Ovan Ltd and Pluto Ltd are energy providers in New Zealand, both with a major focus on the Auckland region. Ovan's board of directors considers Pluto Ltd to be its major competitor. Ovan Ltd's board of directors has heard that Pluto Ltd is about to launch a highly discounted package to attract new customers from the Auckland region. The board believes the outcome would be devastating to its existing client base. Ovan decides to act swiftly and make an offer to Pluto Ltd containing the following three clauses:

Ovan will have the right to offer any of Pluto Ltd's products to the public for a period of five years;
Pluto Ltd will be prohibited from offering any 'energy products' for a period of five years, and Pluto Ltd will assign its current rights to use the power lines situated in the Auckland region to Ovan Ltd for a period of five years.
You are a recent BCom/LLB graduate from the University of Auckland, studying to become a CA. Ovan is an important client of the accounting firm you work for. Your managing partner has asked you to draft the above agreement. She wants to keep her favorite client happy, so she takes you to one side and Snickers 'Make sure all payment(s) are tied to the use of the power lines, so we trick the IRD into thinking the payment is on revenue account, he he'.

 

Required

 

Using the relevant legislative provisions and key cases discussed in class, is the payment to Pluto Ltd deductible?


What issue pertaining to the New Zealand tax base underpins your discussion in question 1?