Tax avoidance rules defined for first time in 23 years

File photo / NZH

The Inland Revenue Department has spelled out its final view on what constitutes tax avoidance for the first time since 1990 in a 135 page document that the accounting profession and taxpayers have waited years to see.

The last time a final determination on tax avoidance was released was in 1990, and the publication of new finalised guidelines has been delayed in the last five years by a string of wins in the courts for the tax department, which have fundamentally changed the way tax avoidance is defined.

At its most basic, tax avoidance in the 1990 guidelines was judged on the basis of whether the arrangements in question met the letter of the law.

However, the court victories in the last few years have created a new bedrock question for tax avoidance. That is: was the arrangement in line with what Parliament intended when it passed the law.

The most celebrated case in which this principle was applied was in a series of cases involving tax avoidance by foreign-owned, mainly Australian, registered banks, which used complex cross-border arrangements to avoid tax.

The case law in this dispute was never finally settled as the banks and the IRD agreed to settle the claims on Christmas Eve 2009, with the banks agreeing to pay $2.2 billion in back taxes and penalties - a figure lower than the IRD sought, but which avoided the issues being taken to the Supreme Court, where the IRD might have lost.

Deloitte NZ chief executive Thomas Pippos, a tax expert, welcomed the IRD's publication as a "net positive", although it was debatable whether it provided "clarity" on complex tax issues.

"The avoidance boundary has been in a state of flux for some time and it will continue to be," said Pippos.

Ernst & Young senior partner Jo Doolan, a vehement critic of the IRD's creeping success in expanding the definition of avoidance, said the document appears at odds, in some places, with the departments own recent approach to avoidance.

She cited a passage in which IRD acknowledges that "even when an arrangement is complex or unusual, or produces tax results that may be undesirable from a policy perspective, it may not be a tax avoidance arrangement."

It needed only to accord with so-called 'parliamentary intention'.

"This is good news as the line in the sand appeared to have moved so far in favour of the tax office that where taxpayers had a choice of paying a higher or lower amount of tax, they would always opt for the higher amount or run the risk of being slam-dunked," said Doolan.

"The downside is determining what may or may not have been Parliament's intention. One sometimes wonders just how much Parliament actually contemplates."

Both Pippos and Doolan issued a plea that the new rules should create some greater degree of certainty for investors, or risk losing investment.

"Regulatory certainty is a key to economic growth," said Pippos. "Inappropriate use (of the guidelines) could make the ship go slower, not faster."