In June 2013 the IRD issued an interpretation statement on tax avoidance and the interpretation of sections BG1 and GA1 of the Income Tax 2007 Act. The last time the IRD put out a document on anti-avoidance was around 20 years ago and despite some drafts that came out about 7 or 8 years ago, this document has been a long time coming. At 133 pages, it is not light bedtime reading.
As can be expected, it is certainly comprehensive and it does review all of the relevant law on tax avoidance in New Zealand. However, it is sadly lacking because there are no examples. Any inferences are drawn from cases alone without the IRD then applying examples to expand on how it will interpret provisions.
The reality is that while the document is a useful summary of the law, it provides little real practical guidance on how the section is to be applied. Statements like Parliamentary Intention is to be determined from the Act itself where it can’t be divined from actual parliament notes or the like, is of little relevance. In practice the IRD takes the view on what a section is supposed to do, and often there is little if any justification for that, nor is there any easy counter to that for taxpayers forced to fight anti-avoidance discussion.
Sadly also the IRD has been wheeling out anti-avoidance as its stop gap measure when it is concerned technically that it may not otherwise win a dispute. In some cases, it simply applies anti-avoidance without even considering the technical provisions in the first place.
The statement and the recent Alesco decision do however show just how far the pendulum of tax avoidance has swung in favour of the IRD. Historically we have relied upon cases like the Duke of Westminster to justify that that taxpayers were entitled to arrange their affairs so as to legitimately reduce their taxation liability. In short, unless the law said you could not do something, you could.
The cases of Ben Nevis, Glen Harrow and Penny and Hooper moved the ground significantly, probably like a 9.0 magnitude earthquake would! The law became that it is now necessary to determine Parliamentary intention to see if it had intended that you could do something. In short, now we have to show that the law contemplates that you can do something, otherwise you cannot.
Alesco moved the goal posts even further away. Arguably Alesco did do exactly what Parliament had intended, as it clearly complied with the requirements of the Income Tax Act in a way that was contemplated. The Court however decided that as there had been no economic loss, it was still Tax Avoidance.
So one could argue, that we have actually returned to the Challenge & Tax Investigation concept, despite strong views from the IRD that we have not.
So if you are having trouble sleeping, I can guarantee that this one is better drugs. However, if you are involved in a fight, while it is relevant to consider, I don’t think necessarily it is going to be a lot of use to taxpayers and their advisers in the fights against the IRD as to what is and what isn’t anti-avoidance.