Taxation Report: Legal Analysis of Tax Avoidance and Tax Planning

This report delves into the critical distinction between tax avoidance and tax planning, aiming to clarify the legal boundaries that separate them. It begins by outlining the objectives, which include identifying the point at which an arrangement crosses over into tax evasion and assessing a specific scenario in light of relevant legal provisions and precedents. The report meticulously examines key legislative provisions, such as Section BG 1 and GA 1 of the Income Tax Act 2007, along with definitions from Section YA 1 and the Interpretation Act 1999. It also considers the implications of the Tax Administration Act 1994, including the definition of an abusive tax position and associated penalties. Several landmark case laws, including Commissioner of Inland Revenue v Dandelion Investments Ltd, Ben Nevis Forestry Ventures Ltd v CIR, and BNZ Investments Ltd v Commissioner of Inland Revenue, are analyzed to provide context and illustrate the application of these principles. The report applies these legal frameworks and tests to a specific scenario involving a partnership and a related company, assessing whether a proposed arrangement constitutes tax avoidance. The analysis considers the application of tests like the Parliamentary Contemplation test and the Objective test, providing a conclusion based on the discussion and application of the rules to the scenario.

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

1TAXATION
This report has been written because of availing a clear understanding of the tax avoidance
and to identify the thin line of separation between tax avoidance and tax planning. The
objectives of the report are to identify the extent beyond which an arrangement would be
considered to be a tax evasion and not merely a tax planning. It will strive to assess the
scenario in the light of the legal provision and evaluate the scheme involved. This report will
examine the issues arising from the scenario. It will strive to list the legislative provisions and
the precedents that is relevant to the scenario. The provisions that has been listed in the report
will be discussed and applied to the given scenario. The report in the end will strive to
provide a conclusion that can be arrived at from the discussion of the rules and application of
the same in the scenario.
Issue
The issue in the present scenario is whether the structure that has been suggested by Chris
would land Ian and Michael into any problems. Whether the arrangement is acceptable, or is
void as against the Commissioner by virtue of s BG 1 ITA 2007. whether there has been a
“tax avoidance arrangement” which could be attacked by Inland Revenue under the general
anti-avoidance rule [GAAR] of the Income Tax Act 2007. Whether there are any
consequences that might follow the implementation of this arrangement.
Rule
Provisions
Section BG 1 of the Income Tax Act 20071 (ITA 2007) renders any arrangements that has
the effect of tax avoidance as void against the commissioner in relation to tax purposes. The
commissioner has the power to oppose any tax advantage, which has been accrued by a
person availing resort under the tax avoidance scheme.
1 The Income Tax Act 2007, s. BG 1

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Section GA 1 of the ITA 20072 confers the commissioner with general power to make
adjustments. The arrangements, which are rendered void under section BG 1 will be
subjected to adjustments by the commissioner. Any advantage with respect to the tax that a
person has availed under the arrangement with a view to avoid tax affecting his taxable
income will be adjusted by the commissioner in a way that the commissioner would think to
be appropriate. In making the advantage, the chief focus of the commissioner would be to
counteract such an advantage relating to tax that has been effected under the scheme enabling
the tax avoidance. Under this section the commissioner has the power to withdraw the tax
credit in part or in totality or to permit another person to avail such a benefit that has been
availed by the tax payer under the scheme designed for tax avoidance. In making such
adjustments, the Commissioner is required to give regard to the volume of income, deduction,
tax loss and tax credit that the person would have incurred in the absence of such an
arrangement in relation to tax avoidance. A deductions or income that has already been
counted in the computation of the income of one person will not be counted in the income of
another person for tax purposes. For the purpose of this Act, tax credit depicts a reduction in
tax by virtue of any credit or benefit that a person has availed with respect to taxation.
Section YA 1 of the ITA 20073 contains the definition of the terms as to be construed
under this Act. For the purpose of this Act, arrangement implies any contract, agreement,
understanding or plan, irrespective of its enforceability. Tax avoidance implies alteration of
present or future tax liability and avoidance or reduction in the present or future tax liability.
The word tax avoidance arrangement depicts any scheme or arrangement, which has been
created for the sole purpose of avoiding tax.
2 The Income Tax Act 2007, s. GA 1
3 The Income Tax Act 2007, s. YA 1

3TAXATION
Section 5 of the Interpretation Act 19994 requires the court to consider both the literal
meaning of a statute and the intention that has been present while enacting the legislation as a
whole, while interpreting a statute or any provision of the same thereof.
Section 3 of the Tax Administration Act 19945, tax shortfall is defined as any penalty that
can be imposed upon a person for taking any incorrect tax position and abusive tax position
has been defined in this section as having the same definition as has been provided in section
141D of the Act.
Section 141D of the Tax Administration Act 19946 has defined abusive tax position as
any position that can be construed to be unacceptable and has been implemented for the sole
purpose of tax avoidance. The penalty for adopting an abusive tax position will be hundred
percent of the tax shortfall that has resulted from the arrangement.
Case Laws
In the case of Commissioner of Inland Revenue v Dandelion Investments Ltd [2001] 20
NZTC 17,293 (HC)7, the court contended that the an arrangement can be construed to be a
tax avoidance scheme even if any part of it or the whole of the arrangement involves tax
avoidance issues.
In the case of Ben Nevis Forestry Ventures Ltd v CIR [2008] NZSC 1158, the court has
contended that an arrangement would be construed to be a tax avoidance arrangement, if any
step of that arrangement, or a combination of the steps or the total arrangement has the effect
of reducing tax. In this case, it has been contended by the court that even if the steps
individually do not have any tax reduction effect but the combination of all such steps has an
effect to avoiding the tax, the same will be construed to be a tax avoidance arrangement.
4 The Interpretation Act 1999, s. 5
5 The Tax Administration Act 1994, s. 3
6 The Tax Administration Act 1994, s. 141D
7 Commissioner of Inland Revenue v Dandelion Investments Ltd [2001] 20 NZTC 17,293 (HC)
8 Ben Nevis Forestry Ventures Ltd v CIR [2008] NZSC 115

4TAXATION
In the case of BNZ Investments Ltd v Commissioner of Inland Revenue (2000) 19 NZTC
15,732 (HC)9, it was held that the even the arrangement has been connected with a
transaction effected in abroad, it can be construed to be an tax avoidance that has occurred
within New Zealand.
In the case of Commissioner of Inland Revenue v Penny [2010] NZCA 23110, it has been
held that the arrangement will only necessarily involve any particular step or part, but it can
imply a series of transaction they might have occurred for the purpose of tax avoidance.
It has been held in the case of Inland Revenue v Europa Oil (NZ) Ltd [1971] NZLR 641
(PC) [Europa No 1]11, that where there are one or more of many transactions involving tax
avoidance and all the transactions are interrelated, the whole arrangement would be
construed to be a tax avoidance arrangement.
In the English case of W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300
(HL)12, it has been held by the court that statutory provisions are not be applied when a
structure itself indicates the tax avoidance element to be present in a case.
Tests
Parliamentary contemplation test – the viewpoint of the parliament in enacting a
legislation needs to be taken into account. Russell v Commissioner of Inland Revenue (No
2) (2010) 24 NZTC 24,463 (HC)13.
Objective test – consideration will be given to the effect or purpose of an arrangement and
not the motive of the parties. Ashton v Commissioner of Inland Revenue [1975] 2 NZLR
717 (PC)14.
9 BNZ Investments Ltd v Commissioner of Inland Revenue (2000) 19 NZTC 15,732 (HC)
10 Commissioner of Inland Revenue v Penny [2010] NZCA 231
11 Inland Revenue v Europa Oil (NZ) Ltd [1971] NZLR 641 (PC) [Europa No 1]
12 W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL)
13 Russell v Commissioner of Inland Revenue (No 2) (2010) 24 NZTC 24,463 (HC)
14 Ashton v Commissioner of Inland Revenue [1975] 2 NZLR 717 (PC)

5TAXATION
Application
In the present situation, Ian and Michael are both arborists who operate in the Auckland
region running their business as a partnership (I & M Partnership). They own a building,
plant and equipment and have a staff of four. David is an engineering contractor in the
building industry and is the brother of Ian. Auckland Engineering Ltd (AEL) has run into
financial problems and he has approached Ian for his help. Ian and Michael had a discussion
about the same with their accountant Chris who suggested that AEL has a viable future and
they might transfer their partnership assets (Plant and equipment) to AEL (taking a debt
back). I & M Partnership could take a mortgage over the assets of AEL. AEL would then
lease (rent) the equipment back to I & M Partnership for an annual rental. This transaction of
transferring assets does not accrue any economic benefit with respect to the business activity
of the partnership. This can be construed as an arrangement as has been defined under the
interpretation section YA 1 of the ITA 2007. This arrangement consists of several plans and
agreements, which includes transferring of the assets of the partnership to AEL, without any
valid reason of economic nature. It also includes the taking over a mortgage over the assets of
AEL. Finally, these assets are to be rented by AEL back to I & M Partnership. Hence, all
these steps are to be conceived as a part of a single plan that has been proposed to be
instituted. However, to bring this transaction under the purview of section BG 1 of the ITA
200715 for the purpose of being a tax avoidance arrangement, the purpose and the effects of
the same is required to be analysed. In this furtherance, the analysis of the situation under the
provisions different legislations relating to tax avoidance are to be carried out and the several
tests in this regard is needed to be applied.
Moreover, it has further been noted by Chris that AEL has approximately $1 million of tax
losses carried forward so he thinks that they could be used to offset the rental income and
15 The Income Tax Act 2007, s. BG 1

6TAXATION
other expenses. They have agreed that one-third of the tax saved will be gifted to David to
help him with cash flow and two-third of the same will be shared by I & M Partnership. This
makes it evident that the chief motive of this arrangement is for the purpose of saving tax and
the same does not have any financial benefit in relation to the business activity of the firm.
This can be treated as a tax avoidance arrangement with all the steps in it to have a purpose of
assisting the saving of tax. This can be treated to be a tax avoidance arrangement and would
have the consequence of attracting the section BG 1 and other tax avoidance provisions.
The arrangement that has been proposed by Chris is to be construed as a tax avoidance
scheme and the same will attract section BG 1 of the ITA 200716. This will render the
arrangement effecting the tax avoidance as void against the commissioner in relation to tax
purposes. The commissioner has the power to oppose any tax advantage, which has been
accrued by them availing resort under the tax avoidance scheme. In this case, the tax saved
from this arrangement has been decided to be distribute among the partnership and David.
This will require the commissioner to render all such agreements to be rendered void and to
cancel all the benefits and tax savings that they might accrue from the proposed scheme.
In this context, it would be required to be analysed that whether the arrangement designed
by Chris contains any step or combination of steps which would be rendered to have the
effect of avoiding tax. In this case, all the steps of the arrangement can be construed to be
have an effect of saving tax and it does not have any other purpose to serve with respect to
the business activity that they are supposed to be carried out. This can be supported by the
principles established in the case of Ben Nevis Forestry Ventures Ltd v CIR17.
For the purpose of bringing a case under the purview of this section the commissioner is to
be satisfied that a series of transactions that are interrelated is required to be directed towards
16 The Income Tax Act 2007, s. BG 1
17 Ben Nevis Forestry Ventures Ltd v CIR [2008] NZSC 115

7TAXATION
the saving of tax for this purpose all the transaction should not necessarily be directed to
avoid tax. Any one or more of the transactions would be required to have the effect of
avoiding tax. This can be explained with the principle established in the case of
Commissioner of Inland Revenue v Penny18. In this context, it can be stated all the
transactions that has been proposed by Ian and Michael would be a part of the arrangement
that has been designed to effect tax avoidance.
In the present case, as the structure that has been designed by Chris implies a tax
avoidance motive and effect, the principle of the case W T Ramsay Ltd v Inland Revenue
Commissioners19, implies it to be a tax avoidance scheme irrespective of any application of
the legal provision.
In this furtherance, the Parliamentary contemplation test can also be applied that requires the
viewpoint of the parliament in enacting a legislation to be taken into account while bringing a
case under the scope of section BG 1 of the ITA 2007. In this case, the parliamentary
contemplation test would render the situation to be a tax avoidance arrangement as the
structure proposed by Chris has the sole purpose of saving tax and no other purpose to serve
to the business of I & M partnership. This can further be backed by the case of Russell v
Commissioner of Inland Revenue20.
The Objective test will also be considered to render a situation that has been alleged to have
the implication of tax avoidance. This test will analyse the effect or the purpose of the
arrangement that has been achieved and not the motive of the parties. The innocence of the
parties will not waive their liability under the tax avoidance scheme. The reaping of the
benefits of the scheme would be enough to render them to be liable for tax avoidance. In this
situation, the partnership has possibility of saving tax and the design would have the effect of
18 Commissioner of Inland Revenue v Penny [2010] NZCA 231
19 W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL)
20 Russell v Commissioner of Inland Revenue (No 2) (2010) 24 NZTC 24,463 (HC)

8TAXATION
distributing the tax saving among the partnership and David. Hence, both I & M Partnership
and David would be treated to be a party to the tax avoidance arrangement. This can be
illustrated with the case of Ashton v Commissioner of Inland Revenue21.
In this context, reference may also be made with respect to Section GA 1 of the ITA 2007
that confers the commissioner with general power to make adjustments. As the arrangements
that has been proposed in this case, is to be rendered void under section BG 1, the same will
be subjected to adjustments by the commissioner. Any advantage with respect to the tax that
the partnership or the any other person benefitting from the same has availed under the
arrangement with a view to avoid tax affecting his taxable income will be adjusted by the
commissioner in a way that the commissioner would think to be appropriate. In adjusting the
advantage, the emphasis of the commissioner would be to counteract such an advantage
relating to tax that has been effected under the scheme enabling the tax avoidance. Under this
section, the commissioner has the power to withdraw the tax credit in part or in totality or to
permit another person to avail such a benefit that has been availed by the taxpayer under the
scheme designed for tax avoidance. In making such adjustments, the Commissioner is
required to give regard to the volume of income, deduction, tax loss and tax credit that the
person would have incurred in the absence of such an arrangement in relation to tax
avoidance. A deductions or income that has already been counted in the computation of the
income of one person will not be counted in the income of another person for tax purposes.
For the purpose of this Act, tax credit depicts a reduction in tax by virtue of any credit or
benefit that a person has availed with respect to taxation. In this case, the reduction in tax has
been planned to have distributed among the I&M partnership and David. This needs to be
counteracted by the commissioner and the benefit is required to be taken away by the
commissioner.
21 Ashton v Commissioner of Inland Revenue [1975] 2 NZLR 717 (PC)

9TAXATION
This would require Ian & Michael and also David to be penalised under Section 3 of the
Tax Administration Act 199422 as they have taken an incorrect tax position and abusive tax
position has been defined in this section as having the same definition as has been provided in
section 141D of the Act.
The partnership and David would be held liable under Section 141D of the Tax
Administration Act 199423 for taking an abusive tax position. Abusive tax position can be
construed to be unacceptable and has been implemented for the sole purpose of tax
avoidance. The penalty for adopting an abusive tax position will be hundred percent of the
tax shortfall that has resulted from the arrangement. In this case, Ian and Michael along with
David will gain an abusive tax position under this section and will be rendered to be
penalised with a hundred percent of the tax benefit that they have accrued under the scheme.
Conclusion
Hence, it can be concluded that the structure that has been suggested by Chris would land
Ian and Michael into the problems of tax evasion. The arrangement is unacceptable and is
void as against the Commissioner by virtue of s BG 1 ITA 2007. There has been a “tax
avoidance arrangement”, which could be attacked by Inland Revenue under the general anti-
avoidance rule [GAAR] of the Income Tax Act 2007. The implementation of the arrangement
would render I&M partnership and David to be liable under section 141D for the purpose of
incurring penalty.
22 The Tax Administration Act 1994, s. 3
23 The Tax Administration Act 1994, s. 141D

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Reference
Legislation
The Income Tax Act 2007
The Interpretation Act 1999
The Tax Administration Act 1994
Cases
Ashton v Commissioner of Inland Revenue [1975] 2 NZLR 717 (PC)
Ben Nevis Forestry Ventures Ltd v CIR [2008] NZSC 115
BNZ Investments Ltd v Commissioner of Inland Revenue (2000) 19 NZTC 15,732 (HC)
Commissioner of Inland Revenue v Dandelion Investments Ltd [2001] 20 NZTC 17,293
(HC)
Commissioner of Inland Revenue v Penny [2010] NZCA 231
Inland Revenue v Europa Oil (NZ) Ltd [1971] NZLR 641 (PC) [Europa No 1]
Russell v Commissioner of Inland Revenue (No 2) (2010) 24 NZTC 24,463 (HC)
W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL)