In reality the factor IRD auditors are most likely to focus on is non-arm’s length salaries. Thanks to the Court of Appeal’s carte blanche in Penny & Hooper, Inland Revenue Officials now have the authority under the Income Tax Act to tell taxpayers how much money they ought to be making and even, the Revenue Alert suggests, what the ongoing capital requirements of their business will be.
The Revenue Alert is the logical corollary of the Court’s failure to provide any guidance on the application of the anti avoidance rule. Tax is supposed to be something levied by Parliament under statute, not pursuant to a press release issued by an Inland Revenue Official – yet this is what our tax system has come to.
If the Court of Appeal just throws up its hands and confesses it cannot say for certain what tax avoidance is, then the Commissioner must step into the gap, substituting his own view of the law for the silence of the judiciary. I am not aware of any other OECD country where the Courts have ceded their responsibilities for interpreting tax statutes to the tax administration in this manner.
I am certain that there are very few New Zealanders who care about the fate of Messrs Penny and Hooper. Maybe there is something in the phrase “tax avoidance” that causes the NZ public to imagine these Christchurch surgeons were up to no good.
The reality is that Mr Penny & Hooper paid far more attention to their tax compliance obligations than most ordinary New Zealanders. Those ordinary New Zealanders, of course, think that Penny & Hooper have avoided paying a “fair” amount of tax. I suspect however, those same New Zealanders would not be surprised to learn that there is no rule in the NZ taxing statute that requires only a “fair” amount of tax to be paid. Tax law is a bunch of rules telling us what kind of transactions are subject to tax and what kinds are not. That kind of certainty is at the core of a self-assesment tax system and it is being steadily undermined.
Tax advisors tend to go on about certainty a lot. What they really mean is the rule of law. Certainty is important because, in the absence of certainty, the taxpayer simply ends up paying the amount of tax the Commissioner demands (plus penalties and interest). Without rules, opposition to state action is futile. The unlimited resources and powers of the Inland Revenue combined with grinding buearacratic processes of the disputes regime make resistance difficult. Without any certainty as to the outcome resistance is often pointless. Most taxpayers with disputes have given up before they even get anywhere near a court.
What is to be done?
In the absence of widespread public support for those who the Commissioner chooses to brand as tax avoiders, and in the absence of a new political party proposing changes to the general anti avoidance rule, it can only come down to us, the advisors.
If, as professionals, we care about what is being done to the New Zealand tax system (and we must) we have to fight our own corner. Every major law and accounting firm in the country should, in my view, be offering the victims of this latest Revenue Alert the opportunity for independent legal advice backed by a willingness to litigate these cases, for free if necessary, in order to return some semblance of certainty to the law.
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I must agree. I am surprised that the reality of what this new law, created retropsectively ,can do to our ecomony and it is not being recognised. It has and will stop economic activity due to the “uncertainies” The tax rules make it difficult enough in some cases already, an issue we must deal with.
If Penny & Hooper is not appealed then hopefully when another case is started, application can be made under sectionn 138N(3) of the TAA to go direct to the CA. Hopefully different judges are appointed or better lines are drawn.
To quote an earlier commentor “I reckon Judge Randerson has given IRD a tiger to try and tame by holding onto its tail” Can IRD tame the tiger, without much more resources?
If a person in business needs to pay tax on all profits before investing those funds in another activity that may make initial losses then that risk maybe too much. I know that history has highlighted the abuse of that past right but it seems only the bad stories make good reading.
Like Australia, if that is the way it’s going to be and it’s what our government wants, shouldn’t the government decide the rules not IRD, retrospectively? Shouldn’t that change go through the correct political process? Eg the associated pesons test and property developers. Look at what the FEC committe did with IRD recommendations. Without those changes the tests proposed by IRD would have ground down economic activity
Also ths is only one situation in respect to the decision. What happens when the principle of the decision is applied to other situations? Having worked on tax avoidance issues for both IRD and the private sector for many years, I see a great deal of future issues if IRD choose to apply the principle elsewhere and nobody else can judge the issue. Simply pay up or settle
It seems as if we are to some extent copying Australia by this decision, but is our economy the same? I do not think so? Again the few that work hard to earn and make the economy grow will find it much harder, because of this perceived immoral behaviour. There may well be some tax “leakage” by not having rock tight rules , but rock tight rules can stop economic activity and economic activity generates tax revenue. Why did the FEC lighten up the associated peson test proposed by IRD? Clearly because it went too far and would curtail tax generating economic activity