Tax avoidance – where do you draw the line?

Unlike the vast majority of the specific provisions contained in the Income Tax Act 2007 (the Act), Parliament has left the general anti-avoidance provision (section BG 1 and its associated definitions of “tax avoidance” and “tax avoidance arrangement” in section YA 1 of the Act) deliberately general.


“Tax avoidance” includes directly or indirectly altering the incidence of any income tax, directly or indirectly relieving a person from liability to pay income tax or from a potential or prospective liability to future income tax, and directly or indirectly avoiding, postponing, or reducing any liability to income tax or any potential or prospective liability to future income tax. “Tax avoidance arrangement” means an arrangement, whether entered into by the person affected by the arrangement or by another person, that directly or indirectly has tax avoidance as its purpose or effect, or has tax avoidance as 1 of its purposes or effects, whether or not any other purpose or effect is referable to ordinary business or family dealings, if the tax avoidance purpose or effect is not merely incidental.

The Supreme Court in the leading case on tax avoidance, Ben Nevis Forestry Ventures Ltd and Ors v Commissioner of Inland Revenue, SC 43/2007 [19 December 2008], stated that the courts should focus on what Parliament would have contemplated for the provisions engaged by the particular arrangement. It also advised that the courts should not strive to create greater certainty than Parliament has chosen to provide (see paragraphs 101 and 112).

The most important issue, however, is whether a deduction based arrangement falls within the definition of a tax avoidance arrangement. If it does, then the Commissioner of Inland Revenue can void the arrangement and reconstruct under Subpart GA of the Act. This means that it is often a process of drawing a line in order to distinguish between a permissible tax advantage that has been contemplated by Parliament and one which falls foul of the legislature.

The Supreme Court in Ben Nevis provided the first opportunity to consider a tax avoidance case since its establishment in 2004. Prior to this time, the final court of appeal for New Zealand was the Judicial Committee of the Privy Council. The means by which the drawing of the line should be set out are principally contained in paragraphs 103 to 114 of Ben Nevis, culminating with the “ultimate question” posed by the Supreme Court (at paragraph 109):

“… whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament’s purpose.”

The answer to this question involves an examination of both an arrangement’s legal form and its economic and commercial substance.

On 13 June 2013, the Commissioner provided an Interpretation Statement giving guidance on how she believes the line should be drawn. This guidance is contained in IS 13/01: “Tax Avoidance and the interpretation of sections BG 1 and GA 1 of the Income Tax Act 2007”. (A link to IS 13/01 can be found at here.) The Commissioner’s interpretation statement contains a detailed analysis of the law and a set of guidelines which has introduced new language in relation to the parliamentary contemplation test elaborating on Ben Nevis. The Commissioner says that in order to identify what Parliament would have expected to give effect to the purpose of a specific provision requires an exercise of identifying what “facts, features and attributes” that Parliament would expect to be present in or absent from an arrangement.

As part of its Commercial Law Series, ADLS has an upcoming seminar on this subject entitled “Tax Avoidance – Where Do You Draw the Line?”, taking place on Thursday 25 May 2017. The presenters, Paul Hale (Principal Advisor, Large Enterprises, Inland Revenue), Tom Fraser (Senior Tax Counsel, Legal & Technical Services, Inland Revenue) and Fred Ward (Partner, Russell McVeagh), will provide insights into answering the Supreme Court’s ultimate question by reference to the Interpretation Statement, through their experiences of dealing with the anti-avoidance rules in practice, and looking at a series of case studies. For more information and to register, click here.

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