Henry Staples is an economic consultant.  He is married with 4 children:

Amy was aged 12, Barry was aged 15, Gary was aged 20, and Franky was aged 22. 

Henry arrived in New Zealand with his family and spouse Sarah in April 2019.  After his arrival, he started an economics consultancy and secured lucrative contracts with major electricity generators advising them on rate regulation along with work from some existing smaller clients overseas.  He operates out of an office at his home in Wellington.  For the income year ended 31 March 2021, he earned a net income of $280,000 from his consulting.

When the top tax rates for individuals increased to 39% from 1 April 2021, Henry became concerned about his increased tax bill.  He sought the advice of his neighbor Sam who suggested the following plan to overcome the higher tax rate from 1 April 2021: 

 

 -Henry should settle a trust for $1,000 with Henry and his wife Sarah as trustees.  The beneficiaries should be his wife and four children who should each be entitled to a 20% share of the trust's annual income annually under the trust deed.  The trust could be wound up when Henry dies with his four remaining children sharing in any remaining capital.

 -Henry should then incorporate a company with paid-up capital of $100 all of which will be owned by the trustees of his trust.  Henry will be the sole director of the company.

 -Henry should enter an employment contract with the new company for an annual salary of $180,000.

 -After paying Henry's salary, the company should pay out all of its tax-paid net profits to the trust as fully imputed dividends which will subsequently be distributed by the trust to his wife and children to take advantage of their lower marginal tax rates.

Required:

  -Critically evaluate the above proposal and determine whether it would enable Henry to achieve the goals sought by him.   

 -Henry's son Barry has suggested another way to save tax would be to have the fees from Henry's overseas clients paid into a bank account set up in Abu Dubai and not include the receipts in either his father's or the company's tax return.  The money could be spent when they go overseas on holiday.  Evaluate this proposal to reduce tax payable by Henry. 

 -One of Henry's New Zealand clients has advised him that from 1 April 2022 they would like him to consult exclusively for them for $350,000pa.  Henry would not be allowed to consult for any other New Zealand clients.  Advise the tax implications of Sam's proposal in light of such a change to Henry's client base.