Tax Avoidance, the Rule of Law and The New Zealand ... staff...Tax Avoidance, the Rule of Law and The New Zealand Supreme Court 265 anyone else – has formulated a satisfactory definition,

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Tax Avoidance, the Rule of Law and The New Zealand

Supreme Court

Michael Littlewood*

I. INTRODUCTION The Privy Council served as New Zealand’s highest court until 2004, when the Supreme Court was established. The transition prompted speculation as to the areas of the law in which the New Zealand courts, freed from the colonial yoke, might develop an indigenous jurisprudence. One area in which change was widely expected was in the law relating to tax avoidance, and this expectation has been more than fulfilled. Two cases have gone to the Supreme Court: Ben Nevis Ltd v Commissioner of Inland Revenue1 (which concerned the General Anti-Avoidance Rule (GAAR) contained in the Income Tax Act2 and is perhaps the Court’s most important decision, in any field, to date) and

* Earlier versions of this paper were presented at a symposium called “A Symposium

on Private Law and Justice” at the University of Auckland on 24 March 2010 and at a joint meeting of the Society for Legal and Social Philosophy (Auckland Branch) and the International Fiscal Association (New Zealand Branch) at the University of Auckland on 29 September 2010. I am grateful to all those who contributed on those occasions, especially Jim Evans, Richard Ekins, Casey Plunket, Craig Elliffe, John Gardner, Sir Edmund Thomas, Rob McLeod and the Hon Robert Smellie.

1 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.

2 Ben Nevis concerned the GAAR contained in s BG 1 of the Income Tax Act 1994. Since then, the Act has been repealed and replaced several times. The GAAR is now contained in s BG 1 of the Income Tax Act 2007. Its wording remains unchanged.

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Glenharrow Ltd v Commissioner of Inland Revenue3 (which concerned the GAAR contained in the Goods and Services Tax Act 1985).

These cases lend weight to the theory that the idea of tax avoidance is not susceptible to coherent explication and that rules against it are therefore inescapably problematic – to the extent, even, that they constitute a departure from the rule of law. The cases also suggest, however, that having a GAAR is none the less better than not having one. It seems clear, too, that the Supreme Court has already, in these two cases, both clarified the law and taken a tougher line against tax avoidance than did the Privy Council.

A third case – Penny and Hooper v Commissioner of Inland Revenue4 – has reached the Court of Appeal, and leave has been granted for an appeal to the Supreme Court. And a whole raft of cases has been decided by the High Court: BNZ Investments Ltd v Commissioner of Inland Revenue,5 Westpac Banking Corporation v Commissioner of Inland Revenue,6 Education Administration Ltd v Commissioner of Inland Revenue,7 DT United Kingdom Ltd v Commissioner of Inland Revenue,8 Russell v Commissioner of Inland Revenue,9 Krukziener v Commissioner of Inland Revenue,10 and White v Commissioner of Inland Revenue.11 Still more are in the pipeline. It is apparent from these cases, as from Ben Nevis and Glenharrow, that the New Zealand courts are developing their own jurisprudence on avoidance, and that they are less tolerant of it than was the Privy Council. Indeed, the Commissioner has won all of the cases but one (White), though the appeal in Penny and Hooper is pending and appeals in some of the other cases are still possible.

Tax avoidance disputes in New Zealand usually, though not always, revolve around the GAAR now contained in s BG 1(1) of the Income Tax Act 2007, which provides that every “tax avoidance arrangement” is void. But what exactly is “tax avoidance”? This problem was raised before the Privy Council, in appeals from New Zealand and Australia, on 13 occasions (the first in 1900, the last in 2005),12 but it remains unresolved, for to date no one – not Parliament, the Privy Council, the Supreme Court, any other court, nor

3 Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009]

2 NZLR 359. 4 Commissioner of Inland Revenue v Penny [2010] NZCA 231, [2010] 3 NZLR 360. 5 BNZ Investments Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 23,997 (HC).

This decision is sometimes referred to as the second BNZ case, to distinguish it from Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA).

6 Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834 (HC).

7 Education Administration Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,238 (HC).

8 DT United Kingdom Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,369 (HC).

9 Russell v Commissioner of Inland Revenue (2010) 24 NZTC 24,463 (HC). 10 Krukziener v Commissioner of Inland Revenue (2010) 24 NZTC 24,563 (HC). 11 White v Commissioner of Inland Revenue (2010) 24 NZTC 24,600 (HC). 12 See M Littlewood “The Privy Council and the Australasian Anti-Avoidance Rules”

[2007] British Tax Review 175.

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anyone else – has formulated a satisfactory definition, or even a coherent explanation.13

Many legal concepts are, of course, difficult to define. But the idea of tax avoidance is especially, perhaps uniquely, difficult. Most legal concepts have a more or less solid core and are disputed only at the margins – as with, for example, the distinction between income and capital gains. But the idea of tax avoidance has no core – the uncertainty goes right through, for there is no such thing as a non-contestable case of tax avoidance. Consequently, not only does the concept remain undefined, but there is no agreed set of guidelines as to how it might be recognised. Or, at least, whatever guidelines there are fail to address the crux of the issue, which is how to distinguish between tax avoidance (which is caught by the GAAR) and acceptable tax planning (a category that the courts have always recognised, though the terminology has varied).

Moreover, the interpretation of the GAAR is not the only problem. In cases in which tax avoidance is alleged, logic requires a two-stage analysis. First, it is necessary to determine whether, but for the GAAR, the legislation produces the result claimed by the taxpayer. In other words, but for the GAAR, would the taxpayer’s scheme succeed? Secondly, it is necessary to determine – if the answer to the first question is that, but for the GAAR, the scheme would succeed – whether the GAAR applies. An example of a taxpayer’s scheme failing at the first hurdle is Inland Revenue Commissioner v Europa Oil (NZ) Ltd,14 in which the majority of the Privy Council held that, under the rules relating to deductions, the taxpayer was simply not entitled to the deductions it claimed; and that it was therefore unnecessary to consider the GAAR. Another is Hadlee v Commissioner of Inland Revenue,15 in which the Board held that the taxpayer’s attempt to assign income to a trust was ineffectual; and, again, that it was therefore unnecessary to consider the GAAR. More recently, in Peterson v Commissioner of Inland Revenue,16 the last case about the New Zealand GAAR to be heard by the Privy Council, Lord Millett, speaking for the majority, made the point as follows:

Their Lordships observe that reliance by the commissioner on the section [containing the GAAR] presupposes that he accepts that but for its provisions the scheme would have succeeded in achieving its object; for, if not, the taxpayer has not obtained a tax advantage and there is nothing for the Commissioner to counteract. As Richardson P said in Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 at p 464:

13 See generally N Orow General Anti-Avoidance Rules (Jordan Publishing, Bristol,

2000) and R Tooma Legislating Against Tax Avoidance (IBFD, Amsterdam, 2008). 14 Inland Revenue Commissioner v Europa Oil (NZ) Ltd [1971] AC 760 (PC). This is

usually called the first Europa case, to distinguish it from Europa Oil (NZ) Ltd v Commissioner of Inland Revenue [1976] 1 NZLR 546 (PC) (the second Europa case).

15 Hadlee v Commissioner of Inland Revenue [1993] 2 NZLR 385 (PC). 16 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433 at [4].

The case cited by Lord Millett – the first BNZ case – is reported as Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA).


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… it is inherent in the section that, but for its provisions, the impugned arrangements would meet all the specific requirements of the income tax legislation.

For this reason it is usually prudent for the commissioner to contend in the alternative either that a scheme does not in fact achieve the desired tax advantage or, if it does, that it can be countered by the application of s 99 [the section containing the GAAR].

One aspect of the problem, therefore, is, in answering the first question, how should the court go about interpreting the taxing statute? Is a literal interpretation required? Or a purposive interpretation? Do the same rules of interpretation apply to tax statutes as to other statutes? Does it make any difference if the taxpayer has deliberately arranged his affairs with the intention of reducing his liability to tax? Are the courts confined to considering the legal form of the transactions carried out by taxpayers? Or can they consider also their economic substance? These questions remain largely unresolved.

New Zealand is not unique in having a GAAR. Various other countries have very similar rules. Australia, like New Zealand, has had one for more than a hundred years;17 Hong Kong introduced one in 1941;18 and Canada did so in 1988.19 But many countries, notably the United Kingdom20 and the United States, do not have a GAAR.21 That is, they do not have a general anti-avoidance rule – though virtually all jurisdictions, both those that have GAARs and those that do not, have numerous specific anti-avoidance rules (that is, rules aimed at specific forms of avoidance). The advantage of specific rules is that it is possible to draft them with reasonable precision. But specific rules are only ever enacted after taxpayers have exposed, by usage, the method

17 See M Littlewood “The Privy Council and the Australasian Anti-Avoidance Rules”

[2007] British Tax Review 175–205 and C Evans “Containing Tax Avoidance: Anti-Avoidance Strategies” in J Head and R Krever (eds) Tax Reform in the 21st Century (Kluwer Law International, Amsterdam, 2009) at 529.

18 Inland Revenue Ordinance 1947 (HK), ss 61 and 61A. See P Willoughby and A Halkyard Encyclopaedia of Hong Kong Taxation (Butterworths, Hong Kong, 1993 (looseleaf)) and A Halkyard and J VanderWolk “CIR v HIT Finance; CIR v Tai Hing Cotton Mill (Development) Ltd – Tax Avoidance Doctrine in Hong Kong with Australasian Characteristics” [2009] British Tax Review 180.

19 See I Roxan “General Anti-Avoidance in Action – News from Canada” [1998] British Tax Review 140; and D Duff “Lipson v Canada – Whither the Canadian GAAR?” [2009] British Tax Review 161.

20 See for instance J Freedman “Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle” [2004] British Tax Review 332; and J Freedman “Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament” (2007) 123 LQR 53.

21 In 2010 the United States Congress enacted a provision giving statutory force to a judge-made anti-avoidance principle, but it seems clear from its terms and the commentaries on it that it is less than a fully-fledged GAAR. See M McMahon “Living with the Codified Economic Substance Doctrine” [2010] Tax Notes Today 158–162.


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of avoidance at which they are directed, so the legislature is forever shutting the door after the horses have bolted – hence the case for a general rule.

The main argument against GAARs is that it is unsound to pass a law against something that cannot be defined or even coherently explained – such as tax avoidance. To this is usually added the argument that the legislature, if it wishes to impose a tax, should be able to define its scope; that a GAAR is necessary only if the legislature has failed to adequately define the scope of the tax; and that the enactment of a GAAR is therefore an admission of failure on the part of the legislature.

Although the United Kingdom has no GAAR, its courts have taken a relatively robust approach to the interpretation of taxing statutes, especially in cases where the taxpayer has deliberately sought to avoid liability. This has come, most importantly, in the anti-avoidance principle established by the House of Lords in WT Ramsay Ltd v Inland Revenue Commissioners22 and subsequent cases.23 But these cases raise two difficult questions. First, considerable doubt persists as to what they stand for. And, secondly, it is unclear whether the principle – whatever it is – applies in New Zealand.

This paper consists of six parts, the first of which is this introduction. Part II examines the wording of the GAAR contained in the Income Tax Act 2007 and the problems that arise in interpreting it. Part III addresses the Ramsay principle and the vexed question of its place, if any, in New Zealand law. And Parts IV and V examine, respectively, the decisions of the Supreme Court in Ben Nevis and Glenharrow. The paper does not examine the other recent cases. Penny and Hooper will probably prove an important case but, as noted above, an appeal is pending. At least some of the High Court decisions will probably prove important also, but it would be premature to review them, both because appeals are still possible and because it is probable that yet more GAAR cases will come before the High Court within the next 12 months or so. Part VI is the conclusion.

II. THE DRAFTING AND INTERPRETATION OF THE GAAR

The GAAR is set out in ss BG 1 and GA 1 of the Income Tax Act 2007, supplemented by some definitions in s YA 1. Section BG 1(1) provides that tax avoidance arrangements are void against the Commissioner for income tax purposes. Section YA 1 defines “tax avoidance arrangement” as any arrangement either (a) having tax avoidance “as its purpose or effect” or (b) having tax avoidance “as one of its purposes or effects, whether or not any other purpose or effect is referable to ordinary business or family dealings, if the tax avoidance purpose or effect is not merely incidental.”

22 WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, [1981] 1 All ER 865

(HL). 23 See generally J Tiley Revenue Law (6th ed, Hart, Oxford, 2008) ch 5.


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But in some circumstances, merely voiding the arrangement is not enough to nullify the tax advantage it has produced.24 For this reason, s BG 1(1) is supplemented by s BG 1(2), which provides that the Commissioner can “counteract a tax advantage that a person has obtained from or under a tax avoidance arrangement.” This is expanded upon by s GA 1(2), which provides that the Commissioner “may adjust the taxable income of a person affected by the arrangement in a way the Commissioner thinks appropriate, in order to counteract a tax advantage obtained by the person from or under the arrangement.” Thus, in order to counteract the tax advantage produced by the arrangement, the Commissioner has a choice: he can either (a) treat the taxpayer as if he had never entered into the arrangement at all, or (b) make up some other transaction, which the taxpayer might have carried out, but did not, and tax him accordingly. As to how the Commissioner might go about constructing such a counterfactual, s GA 1(4) authorises him to consider what would have happened, but for the arrangement; what would in all likelihood have happened; and also what might be expected to have happened.

These provisions pose a morass of interpretative difficulty. What is an “arrangement”? What is the difference between “purpose” and “effect”, and does it matter? What does “incidental” mean? What are “ordinary business or family dealings”? What is a “tax advantage”? How, exactly, is the Commissioner supposed to go about constructing the appropriate counterfactual? These are all important questions, and much has been written about them, both judicially and by commentators. But there is one question that is both logically prior to the rest and more important – namely, what is tax avoidance? Section YA 1 of the Act defines it as follows:

tax avoidance includes (a) directly or indirectly altering the incidence of any income tax: (b) directly or indirectly relieving a person from liability to pay income

tax or from a potential or prospective liability to future income tax: (c) directly or indirectly avoiding, postponing, or reducing any liability

to income tax or any potential or prospective liability to future income tax.

This is an outstandingly bad definition because, taken literally, it covers virtually every conceivable transaction. This is worse than useless, because it is not merely nonsense, but misleading. Paragraph (c) provides, among other things, that “tax avoidance” includes “avoiding … tax”, which obviously gets us nowhere. Paragraph (a) provides that tax avoidance includes “altering the incidence of any income tax”. This is ambiguous; it could mean altering any accrued liability to tax, or it could mean altering any potential liability to tax. But if it means any accrued liability, then there are no transactions to which this paragraph could conceivably apply – for once the liability has accrued, it is too late for the taxpayer to do anything about it. Alternatively, if it means any

24 See, for example, Peate v Federal Commissioner of Taxation [1967] 1 AC 308, [1966]

ALR 1199 (PC), especially per Lord Donovan, dissenting; and Commissioner of Inland Revenue v Gerard [1974] 2 NZLR 279 (CA).


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potential liability, the GAAR will apply to virtually all transactions – for, as Woodhouse J pointed out long ago in Elmiger v Commissioner of Inland Revenue,25 nearly all transactions alter the potential incidence of tax. For example, if the owner of a rent-producing building sells it, the liability to tax on the rent will ordinarily be “altered” in the sense that it will be the purchaser, rather than the seller, who is obliged to pay. To tax the seller as if he were still receiving the rent would obviously be absurd (in an ordinary case), even if his only reason for selling was to escape the tax, and cannot have been Parliament’s intention. Worse, it is possible to alter a potential liability to tax not only by means of an act, but also by means of an omission. For example, if you stay at home instead of going to work, you might alter the amount of your income and also, consequently, your liability to tax. But obviously Parliament did not intend that that should be counted as avoidance.

Paragraph (b) refers to both “liability” and “potential or prospective liability”. Thus it seems to cover both (i) every transaction that relieves a person from an accrued liability to tax and also (ii) every transaction that relieves a person from a potential liability to tax. As explained above, the former category seems to be empty (because once a liability has accrued, it is too late for the taxpayer to do anything about it) and the latter category seems to cover every transaction imaginable (because all transactions affect potential liabilities to tax). Paragraph (c) is to more or less the same effect.

The statutory definition of “tax avoidance” is therefore nonsense, and so it falls to the courts to define the term. One approach would be to deny that there is any such thing as tax avoidance. The argument is that tax is payable only as required by law; that if no tax is payable, that can only be because the law does not require it; and that there is no sound basis for labelling as “avoidance” some of the circumstances in which the law does not require tax to be paid. For example Lord Hoffmann, writing extrajudicially, has observed that “tax avoidance in the sense of transactions successfully structured to avoid a tax which Parliament intended to impose should be a contradiction in terms.”26 However, if that were correct, the GAAR would be in effect a nullity, for there would be no transactions to which it might apply. In any event, the courts have never taken that approach. Rather, they have consistently held that there is such a thing as tax avoidance,27 even though, to date, no one has managed to define it, or even to formulate a coherent set of guidelines as to how it might be recognised.

Another approach would be to define tax avoidance as any act that reduces a person’s liability to tax. That, according to the courts, is the literal meaning of the words.28 But to define tax avoidance as meaning any act that reduces a

25 Elmiger v Commissioner of Inland Revenue [1966] NZLR 683 (SC) at 688. 26 Lord Hoffmann “Tax Avoidance” [2005] British Tax Review 197 at 206. 27 Perhaps most pertinently, Lord Hoffmann himself, giving the judgment of the

Privy Council in O’Neil v Commissioner of Inland Revenue [2001] UKPC 17, [2001] STC 742, held that what the taxpayer had done was tax avoidance.

28 Mangin v Inland Revenue Commissioner [1971] AC 739 at 749, [1971] 1 All ER 179 (PC) at 185.


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person’s liability to tax would produce absurd results. For example, a person might emigrate, or sell a rent-producing property, or retire from the practice of the law and work instead as a ski instructor or a university lecturer. To tax him, on the basis of the GAAR, as if he were still resident, or still receiving the rent, or still practising law would be absurd, not to mention administratively problematic – even if his sole object in emigrating, selling or retiring was to escape the tax.

The courts have thus found it necessary to find a middle way. As Lord Donovan said in Mangin v Inland Revenue Commissioner:29

… in consequence … of some of the absurdities to which a strictly literal interpretation of s 108 [the predecessor to s BG 1] would lead, judges have been compelled to search for an interpretation which would make the section both workable and just.

To that end, the courts have long interpreted the GAAR on the basis of what is sometimes called the “choice” principle.30 This is the idea that tax legislation effectively presents taxpayers with choices as to how they arrange their affairs; that the alternatives available often lead to different tax consequences; that, in some instances, permitting taxpayers a choice of tax treatments was what Parliament intended; that it would be absurd for the courts to interpret the GAAR so as to deprive taxpayers of choices that Parliament intended to confer; and that some transactions will therefore not count as avoidance, and so will not be caught by the GAAR, even if they reduce the taxpayer’s liability to tax, and even if that is the taxpayer’s only reason for undertaking them.

The courts have used a varied vocabulary to explain this principle, as can be seen from the 13 Privy Council cases.31 The saga began in the 19th century, when the New Zealand Parliament and the Parliaments of several of the British colonies in Australia enacted death duty statutes containing rules against dispositions made for the purpose of evading duty. The scope of these rules was first raised before the Privy Council in a South Australian case, Simms v Registrar of Probates.32 Lord Hobhouse, delivering the judgment of the Judicial Committee, said that to interpret the rule in question as applying to any disposition intended to reduce a person’s liability to duty would produce

29 Mangin v Inland Revenue Commissioner [1971] AC 739 at 749, [1971] 1 All ER 179 (PC)

at 185. See also Simms v Registrar of Probates [1900] AC 323 (PC); Newton v Commissioner of Taxation for the Commonwealth of Australia [1958] AC 450, [1958] 2 All ER 759 (PC); Commissioner of Inland Revenue v Challenge Corporation Ltd [1987] AC 155 at 171–172; Europa Oil (NZ) Ltd v Commissioner of Inland Revenue [1976] 1 NZLR 546 (the second Europa case); and Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433 at [35]–[39].

30 See for instance Richardson J in Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (HC) at 551.

31 For an assessment of these 13 cases, see M Littlewood “The Privy Council and the Australasian Anti-Avoidance Rules” [2007] British Tax Review 175. In addition to the Privy Council cases from New Zealand and Australia, there is also one – Seramco Superannuation Fund Trustees v Income Tax Commissioner [1977] AC 287 (PC) – from Jamaica.

32 Simms v Registrar of Probates [1900] AC 323 (PC).


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unsatisfactory results, for more or less the reasons outlined above.33 He therefore read the rule down by drawing a line between evasion (to which the rule applied) and avoidance (to which it did not). This was followed in New Zealand, by the Privy Council itself, in Minister of Stamps v Townend.34 These cases thus represent important steps in the development of the modern distinction between tax evasion (nondisclosure or misrepresentation of facts relevant to a liability to tax) and tax avoidance (arranging the facts so as to lead to a lesser liability to tax than might otherwise arise).35

They also prompted the New Zealand and Australian Parliaments to include rules against avoidance in their income tax legislation. The scope of these rules first came before the Privy Council in an Australian case, Newton v Commissioner of Taxation.36 Lord Denning, giving the judgment of the Board, interpreted the rule on the basis of a distinction between avoidance (to which the rule applied) and ordinary transactions (to which, he said, it did not). Some years later, in Mangin v Inland Revenue Commissioner,37 Lord Donovan, delivering the judgment of the majority in the Privy Council, interpreted the New Zealand rule in the same way, regarding as irrelevant the various minor differences between it and the Australian equivalent.

The New Zealand Parliament responded by redefining “tax avoidance arrangement” as not excluding “ordinary” transactions.38 Thus the classification of a transaction as ordinary would no longer save it from counting as avoidance. In other words, Parliament had attempted to negate the limitation which the Privy Council had read into the rule. Parliament did not, however, substitute any other limitation. Perhaps, then, it really did intend “tax avoidance” to mean any act reducing the actor’s liability to tax. But as Lord Hobhouse (in Simms) and Lord Denning (in Newton) had explained, this leads to unsatisfactory results. The Privy Council therefore did not adopt that view. Their Lordships thus found themselves having to read some other limitation into the rule. This conundrum presented itself to the Board in Commissioner of Inland Revenue v Challenge Corporation Ltd39 – and it was in that case that Lord Templeman, speaking for the majority, famously drew the line by reference to the distinction between tax avoidance (to which the rule applied) and tax mitigation (to which it did not).40

Finally, in Peterson v Commissioner of Inland Revenue41 – decided in 2005 and presumably the Privy Council’s last word on the subject – the Judicial 33 Simms v Registrar of Probates [1900] AC 323 (PC) at 331–335. 34 Minister of Stamps v Townend [1909] AC 633 (PC). 35 See also Payne v R [1902] AC 552 (PC); and Bullivant v Attorney-General for Victoria

[1901] AC 196, [1900-3] All ER Rep 812 (HL). 36 Newton v Commissioner of Taxation [1958] AC 450, [1958] 2 All ER 759 (PC). 37 Mangin v Inland Revenue Commissioner [1971] AC 739, [1971] 1 All ER 179 (PC). 38 See Commissioner of Inland Revenue v Challenge Corporation Ltd [1987] AC 155 (PC) at

162 and, now, Income Tax Act 2007, s YA 1, definition of “tax avoidance arrangement”.

39 Commissioner of Inland Revenue v Challenge Corporation Ltd [1987] AC 155 (PC). 40 Commissioner of Inland Revenue v Challenge Corporation Ltd [1987] AC 155 (PC) at 167–

168. 41 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433.


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Committee unanimously approved the distinction between tax avoidance and tax mitigation, but the majority also distinguished between acceptable and unacceptable tax advantages. Also worth mentioning is the decision of the New Zealand Court of Appeal in the first BNZ case, where the majority drew the line between legitimate tax planning and improper tax avoidance.42

In Ben Nevis, the majority in the Supreme Court described the distinction between tax mitigation and tax avoidance as “unhelpful.”43 Instead, they drew the line between permissible and impermissible tax advantages.44 But why the distinction between permissible and impermissible tax advantages is more helpful than that between tax avoidance and tax mitigation remains, with respect, unclear. As the majority in Ben Nevis observed, what counts is not the terminology but “the underlying approach”,45 for the variations in terminology seem to be purely semantic. The point is that, if absurdity is to be avoided, there must be a class of acts by which a person can reduce his liability to tax without its counting as avoidance, even if reducing his liability is his only objective; that such acts are not caught by s BG 1; and that what the class is called is relatively unimportant. But how are tax avoidance and tax mitigation (or whatever it is to be called) to be distinguished? By what sense, as Lord Wilberforce rather mystically put it in Mangin, is the distinction to be perceived?46 This question is the crux of the matter, and it remains unresolved.

Perhaps the strangest feature of the cases is that the courts tend to present whichever outcome they prefer not only as correct, but as clearly so – even when they fail to agree. For example, in Challenge Lord Templeman said “a clearer case … cannot be imagined”,47 though that was evidently less clear to Lord Oliver, who dissented. Similarly in Peterson the majority regarded it as clear that the GAAR did not apply, and the minority as equally clear that it did – “a clearer case”, said Lord Bingham and Lord Scott in their joint dissenting judgment, “can hardly be imagined”.48 In Ben Nevis, too, the majority described the transactions in question as “clearly” a tax avoidance arrangement,49 though that was presumably less clear to the lawyer who designed them and the clients to whom he sold them. The cases thus confirm what is notorious: that the idea of tax avoidance is one of the most difficult in the whole of the law. To describe the distinction between avoidance and mitigation as “vague” is to understate the problem, for it suggests that there is general agreement as to 42 Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 at [39]. See

n 5. 43 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [95]. 44 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [104] and [106]. 45 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [95]. 46 Mangin v Inland Revenue Commissioner [1971] AC 739 at 757, [1971] 1 All ER 179 (PC)

at 190. 47 Commissioner of Inland Revenue v Challenge Corporation Ltd [1987] AC 155 (PC) at 164. 48 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433 at [96]. 49 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [182].


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roughly where the line lies and that the disagreement is only as to marginal cases. But there seems to be no such agreement and none of the judges seems to have regarded any of the cases as marginal.

The cases are notable too for the colourful language typically employed, though the New Zealand courts have been more restrained than the Privy Council. Lord Wilberforce, dissenting in Mangin, accused the majority of “interpretative astigmatism”.50 Lord Oliver, dissenting in Challenge, described the majority view as “eccentric”.51 And Lord Bingham and Lord Scott, dissenting in Peterson, said the majority view was “extraordinary”52 and required “shutting one’s eyes to the obvious.”53

III. THE RAMSAY PRINCIPLE In the United Kingdom, the analysis of the law relating to tax avoidance traditionally begins with the Duke of Westminster case,54 which stands for the principle that, if there are two methods by which a transaction might be effected, and they entail different tax consequences, the taxpayer is free to choose the method leading to the lesser liability. This seems to amount to an unrestricted charter for tax avoidance, and so is much vaunted by the tax planning industry. Since 1981, however, the Duke of Westminster principle has been drastically curtailed by WT Ramsay Ltd v Inland Revenue Commissioners55 and the cases in which Ramsay has been followed. In Ramsay, the taxpayer carried out a complex, circular series of transactions. These transactions served no commercial purpose but, if the statute was interpreted pedantically and applied to each step in the series of transactions, the result was that the taxpayer was liable for a smaller amount of tax than it otherwise would have been. The House of Lords held that the transactions did not produce that result and that the taxpayer was not entitled to the reduction in its liability that it claimed. The decision was followed in a series of cases, the most important of which are perhaps Furniss v Dawson,56 Inland Revenue Commissioners v McGuckian57 and Barclays Finance Ltd v Mawson.58

50 Mangin v Inland Revenue Commissioner [1971] AC 739 at 755, [1971] 1 All ER 179 (PC)

at 189. 51 Commissioner of Inland Revenue v Challenge Corporation Ltd [1987] AC 155 (PC) at 173. 52 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433 at [101]. 53 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433 at [78]

and [101]. 54 Inland Revenue Commissioners v Duke of Westminster [1936] AC 1, [1935] All ER Rep

259 (HL). 55 WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, [1981] 1 All ER 865

(HL). 56 Furniss v Dawson [1984] AC 474 (CA) at 527. 57 Inland Revenue Commissioners v McGuckian [1997] 3 All ER 817 (HL). 58 Barclays Finance Ltd v Mawson [2004] UKHL 51, [2005] 1 AC 684, [2005] 1 All ER

97.


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Exactly what Ramsay stands for has been much debated. In Furniss v Dawson, Lord Brightman explained the principle as follows:59

First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end … .Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax – not “no business effect”. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.

In the early years, it was sometimes suggested that the House of Lords in Ramsay had established a substantive rule against tax avoidance, but the House itself explained the case as entailing no more than an approach to the interpretation of taxing legislation.60 This is easier to reconcile with the convention that the role of the courts is not to make the law, but merely to interpret and apply it. More recently, the courts have treated Ramsay as a general mandate for a robust approach to both the interpretation of the law and the analysis of the transactions – often complex and contrived – by means of which taxpayers have sought to reduce their liability to tax. In 1997, in Inland Revenue Commissioners v McGuckian, Lord Steyn explained the Ramsay line of cases as merely bringing the interpretation of tax statutes into line with the interpretation of statutes generally:61

During the last 30 years there has been a shift away from literalist to purposive methods of construction. Where there is no obvious meaning of a statutory provision the modern emphasis is on a contextual approach designed to identify the purpose of a statute and to give effect to it. But under the influence of the narrow Duke of Westminster doctrine, tax law remained remarkably resistant to the new non-formalist methods of interpretation … . Tax law was by and large left behind as some island of literal interpretation.

The Ramsay decision, he concluded, had brought an end to the theory that tax was somehow an exception to the new orthodoxy. In the same case, Lord Cooke of Thorndon described the Ramsay approach as “perfectly natural and orthodox”62 and as no more than “an application to taxing Acts of the general approach to statutory interpretation whereby, in determining the natural meaning of particular expressions in their context, weight is given to the purpose and spirit of the legislation.”63

59 Furniss v Dawson [1984] 1 AC 474 (CA) at 527. Lord Brightman’s emphasis. 60 See for example Craven (Inspector of Taxes) v White [1989] AC 398, [1987] 3 All ER 27

(CA). 61 Inland Revenue Commissioners v McGuckian [1997] 3 All ER 817 (HL) at 824. 62 Inland Revenue Commissioners v McGuckian [1997] 3 All ER 817 (HL) at 829. 63 Inland Revenue Commissioners v McGuckian [1997] 3 All ER 817 (HL) at 830.


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More recently still, Ribeiro PJ in the Hong Kong Court of Final Appeal in Collector of Stamp Revenue v Arrowtown Assets Ltd explained the principle thus: “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”64 This was endorsed by the House of Lords in Barclays Finance Ltd v Mawson.65 It is difficult to argue with, for who would maintain that the intention of Parliament should be ignored? Or that the facts of cases should be viewed unrealistically? But these innocuous sounding words seem to entail that the courts are freed from a formalistic interpretation of the statute and that they should consider not only the legal form of the transaction in question, but also its economic substance.

The relevance of the Ramsay principle to the interpretation of a statute containing a GAAR has long been a vexed question. The view prevailing in Australia is that the principle is simply irrelevant.66 In New Zealand, in contrast, the question remains unresolved. In the United Kingdom, the Ramsay principle is generally thought of as fundamental to the interpretation of taxing legislation67 and, as explained by Lord Steyn and Lord Cooke in McGuckian, as no more than the application to taxing statutes of the same principles as apply to legislation generally.68 It might seem odd, therefore, that the place of the principle in New Zealand law remains unclear. The explanation seems to be that the Commissioner and the courts have assumed that the GAAR probably catches every tax-minimising scheme that the Ramsay principle would catch; that the principle will therefore seldom affect the outcome in any particular case; and that it is therefore unnecessary to decide whether it applies or not, for either the GAAR applies (in which case the Commissioner wins, even without Ramsay) or the GAAR does not apply (in which case Ramsay would not avail him). For this reason, the Commissioner has tended to rely on the GAAR, rather than on the possibility that the Income Tax Act, properly interpreted, simply does not produce the tax advantage claimed by the taxpayer. That individual cases should be decided in this way is understandable, but the cumulative effect is unfortunate. Given that, in the United Kingdom, the Ramsay principle is regarded as fundamental, leaving its applicability in New Zealand up in the air is like ignoring an elephant in the room. Some of the undesirable consequences of leaving the issue unresolved are examined below, by reference to the Ben Nevis decision.

The Australian position – that the Ramsay principle does not apply – is based on the theory that Parliament, in enacting a statutory rule against

64 Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, (2003)

6 HKCFAR 517 at [35]. 65 Barclays Finance Ltd v Mawson [2004] UKHL 51, [2005] 1 AC 684, [2005] 1 All ER

97 at [36]. 66 See Oakey Abattoir Pty Ltd v Federal Commissioner of Taxation (1984) 55 ALR 291,

(1984) 15 ATR 1059 (FCA); and John v Federal Commissioner of Taxation (1989) 166 CLR 417, (1989) 83 ALR 606 (HCA).

67 See for example J Tiley Revenue Law (6th ed, Hart, Oxford, 2008) ch 5. 68 See above at nn 61–63.


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avoidance, left no room for a judge-made one.69 To be precise, the argument seems to entail that Parliament, in enacting a rule against tax avoidance, intended that the rest of the statute should be interpreted in such a manner as to permit forms of avoidance that might otherwise have failed – which seems odd. Moreover, the Australian position involves treating tax law as a bastion of formalism, an island, as Lord Steyn put it in McGuckian, uniquely immune to the more realistic approach nowadays taken to the interpretation of statutes – and this, too, seems odd. The explanation is, perhaps, that the Australian courts rejected Ramsay early on, when the principle was still sometimes seen as a substantive rule rather than as a matter of interpretation.

The better view, therefore, is that the statutory rule does not oust the judge-made one and that the Ramsay principle or something like it (such as, perhaps, the anti-avoidance doctrines developed by the United States courts)70 does apply in New Zealand (and, perhaps, in other jurisdictions whose taxing statutes contain a GAAR). In other words, taxing statutes should not be treated as an “island of literal interpretation”; rather, they should be interpreted in the same realistic and purposive manner as other statutes.

It is necessary to emphasise, though, that the Ramsay principle should not be regarded as merely influencing the interpretation of the GAAR. On the contrary, the principle would seem more aptly to apply at the first stage of the two-stage analysis – that is, in considering whether, but for the GAAR, the taxpayer’s scheme would succeed. Thus, what the courts should do, in tax avoidance cases, is to begin by interpreting realistically and purposively, in accordance with Ramsay and McGuckian, the provisions in the legislation upon which the taxpayer seeks to rely. If, on that basis, the Commissioner wins, it is unnecessary to consider whether or not the GAAR applies (though of course the court may still choose to do so). But if the taxpayer’s scheme succeeds even on a Ramsayesque reading of the rest of the statute, then it will be necessary to consider the GAAR. Or perhaps the Ramsay principle and the GAAR should be considered in parallel. The proposition that the GAAR does not oust the Ramsay principle is supported by McGuckian, where Lord Cooke described the principle as “antecedent or … collateral” to the GAAR.71 Similarly, Lord Hoffmann, speaking for the Privy Council in the New Zealand case Commissioner of Inland Revenue v Auckland Harbour Board, regarded the GAAR and the Ramsay principle as working together – though he also thought that “[s]ome of the work” previously done by the GAAR had been “taken over” by “the more realistic approach to the construction of taxing Acts

69 See John v Federal Commissioner of Taxation (1989) 166 CLR 417 at 434–435, (1989)

83 ALR 606 (HCA) at 617. 70 The classic statement of the United States’ position is Helvering v Gregory (1934) 69 F

2d 809. See generally A Likhovski “The Duke and the Lady: Helvering v Gregory and the History of Tax Avoidance Adjudication” (2004) 25 Cardozo Law Review 953 and for a more recent example Coltec Industries, Inc v United States (2006) 454 F 3d 1340. For an examination of the relevance of the United States cases in New Zealand, see the judgment of Hammond J in Commissioner of Inland Revenue v Penny [2010] NZCA 231, [2010] 3 NZLR 360 at [146]–[156].

71 Inland Revenue Commissioners v McGuckian [1997] 3 All ER 817 (HL) at 830.


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exemplified by [Ramsay].”72 But there is, still, no New Zealand case in which a court has based its decision on the Ramsay/McGuckian line of authority.

Against this, it might be said that the GAAR probably catches every scheme that a purposive approach to the first stage of the analysis would catch; and, therefore, that the principle would be redundant in New Zealand. But in order to confirm that every scheme caught by Ramsay would also be caught by the GAAR, it would be necessary, in each case, to determine whether the scheme would be caught by Ramsay. If that is so, the principle would still, in effect, be part of New Zealand law – albeit as bearing on the second stage of the analysis rather than the first. But this seems absurdly convoluted. It would be much simpler to do as Lord Cooke and Lord Hoffmann suggest – that is, to treat the Ramsay principle (as restated by Ribeiro PJ in Arrowtown and by Lords Steyn and Cooke in McGuckian) as bearing on the first stage of the inquiry, “antecedent or collateral” to the GAAR.

IV. THE BEN NEVIS CASE Ben Nevis v Commissioner of Inland Revenue73 involved a tax avoidance scheme attached to a forestry venture. In 1997, a company called Trinity 3 Ltd purchased a block of land in Southland. It granted the taxpayers (politely referred to by the Court as “investors”) a licence to occupy this land for 50 years and to grow a forest of fir trees on it. In exchange for the licence, the taxpayers agreed to pay Trinity 3 licence fees of about $24,000 per year and a premium of $992 million. The premium was payable in 2048, by which time the trees would have matured. The idea was that the taxpayers would fell the trees and sell the timber, and the proceeds of sale would cover the premium. The taxpayers purported to discharge their liability for the premium immediately in 1997, by issuing Trinity 3 a promissory note for $992 million (apparently redeemable in 2048). They then claimed (a) to deduct the licence fees of $24,000 per year and (b) to write off the premium over the 50-year term of the licence – that is, at $19,844,000 per year. In other words, their out-of-pocket expenditure would be $24,000 per year, and they would get deductions of $19,868,000 ($19,844,000 + $24,000) per year. It seems obvious that the point of these arrangements was not to finance a forestry venture in a tax-effective manner but, rather, to enable the taxpayers to set off the losses of almost $20 million per year against their other income. In other words, if the scheme worked, the first $20 million of the taxpayers’ other income would be exempt from tax, every year for 50 years.

The scheme also incorporated an insurance contract or, at least, what was presented as an insurance contract. The taxpayers entered into an agreement

72 Commissioner of Inland Revenue v Auckland Harbour Board [2001] 3 NZLR 289 (PC) at

299. 73 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289.


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with CIS, a company established in a tax haven by the lawyer who designed the scheme. Under this agreement, the taxpayers agreed to pay a premium of $16 million to CIS; and CIS agreed to insure the taxpayers against the risk that the monies derived from the sale of the timber in 2048 would be insufficient to cover the $992 million licence premium payable by the taxpayers to Trinity 3. CIS seems neither to have had any assets nor to have reinsured the risk. The insurance premium was due in 2047, but, as with the licence fee, the taxpayers purported to discharge the liability immediately, in 1997, by issuing to CIS a promissory note redeemable in 2047. They then claimed to deduct the full amount of the premium. Again it seems obvious that the point of these arrangements was not to achieve any commercial end, but to produce a tax benefit – namely, enjoying a $16 million deduction, without incurring any real expenditure.

The Supreme Court held unanimously that the scheme did not succeed, but disagreed as to the reasons. Tipping, McGrath and Gault JJ delivered a joint judgment, and so did Elias CJ and Anderson J. Both the majority and the minority held that what the taxpayers had done was tax avoidance; that the GAAR applied; and that the taxpayers were therefore not entitled to the deductions they had claimed. But the majority held that, but for the GAAR, the scheme would have succeeded, whereas the minority declined to accept that that was so.

(i) The majority judgment The majority judgment in Ben Nevis confirmed four basic orthodoxies, broke some new ground and raised some difficult questions.

The four orthodoxies

The four orthodoxies confirmed by the majority were as follows. First, they confirmed that it would be absurd to interpret the word “avoidance” as covering all transactions that “alter” a person’s liability to tax; and that s BG 1 must therefore be interpreted as permitting a class of transactions that alter the taxpayer’s liability but do not count as avoidance. In other words, the section must be interpreted in accordance with the choice principle. As noted above, the majority made this point by distinguishing between permissible and impermissible tax advantages.74 For example, the majority said:75

… the use of companies and trusts as separate taxpayer entities will normally be an acceptable mechanism for taking advantage of concessions

74 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,


[2009] 2 NZLR 289 at [129].


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available under specific provisions, being within what Parliament must have contemplated in enacting them.

Secondly, the majority confirmed also that, as is explained above, cases in which the Commissioner has invoked the GAAR will typically entail a two-stage analysis. First, the court must determine whether, but for the GAAR, the taxpayer’s scheme would have worked. Then, if the scheme is, on the face of it, successful, the court must decide whether the GAAR defeats it.76

Thirdly, the majority confirmed the longstanding rule – laid down by Lord Denning in Newton – that the words “purpose or effect”, as appearing in the definition of “tax avoidance arrangement” (see above), are to be interpreted objectively, not subjectively.77 In other words, whether a transaction is a tax avoidance arrangement is to be determined by reference to the characteristics of the transaction, not by reference to the taxpayer’s state of mind. Strictly speaking, Lord Denning’s interpretation is problematic, because the word “purpose” necessarily connotes a state of mind; something lacking consciousness, such as a transaction, cannot have a purpose, other than the purpose of its creator. If the meaning of the words is ignored, however, the rule is easily justified on the basis that it is desirable to exclude evidence of taxpayers’ states of mind – not to mention the troublesome possibility of two taxpayers entering into the same transaction with different purposes. Even so, it might be better to formulate Lord Denning’s rule as a presumption – rebuttable, but only by extraordinary evidence – that the purpose of the taxpayer is as may be inferred from the transaction. This would achieve the same result, but without doing violence to the language. In any event, the taxpayer’s evidence of lack of purpose would be unlikely to get him anywhere, because an arrangement will also count as a tax avoidance arrangement if it has tax avoidance as its effect, or one of its effects.78

Fourth, the majority in Ben Nevis confirmed also what has come to be called the “scheme and purpose” approach. This is the idea, apparently first advanced by Richardson J in Challenge, that in drawing the line between avoidance and mitigation (or whatever it is to be called), it is necessary to consider not only the wording of the particular provision upon which the taxpayer seeks to rely, but also the “scheme and purpose” of the Act as a whole.79



[2009] 2 NZLR 289 at [73]–[76], citing Lord Denning: Newton v Commonwealth of Australia [1958] AC 450 at 465–466, [1958] 2 All ER 759 (HL) at 762.

78 See Income Tax Act 2007, s YA 1, definition of “tax avoidance arrangement”. 79 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (CA) at

549.


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New Ground I: defining tax avoidance

In addition to confirming these points, the majority in Ben Nevis made three major innovations. First, they took a broader approach than had the Privy Council as to what counts as tax avoidance. That is, it would appear that the GAAR will now catch some transactions that previously would have escaped. Exactly where the line lies remains unclear, but that it has shifted significantly in favour of the Revenue seems plain. For instance, Harrison J in Westpac Banking Corporation v Commissioner of Inland Revenue80 took Ben Nevis as marking “a significant shift”81 in the interpretation of the GAAR, “mandating a broader inquiry than was previously required”.82 He continued:83

… The previous constraints imposed by a legalistic focus, to the exclusion of economic realism, have gone.

I read Ben Nevis as prescribing a combined form and substance test. An analysis of the form or nature of the contractual relationship remains as the starting point in a tax avoidance inquiry … Ben Nevis does not authorise a Court to bypass the legal structure and move straight to a substance assessment … .

Conversely, the legal structure cannot shield a transaction from substantive scrutiny where the general anti-avoidance provision is invoked … .

Consequently, some of the earlier case law must be regarded as no longer authoritative. The majority did not expressly disapprove any of the earlier cases, but it would seem that, for example, Peterson,84 the second Europa case85 and the first BNZ case86 have all been impliedly overruled – or at least, to use the usual euphemism, confined to their facts.

As to the crucial question – how is avoidance to be distinguished from mitigation? or, to use the language preferred by the majority, how are permissible tax advantages to be distinguished from impermissible? – the majority in Ben Nevis observed:87

Judicial attempts to articulate how the line is to be drawn have in the past too often been seized on as if they were equivalent to statutory language.

80 Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834

(HC). 81 Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834

(HC) at [194]. 82 Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834

(HC) at [194]. 83 Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834

(HC) at [194]–[196]. 84 Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433. 85 Europa Oil (NZ) Ltd v Commissioner of Inland Revenue [1976] 1 NZLR 546. See n 14. 86 Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA). 87 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [104].


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That is no doubt true. The majority continued:88

Judicial glosses and elaborations on the statutory language should be kept to a minimum.

This sounds highly desirable. But as Lord Donovan said in Mangin, if the GAAR is interpreted literally, the results are absurd.89 Some elaboration on the statutory language – or, to be precise, some reading down – is therefore required (assuming, as the courts have always assumed, that the words permit some narrower interpretation). As the majority themselves put it, one needs to distinguish between permissible and impermissible tax advantages. But how is this line to be drawn? The majority’s answer to this question was as follows:90

The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision [that is, the provision under which the taxpayer claims to be entitled to a tax advantage] in a manner that is consistent with Parliament’s purpose. If that is so, the arrangement will not, by reason of that use, be a tax avoidance arrangement. If the use of the specific provision is beyond parliamentary contemplation, its use in that way will result in the arrangement being a tax avoidance arrangement.

This seems sage. But it does not entirely solve the problem, because it does not explain how Parliament’s intention is to be to determined. The principal indicator of what Parliament had in mind is the words it used in the statute. But we are ex hypothesi dealing with cases in which (a) the wording of the provisions upon which the taxpayer relies enables him to obtain a tax advantage; and (b) the Commissioner maintains that the GAAR applies so as to deprive the taxpayer of that advantage (for the only difference the GAAR can ever make is to defeat schemes that would otherwise have worked). It would seem, therefore, that it is necessary to determine Parliament’s purpose by reference to something other than the wording of the provision upon which the taxpayer relies. The most likely guide to Parliamentary intention in this context is perhaps, as suggested by Richardson J in Challenge, the scheme of the Act.91 That is, the court should consider the scheme of the Act as a whole, and infer from it Parliament’s intention as to the scope of the provisions relied on by the taxpayer.


[2009] 2 NZLR 289 at [104]. 89 Mangin v Inland Revenue Commissioner [1971] AC 739 at 749, [1971] 1 All ER 179 (PC)

at 185. 90 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [109]. 91 Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (CA) at

549.


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New Ground II: “pre-tax negative transactions”

Secondly, and more specifically, it appears from the majority judgment that a transaction will constitute tax avoidance if (a) the taxpayer expects it to be unprofitable and (b) his main reason for undertaking it is to reduce his liability to tax on his other income. In other words, it suggests that transactions that are, in the jargon, pre-tax negative but post-tax positive will generally, and perhaps necessarily, constitute tax avoidance. It might seem obvious, to those unfamiliar with tax avoidance jurisprudence, that undertaking an unprofitable transaction for no other purpose than to reduce one’s liability to tax on one’s other income ought to be counted as tax avoidance. Equally, it might seem surprising that this is not well established. Nevertheless, it is not, as can be seen from Peterson and the first BNZ case. The majority in Ben Nevis did not expressly overrule either of these cases, but even so, both must now be regarded as of dubious authority, at best.

Thus, at its first opportunity, the Supreme Court has contributed an important new principle to this area of the law. This principle does not constitute a complete answer to the problem, though, for it seems unlikely that the courts will hold that pre-tax negative transactions are the only form of avoidance. For example, neither Mangin v Inland Revenue Commissioner92 nor Ashton v Commissioner of Inland Revenue93 involved a pre-tax negative transaction, yet in both cases the Privy Council held that the GAAR applied, and it seems unlikely that the Supreme Court will treat taxpayers more generously.

New Ground III: the GAAR and the rest of the Act working “in tandem”

The third major innovation in the majority judgment in Ben Nevis lies in its analysis of the relationship between the GAAR and provisions such as those under which the taxpayers claimed to be entitled to deduct the expenditure in question. This was, the majority said, “the central issue in this case”.94 On the one hand, if the GAAR is regarded as overriding the provisions in the Act upon which the taxpayer seeks to rely (or, at least, as limiting their scope), the intention of Parliament will be defeated, because Parliament presumably enacted those provisions with the intention that they should have some effect. On the other hand, if the provisions upon which the taxpayer seeks to rely override (or limit) the GAAR, the intention of Parliament will again be defeated, because Parliament presumably enacted the GAAR with the intention that it should have some effect – and the GAAR would be “a dead letter” if “a mechanical and meticulous compliance with some other section

92 Mangin v Inland Revenue Commissioner [1971] AC 739, [1971] 1 All ER 179 (PC). 93 Ashton v Commissioner of Inland Revenue [1975] 2 NZLR 717 (PC). 94 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [83].


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of the Act” were sufficient to oust it.95 The majority in Ben Nevis resolved this aspect of the conundrum as follows:96

We consider Parliament’s overall purpose is best served by construing specific tax provisions and the general anti-avoidance provision so as to give appropriate effect to each. They are meant to work in tandem. Each provides a context which assists in determining the meaning and, in particular, the scope of the other. Neither should be regarded as overriding. Rather they work together.

The first stage of the analysis

As mentioned above, the majority in Ben Nevis held that, but for the GAAR, the scheme would have worked. That is, but for the GAAR, the taxpayers would have been entitled to the deductions they claimed. This conclusion seems to have followed from concessions made by the Commissioner97 – and, since his strategy proved successful, he cannot be criticised for it. Even so, the concessions seem generous. The general rule – currently set out in s DA 1 of the Income Tax Act 2007 – is that expenditure is deductible if it is incurred in deriving assessable income. But it seems far from clear that the expenditure in question was really incurred at all, let alone that it was incurred in deriving assessable income.

As regards the former point, it is well established that it is possible to incur an expense without actually making a payment. If the money has been paid, then the expense will have been incurred. But the expense will also have been incurred if the taxpayer, although not having actually made the payment, is “definitively committed” to doing so.98 For example, if the taxpayer receives an invoice at the end of this financial year, he can claim the deduction this year (assuming he does not dispute liability), even if he does not actually put the cheque in the mail until next year. How far this principle can be taken is debatable, but the Commissioner’s concession in Ben Nevis seems to have set a new limit. The items of expenditure in question were the licence premium of $992 million and the insurance premium of $16 million. The licence premium was payable in 2048, but the taxpayers purported to discharge the liability immediately in 1997, by executing a promissory note in favour of the licensor. But as the majority observed, it was possible that the taxpayers “may not actually pay the premium in 2048”. Indeed, the majority continued, the

95 Commissioner of Inland Revenue v Challenge Corporation Ltd [1987] AC 155 at 165, per

Lord Templeman citing Richardson J in the Court of Appeal [1986] 2 NZLR 513 at 549.

96 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [103].

97 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [119] and n 121.

98 Commissioner of Inland Revenue v Mitsubishi Motors New Zealand Ltd [1995] 3 NZLR 513 (PC) at 516 and 519.


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taxpayers would “probably never incur the real expenditure.”99 And yet, the Commissioner conceded that the expense had been incurred.

In accepting the Commissioner’s position, the majority referred to (a) the decisions of the courts as to the meaning of “incurred”, especially the Privy Council decision in Commissioner of Inland Revenue v Mitsubishi Motors New Zealand Ltd100 and (b) “the technical rule that a contractual debt may legally be discharged by consensual substitution of a promissory note.”101 But there was no suggestion in the Mitsubishi case that the expenditure there in question was unreal. The position accepted by the majority in Ben Nevis – that s DA 1 permits the deduction of expenditure even if it is not “real” – thus entails a much more generous interpretation of that section. Moreover, the expenditure in Mitsubishi was paid within 12 months of its being incurred – whereas in Ben Nevis the postponement was not one year, but 50. As for the “technical rule” about promissory notes, it is not self-evident that it should govern the interpretation of the word “incurred”, as appearing in the Income Tax Act, and the majority in Ben Nevis did not explain why it should.

The alleged payment of the insurance premium was likewise effected by means of a promissory note. As the majority put it, this meant that the premium had “technically” been paid, although “in substance the debt remains unpaid.” Moreover, there had been “no transfer of real value” and the payment was “artificial”. The premium had not been paid “in any real sense” and “[t]he purported payment did not give rise to any economic consequences on either side.”102 And yet the Commissioner appears to have accepted that the expense had been “incurred”. Again, this seems a more generous interpretation of s DA 1 than has previously prevailed.

As for the rule that expenditure is deductible only if it is incurred in deriving assessable income, it is well established that this means that expenditure is deductible if it is incurred for the purpose of producing assessable income.103 It is not necessary that the expense actually produce income. Nor need the expense be necessary or even reasonable, for it is not for the Commissioner or the courts to tell the taxpayer how to run his business. All that is required is a genuine intention that the expenditure should produce income. But it is difficult, with respect, to see why the taxpayers in Ben Nevis should be regarded as having satisfied even that quite low threshold, since, as the majority themselves put it, “it appears it was never intended that the forest would make


[2009] 2 NZLR 289 at [127] (emphasis added). 100 Commissioner of Inland Revenue v Mitsubishi Motors New Zealand Ltd [1995] 3 NZLR 513

(PC). 101 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,


[2009] 2 NZLR 289 at [147]. 103 Aspro Ltd v Commissioner of Taxes [1932] AC 683 (PC).


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a profit”.104 If the taxpayers never intended to make a profit, why should it be concluded that the expenditure was incurred in deriving assessable income?

It thus appears that the presence of the GAAR inclined the Commissioner (and perhaps the majority of the Court) to adopt a more generous approach than they would otherwise have taken to the interpretation of the rest of the Act. As has been explained, that is also what has happened in Australia.105 But it is the opposite of what one would expect – for surely Parliament, in enacting a law against tax avoidance, did not intend in any way to make tax avoidance easier. It might be said that it does not matter much whether the Commissioner and the majority in the Supreme Court would have allowed the deductions, had there been no GAAR – for there is a GAAR, and the majority disallowed the deductions under it, so the result is the same. But this is too glib, for the majority in Ben Nevis confirmed the traditional view that cases in which the Commissioner invokes the GAAR require a two-stage analysis – and to argue that what would have happened but for the GAAR is irrelevant is to eliminate the first stage; it is to assume that, but for the GAAR, the taxpayer’s scheme would succeed. This seems unsound in principle, because surely it is impossible to determine whether a tax has been avoided – which is what the GAAR requires – without first determining the scope of the tax. It might also be dangerous, in that the traditional two-stage analysis provides the revenue with two lines of defence against tax avoidance.106 If the first is eliminated, the second (that is, the GAAR) will be required to bear a heavier weight – and its history suggests that it might fail under the burden.107 Moreover, a loose approach to the first stage is likely to have implications for cases where the GAAR does not apply. Ben Nevis itself illustrates this problem, for whilst the case is now the leading authority on the scope of the GAAR, it might also be taken as the leading authority on the scope of s DA 1 (the basic rule permitting taxpayers to deduct expenditure) – and it seems to require that that section be interpreted more generously, from the taxpayer’s point of view, than previously.

(ii) The minority judgment The minority in Ben Nevis – Elias CJ and Anderson J – agreed with the majority as to the scope of the GAAR and that the taxpayers were caught by


[2009] 2 NZLR 289 at [123]–[126]. 105 See Oakey Abattoir Pty Ltd v Federal Commissioner of Taxation (1984) 55 ALR 291,

(1984) 15 ATR 1059 (FCA); and John v Federal Commissioner of Taxation (1989) 166 CLR 417, (1989) 83 ALR 606 (HCA).

106 For a critique of similar reasoning in a very different context, see Scott Optican “What is a ‘Search’ Under s 21 of the New Zealand Bill of Rights Act 1990?” [2001] NZ Law Rev 239 at 251 and 255–256.

107 See for example the second Europa case: Europa Oil (NZ) Ltd v Commissioner of Inland Revenue [1976] 1 NZLR 546 (PC); and Peterson v Commissioner of Inland Revenue [2005] UKPC 5, [2006] 3 NZLR 433.


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it. Thus, the minority in effect (a) confirmed the conventional view that not all transactions that reduce a person’s liability to tax will count as tax avoidance, (b) confirmed also that cases in which the Commissioner invokes the GAAR will typically require a two-stage inquiry, (c) endorsed the majority’s relatively broad interpretation of the GAAR and (d) endorsed also the principle that pre-tax negative transactions should be counted as tax avoidance.

But unlike the majority, the minority declined to accept that, but for the GAAR, the scheme would have succeeded. In other words, despite the Commissioner’s concessions, the minority seem to have doubted that the expenditure allegedly incurred by the taxpayers was deductible under s DA 1. The minority began with the observation that the basic approach to the interpretation of tax legislation is much the same in New Zealand as in the United Kingdom. In other words, according to the minority, the Ramsay principle (or something very like it) is part of the law of New Zealand:108

… we do not think that there are stark differences between the general approach to statutory interpretation of specific provisions in New Zealand and in the United Kingdom, at least since W T Ramsay Ltd v Inland Revenue Commissioners and Furniss (Inspector of Taxes) v Dawson. The rejection of literal interpretation described by Lord Steyn and Lord Cooke in Inland Revenue Commissioners v McGuckian applies equally in construing the specific New Zealand tax provisions.

Then the minority (like the majority) confirmed that, in tax avoidance cases, a two-stage approach is required:109

The first question is whether the claimed allowance or deduction falls within the meaning of the specific provision, purposively construed. If it does not, the Commissioner can disallow the claim … . If the claim is within the meaning of the specific tax provision, purposively interpreted, an arrangement on which it is based may nevertheless constitute tax avoidance … .

In other words, first, it is necessary to determine whether, but for the GAAR, the scheme would have succeeded; then, if the answer to that question is “yes”, it is necessary to determine whether the scheme falls foul of the GAAR.

Finally, the minority returned to the first question, and explained how the court should go about answering it:110


[2009] 2 NZLR 289 at [2], footnotes omitted. Some of Lord Steyn’s and Lord Cooke’s observations are cited above at nn 61–63.

109 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [3].

110 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [5], footnotes omitted. As mentioned above at n 64, Ribeiro PJ’s dictum is from Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, (2003) 6 HKCFAR 517 at [35].


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We do not therefore accept that when considering the application of a specific tax provision, and before considering the question of avoidance, the Court is concerned primarily with the legal structures and obligations created by the parties, and not with the economic substance of what they do. It depends on the context. The critical question is whether the “relevant provision of the statute, upon its true construction, applies to the facts as found”. Those facts must be viewed “realistically” because, as Lord Wilberforce put it in Ramsay, tax is “created to operate in a real world, not that of make-believe”. In Barclays, the House of Lords quoted with approval the explanation of Ribeiro PJ that the ultimate question is whether the statutory provisions “construed purposively, were intended to apply to the transaction, viewed realistically”.

As indicated above, the minority declined to accept that the scheme passed even this first hurdle. That is, the minority expressly left open the possibility that, even without the GAAR, the scheme would have failed. As has been mentioned, the majority’s position on this aspect of the case seems to have followed from a concession made by the Commissioner. But that concession seems generous, given the majority’s own interpretation of the facts – that the “real” expenditure had not been incurred and that the taxpayers were not motivated by the possibility of profit. For that reason, the minority’s analysis is, with respect, to be preferred.

V. THE GLENHARROW CASE Glenharrow Ltd v Commissioner of Inland Revenue111 was about GST and illustrates the especially damaging kind of abuse to which value-added taxes are susceptible.112 In the case of an income tax, avoidance merely means that the government collects less tax than it should. But a value-added tax such as GST can function as a means by which money is extracted from the government. The reason is that an essential feature of a value-added tax is that in various circumstances taxpayers are entitled to refunds of input tax. This means that the government is routinely obliged to make payments to taxpayers. Moreover, the payments it is obliged to make are sometimes large. In effect, then, value-added taxes invite taxpayers to simulate by fraud or replicate by cunningly-contrived transactions the circumstances in which the government is obliged to disgorge money. It is for this reason that GST and VAT are sometimes referred to by tax administrators as “the scary tax”.

Glenharrow concerned a mining licence that was issued in 1990, had a term of ten years, and permitted the extraction of greenstone from a block of land in the South Island. The licence changed hands in 1993 (for $5,000), again in 1994 (for $100), and again in 1996 (for $10,000). In 1997, the then licensee, one Michael Meates, sold the licence to the taxpayer, a company called

111 Glenharrow Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR

359. 112 Another case of this kind is Ch’elle Properties (NZ) Ltd v Commissioner of Inland Revenue

[2007] NZCA 256, [2008] 2 NZLR 342.


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Glenharrow Ltd, for $45 million. Glenharrow maintained that that was what the licence was worth, because (a) “it had formed the view that there was at least half a million tonnes of [greenstone] within the licence area”,113 (b) this greenstone was worth at least $1,000 per tonne and up to $10,000 per tonne, and (c) it thought (wrongly, as it turned out) that it would be able to obtain an extension to the ten-year term of the licence.

Glenharrow had a share capital of $100 and no assets. The purchase of the licence was effected on the basis that Glenharrow would pay $80,000 and the vendor would lend it $44,920,000, repayable within three years, with which to pay the balance. Glenharrow’s owner advanced it $80,000, which it duly paid to Meates. Glenharrow also gave Meates a cheque for $44,920,000. Meates gave Glenharrow a cheque for the same amount ($44,920,000), supposedly by way of a loan. Whether these cheques were presented is unclear. But neither party actually had $45 million, or anything approaching that amount. Indeed, Glenharrow, as has been mentioned, had no assets at all.

Meates was not registered for GST. Nor was he obliged to register, because under the Act a person is required to register only if he is carrying on a “taxable activity”114 (meaning essentially a business or something resembling a business) and Meates was not carrying on a taxable activity. He was therefore not obliged to pay any GST on the proceeds of sale of the licence. Glenharrow, however, was registered. The Goods and Services Tax Act 1985 provides that a registered person who buys second-hand goods from an unregistered person is entitled to an input tax credit for the “tax fraction” (then one-ninth) of the price.115 The licence came within the definition of second-hand goods (which, although semantically odd, is clearly sound as a matter of tax-system design) and Glenharrow claimed an input tax credit of one-ninth of $80,000 ($8,888). Since it was not liable for any output tax, it also claimed a “refund” of that amount. The Inland Revenue paid this refund. Glenharrow then claimed a further refund of one-ninth of the other $44,920,000 – that is, $4,991,111. 113 Glenharrow Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR

359 at [9]. 114 Goods and Services Tax Act 1985, s 51. 115 Goods and Services Tax Act 1985, ss 20(3) and 3A. A registered person buying

goods from another registered person is entitled to an input tax credit for the amount of output tax paid by the seller. But an unregistered seller is not required to pay tax. The “second-hand goods” credit effectively eliminates the disadvantage the registered person would otherwise suffer when buying from an unregistered seller. The resulting revenue loss is usually minimal, because the unregistered seller ordinarily bears the burden of the tax when he acquires the goods; and the purchaser is usually unable to sell them for much more than the seller paid for them. In Glenharrow, the revenue loss, if the taxpayer’s claim had succeeded, would have been substantial, because Meates paid only $10,000 for the licence and sold it to Glenharrow for $45 million. But gains of that magnitude on sales of second hand goods are unusual. The tax fraction was one ninth because the rate of GST was then 12.5 percent. The amount of tax was therefore one ninth of the GST-inclusive price. For example, $100.00 + 12.5 percent = $112.50; and $12.50 is one ninth of $112.50. The rate of GST has since been raised to 15 percent, so the tax fraction is now 3/23.


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This the Revenue declined to pay. They maintained that the GAAR (s 76 of the Goods and Services Tax Act 1985) applied, and that Glenharrow was therefore not entitled to any further refund. Section 76 provided as follows (emphasis added):116

(1) Notwithstanding anything in this Act, where the Commissioner is satisfied that an arrangement has been entered into between persons to defeat the intent and application of this Act, or of any provision of this Act, the Commissioner shall treat the arrangement as void for the purposes of this Act and shall adjust the amount of tax payable by any registered person (or refundable to that person by the Commissioner) who is affected by the arrangement, whether or not that registered person is a party to it, in such manner as the Commissioner considers appropriate so as to counteract any tax advantage obtained by that person from or under the arrangement.

Glenharrow objected. The Supreme Court, in a unanimous judgment given by Blanchard J, held that s 76 applied and that the Commissioner’s refusal to make the payment should stand.

It is notable, though, that the Commissioner seems to have accepted as uncontestable the proposition that, but for the GAAR, Glenharrow was entitled to the refund.117 In other words, as in Ben Nevis, the Commissioner conceded that, but for the GAAR, the taxpayer was entitled to the tax advantage it claimed. The Commissioner seems not to have asserted that a more robust interpretation of the Act (for example, on the basis of the Ramsay/McGuckian line of authority) might lead to a different conclusion; and it was presumably for that reason that Blanchard J did not discuss the possibility. But Glenharrow’s entitlement to the “refund” was based on its claim that it had paid $44,920,000; and the alleged payment had been made by means of a cheque drawn on an account with no money in it. Blanchard J’s assessment of the facts included that the transaction was “artificial”; that the price of $45 million “was not paid in economic terms”; that both parties were “well aware” that “payment in full would certainly not occur”; that for Glenharrow to pay the $45 million was “plainly an impossible task”; and that the transaction was “contrary to all economic reality”.118 Given these facts, the conclusion that the $45 million had been paid seems generous.

Thus Glenharrow, like Ben Nevis, suggests that there is something about GAARs that encourages the Revenue and the courts to take a more generous approach than they otherwise would to the interpretation of the rest of the statute. As in Ben Nevis, it might be said that the result is the same, so it makes

116 The wording of s 76 has since been amended so as to make clear that its

applicability depends only on the characteristics of the arrangement in question, and that the taxpayer’s state of mind is irrelevant.

117 Glenharrow Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR 359 at [31].

118 Glenharrow Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR 359 at [51]–[53].


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little difference whether it is reached by means of the GAAR or by means of a robust interpretation of the rest of the statute – in other words, that it makes no difference whether the taxpayer’s raid on the Treasury fails at the first stage of the analysis or the second. But, as in Ben Nevis, it would seem unduly sanguine to overlook this difficulty on the basis that a correct result was reached by other means. Moreover, whilst the GAAR bore the burden satisfactorily in this instance, there is no guarantee that it will always do so.

VI. CONCLUSION Seven main points emerge from New Zealand’s post-Privy Council tax avoidance cases. First, the Supreme Court’s judgments in Ben Nevis and Glenharrow represent, with respect, very considerable progress. It is tempting to speculate that one reason for this might be that the Court has naturally focused on New Zealand law, whereas the Privy Council perhaps tended to take a broader view. If this is so, it would seem a powerful vindication of the decision to establish the Supreme Court.

Secondly, the Supreme Court in Ben Nevis has taken a tougher line against tax avoidance than was taken by the Privy Council. In particular, Ben Nevis suggests that the courts might from now on treat pre-tax negative transactions as tax avoidance.119 If so, this is a significant development and a desirable one.

Thirdly, it seems plain that enormous uncertainty persists as to what is meant by tax avoidance and also, therefore, as to the scope of the GAAR – notwithstanding the new principle that pre-tax negative transactions constitute avoidance. In Ben Nevis, the majority disliked the traditional distinction between tax avoidance and tax mitigation and instead analysed the problem in terms of the distinction between permissible and impermissible tax advantages.120 But what the difference is between permissible and impermissible tax advantages remains unclear. Nor is it clear what the difference is between (on the one hand) tax mitigation and (on the other) the obtaining of a permissible tax advantage. All in all, the cases do little to challenge the notion that the idea of tax avoidance is simply not susceptible to coherent explication.

These difficulties are compounded by the apparent implied overruling of some, but not all, of the earlier cases. It seems likely that taxpayers against whom the GAAR is invoked will continue to cite pre-Ben Nevis cases where they seem to assist; and that the courts will therefore be required to determine in detail the extent to which these cases remain authoritative. It seems likely, too, that the Commissioner will take Ben Nevis as requiring him to take a more assertive approach to the invoking of the GAAR. The scope for argument is therefore considerable.

119 See also BNZ Investments Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 23,997

(HC) and Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834 (HC).

120 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [104] and [106].


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Fourthly, if the idea of tax avoidance is incoherent, as seems to be the case, it might be concluded also that rules against it must result in arbitrary taxation and that this entails a departure from the rule of law. The recent New Zealand cases leave this critique intact – though weaker than before, because the courts are, albeit slowly, working towards a solution to the problem of defining tax avoidance. Moreover, even if the outcomes in cases in which the Commissioner has invoked the GAAR appear somewhat arbitrary, they are no more so than the outcomes in tax avoidance cases in jurisdictions that do not have a GAAR, such as the United Kingdom and the United States. In other words, the uncertainty may be a feature not of the anti-avoidance rule, but of the rules defining the scope of the tax.

Fifthly, whilst enacting a law against something that cannot be defined or explained is problematic in principle, the results to date do not seem objectionable. Taxpayers against whom the GAAR is invoked routinely complain of the uncertainty apparently inherent in it,121 but these complaints deserve no sympathy, for all the taxpayers against whom the Commissioner has invoked the GAAR had plainly attempted unmeritorious raids on the Treasury. Those who sail too close to the wind should not complain if they get wet.

Sixthly is the question of the interpretation of taxing statutes generally. Before coming to the GAAR, how should the courts interpret taxing legislation, in cases in which the taxpayer has sought to escape liability? How, in other words, should the courts approach the first stage of the two-stage inquiry? In Ben Nevis, the minority preferred a robust approach, along the lines of that adopted in the Ramsay/McGuckian line of cases. The majority were unenthusiastic, but noncommittal. The better view, with respect, is that the more robust approach has much to commend it. As the minority observed, it “avoids the distortion of overuse and unnecessary expansiveness in application of the general anti-avoidance provision”.122 Moreover, the Australian position – that Parliament, in enacting the GAAR, excluded Ramsay – seems to entail attributing to Parliament the intention that, in passing a law against tax avoidance, it wanted to make tax avoidance easier, and that seems unlikely. Some of the cases – notably the majority judgment in Ben Nevis and the judgment of the Court in Glenharrow – suggest that the GAAR has a tendency to lead the Commissioner and the courts to take a more generous approach to the interpretation of the statute that contains it than they would have done had it not contained it. But it seems unlikely that that was what Parliament intended, so the tendency should be resisted.

Seventhly and finally, it might be said that the problems presented by the GAAR are a consequence of poor drafting and that the solution, therefore, is to refine the wording. In principle, this might be a good idea. Theoretical jurisprudence seems to assume that there is nothing that cannot be defined –

121 See for instance Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008]

NZSC 115, [2009] 2 NZLR 289 at [112]. 122 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115,

[2009] 2 NZLR 289 at [2].


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or, at least, that it is possible to define any phenomenon concerning which it might be desirable to legislate. But the problem of tax avoidance, as this paper has sought to explain, is peculiarly troublesome. Drawing the line between avoidance and mitigation (or whatever it is to be called) is a very old problem, and one that afflicts every tax system – but so far no one, anywhere in the world, has succeeded in explaining it coherently. Far less has anyone succeeded in formulating a satisfactory definition of the distinction. Perhaps one day someone, somewhere in the world, will resolve the conundrum. At that point, it might be a good idea to incorporate the solution, whatever it turns out to be, in the legislation – though equally, once a solution has been devised, it might be better to let the courts incorporate it in the law as a matter of interpretation. But there is no reason to suppose that a solution will be devised in the foreseeable future or, indeed, ever – either in New Zealand or anywhere else. It might be suggested also that the best way of identifying a solution would be to establish a committee. But to think that a problem of this order – a profoundly difficult jurisprudential challenge, as yet unsolved by anyone, anywhere in the world – might be resolved by a committee seems unduly optimistic.

Far from solving the problem, amending the GAAR would probably make matters worse. The reason is that after the better part of a century, the courts are at last concentrating on the real issue; that is, on the line between avoidance and mitigation. And, at last, some real progress is being made – most importantly, in the Ben Nevis case. But progress had been very slow, largely because, in addition to the crucial question (that is, how to distinguish between avoidance and mitigation), the GAAR has always presented an array of subordinate problems. For instance, what is meant by “arrangement”? Does the GAAR apply where a taxpayer gains a tax advantage from an arrangement to which he is not a party? How, in cases of tax avoidance, should the Commissioner go about constructing the counterfactual according to which the taxpayer’s liability is to be determined? And so on. If the GAAR were to be redrafted, the new wording would probably give rise to a similar variety of subordinate problems; and, if past experience is anything to go by, the courts would find it necessary to resolve these before returning to the crucial question.

If an attempt were to be made to redraft the GAAR, one possible outcome would be a rule requiring the Commissioner and the courts to consider a list of factors supposedly indicative of avoidance. That is what has happened in some other jurisdictions, notably Australia and Hong Kong.123 But, as the experience of those jurisdictions illustrates, such lists are counterproductive, for they do not supply any framework as to how the analysis is to be conducted. Nor do they give any guidance as to the weight to be attached to each item on the list. Rather, they merely require the courts to consider the factors listed, and somehow derive from them a conclusion. Moreover, the factors listed generally seem to fall into two categories: either 123 See Income Tax Assessment Act 1936 (Australia), s 177D, and Inland Revenue

Ordinance 1947 (Hong Kong), s 61A.


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they are irrelevant to the facts of the particular case, or they are matters the court would have considered anyway. Consequently, the list adds nothing, other than an extra layer of complexity.124

As is explained above, the definition of “tax avoidance” contained in the current legislation is both meaningless and misleading. It might be said, therefore, that it would be a good idea to repeal it, so long as the GAAR itself and the other definitions remained unchanged. Repealing the definition would at least make clear – what is the case anyway – that it falls to the courts to draw the line between avoidance and mitigation. Even so, repealing the definition would be risky, because it might lead a court to infer that Parliament’s intention, in amending the legislation, was to change the law. It might be safer, therefore, to leave the admittedly flawed definition unchanged.

To this it might be added that working slowly and incrementally towards solutions to difficult problems is exactly the strength of the common law – even when the problem is one of statutory interpretation, rather than common law proper. This process might usually be slow and in this instance (that is, in drawing the line between avoidance and mitigation) it might be even slower than usual. But that is merely reflective of the difficulty of the problem. There is no reason to suppose that Parliament would do better than the courts, and every reason to suppose that it would do worse. Indeed, Parliament, far from ameliorating the problems, would probably exacerbate them. 124 The Australian Government has recently expressed doubts as to the merits of its

own approach: Australian Government Improving the Operation of the Anti-Avoidance Provisions in the Income Tax Law (Discussion Paper, 18 November 2010).


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Tax Avoidance, the Rule of Law and The New Zealand ... staff...Tax Avoidance, the Rule of Law and The New Zealand Supreme Court 265 anyone else – has formulated a satisfactory definition,