|Brendan Brown||Greg Neill|
Significant changes from the draft statement
As a result of the consultation process, the Statement contains several important changes from the draft circulated in December 2011, including:
- The inclusion of three worked examples;
- Substantial amendments to the section on reconstruction to confirm that Inland Revenue is required to reconstruct an arrangement found to be void under the GAAR in order to reinstate legitimate tax benefits; and
- Amendments to better explain the "Parliamentary contemplation" test.
General comments on the Statement
The finalised Statement comes at a time when there is significant uncertainty as to the line between tax avoidance and acceptable tax planning. This is due to the more expansive approach by Inland Revenue to the scope of the tax avoidance provisions and a series of wins for Inland Revenue before the courts.
The most difficult aspect of Inland Revenue's new approach to the GAAR is the "Parliamentary contemplation" test, adopted by New Zealand's Supreme Court as the correct way to apply the GAAR. The Statement provides (at paragraph 210) that "[t]he test to identify whether an arrangement involves tax avoidance is to ask if the arrangement, viewed in a commercially and economically realistic way, makes use of the Act in a manner that is consistent with Parliament's purpose".
If it is accepted that a taxpayer who has fallen within, or outside of, the relevant specific tax provisions may nonetheless be considered to have made use of the Act in a manner that is inconsistent with Parliament's purpose, there is a risk that the test will become either a hindsight test (which asks what the law would have been had Parliament considered this arrangement) or an economic substance test (which asks whether the tax consequences are reflective of the arrangement's economic substance).
The hindsight test is objectionable on constitutional grounds, as the GAAR would effectively become a tool with which Inland Revenue officials and judges are asked to fill in perceived gaps in tax policy, thereby (in effect) retrospectively changing the law. And the economic substance test is impractical, because in tax, as in most fields of commercial law, the same economic consequences can often be achieved using different legal arrangements, with different tax and regulatory consequences, and that alone should never result in a GAAR applying. The changes made to the Statement following the consultation process seek to address these concerns. But it will be important that Inland Revenue's processes are sufficiently robust so that neither the hindsight test nor economic substance becomes the touchstone for Inland Revenue's administration of the Parliamentary contemplation test in practice.
The release of the Statement is a positive development in that it describes for taxpayers the framework Inland Revenue should apply when considering tax avoidance questions. But for businesses to have the certainty they need, New Zealand taxpayers will hopefully see a continued focus from Inland Revenue on providing rulings and other guidance on the tax consequences of particular transactions in a prompt and efficient manner.