The New Zealand Inland Revenue Department released an item on the 25th September which discusses whether the abusive tax position penalty under s 141D of the Tax Administration Act 1994 applies automatically where there is a “tax avoidance arrangement” under s BG 1 of the Income Tax Act 2007. The item outlines that:

“The abusive tax position penalty under s 141D does not apply automatically where there is a “tax avoidance arrangement”. This is because:

  • Section BG 1 requires the tax avoidance purpose or effect of the arrangement to be more than merely incidental. Section 141D requires the dominant purpose to be avoiding tax. Therefore, the tests in the two provisions are fundamentally different.
  • The intention expressed in the pre-legislative material was that the abusive tax position penalty would only apply to “abusive avoidance”.
  • The courts have identified that there is a different test under s 141D than under s BG 1.

To determine whether the abusive tax position penalty applies it is necessary to decide whether the dominant purpose of the arrangement is avoiding tax. In order to determine that, the tax purposes must be weighed against any other purposes of the arrangement (such as commercial or family purposes) with reference to the specific structure of the arrangement. The factors that may be considered may include artificiality, contrivance, circularity of funding, concealment of information and non-availability of evidence, and spurious interpretations of tax laws”.

For more information refer to: http://www.ird.govt.nz/technical-tax/questions/questions-shortfall/