ACCT862 Trimester 1 2019 Tax Avoidance and Planning Report

This report examines the complexities of tax avoidance and tax planning, differentiating between the two concepts and exploring the legal boundaries that define them. It delves into the Income Tax Act 2007, specifically sections BG 1 and GA 1, and the General Anti-Avoidance Rule (GAAR), analyzing their implications and the authority of the Commissioner of Inland Revenue. The report evaluates a scenario involving a partnership (I & M Partnership) and Auckland Engineering Ltd, assessing whether the proposed arrangement could be considered tax avoidance under New Zealand law. It incorporates relevant case law, such as Commissioner of Inland Revenue vs. Dandelion Investments Limited and Ben Nevis Forestry Ventures Limited vs. CIR, to illustrate how courts interpret tax avoidance schemes. The report also considers the application of the contemplation and objective tests in determining the intent and impact of tax avoidance arrangements, providing a comprehensive analysis of the subject matter.

Running Head: TAXATION
Taxation
Name of the Student
Name of the University
Author Note

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TAXATION
The primary objective of this report is to provide a clear conception regarding tax avoidance as
well as a depiction of the subtle difference between tax avoidance as well as tax planning. The
maximum limit beyond which tax planning activities can be regarded as actions for tax evasion
is to be depicted in this report. This report will also explain the scenario in context to legal
provisions as well as evaluate schemes involved. The aspects emerging from the situation will
undergo an examination under the scope of this report. Provisions advocated by the legislation as
well as their presidents in context to the above mentioned scenarios will also be listed in the
course of this report. Finally, the report will lay out a concluding statement after analyzing the
regulatory principles that are contextual in case of this scenario.
Issue
The concerned scenario in this instance is whether the structure that has recommended would be
liable to make Ian as well as Michael to pay problem or not. The issue further extends to the
acceptability of the arrangement which has high chances of being considered void as held by
Commissioner under consideration of the section BG 1 of the ITA Act 20071. The issue further
circumnavigates chances of the prevalence of management for avoiding tax that might be
attacked by the Inland Revenue considering the provisions of the anti-avoidance rule [GAAR]
emphasized by the Income Tax Act of 2007. Finally, it also requires consideration that whether
there might be consequences if this arrangement is implemented and if so what would be the
nature of its effects.
Regulations
Provisions of rules
1 The Income Tax Act 2007, s. BG 1

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TAXATION
The s BG 1 under the ITA act of 2007 holds that arrangements that have the potential for tax
avoidance are to be considered as void by the Commissioner so far as tax payments are
concerned. Provisions of tax advantages of any kind by undergoing implementation of the
arrangements can be fully exposed by the Commissioner when any taxpayer has availed the tax
avoidance scheme.
The above mentioned section of the Income-Tax act of 2007 provides authority in the hands of
the Commissioner for alternating the adjustments. In case if the Commissioner considers the
arrangements to be void under the spectacle of the BG 1, he has every right to arrange for
alternative adjustment. The Commissioner can make the Adjustment in any way that he Dims
appropriate and relevant to the context. In alternate in the case of tax advantage, the
Commissioner should be emphasizing on counteracting any related advantage that might have
been gained under the provisions of the scheme that enabled tax avoidance to any taxpayer. The
BG 1 also equips the commissioner with the authorization of withdrawing tax credits partially or
entirely for transfer permission to another entity for enjoying the benefit which the taxpayer has
been able to gain under the implementable scheme regarding tax avoidance2. The primary factors
that the Commissioner would consider while making such alterations are the expanse of income,
tax credit, tax laws as well as a viable deduction that the person would have been eligible for, in
the absence of the arrangements under the scheme for avoiding tax. Directions over income that
has been completed already, against the salary of an individual cannot be calculated as well as
incorporated in the income of a different person for what purpose is like tax payment. So far as
this Law Act is concerned, a tax credit to a section of partially taxable value by availing loan that
the taxpayer can get in context to tax payment.
2 The Income Tax Act 2007, s. GA 1

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TAXATION
The next section that needs to be considered under the Income Tax Act of 2007 is the YA 13.
Definition of relevant terms borne by this act is contained in this section. In the context of this
act, the arrangement can take the form of any agreement or contract or planning without
considering its enforceability. Tax avoidance can be best described as alternating the tax
liabilities which are currently applicable or in the future, parallelly reducing the current Tax
liability. The coinage, “tax avoidance arrangements” reflects some schematic arrangement that
has been sought after the primary objectives of tax evasion.
The next section that requires focus under the Tax Administration Act of 1994 is 141 D. This
section refers to the abusive position of tax as a position that can be held an acceptable and
whose implementation has been solely fuelled by the objective of tax evasion. The legal charges
against the adoption of abusive tax Positioning might be accounting to the entire tax shortfall
resulting from such an arrangement. The s 3 of the same act defines tax shortfall as a legal
charge that any person is liable to undergo for adopting wrongful text position. The same section
defines an abusive tax position as it has been considered in section 141 D of this equal act.
In context to the discussion of section 3 as well as section 141 D of the Tax Administration Act,
1994 calls forth a need to discuss the Section 5 of the interpretation act of 19994. This section
holds that the court should consider the real significance of one statute as well as the currently
employable intention in case of wholesome enactment of legalization for interpretation of any
law or the provisions of the same thereof.
Applicable case laws
3 The Income Tax Act 2007, s. YA 1
4 The Interpretation Act 1999, s. 5

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Initially, the case regarding commissioner of Inland Revenue vs. Dandelion investments Limited
[2001]20 NZTC 17,293 (HC) the contentions of the court referred to the arrangements as a
scheme for tax evasion without because the agreement, wholly or partly incorporates issues of
tax avoidance.
The case regarding Ben Nevis Forestry ventures Limited vs. CIR [2008] NZSC 115 can also be
considered5. The court, in this case, inferred the arrangements could be depicted as a scheme for
tax avoidance on condition that any particular step in the course of the arrangement for more
than one steps in that arrangement or fact the entire arrangement has the potential to reduce tax
effectively. In that case, the court might derive that although some individual action in the
arrangement do not effectively promote that tax evasion however combination of some or all the
steps have the potential for tax avoidance, the same will be noted by the court as a step for
arranging avoidance of tax payment.
It is also interesting to note that in the court case of BNZ investments Limited vs. Commissioner
of the inland revenue (2000) 19 NZTC 15,732 (HC), irrespective of the fact that the arrangement
impacted a transaction conducted abroad, the court might construct the same as a scheme for tax
avoidance that has happened within the territory of New Zealand6.
It is noteworthy that in the case of Penny vs. Commissioner of the Inland Revenue [2011] NZSC
95 the court considered that arrangements for tax avoidance might have been enacted in order to
implement an array of transaction or incidents which might not a perfect individual portions or
steps associated with the event7. In spite of that, the primary consideration will be that the
primary intention of all related events is associated with the effectiveness of tax avoidance.
5 Ben Nevis Forestry ventures Limited vs. CIR [2008] NZSC 115
6 BNZ investments Limited vs. Commissioner of the inland revenue (2000) 19 NZTC 15,732 (HC)
7 vs. Commissioner of the Inland Revenue [2011] NZSC 95

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TAXATION
In the court case of Krukzeiner vs. Commissioner of the Inland Revenue (No. 3). [2010] 24
NZTC 24,563 (HC), the contention of the court holds that arrangements were having more than 1
part which might effectively help in tax avoidance which the other parts were preserving the
same intention, however with no direct consequences, the entire arrangement might be held as an
arrangement intended towards tax avoidance.
The court case of Furniss (Inspector of Taxes) vs. Dawson [1984] AC 474 [HL] in the English
Court, considered the structure to be depicting chances of tax avoidance will be promptly
rendered as so. Concerning this, it might not be regarded after it had been contended that there is
a motivation of tax avoidance in the scope of the structure8.
Tests
Contemplation test
The parliamentary perception in context to the enactment of legislation should be considered.
The case reference is Russell vs. commissioner of the Inland Revenue (number 2) (2010) 24
NZTC 24,463 (HC).
Objective test
The intention or impact of an arrangement will be the primary focus of consideration rather than
the motivation of the concerned parties. The case reference is Ashton vs. the Commissioner of
the Inland Revenue [1975] 2 NZLR 717 (PC).
Applications
8 Furniss (Inspector of Taxes) vs. Dawson [1984] AC 474 [HL]

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TAXATION
Under the current situation, the label of arborists is to be conferred upon both of Ian as well as
Michael who has been operational in Auckland under a partnership business known as I and M
partnership. Their Holdings include a building, plant as well as equipment also including four
staffs. David who is a contractor of engineering deliverables in the construction industry is also
the brother to Ian. As a consequence of undergoing problems, Ian was approached by Auckland
Engineering Limited for help. He and Michael held a discussion regarding this issue with Chris,
Accountant of the partnership business, who delivered the recommendation that the future of
Auckland Engineering Limited is viable which might create the opportunity of transfer of the
partnership assets like the plant as well as equipment to the Auckland Engineering Limited as a
form of debt back. The partnership firm could claim the Assets of Auckland Engineering Limited
as a form of a mortgage. This strategy would force Auckland Engineering Limited to lease their
equipment back to the partnership Company against a yearly rental. This transfer of actions does
not affect any monetary benefit in context to the business operations of the company of Ian and
Michael. This can be perceived as an arrangement under the provisions of the section YA 1
UNDER THE INCOME TAX ACT OF 20079. There are more than one plans as well as
agreements imbibed within this arrangement including the likes of transfer of assets with the
partnership to Auckland Engineering Limited without citation of any valid economic liability. It
further incorporates acceptance of mortgage of assets held by the Auckland Engineering Limited
firm. The final part of the arrangement includes steps like renting of the Asset back to Ian and
Michael by Auckland Engineering Limited. Therefore, all individual levels in this arrangement
are fragments of one plan which have been deliberately instituted. However, to align this
transaction with the provisions of the BG 1 OF THE INCOME TAX ACT OF 2007, to be
perceived as an arrangement for avoiding tax, the intention, as well as the impact of this
9 The Income Tax Act 2007, s. YA 1

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TAXATION
arrangement, has to be scrutinized. Furthermore, the situation under which the arrangement was
developed has to be evaluated considering provisions held by various tax avoidance related
legislation and more than one test are to be initiated in this context10.
Again, Chris had noted that the tax loss of Auckland Engineering Limited is approximately up to
$1 million US dollars. That is why he might have intended to utilize those assets for offsetting
rental income as well as other expenses. The agreement was that one third part of the monetary
asset saved from tax avoidance will be delivered to David and that will provide him with cash
flow and the business partners Ian and Michael will be sharing the rest part. Hence, it can be
easily derived that tax saving was the primary purpose of this arrangement and this motive is not
initiated out of the craze for financial benefit in context to any of the business activities
conducted by the company. This can be considered as an arrangement intended towards tax
avoidance where every individual step of the arrangement has the intention to assist in the act of
saving tax. In conclusion, this arrangement can be treated as a scheme for tax avoidance and
therefore attracts the provisions of BG 1 as well as other sections of the Income Tax Act of 2007.
This scheme for tax avoidance has been formulated by Chris and will come under BG 1 of the
Income-Tax act 2007. It will render this arrangement with the intention for tax evasion to be void
which effectiveness from the end of the Commissioner of tax purposes. It is evident that a
commissioner is holding the authority of altering tax advantages which the taxpayers could have
availed if the two would have taken resort to this scheme. In the current situation, money saved
from tax avoidance was decided to be distributed evenly as per the agreement between the
business partners and David. Under this consideration, the Commissioner will naturally render
10 The Income Tax Act 2007, s. BG 1

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this agreement to be void and thereby nullify any benefit of tax saving that the three of them
would have enjoyed as an outcome of the implementation of their proposed scheme.
In context to the above situation, it also needs analyses that whether this arrangement which had
been designed, to contain any individual state or an accumulation of steps that can be rendered as
having the intention of tax avoidance. In this context, not only one, instead all the steps can be
manifested as having the effect of tax evading, and there is no other concrete purpose is related
to business that can be solved by this scheme. The outcome of the case of Ben Nevis Forestry
ventures Limited vs. the Commissioner of Inland revenue establishes this standpoint.
In order bring any case under the consideration of the above mentioned section, the
Commissioner has to be convinced that the range of transactions are directed towards the
purpose of tax saving and are interrelated in their intention since all individual transactions do
not necessarily imply tax avoidance. The instance established in the court case of Penny vs. CIR
explains this fact. In context to the above mentioned court case, it can be communicated that the
transactions which have been proposed to be conducted by the business partners are an integral
part of the arrangement that was intended entirely to avoid tax payment11.
There is both the intention as well as the effect of tax avoidance in the scheme that Chris had
formulated for the two business partners. The principal contentions of the court case of W.T.
Ramsay Limited vs. CIR imply that the current situation can also be considered to be a case of
tax avoidance scheme without reference to any application of legal provisions.
Furthermore, the consequences of the contemplation test can also be implied here. These
necessary tests shape the perception of parliament in the enactment of legislation which would be
responsible for bringing the current case under the spectacle of the section BG 1 UNDER THE
11 Commissioner of Inland Revenue v Penny [2010] NZCA 231

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INCOME TAX ACT OF 200712. In this context, the contemplation test holds that the current
situation is the arrangement for tax avoidance as tax saving was the only intention of Chris and
there was by far no other purpose to be served in terms of benefit to the business of Ian and
Michael. The outcomes of the case of Russell vs. the Commissioner of the Inland Revenue also
support this.
The outcomes of the objective test can also be considered as this test also provides the situation
where tax avoidance was the necessary implication of an arrangement. This test gives stress to
the effect or outcome of the implementation of the arrangement rather than the intention with
which the respective parties launched it. Hence, even if the parties stand innocent regarding the
purpose, the liability of tax avoidance cannot be evaded by them. It is clear that after successful
implementation of this arrangement, all the concerned parties would be reaping the financial
advantage of the scheme and this is enough to consider them liable for tax avoidance. The
illustrations in the court case of Ashton vs. Commissioner of Inland revenue hold the above
stated.
Reference to the section GA 1 of the Income Tax Act 2007 can also be provided here, which
bestows general authority of making adjustments with the Commissioner. Under the prepositions
of this case, the arrangement can be considered as void supported by the provisions of this
section, and it will also be subjected to the consideration of the Commissioner to be adjusted as
per his discretion13. The Commissioner can modify any advantage that the business partners
could have reached as an outcome of this arrangement as he thinks it to be appropriate. The
Commissioner will give priority to the intention of counteracting any advantage that he might
imagine, the business partners would have got under this tax avoiding scheme. The
12 The Income Tax Act 2007, s. BG 1
13 The Income Tax Act 2007, s. GA 1

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Commissioner can withdraw the tax credit to give the power to some other person to enjoy the
benefit that the taxpayer would have gained under this arrangement. While undertaking any such
decision, the Commissioner will emphasize on the expense of income tax credit, deduction as
well as tax loss that the concerned parties, in this case, would have incurred if this arrangement
would not have been into place. Any income deduction that has been already completed while
calculating the income of a person will not be added further to be calculated into the income of
different persons for purposes of tax payment. In the context of this act, tax credits can be
depicted as a reduction in the value of tax through any benefit that can be availed by a person
concerning the taxation norms. In this instance, the monetary benefit of tax reduction was
planned to be distributed as per the agreement between Ian, Michael as well as David. The
Commissioner should be counteracting this, and most probably he will be taking away this
benefit from them.
Ian and my film should be charged legally under the provisions of section 3 of Tax
Administration Act of 1994 as wrongful text position have been taken up by them as per the
requirements of the 14. The definitions provided under section 141 D also proposes the same
outcome.
Section 141 D of the Tax Administration Act of 1994 should hold David as well as the business
partners liable for abusive taxhortfal position15. They can incur a penalty which is worth the
hundred percent of tax shortfall accounting out of the implementation of this arrangement.
Conclusion
14article The Tax Administration Act 1994, s. 3
15 The Tax Administration Act 1994, s. 141D

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It can be adequately concluded that the arrangement proposed by Chris would put the two
business partners under the liability of tax evasion. This arrangement made by Chris is to be
considered as void by the Commissioner under the provisions of BG 1 of the Income-Tax act of
2007. This is crucial in terms of tax avoidance arrangement which can be attacked by the Inland
Revenue advocated by the anti-avoidance rule of Income Tax Act of 2007. In case if this
arrangement where implemented, Ian and Michael would have been held liable by the provisions
of 141D and would have had to incur a penalty as discussed above.