Genuine Use Of The Complying Conditions †Myassignmenthelp.Com

Question: Discuss About The Genuine Use Of The Complying Conditions? Answer: Introducation The issue of tax-avoidance is like a double-edged sword in the hands of the tax authorities. It becomes difficult, for both the taxpayers as well as the authorities, to differentiate between the genuine use of the complying conditions and the actual compliance of the regulations. In certain cases, a taxpayer may put forth a tax-avoidance proposal as a non-tax avoidance proposal to escape the tax net. In some cases, this happens because the margins from investments are too low for the taxpayer. However, when a taxpayer is opting for a better rate of return by investments not being subject to taxation because of tax avoidance use of the Act, then the purpose of the taxpayer is to take undue advantage of tax avoidance regulations. In the view of the Commissioner, this is also shown through the lawsuit of Challenge (CA) and is also consistent with the approach which the Australian High Court adopted in the case of Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404. Even McGechan J has also spoken about how such an arrangement was structured in the case of Elmiger (HC)[1], and I quote: I am quite unable to accept submission (a). Clearly, and at the very least, one of the purposes or effects of the downstream transactions was tax avoidance, and that was not a merely incidental purpose or effect. One need not look very far. There was, of course, an ordinary business purpose or a degree of ordinary business purpose in what was done. Fay Richwhite and CML intended to make profits. That is true in all business, including business carried forward in a tax effective way: it is not done for amusement or to tantalise the tax man. They went about it, however, in a way which - tax factors apart - was extraordinarily and unnecessarily complicated. There was no reason - tax factors apart - for the elaborate downstream chain and auxiliary activities being included in something which in essence was a lending of money raised by the RPS transactions on secure investments earning interest. To say otherwise is like travelling from Wellington to Auckland through Stewart Island, the Ch athams and Kermadecs (if not Easter Island), then claiming that is just another available route. Unquote. In view of such observations, it follows that the size of a tax benefit achieved by a taxpayer under the structured arrangement cannot be used to establish that the taxpayer has utilised a tax avoidance purpose which is merely incidental. On the contrary, taxation authorities need to put forward a strong evidential factor in a court of law which will make the judge consider a view on whether the tax avoidance purpose of the taxpayer is following naturally from a non-tax avoidance purpose. Merely saying that the tax benefits are large, can make it difficult for the taxation authorities to establish that the taxpayers tax benefits shall follow naturally from or maybe necessarily linked to, some other purpose[2]. The issue which this paper claims to look into is the task faced by the taxation authorities in identifying any arrangements which are structured by the taxpayer and this includes identification of the tax effects under the tax provisions covering the issues[3] through Sections BG 1 and GA 1 of the Income Tax Act of 2007. Regulations s 108 of the Land and Income Tax Act, 1954; s 99 of the Income Tax Act, 1976; ss BG 1 and GB 1 of the Income Tax Act, 1994; ss GB 1 and GB 1 of the Income Tax Act, 2004; ss BG 1 and GA 1 of the Income Tax Act, 2007; s YA 1 of the Income Tax Act, 2007. Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289. BNZ Investments Ltd v Commissioner of Inland Revenue (2009) 24 NZTC 23,582 (HC). Commissioner of Inland Revenue v Alcan New Zealand Ltd [1994] 3 NZLR 439 (CA). Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA). MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6, [2003] 1 AC 311. Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433. Sovereign Assurance Company Ltd v Commissioner of Inland Revenue [2012] NZHC 1760, (2012) 25 NZTC 20-138.APPROACH TO SECTION BG 1 Before we start the discussion on matters related to tax avoidance by taxpayers, we need to understand the explanation which Section BG 1[4] provides: a tax avoidance arrangement structured by the taxpayer becomes void as it gets against the viewpoint of the Commissioner; in such cases the Commissioner has the option to counteract the tax advantage which the taxpayer has obtained under the arrangement. Under the legislation, there are certain key elements which apply to ss BG 1 and GA 1 of the Income Tax Act, 2007: arrangement; tax avoidance; and tax avoidance arrangement. Section BG 1 is used by taxation authorities to explain the term tax avoidance arrangement. This term contains two important parts - the term tax avoidance and arrangement. We will discuss the term arrangement first and the term tax avoidance will be discussed later. The concept of an arrangement is defined in s YA 1 as a means or an agreement or a contract or a plan or an understanding, which may be enforceable or unenforceable and includes all the steps as well as the transactions through which it can be brought into effect. Definition of the term arrangement had been provided in s 99(1) of the Income Tax Act, 1976 and was considered by Richardson P in the case of BNZ Investments No 1 (CA) and it differs from the current definition of arrangement in s YA 1[5]. The term is defined under s YA 1 as an arrangement can be a contract which is legally enforceable or a less formal agreement or a plan which may or may not be legally enforceable. Although the words used in the above noted definition, an agreement, contract, plan, or understanding have been used in the singular form, it does not convey the meaning that the arrangement structured by the taxpayer would be located either in a single document or transaction. This makes it clear that there can be two or more documents or may be transactions, which may together make one arrangement. This has been established in the case of Tayles v Commissioner of Inland Revenue [1982] 2 NZLR 726 (CA), where the appellant farmer had executed three documents a deed of trust, a deed of partnership and an agreement for the transaction which involved only one stock. Therefore, the definition of the term makes it clear that an arrangement can be encompassed of various actions which have been undertaken by the taxpayer for carrying out a structured arrangement, even if all the actions are not delineated in the agreement or contract or plan or understanding. This is also established in the case of Commissioner of Inland Revenue v Penny [2010] NZCA 231, [2010] 3 NZLR 360, where Randerson J stated, and I quote: I am satisfied that an arrangement is not limited to a specific transaction or agreement but may embrace a series of decisions and steps taken which together evidence and constitute an agreement, plan or understanding. Any such arrangement may be continued in each of the income years in question or may be varied from year to year. Unquote. In some other decisions, the courts did convey the meaning that two or more transactions may not be sufficiently linked to each other so that they can constitute an arrangement. These decisions were instrumental in suggesting that two or more transactions cannot be regarded as constituting an arrangement just for the reason that one person is proved to be the party to both transactions and it has been assumed that he entered into one transaction because of the other. When such happenings come to the forefront, it is for taxation authorities to collect and examine all the relevant facts pertaining to the transaction or transactions and present their linking with the structured arrangement developed by the taxpayer and present the actual facts to the court. In this context, the first step was taken by Wild J while dealing with the case of BNZ Investments No 2 (HC)[6], when he undertook an extensive analysis of the presented facts before he considered the application under s BG 1. It sometimes become difficult even for the honourable judges to take a decision as to what is relevant when analysing whether there is a genuine tax avoidance by the taxpayer or whether any tax avoidance is being shown as merely incidental to the non-tax purpose. In short, it is the correct analysis of the information which will be relevant in reaching to a fair and accurate viewpoint as to whether there is a tax avoidance, if it can objectively establish the commercial an d economic reality of the transactions and can relate the structured plan of the taxpayer to a particular section of the Act. Similarly, the collected information will also become relevant to the test not merely incidental, if it leads to the evidence of a non-tax avoidance purpose of the taxpayer which can explain the exact structure of the arrangement proposed by the taxpayer[7]. In this context, the present case of Mr. Nathan can be compared with that of AMP Life Ltd v Commissioner of Inland Revenue (2000) 19 NZTC 15,940 (HC). This case is considered to be an authority on the subject that the sequence of the reported events may not always constitute an arrangement merely on the consideration that one event follows the other and/or they seem to be causally related to each other. The contention of the Commissioner was that in this case, there was an arrangement between AMP and AFS (a subsidiary) and this was surmised because of the following related steps: AMP and various subsidiaries of it (including AFS) were grouping their losses which they had incurred because of the share market crash of 1987 and were claiming deductions on account of these losses in their income year ended 31 March 1988; AMP had subscribed for capital in AFS in December 1989; AMP had sold its shares in AFS to another subsidiary, AMP Discount Corporation in October 1992; and AMP was claiming deduction on account of loss it suffered on the disposal of the AFS shares. This was concluded as artificiality and contrivance by the Commissioner while presenting its case to the court on the surmise that it also indicated of an arrangement which was structured by the management of AMP so that the tax purpose could be contrived and they could make it to appear as if all these transactions were incidental to the commercial purpose of the company. In his final judgment, Learned Woodhouse P made the following point in Challenge (CA) and I quote: As a matter of construction I think the phrase merely incidental purpose or effect in the context of s 99 points to something which is necessarily linked and without contrivance to some other purpose or effect so that it can be regarded as a natural concomitant. Unquote. In this instance, the artificiality and contrivance were merely relevant and incidental to the test because, as observed by the honourable court, if artificiality and contrivance are used for achieving the purpose of tax avoidance, then there is every likelihood that tax avoidance should be considered as an end in itself rather than merely being incidental to another purpose. Woodhouse P in Challenge (CA)[8] also commented on this relevance of artificiality or contrivance to the merely incidental test, and I quote: When construing s 99 and the qualifying implementations of the reference in subs (2)(b) to incidental purpose I think the questions which arise need to be framed in terms of the degree of economic reality associated with a given transaction in contrast to artificiality or contrivance or what may be described as the extent to which it appears to involve exploitation of the statute while in direct pursuit of tax benefits. To put the matter in another way, there is all the difference in the world, I think, between the prudent attention on the one hand that can always be given sensibly and quite properly to the tax implications likely to arise from a course of action when deciding whether or not to pursue it and its pursuit on the other hand simply to achieve a manufactured tax advantage. Unquote. There are other purposes or effects connected with arrangements and identifying them leads to making the distinction between tax avoidance and non-tax avoidance purposes of the arrangement that become an integral part to the structured arrangements made by taxpayers. The experts state that there is a commercial objective for which the stakeholders try to maximise their financial returns from their profitable trading transactions. However, the stakeholders financial returns from their profitable trading transactions get improved only when there is tax which they avoided to pay under the arrangement. When only the merely incidental test is considered, the non-tax avoidance purpose should be able to explain why the taxpayer made an arrangement which was structured in that particular way. When considering these facts, the purpose of the taxpayer in providing the arrangement in a way and structured in a particular way so that it helps in the tax avoidance purpose or effect through the use of this particular structure is not sufficient enough to prove that it was merely incidental to any non-tax avoidance purposes or effects[9]. Outcome To arrive at a clear understanding of the facts related to the case of Nathan in this case study, it is essential to know how the arrangement interacts with the Act. This will also lead us to the subsequent analysis of the arrangement structured by Nathan through which we can identify the additional relevant provisions and which will lead us to those tax effects which are required to be understood. Sometimes, a taxpayer, such as Nathan, will have put forward a very general purpose to explain his structured arrangements and it is for the taxation authorities to how to treat such purposes in the context of the merely incidental test. If s BG 1, combined with the merely incidental test, is applied to this specific arrangement which Nathan has entered into, Learned Woodhouse P would consider whether a tax avoidance purpose is merely incidental by considering by reference to the arrangement itself. Although the existence of such a purpose may not be sufficient for establishing a tax avoidance purpose, it is required that more information, which is merely incidental to it and which leads to the adoption of a particular structure by Nathan, would be required before an assessment can be made whether the tax avoidance purpose of Nathan is merely incidental to a more specific non-tax avoidance purpose. References Enonchong, N.D. Undue Influence and Unconscionable Dealing (Sweet Maxwell 2006) Mayer, D.N. Liberty to Contract: Rediscovering a Lost Constitutional Right (Cato Institute 2011) Poole, J. Contract Law (OUP 2008) Trebilcock, M.J. The Limits of Freedom of Contract (HUP 1993) Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289. Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at 555 (PC). Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3 Elmiger v Commissioner of Inland Revenue [1966] NZLR 683 (SC) at 687688. Furniss (Inspector of Taxes) v Dawson [1984] AC 474 (HL). Miller v Commissioner of Inland Revenue [1999] 1 NZLR 275 (CA). Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433. W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL). [1] Elmiger v Commissioner of Inland Revenue [1966] NZLR 683 (SC) at 687688. [2] (see Hadlee (HC); Westpac). [3] (see Ben Nevis and Westpac) [4] ss BG 1 and GA 1 of the Income Tax Act, 2007 [5] s YA 1 of the Income Tax Act, 2007. [6] W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (HL). [7] AMP Life Ltd v Commissioner of Inland Revenue (2000) 19 NZTC 15,940 (HC) [8] Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 at 555 (PC). [9] Mayer, D.N. Liberty to Contract: Rediscovering a Lost Constitutional Right (Cato Institute 2011)