Tax Avoidance

Tax Avoidance needs Teamwork
Any taxation plan formulated for the purpose of minimising taxation must take into account the complex interplay of legislation, tax and business.

Taxation today is a very complex subject with many pitfalls. Constant changes of tax legislation and the many new schemes being presented to the IRD has meant that many accountants and lawyers have been left far behind in attempting to keep up with the play.

There is no substitute for a team effort between the accountant, lawyer and the client to produce a carefully researched plan and where necessary obtaining a ruling from the Taxation Commissioner before proceeding.

Any proposal should be examined thoroughly for unforeseen side effects before its final implementation. It must also be stressed that the best of plans must take into consideration the possible effects of a failure of that proposed plan.

Section BB3 and BG1 of the Tax Act gives the Commissioner of Inland Revenue wide powers for upsetting schemes and plans which do not meet with the requirements of the Law.

Clients must be forewarned that they may possibly have to fight every inch to hang onto any tax advantages that may occur from a particular plan or scheme. It is not therefore recommended for the faint-hearted.

What is Tax Avoidance?
The simple definition is -

“Tax avoidance is the legal and logical arrangement of one’s affairs so that full advantage is taken of all the favourable terms and allowances available in the Tax Act and by doing so the tax finally payable is less than it otherwise would be.”

This basically covers tax schemes and other avenues which are, although perfectly legal, may be morally reprehensible in some cases. In contrast, tax evasion is where one wilfully attempts to evade the liability for tax by submitting false information and records, or admitting any material or details that should have been disclosed.

Evasion involves a fraudulent ‘intention to deceive’ while in avoidance, no deceit exists. The distinction between avoidance and evasion is a very thin line, but it is a line that all tax planning advisers should never cross. Evasion is the deliberate act whereby the taxpayer flouts the tax laws. Avoidance, on the other hand, complies with the law, but in general takes fair advantage of it.

Legitimate Tax Planning
There is nothing illegal or immoral in tax planning, as it is wholly acceptable and even the courts recognise this. The taxpayer who carries out tax planning can follow legitimate courses open to him or her to minimise income tax.

Tax evasion has never been an acceptable method of minimising one’s taxation and yet the practice is punished in New Zealand in a surprisingly milder manner than other overseas countries.

Tax avoidance is a different ‘kettle of fish’ where the Commissioner of Inland Revenue is increasingly amazed at the ingenuity and artificiality of some measures that are employed by some taxpayers to reduce their tax.

It is for this reason that tax avoidance has graduated to a grey area, but tax planning itself still retains it unsullied nature.