MOSHI CO-OPERATIVE UNIVERSITY

(MoCU).
FACULTY : FCCD

PROGRAMME : BA-AF III

COURSE : PUBLIC FINANCE AND TAXATION II

COURSE ANTE : BMF 306

COURSE INSTRUCTOR : TOWO (Mr. S)

NAME : EMMANUEL C. MAKIRITA

REGISTRATION NO. : MoCU/BA-AF/1368/12

TASK : INDIVIDUAL ASSIGNMENT

SUBMISSION DATE : 5TH/JANUARY/2015

QUESTIONS;

1. With relevant examples, explain the principal methods of avoiding tax by

taxpayers.

2. With relevant sections in the ITA 2008, explain the statutory mechanism set
for preventing both tax avoidance and tax evasion in Tanzania.

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QUESTION ONE

A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity)
by a state or the functional equivalent of a state such that failure to pay, or evasion of or
resistance to collection, is punishable by law. Taxes are also imposed by many administrative
divisions. Taxes consist of direct or indirect taxes and may be paid in money or as its labour
equivalent.

Tax avoidance is the practice and technique whereby one so arranges his business affairs such
that he pays little or no tax at all but without contravention of the tax laws. Tax avoidance takes
advantage of any loopholes and weaknesses, deficiencies and loose or vague clauses in the tax
legislations to minimize or eliminate tax liability altogether. Tax avoidance is not punishable in
law. Where the tax authorities detect the practice, the only solution is to amend the law in order
to plug the loopholes and weaknesses in the laws that allow the possibility of tax avoidance. It is
for this reason that the practice of tax avoidance is sometimes considered as legally
allowed. However, this does not mean that the tax authorities will allow the practice. For
example, the taxpayer who claims the maximum permissible deductions in any particular year(s)
of income such as through acquisition of assets that allow the highest capital deductions (e.g.
clearing or clearing and planting permanent or semi-permanent crops, acquisition of class I or
class 8 assets for depreciable allowances/wear and tear purposes etc.) constitute tax avoidance.
Similarly, there is no law that prevents anyone from changing his business organization from a
sole proprietorship into a partnership or limited liability company. Whereas tax consideration
may influence the change in the form of business organization, there may be other good reasons
to justify the change such as the need to raise more capital for business expansion or attract
necessary skills etc. It may also constitute legitimate tax planning where assets are leased instead
of ownership because the higher lease rent is allowable over a shorter period instead of the
smaller amount of depreciation allowance claims over a longer period of time. In all these cases
there is no contravention of any law. The taxpayer merely looks at the existing legal framework
to structure his business transactions to realize the maximum tax saving. OR

Tax avoidance is the legal act of minimizing one's taxes. It is not the same as tax evasion. How
it works/Example: Practically every taxpayer engages in tax avoidance at some point in order to

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minimize his or her tax bill. For example, taxpayers who contribute to Individual Retirement
Accounts (IRAs) before the April 15 tax deadline are engaging in tax avoidance because those
contributions are deductible and thus lower their tax bills. Similarly, charitable contributions are
tax-deductible and thus another way that taxpayers can lower their tax bills.

EXAMPLE OF TAX AVOIDANCE

TRA gave vivid examples of tax avoidance like issues of transfer pricing done by multinational
corporations. All sectors are affected but mostly agriculture, tourism and mining are leading. An
example of a mining company which was declaring losses to be discovered to be making profit
to the tune of USD 330m was made. Discovery was done after a forensic investigation. Exporters
of tobacco, cashew and coffee are all involved in tax avoidance schemes through under
declaration of selling prices. Case studies were presented to the PAC. Telecommunication
companies were mentioned as serial loss making facilitated by tax avoidance schemes including
management contracts as well as technical services agreements entered with related companies.

Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts. Tax evasion
often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax
authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less
income, profits or gains than the amounts actually earned, or overstating deductions. Tax evasion
is an activity commonly associated with the informal economy. One measure of the extent of tax
evasion (the "tax gap") is the amount of unreported income, which is the difference between the
amount of income that should be reported to the tax authorities and the actual amount reported.

Tax evasion is the act of illegally avoiding tax liability. Tax evasion is a felony. Section 7201 of
the Internal Revenue Code states, "Any person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties
provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both,
together with the costs of prosecution."

For example, let's say that John wants to lower his tax bill. On his Form 1040, he claims a $500
deduction for charitable donation of goods that he did not actually donate, he neglects to report

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$6,000 of income he made in cash from giving piano lessons and he does not report income he
received from an offshore bank account. John is committing tax evasion

Facilitating factors for tax avoidance and tax evasion

INVESTOPEDIA EXPLAINS 'Tax Avoidance'

Most taxpayers use some forms of tax avoidance. For example, individuals who contribute to
employer-sponsored retirement plans with pre-tax funds are engaging in tax avoidance because
the amount of taxes paid on the funds when they are withdrawn is usually less than the amount
that the individual would owe today. Furthermore, retirement plans allow taxpayers to defer
paying taxes until a much later date, which allows their savings to grow at a faster rate.

The following are basic methods of avoidance of tax by tax payer.

Postponement of capital gains. The first method is a modification of the familiar technique of
postponing the realization of capital gains, which gives rise to the locked in effect. It is based on
two aspects of the tax code: capital gains are taxed only upon realization, and there is a step up in
basis at death. To avoid taxes and any change in the pattern of risk bearing or consumption, the
individual sells shortly a perfectly correlated security at precisely the same moment that he

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would have, in the absence of taxation, sold the given security. The individual's (net) portfolio
positions and income flows are then identical to what they would have otherwise been; but
because no capital gain has been realized, no capital gain tax liability has been incurred. It is thus
apparent how an individual can risk avoid paying capital gains taxes. But he can do still better
for himself. Assume that at any date, the individual buys a security and sells a perfectly
correlated (set of) security (securities) short. Again, the individual's net portfolio position is
unchanged. At the end of the year, one asset will have increased in value, the other decreased;
the individual sells the latter, using the loss to offset other income. At the same time, the
individual finds some other security (or linear combination of securities) which is perfectly
(positively or negatively) correlated, and takes an offsetting position in that security. Thus, again,
the individual has been able to avoid all risk (since throughout, his net position in the set of
perfectly correlated securities remains zero). But now he has succeeded in obtaining losses,
which he can use to offset against other income. When the individual dies, his heirs close out his
positions; with the step up in basis, no tax liabilities become due. objections to this method that
are commonly raised are that it ignores the consequences of limitations on loss offsets and wash
sales.

Arbitraging between short term and long term capital gains rates. The previous method of
tax avoidance took advantage of the fact that capital gains are only taxed upon realization; it did
not take advantage of the lower rates which are afforded capital gains. The second method does.
But while optimal portfolio strategies in the previous method exhibited the "locked in effect",
with this method they do not. Individuals again purchase and sell short two perfectly correlated
securities, so that the net position in the two assets together remains zero; no risk has been
incurred. The major objection to this method is that it ignores the special provisions by which
long term gains are used to offset short term losses. This objection can be overcome, if there are
methods by which ordinary income (losses) can be converted into (short term) capital gains.
There are several methods by which this can be done. For instance, in the options market, some
of the capital gains that one attains may be an implicit interest return; that is, a person can engage
in a set of transactions which involves borrowing and buying options, which is perfectly risk but
which generates an interest deduction and a short term capital gain.

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Indebtedness. The third method takes advantage of the differential treatment afforded long term
capital gains and interest. From an economic point of view, interest and capital gains are simply
two alternative forms of return on capital; there would be no reason to differentiate among them.
For example, if there were no uncertainty about changes in the price of gold. An exhaustible
natural resource like gold should have its price rise at the rate of interest. All of the returns,
however, are realized in the form of capital gains. If an individual borrows to purchase gold, then
his interest would be deductible against ordinary income, his capital gains taxed at favorable
rates. With a perfect capital market, there would be no reason that the bank would not lend to the
individual: he could simply put up the gold as collateral, and there would thus be no risk to either
party. To implement this method, there need not exist a perfectly sale asset; all that is required is
that there exists an asset(or a linear combination of assets) which yield a strictly positive return
in all states of nature, and that one can issue an option to divest oneself of all the risk associated
with returns in excess of the minimum return.

A company may choose to avoid taxes by establishing their company or subsidiaries in an

offshore jurisdiction. Individuals may also avoid tax by moving their tax residence to a tax
haven, such as Monaco, or by becoming a perpetual traveler. They may also reduce their tax by
moving to a country with lower tax rates.

Double taxation. Most countries impose taxes on income earned or gains realized within that
country regardless of the country of residence of the person or firm. Most countries have entered
into bilateral double taxation treaties with many other countries to avoid taxing nonresidents
twice—once where the income is earned and again in the country of residence (and perhaps, for
U.S. citizens, taxed yet again in the country of citizenship)—however, there are relatively few
double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not
enough to simply move one's assets to a tax haven. One must also personally move to a tax
haven (and, for U.S. citizens, renounce one's citizenship) to avoid tax.

Legal entities. Without changing country of residence (or, if a U.S. citizen, giving up one's
citizenship), personal taxation may be legally avoided by the creation of a separate legal entity to
which one's property is donated. The separate legal entity is often a company, trust, or
foundation. These may also be located offshore, such as in the case of many private foundations.

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Assets are transferred to the new company or trust so that gains may be realized, or income
earned, within this legal entity rather than earned by the original owner. If assets are later
transferred back to an individual, then capital gains taxes would apply on all profits. Also income
tax would still be due on any salary or dividend drawn from the legal entity. For a settlor (creator
of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the
trust. For example, the settlor of the trust may not be allowed to be a trustee or even a beneficiary
and may thus lose control of the assets transferred and/or may be unable to benefit from them.

Legal vagueness. Tax results depend on definitions of legal terms which are usually vague. For
example, vagueness of the distinction between "business expenses" and "personal expenses" is of
much concern for taxpayers and tax authorities. More generally, any term of tax law has a vague
penumbra, and is a potential source of tax avoidance.

Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax
liability. Although things such as home ownership, pension plans, and Individual Retirement
Accounts (IRAs) can be broadly considered "tax shelters", insofar as funds in them are not taxed,
provided that they are held within the Individual Retirement Account for the required amount of
time, the term "tax shelter" was originally used to describe primarily certain investments made in
the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue
Service to be abusive.

The Internal Revenue Service and the United States Department of Justice have recently teamed
up to crack down on abusive tax shelters. In 2003 the Senate's Permanent Subcommittee on
Investigations held hearings about tax shelters which are entitled U.S. tax shelter industry: the
role of accountants, lawyers, and financial professionals. Many of these tax shelters were
designed and provided by accountants at the large American accounting firms.

Examples of U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and
Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting
firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions."

Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real
estate investment ventures) were allowed to use the passive losses (if any) of the partnership (i.e.,

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losses generated by partnership operations in which the investor took no material active part) to
offset the investors' income, lowering the amount of income tax that otherwise would be owed
by the investor. These partnerships could be structured so that an investor in a high tax bracket
could obtain a net economic benefit from partnership-generated passive losses.

In the Tax Reform Act of 1986 the U.S. Congress introduced the limitation (under 26
U.S.C. § 469) on the deduction of passive losses and the use of passive activity tax credits. The
1986 Act also changed the "at risk" loss rules of 26 U.S.C. § 465. Coupled with the hobby loss
rules (26 U.S.C. § 183), the changes greatly reduced tax avoidance by taxpayers engaged in
activities only to generate deductible losses.

Transfer mispricing. Fraudulent transfer pricing, sometimes called transfer mispricing, also
known as transfer pricing manipulation,[11] refers to trade between related parties at prices meant
to manipulate markets or to deceive tax authorities.

For example, if company A, a food grower in Africa, processes its produce through three
subsidiaries: X (in Africa), Y (in a tax haven, usually offshore financial centers) and Z (in the
United States). Now, Company X sells its product to Company Y at an artificially low price,
resulting in a low profit and a low tax for Company X based in Africa. Company Y then sells the
product to Company Z at an artificially high price, almost as high as the retail price at which
Company Z would sell the final product in the U.S.. Company Z, as a result, would report a low
profit and, therefore, a low tax. About 60% of capital flight from Africa is from improper
transfer pricing.[12] Such capital flight from the developing world is estimated at ten times the
size of aid it receives and twice the debt service it pays.[13][14]

The African Union reports estimates that about 30% of Sub-Saharan Africa's GDP has been
moved to tax havens.[15] Solutions include corporate “country-by-country reporting” where
corporations disclose activities in each country and thereby prohibit the use of tax havens where
real economic activity occurs

There is a distinction between tax evasion and tax avoidance. Tax evasion is using illegal means
to reduce or eliminate tax liabilities, while tax avoidance involves tax planning and strategy to
legally reduce or eliminate tax liabilities, according to the Legal Match website. The IRS

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encourages taxpayers to pursue every opportunity for legitimate deductions. There are three main
options to avoid or minimize taxes: income deferral, tax deductions and charitable contributions.
For small businesses there are even more opportunities to avoid taxes.
( http://www.ehow.com/list_6691986_ten-tips-legal-tax-avoidance.html)

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Income Deferral. Income deferral means postponing the receipt of income until after the close
of the tax year. It is difficult but not impossible for individuals to postpone income. Employees
anticipating end-of-year bonuses can check with their employers to see if it is possible to delay
the payment until after Dec. 31.

Tax Deductions. Take advantage of all possible deductions from your personal taxes, advises
Legal Match. These include casualty or theft losses. If the loss is substantial enough, you might
be able to write off a large portion of it from your taxable liabilities. You also can write off
interest expenses, like mortgage interest or student loan interest payments. You can write off
medical and dental expenses including co-pays, prescriptions and some insurance plans.
Miscellaneous itemized deductions include tax preparation fees, the costs of a safety deposit box
holding financial documents, union dues and subscriptions.

Charitable Contributions. Charitable deductions include cash contributions to charities, non-

cash contributions (clothing, furniture and appliances) and mileage driven for charitable acts.
These contributions in total should not exceed half your adjusted gross income. Charitable
contributions are one of the few ways individuals can control the timing of deductions. A large
contribution made on Dec. 31 counts on that tax year.(http://www.ehow.com/list_6691986_ten-
tips-legal-tax-avoidance.html) Recent weeks have seen a spate of stories about wealthy
individuals trying to reduce their tax bills (much to George Osborne's surprise). The latest
features a film investment scheme, Eclipse 35, on which HMRC refused to pay tax relief – bad
news for some famous names, according to reports. But other people have been more successful
in their attempts to pay less tax. So how exactly do they do it? Here are few of the common
methods used to cut the amount that ends up in the taxman's coffers.

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Start a company. Why pay tax at 50%, or even 40%, when by channelling all your earnings into
a company you can avoid income tax altogether? First you set up a company to receive your
earnings, then you pay yourself – and possibly a partner – an annual dividend of just below the
40% tax threshold, currently £42,475. Let the rest of your earnings build up, then after two or
three years liquidate the company and tax the rest out. You won't avoid tax entirely. You will pay
20% on the company's profits – in this case everything going into the company, and 10%
"entrepreneur's tax" on the amount left in the trading company when it is liquidated. But say your
take home pay was £200,000 a year over the three years, your bill would be substantially lower
than had you taken the lot as income. If you received £200,000 direct into your bank account,
you would pay just over £78,000 in income tax. If that sum was paid into a company you would
pay 20% tax on the whole amount (£40,000). You could then take £42,000 out as a dividend
without paying tax, as long as it was your only income. Get your partner to do the same and you
have withdrawn £84,000. This leaves £76,000 in the company when it is liquidated, on which
you pay tax at 10% (£7,600). In total you have paid £47,600 – cutting your tax bill by more than
£30,000.

Employ your partner. We each have a personal allowance on which we don't pay any tax, then
set amounts we can earn at different tax levels. If you own a business, employing your partner
can help you spread some of the income you take from it to take advantage of two tax
allowances. Instead of paying yourself £100,000 out of your business and paying tax at 40% on
everything above £42,475 a year – a tax bill of £23,010 – you could employ your partner and
both receive a salary of £50,000. That would mean a 40% tax levied against just £15,050 instead
of £57,525, which gives a tax bill of £6,020. If your income from the company was £190,000,
splitting it would get you back your personal allowance, which is phased out on earnings above
£100,000, and also let you use your partner's. Taking £95,000 each would remove any of your
income from the current 50% rate and let you reduce your total tax bill from £73,125 to £55,768.

Don't take an income. "It's very hard once income has arisen to not pay tax on that income,"
Henderson says. "The super-wealthy can arrange their affairs so an income doesn't arise in a
certain year." Selling assets and realising capital gains could give you a source of cash if you
needed it, and careful planning so losses in previous years offset any gains could help reduce
your capital gains tax bill.

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Make an investment. A number of tax reliefs exist to encourage investment in things like films
and small businesses, and these can be used by the wealthy to cut their tax bill. The schemes
offer upfront tax relief on your investment. Through the Enterprise Investment Scheme (EIS) you
get relief on 30% of the amount you invest, up to a maximum of £150,000 a year. As long as
there is a profit the scheme will pay out a dividend each year, which could be subject to tax if
you earn enough elsewhere. Some investors set up their affairs so they take a loan to invest in the
EIS and use the dividend to repay that loan. "Say you got a £1m bonus, you could borrow the
same amount and put that into an EIS," Nash says. "That would give you tax relief of £300,000.
The loan could then be repaid from your dividends from the scheme." It's risky, which is why the
tax relief is offered to incentivize investment, but you could avoid paying £150,000 to the
taxman.

Make a loss. There are lots of losses that can be offset against income or capital gains to reduce
your tax bill. Any good accountant will help their clients minimize their tax bill by finding
legitimate losses they can use in this way, but some of the more "aggressive" tax avoidance
schemes look for ways to make artificial losses. One that was recently closed down by HMRC
involved ownership of agricultural land. There was no real business and transactions were done
simply to create losses, which investors could use to reduce their tax liability.

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Give to charity. This is one of the strategies the government is planning to crack down on,
although its plans have attracted controversy and could be watered down as a result. Currently, if
you give assets to charity you can claim income tax relief up to their entire value. The
government's own Direction website gives an example of how donating a property worth
£90,000 to charity allows you to avoid paying tax on the same amount. In this case you are
obviously losing the asset, but you are reducing your taxable income. Give enough away and you
could reduce your taxable income to zero. There is a way to keep hold of the asset and reduce
your income. If you have a freehold property you could grant a lease on it and give that to the
charity. For example, if you grant an eight-year lease the charity holds the property for the term
of that lease and benefits from any rental income during that period, but at the end of the lease
the property reverts to your ownership. You won't get tax relief on the value of the freehold
property, but on the value of the lease – in London that kind of lease on a £1m house could be
worth £50,000.From April 2013, the government wants to reduce the amount of tax relief
individuals can claim from charitable donations to £50,000 a year or 25% of their income,
whichever is higher. Someone earning £8m a year, therefore, could still get tax relief on up to
£2m of donations.

Leave the country. This isn't as easy as it was, as you will need to be out of the country for at
least five years before you can escape capital gains tax on assets held in the UK. If you work for
a complete tax year outside the UK you will no longer be liable for most UK taxes, but will be
taxed on some income arising in the UK such as rental income.

Put your money offshore. Investment schemes exist that let you hold money in an offshore fund
and roll-up the interest you earn on it. You will have to pay tax when you eventually withdraw
the money, but in the meantime you can withdraw 5% a year without a tax liability. You can
choose when you realize your investment, so you can plan it to fall when you are a basic rate
rather than a high rate taxpayer. This article was amended on 25 April 2012. The original said
investing £1m in an EIS scheme would give tax relief on £300,000 of earnings. This has been
corrected.
So Government policy towards tax avoidance and evasion
On the basis of the above negative implications arising from tax avoidance and evasion the
government policy will fight against and discourage both practices of tax avoidance and evasion

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(e.g. s. 33 to s.35 – tax avoidance arrangements). Some other provisions against tax avoidance
and evasion are under sections 98 to 124 of the ITA 2004. The other tax policy tool particularly
against tax avoidance is to enact timely amendments of pensive of the tax acts wherever it is
detected those certain provisions of the law allow tax avoidance in a major scale. The timely
amendment of the law is in the nature of preventive tax maintenance to pre-empt possible
avoidance and evasion. Same of way of reduce are; Limit or remove the legal standing of –
blacklist – companies or ownership from jurisdictions with cannibalistic tax and secrecy regimes
(with "restricted" and "banned" categories). Restrict qualifying criteria for offshore and
residency statuses.  Overseas ("offshore") ownership should be substantive not nominal; "non-
domicile" status limited and finite in time; and "non-resident" status exclude those with lives,
businesses or wealth in essence in or derived from the UK.  

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Question Two.
Government policy towards tax avoidance and evasion
Normally when there tax avoidance and evasion the government should take a measure to
minimize it because it cannot be eliminated so should make a measure which will fight against
and discourage both practices of tax avoidance and evasion (for example. sections. 33 to 35 – tax
avoidance arrangements). Some other provisions against tax avoidance and evasion are under
sections 98 to 124 of the ITA 2004. The other tax policy tool particularly against tax avoidance is
to enact timely amendments of pensive of the tax acts wherever it is detected those certain
provisions of the law allow tax avoidance in a major scale. The timely amendment of the law is
in the nature of preventive tax maintenance to pre-empt possible avoidance and evasion.

Under provision of ITA 2004.

Section 35; Tax avoidance arrangements.
35.-(1) Notwithstanding anything in this Act, where the Commissioner is of the opinion that an
arrangement is a tax avoidance arrangement, he may by notice in writing make such adjustments
as regards a person's or persons 'liability to tax (or lack thereof) as the Commissioner thinks
appropriate to counteract any avoidance or reduction of liability to tax that might result if the
adjustments were not made. So this section empower the commissioner to make adjustment to
any arrangement where he is of the opinion that the arrangement it Tax avoidance arrangement
who is to be the payee of the payment and the payer, an associate of the payer or a third person
under an arrangement with the payer or with an associate of the payer intends the payment to
benefit the person.
(2) Where this subsection applies, the Commissioner may, by practice note generally or by notice
in writing served on the person –
(a) Treat the person as the payee of the payment;
(b) Treat the person as the payer of the payment; or
(c) Treat the person as the payee of the payment and as making an equal payment to the person
who would be considered the payee of the payment if this subsection were ignored.
So under this section Commissioner is empowered to adjust payment arrangement between
associate that the difficult to identify.

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Section 98.Penalty for failure to maintain documents or file, statement or return of income
(1)A person who fails to
(a) Maintain proper documents for a year of income as required by subsection80 (1);
(b) File an estimated for a year of income required by section 89(1); or
(c) file a return of income for a year of income as required by
section 91(1), shall be liable for a penalty for each month and part of a m o n t h during which
the failure continues calculated as the higher of -
( d ) 2.5 percent of the difference between the income tax payable by the person for the year of
income under section 3(1)(a) and (b) and the amount of that income tax that has been paid by the
start of the month; or
(e) Tshs.10, 000 in the case of an individual or TShs. 100,000 in the case of a corporation.
Section 99 Penalty for making false misleading statement

Section 12(2) Ant-Thin capitalization provision:

(2) The total amount of interest that an exempt-controlled resident entity may deduct in
accordance with section 11(2) for a year of income shall not exceed the sum of interest
equivalent to debt-to-equity ratio of 70 to 30.So intended to limit the amount of interest to be
deducted in computing taxable income in cases of exempt controlled resident company

Section 34 income splitting

34.-(1) where a person attempts to split income with another person, the Commissioner may, by
notice in writing,
(a) Adjust amounts to be included or deducted in calculating the income of each person; or
(b) Re-characterize the source and type of any income, loss, amount or payment, to prevent any
reduction in tax payable as a result of the splitting of income.
(2) Subject to the provisions of subsection (3), a reference in subsection (1) to a person
attempting to split income includes a reference to a transfer, either directly or indirectly, between
the person and an associate of the person of-
(a) Amounts to be derived or expenditure to be incurred; or
(b) An asset with the result that the transferee receives or enjoys amounts derived from owning
the asset

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(3) Subsection (2) applies only where the reason or one of the reasons for .The transfer is to
lower the tax payable by the person or the associate.
So Commissioner shall consider the market value of any payment made for the transfer. The
section empower the commissioner to adjust income splitting arrangement between person
especially associated which have in this option been in order to lower the tax liability.

Types of income splitting arrangement and their anti-avoidance provision

Section 43 Transfer of asset to spouse or former spouse .Where on divorce settlement or
bona fide separation agreement an individual transfers an asset to a spouse or former spouse and
an election for this subsection to apply is made by the spouse or former spouse in writing –
(a) The individual is treated as deriving an amount in respect of the realization equal to the net
cost of the asset immediately before the realization; and
(b) The spouse or former spouse is treated as incurring expenditure of the amount referred to in
paragraph (a) in acquiring the asset.

Section 44 Transfer of asset to an associate or for no consideration

44.-(1) Subject to the provisions of this section and section 43, where a person realizes an asset
by way of transfer of ownership of the asset to an associate of the person or by way of transfer to
any other person by way of gift –
(a) the person shall be treated as deriving an amount in respect of the realization equal to the
greater of the market value of the asset or the net cost of the asset immediately before the
realization; and
(b) The person who acquires ownership of the asset shall be treated as incurring expenditure of
the amount referred to in paragraph (a) in the acquisition.
(2) Where a person realizes an asset, being a business asset, depreciable asset or trading stock, by
way of transfer of ownership of the asset to an associate of the person and the requirements of
subsection (4) are met –
(a)The person shall be treated as deriving an amount in respect of the realization equal to the net
cost of the asset immediately before the realization; and
(b) The associate shall be treated as incurring expenditure of the amount referred to in paragraph
(a) in acquiring the asset.

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(3) For the purposes of subsection (2), the net cost of a depreciable asset at the time of its
realization is equal to its share of the written down value of the pool to which it belongs at that
time apportioned according to the market value of all the assets in the pool.
(4) The requirements specified in subsection (2) shall be-
(a) Either the person or the associate is an entity;
(b) The asset or assets are business assets, depreciable assets or trading stock of the associate
immediately after transfer by the person;
(c) At the time of the transfer -
(i) The person and the associate are residents; and
(ii) The associate or, in the case of an associate partnership, none of its partners is exempt from
income tax; plus
(ii) The amount, if any, by which amounts derived in respect of the realization exceed
expenditure incurred in acquiring the replacement asset (calculated ignoring this section)

Section 55; Asset dealings between entities and members

55. Subject to the provisions of section 44(2), where an asset is realized by way of transfer of
ownership of the asset by an entity to one of its members or vice versa –
(a) the transferor shall be treated as deriving an amount in respect of the realization equal to the
market value of the asset immediately before the realization; and
(b) The transferee shall be treated as incurring expenditure of the amount referred to in paragraph
(a) in the acquisition.

Section 57; Income or Dividend stripping

57(1) where a distribution is made by an entity to an acquirer in the course of an income or
dividend stripping arrangement, the arrangement shall be treated as though -
(a) The payment (referred to in subsection (2) is a distribution made by the entity to the original
member of the entity; and
(b) The distribution made by the entity to the acquirer is in an amount equal to the distribution
less the amount of the payment.

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(2) For the purpose of subsection (1) “income or dividend stripping arrangement” means an
arrangement under which -
(a) An entity has accumulated current or expected income (the income”);
(b) a person (the “acquirer”) acquires a membership interest in the entity and the acquirer or an
associate of the acquirer makes a payment (the "payment"), whether or not in respect of the
acquisition and whether or not the payment is at the time of acquisition, to another person who is
or was a member in the entity (the "original member") or an associate of such another person;
(c) The payment reflects, in whole or in part, the income of the entity; and
(d) After the acquirer acquires the interest in the entity, the entity makes a distribution to the
acquirer that represents, in whole or in part, the income.

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