Judicial Techniques for Controlling the New Zealand General Antiavoidance Rule: A Case of Old Wine in New Bottles, From Challenge Corporation to Peterson

Abstract

The judgment of the Privy Council in the recent Peterson case highlights the difficulty of deciding whether a general antiavoidance rule should apply to set aside for tax purposes a passive investment structure which sought to take advantage of a number of unrelated provisions in the Income Tax Act 2004 (ITA). The taxpayer invested in a film known as Lie of the Land which was a commercial failure. The film was never released yet the tax system not only underwrote the taxpayer's investment, but it also enabled him to make a cash profit from what could be fairly described as a financial disaster. The financial success or failure of the investment (post tax) turned on whether the courts were prepared to allow the Commissioner of Inland Revenue (CIR) to apply the general anti avoidance rule to cancel the cash profit made by the taxpayer. That case is the motivation for this working paper. During the last 30 years the ITA has been extensively amended as part of a major overhaul of the income tax system. However there have been no changes to section BG 1 since the 1974 amendments. This working paper examines the NZ judicial approach to the interpretation of section BG 1 to ascertain how of the judiciary have applied this provision to tax planning arrangements which reflect the extensive amendments enacted during the last 30 years. There is a line of cases starting with Challenge and ending with the recent decision in Peterson which provides a platform to examine the broad question whether it is possible for a general anti avoidance rule to be consistently applied by the New Zealand courts to sophisticated schemes which were deliberately designed to enable the taxpayer to obtain tax advantages which in all probability were not contemplated by the legislature at the time the relevant tax rules were enacted? A second working paper will consider the interpretive approach taken by the Courts in Canadian and Australia to similar antiavoidance provisions to ascertain whether there are any developments in those two jurisdictions which would assist the New Zealand courts in maintaining a balance between taxpayers and the CIR.