NZ Taxation: Anti-Avoidance Provisions

This report analyzes New Zealand's general anti-avoidance provisions under sections BG 1 and GA 1 of the Income Tax Act 2007. It examines the interpretation of these sections by the New Zealand Supreme Court in cases like Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue and Penny v Commissioner of Inland Revenue. The report delves into the definition of key terms like 'arrangement' and 'tax avoidance arrangement,' exploring the parliamentary contemplation test and the predication test. It discusses the application of section BG 1 in voiding tax avoidance arrangements and the role of section GA 1 in making adjustments. The report concludes by highlighting the importance of understanding the economic and commercial reality of arrangements to determine whether they constitute tax avoidance. The provided solution includes a comprehensive review of relevant case law and legislation, offering a detailed analysis of New Zealand's approach to combating tax avoidance.

NZ TAXATION
01. INTRODUCTION
A. BACKGROUND
Section BG 1 of the Income Tax Act, 2007 of New Zealand deals with the general anti-
avoidance provisions explained in the Act. Whereas Section GA 1 of the cited Act gives
the Commissioner power to make adjustments after the application of s BG 1. These
two legal provisions broadly outline the legal stand which the Commissioner can take
on tax avoidance in New Zealand. They also outline the approach which the
Commissioners have been adopting towards implementing the Anti-avoidance
regulations in New Zealand.
B. OBJECTIVES
Application of s BG 1 is usually considered only after determining if other provisions
under the Act are applicable or not. To evaluate this arrangement, a specific provision is
interpreted in accordance to its purpose as defined under s 5(1) of the Interpretation
Act, 1999. Hence, s BG 1 can only be considered as applicable in view of the whole
arrangement after circumventing other specific provisions and discarding them.
C. SCOPE
Interpretation of these sections was set as a procedure by the New Zealand Supreme
Court in the case of Ben Nevis Forestry Ventures Ltd v Commissioner of Inland
Revenue [2008] NZSC 115, [2009] 2 NZLR 289. Through this judgment, the Supreme
Court indicated its intention in settling the approach to be followed in establishing the
relationship between s BG 1 and rest of the Income Tax Act, 20071.
1 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR
289.

02. METHOD
A. ISSUE
The issue being considered in this paper is the general anti-avoidance provisions
contained in the Income Tax Act, 2007 under ss BG 1 and GA 1 and the relevant terms
as defined in s YA 1 of the Act. There are still cases where matters on tax avoidance are
referred to the predecessors of ss BG 1 and GA 1, notably:
s 108 of the Land and Income Tax Act, 1954;
s 99 of the Income Tax Act, 1976;
ss BG 1 and GB 1 of the Income Tax Act, 1994;
and ss BG 1 and GB 1 of the Income Tax Act, 2004.
B. LAW
s BG 1 of the Income Tax Act, 2007.
s GA 1 of the Income Tax Act, 2007.
s YA 1 of the Income Tax Act, 2007.
Elmiger v Commissioner of Inland Revenue [1966] NZLR 683 (SC) at 687–688.
W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL).
Furniss (Inspector of Taxes) v Dawson [1984] AC 474 (HL).
Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at 555
(PC).
Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA).
Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3
NZLR 767.
Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,
[2009] 2 NZLR 289.
Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433.
C. APPLICATION
SECTION BG 1
01. Section BG 1 has always been applied by the tax authorities for creating situations
to void the whole arrangement. This is because the language used in framing s BG
1 does not allow any scope for apportionment, hence all tax outcomes of the

whole arrangement, including all the legitimate outcomes, are treated as void. The
law leaves no scope, under s BG 1, for the applicant to leave in place even a part
of the tax avoidance arrangement. The final effect of s BG 1(1) thus becomes that
a tax avoidance arrangement becomes void right from the beginning of the
arrangement.
02. Section BG 1 is in itself an annihilating provision. It has no provision of itself to
create a tax liability2. In order to complete an assessment, the Commissioner has
to apply s 113 of the Tax Administration Act, 1994 after completing the process of
voiding.
SECTION GA 1 ADJUSTMENT
03. Legal circles have pointed out on many occasions this drawback. It has been
argued that if the voiding of an arrangement, by using s BG 13, has been
successfully implemented to counteract the tax advantages which the applicant
could have availed, (and the section does no more than that) then there would be
no need for the Commissioner to apply s GA 14. But this does not happen in
practice. The main point to be noted is that if voiding has not been able to
appropriately counteract tax avoidance by the applicant or the voiding has been
able to remove legitimate outcomes which the applicant could have gained or if
there still are consequential adjustments which are required to be made, the
Commissioner has to resort to the application of s GA 1.
04. The legal fraternity has been repeatedly saying that Sections BG 1 and GA 1 are
giving undue powers to the Commissioner which are used to counteract a tax
advantage. This takes place because of the combination created by the effect of s
BG 1 and the application of s GA 1.
YA 1 DEFINITIONS
Before proceeding further with the arguments, it is pertinent to fully understand the
various important legal terms used in the context of anti-avoidance doctrine and their
exact meanings when used in legal matters.
05. Arrangement in fact means an agreement or a contract or plan or an
understanding, irrespective of whether it is enforceable or unenforceable, and
2 Wisheart, Macnab and Kidd v Commissioner of Inland Revenue [1972] NZLR 319 (CA)
3 s BG 1 of the Income Tax Act, 2007.
4 s GA 1 of the Income Tax Act, 2007.

shall include all steps and transactions through which it is carried by the applicant
into effect5.
06. Tax Avoidance6 deals with situations which:
(a) directly or indirectly help the applicant in altering the incidence of any kind of
income tax;
(b) directly or indirectly helps the applicant to be relieved from the liability of
paying income tax, including from a potential or a prospective liability of
income tax in future;
(c) directly or indirectly helps the applicant in reducing, avoiding or postponing
any income tax liability or from any potential or prospective income tax
liability in the future.
07. Tax Avoidance Arrangement7, is in fact the culmination of the first two
terminologies discussed at 5 and 6 and describes any arrangement, whether
entered into by the person affected because of the arrangement or by any another
person, who directly or indirectly:
(a) has tax avoidance as its purpose or effect;
(b) or has tax avoidance as one of its purposes or effects;
(c) whether or not any other purpose or effect is refer-able to ordinary business or
family dealings, provided the tax avoidance purpose or effect is not merely an
incidental one.
08. As stated above, s BG 1 has powers to void any tax avoidance arrangement.
Technically, an “arrangement” is defined as and includes a formal, legally-
enforceable contract through certain informal, unenforceable understandings.
09. Hence, an “arrangement” shall:
 include “all steps and transactions by which it is carried into effect”;
 include unilateral arrangements;
 comprise two or more documents or transactions together if they are forming
part of a single “agreement, contract, plan or understanding”;
 include all steps or transactions which are carried out or brought into effect by
the applicant even outside of New Zealand.
5 s YA 1 of the Income Tax Act, 2007.
6 s YA 1 of the Income Tax Act, 2007.
7 s YA 1 of the Income Tax Act, 2007.

10. The definition also implies that a taxpayer shall be considered party to an
“arrangement” even if it did not know the details of the arrangement and the way
it would be carried out.
11. Hence, before taking any decision, it becomes important for the law makers to
understand the arrangement fully, to take into account all the pertinent and
relevant facts and the information related to the arrangement. This should also
include understanding of the private, commercial and any other objectives of the
arrangement, including those of tax.
12. To determining and establish whether there existed a tax avoidance arrangement
and this should involve the consideration of various factors, including the:
 manner in which the arrangement is carried out;
 role of all relevant parties and their relationships;
 economic and commercial effect of documents and transactions;
 duration of the arrangement;
 nature and extent of the financial consequences;
13. The relevance of all these factors will depend on the provisions used by the
lawmakers or circumvented and also what facts, features and attributes are
required under the Act as a whole8.
APPLYING THE PARLIAMENTARY CONTEMPLATION TEST
14. Based on the above discussed points, the important question is - Does the
arrangement, when viewed in a commercially and economically realistic way,
makes use of (or circumvents) the relevant provisions in a manner which is
consistent with the purpose set out by the Parliament? In this context, it is
necessary to exercise judgement as to whether any of the requisite facts, features
and attributes are absent or present to the degree sufficient for enforcing the Act9.
15. Even in cases where an arrangement, which is complex or unusual and creates or
produces such tax results which can be considered as undesirable from the
perspective of the policy, it may not exactly be a tax avoidance arrangement.
Taxpayers have the liberty of structuring their financial arrangements to get them
the best tax advantages, provided, of course, that the use of such provisions has
been made in accordance with what the Parliament had contemplated when
enacting the provisions. However, it is also a fact that merely a literal compliance
8 Elmiger v Commissioner of Inland Revenue [1966] NZLR 683 (SC) at 687–688.
9 W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL).

with the legal provisions is not sufficient for establishing that the use has been
made within the Parliament’s contemplation10.
THE PREDICATION TEST
16. In this respect, Lord Denning outlined in the case of Newton what has now
become known as the predication test. Under this test, his Lordship ruled that an
arrangement may not be considered as a tax avoidance arrangement if it can be
explained as an ordinary business or a family dealing. Lord Denning said, and I
quote:
“In order to bring the arrangement within the section you must be able
to predicate - by looking at the overt acts by which it was implemented -
that it was implemented in that particular way so as to avoid tax. If you
cannot so predicate, but have to acknowledge that the transactions are
capable of explanation by reference to ordinary business or family
dealing, without necessarily being labelled as a means to avoid tax, then
the arrangement does not come within the section.” Unquote.
17. This test has limited the anti-avoidance provision to such arrangements which
have the sole or principal purpose to effect a tax avoidance. In Challenge, the
Privy Council11 had ruled that the relevant purpose of tax avoidance had to be the
sole or at least principal purpose of an existing arrangement and this was
instrumental in overturning the view of Woodhouse J in Miller12). Consequently,
amendments were carried out in s 108, (which is a predecessor to s BG 1) by
introducing s 9 of the Land and Income Tax Amendment Act (No 2) of 1974 for
countering this restrictive manner in which s 108 was being applied. This
amendment opened a way towards clarifying that such arrangements which have a
more than “merely incidental purpose or effect” of tax avoidance should be
considered as tax avoidance arrangements, whether or not, such purposes or
effects are refer-able to an ordinary business or some family dealings.
18. In general, the anti-avoidance provisions proscribe those arrangements which use
the Act in such a way that the Parliament had not contemplated. Although the
taxpayers have the freedom to structure their financial arrangements while using
those structures which have been recognised by the Act, an arrangement can be
10 Furniss (Inspector of Taxes) v Dawson [1984] AC 474 (HL).
11 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at 555 (PC).
12 Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA).

declared a tax avoidance arrangement if the applicant’s structures are based on
provisions which are outside of the Parliament’s contemplation. Consider for
example, that a taxpayer has chosen to sell or lease an asset and he has different
tax consequences from that choice. Now, if the taxpayer has structured such an
arrangement so as to use the lease provisions but on taking into consideration the
commercial and economic conditions of the arrangement, that the arrangement is
actually a sale, then the provisions used by the applicant shall be considered to be
outside the Parliament’s contemplation.
D. CONCLUSION
The judgment given by the New Zealand Supreme court in the case of Ben Nevis
Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2
NZLR 289 has since been acknowledged in subsequent judicial decisions on the same
topic. Many subsequent judgments did acknowledge that the Ben Nevis approach is the
most appropriate approach for applying s BG 1 in matters related to anti-avoidance.
Another landmark decision on anti-avoidance issue was given by the Supreme Court in
the case Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR
433, popularly referred to as Penny & Hooper in the legal circles. Accordingly, all the
subsequent Commissioners consider that these judgments reflect the true essence of the
law in cases related to anti-avoidance.
Under PART-C: APPLICATION of this paper, legal application of the term
Arrangement has been discussed. It has also been detailed how s BG 1 becomes eligible
when an arrangement is proven showing that the defendant in an anti-avoidance lawsuit
was doing so with intent and knowledge. However, there have come to light certain
lawsuits where the defendant was unaware of the arrangement and still was implicated
because of s BG 1. In the contention of this paper, this lawsuit seems to be a case where
Mr. Nathan was unaware of the legality of the term arrangement and had no intention
of creating a situation of anti-avoidance of tax. His only contention was to safeguard the
financial rights of his family members in a legal way and hence he created a family trust
to which he entrusted all the financial responsibilities and legal rights of the trustees
with respect to the asset that he created and also with regard to the income which this
asset would be generating in the future.

Based on the above arguments, the taxpayers had requested in Ben Nevis that courts
should recognise the use of choices in the Act. The court said, and I quote:
“The appellants made a sustained plea that the courts should not
deprive commercial and other parties of tax beneficial choices. On the
approach we have set out, taxpayers have the freedom to structure
transactions to their best tax advantage. They may utilise available tax
incentives in whatever way the applicable legislative text, read in the
light of its context and purpose, permits. They cannot, however, do so in
a way that is proscribed by the general anti-avoidance provision.
Unquote.
The New Zealand Supreme Court in Penny (SC) had said that while the taxpayers
should have the choice to transfer the assets owned by their businesses to trusts or
companies owned by their family trusts, provided there were no other aspects of the
arrangement which meant it was a tax avoidance arrangement. The economic and
commercial reality of an arrangement, when considered as a whole, should be that the
taxpayer received the full benefits of the income provided it was derived effectively.
BIBLIOGRAPHY
BOOKS
Enonchong, N. D. Undue Influence and Unconscionable Dealing (Sweet & Maxwell
2006)
Mayer, D.N. Liberty to Contract: Rediscovering a Lost Constitutional Right (Cato
Institute 2011)

Poole, J. Contract Law (OUP 2008)
Trebilcock, M.J. The Limits of Freedom of Contract (HUP 1993)
CASES
Allcard v Skinner [1887] LR 36 ChD 145
Barton v Armstrong [1976] 1 AC 104
Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,
[2009] 2 NZLR 289.
Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at
555 (PC).
Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3
NZLR 767.
CTN Cash And Carry Ltd v Gallagher Ltd [1994] 3 All ER 714
Dimskal Shipping Co SA v International Transport Workers’ Federation, The Evia Luck
[1991] 4 All ER 871
Elmiger v Commissioner of Inland Revenue [1966] NZLR 683 (SC) at 687–688.
Fisher v Bell [1961] 1 QB 394
Furniss (Inspector of Taxes) v Dawson [1984] AC 474 (HL).
Occidental Worldwide investment Corporation v Skibs A/S Avanti, the Siboen and the
Sibotre [1976] 1 Lloyd’s Rep 293
Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA).
Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433.
W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL).