The Inland Revenue Department is continuing with its campaign on tax avoidance by releasing a large discussion document just before Christmas. Business editor Dene Mackenzie talks to tax expert Peter Truman about the implications.
Taxpayers have been waiting for the document since 2004.
Deloitte Dunedin tax partner Peter Truman said the release of the draft interpretation was welcome, because the intervening period had been one of significant upheaval in the area of tax avoidance.
"There have been a string of material wins for the commissioner that has created a significant `grey area' in terms of where the tax avoidance boundary lies."
Taxpayers and their advisers would be hoping that the draft statement provided some clarity as to what kind of arrangements the commissioner considered would constitute tax avoidance.
The boundary was currently in a state of flux and had been for some time, Mr Truman said.
The document recognised the complexity of the law. Given the critical importance of the issue to the taxpaying community, many tax advisers up and down the country would be looking to some "hefty" Christmas reading.
"While tax experts are expected to read and absorb such guidance, many normal taxpayers will find the thought of 117 pages somewhat daunting."
The draft statement was part of a journey through which greater certainty could be achieved by taxpayers, Mr Truman said. It provided a framework of analysis required to be undertaken to determine the avoidance questions but did not make the avoidance analysis simple.
The guidance did not provide examples. Examples were useful to taxpayers because they were able to reinforce what transactions the department would seek to attack and those it was likely to be happy with, he said.
"We suspect the absence of examples is quite deliberate. Inland Revenue is ensuring it does not constrain itself from challenging any arrangements in the future on tax avoidance grounds by use of examples that may be taken out of context - from an IRD perspective.
"It also will be concerned around limiting the ability of the law to evolve," Mr Truman said.
On the flip side, it did diminish the usefulness of the statement.
There have been several significant tax avoidance decisions handed down by the Supreme Court in recent years, including Ben Nevis Forestry Ventures and Penny and Hooper.
The decisions represented a different emphasis on previous decisions of the Privy Council, Mr Truman said.
The Supreme Court emphasised the "Parliamentary Contemplation" test which examined whether the tax outcomes were what Parliament would have intended for the relevant tax provision with regard to the commercial reality and the economic effects of the transaction.
Inland Revenue had been successful with several high-profile tax avoidance cases which had resulted in the tax avoidance pendulum swinging in its favour, he said.
Taxpayers would need to take more care in considering whether the structuring of transactions which produced tax advantages could be substantiated should IRD seek to challenge them.
Predictably, the department found favour with the stance taken by the Supreme Court, Mr Truman said.
Case studies
Penny and Hooper
The Inland Revenue won its Supreme Court appeal against Christchurch orthopaedic surgeons Ian Penny and Gary Hooper.
The court found that the two surgeons should not be allowed to structure their pay with a "more than merely incidental purpose of obtaining a tax advantage unless that advantage was in the contemplation of Parliament".
One of the key issues in the case was whether the surgeons should be able to pay themselves at a much lower rate than the normal commercial rate for their kind of work.
Ben Nevis
The Ben Nevis decision concerned the Trinity scheme, so-called after companies at its heart. The scheme involved forestry investment with a twist - investors bought a licence entitling them to grow fir trees, and under the terms of the agreement they did not own the land, or the trees, but they had a right to the proceeds from harvesting the trees.
In return, they paid a relatively small up-front fee and agreed to pay a premium for the licence when the trees came to be harvested in about 50 years. According to Inland Revenue, about $3.7 billion would have been at stake had the transaction run its course and all tax deductions been claimed.
