Tax avoidance and the interpretation of the general anti-avoidance provisions - PUB 00305 30 March 2021
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Tax avoidance and the
interpretation of the
general anti-avoidance
provisions
–––––––
PUB 00305
30 March 2021
30 March 2021
Tania Sauvao
Tax Counsel Office
National Office
Inland Revenue Department
PO Box 2198
Wellington
By email: public.consultation@ird.govt.nz
Dear Tania
PUB 00305 - Tax avoidance and the
interpretation of the general anti-avoidance
provisions
Thank you for the opportunity to comment on the draft interpretation statement "Tax avoidance and
the interpretation of the general anti-avoidance provisions sections BG 1 and GA 1 of the Income Tax
Act 2007" (draft statement).
CA ANZ understands the need to review and update Inland Revenue’s current statement on tax
avoidance. Subject to our comments below, we look forward to the finalisation of the draft statement.
In our view, readability for a wider audience would be improved if an Executive Summary was included
in the draft statement. Taxpayers and tax agents’ utility would be further enhanced if the draft
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.
Page 2
statement was supplemented with appropriate QWBAs setting out an indicative view of scenarios where
tax avoidance may or may not be present.
CA ANZ would welcome the opportunity to assist Inland Revenue educate tax advisors and agents about
the change in approach using our available communication channels, including a webinar.
Background
The draft statement outlines the Commissioner's approach to tax avoidance (section BG 1). It also
explains how the Commissioner will adjust a person's taxable income to cancel the tax advantage received
(section GA 1). When finalised the draft statement will replace Interpretation Statement IS 13/01,
published in 2013.
In contrast to the current statement IS13/01, there has been a change in emphasis in the analysis in the
draft statement. When applying section BG 1 the main focus is now on answering the Parliamentary
contemplation test which is referred to throughout the draft as being “the Ultimate Question.” Greater
weight is being placed on the presence of artificiality or contrivance and there is more attention on an
arrangement's commercial and private purposes when answering the Parliamentary contemplation test.
The draft statement places less emphasis on identifying whether there is a mismatch of facts, features
and attributes between what Parliament would have contemplated and those that appear in the
arrangement in economic substance.
In addition, the draft statement reiterates that it is incorrect to argue that an arrangement has a tax
avoidance purpose or effect by comparing the arrangement with a hypothetical alternative arrangement
("a counterfactual").
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.
Page 3
The draft statement confirms the framework that the Commissioner will apply in considering whether
an arrangement was one of tax avoidance. The statement includes two flowcharts. One sets-out the
approach to whether section BG 1 applies. The second flowchart confirms the steps to applying section
GA 1.
Briefly, the approach suggested in applying section BG 1 includes:
1 understanding the legal form of the arrangement (its steps, transactions and tax effects);
2 identifying Parliament’s purpose for the specific provisions that are used or circumvented by the
arrangement;
3 viewing the arrangement as a whole in a commercially and economically realistic way,
including considering any non-tax avoidance purposes or effects;
4 answering the ultimate question of whether the arrangement, viewed in a commercially and
economically realistic way, uses or circumvents the specific provision in a manner that is consistent
with Parliament’s purpose1;
5 If tax avoidance is not the sole purpose of an arrangement, consider whether the tax avoidance
purpose or effect is merely incidental.
Once finalised the interpretation statement will outline the Commissioner's view on tax avoidance in
New Zealand and the approach the Commissioner will take in applying sections BG 1 and GA 1.
1 PUB00305 Information Sheet page 4
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.
Page 4
However, the statement must apply to a taxpayer’s situation specifically before a taxpayer is able to rely
on that statement.
Readability
Whilst we understand the topic is complex CA ANZ is concerned the statement lacks accessibility for
many users. The statement includes a comprehensive and extensive legal analysis. Overall due to legal
complexity and length many readers will disengage. In part this is due to it being repetitive.
We are concerned that, given its size, the draft statement in its current form will not provide taxpayers
with sufficient guidance that will enable them to effectively structure their affairs and know with
reasonable certainty that their arrangement does not constitute tax avoidance. A degree of certainty is
needed to minimise administration and compliance costs.
We recommend that the draft statement include a short-simplified Executive Summary. even if it were
necessary to cross refer to other parts of the draft statement. The draft statement should refer readers
to a linked collection of practical examples to assist their understanding of the issues and how the law is
applied.
Practical examples
In conjunction with the release of the draft statement, three ‘Questions we've being asked’ (QWBA) that
relate to avoidance will be withdrawn. Although two of the QWBAs are being refreshed, there is a real
lack of practical examples on the Commissioner's approach to different arrangements. The lack of
practical examples is very concerning because the application of the law to factual situations is the best
way to see the application of the anti-avoidance test.
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.Page 5
Due to the wide range of circumstances in which tax avoidance can arise we accept that it is impossible to
provide a definitive list of arrangements which constitute tax avoidance. However, the inclusion of clear
illustrations, using real-life examples, that are closer to section BG 1's boundaries would provide more
clarity and allow taxpayers to determine the tax treatment of their particular arrangements with more
certainty. Examples also help taxpayers comply with the standards expected.
Further, the inclusion of examples will provide meaningful assurance that Inland Revenue will act
consistently.
We acknowledge a taxpayer can gain certainty about the tax treatment of their arrangements through the
binding ruling process. However, the cost and timeframe involved in seeking a ruling means this course
of action cannot always be justified by many taxpayers.
Publishing more practical examples would be beneficial to taxpayers and practitioners. These do not
necessarily have to be included in the interpretation statement and could be achieved by the release of
further QWBAs. We would like to see additional examples reflecting recent Inland Revenue operations
and dispute review experiences, including factual situations where section BG 1 was considered but
Inland Revenue concluded that the provision did not apply.
Practical examples could include:
An example involving restructuring and future income flows: indicatively consider the
restructure of Kidicorp in 2015 where the whole business was sold to a charitable foundation
and whether this was an appropriate use of a charitable structure;
An example involving structures where the money is not allocated to ultimate beneficiaries: for
instance, based on Penny but the money stays in the trust;
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.Page 6
An example involving debt forgiveness: the introduction of additional equity by a shareholder
when the company is insolvent;
An example using structures to derive passive income: perhaps passive income earnt by a
company or structure, retained and accumulated, and distributed in the future;
An example involving the use of funds on a long-term basis by different taxpayers: consider
interest free loan to company by shareholder. The money is repaid in 10 years’ time; or
situations involving overdrawn current accounts.
White v C of IR
The analysis in the draft statement does not refer to the White v C of IR2 decision. Expanding the
commentary to include a discussion on White would help taxpayers understand section BG 1’s
boundaries.
In Penny the Supreme Court stated:
Similarly, the salary might be set at a relatively low level because the company had a commercial
need to retain funds in order to make a capital expenditure. Again, no question of avoidance
could arise. That would also be the position if the company was experiencing financial difficulties
or reasonably considered that it might do so in the future, and could not afford to pay the family
member employee the equivalent of a commercial rate for the time being, or reasonably took the
view that it was not in the meantime financially prudent to do so3.
2 White v C of IR (2010) 24 NZTC 24,600
3 Penny and Hooper v C of IR (2011) 25 NZTC para 34
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.Page 7
In White, a situation similar to Penny, the court found failure to pay a salary to a doctor employed by the
company was not tax avoidance. The difference in this instance was that the company ran a profit-
making anaesthetist business and a loss-making orchard. Heath J stated the lack of funds was a sufficient
reason for holding that the purpose of the arrangement was not tax avoidance.
Flowchart 1: An approach to the tax avoidance inquiry
The flowcharts will be an excellent aid. However, the relationship between the "conclusion on tax
avoidance" and the "conclusion on merely incidental" in the flowchart is confusing , it lacks clarity and
should be fleshed out in a much clearer way.
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.Page 8
The difficulty arises when a person has more than one purpose, and one of those purposes does not meet
the parliamentary contemplation test. The flowchart directs the person to the merely incidental test.
This approach may be overly simplistic and could be better expressed as “unless the tax avoidance
purpose is merely incidental”.
It is clear from Paragraphs 5.74 , 5.76 and 8.2 that if the tax advantage was a principal or predominant
purpose it is then very unlikely that the tax avoidance purpose is merely incidental to a non-tax avoidance
purpose. This point is not apparent in the flowchart and it should be.
Facts features and attributes
In our view the decreased emphasis on facts, features and attributes in the draft statement is detrimental
to the analysis that is required. Facts, features and attributes are an important part of examining the
commercial reality and economic effects of an arrangement.
Arrangements being pre-tax negative
The discussion on whether an arrangement is pre-tax negative does not help taxpayers and practitioners
understanding. Based on the very limited commentary a reader may conclude the purchase of a rental
property or investing in a PIE could be considered tax avoidance since the investment could well be pre-
tax negative. Is it intended that this test be so definitive? Surely the element here is that the investment
doesn’t make sense from a commercial and economic perspective unless certain tax-related features are
incorporated, so presumably the assessment of pre-tax negativity can be displaced by other commercial
and business purposes.
The statement would be improved by increased commentary that includes when a pre-tax negative
arrangement is acceptable.
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.Page 9
Part 8 Applying s BG 1
The draft statement places much emphasis on the fact that if one step in the arrangement is tax
avoidance it can lead to a conclusion that the entire arrangement is tax avoidance. It uses the decision in
Penny and the setting of non-market remuneration to illustrate the point. This suggests an extremely
simple and almost immaterial step in an arrangement which is tax avoidance will render the whole
transaction being labelled tax avoidance despite it not being a significant part of the transaction or it
being a by-product. In our view, the paying of a non-market salary was an absolutely critical part of the
Penny decision that led to the arrangement being outside Parliament's contemplation. We consider this
warrants a better analysis of the two stages in tax avoidance. In addition, a more fulsome discussion on
the steps in the arrangement leading to the whole arrangement being void would be useful.
Does IR apply the Commissioner’s stated approach in
practice?
Members have expressed concerns that Inland Revenue auditors have raised tax avoidance in the course
of an investigation without regard or reference to the principles discussed in the current
interpretation statement. We recommend that:
IR should implement an internal escalation process to test and moderate on whether it is
appropriate to invoke section BG 1;
instructions should be given to auditors that avoidance should not be raised during an audit
unless it is reasonably contemplated that section BG 1 will be invoked and the matter has been
through the internal escalation process for ratification.
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.Page 10
Frucor
We echo Justice Susan Glazebrook's words:
"While there is no reason to think that the Supreme Court would depart from the principles
espoused in the tax avoidance cases it has decided so recently, the possibility that it may do so or
that it may modify them to some degree cannot be totally discounted".4
Finalisation of the draft statement before the Frucor appeal in the Supreme Court Appeal has been heard
(and the judgement released) may mean the statement will need to be updated to incorporate any
departure from principles adopted in earlier tax avoidance cases.
Withdrawn QB 15/01
We acknowledge changes to the debt forgiveness rules mean the scenario contained in QB 15/01 is no
longer relevant.
However, consideration should be given to revising QB 15/01. The rules covering debt forgiveness do
not apply where forgiveness is not pro-rata to ownership interests nor do they apply to debt
capitalisation. Debt capitalisation is still taking place therefore guidance in this area is necessary.
4Statutory interpretation, tax avoidance and the Supreme Court: reconciling the specific and the general: Justice Susan
Glazebrook; November 2013
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.Page 11
We are happy to discuss our submission. Please contact Teri Welham in this regard.
Yours sincerely
John Cuthbertson FCA Teri Welham
CA ANZ NZ Tax Leader Senior Tax Advocate
Chartered Accountants Australia and New Zealand
Carlaw Park, 12-16 Nicholls Lane, Parnell, Auckland 1010
PO Box 3334, Shortland Street, Auckland 1140 P +64 9 917 5915
© Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.You can also read
