)posted a technical submission I made to IRD Policy and Advice (PAD) on 8 November, to which I have now received a reply. You will note in my submission I have made reference to previous advice from IRD Legal and Technical Services (LTS): the problems I had with that advice were the subject of my second submission to PAD, particularly regarding how the Owner’s Basis in the LTC regime is structured around a deductions limitation, not a loss limitation, that will unjustly catch some few taxpayers out in the manner I have stated in my submission, but more importantly, about how that is a mechanism philosophically anathema to a Western nation with the rule of law, and as such it must be fought on principle. To this concern, I have received the following unsatisfactory reply from PAD:
The extract from the LTS reply that you cited on page 1 of your 8 November letter explains the policy rationale for allowing an owner to claim deduction only to the extent of their economic risk. There is nothing further I can add from a policy perspective.
The intention is to measure an individual’s ‘economic amount of risk’ over the lifetime of a business; so overall an individual will be able to claim in deductions only what they have personally funded by taking on an economic risk … I note your comments that the rules are not truly ‘loss limitation’ because in certain circumstances they can lead to taxable income for a shareholder even if the company overall … has made a tax loss … This is the intended outcome of the loss limitation rule. This is in keeping with the policy rationale discussed above, because it indicates that the company’s losses are not being ‘funded’ by that particular owner. In this example, the current rule is operating with the intended policy that their tax deductions should be restricted to their economic loss.’
However, I believe there is a relatively easy solution to this which would put back into LTC’s none of the sense required, but at least in this respect, a little fairness.