What is Tax Avoidance?

Tax Avoidance

What is Tax Avoidance?

If you have ever watched the enchanting Australian film, The Castle, you’ll be familiar with the expression, “it’s the vibe’. Bungling defence lawyer Dennis Denuto seeks to have a planning decision overturned in an Australian court on behalf of his client. Stuck for an effective argument, he ventures to the judge that “it’s the vibe”. Not to be outdone, the Inland Revenue Department said pretty much the same thing recently and it will affect all of us. In the recently published Interpretative Statement, Tax Avoidance and the Interpretation of Sections BG1 and GA1 of the Income Tax Act 2007the IRD takes precisely 135 pages to fall short of their stated goal of defining avoidance.

Rather than give a specific definition, the IRD has introduced a new hurdle in tax law called the Parliamentary Contemplation Test. This means that the Courts must now give weight to just what Parliament might have been contemplating when they passed a particular section of legislation.

The mere suggestion that Parliament may have been contemplating anything during the stages of a Tax Bill has given rise to quite a bit of humorous comment. The Income Tax legislation runs to thousands of pages and I think even the most charitable commentator would struggle to claim that any more than a tiny handful of MPs would understand it.

What the new test does in effect is move the responsibility of setting the tax rules from parliament to the judiciary. It will be the judges who are now responsible for reading the minds of the parliamentarians. That should concern every taxpayer.

So why is this important? Without settled law, the IRD can essentially claim that any particular tax treatment is avoidance. To prove otherwise, a taxpayer would need to go to considerable cost and inconvenience to fight that ruling in the courts. The IRD might well bet that the taxpayer will just pay up to avoid the cost and uncertainty of a court case.

We are equally concerned about the impact this may have on foreign investment in New Zealand. Investors crave regulatory certainty when risking capital overseas.

The 2007 Act was an improvement on what went before but still fell short on codifying large numbers of common transactions. Case law is still a very important source of opinion. To open up the definition of avoidance  to be contrary to the contemplation of parliament is unnerving. If we are to comply with the law, we should demand that the law is clear and settled.

I’m sure we haven’t heard the last of this and we will keep you posted.

I have no use for bodyguards, but I have a very specific use for two highly trained accountants.

Generate Accounting
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