Eight years after the process began, Inland Revenue has issued its draft interpretation statement on tax avoidance.
IRD’s chief tax counsel Martin Smith says it sets out the commissioner’s view of the principles to be applied in reaching a view on whether an arrangement is a “tax avoidance arrangement”.
Tax planning including the use of alternative business structures does not necessarily constitute avoidance, he says.
“However, Inland Revenue does focus on cases where there are clear indicators and circumstances indicating that a taxpayer has entered into a tax avoidance arrangement,” Mr Smith says.
Under sections BG 1 and GA 1 of the Income Tax Act, if an arrangement is a “tax avoidance arrangement”, the IRD commissioner can counteract any tax advantage individuals or entities sought to gain.
The draft statement is particularly based upon the Supreme Court’s judgments and approach to the law in the Ben Nevis and Penny and Hooper cases, Mr Smith says.
Submissions will close at end of March and the statement is likely to be finalised in mid 2012.
The draft paper is at http://www.ird.govt.nz/resources/1/9/1995a880496fc8c3b5b3bd37e0942771/ins0121.pdf
Today’s release has been eagerly anticipated because of the broadness of the general anti-avoidance provisions in the Income Tax Act and the need seen to clarify just where the boundaries between legitimate tax minimisation and avoidance are.
The guidelines are seen as particularly necessary because of New Zealand’s move, in the last 20 years, to a self-assessment tax regime.
Earlier this year, following the IRD’s Supreme Court win in the Penny and Hooper case, the department released a Revenue Alert which provided some clearer guidelines, but this was only focused on high earning individuals providing personal services – medical professionals and the like.
PwC tax partner, Geof Nightingale says the consultation paper is of critical importance to taxpayers.
“The problem with the anti-avoidance powers is it could apply to a wide range of transactions. For example, if someone chooses to invest one way because the tax rate is lower than another, then they have literally avoided paying a certain amount of tax,” he says.
Acknowledging the draft’s reflection of IRD's recent court wins on tax avoidance, Mr Nightingale says that means legal transactions that comply with black letter law can be over-turned if the tax outcome is not what Parliament would have contemplated.
“While protecting the tax, base it embeds uncertainty into business tax matters. Courts and Inland Revenue like that uncertainty - it encourages risk averse taxpayer behaviour.”
The guidelines will not please business as the increased uncertainty raises transaction costs, he added.
Given the perception that the line in the sand between what is acceptable and unacceptable tax avoidance has moved in the last 20 years today’s document is welcomed, Ernst and Young partner Jo Doolan says, noting though, that it is only a draft and cannot be relied on until final.
“While the document does not appear to contain any earth shattering revelations, the process of determining whether the anti avoidance rules can be applied are outlined in an easy to read fashion and provide some clear steps and hurdles taxpayers need to work through in order to ensure they are not falling foul of the anti avoidance rules,” she says.
• fully understanding what the arrangement is,
• working through the provisions of the Income Tax Act that are either being used or circumvented for the tax position taken;
• examining the commercial reality and the economic effects of the arrangement
• ascertaining Parliament's purpose for the provisions
• combining the commercial reality and economic effects with Parliament's purpose to determine if the arrangement is outside Parliament's contemplation.
“If the arrangement is not outside of Parliament's intention then you have a home run and can breathe easy; if it is outside of Parliament's contemplation then you still have one get out of trouble free card if you can establish the tax avoidance is merely incidental,” Ms Doolan says.
“If you the fail this test then you are in hot water and the Commissioner will treat the transactions as void,” she adds.
Ms Doolan says there is still uncertainty about how the commissioner's approach fits in with the ability of taxpayers to choose how they structure transactions or what entities they use and the extent to which the commissioner can dictate how they do business.
“Also unclear is how relevant it should be to the New Zealand tax office that a taxpayer is getting a tax advantage in another country from a New Zealand cross border transaction.”
The document is a step in the right direction but does not as yet provide that real certainty as to how the tax laws are applied,” Ms Doolan says.
Despite this the document is compulsory reading for all tax practitioners and will no doubt the subject of many heated debates over the summer break.
Tue, 20 Dec 2011